STATES UNITED DISTRICT COURT NORTHERN DISTRICT OF TEXAS
ELAINE SCHNEIDER , Individually and On Behalf of All Others Similarly Situated, Plaintiff, vs. BLOCKBUSTER, INC, NATIONAL AMUSEMENTS, INC ., VIACOM, INC ., JOHN F . ANTIOCO, RICHARD J . BRESSLER, JACKIE M . CLEGG, PHILIPPE P . DAUMAN, MICHAEL D . FRICKLAS, LINDA GRIEGO, MEL KARMAZIN, JOHN L . MUETHING, SUMNER M . REDSTONE, and LARRY J . ZINE, Defendants .
CIVIL ACTION NO .
CLASS ACTION COMPLA INT
JURY TRIAL DEMANDED
Plaintiff, Elaine Schneider ("Plaintiff'), alleges the following based upon the investigatio n of Plaintiffs counsel, which included, among other things, a review of the defendants' public documents , conference calls and announcements made by defendants, United States Securities and
Exchange Commission ("SEC") filings, wire and press releases published by and regarding
Blockbuster , Inc . ("Blockbuster" or the "Company") securities analysts' reports and advisories about the Company, and information readily obtainable on the Internet . NATURE OF THE ACTIO N
1 . This is a federal securities class action on behalf of a class consisting of all person s
other than defendants who purchased Blockbuster pursuant to the Company's exchange offer o f Viacom, Inc . ("Viacom") stock for 144 million common shares of Blockbuster ("the Exchang e Offer"), and on behalf of those who purchased Blockbuster shares in the open market between -I-
September 8, 2004 and August 9, 2005, seeking to pursue remedies under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act") . 2 . Blockbuster and its subsidiaries engage in operation and franchise of entertainment-related stores in the United States and internationally . 3 . On February 10, 2004, Viacom announced that it intended to divest itself of its majority interest in Blockbuster in what it characterized as a "tax free Splitoff' (the "Splitoff') . In connection with the Splitoff, Viacom declared a dividend of $5 per share, payable September 3, 2004, to Blockbuster shareholders of record at the close of business on August 27, 2004 . As the owner of 147,600,352 shares of Blockbuster Class A common stock, Viacom received a total Blockbuster dividend of $738,001,760 . As a consequence of the dividend, Blockbuster had to incur approximately $900 million of debt, which defendant Jackie M . Antioco, Blockbuster's Chairman and Chief Executive Officer, publicly declared was not going to harm the Company . 4. Following the Splitoff, Blockbuster planned to initiate a new and ambitious busines s strategy to transform itself "from a place where you go to rent a movie to a brand where you go to rent, buy, or trade a movie or game[ .]" In executing the new approach, Blockbuster introduced a series of initiatives including internet sales, in-store movie subscription, in-store game subscription, and eliminated late fees . 5 . The complaint alleges that defendants' Class Period representations regardin g Blockbuster were materially false and misleading when made for the following reasons : (1) that the Splitoffand payment of the special dividend left Blockbuster without the financial resources required to implement its ambitious strategic plan ; (2) that the Company, due to outdated equipment and inventory tracking issues, could not support the "No More Late Fees" program, as such could no t
-2-
integrate its in-store and online operations ; (3) that the Company was experiencing difficultie s launching its in-store DVD trading program, because it lacked adequate internal controls ; and (4) that the Splitoff was engineered not to benefit Blockbuster but rather, to allow Viacom to rea p hundreds of millions of dollars in proceeds from the pre-Exchange Offer Special Dividend and t o reduce the public float of Viacom . 6 . On August 9, 2005, Blockbuster announced that total revenues decreased 1 .6% to $1 .40 billion for the second quarter of 2005 from $ 1 .42 billion for the second quarter of 2004 . On this news, shares of Blockbuster fell $0 .92 per share, or 11 .49 percent, to close at $7 .09 per share . 7. On October 26, 2005, Blockbuster confirmed that the Company had a meeting with its lender group to discuss modifications to its credit agreement that would give the Company improved operating flexibility over the term of the original credit agreement and that as part of the modifications, the Company would pursue raising additional capital that would be used for working capital purposes including debt reduction . 8 . On November 8, 2005, Blockbuster announced that it could be forced into bankruptc y protection if a credit-pact amendment with creditors does not become effective, and stated that " a very large majority" of its assets already are pledged as collateral on loans and creditors are imposin g stricter terms . By this time share of Blockbuster were trading as low as $4 .20 per share . JURISDICTION AND VENU E 9 . The claims asserted herein arise under and pursuant to Sections 11, 12(a)(2) and1 5
of the Securities Act [15 U.S .C. 77k, 771(a)(2) and 77o] and Sections 10(b) and 20(a) of the
Exchange Act [15 U .S .C. 78j(b), 78n(a), and 78t(a)], and Rule 1 Ob -5 promulgated thereunder b y the SEC [17 C.F.R. 240 .10b-5 1 .
-3-
10 . This Court has jurisdiction of this action pursuant to Section 22 of the Securities Ac t [15 U.S .C. 77v], Section 27 of the Exchange Act and 28 U.S.C. 1331 and 1337 . 11 . Venue is properly laid in this District pursuant to Section 22 of the Securities Act , Section 27 of the Exchange Act and 28 U .S.C. 1391(b) and (c) . Many of the acts and transactions
alleged herein, including the preparation and dissemination of materially false and misleading
information, occurred in substantial part in this Judicial District. 12. In connection with the acts, conduct and other wrongs alleged in this complaint , defendants, directly or indirectly, used the means and instrumentalities of interstate commerce , including but not limited to, the United States mails, interstate telephone communications and the facilities of the national secu rities exchange . PARTIE S 13 . Plaintiff, Elaine Schneider, as set forth in the accompanying certification , incorporated by reference herein, purchased Blockbuster secu rities at artificially inflated prices . 14 . Defendant Blockbuster is a Delaware corporation with its principal executive office s
located at 1201 Elm Street, Dallas, TX 75270.
15 . Defendant National Amusements, Inc . ("National Amusements") is a closely held corporation that owns and operates movie screens in the United States ("U.S."), the United Kingdom ("U .K.), South America and Russia . Defendant Sumner M . Redstone is the controlling shareholder ofNational Amusements . National Amusements, through its wholly owned subsidiary, NA[RI, Inc . beneficially owns Class A Common Stock of Viacom representing approximately 71 percent of the voting power of all classes of Vicacom's Common Stock, and approximately 12 percent of the Company's Class A Common Stock and Class B Common Stock on a combined basis .
-4-
16. Defendant Viacom is a Delaware corporation with its principal place of busines s
located at 1515 Broadway, New York, NY 100036 .
17. Defendant John F . Antioco ("Antioco") was, at all relevant times, Chairman an d
Chief Executive Officer of Blockbuster .
18 . Defendant Richard J. Bressler ("Bressler") was, at all relevant times until the Splitoff, a director of Blockbuster and the Senior Executive Vice President and Chief Financi al Officer o f Viacom. 19 . Defendant Jackie M. Clegg ("Clegg") was, at all relevant times, a director o f Blockbuster. 20. Defendant Phillippe P . Dauman ("Dauman") was, at all relevant times until th e Splitoff, a director of Blockbuster and a director of Viacom . 21 . Defendant Michael D. Fricklas ("Friclas") was, at all relevant times until the Splitoff, a director of Blockbuster and the Executive Vice President, General Counsel and Secretary of Viacom. 22. Defendant Linda Griego ("Greigo") was, at all relevant times, a director o f Blockbuster. 23 . Defendant John L . Muething ("Muething") was, at all relevant times, a director o f Blockbuster . 24. Defendant Sumner M . Redstone ("Redstone") was, at all relevant times, Chairma n and Chief Executive Officer of Viacom and, until the Splitoff, a director of Blockbuster . Defendant Sumner M . Redstone is the controlling shareholder of National Amusements . Nationa l Amusements, through its wholly owned subsidiary, NAIRI, Inc . beneficially owns Class A Common
-5-
Stock of Viacom representing approximately 71 percent of the voting power of all classes of Vicacom's Common Stock, and approximately 12 percent of the Company's Class A Common Stock and Class B Common Stock on a combined basis . 25 . Defendant Larry J . Zine ("Zine") was, at all relevant times, Chief Financial Officer of Blockbuster . 26 . Defendant Mel Karmazin ("Karmazin") was, at all relevant times until the Splitoff, a Blockbuster director.
27 . Defendants identified in 17-26 are collectively referred to hereinafter as th e
"Individual Defendants ." The Individual Defendants, because of their positions with the Company, possessed the power and authority to control the contents of Blockbuster's quarterly reports, press releases and presentations to securities analysts, money and portfolio managers and institutional investors, i .e., the market . Each defendant was provided with copies of the Company's reports and press releases alleged herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected . Because of thei r positions and access to material non-public information available to them but not to the public, each of these defendants knew that the adverse facts specified herein had not been disclosed to and were being concealed from the public and that the positive representations which were being made were then materially false and misleading . The Individual Defendants are liable for the false statements pleaded herein, as those statements were each "group-published" information, the result of the collective actions of the Individual Defendants . SUBSTANTIVE ALLEGATION S 28 . Blockbuster and its subsidiaries engage in operation and franchise o f
-6-
entertainment-related stores in the United States and internation ally. The Company offers
prerecorded videos, as well as video games, for in-store rental, sale and trade, and also sells othe r entertainment-related merchandise. It also operates BLOCKBUSTER ONLINE, an online servic e
offering rental of movies delivered by mail . As of September 30, 2005, the Company operated 9,07 6 stores. The Company was founded in 1982 and is headquartered in Dallas, Texas . 29. On February 10, 2004, Viacom announced that it intended to divest itself of it s
majority interest in Blockbuster in what it characterized as a "tax free Splitoff." In its press release ,
Viacom justified its decision to split "based on the conclusion that Blockbuster would be bette r positioned as a company completely independent of Viacom ." Also, on February 10, 2004, defendant Antioco, made the following statements with respect to the Splitoff "We believe Blockbuster will compete very effectively as an independent company and that separation from Viacom will enable us to better pursue our unique strategic vision and significant avenues for expansion. With our brand, our cash flow, and our growth opportunities, we are convinced that the prospects for our business are exceptionally strong ." 30. In connection with the Splitoff, Viacom declared a dividend of $5 per share, payabl e September 3, 2004, to Blockbuster shareholders of record at the close of business on August 27 , 2004 . As the owner of 147,600,352 shares of Blockbuster Class A common stock, Viacom receive d
a total Blockbuster dividend of $738,001,760 . Prior to the payment of the dividend, Blockbuster had
been a virtually debt free Company. As a consequence of the dividend, Blockbuster had to incu r approximately $900 million of debt, which defendant Antioco publicly declared was not going t o harm the Company. 31 . Following the Splitoff, Blockbuster planned to initiate a new and ambitious business
-7-
strategy to transform itself "from a place where you go to rent a movie to a brand where you go t o
rent, buy, or trade a movie or game[ .]" In executing the new approach, Blockbuster introduced a series of initiatives including internet sales , in-store movie subscription, in-store game subscription , and eliminated late fees . FALSE AND MISLEADING STATEMENTS 32. On September 8, 2004, Viacom issued a press release entitled "Viacom Announce s Commencement Of Blockbuster Split-Off Exchange Offer ." Therein, Viacom stated : Viacom Inc . (NYSE: VIA and VIA .B) today announced that it has commenced an offer to its stockholders for the exchange, on a tax-free basis, of some or all of their shares of Viacom stock for shares of Blockbuster Inc. (NYSE : BBI) held by Viacom . Assuming the exchange offer is fully subscribed, Viacom will dispose of its entire ownership interest in Blockbuster , which currently totals approximately 81 .5% of Blockbuster's outstanding shares . Under the terms of the offer, each holder of Viacom Class A Common Stock and Viacom Class B Common Stock will receive 5.15 shares of Blockbuster stock, consisting of 2 .575 shares of Blockbuster Class A Common Stock and 2 .575 shares ofBlockbuster Class B Common Stock, in exchange for each Viacom share tendered . Viacom will accept pursuant to the offer up to an aggregate of 27,961,165 shares of Viacom Class A and Class B common stock. The exchange offer will expire at 12 :00 midnight, New York City time, on October 5, 2004. The terms and conditions of the exchange offer are more fully described in a Blockbuster Registration Statement on Form S-4 and a Viacom Schedule TO being filed with the Securities and Exchange Commission today . Under the terms of the offer, a shareholder accepting the offer would receive shares of Blockbuster Common Stock with a value, based on closing market prices on September 7, 2004, representing a premium of approximately 19.2% over the closing price on that date of a share of Viacom Class B Common stock . The premium over the price of a share of Viacom Class A Common Stock on that date would be 17 .6% . The actual premium will differ depending on changes in market prices through the consummation of the offer and the price o f
-8-
Blockbuster Class B Common Stock at the time the Blockbuster Class B. Common Stock begins to trade . Viacom currently owns 144 million shares of Blockbuster Cl as s B Common Stock, representing all of the outstanding shares of Blockbuster Class B Common Stock . Subject to the satisfaction of certain conditions to ensure the tax- free nature of the exchange offer, Viacom will convert 72 million shares of Blockbuster Class B Common Stock, on a one -for-one basis, into shares of Blockbuster Class A Common Stock p ri or to the completion of the exchange offer. As a result of this conversion, the outstanding Blockbuster common stock after completion of the exchange offer will consist of approximately 60% Blockbuster Class A Common Stock and 40% Blockbuster Class B Common Stock . It is currently expected that, after the tr ansaction is completed, the number of votes per share of Blockbuster Class B Common Stock will be reduced from five votes per share to two votes per share . 33 . On September 8, 2004, Blockbuster filed with the SEC a Prospectus -Offer to Exchange (the "Prospectus") . In the Prospectus, defendant Antioco, stated : As you consider this exchange offer being made by Viacom, I want to take this opportunity to summarize my personal vision for Blockbuster. Whatever the competitive set mass merchants, "rentailers," game boutiques or online rental services-Blockbuster plans to set itself apart from the competition by transforming itself from a place where you go to rent a movie to a brand where you go to rent, buy or trade a movie or game, new or used, pay-by-the-day, pay-by-the-month, in-store or online . When we achieve this vision, I believe Blockbuster will be a multi-dimensional, highly differentiated and highly profitable home entertainment brand. We see the opportunity for the future growth of Blockbuster . We also see the challenges that face our company and our business, which we have discussed in the Prospectus-Offer to Exchange . As you consider Viacom's exchange offer, please take the time to read and consider the entire Prospectus-Offer to Exchange . Two years ago Blockbuster announced its new corporate mission statement : "to be a complete source for movies and games ." Since that time, we have come a long way in redefining BLOCKBUSTER@ as a place where customers can not only rent movies and games , but also buy and trade them as well .
-9-
Given Blockbuster's ongoing transformation from a ""rentailing-only" company into a specialty retailer of home entertainment, we believe now is an appropriate time for us to separate from Viacom. Over the course of the past ten years, Viacom has been a supportive majority stockholder, but as Blockbuster has moved to participate on a broader scale in the home entertainment retailing marketplace, we have moved away from the core media business of Viacom. Blockbuster and Viacom have different competitive strengths, different operating philosophies, and different strategies designed to achieve future growth. However, Blockbuster and Viacom are united in the belief that a split-off of Blockbuster from Viacom will enable each company, respectively, to better focus its managerial and financial resources . A brief history of Blockbuster' s transformation As a fully independent comp any, we are looking forward to accelerating our transformation into a speci alty retailer of home entertainment. We began this transformation process in 2002 when we established Blockbuster in a much mo re significant way in the movie retailing business . At that time, we inc reased our retail movie inventory, merchandising presence and advertising , and implemented various retail sales promotions . It was all part of a plan to have customers notice that there was something new at Blockbuster, and notice they did . We were successful at establishing Blockbuster as a movie retailer, as well as a "rentailer." Our mission didn't change in 2003 . We continued to dedicate ourselves to expanding our movie and game offerings, and to accomplishing this transformation more profitably by improving gross margins, reducing low-profit transactions, reducing advertising expenditures and refining marketing programs to give us a better return on investment. This focus on profitability played a central role in our efforts to transform Blockbuster , as the steady operating cash flow from our core rental business has provided us with the ability to invest in new initiatives . Specifically, these new initiatives are rental subscription programs (both in-store and online), movie and game trading, and video game concepts .
-10-
Our plan going forward is to capture a larger share of the domestic rental market and drive more rental customers into our stores through a combination of marketing, promotion, and new rental offerings . As a result, we intend to be able to expose a growing number of customers to our expanding number of new offerings with the goal of increasing the size and number of our transactions and, eventually, our profitability . To accomplish all of this, we intend to reinvent the way people rent home entertainment, and we intend to do this through our rental subscription programs-both in-store and online . In late May of this year, we began offering on a national basis the BLOCKBUSTER MOVIE PASSIM, our store-based movie subscription program that we have been testing in multiple markets since the summer of 2002 . For a flat monthly fee, the movie pass allows customers to rent an unlimited number of movies, two or three at a time, without return dates or extended viewing fees for as long as they subscribe to the pass . We see the movie pass as a key means of increasing our rental traffic in a tough rental market . Our goal is to have 8% of our active monthly members on the service by the end of this year and 10% of our active monthly members paying us a monthly fee by the end of 2005 . As for renting movies online, we see this as a sizable opportunity that can cont ribute to our long-term profitability. As a defensive strategy, we don 't want customers , who are interested in renting online, going anywhere else for their movies . As an offensive move, we think online rentals could represent new customers for us because many potential subscribers live outside the proximity of a BLOCKBUSTER store. To begin serving these potential online customers, we launched an online rental service in the United Kingdom in mid-May, and launched BLOCKBUSTER OnlineTM, our online rental service in the United States, in August. Our plan is to utilize the full power of our globally recognized brand, our marketing ability, our rich customer database and the promotional opportunities afforded by our store network to gain as many subscribers as possible . We see no reason why we can't have a substantial share of the online rental transactions by the end of next year . We are also proceeding with our plans to merge our U.S. in-store and online subscription programs in 2005 . This integrated approach should give ou r
-11-
customers the best of both worlds-the ability to rent or return movies by mail or at their local BLOCKBUSTER store. The movie and game trading business-a new growth opportunity Another opportunity we are aggressively pursuing and plan to have in place in 2004 is movie and game trading . We believe movie and game trading at Blockbuster represents a significant source of future incremental revenues . Many of the DVDs purchased in the United States last year were previously viewed, and Blockbuster is already the nation's largest retailer of used DVDs. We believe that our customers, who are already accustomed to buying previously rented DVDs from us, will be interested in selling and buying previously owned DVDs at Blockbuster as well . *** We first offered the concept of movie trading at our stores during the holiday season of 2003 with our Big DVD Trade-In promotion that gives customers the opportunity to trade in a used DVD and purchase a popular, new title for a reduced price. Also, we have been testing a more comprehensive trading model that enables customers to receive store credit for their used DVDs, which can be used for anything in our stores-movies, games or merchandise. While our trading program is still in its early stages, we believe a strong demand for DVD trading will emerge as consumers learn that trading is a smart, economical way to refresh their movie libraries or monetize their collections . So movie trading is one more benefit we can offer our customers , one more way we can leverage our existing store locations and store traffic and one more way we can differentiate Blockbuster from traditional retailers . We have tested the trading market since 2002 with the acquisitions of Movie Trading Company and GAMESTATION, which are freestanding trading store chains. We intend to have movie and game trading available in more than 2 ,000 of our U.S. stores and all of our 700-plus U.K. stores by the end of 2004 .
In summary
-12-
The home entertainment market has changed significantly in the past few years, largely due to the emergence of retail-priced DVD, the resulting competition from mass merchants and the increasing availability of other entertainment options . These changes have presented our industry with challenges ; however, they have also presented us with new opportunities, including rental subscription programs, online and in-store, movie and game trading, and games store-in-stores, which have the potential to contribute significantly to our operating profits . All of these initiatives require financial investment . Investment in new information technology systems, store facilities, new processes to ensure employee productivity, marketing, incentives for store personnel, aggressive promotions, and much more . These initiatives also require investments of people resources and a lot of hard work . In short, our transformation will not be easy . I believe we are up to the challenge and that we will be better equipped to achieve our goals as an independent, stand-alone company rather than as a subsidiary of Viacom. Blockbuster is a great brand and a great retailing concept . We have approximately 9,000 stores worldwide . We have a plan in place that should allow us to grow our business, and I believe we have the management team, the employees and the franchisees that will enable us to transform Blockbuster into the complete source for movies and games . Sincerely, JOHN ANTIOCO (Emphasis added.)
34 . Moreover, Blockbuster, in the Prospectus stated : Why has Viacom decided to separate Blockbuster from Viacom ?
A: Viacom's board of directors has authorized the divestiture of its approximately 81 .5% interest in Blockbuster . As a result of the divestiture, Blockbuster will be an independent entity . Each company believes that the separation of Blockbuster from Viacom will provide numerous corporate benefits to itself and the other company, the most important of which are listed below . Facilitate Viacom 's and Blockbuster' s Respective Expansion and Growth . Viacom and Blockbuster have significantly different
-13-
competitive strengths and operating strategies, and each company believes that the separation of Blockbuster from Viacom, which is referred to in this Prospectus -Offer to Exchange as the "split-off," will strengthen its ability to focus its managerial and financial resources on developing and growing its core businesses . Viacom is a diversified, broad-based media business, and desires to emphasize capital investment opportunities in its core businesses, rather than investing capital in initiatives that would enhance Blockbuster's growth . Blockbuster is in the rental and retail home video and game industry and shares many more characteristics with other retailers than with Viacom's other businesses . Blockbuster has a number of strategic initiatives that it is currently pursuing in response to industry changes . For example, Blockbuster has plans to expand its rental subscription programs and to continue to develop its games concepts and its movie and games trading model . Execution of these initiatives will move Blockbuster 's business further away from Viacom' s areas of strategic focus . Resolve Appearance of Competitive Conflicts Involving Blockbuster and Paramount Pictures . Paramount Pictures Corporation, a Viacom subsidiary, is in the motion picture business and competes with other movie studios . As a result, Blockbuster believes that the other movie studios, which supply Blockbuster with its movies, consider Blockbuster's af filiation with Paramount Pictures to be a conflict of interest. Similarly, because Paramount Pictures supplies movies to Blockbuster ' s competitors in the video rental market , Viacom believes that Blockbuster's competitors, who are customers of Paramount Pictures, view Paramount Pictures as having a conflict of interest . The split-off should eliminate these perceived competitive conflicts . Facilitate Investment Decisions by Stockholders . Following the split- off, it will be easier for potential investors to assess Viacom and Blockbuster on an independent basis and choose the company in which to invest and in what relative percentages . The split-off is expected to enable Viacom stockholders who currently own an indirect interest in Blockbuster through Viacom to convert their investment to a direct ownership of Blockbuster in a tax-efficient manner. (Emphasis added.) 35 . On October 19, 2004, Blockbuster revealed that it was engaged in a "price-war" with
-14-
its online competitor NetFlix . Furthermore, the Company announced that it would cut its monthly
fee to $17 .49 per month.
36 . On October 27, 2004, Blockbuster issued a press release entitled "Blockbuste r Reports Third Quarter 2004 Results." Therein, the Company, in relevant part, stated: Blockbuster Inc . (NYSE : BBI, BBI.B), a leading global provider of in-home movie and game entertainment, today announced financial results for the third quarter ended September 30, 2004 . Total revenues increased 1 .8% to $1 .41 billion for the third quarter of 2004 from $1 .38 billion for the third quarter of last year . The Company recorded non-cash charges totaling $1 .50 billion, or $7 .84 per share after tax, to impair goodwill and other long-lived assets, resulting in a net loss of $1 .42 billion, or $7 .82 per share, for the third quarter of 2004 . Excluding the impact of the impairment charges, adjusted net income totaled $3 .4 million, or $0 .02 per diluted share for the third quarter of 2004 . This compares with net income of $63.7 million, or $0 .35 per diluted share for the third quarter of 2003 . The impact of the impairment charges for the third quarter and nine months of the year ended September 30, 2004 is presented on page five of the financial tables . "We are excited about having successfully completed our divestiture from Viacom and are pleased with the significant progress we made during the quarter with our plan to transform Blockbuster from a 'rentailer' into a complete source for movies and games," said John Antioco, Blockbuster Chairman and CEO . "In keeping with this plan, we successfully launched our online subscription program well ahead of schedule, exceeded our subscription expectations for both our in-store and online passes, and aggressively rolled out movie and game trading to thousands of stores . To support these initiatives, as indicated in our previous guidance, we accelerated investment spending and this, along with continued softness in the movie rental industry, impacted our profitability . However, we believe we are taking the right steps to position Blockbuster for future growth in both revenues and profits . "
Fourth Quarter and Full Year 2004 Business Outloo k
-15-
The following are the Company's current expectations for the fourth quarter and full year 2004 results of operations . * The Company expects profitability for the fourth quarter of 2004 to decline significantly from last year based on an estimated low-single digit percentage decline in worldwide same-store revenues , a significant year-over-year increase in operating expenses associated with the development and launch of the key growth initiatives, an anticipated compensation charge ranging from $60 to $ 80 million associated with an employee stock option exchange offer and higher interest expense resulting from the assumption of debt as a result of payment of the special distribution to stockholders in September 2004 . Worldwide same-store revenues will be affected by continued weakness in the rental industry which will be further impacted by both Christmas and New Year's holidays occurring on a weekend. This impact will be partially offset by revenues from the new initiatives . * The Company expects the percentage increase in total revenues for the full-year 2004 to be in the low-single digit range as a result of favorable impact of foreign exchange and growth in the store base . ** * * Profitability for the full -year 2004 will decline significantly because of the goodwill impairment charge, the accelerated initiative investment, continued weakness in the rental business, the anticipated charge associated with the employee stock option exchange offer and higher interest expense associated with the additional $950 million in debt . As a result, the Company's prior guidance for an approximately 30% decrease in 2004 diluted earnings per share from adjusted diluted earnings per share of $1 .48 for the full-year 2003 is no longer relevant and year-over-year results are not comparable . * For the full-year 2004, the Company expects to open approximately 400 company-operated stores . * Capital expenditures for the full-year 2004 are expected to be approximately $280 million, compared with the $176 .8 million recorded in 2003 . The increase in capital expenditures is related primarily to the investment in systems and infrastructure to suppor t -16-
the Company's key growth initiatives, including rental subscription programs, movie and game trading and store-in-store game concepts . Full Year 2005 Business Outlook The Company expects the rental industry to continue to decline in 2005, but believes the rental industry will stabilize by the end of 2005 as DVD penetration is projected to reach 70% of U .S . households . Additionally , the Company expects to continue to invest heavily in the business in 2005, which combined with projected softness in rental revenues, will adversely affect profitability for the full year 2005 . (Emphasis added .) 37. On March 9, 2005, Blockbuster issued a press release entitled "Blockbuster Reports Fourth Quarter and Full Year Results - Revenues Top $6 .1 Billion ." Therein, the Company, in relevant part, stated : Blockbuster Inc . (NYSE : BBI, BBLB), a leading global provider of in-home movie and game entertainment, today reported financial results for the fourth quarter and full year ended December 31, 2004 . Total revenues increased 6 .3% to $1 .72 billion for the fourth quarter of 2004 from $1 .62 billion for the fourth quarter of last year. For the full year, total revenues increased 2 .4% to $6 .05 billion for 2004 from $5.91 billion last year. Net income for the fourth quarter of 2004 totaled $0 .9 million . Adjusted net income for the fourth quarter of 2004 totaled $12 .3 million, or $0 .07 per diluted share, excluding non-cash share-based compensation charges . This compared with a net loss of $1 .19 billion, or $6 .57 per share, for the fourth quarter of 2003 . Adjusted net income for the fourth quarter of 2003, excluding non-cash impairment charges, totaled $58 .0 million, or $0 .32 per diluted share . The impact of these charges for the fourth quarter and full year ended December 31, 2004 and 2003 is reflected on page 5 of the financial tables . "During 2004, Blockbuster invested in new customer propositions designed to improve our competitive position in the home entertainment marketplace and strengthen our future revenues and profits," said John Antioco, Blockbuster Chairman and CEO . "We are
-17-
especially delighted with the rapid growth of our online business, which, in just seven months, has built a base of more than 750,000 subscribers . Based on our initial success in this area, we are accelerating our investment in BLOCKBUSTER Online, with a goal of achieving more than 2 million subscribers by the first quarter of 2006." "We are also very pleased with the early results of "No Late Fees" . While this was a significant investment, our transactions are increasing and our active member counts are trending up for the first time in almost two years . We firmly believe that the elimination of extended viewing fees will help revitalize our core rental business ."
Business Outlook The following are the Company's current expectations for 2005 : * The percentage increase in total revenues for 2005 is expected to be in the low-single digit range over 2004 as a result of growth in active members and growth in the store base . * For the full-year 2005, the Company projects that extended viewing fees would have contributed approximately $250 million to $300 million to operating income, which is expected to be offset by growth in revenues resulting from increased store traffic, less promotional and marketing activity, and increased focus on operating expense management . * The Company expects operating income for the full-year 2005 to be flat with adjusted operating income for full-year 2004 before the initial marketing and implementation costs of approximately $50 million associated with the launch of Blockbuster's "No Late Fees" policy and approximately $40 million in share -based compensation costs associated with the adoption of FAS 123R . However, operating income for the first quarter of 2005 will be reduced by approximately $80 million in projected operating income from extended viewing fees, approximately $ 60 mi ll ion in operating costs for BLOCKBUSTER Online, and approximately $ 50 million in launch costs for "No Late Fees."
* In order to build on the initial success of BLOCKBUSTER Online, -18-
the Company will spend an incremental $ 70 million in 2005 to further accelerate subscriber growth . This incremental spend is expected to be offset with an SG&A reduction plan to be implemented across the company beginning in the second quarter of 2005 . The total operating costs for BLOCKBUSTER Online for 2005 are expected to be approximately $120 million . * Total capital expenditures for the full-year 2005 are expected to be approximately $150 .0 million, compared with the $274 .9 million recorded in 2004 . This reflects fewer new store openings, fewer store remodels and fewer additions of freestanding and game store-in-stores. (Emphasis added .) 38. On April 7, 2005, Carl Icahn, on of the Company' s largest investors, sent a public letter to Blockbuster and defendant Antioco criticizing him for his excessive pay package of $5 1 million, seeking increased dividend payments, and wasting shareholder money .
39. On April 18, 2005, Blockbuster issued a press release entitled "Blockbuster Reaffirm s
Corporate Strategy - Addresses Icahn's Statements ." Therein, the Company, in relevant part, stated : Dear Mr. Icahn, The Board of Directors I and have reviewed the issues raised in your April 7, 2005, letter . We strongly object to your criticism and believe that it is both inaccurate and potentially misleading to our other shareholders . Since late 2003, Blockbuster has been following a well-planned and broadly communicated strategy that is essential to confront the significant challenges facing our industry . This strategy, which is designed to revitalize our core rental business and create alternative revenue sources, is working . We believe abandoning this strategy would be shortsighted and could bring about a precipitous drop in our future cash flow from which there may be no recovery. A key feature of our growth strategy is the recently introduced "End of Late Fees " program , which directly addresses the major problem customers had with their movie rental expe rience . The program also positions us better to compete with home entertainment options that
-19-
do not have late fees, including retail DVD, pay-per-view and VOD . To date, the "End of Late Fees" program is producing the desired results. Since the first of January when we introduced the program, we have had positive growth in active membership for the first time in nearly two years . Another critically important initiative - and the only significant investment we intend to make this year - is our online rental business. Blockbuster is uniquely positioned to compete in this fast growing business . Given the views of leading industry experts that within three years online rental could represent 20% to 30% of movie rental revenues, it is imperative that we pursue this opportunity, which we believe will mean hundreds of millions of dollars in future operating income for our company. Furthermore , your characterization of Blockbuster 's essential investments in the business as a "spending spree" is simply wrong . We are prioritizing new initiatives, investing wisely for the future and cutting costs aggressively . We have cut 2005 capital spending by over $100 million from last year and reduced corporate overhead by $70 million on an annualized basis . Additionally, to reduce costs further and better focus our resources, we have put our game initiative, as well as the marketing of our movie trading business, on hold until 2006 .
On a more personal note, the figure you reference in regards to my 2004 compensation is not correct as it takes into account compensation that has not yet been earned or paid . Our independent directors and their advisors specifically designed my compensation package to achieve a payout over the next five years in order to align my interests with the interests of Blockbuster's shareholders . In closing, Blockbuster is engaged in a strategy that requires tremendous focus and enthusiastic execution by all our employees . The turmoil and uncertainty you have created threaten to distract the organization and jeopardize our success and could prove damaging to shareholder value . The Board of Directors and I are committed to build and fight for the future of Blockbuster .
-20-
Sincerely, /s/John F . Antioco Blockbuster Chairman & CEO (Emphasis added.) 40. On March 29, 2005, Blockbuster filed its annual report with the SEC on Form 10-K .
The Company's Form 10-K was signed by defendant Antioco and reaffirmed the Company' s
previously announced financial results . In the Form 10-K, the Company represented : BLOCKBUSTER OVERVIE W Blockbuster Inc . is a leading global provider of in-home rental and retail movie and game entertainment, with approximately 9,100 stores in the United States, its territories and 24 other countries as of December 31, 2004 . Our focus in 2004 was on furthering our mission to become a complete source for movies and games . Specifically, we took advantage of our improved profitability from 2003 and the traffic generated by our core rental business to fund and create awareness for our strategic initiatives. During 2004 we (i) successfully launched BLOCKBUSTER ONLINETM, our U .S. online subscription program ; (ii) expanded our in-store subscription pass offering nationwide and significantly exceeded our in-store subscriber expectations and (iii) aggressively rolled out movie and game trading to thousands of stores. We believe that these strategic initiatives will provide growth opportunities for our business and complement our mature rental business, which continued to decline during 2004 . Our total revenues and gross profit for 2004 were $ 6.1 billion and $3 .6 billion, respectively. Of our revenues, 69 .5% were generated in the United States and 30 .5 % were generated outside of the United States . In October 2004, we completed our divestiture from Viacom Inc . We believe that we will compete effectively as an independent company and that the separation from Viacom has better positioned us to pursue our unique corporate goals and growth opportunities . (Emphasis added .) 41 . On May 5, 2005, Blockbuster filed a press release entitled "Blockbuster Reports Firs t Quarter 2005 Results ." Therein, the Company, in relevant part, stated :
-21-
Blockbuster Inc. (NYSE : BBI, BBI.B), a leading global provider of in-home movie and game entertainment, today reported financial results for the first quarter ended March 31, 2005 . Total revenues increased 3 .0% to $1 .55 billion for the first quarter of 2005 from $1 .50 billion for the first quarter of 2004 despite the elimination of $145 .3 million in extended viewing fee revenue . Net loss for the first quarter of 2005 totaled $57 .5 million, or $0 .31 per share, compared with net income of $114 .4 million, or $0 .63 per diluted share, for the first quarter o2004 . Adjusted net loss for the first quarter of 2005 totaled $42 .7 million, or $0 .23 per share, excluding non-cash share-based compensation expense and one-time costs incurred in connection with the efforts to acquire Hollywood Entertainment Corporation . Adjusted net income for the first quarter of 2004, excluding the tax benefit from the resolution of the federal income tax audit for tax years January 1, 1997 through May 4, 2000, totaled $77.3 million, or $0 .42 per diluted share . The impact of these non-cash charges and non-recurring items for the first quarter of 2005 and 2004 is reflected on page 5 of the financial tables . "The Company's first quarter performance was in line with our expectations and in keeping with our plan to reinvigorate our core rental business and develop new revenue streams," said John Antioco, Blockbuster Chairman and CEO . "In fact, even after the elimination of approximately $145 million in extended viewing fee revenues, our year-over-year total revenues are up, and rental transactions increased more than 20% fueled by the "No Late Fees" program, in-store subscriptions, and growth in BLOCKBUSTER Online. While the level of investment in these initiatives was significant, we are balancing our spending levels with cost containment . We believe that the best prospects for realizing meaningful shareholder value, shortor long-term, are through the continued implementation and successful completion of our current strategy . " 42 . The statements referenced above in 33-41 were each materially false an d misleading because they failed to disclose and misrepresented the following adverse facts, amon g others : (1) that the Splitoff and payment of the special dividend left Blockbuster without the financia l resources required to implement its ambitious strategic plan ; (2) that the Company, due to outdate d
-22-
equipment and inventory tracking issues, could not support the "No More Late Fees" program, a s such could not integrate its in-store and online operations ; (3) that the Company was experiencin g difficulties launching its in-store DVD trading program, because it lacked adequate inte rnal controls ; and (4) that the Splitoff was engineered not to benefit Blockbuster but rather, to allow Viacom t o reap hundreds of millions of dollars in proceeds from the pre-Exchange Offer Special Dividend an d to reduce the public float of Viacom . The Truth Begins to Emerg e 43. On August 9, 2005, Blockbuster issued a press release entitled "Blockbuster Reports Second Quarter 2005 Results ." Therein, the Company, in relevant part, stated : Blockbuster Inc . (NYSE : BBI, BBI.B), a leading global provider of in- home movie and game entertainment, today reported financial results for the second quarter ended June 30, 2005 . Total revenues decreased 1 .6% to $1 .40 billion for the second quarter of 2005 from $1 .42 billion for the second quarter of 2004 . Net loss for the second quarter of 2005 totaled $57 .2 million, or $0.31 per share, compared with net income of $48 .6 million, or $0.27 per diluted share, for the second quarter of 2004 . Adjusted net loss for the second quarter of 2005 totaled $40 .2 million, or $0.22 per share, excluding non-cash charges related to share-based compensation and impairment of certain long-lived assets and non-recurring costs incurred for employee severance . The impact of these non-cash charges and non-recurring items for the second quarter of 2005 is reflected on page 5 of the financial tables .
Business Updat e
Since the beginning of the year, Blockbuster has focused on delivering a plan that drives growth in both active members in stores and subscribers for BLOCKBUSTER Online . The investment in these two initiatives was designed to better position the Company to grow future revenues and profits even with a declining in-store rental
-23-
industry . Even though the in-store rental industry declined in the second quarter, with the month of June down substantially more than anticipated, Blockbuster is experiencing certain favorable trends from the investments in its business . The elimination of extended viewing fees under the "No Late Fees" program negatively impacted rental revenues by almost $140 million in the second quarter of 2005, but was largely offset by the following : - Base rental revenues, which consist of online and in-store rentals and exclude the impact of extended viewing fees, increased 9% year over year. Extended viewing fees accounted for approximately 15% of the Company's rental revenues during the second quarter of 2004 . - Rental transactions for the second quarter increased by 10 .4% over the same period last year. - Active member trends in company-operated domestic stores continued to show improvement for both the quarter and first six months of the year . Additionally, the active member trends in company-operated domestic stores are significantly better than those in domestic franchise stores that have not eliminated extende d viewing fees. (Emphasis added .) 44 . On this news, shares of Blockbuster fell $0 .92 per share, or 11 .49 percent, to close at $7 .09 per share . POST CLASS PERIOD DISCLOSURE S 45. On October 26, 2005, Blockbuster confirmed that the Company had a meeting wit h its lender group to discuss modifications to its credit agreement that would give the Compan y improved operating flexibility over the term of the o riginal credit agreement and that as part of the modifications, the Company would pursue raising additional capital that would be used for working
capital purposes including debt reduction .
46. On November 8, 2005, Blockbuster announced that it could be forced into bankruptc y protection if a credit-pact amendment with creditors does not become effective, and stated that " a
-24-
very large maj ority"of its assets already are pledged as collateral on loans and creditors are imposin g stricter terms . By this time share of Blockbuster were trading as low as $4 .20 per share . PLAINTIFF'S CLASS ACTION ALLEGATION S 47. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of a Class, who purchased Blockbuster pursuant to th e Company's exchange offer of Viacom, Inc . ("Viacom") stock for 144 million common shares o f
Blockbuster ("the Exchange Offer"), and on behalf of those who purchased Blockbuster shares in the open market between September 8, 2004 and August 9, 2005 .
48 . The members of the Class are so numerous that joinder of all members is impracticable . Throughout the Class Period, Blockbuster's common stock was actively traded on the NYSE . While the exact number of Class members is unknown to Plaintiff at this time and can only be ascertained through appropriate discovery, Plaintiff believes that there are hundreds or thousand s ofinembers in the proposed Class . Record owners and other members ofthe Class may be identified from records maintained by Blockbuster or its transfer agent and may be notified of the pendenc y
of this action by mail, using the form of notice similar to that customarily used in securities clas s actions.
49. Plaintiffs claims are typical of the claims of the members of the Class, as al l members of the Class are similarly affected by defendants' wrongful conduct in violation of federa l law that is complained of herein. 50. Plaintiff will fairly and adequately protect the interests of the members of the Clas s and has retained counsel competent and experienced in class and securities litigation . 51 . Common questions of law and fact exist as to all members of the Class and
-25-
predominate over any questions solely affecting individual members of the Class . Among the questions of law and fact common to the Class are : (a) whether the federal securities laws were violated by defendants' acts as alleged
herein;
(b) whether statements made by defendants to the investing public during the Clas s Period misrepresented material facts about the business, operations and management ofBlockbuster ; and (c) to what extent the members of the Class have sustained damages and the proper measure of damages . 52. A cl ass action is superior to all other available methods for the fair and efficien t adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for members of the Class to individually redress the wrong s done to them. There will be no difficulty in the management of this action as a class action . SCIENTER ALLEGATIONS 53 . As alleged herein, defendants acted with scienter in that defendants knew that the public documents and statements issued or disseminated in the name of the Company were materially false and misleading ; knew that such statements or documents would be issued o r disseminated to the investing public ; and knowingly and substantially participated or acquiesced i n the issuance or dissemination of such statements or documents as p rimary violations of the federal securities laws . As set forth elsewhere herein in detail, defendants, by virtue of their receipt o f information reflecting the true facts regarding Blockbuster, their control over, and/or receipt and/o r
-26-
modification of Blockbuster's allegedly materially misleading misstatements and/or thei r
associati ons with the Company which made them privy to confidential proprietary information concerning Blockbuster, participated in the fraudulent scheme alleged herein .
UNDISCLOSED ADVERSE FACT S 54. The market for Blockbuster 's securi ties was open, well -developed and efficient at all relevant times . As a result of these materially false and misleading statements and failures t o disclose, Blockbuster 's securities traded at artificially inflated prices duri ng the Class Period .
Plaintiff and other members of the Class purchased or otherwise acquired Blockbuster securities
relying upon the integrity of the market price of Blockbuster's securities and market informatio n relating to Blockbuster , and have been damaged thereby. 55 . During the Class Period, defendants materially misled the investing public, thereby
inflating the p rice of Blockbuster's securities , by publicly issuing false and misleading statements and omitting to disclose material facts necessary to make defendants' statements, as set forth herein ,
not false and misleading. Said statements and omissions were materially false and misleading in tha t
they failed to disclose material adverse information and misrepresented the truth about the Company ,
its business and operations, as alleged herein .
56. At all relevant times, the material misrepresentations and omissions particularized
in this Complaint directly or proximately caused or were a substantial contributing cause of th e damages sustained by plaintiff and other members of the Class . As described herein, during th e
Class Period, defendants made or caused to be made a series of materially false or misleading
statements about Blockbuster's business, prospects and operations . These material misstatements and omissions had the cause and effect of creating in the market an unrealistically positiv e
-27-
assessment of Blockbuster and its business, prospects and operations, thus causing the Company' s securities to be overvalued and artificially inflated at all relevant times . Defendants' materially fals e
and misleading statements during the Class Period resulted in plaintiff and other members of th e
Class purchasing the Company's securities at artificially inflated prices, thus causing the damage s complained of herein . LOSS CAUSATION 57. Defend ants ' wrongful conduct, as al leged herein, directly and proximately caused the economic loss suffered by Plaintiff and the Class . 58 . During the Class Period, Plaintiff and the Class purchased securities of Blockbuste r at artificially inflated prices and were damaged thereby . The price of Blockbuster's common stock declined when the misrepresentations made to the market, and/or the information alleged herein to had been concealed from the market, and/or the effects thereof, were revealed, causing investors' losses. Applicability Of Presumption Of Reliance : Fraud-On-The-Market Doctrin e 59 . At all relevant times, the market for Blockbuster securities was an efficient marke t for the following reasons , among others: (a) Blockbuster stock met the requirements for listing, and was listed and actively traded on the NYSE, a highly efficient and automated market ; (b) As a regulated issuer, Blockbuster filed periodic public reports with the SEC an d the NYSE ; (c) Blockbuster regularly communicated with public investors via established marke t
-28-
communication mechanisms, including through regular disseminations of press releases on the national circuits ofmajor newswire services and through other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services ; and (d) Blockbuster was followed by several securities analysts employed by major brokerage firms who wrote reports which were distributed to the sales force and certain customers of their respective brokerage firms . Each of these reports was publicly available and entered the public marketplace . 60 . As a result of the foregoing, the market for Blockbuster securities promptly digested current information regarding Blockbuster from all publicly-available sources and reflected such information in Blockbuster's stock price. Under these circumstances, all purchasers of Blockbuster securities during the Class Period suffered similar injury through their purchase of Blockbuster securities at artificially inflated prices and a presumption of reliance applies . NO SAFE HARBO R 61 . The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the allegedly false statements pleaded in this complaint . Many of the specific statements pleaded herein were not identified as "forward-looking statements" when made . To the extent there were any forward-looking statements, there were no meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the purportedly forward-looking statements . Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants are liable for those false forward-looking statements because at the time each of those forward-looking statements was made, the particular speaker knew that the particular forward-looking statement wa s
-29-
false, and/or the forward-looking statement was authorized and/or approved by an executive office r of Blockbuster who knew that those statements were false when made. FIRST CLAI M Violation Of Section 11 Of The Securities Act Against Promulgated Thereunder Against All Defendants 62 . Plaintiff repeats and realleges each and every allegation contained above, excluding all allegations above that contain facts necessary to prove any elements not required to state a Section
11 claim, including without limitation , scienter.
63 . This claim is brought by Plaintiff who obtained Blockbuster stock pursuant to the Prospectus on behalf of himself and other members of the Class . Each Class member acquired their shares pursuant to or traceable to, and in reliance on, the Prospectus . 64. Individual Defendants as signatories of the Prospectus, as a directors and/or officer s of Blockbuster and controlling persons of the issuer, owed to the holders of the stock obtaine d through the Prospectus the duty to make a reasonable and diligent investigation of the statements contained in the Prospectus at the time they became effective to ensure that such statements wer e true and correct and that there was no omission of material facts required to be stated in order t o make the statements contained therein not misleading . Defendants knew, or in the exercise o f reasonable care should have known, of the material misstatements and omissions contained in o r
omitted from the Prospectus as set forth herein . As such, defendants are liable to the Class .
65 . Audit defendant and Underwriter Defendants owed to the holders of the stoc k obtained through the Prospectus the duty to make a reasonable and diligent investigation of th e statements contained in the Prospectus at the time they became effective to ensure that suc h statements were true and correct and that there was no omission of material facts required to b e -30-
stated in order to make the statements contained therein not misleading . Defendants knew, or in the exercise of reasonable care should have known, of the material misstatements and omission s
contained in or omitted from the Prospectus as set forth herein. As such, defendants are liable to th e Class . 66. None of the defendants made a reasonable investigation or possessed reasonabl e
grounds for the belief that the statements contained in the Prospectus were true or that there was n o omission of material facts necessary to make the statements made therein not misleading . 67 . Defendants issued and disseminated, caused to be issued and disseminated, an d participated in the issuance and dissemination of, material misstatements to the investing public which were contained in the Prospectus, which misrepresented or failed to disclose, inter alia, the facts set forth above . By reason of the conduct herein alleged, each defendant violated and/or controlled a person who violated t 1 of the Securities Act . 68 . As a direct and proximate result of defendants' acts and omissions in violation of th e Securities Act, the market price of Blockbuster stock was artificially inflated and Plaintiff and th e Class suffered substantial damage in connection with their ownership of Blockbuster common stoc k pursuant to the Prospectus . 69 . Blockbuster is the issuer of the stock sold via the Prospectus . As issuer of the stock , the Company is strictly liable to Plaintiff and the Class for the material misstatements and omissions therein . 70. At the times they obtained their shares of Blockbuster, the Plaintiff and members o f the Class did so without knowledge of the facts concerning the misstatements or omissions allege d herein .
-31-
This action is brought within one year after discovery of the untrue statements and omissions in and from the Prospectus should have been made through the exercise of reasonabl e diligence, and within three years of the effective date of the Prospectus . By virtue of the foregoing, Plaintiff and the other members of the Class are entitle d to damages under Section 11 as measured by the provisions of Section 11(e), from the defendant s and each of them, jointly and severally .
SECOND CLAIM
Violations of Section 12(a)(2) of the Securities Act Against All Defendant s Plaintiff repeats and realleges each and every allegation contained above . This Count is brought pursuant to Section 12(a)(2) of the Securities Act on behalf o f
the Class, against all defendants.
Defendants were sellers and offerors and/or solicitors of purchasers of the share s offered pursuant to the Prospectus.
The Prospectus contained untrue statements of material facts, omitted to state othe r
facts necessary to make the statements made not misleading, and concealed and failed to disclos e
of solicitation preparation of the false and misleading Prospectus. Defendants owed to the purchasers of Blockbuster Securities, including plaintiff an d
other class members, the duty to make a reasonable and diligent investigation of the statements contained in the offering materials, including the Prospectus contained therein, to ensure that suc h
statements were true and that there was no omission to state a material fact required to be stated in
order to make the statements contained therein not misleading . Defendants knew of,
exercise of reasonable care should have known of, the misstatements and omissions contained in th e offering materials as set forth above . 78 . Plaintiff and other members of the Class purchased or otherwise acquired Blockbuste r Securities pursuant to and/or traceable to the defective Prospectus . Plaintiff did not know, or in the exercise of reasonable diligence could not have known, of the untruths and omissions contained in the Prospectus . 79. Plaintiff, individually and representatively, hereby offers to tender to defendants those securities which plaintiff and other Class members continue to own, on behalf of all members of th e Class who continue to own such securities, in return for the consideration paid for those securitie s together with interest thereon. Class members who have sold their Blockbuster Securities are entitle d to rescissory damages . 80. By reason of the conduct alleged herein, these defendants violated, and/or controlle d a person who violated , 12(a)(2) of the Securities Act. Accordingly, Plaintiff and members of the Class who hold Blockbuster Securities purchased in the offering have the right to rescind and recove r the consideration paid for their Blockbuster securiti es and hereby elect to rescind and tender their
Blockbuster securities to the defendants sued herein. Plaintiff and Class members who have sold
their Blockbuster securities are entitled to rescissory damages . THIRD CLAIM Violation of Section 15 of The Securities Act Against Individual Defendant s 81 . Plaintiff repeats and realleges each and every allegation contained above, excludin g all allegations above that contain facts necessary to prove any elements not required to state a Sectio n 15 claim, including without limitation, scienter.
-33-
82. This count is asserted against Individual Defendants and is based upon Section 15 o f
the Securities Act . 83. Individual Defendants, by virtue of their offices, directorship and specific acts were , at the time of the wrongs alleged herein and as set forth herein, controlling persons of Blockbuste r within the meaning of Section 15 of the Securities Act . Individual Defendants had the power and influence and exercised the same to cause Blockbuster to engage in the acts described herein . 84. Individual Defendants' position made them privy to and provided them with actua l knowledge of the material facts concealed from Plaintiff and the Class . 85 . By virtue of the conduct alleged herein, Individual Defendants are liable for th e
aforesaid wrongful conduct and are liable to plaintiffs and the Class for damages suffered . FOURTH CLAI M
Violation Of Section 10(b) O f The Exchange Act Against And Rule 10b-5 Promulgated Thereunder Against All Defendant s 86. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein.
87. During the Class Period, defendants carried out a plan, scheme and course of conduc t
which was intended to and , throughout the Class Period , did: (i) deceive the investing public , including Plaintiff and other Class members, as alleged herein ; and (ii) cause Plaintiff and other members of the Class to purchase Blockbuster securities at artificially inflated prices . In furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them, took the action s
set forth herein.
88 . Defendants (a) employed devices, schemes, and artifices to defraud; (b) made untrue
-34-
statements of material fact and/or omitted to state material facts necessary to make the statement s not misleading ; and (c) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon the purchasers of the Company's securities in an effo rt to maintain artificially high
market prices for Blockbuster securities in violation of Section 10(b) of the Exchange Act and Rul e
I Ob-5 . All defendants are sued either as primary participants in the wrongful and illegal conduc t charged herein or as controlling persons as alleged below. 89. Defendants, individually and in concert, directly and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct to conceal adverse material information about the business, operation s and future prospects of Blockbuster as specified herein . 90 . These defendants employed devices, schemes, and artifices to defraud, while i n possession of material adverse non-public information and engaged in acts, practices, and a cours e of conduct as alleged herein in an effort to assure investors of Blockbuster's value and performanc e and continued substantial growth, which included the making of, or the participation in the makin g of, untrue statements of material facts and omitting to state material facts necessary in order to mak e the statements made about Blockbuster and its business operations and future prospects in light of the circumstances under which theywere made, not misleading, as set forth more particularly herein, and engaged in transactions, practices and a course of business which operated as a fraud and deceit upon the purchasers of Blockbuster securities during the Class Period . 91 . Each of the Individual Defendants' primary liability, and controlling person liability , arises from the following facts : (i) the Individual Defendants were high-level executives and/or directors at the Company during the Class Period and members of the Company's management tea m
-35-
or had control thereof; (ii) each of these defendants, by virtue of his or her responsibilities an d activities as a senior officer and/or director of the Company was privy to and participated in th e creation, development and reporting of the Company's internal budgets, plans, projections and/o r reports ; (iii) each of these defendants enjoyed significant personal contact and familiarity with th e
other defendants and was advised of and had access to other members ofthe Company's managemen t team, internal reports and other data and information about the Company's finances, operations, an d sales at all relevant times ; and (iv) each of these defendants was aware of the Company' s
dissemination of information to the investing public which they knew or recklessly disregarded wa s
materially false and misleading . 92. The defendants had actual knowledge of the misrepresentations and omissions o f
material facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them. Such defendants '
material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose
and effect of concealing Blockbuster's operating condition and future business prospects from the
investing public and supporting the artificially inflated price of its securities . As demonstrated b y
defendants' overstatements and misstatements of the Company's business, operations and earning s
throughout the Class Period, defendants, if they did not have actual knowledge of th e
misrep resentations and omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining from taking those steps necessary to discover whether those statements wer e false or misleading . 93. As a result of the dissemination of the materially false and misleading information and failure to disclose material facts, as set- forth above, the market price of Blockbuster securitie s
-36-
was artificially inflated during the Class Period . In ignorance of the fact that market prices o f Blockbuster's publicly-traded securities were artificially inflated, and relying directly or indirectl y
on the false and misleading statements made by defendants, or upon the integrity of the market i n which the securities trade, and/or on the absence of material adverse information that was known t o or recklessly disregarded by defendants but not disclosed in public statements by defendants durin g the Class Period, Plaintiff and the other members of the Class acquired Blockbuster securities durin g the Class Period at artificially high prices and were damaged thereby . 94. At the time of said misrepresentations and omissions , Plaintiff and other member s
of the Class were ignorant of their falsity, and believed them to be true . Had Plaintiff and the other
members of the Class and the marketplace known the truth regarding the problems that Blockbuste r
was experiencing, which were not disclosed by defendants, Plaintiff and other members of the Clas s
would not have purchased or otherwise acquired their Blockbuster securities, or, if they had acquired such securities during the Class Period, they would not have done so at the artificially inflated price s which they paid . 95. By virtue of the foregoing, defendants have violated Section 10(b) of the Exchang e
Act, and Rule IOb-5 promulgated thereunder .
96. As a direct and proximate result of defendants' wrongful conduct, Plaintiff and th e other members of the Class suffered damages in connection with their respective purchases and sale s
of the Company's securities during the Class Period .
FIFTH CLAIM Violation Of Section 20(a) O f The Exchange Act Against the Individual Defendants 97. Plaintiff repeats and realleges each and every allegation contained above as if full y
-37-
set forth herein.
98 . The Individual Defendants acted as controlling persons of Blockbuster within the meaning of Section 20(a) of the Exchange Act as alleged herein . By virtue of their high-level positions, and their ownership and contractual rights, participation in and/or awareness of the Company's operations and/or intimate knowledge of the false financial statements filed by the Company with the SEC and disseminated to the investing public, the Individual Defendants had the power to influence and control and did influence and control, directly or indirectly, the decision-making of the Company, including the content and dissemination ofthe various statements which Plaintiff contends are false and misleading . The Individual Defendants were provided with or had unlimited access to copies of the Company's reports, press releases, public filings and other statements alleged by Plaintiff to be misleading prior to and/or shortly after these statements were issued and had the ability to prevent the issuance of the statements or cause the statements to be corrected. 99 . In particular, each of these defendants had direct and supervisory involvement in the day-to-day operations of the Company and, therefore, is presumed to have had the power to control or influence the particular transactions giving rise to the securities violations as alleged herein, and exercised the same . 100 . As set forth above, Blockbuster and the Individual Defendants each violated Sectio n 10(b) and Rule I Ob-5 by their acts and omissions as alleged in this Complaint . By virtue of their positions as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) of the Exchange Act . As a direct and proximate result of defendants' wrongful conduct, Plaintiff and other members of the Class suffered damages in connection with their purchases of the Company' s
-38-
securities during the Class Period. WHEREFORE, Plaintiff prays for relief and judgment, as follows : (a) Determining that this action is a proper class action, designating Plaintiff as Lead
Plaintiff and certifying Plaintiff as a class representative under Rule 23 of the Federal Rules of Civi l
Procedure and Plaintiffs counsel as Lead Counsel ; (b) Awarding compensatory damages in favor of Plaintiff and the other Clas s members against all defendants, jointly and severally, for all damages sustained as a result o f defendants' wrongdoing, in an amount to be proven at trial, including interest thereon ; (c) Awarding Plaintiff and the Class their reasonable costs and expenses incurred i n this action, including counsel fees and expert fees ; and (d) Such other and further re lief as the Court may deem just and proper .
-39-
JURY TRIAL DEMANDED Plaintiff hereby demands a trial by jury .
Dated :
CLAXTON & HILL, PLLC Roger Claxto n 700 McKinney Place, 3131 McKinney Avenue - LB 103 Dallas, Texas 75204-247 1
(214)969-902 9
SCHIFFRIN & BARROWAY, LLP Marc A. Topaz Richard A . Maniskas Tamara Skvirsky 280 King of Prussia Road Radnor, PA 19087 Telephone: [phone] Attorneys for Plaintiff
-40-