<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 5, 1994
REGISTRATION NO. 33-68674
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BLOCKBUSTER ENTERTAINMENT
CORPORATION
(Exact name of Registrant as specified in its charter)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7841 75-1849418
(STATE OR OTHER (PRIMARY STANDARD (I.R.S.
JURISDICTION OF INDUSTRIAL EMPLOYER
INCORPORATION OR CLASSIFICATION CODE IDENTIFICATION
ORGANIZATION) NUMBER) NO.)
</TABLE>
ONE BLOCKBUSTER PLAZA
FORT LAUDERDALE, FLORIDA 33301
(305) 832-3000
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive office)
THOMAS W. HAWKINS
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
ONE BLOCKBUSTER PLAZA
FORT LAUDERDALE, FLORIDA 33301
(305) 832-3000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
COPY TO:
BRYAN D. ROSENBERGER
ECKERT SEAMANS CHERIN & MELLOTT
600 GRANT STREET, 42ND FLOOR
PITTSBURGH, PENNSYLVANIA 15219
------------------------
FILING AMENDED PROSPECTUS AND AMENDING
ITEMS 15 AND 16 OF PART II
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
BLOCKBUSTER ENTERTAINMENT CORPORATION
CROSS REFERENCE SHEET FURNISHED PURSUANT TO
ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND HEADING CAPTION IN PROSPECTUS
- ------------------------------------------------------------- --------------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus................... Cover Page of the Registration Statement; Cross
Reference Sheet; Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Inside Front Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ Prospectus Summary; The Company
4. Use of Proceeds................................... Securities Covered by this Prospectus
5. Determination of Offering Price................... *
6. Dilution.......................................... *
7. Selling Security Holders.......................... Cover Page of Prospectus; Securities Covered by this
Prospectus; Inside Back Cover Page
8. Plan of Distribution.............................. Securities Covered by this Prospectus
9. Description of Securities to be Registered........ Description of Capital Stock
10. Interests of Named Experts and Counsel............ *
11. Information with Respect to the Registrant........ The Company; Price Range of Common Stock and Dividend
Policy; Selected Financial Data; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Properties;
Management; Security Ownership of Certain Beneficial
Owners; Information With Respect to Certain
Stockholders; Financial Statements
12. Disclosure of Commission Position on
Indemnification of Securities Act Liabilities.... *
<FN>
- ------------------------
*Not applicable or answer thereto is negative.
</TABLE>
<PAGE>
PROSPECTUS
8,964,220 SHARES
[LOGO]
BLOCKBUSTER ENTERTAINMENT
CORPORATION
COMMON STOCK
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The 8,964,220 shares of common stock, $.10 par value (the "Common Stock"),
covered by this Prospectus may be offered and issued from time to time by
Blockbuster Entertainment Corporation (the "Company") in connection with future
acquisitions of other businesses, properties or securities in business
combination transactions in accordance with Rule 415(a)(1)(viii) of Regulation C
under the Securities Act of 1933, as amended (the "1933 Act"). This Prospectus
may also be used, with the Company's prior consent, by persons or entities who
have received or will receive such shares in connection with such acquisitions
and who wish to offer and sell such shares under circumstances requiring or
making desirable its use and by certain donees of such persons or entities. See
"Securities Covered by this Prospectus."
The Common Stock is listed on the New York Stock Exchange under the symbol
"BV" and on the London Stock Exchange. On May , 1994, the closing sale price
of the Common Stock on the New York Stock Exchange was $ per share. See
"Price Range of Common Stock and Dividend Policy."
All references to numbers of shares of Common Stock, or options or warrants
for shares of Common Stock, and all references to market, warrant and option
prices per share, and income per share in this Prospectus have been adjusted to
reflect all stock dividends of the Company through the date of this Prospectus.
THE DATE OF THIS PROSPECTUS IS MAY , 1994
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY
PERSON IN ANY JURISDICTION WHERE SUCH OFFER WOULD BE UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Prospectus Summary........................................................ 3
The Company............................................................... 7
Recent Developments....................................................... 8
Securities Covered by this Prospectus..................................... 8
Price Range of Common Stock and Dividend Policy........................... 9
Selected Financial Data................................................... 10
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 11
Business.................................................................. 22
Management................................................................ 36
Securities Ownership of Certain Beneficial Owners......................... 47
Information With Respect to Certain Stockholders.......................... 48
Description of Capital Stock.............................................. 49
Credit Agreement.......................................................... 50
Experts................................................................... 50
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and, in accordance therewith,
files reports and other information with the Securities and Exchange Commission
(the "Commission"). Such material may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the following Regional Offices of the
Commission: New York Regional Office, Seven World Trade Center, New York, NY
10048; and Chicago Regional Office, 500 West Madison Street, Room 1400, Chicago,
IL 60661. Copies of such material may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Company's Common Stock is listed on the New York Stock
Exchange and the London Stock Exchange and such material may also be inspected
at the offices of the New York Stock Exchange, 20 Broad Street, New York, NY
10005 and the London Stock Exchange, Old Broad Street, London, England EC2N 1HP.
This Prospectus constitutes a part of a Registration Statement on Form S-1
filed by the Company with the Commission under the 1933 Act. This Prospectus
omits certain information contained in the Registration Statement, and reference
is hereby made to the Registration Statement and related exhibits for further
information with respect to the Company and the shares of Common Stock offered
hereby. Statements contained herein concerning the provisions of any document
are not necessarily complete and, in each instance, reference is made to the
copy of such document filed as an exhibit to the Registration Statement or
otherwise filed with the Commission. Each such statement is qualified in its
entirety by such reference.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING
ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Blockbuster Entertainment Corporation 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. As used in this Prospectus, the term "Company"
refers to Blockbuster Entertainment Corporation and its subsidiaries, unless the
context otherwise requires. The principal executive offices of the Company are
located at One Blockbuster Plaza, Ft. Lauderdale, Florida 33301 (telephone (305)
832-3000).
HOME VIDEO RETAILING
The Company owns, operates and franchises Blockbuster Video videocassette
rental and sales stores. The Company believes that Blockbuster Video stores are
generally larger than most videocassette rental and sales stores, ranging in
size from approximately 3,800 to 11,500 square feet. 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 include 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 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'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 rental chain in the
United States.
Since February 1992, the Company has operated video stores under the trade
name "Ritz" in the United Kingdom through Cityvision plc ("Cityvision"), a
subsidiary of the Company. These stores average 1,100 square feet in size with,
on average, approximately 3,000 prerecorded videocassettes available for rental
and sale.
As of December 31, 1993, there were 3,593 video stores operating in the
Company's system, of which 2,698 were Company-owned and 895 were
franchise-owned. 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 in the United Kingdom and Austria 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.
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. The joint venture currently owns interests in and operates 20
"Megastores."
3
<PAGE>
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 series, mini-series, movies-for-television,
pilots and feature films. At December 31, 1993, the Company owned 45,658,640
shares, or approximately 70.5%, of Spelling's outstanding common stock. The
Company also holds warrants to acquire an aggregate of 1,337,148 shares of
Spelling's common stock.
In April 1994, a wholly-owned subsidiary of Spelling merged with and into
Republic Pictures Corporation ("Republic") and Republic became a wholly-owned
subsidiary of Spelling. 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. It is
anticipated that the operations of Spelling and Republic will be substantially
consolidated.
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. Such 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.
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 44 Discovery Zone
facilities and has franchise rights to develop additional 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.
RECENT DEVELOPMENTS
In January 1994, the Company entered into a merger agreement with Viacom
pursuant to which the Company has agreed to merge into Viacom, with Viacom being
the surviving corporation. Consummation of the merger is subject to certain
conditions, including, among other things, approval by the stockholders of the
Company.
The Company mailed a letter to its stockholders, dated May 4, 1994, updating
them as to the status of the Viacom transaction. The letter noted that since the
date the merger agreement was entered into, there has been a substantial drop in
the market prices of Viacom stock. The letter stated that although the Company's
Board of Directors continues to believe that the combination of the Company with
Viacom and Paramount Communications, Inc. represents an excellent strategic
opportunity, given the current price levels of the Viacom stock, there could be
no assurance that the Company's Board of Directors would be able to recommend
the transaction at the time of any stockholder meeting called to vote on the
merger. The letter also stated that the Company was unable to say whether or not
the transaction would go forward or whether or not any special meeting of the
Company's stockholders would be called to vote on the merger, but noted that in
any event, as Viacom's second largest stockholder and its largest customer, the
Company would continue to work closely with Viacom to assure that the
relationship between the companies would remain mutually beneficial and
productive.
On April 19, 1994, the Company announced its results of operations for the
three months ended March 31, 1994. Revenue was $696,531,000 and net income was
$72,593,000, or 29 cents per share on a fully diluted basis.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA)
In August 1993, the Company merged with WJB Video Limited Partnership and
certain of its related entities ("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 Summary
Consolidated 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 and pro forma information appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF OR
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1993(1) 1992(2) 1991(3) 1990 1989(4)
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
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(5)............................................... 1.10 .76 .51 .39 .26
BALANCE SHEET DATA:
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(6)............................ .095 .06 -- -- --
NUMBER OF VIDEO STORES AT END OF PERIOD:
Company-owned................................................... 2,698 2,215 1,235 928 637
Franchise-owned................................................. 895 912 793 654 442
----------- ----------- ----------- ----------- ---------
Total video stores.............................................. 3,593 3,127 2,028 1,582 1,079
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
NUMBER OF MUSIC STORES AT END OF PERIOD:
Company-owned................................................... 511 238 -- -- --
Joint venture................................................... 20 15 -- -- --
----------- ----------- ----------- ----------- ---------
Total music stores.............................................. 531 253 -- -- --
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
SYSTEMWIDE REVENUE(7):............................................ $ 2,909,158 $ 1,972,373 $ 1,509,645 $ 1,118,487 $ 650,625
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
<FN>
- ------------------------------
(1) In April 1993, the Company acquired a majority of Spelling's outstanding
common stock. This transaction was accounted for under the purchase method
of accounting and, accordingly, the results of operations of Spelling
subsequent to that time are included in the Company's Consolidated
Financial Statements herein. At December 31, 1993, the Company owned
45,658,640 shares representing approximately 70.5% of the outstanding
common stock of Spelling. In November 1993, the Company acquired all of
the outstanding capital stock of Super Club. This transaction was
accounted for under the purchase method of accounting, and, accordingly,
the results of operations of Super Club subsequent to that time are
included in the Company's Consolidated Financial Statements herein.
(2) In February 1992, the Company acquired substantially all of the
outstanding ordinary shares of Cityvision. The transaction was accounted
for under the purchase method of accounting and, accordingly, the results
of operations of Cityvision subsequent to that time are included in the
Company's Consolidated Financial Statements herein. In November 1992, the
Company acquired all of the outstanding common stock of Sound Warehouse
and Music Plus. These transactions were accounted for under the purchase
method of accounting and, accordingly, the results of operations of Sound
Warehouse and Music Plus subsequent to that time are included in the
Company's Consolidated Financial Statements herein.
(3) Effective April 1991, the Company acquired all of the outstanding shares
of capital stock of Erol's Inc. ("Erol's"). The transaction was accounted
for under the purchase method of accounting and, accordingly, the results
of operations of Erol's subsequent to that time are included in the
Company's Consolidated Financial Statements herein.
(4) In January 1989, a wholly-owned subsidiary of the Company was merged into
Major Video Corp. ("Major Video"). In August 1989, the Company acquired
Video Superstore Master Limited Partnership and certain affiliated
entities ("VSMLP"), then its largest franchise owner. These transactions
were accounted for under the pooling of interests method of accounting.
Accordingly, financial and store data have been restated as if the
Company, Major Video and VSMLP had operated as one entity since inception.
(5) Net income per common and common equivalent share assuming full dilution
has been adjusted to reflect two-for-one splits of the Company's Common
Stock in May 1989 and March 1991.
(6) See "Price Range of Common Stock and Dividend Policy."
(7) Systemwide revenue includes revenue from Company-owned and franchise-owned
video stores, and, for the year ended December 31, 1992 and later periods,
revenue from Company-owned music stores. Systemwide revenue for the year
ended December 31, 1993, also includes revenue from Spelling and other
entertainment related businesses.
</TABLE>
5
<PAGE>
FIRST QUARTER 1994 FINANCIAL RESULTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
On April 19, 1994, the Company announced consolidated results of operations
for the three month period ended March 31, 1994. The results of operations,
which are shown below (with comparative figures shown for the three month period
ended March 31, 1993) and which have not been audited by the Company's
independent certified public accountants, reflect, in the opinion of the
Company, all material adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the results of operations for such
periods. The results of operations for interim periods are not necessarily
indicative of results for the entire year. Operating results for the three month
period ended March 31, 1993 have been restated to reflect the Company's merger
with WJB.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1994 1993
---------- ----------
<S> <C> <C>
Systemwide revenue........................................................................ $ 883,010 $ 604,843
---------- ----------
---------- ----------
Revenue................................................................................... $ 696,531 $ 433,398
Operating costs and expenses.............................................................. 576,932 356,470
---------- ----------
Operating income.......................................................................... 119,599 76,928
Other expense, net........................................................................ 4,372 6,556
---------- ----------
Income before income taxes................................................................ 115,227 70,372
Provision for income taxes................................................................ 42,634 25,686
---------- ----------
Net income................................................................................ $ 72,593 $ 44,686
---------- ----------
---------- ----------
Net income per common share -- assuming full dilution..................................... $ 0.29 $ 0.22
---------- ----------
---------- ----------
</TABLE>
6
<PAGE>
THE COMPANY
As used herein, unless the context otherwise requires, the term "Company"
refers to Blockbuster Entertainment Corporation and its subsidiaries. All
numbers of shares, per share amounts and share prices relating to the Common
Stock reflect the two-for-one stock splits that occurred in May 1989 and March
1991.
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.
HOME VIDEO RETAILING
The Company owns, operates and franchises Blockbuster Video videocassette
rental and sales stores. The Company believes that Blockbuster Video stores are
generally larger than most videocassette rental and sales stores, ranging in
size from approximately 3,800 to 11,500 square feet. 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 include 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 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'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 rental chain in the
United States.
Since February 1992, the Company has operated video stores under the trade
name "Ritz" in the United Kingdom through Cityvision, a subsidiary of the
Company. These stores average 1,100 square feet in size with, on average,
approximately 3,000 prerecorded videocassettes available for rental and sale.
As of December 31, 1993, there were 3,593 video stores operating in the
Company's system, of which 2,698 were Company-owned and 895 were
franchise-owned. 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 in the United Kingdom and 120 stores operating under
the "Video Towne", "Alfalfa", "Movies at Home" and "Movieland" trade names. The
Blockbuster video system operates in 49 states in the United States and in nine
foreign countries.
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 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 to develop and operate "Megastores"
in continental Europe, Australia and the United States. The joint venture
currently owns interests in and operates 20 "Megastores."
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. The
operations of Spelling encompass a broad range of businesses in the filmed
entertainment industry, supported by an extensive library of television series,
mini-
7
<PAGE>
series, movies-for-television, pilots and feature films. At December 31, 1993,
the Company owned 45,658,640 shares, or approximately 70.5%, of Spelling's
outstanding common stock. The Company also holds warrants to acquire an
aggregate of 1,337,148 shares of Spelling's common stock.
In April 1994, a wholly-owned subsidiary of Spelling merged with and into
Republic, and Republic became a wholly-owned subsidiary of Spelling. 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. It is anticipated that the operations of
Spelling and Republic will be substantially consolidated.
OTHER ENTERTAINMENT
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. Such 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 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.
At December 31, 1993, the Company owned 7,153,750 shares or approximately
19.1%,of the outstanding common stock of Discovery Zone. Discovery Zone owns,
operates and franchises indoor recreational facilities for children. The Company
currently operates 44 Discovery Zone facilities and has franchise rights to
develop additional 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.
RECENT DEVELOPMENTS
In January 1994, the Company entered into a merger agreement with Viacom
pursuant to which the Company has agreed to merge with Viacom, with Viacom being
the surviving corporation. Consummation of the merger is subject to certain
conditions, including, among other things, approval by the stockholders of the
Company.
The Company mailed a letter to stockholders, dated May 4, 1994, updating
them as to the status of the Viacom transaction. The letter stated that since
the date the merger agreement was entered into, there has been a substantial
drop in the market prices of Viacom stock. The letter further stated that
although the Company's Board of Directors continues to believe that the
combination of the Company with Viacom and Paramount Communications, Inc.
represents an excellent strategic opportunity, given the current price levels of
the Viacom stock, there could be no assurance that the Company's Board of
Directors would be able to recommend the transaction at the time of any
stockholder meeting called to vote on the merger. The letter also stated that
the Company was unable to say whether or not the transaction would go forward or
whether or not any special meeting of the Company's stockholders would be called
to vote on the merger, but noted that in any event, as Viacom's second largest
stockholder and its largest customer, the Company would continue to work closely
with Viacom to assure that the relationship between the companies would remain
mutually beneficial and productive.
On April 19, 1994, the Company announced its results of operations for the
three months ended March 31, 1994. Revenue was $696,531,000 and net income was
$72,593,000, or 29 cents per share on a fully diluted basis.
SECURITIES COVERED BY THIS PROSPECTUS
The 8,964,220 shares of Common Stock covered by this Prospectus are
available for use in future acquisitions of other businesses, properties or
securities in business combination transactions, which may relate to businesses
similar or dissimilar to the Company's businesses. The consideration offered by
the Company in such acquisitions in addition to the shares of Common Stock
offered by this Prospectus may include cash, debt or other securities (which may
be convertible into shares of Common Stock covered by this Prospectus), or
assumption by the Company of liabilities of the business being acquired, or a
combination thereof. It is contemplated that the terms of each acquisition will
be determined by negotiations between the Company and the management or the
owners of the businesses or properties to be acquired or the owners of the
securities (including newly issued securities) to be acquired, with the Company
taking into account the quality of management, the past and potential earning
power and growth of the businesses,
8
<PAGE>
properties or securities to be acquired, and other relevant factors. It is
anticipated that shares of Common Stock issued in acquisitions will be valued at
a price reasonably related to the market value of the Common Stock at the time
the basic terms of the acquisition are tentatively agreed upon or at or about
the time or times of delivery of the shares.
With the consent of the Company, this Prospectus may also be used by persons
or entities who have received or will receive from the Company Common Stock
covered by this Prospectus in connection with acquisitions of businesses,
properties or securities and who may wish to sell such stock under circumstances
requiring or making desirable its use and by certain transferees of such persons
or entities. The Company's consent to such use may be conditioned upon such
persons or entities agreeing not to offer more than a specified number of shares
following amendments to this Prospectus, which the Company may agree to use its
best efforts to prepare and file at certain intervals. The Company may require
that any such offering be effected in an organized manner through securities
dealers.
Sales by means of this Prospectus by persons other than the Company may be
made from time to time privately at prices to be individually negotiated with
the purchasers, or publicly through transactions on the New York Stock Exchange
(which may involve crosses and block transactions), other exchanges or in the
over-the-counter market, at prices reasonably related to market prices at the
time of sale or at negotiated prices. Broker-dealers participating in such
transactions may act as agent or as principal and may receive commissions from
the purchasers as well as from the sellers. The Company may indemnify any
broker-dealer participating in such transactions against certain liabilities,
including liabilities under the 1933 Act. Profits, commissions and discounts on
sales by persons who may be deemed to be underwriters within the meaning of the
1933 Act may be deemed underwriting compensation under the 1933 Act.
Stockholders may also offer shares of stock issued in past and future
acquisitions or purchased from the Company by means of prospectuses under other
registration statements or pursuant to exemptions from the registration
requirements of the 1933 Act, including sales which meet the requirements of
Rule 144 or 145(d) under the 1933 Act, and stockholders should seek the advice
of their own counsel with respect to the legal requirements for such sales.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock 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 April 29, 1994
on the New York Stock Exchange Composite Tape as reported by THE WALL STREET
JOURNAL (Southeast Edition).
CALENDAR PERIOD
<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
1994:
First Quarter............................................... 31 3/8 23 3/8
Second Quarter (through April 29, 1994)..................... 27 1/4 23 7/8
</TABLE>
See the cover page of this Prospectus for a recent sale price of the Common
Stock. At April 29, 1994, there were 12,787 holders of record of the Common
Stock.
Prior to April 1992, the Company had not declared any cash dividends on its
Common Stock. On April 21, 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 initiated the program by declaring 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.
9
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE 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 and pro forma information appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF OR
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1993(1) 1992(2) 1991(3) 1990 1989(4)
------------ ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
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 (5)................ 1.10 .76 .51 .39 .26
BALANCE SHEET DATA:
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 (6)............ .095 .06 -- -- --
<FN>
- ------------------------
(1) In April 1993, the Company acquired a majority of Spelling's outstanding
common stock. This transaction was accounted for under the purchase method
of accounting and, accordingly, the results of operations of Spelling
subsequent to that time are included in the Company's Consolidated
Financial Statements herein. At December 31, 1993, the Company owned
45,658,640 shares representing approximately 70.5% of the outstanding
common stock of Spelling. In November 1993, the Company acquired all of
the outstanding capital stock of Super Club. This transaction was
accounted for under the purchase method of accounting, and, accordingly,
the results of operations of Super Club subsequent to that time are
included in the Company's Consolidated Financial Statements herein.
(2) In February 1992, the Company acquired substantially all of the
outstanding ordinary shares of Cityvision. The transaction was accounted
for under the purchase method of accounting and, accordingly, the results
of operations of Cityvision subsequent to that time are included in the
Company's Consolidated Financial Statements herein. In November 1992, the
Company acquired all of the outstanding common stock of Sound Warehouse
and Music Plus. These transactions were accounted for under the purchase
method of accounting and, accordingly, the results of operations of Sound
Warehouse and Music Plus subsequent to that time are included in the
Company's Consolidated Financial Statements herein.
(3) Effective April 1991, the Company acquired all of the outstanding shares
of capital stock of Erol's. The transaction was accounted for under the
purchase method of accounting and, accordingly, the results of operations
of Erol's subsequent to that time are included in the Company's
Consolidated Financial Statements herein.
(4) In January 1989, a wholly-owned subsidiary of the Company was merged into
Major Video. In August 1989, the Company acquired VSMLP, then its largest
franchise owner. These transactions were accounted for under the pooling
of interests method of accounting. Accordingly, financial data has been
restated as if the Company, Major Video and VSMLP had operated as one
entity since inception.
(5) Net income per common and common equivalent share assuming full dilution
has been adjusted to reflect two-for-one splits of the Company's Common
Stock in May 1989 and March 1991.
(6) See "Price Range of Common Stock and Dividend Policy."
</TABLE>
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE YEARS ENDED DECEMBER 31, 1993
VIACOM INC. AGREEMENTS
In January 1994, the Company entered into a merger agreement pursuant to
which the Company has agreed to merge into 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.
Concurrently with the merger agreement, the Company entered into 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 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,
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 from certain subsidiaries of Philips Electronics N.V. ("Philips").
The purchase price paid by the Company was approximately $150,000,000 and
consisted of 5,245,211 shares of Common Stock and warrants to acquire additional
shares of Common Stock. The warrants give Philips the right to acquire 1,000,000
and 650,000 shares of Common Stock at exercise prices of $31.00 and $32.42 per
share, respectively. As a result of the acquisition, the Company added to its
system 270 music stores and 120 video stores operating primarily in the
southeastern United States.
11
<PAGE>
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, 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 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.
In February 1992, the Company acquired 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
12
<PAGE>
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 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 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.
13
<PAGE>
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 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.
The Company's filmed entertainment business in general may also be affected
by the public taste, which is unpredictable 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.
14
<PAGE>
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 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.
15
<PAGE>
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.
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
16
<PAGE>
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.
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 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 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
17
<PAGE>
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.
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.
18
<PAGE>
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.
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 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.
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<PAGE>
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.
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
20
<PAGE>
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, 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.
21
<PAGE>
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. 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 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 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.
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<PAGE>
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
<FN>
- ------------------------
Source: Paul Kagan Associates, Inc.
</TABLE>
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 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 confectionery 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-
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<PAGE>
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 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 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 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
24
<PAGE>
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 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
25
<PAGE>
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 videocassettes 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.
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.
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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.
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 governmental 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 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 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 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
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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 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.
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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 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 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.
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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. The
operations of Spelling encompass a broad range of businesses in the filmed
entertainment industry, supported by an extensive library of television 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 also
holds warrants to acquire an aggregate of 1,337,148 shares of Spelling's common
stock.
In April 1994, a wholly-owned subsidiary of Spelling merged with and into
Republic, and Republic became a wholly-owned subsidiary of Spelling. 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. It is anticipated that 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.
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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.
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. Particularly 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.
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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 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 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 successful 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.
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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.
OTHER ENTERTAINMENT
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. 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 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 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.
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At December 31, 1993, the Company owned 7,153,750 shares or approximately
19.1%, of the outstanding common stock of Discovery Zone. Discovery Zone owns,
operates and franchises indoor recreational facilities for children. The Company
currently operates 44 Discovery Zone facilities and has franchise rights to
develop additional 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.
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
34
<PAGE>
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.
Consummation of the merger is subject to certain conditions, including,
among other things, approval by the stockholders of the Company and Viacom.
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.
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
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<PAGE>
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.
MANAGEMENT
The following table sets forth, as of May 5, 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 -- Domestic Consumer Division
Ramon Martin-Busutil 60 President -- International Division
John J. Melk 57 Director
Gerald W. B. Weber 43 President -- Music Division
</TABLE>
Each director holds office until the next annual meeting of shareholders 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 (collectively, the "Stadium Companies"), which own and
operate Joe Robbie Stadium in South Florida. Mr. Huizenga has entered into an
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<PAGE>
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 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 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 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 & 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 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
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<PAGE>
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 -- Domestic 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 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, became Senior Vice President of Operations in February 1991 and
became President -- Music Division in April 1994. 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.
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<PAGE>
COMPENSATION
SUMMARY COMPENSATION TABLE
Set forth below is information concerning the annual and long-term
compensation for services in all capacities to the Company for the fiscal years
ended December 31, 1993, 1992 and 1991, of those persons who were, at December
31, 1993, (i) the Chief Executive Officer, and (ii) the other four most highly
compensated executive officers of the Company (collectively, the "Named
Officers"). The principal positions described with respect to the Named Officers
relate to the positions held by such persons as of December 31, 1993.
<TABLE>
<CAPTION>
LONG TERM-
ANNUAL COMPENSATION COMPENSATION
-------------------------------- ------------
OTHER SECURITIES
NAME & ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- ----------------------------------- ---- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
H. Wayne Huizenga 1993 $444,231 $112,500 $ -- 385,715 $ --
Chairman of the Board and Chief 1992 416,154 105,000 -- 855,067 --
Executive Officer 1991 400,000 100,000 -- 500,000 --
Steven R. Berrard 1993 444,231 112,500 -- 808,572 --
Vice Chairman of the Board, 1992 416,154 105,000 -- 605,067 --
President and Chief Operating 1991 380,769 100,000 -- 136,900 --
Officer
Gregory K. Fairbanks 1993 307,577 81,250 26,873 (1) 111,429 41,924 (2)
Senior Vice President, Treasurer 1992 178,846 75,000 31,525 (1) 71,429 94,383 (2)
and Chief Financial Officer 1991 -- -- -- -- --
James L. Hilmer 1993 297,931 93,750 25,105 (1) 171,429 57,360 (2)
Senior Vice President and Chief 1992 -- -- -- -- --
Marketing Officer 1991 -- -- -- -- --
Gerald W. B. Weber 1993 287,500 75,000 -- 152,858 --
Senior Vice President, Operations 1992 225,385 58,750 -- 77,552 --
1991 182,116 58,750 -- 47,488 --
<FN>
- ------------------------
(1) Represents amounts reimbursed for the payment of taxes incurred in
connection with the payment by the Company of certain relocation-related
expenses.
(2) Represents payments by the Company of certain relocation-related expenses.
</TABLE>
39
<PAGE>
STOCK OPTION GRANT TABLE
Set forth below is information with respect to grants of stock options
during the fiscal year ended December 31, 1993, to the Named Officers. Stock
appreciation rights are not available under the Company's stock option plans.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
NUMBER OF -----------------------------------
SECURITIES % OF TOTAL POTENTIAL REALIZABLE VALUE
UNDERLYING OPTIONS AT ASSUMED ANNUAL RATES
OPTIONS GRANTED TO OF STOCK PRICE APPRECIATION
GRANTED IN EMPLOYEES FOR OPTION TERM
FISCAL IN FISCAL EXERCISE EXPIRATION ----------------------------
NAME YEAR(1) YEAR PRICE DATE 5% 10%
- ----------------------------------- ----------- ----------- --------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
H. Wayne Huizenga.................. 385,715 7.7% $ 17.50 2/12/03 $ 4,245,083 $ 10,757,495
Steven R. Berrard.................. 308,572 6.1 17.50 2/12/03 3,396,066 8,605,996
500,000 10.0 24.625 7/27/03 7,743,331 19,622,431
Gregory K. Fairbanks............... 111,429 2.2 17.50 2/12/03 1,226,360 3,107,727
James L. Hilmer.................... 171,429 3.4 17.50 2/12/03 1,886,705 4,781,112
Gerald W. B. Weber................. 102,858 2.0 17.50 2/12/03 1,132,029 2,868,684
50,000 1.0 24.625 7/27/03 774,333 1,962,243
<FN>
- ------------------------
(1) Stock options granted to the Chairman of the Board and Chief Executive
Officer vested in full immediately upon grant as provided in or
contemplated by the Company's Employee Director Stock Option Plan. Stock
options granted to the other Named Officers vest in equal amounts over a
period of four years. All options granted under the Company's stock option
plans may become immediately exercisable upon the occurrence of certain
business combinations. The proposed Merger with Viacom would constitute a
business combination such that all options outstanding under the Company's
stock option plans would become immediately exercisable upon consummation
of the Merger. The Compensation Committee of the Board of Directors may
accelerate the exercisability of any option subject to such terms and
conditions as the Committee deems necessary and appropriate.
</TABLE>
STOCK OPTION EXERCISES AND YEAR-END HOLDINGS
Set forth below is certain information pertaining to stock options held by
the Named Officers as of December 31, 1993.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
ACQUIRED YEAR-END AT FISCAL YEAR-END
ON VALUE ------------------------- ----------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------- ------------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
H. Wayne Huizenga............ 591,141 $ 15,000,001 4,569,641 -- $ 93,666,715 $ --
Steven R. Berrard............ 202,660 4,940,544 456,989 1,409,914 8,808,408 17,305,455
Gregory K. Fairbanks......... -- -- 17,857 165,001 296,873 2,353,140
James L. Hilmer.............. -- -- -- 171,429 -- 2,250,006
Gerald W. B. Weber........... 19,246 371,087 107,905 256,357 2,278,076 3,705,648
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following persons served as members of the Compensation Committee of the
Board of Directors during the year ended December 31, 1993: A. Clinton Allen,
III (Chairman), Donald F. Flynn and John W. Croghan. None of the members of the
Compensation Committee were employees of the Company.
Effective in April 1993, the Company entered into a stock purchase agreement
with Discovery Zone and certain other parties pursuant to which the Company
acquired 6,200,000 newly issued shares of the common stock of Discovery Zone and
certain options to acquire additional shares of Discovery Zone's common stock.
Following Discovery Zone's initial public offering of its common stock in June
1993, the Company exercised one such option and acquired an additional 953,750
shares of Discovery Zone's common stock. At December 31, 1993, the Company owned
7,153,750 shares of common stock of Discovery Zone, representing approximately
19.1% of its outstanding common stock. The Company currently operates 44
Discovery Zone facilities and has franchise rights to develop additional
Discovery Zone facilities. In
40
<PAGE>
addition, the Company has 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. Donald F.
Flynn, a director of the Company and member of the Compensation Committee is
Chairman of the Board and Chief Executive Officer of Discovery Zone. H. Wayne
Huizenga, Chairman of the Board and Chief Executive Officer of the Company, and
John J. Melk, a director of the Company, are each directors of Discovery Zone.
The following persons owned the following percentages of common stock in
Discovery Zone at March 23, 1994, as calculated in accordance with Rule 13d-3
under the 1934 Act: John W. Croghan, a director of the Company -- less than 1%;
Donald F. Flynn, a director of the Company -- 38.4%; John J. Melk, a director of
the Company -- 3.8%; and J. Ronald Castell, Senior Vice President of the Company
- -- less than 1%. Because of their positions with the Company, H. Wayne Huizenga,
Chairman of the Board and Chief Executive Officer, and Steven R. Berrard, Vice
Chairman of the Board, President and Chief Operating Officer of the Company, may
each be deemed to be beneficial owners of the shares of Discovery Zone's common
stock owned by the Company. Mr. Huizenga and Mr. Berrard each disclaim
beneficial ownership of such shares, and such shares are not reflected in the
calculations presented above.
For the fiscal years ended December 31, 1993, 1992 and 1991, the Company
paid approximately $1,100,000, $790,598 and $870,000, respectively, to
Psychemedics for testing services in connection with the Company's drug
screening policy. At December 31, 1993, Messrs. Allen, Croghan and Flynn
beneficially owned 9.3%, less than 1%, and 9.5%, respectively, of the common
stock of Psychemedics. In addition, as of that date, Mr. Flynn's spouse
beneficially owned 3.1%, and Patricia A. Flynn, as trustee under trusts for the
benefit of Mr. Flynn's children, beneficially owned 6.3% of the common stock of
Psychemedics. Messrs. Allen and Flynn are directors of Psychemedics. See
"Compensation -- Transactions and Other Events".
Effective in July 1992, the Company acquired all of the assets relating to
three Blockbuster Video stores located in Central California from Marquee
Entertainment, Inc., a California corporation ("Marquee"). Donald F. Flynn was a
principal shareholder of Marquee but did not participate in its management. In
exchange for the purchased assets, the Company paid Marquee $2,150,415 in cash.
For the period from January 1, 1992 until the acquisition date and during the
fiscal year ended December 31, 1991, the Company received under its development
and franchise agreements with Marquee an aggregate of approximately $647,269 and
$200,184, respectively, in payment of development, franchise and royalty fees
and the purchase of inventory and equipment. The Company believes that the terms
of the acquisition were substantially similar to the terms of other acquisitions
of similarly situated businesses of franchise owners. The Company also believes
that the terms of its franchise and development agreements with Marquee were as
favorable to the Company as those with other franchise owners, and that the
terms of such agreements were substantially similar to the terms of the
Company's other franchise and development agreements.
Effective in July 1992, the Company acquired all of the assets relating to
four Blockbuster Video stores located in Central California from F & G
Entertainment, Inc., a California corporation ("F & G"). Mr. Flynn was a
principal shareholder of F & G but did not participate in its management. In
exchange for the purchased assets, the Company paid F & G $3,485,000 in cash.
For the period from January 1992 until the acquisition date and during the
fiscal years ended December 31, 1991 and 1990, the Company received under its
development and franchise agreements with F & G an aggregate of approximately
$303,463, $366,590 and $422,791, respectively, in payment of franchise and
royalty fees and the purchase of inventory and equipment. The Company believes
that the terms of the acquisition were substantially similar to the terms of
other acquisitions of similarly situated businesses of franchise owners. The
Company also believes that the terms of its franchise and development agreements
with F & G were as favorable to the Company as those with other franchise
owners, and that the terms of such agreements were substantially similar to the
terms of the Company's other franchise and development agreements.
Effective in July 1992, the Company acquired all of the assets relating to
eleven Blockbuster Video stores located in California, Washington and Idaho from
Flynn Brothers Entertainment, Inc., a Washington corporation ("Flynn Brothers").
In exchange for the purchased assets, the Company issued 284,645 shares of its
Common Stock to Flynn Brothers. Kevin Flynn and Brian Flynn, sons of Donald F.
Flynn, were the sole shareholders of Flynn Brothers. For the period from January
1992 until the acquisition date and during the
41
<PAGE>
fiscal years ended December 31, 1991 and 1990, the Company received under its
development and franchise agreements with Flynn Brothers an aggregate of
approximately $354,452, $940,816 and $146,000, respectively, in payment of
development, franchise and royalty fees and, in addition, sold to Flynn
Brothers, inventory and equipment at an aggregate purchase price of $341,697,
$1,154,591 and $1,078,698, respectively. The Company believes that the terms of
the acquisition were substantially similar to the terms of other acquisitions of
similarly situated businesses of franchise owners. The Company also believes
that the terms of its franchise and development agreements with Flynn Brothers
were as favorable to the Company as those with other franchise owners and that
the terms of such agreements were substantially similar to the terms of the
Company's other franchise and development agreements.
TRANSACTIONS AND OTHER EVENTS
On September 17, 1993, the Company and Spelling entered into a Stock
Purchase Agreement pursuant to which, on October 5, 1993, Spelling sold to the
Company 13,362,215 shares of Spelling's common stock for the aggregate purchase
price of $100,216,612 which was paid in full by delivery of 3,652,542 shares of
Common Stock. This transaction increased the Company's beneficial ownership of
Spelling's common stock to 45,658,640 shares, or approximately 70.5% of
Spelling's common stock issued and outstanding on such date.
For the fiscal year ended December 31, 1993, Spelling reimbursed the Company
in the aggregate amount of $380,437 for the cost of various services provided to
Spelling by certain of the Company's employees. Such services included
accounting, legal and tax services, as well as the services of certain officers
of Spelling who were also officers of the Company. The amount reimbursed to the
Company with respect to such officers represents the allocable portion of such
officer's base salary and bonus paid by the Company attributable to their
services provided to Spelling. Such officers did not receive separate salaries
from Spelling for such services.
During the fiscal year ended December 31, 1993, the Company was charged by
Spelling approximately $3,100,000 for the purchase of prerecorded videocassettes
in connection with the Company's home video retailing business. The Company
believes that the terms of purchases of videocassettes from Spelling were as
favorable to the Company as could have been obtained from an unaffiliated party.
The Company expects to continue to purchase videocassettes from Spelling upon
similar terms in the future.
Effective January 1994, Spelling entered into a Credit Agreement (the
"Spelling Credit Agreement") with the Company and related agreements pursuant to
which the Company has agreed to advance Spelling and/or certain of its
subsidiaries an aggregate of $175,000,000, consisting of a term loan in the
amount of $100,000,000 (the "Term Loan") and revolving loans in an aggregate
principal amount of $75,000,000 (the "Revolving Loans"). The Term Loan will bear
interest at a fixed rate of 6 5/8% and interest payments will be due
semi-annually. Amounts borrowed and repaid pursuant to the Term Loan may not be
reborrowed. The Revolving Loans will bear interest at the one, two and three
month LIBOR rate (as selected by Spelling) plus 1%. Amounts borrowed and repaid
pursuant to the Revolving Loans may be reborrowed from time to time up to the
amount of the Revolving Loans available under the Credit Agreement. Spelling is
obligated to pay an annual fee to the Company of 0.175% of the unused amount
available for Revolving Loans and certain facility and administration fees. The
Company believes that the terms of the Spelling Credit Agreement are comparable
to the terms of similar agreements between similarly situated companies.
In April 1994, a wholly owned subsidiary of Spelling merged with and into
Republic (the "Spelling/ Republic Merger"), and Republic became a wholly-owned
subsidiary of Spelling. Each share of Republic's common stock outstanding
immediately prior to the effective time of the Spelling/Republic Merger (the
"Effective Time") was converted into the right to receive $13.00 in cash,
without interest. Options and warrants to acquire shares of Republic's common
stock outstanding immediately prior to the Effective Time were converted into
the right to receive, upon payment of the exercise price (as adjusted as set
forth below), 1.6508 shares of Spelling's common stock for each share of
Republic's common stock into which such option or warrant was exercisable
immediately prior to the Effective Time. The exercise price of such options and
warrants was adjusted by multiplying such exercise price by 0.6058.
42
<PAGE>
Prior to the Spelling/Republic Merger, the Company owned 2,550,000 shares of
Republic's common stock and warrants to acquire an aggregate of 810,000 shares
of Republic's common stock at an exercise price of $11.50 per share, which
shares and warrants, as a result of the Spelling/Republic Merger, were converted
into the right to receive an aggregate of $33,150,000 and warrants to acquire an
aggregate of 1,337,148 shares of Spelling's common stock, respectively. The
exercise price for such warrants is $6.9667 per share. H. Wayne Huizenga and
Steven R. Berrard, the Company's Chairman of the Board and Chief Executive
Officer and Vice Chairman of the Board, President and Chief Operating Officer,
respectively have served on the Board of Directors of Republic since February
1993.
Effective in May, 1993, the Company acquired all of the assets relating to
six Blockbuster Video stores located in Illinois and Iowa from United
Consortium, Inc., an Illinois corporation ("United"). In exchange for the
purchased assets, the Company issued 229,876 shares of its Common Stock to
United. John J. Melk, currently a director and at the time of the transaction a
nominee for director of the Company, and his son Daniel J. Melk are the sole
shareholders of United. For the period January 1, 1993 until the acquisition
date, the Company received an aggregate of approximately $152,588 from United in
payment of franchise and royalty fees and the purchase of inventory and
equipment. The Company believes that the terms of the acquisition were
substantially similar to the terms of other acquisitions of similarly situated
businesses of franchise owners. The company also believes that the terms of its
franchise agreement with United were as favorable to the Company as those with
other franchise owners, and that the terms of such agreement were substantially
similar to the Company's other franchise agreements.
Effective August 12, 1993, the Company merged with WJB in a pooling of
interests business combination. In connection with such combination, the Company
issued 7,214,192 shares of Common Stock to the equity holders of WJB. As a
result of such combination, the Company added 209 Blockbuster Video stores as
Company-owned stores, and the Company now owns the real estate on which 51 of
such Blockbuster Video stores are located. In addition, as a result of such
combination, the Company now owns certain additional franchise and development
rights granted by Discovery Zone to WJB. George D. Johnson, Jr., who became a
director and President -- Domestic Consumer Division of the Company upon
consummation of the business combination, and certain trusts for the benefit of
Mr. Johnson's son and daughter were equity holders of WJB, such that each
received shares of Common Stock in connection with the combination. The Company
believes that the terms of the combination were substantially similar to the
terms of other transactions involving similarly situated businesses of franchise
owners.
As a result of the combination with WJB, the Company became successor in
interest to a property management agreement with Johnson Development Associates,
Inc., a South Carolina corporation ("Johnson Development"), pursuant to which
Johnson Development serves as the property manager of 51 Blockbuster Video store
locations owned by the Company. George D. Johnson, Jr. is an equity holder of
Johnson Development. Pursuant to the terms of the management agreement with
Johnson Development, the Company is obligated to make monthly payments to
Johnson Development in the aggregate amount of approximately $17,000 for its
services. The management agreement remains in effect until terminated by either
party upon 180 days notice. The Company believes that the terms of the
management agreement with Johnson Development are as favorable to the Company as
it could have obtained from an unaffiliated party.
As a result of the combination with WJB, the Company became a successor in
interest to a lease agreement with Ben Hill Associates L.P. ("Ben Hill") for the
use of office space located in Spartanburg, South Carolina. George D. Johnson,
Jr. is general partner of Ben Hill, and a limited partnership, of which Mr.
Johnson, his wife and trusts for the benefit of his children are equity holders,
is its sole limited partner. Under such lease agreement, the Company is
obligated to make monthly lease payments in the amount of $38,106. Such lease
remains in effect until January 30, 2005. The Company believes that the terms of
the lease agreement with Ben Hill are as favorable to the Company as it could
have obtained from an unaffiliated party.
In November 1993, Steven R. Berrard, Vice Chairman, President and Chief
Operating Officer of the Company sold 300,000 shares of Common Stock in
connection with an underwritten public offering of Common Stock conducted by the
Company. Mr. Berrard sold such shares in connection with the public
43
<PAGE>
offering rather than in an open market transaction, in deference to concerns of
Mr. Berrard and the Company that an open market sale might have adversely
affected the public offering. Because of the considerable benefit to the Company
resulting from Mr. Berrard's sale of shares through the public offering rather
than an open market transaction, the Company determined it appropriate to put
Mr. Berrard in the same financial position he would have been had he sold such
shares in the open market rather than as part of the underwritten public
offering. The Company therefore reimbursed Mr. Berrard $296,400, which amount
represented the underwriting fee paid by Mr. Berrard in connection with the
public offering minus estimated brokerage commissions and fees Mr. Berrard would
otherwise have paid in an open market transaction. The Company believes such
payment was reasonable in light of the benefit received by the Company.
In connection with the relocation to South Florida of Gregory K. Fairbanks,
Senior Vice President, Treasurer and Chief Financial Officer of the Company, in
June 1992, the Company made a secured non-interest bearing loan of $400,000 to
Mr. Fairbanks, $250,000 of which has been repaid and $150,000 of which is
payable on December 31, 1994.
During each of the fiscal years ended December 31, 1993, 1992 and 1991, the
Company made payments to Holdings in the aggregate amount of $122,703, $180,000
and $180,000, respectively, for the business use of certain airplanes owned by
Holdings. Also during 1993 and 1992, the Company paid all direct costs
associated with the operation of such airplanes. Holdings reimbursed the Company
$635,654 and $166,508 in 1993 and 1992, respectively, for Holdings' share of all
costs associated with its use of the airplanes. The Company believes that the
terms of its use of the airplanes were more favorable to the Company than it
could have obtained from an unaffiliated party and expects to continue to use
the airplanes on such terms in the future.
In May 1992, Holdings entered a lease agreement with an indirect wholly
owned subsidiary of the Company for the use of office space in One Blockbuster
Plaza, the Company's principal office building. Under such lease agreement,
Holdings became obligated to make monthly lease payments in the amount of $3,524
commencing in November 1992. For the fiscal year ended December 31, 1993, the
Company received $86,976 in payments under such lease. Such lease is for an
initial term of five years and is renewable for an additional term of five years
at the option of Holdings. The Company believes that the terms of its lease
agreement with Holdings are as favorable to the Company as it could have
obtained from an unaffiliated party.
During the fiscal year ended December 31, 1993, the Company made payments to
Suncoast Helicopters, Inc., a Florida corporation ("Suncoast"), and a subsidiary
of Holdings, in the aggregate amount of $25,762 for the business use of certain
helicopters owned by Suncoast. The Company believes that the terms of its use of
the helicopters were as favorable to the Company as could have been obtained
from an unaffiliated party and expects to continue to use the helicopters on
such terms in the future.
During each of the fiscal years ended December 31, 1992 and 1991 (prior to
the Company's move in May 1992 to its present offices), the Company made
payments in the aggregate amount of $399,831 and $361,423, respectively, to Las
Olas Development Co. ("Las Olas") for its use of office space located in Fort
Lauderdale, Florida which was subject to a lease agreement between Las Olas as
lessor, and Holdings, as lessee, based on the Company's occupancy of certain
space subject to the lease agreement. The Company believes that such payments
were on terms as favorable to the Company as could have been obtained had the
Company itself been the party to the lease agreement.
Since June 1990, Mr. Huizenga has owned an equity interest in the Stadium
Companies. During the fiscal years ended December 31, 1993, 1992 and 1991, the
Company made payments in the aggregate amount of $110,602, $129,613 and $66,083,
respectively, to the Stadium Companies for signage and other advertising and for
tickets to sporting and other events, for which the Company contracted with the
Stadium Companies prior to Mr. Huizenga's investment therein. The Company also
made payments during the fiscal years ended December 31, 1993, 1992 and 1991, in
the aggregate of $100,000, $100,000 and $150,000, respectively, to the Stadium
Companies for scoreboard signage pursuant to a contract entered into by the
Company and the Stadium Companies after Mr. Huizenga's investment therein. The
Company believes that the terms of the
44
<PAGE>
contract for scoreboard signage are as favorable to the Company as terms which
could be obtained from an unaffiliated party. The Company expects to continue to
conduct business with the Stadium Companies in the future.
During the fiscal years ended December 31, 1993, 1992, and 1991, the Company
received from Donovan Entertainment, Inc. ("Donovan"), a franchise owner of the
Company, an aggregate of approximately $281,846, $393,976 and $155,070,
respectively, for the purchase of inventory and equipment and in payment of
royalty fees. During the same periods, the Company received from Dorn Video,
Inc., a Florida corporation ("Dorn") and a franchise owner of the Company, an
aggregate of approximately $110,002, $104,809 and $296,081, respectively, for
the purchase of inventory and equipment and in payment of royalty fees. H. Wayne
Huizenga, Jr., a son of Mr. Huizenga, is a creditor of Donovan and Dorn. The
Company believes that the terms of its development and franchise agreements with
Donovan and Dorn are as favorable to the Company as those with its other
franchise owners, and that the terms of such agreements are substantially
similar to the terms of the Company's other franchise and development
agreements.
During the fiscal years ended December 31, 1993, 1992 and 1991, the Company
received an aggregate of approximately $556,360, $692,159 and $682,982,
respectively, from Brevard Entertainment Corp., a Florida corporation
("Brevard"), in payment of development, franchise and royalty fees and the
purchase of inventory and equipment. In October 1993, Brevard acquired all of
the assets of a video store which the Company acquired along with other video
stores in a separate transaction, and paid certain franchise-related fees
pertaining to such store, for an aggregate of $324,897. The purchase price paid
by Brevard for such assets was based on an allocation of the purchase price paid
by the Company for all of the video stores acquired in the separate transaction.
The franchise and royalty fees paid to the Company and purchase of inventory and
equipment from the Company relating to such store are also reflected in the
aggregate amount of such fees and payments for the fiscal year ended December
31, 1993 presented above. Bonnie J. Hudson and Harris W. Hudson, the sister and
brother-in-law of Mr. Huizenga, are shareholders in Brevard. The Company
believes that the terms of its franchise and development agreements with Brevard
are as favorable to the Company as those with other franchise owners and that
the terms of such agreements are substantially similar to the terms of the
Company's other franchise and development agreements. The Company believes that
the terms of the sale of the store to Brevard were substantially similar to the
terms of sales of other similarly situated stores to other franchise owners.
Until August 1991, the Company leased on a month-to-month basis certain
office facilities from Adams Building Associates ("Adams"), a partnership of
which Mr. Huizenga holds an equity interest but which is managed by persons
other than Mr. Huizenga, pursuant to a certain lease agreement. Under the terms
of the lease agreement, the Company paid to Adams during the fiscal year ended
December 31, 1991 an aggregate of $83,602. The Company believes that the terms
of the lease agreement were more favorable to the Company than could have been
obtained from an unaffiliated party.
In December 1992, the Company entered into franchise and development
agreements with Royal Palm Video, Inc., a Florida corporation ("Royal Palm").
During the fiscal years ended December 31, 1993 and 1992, the Company received
an aggregate of approximately $127,751 and $570,930, respectively, from Royal
Palm in payment of franchise and development fees and the purchase of inventory
and equipment. In February 1994, the Company entered into franchise and
development agreements with Polo Video, Inc., a Florida corporation ("Polo"). In
connection with the agreements with Polo, the Company received an aggregate of
approximately $613,063 from Polo in payment of franchise and development fees
and for the purchase of inventory and equipment. E. Charles Pike, a
brother-in-law of Mr. Huizenga, is a principal shareholder of Royal Palm and
Polo. The Company believes that the terms of its franchise and development
agreements with Royal Palm and Polo are as favorable to the Company as those
with its other franchise owners, and that the terms of such agreements are
substantially similar to the terms of the Company's other franchise and
development agreements.
In February 1993, the Company entered into an agreement with the Florida
Marlins to sponsor certain events at or in connection with Florida Marlins
baseball games in the 1993 through 1995 baseball seasons. The Company will pay
the Florida Marlins an aggregate of $340,000 per year for these sponsorship
rights.
45
<PAGE>
H. Wayne Huizenga, Jr., G. Harry Huizenga, Bonnie J. Hudson and Harris W.
Hudson, who are Mr. Huizenga's son, father, sister and brother-in-law,
respectively, are all limited partners in the Florida Marlins. Mr. Berrard also
is a limited partner in the Florida Marlins. Mr. Huizenga is the majority owner
thereof and the Chairman and Chief Executive Officer of Florida Marlins, Inc.,
its managing general partner. The Company believes that the terms of its
sponsorship agreement are as favorable to the Company as terms which could be
obtained from an unaffiliated party. The Company expects to continue to conduct
business with the Florida Marlins in the future.
In June 1993, the Company and Mr. Huizenga formed a joint venture, Panthers
Investment Venture (the "Venture"), pursuant to which the Company received an
option (the "Panthers Option") to acquire a 50% limited partnership interest in
the Florida Panthers in exchange for the Company's guarantee of a $20,000,000
bank loan to the Venture. Mr. Huizenga also has guaranteed such bank loan and
has agreed to reimburse the Company for certain losses, if any, which may be
incurred under the Company's guarantee. The Florida Panthers owns and operates
the National Hockey League franchise in South Florida, and Mr. Huizenga is its
sole limited partner and the sole shareholder of its corporate general partner.
If the Company elects to exercise the Panthers Option, which is conditioned upon
the Company implementing a plan to develop a sports entertainment complex in
South Florida prior to June 1996, the Company would be required at the time of
exercise to make an additional capital contribution to the Venture equal to the
aggregate amount of costs incurred by Mr. Huizenga in capitalizing the Florida
Panthers through the date of exercise. The Company believes that the terms of
the transaction are more favorable to the Company than it could have obtained
from an unaffiliated party.
In August 1993, the Company entered into a contract with the Florida
Panthers whereby the Company will pay an aggregate of $487,790 for advertising
and sponsorship activities during the 1993-94 and 1994-95 hockey seasons. The
Company believes that the terms of the contract for advertising and sponsorship
activities are as favorable to the Company as terms which could be obtained from
an unaffiliated party.
During the fiscal year ended December 31, 1993, the Company paid BRWC, Inc.,
a Florida corporation ("Blue Ribbon"), an aggregate of $20,000 for the purchase
of bottled water and the rental of water coolers for the Company's offices in
Fort Lauderdale, Florida. Blue Ribbon is owned by H. Wayne Huizenga. The Company
believes that the terms of its agreement with Blue Ribbon with respect to the
purchase of bottled water and rental of water coolers are as favorable to the
Company as could have been obtained from an unaffiliated party. The Company
expects to continue to conduct business with Blue Ribbon upon similar terms in
the future.
For the fiscal years ended December 31, 1993, 1992 and 1991, the Company
paid approximately $1,100,000, $790,598 and $870,000, respectively, to
Psychemedics for testing services in connection with the Company's drug
screening policy. The Company believes that Psychemedics provides a less
intrusive and more accurate testing service than other companies because such
testing is based on the analysis of hair follicles rather than body fluids. The
Company believes that Psychemedics is the only company that provides testing
services based on the analysis of hair follicles. The following persons owned
the following percentages of common stock in Psychemedics at December 31, 1993,
as calculated in accordance with Rule 13d-3 under the 1934 Act: A. Clinton
Allen, III, a director of the Company -- 9.3%; H. Wayne Huizenga, Chairman of
the Board and Chief Executive Officer of the Company -- 12.8%; each of Mr.
Huizenga's spouse, father and children -- less than 1%; Donald F. Flynn, a
director of the Company -- 9.5%; Mr. Flynn's spouse -- 3.1%; Patricia A. Flynn,
trustee under trusts for the benefit of Mr. Flynn's children -- 6.3%; John J.
Melk, a director of the Company -- 12.4%; each of Mr. Melk's children -- less
than 1%; a trust for the benefit of Mr. Melk's children -- 3%; John W. Croghan,
a director of the Company -- less than 1%; Robert A. Guerin, Senior Vice
President of the Company -- less than 1%; and Steven R. Berrard, Vice Chairman,
President and Chief Operating Officer of the Company -- less than 1%. Messrs.
Allen, Flynn and Melk are directors of Psychemedics. The Company believes that
the terms of its agreement with Psychemedics are as or more favorable to the
Company as could have been obtained from an unaffiliated party using testing
procedures substantially similar to those used by Psychemedics. The Company
expects to continue to conduct business with Psychemedics in the future.
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<PAGE>
See "Compensation Committee Interlocks and Insider Participation."
During the fiscal year ended December 31, 1991, the Company received from
Three A's Corp., a Delaware corporation ("Three A's") and franchise owner of the
Company, an aggregate of $386,134, for the purchase of inventory and equipment,
and in payment of franchise and royalty fees. The siblings of Saad J. Nadhir,
who was an executive officer of the Company until December 1991, were
shareholders of Three A's. The Company believes that the terms of its franchise
agreements with Three A's were as favorable to the Company as those with its
other franchise owners, and that the terms of such agreements were substantially
similar to the terms of the Company's other franchise and development
agreements.
During the fiscal year ended December 31, 1991, the Company made payments
pursuant to a lease agreement with a general partnership of which the
brother-in-law and a sibling of Saad J. Nadhir, who was an executive officer of
the Company until December 1991, are partners. Under the terms of the lease, the
Company leases certain retail space at an average base monthly rent of $8,212.
The Company believes that the terms of the lease are as favorable to the Company
as terms which could be obtained from an unaffiliated party.
During the fiscal years ended December 31, 1992 and 1991, the Company
retained the law firm of Eckert Seamans Cherin & Mellott to represent the
Company on various matters. The late Carl F. Barger, a former director of the
Company, was a partner and a member of the firm's Executive Committee.
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of March 18, 1994, as
to the beneficial ownership of Common Stock by the directors, certain executive
officers and by all directors and executive officers as a group:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
NUMBER OF DIRECTOR, COMMON STOCK PERCENT OF
NOMINEE FOR DIRECTOR BENEFICIALLY COMMON
OR EXECUTIVE OFFICER OWNED(1)(2) STOCK(2)
- ---------------------------------------------------------------------------- -------------- -------------
<S> <C> <C>
H. Wayne Huizenga........................................................... 16,254,938 6.4%
A. Clinton Allen, III....................................................... 143,400 *
Steven R. Berrard........................................................... 678,685 *
John W. Croghan............................................................. 427,504 *
Gregory K. Fairbanks........................................................ 63,571 *
Donald F. Flynn............................................................. 5,941,476 2.4
James L. Hilmer............................................................. 42,857 *
George D. Johnson, Jr. ..................................................... 2,067,005 *
John J. Melk................................................................ 6,915,009 2.8
Gerald W.B. Weber........................................................... 162,098 *
All directors and executive officers as a group, including persons
named above (16 persons)................................................... 32,983,166 12.9
<FN>
- ------------------------
* Less than one percent.
(1) Ownership of shares for Mr. Huizenga and for all directors and executive
officers as a group includes 300,000 shares owned by certain grantor trusts
of which Mr. Huizenga is the trustee and sole beneficiary. Ownership of
shares for Mr. Melk and for all directors and executive officers as a group
includes 1,319,446 shares owned by certain partnerships and corporations of
which Mr. Melk holds majority interests and directs the voting of such
shares. Ownership of shares for Mr. Johnson, Mr. Flynn, Mr. Melk and Mr.
Weber and for all directors and executive officers as a group does not
include 35,400 shares, 2,320 shares, 163,128 shares and 540 shares not held
directly by Mr. Johnson, Mr. Flynn, Mr. Melk or Mr. Weber, respectively,
but held by or for the benefit of their respective spouses, as to which
they have neither investment power nor voting power. Mr. Johnson, Mr.
Flynn, Mr. Melk and Mr. Weber disclaim any beneficial ownership of such
shares. Ownership of shares shown from
</TABLE>
47
<PAGE>
<TABLE>
<S> <C>
Mr. Johnson and for all directors and executive officers as a group
includes 78,881 shares held by a
corporation of which Mr. Johnson owns a majority interest and 53,326 shares
held by a corporation of which Mr. Johnson owns a one-third interest. Mr.
Johnson disclaims any beneficial ownership as to 35,196 of the shares held
by such corporation of which he owns a one-third interest.
(2) The named directors and executive officers and all directors and executive
officers as a group have sole voting and investment power over shares
listed except for 7,223,017 shares covered by certain warrants and stock
options exercisable within 60 days of March 18, 1994 and except to the
extent any such shares are subject to the Amended and Restated Option
Agreement or the Amended and Restated Proxy Agreement described below. The
numbers and percentages of shares owned by each director and executive
officer and by all directors and executive officers as a group assume that
such outstanding warrants and stock options had been exercised as follows:
Mr. Huizenga -- 5,349,053; Mr. Allen -- 90,000; Mr. Berrard -- 673,715; Mr.
Croghan -- 260,000; Mr. Fairbanks -- 63,571; Mr. Flynn -- 20,000; Mr. Melk
-- 313,460; Mr. Weber -- 162,098; and all directors and executive officers
as a group (including such individuals) -- 7,223,017. Such persons and the
members of such group disclaim any beneficial ownership of the shares
subject to such warrants and stock options.
</TABLE>
INFORMATION WITH RESPECT TO CERTAIN STOCKHOLDERS
As of March 18, 1994, no one is known to own beneficially more than five
percent of the outstanding Common Stock, except:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF SHARES OF
BENEFICIAL OWNER COMMON STOCK PERCENT
- --------------------------------------------------------------------------- -------------- ------------
<S> <C> <C>
Philips Electronics N.V. .................................................. 18,895,211 7.1% (a)
Postbust 218
5600 MD
Eindhoven, The Netherlands
H. Wayne Huizenga.......................................................... 16,254,938 6.4% (b)
One Blockbuster Plaza
Ft. Lauderdale, FL 33301
Viacom Inc. ............................................................... 55,889,938 22.4% (c)
200 Elm Street
Dedham, Massachusetts 02026
<FN>
- ------------------------
(a) Includes 1,650,000 shares of Common Stock underlying warrants. The
information regarding Philips ownership of Common Stock is based upon
information disclosed by Philips in its Statement on Schedule 13D, as
amended, relating to its ownership of Common Stock.
(b) Includes 5,349,053 shares of Common Stock underlying options and warrants.
Also includes 300,000 shares of Common Stock owned by certain grantor
trusts of which Mr. Huizenga is the trustee and sole beneficiary.
(c) Represents shares of Common Stock currently subject to an Amended and
Restated Stockholders Stock Option Agreement dated as of January 7, 1994
and shares currently subject to an Amended and Restated Proxy Agreement
dated as of January 7, 1994, including 10,905,885 shares of Common Stock
owned by Mr. Huizenga and 17,245,211 shares of Common Stock owned by
Philips. Viacom has limited voting power only with respect to the shares of
Common Stock subject to the Amended and Restated Proxy Agreement, and does
not have dispositive power with respect to such shares. Shares of Common
Stock subject to the Amended and Restated Stockholders Stock Option
Agreement may be acquired by Viacom only under certain limited
circumstances.
</TABLE>
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following statements with respect to the Company's capital stock are
subject to the detailed provisions of the Company's certificate of
incorporation, as amended (the "Certificate of Incorporation"), and bylaws, as
amended (the "Bylaws"). These statements do not purport to be complete and are
qualified in their entirety by reference to the terms of the Certificate of
Incorporation and the Bylaws.
The authorized capital stock of the Company consists of 300,000,000 shares
of $.10 par value Common Stock and 500,000 shares of $1.00 par value preferred
stock (the "Preferred Stock"). At April 29, 1994, there were 249,040,099 shares
of Common Stock outstanding and no shares of Preferred Stock outstanding. At the
Company's 1994 Annual Meeting of Stockholders scheduled to be held on May 24,
1994, the Company's stockholders will vote on a proposal to increase the number
of authorized shares of Common Stock to 800,000,000 shares.
COMMON STOCK
All holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Votes may not be
cumulated in the election of directors. Stockholders have no preemptive or
subscription rights. The Common Stock is neither redeemable nor convertible, and
there are no sinking fund provisions. Holders of Common Stock are entitled to
dividends when and as declared by the Board of Directors from funds legally
available therefor and are entitled, in the event of liquidation, to share
ratably in all assets remaining after payment of liabilities, subject, in each
instance, to any preferential rights of the holders of any outstanding Preferred
Stock. The outstanding shares of Common Stock are, and the shares of Common
Stock to be issued by the Company hereby when issued and paid for, will be,
fully paid and nonassessable.
SPECIAL VOTING PROVISIONS
The Certificate of Incorporation contains provisions that require the
approval of the holders of 67% of the voting power of the outstanding shares of
the Company entitled to vote generally for specified transactions involving the
Company. Such transactions include: (i) any merger or consolidation of the
Company or any subsidiary with any beneficial owner of 15% or more of the
capital stock of the Company (a "Substantial Stockholder"); (ii) the sale or
disposition by the Company of assets or securities having a value of $1,000,000
or more if a Substantial Stockholder is a party to the transaction; (iii) the
issuance or transfer of any securities of the Company or any subsidiary to a
Substantial Stockholder or affiliate thereof in exchange for cash, securities or
other property having an aggregate fair market value of $1,000,000 or more; (iv)
the adoption of any plan or proposal for the liquidation or dissolution of the
Company proposed by or on behalf of a Substantial Stockholder; or (v) any
reclassification of securities, recapitalization, merger with a subsidiary or
other transaction which has the effect, directly or indirectly, of increasing a
Substantial Stockholder's proportionate interest in the outstanding capital
stock of the Company. A similar 67% vote would be required to amend such
provisions. The stockholder vote requirement does not apply to any such
transaction approved by a majority of disinterested directors of the Company.
Such provisions may operate to make a takeover of the Company more difficult.
PREFERRED STOCK
The shares of Preferred Stock may be issued in connection with future
acquisitions or other proper corporate purposes. There are no present plans or
arrangements for the issuance of any shares of Preferred Stock. The Board of
Directors is authorized, without further stockholder approval, to designate the
terms of and issue the Preferred Stock in one or more series and to establish
the dividend rights, dividend rates, redemption terms, liquidation preferences,
sinking fund payments, conversion privileges, voting powers, designations,
preferences and relative participation, option or other special rights and any
qualifications, limitations or restrictions thereof relating to any such series.
TRANSFER AGENT AND REGISTRAR
First Union National Bank of North Carolina is the transfer agent and
registrar for the Common Stock.
49
<PAGE>
CREDIT AGREEMENTS
On December 22, 1993, the Company entered into the Credit Agreement with
certain banks named in the Credit Agreement, Bank of America National Trust and
Savings Association ("Bank of America"), for itself and as agent, and BA
Securities, Inc. ("BA Securities") as Arranger, pursuant to which such banks
have agreed to advance the Company on an unsecured basis an aggregate of up to
$1,000,000,000. Under the Credit Agreement, the banks are obligated to make
advances to the Company for a term of 40 months. Outstanding advances, if any,
will become payable at the expiration of the 40-month term. The Credit Agreement
replaces a 1992 revolving credit agreement among the Company, Bank of America
and certain other banks.
The Credit Agreement requires, among other items, that the Company maintain
certain financial ratios and comply with certain financial covenants. These
ratios and covenants, as well as interest rates on outstanding advances, are
generally consistent with those applicable to the Company under its prior credit
agreement.
On February 15, 1994, the Company entered into a credit agreement with
certain financial institutions named in such agreement, Bank of America for
itself and as agent, and BA Securities, as Arranger, pursuant to which such
financial institutions advanced to the Company on an unsecured basis
$1,000,000,000 for the purchase of shares of capital stock of Viacom pursuant to
the Subscription Agreement.
EXPERTS
The Consolidated Financial Statements and Schedules of Blockbuster
Entertainment Corporation and subsidiaries as of December 31, 1993 and 1992 and
for each of the three years in the period ended December 31, 1993 included in
this Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen & Co., independent certified public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
The consolidated financial statements of Super Club Retail Entertainment
Corporation and subsidiaries as of April 3, 1993, and for the fifty-two week
period then ended, included in this Prospectus have been included herein in
reliance upon the report of KPMG Peat Marwick, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing. The report of KPMG Peat Marwick refers to a
change in the method of depreciating certain new release copies of video rental
cassettes.
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants....................................................... F-2
Consolidated Balance Sheets as of December 31, 1993 and 1992............................................. F-3
Consolidated Statements of Operations for Each of the
Three Years Ended December 31, 1993..................................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for Each of the
Three Years Ended December 31, 1993..................................................................... F-5
Consolidated Statements of Cash Flows for Each of the
Three Years Ended December 31, 1993..................................................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report............................................................................. F-22
Consolidated Balance Sheet as of April 3, 1993........................................................... F-23
Consolidated Statement of Operations for the Fifty-Two Week Period
Ended April 3, 1993..................................................................................... F-24
Consolidated Statement of Stockholders' Equity for the Fifty-Two Week Period
Ended April 3, 1993..................................................................................... F-25
Consolidated Statement of Cash Flows for the Fifty-Two Week Period Ended April 3, 1993................... F-26
Notes to Consolidated Financial Statements............................................................... F-27
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheet as of October 2, 1993..................................... F-35
Unaudited Condensed Consolidated Statements of Operations for the Twenty-Six Week Periods Ended October
2, 1993 and October 3, 1992............................................................................. F-36
Unaudited Condensed Consolidated Statements of Stockholders' Equity for the Twenty-Six Week Period Ended
October 2, 1993......................................................................................... F-37
Unaudited Condensed Consolidated Statements of Cash Flows for the Twenty-Six Week Periods Ended October
2, 1993 and October 3, 1992............................................................................. F-38
Notes to Unaudited Condensed Consolidated Financial Statements........................................... F-39
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES, SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND
SUBSIDIARIES AND SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 31, 1993......................... F-42
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
Year Ended December 31, 1993............................................................................ F-43
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements................................. F-44
</TABLE>
F-1
<PAGE>
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 are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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.
ARTHUR ANDERSEN & CO.
Fort Lauderdale, Florida,
March 23, 1994.
F-2
<PAGE>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1993 1992
------------ ------------
<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
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
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.
F-3
<PAGE>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
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.
F-4
<PAGE>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN THOUSANDS)
<TABLE>
<CAPTION>
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.
F-5
<PAGE>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
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.
F-6
<PAGE>
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.
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.
F-7
<PAGE>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-8
<PAGE>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 lives 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
F-9
<PAGE>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-10
<PAGE>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
which considered the terms and conditions of the preferred stock as well as
comparisons to other similar securities, the Company estimates the fair value of
such investment to be approximately $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 YEAR ENDED DECEMBER 31,
ENDED ------------------------
JUNE 30, 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.
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".
F-11
<PAGE>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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.
F-12
<PAGE>
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.
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
F-13
<PAGE>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 at such date for all outstanding LYONs of approximately $159,000,000.
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 superseded 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>
F-14
<PAGE>
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.
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.
F-15
<PAGE>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 outstanding at end of year............... $ 1.08 to $ 1.08 to $ 1.08 to
$ 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.
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.
F-16
<PAGE>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
8. COMMITMENTS AND CONTINGENCIES
The Company leases substantially all of its retail, distribution and
administration facilities under non-cancelable 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-cancelable 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
F-17
<PAGE>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 of prerecorded music and related
items and the production and distribution of filmed entertainment.
F-18
<PAGE>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
F-19
<PAGE>
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 INCOME
REVENUE INCOME NET 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.
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.
F-20
<PAGE>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Super Club Retail Entertainment Corporation:
We have audited the accompanying consolidated balance sheet of Super Club
Retail Entertainment Corporation and subsidiaries as of April 3, 1993, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the fifty-two week period then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
The accompanying consolidated financial statements reflect certain
adjustments and reclassifications, as discussed in note 1(m), to conform them to
the rules and regulations of the Securities and Exchange Commission. Such
adjustments and reclassifications were not reflected in the previously issued
consolidated financial statements.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Super Club
Retail Entertainment Corporation and subsidiaries as of April 3, 1993, and the
results of their operations and their cash flows for the fifty-two week period
ended April 3, 1993 in conformity with generally accepted accounting principles.
As discussed in note 1(e) to the consolidated financial statements, in
fiscal 1993 the Company changed its policy for depreciating certain new release
copies of video rental cassettes.
KPMG Peat Marwick
Dallas, Texas
June 4, 1993, except for note 5(a),
which is as of June 30, 1993,
and note 1(m), which is as of
November 1, 1993
F-22
<PAGE>
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
APRIL 3, 1993
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
Current assets:
<S> <C>
Cash and cash equivalents....................................................... $ 186
Accounts receivable, net of allowance for doubtful accounts of $411............. 19,030
Merchandise inventories......................................................... 84,224
Prepaid expenses and other assets............................................... 3,407
---------
Total current assets.......................................................... 106,847
Video rental inventories, net..................................................... 22,598
Property and equipment, net....................................................... 44,793
Goodwill, net of accumulated amortization of $13,615.............................. 107,371
Noncompetition agreements, net of accumulated amortization of $1,829.............. 687
Deferred taxes, net of valuation allowance........................................ 625
Other assets, net................................................................. 1,674
---------
$ 284,595
---------
---------
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
Current liabilities:
Current portion of long-term debt............................................... $ 1,514
Accounts payable................................................................ 45,180
Accrued expenses and other...................................................... 9,134
Deferred rent................................................................... 3,187
Deferred taxes.................................................................. 720
---------
Total current liabilities..................................................... 59,735
Long-term debt, less current portion.............................................. 73,340
Due to parent, net................................................................ 9,119
Other............................................................................. 326
---------
Total liabilities............................................................. 142,520
---------
Series A preferred stock, $1,000 par value, 125 shares authorized, 20 shares
issued and outstanding, subject to redemption, plus accrued dividends of $650... 20,650
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par value, 200 shares authorized, 174 shares issued and
outstanding.................................................................... 174
Additional paid-in capital...................................................... 172,033
Accumulated deficit............................................................. (50,782)
---------
Total stockholders' equity.................................................... 121,425
---------
$ 284,595
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FIFTY-TWO WEEK PERIOD ENDED APRIL 3, 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
Revenues:
<S> <C>
Merchandise sales............................................................... $ 312,940
Video rentals................................................................... 68,223
Other........................................................................... 3,541
---------
384,704
Costs and expenses:
Cost of merchandise sales....................................................... 222,676
Depreciation of video rental inventories........................................ 14,852
Depreciation and amortization of property and equipment......................... 10,661
Amortization of goodwill........................................................ 3,981
Amortization of noncompetition agreements....................................... 525
Selling, general and administrative............................................. 97,170
Rent............................................................................ 33,735
Interest, net................................................................... 6,571
---------
390,171
Loss before income taxes...................................................... (5,467)
Income taxes...................................................................... 314
---------
Net loss...................................................................... $ (5,781)
---------
---------
Loss attributable to common stockholders...................................... $ (6,181)
---------
---------
Loss per common share......................................................... $ (35.60)
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE FIFTY-TWO WEEK PERIOD ENDED APRIL 3, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
----------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at March 31, 1992............................ 174 $ 174 $ 169,826 $ (44,601) $ 125,399
Series A preferred stock dividends accrued............ -- -- -- (400) (400)
Liabilities assumed by parent......................... -- -- 2,207 -- 2,207
Net loss.............................................. -- -- -- (5,781) (5,781)
--- ----- ---------- ------------ ------------
Balances at April 3, 1993............................. 174 $ 174 $ 172,033 $ (50,782) $ 121,425
--- ----- ---------- ------------ ------------
--- ----- ---------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE FIFTY-TWO WEEK PERIOD ENDED APRIL 3, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
Cash flows from operating activities:
<S> <C>
Net loss........................................................................ $ (5,781)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization................................................. 30,019
Deferred taxes................................................................ 95
Liabilities assumed by parent................................................. 2,207
Changes in assets and liabilities:
Accounts receivable......................................................... 1,099
Merchandise inventories..................................................... (2,697)
Prepaid expenses and other assets........................................... (117)
Accounts payable............................................................ (4,047)
Accrued expenses and other current liabilities.............................. (10,031)
Other liabilities........................................................... (39)
---------
Net cash provided by operating activities................................. 10,708
---------
Cash flows from investing activities:
Purchases of property and equipment............................................. (12,101)
Disposals of property and equipment............................................. 2,166
Purchases of video rental inventories........................................... (21,884)
Disposals of video rental inventories........................................... 4,587
---------
Net cash used in investing activities..................................... (27,232)
---------
Cash flows from financing activities:
Proceeds from long-term debt.................................................... 76,636
Payments on long-term debt...................................................... (84,934)
Increase in due to parent....................................................... 22,574
---------
Net cash provided by financing activities................................. 14,276
---------
Decrease in cash and cash equivalents............................................. (2,248)
Cash and cash equivalents at beginning of period.................................. 2,434
---------
Cash and cash equivalents at end of period........................................ $ 186
---------
---------
Supplemental cash flow information:
Interest paid................................................................... $ 7,867
---------
---------
Income taxes paid............................................................... $ 1,218
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
Super Club Retail Entertainment Corporation (the Company) was organized on
May 24, 1989. Presently, all of the Company's outstanding preferred stock and
67% (115,453 shares) of its common stock are owned by Super Club North America
Corporation (SCNA), a wholly-owned subsidiary of Super Club Nederland B.V.
(SCBV), a Dutch Company, which is wholly-owned by Super Club Holding & Finance
(SCHF), a Swiss company which is owned by Philips Electronics N.V. SCBV owns 30%
(51,987 shares) of the Company's common stock and the remaining 3% are owned by
others.
The consolidated financial statements of the Company include the accounts
and results of operations of the Company and its wholly-owned subsidiaries:
Super Club Music Corporation (SCMC); Best Video, Inc. (Best); Super Club Video
Corporation (SCVC); Playback International, Inc. (Playback); and Automated
Video, Inc. (AVI). SCVC accounts include its wholly-owned subsidiaries Alfalfa
Video, Inc. (Alfalfa) and SC Video Corporation.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
During 1993, the Company changed its fiscal year to a 52-week period ending
on the Saturday nearest to March 31. The impact of this change was not
significant.
(b) OPERATIONS (UNAUDITED)
At April 3, 1993, SCMC operated 173 Tracks and Record Bar stores and 109
Turtles stores which sell prerecorded audio and video merchandise and related
accessories primarily in the southeastern United States. Some locations also
rent video cassettes. Additionally at April 3, 1993, SCVC operated 96 Video
Towne stores, 58 Alfalfa stores, and 18 Movies At Home stores, all of which are
engaged primarily in the rental and sale of video cassettes, sale of prerecorded
audio merchandise and the sale of related accessories. Video Towne stores are
located primarily in Ohio, Indiana and New Jersey. Alfalfa operates primarily in
Louisiana, Mississippi, Arkansas, Oklahoma and Florida. Movies At Home stores
are located in the Kansas City area.
A summary of store openings and closings during the fifty-two week period
ended April 3, 1993 follows:
<TABLE>
<CAPTION>
STORES STORES
OPEN AT OPEN AT
MARCH 31, STORES STORES APRIL 3,
1992 OPENED CLOSED 1993
--------- ------ ------ --------
<S> <C> <C> <C> <C>
Tracks and Record Bar.................................. 179 3 9 173
Turtles................................................ 111 -- 2 109
Video Towne............................................ 108 1 13 96
Alfalfa................................................ 53 10 5 58
Movies At Home......................................... 17 2 1 18
--- -- -- ---
468 16 30 454
--- -- -- ---
--- -- -- ---
</TABLE>
Best is a wholesale distributor of video cassettes with five operating
branches in Oklahoma, Texas and Utah. Playback is a used tape broker operating
in Texas. AVI is a rackjobber of video cassettes to 65 supermarket food stores
as of April 3, 1993.
(c) CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
F-27
<PAGE>
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 3, 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d) MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) cost method.
Under current trade practices, retailers and distributors of prerecorded
video merchandise are entitled to exchange certain products they have purchased
from suppliers for other video titles carried by these suppliers. Retailers of
audio products are usually entitled to return certain merchandise for credits
subject to return penalty. Merchandise inventories include certain products held
for return to suppliers.
(e) VIDEO RENTAL INVENTORIES
Video rental cassettes of new release feature films purchased prior to April
1, 1992 are depreciated on an accelerated basis over nine months with a residual
value of $6 per cassette. Effective April 1, 1992, the Company changed its
policy for depreciating certain new release copies to more accurately reflect
the economic life of the copies and to be more consistent with industry
practices. Under the new policy, the first three new release copies purchased
per store are depreciated on a straight-line basis over three years with a
residual value of $6 per cassette. Additional new release copies continue to be
depreciated on an accelerated basis over nine months with a residual value of $6
per cassette. The impact of this change in accounting estimate was to decrease
the net loss for the period ended April 3, 1993 by approximately $4,018,000.
Video rental cassettes which are considered "base stock" are depreciated on
a straight-line basis over three years with a residual value of $6 per cassette.
When video rental cassettes and video cassette players are sold or otherwise
retired, the cost and accumulated depreciation applicable to the retired assets
are removed from the accounts and any gain or loss is included in operations.
(f) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation of buildings,
furniture and equipment, and vehicles is computed over the estimated useful
lives of the assets using the straight-line method. Leasehold improvements are
amortized on a straight-line basis over the term of the lease or their estimated
useful lives, whichever is shorter. Expenditures for renewals and betterments
are capitalized and expenditures for maintenance and repairs are charged to
operations. Gains and losses resulting from dispositions of property and
equipment are included in operations.
(g) NONCOMPETITION AGREEMENTS
Noncompetition agreements are amortized over the terms of the agreements or
their estimated useful lives, whichever is shorter, using the straight-line
method.
(h) GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
net assets acquired and is being amortized using the straight-line method over
the following lives:
<TABLE>
<CAPTION>
ESTIMATED
COMPANY LIFE
- ----------------------------------------------------------- -------------
<S> <C>
SCMC....................................................... 35 years
Best....................................................... 25 years
SCVC....................................................... 20 years
AVI........................................................ 20 years
</TABLE>
F-28
<PAGE>
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 3, 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i) STORE OPENINGS AND CLOSINGS
Costs associated with the opening of new stores are expensed as incurred.
Estimated costs of closing stores are charged to operations when the decision is
made to close the store.
(j) REVENUE RECOGNITION
Video rental and retail sales revenue is recognized at the time of rental or
sale. Revenue from the wholesale distribution of video cassettes is recognized
when the cassettes are shipped.
(k) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and equivalents, accounts receivable, accounts
payable, and accrued expenses approximates fair value because of the short
maturity of these instruments.
The fair value of the Company's long-term debt is estimated based upon the
current rates offered to the Company for debt of the same remaining maturities.
The carrying amount approximates fair value.
(l) LOSS PER SHARE
Loss per common share is based on the weighted average number of common
shares outstanding without regard for the antidilutive effect of the options
discussed in note 6. The loss attributable to common stockholders considers the
accrual of annual dividends relating to the Series A preferred stock amounting
to $400,000.
(m) ADJUSTMENTS AND RECLASSIFICATIONS TO PREVIOUSLY ISSUED FINANCIAL
STATEMENTS
In connection with a filing of the accompanying consolidated financial
statements with the Securities and Exchange Commission (SEC), certain
adjustments and reclassifications have been made to the previously issued
consolidated financial statements of the Company to conform with the rules and
regulations of the SEC as follows:
- During fiscal 1993, the Company's parent assumed the
liabilities associated with the settlement of a lawsuit with a
competitor and a settlement with an employee totaling
$2,207,000. The assumption of the liabilities associated with
these settlements has been reflected as additional selling,
general and administrative expenses in the accompanying
consolidated statement of operations with a corresponding
capital contribution in the accompanying consolidated statement
of stockholders' equity.
- The Series A preferred stock held by SCNA and redeemable at the
option of the Company has been reclassified outside of
stockholders' equity.
(2) MERCHANDISE INVENTORIES
Merchandise inventories consist of the following at April 3, 1993 (in
thousands):
<TABLE>
<S> <C>
Prerecorded audio.................................................. $ 59,315
Prerecorded video.................................................. 17,139
Accessories and other.............................................. 7,770
---------
$ 84,224
---------
---------
</TABLE>
F-29
<PAGE>
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 3, 1993
(3) VIDEO RENTAL INVENTORIES
Video rental inventories consist of the following at April 3, 1993 (in
thousands):
<TABLE>
<S> <C>
Video cassettes.................................................... $ 51,657
Video cassette players............................................. 636
---------
52,293
Less accumulated depreciation...................................... 29,695
---------
$ 22,598
---------
---------
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at April 3, 1993 (in
thousands):
<TABLE>
<S> <C>
Leasehold improvements............................................. $ 26,872
Furniture and equipment............................................ 37,697
Vehicles........................................................... 32
Other.............................................................. 8,254
---------
72,855
Less accumulated depreciation and amortization..................... 28,062
---------
$ 44,793
---------
---------
</TABLE>
(5) LONG-TERM DEBT
Long-term debt consists of the following at April 3, 1993 (in thousands):
<TABLE>
<S> <C>
Loan agreement with a group of banks (a):
Revolving credit portion......................................... $ 50,500
Term portion..................................................... 21,240
Notes payable to former stockholders of subsidiary (b)............. 1,275
Notes payable to sellers -- Alfalfa (c)............................ 500
Other notes (d).................................................... 1,339
---------
74,854
Less current portion............................................... 1,514
---------
$ 73,340
---------
---------
<FN>
- ------------------------
(a) This loan agreement was entered into by the Company in September 1990 and
was amended on August 12, 1991. Under the amended agreement, the revolving
credit portion bears interest at prime plus 3/4% (6 3/4% at April 3, 1993)
and is due in August 1994. The term portion bears interest at prime plus
1 3/4% (7 3/4% at April 3, 1993) and is due in varying principal
installments through August 1994. On June 30, 1993, the Company repaid all
amounts outstanding under this loan agreement with proceeds from
borrowings under a new term note agreement (maximum amount of
$110,000,000) with SCNA which is noninterest bearing and matures on April
30, 1994. The maturities and classification of the debt have been adjusted
to reflect the terms of the new loan with SCNA. In connection with the
retirement of the bank debt, the related unamortized finance costs of
approximately $900,000 will be written off in fiscal year 1994.
(b) These notes are payable in annual installments through September 1994 with
interest at 10%, and are guaranteed by SCNV.
</TABLE>
F-30
<PAGE>
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 3, 1993
(5) LONG-TERM DEBT (CONTINUED)
<TABLE>
<S> <C>
(c) These notes are payable through June 1993 with interest at 11%.
(d) These notes generally are payable in monthly installments with interest at
rates ranging from 9% to 16 1/4%. They are due at various dates through
1996 and are partially collateralized by equipment and vehicles.
</TABLE>
At April 3, 1993, the aggregate amounts of remaining required principal
payments on long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR:
- -----------------------------------------------------------------------------------
<S> <C>
1994............................................................................. $ 1,514
1995............................................................................. 72,778
1996............................................................................. 273
1997............................................................................. 158
1998............................................................................. 131
---------
$ 74,854
---------
---------
</TABLE>
(6) EMPLOYEE BENEFIT PLANS
At April 3, 1993, 12,000 shares of the Company's common stock were reserved
for issuance under an employment contract and an incentive stock option plan.
The Company may grant options to purchase the Company's common stock to officers
and certain other employees at an exercise price per share which approximates
fair market value at the date of grant as determined by the Company's Board of
Directors. Stock options had been granted as of April 3, 1993 for 348 shares of
common stock with option prices of $1,319 per share. Options representing 323
shares are fully vested at April 3, 1993 and the remaining options vest over the
next three years.
The Company participates in a SCNA qualified deferred compensation plan
which was formed effective January 1, 1991, and generally covers employees over
21 years of age who have completed one year of service. The Company matches 50%
of employee contributions up to a maximum of 2% of employee compensation and the
Company's contributions vest over six years of service.
The Company also participates in a SCNA nonqualified deferred compensation
plan which was formed effective February 1, 1991, and generally covers
highly-compensated employees who have completed six months of service. The
Company matches 50% of employee contributions up to a maximum of $4,375 per
employee and the Company's contributions vest over six years of service.
Expenses related to these plans were $466,000 for the fifty-two week period
ended April 3, 1993.
(7) INCOME TAXES
The Company files a consolidated Federal income tax return with its
subsidiaries. Taxes have been allocated to the subsidiaries as if they filed
separate Federal income tax returns.
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes".
Statement 109 uses the asset and liability method of accounting for income
taxes. Under the asset and liability method of Statement 109, and former
Statement 96, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and unused tax net operating losses and other carryforwards.
F-31
<PAGE>
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 3, 1993
(7) INCOME TAXES (CONTINUED)
Effective April 1, 1992, the Company adopted Statement 109. This change in
the method of accounting for income taxes had no effect on the 1993 consolidated
statement of operations.
The provision (benefit) for income taxes for the fifty-two week period ended
April 3, 1993 is comprised of the following (in thousands):
<TABLE>
<S> <C>
Federal:
Current............................................................ $ (95)
Deferred........................................................... 95
---------
--
State -- current..................................................... 314
---------
$ 314
---------
---------
</TABLE>
A reconciliation of computed expected income tax benefit to actual tax
expense, using the statutory rate of 34%, for the fifty-two week period ended
April 3, 1993 follows (in thousands):
<TABLE>
<S> <C>
Expected income tax benefit at statutory rate...................... $ (1,859)
Liabilities assumed by parent...................................... 751
Change in beginning-of-the-year balance of the valuation allowance
for deferred tax assets........................................... (333)
Goodwill amortization.............................................. 1,531
State income taxes, net of Federal benefit......................... 208
Other, net......................................................... 16
---------
$ 314
---------
---------
</TABLE>
The tax effect of temporary differences that give rise to the deferred tax
assets and liabilities at April 3, 1993 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards................................ $ 16,833
Amortization of noncompetition agreement........................ 788
Future rent..................................................... 1,003
Inventory capitalization........................................ 668
Other, net...................................................... 1,841
---------
21,133
Less valuation allowance........................................ (16,844)
---------
Deferred tax assets........................................... 4,289
Deferred tax liabilities:
Property and equipment, principally differences in depreciation
lives.......................................................... (3,203)
Inventory....................................................... (888)
Other, net...................................................... (293)
---------
Deferred tax liabilities...................................... (4,384)
---------
Net deferred tax liability.................................... $ (95)
---------
---------
</TABLE>
Deferred income tax expense represents the change in the deferred tax
liability resulting from changes in the amounts of temporary differences.
F-32
<PAGE>
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 3, 1993
(7) INCOME TAXES (CONTINUED)
At April 3, 1993, the Company had net operating loss carryforwards for tax
purposes of approximately $50,000,000, which expire through 2008. The tax net
operating loss carryforwards include preacquisition net operating loss
carryforwards of approximately $2,373,000. In addition, the Company had
alternative minimum tax net operating loss carryforwards for tax purposes of
approximately $37,000,000 at April 3, 1993.
(8) COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries have various operating leases relating
principally to stores, administrative offices, distribution centers and certain
equipment which expire at various dates through 2008 (certain leases have
renewal options under the terms of the agreements, at increased rates).
The approximate future minimum commitments under noncancelable operating
leases at April 3, 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR:
- ----------------------------------------------------------------------------------
<S> <C>
1994............................................................................ $ 29,144
1995............................................................................ 24,993
1996............................................................................ 19,327
1997............................................................................ 14,132
1998............................................................................ 11,926
Thereafter...................................................................... 27,340
----------
$ 126,862
----------
----------
</TABLE>
Certain store leases require additional percentage rent when sales volumes
exceed a specified amount and certain of these leases also require payments
based on a pro rata distribution of expenses associated with common areas in
shopping centers. Percentage rent expense for the fifty-two week period ended
April 3, 1993 was approximately $571,000.
Payments on certain leases are collateralized by all equipment and
improvements on the leased premises.
Under the terms of certain leases, the monthly base rent will be waived for
certain periods at the beginning of the lease. In addition, each year the rent
for certain leases is increased based on a specific percentage of the preceding
year's amount. For financial reporting purposes, rent expense is recognized
ratably over the term of the lease.
The Company and its subsidiaries are defendants in various lawsuits that
arose during the ordinary course of business. Management is of the opinion that
the ultimate resolutions of these proceedings will not have a material impact on
the Company's consolidated financial position.
(9) SERIES A PREFERRED STOCK
The Company's Board of Directors has authorized 125,000 shares of Series A
preferred stock with a par value of $1,000. As of April 3, 1993, 20,000 shares
have been issued and are outstanding and held by SCNA. Dividends, payable at an
annual rate of $20 per share, are cumulative and have preference over dividends
on the Company's common stock. The Series A preferred stock may be redeemed by
the Company, at its option, from time to time at par value plus any declared but
unpaid dividends and may be converted by the holder to the common stock of the
Company upon the occurrence of certain defined events at certain defined ratios.
Upon liquidation of the Company, the holder of the Series A preferred stock has
preference over the common stockholders.
F-33
<PAGE>
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 3, 1993
(9) SERIES A PREFERRED STOCK (CONTINUED)
Dividends in arrears on the outstanding Series A preferred stock at April 3,
1993 are $650,000 and have been reflected as an adjustment to the carrying value
of the Series A preferred stock in the accompanying consolidated balance sheet.
(10) RELATED PARTY TRANSACTIONS
Selling, general and administrative expenses include allocations of salaries
and benefits, rent, depreciation and other expenses (including a settlement with
an employee) from SCNA of approximately $3,959,000 for the fifty-two week period
ended April 3, 1993.
During the fifty-two week period ended April 3, 1993, the Company purchased
approximately $21,000,000 of audio and video products from companies owned by
Philips Electronics, N.V.
(11) SUBSEQUENT EVENT
In May 1993, the Company reached an agreement with a lender to provide
financing for up to $7 million of equipment purchases for its stores. Under the
agreement, outstanding balances will bear interest at 8% per annum.
F-34
<PAGE>
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
OCTOBER 2, 1993
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents......................................................... $ 7,394
Accounts receivable, net of allowance for doubtful accounts of $629............... 20,528
Merchandise inventories........................................................... 89,315
Prepaid expenses and other assets................................................. 3,423
---------
Total current assets............................................................ 120,660
Video rental inventories, net..................................................... 25,112
Property and equipment, net....................................................... 44,790
Goodwill, net of accumulated amortization of $15,605.............................. 105,382
Noncompetition agreements, net of accumulated amortization of $2,088.............. 428
Deferred taxes, net of valuation allowance........................................ 626
Other assets, net................................................................. 671
---------
$ 297,669
---------
---------
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
Current liabilities:
Current portion of long-term debt................................................. $ 1,029
Accounts payable.................................................................. 58,278
Accrued expenses and other........................................................ 8,043
Deferred rent..................................................................... 3,148
Deferred taxes.................................................................... 720
---------
Total current liabilities....................................................... 71,218
Long-term debt, less current portion.............................................. 895
Due to parent (non-interest bearing).............................................. 88,950
Other............................................................................. 311
---------
Total liabilities............................................................... 161,374
---------
Series A preferred stock, $1,000 par value, 125 shares authorized, 20 shares
issued and outstanding, subject to redemption, plus accrued dividends of $852.... 20,852
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par value, 200 shares authorized, 174 shares issued and
outstanding...................................................................... 174
Additional paid-in capital........................................................ 172,033
Accumulated deficit............................................................... (56,764)
---------
Total stockholders' equity...................................................... 115,443
---------
$ 297,669
---------
---------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-35
<PAGE>
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TWENTY-SIX WEEK
PERIOD ENDED
----------------------
OCTOBER 2, OCTOBER 3,
1993 1992
---------- ----------
<S> <C> <C>
Revenues:
Merchandise sales....................................................................... $ 144,138 $ 141,473
Video rentals........................................................................... 33,435 34,080
Other................................................................................... 1,850 1,783
---------- ----------
179,423 177,336
Operating costs and expenses:
Cost of merchandise sales............................................................... 105,730 101,304
Depreciation of video rental inventories................................................ 6,323 10,852
Depreciation and amortization of property and equipment................................. 5,825 5,145
Amortization of goodwill................................................................ 1,989 1,993
Amortization of noncompetition agreements............................................... 260 260
Selling, general and administrative..................................................... 45,936 46,673
Rent.................................................................................... 16,786 15,742
Interest, net........................................................................... 1,482 3,694
---------- ----------
Loss before income taxes and extraordinary item....................................... (4,908) (8,327)
Income taxes.............................................................................. 63 28
Extraordinary item........................................................................ 809 --
---------- ----------
Net loss.............................................................................. $ (5,780) $ (8,355)
---------- ----------
---------- ----------
Loss attributable to common stockholders.............................................. $ (5,982) $ (8,559)
---------- ----------
---------- ----------
Loss per common share:
Before extraordinary item........................................................... $ (29.80) $ (49.30)
---------- ----------
---------- ----------
Net loss............................................................................ $ (34.46) $ (49.30)
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-36
<PAGE>
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE TWENTY-SIX WEEK PERIOD ENDED OCTOBER 2, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at April 3, 1993.............................. 174 $ 174 $ 172,033 $ (50,782) $ 121,425
Series A preferred stock dividend accrued.............. -- -- -- (202) (202)
Net loss............................................... -- -- -- (5,780) (5,780)
------ ------ ---------- ----------- -------------
Balances at October 2, 1993............................ 174 $ 174 $ 172,033 $ (56,764) $ 115,443
------ ------ ---------- ----------- -------------
------ ------ ---------- ----------- -------------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-37
<PAGE>
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWENTY-SIX WEEK
PERIOD ENDED
------------------------
OCTOBER 2, OCTOBER 3,
1993 1992
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................................ $ (5,780) $ (8,355)
Adjustments to reconcile net loss to net cash provided by operations:
Depreciation and amortization......................................................... 14,397 18,250
Changes in assets and liabilities:
Accounts receivable................................................................... (1,498) 65
Merchandise inventories............................................................... (5,091) (8,031)
Prepaids and other assets............................................................. (105) 418
Accounts payable...................................................................... 13,098 10,437
Accrued expenses and other liabilities................................................ (1,144) (7,021)
----------- -----------
Net cash provided by operating activities........................................... 13,877 5,763
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment, net................................................ (4,733) (6,220)
Purchases of video rental inventories, net.............................................. (8,836) (8,520)
----------- -----------
Net cash used in investing activities............................................... (13,569) (14,740)
----------- -----------
Cash flows from financing activities:
Long-term debt, net..................................................................... (72,931) 484
Increase in due to parent............................................................... 79,831 7,373
----------- -----------
Net cash provided by financing activities........................................... 6,900 7,857
----------- -----------
Increase (decrease) in cash and cash equivalents.......................................... 7,208 (1,120)
Cash and cash equivalents, beginning of period............................................ 186 2,589
----------- -----------
Cash and cash equivalents, end of period.................................................. $ 7,394 $ 1,469
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-38
<PAGE>
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(000'S OMITTED IN ALL TABLES)
1. INTERIM FINANCIAL STATEMENTS:
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in the accompanying unaudited
condensed consolidated financial statements of Super Club Retail Entertainment
Corporation and subsidiaries (the "Company"). It is suggested that these
condensed consolidated financial statements be read in conjunction with the
audited consolidated financial statements and notes thereto included elsewhere
in this document.
The financial statements reflect, in the opinion of management, all material
adjustments (which include only normal recurring adjustments) necessary to
present fairly the Company's financial position and results of operations.
Loss per common share is based on the weighted average number of common
shares outstanding. The loss attributable to common stockholders considers the
accrual of annual dividends relating to the Series A preferred stock amounting
to $202,000 and $204,000 in 1993 and 1992, respectively.
2. MERCHANDISE INVENTORIES:
Merchandise inventories consist of the following at October 2, 1993:
<TABLE>
<S> <C>
Prerecorded audio.......................................................... $ 67,942
Prerecorded video.......................................................... 16,815
Accessories and other...................................................... 4,558
---------
$ 89,315
---------
---------
</TABLE>
3. VIDEO RENTAL INVENTORIES:
Video rental inventories consist of the following at October 2, 1993:
<TABLE>
<S> <C>
Video cassettes............................................................ $ 55,631
Video cassette players..................................................... 736
---------
56,367
Less accumulated depreciation.............................................. 31,255
---------
$ 25,112
---------
---------
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at October 2, 1993:
<TABLE>
<S> <C>
Leasehold improvements..................................................... $ 27,854
Furniture and equipment.................................................... 44,118
Vehicles................................................................... 18
Other...................................................................... 6,311
---------
78,301
Less accumulated depreciation and amortization............................. 33,511
---------
$ 44,790
---------
---------
</TABLE>
F-39
<PAGE>
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(000'S OMITTED IN ALL TABLES)
5. LONG-TERM DEBT:
Long-term debt consists of the following at October 2, 1993:
<TABLE>
<S> <C>
Notes payable to former stockholders of subsidiary.......................... $ 638
Other notes................................................................. 1,286
---------
1,924
Less current portion........................................................ 1,029
---------
$ 895
---------
---------
</TABLE>
6. INCOME TAXES:
Income taxes have been provided for based on the Company's anticipated
annual effective income tax rate.
7. SERIES A PREFERRED STOCK:
The Company's Board of Directors has authorized 125,000 shares of Series A
preferred stock with a par value of $1,000. As of October 2, 1993, 20,000 shares
are issued and outstanding and held by Super Club North America Corporation
(SCNA). Dividends, payable at an annual rate of $20 per share, are cumulative
and have a preference over dividends on the Company's common stock. The Series A
preferred stock may be redeemed by the Company, at its option, from time to time
at par value plus any declared but unpaid dividends and may be converted by the
holder to common stock upon the occurrence of certain defined events at certain
defined ratios. Upon liquidation of the Company, SCNA, the holder of the Series
A preferred stock, has preference over the common stockholders.
Dividends in arrears on the outstanding Series A preferred stock at October
2, 1993 are $852,000 and have been reflected as an adjustment to the carrying
value of the Series A preferred stock in the accompanying condensed consolidated
balance sheet.
8. SUBSEQUENT EVENT:
In October 1993, Philips Electronics N.V., a Netherlands corporation and the
ultimate parent of the majority stockholders of the Company, SCNA and Super Club
Nederland B.V., entered into an agreement in principle to sell the Company to
Blockbuster Entertainment Corporation ("Blockbuster") for approximately
$150,000,000 payable in cash, warrants, shares of Blockbuster common stock or a
combination thereof. The closing of the transaction is subject to the execution
of a definitive agreement and other customary conditions.
F-40
<PAGE>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES,
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES
AND SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The historical financial statements of Blockbuster Entertainment Corporation
and subsidiaries (the "Company") 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, all of the Company's historical financial data has been restated as
if the companies had operated as one entity since inception.
The following unaudited pro forma condensed consolidated balance sheet
presents the pro forma financial position of the Company as of December 31,
1993. The balance sheet contains pro forma adjustments for certain significant
transactions which occurred in 1994, in connection with the Viacom Inc.
("Viacom") merger agreement. These transactions include a $1.25 billion
investment in Viacom and additional borrowings of $1.25 billion and are
reflected in the balance sheet as if these transactions had been completed as of
December 31, 1993. Spelling Entertainment Group Inc. and subsidiaries
("Spelling") and Super Club Retail Entertainment Corporation and subsidiaries
("Super Club") are included in the Company's historical balance sheet at
December 31, 1993.
The following unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 1993 presents the pro forma results
of continuing operations of the Company as if the acquisitions of Super Club and
approximately 70.5% of the outstanding common stock of Spelling had been
consummated at the beginning of the period presented. The following unaudited
pro forma condensed consolidated statement of operations also contains pro forma
adjustments for certain significant transactions which occurred during 1993 or
1994 in connection with the Viacom merger agreement. These transactions include
a $600 million and a $1.25 billion investment in Viacom, additional borrowings
of $600 million and $1.25 billion, and the sale of 14,650,000 shares of the
Company's Common Stock, and are reflected in the unaudited pro forma condensed
consolidated statement of operations as if these transactions had been
consummated at the beginning of the period presented. The following unaudited
pro forma condensed consolidated statement of operations does not give effect to
the estimated cost savings to be realized from the consolidation of certain
Super Club operational and administrative functions, including the elimination
of duplicate facilities and personnel, and management fees previously charged by
related affiliates. These unaudited pro forma condensed consolidated financial
statements should be read in conjunction with the respective historical
financial statements and notes thereto of the Company, Super Club and Spelling.
Income from continuing operations 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 income from continuing
operations per common and common equivalent share, the Company utilizes the
treasury stock method.
The unaudited pro forma condensed consolidated financial statements were
prepared utilizing the accounting policies of the respective entities as
outlined in their historical financial statements except as described in the
accompanying notes. The unaudited pro forma condensed consolidated financial
statements reflect the Company's preliminary allocations of purchase prices
which will be subject to further adjustments as the Company finalizes the
allocations of the purchase prices in accordance with generally accepted
accounting principles. All of the aforementioned acquisitions, excluding WJB,
were accounted for under the purchase method of accounting. The unaudited pro
forma condensed consolidated results of operations do not necessarily reflect
actual results which would have occurred if the aforementioned acquisitions had
taken place on the assumed dates, nor are they indicative of the results of
future combined operations. If the Viacom merger were not to occur, certain pro
forma adjustments included in these unaudited pro forma condensed consolidated
financial statements would change significantly.
F-41
<PAGE>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
-------------------------------- PRO
THE COMPANY DR. CR. FORMA
------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents....................... $ 95,254 $ 95,254
Accounts and notes receivable, less allowance... 135,172 135,172
Merchandise inventories......................... 350,763 350,763
Film costs and program rights, net.............. 117,324 117,324
Other........................................... 50,210 50,210
------------- --------------- --------------- ------------
Total Current Assets........................ 748,723 748,723
Videocassette rental inventory, net............. 470,223 470,223
Property and equipment, net..................... 522,745 522,745
Intangible assets, net.......................... 856,318 856,318
Investment in Viacom............................ 600,000 $ 1,250,000(a) 1,850,000
Other assets.................................... 322,958 322,958
------------- --------------- --------------- ------------
$ 3,520,967 $ 1,250,000 $ 4,770,967
------------- --------------- --------------- ------------
------------- --------------- --------------- ------------
Current Liabilities:
Current portion of long-term debt............... $ 9,083 $ 1,000,000(b) $ 1,009,083
Accounts payable................................ 369,815 369,815
Accrued liabilities............................. 177,695 177,695
Accrued participation expenses.................. 43,013 43,013
Income taxes payable............................ 43,632 43,632
------------- --------------- --------------- ------------
Total Current Liabilities................... 643,238 1,000,000 1,643,238
Long-term debt, less current portion............ 603,496 250,000(b) 853,496
Other liabilities............................... 59,999 59,999
Minority interests in Subsidiaries.............. 90,834 90,834
Shareholders' Equity:
Common stock.................................. 24,738 24,738
Capital in excess of par value................ 1,564,685 1,564,685
Cumulative foreign currency translation
adjustment................................... (38,143) (38,143)
Retained earnings............................. 572,120 572,120
------------- --------------- --------------- ------------
Total Shareholders' Equity.................. 2,123,400 2,123,400
------------- --------------- --------------- ------------
$ 3,520,967 $ 1,250,000 $ 4,770,967
------------- --------------- --------------- ------------
------------- --------------- --------------- ------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-42
<PAGE>
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
SUPER CLUB RETAIL ENTERTAINMENT CORPORATION AND SUBSIDIARIES AND
SPELLING ENTERTAINMENT GROUP INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUPER CLUB
RETAIL
ENTERTAINMENT SPELLING
CORPORATION ENTERTAINMENT PRO FORMA
ELEVEN MONTHS GROUP INC. ADJUSTMENTS
THE ENDED THREE MONTHS --------------------------- PRO
COMPANY 11/20/93 ENDED 3/31/93 COMBINED DR. CR. FORMA
----------- ------------- ------------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Rental revenue......... $ 1,285,412 $ 58,702 $1,344,114 $1,344,114
Product sales.......... 658,097 254,544 912,641 912,641
Other revenue.......... 283,494 3,441 $ 51,509 338,444 338,444
----------- ------------- ------------- ---------- ---------- ------------- ----------
2,227,003 316,687 51,509 2,595,199 2,595,199
Operating Costs and
Expenses:
Cost of product
sales................. 430,171 185,760 615,931 615,931
Operating expenses..... 1,195,483 119,317 38,049 1,352,849 $21,254(d-h) 1,331,595
Selling, general and
administrative........ 178,322 26,029 7,737 212,088 212,088
----------- ------------- ------------- ---------- ---------- ------------- ----------
Operating income
(loss)................ 423,027 (14,419) 5,723 414,331 21,254 435,585
Interest expense....... (33,773) (2,612) (2,437) (38,822) $60,381(j) 551(i) (98,652)
Interest income........ 6,818 179 210 7,207 7,207
Other income (expense),
net................... (6,238) 81 (883) (7,040) 914(c) 24,250(k) 16,296
----------- ------------- ------------- ---------- ---------- ------------- ----------
Income (loss) before
income taxes.......... 389,834 (16,771) 2,613 375,676 61,295 46,055 360,436
Provision for income
taxes................. 146,188 87 1,674 147,949 12,785(l) 135,164
----------- ------------- ------------- ---------- ---------- ------------- ----------
Income (loss) from
continuing
operations............ $ 243,646 $ (16,858) $ 939 $ 227,727 $61,295 $58,840 $ 225,272
----------- ------------- ------------- ---------- ---------- ------------- ----------
----------- ------------- ------------- ---------- ---------- ------------- ----------
Weighted average common
and common equivalent
shares outstanding.... 220,195 242,766
----------- ----------
----------- ----------
Income from continuing
operations per common
and common equivalent
share................. $ 1.11 $ 0.93
----------- ----------
----------- ----------
Weighted average common
and common equivalent
shares outstanding --
assuming full
dilution.............. 221,476 244,047
----------- ----------
----------- ----------
Income from continuing
operations per common
and common equivalent
share -- assuming full
dilution.............. $ 1.10 $ 0.92
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-43
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(a) Represents the Company's additional $1.25 billion investment in Viacom.
(b) Represents additional debt incurred by the Company which was used to
fund the Company's investment in Viacom.
(c) Represents the recording of the minority interest resulting from the
Company's purchase of approximately 70.5% of the outstanding common stock of
Spelling.
(d) Represents a net adjustment related to the elimination of the historical
amortization of intangible assets and the recording of amortization, on a
straight-line basis, on the intangible assets resulting from the preliminary
purchase price allocations of the acquired entities. Intangible assets resulting
from the purchases of Super Club and Spelling are being amortized over a 40 year
life which approximates the useful life.
(e) Represents a reduction to videocassette rental inventory amortization
expense due to adjustments to the carrying value of Super Club's videocassette
rental inventory as a result of the preliminary purchase price allocations and
the assignment of remaining useful lives.
(f) Represents a reduction to property and equipment depreciation expense
resulting from adjustments to the carrying value of Super Club's property and
equipment as a result of the preliminary purchase price allocations and the
assignment of remaining useful lives.
(g) Represents reductions to occupancy expense resulting from preliminary
purchase price allocations which reflect the fair market value of certain lease
liabilities related to Super Club.
(h) Represents reductions to programming and distribution, depreciation and
occupancy expenses resulting from preliminary purchase price allocations which
reflect the fair market value of various assets and liabilities related to
Spelling.
(i) Represents the reduction in interest expense resulting from the
revaluation of outstanding indebtedness of Spelling by the Company at current
interest rates.
(j) Represents additional interest expense resulting from the Company's
additional borrowings used to fund its additional investment in Viacom.
(k) Represents dividend income related to a portion of the Company's
investment in Viacom.
(l) Represents the incremental change in the combined entity's provision for
income taxes as a result of the pretax earnings (loss) of Super Club and
Spelling and all pro forma adjustments as described above.
F-44
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On January 11, 1994, in connection with the acquisition of 1,864,444
ordinary shares of Virgin Interactive Entertainment plc., the Registrant issued
1,108,403 shares of its Common Stock to ten foreign trusts. As no public
offering was involved, such shares were exempt from registration under the 1933
Act, including Section 4(2) thereof.
On November 19, 1993, in connection with the acquisition of all of the
outstanding capital stock of Super Club Retail Entertainment Corporation and
subsidiaries the Registrant issued an aggregate of 5,245,211 shares of its
Common Stock and warrants to acquire shares of its Common Stock to Super Club
Nederland B.V. and Super Club North America Corporation, subsidiaries of Philips
Electronics N.V. The warrants cover 1,000,000 and 650,000 shares of Common Stock
and have an exercise price of $31 per share and $32.416 per share, respectively.
As no public offering was involved, such shares were exempt from registration
under the 1933 Act, including Section 4(2) thereof.
On October 5, 1993, in connection with the acquisition of 13,362,215 shares
of common stock of Spelling Entertainment Group Inc., the Registrant issued
3,652,542 shares of its Common Stock. As no public offering was involved, such
shares were exempt from registration under the 1933 Act, including Section 4(2)
thereof.
On August 12, 1993, in connection with its consolidation with WJB Video
Limited Partnership and related entities ("WJB"), the Registrant issued an
aggregate of 7,214,192 shares of its Common Stock to the former equity holders
of WJB. As no public offering was involved, such shares were exempt from
registration under the 1933 Act, including Section 4(2) thereof.
On June 25, 1993, in connection with the acquisition of 4,904,050 shares of
common stock of Spelling Entertainment Group Inc. in privately negotiated
transactions, the Registrant issued an aggregate of 1,676,097 shares of its
Common Stock to certain former shareholders of Spelling Entertainment Group Inc.
As no public offering was involved, such shares were exempt from registration
under the 1993 Act, including Section 4(2) thereof.
On March 31, 1993, in connection with the acquisition of 24,522,375 shares
of common stock of Spelling Entertainment Group Inc., the Registrant issued an
aggregate of 7,601,937 shares of its Common Stock and warrants to acquire an
aggregate of 2,000,000 shares of its Common Stock for an exercise price of
$25.00 per share to American Financial Corporation and certain of its related
companies. As no public offering was involved, such shares and warrants were
exempt from registration under the 1933 Act, including Section 4(2) thereof.
On February 11, 1993, in connection with the acquisition of 2,500,000 shares
of Class A common stock of Republic Pictures Corporation and warrants to acquire
810,000 shares of such Class A common stock, the Registrant issued 1,321,004
shares of its Common Stock to Republic Pictures Corporation. As no public
offering was involved, such shares were exempt from registration under the 1933
Act, including Section 4(2) thereof.
On November 13, 1992, in connection with the acquisition of all outstanding
shares of capital stock of Sound Warehouse, Inc. and Show Industries, Inc., the
Registrant issued an aggregate of 4,142,051 shares of its Common Stock to the
former shareholders of Sound Warehouse, Inc. and Show Industries, Inc. As no
public offering was involved, such shares were exempt from registration under
the 1933 Act, including Section 4(2) thereof.
On April 8, 1992, Philips Electronics N.V. elected to purchase 6,000,000
shares of Common Stock for the pound sterling equivalent of $11.00 per share
pursuant to its exercise of a certain stock option granted in connection with an
Investment Agreement dated November 15, 1991. Further, on June 30, 1992, Philips
II-1
<PAGE>
Electronics N.V. elected to purchase 5,000,000 shares of Common Stock for $11.00
per share pursuant to its exercise of a certain Stock Option granted on April 8,
1992. As no public offering was involved, such shares and options were exempt
from registration under the 1933 Act, including pursuant to Section 4(2)
thereof.
On August 16, 1991, in connection with the acquisition of all outstanding
shares of capital stock of Century Entertainments Limited, the Company issued
two warrants to Century Entertainments Limited Partnership, Century
Entertainments Managing General Partners, Inc. and FJW Voting Holdings, Inc.,
which constituted part of the purchase price. The warrants cover 200,000 and
100,000 shares of Common Stock and have an exercise price of $8.375 per share
and $11.625 per share, respectively. As no public offering was involved, such
warrants were exempt from registration under the 1933 Act, including pursuant to
Section 4(2) thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
A list of the exhibits filed as part of this registration statement is set
forth in the Exhibit Index which immediately precedes such exhibits.
(B) FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants on Financial Statement Schedules
<TABLE>
<S> <C> <C>
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
</TABLE>
II-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
TO BLOCKBUSTER ENTERTAINMENT CORPORATION:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Blockbuster Entertainment Corporation
and subsidiaries included in this Registration Statement and have issued our
report thereon dated March 23, 1994. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedules listed in Item 16.(b) are the responsibility of the Company's
management and 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.
II-3
<PAGE>
SCHEDULE V
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
BALANCE AT OTHER CHANGES BALANCE AT
BEGINNING ADDITIONS ADD (DEDUCT) END OF
CLASSIFICATION OF PERIOD AT COST RETIREMENTS ACQUISITIONS (1) DESCRIBE (2) PERIOD (2)
- ------------------------------- ---------- ---------- ----------- -------------- ------------- ----------
<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
---------- ---------- ----------- ------- ------------- ----------
---------- ---------- ----------- ------- ------------- ----------
<FN>
- ------------------------
(1) Assets acquired in business combinations accounted for under the purchase
method of accounting.
(2) Primarily represents the effects of foreign currency translation.
</TABLE>
II-4
<PAGE>
SCHEDULE V
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 1992
<TABLE>
<CAPTION>
BALANCE AT OTHER CHANGES BALANCE AT
BEGINNING ADDITIONS ADD (DEDUCT) 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
---------- ---------- ----------- ------- ------------- ----------
---------- ---------- ----------- ------- ------------- ----------
<FN>
- ------------------------
(1) Assets acquired in business combinations accounted for under the purchase
method of accounting.
(2) Primarily represents the effects of foreign currency translation.
</TABLE>
II-5
<PAGE>
SCHEDULE V
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 1991
<TABLE>
<CAPTION>
BALANCE AT OTHER CHANGES BALANCE
BEGINNING ADDITIONS ACQUISITIONS ADD (DEDUCT) AT END
CLASSIFICATION OF PERIOD AT COST RETIREMENTS (1) DESCRIBE OF 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
---------- ---------- ----------- ------- ------ ----------
---------- ---------- ----------- ------- ------ ----------
<FN>
- ------------------------
(1) Assets acquired in business combinations accounted for under the purchase
method of accounting.
</TABLE>
II-6
<PAGE>
SCHEDULE VI
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
ADDITIONS OTHER
BALANCE AT CHARGED TO CHANGES BALANCE
BEGINNING COSTS AND ADD (DEDUCT) AT END
CLASSIFICATION OF PERIOD EXPENSES RETIREMENTS DESCRIBE (1) OF 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
---------- ----------- ----------- ----- ----------
---------- ----------- ----------- ----- ----------
<FN>
- ------------------------
(1) Primarily represents the effects of foreign currency translation.
</TABLE>
II-7
<PAGE>
SCHEDULE VI
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 1992
<TABLE>
<CAPTION>
ADDITIONS OTHER
BALANCE AT CHARGED TO CHANGES BALANCE
BEGINNING COSTS AND ADD (DEDUCT) AT END
CLASSIFICATION OF PERIOD EXPENSES RETIREMENTS DESCRIBE (1) OF 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
---------- ----------- ----------- ------------ ----------
---------- ----------- ----------- ------------ ----------
<FN>
- ------------------------
(1) Primarily represents the effects of foreign currency translation.
</TABLE>
II-8
<PAGE>
SCHEDULE VI
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
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
CLASSIFICATION OF PERIOD EXPENSES RETIREMENTS DESCRIBE OF 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>
II-9
<PAGE>
SCHEDULE VIII
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF CHARGED TO ACCOUNTS END OF
PERIOD 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>
II-10
<PAGE>
SCHEDULE X
BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES
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
--------- --------- ---------
--------- --------- ---------
<FN>
- ------------------------
(1) Items not presented are less than one percent of revenue.
</TABLE>
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has duly caused this registration statement or
amendment thereto to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fort Lauderdale, State of Florida, on May 5, 1994.
BLOCKBUSTER ENTERTAINMENT
CORPORATION
By /s/ H. WAYNE HUIZENGA
--------------------------------------
H. Wayne Huizenga
CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ----------------------------------------- --------------
<C> <S> <C>
/s/ H. WAYNE HUIZENGA
------------------------------------------- Chairman of the Board and Chief Executive May 5, 1994
H. Wayne Huizenga Officer (Principal Executive Officer)
/s/ STEVEN R. BERRARD
------------------------------------------- Vice Chairman, President and Chief May 5, 1994
Steven R. Berrard Operating Officer
/s/ GREGORY K. FAIRBANKS Senior Vice President, Chief Financial
------------------------------------------- Officer and Treasurer (Principal May 5, 1994
Gregory K. Fairbanks Financial Officer)
/s/ ALBERT J. DETZ
------------------------------------------- Vice President and Corporate Controller May 5, 1994
Albert J. Detz (Principal Accounting Officer)
/s/ A. CLINTON ALLEN, III
------------------------------------------- Director May 5, 1994
A. Clinton Allen, III
/s/ JOHN W. CROGHAN
------------------------------------------- Director May 5, 1994
John W. Croghan
/s/ DONALD F. FLYNN
------------------------------------------- Director May 5, 1994
Donald F. Flynn
/s/ GEORGE D. JOHNSON, JR.
------------------------------------------- Director May 5, 1994
George D. Johnson, Jr.
/s/ JOHN J. MELK
------------------------------------------- Director May 5, 1994
John J. Melk
</TABLE>
II-12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- ----------------------------------------------------------------------------------------------
<S> <C> <C>
1 *
2.1 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)
2.2 Purchase Agreement among Registrant, Erol M. Onaran, Erol's Inc., and BF Holding Company dated
December 14, 1990 (incorporated by reference to the Registrant's Current Report on Form 8-K
dated December 14, 1990), as amended by Amendment No. 1 to the Purchase Agreement, Amendment
No. 2 to the Purchase Agreement, and Amendment No. 3 to the Purchase Agreement, and the
Letter Agreement dated April 19, 1991 among Erol M. Onaran, Erol's Inc., BF Holding Company
and the Registrant (all of which are incorporated by reference to Exhibit 28 to the
Registrant's Current Report on Form 8-K dated April 19, 1991)
2.3 Recommended Offers by Merrill Lynch International Limited on behalf of Blockbuster
Entertainment (UK) Limited for Cityvision plc dated December 20, 1991 (incorporated by
reference to pages 1 through 100 of the Registrant's Registration Statement No. 33-38231 on
Form S-4)
2.4 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 20, 1992)
2.5 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 20, 1992)
2.6 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 20, 1992)
2.7 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)
2.8 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)
2.9 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)
2.10 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, 1997)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- ----------------------------------------------------------------------------------------------
<S> <C> <C>
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 the
Registrant's Registration Statement No. 33-17479 on Form S-1)
4.2 Indenture dated as of February 1, 1993 between the 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% Senior Note due February 15, 1998 (incorporated by
reference to Exhibit 1 to the Registrant's Form 8-A filed on February 10, 1993)
4.4 Blockbuster Entertainment Corporation Retirement and Savings Plan (incorporated by reference
to Exhibit 4.6 to the Registrant's Registration Statement No. 33-64494 on Form S-8)
5 Opinion of legal counsel (incorporated by reference to Exhibit 5 to the Registrant's
Registration Statement No. 33-68674 on Form S-1)
6-9 *
10.1 Previous Form of Standard Franchise Agreement and Form 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 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)
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 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)
10.7 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)
10.8 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)
10.9 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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- ----------------------------------------------------------------------------------------------
<S> <C> <C>
10.10 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 the Registrant's
Current Report on Form 8-K dated November 11, 1988)
10.11 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 the Registrant's Current Report on Form 8-K
dated November 11, 1988)
10.12 Registrant's 1989 Stock Option Plan (incorporated by reference to the Registrant's Notice of
Annual Meeting and Proxy Statement dated March 31, 1989)
10.13 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)
10.14 Registrant's 1990 Stock Option Plan (incorporated by reference to the Registrant's Notice of
Annual Meeting and Proxy Statement dated March 29, 1990)
10.15 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)
10.16 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)
10.17 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)
10.18 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)
10.19 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)
10.20 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)
10.21 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. (See Exhibit 2.5)
10.22 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. (See Exhibit 2.6)
10.23 Stock Purchase Agreement, dated as of October 18, 1992, by and between the Registrant and
Louis C. Fogelman (See Exhibit 2.7)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- ----------------------------------------------------------------------------------------------
<S> <C> <C>
10.24 Establishment Agreement date November 13, 1992 by and between Virgin Retail Group Limited, the
Registrant and Virgin Enterprises Limited (incorporated by reference to Exhibit 28.1 to the
Registrant's Current Report on Form 8-K dated November 20, 1992)
10.25 Joint Venture Agreement date December 22, 1992 by and between Virgin Retail Group Limited, the
Registrant and others (incorporated by reference to Exhibit 28.1 to the Registrant's Current
Report on Form 8-K dated December 22, 1992)
10.26 Establishment Amendment Agreement dated December 22, 1992 by and between Virgin Retail Group
Limited, the 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)
10.27 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 (See Exhibit 2.8)
10.28 Stock Purchase Agreement, dated as of October 21, 1993, by and between the Registrant and
Viacom Inc. (see Exhibit 2.9)
10.29 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)
10.30 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)
10.31 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)
10.32 Subscription Agreement, dated as of January 7, 1994, between the Registrant and Viacom Inc.
(incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K
dated January 7, 1994)
10.33 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)
10.34 Registrant's 1994 Stock Option Plan which is subject to stockholder approval (incorporated by
reference to Exhibit 10.35 to the Registrant's Annual Report on From 10-K for the fiscal year
ended December 31, 1993)
11 Statement re: computation of per share earnings (see Note 10 to the Consolidated Financial
Statements of the Company which are set forth herein)
12-20 *
21 Subsidiaries of Registrant (incorporated by reference to Exhibit 21 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993)
22 *
23.1 Consent of legal counsel (included in Exhibit 5)
23.2 Consent of Arthur Andersen & Co.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ---------- ----------------------------------------------------------------------------------------------
<S> <C> <C>
23.3 Consent of KPMG Peat Marwick
24-28 *
99 *
<FN>
- ------------------------
* Not applicable
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of
our reports and to all references to our Firm included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN & CO.
Fort Lauderdale, Florida,
May 4, 1994.
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Blockbuster Entertainment Corporation:
We consent to the use of our report dated June 4, 1993, except for note
5(a), which is as of June 30, 1993, and note 1(m), which is as of November 1,
1993, relating to the consolidated balance sheet of Super Club Retail
Entertainment Corporation and subsidiaries as of April 3, 1993, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the fifty-two week period then ended, which report is included herein. Our
report refers to a change in the method of depreciating certain new release
copies of video rental cassettes.
We also consent to the reference to our firm under the heading "Experts" in
the prospectus.
KPMG Peat Marwick
Dallas, Texas
May 4, 1994