ValuePlays

As god is my witness, if Mark Wattles ever buys shares in any company I own shares in, I am selling next day. Who is Mark Wattles you ask? More on that after the news.

Blockbuster announced today in an SEC filing it is on life support:

The risk that we may not successfully complete this refinancing and obtain the related amendment of certain financial covenants included therein, and/or the risk that we may not have adequate liquidity to fund our operations as a result of not meeting our projected financial results, even if the refinancing is completed within the time and upon the terms contemplated, raise substantial doubt about our ability to continue as a going concern.

If we close on our amended credit facility, this amended facility and our other indebtedness will impact our business by, among other things:

• requiring that a substantial portion of our cash flows from operations be used for debt service payments, thereby reducing the availability of cash flows to fund working capital requirements including inventory purchases, capital expenditures, acquisitions and other general corporate purposes;

• making us vulnerable to deterioration in our results of operations and to general adverse economic, market or industry conditions which could impact our ability to make our debt payments;

• limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate including limiting our ability to invest in certain strategic initiatives, consequently placing us at a competitive disadvantage to our competitors; and

• providing liquidity at or near minimum cash levels required to operate the business during certain periods of time during 2009.

We believe that cash on hand, cash from operations and available borrowings under the amended credit facility (assuming that we close on such facility) will be sufficient to fund our anticipated cash requirements for working capital purposes and normal capital expenditures, and that we will remain in compliance with the financial covenants contained in our amended debt agreements, for at least the next twelve months. However, there can be no assurance regarding these matters given the current state of the global economy, which has negatively impacted our ability to accurately forecast our results of operations and cash position, and which may result in deterioration of our revenues beyond what we anticipate. Our current 2009 plan contemplates that worldwide same-store revenues will be lower than what we experienced in the fourth quarter of 2008. Further deterioration would expose us to declining margins as a result of an imbalance between our inventory levels and customer demand. Additionally, if our trade creditors were to impose unfavorable terms on us, it would negatively impact our ability to obtain products and services on acceptable terms and operate our business.

Our independent registered public accounting firm has issued an opinion on our fiscal 2008 consolidated financial statements that includes an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern. As part of the amendment discussed above, and not subject to closing of the amended credit facility, our lenders have agreed to waive the requirement in our credit agreement that our fiscal 2008 audit opinion not include a going concern explanatory paragraph or like qualification.

If we are unable to generate sufficient cash flow from operations to service our indebtedness and remain in compliance with our financial covenants, we would be in default under one or more of our debt agreements, which if not cured or waived, could result in the acceleration of all of our debt due to cross-default provisions contained in such agreements and in certain of our leases.

In such event, we would be required to search for alternative sources of liquidity to refinance the debt, which may not be available to us on acceptable terms, if at all. Our ability to obtain alternative financing would likely be adversely affected because substantially all of our assets have been secured as collateral for our existing debt and because our financial results, substantial indebtedness and credit ratings could each adversely affect the availability and terms of any such financing. 

If we were unable to repay our debt upon acceleration, we could be forced to file for protection under the U.S. Bankruptcy Code. In addition, as discussed above, our financing arrangements are relatively short-term in nature. As a result, we will face additional refinancing pressures over the next several years.

Now, Wattles. From a post a few weeks ago:

Wattles, co-founder and former CEO of Hollywood Entertainment and currently the majority owner of the Ultimate Electronics chain, said in a Securities and Exchange Commission filing on Monday, March 16, that he acquired the shares for investment purposes because he believes Blockbuster “does not have a motive to reorganize under Chapter 11.”

Anyone remember Wattles last investment? Yup, now defunct Circuit City.

Mr. Wattles, principal of Wattles Capital Management LLC and the founder of video-rental chain Hollywood Entertainment, took a 6.5% stake in Circuit City, which had at the time about $12 billion in annual sales. Circuit city was evenautally liquidated

Beofre Circuit city Mr. Wattles bought Ultimate Electronics out of bankruptcy, ran it back into bankruptcy, and the bought it out again in 2005. Today it has locations in 9 states and is private, so no word on how it is performing is easily available.

Before that Wattles was best known as the founder of Hollywood Entertainment Corp., which he sold to Movie Gallery Inc. for $1.2 billion in 2005. Good timing. The combined company? You guessed it, ended up in bankruptcy.

Now he will eventually be able to add Blockbuster to his list. This is way beyond bad luck, this is just bad investing, period. As the filing states, there will nothing left should Blockbuster file Chapter 11, all its assets are pledged as collateral. The banks own them.

For those who wish to void the Wattles train wreck in their holdings, you can follow his activity here at the SEC’s website. I suggest the RSS feed as it delivers filings as they are made.

Said Wattles in his Blockbuster filing:

The Class A shares of Common Stock were acquired for investment purposes by the Reporting Person, primarily because of his belief that the Issuer does not have a motive to reorganize under Chapter 11 and that the Issuer will continue as a “going concern” despite the market’s expectation of obtaining a qualified opinion from the Issuer’s auditors in conjunction with the year-end audit.

Given the operating fundamentals of the Issuer combined with the short term of its real estate leases (typically five years) and the aggressive and proactive manner in which the Issuer has managed its store base (including relocations, store closings, reductions in store size and subleases), Mr. Wattles does not believe that the Issuer has a motive to reorganize under Chapter 11.

In addition, regardless of the likelihood of obtaining a “going concern” qualification from its auditors, Mr. Wattles believes the Issuer will be successful in refinancing its revolving bank line of credit, or if it cannot, that it will be able to use cash flow from operations to meet its August repayment obligations and 2009 liquidity needs.

Blockbuster disagrees….

Now to be fair, the Circuit City bankruptcy was not Wattles fault, he did not cause it. What is his fault is buying shares in these companies that are doomed….repeatedly…I just do not get it

Call him by his Biblical name “Mark: Chapter 11”

Disclosure (“none” means no position):None