BLOCKBUSTER BANKRUPCY?

Blockbuster Inc. (BBI) again warned it may have to file for bankruptcy protection as the movie-rental giant continues to lose money.

In its annual report filed Tuesday, Blockbuster said its declining sales and cash flow, coupled with increasingly competitive industry conditions, "raise substantial doubt about our ability to continue as a going concern." Blockbuster provided similar warnings nearly a year ago before it was able to refinance its long-term debt in the fall.

Nonetheless, the latest warning reminds investors of the serious challenges that the company faces.

Blockbuster is scrambling to expand in new distribution channels as rentals and sales at its 6,500 stores worldwide continue to decline amid intense competition from by-mail movie-rental services such as Netflix Inc. (NFLX) and rental kiosks such as those operated by Coinstar Inc.'s (CSTR) Redbox unit.

As of Jan. 3, Blockbuster said its total liabilities were $314.3 million more than its total assets.

Blockbuster shares fell 29% to 28 cents in recent trading. Blockbuster's 9% notes due 2012 are down 2.9 points to 22 cents on the dollar in very active trade Wednesday, according to MarketAxess.

Blockbuster has its own brand of by-mail service and kiosks, owned and operated by NCR Corp. (NCR), and it has worked with TiVo and other electronics makers to boost its digital-download offerings. But those businesses so far haven't taken off quickly enough to offset the declining rentals and sales at its stores.

Indeed, while Blockbuster's filing Tuesday said NCR expected to have 10,000 kiosks under the Blockbuster Express brand name by mid year, NCR has about 4,000, some of which are operating under kiosk brands NCR purchased last year. And an NCR spokesman called "inaccurate" Blockbuster's characterization, reiterating that NCR expects to have as many as 10,000 kiosks by year end, and some will not be under the Blockbuster name.

With its growth efforts constrained by debt and declining cash flow, Blockbuster is closing hundreds of underperforming stores, including 500 to 545 this year, and has outlined $200 million in fresh cost cuts tied to staffing and advertising spending. Since last year, it has pursued options for overseas assets, selling its business in Ireland in August for up to $45 million in cash, but it so far has been unable to close deals on other divestitures.

Blockbuster said Tuesday that it also seeks to boost its balance sheet, including modifying terms of its senior notes and the possible swap of senior subordinated debt with Class A common stock. The exchange could be implemented in late second quarter or early third quarter, but some of potential moves may require the company to file a pre-packaged or other filing under Chapter 11 bankruptcy-protection laws, Blockbuster said.

"It may not be possible to turn Blockbuster's business around," Gimme Credit analyst Kim Noland said. "While its high-yield issuance last fall appeared to buy it some time, its recent negative revision in guidance and the inroads into its business by competitors bode very ill for its long term health."

Noland said Blockbuster isn't yet in a liquidity crunch, but it could be if the poor results of the fourth quarter are repeated.