<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/ X / Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For fiscal year ended December 31, 1993 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 Identification No.)
Incorporation or Organization)
One Blockbuster Plaza
Fort Lauderdale, Florida 33301
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (305) 832-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
----------------------------- -----------------------------------------
Common Stock, $.10 Par Value New York Stock Exchange
6 5/8% Senior Notes, due 1998 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
On March 18, 1994, the registrant had 249,049,687 outstanding shares of
Common Stock, $.10 par value, and at such date, the aggregate market value of
the shares of Common Stock held by non-affiliates of the registrant was
approximately $6,167,376,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of Registrant's Proxy Statement relative to the 1994
Annual Meeting of Stockholders to be held on May 24, 1994.
Part IV - Portions of previously filed reports and registration statements.
<PAGE> 2
INDEX
Page
Number
PART I.
ITEM 1. BUSINESS 3-22
ITEM 2. PROPERTIES 22
ITEM 3. LEGAL PROCEEDINGS 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 24
ITEM 6. SELECTED FINANCIAL DATA 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 25-40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 41-65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 66
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 66-70
ITEM 11. EXECUTIVE COMPENSATION 71
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 71
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 71
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 71-80
<PAGE> 3
PART I.
Item 1. Business
GENERAL
The Company is an international entertainment company with businesses operating
in the home video, music retailing and filmed entertainment industries. The
Company also has investments in other entertainment related businesses. The
Company was incorporated in the State of Delaware in December 1982.
HOME VIDEO RETAILING
Since July 1985, the Company has been engaged in the home video retailing
business, which accounted for 72%, 94% and 100% of the Company's total revenue
in 1993, 1992 and 1991, respectively. Over the past five years, the Company
has rapidly expanded its home video operations through the development,
acquisition and franchising of stores. The following table sets forth the
number of video stores in operation as of December 31 for each of the years
indicated:
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Company-owned 2,698 2,215 1,235 928 637
Franchise-owned 895 912 793 654 442
----- ----- ----- ----- -----
3,593 3,127 2,028 1,582 1,079
===== ===== ===== ===== =====
</TABLE>
Company-owned video stores at December 31, 1993 included 1,803 stores operating
under the "Blockbuster Video" trade name, 775 stores operating under the "Ritz"
trade name and 120 stores operating under the "Video Towne," "Alfalfa," "Movies
at Home" and "Movieland" trade names which the Company acquired in November
1993 as a result of its acquisition of Super Club Retail Entertainment
Corporation and subsidiaries ("Super Club"). The Blockbuster video system
operates in 49 states in the United States and in nine foreign countries. All
financial data, including the number of stores, has been restated to reflect
the Company's merger with WJB Video Limited Partnership and certain of its
affiliates ("WJB") in August 1993 in a transaction accounted for under the
pooling of interests method of accounting.
THE HOME VIDEO INDUSTRY
The home video industry has experienced substantial growth since 1980. This
growth is largely a result of the increase in the number of videocassette
recorders ("VCRs") in use both domestically and internationally. Technological
advances have improved the dependability, portability, picture quality and
convenience of VCRs. Furthermore, many VCRs are now moderately priced. These
factors have enhanced significantly the consumer appeal of VCRs.
According to Paul Kagan Associates, Inc., VCR unit sales in the United States
have remained relatively constant during the past five years, averaging
approximately 12,000,000 units per year, while VCR market
3
<PAGE> 4
penetration in the United States has grown significantly, increasing
from 53.3% in 1987 to 80.5% in 1993. VCR penetration continues to increase in
many areas of the world in which the Company currently has operations,
including Europe, the Pacific Rim and Central and South America. By the end of
1994, VCR penetration is expected to increase to approximately 77% in
Australia, 74% in the United Kingdom, 75% in Canada and 72% in Japan, according
to industry analysts.
The Company believes that VCR unit sales in 1994 will continue to remain strong
both in the United States and foreign countries as VCR penetration and the
number of households owning more than one VCR continue to increase. However,
annual increases in VCR penetration levels may continue to be less than in the
past as a result of the constantly increasing base of VCRs. There can be no
assurance that VCR penetration will continue to increase.
The consumer market for feature and other films on prerecorded videocassette is
a rental and sales market. An analysis of estimated historical and projected
retail home video revenue in the United States (in billions) is as follows:
<TABLE>
<CAPTION>
Rental Sales Total
------ ----- ------
<S> <C> <C> <C>
1989 . . . . . . . . . . . . . . . . . $ 7.1 $ 2.2 $ 9.3
1990 . . . . . . . . . . . . . . . . . 7.6 2.8 10.4
1991 . . . . . . . . . . . . . . . . . 7.8 3.2 11.0
1992 . . . . . . . . . . . . . . . . . 8.3 3.7 12.0
1993 . . . . . . . . . . . . . . . . . 8.8 4.4 13.2
1994 . . . . . . . . . . . . . . . . . 9.4 5.0 14.4
1995 . . . . . . . . . . . . . . . . . 10.1 5.7 15.8
1996 . . . . . . . . . . . . . . . . . 10.6 6.3 16.9
1997 . . . . . . . . . . . . . . . . . 11.0 7.0 18.0
1998 . . . . . . . . . . . . . . . . . 11.5 7.7 19.2
</TABLE>
_____________________
Source: Paul Kagan Associates, Inc.
According to Paul Kagan Associates, Inc., total worldwide retail home
video revenue was $25.3 billion in 1993, up from $23.6 billion in 1992, $22.1
billion in 1991 and $20.7 billion in 1990.
New release feature films on videocassette have generally been priced for
retail sale in the United States at approximately $60 to $99. This price range
tends to discourage retail consumer purchases. In recent years, movie
producers have released certain new release feature films priced for retail
sale at approximately $15 to $30. This price level has resulted in more unit
sales in the United States for these new release feature films than would have
been the case at higher retail prices. The Company believes that in the
absence of additional significant reductions in feature film retail sales
prices, the consumer market in the United States for videocassettes will be
primarily a rental market in the foreseeable future. In the event of a
significant reduction in retail sales prices, the Company would be able to
devote more space in its stores for display of prerecorded videocassettes for
4
<PAGE> 5
sale, although there can be no assurance that such a change would not have a
material adverse effect on the Company's results of operations.
The Company intends to increase its share of the domestic home video market as
the industry continues to grow. Additional video stores are also scheduled to
be opened in 1994 in various international markets, including Japan, Europe,
Australia, Canada and Mexico and in other areas of Central and South America,
by the Company and its franchise owners.
COMPANY HOME VIDEO OPERATIONS
The Company owns, operates and franchises Blockbuster Video stores. These
stores rent and sell prerecorded videocassettes and other entertainment
software, as well as sell confectionary items and video accessories.
Blockbuster Video stores generally carry a comprehensive selection of 7,000 to
13,000 prerecorded videocassettes, consisting of more than 5,000 titles. The
Company believes, based on industry trade publications and its informal
inspection of competitors, that Blockbuster Video stores generally offer a
greater number of copies of the more popular titles, have greater selection,
stay open for longer hours and have faster and more convenient computerized
check-in/check-out procedures than most of its competitors. The Company's home
video stores do not sell video hardware. Blockbuster Video stores, however,
offer customers a limited number of video hardware units for rental. Based
on a survey published in the December 1993 issue of Video Store Magazine, the
Company believes that the Company's and its franchise owners' systemwide
revenue from the rental and sale of prerecorded videocassettes is significantly
greater than that of any other home video retail chain in the United States.
The Company believes that Blockbuster Video stores are generally larger than
most home video retail stores, ranging in size from approximately 3,800 to
11,500 square feet. It is the Company's current intention that all new
Company-opened Blockbuster Video stores will be no less than 5,500 square feet
in size and that the square footage of its smaller Blockbuster Video stores
will be increased where appropriate. Company-owned Blockbuster Video stores
generally are, and it is anticipated that most future stores developed by the
Company will be, highly visible and located in free-standing structures or at
the end of strip shopping centers with ample parking facilities. Blockbuster
Video stores are designed and located to be highly visible and to attract their
own customers rather than to rely solely on customers generated by neighboring
stores. Based on current Blockbuster Video store design and operating
criteria, each Company-owned Blockbuster Video store generally requires a
capital expenditure, including purchase of initial inventories, of between
$375,000 and $700,000, depending on the size and location of the store,
leasehold improvement costs and the number of videocassettes and other products
stocked for rental and sale.
The proprietary computer software used in each Blockbuster Video store has been
designed and developed by the Company, and is available only to Company-owned
and franchise-owned Blockbuster Video stores and to other video stores which
are to be converted to the Blockbuster Video format. The Company developed its
computerized point-of-sale system to simplify rental and sale transactions.
This system utilizes a laser bar code
5
<PAGE> 6
scanner to read key data from products and from the member's identification
card. This system provides management with a daily summary report for
financial control of each store and considerable information concerning
demographics of each Blockbuster Video store's membership, rental and sale
patterns and the number of times each item or title in inventory has been
rented or sold. The Company believes this information to be a valuable asset
as it relates to its buying and marketing decisions.
Since the acquisition of Cityvision plc ("Cityvision") in February 1992, the
Company has operated video stores under the trade name "Ritz" in the United
Kingdom. These stores average approximately 1,100 square feet in size with, on
average, approximately 3,000 videocassettes available for rental and sale.
Since the acquisition of Super Club in November 1993, the Company has operated
video stores under the trade names "Video Towne", "Alfalfa", "Movies at Home"
and "Movieland" in the United States. These stores average approximately 6,700
square feet in size with, on average, approximately 5,000 videocassettes
available for rental and sale.
The Company has a policy of excluding titles which have been rated either "X"
or "NC-17" by the Motion Picture Association of America ("MPAA") from the
videocassette inventory of each of its Blockbuster Video stores. The Company
also has a Youth Restricted Viewing Program that allows parents to restrict
their children under 17 years of age from renting movies that have been rated
"R" by the MPAA or movies that have similar themes or content.
FRANCHISING
In order to maximize its ability to expand rapidly in the home video business,
the Company has employed a strategy of developing Blockbuster Video stores
through a combination of Company and franchise development. The extent to
which a domestic or international market is to be developed, and the balance
between Company and franchise development in a given market, is determined by
evaluating a number of different criteria, including resources available and
operating efficiencies. As of March 1994, the Company's franchise owners are
committed under their franchise agreements to open 558 additional Blockbuster
Video stores.
Under the Company's current franchising program, the Company will grant to a
franchise owner the right to develop one or a specified number of Blockbuster
Video stores at an approved location or locations within a defined geographic
area pursuant to the terms of a development agreement. The franchise owner
generally is charged a development fee in advance for each Blockbuster Video
store to be developed during the term of the development agreement. Each of the
Company's development agreements provides that if a franchise owner fails to
open the minimum number of Blockbuster Video stores required by the agreement,
the franchise owner may lose exclusivity for the development area as well as
the right to open additional Blockbuster Video stores.
Prior to the opening of a Blockbuster Video store, the franchise owner enters
into the Company's standard franchise agreement. This form of
6
<PAGE> 7
agreement governs the operation of a single Blockbuster Video store during a
term of 20 years and in certain circumstances gives the franchise owner the
right to renew the franchise agreement for an additional five-year term. At
the time the franchise agreement is executed, the franchise owner generally is
required to pay to the Company a franchise fee for the right to operate under
the Blockbuster Video service marks and a software license fee for the right to
use required proprietary software.
After a Blockbuster Video store is opened, the franchise agreement requires the
franchise owner to pay the Company a continuing royalty and service fee
(currently, franchise owners pay fees ranging from 3% to 8% of gross revenue)
and a continuing monthly payment for maintenance of the proprietary software.
Franchise owners are also required to contribute funds for the development of
national advertising and marketing programs and are required to spend an
additional amount for local advertising. Each franchise owner has sole
responsibility for all financial commitments relating to the opening and
operation of Blockbuster Video stores in the franchised territory, including
rent, utilities, payroll and other incidental expenses.
The Company provides extensive product and support services to its franchise
owners and derives income from providing these services. These products and
support services include, among other things, site selection reviews, the
packaging of the initial rental inventory and providing computer hardware and
software.
DISTRIBUTION AND INVENTORY MANAGEMENT ACTIVITIES
The Company believes that the success of Blockbuster Video stores depends, in
part, on effective and timely distribution and inventory management activities.
For its distribution center, the Company leases a facility of approximately
69,000 square feet in Dallas, Texas. The Dallas facility, which has storage
capacity for over 400,000 videocassettes, is used for shipping, receiving and
packaging rental inventories according to the Company's uniform standards.
This packaging process involves removing each rental videocassette from its
original carton, applying labels and security devices to each videocassette,
matching each videocassette with its bar coded information and placing the
videocassette into its hard plastic rental case. In addition, a display carton
is created for each videocassette by inserting foam and a security device into
the original videocassette carton and shrink wrapping the carton. The end
result of the packaging process for a Blockbuster Video store's initial rental
inventory is a shipment that arrives already sorted alphabetically within
categories and ready to be placed on display shelves. This level of packaging
and distribution service is enhanced by the Company's automated packaging
lines. The Company also provides computer software and hardware, and
substantially all related items and fixtures necessary to equip and operate a
Blockbuster Video store.
The Company has established an inventory management department to select and
purchase titles to be carried in Blockbuster Video stores. Several hundred new
titles are released every month which are reviewed and evaluated by the
inventory management department. This department
7
<PAGE> 8
selects appropriate titles for inclusion in the Company-owned Blockbuster Video
stores and recommends to the Company's franchise owners and managers of
Company-owned stores the number of copies to be placed in their inventories.
Prerecorded videocassettes and other entertainment software rented and sold by
the Company are generally purchased directly from distributors. For new
release videocassettes, the Company, like others in the home video industry,
places a pre-order with a distributor specifying the number of copies of the
new title it desires to purchase. Approximately three to four weeks
thereafter, the new release becomes available for shipment on an industry-wide
basis. On average, home video businesses are currently able to purchase a
title for rent or sale about six months after its release to motion picture
theaters. Prerecorded videocassettes which exceed the number needed in a
particular store because of changing customer demand may be moved to other
stores or sold to customers. The Company believes that its ability to move
videocassettes from store to store and to sell previously viewed rental
videocassettes assists it in effectively controlling videocassette inventories.
The Company has been able to negotiate certain favorable terms from one
particular distributor, which the Company uses on an exclusive basis. These
terms include discounts from suggested retail prices on certain titles, and the
ability to return defective merchandise under certain circumstances. The
Company is able to return to this distributor a pre-determined number of video
cassettes purchased for sale (whether or not defective) within a certain amount
of time.
SERVICE MARKS
The Company owns United States federal registrations for its service marks
"Blockbuster", "Blockbuster Video", a torn ticket design, "Blockbuster Video"
with the torn ticket design, and other related marks. The federal
registrations for "Blockbuster", "Blockbuster Video" and "Blockbuster Video"
with the torn ticket design have become incontestable.
The Company is in the process of federally registering "Blockbuster
Entertainment" and various other trademarks, service marks and slogans. In
addition, the Company has registered the service mark "Blockbuster",
"Blockbuster Video" and "Blockbuster Video" with torn ticket design in certain
foreign jurisdictions and is in the process of registering other related marks
in such jurisdictions.
The Company considers its service marks important to its continued success.
COMPETITION
The home video business is highly competitive. The Company believes that the
principal competitive factors in the business are title selection, number of
copies of titles available, the quality of customer service and, to a lesser
extent, pricing. The Company believes that it has generally addressed the
selection and service demands of consumers more adequately than most of its
competitors.
8
<PAGE> 9
The Company and its franchise owners compete with video retail stores, as well
as supermarkets, drug stores, convenience stores, book stores, mass
merchandisers and others. According to industry analysts, video retail stores
alone have grown from approximately 7,000 outlets in 1983 to approximately
28,000 outlets in 1993. The Company believes that the success of its business
depends in part on its large and attractive Company-owned and franchise-owned
Blockbuster Video stores offering a wider selection of titles and larger and
more accessible inventory than its competitors, in addition to more convenient
store locations, faster and more efficient computerized check-in/check-out
procedures, extended operating hours, effective customer service and
competitive pricing.
In addition to competing with other home video retailers, the Company
and its franchise owners compete with all other forms of entertainment and
recreational activities including, but not limited to movie theaters, network
television and other events, such as sporting events. The Company also
competes with cable television, which includes pay-per-view television.
Currently, pay-per-view television provides less viewing flexibility to the
consumer than videocassettes, and the more popular movies are generally
available on videocassette prior to appearing on pay-per-view television.
However, technological advances could result in greater viewing flexibility for
pay-per-view or in other methods of electronic delivery, and such industry
developments could have an adverse impact on the Company and its franchise
owners' businesses. Notwithstanding these possible technological advances, the
Company believes that home video will continue to have the competitive
advantages of being not only the first source of filmed entertainment in the
home before pay-per-view but also the most convenient source.
The Company's corporate marketing department, with the assistance of its
advertising agencies, has developed advertising campaigns for implementation
systemwide. The Company aggressively uses both local and national advertising,
including television commercials. The Company uses vendor advertising
allowances, cooperative advertising and promotional programs that are currently
made available to the home video industry by producers and distributors of home
video products. Generally, these programs provide an allowance to the industry
as a whole of approximately 1% to 2% of industry-wide purchases of a particular
title for use in advertising and promoting the title. Recently, advertising
expense (net of cooperative advertising allowances and amounts received from
franchise owners pursuant to various franchise agreements) has averaged between
3% and 5% of the revenue generated by Company-owned video stores. The Company
believes that cooperative advertising and promotional programs will continue to
be provided by producers and distributors in the future, but such allowances
might not continue at current levels.
AVAILABILITY OF PRODUCT
Prerecorded videocassettes and other entertainment software are readily
available from numerous distributors and other suppliers. Although a specific
title may only be available from a single source, the Company does not
anticipate that the Company or its franchise owners will experience difficulty
in obtaining these products.
9
<PAGE> 10
SEASONALITY
The Company's home video business may be affected by a variety of factors,
including, but not limited to, general economic trends, acquisitions made by
the Company, additional and existing competition, marketing programs, weather,
special or unusual events, variations in the number of store openings, the
quality of new release titles available for rental and sale, and similar
factors that may affect retailers in general. As compared to other months of
the year, revenue from Blockbuster Video stores in the United States has been,
and the Company believes will continue to be, subject to a decline during the
months of April and May, due in part to the change to Daylight Savings Time,
and during the months of September, October and November, due in part to the
start of school and introduction of new television programs.
REGULATION
Certain states, the United States Federal Trade Commission and certain foreign
jurisdictions require a franchisor to transmit specified disclosure statements
to potential owners before issuing a franchise. Additionally, some states and
foreign jurisdictions require the franchisor to register its franchise before
its issuance. The Company believes the offering circulars used to market its
franchises comply with the Federal Trade Commission guidelines and all
applicable laws of states in the United States and foreign jurisdictions
regulating the offering and issuance of franchises. The Company's home video
business, other than the franchising aspect thereof, is not generally subject
to any government regulation other than customary laws and local zoning and
permit requirements.
MUSIC RETAILING
As of December 31, 1993, the Company was one of the largest specialty
retailers of prerecorded music in the United States with 511 retailing outlets
operating throughout the country. The Company has been engaged in the music
retailing business since November 1992, when it acquired 235 stores in
connection with its acquisition of Sound Warehouse, Inc. and subsidiary and
Show Industries, Inc. ("Sound Warehouse" and "Music Plus"). In connection
with its acquisition of Super Club in November 1993, the Company acquired 270
stores operating under the trade names "Record Bar", "Tracks", "Turtles" and
"Rhythm and Views". The Company also owns and operates music stores under the
trade name "Blockbuster Music Plus". Additionally, the Company is a partner in
an international joint venture with Virgin Retail Group Limited ("Virgin") to
develop and operate "Megastores" in continental Europe, Australia and the
United States.
Through its purchase of Sound Warehouse, Music Plus and Super Club and its
joint venture with Virgin, the Company has embarked on a major new expansion
effort in the music retailing industry.
THE MUSIC RETAILING INDUSTRY
In the last decade, the music retailing industry has experienced substantial
growth. According to industry analysts, worldwide retail revenue generated by
the music industry increased from approximately $12
10
<PAGE> 11
billion in 1983 to approximately $29 billion in 1992. Retail music revenue in
the United States alone was approximately $10 billion in 1993, and is projected
by industry analysts to reach approximately $13 billion by the year 1997.
An important element of this growth in the music retailing industry has been
the increasing worldwide penetration of compact disc players. According to
industry analysts, approximately 43% of households in the United States
presently have a compact disc player. Industry sources place compact disc
player penetration at approximately 40% in Europe and nearly 100% in Japan.
Compact discs, the top selling prerecorded music format, are generally more
expensive than audiocassette tapes but are considered to be superior due to the
higher quality of the sound reproduction and the durability of the discs.
Audiocassette tapes were the top selling prerecorded music format prior to the
introduction and acceptance of the compact disc. Audiocassette tapes continue
to comprise a large percentage of prerecorded music sales due to the large
number of audiocassette players in use in homes and automobiles and the large
base of portable cassette players in active use.
Technology may produce new format media which could affect the Company's future
sales. The compact disc has had a positive impact on the prerecorded music
retailing business. There is no assurance, however, that other new
technologies will gain significant consumer acceptance generally or among the
Company's customers. Also, past experience with new technology indicates that,
even if successful in gaining acceptance, any significant impact on sales would
not be experienced for several years.
COMPANY MUSIC OPERATIONS
The Company's music stores sell compact discs and audiocassettes
manufactured by all major domestic and certain foreign manufacturers. These
stores offer a wide selection of prerecorded music. The number of prerecorded
music titles offered for sale in the Company's music stores averages
approximately 17,400 per music store. The assortment of music titles offered
by the Company includes those of prominent artists and established labels.
Music selections cover a broad range including, among others, pop, rock,
country, classical, jazz and soul. The Company believes that its music stores
generally offer a wider selection of prerecorded music than most of its
competitors in the markets in which these stores operate. The Company
currently also rents and sells prerecorded videocassettes in most of its music
stores, but on a much more limited basis than in its Company-owned video
stores.
The Company anticipates that most future music stores developed by the
Company will be highly visible and located in free-standing structures or strip
shopping centers with ample parking facilities. Such music stores are designed
and located to be highly visible and to attract their own customers rather than
relying solely on customers generated by neighboring stores. At December 31,
1993, the Company operated 331 music stores which are located in free-standing
structures or strip shopping centers and 180 music stores
11
<PAGE> 12
located in shopping malls. The average size of the Company's music
stores is approximately 6,400 square feet.
The Company has recently developed its own prototype music store called
"Blockbuster Music Plus". New Blockbuster Music Plus stores offer personal
listening posts which allow the customer to preview selections prior to
purchase and other state-of-the-art features as well as a broad range of
musical selections. The Company currently projects that the cost to open a new
"Blockbuster Music Plus" store will require an initial investment, including
capital expenditures and merchandise inventory of generally between $700,000
and $1,000,000.
Retail point-of-sale computer systems at the Company's music stores are
currently being standardized for uniformity of use in all of the Company's
music stores. Similar to the system in use at the Company's video stores, the
Company's music store systems use an optical scanner to read the product's
unique bar code, record the appropriate price or charge, and create a customer
receipt. Product information is stored on the system for retrieval and
analysis, providing valuable information about inventory movement and customer
tastes which is considered in subsequent stocking of product inventories. The
Company is currently examining the feasibility of integrating its video and
music store computer systems.
In December 1992, the Company formed an international joint venture with Virgin
to take advantage of opportunities in the retailing of music and related
products through the ownership and development of Megastores. As of December
31, 1993, the joint venture owned interests in and operated 20 Megastores in
France, Germany, Austria, Spain, Italy, Holland, Australia and Los Angeles,
California. These Megastores, ranging in size from approximately 25,000 to
40,000 square feet, are generally larger than most retail music stores. The
Megastores offer an extremely wide range of music, video and game products, as
well as special interest departments, interactive entertainment facilities,
personal listening posts, video viewing posts, information centers and even
cafes. The Company and Virgin will continue to build Megastores in major
metropolitan areas throughout Continental Europe, Australia and the United
States.
DISTRIBUTION AND INVENTORY MANAGEMENT ACTIVITIES
Sound Warehouse, Music Plus and Blockbuster Music Plus operate a
central warehouse distribution center located in Dallas, and the Company's
remaining music retailing chains operate a central distribution center in
Atlanta. Generally, these distribution centers maintain large quantities of
popular music titles available for immediate shipment to their respective music
stores. The Company believes that the maintenance of the distribution centers
allows it to support a wide selection of merchandise within its music stores,
minimize music store inventory requirements and labor costs, and maintain
effective controls. The Company is currently examining the feasibility of
consolidating the Dallas and Atlanta distribution centers.
Each of the Company's music chains have product buyers who make initial
purchasing decisions on new titles and products for each music store and
12
<PAGE> 13
for the central warehouse distribution centers. In making purchasing
decisions, the product buyers consider such factors as knowledge of the new
title or product, product background and historical sales from each store.
Music store personnel reorder products for the store as needed based upon
recent sales of each item compared to the amounts on hand in the store's
inventory. Centralized product buyers reorder products for the warehouses by
monitoring both detailed sales information and the reorders placed by music
store personnel. The Company is in the process of further centralizing
purchasing decisions.
Most of the products sold by the Company through its music stores are
purchased directly from manufacturers. The Company is generally able to lower
its cost per product due to favorable volume purchasing terms from its
suppliers. Under current trade practices, retailers of prerecorded music are
entitled to return products they have purchased from major suppliers.
Generally, prerecorded music may be returned as long as it remains in the
current catalog of its manufacturer. Suppliers will typically notify
retailers before titles are removed from the manufacturer's current catalog.
This industry practice permits the Company to carry a wide selection of music,
and at the same time reduce the risk of obsolete inventory.
Major manufacturers of prerecorded music typically do not limit the amount of
merchandise that may be returned by a customer although certain manufacturers
penalize the customer through return handling charges. The Company currently
does not have any significant amounts of excess prerecorded music inventory
that could not be returned to manufacturers under current return policies. The
manufacturers' exchange privilege policies have previously been subject to
change and may change in the future. Any change in these policies could
adversely affect the value of the Company's inventory and affect its business
policies.
SERVICE MARKS
The Company owns United States federal registrations for its service marks
"Music Plus", "Music Plus" with design, "Sound Warehouse", "Sound Warehouse"
with design and other related marks. The Company is in the process of
registering "Blockbuster Music", "Blockbuster Music Plus" with design and
various other trademarks, service marks and slogans relating to its music
business in the United States and certain foreign jurisdictions.
COMPETITION
The retail sale of prerecorded music and related products is highly competitive
among numerous chain and department stores, discount stores, mail order clubs
and specialty music stores. Some mail order clubs are affiliated with major
manufacturers of prerecorded music and may have advantageous marketing
arrangements with their affiliates. Since music stores generally serve
individual or local markets, competition is fragmented and varies substantially
from one location or geographic area to another. The Company believes that its
ability to compete successfully in the music retailing business depends on its
ability to
13
<PAGE> 14
secure and maintain attractive and convenient locations, manage merchandise
efficiently, offer broad merchandise selections at competitive prices and
provide effective service to its customers.
The Company frequently advertises its music stores and products which they
carry in newspapers, on radio and television and by direct mail. In addition,
the Company frequently engages in promotions which offer products at reduced
prices. The Company's advertising emphasizes price, breadth and depth of
merchandise, and the convenience of music store locations.
Most of the vendors from whom the Company purchases its music store products
offer their customers, including the Company, an advertising allowance which is
often based on a percentage of a customer's purchases. The Company also
receives significant advertising allowances from suppliers of prerecorded music
products to promote new artists. The terms of such advertising allowances
generally require the Company to submit advertising campaigns to the vendor for
approval prior to their use. The Company currently takes full advantage of
vendors' advertising allowances.
AVAILABILITY OF PRODUCTS
The Company has no long-term agreements for the purchase of prerecorded music
and related products and deals with its suppliers principally on an
order-by-order basis. The Company has not experienced difficulty in obtaining
satisfactory sources of supply and believes that adequate sources of supply
will continue to exist for the products sold in its music stores.
SEASONALITY
The Company's music business may be affected by a variety of factors
including, but not limited to, general economic trends and conditions in the
music industry, including the quality of new titles and artists, existing and
additional competition, changes in technology and similar factors that may
affect retailers in general. The Company's music business is seasonal, with
higher than average monthly revenue experienced during the Thanksgiving and
Christmas seasons, and lower than average monthly revenue experienced in
September and October.
REGULATION
The Company's retail music business is not generally subject to any
governmental regulation other than customary laws and local zoning and permit
requirements.
FILMED ENTERTAINMENT
In April 1993, the Company expanded into the filmed entertainment business
through the acquisition of a majority of the common stock of Spelling
Entertainment Group Inc. ("Spelling"). The operations of Spelling encompass a
broad range of businesses in the filmed entertainment industry, supported by an
extensive library of television
14
<PAGE> 15
series, mini-series, movies-for-television, pilots and feature films
(collectively "film product"). At December 31, 1993, the Company owned
45,658,640 shares, or approximately 70.5% of Spelling's outstanding common
stock.
The Company owns 2,550,000 shares, and warrants to acquire an additional
810,000 shares, of the common stock of Republic Pictures Corporation
("Republic"). At December 31, 1993, the Company's investment in Republic
represented approximately 39% of Republic's outstanding common stock, including
shares subject to such warrants. Republic is engaged in the development and
production of television programming and the distribution of this programming
and its extensive library of feature films, television movies and mini-series.
In December 1993, Spelling and Republic entered into a definitive
agreement pursuant to which a wholly-owned subsidiary of Spelling would be
merged with Republic and Republic, as a result of the merger, would become a
wholly-owned subsidiary of Spelling. Spelling will exchange $13.00 in cash for
each share of Republic common stock issued and outstanding at the effective
time of the merger. Options and warrants to acquire shares of Republic common
stock will be converted into the right to receive upon payment of the exercise
price 1.6508 shares of Spelling common stock for each share of Republic common
stock into which such option or warrant was exercisable immediately prior to
the effective time of the merger. Consummation of the merger, which is
currently anticipated to occur in April 1994, is subject, among other things,
to approval by the stockholders of Republic and other customary conditions.
Following the merger, the operations of Spelling and Republic will be
substantially consolidated.
With the Company's ownership of a majority interest in Spelling, the Company
has a significant presence in the development, production and distribution of
television programming and filmed entertainment.
COMPANY FILMED ENTERTAINMENT OPERATIONS
Spelling is engaged primarily in the development, production, acquisition and
distribution of television programming. Spelling also produces feature films
for others, distributes films in international markets and licenses music and
merchandising rights associated with its television programming.
Television programming is developed and produced by Spelling primarily through
two subsidiaries, Spelling Television and Laurel Entertainment ("Laurel").
Spelling's distribution activities are carried out by its Worldvision
Enterprises subsidiary ("Worldvision"). Additionally, Worldvision engages in
production by advancing funds to producers in exchange for all or a portion of
the distribution rights. The primary markets for the television programming
produced, funded or otherwise acquired by the Company include first-run network
exhibition, domestic first-run and repeat syndication (including cable),
international syndication and home video.
15
<PAGE> 16
NETWORK PROGRAMMING
Scripts written for network television programming are submitted to the
network for review. If the network accepts the script, it will typically order
production of a pilot or a prototype episode, for which it will pay Spelling a
negotiated fixed license fee. Spelling's cost of producing such a pilot
usually exceeds the network license fee. As of March 1994, Spelling had
received orders for two new series projects. One is an eight episode order of a
one-hour series for the Fox network, tentatively titled "Models, Inc." and the
other is a six episode order of a one-hour series for the Fox network,
tentatively titled "Shock Rock". The Company has other projects under network
consideration.
Spelling is currently producing the television series "Beverly Hills, 90210" and
"Melrose Place" which are being aired on the Fox network. "Beverly
Hills, 90210" is in its fourth season and has been renewed for the 1994-95
television season. "Melrose Place", which debuted during the summer of 1992, is
in its second full season, and has also been renewed for the 1994-95 television
season. Spelling is also producing the television series "Winnetka Road" and
"Burke's Law", both mid-season replacements, and has received an order for an
additional 13 episodes of "Burke's Law" from the CBS network for the 1994-95
television season.
In 1993, Laurel produced "The Stand", an eight-hour mini-series based on one of
Stephen King's best selling books, which was delivered to the ABC network in
December 1993 and is scheduled to air in May 1994. Spelling has recently
received orders for two four-hour mini-series from the ABC network, one based
on James Michener's novel, "Texas" and the other based on Stephen King's novel,
"The Langoliers". Laurel has also produced a movie-for-television, "Precious
Victims", which aired on the CBS network in September 1993. As with television
series, the network license fees received for mini-series and
movies-for-television are normally less than the costs of production, and such
deficits must be covered by revenue derived from other sources of distribution,
primarily through the exploitation of rights in international markets.
Spelling had revenue from one customer, the Fox network, representing 22%, 22%
and 13% of Spelling's revenues in 1993, 1992 and 1991, respectively.
16
<PAGE> 17
FIRST-RUN SYNDICATED PROGRAMMING
First-run syndicated television series are produced and sold directly to
television stations in the United States without any prior network broadcast.
These programs are licensed to individual or groups of television stations, on
a market by market basis, in contrast to network distribution, which provides
centralized access to a national audience.
In first run syndication, Spelling licenses its film product in exchange for
cash payments, advertising time (barter) or a combination of both. In cash
licensing, a broadcaster normally agrees to pay a fixed licensing fee
in one or more installments in exchange for the right to broadcast the product
a specified number of times over an agreed upon period of time. Where product
is licensed in exchange for advertising time, through what are known as "barter
agreements", a broadcaster agrees to give Spelling a specified amount of
advertising time, which Spelling subsequently sells. Particuarly in the
initial years of such programming, domestic syndication revenue can be less
than Spelling's costs of producing the programming.
Worldvision is currently marketing for first-run barter syndication 22 episodes
each of two series, currently titled "Robin's Hoods" and "Heaven Help Us", to
be produced by Spelling Television. Worldvision has also begun to distribute
these programs to international television markets for cash license fees. In
first-run syndication, the Company retains greater control over creative and
production decisions than is the case with network programming; however, there
is a greater financial risk associated with such programming, and potentially
greater financial upside. Fixed license fees paid by networks usually cover at
least 75% of Spelling's production costs; however, Spelling does not share
in the network's advertising revenue which can be substantial. Barter revenue
is not fixed but is dependent on the viewing public's acceptance or rejection
of the show as reflected in the ratings. If a show's ratings are high, the
advertising revenue received by the Company through its barter arrangement
could be substantial.
ACQUIRING DISTRIBUTION RIGHTS
A substantial portion of Worldvision's revenue is derived from fees
earned from the distribution and licensing of television programming produced
by Spelling. In addition, since 1989, Worldvision has invested approximately
$150 million in the acquisition of distribution rights to film product from
third parties. Worldvision acquires the exhibition rights to television
programming and feature films through contracts with the producers or other
owners of such products. These contracts generally give Worldvision the
exclusive distribution rights to license an unlimited number of exhibitions of
the film products over a period of time, typically in excess of twenty years.
Worldvision also acquires distribution rights from third party producers by
partially financing production costs through advances to such producers which
are recovered by Worldvision from revenue earned from distribution. Usually
Worldvision recovers its distribution fees, expenses and advances before the
producers or owners receive any additional proceeds. Worldvision
17
<PAGE> 18
currently distributes programming in 110 countries through offices in New York,
Chicago, Atlanta, Los Angeles, London, Paris, Rome, Toronto, Sydney, Tokyo and
Rio de Janeiro.
In September 1992, Worldvision purchased from Carolco Television Inc.
the domestic television rights to a film library of more than 150 feature films
along with certain related receivables. The library includes box-office hits
such as "Terminator 2", "Basic Instinct", the "Rambo" trilogy, "L.A. Story",
"Red Heat", "Total Recall", "Platoon", "The Last Emperor" and "Universal
Soldier". Due to pre-existing licensing agreements covering these films, the
Company will not recognize significant revenue from the exploitation of the
rights until after 1996.
LICENSING AND MERCHANDISING
Hamilton Projects, Inc. ("Hamilton Projects"), a subsidiary of
Spelling, merchandises products and licenses music associated with several of
the Company's television properties, including "Beverly Hills, 90210", and
"Melrose Place". Hamilton Projects is a full-service licensing and
merchandising company, providing strategic planning, concept development and
program execution to the Company as well as third parties.
SERVICE MARKS
Spelling or its subsidiaries own various United States federal trademark or
service mark registrations including "Spelling", "Beverly Hills, 90210",
"Melrose Place", and has applied for registration for numerous other marks
relating to its film products in the United States and foreign countries.
Spelling or its subsidiaries own various foreign trademark or service mark
registrations or have applied for trademark or service mark registrations
including "Tele Uno".
COMPETITION
The motion picture and television industry is highly competitive. Many
companies compete to obtain access to the available literary properties,
creative personnel, talent, production personnel, television acceptance,
distribution commitments and financing, which are essential to produce and sell
their film products. Certain of Spelling's competitors have greater
18
<PAGE> 19
available resources for promotion and marketing and more people engaged in the
acquisition, development, production and distribution of both television
programming and feature films. Spelling must continue to acquire distribution
rights to television programming and feature films to maintain its competitive
position. In order to acquire rights to distribute new third party film
product, Spelling may be required to increase its advances to producers or to
reduce its distribution fees.
Spelling's arrangements with the networks provide it with pilot, series and
movies-for-television commitments; however, the networks are under no obligation
to actually broadcast Spelling's product. Spelling's sucessful domestic repeat
syndication of a network series generally depends upon the ratings achieved
through network exhibition of such a series over a number of years sufficient
to generate a minimum of 65 episodes. In turn, Spelling's overall success in
achieving multiple years of network exhibition of a series is dependent upon
factors such as the viewing public's taste (as reflected in the ratings) and
critical reviews.
Licensing television programming to broadcasters and cable networks has also
become increasingly competitive as new products continually enter the
syndication market and certain producers attempt to develop an additional
network to distribute their product.
Likewise, Spelling is competing with numerous well-financed, experienced
companies engaged in feature film production and international feature film
distribution. Spelling's relative lack of experience and financial strength in
distributing feature films in the international market may hinder its ability
to compete effectively with companies which are more experienced and have
greater financial capabilities.
GOVERNMENT REGULATION
The production and distribution of television programming by independent
producers is not directly regulated by the federal or state governments, but
the marketplace for television programming is substantially affected by
regulations of the Federal Communications Commission ("FCC") applicable to
television stations, television networks and cable television systems.
In 1993, the FCC further relaxed its rules governing financial
interests in and syndication of programming by the broadcast television
networks (known as the "fin syn" rules). The relaxed rules still prohibit the
three largest broadcast networks from (i) holding or acquiring financial
interests and syndication rights in any first-run program, except in programs
produced solely by the network and in programs distributed only outside the
United States, (ii) domestically syndicating any prime time network or
first-run non-network program, and (iii) withholding a prime time program in
which it has syndication rights from syndication for more than a specified
period. However, these remaining restrictions on program syndication by the
networks are set to expire in November 1995, and are currently the subject of
judicial review. In addition, in November 1993 a Federal district court
vacated certain provisions of consent decrees which prohibited television
networks from acquiring financial interests and syndication rights in
television programming developed or created by non-network suppliers such as
the Company. The effect of the relaxed fin syn rules and the district courts'
action on the operations of the Company is as yet unclear; however, these
regulatory changes could result in increased competition for the Company's
filmed entertainment business.
Foreign regulations may also affect the Company's filmed entertainment
business. In 1989, the twelve-member European Community ("EC") adopted a
"directive" that its member states ensure that more than 50% of the programming
shown on their television stations be European-produced "where practicable".
These guidelines could restrict the amount of American television programming
and feature films that are shown on European television. In addition, certain
European countries have adopted individual national restrictions on
broadcasting of programming based on country of origin. Other countries in
which the Company distributes its programming may adopt similar restrictions,
which may have an adverse effect on its ability to distribute its programs or
create stronger incentives for the Company to establish ventures with
international films.
19
<PAGE> 20
OTHER ENTERTAINMENT
In October 1993, the Company purchased 24,000,000 shares of newly-issued Series
A Cumulative Convertible Preferred Stock ("Preferred Stock") of Viacom Inc.
("Viacom") for an aggregate purchase price of $600,000,000. The Preferred
Stock provides for 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.
In January 1994, the Company and Viacom entered into a subscription
agreement ("the 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 $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 discussed
below under the caption "Viacom 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 but
may not exceed $275,000,000. See "Viacom Inc. Agreements" of Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 12, Other Matters, of Notes to Consolidated Financial
Statements for further discussion of the Company's investment in Viacom.
At December 31, 1993, the Company owned 7,153,750 shares or approximately
19.1% of the outstanding common stock, of Discovery Zone, Inc. ("Discovery
Zone"). Discovery Zone owns, operates and franchises indoor recreational
facilities for children. The Company currently operates 34 Discovery Zone
facilities and has franchise rights to develop an additional 91 Discovery Zone
facilities. The Company has also entered into a joint venture agreement with
Discovery Zone pursuant to which the joint venture has been granted the right
to develop an additional 10 Discovery Zone facilities in the United Kingdom.
EMPLOYEES
In March 1994, the Company had approximately 46,000 employees,
including 43 officers, 37,000 video and music retail employees in the United
States and 9,000 other employees. Other employees consist principally of the
Company's international employees. Of the retail employees in the United
States, the Company had approximately 8,800 full-time and 28,200 part-time
store employees. The total staffing for a Blockbuster Video store is generally
10 to 15 employees (full-time and part-time), including a store manager. The
total staffing for a music store is generally 15 to 18 employees (full-time and
part-time), including a store manager. The required staffing in the Company's
video and music stores at any one point in time generally ranges between 2 to
10 employees, and is dependant upon the time of season, day of the week and
time of the day.
20
<PAGE> 21
At December 31, 1993, Spelling employed or had service agreements with
approximately 223 employees who were employed in administrative or other
positions which are relatively independent of the Company's current level of
production activities. In addition, Spelling employs individuals for
particular production projects. As a result, the number of employees and
production project employees providing services to Spelling can vary
substantially during the course of a year depending upon the number and
scheduling of its productions. Certain subsidiaries of Spelling are
signatories to certain collective bargaining agreements relating to the various
types of employees and independent contractors required to produce the
television programming and feature films. The Company's other employees are
not represented by a labor union or covered by a collective bargaining
agreement.
The Company believes its relationship with employees to be good.
VIACOM MERGER AGREEMENT
In January 1994, the Company and Viacom entered into a merger agreement
under which the Company would merge with and into Viacom, with Viacom being the
surviving corporation. Under the terms of the merger agreement, each
outstanding share of the Company's common stock, other than shares owned by
Viacom or any subsidiary of Viacom or the Company and any dissenting shares
(if applicable), shall be converted into the right to receive (i) .08 of one
share of Viacom Class A common stock, (ii) .60615 of one share of non-voting
Viacom Class B common stock, and (iii) up to an additional .13829 of one share
of non-voting Viacom Class B common stock, with such amount to be determined in
accordance with, and the right to receive such shares evidenced by, one
variable common right (a "VCR") issued by Viacom. Employee stock options and
warrants to acquire Company common stock outstanding as of the effective time
of the merger will become exercisable thereafter for the merger consideration
described above.
The number of shares of non-voting Viacom Class B common stock into
which the VCRs convert will generally be based upon the highest 30 consecutive
trading day average price of the non-voting Viacom Class B common stock during
the 90 trading day period prior to the conversion date, which occurs on the
first anniversary of the completion of the merger. In the event that such
value is more than $40.00 per share but less than $48.00 per share, the VCRs
will convert into the right to receive .05929 of a share of non-voting Viacom
Class B common stock. If such value is below $40.00 per share, such number of
shares will increase ratably to the maximum of .13829 of a share of non-voting
Viacom Class B common stock at a value of $36.00 per share or, if such value is
above $48.00 per share, the number of shares into which the VCR will convert
will decrease ratably to have no value at a price of $52.00 per share. The
upward adjustment in the value of the VCR in excess of .05929 of a share of
non-voting Viacom Class B common stock will not be made in the event that,
during any 30 trading day period following the completion of the merger and
prior to the conversion date, the average closing price exceeds $40.00 per
share. In the event that during any such period such average price exceeds
$52.00 per share, the VCR will terminate.
21
<PAGE> 22
Consummation of the merger is subject to certain conditions, including, among
other things, approval by the stockholders of the Company and
Viacom.
Item 2. Properties
The Company owns its corporate headquarters which total approximately 133,200
square feet located in Fort Lauderdale, Florida.
The Company owns the land and building for 54 of its Blockbuster Video stores
and leases all of the remaining real estate sites (including the buildings and
improvements thereon) upon which Company-owned video stores are located.
The Company's principal home video distribution and warehouse facility is
located in Dallas, Texas in a leased facility of approximately 69,000 square
feet. The lease for the distribution center expires on December 31, 1995. The
Company also has leased office facilities in eleven cities in the United States
serving as regional and district offices and has leased office space in
Toronto, Canada, in London, England and in Tokyo, Japan in connection with its
home video businesses.
The Company owns the land and building for two of its retail music stores and
owns the building of a third music store location which is located on leased
land. The Company leases the remaining real estate sites (including the
buildings and improvements thereon) upon which the Company's music stores are
located.
The Company leases space for offices and a distribution center in Dallas, Texas
relating to the operations of Sound Warehouse, Music Plus and Blockbuster Music
Plus. The space consists of two buildings in which the Company leases
approximately 155,000 square feet of total floor space. The Company also has
leased office space in Los Angeles, California and Atlanta, Georgia and
distribution centers in Atlanta, Georgia and Durham, North Carolina in
connection with its music business.
Spelling leases office space of approximately 51,000 square feet in Los
Angeles and approximately 63,000 square feet in New York. In addition,
Spelling leases offices in other cities in the United States and in various
other countries throughout the world in connection with its international
distribution activities. Spelling also rents facilities on a short-term basis
for the production of its film product, including approximately 80,000 square
feet in Vancouver, British Columbia.
The Company owns approximately 1,770 acres of land in Southeast Florida
upon which it is considering the development of a sports and entertainment
complex. The Company is currently undertaking various studies and analyses to
determine whether such a project would be feasible.
Management believes that the Company's distribution, warehouse and office
facilities will be adequate for its home video, music retailing and filmed
entertainment businesses in the foreseeable future.
22
<PAGE> 23
Item 3. Legal Proceedings
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 and 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 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 estimated
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 such liabilities in excess of a threshold amount of
$25,000,000, subject to certain adjustments. Substantial portions of such
accruals are intended to cover environmental costs associated with Spelling's
former operations. Such accruals are recorded without discount or offset for
either the time value of money prior to the anticipated date of payment or
expected recoveries from insurance or contribution claims against unaffiliated
entities.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders.
EXECUTIVE OFFICERS OF THE COMPANY
See Part III, Item 10 of this report.
23
<PAGE> 24
PART II.
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The common stock, $.10 par value ("Common Stock"), of the Company is listed on
the New York Stock Exchange and the London Stock Exchange. The following table
sets forth the quarterly high and low prices of the Common Stock for the period
from January 1, 1992 through December 31, 1993 on the New York Stock Exchange
Composite Tape as reported by the Wall Street Journal (Southeast Edition).
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1992:
First Quarter . . . . . . . . . $15 $11-7/8
Second Quarter . . . . . . . . . 15-7/8 12-1/8
Third Quarter . . . . . . . . . 13-3/4 11-1/8
Fourth Quarter . . . . . . . . . 19-1/2 12-3/8
1993:
First Quarter . . . . . . . . . $20-1/8 $15-3/4
Second Quarter . . . . . . . . . 21-7/8 16-3/4
Third Quarter . . . . . . . . . 30-1/8 21-3/8
Fourth Quarter . . . . . . . . . 34-1/4 24-1/2
</TABLE>
At March 18, 1994, there were 12,728 holders of record of the Common Stock. In
April 1992, the Board of Directors of the Company adopted a policy providing
for the payment of quarterly cash dividends to the Company's stockholders and
declared a cash dividend of two cents per share which was paid on July 1, 1992
to stockholders of record on May 4, 1992. On May 11, 1993, the Board of
Directors of the Company amended such policy to provide for the payment of
quarterly cash dividends to the Company's stockholders of two and one half
cents per share.
24
<PAGE> 25
Item 6. Selected Financial Data
In August 1993, the Company merged with 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. The
following Selected Financial Data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the Company's Consolidated Financial Statements and Notes thereto,
and other financial information appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
As of and for the
Years Ended December 31,
--------------------------------------------------------------------------
(in thousands, except per share data)
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue $2,227,003 $1,315,844 $961,638 $699,652 $421,940
Net income 243,646 148,269 89,112 65,890 42,697
Net income per
common and common
equivalent share -
assuming full
dilution 1.10 .76 .51 .39 .26
Total assets 3,520,967 1,540,654 893,294 702,059 468,935
Long-term debt 603,496 238,034 84,058 118,895 57,774
Subordinated
convertible debt --- 118,532 109,645 101,378 93,729
Total shareholders'
equity 2,123,400 787,347 480,461 319,365 210,172
Cash dividends
declared per share .095 .06 --- --- ---
</TABLE>
See Notes 2 and 12, Business Combinations and Investments and Other
Matters, of Notes to Consolidated Financial Statements for a discussion of
business combinations and their effect on comparability of year-to-year data as
well as events occurring subsequent to December 31, 1993.
Item 7. 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 has agreed to merge into Viacom Inc. ("Viacom"), with Viacom being
the surviving corporation. The closing of the merger is subject to customary
conditions, including approval of the merger by the Company's stockholders.
25
<PAGE> 26
Concurrently 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 $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 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 "Capital Structure" under the heading of "Financial Condition" and
"Recently Issued Accounting Standards" of Management's Discussion and Analysis
of Financial Condition and Results of Operations and Note 12, Other Matters, of
Notes to 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.
In November 1993, the Company acquired all of the outstanding capital stock of
Super Club Retail 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
26
<PAGE> 27
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 to its system 270 music stores and 120 video stores operating
primarily in the southeastern United States.
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.
In August 1993, the Company merged with WJB, the Company's 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. ("Spelling"), a producer and
distributor of filmed entertainment. The aggregate consideration paid by the
Company was 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 the Company's 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. See Note
7, Shareholders' Equity, of Notes to Consolidated Financial Statements for a
further discussion of this transaction. As a result of the transactions
described above, the Company owned approximately 70.5% of the outstanding
common stock of Spelling at December 31, 1993.
During 1993, the Company also acquired or invested in businesses that own and
operate video stores, are involved in the production and distribution of filmed
entertainment, and own, operate and franchise indoor recreational facilities
for children. The aggregate purchase price paid by the Company was
approximately $195,610,000 and consisted of cash and 5,631,180 shares of Common
Stock.
In November 1992, the Company acquired Sound Warehouse, Inc. and
subsidiary and Show Industries, Inc. ("Sound Warehouse" and "Music Plus").
Sound Warehouse and Music Plus are among the largest specialty retailers of
prerecorded music in the United States with 235 stores operating in 40
metropolitan areas in 15 states at December 31, 1993. The purchase price paid
by the Company was approximately $190,000,000 and consisted of cash and
4,142,051 shares of Common Stock.
27
<PAGE> 28
In February 1992, the Company acquired Cityvision plc ("Cityvision"), the
largest home video retailer in the United Kingdom. The purchase price paid by
the Company was approximately $125,000,000 and consisted of cash and 3,999,672
shares of Common Stock. At December 31, 1993, Cityvision operated 775 stores
under the trade name "Ritz".
During 1992, the Company also acquired or invested in several other
businesses that own and operate video and music stores. The aggregate purchase
price paid by the Company was approximately $103,774,000 and consisted of
cash and 2,112,977 shares of Common Stock.
During 1991, the Company acquired several businesses that own and
operate video stores. The aggregate purchase price paid by the Company was
approximately $89,614,000 and consisted of cash and 6,492,757 shares of
Common Stock.
The Company may from time to time invest in or acquire other businesses,
properties or securities.
See "Capital Structure" under the heading "Financial Condition" of Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Notes 2 and 12, Business Combinations and Investments and Other Matters, of
Notes to Consolidated Financial Statements for a further discussion of business
combinations and their effect on comparability of year-to-year data.
RESULTS OF OPERATIONS
The Company continued its record of profitable growth during 1993. Revenue was
$2,227,003,000, an increase of 69% over the prior year. Net income was
$243,646,000 and net income per share was $1.10, increases of 64% and 45%,
respectively, over 1992. 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 a 9.2% 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 reflects the Company's operating performance ratios (shown
as a percentage of revenue or average investment) as of December 31 for each of
the years indicated:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Operating Income 19% 18% 17%
Income Before Income Taxes 18% 18% 15%
Net Income 11% 11% 9%
Return on Average:
Capital 16% 18% 17%
Equity 20% 23% 22%
Assets 12% 14% 13%
</TABLE>
The ratios presented above generally met or exceeded the Company's performance
goals. Returns on average capital, equity and assets declined in 1993 due
primarily to the Company's strategic $600,000,000
28
<PAGE> 29
investment in Series A cumulative convertible preferred stock of Viacom
which provides a fixed rate of return which is less than the return
historically achieved by the Company's video, music and filmed entertainment
businesses. Return on average equity also decreased due to the increase in
equity resulting from the conversion of the Company's Liquid Yield Option Notes
("LYONs") to shares of Common Stock. There can be no assurance that the ratios
presented above will continue at the same levels. See also "Capital Structure"
under the heading "Financial Condition" of Management's Discussion and Analysis
of Financial Condition and Results of Operations.
The following table sets forth the number of video and music stores in
operation as of December 31 for each of the years indicated:
<TABLE>
<CAPTION>
1993 1992 1991
----- ----- -----
<S> <C> <C> <C>
Video stores:
Company-owned 2,698 2,215 1,235
Franchise-owned 895 912 793
----- ----- -----
3,593 3,127 2,028
===== ===== =====
Music stores:
Company-owned 511 238 ---
Joint venture 20 15 ---
----- ----- -----
531 253 ---
===== ===== =====
</TABLE>
Company-owned video stores at December 31, 1993 included 775 stores operating
under the "Ritz" trade name and 120 Super Club stores operating under the
"Video Towne", "Alfalfa", "Movies at Home" and "Movieland" trade names.
Company-owned music stores at December 31, 1993 consist of 511 retailing
outlets currently operating under the "Blockbuster Music Plus", "Sound
Warehouse", "Music Plus", "Record Bar", "Tracks", "Turtles" and "Rhythm and
Views" trade names. Joint venture music stores at December 31, 1993 consist of
"Megastores" operating under joint ventures with the Virgin Retail Group
Limited ("Virgin").
The Company may from time-to-time convert certain Company-owned video and music
stores operating under non-Blockbuster trade names to Blockbuster format
stores. Additionally, the Company may decide to close or relocate certain
Company-owned stores for various strategic reasons. As a franchisor of video
stores, the Company may from time-to-time purchase certain franchise-owned
stores or sell certain Company-owned stores to franchise owners in order to
achieve the optimum mix of franchise-owned and Company-owned video stores
within specific markets and the optimum division of geographic territory
between the Company and its franchise owners.
The Company's video business may be affected by a variety of factors
including, but not limited to, general economic trends, acquisitions made by
the Company, additional and existing competition, marketing programs, weather,
special or unusual events, variations in the number of store openings, the
quality of new release titles available for rental and sale, and similar
factors that may affect retailers in general. As compared to other months of
the year, revenue from Company-owned video stores in the United States has
been, and the Company
29
<PAGE> 30
believes will continue to be, subject to a decline during the months of April
and May, due in part to the change to Daylight Savings Time, and during the
months of September, October and November, due in part to the start of school
and introduction of new television programs.
The Company's video business may also be affected by technological advances
including, but not limited to, those relating to pay-per-view television.
Currently, pay-per-view television provides less viewing flexibility to the
consumer than videocassettes, and the more popular movies are generally
available on videocassette prior to appearing on pay-per-view television.
However, technological advances could result in greater viewing flexibility for
pay-per-view television or in other methods of electronic delivery, and such
industry developments could have an adverse impact on the Company and its
franchise owners' businesses. Notwithstanding these possible technological
advances, the Company believes that home video will continue to have the
competitive advantages of being not only the first source of filmed
entertainment in the home before pay-per-view but also the most convenient
source.
The Company's music business in general may be affected by economic conditions
and conditions in the music industry including, but not limited to, the quality
of new titles and artists, existing and additional competition, changes in
technology and similar factors that may affect retailers in general. The
Company's music business is seasonal with higher than average monthly revenue
normally experienced during the Thanksgiving and Christmas seasons, and
somewhat lower than average revenue normally experienced in September and
October.
The Company believes that as it continues to open and acquire video and
music stores in areas in which there are existing Company stores, revenue and
operating income of such existing stores may decline. The Company believes
such a decline could result from certain customers of existing stores choosing
to become customers of new Company stores due to more convenient locations.
The Company, however, believes that aggregate revenue and operating income
generated by all stores in operation will most likely increase because
newly-opened and acquired Company stores typically not only draw customers from
existing Company stores, but may also draw customers of competitors' stores who
prefer the more favorable selection, convenience and shopping experience of a
nearby Company store.
The success of the Company's filmed entertainment business depends, in
part, upon the network exhibition of its television series over several years
to allow for more profitable licensing and syndication arrangements. During
the initial years of a television series, network and international license
fees normally approximate the production costs of the series, and accordingly,
the Company recognizes only minimal profit or loss during this period. If a
sufficient number of episodes of a series are produced, the Company is
reasonably assured that it will also be able to sell the series in the domestic
off-network market, and the Company would then expect to realize a more
substantial profit with respect to the series.
30
<PAGE> 31
The Company's filmed entertainment business in general may also be affected by
the public taste, which is unpredictible and subject to change, and by
conditions within the filmed entertainment industry including, but not limited
to, the quality and availability of creative talent and the negotiation and
renewal of union contracts relating to writers, directors, actors, musicians
and studio craftsmen, as well as any changes in the law and governmental
regulation. In 1993, a Federal district court vacated certain provisions of
consent decrees which prohibited television networks from acquiring financial
interests and syndication rights in television programming developed or created
by non-network suppliers such as the Company. Accordingly, subject to certain
restrictions imposed by the Federal Communications Commission, the networks
will be able to negotiate with program suppliers to acquire financial interests
and syndication rights in television programs that air on the networks and
therefore could become competitors of the Company.
The following is a discussion of significant items in the Consolidated
Statements of Operations for the three years ended December 31, 1993:
RENTAL REVENUE
Rental revenue consists primarily of the rental of videocassettes and was
$1,285,412,000 in 1993, as compared to $969,333,000 in 1992 and $742,013,000 in
1991, representing annual increases of 33% and 31%, respectively. The
significant increases in rental revenue in 1993 and 1992 are primarily the
result of the increased number of Company-owned video stores in operation and
increased same store rental revenue for video stores in operation for more than
one year.
PRODUCT SALES
The following table sets forth the components of product sales revenue for the
years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Product Sales:
Music stores $371,232 $ 74,412 $ ---
Video stores 253,734 186,989 128,721
Product sales to franchise
owners 33,131 36,937 53,311
-------- -------- --------
$658,097 $298,338 $182,032
======== ======== ========
</TABLE>
Product sales at music stores, which consist principally of the sales of
compact discs, audiocassettes and other music related items, represent sales
made at Sound Warehouse and Music Plus stores which were acquired by the
Company in November 1992 and Super Club music stores which were acquired in
November 1993.
The significant increases in product sales at Company-owned video stores, which
consist principally of the sales of prerecorded videocassettes, confectionery
items and video accessories, are primarily due to a greater number of stores in
operation and an increase in product sales on a per store basis. Revenue from
product sales in
31
<PAGE> 32
Company-owned video stores represented approximately 16% of total video store
revenue for 1993 and 1992 and 15% for 1991.
See Revenue Recognition of Note 1, Summary of Significant Accounting Policies,
of Notes to Consolidated Financial Statements for a further discussion of
product sales.
OTHER REVENUE
Other revenue consists primarily of programming and distribution revenue
generated by the Company's filmed entertainment business, which was acquired
during 1993, and royalties from video franchising activities. Programming and
distribution revenue is derived primarily from network license fees, first run
syndication sales and fees arising from domestic and international television
licensing agreements.
The following table sets forth the components of other revenue for the years
ended December 31 (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
-------- ------- -------
<S> <C> <C> <C>
Programming and distribution
revenue $225,464 $ --- $ ---
Royalties and other 58,030 48,173 37,593
-------- ------- -------
$283,494 $48,173 $37,593
======== ======= =======
</TABLE>
See Revenue Recognition of Note 1, Summary of Significant Accounting Policies,
of Notes to Consolidated Financial Statements for a further discussion of other
revenue.
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 years ended December 31:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Cost of product sales 65% 66% 70%
Operating expenses:
Programming and distribution
expenses 67% -- --
Compensation and related expenses 16% 18% 19%
Occupancy 13% 17% 16%
Depreciation and amortization 18% 23% 23%
Selling, general and administrative 8% 9% 11%
</TABLE>
The above table represents consolidated percentages of operating costs and
expenses which include the addition of the Company's music business in November
1992 and its expansion during 1993 and the addition of the Company's
programming and distribution business in April 1993. The inclusion of these
businesses affect the comparability of year-to-year data as more fully
described below.
32
<PAGE> 33
COST OF PRODUCT SALES
Cost of product sales was $430,171,000, $196,175,000 and $126,746,000 for the
years ended December 31, 1993, 1992 and 1991, respectively. These increases
are consistent with the increases in product sales revenue for such periods.
The decrease in cost of product sales as a percentage of product sales revenue
for the years ended December 31, 1993 and 1992 is primarily attributable to the
addition of the Company's music business in late 1992 and its expansion during
1993. The sale of music products generated higher gross margins than those
historically achieved from the sale of video related products.
OPERATING EXPENSES
Programming and distribution expenses were $151,610,000 for the year ended
December 31, 1993. Such expenses relate to the Company's filmed entertainment
business and include amortization of film costs and program rights, amounts
paid or due to producers, and other residual and profit participation expenses.
See Film Costs and Program Rights of Note 1, Summary of Significant Accounting
Policies, of Notes to 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 1993 compared to 1992. These decreases
relate principally to the addition of the Company's music and filmed
entertainment businesses for the 1993 periods. The ratios of compensation,
occupancy, and depreciation and amortization expenses to the revenue of such
businesses were lower than the ratios historically achieved in the Company's
video business.
Compensation expenses were $349,798,000, $238,531,000 and $187,199,000 for the
years ended December 31, 1993, 1992 and 1991, respectively. These increases
are primarily a result of the continued expansion of the Company's business
through the development and acquisition of video stores and the addition of the
Company's music and filmed entertainment businesses.
Occupancy expenses were $297,953,000, $217,860,000 and $154,289,000 for the
years ended December 31, 1993, 1992 and 1991, respectively. These increases
are 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 $396,122,000, $306,829,000
and $223,672,000 for the years ended December 31, 1993, 1992 and 1991,
respectively. The increases are primarily the result of the Company's
continued investment in capital additions, particularly videocassette rental
inventory, and, in 1992, the Company's adoption of a shorter economic life for
certain videocassettes purchased after December 31, 1991. See Videocassette
Rental Inventory and Property and Equipment of Note 1, Summary of Significant
Accounting Policies, of Notes to Consolidated Financial Statements for a
further discussion of depreciation and amortization.
33
<PAGE> 34
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $178,322,000, $113,587,000
and $108,607,000 for the years ended December 31, 1993, 1992 and 1991,
respectively. These increases primarily reflect the expansion of the Company's
business through the development and acquisition of video and music stores.
However, as a percentage of revenue, these expenses declined due to the
addition of the Company's music businesses in November 1992 and 1993 and filmed
entertainment business in April 1993. The ratio of selling, general and
administrative expenses to the revenue of such businesses is lower than the
ratio historically achieved in the Company's video business.
INTEREST EXPENSE
Interest expense was $33,773,000, $17,793,000 and $21,780,000 for the years
ended December 31, 1993, 1992 and 1991, respectively. The increase in 1993 is
primarily attributable to increases in average indebtedness resulting from the
expansion of the Company's business.
GAIN FROM EQUITY INVESTMENT
The Company's consolidated results of operations for the year ended December
31, 1993 include a gain before income taxes of $2,979,000 resulting from the
Company's investment in Discovery Zone, Inc. ("Discovery Zone") and a
subsequent initial public offering of 5,000,000 common shares by Discovery Zone
in June 1993. See Gain on Equity Investment of Note 1, Summary of Significant
Accounting Policies, of Notes to Consolidated Financial Statements for a
further discussion of this transaction.
OTHER EXPENSE
Other expense, net, was $9,217,000, $893,000 and $2,345,000 for the years ended
December 31, 1993, 1992 and 1991, respectively. The increase in 1993 is
primarily a result of minority interest expense arising from the Company's
filmed entertainment business, which is less than 100% owned.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 37.5%, 35.9% and 36.8% for the years ended
December 31, 1993, 1992 and 1991, respectively. The increased rate in 1993 is
primarily attributable to the increase in the statutory federal corporate tax
rate. The decreased rate in 1992 is primarily the result of reductions in the
Company's effective foreign income tax rate.
See Note 5, Income Taxes, of Notes to Consolidated Financial Statements for a
further discussion of income taxes.
FINANCIAL CONDITION
The Company believes that its financial condition remains strong and that it
has sufficient operating cash flow and other financial resources
34
<PAGE> 35
necessary to meet its anticipated capital requirements and obligations as they
come due.
WORKING CAPITAL
Working capital at December 31, 1993 amounted to $105,485,000 as compared to a
deficit of $54,992,000 at December 31, 1992. The increase of $160,477,000
during 1993 was due primarily to cash provided by operating and financing
activities and working capital resulting from the addition of the Company's
filmed entertainment business.
Videocassette rental inventories are deemed non-current assets under generally
accepted accounting principles as they are not assets which are reasonably
expected to be completely realized in cash or sold in the normal business
cycle. Although the rental of such inventory generates a significant portion
of the Company's revenue, the classification of such assets as non-current
under generally accepted accounting principles requires their exclusion from
the computation of working capital. For this reason, the Company believes
working capital is not as significant as a measurement of financial condition
for companies operating in the home video industry as it is for companies
without operations in the home video industry.
Accounts and notes receivable consist primarily of amounts due from customers.
At December 31, 1993, accounts and notes receivable were $135,172,000, an
increase of $91,022,000 over December 31, 1992. This increase relates
primarily to the addition of receivables from licensing agreements related to
the Company's filmed entertainment business.
The current portion of film costs and program rights was $117,324,000 at
December 31, 1993 and also relates to the addition of the Company's filmed
entertainment business.
Other current assets were $50,210,000 at December 31, 1993, an increase of
$27,111,000 as compared to December 31, 1992. This increase was primarily due
to the expansion of the Company's music business and an increase in current
deferred income tax assets related to the Company's foreign operations.
Merchandise inventories and accounts payable at December 31, 1993 were
$350,763,000 and $369,815,000, respectively, an increase of $170,761,000 and
$153,453,000 over December 31, 1992. These increases are primarily a result of
the Company's expanded music business where it is customary to carry larger
merchandise inventories as compared to Company-owned video stores, as well as
its expanding video operations.
Accrued liabilities were $177,695,000 at December 31, 1993, an increase of
$78,177,000 as compared to December 31, 1992. This increase primarily reflects
the Company's addition of its filmed entertainment business and expansion of
its music business.
Accrued participation expenses were $43,013,000 at December 31, 1993 and relate
to the addition of the Company's filmed entertainment business.
35
<PAGE> 36
VIDEOCASSETTE RENTAL INVENTORY AND PROPERTY AND EQUIPMENT
See "Cash Flows From Investing Activities" under the heading "Cash Flows" of
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Videocassette Rental Inventory and Property and Equipment of
Note 1, Summary of Significant Accounting Policies, of Notes to Consolidated
Financial Statements for a discussion of videocassette rental inventory and
property and equipment policies and other information.
INTANGIBLE ASSETS
Intangible assets increased approximately $434,163,000 during 1993 primarily as
a result of acquisitions made by the Company during the year.
See Intangible Assets of Note 1, Summary of Significant Accounting Policies and
Note 2, Business Combinations and Investments, of Notes to Consolidated
Financial Statements for a further discussion of intangible assets.
OTHER ASSETS
Other assets consist primarily of equity investments in less than
majority-owned businesses and the non-current portion of film costs and program
rights and increased approximately $205,824,000 during 1993 primarily as a
result of the addition of the Company's filmed entertainment business and
investments in less than majority-owned businesses.
See Other Assets of Note 1, Summary of Significant Accounting Policies, of
Notes to Consolidated Financial Statements for a further discussion of other
assets.
MINORITY INTERESTS IN SUBSIDIARIES
Minority interests in subsidiaries increased during 1993 as a result of the
Company's acquisition of its filmed entertainment business which is less than
100% owned.
CAPITAL STRUCTURE
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. In March 1994, the Company used
the proceeds from such borrowing along with $250,000,000 of proceeds from
borrowings under its existing credit facility for the purchase of shares of
non-voting Viacom Class B common stock. See "Business Combinations and
Investments" of Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 12, Other Matters, of Notes to Consolidated
Financial Statements for a further discussion of the Viacom transactions.
36
<PAGE> 37
The following table sets forth the components of the Company's capital
structure, as a percentage of total capital, at December 31:
<TABLE>
<CAPTION>
1993 1992
------ ------
<S> <C> <C>
Long-term debt 22% 21%
Subordinated convertible debt -- 10
Shareholders' equity 78 69
---- ----
Total capital 100% 100%
==== ====
</TABLE>
The changes in long-term debt, subordinated convertible debt and shareholders'
equity as a percentage of total capital in 1993 primarily reflects the
conversion of substantially all of the Company's subordinated convertible debt
into shares of Common Stock during 1993. Significant transactions affecting
long-term debt, subordinated convertible debt and shareholders' equity are
discussed below.
In December 1993, the Company entered into a credit agreement (the "Credit
Agreement") with certain banks pursuant to which such banks have agreed to
advance the Company on an unsecured basis an aggregate of $1,000,000,000 for a
term of 40 months. The Credit Agreement significantly increased the Company's
committed borrowing capacity and contains terms and conditions generally
consistent with those existing under the prior 1992 revolving credit facility
which the Credit Agreement replaced. At December 31, 1993, approximately
$411,000,000 was outstanding under the Credit Agreement.
In November 1993, the Company completed an underwritten public offering of
14,650,000 shares of Common Stock, realizing net proceeds of approximately
$424,118,000 which were used to reduce existing indebtedness.
Subordinated convertible debt represented the Company's issuance of
$300,000,000 principal amount at maturity of LYONs. The LYONs were
zero-coupon notes subordinated to all existing and future senior indebtedness.
In August 1993, the Company called the LYONs for redemption. As a consequence
of the call, substantially all such LYONs were converted to approximately
8,303,000 shares of Common Stock.
In December 1992, the Company filed with the Securities and Exchange Commission
a shelf registration statement covering up to $300,000,000 of unsecured senior
and unsecured subordinated debt securities. In February 1993, the Company
issued $150,000,000 of 6.625% senior notes under the registration statement,
which notes mature in February 1998 and pay interest semi-annually. The
proceeds from such issuance were used to refinance existing indebtedness.
In January 1992, the Company received approximately $66,000,000 from Philips
for the purchase of 6,000,000 shares of Common Stock. Philips subsequently
exercised an option to acquire an additional 5,000,000 shares of Common Stock
at $11.00 per share. The sale of the additional 5,000,000 shares of Common
Stock was completed in July 1992 with the Company receiving from Philips a
$54,500,000 promissory note which was paid on June 30, 1993. During 1992, in
addition to the option exercised
37
<PAGE> 38
by Philips, the Company received net proceeds of approximately $15,808,000 in
connection with the exercise of warrants and options to acquire 7,371,084
shares of Common Stock.
During 1993 and 1992, the Company issued Common Stock valued at approximately
$369,407,000 and $113,974,000, respectively, in connection with its
acquisitions and investments.
See Notes 2, 3, 4 and 7, Business Combinations and Investments, Long-Term Debt,
Subordinated Convertible Debt and Shareholders' Equity, of Notes to
Consolidated Financial Statements for a further discussion of business
combinations, investments, indebtedness and shareholders' equity.
CASH FLOWS
Cash and cash equivalents increased by $51,896,000 in 1993 compared to
decreases of $8,306,000 in 1992 and $94,000 in 1991. The major components of
these changes are discussed below.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows provided by operating activities increased to $522,284,000 in 1993
from $450,785,000 in 1992 and $350,351,000 in 1991. Such increases are
primarily a result of the increased number of Company-owned video stores in
operation. Cash provided by operating activities combined with cash provided
by financing activities in 1993, 1992 and 1991 were used to fund capital
additions and acquisitions as the Company's business expanded during these
years. Cash provided by operating activities generated substantially all of
the cash needed for capital additions, net of disposals of videocassette rental
inventory, during the three years ended December 31, 1993, 1992 and 1991.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital additions for new and existing stores and cash used in business
combinations and investments comprise most of the Company's investing
activities. Capital additions, which consist primarily of purchases of
videocassette rental inventory and property and equipment, were $615,657,000,
$394,532,000 and $300,694,000 in 1993, 1992 and 1991, respectively. Cash used
in business combinations and investments was $673,241,000, $252,888,000 and
$8,244,000 in 1993, 1992 and 1991, respectively, and includes the $600,000,000
investment in Series A cumulative convertible preferred stock of Viacom as well
as acquisitions of Spelling and Super Club in 1993 and the acquisitions of
Cityvision, Sound Warehouse and Music Plus in 1992.
See "Viacom Inc. Agreements" and "Business Combinations and Investments" of
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 2, Business Combinations and Investments and Note 12, Other
Matters, of Notes to Consolidated Financial Statements for a further discussion
of businesses acquired and other investments.
38
<PAGE> 39
During 1993, 1992 and 1991 the Company opened or acquired a net of 483, 980
(including 775 stores related to the Cityvision acquisition) and 307 video
stores, respectively. During 1993 and 1992, the Company also opened or
acquired a net of 273 and 238 music stores, respectively. Company-opened
video stores require initial capital expenditures, including the purchase of
videocassettes for rental, of generally between $375,000 to $700,000 per store.
The Company has recently developed its own prototype music store called
"Blockbuster Music Plus". The Company currently projects that the cost to open
a new "Blockbuster Music Plus" store will require an initial investment,
including capital expenditures and merchandise inventory, of generally between
$700,000 to $1,000,000. The cost of acquiring video and music stores varies,
depending upon the size, location, operating history of the store, and, in the
case of video stores, the value associated with any reacquisition of franchise
rights for the territory related to the video store acquired. Thus, although
the Company can reasonably estimate the dollar amount necessary to open a new
video or music store, it is impossible to know the cost of each acquisition or
what mix of new store openings and acquisitions will occur in the future.
The Company believes that during 1994 it will continue to purchase new release
videocassettes and property and equipment in a manner substantially consistent
with historical practices. The Company currently intends to continue to expand
in the entertainment industry, which may include acquiring and opening
additional video and music stores, as well as developing, making investments
in or acquiring other entertainment related concepts or businesses. In
addition, the Company plans on converting a substantial number of its existing
music stores to the "Blockbuster Music Plus" format during 1994. The Company
believes that cash provided by operating activities as well as cash available
under the Company's Credit Agreement will be adequate to finance capital
additions and other funding requirements during 1994. The Company from time
to time may seek additional or alternate sources of financing.
See Note 3, Long-Term Debt, of Notes to Consolidated Financial Statements for a
further discussion of financing available under the Company's credit facilities
and from other sources.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities during 1993, 1992 and 1991 resulted from
commercial bank borrowings, repayments of such bank borrowings, issuances of
Common Stock and, in 1993 and 1992, the payment of cash dividends. Proceeds
from the issuance of Common Stock were $595,698,000 in 1993 and primarily
consisted of the sale of 14,650,000 shares of Common Stock in an underwritten
public offering. These financing activities combined with cash provided by
operating activities were used to fund capital additions and the development
and acquisition of stores as the Company's business expanded during these
years.
See "Capital Structure" under the heading "Financial Condition" of Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Notes 3, 4, 6 and 7, Long-Term Debt, Subordinated Convertible Debt, Stock
Options and Warrants and Shareholders' Equity,
39
<PAGE> 40
of Notes to Consolidated Financial Statements for a further discussion of
indebtedness and shareholders' equity transactions.
INFLATION
The Company anticipates that its business will be affected by general economic
trends. While the Company has not operated in the videocassette rental
industry, the music retailing industry or filmed entertainment industry during
a period of high inflation, the Company believes that if costs increase, it
should be able to pass such increases on to its customers.
FOREIGN EXCHANGE
The Company has foreign operations, primarily in the United Kingdom and Canada.
Exchange rate fluctuations between the currencies of these countries and the
U.S. Dollar may result in the translation and reporting of varying amounts of
U.S. Dollars in the Company's consolidated financial statements. Based on the
current scope of its foreign operations, the Company believes that any such
fluctuations would not have a material adverse effect on the Company's
consolidated financial condition or results of operations as reported in U.S.
Dollars.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 112, Employers' Accounting for Postemployment
Benefits, and SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. The Company believes the adoption of SFAS No. 112 will not
have a material effect on its results of operations or financial condition.
However, the adoption of SFAS No. 115 will require the Company to adjust its
investment in non-voting Viacom Class B common stock to fair value. Pursuant
to the provisions of SFAS No. 115, the Company has classified such investment
as an "available-for-sale security". Accordingly, any adjustment to fair value
will be excluded from net income and reported as a separate component of
shareholders' equity. Based on the quoted market price at March 23, 1994 and
after satisfaction of Viacom's make-whole obligation, the maximum adjustment to
fair value would result in a reduction of total assets and shareholders' equity
of approximately $186,000,000, net of income taxes, at such date.
See "Viacom Inc. Agreements" of Management's Discussion and Analysis of
Financial Condition and Results of Operations for a further discussion of the
Viacom investment.
40
<PAGE> 41
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Report of Independent Certified Public Accountants 42
Consolidated Balance Sheets as of
December 31, 1993 and 1992 43
Consolidated Statements of Operations for Each of the Three
Years Ended December 31, 1993 44
Consolidated Statements of Changes in Shareholders' Equity
for Each of the Three Years Ended December 31, 1993 45
Consolidated Statements of Cash Flows for Each of the Three
Years Ended December 31, 1993 46
Notes to Consolidated Financial Statements 47-65
Financial Statement Schedules for Each of the Three
Years Ended December 31, 1993:
V. Property, Plant and Equipment 73-75
VI. Accumulated Depreciation, Depletion and 76-78
Amortization of Property, Plant
and Equipment
VIII. Valuation and Qualifying Accounts 79
X. Supplementary Statements of Operations Information 80
</TABLE>
All other schedules are omitted as not applicable or not
required.
41
<PAGE> 42
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Blockbuster Entertainment Corporation:
We have audited the accompanying consolidated balance sheets of Blockbuster
Entertainment Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1993 and 1992, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1993. These financial statements
and the schedules referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Blockbuster Entertainment
Corporation and subsidiaries as of December 31, 1993 and 1992, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1993, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules included in Item 14.(a)(2)
are presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, fairly state, in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
Fort Lauderdale, Florida,
March 23, 1994.
42
<PAGE> 43
<TABLE>
<CAPTION>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(In thousands, except share data)
1993 1992
---- ----
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 95,254 $ 43,358
Accounts and notes receivable,
less allowance 135,172 44,150
Merchandise inventories 350,763 180,002
Film costs and program rights, net 117,324 ---
Other 50,210 23,099
---------- ----------
Total Current Assets 748,723 290,609
VIDEOCASSETTE RENTAL INVENTORY, NET 470,223 322,168
PROPERTY AND EQUIPMENT, NET 522,745 388,588
INTANGIBLE ASSETS, NET 856,318 422,155
INVESTMENT IN VIACOM INC. 600,000 ---
OTHER ASSETS 322,958 117,134
---------- ----------
$3,520,967 $1,540,654
========== ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 9,083 $ 16,894
Accounts payable 369,815 216,362
Accrued liabilities 177,695 99,518
Accrued participation expenses 43,013 ---
Income taxes payable 43,632 12,827
---------- ----------
Total Current Liabilities 643,238 345,601
LONG-TERM DEBT, LESS CURRENT PORTION 603,496 238,034
SUBORDINATED CONVERTIBLE DEBT --- 118,532
OTHER LIABILITIES 59,999 48,365
MINORITY INTERESTS IN SUBSIDIARIES 90,834 2,775
COMMITMENTS AND CONTINGENCIES --- ---
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value; authorized
500,000 shares; none outstanding --- ---
Common stock, $.10 par value; authorized
300,000,000 shares; issued and
outstanding 247,380,069 and 197,944,685
shares, respectively 24,738 19,794
Capital in excess of par value 1,564,685 453,081
Cumulative foreign currency
translation adjustment (38,143) (34,656)
Retained earnings 572,120 349,128
---------- ----------
Total Shareholders' Equity 2,123,400 787,347
---------- ----------
$3,520,967 $1,540,654
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
43
<PAGE> 44
<TABLE>
<CAPTION>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(In thousands, except per share data)
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
REVENUE:
Rental revenue $1,285,412 $ 969,333 $742,013
Product sales 658,097 298,338 182,032
Other revenue 283,494 48,173 37,593
---------- --------- --------
2,227,003 1,315,844 961,638
OPERATING COSTS AND EXPENSES:
Cost of product sales 430,171 196,175 126,746
Operating expenses 1,195,483 763,220 565,160
Selling, general and administrative 178,322 113,587 108,607
---------- --------- --------
OPERATING INCOME 423,027 242,862 161,125
INTEREST EXPENSE (33,773) (17,793) (21,780)
INTEREST INCOME 6,818 7,044 4,013
GAIN FROM EQUITY INVESTMENT 2,979 --- ---
OTHER EXPENSE, NET (9,217) (893) (2,345)
---------- --------- --------
INCOME BEFORE INCOME TAXES 389,834 231,220 141,013
PROVISION FOR INCOME TAXES 146,188 82,951 51,901
---------- --------- --------
NET INCOME $ 243,646 $ 148,269 $ 89,112
========== ========= ========
Net Income per Common and
Common Equivalent Share $ 1.11 $ .77 $ .51
Net Income per Common and ========== ========= ========
Common Equivalent Share -
assuming full dilution $ 1.10 $ .76 $ .51
========== ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
44
<PAGE> 45
<TABLE>
<CAPTION>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(In thousands)
Capital in Cumulative
Common Excess of Translation Retained
Stock Par Value Adjustment Earnings
-------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1990 $ 15,638 $ 181,021 $ --- $122,706
Net income --- --- --- 89,112
Sales of common stock, net 644 10,872 --- ---
Stock issued in acquisitions 649 54,396 --- ---
Tax benefit of non-qualified
stock options exercised --- 8,798 --- ---
Other --- (3,375) --- ---
-------- ------ -------- --------
Balance, December 31, 1991 16,931 251,712 --- 211,818
Net income --- --- --- 148,269
Sales of common stock, net 1,838 133,431 --- ---
Stock issued in acquisitions
and investments 1,025 112,949 --- ---
Note receivable from
shareholder --- (54,500) --- ---
Cash dividends --- --- --- (10,959)
Tax benefit of non-qualified
stock options exercised --- 8,740 --- ---
Foreign currency translation
adjustment --- --- (34,656) ---
Other --- 749 --- ---
-------- --------- -------- --------
Balance, December 31, 1992 19,794 453,081 (34,656) 349,128
Net income --- --- --- 243,646
Sales of common stock, net 2,098 539,100 --- ---
Stock issued for conversion
of subordinated convertible
debt 830 121,442 --- ---
Collection of shareholder
note receivable --- 54,500 --- ---
Stock issued in acquisitions
and investments 2,016 367,391 --- ---
Cash dividends --- --- --- (20,654)
Tax benefit of non-qualified
stock options exercised --- 18,909 --- ---
Foreign currency translation
adjustment --- --- (3,487) ---
Other --- 10,262 --- ---
-------- ---------- -------- --------
Balance, December 31, 1993 $ 24,738 $1,564,685 $(38,143) $572,120
======== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
45
<PAGE> 46
<TABLE>
<CAPTION>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(In thousands)
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 243,646 $148,269 $ 89,112
Adjustments to reconcile net income
to cash flows from operating
activities:
Depreciation and amortization 396,122 306,829 223,672
Amortization of film costs 87,281 --- ---
Additions to film costs and
program rights (110,422) --- ---
Interest on subordinated
convertible debt 6,362 8,945 8,267
Gain from equity investment (2,979) --- ---
Changes in operating assets and
liabilities, net of effects from
purchase transactions:
Increase in accounts and notes
receivable (29,444) (9,347) (14,203)
(Increase) decrease in
merchandise inventories (83,333) 1,379 (38,606)
(Increase) decrease in other
current assets (974) (5,254) 386
Increase (decrease) in accounts
payable and accrued liabilities (62,529) (37,159) 24,831
Increase in income taxes
payable and related items 83,655 20,391 39,786
Other (5,101) 16,732 17,106
---------- -------- --------
522,284 450,785 350,351
---------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of videocassette rental
inventory (451,116) (296,139) (221,996)
Disposals of videocassette
rental inventory 40,595 37,618 22,648
Purchases of property and equipment (164,541) (98,393) (78,698)
Net cash used in business combinations
and investments (673,241) (252,888) (8,244)
Other (2,216) (22,893) (15,603)
---------- -------- --------
(1,250,519) (632,695) (301,893)
---------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common
stock, net 595,698 80,769 11,516
Proceeds from long-term debt 2,373,786 328,583 87,717
Repayments of long-term debt (2,152,239) (222,523) (144,410)
Cash dividends paid (18,275) (7,154) ---
Other (18,839) (6,071) (3,375)
---------- -------- --------
780,131 173,604 (48,552)
---------- -------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 51,896 (8,306) (94)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 43,358 51,664 51,758
---------- -------- --------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 95,254 $ 43,358 $ 51,664
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
46
<PAGE> 47
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000's omitted in all tables except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements present the consolidated
financial position and results of operations of Blockbuster Entertainment
Corporation and subsidiaries (the "Company"). All material intercompany
accounts and transactions have been eliminated.
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 consolidated 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 2, Business Combinations and Investments, for a further discussion of
this transaction.
Accounts and Notes Receivable:
Accounts and notes receivable, which are stated net of an allowance for
doubtful accounts, consist primarily of amounts due from customers. The
current portion of notes receivable was approximately $13,298,000 and
$15,432,000 at December 31, 1993 and 1992, respectively. The Company believes
that the carrying amounts of accounts and notes receivable at December 31, 1993
and 1992 approximate fair value at such dates.
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.
Film Costs and Program Rights:
Film costs and program rights relate to the operations of the Company's filmed
entertainment business. See Note 2, 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.
47
<PAGE> 48
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO 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 product
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. Based on the Company's
estimates of future gross revenue as of December 31, 1993, approximately 60% of
unamortized released film costs and program rights will be amortized within the
next three years.
The components of film costs and program rights, net of amortization, at
December 31, 1993 are as follows:
<TABLE>
<S> <C>
Film costs:
Released $ 77,204
In process and other 22,009
Program rights 89,690
--------
188,903
Less: non-current portion (71,579)
--------
Current portion of film costs
and program rights $117,324
========
</TABLE>
The non-current portion of film costs and program rights is included in other
assets.
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 twelve or more copies per store were purchased during
the period from January 1, 1990 through December 31, 1991 were, for the twelfth
and any succeeding copies, amortized over twelve months on an accelerated
basis. Effective January 1, 1992, "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. For the twelve months ended
December 31, 1992, the adoption of this shorter economic life had the effect
of reducing net income by approximately $9,556,000 and net income per common
and common equivalent share by approximately five cents per share.
48
<PAGE> 49
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Videocassette rental inventory and related amortization at December 31 are as
follows:
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
Videocassette rental inventory $841,488 $580,748
Less: accumulated amortization (371,265) (258,580)
-------- --------
$470,223 $322,168
======== ========
</TABLE>
Amortization expense related to videocassette rental inventory was
$295,729,000, $234,862,000 and $171,509,000 in 1993, 1992 and 1991,
respectively. As videocassette rental inventory is sold or retired, the
applicable cost and accumulated amortization are eliminated from the accounts
and any gain or loss thereon is recorded.
Property and Equipment:
Property and equipment is stated at cost. Depreciation and amortization
expense is provided over the estimated lives of the related assets using the
straight-line method. Property and equipment at December 31 consists of the
following:
<TABLE>
<CAPTION>
Life 1993 1992
---- ---- ----
<S> <C> <C> <C>
Land and buildings 15-32 Years $ 77,715 $ 51,781
Leasehold improvements 2-10 Years 281,992 199,463
Furniture and fixtures 2-10 Years 178,578 146,282
Equipment 2-10 Years 194,125 132,648
-------- --------
732,410 530,174
Less: accumulated depreciation
and amortization (209,665) (141,586)
-------- --------
$522,745 $388,588
======== ========
</TABLE>
Depreciation and amortization expense related to property and equipment was
$74,772,000, $59,094,000 and $43,868,000 in 1993, 1992 and 1991, respectively.
Additions to property and equipment are capitalized and include acquisitions of
property and equipment, costs incurred in the development and construction of
new stores, major improvements to existing property and management information
systems. As property and equipment is sold or retired, the applicable cost and
accumulated depreciation and amortization are eliminated from the accounts and
any gain or loss thereon is recorded.
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. Subsequent to its
acquisitions, the Company continually evaluates factors, events and
circumstances which include, but are not limited to, the historical and
projected operating performance of acquired businesses, specific industry trends
and general economic conditions to assess whether the
49
<PAGE> 50
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
remaining estimated useful life of intangible assets may warrant
revision or that the remaining balance of intangible assets may not be
recoverable. If such factors, events or circumstances indicate that
intangible assets should be evaluated for possible impairment, the Company uses
an estimate of undiscounted net income over the remaining life of the
intangible assets in measuring their recoverability. Accumulated amortization
of intangible assets at December 31, 1993 and 1992 was $45,286,000 and
$20,168,000, respectively.
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. The non-current portion
of such receivables was approximately $39,153,000 and $47,288,000 at December
31, 1993 and 1992, respectively. The Company believes the carrying amounts of
the non-current portion of accounts and notes receivable approximate fair value
at such dates.
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.
Foreign Currency Translation:
Foreign subsidiaries' assets and liabilities are translated at the rates of
exchange at the balance sheet date while income statement accounts are
translated at the average exchange rates in effect during the periods
presented. The resulting translation adjustments are reported as a separate
component of shareholders' equity. Gains and losses resulting from foreign
currency transactions are included in net income. The aggregate transaction
gain included in the determination of net income for the year ended December
31, 1992 was $6,778,000. There were no transaction gains or losses during the
years ended December 31, 1993 and 1991.
Revenue Recognition:
Revenue from Company-owned video and music stores is recognized at the time of
rental or sale. Revenue from franchise owners is recognized when all material
services or conditions required under the Company's franchise agreements have
been performed by the Company.
Revenue from programming and distribution is recognized as follows: (1) revenue
from licensing agreements covering film product owned by the Company is
recognized when the film product is available to the licensee for telecast,
exhibition or distribution, and other conditions of the licensing agreements
have been met and (2) revenue from television distribution of film product
which is not owned by the Company is recognized when billed.
50
<PAGE> 51
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gain From Equity Investment:
It is the Company's policy to record gains or losses from the sale or issuance
of previously unissued stock by its subsidiaries or by companies in which the
Company is an equity investor and accounts for its investment using the equity
method.
The Company's consolidated results of operations for the year ended December
31, 1993 include a gain before income taxes of $2,979,000, resulting from the
Company's investment in Discovery Zone, Inc. ("Discovery Zone") and a
subsequent initial public offering of 5,000,000 common shares by Discovery Zone
in June 1993. Discovery Zone owns, operates and franchises indoor recreational
facilities for children.
Cash Flow Information:
Cash equivalents consist of interest bearing securities with original
maturities of less than ninety days.
See Notes 2, 3, 5 and 7, Business Combinations and Investments, Long-term Debt,
Income Taxes and Shareholders' Equity, of Notes to Consolidated Financial
Statements for a discussion of supplemental cash flow information.
2. 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.
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 the
Company's common stock, $.10 par value ("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 October 1993, the Company purchased 24,000,000 shares of newly-issued Series
A cumulative convertible preferred stock of Viacom Inc. ("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. Although the
preferred stock is currently an unlisted equity security, 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
51
<PAGE> 52
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
value of such investment to be approximately $552,000,000 at December 31, 1993.
In August 1993, the Company merged with WJB, its largest franchise owner. 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.
Revenue and net income of the previously separate companies for the periods
before the pooling of interests business combination was consummated (after
reflecting the effects of intercompany eliminations) are as follows:
<TABLE>
<CAPTION>
Six Months
Ended
June 30, Year Ended December 31,
-----------------------
1993 1992 1991
---------- ---------- ---------
<S> <C> <C> <C>
Revenue:
The Company $840,416 $1,188,118 $858,353
WJB 85,440 127,726 103,285
-------- ---------- --------
$925,856 $1,315,844 $961,638
======== ========== ========
Net Income:
The Company $ 81,006 $ 133,638 $ 86,798
WJB 11,646 14,631 2,314
-------- ---------- --------
$ 92,652 $ 148,269 $ 89,112
======== ========== ========
</TABLE>
During the second quarter of 1993, the Company acquired a majority of the
common stock of Spelling Entertainment Group Inc. ("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 more fully
discussed in Note 7, Shareholders' Equity. As a result of the transactions
described above, the Company owned approximately 70.5% of the outstanding
common stock of Spelling at December 31, 1993.
During 1993, the Company acquired or invested in businesses that own and
operate video stores, are involved in the production and distribution of filmed
entertainment, and own, operate and franchise indoor recreational facilities
for children. The aggregate purchase price paid by the Company was
approximately $195,610,000 and consisted of cash and 5,631,180 shares of Common
Stock.
52
<PAGE> 53
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In November 1992, the Company acquired Sound Warehouse, Inc. and subsidiary and
Show Industries, Inc. ("Sound Warehouse" and "Music Plus") which own and operate
music stores. The purchase price paid by the Company was approximately
$190,000,000 and consisted of cash and 4,142,051 shares of Common Stock.
In February 1992, the Company acquired Cityvision plc ("Cityvision"), the
largest home video retailer in the United Kingdom. The purchase price paid by
the Company was approximately $125,000,000 and consisted of cash and 3,999,672
shares of Common Stock. At December 31, 1993, Cityvision operated 775 stores
under the trade name "Ritz".
During 1992, the Company also acquired or invested in several other businesses
that own and operate video and music stores. The aggregate purchase price paid
by the Company was approximately $103,774,000 and consisted of cash and
2,112,977 shares of Common Stock.
During 1991, the Company acquired several businesses that own and operate video
stores. The aggregate purchase price paid by the Company was approximately
$89,614,000 and consisted of cash and 6,492,757 shares of Common Stock. Such
shares of Common Stock include 1,297,921 shares issued by the Company in
connection with the repayment of a $12,586,000 short-term promissory note which
was issued by the Company in connection with an acquisition during 1991.
The Company's consolidated results of operations for the years ended December
31 on an unaudited pro forma basis assuming the acquisitions of Super Club,
Spelling, Sound Warehouse and Music Plus had occurred as of January 1, 1992,
are as follows:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Revenue $2,595,199 $2,296,570
========== ==========
Net income $ 247,735 $ 177,034
========== ==========
Net income per common and common
equivalent share - assuming
full dilution $ 1.07 $ .82
========== ==========
</TABLE>
53
<PAGE> 54
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The purchase price allocations for all business combinations and investments
discussed above, except for the merger with WJB which was accounted for under
the pooling of interests method of accounting, were as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Videocassette rental inventory $ 33,683 $ 53,889 $ 18,642
Property and equipment 56,781 85,175 22,276
Intangible assets 456,937 347,635 40,306
Investment in Viacom 600,000 --- ---
Other assets 182,075 19,825 10,376
Working capital deficiency,
net of cash acquired (45,614) (73,592) (47,464)
Long-term debt assumed (131,008) (40,048) (8,759)
Other liabilities (13,986) (26,022) 15,326
Minority interests in
subsidiaries (96,220) --- ---
Common stock issued (369,407) (113,974) (42,459)
-------- -------- --------
Net cash used in business
combinations and investments $673,241 $252,888 $ 8,244
======== ======== ========
</TABLE>
The amounts presented above for 1993 reflect the preliminary purchase price
allocations for business combinations.
54
<PAGE> 55
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. LONG-TERM DEBT
Long-term debt at December 31 is as follows:
<TABLE>
<CAPTION>
1993 1992
------------- ------------
<S> <C> <C>
Payable to banks under an unsecured revolving credit agreement,
interest at 3.71% at December 31, 1993 $ 411,000 $ ---
Payable to banks under an unsecured
revolving credit agreement, interest at
3.98% at December 31, 1992 --- 173,000
Unsecured senior notes, interest fixed
at 6.625% 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%
at December 31, 1993 2,000 41,031
Payable to a bank under a secured
revolving credit agreement, interest at
LIBOR plus 1.75% (5.06% at
December 31, 1992) --- 31,500
Payable to a bank under a secured term
loan agreement, interest at LIBOR plus 1.50% (4.81% at December 31,
1992) --- 9,397
--------- ---------
Total long-term debt 612,579 254,928
Less: current portion (9,083) (16,894)
--------- ---------
Long-term debt, less current portion $ 603,496 $ 238,034
========= =========
</TABLE>
In December 1993, the Company entered into a credit agreement (the "Credit
Agreement") with certain banks pursuant to which such banks have agreed to
advance the Company on an unsecured basis an aggregate of $1,000,000,000
for a term of 40 months. Outstanding advances, if any, are payable at the
expiration of the 40-month term. The Credit Agreement requires, among other
items, that the Company maintain certain financial ratios and comply with
certain financial covenants. Interest is generally determined and payable
monthly using a competitive bid feature. The Credit Agreement replaces a
1992 revolving credit arrangement among the Company and certain other banks.
55
<PAGE> 56
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In December 1992, the Company filed with the Securities and Exchange Commission
a shelf registration statement covering up to $300,000,000 of unsecured senior
debt securities and unsecured subordinated debt securities. In February 1993,
the Company issued $150,000,000 of 6.625% senior notes under the registration
statement. Such notes mature in February 1998 and pay interest semi-
annually. The proceeds from such issuance were used to refinance existing
indebtedness. The notes are registered on the New York Stock Exchange and at
December 31, 1993 had a quoted market price of approximately $101.25 per note
resulting in a fair value for all outstanding notes of approximately
$151,875,000.
All outstanding advances under the bank term loan, which were related to the
Company's filmed entertainment business, were repaid and such loan terminated
in January 1994.
Excluding the unsecured senior notes discussed above, substantially all
of the Company's long-term debt at December 31, 1993 and 1992 carried interest
rates that were adjusted regularly to reflect current market conditions.
Accordingly, the Company believes the carrying amount of such indebtedness
approximated fair value at such dates.
The Company made interest payments of $26,301,000, $9,707,000 and $12,913,000
in 1993, 1992 and 1991, respectively.
4. SUBORDINATED CONVERTIBLE DEBT
In August 1993, the Company called its Liquid Yield Option Notes ("LYONs") for
redemption. As a consequence of the call, substantially all such LYONs were
converted to approximately 8,303,000 shares of Common Stock resulting in an
increase to shareholders' equity of approximately $122,272,000. The LYONs were
issued initially in November 1989 in the aggregate principal amount at maturity
of $300,000,000 and required no periodic interest payments. Each LYON had an
issue price of $308.32 and would have had a principal amount due at maturity of
$1,000 (representing a yield to maturity of 8% per annum computed on a
semi-annual bond equivalent basis). Each LYON was convertible into 27.702
shares of Common Stock, at the option of the holder, at any time on or prior to
maturity, was subordinated to all existing and future Senior Indebtedness (as
defined in the LYONs indenture agreement) of the Company, and was
redeemable under certain circumstances in whole or in part, at the option of
the Company, for cash in an amount equal to the issue price plus accrued
original issue discount to the date of redemption.
The LYONs were registered on the New York Stock Exchange and at December 31,
1992 had a quoted market price of approximately $530 per LYON resulting in a
fair value for all outstanding LYONs of approximately $159,000,000.
56
<PAGE> 57
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 109 - Accounting for Income Taxes,
which superceded SFAS No. 96. The Company adopted SFAS No. 109 in 1991.
The income tax provision for the years ended December 31 consists of the
following components:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $100,008 $69,020 $38,443
State 8,600 5,006 2,095
Foreign 2,749 --- ---
-------- ------- -------
Total current 111,357 74,026 40,538
-------- ------- -------
Deferred:
Federal 27,549 3,407 10,041
State 1,689 227 1,322
Foreign 5,593 5,291 ---
-------- ------- -------
Total deferred 34,831 8,925 11,363
-------- ------- -------
$146,188 $82,951 $51,901
======== ======= =======
</TABLE>
A reconciliation of the federal income tax rate to the Company's effective
income tax rate for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Income tax at statutory rate 35.0% 34.0% 34.0%
State income taxes, net of
federal income tax benefit 2.6 2.3 2.4
Other, net (.1) (.4) .4
----- ----- -----
37.5% 35.9% 36.8%
===== ===== =====
</TABLE>
57
<PAGE> 58
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31 are as
follows:
<TABLE>
<CAPTION>
1993 1992
------ ------
<S> <C> <C>
Deferred Tax Assets:
Difference between assigned
value and tax basis of
acquired entities:
Foreign $ 3,008 $12,862
Domestic 82,373 11,898
Tax loss and credit carryforwards 82,469 10,218
Other 6,076 5,109
-------- -------
173,926 40,087
Less: valuation allowance (47,275) (3,731)
-------- -------
$126,651 $36,356
======== =======
Deferred Tax Liabilities:
Expenses deducted for tax,
amortized for book $ 22,221 $15,518
Excess tax over book
depreciation and amortization 54,733 29,160
Other 3,808 8,575
-------- -------
$ 80,762 $53,253
======== =======
</TABLE>
During 1993, the Company's valuation allowance increased by $43,544,000 to
$47,275,000. Such increase relates primarily to certain deferred tax assets of
acquired businesses which consist principally of net operating loss
carryforwards. Should future circumstances result in a change in the valuation
allowance, such change may be allocated so as to increase or decrease
intangible assets.
The foreign component of income before income taxes for the years ended
December 31, 1993 and 1992 was approximately $15,200,000 and $22,723,000,
respectively.
At December 31, 1993, the Company had approximately $210,000,000 of operating
and capital loss carryforwards available to reduce future income taxes, of
which approximately $29,000,000 have unlimited carryforward periods and
approximately $181,000,000 expire in varying amounts commencing in 2001. These
carryforwards relate primarily to businesses acquired by the Company and to
periods prior to their respective acquisition dates.
The Company made income tax payments of approximately $63,621,000, $61,002,000
and $14,857,000 in 1993, 1992 and 1991, respectively.
58
<PAGE> 59
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. STOCK OPTIONS AND WARRANTS
The Company has various stock option plans under which shares of Common Stock
may be granted to key employees and directors of the Company. Options granted
under the plans are non-qualified and are granted at a price equal to the fair
market value of the Common Stock at the date of grant.
A summary of stock option and warrant transactions for the years ended December
31 is as follows:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Options and warrants outstanding
at beginning of year 12,658 17,384 21,614
Granted 8,915 8,963 2,942
Exercised (2,675) (12,371) (6,440)
Cancelled (584) (1,318) (732)
------- ------- -------
Options and warrants outstanding
at end of year 18,314 12,658 17,384
======= ======= =======
Average price of options and
warrants exercised $ 6.45 $ 5.72 $ 1.79
Prices of options and warrants $1.08 to $1.08 to $1.08 to
outstanding at end of year $32.42 $16.75 $14.25
Average price of options and
warrants outstanding at end
of year $15.86 $ 9.07 $ 6.83
Vested options and warrants at
end of year 11,070 7,645 12,736
Options available for future
grants at end of year 1,800 6,481 9,126
</TABLE>
In February 1992, warrants to acquire 5,138,323 shares of Common Stock,
originally issued in 1987 in connection with the initial equity investment in
the Company by its Chairman, were exercised with the Company receiving proceeds
of approximately $6,293,000.
In April 1992, the Company granted a call option, for 5,000,000 shares of
Common Stock, to Philips Electronics N.V. ("Philips") that was subsequently
exercised as more fully described in Note 7, Shareholders' Equity.
7. SHAREHOLDERS' EQUITY
The Board of Directors has the authority to issue up to 500,000 shares of $1
par value preferred stock at such time or times, in such series, with such
designations, preferences, special rights, limitations or restrictions thereof
as it may determine. No shares of preferred stock have been issued.
59
<PAGE> 60
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In November 1993, the Company registered with the Securities and Exchange
Commission 14,650,000 shares of its Common Stock to be offered in an
underwritten public offering. Upon the sale of such shares, the Company
realized net proceeds of approximately $424,118,000 which were used to reduce
existing indebtedness.
In October 1993, the Company issued 3,652,542 shares of its Common Stock to
Spelling in exchange for 13,362,215 newly issued shares of Spelling's common
stock increasing the Company's ownership to approximately 70.5% of the
outstanding common stock of Spelling. Spelling subsequently resold such shares
of the Company's Common Stock resulting in an increase to the Company's
shareholders' equity of approximately $100,445,000.
In 1993, the Company received net proceeds of approximately $16,635,000 in
connection with the exercise of warrants and options to acquire 2,674,933
shares of Common Stock.
Sales of Common Stock as shown on the Consolidated Statements of
Changes in Shareholders' Equity for the year ended December 31, 1992 include
$66,000,000 received in January 1992 from Philips for the purchase of 6,000,000
shares of Common Stock and $55,000,000 from Philips related to the exercise of
an option to purchase 5,000,000 shares of Common Stock. The sale of the
additional 5,000,000 shares of Common Stock was completed in July 1992 with the
Company receiving from Philips a $54,500,000 promissory note which was
subsequently collected in June 1993. In addition to the option exercised by
Philips, the Company received net proceeds of approximately $15,808,000 in
connection with the exercise of warrants and options to acquire 7,371,084
shares of Common Stock in 1992.
In April 1992, the Board of Directors of the Company adopted a policy providing
for the payment of quarterly cash dividends to the Company's shareholders.
Cash dividends of nine and one half and six cents per common share were
declared during 1993 and 1992, respectively.
In 1991, the Company received net proceeds of approximately $11,516,000 in
connection with the exercise of warrants and options to acquire 6,439,748
shares of Common Stock.
As of December 31, 1993, approximately 34,624,000 shares of 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.
60
<PAGE> 61
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. COMMITMENTS AND CONTINGENCIES
The Company leases substantially all of its retail, distribution and
administration facilities under non-cancellable operating leases, which in most
cases contain renewal options. Rental expense was approximately $212,803,000,
$153,522,000 and $106,608,000 for the years ended December 31, 1993, 1992 and
1991, respectively.
Future minimum lease payments under non-cancellable operating leases at
December 31, 1993 are due as follows:
<TABLE>
<S> <C>
1994 $282,822
1995 254,853
1996 227,278
1997 202,158
1998 170,699
Thereafter 625,095
</TABLE>
The Company has guaranteed obligations of certain of its joint ventures
aggregating approximately $53,755,000 at December 31, 1993. After considering
its interest in the underlying assets of such joint ventures, the Company
believes it is not exposed to any potential material losses in connection with
these guarantees.
Subject to certain conditions, the Company is committed to purchase all of the
outstanding common stock of Republic Pictures Corporation ("Republic") for
approximately $68,000,000 in cash in connection with the merger of Republic
into Spelling.
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 will 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 and contract disputes, environmental clean-up
assessments, damages from alleged dioxin contamination and other matters
primarily resulting from its discontinued operations. Some of the parties
involved in such actions seek significant amounts of damages. 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 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. Substantial portions of such accruals are
intended to cover environmental costs associated with Spelling's former
operations. Such accruals are recorded without discount or offset for either
the time value of money prior to the
61
<PAGE> 62
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
anticipated date of payment or expected recoveries from insurance or
contribution claims against unaffiliated entities.
Although there are significant uncertainties inherent in estimating
environmental liabilities, based upon the Company's experience it is considered
unlikely that the amount of possible environmental liabilities and Chapter 11
disputed claims would exceed the amount of accruals by more than $50,000,000.
9. NET INCOME PER SHARE
Net income per common and common equivalent 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 and
common equivalent share, the Company utilizes the treasury stock method. For
the year ended December 31, 1992, computation of net income per common and
common equivalent share on a fully diluted basis assumes conversion of the
LYONs, resulting in an increase to net income for the hypothetical elimination
of interest expense, net of tax, related to the LYONs. No such adjustment was
necessary for 1993 as the LYONs were converted to shares of Common Stock as
more fully described in Note 4, Subordinated Convertible Debt.
The information required to compute net income per share on a primary and fully
diluted basis for the years ended December 31 is presented below:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Primary:
Weighted average number
of common and common
equivalent shares 220,195 192,427 175,420
======== ======== ========
Fully Diluted:
Net income $243,646 $148,269 $ 89,112
Interest expense related
to LYONs, net of tax --- 5,770 ---
-------- -------- --------
Adjusted net income $243,646 $154,039 $ 89,112
======== ======== ========
Weighted average number
of common and common
equivalent shares 221,476 194,008 175,687
Shares issued upon assumed
conversion of LYONs --- 8,306 ---
-------- -------- --------
Shares used in computing
net income per common and
common equivalent share
assuming full dilution 221,476 202,314 175,687
======== ======== ========
</TABLE>
10. BUSINESS SEGMENT INFORMATION
Prior to 1992, the Company's operations consisted primarily of operating
and franchising video stores. With the acquisition of Sound Warehouse and
Music Plus in November 1992, the acquisition of a majority interest in Spelling
in April 1993 and the acquisition of Super Club in November 1993, the Company's
operations were expanded to include the sale
62
<PAGE> 63
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of prerecorded music and related items and the production and distribution of
filmed entertainment.
Financial information about the Company's operations by industry segment
for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Revenue:
Video $1,597,024 $1,234,237
Music 404,515 81,607
Filmed Entertainment 225,464 ---
---------- ----------
$2,227,003 $1,315,844
========== ==========
Operating Income:
Video $ 332,118 $ 228,910
Music 43,181 13,952
Filmed Entertainment 47,728 ---
---------- ----------
$ 423,027 $ 242,862
========== ==========
Depreciation and Amortization Expense:
Video $ 378,577 $ 305,043
Music 12,809 1,786
Filmed Entertainment 4,736 ---
---------- ----------
$ 396,122 $ 306,829
========== ==========
Identifiable Assets:
Video $1,541,274 $1,177,184
Music 537,883 309,168
Filmed Entertainment 584,570 ---
Corporate and Other 857,240 54,302
---------- ----------
$3,520,967 $1,540,654
========== ==========
Capital Expenditures:
Video $ 610,505 $ 523,012
Music 35,885 10,584
Filmed Entertainment 3,008 ---
Corporate and Other 56,723 ---
---------- ----------
$ 706,121 $ 533,596
========== ==========
</TABLE>
63
<PAGE> 64
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The following is an analysis of certain items in the Consolidated
Statements of Operations by quarter for 1993 and 1992.
<TABLE>
<CAPTION>
Operating Net Net Income
Revenue Income Income Per Share
------- ------ ------ ---------
<S> <C> <C> <C> <C>
1993
----
First quarter $ 433,398 $ 76,928 $ 44,686 $ .22
Second quarter 492,458 81,729 47,966 .22
Third quarter 577,450 127,329 69,699 .32
Fourth quarter 723,697 137,041 81,295 .34
---------- -------- -------- -------
$2,227,003 $423,027 $243,646 $ 1.10
========== ======== ======== =======
1992
----
First quarter $ 280,596 $ 47,614 $ 27,808 $ .15
Second quarter 287,758 50,402 30,192 .16
Third quarter 310,772 65,230 42,623 .22
Fourth quarter 436,718 79,616 47,646 .23
---------- -------- -------- -------
$1,315,844 $242,862 $148,269 $ .76
========== ======== ======== =======
</TABLE>
12. OTHER MATTERS
In January 1994, the Company entered into a merger agreement pursuant to which
the Company has agreed to merge with and into Viacom, with Viacom being the
surviving corporation. Under the terms of the agreement each share of Common
Stock shall be converted into the right to receive .08 shares of Viacom Class A
common stock, .60615 shares of non-voting Viacom Class B common stock and under
certain circumstances, up to an additional .13829 shares of non-voting Viacom
Class B common stock. The closing of the merger is subject to customary
conditions including approval of the merger by the Company's shareholders.
Concurrently 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 $1,250,000,000, or $55 per share.
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. In March 1994, the Company used
the proceeds from such borrowing along with $250,000,000 of proceeds from
borrowings under its existing Credit Agreement for the purchase of shares of
non-voting Viacom Class B common stock.
64
<PAGE> 65
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities. The adoption of SFAS No. 115 will require the
Company to adjust its investment in non- voting Viacom Class B common stock to
fair market value. Pursuant to the provisions of SFAS No. 115, the Company has
classified such investment as an "available-for-sale security". Accordingly,
any adjustment to fair value will be excluded from net income and reported as a
separate component of shareholders' equity. Based on the quoted market price
at March 23, 1994 and after satisfaction of Viacom's make-whole obligation, the
maximum adjustment to fair value would result in a reduction of total assets
and shareholders' equity of approximately $186,000,000, net of income taxes, at
such date.
65
<PAGE> 66
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None
PART III.
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth as of March 18, 1994, the names of the directors
and executive officers of the Company, their respective ages and their
respective positions with the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
H. Wayne Huizenga . . . . . . . . . . . . . . . . 56 Chairman of the Board and Executive Committee and
Chief Executive Officer
A. Clinton Allen, III . . . . . . . . . . . . . . 50 Director, Chairman of the Compensation Committee
H. Scott Barrett . . . . . . . . . . . . . . . . 33 Senior Vice President of Information Systems
Steven R. Berrard . . . . . . . . . . . . . . . . 39 Vice Chairman of the Board,
President and Chief Operating Officer
J. Ronald Castell . . . . . . . . . . . . . . . . 56 Senior Vice President of Programming and Communications
John W. Croghan . . . . . . . . . . . . . . . . . 63 Director, Chairman of the Audit and Finance Committee
Albert J. Detz . . . . . . . . . . . . . . . . . 46 Vice President and Corporate Controller
Gregory K. Fairbanks . . . . . . . . . . . . . . 40 Senior Vice President, Chief
Financial Officer and Treasurer
Donald F. Flynn . . . . . . . . . . . . . . . . . 54 Director, Chairman of the Nominating Committee
Robert A. Guerin . . . . . . . . . . . . . . . . 50 Senior Vice President of Domestic Franchising
Thomas W. Hawkins . . . . . . . . . . . . . . . . 33 Senior Vice President,
General Counsel and Secretary
James L. Hilmer . . . . . . . . . . . . . . . . . 49 Senior Vice President and
Chief Marketing Officer
George D. Johnson, Jr. . . . . . . . . . . . . . 51 Director and President - Consumer
Division
</TABLE>
66
<PAGE> 67
<TABLE>
<S> <C> <C>
Ramon Martin-Busutil . . . . . . . . . . . . . . 60 President - International Division
John J. Melk . . . . . . . . . . . . . . . . . . 57 Director
Gerald W.B. Weber . . . . . . . . . . . . . . . . 42 Senior Vice President of Operations - Consumer Divison
</TABLE>
Each director holds office until the next annual meeting of stockholders and
until his successor has been elected and qualified. Officers are elected by
the Board of Directors and serve at its discretion.
Mr. Huizenga became a Director of the Company in February 1987, was elected as
Chairman of the Board, Chief Executive Officer and President of the Company in
April 1987 and is Chairman of the Executive Committee. Mr. Huizenga served as
President of the Company until June 1988. He is a co-founder of Waste
Management, Inc. (now known as WMX Technologies, Inc. ("WMX")), a waste
disposal and collection company, where he served in various capacities,
including President, Chief Operating Officer and a Director, until May 1984.
From May 1984 to present, Mr. Huizenga has been an investor in other businesses
and is the sole stockholder and Chairman of the Board of Huizenga Holdings,
Inc. ("Holdings"), a holding and management company with various business
interests. In connection with these business interests, Mr. Huizenga has been
actively involved in strategic planning for, and executive management of, these
businesses. Mr. Huizenga also has a majority ownership interest in Florida
Marlins Baseball, Ltd. ("the "Florida Marlins"), a Major League Baseball sports
franchise, owns the Florida Panthers Hockey Club, Ltd., a National Hockey
League sports franchise (the "Florida Panthers"), a limited partnership
interest in Miami Dolphins, Ltd. (the "Miami Dolphins"), a National Football
League sports franchise, and an ownership interest in Robbie Stadium
Corporation and certain affiliated entities, which own and operate Joe Robbie
Stadium in South Florida. Mr. Huizenga has entered into an agreement to
purchase the remaining ownership interest in the Miami Dolphins. Mr. Huizenga
is Chairman of the Board of Directors of Spelling. Mr. Huizenga is also a
member of the Boards of Directors of Republic, Discovery Zone, Viacom, Viacom
International Inc. and Paramount Communications, Inc.
Mr. Allen became a Director of the Company in July 1986 and is Chairman of the
Compensation Committee. Since October 1988, Mr. Allen has served as Chairman
and Chief Executive Officer of A.C. Allen & Co., a financial services
consulting firm. He also is a Director and Vice Chairman of both Psychemedics
Corporation ("Psychemedics") and the DeWolfe Companies, Inc. He is also a
director of the Forschner Group. Prior to October 1988, Mr. Allen was Executive
Vice President of Advest Group, Inc., an investment banking firm. Mr. Allen
was Chairman and Chief Executive Officer of Burgess and Leith, a New York Stock
Exchange member firm from 1984 to 1986.
Mr. Barrett joined the Company in July 1989 as Director of Information Services
and became Vice President of Corporate Information Systems in February 1992.
He became Senior Vice President of Information Services
67
<PAGE> 68
in February 1994. From January 1983 until July 1989, he was a management
consultant with Andersen Consulting in Dallas, Texas.
Mr. Berrard joined the Company in June 1987 as Senior Vice President, Treasurer
and Chief Financial Officer and became a Director of the Company in May 1989.
Mr. Berrard became Vice Chairman of the Board in November 1989 and President
and Chief Operating Officer in January 1993. He served as Treasurer of the
Company from June 1987 until February 1989, as Senior Vice President of the
Company from June 1987 until November 1989 and as Chief Financial Officer of
the Company from June 1987 to June 1992. Mr. Berrard is President, Chief
Executive Officer and a Director of Spelling. He is also a member of the Board
of Directors of Republic. He is also a limited partner of the Florida
Marlins. Prior to his tenure with the Company, Mr. Berrard served as
President of Holdings, which was known prior to June 1988 as Waco Services,
Inc. From January 1983 to April 1985, Mr. Berrard served in various positions
with Waco Leasing Company and Port-O-Let International, Inc., including
President, Chief Financial Officer, Treasurer and Secretary. Prior to January
1983, Mr. Berrard was employed by Coopers & Lybrand, an international public
accounting firm, for over five years.
Mr. Castell joined the Company in February 1989 as Senior Vice President of
Programming and Merchandising and became Senior Vice President of Programming
and Communications in August 1991. From October 1985 to February 1989, he was
Vice President of Marketing and Merchandising at Erol's Inc., then a chain of
two hundred video stores headquartered in the Washington, D.C. area. From
October 1984 to October 1985, Mr. Castell was the President and sole
stockholder of Big Think, Inc., a marketing consulting company. Mr. Castell
is also Vice President of Spelling.
Mr. Croghan became a Director of the Company in July 1987 and is currently
Chairman of the Audit and Finance Committee. He is also a Director of Lindsay
Manufacturing Company, St. Paul Bancorp, Inc. and the Morgan Stanley Emerging
Markets Fund. Mr. Croghan is, and has been for more than the past five years,
the Chairman of Lincoln Capital Management Company, an investment advisory
firm.
Mr. Detz joined the Company in January 1991 as Assistant Corporate Controller
and became Vice President and Corporate Controller in February 1992. From 1980
until he joined the Company, Mr. Detz served in various finance related
positions with Encore Computer Corporation, including Vice President and
Corporate Controller. Prior to 1980, Mr. Detz was employed by Coopers and
Lybrand, an international public accounting firm, for four years.
Mr. Fairbanks joined the Company in June 1992 as Senior Vice President and
Chief Financial Officer and became Treasurer of the Company in March 1993.
From October 1980 until the time he joined the Company, Mr. Fairbanks served in
a number of finance related capacities, including Executive Vice President and
Chief Financial Officer of Waste Management International plc. Prior to
October 1980, Mr. Fairbanks was employed by Arthur Andersen & Co., an
international public accounting
68
<PAGE> 69
firm, for approximately four years. Mr. Fairbanks is also Senior Vice
President of Spelling.
Mr. Flynn became a Director of the Company in February 1987 and is Chairman of
the Nominating Committee. He is Chairman and Chief Executive Officer of Flynn
Enterprises, Inc., a business consulting and venture capital company, and since
July 1992 has been Chairman and Chief Executive Officer of Discovery Zone, a
franchisor and operator of fun and fitness centers for children. Mr. Flynn
also currently serves as a Director of WMX, Chemical Waste Management, Inc.,
Waste Management International plc., Wheelabrator Technologies, Inc. and
Psychemedics. From 1972 to 1990, Mr. Flynn served in various positions with
WMX, including Senior Vice President and Chief Financial Officer.
Mr. Guerin became Senior Vice President of Domestic Franchising of the Company
in January 1992. From October 1989 until December 1991, Mr. Guerin was Senior
Vice President of Administration and Development for the Company. He joined
the Company as a Vice President in March 1988. From March 1986 to March 1988,
he served as Vice President and Region Manager of Waste Management of North
America, Inc., a subsidiary of WMX, where he was responsible for operations
with over 6,000 employees. From June 1982 to March 1986, he served as
President of Wells Fargo Armored Service Corp., a transporter of currency and
valuables with over 7,000 employees.
Mr. Hawkins joined the Company in November 1989 as Senior Corporate Counsel and
became Associate General Counsel and Secretary in August 1991 and Vice
President, General Counsel and Secretary in February 1993. He became Senior
Vice President, General Counsel and Secretary in February 1994. He is also
Vice President, General Counsel and Secretary of Spelling. From May 1986 until
October 1989, he was associated with the law firm of Bell, Boyd & Lloyd in
Chicago, Illinois.
Mr. Hilmer joined the Company in February 1993 as Senior Vice President and
Chief Marketing Officer. From 1984 to 1992, he served as Division President
and Managing Partner as well as a member of the Board of Directors of Whittle
Communications L.P., a media and education company. From 1969 to 1984, Mr.
Hilmer held various senior marketing-related positions including Senior Vice
President and Management Director at Leo Burnett & Co., a worldwide advertising
agency.
Mr. Johnson became a director and President - Consumer Division of the Company
in August 1993. From 1987 until August 1993, Mr. Johnson was managing general
partner of WJB, which prior to its consolidation with the Company in August
1993 was the Company's largest franchise owner. From 1967 through 1987, Mr.
Johnson served as counsel to the law firm of Johnson, Smith, Hibbard & Wildman
in Spartanburg, South Carolina. Mr. Johnson is a member of the Board of
Directors of Duke Power Company.
Mr. Martin-Busutil joined the Company in July 1992 as President - International
Division. From 1981 to 1992, Mr. Martin-Busutil held various positions with
Cadbury-Schweppes, including President of
69
<PAGE> 70
Cadbury Beverages in Europe. From 1961 to 1981, Mr. Martin-Busutil served in a
number of international management and marketing related capacities with
General Foods.
Mr. Melk was re-elected a director of the Company in May 1993. Since 1988,
Mr. Melk has been Chairman and Chief Executive Officer of H20 Plus Inc., which
develops and manufactures health and beauty aid products. Mr. Melk has been a
private investor in various businesses since March 1984 and prior to March
1984, he held various positions with WMX and its subsidiaries, including
President of Waste Management International, plc. Mr. Melk also currently
serves as a director of Psychemedics and Discovery Zone. From February 1987
until March 1989, Mr. Melk served as a director and Vice Chairman of the
Company.
Mr. Weber joined the Company in January 1988 as Regional Manager, became Zone
Vice President in May 1989, was promoted to Vice President of Operations in
June 1990 and became Senior Vice President of Operations in February 1991.
From January 1986 to December 1987 he was President and Chief Operating Officer
of Spirits, Inc., a Ft. Lauderdale, Florida company. From November 1982 to
January 1986, he held the position of Vice President of the Gray/Drug Fair
Division of Sherwin-Williams Co. Prior to that, Mr. Weber held various
management positions with the Shoppers Drug Mart division of the Imasco
Corporation.
In 1993, the Board of Directors held an aggregate of 13 regular and special
meetings. Each member of the Board who is not an employee of the Company is
currently paid a quarterly fee of $6,250 plus $1,250 for each meeting attended.
In addition, each non-employee member of the Board who serves as the Chairman
of a Board Committee is paid $625 for each meeting of such committee attended.
70
<PAGE> 71
Item 11. Executive Compensation
The information required by this item will be set forth in the Proxy Statement
of the Company relating to the 1994 Annual Meeting of Stockholders, and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be set forth in the Proxy Statement
of the Company relating to the 1994 Annual Meeting of Stockholders, and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item will be set forth in the Proxy Statement
of the Company relating to the 1994 Annual Meeting of Stockholders, and is
incorporated herein by reference.
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements of the Company are set forth in
Part II, Item 8.
(2) The following financial statement schedules for each of the
three years ended December 31, 1993 are submitted herewith:
Schedule V - Property, Plant and Equipment.
Schedule VI - Accumulated Depreciation, Depletion and
Amortization of Property, Plant and Equipment.
Schedule VIII - Valuation and Qualifying Accounts.
Schedule X - Supplementary Statements of Operations
Information.
(3) Exhibits - (See the Index to Exhibits included elsewhere
herein).
(b) Form 8-K dated October 6, 1993 relating to an agreement in
principle pursuant to which the Company will purchase Super Club
Retail Entertainment Corporation from Philips Electronics N.V.
for approximately $150,000,000.
Form 8-K dated October 22, 1993 relating to the Company's
restated financial information which reflects the consolidation
with WJB Video Limited Partnership and certain
71
<PAGE> 72
of its affiliates which was accounted for under the pooling of
interests method of accounting, and a $600,000,000 credit
agreement obtained by the Company.
Form 8-K dated November 1, 1993 relating to the consummation of
the investment in Viacom Inc. and pro forma capitalization
information.
Form 8-K dated November 5, 1993 relating to certain financial
statements and pro forma financial information related to the
Company's proposed acquisition of Super Club Retail
Entertainment Corporation.
Form 8-K dated November 19, 1993 relating to the completion of
the acquisition of Super Club Retail Entertainment Corporation
and related pro forma information.
Form 8-K dated December 22, 1993 relating to the Company's
amended and restated Credit Agreement pursuant to which certain
financial institutions have agreed to advance the Company and/or
certain subsidiaries of the Company on an unsecured basis an
aggregate of $1,000,000,000.
Form 8-K dated January 7, 1994 relating to the Company's
Agreement and Plan of Merger with Viacom Inc. and Subscription
Agreement pursuant to which the Company will purchase from
Viacom Inc. 22,727,273 shares of non-voting Viacom Class B
common stock for an aggregate purchase price of $1,250,000,000.
Form 8-K dated February 15, 1994 relating to the Company's
Credit Agreement pursuant to which certain financial
institutions have agreed to advance the Company on an unsecured
basis an aggregate of $1,000,00,000 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.
Form 8-K dated March 10, 1994 relating to the Company's
completed purchase from Viacom Inc. of 22,727,273 shares of
non-voting 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
$1,250,000,000.
72
<PAGE> 73
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
SCHEDULE V
PROPERTY, PLANT AND EQUIPMENT
(In Thousands)
For the year ended December 31, 1993
<TABLE>
<CAPTION>
Balance at Other changes Balance
beginning Additions add (deduct) at end of
Classification of period at cost Retirements Acquisitions (1) describe (2) period
-------------- ---------- --------- ----------- ---------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Videocassette Rental
Inventory $580,748 $451,116 $(223,219) $ 33,683 $ (840) $841,488
======== ======== ========== ========= ========== ========
Property and Equipment:
Land and Buildings $ 51,781 $ 28 $ (150) $ 26,066 $ (10) $ 77,715
Leasehold Improvements 199,463 72,624 (6,099) 16,582 (578) 281,992
Furniture and Fixtures 146,282 29,057 (4,071) 7,765 (455) 178,578
Equipment 132,648 62,832 (7,129) 6,368 (594) 194,125
-------- -------- -------- --------- ---------- --------
Total Property and
Equipment $530,174 $164,541 $(17,449) $ 56,781 $ (1,637) $732,410
======== ======== ========= ========= ========== ========
</TABLE>
(1) Assets acquired in business combinations accounted for under the
purchase method of accounting.
(2) Primarily represents the effects of foreign currency translation.
73
<PAGE> 74
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
SCHEDULE V
PROPERTY, PLANT AND EQUIPMENT
(In Thousands)
For the year ended December 31, 1992
<TABLE>
<CAPTION>
Balance at Other changes Balance
beginning Additions add (deduct) at end of
Classification of period at cost Retirements Acquisitions (1) describe (2) period
-------------- ---------- --------- ----------- ---------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Videocassette Rental
Inventory $ 472,009 $ 296,139 $(232,433) $ 53,889 $ (8,856) $ 580,748
========= ========= ========== ========== ============ =========
Property and Equipment:
Land and Buildings $ 34,696 $ 1,036 $ (112) $ 16,288 $ (127) $ 51,781
Leasehold Improvements 148,440 38,698 (8,309) 25,442 (4,808) 199,463
Furniture and Fixtures 99,544 25,889 (7,834) 33,331 (4,648) 146,282
Equipment 98,916 32,770 (6,766) 10,114 (2,386) 132,648
--------- --------- --------- ---------- ----------- ---------
Total Property and
Equipment $ 381,596 $ 98,393 $ (23,021) $ 85,175 $ (11,969) $ 530,174
========= ========= ========= ========== =========== =========
</TABLE>
(1) Assets acquired in business combinations accounted for under the
purchase method of accounting.
(2) Primarily represents the effects of foreign currency translation.
74
<PAGE> 75
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
SCHEDULE V
PROPERTY, PLANT AND EQUIPMENT
(In Thousands)
For the year ended December 31, 1991
<TABLE>
<CAPTION>
Balance at Other changes Balance
beginning Additions add (deduct) at end of
Classification of period at cost Retirements Acquisitions (1) describe period
-------------- ---------- --------- ----------- ---------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Videocassette Rental
Inventory $ 367,217 $ 221,996 $(135,846) $ 18,642 $ --- $ 472,009
========= ========= ========== ========== =========== =========
Property and Equipment:
Land and Buildings $ 30,536 $ 2,892 $ (574) $ 1,842 $ --- $ 34,696
Leasehold Improvements 116,352 27,892 (7,593) 11,789 --- 148,440
Furniture and Fixtures 77,425 21,553 (5,825) 6,391 --- 99,544
Equipment 73,582 26,361 (3,281) 2,254 --- 98,916
--------- --------- --------- ---------- ----------- ---------
Total Property and
Equipment $ 297,895 $ 78,698 $(17,273) $ 22,276 $ --- $ 381,596
========= ========= ========= ========== =========== =========
</TABLE>
(1) Assets acquired in business combinations accounted for under the
purchase method of accounting.
75
<PAGE> 76
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
SCHEDULE VI
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
(In Thousands)
For the year ended December 31, 1993
<TABLE>
<CAPTION>
Additions
Balance at charged to Other changes Balance
beginning costs and add (deduct) at end of
Classification of period expenses Retirements describe (1) period
-------------- ---------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Videocassette Rental
Inventory $ 258,580 $ 295,729 $(182,624) $ (420) $ 371,265
========= ========= ========== ============ =========
Property and Equipment:
Land and Buildings $ 1,636 $ 896 $ --- $ --- $ 2,532
Leasehold Improvements 45,668 25,727 (1,998) (78) 69,319
Furniture and Fixtures 38,450 19,045 (2,660) (53) 54,782
Equipment 55,832 29,104 (1,813) (91) 83,032
--------- --------- ---------- ----------- ---------
Total Property and
Equipment $ 141,586 $ 74,772 $ (6,471) $ (222) $ 209,665
========= ========= ========== =========== =========
</TABLE>
(1) Primarily represents the effects of foreign currency translation.
76
<PAGE> 77
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
SCHEDULE VI
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
(In Thousands)
For the year ended December 31, 1992
<TABLE>
<CAPTION>
Additions
Balance at charged to Other changes Balance
beginning costs and add (deduct) at end of
Classification of period expenses Retirements describe (1) period
-------------- ---------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Videocassette Rental
Inventory $ 220,935 $ 234,862 $(194,815) $ (2,402) $ 258,580
========= ========= ========== ============ =========
Property and Equipment:
Land and Buildings $ 1,000 $ 668 $ (26) $ (6) $ 1,636
Leasehold Improvements 28,815 19,273 (1,774) (646) 45,668
Furniture and Fixtures 25,082 15,516 (1,739) (409) 38,450
Equipment 33,686 23,637 (873) (618) 55,832
--------- --------- ---------- ------------ ---------
Total Property and
Equipment $ 88,583 $ 59,094 $ (4,412) $ (1,679) $ 141,586
========= ========= ========== ============ =========
</TABLE>
(1) Primarily represents the effects of foreign currency translation.
77
<PAGE> 78
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
SCHEDULE VI
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
(In Thousands)
For the year ended December 31, 1991
<TABLE>
<CAPTION>
Additions
Balance at charged to Other changes Balance
beginning costs and add (deduct) at end of
Classification of period expenses Retirements describe period
-------------- ---------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Videocassette Rental
Inventory $ 162,624 $ 171,509 $(113,198) $ --- $ 220,935
========= ========= ========== =========== =========
Property and Equipment:
Land and Buildings $ 438 $ 566 $ (4) $ --- $ 1,000
Leasehold Improvements 16,002 13,788 (975) --- 28,815
Furniture and Fixtures 14,617 11,462 (997) --- 25,082
Equipment 16,585 18,052 (951) --- 33,686
--------- --------- ---------- ----------- ---------
Total Property and
Equipment $ 47,642 $ 43,868 $ (2,927) $ --- $ 88,583
========= ========= ========== =========== =========
</TABLE>
78
<PAGE> 79
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
For the years ended December 31,
<TABLE>
<CAPTION>
Balance at Balance
beginning Charged Accounts at end of
of period to expense written off period
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
1993 - Allowance for doubtful
accounts $ 229 $ 11,717 $ (9,809) $ 2,137
========= ========= ========== =========
1992 - Allowance for doubtful
accounts $ 374 $ 10,583 $ (10,728) $ 229
========= ========= ========== =========
1991 - Allowance for doubtful
accounts $ 426 $ 13,544 $ (13,596) $ 374
========= ========= ========== =========
</TABLE>
79
<PAGE> 80
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
SCHEDULE X
SUPPLEMENTARY STATEMENTS OF OPERATIONS INFORMATION
(In Thousands)
For the years ended December 31,
<TABLE>
<CAPTION>
Charged to Costs and Expenses
-----------------------------------------
Item (1) 1993 1992 1991
- ---- -------- -------- -------
<S> <C> <C> <C>
Amortization of intangible assets $ 24,692 $ 9,874 $ 5,518
======== ======== ========
Real property taxes $ 26,411 $ 18,491 $ 8,734
======== ======== ========
Advertising costs $ 50,774 $ 39,922 $ 38,992
======== ======== ========
</TABLE>
(1) Items not presented are less than one percent of revenue.
80
<PAGE> 81
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BLOCKBUSTER ENTERTAINMENT
CORPORATION
Date: March 30, 1994 By: /S/ H. Wayne Huizenga
----------------------------------
H. Wayne Huizenga
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 30, 1994 By: /S/ H. Wayne Huizenga
----------------------------------
H. Wayne Huizenga
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
March 30, 1994 By: /S/ Steven R. Berrard
----------------------------------
Steven R. Berrard
Vice Chairman of the Board,
President and Chief Operating
Officer
March 30, 1994 By: /S/ Gregory K. Fairbanks
----------------------------------
Gregory K. Fairbanks
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
March 30, 1994 By: /S/ Albert J. Detz
----------------------------------
Albert J. Detz
Vice President and
Corporate Controller
(Principal Accounting Officer)
March 30, 1994 By: /S/ A. Clinton Allen, III
----------------------------------
A. Clinton Allen, III
Director
March 30, 1994 By: /S/ John W. Croghan
----------------------------------
John W. Croghan
Director
81
<PAGE> 82
March 30, 1994 By: /S/ Donald F. Flynn
---------------------------------
Donald F. Flynn
Director
March 30, 1994 By: /S/ George D. Johnson, Jr.
---------------------------------
George D. Johnson, Jr.
Director
March 30, 1994 By: /S/ John J. Melk
---------------------------------
John J. Melk
Director
82
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
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)
3(i) - Certificate of Incorporation of the Registrant as amended through May 15, 1990 (incorporated by reference to Exhibit
3(i) to the Registrant's Registration Statement No. 33-50867 on Form S-3)
3(ii) - Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3(ii) to the Registrant's
Registration Statement No. 33-50867 on Form S-3)
4.1 - Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.3 to Registrant's Registration Statement
No. 33-17479 on Form S-1)
4.2 - Indenture dated as of February 1, 1993 between Registrant and Continental Bank, National Association, as Trustee
(incorporated by reference to Exhibit 2 to the Registrant's Form 8-A filed on February 10, 1993)
4.3 - Specimen Certificate for Registrant's 6-5/8% Senior Note due February 15, 1998 (incorporated by reference to Exhibit
1 to the Registrant's Form 8-A filed on February 10, 1993)
9 - *
10.1 - Previous Form of Standard Franchise Agreement and Form of Area Development Agreement (incorporated by reference to
Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1987)
10.2 - Current Form of Standard Franchise Agreement and Form of Area Development Agreement (incorporated by reference to
Exhibit 10.2 to post-effective amendment No. 5 to Registrant's Registration Statement No. 33-17479 on Form S-1)
10.3 - Stock Purchase Agreement dated February 11, 1987 ("Stock Purchase Agreement") by and among the Registrant, H. Wayne
Huizenga, John J. Melk and Donald F. Flynn (incorporated by reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K dated February 11, 1987)
10.4 - Amendment dated March 18, 1987 to the Stock Purchase Agreement (incorporated by reference to Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K, as amended, for the year ended December 31, 1986)
</TABLE>
83
<PAGE> 84
<TABLE>
<S> <C>
10.5 - Amendment dated December 31, 1987 to Stock Purchase Agreement (incorporated by reference to Exhibit 10 to the
Registrant's Current Report on Form 8-K dated December 31, 1987)
10.6 - Agreement by and among the Registrant, Gordon E. MacDonald, John J. Ellis, E. Michael Krebs, James F. Ellis and
Movies To Go, Inc. (incorporated by reference to Exhibit 2.1 to Registrant's Current report on Form 8-K dated June
15, 1987)
10.7 - Agreement and Plan of Reorganization among the Registrant, SAB Acquisition Company, Inc., SAB Corporation, Certain
Partners and Scott A. Beck, and Agreement of Mergers among VSMLP Merger Subsidiary, Inc., Video Superstore Master
Limited Partnership and VSMI Limited Partnership dated June 1, 1989 (incorporated by reference to Exhibit 2 to the
Registrant's Registration Statement No. 33-29311 on Form S-4)
10.8 - Purchase Agreement among Registrant, Erol M. Onaran, Erol's Inc. and BF Holding Company dated December 14, 1990
(incorporated by reference to Exhibit 28 to the Registrant's Current Report on Form 8-K dated December 14, 1990)
10.9 - Registrant's 1987 Stock Option Plan (incorporated by reference to Exhibit 10.19 to the Registrant's Registration
Statement No. 33-17479 on Form S-1)
10.10 - Amendments to Registrant's 1987 Stock Option Plan (incorporated by reference to the Registrant's Notice of Annual
Meeting and Proxy Statement dated April 15, 1991)
10.11 - Settlement Agreement, Covenant Not to Sue and General Release by and among Bobby Cox, Roger A. Ellis, Cliff
Throneberry, United Texas Entertainment, Inc., Three Times Prime, Inc., Major Video of El Paso, United Arizona
Entertainment, Inc. and Oklahoma Entertainment, Inc., Blockbuster Entertainment Corporation, MV Merger Sub, Inc.,
Major Video Corp., and Major Video Super Stores, Inc. (incorporated by reference to Exhibit 28.2 to Registrant's
Current Report on Form 8-K dated November 11, 1988)
10.12 - Settlement Agreement, General Release, Covenant Not to Sue, and Order by and among Northeast Management, Inc.,
Frederick G. Kilsey and Mark R. Feinstein and Major Video Super Stores, Inc., Major Video Corp., MV Merger Sub, Inc.,
and Blockbuster Entertainment Corporation (incorporated by reference to Exhibit 28.2 to Registrant's Current Report
on Form 8-K dated November 11, 1988)
10.13 - Registrant's 1989 Stock Option Plan (incorporated by reference to the Registrant's Notice of Annual Meeting and Proxy
Statement dated March 31, 1989)
10.14 - Amendments to Registrant's 1989 Stock Option Plan (incorporated by reference to the Registrant's Notice of Annual
Meeting and Proxy Statement dated April 15, 1991)
</TABLE>
84
<PAGE> 85
<TABLE>
<S> <C>
10.15 - Registrant's 1990 Stock Option Plan (incorporated by reference to the Registrant's Notice of Annual Meeting and Proxy
Statement dated March 29, 1990)
10.16 - Amendments to Registrant's 1990 Stock Option Plan (incorporated by reference to the Registrant's Notice of Annual
Meeting and Proxy Statement dated April 15, 1991)
10.17 - Registrant's 1991 Employee Director Stock Option Plan (incorporated by reference to the Registrant's Notice of Annual
Meeting and Proxy Statement dated April 15, 1991)
10.18 - Registrant's 1991 Non-employee Director Stock Option Plan (incorporated by reference to the Registrant's Notice of
Annual Meeting and Proxy Statement dated April 15, 1991)
10.19 - Investment Agreement dated November 15, 1991 by and among the Registrant, Blockbuster Entertainment (U.K.) Limited
and Philips Electronics N.V. (incorporated by reference to Exhibit 28(a) to the Registrant's Current Report on Form
8-K dated November 18, 1991)
10.20 - Amendment to Investment Agreement dated April 8, 1992 by and among the Registrant, Blockbuster Entertainment (U.K.)
Limited and Philips Electronics N.V. (incorporated by reference to Exhibit 28(a) to the Registrant's Current Report
on Form 8-K dated April 8, 1992)
10.21 - Credit Agreement, dated October 15, 1992, by and among the Registrant, certain subsidiaries of the Registrant, the
Banks named therein as banks and Bank of America Trust and Savings Association, as Agent (incorporated by reference
to Exhibit 28.1 to the Registrant's Current Report on Form 8-K dated October 15, 1992)
10.22 - Agreement and Plan of Merger, dated as of October 18, 1992 (as amended), by and among the Registrant, Shamrock
Entertainment Holdings II, Inc., Shamrock Holdings of California, Inc., Shamrock Entertainment Investors II, Inc.,
Shamrock Entertainment Capital II, L.P. and BM Merger Sub, Inc. (incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated November 13, 1992)
10.23 - Agreement and Plan of Merger, dated as of October 18, 1992 (as amended), by and among the Registrant, Shamrock
Entertainment, Inc., Shamrock Holdings of California, Inc. and BM Merger Sub B, Inc. (incorporated by reference to
Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated November 13, 1992)
10.24 - Stock Purchase Agreement, dated as of October 18, 1992, by and between the Registrant and Louis C. Fogelman
(incorporated by reference to Exhibit 2.3 to the Registrant's Current Report on Form 8-K dated November 13, 1992)
</TABLE>
85
<PAGE> 86
<TABLE>
<S> <C>
10.25 - Establishment Agreement dated November 13, 1992 by and between Virgin Retail Group Limited, Registrant and Virgin
Enterprises Limited (incorporated by reference to Exhibit 28.1 to the Registrant's Current Report on Form 8-K dated
November 13, 1992)
10.26 - Joint Venture Agreement dated December 22, 1992 by and between Virgin Retail Group Limited, Registrant and others
(incorporated by reference to Exhibit 28.1 to the Registrant's Current Report on Form 8-K dated December 22, 1992)
10.27 - Establishment Amendment Agreement dated December 22, 1992 by and between Virgin Retail Group Limited, Registrant and
Virgin Enterprises Limited (incorporated by reference to Exhibit 28.2 to the Registrant's Current Report on Form 8-K
dated December 22, 1992)
10.28 - Stock Purchase Agreement, dated as of March 7, 1993, among the Registrant, BPH Subsidiary, Inc., American Financial
Corporation and certain subsidiaries of American Financial Corporation (incorporated by reference to Exhibit 28.1 to
the Registrant's Current Report on Form 8-K dated March 7, 1993)
10.29 - Stock Purchase Agreement, dated as of October 21, 1993, by and between the Registrant and Viacom Inc. (incorporated
by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K dated November 1, 1993)
10.30 - Credit Agreement, dated as of October 22, 1993, by and among the Registrant, the Banks named therein as banks and
Bank of America National Trust and Savings Association, as Agent. (incorporated by reference to Exhibit 99.2 to the
Registrant's Current Report on Form 8-K dated October 22, 1993)
10.31 - Agreement and Plan of Merger, dated as of November 19, 1993, by and among Super Club Retail Entertainment
Corporation, Philips Electronics N.V., Super Club Nederland B.V., Super Club North America Corporation, Blockbuster
SC Holding Corporation and the Registrant (incorporated by reference to exhibit 2 to the Registrant's Current Report
on Form 8-K dated November 19, 1993)
10.32 - Amended and Restated Credit Agreement, dated as of December 22, 1993, by and among the Registrant, certain
subsidiaries of 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 December 22, 1993)
10.33 - 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)
</TABLE>
86
<PAGE> 87
<TABLE>
<S> <C>
10.34 - 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)
10.35 - Registrant's 1994 Stock Option Plan which is subject to stockholder approval
11 - Statement re:computation of per share earnings (see Note 10 to the Consolidated Financial Statements of the Company
which are set forth in Part II, Item 8 herein)
12-13 - *
16 - *
18 - *
21 - Subsidiaries of Registrant
22 - *
23 - Consent of Arthur Andersen & Co.
24-25 - *
28 - *
99 - *
</TABLE>
- ----------------
* Not applicable
87
<PAGE> 1
EXHIBIT 10.35
BLOCKBUSTER ENTERTAINMENT CORPORATION
1994 STOCK OPTION PLAN
1. STATEMENT OF PURPOSE. The purpose of this Stock Option Plan (the
"Plan") is to benefit Blockbuster Entertainment Corporation, a Delaware
corporation (the "Company"), and its subsidiaries through the maintenance and
development of their respective businesses by offering certain present and
future key employees a favorable opportunity to become holders of stock in the
Company over a period of years, thereby giving them a permanent stake in the
growth and prosperity of the Company and encouraging the continuance of their
involvement with the Company or its subsidiaries.
2. ADMINISTRATION. The Plan shall be administered by the Compensation
Committee (the "Committee"), consisting of two or more outside directors (as
defined under Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code")) appointed by the Board of Directors, whose interpretation of the
terms and provisions of the Plan shall be final and conclusive. The selection of
employees for participation in the Plan and all decisions concerning the timing,
pricing and amount of any grant or award under the Plan shall be made solely by
the Committee.
3. ELIGIBILITY. Options shall be granted only to key employees of the
Company and its subsidiaries (including officers of the Company and its
subsidiaries but excluding non-employee directors of the Company) selected
initially and from time to time by the Committee on the basis of their
importance to the business of the Company or its subsidiaries.
4. GRANTING OF OPTIONS. The Committee may grant options under which a
total of not in excess of 15,000,000 shares of the $.10 par value common stock
of the Company ("Common Stock") may be purchased from the Company, subject to
adjustment as provided in Section 10; provided that the Committee may not grant
to any individual options to purchase more than 4,000,000 shares of Common Stock
or more than 26.67% of the total number of options to purchase shares of Common
Stock granted under the Plan. Options granted under the Plan are intended not to
be treated as incentive stock options as defined in Section 422 of the Code.
In the event that an option expires or is terminated or cancelled
unexercised as to any shares, such released shares may again be optioned
(including a grant in substitution for a cancelled option). With respect to any
individual, however, in the case of an option that is terminated or cancelled
unexercised as to any shares, such released shares shall continue to count
against the maximum number of shares that may be offered such individual under
the Plan. Shares subject to options may be made available from unissued or
reacquired shares of Common Stock.
Nothing contained in the Plan or in any option granted pursuant thereto
shall confer upon any optionee any right to be continued in the employment of
the Company or any subsidiary of the Company, or interfere in any way with the
right of the Company or its subsidiaries to terminate his employment at any
time.
5. OPTION PRICE. The option price shall be determined by the Committee
and, subject to the provisions of Section 10 hereof, shall be not less than the
fair market value, at the time the option is granted, of the shares of Common
Stock subject to the option.
6. DURATION OF OPTIONS, INCREMENTS AND EXTENSIONS. Subject to the
provisions of Section 8 hereof, each option shall be for such term of not less
than five years nor more than ten years, as shall be determined by the
Committee. Each option shall become exercisable with respect to 25% of the total
number of shares subject to the option twelve months after the date of its grant
and with respect to each additional 25% at the end of each twelve-month period
thereafter during the succeeding three years. Notwithstanding the foregoing, the
Committee may in its discretion (i) specifically provide for another time or
times of exercise; (ii) accelerate the exercisability of any option subject to
such terms and conditions as the Committee deems necessary and appropriate; or
(iii) at any time prior to the expiration or termination of any option
previously granted, extend the term of any option (including such options held
by officers) for such additional period as the Committee in
88
<PAGE> 2
its discretion shall determine. In no event, however, shall the aggregate option
period with respect to any option, including the original term of the option and
any extensions thereof, exceed ten years. Subject to the foregoing, all or any
part of the shares to which the right to purchase has accrued may be purchased
at the time of such accrual or at any time or times thereafter during the option
period.
In the event that the Company participates in any Business Combination with
any Substantial Stockholder, all outstanding options shall become immediately
exercisable, provided that such Substantial Stockholder is not a participant in
the Plan or any other stock plan of the Company then in effect. For this
purpose, the terms "Business Combination" and "Substantial Stockholder" shall
have the meanings ascribed to them in the Company's Certificate of
Incorporation, as now in effect or as subsequently amended. Notwithstanding any
other provision in the Plan, during the period 30 days after any such Business
Combination, each optionee who is an officer or a director (and also an
employee) of the Company shall have the right to require the Company to purchase
from him any option granted under the Plan at a purchase price equal to (i) the
excess of the fair market value per share over the option price (ii) multiplied
by the number of option shares specified by such individual for purchase in a
written notice to the Company, attention of the Secretary. For purposes of this
paragraph, "fair market value per share" shall mean the average of the highest
sales price per share of the Company's Common Stock as quoted by the exchange
upon which the Company's Common Stock is listed on each of the five trading days
immediately preceding the date on which such individual so notifies the Company.
The amount payable to each such individual by the Company shall be in cash or by
certified check and shall be reduced by any taxes required to be withheld.
7. EXERCISE OF OPTION. As a condition to the exercise of any option, the
"Quoted Price" (as defined below) per share of Common Stock on the date of
exercise must equal or exceed the option price referred to in Section 5 hereof.
An option may be exercised by giving written notice to the Company, attention of
the Secretary, specifying the number of shares to be purchased, accompanied by
the full purchase price for the shares to be purchased either in cash, by check,
by a promissory note in a form specified by the Company and payable to the
Company no later than 15 business days after the date of exercise of the option
or, if so approved by the Committee, by shares of the Common Stock of the
Company or by a combination of these methods of payment. The "Quoted Price" and
the per share value of Common Stock for purposes of paying the option price in
accordance with the immediately preceding sentence shall equal the closing
selling price per share of Common Stock on the date in question on the stock
exchange upon which the Company's Common Stock is listed (the "Exchange"). The
right to pay the purchase price of shares by delivery of a promissory note shall
not be available to any optionee who is a person described in Section 16(a) of
the Securities Exchange Act of 1934 (the "1934 Act").
At any time of any exercise of any option, the Company may, if it shall
determine it necessary or desirable for any reason, require the optionee (or his
heirs, legatees, or legal representative, as the case may be) as a condition
upon the exercise thereof, to deliver to the Company a written representation of
present intention to purchase the shares for investment and not for
distribution. In the event such representation is required to be delivered, an
appropriate legend may be placed upon each certificate delivered to the optionee
upon his exercise of part or all of the option and a stop transfer order may be
placed with the transfer agent. Each option shall also be subject to the
requirement that, if at any time the Company determines, in its discretion, that
the listing, registration or qualification of the shares subject to the option
upon any securities exchange or under any state or federal law, or the consent
or approval of any governmental regulatory body is necessary or desirable as a
condition of or in connection with, the issue or purchase of shares thereunder,
the option may not be exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Company.
At the time of the exercise of any option the Committee may require, as a
condition of the exercise of such option, the optionee to (x) pay the Company an
amount equal to the amount of tax the Company may be required to withhold to
obtain a deduction for federal income tax purposes as a result of the exercise
of such option by the optionee or (y) make such other arrangements with the
Company which would enable the Company to pay such withholding tax, including,
without limitation, holding back a number of shares issuable upon exercise of
the option equal to the amount of such withholding tax, or permitting the
optionee to deliver a promissory note in a form specified by the Committee, or
(z) a combination of the foregoing.
89
<PAGE> 3
8. TERMINATION OF RELATIONSHIP-EXERCISE THEREAFTER. In the event the
relationship between the Company and an optionholder is terminated for any
reason other than death, permanent disability or retirement such optionholder's
options shall expire and all rights to purchase shares pursuant thereto shall
terminate immediately; provided that if the Company merges with and into Viacom
Inc. ("Viacom") pursuant to the Merger Agreement dated January 7, 1994 (as such
agreement may be amended from time to time, the "Merger Agreement"), between the
Company and Viacom, then in the event an optionholder is terminated by Viacom on
or prior to the second anniversary of the Effective Time (as defined in the
Merger Agreement), such optionholder's options shall terminate on the earlier to
occur of (i) the expiration date of such options or (ii) the second anniversary
of the Effective Time. The Committee may, in its sole discretion, permit any
option to remain exercisable for such period after such termination as the
Committee may prescribe, but in no event after the expiration date of the
option. Temporary absence from employment because of illness, vacation, approved
leaves of absence, and transfers of employment among the Company and its
subsidiaries, shall not be considered to terminate employment or to interrupt
continuous employment.
In the event of termination of said relationship because of death,
permanent disability (as that term is defined in Section 22(e)(3) of the Code,
as now in effect or as subsequently amended), or retirement the option may be
exercised in full, without regard to any installments established under Section
6 hereof, by the optionee or, if he is not living, by his heirs, legatees or
legal representative (as the case may be) during its specified term prior to
three years after the date of death, permanent disability or retirement, or such
longer period as the Committee may prescribe, but in no event after the
expiration date of the option.
9. NON-TRANSFERABILITY OF OPTIONS. During the lifetime of the optionee,
options shall be exercisable only by the optionee, and options shall not be
assignable or transferable by the optionee otherwise than by will or by the laws
of descent and distribution, or pursuant to a qualified domestic relations order
as defined by the Code, or Title I of the Employee Retirement Income Security
Act of 1974, as amended, or the rules thereunder.
10. ADJUSTMENT. The number of shares subject to the Plan and to options
granted under the Plan shall be adjusted as follows: (a) in the event that the
outstanding shares of Common Stock of the Company is changed by any stock
dividend, stock split or combination of shares, the number of shares subject to
the Plan and to options granted hereunder shall be proportionately adjusted; (b)
in the event of any merger, consolidation or reorganization of the Company with
any other corporation or corporations, there shall be substituted, on an
equitable basis as determined by the Committee, for each share of Common Stock
then subject to the Plan, whether or not at the time subject to outstanding
options, the number and kind of shares of stock or other securities to which the
holders of shares of Common Stock of the Company will be entitled pursuant to
the transaction; and (c) in the event of any other relevant change in the
capitalization of the Company, the Committee shall provide for an equitable
adjustment in the number of shares of Common Stock then subject to the Plan,
whether or not then subject to outstanding options. In the event of any such
adjustment the purchase price per share shall be proportionately adjusted.
11. NO IMPAIRMENT OF RIGHTS. Nothing contained in the Plan or any option
granted pursuant to the Plan shall confer upon any optionee any right to be
continued in the employment of the Company or any subsidiary of the Company or
interfere in any way with the right of the Company or its subsidiaries to
terminate such employment and/or to remove any optionee who is a director from
service on the Board of Directors of the Company at any time in accordance with
the provisions of applicable law.
12. AMENDMENT OF PLAN. The Board of Directors of the Company may amend or
discontinue the Plan at any time. However, no such amendments or discontinuance
shall be made without the requisite stockholder approval of the stockholders of
the Company if stockholder approval is required as a condition to the Plan
continuing to comply with the provisions of Rule 16b-3 (or former Rule 16b-3e to
the extent that the Plan is then governed by former Rule 16b3-e) or Section
162(m) of the Code.
13. GOVERNANCE BY RULE 16B-3. The Plan is intended to and shall be
governed by Rule 16b-3 (or former Rule 16b-3e to the extent that the Plan is
then governed by former Rule 16b3-e) promulgated under the 1934 Act.
90
<PAGE> 4
14. EFFECTIVE DATE. On February 7, 1994, this Plan was adopted and
authorized by the Board of Directors of the Company for submission to the
stockholders of the Company. If this Plan is approved by the affirmative vote of
the holders of a majority of the shares of Common Stock voting in person or by
proxy at a duly held stockholders' meeting, this Plan shall be deemed to have
become effective on February 7, 1994. With respect to any options granted on or
after such effective date and prior to stockholder approval, all such options
shall be cancelled and void if this Plan is not approved by stockholders.
91
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
State or
Jurisdiction Names Under Which
Subsidiary of Incorporation Subsidiary Does Business
- ---------- ---------------- ------------------------
<S> <C> <C>
Blockbuster Video Holding Corporation Delaware Blockbuster Video
Blockbuster Music Holding Corporation Delaware Sound Warehouse, Music Plus,
Blockbuster Music,
Virgin Megastore
Blockbuster Pictures Holding Corporation Delaware N.A.
Blockbuster SC Holding Corporation Delaware *
Blockbuster U.K. Group Ltd. United Kingdom Ritz and Blockbuster Video
Blockbuster Video Acquisition Corporation Delaware Blockbuster Video
Blockbuster Videos, Inc. Texas Blockbuster Video
BVJV Inc. Delaware Blockbuster Virgin Megastore
Citivision plc United Kingdom Ritz
Major Video Corp. Nevada Major Video
Major Video Super Stores, Inc. Nevada Major Video
SEGI Holding Co. Delaware N.A.
Show Industries, Inc. California Music Plus
Sound Warehouse, Inc. Delaware Sound Warehouse and
Blockbuster Music Plus
Virgin Blockbuster Limited United Kingdom Virgin Megastore
</TABLE>
<TABLE>
<S> <C>
*Record Bar Video Towne
Record Bar/Tracks Video Towne CD & Audio
Rhythm & Views Video Towne Entertainment
Tracks Video Towne Movies, Music & More
Turtles Video Towne Music, Games & More
Turtles Music Video Towne Music & Video
Turtles Music Super Video Video Towne Superstore
Turtles Movies, Music & More Video Towne Movies & Music
Alfalfa Video Movies at Home
Movieland Movie Video Towne Music
Movies Video Towne Music
</TABLE>
92
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into the Company's
previously filed Registration Statements on Form S-3 (Registration Nos.
33-25040, 33-31172, 33-31336, 33-36682, 33-40445, 33-42930, 33-47429,
33-54832, 33-56154, 33-58274 33-60610, 33-65128, 33-67642, 33-68672, 33-69130,
33-51267 and 33-51751), Form S-4 (Registration Nos. 33-29311, 33-38231 and
33-44635) and Form S-8 (Registration Nos. 33-23765, 33-32337, 33-45183 and
33-64494).
ARTHUR ANDERSEN & CO.
Fort Lauderdale, Florida,
March 28, 1994.
93
