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| BBI > SEC Filings for BBI > Form 10-K on 6-Apr-2009 | All Recent SEC Filings |
6-Apr-2009
Annual Report
(Tabular Dollars in Millions)
Unless otherwise noted, the following discussion and analysis relates only to
results from continuing operations. The following discussion and analysis should
be read in conjunction with the consolidated financial statements and related
notes appearing elsewhere in this document. We have the intent and ability to
take actions necessary for the Company to continue as a going concern, as
discussed herein, and accordingly our consolidated financial statements have
been prepared assuming that we will continue as a going concern. Our revolving
credit facility and Term A loan facility are each scheduled to expire in August
2009. Given the impending expiration of both our revolving credit facility and
Term A loan facility, on April 2, 2009, we amended our revolving credit
facility, Term A loan facility and Term B loan facility to include commitments
from certain of our lenders and certain new lenders to (a) replace the existing
revolving credit facility with a $250 million revolving credit facility with a
maturity date of September 30, 2010 (the "amended credit facility"), and
(b) amend certain financial covenants, other covenants and other terms in our
existing revolving credit facility, Term A loan facility and Term B loan
facility. The obligation of the lenders to fund the $250 million revolving
credit facility and effectuate such amendments is subject to the satisfaction of
certain conditions set forth in the amendment. While we believe that all such
conditions will be met and that we will be in a position to close on the amended
credit facility on or about May 11, 2009, there can be no assurance regarding
these matters. The risk that we may not successfully complete this refinancing
and obtain the related amendment of certain financial covenants included
therein, and/or the risk that we may not have adequate liquidity to fund our
operations as a result of not meeting our projected financial results, even if
the refinancing is completed within the time and upon the terms contemplated,
raise substantial doubt about our ability to continue as a going concern.
Management's plans concerning these matters are also discussed under "Liquidity
and Capital Resources" below and in Note 1 to the consolidated financial
statements. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Change in Fiscal Year End
On October 12, 2006, our Board of Directors approved a change in our fiscal year from a calendar year ending on December 31st to a 52/53 week fiscal year ending on the first Sunday following December 30th. The change in our fiscal year took effect on January 1, 2007 and, therefore, there was no transition period in connection with this change of fiscal year-end. Fiscal year 2008 includes the 52 weeks ended January 4, 2009, while fiscal year 2007 includes the 53 weeks ended January 6, 2008, and fiscal year 2006 includes the calendar year ended December 31, 2006.
Overview
Blockbuster Inc. is a leading global provider of in-home rental and retail movie and game entertainment, with over 7,400 stores in the United States, its territories and 20 other countries as of January 4, 2009. We also offer rental and retail movie entertainment through the Internet and by mail in the United States.
While the overall media entertainment industry has remained stable over the past few years, it has experienced a channel shift primarily driven by the emergence of new methods of distribution. Recognizing that shift, we have broadened our focus beyond DVD rental to providing convenient access to media entertainment across five channels of distribution:
• in-store,
• by mail,
• vending and kiosks,
• online, and
• at home (direct to the TV).
In 2008, we have continued to build on the series of actions we took during the second half of 2007 that were designed to both improve short-term profitability and position us to achieve our strategic objectives.
2008 Strategic Objectives and Accomplishments
Leverage and grow our leadership position in the movie and game rental business
• Greatly enhance product availability-We have increased our in-stock availability on new releases and have expanded Blu-ray to all stores with prominent positioning.
• Improve the customer experience-We are currently testing a number of store prototypes in approximately 600 stores that range from a refreshed and modernized look and feel of typical BLOCKBUSTER stores to Rock-the-Block stores that emphasize gaming, beverages and snacks and video-enabled electronic devices, all of which are designed to improve the in-store customer experience.
• Innovatively merchandise our product offerings-We are cross-merchandising retail and rental product in high-traffic areas in our stores.
Enhance retail and merchandising opportunities
• We are leveraging our leadership position in the rental market to increase sales of movies, games and other complementary entertainment-related products by cross-merchandising retail and rental product in high-traffic areas in our stores.
• We have broadened our product assortment to include Blu-ray, and completed a roll out of games software, hardware and accessories in all our U.S. corporate-owned stores during the second quarter of 2008.
• In December 2008, we announced a three-year agreement that makes BLOCKBUSTER stores the exclusive physical retail ticket outlet for Live Nation Ticketing, beginning with the start of the 2009 concert season.
Develop digital solutions
• We have launched digital downloading on blockbuster.com, which enables our customers to download entertainment content for both rental and purchase.
• We launched BLOCKBUSTER OnDemand in November 2008 with the 2Wire MediaPoint ™ digital media player, an easy-to-use, on-demand video solution that offers movie fans instant access through their television sets to BLOCKBUSTER OnDemand content, including thousands of titles from the latest movie releases to classic favorites.
• We are also testing digital delivery through kiosks in select stores to digitally deliver entertainment content to our customers' portable devices.
Implement cost controls-We have surpassed our goal of reducing annualized overhead costs by $100 million through the elimination of staffing and operational redundancies in our in-store and online corporate support structure and through operational improvements. Our primary focus has been on cost reductions through:
• outsourcing,
• lease renegotiations to generate significant reductions in future store occupancy costs, and
• elimination of operational redundancies.
Key Financial Points for 2008
• Reported net loss of $374.1 million, driven by non-cash impairment charges to our goodwill and other long-lived assets of $435.0 million.
• Same-store revenues increased 3.9%.
• Selling, general and administrative expenses decreased by $291 million or 11%.
• Estimated impact of the 53rd week in fiscal 2007:
• Revenues decreased by $102 million.
• Gross profit decreased by $52 million.
• Operating income decreased by $7 million.
• The worldwide economic downturn in late 2008 had a negative impact on our results of operations, especially in our international markets.
Outlook
While we continue to be committed to improving our financial results through the operational and strategic initiatives discussed above, due to the recent extraordinary and unexpected limitations in domestic and international capital and credit markets, we have temporarily deferred or limited our spending on certain of these initiatives while we take prudent actions that are intended to provide that cash on hand, cash from operations and available borrowings under our amended revolving credit facility (assuming that we close on such facility) will be sufficient to fund our cash requirements. These actions include, but are not limited to, adjusting capital expenditures and inventory levels, evaluating expenditures for strategic initiatives and continuing to implement
ongoing cost controls. We intend that any such actions will remain in effect only until such time as improvements in the capital and credit markets provide additional options for sources of financing. Additionally, we continue to consider options for divesting certain non-core assets, including selling and/or licensing some of our international operations.
In 2009 we expect to continue facing the challenges of a depressed economy and the fragmentation of the media entertainment industry. Our current 2009 plan contemplates that worldwide same-store revenues will be lower than what we experienced in the fourth quarter of 2008. We believe that the actions we have taken to reduce costs and diversify our product offerings will help mitigate these challenges. However, there can be no assurances that conditions currently affecting the worldwide economic environment and other macroeconomic factors that could influence consumer confidence and spending behavior will not further alter our strategic objectives.
See "Liquidity and Capital Resources" below and Note 6 to the consolidated financial statements for discussion of our amended revolving credit facility, Term A loan facility and Term B loan facility.
Results of Operations
Consolidated Results
The following table sets forth a summary of consolidated results of certain
operating and other financial data.
Fiscal Year Ended
January 4, January 6, December 31,
2009 2008 2006
(In millions, except worldwide store data)
Statement of Operations Data:
Revenues $ 5,287.9 $ 5,542.4 $ 5,522.2
Cost of sales 2,565.4 2,677.8 2,479.7
Gross profit 2,722.5 2,864.6 3,042.5
Operating expenses(1) 3,015.8 2,825.5 2,968.9
Operating income (loss) (293.3 ) 39.1 73.6
Interest expense (73.0 ) (88.7 ) (101.6 )
Interest income 2.5 6.5 9.9
Other items, net(2) 15.6 (1.5 ) 5.4
Income (loss) before income taxes (348.2 ) (44.6 ) (12.7 )
Benefit (provision) for income taxes(3) (25.6 ) (29.6 ) 76.4
Income (loss) before discontinued
operations (373.8 ) (74.2 ) 63.7
Income (loss) from discontinued
operations, net of tax(4) (0.3 ) 0.4 (13.2 )
Net income (loss) $ (374.1 ) $ (73.8 ) $ 50.5
Cash Flow Data:
Cash flows provided by (used for)
operating activities $ 51.0 $ (56.2 ) $ 329.4
Cash flows provided by (used for)
investing activities $ (116.5 ) $ 76.7 $ (41.0 )
Cash flows provided by (used for)
financing activities $ 49.4 $ (241.0 ) $ (183.2 )
Other Data:
Depreciation and intangible
amortization $ 152.2 $ 185.7 $ 210.9
Impairment of goodwill and other
long-lived assets $ 435.0 $ 2.2 $ 5.1
Margins:
Rental margin(5) 62.1 % 60.7 % 65.2 %
Merchandise margin(6) 20.9 % 23.3 % 24.9 %
Gross margin(7) 51.5 % 51.7 % 55.1 %
Worldwide Store Data:
Same-store revenues increase
(decrease)(8) 3.9 % (2.3 )% (4.2 )%
Company-operated stores at end of year 5,806 6,073 6,551
Franchised and joint venture stores at
end of year 1,599 1,757 1,809
Total stores at end of year 7,405 7,830 8,360
Total Avg Sq. Total Sq.
Number Footage Footage
(in thousands) (in thousands)
Real Estate Data at January 4, 2009:
Domestic
Company-operated stores 3,878 5.5 21,484
Distribution centers 39 N/A 1,121
Corporate/regional offices 12 N/A 416
International
Company-operated stores 1,928 3.1 5,943
Distribution centers 7 N/A 199
Corporate/regional offices 7 N/A 117
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(1) Operating expenses include:
• non-cash charges to impair goodwill and other long-lived assets in accordance with SFAS 142 and SFAS 144 totaling $435.0 million, $2.2 million and $5.1 million for fiscal years 2008, 2007 and 2006, respectively; and
• a gain on sale of Gamestation of $81.5 million for fiscal 2007.
(2) Other items, net include the favorable impact of $15.5 million of foreign currency exchange gains related primarily to intercompany loans denominated in currencies other than the U.S. dollar in 2008.
(3) The benefit for income taxes in 2006 mainly relates to a benefit recorded in the first and second quarters of 2006 from the resolution of multi-year income tax audits.
(4) During 2006, we completed the divestiture of Movie Brands Inc. ("MBI") and MOVIE TRADING CO. ("MTC") in addition to closing all of our store locations in Spain. During January 2007, we also completed the sale of RHINO VIDEO GAMES ("RHINO"). In accordance with SFAS 144, these operations have been classified as discontinued operations.
(5) Rental gross profit (rental revenues less cost of rental revenues) as a percentage of rental revenues.
(6) Merchandise gross profit (merchandise sales less cost of merchandise sold) as a percentage of merchandise sales.
(7) Gross profit as a percentage of total revenues.
(8) A store is included in the same-store revenues calculation after it has been opened and operated by us for more than 52 weeks. An acquired store becomes part of the same-store base in the 53rd week after its acquisition and conversion. The percentage change is computed by comparing total net revenues for same-stores at the end of the applicable reporting period with total net revenues from these same-stores for the comparable period in the prior year. The same-store revenues calculation does not include the impact of foreign exchange or by-mail subscription revenue. The method of calculating same-store revenues varies across the retail industry; therefore, our method of calculating same-store revenues may not be the same as other retailers' methods.
Segments
Beginning in the fourth quarter of fiscal 2007, we operate our business in two reportable segments: Domestic and International. We identify segments based on how management makes operating decisions, assesses performance and allocates resources.
• The Domestic segment is comprised of all U.S. store operations and by-mail subscription service operations in addition to the digital delivery of movies through blockbuster.com. As of January 4, 2009, we had 4,585 stores operating under the BLOCKBUSTER brand in the United States and its territories. Of these stores, 707 stores were operated through our franchisees.
• The International segment is comprised of all non-U.S. store operations including operations in Europe, Latin America, Australia, Canada, Mexico and Asia. As of January 4, 2009, we had 2,820 stores operating under the BLOCKBUSTER brand and other brand names owned by us located in 20 markets outside of the United States. Of these stores, 892 stores were operated through our franchisees. In the Republic of Ireland and Northern Ireland, we operate under the XTRA-VISION® brand name due to its strong local brand awareness. In Canada, Italy, Mexico and Denmark, we also operate freestanding and store-in-store game locations under the GAME RUSH brand. During 2007, we sold our freestanding game locations which operated under the brand name GAMESTATION ® and we retained 34 Gamestation locations that operate as a "store-in-store" within BLOCKBUSTER stores. Additionally, during 2006, 2007 and 2008, we sold our Taiwanese, Australian and Chilean subsidiaries, respectively, each coupled with a license agreement. The results of Gamestation, Taiwan, Australia and Chile have been included in continuing operations through the period in which they were sold.
The following table is a summary of operating income (loss) by business segment.
Domestic International Unallocated/
Segment Segment Corporate Total
Statement of Operations Data:
Fiscal Year Ended January 4, 2009
Revenues $ 3,590.8 $ 1,697.1 $ - $ 5,287.9
Cost of sales 1,673.4 892.0 - 2,565.4
Gross profit 1,917.4 805.1 - 2,722.5
Operating expenses 2,143.3 727.6 144.9 3,015.8
Operating income (loss) $ (225.9 ) $ 77.5 $ (144.9 ) $ (293.3 )
Fiscal Year Ended January 6, 2008
Revenues $ 3,607.9 $ 1,934.5 $ - $ 5,542.4
Cost of sales 1,638.9 1,038.9 - 2,677.8
Gross profit 1,969.0 895.6 - 2,864.6
Operating expenses 1,907.9 734.7 182.9 2,825.5
Operating income (loss) $ 61.1 $ 160.9 $ (182.9 ) $ 39.1
Fiscal Year Ended December 31, 2006
Revenues $ 3,617.2 $ 1,905.0 $ - $ 5,522.2
Cost of sales 1,452.5 1,027.2 - 2,479.7
Gross profit 2,164.7 877.8 - 3,042.5
Operating expenses 1,930.9 833.9 204.1 2,968.9
Operating income (loss) $ 233.8 $ 43.9 $ (204.1 ) $ 73.6
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Comparison of Fiscal 2008 (52 Weeks) to Fiscal 2007 (53 Weeks)
Domestic Segment. The following table is a summary of domestic results of
operations.
Fiscal Year Ended Fiscal Year Ended
January 4, 2009 January 6, 2008 Increase/
(52 Weeks) (53 Weeks) (Decrease)
Percent of Percent of
Amount Revenue Amount Revenue Dollar Percent
Revenues:
Rental revenues:
Movies $ 2,272.4 63.4 % $ 2,389.3 66.3 % $ (116.9 ) (4.9 )%
Games 219.9 6.1 % 220.6 6.1 % (0.7 ) (0.3 )%
Previously rented product
("PRP") 492.7 13.7 % 527.3 14.6 % (34.6 ) (6.6 )%
Total rental revenues 2,985.0 83.2 % 3,137.2 87.0 % (152.2 ) (4.9 )%
Merchandise sales:
Movies 227.4 6.3 % 221.2 6.1 % 6.2 2.8 %
Games 155.0 4.3 % 47.4 1.3 % 107.6 227.0 %
General merchandise 200.1 5.6 % 177.9 4.9 % 22.2 12.5 %
Total merchandise sales 582.5 16.2 % 446.5 12.3 % 136.0 30.5 %
Royalties and other 23.3 0.6 % 24.2 0.7 % (0.9 ) (3.7 )%
Total revenues 3,590.8 100.0 % 3,607.9 100.0 % (17.1 ) (0.5 )%
Cost of sales:
Cost of rental revenues 1,196.9 33.3 % 1,314.3 36.4 % (117.4 ) (8.9 )%
Cost of merchandise sold 476.5 13.3 % 324.6 9.0 % 151.9 46.8 %
1,673.4 46.6 % 1,638.9 45.4 % 34.5 2.1 %
Gross profit 1,917.4 53.4 % 1,969.0 54.6 % (51.6 ) (2.6 )%
Operating expenses:
General and administrative:
Stores 1,338.2 37.2 % 1,402.5 38.9 % (64.3 ) (4.6 )%
Corporate and field 178.3 5.0 % 230.3 6.4 % (52.0 ) (22.6 )%
Total general and
administrative 1,516.5 42.2 % 1,632.8 45.3 % (116.3 ) (7.1 )%
Advertising 85.9 2.4 % 150.5 4.2 % (64.6 ) (42.9 )%
Depreciation and intangible
amortization 105.9 2.9 % 122.4 3.3 % (16.5 ) (13.5 )%
Impairment of goodwill and
other long-lived assets 435.0 12.2 % 2.2 0.1 % 432.8 N/A
2,143.3 59.7 % 1,907.9 52.9 % 235.4 12.3 %
Operating income (loss) $ (225.9 ) (6.3 )% $ 61.1 1.7 % $ (287.0 ) N/A
Margins:
Rental margin 59.9 % 58.1 %
Merchandise margin 18.2 % 27.3 %
Gross margin 53.4 % 54.6 %
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Fiscal Year Ended
January 4, 2009
Same-store revenues increase/(decrease)
Store only:
Rental revenues 1.2 %
Merchandise revenues 37.4 %
Total revenues 6.4 %
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Domestic-Rental revenues
• Rental revenues decreased mainly as a result of:
• a $60 million decrease in by-mail revenues driven by a 26% average decline in by-mail subscribers, which is more than offset by related cost reductions described below under "Domestic-Gross profit;"
• an estimated $55 million decrease due to the 53rd week included in fiscal 2007 results; and
• a 3.2% decline in company-operated stores due primarily to the continued selective closure of unprofitable stores;
• offset by the favorable impact of price increases which contributed to a same-store revenue increase of $28.7 million or 1.2%.
• Although we expect the in-store movie rental industry to continue declining in 2009, we believe that our initiatives to maximize product availability of new releases, simplify pricing terms, improve customer service, obtain exclusive content and innovatively merchandise our product offerings will help at least partially offset this trend.
• We have launched a pilot program during the first quarter of 2009, which allows select BLOCKBUSTER Total Access online customers to rent video games, as well as movies, through the mail as part of their subscription plan.
Domestic-Merchandise sales
• Same-store game sales increased $108.0 million or 244.9%, representing the favorable impact of:
• the expansion of games software, hardware and accessories to all stores;
• cross-merchandising games hardware, software and accessories to prominent positions in our stores; and
• a 37% higher average selling price per unit of games software due to an increase in games software sold for next generation game platforms that carry a higher average selling price than the older game platforms sold in 2007.
• Same-store general merchandise sales, which include sales of confections and other movie and game-related products, increased $30.3 million or 18.2% due to:
• our strategy of having an assortment of licensed merchandise product available for major theatrical releases; and
• the roll-out of framed entertainment posters to our stores during the first quarter of 2008.
• The following partially offset the increases to merchandise sales discussed above:
• the 3.2% decline in company-operated stores discussed above; and
• an approximately $11 million decrease in total merchandise sales due to the 53rd week included in fiscal 2007 results.
Domestic-Gross profit
• Rental gross profit decreased due to the decrease in rental revenues, offset by:
• reduced estimated costs for our by-mail offering of $150 million, including the favorable impact of approximately 50% fewer free in-store exchanges for BLOCKBUSTER Total Access ("Total Access") subscribers; and
. . .
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