PLEASE PROVIDE EXCEL SHEET

On May 9, 1989, Bear Stearns & Co. issued a report on Blockbuster Entertainment Corp., which is reproduced in part below.

Blockbuster-Entertainment (Ticker symbol: BV, Price per share: $33 ) increased owned and franchised video stores from 19 at the end of 1986 to 415 at December 31, 1988. In the same period revenue jumped from $7.4 million to $136.9 million. Reported earnings also leaped; from $.34 per share in 1986 to $.57 per share in 1988. The stock carries an historical Price to Earnings ratio of 59, and there were 25,741,549 shares of common stock issued and outstanding as of 12/31/88.

A) Some of Blockbuster's mergers with other video rental companies have been recorded as purchases. In a merger treated as a purchase, the price paid is first allocated to the fair values of assets that can be kicked, picked up or painted. Any excess paid for the company beyond these "fair values becomes goodwill, which Blockbuster labels "intangible assets relating to acquired businesses." APB Opinion 17 requires that goodwill be amortized to income (expensed) over 40 years or less.

In the past, many companies automatically adopted 40 year amortization. Current practice (which is usually required by the SEC) is to relate the amortization period to the nature of the business acquired. Thus in a typical hi-tech acquisition the SEC requires goodwill to be amortized over 5 to 7 years; in bank purchases, over 15 to 20 years.

Other information: Eight of the eighty company-owned stores that appeared in the 1987 10-K (annual filing with the SEC) are not on the 1988 list. The maximum term of the company's franchise agreements is 25 years.

1) What is Blockbuster's amortization timetable? Do you think it is appropriate?

2) What would be the impact on Blockbuster's 1988 earnings per share if 5 year amortization were applied to this goodwill?

B) On April 20, Blockbuster announced an agreement to merge with its largest franchisee, Video Superstore. Video Superstore was Blockbuster's largest customer for videotapes, accounting for 10% of such sales in 1988, 21% in 1987, and 48% in 1986.

Since intra-company transactions are eliminated from the financial statements (it doesn't make sense to record sales to yourself!), these sales will disappear next year.

3) What would have been the effect on earnings per share if Video Superstore purchases were not included in 1988 revenues?

C) BV drastically slowed its depreciation (amortization) of "hit* video tapes at the start of 1988. In 1987 BV depreciated its rental videotape "hits" over nine months, straight line. At the start of 1988, it switched to a method it called "36 month accelerated. The financial statements do not disclose how accelerated the curve is, but do say that the company uses 150% of straight line, computed on a monthly basis. Thus, the resulting depreciation is as follows:

First 12 months 40%

Second 12 months 30%

Third 12 months 30%

4) Over what period does BV depreciate its "base stock videotapes?

5) What was the effect on earnings per share of the change in depreciation method for hit tapes (assume that hit tapes made up 25% of new tape purchases, and that the average hit tape was owned for half the year)?

D) BV also sells videotapes. However, most of the sales are in bulk to new franchisees, rather than to store customers. In 1988, 68% of sales were to franchisees.

6) What was the effect on earnings per share of these sales to franchisees?

E) BV charges franchisees various fees and discloses them in a somewhat confusing manner. The income statement shows, in revenues:

Royalties and other fees $8,142,000

However, Note 1 to the financial statements lists:

Royalties and other fees $7,590,000

Area Development fees 550,000

Initial franchise fees 2,415,000

The first two items total to the income statement amount, the third seems to be buried, inexplicably, in rental revenues.

7) What was the effect on 1988 earnings per share, of the non-recurring items: area development fees and initial franchise fees?

8) What would BV's 1988 earnings per share be after all of the above adjustments?

9) Ignoring #3 above, what would BV's 1988 earnings per share be after the above adjustments?

10) What would BV's Price/Earnings ratio be, given all of the above adjustments (including #3)?

Exhibit 2

Selected Excerpts: Blockbuster Entertainment Corporation 1988 Annual Report

BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

For the Years ended December 31,

(in thousands, except per share data)

1988

1987

1986

REVENUE:

Rental revenue

$87,299

$19,009

$ 2,893

Product sales

41,452

21.546

4,247

Royalties and other fees

8,142

2,673

298

136,893

43,228

7,438

OPERATING COSTS AND EXPENSES:

Cost of product sales

31,343

15,923

3,511

Operating expenses

63,638

16,429

5,152

Selling, general, and administrative

15,567

4,162

2,093

OPERATING INCOME (LOSS)

26,345

6,714

(3,318)

EQUITY IN LOSS OF AN AFFILIATE

(954)

INTEREST INCOME

626

456

228

INTEREST EXPENSE

(2,066)

(569)

OTHER INCOME, NET

92

104

INCOME (LOSS) BEFORE INCOME TAXES

24,997

6,705

(4,044)

PROVISION FOR (BENEFIT OF) INCOME TAXES

9,499

2,615

(823)

NET INCOME (LOSS)

$ 15,498

$ 4,090

$(3,221)

NET INCOME (LOSS) PER COMMON AND COMMON SHARE EQUIVALENT

$.58

$.28

$(.34)

NET INCOME (LOSS) PER COMMON AND COMMON SHARE EQUIVALENTASSUMING FULL DILUTION

$.57

$.28

$(.34)

Exhibit 2 (Continued)

BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

For the Years ended December 31,

(in thousands, except per share data)

ASSETS

1988

1987

CURRENT ASSETS

Cash and short term investments

$8,959

7,168

Accounts receivable, less allowances

5,617

2,596

Notes receivable from shareholders

7,919

Merchandise Inventories

17,901

8,440

Other

6,359

2,399

Total Current Assets

38,836

28,522

VIDEOCASSETTE RENTAL INVENTORY, NET

60,294

16,389

PROPERTY AND EQUIPMENT, NET

47,284

14,998

INTANGIBLE ASSETS RELATING TO ACQUIRED

BUSINESS, NET

24,754

12,149

OTHER ASSETS

5,599

2,127

176,767

74,185

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES

Current Portion of Long Term Debt

$3,139

$2,182

Accounts payable

34,131

10,587

Accrued liabilities

8,108

2,546

Current deterred income taxes

189

445

Advance payments from franchise owners

3,653

489

Total Current Liabilities

49,220

16,879

LONG TERM DEBT. LESS CURRENT PORTION

21,303

14,797

OTHER NONCURRENT LIABILITIES

1,293

451

DEFERRED INCOME TAXES

3,167

60

COMMITMENTS

SHAREHOLDERS' EQUITY:

Preferred Stock, $1 par value; authorized 500,000 Shares; none outstanding

Common Stock, $10 par value; authorized 40.000.000 and 20,000.000 shares, respectively; issued 25,741.549 and 17,995.092, respectively

2,574

1,800

Capital In excess of par value

84,806

40,572

Retained earnings (deficit)

15,124

(374)

Total Shareholders Equity

101,784

41,998

$176,767

$74,185

The accompanying notes are an Integral part of these statements.

Exhibit 2 (Continued)

BLOCKBUSTER ENTERTAINMENT CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

For the Years ended December 31,

(in thousands, except per share data)

1988

1987

1986

CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss)

$15,498

$4,090

$(3,221)

Adjustments to reconcile net income (loss) to net cash from (used in operating activities)

22,223

4,776

1,038

Depreciation and amortization

954

Equity in loss of an affiliate

Changes in operating assets and liabilities, net of effects from purchase transactions

Increase in accounts receivable

(3,132)

(1,211)

(1,264)

Increase in merchandise inventories

(9,309)

(5,068)

(3,153)

Increase in accounts payable and accrued liabilities

24,797

8,947

2,619

Increase (decrease) in advance payments from franchise owners

3,164

(1,511)

2,000

Increase in other working capital items, net

(3,984)

1,138

346

Other

(917)

1,378

346

NET CASH FLOW FROM (USED IN) OPERATING ACTIVITIES

48,340

10.263

(1,376)

CASH FLOWS FROM INVESTING ACTIVITIES

Collection of notes receivable

7,919

Purchase of videocassette rental inventory, net

(51,255)

(14,281)

(3,053)

Purchases of property and equipment, net

(31,224)

(10,519)

(4,133)

Used in acquisitions

(9,843)

(2,814)

Other

(2,805)

(1,174)

NET CASH USED IN INVESTING ACTIVITIES

(84,403)

(30,449)

(8,360)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from the issuance of common stock, net

36,094

17,800

3,898

Proceeds from long term debt

39,847

9,184

1,400

Repayments of long term debt

(38,807)

(2,794)

Other

(238)

150

NET CASH PROVIDED BY FINANCING ACTIVITIES

37,854

23,952

5,448

NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENT

1,791

3,766

(4,288)

CASH AND SHORT TERM INVESIMENTS, BEGINNING OF YEAR

7,168

3,402

7,690

CASH AND SHORT-TERM INVESTMENTS, END OF YEAR

8,959

7,168

3,402