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Bankruptcy For Blockbuster?

8 Nov, 2005 By: Erik Gruenwedel

Blockbuster Inc. may seek bankruptcy protection should it fail to secure at least $100 million in cash by Nov. 20 through the sale of stock or other equity arrangements to satisfy its majority lenders, the company disclosed today.

First Look Studios' announcement today to purchase DEJ Productions, Blockbuster's separate production and distribution unit for $25 million would not qualify toward the $100 million in equity needed, according to retail analyst Dennis McAlpine of McAlpine Associates.

The funding requirement resulted from a Nov. 4 renegotiated credit agreement between Blockbuster and its lenders. Compliance with the amendment would effect undisclosed changes to the credit agreement, including “less stringent financial covenants.”

Blockbuster said it would offer up to $173 million in convertible perpetual preferred stock to 25 of its top qualified institutional buyers.

Blockbuster executives said that without the third amendment the company would likely fail to meet previous financial covenants by Dec. 31 and thereafter.

“If they don't raise [the funds], they have a serious problem,” said McAlpine. “It is getting a little dicey.”

In accordance with SEC disclosure rules for equity funding, Blockbuster, in a separate filing Tuesday, included comments from its auditor, PricewaterhouseCoopers LLP, regarding irregularities of “internal control over financial reporting” as of Dec. 31, 2004. Irregularities in the statement of property and equipment, deferred rent liability, rent expense and depreciation expense forced Blockbuster to restate its 2002, 2003 annual and interim financial statements.

A source familiar with Blockbuster said the company resolved those issues with the auditor as of March 31, 2005. A Blockbuster representative reiterated the issue was discussed in the company's 10Q filing in May. He declined further comment.

Big Blue reported third quarter (ended Sept. 30) declines in same-store sales and rentals resulting in a net loss of $491.4 million, compared to a loss of $1.4 billion last year. Total revenues for the quarter were $1.39 billion, compared to $1.4 billion last year.

Worldwide same-store sales dropped 3.8 percent from the same period last year, while same-store rental revenue, which includes revenue from Blockbuster Online, decreased 2.5 percent. The subscriber base for Blockbuster Online remained flat at 1 million members. Company executives said the service was on track to register 2 million members by the end of 2006 and become profitable in 2007.

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