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Rough Quarter for Blockbuster

It posts a wide loss, withdraws guidance and tweaks a credit line.
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swung to a substantial loss in the second quarter as online competition, lousy movies and piracy led to a 6.6% decline in same-store rental revenue.

The company withdrew its full-year forecast and said it had to get a waiver on the leverage-ratio covenant of its revolving credit facility in order to avoid a default. It also raised the price of its online movie rentals.

Blockbuster, which recently welcomed Carl Icahn and two of his allies to its board, lost $57.2 million, or 31 cents a share, in the quarter, compared with earnings of $48.6 million, or 27 cents a share, a year ago.

Excluding compensation charges and various writedowns, the company lost $40.2 million, or 22 cents a share, in the most recent quarter. On that basis, analysts had been expecting a loss of 10 cents a share.

Blockbuster's revenue fell 1.6% from a year ago to $1.40 billion, reflecting the curtailment of "extended viewing" charges under its no late fee initiative. Base rental fees were $999.5 million in the second quarter of 2005, up from $917.0 million a year ago, while merchandise sales were $360.4 million, down from $323.2 million.

Analysts had been forecasting revenue of $1.45 billion in the quarter.

Blockbuster said the elimination of late fees cost it $140 million in lost revenue in the latest quarter.

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The company cited "a substantially weaker home video-release schedule," "increased competition for consumers' leisure time from other forms of entertainment," "competition from online rentals and retail mass merchants" and piracy in some international markets for the revenue decline.

Blockbuster said it won't be able to achieve its goals for full-year 2005, which had previously called for operating profit that was roughly equal to 2004's before costs related to the no late fee program and stock-based compensation.

"As a result of the uncertainty and continued decline in the rental industry, the company is no longer on track to achieve this guidance and is unable to forecast 2005 results with reasonable certainty," it said. On the bright side, the company said results in the fourth quarter should exceed those in the third.

Blockbuster also had to tweak provisions of a credit line.

"On Aug. 8, the company amended its credit facility to provide for a waiver of certain financial covenants for the second and third quarters of 2005 and amended certain other aspects of the credit agreement," the company said.

"The company will have full access to the revolving credit facility during the waiver period, subject to the terms of the amendment. Without the waiver, the company would have been in default of the leverage ratio covenant for the second quarter of 2005."

In a separate release, Blockbuster said it was raising its subscription price for three movies rented over the Internet, to $17.99 from $14.99. The hike brings the rate in line with that charged by


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