Blockbuster IncMillie SheppardACG2021 002

Executive Summary

Blockbuster suffered a great loss over the last year of 2004. It will be interesting to see how

2005 turns out for them and to see if they can turn their giant net loss into even the slightest net income. There is nothing that hurts a company’s numbers more

than a net loss. Even a little net income looks better than any sort

of net loss.

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Part A. IntroductionBlockbusters Chief Executive Officer is John F.

Antioco, who has held this position since 2001.Their home office is located at:

1201 Elm Street Dallas, Texas 75270

Blockbuster is known for their home video and game rentals. They also work hand-in-hand with studio production companies, helping to support the release of a new movie. Blockbuster also has “specialty games stores” operating under the name Rhino Video, that help bring in additional income in the retail of video games.

While Blockbuster is located all through out the U.S., there are stores located in 24 other countries.

California leads the way with 681 stores, followed close by Texas with 533, and Florida with 434.

Part A. Audit Report

Blockbusters auditors are:PricewaterhouseCoopers LLP2001 Ross AvenueSuite 1800Dallas, TX 75201

According to PricewaterhouseCoopers the internal operations and management of Blockbuster is not up to par, and is one of the reasons for its lack of net income. Without the internal control and guidance, there is little communication involved, all of which are essential in a corporation as large as this one.

Part A. Stock Market Information

Blockbuster sells two differentstocks as of October 2004, referredto as class A and class B commonStocks.

Class A stocks started being open to thepublic in 1999, and class B came around in

October of 2004 as a part of Viacom.

Quarter Ended March 31, 2004 $19. 37 $15.60 $0.02

Quarter Ended June 30, 2004 $17.58 $14.61 $0.02

Quarter Ended September 30, 2004

$15.12 $7.24 $0.02

Quarter Ended December 31, 2004

$10.49 $6.50 $9.85 $6.31 $0.02

Here is a table comparing class A common stocks to class B stocks starting at the year end, and being computed quarterly.

Year Ended December 31, 2004 Sales price (A): High

Sales price (A): low

Sale price (B): high

Sale price (B): low

Cash Dividend per share:

Buying/selling/holding stock

Blockbuster stock as of December 2004 was at one of its lowest points. Its hard to say what it might do in the future, but when deciding whether to buy, sell or hold I think its easy to say that due to the net loss buying stock is not in everyones’ best interest. But as far as selling goes, the price of the stock is at its lowest.

Part B. Industry Situation and Company Plans

• Blockbuster is claiming that the majority of its problems are also lying in the fact that they recently got rid of late fees in many of their stores and are now competing with the idea of the online movie rental stores.

• Its only a matter of time before Blockbuster gets back on their feet after having made the necessary adjustments.

Part C. Income Statement

Multi-step vs. Single step

Blockbuster chose to use the multi-step income statement. This is apparent due to the fact that cost of goods sold is taken into account in order to calculate the gross profit for the company.

Even though the gross profit for the company increased over the year, it seems as though their expenses or liabilities increased as well, making their profit have to be applied there, instead of as an income.

Gross Profit $3, 611.8 $3, 521.9

Operating Income (Loss)

($ 1, 253.2) ($ 836.7)

Net Loss ($ 1,248.8) ($ 978.7)

2004 2003

Year ended Dec. 31, 2004 (in millions)

Part C. Balance Sheet

Current Assets Cash and cash equivalents Receivables Inventories Prepaid and other current assetsTotal Current Assets

$330.3 117.8 516.6 193.0

1,217.1

$233.4183.7415.1128.1960.3

Rental Library 457.6 354.4

Receivable from Viacom, net 2.6 3.5

Property and equipment, net 854.0 787.3

Deferred tax asset 87.0 ------

Intangibles, net 34.5 34.4

Goodwill 1,138.5 2,627.7

Other Assets 71.5 54.4

TOTAL ASSETS $3,863.4 $4,822.0

ASSETS (In millions) Year ended Dec. 31,2004 2004 2003

Current Liabilities Accounts payable Accrued expenses Current portion of long-term debt Current portion of capital lease obligations Deferred taxesTotal Current Liabilities

$721.8697.35.819.74.8$1,449.4

$565.1610.2124.120.73.3$1,323.4

Long-term debt, less current portion 1,044.9 0.7

Capital lease obligations, less current portion

74.8 74.4

Deferred taxes ------- 9.3

Deferred rent liability 69.2 71.1

Other liabilities 162.2 154.7

TOTAL LIABILITIES $2,800.5 $1,633.6

LIABILITIES year ended Dec. 31, 2004 2004 2003

Preferred stock, par value $0.01 per share: 100.0 shares authorized; no shares issued or outstanding

-------- ---------

Class A common stock, par value $0.01 per share; 400.0 shares authorized; 117.1 and 36.9 shares issued and outstanding for 2004 and 2003, respectively

1.1 .4

Class B common stock, par value $0.01 per share; 500.0 shares authorized; 72.0 and 144.0 shares issued and outstanding for 2004 and 2003, respectively

.7 1.4

Additional paid-in capital 5,336.7 6,227.3

Retained deficit (4,248.3) (2,999.5)

Accumulated other comprehensive loss (27.3) (41.2)

TOTAL STOCKHOLDER’S EQUITY 1,062.9 3,188.4

Stockholder’s Equity (per share amounts) Year ended Dec. 31, 2004 2004 2003

Assets = Liabilities + Stockholders Equity

Total Assets $3,863.4 $4,822.0

Total Liabilities $2,800.5 $1,633.6

Total Stockholder’s Equity $1,062.9 $3,188.4

2004 2003

2004: 3,863.4= 2,800.5 + 1,062.9

2003: 4,822.0= 1,633.6 + 3,188.4

From 2003 to 2004 it is very evident that the liabilities took a significant increase, while the

stockholders equity fell greatly, probably due to the slight decrease in assets.

Part C. Statement of Cash Flows

(in millions)Since there was a net loss for the company in both 2004 and 2003, the net cash flow provided by operating activities was greater than the net loss both years.

2004: Net loss= $(1,248.8)Net cash flow for operations= 1,215.4

•That shows a significant difference between the two.•2003: Net loss= $(978.7)

Net cash flow for operations= 1,430.3*Yet again it is evident that the net cash flow for 2003 was greater than the net loss.

Being that the net loss in 2004 was much greater than in 2003, the net cash flow also decreased for 2004 as well.

Part C. Statement of Cash Flows

continuedThe company as a whole increased their long-term

investments from 2003 to 2004 by 199.5.

As far as their investing activities, those decreased in 2003 to 2004 from (1,024.6) to (1,112.3), respectively.

The company’s primary source of financing was through long-term loans, which is one reason their liabilities jumped so high in 2004.

The company has been bringing more money in for 2004, but it seems that their liabilities have increased to a point that has made them put their income right back into the company.

Part D. Accounting Policies

• The company’s main concern is its internal affairs. It has been mentioned that the company’s main problem lies within. For example how the managers and owners interact with the shift workers.

• They hope that over the next years they can work to reduce such problems, and improve their numbers by first fixing problems within.

Part E. Financial AnalysisLiquidity Ratios

Working Capital (in millions): current assets- current liabilities

2003: 233.4- 565.1 = $(331.7)2004: 330.3- 721.8 = $(391.5)*since Blockbuster has more liabilities than assets, it

becomes apparent that it will be really difficult to pay off their liabilities and could lead to business failure.

Current Ratio:current assets/current liabilities

2003: 233.4/ 565.1= .4132004: 330.3/ 721.8 = .458*Its not effective to have a high or a low current ratio,

this lets us know their ability to pay off loans, but seeing as the assets are more than liabilities, it will be significantly harder.

Part E. Financial AnalysisLiquidity Ratios

continued

Receivable turnovernet sales/average accounts receivable

2003: 5,911.7/ 180.75 = 33.15 times a year2004: 6,053.2/ 180.75 = 33.49 times a year*A company prefers their receivable turnover to be a bit

number because it lets us know how often you get cash for receivables.

Average days’ sales uncollected365/ receivable turnover

2003: 365/ 33.15 = 11.01 days2004: 365/ 33.49 = 10.9 days*This number is better if it is smaller, because it shows

how long it takes for a customer to pay you off. And depending on the industry, this may or may not be a suitable number.

Part E. Financial AnalysisLiquidity Ratios

continued

Inventory turnovercost of good sold/ average inventory

2003: 2,441.4/ 465.85 = 5.24 times a year2004: 2,389.8/ 465.85 = 5.13 times a year*This calculations allows us to discover how

frequently the shelves are restocked every year.

Average days’ inventory on hand365/ inventory turnover

2003: 365/ 5.24 = 69.66 days2004: 365/ 5.13 = 71.15 days*Average days’ inventory on hand is another way of

saying “shelf life.” How long a product sits on the shelf.

Part E. Financial AnalysisProfitability Ratios

Profit marginnet income/ total revenue

2003: (978.7)/ 5,911.7 = (.17)2004: (1,248.8)/ 6,053.2 = (.21)*How much of a sale equals net income. In blockbusters case,

it is a negative number because they actually suffered a net loss instead of a net income.

Asset turnovertotal revenue/ average total asset

2003: 5,911.7/ 4,344.7 = 1.362004: 6,053.2/ 4,344.7 = 1.39*How much are assets used to make sales happen. In this case

the higher number shows that the company is more efficient.

Part E. Financial AnalysisProfitability Ratios

continued

Return on assetsnet income/ average total assets

2003: (978.7)/ 4,344.7 = (23%)2004: (1,248.8)/ 4,344.7 = (29%)*Return on assets shows us how much of every dollar

goes to the pocket. Yet again, the calculation is negative due to the net loss seen by Blockbuster.

Return on equitynet income/ total stockholders equity

2003: (978.7)/ 3,188.4 = (31%)2004: (1,248.8)/ 1,062.9 = (117%)*How much of every dollar is invested by stockholders.

It’s the net loss that is really hurting Blockbuster.

Part E. Financial AnalysisSolvency Ratio

Debt to equity (in millions)total liabilities/ total stockholders equity

2003: 1,633.6/ 3,188.4 = 51%2004: 2,800.5/ 1,062.9 = 263.5%*A ratio that is less than one shows that the company owes less to the creditors. By this calculation it is very apparent that the creditors own the company.

Part E. Financial AnalysisMarket Strength Ratios

Price/earnings per shareprice per share/ earnings per share

(earnings per share= net income/ #outstanding shares)Common Stock A2003: (.00037)2004: (.00026)

Common Stock B2003: (.0015)2004: (.0012)*A small number at that, due mostly to the fact yet again that

Blockbuster is suffering a significant net loss.

Dividend yeilddividend per share/ stock price at year end

2003: .02/22.92= .00087 2004: .02/10.49= .00191