Blockbuster Says Bankruptcy A Possibility - Update

(RTTNews) - Video-rental chain Blockbuster Inc. (BBI: News ) said Tuesday that it is in talks with Hollywood studios to reduce DVD costs, and may need to file for Chapter 11 bankruptcy protection.

In its annual Form 10-K filing with the U.S. Securities and Exchange Commission, the Dallas, Texas-based company said it was discussing with the studios the possibility of using its Canadian stores as collateral for accounts payable to studios because it could not access bank credit. The Canadian assets that Blockbuster may use as collateral include 459 company-owned stores.

Blockbuster disclosed in the filing, "We are currently in discussions with several major studios to maintain or improve our existing credit terms by pledging our unencumbered Canadian assets as collateral for our domestic studio payables. As an alternative, we may borrow against our unencumbered Canadian assets. However, there can be no assurance that we can execute either alternative."

The company further said it was pursuing an exchange of all or parts of its senior subordinated notes for Class A common stock as part of efforts to maximize its cash and cash equivalents over the near term. The company's aggregate principal indebtedness under the senior secured notes and the senior subordinated notes was $975.0 million as of January 3, 2010.

Blockbuster also said, "Given our liquidity limitations and uncertainty surrounding our ability to finance our obligations, we are currently in discussions with several of the large studios regarding the credit terms for our inventory purchases. If the studios tighten their credit terms or if studios eliminate their provision of credit to us altogether, this could result in up-front cash commitments that we may be unable to sustain on a long-term basis given our debt service and other business obligations."

Blockbuster added that if the studios go through with their efforts to tighten credit terms and its financial situation doesn't improve, bankruptcy is a possibility.

"Should we not be able to generate sufficient cash flow from operations and should the studios tighten or eliminate credit terms, we may determine that it is in the Company's best interests to voluntarily seek relief through a pre-packaged, pre-arranged or other type of filing under Chapter 11 of the U.S. Bankruptcy Code," the company said.

Blockbuster has been hard hit in North America by the rise of both, the DVD-by-mail subscription service of Netflix Inc. (NFLX: News ) and the expansion of low-cost automated rental kiosks run by Coinstar Inc.'s (CSTR: News ) Redbox subsidiary.

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