Filed by: Blockbuster Inc.
Pursuant to Rule 425 under the Securities Act of 1933
Commission File No: 001-15153
Subject Company: Blockbuster Inc.
On September 21, 2004, Blockbuster Inc. began using the following slides in road show presentations regarding
the split-off exchange offer. Any slides that are subsequently revised will also be filed pursuant to Rule 425.
Blockbuster Presentation Regarding Viacom Exchange Offer
September 2004
Forward Looking Statements
Investors are advised to read Viacom’s Tender Offer Statement on Schedule TO, Blockbuster’s Registration Statement on Form S-4 and the Prospectus-Offer to Exchange, and any other documents relating to the exchange offer that are filed with the Securities and Exchange Commission as they become available and as they are amended because they will contain important information. Investors may obtain copies of these documents for free, where available, at the SEC’s website at www.sec.gov or from Viacom Investor Relations at 1-800-516-4399.
This presentation contains both historical and forward-looking statements. Forward-looking statements in this presentation are not based on historical facts, but rather reflect Blockbuster management’s current intent, expectations, estimates and projections concerning future results and events. Forward-looking statements generally can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, words such as “believe”, “expect”, “anticipate”, “may”, “could”, “intend”, “intent”, “belief”, “estimate”, “plan”, “foresee”, “likely”, “will” or other similar words or phrases and similar expressions and variations thereof. Similarly, statements concerning the Blockbuster special distribution or borrowings by Blockbuster pursuant to its new credit agreement and senior subordinated notes, the exchange offer or agreements or arrangements relating to any of such matters or that describe Viacom’s or Blockbuster’s strategies, initiatives, objectives, plans, goals or results of operations are forward-looking statements. These forward-looking statements are not guarantees of future performance and involve risks, uncertainties, assumptions and other factors that are difficult to predict and that could cause Viacom’s or Blockbuster’s actual results, performance or achievements to vary materially from what is expressed in or indicated by such forward-looking statements. Viacom and Blockbuster cannot make any assurances that projected results or events will be achieved. Factors specific to Blockbuster include, among others: (i) consumer demand for Blockbuster’s existing and planned product and service offerings, including new offerings related to its subcription, trading and games initiatives, and the related impact of competitor pricing and product and service offerings; (ii) the variability in consumer appeal of the movie titles and games software released for rental and sale; (iii) Blockbuster’s ability to respond to changing consumer preferences and to effectively adjust its product mix, service offerings and marketing and merchandising initiatives; (iv) Blockbuster’s ability to effectively and timely prioritize, implement and maintain the necessary information technology systems and infrastructure to support shifts in consumer preferences and in its operating model, including support for its subscription, trading and games initiatives; (v) the impact of changes in Blockbuster’s consumer rental terms, including Blockbuster’s subscription rental offers; (vi) vendor determinations relating to pricing and distribution of their product and Blockbuster’s ability to reach agreements with its suppliers on acceptable commercial terms; (vii) the studios’ dependance on revenues generated from retail home video and their maintenance of exclusive distribution windows for retail home video; (viii) the application of existing and future accounting policies and pronouncements, including without limitation any continuing impact of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, and the potential impact of pronouncements such as the Financial Accounting Standards Board Exposure Draft,
Share-Based Payment, an Amendment of FASB Statements No. 123 and 95, or pending legislation such as H.R. 3574, The Stock Option Accounting Reform Act; (ix) the effect of game platform cycles; and (x) the impact of developments affecting Blockbuster’s outstanding litigation and claims against it. In addition, the risk factors set forth in the section of the Prospectus-Offer to Exchange entitled “Risk Factors”, and the matters discussed in Blockbuster’s and Viacom’s SEC filings, including the “Disclosure Regarding Forward-Looking Information” sections of Blockbuster’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and Blockbuster’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004, and the matters discussed in the “Cautionary Statement Concerning Forward-Looking Statements” sections of Viacom’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and Viacom’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004, among others, could affect future results, causing these results to differ materially from those expressed in the forward-looking statements.
Offering Summary
Structure: Tax-free split-off
Distribution Company: Viacom (Ticker: VIA/VIAB)
Distributed Company: Blockbuster (Ticker: BBI/BBI.B)
Fixed Exchange Ratio: 2.575 class A shares and 2.575 class B shares of Blockbuster for each class A or B share of Viacom
Exchange Offer: Viacom is offering an aggregate of 72.0 million class A shares and 72.0 million class B shares of Blockbuster in exchange for up to approximately 28.0 million Viacom shares
Minimum Tender Condition: At least 16,776,699 Viacom shares, which will enable Viacom to exchange at least 60% of its Blockbuster shares
Exchange Offer Expiration: Midnight NYC time on October 5, 2004
Dealer Managers: Bear Stearns Goldman Sachs
Business Overview
Our vision is to transform Blockbuster from a place you rent a movie to a brand where you rent, buy or trade movies and games new or used, in-store or online.
We will be making significant investments in 2004 and 2005 as we transform our business, build our active membership and remove consumer barriers to rental.
We believe this two-year plan will provide attractive future returns for our shareholders.
Key Investment Highlights
Large and Growing Home Video and Games Industry
Leading Position in Our Markets
Global Brand with Competitive Advantage
Strong Cash Flow and Balance Sheet
Growth Through Implementation of New Initiatives
Proven Management Team
Introduction to Blockbuster
Largest movie and game rental retailer in the world
Domestic rental revenue nearly 2x bigger than two closest competitors combined
Highly recognizable global brand
Approximately 9,000 stores in 26 countries as of 6/30/04 (64% US)
80% company-operated stores/20% franchised
Prime and flexible real estate portfolio
Approximately 40 million 12-month active US member accounts
2003 revenues of $5.9 billion
Approximately 74% US/26% international
Approximately 77% rental/23% retail & other
Home Video Is a Growth Market
Source: Kagan Research, LLC.
Aggregate Size ($ in billions)
Annual Spend per Video HH
CAGR: 9.5%
$273
$257
$235
$219
$21.7
$24.0
$26.3
$28.5
0
5
10
15
20
25
30
$35
2003
2004E
2005E
2006E
0
100
200
300
400
$500
Total Rental
Total Retail
Home Video per Video HH
Opportunities Brought on by DVD
DVD has been the fastest accepted entertainment technology in history
Solidified studios’ interest in maintaining exclusive home video window
Growth has created opportunities for Blockbuster
Improved movie rental gross margin to approximately 70% from approximately 60%
Increased copy depth and product availability
Dramatic increase in consumer DVD collections should drive interest in trading
Enabled subscription rental business
Rental Market Opportunity
Dominant market share provides competitive advantage in evolving market
The DVD rental subscription market is a growth opportunity for Blockbuster
Online rental subscription market expected to grow from $288.8 million in 2003 to $1,340.0 million in 2006 (66.8% CAGR)(1)
(1) Source: Kagan Research, LLC.
Rental DVD Segment Continues to Grow
($ in billions)
(1)
(1)
(1)
0.0
2.5
5.0
7.5
$10.0
2003
2004E
2005E
2006E
DVD
DVD Online Rental Subscription
VHS
$8.2
$8.1
$7.9
$7.7
1998(1)
Studios Are Dependent on Home Video
Home Video 44.6%
VOD/PPV 1.4%
Theater 28.6%
TV & Cable 15.0%
2003(1)
Premium Channels 10.4%
VOD/PPV 1.8%
Home Video 51.8%
TV & Cable 14.0%
Premium Channels 9.3%
Theater 23.1%
Home Video is a Critical Window—Studio Revenue by Window
Wholesale pricing decrease is unlikely due to economic impact on studios
Studios would have to replace lost dollars with much greater volume
However, wholesale decrease would result in rental margin increase for Blockbuster
(1) Source: Kagan Research, LLC.
Importance of Home Video Release Window
Home Video is One of Only Two Exclusive Windows
Home Video
PPV/VOD
Network/Other
Box Office
Up to 6 months
Months
Up to 2 months
Exclusive
Window(1)
0
2
6
8
10
12+
4
(1) Airlines and hotels have a smaller window between box office and home video.
We Believe VOD Will Stay in the PPV Window
VOD would significantly cannibalize retail sales of movies
Studio profitability would be impacted
We believe the Blockbuster experience is superior to VOD:
Better customer experience (browsing for titles, personal interaction, movie recommendations, confections offerings, etc.)
Wider selection of new releases and catalog titles
DVD extras
1 Retail Sale $15.00
1 VOD Sale $3.00
It takes 5 VOD transactions to maintain profitability of one retail sale
Source: Blockbuster estimates.
Video Game Market Opportunity
Source: LEK for rental and Veronis Suhler for retail (represents console software only).
($ in billions)
Blockbuster positioned to benefit from broadening demographics of “gamers”
The average age of gamers is increasing
The fastest growing demographic group is women
Gamers are already Blockbuster customers
CAGR: 10.8%
$9.0
$7.9
$7.1
$6.6
0
2
4
6
8
10
$12
2003
2004E
2005E
2006E
Total Rental
Total Retail
New Initiatives
New Initiatives
New Initiatives Create Opportunities for Future Growth
Source: Kagan Research, LLC.
Source: LEK.
Includes previously viewed/played product, which Blockbuster reports under rental revenue.
Source: Veronis Suhler.
Movie Rental(1) $7.9 B $6.4 B
Games Rental(2) 804 M 980 M
On-line Subscription(1) 289 M 1.3 B
Retail Movies(1) 13.5 B 20.8 B
Used/Traded Movies(2)(3) 1.3 B 2.2 B
Retail Games(4) 5.8 B 8.0 B
Used/Traded Games(2)(3) 989 M 1.2 B
Total $30.6 B $40.9 B
2003 2006E
CAGR
10.1%
US Movies and Games Industry
Subscription Initiative
Approximately 1,100 at y/e 2003
All domestic stores by May 2004
Launched in the UK in May 2004
Launched in the US in August 2004
In-Store
Online
Launch
8% of active monthly members by y/e 2004
10% of active monthly members by y/e 2005
Substantial share by y/e 2005
Ultimate goal to broaden online to include sale and online delivery of movies and games
Goal
Offers immediate gratification and access to new releases
Increased customer loyalty
Offers deeper catalogue
Home delivery convenience
Offering/ Results
Integrated Subscription Planned for 2005
DVD Trading Initiative
Movie Trading Company (acquired in 2002)
Introduced Big DVD Trade-In during Q4’03
Launch
Goal
Offering/ Results
More than 2,000 US stores and all UK stores by end of 2004
Substantially all Blockbuster stores by end of 2005
Customers can monetize movies through store credit
Increased traffic and use of credit drives revenue
Games Initiative
Store-In-Store
Launch
Goal
Offering/ Results
Freestanding
Acquired UK-based Gamestation in Q4’02– 2nd largest games retailer
Doubled size to 145 stores as of Q2’04
Acquired US-based Rhino video games in Q2’04 (40 stores)
Approximately 550 operating in 2004
Approximately 1,000 operating in 2005
Complete source for rental, retail and trading
Complements store-in-store
Broadens addressable market
Launched in approximately 200 stores Q4’03
Approximately 250 operating in 2004
Approximately 400 operating in 2005
Blockbuster Offers the Most Options for Movie and Game Customers
Blockbuster
Hollywood
Movie Gallery
Electronics Boutique
Game Stop
Wal-Mart
Circuit City
Best Buy
Netflix
Source: Public filings and company websites.
Blockbuster Intends to Grow Revenues and Profits by:
Growing market share in core rental business
Growing in-store subscription rental business
Capturing significant share in online rental subscription business
Establishing and growing DVD trading business
Establishing large and growing presence in video games business
Exploring new opportunities to leverage brand and store network
We expect new business initiatives to produce significant revenues in the future
We believe VOD is not a significant threat and that we have already felt a major portion of the impact of retail on our business
Financial Overview
Strong Revenue and Gross Profit Growth
(1) Includes add-back of non-cash charges of $337.6 million for change in accounting estimates and special items.
Rental
Retail
($ in millions)
Revenue
Gross Profit
7.3% CAGR
6.9% CAGR
Same-Store Revenue Growth
8.3%
5.6%
2.5%
5.1%
(2.2%)
(1)
$3,522
$3,207
$3,074
$2,924
$2,701
0
1,000
2,000
3,000
4,000
$5,000
1999
2000
2001
2002
2003
$5,912
$5,566
$5,157
$4,960
$4,464
0
2,000
4,000
6,000
$8,000
1999
2000
2001
2002
2003
Gross Profit Margins
Increasing Profitability
(1) Includes add-back of non-cash charges of $337.6 million for change in accounting estimates and special items.
Rental DVD Mix:
(1)
72.1%
70.0%
66.1%
65.5%
64.4%
66.0%
22.5%
19.8%
17.1%
18.9%
21.4%
21.0%
0
20
40
60
80%
1999
NA
2000
6.9%
2001
18.5%
2002
39.0%
2003
57.3%
1H ‘04
70.2%
Rental
Retail
Total
Strong Cash Flow
OIBDA = Operating Income before Depreciation and Amortization of intangibles. Includes add-back of non-cash charges of $31.6 million in 2000 related to the impairment of certain hardware and capitalized software costs. Includes add-back of non-cash charges of $345.4 million for change in accounting estimates and special items in 2001. Includes Wherehouse Entertainment Inc. lease guarantee write-down of $18.7 million in 2002. Includes add-back of impairment of goodwill and other long-lived assets of $1.3 billion in 2003.
Free cash flow = Net cash flow provided by operating activities—CAPEX—rental library purchases.
($ in millions)
(2)
(1)
$718
$571
$547
$535
$514
$403
$250
$442
$289
($40)
(200)
0
200
400
600
$800
1999
2000
2001
2002
2003
OIBDA
Free Cash Flow
OIBDA Reconciliation
($ in millions)
Operating income (loss) $121.7 $75.7 ($219.6) $337.1 ($845.2) $254.0 $201.2
Depreciation and amortization of intangibles 392.3 427.5 421.1 233.8 257.9 123.3 120.1
Non-cash charges – 31.6 345.4 – – – –
Impairment of goodwill and other long-lived assets – – – – 1,304.9 – –
OIBDA $514.0 $534.8 $546.9 $570.9 $717.6 $377.3 $321.3
1999
2000
2001
2002
2003
1H 2003
1H 2004
Cash provided by operations $1,142.8 $1,320.8 $1,395.1 $1,451.2 $1,416.1 $579.3 $455.2
Rental library purchases (808.7) (810.0) (859.4) (1,060.9) (836.6) (435.2) (355.7)
Capital expenditures (374.4) (221.5) (93.3) (140.6) (176.8) (55.8) (109.1)
Free Cash Flow ($40.3) $289.3 $442.4 $249.7 $402.7 $88.3 ($9.6)
Free Cash Flow Reconciliation
($ in millions)
1999
2000
2001
2002
2003
1H 2003
1H 2004
Free Cash Flow Reconciliation (cont.)
($ in millions)
Net income ($69.2) ($75.9) ($240.3) ($1,627.6) ($983.9) $141.7 $159.4
Depreciation and amortization of intangibles 392.3 427.5 421.1 233.8 257.9 123.3 120.1
Non-cash charges – 31.6 345.4 – – – –
Impairment of goodwill and other long-lived assets – – – – 1,304.9 – –
Capital expenditures (374.4) (221.5) (93.3) (140.6) (176.8) (55.8) (109.1)
Rental library purchases, net of rental amortization (133.6) (74.4) 18.9 (36.6) 118.2 77.4 15.7
Changes in working capital (12.2) 70.6 95.1 (10.5) (45.2) (206.0) (231.3)
Cumulative effect of change in accounting principle, net of tax – – – 1,817.0 4.4 4.4 –
Changes in deferred taxes and other 156.8 131.4 (104.5) 14.2 (76.8) 3.3 35.6
Free Cash Flow ($40.3) $289.3 $442.4 $249.7 $402.7 $88.3 ($9.6)
1999
2000
2001
2002
2003
1H 2003
1H 2004
2003: A Year of Record Profitability and Strong Cash Flow
Significant Expansion of Rental Margin Driven Primarily by Improved Product Buying and Inventory Management
Significant Reduction in Advertising Expense Driven by Leveraging Increased Studio Advertising
Business Outlook
Profitability for the third quarter of 2004 expected to decline significantly from last year based on estimated mid-single digit percentage decline in worldwide same-store revenues and significant increase in operating expenses associated with new initiatives
Percentage increase in total revenues for full year 2004 expected to increase in low-single digit range
Full year 2004 diluted EPS, excluding the impact of 1Q’04 tax benefit, expected to decrease approximately 30% from adjusted diluted earnings per share of $1.48(1)(2) last year as a result of investment of approximately $90 million of incremental operating expenses associated with the development and launch of the key growth initiatives and continued weakness in the rental industry, as well as the difficult comparison to the prior year. If the company decides to accelerate its investment spending or if Blockbuster’s rental business is softer than currently anticipated, the year over year decline would exceed 30%
(1) Before cumulative effect of change accounting principle. Includes add-back of impairment of goodwill and other long lived assets of $6.93 per diluted share.
(2) Before costs related to any incremental expenses associated with the divestiture.
Business Outlook (cont.)
Approximately 400 company-operated stores expected to be opened in 2004
Capital expenditures expected to range between $250 million to $280 million, an increase over $176.8 million recorded in 2003
Blockbuster expects the rental industry to continue to decline in 2005, but believes the industry will stabilize by end of year as DVD penetration is expected to reach 70% of US households
Expected softness in rental combined with continued heavy investment in the business will adversely affect profitability for full year 2005
Pro Forma Balance Sheet
Cash and cash equivalents $157.3
Debt
Credit facility
Revolving credit facility $50.0
Tranche A (due 2009) 100.0
Tranche B (due 2011) 550.0
Total Facility $700.0
Senior Subordinated Notes (due 2012) $300.0
Other 2.1
Capital lease obligations 93.8
Total Debt $1,095.9
Total Stockholders’ Equity 2,505.1
Total Capitalization $3,601.0
6/30/04
($ in millions)
Financial Highlights
Significant growth in revenues and profits over past four years
Strong balance sheet and cash flow
High topline margins and strong operating results support investments in business
Blockbuster Presentation Regarding Viacom Exchange Offer
September 2004