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 28, 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 subscription, 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
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.
Introduction to Blockbuster
Largest movie and game rental retailer in the world
Rental revenue more than 2x two closest competitors combined
Highly recognizable global brand
9,000 stores in 26 countries
65% US/35% International
80% company-operated stores/20% franchised
50 million active member accounts(1)
2003 revenues of $5.9 billion
2003 Free Cash Flow(2) of $402.7 million
Average Free Cash Flow(2) since 2000 of $346.0 million
(1) 12-month active members.
(2) Free Cash Flow = Net cash flow provided by operating activities—CAPEX—rental library purchases.
Home Video Is a Growth Market
Aggregate Size ($ in billions)
Annual Spend per Video HH
CAGR: 9.5%
0 5 10 15 20 25 30 $35
$273 $257 $235 $219 $21.7 $24.0 $26.3 $28.5
2003 2004E 2005E 2006E
0 100 200 300 400 $500
Total Rental Total Retail Home Video per Video HH
Source: Kagan Research, LLC.
Opportunities Brought on by DVD
Solidified studios’ interest in maintaining home video window
Significantly improved rental margin
Increased copy depth and product availability
Enabled subscription rental business
Expanding consumer DVD collections should drive trading
Movie Release Windows
Theatrical
Home Video
PPV/VOD
Network/Other
0 2 4 6 8 10 12+
Months
Note: Airlines and hotels have a smaller window between box office and home video.
Studios Are Dependent on Home Video
Home Video is a Critical Window—Studio Revenue by Window
1998(1)
TV & Cable 15.0%
Theater 28.6%
VOD/PPV
1.4%
Home Video 44.6%
Premium Channels 10.4%
Home Video 51.8%
2003(1)
Theater 23.1%
Premium Channels 9.3%
TV & Cable 14.0%
VOD/PPV 1.8%
(1) Source: Kagan Research, LLC.
We Believe VOD Will Stay in the PPV Window
VOD would significantly cannibalize retail sales of movies
Studio profitability would be impacted
1 Retail Sale $15.00
1 VOD Sale $3.00
It takes 5 VOD transactions to maintain profitability of one retail sale
Source: Blockbuster estimates.
Video Game Market Opportunity
($ in billions)
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
Source: LEK for rental and Veronis Suhler for retail (represents console software only).
New Initiatives
Blockbuster Now Operates in Growth Businesses
US Movies and Games Industry
2003 2006E
Movie Rental(1) $7.9B $6.4B
Retail Movies(1) 13.5B 20.8B
Online Subscription(1) 289M 1.3B
Used/Traded Movies(2)(3) 1.3B 2.2B
Retail Games(4) 5.8B 8.0B
Games Rental/Used/Traded(2)(3) 1.8B 2.2B
Total $30.6B $40.9B
CAGR 10.1%
(1) Source: Kagan Research, LLC.
(2) Source: LEK.
(3) Includes previously viewed/played product, which Blockbuster reports under rental revenue.
(4) Source: Veronis Suhler.
Subscription Initiative
Launch Goal Offering/Results
In-Store
Approximately 1,100 at y/e 2003
All domestic stores by May 2004
8% of active monthly members by y/e 2004
10% of active monthly members by y/e 2005
Offers immediate gratification and access to new releases
Increased customer loyalty
Online
Launched in the UK in May 2004
Launched in the US in August 2004
Substantial share by y/e 2005
Ultimate goal to broaden online to include sale and online delivery of movies and games
Offers deeper catalogue Home delivery convenience
Integrated Subscription Planned for 2005
DVD Trading Initiative
Launch
Goal
Offering/Results
Movie Trading Company (acquired in 2002)
Introduced Big DVD Trade-In during Q4’03
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
Launch
Goal
Offering/Results
Store-In-Store
Launched in approximately 200 stores Q4’03
Approximately 550 operating in 2004
Approximately 1,000 operating in 2005
Complete source for rental, retail and trading
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 250 operating in 2004 Approximately 400 operating in 2005
Complements store-in-store
Broadens addressable market
Blockbuster Offers the Most Options for Movie and Game Customers
DVD Rental DVD Retail Used Movies Movie Trading Games Rental Games Retail Games Trading On-line Sub- scriptions In-Store Sub- scriptions
Blockbuster
Hollywood
Movie Gallery
Electronics Boutique
Game Stop
Wal-Mart
Circuit City
Best Buy
Netflix
Partially developed capabilities Fully developed capabilities
Source: Public filings and company websites.
We believe:
VOD is not a significant threat
Blockbuster has already felt the major portion of retail impact
Blockbuster intends to drive revenue and profits by growing:
Core rental business
In-store rental subscription
Online rental subscription
DVD trading
Video games business
New opportunities to leverage brand and store network
Financial Overview
Strong Revenue and Gross Profit Growth
($ in millions)
Rental Retail
Revenue
Gross Profit
Revenue
7.3% CAGR
1999 2000 2001 2002 2003
$8,000 6,000 4,000 2,000 0
$5,157 $4,960 $4,464 $5,912 $5,566
Same-Store Revenue Growth
8.3% 5.6% 2.5% 5.1% (2.2%)
Gross Profit
6.9% CAGR
$5,000 4,000 3,000 2,000 1,000 0
$3,074 $3,207 $2,924 $2,701 $3,522
1999 2000 2001(1) 2002 2003
(1) Includes add-back of non-cash charges of $337.6 million for change in accounting estimates and special items.
Increasing Profitability
Gross Profit Margins
80% 60 40 20 0
70.0% 72.1% 66.0% 64.4% 65.5% 66.1%
21.0% 21.4% 22.5% 18.9% 19.8% 17.1%
1999 2000 2001(1) 2002 2003 1H ‘04
Rental DVD Mix: NA 6.9% 18.5% 39.0% 57.3% 70.2%
Rental Retail Total
(1) Includes add-back of non-cash charges of $337.6 million for change in accounting estimates and special items.
Strong Cash Flow
($ in millions)
$800 600 400 200 0 (200)
$718 $547 $571 $514 $535 $442 $403 $289 $250 ($40)
1999 2000 2001 2002 2003
OIBDA(1) Free Cash Flow(2)
(1) 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 $1.3 billion in 2003.
(2) Free Cash Flow = Net cash flow provided by operating activities—CAPEX—rental library purchases.
OIBDA Reconciliation
($ in millions)
1999 2000 2001 2002 2003 1H 2003 1H 2004
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 $321.3
Free Cash Flow Reconciliation
($ in millions)
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 ($9.6)
Free Cash Flow Reconciliation (cont.)
($ in millions)
1999 2000 2001 2002 2003 1H 2003 1H 2004
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)
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 $176.8 million recorded in 2003
Blockbuster expects the rental industry to continue to decline in 2005, but believes the industry will stabilize by end of year as DVD penetration is expected to reach 70% of US households
Expected softness in rental combined with continued heavy investment in the business will adversely affect profitability for full year 2005
Pro Forma Balance Sheet
($ in millions)
6/30/04
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
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