<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 1999
REGISTRATION NO. 333-77899
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
BLOCKBUSTER INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7841 52-1655102
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
1201 ELM STREET
DALLAS, TEXAS 75270
(214) 854-3000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
--------------------------
EDWARD B. STEAD
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
BLOCKBUSTER INC.
1201 ELM STREET
DALLAS, TEXAS 75270
(214) 854-3000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
Copies to:
<TABLE>
<S> <C> <C>
STEPHEN T. GIOVE MICHAEL D. FRICKLAS KENNETH A. LEFKOWITZ
SHEARMAN & STERLING VIACOM INC. HUGHES HUBBARD & REED LLP
599 LEXINGTON AVENUE 1515 BROADWAY ONE BATTERY PARK PLAZA
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10036 NEW YORK, NEW YORK 10004-1482
(212) 848-4000 (212) 258-6000 (212) 837-6000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective. If any of the
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one to be used
in connection with a U.S. and Canadian offering of the registrant's class A
common stock and one to be used in connection with a concurrent international
offering of the class A common stock. The international prospectus will be
identical to the U.S. prospectus except that it will have different front and
back cover pages. The form of U.S. prospectus is included herein and is followed
by the alternate pages to be used in the international prospectus which differ
from those used in the U.S. prospectus. Each of the alternate pages for the
international prospectus included herein has been labeled "Alternate Page for
International Prospectus." Final forms of each prospectus will be filed with the
Securities and Exchange Commission under Rule 424(b) of the General Rules and
Regulations under the Securities Act of 1933.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED , 1999
P R O S P E C T U S
SHARES
[BLOCKBUSTER LOGO]
BLOCKBUSTER INC.
CLASS A COMMON STOCK
$ PER SHARE
---------
We are selling shares of our class A common stock. Of the shares
of class A common stock that we are selling, shares are being offered in
the United States and Canada by a syndicate of U.S. underwriters and
shares are being offered concurrently outside the United States and Canada by a
syndicate of international underwriters.
In addition, the U.S. underwriters may purchase up to additional
shares of our class A common stock under some circumstances. The international
underwriters may also purchase up to additional shares of our class A
common stock under some circumstances.
This is an initial public offering of our class A common stock. We currently
expect the initial public offering price to be between $ and $ per share, and
have applied to have the class A common stock listed on the New York Stock
Exchange under the symbol "BBI."
Following this offering, we will have two classes of authorized common
stock, the class A common stock and class B common stock. The rights of the
holders of class A common stock and class B common stock are identical, except
with respect to voting and conversion.
--------------
INVESTING IN THE CLASS A COMMON STOCK INVOLVES CERTAIN RISKS. WE REFER YOU
TO "RISK FACTORS" BEGINNING ON PAGE 10.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
1999.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ------------
<S> <C> <C>
Initial Public Offering Price.................................................................. $ $
Underwriting Discounts and Commissions......................................................... $ $
Proceeds to Blockbuster Inc. (before expenses)................................................. $ $
</TABLE>
--------------
JOINT BOOK-RUNNING MANAGERS
SALOMON SMITH BARNEY BEAR, STEARNS & CO. INC.
---------
CREDIT SUISSE FIRST BOSTON
GOLDMAN, SACHS & CO.
J.P. MORGAN & CO.
BANC OF AMERICA SECURITIES LLC
ING BARING FURMAN SELZ LLC
PAINEWEBBER INCORPORATED
SCHRODER & CO. INC.
SG COWEN
WIT CAPITAL CORPORATION
, 1999
<PAGE>
[ARTWORK]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Prospectus Summary................................................................... 4
Risk Factors......................................................................... 10
Separation from Viacom............................................................... 19
Use of Proceeds...................................................................... 22
Dividend Policy...................................................................... 23
Capitalization....................................................................... 24
Dilution............................................................................. 25
Selected Combined Historical and Pro Forma Financial and Operating Data.............. 26
Unaudited Pro Forma Combined Financial Data.......................................... 28
Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... 33
Video Industry Overview.............................................................. 48
Business............................................................................. 52
Management........................................................................... 74
Related Party Transactions........................................................... 88
Principal Stockholder................................................................ 94
Description of Capital Stock......................................................... 95
Description of Credit Agreement...................................................... 101
Shares Eligible for Future Sale...................................................... 103
Material United States Federal Tax Consequences to Non-United States Holders......... 104
Underwriting......................................................................... 107
Legal Matters........................................................................ 111
Experts.............................................................................. 111
Where You Can Find More Information.................................................. 111
Index to Combined Financial Statements............................................... F-1
</TABLE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF CLASS A COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES
ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS
OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF CLASS A COMMON STOCK.
--------------
At our request, some of the underwriters have reserved up to % of the
shares of class A common stock for sale at the initial public offering price to
persons who are directors, officers or employees of us, or who are otherwise
associated with us and our affiliates, and who have advised us of their desire
to purchase these shares through a directed share program. The number of shares
of class A common stock available for sale to the general public will be reduced
to the extent of sales of shares under the directed share program to any of the
persons for whom they have been reserved. Any shares not so purchased will be
offered by the underwriters on the same basis as all other shares of class A
common stock offered in this offering.
For investors outside the United States: neither we nor any underwriter has
taken or will take any action in any jurisdiction that would permit a public
offering of the class A common stock or possession or distribution of this
prospectus in any jurisdiction where action for that purpose is required, other
than in the United States. Both we and the underwriters require that persons who
come
2
<PAGE>
into possession of this prospectus must inform themselves about and observe any
restrictions as to the offering of the class A common stock and the distribution
of this prospectus.
------------------------
This preliminary prospectus is subject to completion prior to this offering.
Among other things, this preliminary prospectus describes us as we currently
expect to exist at the time of this offering.
Unless otherwise indicated or unless the context otherwise requires, all
information in this prospectus gives effect to: (1) the reorganization described
in "Prospectus Summary -- Separation from Viacom" and "Separation from Viacom --
Pre-Offering Transactions", and (2) the amendment to our certificate of
incorporation to, among other things, change the amount and type of common stock
that we can authorize.
------------------------
BLOCKBUSTER-Registered Trademark-, BLOCKBUSTER VIDEO-Registered Trademark-,
BLOCKBUSTER FAVORITES-TM-, BLOCKBUSTER GIFTCARD-Registered Trademark-,
BLOCKBUSTER GIFTCARDS-TM-, BLOCKBUSTER REWARDS-TM-, BLOCKBUSTER ENTERTAINMENT
AWARDS-Registered Trademark-, KIDPRINT-Registered Trademark-, BLOCKBUSTER
MUSIC-Registered Trademark- and XTRA-VISION are our trademarks.
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This prospectus contains forward-looking statements relating to our
operations that are based on our current expectations, estimates and projections
about us and the home video industry. Words such as "expects," "intends,"
"plans," "projects," "believes," "estimates" and similar expressions are used to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve risks, uncertainties and assumptions that are
difficult to predict. Further, some forward-looking statements are based upon
assumptions as to future events that may not prove to be accurate. Therefore,
actual outcomes and results may differ materially from what is expressed or
forecasted in such forward-looking statements. We undertake no obligation to
update publicly any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.
A number of important factors could cause actual results to differ
materially from those indicated by such forward-looking statements. Such factors
include, among others, those set forth in this prospectus under the heading
"Risk Factors."
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS"
SECTION AND THE COMBINED FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS.
OUR COMPANY
We are the world's leading retailer of rentable home videocassettes, DVDs
and video games, with about 6,500 stores in the United States and 26 other
countries as of March 31, 1999. We operate primarily under the highly recognized
BLOCKBUSTER brand name, which, according to The Gallup Organization, achieves
nearly 100% recognition with active movie renters in the United States. Based on
1998 industry estimates from Paul Kagan Associates, Inc., a video industry
analyst, we estimate that our company-operated and franchised stores attained a
U.S. market share in excess of 27%, over three times greater than that of our
nearest competitor. In the United States, our customer transaction database
contains information on about 87 million accounts, and we estimate that about
59% of the population lives within three miles of one of our stores. Our
revenues in 1998 increased 17.5% from 1997, with about 79% of these revenues
generated in the United States and about 21% generated outside of the United
States. Nearly 60 million people worldwide have rented in excess of 970 million
movies and video games from us or our franchisees within the last 12 months. For
the year ended December 31, 1998, we and our franchisees recorded worldwide
revenues of about $4.7 billion, $3.9 billion from our company operations and
$0.8 billion from our franchised stores.
Under the management team led by John F. Antioco, our chairman, president
and chief executive officer, we developed and implemented a new business model
that focuses on our core rental business and significantly improves customer
satisfaction. Most significantly, we entered into domestic revenue-sharing
agreements with all of the major Hollywood movie studios. Under these
agreements, we agree to share our U.S. rental revenue with the studios for a
limited period of time. We believe that these agreements have significant
benefits to us, including:
- substantially increasing the number of newly released videos in our stores
to better satisfy customer demand;
- contributing to an increase in revenues resulting from an increase in the
total number of transactions and the number of videocassettes rented per
transaction; and
- aligning the studios' economic interests more closely with ours because
they share a portion of the rental revenue with us for a period of time.
Under our new business model, quarterly domestic same store rental revenues
increased 8.6%, 17.5%, 20.0%, 20.5% and 23.1% in the first through fourth
quarters of 1998 compared to 1997 and the first quarter of 1999 compared to the
first quarter of 1998, respectively.
INDUSTRY OVERVIEW
According to Paul Kagan Associates, the U.S. videocassette and DVD rental
and sales industry grew from $15.7 billion in revenue in 1997 to $17.1 billion
in 1998 and is expected to reach $22.0 billion in 2002. Paul Kagan Associates
estimates that in 1998, 83.5 million, or 81.5%, of the 102.5 million total U.S.
households owned a VCR. According to Paul Kagan Associates, 19.7 million VCRs
and DVD players were sold in the United States in 1998, and it expects sales to
reach 21.5 million units by 2002.
The home video industry is highly fragmented, with single store owners
currently operating about 49% of all locations that rent video titles. We
believe that there are several competitive advantages of
4
<PAGE>
being a large home video chain and therefore believe individual stores and small
chains in the home video industry will continue to consolidate with national and
regional chains.
STRATEGY
BUSINESS MODEL
We believe our business model gives us an advantage over other large home
video chains and a significant advantage over our single store competitors. The
key elements of our business model are to:
- provide a large number of copies and a broad selection of movie titles;
- operate conveniently located and highly visible stores;
- offer superior and consistent customer service;
- optimize our pricing to local market conditions;
- nationally advertise and market our BLOCKBUSTER brand name and the
differences between us and our competitors;
- use our extensive customer transaction database to effectively operate and
market our business; and
- improve our efficiency and lower our costs through self distribution.
GROWTH STRATEGY
The goal of our growth strategy is to increase our U.S. systemwide market
share from 27%, as of December 31, 1998, to over 40% within the next three years
and to significantly increase our market share in those countries outside the
United States where it is profitable to do so. The key elements of our growth
strategy are to:
- increase our same store revenues;
- expand our domestic store base;
- expand our international store base;
- expand our worldwide franchise program;
- apply the benefits of our greater size by spreading fixed costs across our
expanding operations;
- pursue strategic acquisitions; and
- pursue new technologies and products related to rentable home
entertainment which capitalize on our brand name.
RISK FACTORS
We operate in a highly fragmented and competitive market. Our business model
and growth strategy are subject to risks which are described under "Risk
Factors." The following are among the risks which may adversely affect our
future financial performance or our ability to effectively compete in our
market:
- introduction and acceptance of new technologies;
- adverse changes in the movie studios' current distribution and pricing
policies;
- uncertainties with respect to our new business model; and
- obstacles to our U.S. and international new store expansion.
5
<PAGE>
SEPARATION FROM VIACOM
We are currently an indirect wholly owned subsidiary of Viacom, Inc.
Immediately after the completion of this offering, Viacom will own none of the
outstanding shares of our class A common stock and 100% of the outstanding
shares of our class B common stock. Accordingly, Viacom will own common stock
representing about % of our equity value, or about % if the
underwriters exercise their over-allotment options in full, and about % of
the combined voting power of our outstanding common stock, or about % if
the underwriters exercise their over-allotment options in full. Viacom has
rights protecting its ability to control at least 80% of our equity value and
the combined voting power of our two outstanding classes of common stock. We
refer you to "Related Party Transactions -- Agreements Between Viacom and Us --
Initial Public Offering and Split-off Agreement" for additional information with
respect to these rights. Viacom has announced that, if it receives a favorable
tax ruling from the Internal Revenue Service, it currently intends to distribute
all of its holdings in our common stock to its stockholders who participate in
an exchange offer intended to qualify for tax-free treatment under Section 355
of the Internal Revenue Code. Viacom has the sole discretion to determine if and
when such split-off will occur and all terms of such split-off. If Viacom
determines to make the distribution, it will occur some time after the later of
(1) September 29, 1999, the five-year anniversary of the merger of Viacom and
Blockbuster Entertainment Corporation and (2) unless the underwriters consent to
an earlier date, 180 days after the completion of this offering. For additional
information on the risks associated with Viacom not completing the split-off, we
refer you to "Risk Factors -- Risk Factors Relating to Our Separation from
Viacom."
THIS OFFERING
This offering is for shares of our class A common stock in the United
States and Canada and the concurrent offering of shares of our class A
common stock outside of the United States and Canada. In this prospectus, a
reference to each offering is a reference to both offerings. The closing of each
offering is conditioned upon the closing of the other.
<TABLE>
<S> <C>
Class A common stock offered by us:
Offering in the United States and Canada... shares
Offering outside of the United States and
Canada................................... shares
Total offering........................... shares
Common stock outstanding after this offering:
Class A common stock....................... shares(1)
Class B common stock....................... shares(2)
Total common stock....................... shares(1)
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Voting rights; Conversion.................... The holders of class A common stock and class
B common stock have identical rights, except
with respect to voting and conversion.
Holders of class A common stock are entitled
to one vote per share and holders of class B
common stock are entitled to five votes per
share. Holders of the class A common stock
and class B common stock generally vote
together as a single class. We refer you to
"Description of Capital Stock -- Common Stock
-- Voting rights." Under some circumstances,
the class B common stock converts
automatically or at the option of Viacom into
class A common stock. We refer you to
"Description of Capital Stock -- Common Stock
-- Conversion."
Use of proceeds.............................. We intend to use all of the net proceeds from
this offering to repay a portion of our
borrowings under our credit agreement which
we describe in "Description of Credit
Agreement." For a full discussion of the use
of proceeds, we refer you to "Use of
Proceeds."
Dividend policy.............................. Subject to our financial performance,
limitations under our credit agreement and
action by our board of directors, we
currently intend to pay dividends on a
quarterly basis, at an initial rate of $
per share, commencing with the first
declaration in for payment in . We
refer you to "Dividends."
Proposed NYSE symbol......................... BBI.
</TABLE>
- ------------------------
(1) This assumes that the underwriters do not exercise their over-allotment
options. We refer you to "Underwriting."
(2) Viacom beneficially owns all of the class B common stock.
OUR COMPANY INFORMATION
Our principal executive offices are located at 1201 Elm Street, Dallas,
Texas 75270 and our telephone number is (214) 854-3000.
7
<PAGE>
SUMMARY COMBINED FINANCIAL DATA
The summary combined historical and pro forma financial data presented below
should be read in conjunction with the combined financial statements and interim
combined financial statements and notes thereto, the "Unaudited Pro Forma
Combined Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PRO FORMA AS PRO FORMA AS
YEAR ENDED OR AT DECEMBER 31, THREE MONTHS ENDED ADJUSTED YEAR ADJUSTED THREE
OR AT MARCH 31, ENDED MONTHS ENDED OR
------------------------------- -------------------- DECEMBER 31, AT MARCH 31,
1996 1997 1998 1998 1999 1998(1) 1999(1)
--------- --------- --------- --------- --------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE AND WORLDWIDE STORE DATA)
STATEMENT OF OPERATIONS
DATA(2):
Revenues..................... $ 2,942.1 $ 3,313.6 $ 3,893.4 $ 931.2 $ 1,113.0
Gross profit................. 1,928.4 1,953.1 1,937.0 604.6 671.2
Operating income (loss)(3)... 267.6 (214.6) (359.2) 67.0 48.6
Income (loss) before income
taxes...................... 249.2 (269.3) (394.7) 61.0 20.0
Net income (loss)............ 77.8 (318.2) (336.6) 15.8 (3.4)
Pro forma net income per
share--basic and
diluted(4).................
Pro forma weighted average
shares outstanding--basic
and diluted(4).............
BALANCE SHEET DATA:
Cash and cash equivalents.... $ 58.6 $ 129.6 $ 99.0 $ 72.9 $ 75.0
Rental library, net.......... 676.0 734.5 441.2 750.2 457.3
Intangibles, net............. 6,309.6 6,192.7 6,055.6 6,161.0 6,074.3
Total assets................. 8,794.6 8,731.0 8,274.8 8,617.0 8,300.5
Long-term debt, less current
portion(5)................. 249.0 331.3 1,715.2 352.2 1,824.6
Stockholders' equity(5)...... 7,784.4 7,617.6 5,637.9 7,603.8 5,662.2
CASH FLOW DATA:
Cash flows from operating
activities(6).............. $ 985.0 $ 991.3 $ 1,234.5 $ 242.3 $ 166.5
Cash flows from (used for)
investing activities(6).... (1,235.1) (1,188.1) (1,022.2) (232.6) (325.4)
Cash flows from (used for)
financing activities(6).... 208.8 269.3 (241.1) (65.9) 135.6
OTHER DATA:
EBITDA(7)(8)(9).............. $ 599.3 $ 207.9 $ 23.7 $ 161.9 $ 143.4
Net income (loss) plus
intangible amortization,
net of tax(9)(10)(11)...... 239.6 (155.0) (172.5) 56.8 37.8
Amortization of
intangibles................ 166.2 168.7 170.2 42.6 43.0
Depreciation................. 165.5 253.8 212.7 52.3 51.8
Capital expenditures......... 323.7 262.2 175.0 38.5 59.8
WORLDWIDE STORE DATA:
Company-operated stores at
end of period.............. 4,472 5,105 5,283 5,076 5,438
Franchised and joint venture
stores at end of period.... 845 944 1,098 942 1,061
Total stores at end of
period..................... 5,317 6,049 6,381 6,018 6,499
Same store revenues increase
(decrease)(12)............. 5.1% (1.8)% 13.3% 7.6% 17.0%
</TABLE>
See footnotes on the following page.
8
<PAGE>
- ------------------------------
(1) For information regarding the pro forma adjustments made to our historical
financial data, we refer you to "Unaudited Pro Forma Combined Financial
Data."
(2) The statement of operations data for the periods presented do not fully
reflect the trends in our business as we had significantly different
business models during these periods resulting in significant charges. As a
result, our statement of operations data for the periods presented are not
comparable.
(3) Operating income (loss) reflects (1) the $50.2 million restructuring charge
recorded in 1996 primarily related to our corporate relocation and
elimination of third party distributors; (2) $220.3 million of the $250
million charge recorded in 1997 primarily related to inventory write-downs,
closure of underperforming stores and additional expenses associated with
our corporate relocation; and (3) the $424.3 million charge recorded in 1998
related to a change in accounting for videocassette and game rental
amortization. The following table presents operating income (loss) excluding
the impact of these special item charges:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Operating income (loss).......................................................... $ 267.6 $ (214.6) $ (359.2)
Impact of special item charges................................................... 50.2 220.3 424.3
--------- --------- ---------
Operating income, excluding special item charges................................. $ 317.8 $ 5.7 $ 65.1
</TABLE>
(4) Our historical capital structure is not indicative of our prospective
capital structure because no direct ownership relationship existed among all
the various units comprising our company. Accordingly, historical earnings
per share has not been presented in the combined financial statements. Pro
forma weighted average shares outstanding reflect all shares of class B
common stock issued and outstanding which are owned by Viacom and the class
A common stock to be issued in this offering as if these shares had been
outstanding since the beginning of each respective period.
(5) This reflects the December 31, 1998 declaration of a $1.4 billion dividend
payable to Viacom in the form of an interest-bearing promissory note.
(6) For information regarding the cash flows data, we refer you to the combined
statements of cash flows on page F-6 and the interim combined statements of
cash flow on page F-29.
(7) EBITDA represents net income (loss) before equity in loss of affiliated
companies (net of tax), benefit (provision) for income taxes, interest
income, interest expense, other items (net), depreciation and amortization
of intangibles. EBITDA may differ in the method of calculation from
similarly titled measures used by other companies.
(8) EBITDA includes: (1) the $50.2 million restructuring charge recorded in 1996
primarily related to our corporate relocation and elimination of third-party
distributors; (2) the $175.2 million effect on EBITDA of the $250 million
charge recorded in 1997 primarily related to inventory write-downs, closure
of underperforming stores and additional expenses associated with our
corporate relocation; and (3) the $424.3 million charge recorded in 1998
related to a change in accounting for videocassette and game rental
amortization. We refer you to notes 3 and 4 of our combined financial
statements included elsewhere in this prospectus.
(9) "EBITDA" and "net income (loss) plus intangible amortization, net of tax"
are presented here to provide additional information about our operations.
These items should be considered in addition to, but not as a substitute for
or superior to, operating income, net income, cash flow and other measures
of financial performance prepared in accordance with generally accepted
accounting principles.
(10) Net income (loss) plus intangible amortization, net of tax, includes: (1)
the $50.2 million restructuring charge recorded in 1996 primarily related to
our corporate relocation and elimination of third-party distributors; (2)
the $250 million charge recorded in 1997 primarily related to inventory
write-downs, closure of underperforming stores and additional expenses
associated with our corporate relocation; and (3) the $424.3 million charge
recorded in 1998 related to a change in accounting for videocassette and
game rental amortization. We refer you to notes 3 and 4 of our combined
financial statements included elsewhere in this prospectus.
(11) Intangible amortization, net of tax, included in this item is primarily
related to goodwill.
(12) A store is included in the same store revenue calculation after it has been
opened and operated by us for more than 52 weeks. An acquired store becomes
part of the same store base in the 53rd week after its acquisition and
conversion. The percentage change is computed by comparing total net
revenues for same stores as defined above at the end of the applicable
reporting period with total net revenues from these same stores for the
comparable period in the prior year.
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RISK FACTORS
You should carefully consider the risks described below and the other
information contained in this prospectus before making a decision to invest in
our class A common stock. We have separated the risks into three groups:
- risks that relate to our business and industry;
- risks that relate to our expected separation from Viacom; and
- risks that relate to the securities market and ownership in our stock.
In addition, the risks described below are not the only ones facing us. We
have only described the risks we consider to be the most material. However,
there may be additional risks that are viewed by us as not material or are not
presently known to us.
If any of the events described below were to occur, our business, prospects,
financial condition, results of operations or cash flows could be materially
adversely affected. When we say below that something could or will have a
material adverse effect on us, we mean that it could or will have one or more of
these effects. In any such case, the price of our common stock could decline,
and you could lose all or part of your investment in our company.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of factors both in
and out of our control, including the risks faced by us described below and
elsewhere in this prospectus.
RISK FACTORS RELATING TO OUR BUSINESS AND INDUSTRY
We are subject to the following risks, which include risks that relate to
our industry:
OUR BUSINESS MAY BE MATERIALLY ADVERSELY AFFECTED BY NEW TECHNOLOGIES
New digital technologies, such as near-video-on-demand and video-on-demand,
and others could have a material adverse effect on us. This is especially true
if:
- newly released movies are made widely available by the studios to these
technologies at the same time, or before, they are made available to video
stores for rental; and
- these technologies are widely accepted by consumers.
THE WIDESPREAD AVAILABILITY OF ADDITIONAL CHANNELS ON SATELLITE AND DIGITAL
CABLE SYSTEMS MAY SIGNIFICANTLY REDUCE PUBLIC DEMAND FOR OUR PRODUCTS. Recent
advances in direct broadcast satellite and cable technologies may adversely
affect public demand for video store rentals. If direct broadcast satellite and
digital cable were to become widely available and accepted, this could cause a
smaller number of movies to be rented if viewers favor the expanded number of
conventional channels and expanded programming, including sporting events,
offered through these services. If this were to occur, it could have a material
adverse effect on us. Direct broadcast satellite providers transmit numerous
channels of programs by satellite transmission into subscribers' homes. Recently
developed technology has presented cable providers with the opportunity to use
digital technology to transmit many additional channels of programs over cable
lines to subscribers' homes.
In addition, because of this increased availability of channels, direct
broadcast satellite and digital cable providers have been able to enhance their
pay-per-view business by:
- substantially increasing the number and variety of movies they can offer
their subscribers on a pay-per-view basis; and
- providing more frequent and convenient start times for the most popular
movies.
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This is referred to within our industry and by others as near-video-on-demand.
If near-video-
on-demand were to become more widely available and accepted, pay-per-view
purchases could significantly increase. Near-video-on-demand allows the consumer
to avoid trips to the video store for rentals and returns of movies which also
eliminates the chance they will incur an extended viewing fee. However, newly
released movies are currently made available by the studios for rental prior to
being made available on a near-video-on-demand basis. Near-video-on-demand also
does not allow the consumer to start, stop and rewind the movie. Increases in
the size of this pay-per-view market could lead to an earlier distribution
window for movies on pay-per-view if the studios perceive this to be a better
way to maximize their revenue.
WE MAY EVENTUALLY HAVE TO COMPETE WITH THE WIDESPREAD AVAILABILITY OF
VIDEO-ON-DEMAND, WHICH MAY SIGNIFICANTLY REDUCE THE DEMAND FOR OUR PRODUCTS.
Some digital cable providers have begun testing technology designed to transmit
movies on demand with interactive capabilities such as start, stop and rewind.
This is referred to within our industry and by others as video-on-demand.
Video-on-demand is currently available in some test markets. However,
video-on-demand competes with other uses of cable infrastructure, such as the
ability to provide internet access and basic telephone services, some of which
may provide higher returns for operators. Video-on-demand could have a material
adverse effect on us if:
- video-on-demand could be profitably provided at a reasonable price; and
- newly released movies were made available at the same time, or before,
they were made available to the video stores for rental.
OUR INDUSTRY WOULD LOSE A SIGNIFICANT COMPETITIVE ADVANTAGE IF THE MOVIE STUDIOS
ADVERSELY CHANGE THEIR CURRENT DISTRIBUTION PRACTICES
A significant competitive advantage that our industry currently enjoys over
most other movie distribution channels except theatrical release is the early
timing of our distribution "window." This window is exclusive against most other
forms of non-theatrical movie distribution, such as pay-per-view, premium
television, basic cable and network and syndicated television. The length of the
window for movie rental varies, typically ranging from 30 to 90 days for
domestic video stores and from 120 to 180 days for international video stores.
Thereafter, movies are made sequentially available to television distribution
channels.
We could be materially adversely affected if:
- the video store windows were no longer the first following the theatrical
release;
- the length of the video store windows were shortened; or
- the video store windows were no longer as exclusive as they are now;
because newly released movies would be made available earlier on these other
forms of non-theatrical movie distribution. As a result, consumers would no
longer need to wait until after the video store distribution window to view a
newly released movie on these other distribution channels.
Although we believe that the studios have a significant interest in
maintaining a viable home video rental industry, because the order, length and
exclusivity of each window for each distribution channel is determined solely by
the studio releasing the movie, we cannot predict the impact, if any, of any
future decisions by the studios.
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BECAUSE MARGINS ON SELL-THROUGH PRODUCTS ARE LOWER THAN RENTAL MARGINS, WE COULD
BE MATERIALLY ADVERSELY AFFECTED IF A GREATER PROPORTION OF NEWLY RELEASED
MOVIES WERE INITIALLY PRICED AS A SELL-THROUGH PRODUCT IN THE UNITED STATES AND
CONSUMERS DESIRED TO OWN THESE MOVIES
Sell-through retail margins are generally lower than rental margins. Some of
our competitors, such as mass merchandisers, warehouse clubs and Internet sites,
can distribute and sell these sell-through movies at lower costs and/or may
operate at lower margins than us. As a result, our sell-through business, which
is described below, in the United States represented only 7.0% of our domestic
revenues for 1998. We believe our profitability would be adversely affected if
we did not derive most of our revenues from the higher margin rental business.
Although we believe that industry economics will dictate that most new releases
on videocassettes and DVDs will continue to be initially priced for rental, we
could be materially adversely affected if:
- a greater proportion of either release format were initially priced as
sell-through merchandise in the United States; and
- consumers desired to own, and not rent, these movies.
In general, studios initially price their movies at prices that are too high
to generate significant consumer demand for purchase. Recently, however, the
studios have released a limited number of movies at prices intended to generate
consumer demand to purchase rather than rent them. This is referred to as
sell-through pricing. Movies priced for sell-through are not subject to our
revenue-sharing agreements. However, if enough consumers desired to rent rather
than own these sell-through priced movies, the adverse effect of sell-through
may be offset, in part or in full, by the improved margins we would obtain from
renting sell-through movies because these movies have low initial wholesale
prices and are not subject to revenue-sharing.
SIGNIFICANT BENEFITS WOULD BE LOST AND WE WOULD BE MATERIALLY ADVERSELY AFFECTED
IF OUR REVENUE-SHARING AGREEMENTS WERE MATERIALLY ADVERSELY CHANGED OR
DISCONTINUED
If our revenue-sharing agreements are materially adversely changed or
discontinued, significant benefits, as described in the summary of this
prospectus, would be lost. This in turn would have a material adverse effect on
us.
Historically, we paid the major studios or their licensees between $60 and
$70 per videocassette for major theatrical releases that were priced for rental
in the United States. In 1998, we entered into revenue-sharing agreements with
the major studios in the United States. These agreements generally have terms
ranging from two to five years. Under these agreements, we pay only a minimal up
front cost per videocassette and agree to share our U.S. rental revenue with the
studios for a limited period of time. In addition, we agree to take a minimum
number of copies of each movie title that is released by a studio in any U.S.
movie theater. We also agree to take, in some cases, a minimum number of movies
that are not released by a studio in any U.S. movie theater.
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IF THE AVERAGE SALES PRICE FOR THE PREVIOUSLY VIEWED TAPES OBTAINED UNDER
REVENUE-SHARING IS NOT AT OR ABOVE AN EXPECTED PRICE, OUR EXPECTED GROSS MARGINS
MAY BE ADVERSELY AFFECTED
Under our revenue-sharing agreements, we expect to earn revenues in two
ways:
(1) revenues resulting from the rental of the videocassettes; and
(2) revenues resulting from the sales of the previously viewed tapes to the
public after the period of time after their useful lives as rental products.
To achieve our expected gross margins, we need to sell these previously viewed
tapes at or above an expected price. If the average sales price of these
previously viewed tapes is not at or above this expected price, our gross
margins under our revenue-sharing agreements may be adversely affected.
As a result of revenue-sharing, we will need to sell significantly more
previously viewed tapes than in the past. Even though revenue-sharing was not
fully implemented during all of 1998, domestically we sold about 17.6 million
previously viewed tapes in 1998, as compared to 1997 when we sold about 7.8
million previously viewed tapes. This represents about a 126% increase in sales.
We cannot assure you that we will be able to sell, on average, these previously
viewed tapes at or above the expected price since we do not have extensive
experience in selling previously viewed tapes in these quantities.
Other factors that affect our ability to sell these previously viewed tapes at
expected prices, include:
(1) consumer desire to own the particular movie; and
(2) the number of previously viewed tapes available for sale by others to
the public.
In addition, after the expiration of the video store distribution window,
the sales of previously viewed tapes also compete with newly released videos
which are priced for sell-through.
WE HAVE HAD LIMITED EXPERIENCE WITH OUR NEW BUSINESS MODEL AND CANNOT ASSURE YOU
THAT WE WILL OPERATE PROFITABLY IN THE FUTURE UNDER THIS NEW MODEL
Because we have had limited experience with our new business model, we
cannot assure you that we will have net income in future periods. Beginning in
the second quarter of 1997, we developed our new business model to refocus on
our core rental business. We have experienced significant losses during this
transitional period. We had net losses of $318.2 million in 1997 and $336.6
million in 1998. We also had a net loss of $3.4 million for the first quarter of
1999.
WE MAY BE UNABLE TO FULLY EXECUTE OUR NEW STORE EXPANSION
Although we believe that we have personnel and other resources required to
implement our store expansion goals, we cannot assure you that we will be able
to execute our new store expansion within the expected time frame. If we are
unable to execute this expansion, it would be detrimental to our goals of
increasing market share, increasing same store revenues and applying the
benefits of our size. We intend to proceed with a significant expansion. Over
each of the next three years, we expect to open:
- about 500 new company-operated stores in the United States;
- about 200 new franchise stores in the United States;
- about 170 new company-operated stores in markets outside the United
States; and
- about 125 new franchise and/or joint venture stores in markets outside the
United States.
In order to meet our store expansion goals within this three-year period, we
will be required to invest considerable time in implementing these plans.
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WE CANNOT ASSURE YOU AS TO THE PROFITABILITY OF NEWLY OPENED STORES
In connection with our growth strategy, we expect to open new
company-operated stores in markets, regions or countries where we have limited
or no operating history. As a result, we cannot assure you that
- these newly opened stores will achieve revenue or profitability levels
comparable to those of our existing stores; or
- that these stores will achieve such revenue or profitability levels within
the time periods estimated by us.
NEWLY OPENED STORES MAY ADVERSELY AFFECT THE PROFITABILITY OF PRE-EXISTING
STORES
We expect to open smaller company-operated stores in markets where we
already have significant operations in order to maximize our market share within
these markets. Although we have a customized store development approach, we
cannot assure you that these smaller newly opened stores will not adversely
affect the revenues and profitability of those pre-existing stores in any given
market.
WE MAY BE LIABLE FOR LEASE PAYMENTS RELATED TO BLOCKBUSTER MUSIC STORES
In October 1998, about 380 BLOCKBUSTER MUSIC stores were sold to Wherehouse
Entertainment Inc. About 110 of the leases transferred in connection with this
sale had previously been guaranteed either by Viacom or its affiliates. If
Wherehouse defaults with respect to these leases, related losses could adversely
affect our future operating income. As of March 31, 1999, the average remaining
term of these leases was 4.1 years. We have agreed to indemnify Viacom with
respect to any amount paid under these guarantees. We estimate that, as of the
time of the sale, we were contingently liable for about $84 million with respect
to base rent for the remaining term of these leases if Wherehouse defaults on
all of these leases. This amount has not been discounted to present value. Our
contingent liability will vary over time depending on the lease terms remaining.
We have not recorded any reserves related to this contingent liability in our
combined financial statements.
OUR EXECUTIVE MANAGEMENT TEAM IS PRIMARILY RESPONSIBLE FOR IMPLEMENTATION OF OUR
NEW BUSINESS MODEL AND WE DEPEND ON THEIR EFFORTS
We are highly dependent on the efforts of our executive officers,
particularly John F. Antioco, our chairman, president and chief executive
officer. We attribute the recent gains in our same store revenues to the efforts
of our executive officers. While we believe that we could find replacements for
these key personnel, the loss of their services and the resulting discontinuity
in the implementation of our new business model could have an adverse effect on
our goals of expanding operations, increasing market share, increasing same
store revenues and applying the benefits of our size. Mr. Antioco has entered
into an employment contract with us through 2002. We refer you to "Management --
Employment Agreements."
WE COULD BE MATERIALLY AND ADVERSELY AFFECTED IF OUR CENTRALIZED DOMESTIC
DISTRIBUTION CENTER IS SHUT DOWN
Our domestic distribution system is centralized. This means that we ship
nearly all of the products to our U.S. company-operated stores, including newly
released videos purchased under the revenue-sharing agreements, through our
distribution center. If our distribution center is shut down for any reason we
could incur significantly higher costs and longer lead times associated with
distributing our videocassettes and other products to our stores.
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AS A PARTICIPANT IN THE HOME VIDEO INDUSTRY, WE ARE SUBJECT TO GOVERNMENTAL
REGULATION PARTICULAR TO OUR INDUSTRY
Any finding that we have been or are in noncompliance with respect to the
laws affecting our business could result in, among other things, governmental
penalties or private litigant damages which could have a material adverse effect
on us. We are subject to various international, U.S. federal and state laws that
govern the offer and sale of our franchises because we act as a franchisor. In
addition, because we operate video stores and develop new video stores, we are
subject to various international, U.S. federal and state laws that govern, among
other things, the disclosure and retention of our video rental records and
access and use of our video stores by disabled persons, and are subject to
various state and local licensing, zoning, land use, construction and
environmental regulations. Furthermore, changes in existing laws, including
environmental and employment laws, new laws or increases in the minimum wage may
increase our costs. Our obligation to comply with, and the effects of, the above
governmental regulations are increased by the magnitude of our operations.
WE MAY BE ADVERSELY AFFECTED IF OUR YEAR 2000 REMEDIATION EFFORTS ARE NOT
SUCCESSFUL
We are highly dependent upon the proper functioning of our computer and
infrastructure systems as well as those of our third party vendors. The failure
of our systems, or those of our third party vendors, to be year 2000 compliant
could have a material adverse effect on us. The possible consequences of a
failure include, among others:
- incomplete or inaccurate accounting, recording or processing of rentals
and sales of videocassettes, DVDs, video games and other products and the
reporting of this information;
- delays or failures in ordering, shipment and distribution of
videocassettes, DVDs, video games and other products;
- the creation of uncertainty about our customer database; or
- the inability to consummate credit and debit card and check transactions.
If a potential year 2000 problem is not remedied, potential risks to us
include business interruption, financial loss, harm to our reputation and legal
liability. We refer you to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for additional information.
RISK FACTORS RELATING TO OUR SEPARATION FROM VIACOM
We are subject to the following risks in connection with our expected
separation from Viacom:
WE WILL BE CONTROLLED BY VIACOM AS LONG AS IT OWNS A MAJORITY OF THE COMBINED
VOTING POWER OF OUR TWO CLASSES OF COMMON STOCK AND OUR OTHER STOCKHOLDERS WILL
BE UNABLE TO AFFECT THE OUTCOME OF STOCKHOLDER VOTING DURING THIS TIME
AFTER THE COMPLETION OF THIS OFFERING, WE WILL BE CONTROLLED BY VIACOM. We
have two classes of common stock:
- class A common stock, which entitles the holder to one vote per share; and
- class B common stock, which entitles the holder to five votes per share,
on all matters submitted to our stockholders. After the completion of this
offering, Viacom will own in excess of a majority of the combined voting power
of our outstanding common stock. As a result, Viacom will be able to determine
the outcome of all corporate actions requiring stockholder approval. Because
Viacom has the ability to control us, it has the power to act without taking the
best interests
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of our company into consideration. For example, Viacom will continue to control
decisions with respect to:
- the direction and policies of our company, including the election and
removal of directors;
- mergers or other business combinations involving us;
- the acquisition or disposition of assets by us;
- future issuances of our common stock or other securities;
- the incurrence of debt by us;
- the payment of dividends, if any, on our common stock; and
- amendments to our certificate of incorporation and bylaws.
Any of these provisions could be used by Viacom for its own advantage to the
detriment of our other stockholders and our company. This in turn may have an
adverse affect on the price of our class A common stock.
VIACOM HAS NO OBLIGATION TO COMPLETE THE SPLIT-OFF. Viacom has the sole
discretion to determine the timing and all terms of any split-off and is under
no obligation to effect the split-off. We cannot assure you as to whether or not
or when the split-off will occur, or as to the terms of the split-off. If Viacom
does not complete the split-off, Viacom will continue to control us.
THERE ARE POTENTIAL CONFLICTS OF INTEREST WITH RESPECT TO OUR RELATIONSHIP WITH
VIACOM BECAUSE VIACOM CONTROLS US AND OUR BUSINESS OBJECTIVES MAY DIFFER
Because Viacom controls us and our business objectives may differ, there are
potential conflicts of interest between Viacom and us regarding, among other
things:
- our past and ongoing relationship with Viacom, including, but not limited
to, Viacom's control of our tax matters for years in which we are
consolidated with Viacom for tax purposes, the acquisition of
videocassettes from Paramount Pictures Corporation, an indirect subsidiary
of Viacom, and the agreements between Viacom and us relating to this
offering and the split-off;
- potential competitive business activities; and
- sales or distributions by Viacom of all or part of its ownership interest
in our company.
We cannot assure you that we will be able to resolve any potential conflicts
or that, if resolved, we would not be able to receive a more favorable
resolution if we were dealing with someone who was not controlling us.
THREE OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO
DIRECTORS AND EXECUTIVE OFFICERS OF VIACOM
Prior to our split-off from Viacom, we expect that three members of our
board of directors will be directors and executive officers of Viacom. These
directors will have obligations to us as well as to Viacom and may have
conflicts of interest with respect to matters potentially or actually involving
or affecting us. Our certificate of incorporation contains provisions designed
to facilitate resolution of these potential conflicts which we believe will
assist our directors in fulfilling their fiduciary duties to our stockholders.
Subject to applicable Delaware law, by becoming a stockholder in our company,
you will be deemed to have notice of and have consented to these provisions of
our certificate of incorporation. Although these provisions are designed to
resolve such conflicts between us and Viacom fairly, we cannot assure you that
any conflicts will be so resolved. We refer you to "Description of
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Capital Stock -- Some of the Provisions of Our Certificate of Incorporation and
Bylaws" for more information.
OUR HISTORICAL COMBINED FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR
RESULTS AS A SEPARATE COMPANY
Since September 1994, our operations have been conducted by various entities
owned directly or indirectly by Viacom. Following this offering, we will be
required to supplement our financial, administrative and other resources to
provide services necessary to operate successfully as an independent public
company. In addition, the financial information included in this prospectus may
not necessarily reflect our results of operations, financial position and cash
flows in the future or what the results of operations, financial position or
cash flows would have been had we been a separate, stand-alone entity during the
periods presented. The financial information included in this prospectus does
not reflect many significant changes that will occur in our capital structure,
funding and operations as a result of our separation from Viacom and this
offering. For additional information, we refer you to "Related Party
Transactions," "Unaudited Pro Forma Combined Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RISK FACTORS RELATING TO THE SECURITIES MARKET AND OWNERSHIP OF OUR STOCK
There are risks related to the securities market that you should consider in
connection with your investment in and ownership of our stock. These risks
include limitations on our ability to execute some types of business
combinations and change of control transactions.
WE CANNOT PREDICT THE EFFECT THAT THE SPLIT-OFF WILL HAVE ON THE PRICE OF OUR
COMMON STOCK; THE PRICE OF OUR COMMON STOCK COULD BE MATERIALLY AND ADVERSELY
AFFECTED BY SALES OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK IN THE PUBLIC
MARKET
We cannot predict the effect that the split-off will have on the price of
your class A common stock. The split-off could involve the distribution of about
shares of our common stock by Viacom to its stockholders who participate in an
exchange offer representing about % of the equity value of our company. All of
those shares would be eligible for immediate resale in the public market, other
than any shares held by our affiliates. Viacom has the sole discretion to
determine the timing, structure and terms of the split-off or other distribution
of its shares of our common stock.
Conversely, if the split-off or other similar transaction is not completed,
Viacom will have the right to require us to register its shares of our common
stock under the U.S. securities laws for sale in the public market. For a
further explanation of this right, we refer you to "Related Party Transactions
- -- Agreements Between Viacom and Us -- Registration Rights Agreement." Sales by
Viacom or others of substantial amounts of our common stock in the public
market, or the perception that such sales might occur, could have a material
adverse effect on the price of your class A common stock.
THERE MAY BE AN ADVERSE EFFECT ON THE PRICE OF OUR CLASS A COMMON STOCK DUE TO
DISPARATE VOTING RIGHTS OF OUR CLASS A COMMON STOCK AND OUR CLASS B COMMON STOCK
AND, POSSIBLY, DIFFERENCES IN THE LIQUIDITY OF THE TWO CLASSES
The differential in the voting rights of the class A common stock and class
B common stock could adversely affect the price of the class A common stock to
the extent that investors or any potential future purchaser of our common stock
ascribe value to the superior voting rights of the class B common stock. The
holders of class A common stock and class B common stock generally have
identical rights except that holders of class A common stock are entitled to one
vote per share while holders of class B common stock are entitled to five votes
per share on all matters to be voted on by stockholders. Holders of class A
common stock and class B common stock are entitled to separate class
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votes on amendments to our certificate of incorporation that would alter or
adversely affect the powers, preferences or special rights of the shares of
their respective classes. In addition, it is possible that differences in the
liquidity between the two classes may develop, which could result in price
differences. We refer you to "Description of Capital Stock."
OUR ANTI-TAKEOVER PROVISIONS MAY DELAY OR PREVENT A CHANGE OF CONTROL OF OUR
COMPANY, WHICH COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK
The existence of some provisions in our corporate documents and Delaware law
may delay or prevent a change in control of our company, which could adversely
affect the price of our common stock. Our certificate of incorporation and
bylaws contain some provisions that may make the acquisition of control of our
company more difficult, including provisions relating to the nomination,
election and removal of directors and limitations on actions by our
stockholders. In addition, Delaware law also imposes some restrictions on
mergers and other business combinations between us and any holder of 15% or more
of our outstanding common stock. Viacom, however, is generally exempted from
these provisions and will have special rights so long as it owns at least a
majority of the combined voting power of our two classes of common stock
outstanding. We refer you to "Description of Capital Stock" for a summary of
these anti-takeover provisions.
In addition, we have entered into a tax matters agreement with Viacom with
respect to several tax matters relating to this offering and the split-off,
which will require, among other things, that until two years after the
completion of the split-off, we cannot voluntarily enter into certain
transactions, including any merger transaction or any transaction involving the
sale of our capital stock without the consent of Viacom. In addition, we have
agreed under this tax matters agreement to indemnify Viacom for any tax
liability incurred as a result of the failure of the split-off to qualify as a
tax-free transaction due to a takeover of our company or any other transaction
involving our capital stock, assets or businesses regardless of whether or not
such transaction is within our control. We refer you to "Related Party
Transactions -- Agreements Between Viacom and Us -- Tax Matters Agreement."
OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY FOLLOWING THE OFFERING AND YOU COULD
LOSE ALL OR PART OF YOUR INVESTMENT AS A RESULT
We, Viacom and the underwriters will negotiate to determine the initial
public offering price. You may not be able to resell your shares at or above the
initial public offering price due to a number of factors. These factors, some or
all of which are beyond our control, include:
- actual or anticipated fluctuations in our operating results;
- changes in expectations as to our future financial performance or changes
in financial estimates of securities analysts;
- success of our operating and growth strategies;
- operating and stock price performance of other comparable companies; and
- realization of any of the risks described in these Risk Factors.
In addition, the stock market recently has experienced extreme volatility
that often has been unrelated or disproportionate to the operating performance
of particular companies. These broad market and industry fluctuations may
adversely affect the trading price of our common stock, regardless of our actual
operating performance.
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SEPARATION FROM VIACOM
SET FORTH IN THIS SECTION IS VIACOM'S CURRENT INTENTION AS TO OUR POSSIBLE
SEPARATION FROM VIACOM. VIACOM HAS THE SOLE DISCRETION TO DETERMINE THE TIMING
AND ALL TERMS OF ANY SPLIT-OFF AND IS UNDER NO OBLIGATION TO EFFECT THE
SPLIT-OFF. WE CANNOT ASSURE YOU AS TO WHETHER OR NOT OR WHEN THE SPLIT-OFF WILL
OCCUR, OR AS TO THE TERMS OF THE SPLIT-OFF.
OVERVIEW
Our business and operations were previously conducted by Blockbuster
Entertainment Corporation, which was incorporated in Delaware in 1982 and
entered the movie rental business in 1985. On September 29, 1994, Blockbuster
Entertainment Corporation was merged with and into Viacom. Since the merger, our
business and operations have been conducted by various subsidiaries of Viacom.
Recently, our business and operations were either (1) merged into Blockbuster
Inc. or (2) purchased by Blockbuster Inc. or one of its subsidiaries.
Blockbuster Inc., an indirect subsidiary of Viacom, was incorporated under a
different name on October 16, 1989 in Delaware.
Viacom has announced that, if it receives a favorable tax ruling from the
Internal Revenue Service, it currently intends to distribute all of its holdings
in our common stock to stockholders who tender shares of Viacom common stock in
an exchange offer described below. This transaction is intended to qualify for
tax-free treatment under Section 355 of the Internal Revenue Code. Viacom has
the sole discretion to determine if and when such split-off will occur and all
terms of such split-off. If Viacom determines to make the distribution, it will
occur some time after the later of (1) September 29, 1999, the five-year
anniversary of the merger of Viacom and Blockbuster Entertainment Corporation
and (2) unless the underwriters consent to an earlier date, 180 days after the
completion of this offering. For additional information of the risks associated
with Viacom not completing the split-off, we refer you to "Risk Factors -- Risk
Factors Relating to Our Separation from Viacom."
Viacom is not obligated to consummate the split-off, and neither Viacom nor
we have any intention of purchasing or redeeming the shares issued in this
offering if the split-off is not consummated. In addition, if the split-off is
ultimately consummated, Viacom does not have any obligation with respect to the
timing or any of the terms of the split-off. We refer you to "Risk Factors --
Risk Factors Relating to Our Separation from Viacom -- Viacom has no obligation
to complete the split-off."
The split-off is intended to establish us as a stand-alone entity with
objectives separate from those of other businesses of Viacom. We and Viacom
believe that the split-off will resolve management, systemic and other problems
that have arisen from the operation of the two groups of businesses under a
common parent corporation. In addition, although we have no specific plans, we
believe that the split-off will allow us to facilitate the expansion of our
business by making acquisitions by issuing our stock and by entering into
partnerships and other agreements. The split-off will also allow us to modify
our compensation structure to be more in line with that used by other retailers
and provide incentives to our employees that are more closely linked to our
performance. In order to accomplish the split-off, we and Viacom have undertaken
or intend to undertake the transactions described below.
PRE-OFFERING TRANSACTIONS
CONSOLIDATION OF BLOCKBUSTER SUBSIDIARIES. In September and November 1998,
numerous U.S. subsidiaries of Viacom International Inc., a wholly owned
subsidiary of Viacom, each of which were directly or indirectly involved in our
business, were merged with and into our current legal entity, which is named
"Blockbuster Inc." On or about the time we entered into the credit agreement
discussed below, we and/or some of our subsidiaries purchased stock or assets
from affiliates of Viacom in order to acquire the non-U.S. operations of our
business that we did not already own for about $222 million.
19
<PAGE>
We paid about $65 million of this purchase price from borrowings under the
credit agreement. We paid the remaining portion of the purchase price with cash
that was contributed to us from our parent, Viacom International Inc.
DIVIDEND NOTE AND ACQUISITION NOTES. On December 31, 1998, we declared a
dividend in the form of a promissory note in the principal amount of $1.4
billion to Viacom International Inc. (the "Dividend Note"). In addition, in the
first quarter of 1999, we issued promissory notes in the aggregate principal
amount of about $77 million to Viacom International Inc. in order to obtain
funds for an acquisition of video stores (the "Acquisition Notes"). We paid the
Dividend Note and the Acquisition Notes, together with any accrued and unpaid
interest, with the proceeds of the borrowings under the credit agreement
described below.
CREDIT AGREEMENT. On , 1999, we entered into a $1.9 billion term and
revolving credit agreement with a syndicate of lenders. For a more complete
description of the credit agreement, we refer you to "Description of Credit
Agreement." On , 1999 we borrowed $1.6 billion under this credit agreement,
all of which was used to:
(1) pay a portion of the purchase price to affiliates of Viacom to acquire
the non-U.S. operations of our business that we did not already own;
(2) repay the Dividend Note and the Acquisition Notes, together with any
accrued and unpaid interest; and
(3) pay the fees and expenses related to the origination of the credit
agreement to the syndicate of lenders.
We refer you to "Use of Proceeds."
AGREEMENTS BETWEEN VIACOM AND US. In order to complete this offering and
the split-off, we and Viacom have entered into a number of agreements. In
addition, there are other agreements between Viacom and us not related to either
this offering or the split-off. We refer you to "Related Party Transactions --
Agreements Between Viacom and Us."
THE OFFERING
We expect to offer about % of our class A common stock in this offering.
As a result, immediately after the completion of this offering, Viacom will own
none of the outstanding shares of our class A common stock and 100% of the
outstanding shares of our class B common stock, which will represent about %
of the equity value and % of the voting power of our outstanding common stock.
Until such time as Viacom holds less than 50% of the combined voting power of
all classes of our common stock outstanding, Viacom will be able to control the
vote on all matters submitted to our stockholders, including the election of
directors and the approval of extraordinary corporate transactions. We refer you
to "Risk Factors -- Risk Factors Relating to Our Separation from Viacom -- After
the completion of this offering, we will be controlled by Viacom."
POST-OFFERING TRANSACTIONS
EXCHANGE OFFER. Viacom intends to offer to exchange its shares of our
common stock for shares of Viacom's class A common stock and Viacom's class B
common stock. In connection with the request for a tax ruling from the Internal
Revenue Service, Viacom has represented that National Amusements, Inc., the
largest single stockholder of Viacom, will not participate in the exchange
offer. If the amount of Viacom's common stock held by its stockholders tendered
in the exchange offer is not sufficient to result in a distribution of all of
our shares of common stock held by Viacom, Viacom will distribute in a "backup
distribution" all of its remaining shares of our common stock that it holds to
its
20
<PAGE>
stockholders in proportion to their Viacom shareholdings. Conditions to
completion of the exchange offer are expected to include:
- the acceptance of the offer by a sufficient number of Viacom's
stockholders to result in a distribution of shares of our common stock
held by Viacom such that, if the backup distribution is necessary,
National Amusements, Inc. will not receive more than 10% of the total
number of our outstanding shares of common stock in the backup
distribution; and
- the receipt of a favorable tax ruling from the Internal Revenue Service.
21
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by us from the sale of shares of class
A common stock in this offering are estimated to be about $ million, or
about $ million if the underwriters exercise their over-allotment options
in full, after deducting underwriting discounts and commissions and estimated
offering expenses. All of the net proceeds of this offering will be used to
repay some of the borrowings under our credit agreement. The first $ million
will be used to repay all or a portion of the $600 million revolving loan
maturing on , 2000. Any remaining proceeds will be used pro rata to repay
a portion of the $700 million revolving loan maturing on July 1, 2004 and a
portion of the $600 million term loan maturing on July 1, 2004.
Borrowings under the credit agreement accrue interest at a rate equal to the
interest rates prevailing on the date of determination in the London interbank
market for the interest period selected by us, plus a margin over this rate. For
a more complete description of the credit agreement, we refer you to
"Description of Credit Agreement."
We have used or will use the borrowings under the credit agreement:
- to pay about $65 million which is a portion of the purchase price to
affilaites of Viacom to acquire the non-U.S. operations of our business
that we did not already own;
- to repay a promissory note issued by us to Viacom International Inc. in
the principal amount of $1.4 billion plus accrued and unpaid interest as a
dividend;
- to repay promissory notes issued by us to Viacom International Inc. in the
aggregate principal amount of about $77 million plus accrued and unpaid
interest for the acquisition of video stores;
- to pay the fees and expenses of about $15 million related to the
origination of the credit agreement to the syndicate of lenders; and
- for working capital and general corporate purposes.
22
<PAGE>
DIVIDEND POLICY
Following this offering, our dividend practices with respect to our common
stock will be determined and may be changed from time to time by our board of
directors. Under Delaware law and our certificate of incorporation, our board of
directors is not required to declare dividends on our common stock. We currently
intend to pay dividends on a quarterly basis, at an initial rate of $ per
share, commencing with the first declaration in for payment in . Our
board of directors is free to change our dividend practices at any time from
time to time and to decrease or increase the dividend paid, or to not pay a
dividend, on our common stock on the basis of our results of operations,
financial condition, cash requirements and future prospects and other factors
deemed relevant by our board of directors. Furthermore, our credit agreement
limits our ability to pay dividends. We refer you to "Description of Credit
Agreement" for additional information.
23
<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents, short-term
borrowings and capitalization:
(1) at March 31, 1999; and
(2) giving pro forma effect to:
- the borrowings under the credit agreement and the application of the
amounts borrowed thereunder;
- this offering and the application of the net proceeds to be received
from the sale of the shares of class A common stock offered hereby at
an initial offering price of $ per share, after deducting the
underwriting discounts and commissions and the estimated offering
expenses; and
- the conversion of Viacom's net equity investment in our company into
shares of class B common stock.
We refer you to "Use of Proceeds" and "Description of Credit Agreement" for
additional information relating to the application of the net proceeds from this
offering and the credit agreement.
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------------
PRO FORMA
ADJUSTED FOR
THIS
HISTORICAL OFFERING(1)
----------- ---------------
<S> <C> <C>
(DOLLARS IN MILLIONS)
Cash and cash equivalents............................................................. $ 75.0 $
----------- ---------------
----------- ---------------
Debt: (2)
Short-term borrowings, including current portion of credit agreement and capital
lease obligations................................................................. 22.3
----------- ---------------
Long-term debt:
Notes payable to Viacom........................................................... 1,690.4
Long-term debt, third party credit agreement, less current portion................ --
Capital lease obligations, less current portion................................... 134.2
----------- ---------------
Total long-term debt, less current portion...................................... 1,824.6
----------- ---------------
Total debt...................................................................... 1,846.9
----------- ---------------
Stockholders' equity:
Class A common stock, par value $0.01 per share, shares authorized, shares
issued and outstanding pro forma (3) (4).......................................... --
Class B common stock, par value $0.01 per share, shares authorized, shares
issued and outstanding pro forma (4).............................................. --
Additional paid-in capital.......................................................... --
Viacom's net equity investment...................................................... 5,723.8
Accumulated other comprehensive loss-foreign currency translation adjustment........ (61.6)
----------- ---------------
Total stockholders' equity (4).................................................. 5,662.2
----------- ---------------
Total capitalization.................................................................. $ 7,509.1 $
----------- ---------------
----------- ---------------
</TABLE>
- ------------------------------
(1) We refer you to "Unaudited Pro Forma Combined Financial Data."
(2) For a description of our borrowings, we refer you to note 7 of our combined
financial statements for the three years ended December 31, 1998 and note 3
of our interim combined financial statements.
(3) Excludes shares of class A common stock issuable upon conversion of
the class B common stock and shares reserved for the exercise of
options granted under our employee compensation plans. We refer you to
"Management."
(4) The pro forma assumes that the underwriters have not exercised their
over-allotment options. If the underwriters exercise their over-allotment
options in full, the number of issued and outstanding shares of class A
common stock and class B common stock will increase to and ,
respectively. In addition, it is estimated that total stockholders' equity
will increase to $ , with a corresponding decrease in the amount
outstanding under our credit agreement. We refer you to "Use of Proceeds."
24
<PAGE>
DILUTION
As of March 31, 1999, we had a net tangible book value of $ or $
per share. After giving effect to our sale of shares of class A common
stock offered hereby (assuming the underwriters do not exercise their
over-allotment options) at an initial public offering price of $ per share,
after deducting the underwriting discount and commission and estimated offering
expenses, our pro forma net tangible book value as of March 31, 1999 would have
been about $ or $ per share. This represents an immediate increase in
net tangible book value of $ per share to the existing stockholder and an
immediate dilution of $ per share to new investors. The following table
illustrates this per share dilution.
<TABLE>
<CAPTION>
PER SHARE
----------
<S> <C>
Initial public offering price per share........................................... $
Net tangible book value before this offering(1)................................. $
Increase attributable to new investors.......................................... $
Pro forma net tangible book value after this offering............................. $
----------
Dilution per share to new investors (2)........................................... $
----------
----------
</TABLE>
- ------------------------
(1) Assuming the transactions described in "Prospectus Summary -- Separation
from Viacom" and "Separation from Viacom -- Pre-Offering Transactions" had
occurred on March 31, 1999, this represents our net tangible book value
(tangible assets less total liabilities) as of March 31, 1999 divided by the
number of shares of class B common stock owned by Viacom.
(2) If the underwriters' over-allotment options are exercised in full, the
dilution per share to new investors will be $ per share.
The following table summarizes, as of March 31, 1999, the relative
investment of the existing stockholder and new investors, giving pro forma
effect to the sale by us of the shares of class A common stock offered in this
offering.
<TABLE>
<CAPTION>
TOTAL CASH
SHARES PURCHASED CONSIDERATION AVERAGE
-------------------- -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholder....................................... % $ % $
New Investors.............................................. % %
--------- --------- --------- --------- ---------
Total.................................................. 100.0% $ 100.0% $
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The foregoing computations do not include shares of class A common stock
issuable upon the exercise of options granted under our employee compensation
plans. We refer you to "Management."
25
<PAGE>
SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table sets forth our selected combined historical and pro
forma financial data as of the dates and for the periods indicated. The selected
statement of operations and balance sheet data for the years ended December 31,
1996 through 1998 are derived from our audited combined financial statements.
The selected statement of operations data for the nine months ended September
30, 1994, the three months ended December 31, 1994, the year ended December 31,
1995 and the three months ended March 31, 1998 and 1999 and the selected balance
sheet data as of December 31, 1994 and 1995 and March 31, 1998 and 1999 are
derived from our unaudited combined financial statements prepared by us, which
in our opinion, include all normal, recurring adjustments necessary for a fair
presentation of the financial position at such dates and the results of
operations for such respective periods. The financial information herein may not
necessarily reflect results of operations, financial position and cash flows of
our company in the future or what the results of operations, financial position
and cash flows would have been had we been a separate, stand-alone entity during
the periods presented.
The pro forma financial data have been derived from the unaudited pro forma
combined financial data which were prepared by us to illustrate the estimated
effects of the transactions to reorganize our company and the application of the
net offering proceeds. For a more complete description of these transactions we
refer you to "Unaudited Pro Forma Combined Financial Data" and notes thereto
included elsewhere in this prospectus. In addition, the unaudited pro forma
combined financial data do not purport to represent what the results of
operations or financial position of our company would actually have been if the
transactions to reorganize our company and the application of the net offering
proceeds had in fact occurred on such dates or to project the results of
operations or financial position of our company for any future period or date.
The following data should be read in conjunction with, and are qualified by
reference to, the combined financial statements and related notes thereto, the
"Unaudited Pro Forma Combined Financial Data" and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
26
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NINE MONTHS THREE MONTHS
ENDED ENDED OR AT YEAR ENDED OR AT DECEMBER 31, OR AT MARCH 31,
SEPTEMBER 29, DECEMBER 31, ------------------------------------------ --------------------
1994(1) 1994 1995 1996(2) 1997(3) 1998(4) 1998 1999
------------- --------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE AND WORLDWIDE STORE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues...................... $ 1,468.0 $ 546.3 $ 2,403.3 $ 2,942.1 $ 3,313.6 $ 3,893.4 $ 931.2 $ 1,113.0
Gross profit.................. 1,030.9 431.0 1,705.4 1,928.4 1,953.1 1,937.0 604.6 671.2
Operating expenses............ 742.9 273.6 1,275.2 1,660.8 2,167.7 2,296.2 537.6 622.6
Operating income (loss)....... 288.0 157.4 430.2 267.6 (214.6) (359.2) 67.0 48.6
Interest expense, net, and
other items................. (16.6) (2.4) (11.0) (18.4) (54.7) (35.5) (6.0) (28.6)
Income (loss) before income
taxes....................... 271.4 155.0 419.2 249.2 (269.3) (394.7) 61.0 20.0
Benefit (provision) for income
taxes....................... (127.1) (71.8) (227.7) (167.4) (30.0) 59.4 (45.2) (23.4)
Equity in income (loss) of
affiliated companies, net of
tax......................... 1.7 -- (48.6) (4.0) (18.9) (1.3) -- --
Net income (loss)............. $ 146.0 $ 83.2 $ 142.9 $ 77.8 $ (318.2) $ (336.6) $ 15.8 $ (3.4)
Pro forma net income (loss)
per share--basic and diluted
(6).........................
Pro forma weighted average
shares outstanding--basic
and diluted (6).............
BALANCE SHEET DATA:
Cash and cash equivalents..... $ 55.2 $ 100.3 $ 58.6 $ 129.6 $ 99.0 $ 72.9 $ 75.0
Rental library, net........... 291.1 519.5 676.0 734.5 441.2 750.2 457.3
Intangibles, net.............. 6,147.1 6,531.3 6,309.6 6,192.7 6,055.6 6,161.0 6,074.3
Total assets.................. 8,249.7 8,570.9 8,794.6 8,731.0 8,274.8 8,617.0 8,300.5
Long-term debt, less current
portion (7)................. 296.3 168.3 249.0 331.3 1,715.2 352.2 1,824.6
Stockholders' equity (7)...... 7,274.9 7,737.2 7,784.4 7,617.6 5,637.9 7,603.8 5,662.2
WORLDWIDE STORE DATA:
Company-operated stores at end
of period................... 3,067 3,692 4,472 5,105 5,283 5,076 5,438
Franchised and joint venture
stores at end of period..... 1,002 821 845 944 1,098 942 1,061
Total stores at end of
period...................... 4,069 4,513 5,317 6,049 6,381 6,018 6,499
Same store revenues increase
(decrease)(8)............... 5.1% (1.8)% 13.3% 7.6% 17.0%
<CAPTION>
PRO FORMA
AS
ADJUSTED
THREE
PRO FORMA AS MONTHS
ADJUSTED ENDED
YEAR ENDED OR AT
DECEMBER 31, MARCH 31,
1998(5) 1999(5)
------------ ----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................
Gross profit..................
Operating expenses............
Operating income (loss).......
Interest expense, net, and
other items.................
Income (loss) before income
taxes.......................
Benefit (provision) for income
taxes.......................
Equity in income (loss) of
affiliated companies, net of
tax.........................
Net income (loss).............
Pro forma net income (loss)
per share--basic and diluted
(6).........................
Pro forma weighted average
shares outstanding--basic
and diluted (6).............
BALANCE SHEET DATA:
Cash and cash equivalents.....
Rental library, net...........
Intangibles, net..............
Total assets..................
Long-term debt, less current
portion (7).................
Stockholders' equity (7)......
WORLDWIDE STORE DATA:
Company-operated stores at end
of period...................
Franchised and joint venture
stores at end of period.....
Total stores at end of
period......................
Same store revenues increase
(decrease)(8)...............
</TABLE>
- ------------------------------
(1) The statement of operations data for the nine months ended September 29,
1994 represents Blockbuster Entertainment Corporation as an independent
company relating solely to the videocassette and video game rental business
prior to its acquisition by Viacom. In September 1994, Blockbuster
Entertainment Corporation merged with and into Viacom. All financial data
subsequent to September 29, 1994 reflects Viacom's basis of accounting
established in purchase accounting effective with its acquisition and now
reflected on our financial statements.
(2) During 1996 we recognized a restructuring charge of $50.2 million primarily
relating to our corporate relocation and elimination of third party
distributors.
(3) During 1997 we recognized charges totaling $250 million primarily related to
inventory write-downs, closure of underperforming stores, write-offs
attributable to international joint ventures and additional expenses
incurred in connection with our corporate relocation.
(4) During 1998 we changed our method of amortizing our videocassette and video
game rental inventory. This newly adopted method represents a more
accelerated method of amortization. The adoption of this new method of
amortization was accounted for as a change in accounting estimate effected
by a change in accounting principle and, accordingly, we recorded a non-cash
charge of $424.3 million recognized as cost of sales.
(5) For information regarding the pro forma adjustments made to our historical
financial data, we refer you to "Unaudited Pro Forma Combined Financial
Data."
(6) Our historical capital structure is not indicative of our prospective
capital structure since no direct ownership relationship existed among all
the various units comprising our company. Accordingly, historical earnings
per share has not been presented in the combined financial statements. Pro
forma weighted average shares outstanding reflect all shares of class B
common stock issued and outstanding which are owned by Viacom and the class
A common stock to be issued in this offering as if these shares had been
outstanding since the beginning of each respective period.
(7) This reflects the December 31, 1998 declaration of a $1.4 billion dividend
payable to Viacom in the form of an interest-bearing promissory note.
(8) A store is included in the same store revenue calculation after it has been
open and owned by us for more than 52 weeks. An acquired store becomes part
of the same store base in the 53rd week after acquisition and conversion.
The percentage change is computed by comparing total net revenues for same
stores as defined above at the end of the applicable reporting period with
total net revenues from these same stores for the comparable period in the
prior year.
27
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The unaudited pro forma combined statements of operations of our company for
the year ended December 31, 1998 and the three months ended March 31, 1999, and
the unaudited pro forma combined balance sheet as of March 31, 1999 have been
prepared based on our combined financial statements and interim combined
financial statements and related notes presented elsewhere in this prospectus.
This data is based on various assumptions and includes the adjustments explained
in the related notes. The unaudited pro forma combined statements of operations
and the unaudited pro forma combined balance sheet have been prepared as if the
transactions described in the following paragraph had occurred as of the
beginning of the respective periods presented, and as of March 31, 1999,
respectively.
On December 31, 1998, we declared a dividend in the form of an
interest-bearing promissory note of $1.4 billion. Additionally, in the first
quarter of 1999 promissory notes were issued to Viacom International Inc in the
aggregate principal amount of about $77 million in order to obtain funds for the
acquisition of video stores. Prior to this offering, the following transactions
occurred:
- we purchased some non-U.S. operations of our business from affiliates of
Viacom for an aggregate amount of about $222 million using about $65
million of proceeds of the credit agreement discussed below and about $157
million in contributed capital from Viacom;
- we entered into a $1.9 billion credit agreement;
- we borrowed about $1.6 billion under the credit facility and the proceeds
were used as follows:
(1) to pay about $65 million which is a portion of the purchase price to
affiliates of Viacom to acquire the non-U.S. operations of our
business that we did not already own;
(2) to repay the Dividend Note of $1.4 billion and the Acquisition Notes
of about $77 million;
(3) to pay about $43 million in accrued and unpaid interest due Viacom
under the Dividend Note and Acquisition Notes; and
(4) to pay the fees and expenses of about $15 million relating to the
origination of the credit agreement.
- we and Viacom entered into a transition services agreement with respect to
cash management, accounting, legal, management information systems,
financial and tax services as well as employee benefit plan and insurance
administration.
We refer you to "Description of Credit Agreement," "Use of Proceeds" and
"Related Party Transactions -- Agreements Between Viacom and Us."
The unaudited pro forma combined financial data do not purport to represent
what the results of operations or financial position of our company would
actually have been if this offering and the other transactions described above
had in fact occurred on such dates or to project the results of operations or
financial position of our company for any future date or period. This data
should be read in conjunction with the combined financial statements and related
notes, the interim combined financial statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
We believe the estimates and assumptions used to prepare the unaudited pro
forma combined financial data provide a reasonable basis for presenting the
significant effects of this offering and the transactions discussed above, and
that the pro forma adjustments give appropriate effect to the estimates and
assumptions and are properly applied in the unaudited pro forma combined
financial data.
28
<PAGE>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------
PRO FORMA
ADJUSTED FOR
PRO FORMA OFFERING THIS
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS OFFERING
--------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues................................... $ 3,893.4 $ $ 3,893.4 $ $
Cost of sales.............................. 1,956.4 1,956.4
Operating expenses, excluding amortization
of intangibles(1)........................ 2,126.0 2,126.0
Amortization of intangibles................ 170.2 170.2
--------- ----------- ----------- ----- ------------
Operating income (loss).................... (359.2) (359.2)
(108.4)(2)
Interest expense and other items, net...... (35.5) (3.0)(3) (146.9) (5)
--------- ----------- ----------- ----- ------------
Income (loss) before income taxes.......... (394.7) (111.4) (506.1)
Benefit (provision) for income taxes....... 59.4 43.5(4) 102.9 (6)
Equity in loss of affiliated companies, net
of tax................................... (1.3) (1.3)
--------- ----------- ----------- ----- ------------
Net income (loss).......................... $ (336.6) $ (67.9) $ (404.5) $ $
--------- ----------- ----------- ----- ------------
--------- ----------- ----------- ----- ------------
Earnings (loss) per share -- basic and
diluted.................................. $ (7)
------------
------------
Weighted average shares outstanding --
basic and diluted........................ (7)
------------
------------
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues................................... $ 1,113.0 $ $ 1,113.0 $ $
Cost of sales.............................. 441.8 441.8
Operating expenses, excluding amortization
of intangibles(1)........................ 579.6 579.6
Amortization of intangibles................ 43.0 43.0
--------- ----------- ----------- ----- ------------
Operating income (loss).................... 48.6 48.6
(2.0)(2)
Interest expense, net...................... (28.6) (.8)(3) (31.4) (5)
--------- ----------- ----------- ----- ------------
Income (loss) before income taxes.......... 20.0 (2.8) 17.2
Benefit (provision) for income taxes....... (23.4) 1.1(4) (22.3) (6)
--------- ----------- ----------- ----- ------------
Net income (loss).......................... $ (3.4) $ (1.7) $ (5.1) $ $
--------- ----------- ----------- ----- ------------
--------- ----------- ----------- ----- ------------
Earnings (loss) per share -- basic and
diluted.................................. $ (7)
------------
------------
Weighted average shares outstanding --
basic and diluted........................ (7)
------------
------------
</TABLE>
- ------------------------
(1) We believe that additional general and administrative expense resulting from
the transition services agreement and from the addition of personnel to
fulfill certain functions previously provided by Viacom will not differ
materially from the allocated general and administrative expense from Viacom
of $12.5 million for the year ended December 31, 1998 and $3.1 million for
the three months ended March 31, 1999.
29
<PAGE>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
(2) This reflects additional interest expense primarily relating to the funding
of the $1.6 billion in borrowings under the credit agreement to fund
promissory notes payable to Viacom International Inc. and the partial
funding of the purchase from affiliates of Viacom of the non-U.S. operations
of our business that we did not already own. The additional interest expense
was calculated by multiplying the $1.6 billion of debt outstanding during
the periods presented, assuming the bank borrowings were outstanding at the
beginning of each respective period, by an average annual interest rate of
7.3% for the year ended December 31, 1998 and 6.7% for the three months
ended March 31, 1999. These amounts were reduced by the historical related
party interest cost of $8.4 million for the year ended December 31, 1998 and
$24.8 million for the three months ended March 31, 1999. This rate
represents the average of the one-month LIBOR rate as of the end of each
month in each respective period plus 1.75%. If interest rates were to
increase or decrease by 0.125 of 1%, our company's related interest expense
would be expected to increase or decrease by about $2.0 million annually and
$0.5 million quarterly.
(3) This represents amortization of deferred bank fees incurred in connection
with our credit agreement.
(4) This reflects the income tax benefit associated with adjustments described
in footnotes (2) and (3) above.
(5) This reflects the reduction in interest expense as a result of the use of
all of the net proceeds of this offering to repay $ of borrowings under
the $1.9 billion credit agreement.
(6) This reflects the income tax provision associated with the adjustment in
footnote (5) above.
(7) The pro forma basic earnings (loss) per share includes both the class A
common stock and class B common stock expected to be outstanding as of the
date of this offering. The pro forma diluted earnings (loss) per share does
not differ from basic earnings (loss) per share as the exercise price of
employee stock options expected to be outstanding will be equal to the
initial public offering price. Therefore, no dilution is expected.
30
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA OFFERING ADJUSTED FOR
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS THIS OFFERING
----------- --------------- ------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Cash and cash equivalents............. $ 75.0 $ $ $ $
Receivables, net...................... 132.5
Merchandise inventories............... 276.6
Prepaid assets........................ 146.4
----------- ------- ------------- ------- ---------------
Total current assets............ 630.5
Rental library, net................... 457.3
Deferred income taxes................. 74.3
Property and equipment, net........... 1,005.3
Intangibles, net...................... 6,074.3
Other assets.......................... 58.8 15.0(1)
----------- ------- ------------- ------- ---------------
Total assets.................... $ 8,300.5 $ 15.0 $ $
----------- ------- ------------- ------- ---------------
----------- ------- ------------- ------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable...................... $ 350.8 $ $ $ $
Accrued expenses...................... 325.7
Current portion of long-term debt and
capital lease obligations........... 22.3 (4)
Short-term borrowings................. -- 600.0(1)
Deferred income taxes................. 11.1
----------- ------- ------------- ------- ---------------
Total current liabilities....... 709.9
Notes payable to Viacom............... 1,690.4 (1,690.4)(1)
Long-term debt, less current
portion............................. 1,000.0(1) (4)
Capital lease obligations, less
current portion..................... 134.2
Other liabilities..................... 103.8
----------- ------- ------------- ------- ---------------
Total liabilities............... 2,638.3
Stockholders' equity:
Class A common stock, par value $.01
per share; shares authorized,
shares issued and outstanding
pro forma......................... -- (3)
Class B common stock, par value $.01
per share; shares
authorized, shares issued and
outstanding pro forma............. -- (2)
Additional paid-in capital.......... -- (2) (3)
Viacom's net equity investment...... 5,723.8 105.4(1)
(2)
Accumulated other comprehensive
loss-foreign currency translation
adjustment........................ (61.6)
----------- ------- ------------- ------- ---------------
Total stockholder's equity...... 5,662.2
----------- ------- ------------- ------- ---------------
Total liabilities and
stockholders' equity.......... $ 8,300.5 $ $ $
----------- ------- ------------- ------- ---------------
----------- ------- ------------- ------- ---------------
</TABLE>
31
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
- ------------------------
(1) This reflects the application of $1.6 billion in borrowings under our $1.9
billion credit agreement to primarily repay the $1.477 billion in promissory
notes payable to Viacom, pay about $22.3 million in accrued but unpaid
interest (classified as Notes payable to Viacom) due Viacom at March 31,
1999, pay about $15.0 million in bank fees incurred pursuant to the credit
agreement with the remaining $85.7 million used to pay a portion of the
purchase price to affiliates of Viacom for the non-U.S. operation of our
business that we did not already own (reflected as a partial retirement of
historical intercompany debt in the accompanying unaudited pro forma balance
sheet). At March 31, 1999 the historical intercompany debt due Viacom for
some of our non-U.S. operations was about $191.1 million. Accordingly, about
$105.4 million (intercompany debt at March 31, 1999 of $191.1 million less
the partial payment of $85.7 million) has been recognized as an increase in
Viacom's net equity investment in the accompanying pro forma balance sheet.
(2) This reflects conversion of Viacom's net equity investment in our company
into shares of class B common stock.
(3) This reflects the receipt of $ in net proceeds from this offering.
Proceeds are calculated based on the assumed sale of shares at $
per share, net of underwriting discounts and commissions of $ million,
and estimated offering expenses of $ million. The pro forma adjustments
assume that the underwriters have not exercised their over-allotment
options. If the underwriters exercise their over-allotment options in full,
the number of issued and outstanding shares of class A common stock and
class B common stock will increase to and , respectively, and it
is estimated that stockholders' equity will increase to $ with a
corresponding decrease to the amount outstanding under our credit agreement.
We refer you to "Use of Proceeds."
(4) This reflects the use of all of the net proceeds from this offering to repay
$ of borrowing under the $1.9 billion credit agreement as described in
"Use of Proceeds."
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
COMBINED FINANCIAL STATEMENTS AND RELATED NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS.
GENERAL
Blockbuster entered into the video rental business in 1985 and is the
world's leading retailer of rentable home videocassettes, DVDs and video games.
Our 6,500 stores offer a wide selection of entertainment products for rent or
purchase. Our business model was significantly modified in 1997 to refocus on
videocassette rental, improving the customer experience and satisfying customer
demand earlier for newly released videos. During 1998, our customers' responses
were very favorable with a revenue increase of 17.5%, an increase in same store
revenues of 13.3% and an increase in domestic rental transactions of 14.4% as
compared to 1997.
The combined financial statements for the periods presented do not fully
reflect the trends in our business as we had significantly different business
models during these periods. In addition, the periods presented include
significant charges which relate to these business model changes. As a result
and as further explained below, our results of operations for those periods are
not comparable.
In connection with our merger with Viacom in 1994, we valued our
videocassette rental library at fair market value, which formed the basis for
subsequent amortization of this inventory over a period of up to 36 months. Such
fair market value proved, on average, to be lower than the cost of rental
videocassettes acquired after the merger. As a result, amortization was lower
with respect to rental videocassettes acquired in the 1994 merger than rental
videocassettes purchased after the merger. This lower amortization favorably
affected results in 1996 and, to a lesser extent, in 1997. Amortization in 1996
and in 1997 also increased as a result of increased purchases of videocassettes.
In 1996, we decided to offer not only our traditional video rental and
related merchandise but various other merchandise categories, including
clothing, books and magazines. We also decided to move our corporate
headquarters from Ft. Lauderdale, Florida to Dallas, Texas and to build an
850,000 square foot distribution center to handle our existing and new products
and eliminate third party distribution. These changes resulted in a $50.2
million charge.
Following significant management changes in 1997, we determined that the new
merchandise lines that had been added in 1996 were not as profitable as our core
rental business. As a result, we refocused our merchandise lines and in the
second quarter of 1997, we recorded charges amounting to $250 million, $100.8
million of which related to a reduction in the carrying value of some of our
retail merchandise inventory.
In recognizing that we could not purchase enough videocassettes at the
"full" cost to satisfy customer demand without significantly increasing our
risk, we changed our business model. In 1998, in order to increase the quantity
and selection of newly released video titles and satisfy our customers' demand
for newly released videos earlier, we entered into revenue-sharing agreements
with the major movie studios. Prior to our change to a revenue-sharing business
model, our videocassette rental library was purchased at "full" cost, generally
between $60 and $70 per videocassette for major theatrical releases that were
priced for rental in the United States. The implementation of revenue-sharing
dramatically affected our cost of sales as we changed our business model from a
primarily fixed to a primarily variable cost approach. Starting in the second
quarter of 1998, revenue-sharing payments to the movie studios became a
significant component of our cost of sales. In addition, we shortened the period
over which we amortize the up front cost of acquiring most newly released
videocassettes to three months. In connection with this change in method of
accounting for our videocassette rental library, we recorded a $424.3 million
charge to reflect a reduction in the carrying value of this library.
33
<PAGE>
We have a substantial amount of intangible assets on our combined financial
statements. As of March 31, 1999, we had net intangible assets of $6,074.3
million, which represented about 73% of our total assets and about 107% of our
stockholders' equity. Our intangible assets consist primarily of goodwill. This
goodwill was primarily created when Viacom acquired our business and operations
in 1994 for a purchase price in excess of the fair market value of our tangible
net assets at that time. This goodwill was originally recorded on Viacom's
financial statements in connection with Viacom's acquisition of our business and
operations and is now recorded as an asset on our combined financial statements.
This goodwill generally represents our BLOCKBUSTER name. We evaluate on a
regular basis whether or not events and circumstances have occurred to indicate
that all or a portion of the carrying amount of these intangible assets may
require an adjustment or a change to the amortization period.
RESULTS OF OPERATIONS
The following table sets forth results of operations and other financial
data.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT MARGIN AND WORLDWIDE STORE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................ $ 2,942.1 $ 3,313.6 $ 3,893.4 $ 931.2 $ 1,113.0
Cost of sales........................................... 1,013.7 1,360.5 1,956.4 326.6 441.8
--------- --------- --------- --------- ---------
Gross profit............................................ 1,928.4 1,953.1 1,937.0 604.6 671.2
Operating expenses...................................... 1,660.8 2,167.7 2,296.2 537.6 622.6
--------- --------- --------- --------- ---------
Operating income (loss)................................. 267.6 (214.6) (359.2) 67.0 48.6
Interest expense........................................ (22.0) (30.8) (27.7) (6.9) (29.2)
Interest income......................................... 3.6 3.7 4.0 0.9 0.6
Other items, net........................................ -- (27.6) (11.8) -- --
--------- --------- --------- --------- ---------
Income (loss) before income taxes....................... 249.2 (269.3) (394.7) 61.0 20.0
Benefit (provision) for income taxes.................... (167.4) (30.0) 59.4 (45.2) (23.4)
Equity in loss of affiliated companies, net of tax...... (4.0) (18.9) (1.3) -- --
--------- --------- --------- --------- ---------
Net income (loss)....................................... $ 77.8 $ (318.2) $ (336.6) $ 15.8 $ (3.4)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
CASH FLOW DATA:
Cash flows from operating activities.................... $ 985.0 $ 991.3 $ 1,234.5 $ 242.3 $ 166.5
Cash flows from (used for) investing activities......... (1,235.1) (1,188.1) (1,022.2) (232.6) (325.4)
Cash flows from (used for) financing activities......... 208.8 269.3 (241.1) (65.9) 135.6
OTHER DATA:
Depreciation............................................ $ 165.5 $ 253.8 $ 212.7 $ 52.3 $ 51.8
Amortization of intangibles............................. 166.2 168.7 170.2 42.6 43.0
EBITDA(1)............................................... 599.3 207.9 23.7 161.9 143.4
Net income (loss) plus intangible amortization, net of
tax(1)(2)............................................. $ 239.6 $ (155.0) $ (172.5) $ 56.8 $ 37.8
MARGINS:
Rental margin(3)........................................ 74.1% 69.6% 54.6% 71.9% 65.7%
Merchandise margin(4)................................... 19.3 7.4 19.8 22.1 19.7
Gross margin(5)......................................... 65.5 58.9 49.8 64.9 60.3
WORLDWIDE STORE DATA:
Same store revenues increase (decrease)(6).............. 5.1% (1.8)% 13.3% 7.6% 17.0%
Total stores at end of period........................... 5,317 6,049 6,381 6,018 6,499
</TABLE>
34
<PAGE>
- ------------------------
(1) "EBITDA" and "Net income (loss) plus intangible amortization, net of tax"
are presented here to provide additional information about our operations.
These items should be considered in addition to, but not as a substitute for
or superior to, operating income, net income, cash flow and other measures
of financial performance prepared in accordance with generally accepted
accounting principles. EBITDA may differ in the method of calculation from
similarly titled measures used by other companies.
(2) Intangible amortization, net of tax, included in this item is primarily
related to goodwill.
(3) Rental gross profit as a percentage of rental revenues.
(4) Merchandise gross profit as a percentage of merchandise revenues.
(5) Gross profit as a percentage of total revenues.
(6) This represents the increase (decrease) over the prior comparable period.
SPECIAL ITEM CHARGES
During the fourth quarter of 1996, we recorded a $50.2 million restructuring
charge associated with the relocation of our headquarters to Dallas, Texas and
the elimination of third party distributors.
During the second quarter of 1997, we recorded a $250 million special item
charge principally associated with a write-down of excess inventory of $100.8
million, operating charges for domestic and international reorganization, store
closings and additional corporate relocation costs. This special item charge
also included write-offs attributable to our joint venture operations in Japan
recorded as equity in loss of affiliated companies, net of tax.
During the second quarter of 1998, we recorded a $424.3 million special item
charge associated with a change in the method of accounting for videocassettes
and video game rental inventory.
The following is a summary of the impact of the above described special item
charges on our operating results during the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Operating income................................... $ (50.2) $ (220.3) $ (424.3) $ -- $ --
Net income......................................... (30.1) (174.7) (273.1) -- --
</TABLE>
Excluding the above-described special item charges, operating results would
have been as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenues................................................ $ 2,942.1 $ 3,313.6 $ 3,893.4 $ 931.2 $ 1,113.0
Cost of sales........................................... 1,013.7 1,259.7 1,532.1 326.6 441.8
--------- --------- --------- --------- ---------
Gross profit............................................ 1,928.4 2,053.9 2,361.3 604.6 671.2
Operating expenses...................................... 1,610.6 2,048.2 2,296.2 537.6 622.6
--------- --------- --------- --------- ---------
Operating income, excluding special item charges........ $ 317.8 $ 5.7 $ 65.1 $ 67.0 $ 48.6
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
35
<PAGE>
FIRST QUARTER ENDED MARCH 31, 1999 COMPARED TO FIRST QUARTER ENDED MARCH 31,
1998
REVENUES. Revenues of $1,113.0 million for the first quarter of 1999
increased $181.8 million, or 19.5%, from $931.2 million for the first quarter of
1998 primarily due to a 17.0% increase in same store revenues, a 14.2% increase
in domestic rental transactions and the net addition of 362 company-operated
stores. Revenue growth consisted primarily of an increase of $180.8 million, or
23.4%, in rental revenues to $952.0 million for the first quarter of 1999,
principally due to the increase in rental transactions driven by:
- a substantial increase in the quantity and selection of newly released
videos provided through revenue-sharing agreements;
- the impact of our advertising campaigns aimed at marketing the improved
customer experience; and
- the implementation of more competitive pricing and rental terms.
COST OF SALES. Cost of sales of $441.8 million for the first quarter of
1999 increased $115.2 million from $326.6 million for the first quarter of 1998.
Cost of sales as a percentage of total revenues increased to 39.7% in the first
quarter of 1999 from 35.1% in the first quarter of 1998. This increase was
primarily attributable to an increase in cost of rental revenues of $110.5
million from the first quarter of 1998 to the first quarter of 1999.
During the first quarter of 1998, our new business model of revenue-sharing
with the studios was not fully implemented. The increased cost of rental
revenues in the first quarter of 1999 was principally related to increases in
revenue-sharing payments made to movie studios and increased rental revenues.
Pursuant to the change in accounting adopted on April 1, 1998, revenue-sharing
payments were expensed as incurred and rental tape amortization was accelerated.
During the first quarter of 1999, the payments pursuant to revenue-sharing
increased substantially compared to the first quarter of 1998.
GROSS PROFIT. Gross profit of $671.2 million for the first quarter of 1999
increased $66.6 million from $604.6 million for the first quarter of 1998. Gross
profit as a percentage of total revenues, or gross margin, decreased to 60.3% in
the first quarter of 1999 from 64.9% in the first quarter of 1998. Gross margin
for the first quarter of 1998 and the first quarter of 1999 are not comparable
because of the change in accounting implemented in the second quarter of 1998
related to our new business model.
OPERATING EXPENSES. Total operating expenses of $622.6 million in the first
quarter of 1999 increased $85.0 million from $537.6 million in the first quarter
of 1998. Total operating expenses decreased as a percentage of total revenues to
55.9% in the first quarter of 1999 from 57.7% in the first quarter of 1998. The
increase in total operating expenses resulted from the following:
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense,
which includes expenses incurred at the store and corporate level, decreased
as a percentage of total revenues to 42.4% in the first quarter of 1999 from
44.1% in the first quarter of 1998. General and administrative expense of
$472.1 million in the first quarter of 1999 increased $61.4 million from
$410.7 million in the first quarter of 1998. The dollar increase in general
and administrative expense primarily resulted from compensation increases of
$32.2 million related to hiring additional personnel to support our store
growth. Occupancy cost increased $7.1 million largely as a result of an
increase in the number of stores. Other corporate and store expenses
increased $22.1 million due primarily to the growth in our business.
ADVERTISING EXPENSE. Advertising expense of $55.7 million in the first
quarter of 1999 increased $23.7 million from $32.0 million in the first
quarter of 1998. As a percentage of total
36
<PAGE>
revenues, advertising expense increased to 5.0% in the first quarter of 1999
from 3.4% in the first quarter of 1998. This reflects our continued
investment in advertising and marketing which increased beginning in the
second quarter of 1998.
INTEREST EXPENSE. Interest expense of $29.2 million in the first quarter of
1999 increased $22.3 million from $6.9 million in the first quarter of 1998
reflecting interest expense associated with a $1.4 billion dividend note issued
to Viacom on December 31, 1998 and other promissory notes issued to Viacom in
January 1999 related to the purchase of video stores.
PROVISION FOR INCOME TAXES. The provision for income taxes of $23.4 million
for the first quarter of 1999 decreased $21.8 million from $45.2 million for the
first quarter of 1998 primarily due to the decrease in pre-tax income.
NET INCOME (LOSS). For the reasons described above, net loss of $3.4
million for the first quarter of 1999 reflected a decrease in net income of
$19.2 million from net income of $15.8 million for the first quarter of 1998.
COMPARISON OF 1998 TO 1997
REVENUES. Revenues of $3,893.4 million in 1998 increased $579.8 million, or
17.5%, from $3,313.6 million in 1997 largely as a result of a 13.3% growth in
our same store revenues which increased primarily as a result of a 14.4%
increase in our domestic rental transactions and the net addition of 178
company-operated stores. Revenue growth consisted primarily of increases in
rental transactions driven by:
- a substantial increase in the quantity and selection of newly released
videos provided through revenue-sharing agreements;
- the impact of our advertising campaigns aimed at marketing the improved
customer experience;
- the implementation of more competitive pricing and rental terms; and
- the increased popularity of game rentals.
Merchandise sales also contributed to revenue growth increasing $24.0
million, or 4.0%, over the prior year largely as a result of the video release
of TITANIC, an increase in the number of company-operated stores and improved
merchandising campaigns in some markets.
COST OF SALES. Cost of sales of $1,956.4 million in 1998 increased $595.9
million from $1,360.5 million in 1997. Cost of sales as a percentage of total
revenues increased to 50.2% in 1998 from 41.1% in 1997. Excluding the special
item charges of $424.3 million in 1998 and $100.8 million in 1997, cost of sales
increased $272.4 million primarily as a result of revenue-sharing payments to
movie studios and cost of merchandise sales. Commencing on April 1, 1998, we
substantially increased our purchases of videocassette rental product through
revenue-sharing arrangements with the movie studios. Pursuant to our new
business model and our change in accounting method adopted on April 1, 1998,
revenue-sharing payments are expensed as incurred and the cost of rental product
amortization has been accelerated. Partially offsetting the increased expense
due to revenue-sharing is a decrease in rental tape amortization. This decrease
is due to the decline in the up front costs of rental product purchased pursuant
to revenue-sharing. Our total cost of merchandise sold of $495.5 million
increased $46.4 million in 1998 from $449.1 million in 1997.
GROSS PROFIT. Gross profit as a percentage of revenues, or gross margin,
decreased to 49.8% in 1998 from 58.9% in 1997. Excluding the special item
charges of $424.3 million in 1998 and $100.8 million in 1997, gross profit
decreased as a percentage of revenues to 60.6% in 1998 from 62.0% in 1997. Gross
margins for 1998 and 1997 are not comparable because of the special item charges
recorded in the second quarter of each year and the change in accounting
implemented in the second
37
<PAGE>
quarter of 1998 related to our new business model. Merchandise margins declined
in 1998 as compared to 1997 due to increased markdowns and promotional
activities during 1998.
OPERATING EXPENSES. Total operating expenses of $2,296.2 million in 1998
increased $128.5 million from $2,167.7 million in 1997. Total operating expenses
as a percentage of total revenues decreased to 59.0% in 1998 from 65.4% in 1997.
The increase in total operating expenses resulted from the following:
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense,
which includes expense incurred at the store and corporate level, decreased
as a percentage of total revenues to 44.5% in 1998 from 48.5% in 1997.
Excluding the special item charge of $74.4 million related to relocation and
occupancy costs in 1997, general and administrative expense of $1,732.3
million in 1998 increased $201.0 million from $1,531.3 million in 1997 due
to compensation increases of $81.3 million, a $73.9 million increase in
other corporate and store expenses and a $45.8 million increase in occupancy
cost. Store labor cost increased because of an increase in the number of
store personnel, the increase in the number of company-operated stores and
an increase in minimum wage from $4.75 per hour to $5.15 per hour which
became effective in September 1997. The increase in the number of store
personnel reflects our commitment to better serve our customers and support
our revenue growth. The increase in occupancy cost was primarily
attributable to an increase in the number of stores.
ADVERTISING EXPENSE. Advertising expense of $181.0 million in 1998
increased $41.5 million from $139.5 million in 1997. As a percentage of
total revenues, advertising expense increased to 4.6% in 1998 from 4.2% in
1997. This increase was primarily due to additional promotional and
advertising activity in order to increase customer awareness of the greater
quantity and selection of newly released videos, our improved customer
service, and the improved selection of BLOCKBUSTER FAVORITES.
DEPRECIATION. Depreciation expense of $212.7 million in 1998 decreased
$41.1 million from $253.8 million in 1997. Excluding the special item charge
of $45.1 million in 1997 associated with domestic and international
reorganization and store closings, depreciation expense increased $4.0
million in 1998 from 1997 reflecting net store growth.
Excluding the 1998 and 1997 special item charges, total operating expenses
increased $248.0 million in 1998 from 1997.
INTEREST EXPENSE. Interest expense of $27.7 million in 1998 decreased $3.1
million from $30.8 million in 1997.
OTHER ITEMS, NET. Other items of $11.8 million in 1998 decreased $15.8
million from $27.6 million in 1997 largely due to the recognition of non-cash
expenses of $10.5 million and $27.1 million in 1998 and 1997, respectively, to
write-down non-strategic investments to their net realizable value.
BENEFIT (PROVISION) FOR INCOME TAXES. We recognized a benefit for income
taxes of $59.4 million in 1998 as compared to a provision for income taxes of
$30.0 million in 1997. This change was primarily attributable to the mix of
domestic and foreign income or losses. We did not recognize a benefit for
foreign losses, as it is more likely than not that the benefit will not be
realized. Goodwill associated with Viacom's acquisition of our business and
operations and which is now recorded on our finanical statements is not
amortizable for tax purposes. Excluding the non-deductible amortization of
intangibles, the annual effective tax rates would have been 24.6% in 1998 and
(25.8%) in 1997.
EQUITY IN LOSS OF AFFILIATED COMPANIES, NET OF TAX. The equity in loss of
affiliated companies, net of tax, decreased primarily due to the fact that we
recognized a pre-tax charge of $29.4 million in 1997 associated with our
investment in our Japanese joint venture.
38
<PAGE>
NET INCOME (LOSS). For the reasons described above, net loss of $336.6
million in 1998 increased $18.4 million from a loss of $318.2 million in 1997.
Excluding the special item charges in 1998 and 1997, net loss declined $80.0
million to $63.5 million in 1998 from $143.5 million in 1997.
COMPARISON OF 1997 TO 1996
REVENUES. Revenues of $3,313.6 million in 1997 increased $371.5 million, or
12.6%, from $2,942.1 million in 1996 principally due to the net addition of 633
company-operated stores over the prior year but was offset by a 1.8% decline in
same store revenues and a lower number of rental transactions. Rental revenues
increased $277.1 million, or 11.6%, driven by the increase in company-operated
stores but were much lower than anticipated as a result of fewer active
customers and rental transactions. Merchandise sales increased $102.7 million,
or 20.9%, over the prior year due to improved product offerings in our
significant international markets.
COST OF SALES. Cost of sales of $1,360.5 million in 1997 increased $346.8
million from $1,013.7 million in 1996. Cost of sales as a percentage of total
revenues increased to 41.1% in 1997 from 34.5% in 1996. Excluding the special
item charge of $100.8 million in 1997, cost of sales increased $246.0 million
primarily due to an increase of amortization expense in 1997 as compared to 1996
resulting from a smaller percentage of our amortization expense in 1997 being
attributable to the lower cost of videocassette rental library acquired in 1994.
GROSS PROFIT. Gross profit as a percentage of total revenues, or gross
margin, decreased to 58.9% in 1997 from 65.5% in 1996. Excluding the special
item charge of $100.8 million in 1997, gross profit decreased to 62.0% in 1997
from 65.5% in 1996. Gross margins for 1997 and 1996 are not comparable because
of the special item charges recorded in the second quarter of 1997.
OPERATING EXPENSES. Total operating expenses of $2,167.7 million in 1997
increased $506.9 million from $1,660.8 million in 1996. Total operating expenses
as a percentage of total revenues increased to 65.4% in 1997 from 56.4% in 1996.
The increase in total operating expenses resulted from the following:
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
as a percentage of total revenues increased to 48.5% in 1997 from 39.5% in
1996. Excluding the $74.4 million special item charge in 1997, general and
administrative expense of $1,531.3 million in 1997 increased $367.7 million
from $1,163.6 million in 1996 due to compensation increases of $135.2
million, a $111.5 million increase in other corporate and store expenses and
a $121.0 million increase in occupancy cost. The increase in compensation
expense was due primarily to increases in the minimum wage in late 1996 from
$4.25 per hour to $4.75 per hour and in late 1997 from $4.75 per hour to
$5.15 per hour and an increase in the number of company-operated stores. In
addition, in connection with our relocation to Dallas, we incurred higher
salary expense due to the hiring of temporary employees until positions were
filled in Dallas. We also paid higher salaries overall due to the strong
labor demand in the Dallas market. The increase in occupancy cost was
primarily attributable to an increase in the number of stores.
ADVERTISING EXPENSE. Advertising expense of $139.5 million in 1997
increased $24.2 million from $115.3 million in 1996. As a percentage of
total revenues, advertising expense increased to 4.2% in 1997 from 3.9% in
1996. This increase was primarily due to increased promotions designed to
increase customer traffic.
DEPRECIATION. Depreciation expense of $253.8 million in 1997 increased
$88.3 million from $165.5 million in 1996. Excluding the $45.1 million
special item charge in 1997, depreciation expense increased $43.2 million in
1997 principally due to the purchases of equipment, fixtures and
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leasehold improvements associated with our store growth and the accelerated
depreciation on the warehouse equipment located at our former distribution
center in Garland, Texas.
RESTRUCTURING CHARGE. We incurred a $50.2 million restructuring charge
in 1996 associated with the relocation of our headquarters to Dallas, Texas
and the elimination of third party distributors.
Excluding the 1997 and 1996 special item charges, total operating expenses
increased $437.6 million in 1997 from 1996.
INTEREST EXPENSE. Interest expense of $30.8 million in 1997 increased $8.8
million from $22.0 million in 1996. This increase is primarily due to an
increase in interest bearing debt owed to Viacom incurred to help finance our
international operations.
OTHER ITEMS, NET. Other items of $27.6 million in 1997 reflect a non-cash
write-down of investments to their estimated net realizable value. During 1997,
as part of our strategic initiatives, management made the decision to dispose of
investments that did not relate to our core business.
BENEFIT (PROVISION) FOR INCOME TAXES. We recognized provisions for income
taxes of $30.0 million in 1997 and $167.4 million in 1996. The decrease was
primarily attributable to the mix of domestic and foreign income or losses. We
did not recognize a benefit for foreign losses, as it is more likely than not
that the benefit will not be realized. In addition, goodwill associated with
Viacom's acquisition of our business and operations and which is now reflected
on our financial statements is not amortizable for tax purposes. Excluding the
non-deductible amortization of intangibles, the annual effective tax rates would
have been (25.8%) in 1997 and 41.8% in 1996.
EQUITY IN LOSS OF AFFILIATED COMPANIES, NET OF TAX. Equity in loss of
affiliated companies, net of tax, increased $14.9 million in 1997 over the prior
year. This increase was primarily due to a pre-tax charge of $29.4 million in
1997 associated with our investment in our Japanese joint venture.
NET INCOME (LOSS). For the reasons described above, in 1997, we recoginized
a net loss of $318.2 million as compared to net income of $77.8 million in 1996.
Excluding the special item charges in 1997 and 1996, 1997 reflects a net loss of
$143.5 million as compared to net income of $107.9 million in 1996.
GENERAL ECONOMIC TRENDS, QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
We anticipate that our business will be affected by general economic and
other consumer trends. Our business is subject to fluctuations in future
operating results due to a variety of factors, many of which are outside of our
control. These fluctuations may be caused by, among other things:
- the number, timing and performance of new or acquired stores;
- public acceptance and interest in newly released videos;
- our mix of products rented and sold;
- our expansion into new markets and geographic locations;
- additional and existing competition and their pricing actions;
- marketing programs and new release acquisition costs;
- seasonality, particularly in April and May, due in part to improved
weather and Daylight Savings Time, and in September and October, due in
part to the start of school and the introduction of new television
programs;
- special events, such as the Olympics and the World Cup;
- changing technologies; and
- other factors affecting retailers in general.
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The following table sets forth quarterly statement of operations data for
the nine quarters ended March 31, 1999. This quarterly information includes the
special item charges recognized in the second quarter of each of 1997 and 1998
discussed above and described in notes 3 and 4 of the combined financial
statements and in our opinion, includes all normal recurring adjustments
necessary for a fair presentation of the information for the periods covered.
This data should be read in conjunction with the combined financial statements
and the notes thereto. The quarterly operating results are not necessarily
indicative of the operating results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30(1) SEPTEMBER 30 DECEMBER 31
--------- ----------- ------------- ------------
(IN MILLIONS EXCEPT PERCENTAGE AMOUNTS)
<S> <C> <C> <C> <C>
1997
Revenues..................................................... $ 823.8 $ 765.3 $ 817.7 $ 906.8
Gross profit................................................. 538.3 370.5 504.5 539.8
Operating income (loss)...................................... 71.2 (263.6) (14.8) (7.4)
Net income (loss)............................................ (19.3) (227.3) (37.8) (33.8)
Net income (loss) plus intangible amortization,
net of tax................................................. 21.5 (186.5) 3.0 7.0
Same store revenues increase (decrease) (2).................. (1.2)% (2.3)% (1.5)% (1.0)%
1998
Revenues..................................................... $ 931.2 $ 890.0 $ 985.4 $ 1,086.8
Gross profit................................................. 604.6 100.2 591.7 640.5
Operating income (loss)...................................... 67.0 (456.9) 5.4 25.3
Net income (loss)............................................ 15.8 (318.0) (21.5) (12.9)
Net income (loss) plus intangible amortization,
net of tax................................................. 56.8 (277.0) 19.6 28.1
Same store revenues increase (2)............................. 7.6% 12.6% 18.2% 14.5%
1999
Revenues..................................................... $ 1,113.0
Gross profit................................................. 671.2
Operating income (loss)...................................... 48.6
Net income (loss)............................................ (3.4)
Net income (loss) plus intangible amortization,
net of tax................................................. 37.8
Same store revenues increase (2)............................. 17.0%
</TABLE>
- ------------------------
(1) The table below presents the second quarter of 1997 and 1998 excluding
special item charges:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE
30,
--------------------
1997 1998
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Revenues................................................................................... $ 765.3 $ 890.0
Gross profit............................................................................... 471.3 524.5
Operating income (loss).................................................................... (43.3) (32.6)
Net income (loss).......................................................................... (52.6) (44.9)
Net income (loss) plus intangible amortization, net of tax................................. (11.8) (3.9)
</TABLE>
(2) This represents the increase (decrease) over the prior comparable period.
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LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY PRIOR TO AND UPON OUR SEPARATION FROM VIACOM
Our capital investments and acquisitions have been financed with a
combination of cash flow from operations and advances from Viacom. We generate
cash from operations predominantly from the rental of videocassettes and we have
substantial operating cash flow because most of our revenue is received in cash
and cash equivalents. Under Viacom's centralized cash management system, Viacom
deposits sufficient cash in our bank accounts to meet our daily obligations and
withdraws excess funds from those accounts. These transactions are included in
advances from Viacom in the combined balance sheets and combined statements of
cash flows. Excess operating cash flow and additional funding from Viacom had
been used primarily for opening and acquiring new stores, the refurbishment,
remodeling and relocation of existing stores and the purchase of videocassette
inventory.
In October 1998, BLOCKBUSTER MUSIC stores were sold to Wherehouse. Some of
the leases transferred in connection with this sale had previously been
guaranteed either by Viacom or its affiliates. The remaining lease terms expire
on various dates through 2007. We have agreed to indemnify Viacom with respect
to any amount paid under these guarantees. At the time of the sale, the
contingent liability for base rent was about $84 million on an undiscounted
basis, with respect to these guarantees. We have not recognized any reserves
related to this contingent liability. If Wherehouse defaults, related payments
could be funded from operating cash flow.
We expect to fund our future anticipated cash requirements, including the
anticipated cash requirements for capital expenditures and payments of principal
and interest on any borrowings, with funds generated from our operations in
addition to various external funds which may be available to us. The external
sources of funds may include future issuances of debt, equity or other
securities. We believe that such internally and externally generated funds will
provide us with adequate liquidity and capital necessary for the next twelve
months.
CASH FLOWS
OPERATING ACTIVITIES. Net cash flows from operating activities decreased
$75.8 million from $242.3 million for the first quarter of 1998 to $166.5
million for the first quarter of 1999 primarily due to the first quarter 1999
net loss of $3.4 million as compared to net income of $15.8 million for the
first quarter of 1998. Significant changes in non-cash items include a $13.2
million decrease in amortization and depreciation expenses and a decrease in
deferred income taxes of $25.3 million. Revenue-sharing payments reduce cash
flow from operating activities. However, this reduction is partially offset by a
decline in videocassette purchases included in investing activities.
Net cash flows from operating activities increased $243.2 million from
$991.3 million in 1997 to $1,234.5 million in 1998 primarily due to stronger
operating results, excluding the non-cash items, and improved payment terms with
vendors, partially offset by prepayments for revenue-sharing and an increased
investment in retail merchandise inventory.
Net cash flow from operating activities increased $6.3 million from $985.0
million in 1996 to $991.3 million in 1997 and was primarily attributable to
slowing of our investment in merchandise inventory in 1997, reflecting our
change in focus from retail to rental.
INVESTING ACTIVITIES. Net cash used for investing activities increased
$92.8 million from $232.6 million for the first quarter of 1998 to $325.4
million for the first quarter of 1999 as a result of a $21.3 million increase in
capital expenditures for new store openings in 1999 and a $83.2 million increase
in cash used for store acquisitions as compared to the first quarter of 1998.
Net cash used for investing activities decreased $165.9 million from
$1,188.1 million in 1997 to $1,022.2 million in 1998 primarily due to the lower
up front costs associated with revenue-sharing titles
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compared to traditional pricing of $42.1 million. Capital expenditures of $175.0
million decreased $87.2 million due to a reduction in new store openings in 1998
as compared to 1997. Cash used for acquisitions of $34.2 million decreased $44.8
million as a result of our change in focus from expansions through acquisitions
to enhancing existing store performance.
Net cash used for investing activities decreased $47.0 million from $1,235.1
million in 1996 to $1,188.1 million in 1997. This decrease was primarily due to
a $61.5 million decrease in capital expenditures attributable to the reduction
in new store openings and a $75.4 million decrease in cash used for
acquisitions. These decreases were partially offset by increased rental library
purchases of $108.7 million and cash received primarily from the disposition of
our Ft. Lauderdale headquarters of $19.1 million.
The major components of investing activities are detailed below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- --------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS)
Cash flows from investing activities:
Rental library purchases............................. $ (751.5) $ (860.2) $ (818.1) $ (194.9) $ (181.0)
Capital expenditures................................. (323.7) (262.2) (175.0) (38.5) (59.8)
Cash used for acquisitions........................... (154.4) (79.0) (34.2) (1.8) (85.0)
Other................................................ (5.5) 13.3 5.1 2.6 0.4
---------- ---------- ---------- --------- ---------
Net cash flow from (used for) investing
activities........................................... $ (1,235.1) $ (1,188.1) $ (1,022.2) $ (232.6) $ (325.4)
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
</TABLE>
Our capital expenditures include store equipment and fixtures, remodeling of
some existing stores, implementation and upgrading of office and store
technology and the opening of new store locations. Each new store opening
requires initial capital expenditures, including leasehold improvements,
inventory, equipment and costs related to site locations, lease negotiations and
construction permits. We plan to evaluate and pursue new sites within the video
rental industry in both the United States and in international markets and will
require capital and/or ongoing infrastructure enhancements to support our
expansion strategies in developing markets and for acquisitions.
We currently anticipate that capital expenditures of about $330.0 million
will be incurred in 1999, of which $213.0 million is anticipated to relate to
new, relocated and, remodeled stores and the conversion of acquired stores,
$25.0 million is anticipated to relate to an upgraded store point of sale system
to provide better service to our customers, and the balance of which relates to
general corporate purposes. We expect the total investment per new store to
approximate $0.4 million, which includes rental and merchandise inventory,
leasehold improvements, signage and furniture, fixtures and equipment. However,
the cost of opening a new store can vary based on size, construction costs in a
particular market and other factors.
FINANCING ACTIVITIES. Net cash flow from financing activities increased
$201.5 million to $135.6 million in the first quarter of 1999 as compared to the
use of funds of $65.9 million in the first quarter of 1998 primarily as a result
of additional net borrowings from Viacom.
Net cash flow from financing activities decreased $510.4 million from $269.3
million in 1997 to a net cash use of $241.1 million in 1998 as a result of
repayment made to Viacom.
Net cash flow from financing increased $60.5 million from $208.8 million in
1996 to $269.3 million in 1997 as a result of advances from Viacom.
On December 31, 1998, we declared a $1.4 billion dividend in the form of
promissory note to Viacom International Inc. In the first quarter of 1999, we
issued other promissory notes of about
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$77 million to Viacom International Inc. relating to our purchase of video
stores. We will pay both these notes including accrued and unpaid interest as
well as any other notes owed to Viacom International Inc. or its affiliates with
the proceeds of the borrowings under the credit agreement described below.
On , 1999, we entered into a $1.9 billion term and revolving credit
agreement with a syndicate of lenders. On , 1999, we borrowed $1.6 billion
under the credit agreement all of which was used to (1) pay a portion of the
purchase price to affiliates of Viacom to acquire the non-U.S. operations of our
business that we did not already own, (2) repay debt owed to Viacom
International Inc. and its affiliates and (3) to pay fees and expenses related
to the origination of the credit agreement. The credit agreement is intended to
replace our reliance on Viacom's centralized cash management system. Upon
completion of this offering and after giving effect to the foregoing financing
transactions, we expect to have outstanding $ billion of long-term
indebtedness. For a more complete description of the credit agreement, we refer
you to "Description of Credit Agreement."
We believe that cash flow from operations and future borrowings, will
provide us with adequate liquidity and capital necessary to continue to fund our
daily operations and expansion strategy in the next two to three years.
Depending upon our growth opportunities and other factors, we may, from time to
time, consider the issuance of debt, equity or other securities, to refinance
debt or for general corporate purposes. However, we can not assure you that we
will be able to access capital markets in the future on terms that are
satisfactory to us.
OTHER FINANCIAL MEASUREMENTS: WORKING CAPITAL
At March 31, 1999, we had cash and cash equivalents of $75.0 million.
Working capital, however, reflected a deficit of $79.4 million due to the
accounting treatment of our videocassette rental library. Under generally
accepted accounting principles, videocassette rental inventories are accounted
for as non-current assets and are excluded from the computation of working
capital. The acquisition cost of videocassette rental inventories, however, is
reported as a current liability and, accordingly, is included in the computation
of working capital. Consequently, we believe working capital is not as
significant a measure of financial condition for companies in the home video
industry as it is for companies in some other industries. Because of this
accounting treatment, we may, from time to time, operate with a working capital
deficit.
At December 31, 1997 and 1998, we had cash and cash equivalents of $129.6
million and $99.0 million, respectively. Working capital reflected a deficit of
$85.2 million and $214.5 million, respectively.
AVAILABILITY OF FOREIGN NET OPERATING LOSSES
Foreign net operating losses, which are fully reserved, may not be available
to us after the split-off. At December 31, 1998, our foreign net operating
losses were $42.5 million.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks including interest rates on our debt
and foreign exchange rates.
INTEREST RATE RISK
Historically, we have had no material interest rate risk associated with
debt used to finance our operations due to limited borrowings and our
relationship with Viacom. Subsequent to this offering, we intend to manage our
interest rate exposure using a mix of fixed and floating interest rate debt and,
if appropriate, financial derivative instruments.
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<PAGE>
FOREIGN EXCHANGE RISK
Operating in international markets involves exposure to movements in
currency exchange rates. Currency exchange rate movements typically also reflect
economic growth, inflation, interest rates, government actions and other
factors. As currency exchange rates fluctuate, translation of the statements of
operations of our international businesses into U.S. dollars may affect
year-over-year comparability and could cause us to adjust our financing and
operating strategies.
On January 1, 1999, eleven member countries of the European Union
established fixed conversion rates between their existing, or local, currencies
and one common currency, the euro. The euro trades on currency exchanges and may
be used in business transactions. Conversion to the euro eliminates currency
exchange risk between the participating member countries. Beginning January
2002, new euro-denominated bills and coins will be issued, and local currencies
will be withdrawn from circulation.
Our operations outside the United States constitute 20.6% of our total
revenues. Our operations in Europe constitute 11.0% of the total revenues. The
majority of these sales are from Great Britain, which has not adopted the euro.
Numerous issues are raised by the euro currency conversion including the
need to adapt computer and financial systems and business processes and
equipment. Due to these uncertainties, we cannot reasonably estimate the
long-term effects one common currency may have on pricing, costs, and the
resulting impact, if any, on financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred. The SOP is effective for financial statements
for fiscal years beginning after December 15, 1998. We adopted SOP 98-5
effective January 1, 1998. Adoption of SOP 98-5 had no material effect on our
combined financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") effective for fiscal years beginning after June
15, 2000. We anticipate that due to our limited use of derivative instruments,
the adoption of SFAS 133 effective January 1, 2001, will not have a material
effect on our financial statements.
YEAR 2000 COMPLIANCE
OVERVIEW
The widespread use of computer programs that rely on two-digit dates to
perform computations and decision-making functions may cause computer systems to
malfunction prior to or in the year 2000 and lead to significant business delays
and disruptions in the United States and internationally. We have implemented a
year 2000 program in order to identify, assess and mitigate our year 2000 risks.
As part of our program, we have hired independent consultants to assist in the
review and oversight of our program, as well as to perform some testing
operations. In addition, we have established a project management team to
monitor our program.
We are reviewing our year 2000 issues based upon three areas: applications,
infrastructure and business partners.
Applications cover the software systems resident on mainframe,
mid-range, network and personal computers. We define an application as one
or a collection of programs directly related to a common system. For
example, a financial application may include all the general ledger and
accounts receivable software code used to process information. In addition,
our applications have
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been segregated into critical and non-critical applications. Critical
applications are software systems which, if not operational, could have a
material impact on our business operations.
Infrastructure includes computers, data and voice communications
networks, and other equipment which use embedded chip processors such as
inventory movement systems, telephone systems and others.
Business partners include franchisees, third party vendors, customers
and other service providers whose systems may interface with us or whose own
operations are important to our daily operations.
These three areas have been addressed using a five phase program: inventory,
assessment, remediation, testing and contingency planning.
- Phase 1 inventories the respective applications, hardware and business
partners.
- Phase 2 assesses the possible impact of a year 2000 error on the
continuing operation of each identified application, hardware system or
business partner relationship and subsequently determines the risk of year
2000 noncompliance to operations and assigns priorities.
- Phase 3 establishes and implements specific plans for the remediation of
applications and hardware systems and for the determination of business
partners' compliance.
- Phase 4 tests each application and hardware system and reviews business
partners' compliance under the plans established in phase 3, to ensure
that year 2000 issues no longer exist.
- Phase 5 establishes and implements contingency plans in the event internal
or external systems are not compliant.
Changes may occur to our operations during the implementation of our year
2000 program or subsequent to the completion of each phase, therefore, we may
periodically revise our plans. We continue to review and test systems for year
2000 compliance as changes occur.
STATE OF READINESS
Our year 2000 progress is as follows:
APPLICATIONS
We have completed the inventory and assessment phases. We have identified 16
critical domestic and 6 critical international applications which primarily
relate to point-of-sale, warehousing and distribution and finance/payroll. A
significant number of critical and non-critical worldwide applications have been
remediated and tested and the remaining applications are scheduled for
completion by August 1999.
INFRASTRUCTURE
We have completed the domestic and international inventory and assessment
phases. A majority of the systems with embedded processors have completed the
remediation and testing phases. The remaining hardware systems remediation will
be completed by August 1999.
BUSINESS PARTNERS
During the course of business operations, we rely on third party business
partners to distribute products and to provide services. These business partners
include financial institutions, governmental agencies and utilities. The
disruption of the ability to receive services or to distribute our products
could adversely affect our financial condition. Although we have little or no
control over the
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remediation and testing of these third party systems, we are taking appropriate
action to determine the level of year 2000 compliance of third parties. These
actions include, but are not limited to, requesting written confirmation of a
business or business system's year 2000 compliance; directly meeting with
business management; and, performing additional independent tests. We have
identified 11 critical business partners and have requested written confirmation
from all of these partners as to their year 2000 compliance. Each of these 11
business partners has responded to our request for information. One has
indicated it is year 2000 compliant and the others have indicated they expect to
be year 2000 compliant before December 31, 1999.
We have substantially completed the inventory phase and are in the
assessment phase of business partners and expect this phase to be completed by
the second quarter of 1999. The determination of third party year 2000
compliance will continue through the end of the year.
CONTINGENCY PLANS AND RISKS
As the remediation, testing and review of each application, infrastructure
item and business partners occurs, we are determining the need for contingency
plans. Where appropriate, plans addressing both operational and technical
alternatives are being developed. This phase has begun and will continue through
the end of 1999.
Our goal is to achieve timely and substantial year 2000 compliance, with
remediation work assigned based upon how critical each system is to our
business. Due to the general uncertainty inherent in the year 2000 problem,
resulting in part from the uncertainty of compliance by third parties upon which
we rely, we are unable to determine at this time what the consequences of the
year 2000 problem will be. Our year 2000 program can only minimize, but cannot
eliminate, the risks of third party non-compliance. If we, or one of these third
parties upon which we rely, fail to adequately address the year 2000 problem, it
could disrupt our business. The possible consequences of a failure include
incomplete or inaccurate accounting, recording or processing of rentals and
sales of videocassettes, video games and other products and the reporting of
this information; delays or failures in ordering, shipment and distribution of
videocassettes, video games and other products; the creation of uncertainty
about our customer database; or inability to consummate credit and debit card
and check transactions. We will continue to devote the necessary resources to
complete our year 2000 program and contingency plans and believe that such
completion will significantly mitigate operational and financial risks.
COSTS
Costs of our year 2000 program have been expensed as incurred. The estimated
costs to complete our year 2000 program is currently expected to total about $11
million, $8.5 million of which has been incurred to date. We do not expect this
to have a material adverse effect on our results of operations, financial
position or liquidity.
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VIDEO INDUSTRY OVERVIEW
DOMESTIC HOME VIDEO INDUSTRY
According to Paul Kagan Associates, the U.S. videocassette and DVD rental
and sales industry grew from $15.7 billion in revenue in 1997 to $17.1 billion
in 1998 and this expert expects it to reach $22.0 billion in 2002. Paul Kagan
Associates estimates that, in 1998, 83.5 million, or 81.5%, of the 102.5 million
total U.S. households owned a VCR. The number of VCRs that were sold in the
United States in 1998 was estimated by Paul Kagan Associates to be 18.8 million,
a 3.5% increase from 1997, which represents the largest number of VCRs sold in
any single year. In addition, Paul Kagan Associates estimates that about 900,000
DVD players were sold in the United States during 1998. According to Paul Kagan
Associates, the VCR and DVD markets will continue to grow as the number of
multi-VCR households is expected to increase from 37.0 million in 1998 to 43.8
million by 2002 and the number of VCRs and DVD players sold in 2002 is expected
to reach 21.5 million.
As part of a November 1997 survey, the Video Software Dealers Association
revealed that each week nearly one-quarter of all U.S. households make a trip to
their video store, and each month almost three-fourths of all U.S. households
with children rent videocassettes. We believe that the following factors, among
others, make video rental a preferred medium of entertainment for millions of
customers:
- the opportunity to browse among a very broad selection of movies;
- the control over viewing, such as the ability to control start, stop,
pause, fast-forward and rewind;
- the opportunity to view recently released movies prior to their
availability for viewing in the home through other mediums such as
pay-per-view, pay television, basic cable television and network and
syndicated television; and
- the opportunity to entertain one or more people for a reasonable price.
The home video industry is highly fragmented. However, the home video
industry has experienced consolidation in recent years, as video store chains
have gained significant market share from single store operators. Based upon
information disclosed by Video Store Magazine and Paul Kagan Associates, the
five largest video store chains have a 41% market share of all U.S. consumer
video rentals in 1998. Dun & Bradstreet, as cited by the Video Software Dealers
Association, estimates that by the first quarter of 1999 there were about 24,590
independent video stores in the United States, down from about 26,960 in the
first quarter of 1998. About 49% of all locations that rent video titles are
currently operated by single store owners. In addition, according to the Video
Software Dealers Association, more than 14,000 of these single store operators
generate annual revenues of less than $220,000. We believe that small stores and
chains in the home video industry will continue to consolidate with national and
regional chains and that such consolidation will offer us numerous acquisition
opportunities. We believe that there are several competitive advantages of being
a large home video chain, including marketing efficiencies, brand recognition,
access to more copies of each videocassette through direct revenue-sharing
agreements, sophisticated information systems, greater access to prime real
estate locations, greater access to capital and competitive pricing made
possible by size and operating efficiencies. Even if there is significant
consolidation, however, we expect that the home video industry will remain
fragmented.
Historically, the major studios or their licensees released movies to video
stores at wholesale prices between $60 and $70 per videocassette for major
theatrical releases that were priced for rental in the United States. The
studios still release movies at relatively high wholesale prices unless the
movie is subject to a revenue-sharing agreement or a quantity discount program
or is designated by the studios as a sell-through movie. The studios attempt to
maximize total revenue from newly released video titles
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by maintaining the high wholesale price during the first four months to one year
after a movie is released. Thereafter, in order to promote sales to consumers,
the major studios release the movies at a substantially lower price, which
movies generally sell at retail for about $10 to $20 per videocassette.
Since the late 1980s, revenue-sharing agreements have been available to home
video chains and independent video dealers through deals brokered by
distributors such as Rentrak Corporation and SuperComm, Inc. More recently, the
major studios have entered into revenue-sharing agreements directly with several
large video chains. Under these new agreements, video stores share with the
studios an agreed-upon percentage of the video stores' rental revenue for a
limited period of time in exchange for minimal up-front payments for the
videocassettes by the video stores. This percentage generally declines over a
period of weeks following the initial release of the movie. The video stores
also agree to take a minimum number of copies of each movie that is released by
a studio in any U.S. movie theater. The video stores may also agree to take a
minimum number of movies that are not released by a studio in any U.S. movie
theater. The revenue-sharing agreements, subject to limitations and exceptions,
allow the video stores to sell previously viewed tapes to their customers.
We believe that the revenue-sharing agreements have the following
significant benefits to participating video stores:
- they provide these stores with the opportunity to substantially increase
the quantity and selection of newly released video titles that they stock;
- they increase revenues as a result of the increase in total number of
transactions per store and number of videocassettes rented per
transaction; and
- they align the studios' economic interests more closely with the interests
of the video stores.
In addition, we believe that revenue-sharing has increased the revenues
received on an annual basis by the studios through increased rental activity on
new releases as well as greater distribution and revenues on non-hit movies
through minimum output provisions.
In addition to wholesale pricing and revenue-sharing agreements, studios
release some movies at relatively low initial prices which movies generally are
sold by retailers for $10 to $20 per videocassette. Because the wholesale price
is relatively low and these movies are not subject to the revenue-sharing
agreements, retailers generally purchase these movies primarily for sale and
such movies are referred to as sell-through movies. These typically consist of
movies for children and other movies that have unique characteristics or other
mass ownership appeal, such as THE RUGRATS MOVIE and TITANIC.
INTERNATIONAL HOME VIDEO INDUSTRY
According to Paul Kagan Associates, the potential market for home video
rentals is growing at a faster pace outside the United States than within the
domestic market. According to Paul Kagan Associates, the number of households
outside of the United States and Canada which own a VCR is expected to grow from
about 264 million in 1996 to about 353 million by 2001. Currently, we operate in
26 countries outside of the United States.
Some of the attributes of the home video industry outside of the United
States are similar to those of the home video industry within the United States.
For example, the major studios generally release movies outside of the United
States according to the same sequential windows as the release of movies within
the United States, though the international windows tend to last for a longer
period of time. In general, however, the home video industry outside of the
United States does not mirror the home video industry within the United States.
For example, most countries have different systems of supply and distribution of
movie titles. Revenue-sharing agreements, which have proliferated within the
U.S. home video industry among large home video chains, generally have not yet
spread into markets
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outside of the United States. In addition, competition in most international
markets generally tends to be more fragmented, with few large home video chains.
MOVIE STUDIO DEPENDENCE ON VIDEO RENTAL INDUSTRY
According to Paul Kagan Associates, total U.S. movie studio and independent
supplier revenue increased about 11% per year from $9.0 billion in 1994 to $13.8
billion in 1998. Paul Kagan Associates also indicates that the video rental
industry is the largest single source of U.S. revenue to movie distributors,
representing about $6.7 billion, or 48.5%, of the $13.8 billion of movie revenue
in 1998. The following table represents Paul Kagan Associates' estimates of
revenues of total movie distributor revenue.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN MILLIONS)
U.S. home video........................ $ 4,612 $ 5,264 $ 6,181 $ 6,311 $ 6,690
Other U.S. revenue..................... 4,398 5,359 5,942 6,431 7,108
--------- --------- --------- --------- ---------
Total U.S. revenue................. 9,010 10,623 12,123 12,742 13,798
--------- --------- --------- --------- ---------
International home video............... $ 3,443 $ 4,230 $ 4,464 $ 4,406 $ 4,185
Other international revenue............ 4,515 4,964 6,010 6,400 6,904
--------- --------- --------- --------- ---------
Total international revenue........ 7,958 9,194 10,474 10,806 11,089
--------- --------- --------- --------- ---------
Total revenue.................... $ 16,968 $ 19,817 $ 22,597 $ 23,548 $ 24,887
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Of the many movies produced by major studios and released in the United
States each year, relatively few are profitable for the studios based on box
office revenues alone. In addition to purchasing box office hits, video rental
stores, including those operated by us, purchase movies on videocassette and DVD
that were not successful at the box office, thus providing the movie studios
with a reliable source of revenue for almost all of their movies. We believe
that the consumer is more likely to view movies which were not box office hits
on a rented videocassette or DVD than on most other formats because video rental
stores provide an inviting opportunity to browse and make an impulse choice
among a very broad selection of movie titles. In addition, we believe the
relatively low cost of video rentals encourages consumers to rent films they
might not pay to view at a theater.
Historically, new technologies have led to the creation of additional
distribution channels for movie studios. Movie studios seek to maximize their
revenues by releasing movies in sequential release date "windows" to various
movie distribution channels. After the initial theatrical release, studios make
their movies available to video stores for a specified period of time. This
window is exclusive against most other forms of non-theatrical movie
distribution, such as pay-per-view, premium television, basic cable and network
and syndicated television. The current length of the window for video stores
varies, typically ranging from 30 to 90 days for domestic video stores and from
120 to 180 days for international video stores. Thereafter, movies are made
sequentially available to other television distribution channels. This method of
sequential release allows the movie studios to increase their total revenue
while minimizing the adverse effect on the revenue derived from previously
established channels. With the advent of revenue-sharing and the incremental
revenues associated with such agreements, most movie studios have lengthened the
video store window for many box office hits.
HOME VIDEO GAME INDUSTRY
The home video game industry has historically been affected by changing
technology, limited hardware platform life cycles and hit-or-miss software
titles. In addition, video games typically generate most of their rental revenue
during the first twelve months after their release. We believe that during
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this time period, the differential between the retail price and a rental price
of a new video game is typically high enough to make rentals an attractive
alternative to the customer. According to Adams Media Research and VidTrac, the
total domestic home video game market generated about $2.0 billion in software
sales and $495 million in rental revenue in 1997. These markets grew to about
$2.7 billion and about $800 million in 1998, respectively, which represents a
36.8% and 61.7% increase, respectively. Adams Media Research estimates that
video game software sales will reach about $3.4 billion in 2002, a 25% increase
over the $2.7 billion in software sales in 1998.
According to the Interactive Digital Software Association, most of the
recent growth in the home video game industry has been fueled by the success of
the Sony PlayStation-TM- and Nintendo 64-TM- and their respective video games.
As of March 31, 1999, the installed base of Sony PlayStation and Nintendo 64
within the United States was about 15.7 million and 10.6 million units,
respectively. We expect that the home video game industry will continue to grow
with the anticipated U.S. introduction of Sega's Dreamcast-TM- and the Sony
PlayStation II-TM-.
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BUSINESS
We are the world's leading retailer of rentable home videocassettes, DVDs
and video games, with about 6,500 stores in the United States and 26 other
countries as of March 31, 1999. We operate primarily under the highly recognized
BLOCKBUSTER brand name, which, according to The Gallup Organization, achieves
nearly 100% recognition with active movie renters in the United States. Our U.S.
Internet site, WWW.BLOCKBUSTER.COM, provides information about our stores and
products, delivers content regarding certain movies and entertainment programs
and serves as our electronic commerce venue. Our revenues in 1998 increased
17.5% from 1997, with about 79% of these revenues generated in the United States
and about 21% generated outside of the United States. Nearly 60 million people
worldwide have rented in excess of 970 million movies and video games from us or
our franchisees within the last 12 months. For the year ended December 31, 1998,
we and our franchisees recorded worldwide revenues of about $4.7 billion, $3.9
billion from our company operations and $0.8 billion from our franchised stores.
Our business and operations were previously conducted by Blockbuster
Entertainment Corporation which was incorporated in Delaware in 1982 and entered
the movie rental business in 1985. On September 29, 1994, Blockbuster
Entertainment Corporation was acquired by and merged with and into Viacom. Since
the merger, our business and operations have been conducted by various indirect
subsidiaries of Viacom. In the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section, we discuss the general
development of our business over the last several years. In this section, we
describe our current business model and strategy. Recently, our business and
operations were either (1) merged into Blockbuster Inc. or (2) purchased by
Blockbuster Inc. and/or one of its subsidiaries. Blockbuster Inc., an indirect
subsidiary of Viacom, was incorporated under a different name on October 16,
1989 in Delaware.
Our brand recognition and leading market position have allowed us to create
one of the strongest entertainment franchises in the United States. Based on
1998 industry estimates from Paul Kagan Associates, we estimate that our
company-operated and franchised stores attained a U.S. market share in excess of
27%, over three times greater than that of our nearest competitor. We have
developed this leading position based on a business model which provides our
customers with superior convenience, selection and service at attractive prices.
We estimate that about 59% of the U.S. population lives within three miles of
one of our stores and our customer transaction database contains information on
about 87 million customer accounts.
Of the 26 markets in which we operated outside the United States, we held
leading market positions in Great Britain, Canada and the Republic of Ireland
and Northern Ireland as of March 31, 1999. Historically, the international video
retailing markets have been highly fragmented with varying distribution patterns
in each market. We believe that the economies of scale that we are able to bring
to each market, combined with our worldwide name recognition and established
distribution agreements, provide us with significant international growth
opportunities.
In 1997, John F. Antioco was recruited to serve as our chairman, president
and chief executive officer, selected in part for his significant multi-store
retail experience. Under the management team led by Mr. Antioco, we began to
develop a new business model which refocused on our core rental business. When
substantially implemented in the second quarter of 1998, this business model led
to a significant improvement in customer satisfaction. Most significantly, we
entered into domestic revenue-sharing agreements with various motion picture
studios. The studios include the six major motion picture studios: Buena Vista
Home Video, a division of the Walt Disney Company, Columbia Tri-Star Home Video
Inc., 20th Century Fox Home Entertainment Inc., Paramount Pictures Corporation
an affiliate of Viacom, Universal Studios Home Video and Warner Home Video.
These agreements are generally referred to as output agreements, because they
require us to distribute most of the rental titles released on videocassette by
these studios. The quantity of each title obtained is generally determined by a
contractual formula.
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We refer to these agreements as revenue-sharing agreements because they
provide that we will share our U.S. rental revenue from the videos with the
studio for a stated period of time, generally 26 weeks. These agreements enable
us to provide the most popular newly released video titles to our customers more
quickly, in greater quantity and on a more efficient basis. We believe these
agreements also have the following significant benefits:
- substantially increasing the number of newly released videos in our stores
to better satisfy customer demand;
- contributing to an increase in revenues resulting from an increase in the
total number of transactions and the number of videocassettes rented per
transaction; and
- aligning the studios' economic interests more closely with ours because
they share a portion of the rental revenue with us for a period of time.
In addition to revenue-sharing, we have made other changes that have
increased our same store revenues while providing enhanced revenue opportunities
for the studios. Some of these other changes include, among others, improving
our product allocation system to more effectively allocate newly released videos
among our stores based upon the likelihood of rental frequency by store and
improving our direct marketing programs and advertising campaigns. Reflecting
this turnaround, quarterly domestic same store rental revenues increased 8.6%,
17.5%, 20.0%, 20.5% and 23.1% in the first through fourth quarters of 1998
compared to 1997 and the first quarter of 1999 compared to the first quarter of
1998, respectively.
BUSINESS MODEL
Our current business model is designed to increase customer traffic and
transaction size by improving customer satisfaction and ultimately generate
higher sales volume per store. We believe our business model gives us an
advantage over other large home video chains and a significant advantage over
our single store competitors. We are applying key elements of our business model
to our international operations. The key elements of our business model are
discussed below.
BROAD SELECTION AND LARGE NUMBER OF MOVIES
We strive to be the leader in satisfying customer demand by stocking each of
our stores with more copies and a wider variety of newly released movies than
our competitors. In large part, our revenue-sharing agreements and our ability
to self-distribute have allowed us to implement this strategy in the United
States. For the year ended December 31, 1998, which reflects nine months under
our new business model, we obtained on average 130% more copies of each
videocassette per store and 49% more video titles than the prior year. In
addition to newly released video titles, we offer a broad selection of
time-tested popular movies and a wide variety of independent and lower-cost
movies that we acquire and are generally only available at our stores for a
specified period of time.
Our goal is to stock each of our stores with a selection and quantity of
merchandise which is optimal for that store. Using our customer transaction
database, we determine on a store-by-store basis the number of copies of each
new release which are to be offered by each store. Our objective is to stock the
top 1,000 most commonly rented popular movies as part of our BLOCKBUSTER
FAVORITES. In addition, we use our customer transaction database to periodically
review each store's inventory of BLOCKBUSTER FAVORITES and identify movie titles
within this category which have not been rented for a period of time. We offer
these previously viewed tapes for sale and replace them with movies which we
believe our customers are interested in renting.
CONVENIENT AND VISIBLE STORES OF OPTIMAL SIZE AND LOCATION
We maintain a strong presence throughout the United States with an estimated
59% of the U.S. population living within three miles of one of our stores. Our
experienced store development team can quickly identify the optimal sites for
our new stores within our targeted markets through the use of our extensive real
estate and customer transaction databases. We have developed three distinct
store formats which are tailored to maximize our penetration in each market.
These three formats include
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our "new" traditional store format, which is about 4,800 square feet, our seam
store format, which is about 2,500-3,500 square feet, and our store-in-store
format, which is about 1,000-1,200 square feet. In addition to stores, we have
begun to deploy video vending machines on an experimental basis.
In 1998, we began a comprehensive program to remodel our company-operated
stores worldwide. We expect to fit most of our company-operated stores with new
interior signage. We also expect to remodel the interior and exterior of some of
our company-operated stores in order to enhance our customer's shopping
experience. During 1998, we remodeled about 700 company-operated stores
worldwide.
SUPERIOR AND CONSISTENT CUSTOMER SERVICE
We focus on providing superior service to all of our customers. An essential
aspect of continuing to improve customer service has been our focus on improving
the in-store experience of each customer. We have worked to improve the quality
of our staff through recruitment, compensation, training and employee
appreciation and incentive programs. These programs encourage and empower our
store employees to gain experience and product knowledge in order to effectively
meet the needs of our customers. In addition, our domestic customers are
eligible to participate in our BLOCKBUSTER REWARDS premium membership program,
which allows our customers to earn free rentals. Our most active customers are
automatically enrolled in the BLOCKBUSTER REWARDS Gold program which offers
additional free rental benefits and the ability to reserve movies. These
programs are designed to develop customer loyalty by encouraging our customers
to rent movies only from our stores.
COMPETITIVE PRICING
Our goal is to optimize on a store-by-store basis the price at which we rent
our video titles. In 1998, we initiated a dual pricing strategy that
differentiated pricing between newly released video titles and BLOCKBUSTER
FAVORITES, whereby the BLOCKBUSTER FAVORITES were priced lower than the newly
released video titles. We believe that our customers perceive this two-tiered
pricing as more appropriate in light of the differences between the demand for
the newly released video titles and the BLOCKBUSTER FAVORITES. Our customer
transaction database provides us with the ability to adjust our overall pricing
strategy for each U.S. store based on local market conditions, including local
prices established by our competitors. In addition, we have implemented a new
policy in our company-operated stores, setting the rental term of our
BLOCKBUSTER FAVORITES, our video games and some of our newly released video
titles to a period ranging from two to five evenings. Previously, all rentals
were due after two evenings.
NATIONAL ADVERTISING AND MARKETING PROGRAMS
Our large U.S. store base and our extensive customer database enable us to
be the only home video chain that actively maintains a national advertising and
marketing program, including network television, national promotions and local
television and radio. For the year ended December 31, 1998, we incurred about
$181 million in advertising expenses. In addition, some of our business
partners, including the studios, allow us to direct a significant amount of
their advertising expenditures. Furthermore, the studios incur additional
expenditures to promote their newly released movies.
Our advertising and marketing provide information regarding one or more key
points of difference between ourselves and the competition. We have pursued an
aggressive advertising and marketing campaign in order to promote awareness of
the BLOCKBUSTER name. Our primary goal is to make our name so recognizable that
any time a person wishes to rent a movie, he or she will first consider coming
to one of our stores. Our advertising and marketing tries to convey the message
that a visit to one of our stores will allow the customer to experience the
magic of the movies.
USE THE CUSTOMER TRANSACTION DATABASE
We have developed and utilized an extensive customer transaction database
with about 87 million customer accounts in the United States. This database
enables us to effectively operate and market our
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business. For example, we are able to directly communicate with our customers on
a targeted and customized basis relating to our products and programs. We are
also able to stock each of our company-operated stores with the quantity and
selection of merchandise which is optimal to that store.
SELF DISTRIBUTION CAPABILITIES
We have constructed and launched a highly-automated distribution center in
McKinney, Texas which allows us to distribute substantially all of our products
to our domestic company-operated stores. We believe that our distribution center
gives us a significant competitive advantage over our competitors which use
third party distributors because we are able to process and distribute a greater
quantity of products while reducing costs and improving service to our stores.
In particular, we mechanically repackage our newly released videos to make them
suitable for rental at our stores. Previously, this activity had been performed
manually at each store. In addition, our distribution center gives us the
capacity to accommodate our planned store expansion without incurring
significant expenditures. For example, between 1997 and the end of 1999, we
anticipate that we will have tripled the number of videocassettes processed and
distributed to our stores. We also believe these distribution capabilities were
a major factor in our ability to successfully implement our revenue-sharing
agreements to provide superior movie selection to our customers.
GROWTH STRATEGY
We believe that our growth strategy will further establish our company as
the leading home video chain in the world. Our goal is to increase our
systemwide U.S. market share from 27%, as of December 31, 1998, to over 40%
within the next three years and to significantly increase our market share in
those countries outside the United States where we believe it is profitable to
do so. We believe that our growth objectives can be met because:
(1) the home video industry is highly fragmented both in the United States
and internationally;
(2) consolidation has already begun and will continue; and
(3) the advantages created by our new business model positioned us to
increase our market share.
As explained more fully below, our growth will principally be driven by an
increase in our same store revenues, an expansion of both our company-operated
and franchisee-operated store base in the United States and internationally and
by spreading our expenses over a larger revenue base.
INCREASE SAME STORE REVENUES
By implementing each element of our business model, we believe that we will
increase same store revenues by:
- increasing the number of movies or video games that a customer rents on
each visit to our stores;
- continuing to grow our active customer base as we increase our market
share;
- increasing the number of times that active customers visit our stores;
- expanding our offering of rentable home entertainment, such as DVDs and
video games; and
- further increasing the quantity of videocassettes in our stores.
EXPAND DOMESTIC STORE BASE
Based on our current store prototypes, we believe that the potential exists
for 4,000 additional new traditional video stores in the United States. Over the
next three years, we expect to add about 500 company-operated stores per year to
our U.S. store base. We plan to open most of these new stores in the 70 largest
markets in the United States. With the use of our extensive customer transaction
database and real estate database, our experienced store development team
identifies markets with growth opportunities and responds to these opportunities
with the appropriate store location and store format, which store format ranges
from about 1,000 to 4,800 square feet. We believe that through our site
selection process and flexible store formats, our new stores will generate
sufficient revenue to
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recover our capital investment in a short period of time without significantly
reducing the revenues of our existing stores.
EXPAND INTERNATIONAL STORE BASE
Our international strategy is focused on both expanding into markets where
we already have an established market position and entering and expanding our
presence in new or less mature markets. Although, as of March 31, 1999, we
operated stores in 26 markets outside of the United States, 90% of our
international rental revenue was generated by our top seven international
markets. These markets are Great Britain, Canada, the Republic of Ireland
together with Northern Ireland, Mexico, Australia, Spain and Taiwan. We believe
that the growth opportunities in these markets are significant because they are
highly fragmented and our respective market share in each of these countries is
generally estimated by us to be less than 40%. We expect to open over 400 new
company-operated stores in these seven markets over the next three years. We
also plan to open over 100 new company-operated stores over the next three years
in international markets other than our top seven markets. As in the United
States, we use different store prototypes in response to local real estate and
market conditions. In addition, we have developed and use a new country entry
model which targets development of a specified range of a number of
company-operated stores and franchised stores at which point economies of scale
can be used to reduce corporate overhead costs and national advertising
expenses.
EXPAND WORLDWIDE FRANCHISE PROGRAM
Over the next three years, we expect to add about 200 franchised stores per
year to our franchised U.S. store base and about 125 franchised stores per year
to our international store base. This includes joint ventures in which we own a
minority interest. We also intend to convert company-operated stores in smaller
markets into franchised stores by selling these stores to franchisees. These
franchisees would also commit to develop additional new franchised stores in
their respective markets. As of March 31, 1999, we had about 125 franchisees
operating 640 U.S. franchised stores and 421 international franchised stores.
For the year ended December 31, 1998, we had revenues of $60.7 million relating
to our franchise operations, or about 1.6% of our 1998 revenues. In order to
accomplish this objective, we have refined our franchise approval process, hired
personnel exclusively dedicated to the development of new franchises and
launched a campaign to attract prospective franchisees. In order to increase the
attractiveness of our U.S. franchise program, by the end of 1999 we expect to
make our revenue-sharing agreements with the studios available to our U.S.
franchisees, which will provide them with an option to increase their quantity
and selection of movies.
APPLY THE BENEFITS OF GREATER SIZE
Our leading market position enables us to derive significant economies of
scale and operating efficiencies that are not necessarily available to our
smaller competitors. We are able to achieve efficiencies on both a store level
basis and a systemwide basis. On a store level basis, the increase in the volume
of transactions and the consequent increase in revenues per store as a result of
our business model provides us with the opportunity to reduce our labor costs as
a percentage of revenues. On a systemwide basis, we believe that we can reduce
our distribution costs and selling, general and administrative expenses as a
percentage of our revenues.
PURSUE STRATEGIC ACQUISITIONS
For the year ended December 31, 1998, we acquired 51 video stores. Thus far
in 1999, we have acquired or are under contract to acquire about 190 video
stores. We will continue to review potential acquisitions, including
acquisitions of video rental chains and stores operated by our franchisees as
well as acquisitions in complementary businesses which will enable us to take
advantage of the highly recognized BLOCKBUSTER brand name, our extensive
customer transaction database and our existing distribution system.
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PURSUE NEW TECHNOLOGIES AND PRODUCTS
Our leading market position and recognizable brand name allow us to take
advantage of developing technologies and products related to rentable home
entertainment. For example, we are aggressively seeking to develop our online
retailing. We currently are redesigning our U.S. Internet site,
WWW.BLOCKBUSTER.COM, to capitalize on:
- our existing customer relationships;
- our extensive customer transaction database;
- recognition of the BLOCKBUSTER brand name;
- our studio relationships;
- our distribution center capabilities; and
- our existing store base.
We expect to increase our online retail sales of videocassettes, DVDs,
compact discs and BLOCKBUSTER
GIFTCARDS. We also expect to begin online sale of previously viewed tapes, video
games, previously played video games and other entertainment products.
In addition, we have already tracked the success of DVDs in the marketplace
and have introduced DVDs for rental and sale in about 750 domestic stores and in
some markets outside of the United States. As DVDs become more widely accepted
by the public we intend to rent and sell DVDs in all of our stores.
CUSTOMER TRANSACTION DATABASE
We have developed and utilize an extensive U.S. customer transaction
database with about 87 million accounts. This database has tracked customer
names, addresses, phone numbers, transaction histories, demographic information
and, recently, e-mail addresses. We also maintain a customer transaction
database in each of the countries in which we operate outside of the United
States. As of March 1999, the following chart summarizes the number of our
systemwide U.S. customer accounts that have been active for the periods shown:
[Bar graph which shows that:
1. about 17.8 million customers rented or purchased a product from one of our
stores within the last 30 days;
2. about 28.4 million customers rented or purchased a product from one of our
stores within the last three months;
3. about 34.5 million customers rented or purchased a product from one of our
stores within the last six months;
4. about 39.1 million customers rented or purchased a product from one of our
stores within the last nine months;
5. about 42.2 million customers rented or purchased a product from one of our
stores within the last year; and
6. about 86.8 million customers have rented or purchased a product from one of
our stores.]
We consider our customer transaction database to be one of our core assets,
which we currently use to:
- communicate with and market directly to our customers on a national basis;
- develop programs to reward our most loyal customers;
- strategically locate potential new store sites based on demographics and
unique trade areas; and
- customize and improve the allocation of merchandise on a store-by-store
basis, based on local demographics and prior rental history of our
customers.
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Over time, we believe we will use the information we collect and the
relationships we have developed with our customers through our database to:
- evaluate new industry trends such as DVDs and the digital broadcast
system;
- further develop and enhance our promotional and marketing strategy through
e-mail and other channels of distribution;
- help customers choose and rent movies by analyzing their previous viewing
history;
- promote our internet site and services; and
- capitalize on new home delivery systems for filmed entertainment as these
systems become economically viable.
MERCHANDISING
We offer a wide selection of movies and video games for rent and purchase.
We stock each of our company-operated stores with the quantity and selection of
merchandise which we believe is optimal for that particular store.
The breakdown of the domestic revenues generated from the rental and sale of
such products for the year end December 31, 1998 is as follows:
[Pie graph which shows a breakdown of our domestic revenue as follows:
1 about 71.1% of our domestic revenues was generated by movie rentals;
2 about 9.4% of our domestic revenues was generated by video game rentals;
3 about 5.2% of our domestic revenues was generated by previously viewed tapes
and previously played video game sales;
4 about 7.0% of our domestic revenues was generated by sell-through movie
sales; and
5 about 7.3% of our domestic revenues was generated from the rental and sale
of other items.]
VIDEOCASSETTE AND VIDEOCASSETTE PLAYER RENTALS. Our typical traditional
domestic store generally carries about 6,100 different movie titles available
for rent, which include about 600 newly released video titles and about 5,500
BLOCKBUSTER FAVORITES. About 81% of 1998 domestic rental revenues were from the
rentals of newly released movies. In some of our stores, we rent videocassette
players. Under our revenue-sharing agreements, we are able to make available a
substantial number of additional copies of each newly released video in order to
satisfy our customers' demand shortly after the movie is released. In addition,
we are able to offer substantially more newly released video titles which
increases the variety of movies available in our stores. Our average customer
rents two videocassettes every time he or she visits one of our stores. Our
stores outside of the United States generally carry fewer movies due to their
smaller store sizes.
VIDEOCASSETTE SALES. We offer sell-through movies for sale for about $10 to
$20 per videocassette. These typically consist of:
- classic movies that we believe have ownership appeal;
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- childrens' movies; and
- new releases that are priced for sell-through.
We also offer for sale previously viewed tapes to the public after the period of
time after their useful lives as rental products. These previously viewed tapes
are generally rewrapped and are sold at low prices.
DVDS AND DVD PLAYERS. We currently rent and sell about 300 different DVD
titles, about 66% of which are available for rent and 34% of which are available
for sale in about 750 domestic stores and in some markets outside of the United
States. We also rent DVD players in these stores. As DVDs become more widely
accepted in the marketplace we expect to increase the number of our stores that
rent and sell DVDs.
VIDEO GAMES AND VIDEO GAME CONSOLES. We rent video games for use with Sony
PlayStation-TM-, Nintendo-TM- and other video game platforms in all of our
domestic stores and many of our international stores. In these stores, we also
sell previously played video games and rent the video game consoles. In
addition, we sell new games in most of our stores in markets outside of the
United States.
OTHER PRODUCTS. For the convenience of our customers, we sell VCR
accessories, such as blank videocassettes and videocassette cleaning equipment,
and a limited selection of snacks and beverages in all of our stores.
Occasionally, we sell licensed products to complement our selection of movies.
Also, we sell music compact discs and cassette tapes in some of our stores and
on our U.S. Internet site.
STORES AND STORE OPERATIONS
SITE SELECTION. We have developed a comprehensive model which we use to
find suitable locations for company-operated stores and markets for franchise
stores. We seek to locate our company-operated stores in geographic areas with
population and customer concentrations that enable us to better allocate
available resources and manage operating efficiencies in inventory management,
advertising, marketing, distribution, training and store supervision. We are
targeting the remaining markets for the opportunity to develop franchises.
Accordingly, we are targeting the 70 largest markets in the United States to
develop company-operated stores and we are targeting the remaining markets for
new franchise development.
Within each targeted market, we identify potential sites for new and
replacement stores by evaluating market dynamics, some of which include
population demographics, psychographics, customer penetration levels and
competition. We use our extensive real estate database and customer transaction
database to continuously monitor market conditions and select strategic store
locations. Our experienced store development team is capable of securing store
leases and preparing sites for operation, a process which typically takes about
six months. We use our knowledge of market areas and rely upon the familiarity
of our brand name to enhance our ability to obtain prime store locations,
negotiate favorable lease terms with landlords and enter into multiple store
leases.
STORE DEVELOPMENT. For the periods presented, the following table
summarizes opened stores, acquired stores, closed stores, and sold stores.
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OUR WORLDWIDE STORE COUNT INFORMATION
<TABLE>
<CAPTION>
NUMBER OF FRANCHISED
NUMBER OF AND/OR JOINT VENTURE TOTAL
COMPANY-OPERATED STORES STORES STORES
----------------------------------- ------------------------------------- -----------
DOMESTIC INTERNAT'L TOTAL DOMESTIC INTERNAT'L TOTAL DOMESTIC
----------- ----------- --------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STORES AT 12/31/94.............. 2,065 1,002 3,067 725 277 1,002 2,790
Open.......................... 313 142 455 86 56 142 399
Acquired...................... 195 165 360 -- 3 3 195
Closed........................ (33) (154) (187) (18) (29) (47) (51)
Sold.......................... (3) -- (3) (150) (129) (279) (153)
----- ----- --------- ----- ----- --------- -----
STORES AT 12/31/95.............. 2,537 1,155 3,692 643 178 821 3,180
Open.......................... 367 211 578 78 92 170 445
Acquired...................... 200 98 298 2 -- 2 202
Closed........................ (36) (58) (94) (17) (10) (27) (53)
Sold.......................... (2) -- (2) (71) (50) (121) (73)
----- ----- --------- ----- ----- --------- -----
STORES AT 12/31/96.............. 3,066 1,406 4,472 635 210 845 3,701
Open.......................... 345 163 508 82 94 176 427
Acquired...................... 57 258 315 7 -- 7 64
Closed........................ (114) (69) (183) (14) (10) (24) (128)
Sold.......................... (7) -- (7) (19) (41) (60) (26)
----- ----- --------- ----- ----- --------- -----
STORES AT 12/31/97.............. 3,347 1,758 5,105 691 253 944 4,038
Open.......................... 174 165 339 53 141 194 227
Acquired...................... 46 5 51 -- 21 21 46
Closed........................ (70) (121) (191) (24) (10) (34) (94)
Sold.......................... -- (21) (21) (22) (5) (27) (22)
----- ----- --------- ----- ----- --------- -----
STORES AT 12/31/98.............. 3,497 1,786 5,283 698 400 1,098 4,195
Open.......................... 60 51 111 13 22 35 73
Acquired...................... 86 -- 86 -- -- -- 86
Closed........................ (25) (17) (42) (2) (1) (3) (27)
Sold.......................... -- -- -- (69) -- (69) (69)
----- ----- --------- ----- ----- --------- -----
STORES AT 3/31/99............... 3,618 1,820 5,438 640 421 1,061 4,258
----- ----- --------- ----- ----- --------- -----
----- ----- --------- ----- ----- --------- -----
<CAPTION>
INTERNAT'L TOTAL
----------- ---------
<S> <C> <C>
STORES AT 12/31/94.............. 1,279 4,069
Open.......................... 198 597
Acquired...................... 168 363
Closed........................ (183) (234)
Sold.......................... (129) (282)
----- ---------
STORES AT 12/31/95.............. 1,333 4,513
Open.......................... 303 748
Acquired...................... 98 300
Closed........................ (68) (121)
Sold.......................... (50) (123)
----- ---------
STORES AT 12/31/96.............. 1,616 5,317
Open.......................... 257 684
Acquired...................... 258 322
Closed........................ (79) (207)
Sold.......................... (41) (67)
----- ---------
STORES AT 12/31/97.............. 2,011 6,049
Open.......................... 306 533
Acquired...................... 26 72
Closed........................ (131) (225)
Sold.......................... (26) (48)
----- ---------
STORES AT 12/31/98.............. 2,186 6,381
Open.......................... 73 146
Acquired...................... -- 86
Closed........................ (18) (45)
Sold.......................... -- (69)
----- ---------
STORES AT 3/31/99............... 2,241 6,499
----- ---------
----- ---------
</TABLE>
We plan to open most of our new company-operated stores in the largest 70
markets in the United States. Based upon our current store model, we believe
that there is the potential for 4,000 additional new traditional video stores in
the United States.
Outside the United States, we plan to open most of our new company-operated
stores in the seven markets where we already have a significant presence. In
addition, we plan to add franchised and joint venture stores in other
international markets.
STORE FORMAT. In the past, we have sought to locate stores in locations
that were convenient and visible to the public. We intend to continue to
conveniently locate store locations by incorporating an "appropriate" store
format using our extensive customer transaction database and real estate
database to maximize revenues without significantly decreasing the revenues of
our nearby stores. To do so, we have designed three store formats:
- NEW TRADITIONAL STORES. These stores are about 4,800 square feet and have
been or will be constructed in markets where store-to-population ratios
are low and where we believe market conditions are optimal. On average,
each new traditional store carries about 600 different newly released
video titles and about 4,000 total copies of these movies and about 5,500
different BLOCKBUSTER FAVORITES and about 6,900 total copies of these
movies.
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- SEAM STORES. These stores are about 2,500-3,500 square feet and have been
or will be constructed in order to compete:
a. in markets that are located in between our traditional stores without
significantly decreasing the market shares of those traditional
stores; and
b. in rural areas.
On average, each seam store carries about 500 different newly released
video titles and about 3,000 copies of these movies and about 3,500
different BLOCKBUSTER FAVORITES and about 5,000 total copies of these
movies.
- STORE-IN-STORES. These stores are about 1,000-1,400 square feet and have
been or will be constructed within a department store, supermarket or
other store. This strategy is being pursued to further expand our presence
and meet demand in mature markets where we already have a strong presence.
On average, each store-in-store carries about 500 different newly released
video titles and about 2,400 copies of these movies and about 2,200
different BLOCKBUSTER FAVORITES and about 2,700 total copies of these
movies.
We also periodically examine whether the formats of our existing stores are
optimal for their location and may downsize or relocate existing stores as
opportunities arise.
STORE LAYOUT. We design our stores to provide a recognizable distinctive
format offering an extensive selection of products in an attractive design aimed
at capturing the magic of the movies. We believe that our trademark blue and
yellow colors which dominate most of our stores make them easily recognizable to
video rental customers. The internal layout of our stores allows our customers
to easily distinguish new video releases, BLOCKBUSTER FAVORITES, DVDs, video
games and other products. Each domestic store typically contains a perimeter
wall, an internal area and a check-out area.
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<PAGE>
Below is a graphic of our new store layout.
[Diagram of our internal store layout.]
STORE OPERATIONS. Our U.S. company-operated stores generally operate under
substantially similar hours of operation. Domestic stores are open 365 days a
year, with daily hours generally from 10:00 a.m. to 12:00 midnight. The hours of
operation for franchised stores vary widely depending on the franchise.
Typically, each U.S. store employs 16 people, including two assistant store
managers and one store manager. A large part of the in-store experience depends
upon the knowledge of our staff. We carry out periodic customer service audits
at all of our stores to understand, satisfy and exceed our customers'
expectations. In addition, as store traffic and same store revenues have
increased, we have been able to achieve significant labor savings through higher
productivity. We have achieved additional labor savings because our distribution
center more efficiently performs tasks of packaging videocassettes which were
previously done manually. International store operations vary by country.
STORE LOCATIONS. At March 31, 1999, in the United States and its
territories, we operated 3,618 stores and our franchisees operated 640 stores.
The following map sets forth the number of domestic stores we operated,
including stores operated by our franchisees, as of March 31, 1999:
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[Map of U.S.A. and its territories showing our total number of stores
(Company-operated and franchised stores) in each state and territory as
follows:]
<TABLE>
<CAPTION>
TOTAL
STATE OR TERRITORY(1) STORES(2)
- ----------------------------------------------------------------------------------------------------- -------------
<S> <C>
ALABAMA.............................................................................................. 49
ALASKA............................................................................................... 12
ARIZONA.............................................................................................. 78
ARKANSAS............................................................................................. 17
CALIFORNIA........................................................................................... 514
COLORADO............................................................................................. 100
CONNECTICUT.......................................................................................... 49
DELAWARE............................................................................................. 8
DISTRICT OF COLUMBIA................................................................................. 7
FLORIDA.............................................................................................. 325
GEORGIA.............................................................................................. 171
HAWAII............................................................................................... 19
IDAHO................................................................................................ 8
ILLINOIS............................................................................................. 203
INDIANA.............................................................................................. 70
IOWA................................................................................................. 24
KANSAS............................................................................................... 49
KENTUCKY............................................................................................. 40
LOUISIANA............................................................................................ 66
MAINE................................................................................................ 5
MARYLAND............................................................................................. 108
MASSACHUSETTS........................................................................................ 104
MICHIGAN............................................................................................. 141
MINNESOTA............................................................................................ 46
MISSISSIPPI.......................................................................................... 28
MISSOURI............................................................................................. 86
MONTANA.............................................................................................. 7
NEBRASKA............................................................................................. 27
NEW HAMPSHIRE........................................................................................ 19
NEW JERSEY........................................................................................... 97
NEW MEXICO........................................................................................... 22
NEW YORK............................................................................................. 249
NEVADA............................................................................................... 37
NORTH CAROLINA....................................................................................... 106
NORTH DAKOTA......................................................................................... 6
OHIO................................................................................................. 155
OKLAHOMA............................................................................................. 51
OREGON............................................................................................... 39
PENNSYLVANIA......................................................................................... 137
PUERTO RICO.......................................................................................... 43
RHODE ISLAND......................................................................................... 24
SOUTH CAROLINA....................................................................................... 63
SOUTH DAKOTA......................................................................................... 5
TENNESSEE............................................................................................ 68
TEXAS................................................................................................ 455
UTAH................................................................................................. 41
VERMONT.............................................................................................. 5
VIRGINIA............................................................................................. 119
VIRGIN ISLANDS....................................................................................... 2
WASHINGTON........................................................................................... 63
WEST VIRGINIA........................................................................................ 11
WISCONSIN............................................................................................ 73
WYOMING.............................................................................................. 5
GUAM................................................................................................. 2
DOMESTIC STORE TOTAL................................................................................. 4,258
</TABLE>
At March 31, 1999, outside of the United States, we operated 1,820 stores,
and our franchisees and joint ventures in which we own a minority interest
operated 421 stores. The following table sets forth, by country, the approximate
number of stores we operated and stores our franchisees operated as of March 31,
1999.
<TABLE>
<CAPTION>
NUMBER OF FRANCHISED
NUMBER OF COMPANY- OPERATED AND/OR JOINT VENTURE
COUNTRY(1) STORES STORES TOTAL(2)(3)
- ---------------------------------------------------- --------------------------- ----------------------- ---------------
<S> <C> <C> <C>
Great Britain....................................... 661 -- 661
Canada.............................................. 351 -- 351
Ireland (Republic) and Northern Ireland............. 220 -- 220
Australia........................................... 130 82 212
Mexico.............................................. 128 18 146
Italy............................................... -- 128 128
Spain............................................... 94 2 96
Brazil.............................................. -- 64 64
Chile............................................... 57 -- 57
Taiwan.............................................. 59 -- 59
Argentina........................................... 49 -- 49
Denmark............................................. 44 -- 44
Japan(4)............................................ -- 38 38
China (Hong Kong)................................... 14 -- 14
Portugal............................................ -- 15 15
Colombia............................................ -- 14 14
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
COMPANY-
OPERATED NUMBER OF FRANCHISED
COUNTRY(1) STORES AND/OR JOINT VENTURE STORES TOTAL(2)(3)
- --------------------------------------------------------- --------------- ------------------------------- -----------
<S> <C> <C> <C>
Venezuela................................................ -- 12 12
Israel................................................... -- 12 12
New Zealand.............................................. 11 -- 11
Thailand................................................. -- 10 10
Peru..................................................... -- 9 9
Ecuador.................................................. -- 6 6
Panama................................................... -- 6 6
El Salvador.............................................. -- 4 4
Uruguay.................................................. 2 -- 2
Poland................................................... -- 1 1
----- --- -----
International Store Total................................ 1,820 421 2,241
----- --- -----
----- --- -----
</TABLE>
- ------------------------
(1) We reached an agreement with a franchisee to begin to operate in the
Philippines by the end of 1999.
(2) This does not include stores leased or owned but not operating.
(3) In addition to the stores listed in the chart, as of March 31, 1999, there
were 37 video vending machines being tested in Spain, Canada and Great
Britain.
(4) We have reached an agreement to sell our interest in our Japanese joint
venture.
ADVERTISING AND MARKETING
Worldwide, in the year ended December 31, 1998, we incurred about $181
million in advertising expenses, which include about $142 million in the United
States and about $39 million internationally. In addition, some of our business
partners, including the studios, allow us to direct a significant amount of
their advertising expenditures. Furthermore, the studios also incur additional
expenditures to promote their newly released movies.
NATIONAL AND LOCAL ADVERTISING CAMPAIGN. In 1998, we launched a national
advertising campaign in order to support our business model. We are the only
home video chain that actively maintains a national advertising campaign. This
campaign consists of network and local television, local advertising and local
radio. We use our customer transaction database to target our direct mailings at
different customer groups. We expect to incur about $235 million in advertising
expenses in 1999, an increase of about 30%. We expect this increase to include
more television, outdoor and transit advertising.
Our national and local advertising campaign is designed based upon our
proprietary research. This is done on a national basis and we also focus our
efforts on a local basis in order to adjust to each local environment. We obtain
information from our customer transaction database, our real estate database and
outside research agencies. We have concentrated on the following factors to
formulate and adjust our advertising:
- our market share;
- our level of store development and brand awareness relative to our
competitors within the relevant market;
- local demographics; and
- other local competitive issues.
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Our advertising campaign focuses on the two areas discussed below.
- OUT-OF-STORE ADVERTISING. We advertise on television, transit and other
like media. We also use our research to customize our direct mailings to
address overall demographic trends and individual customer transaction
history.
- IN-STORE ADVERTISING. We use leading edge graphics and visual
merchandising in our stores in order to give our customers the feeling
that a trip to our stores captures the magic of the movies.
INNOVATIVE MARKETING PROGRAMS. Because of our large store base and our
leading brand awareness throughout the United States and many other markets, we
have been able to implement the following programs in the United States and the
same or similar programs in many of our international markets.
- NATIONAL PROMOTIONS. In 1999, we have planned several one-of-a-kind
national promotional events, each several weeks in duration, designed to
attract customers and increase the number of times that active customers
visit our stores due to the event's novelty and "prize" appeal. To date,
these are the only nationally advertised events in our industry. For
example, in our "Trip-a-day Giveaway" program, each day between January
19, 1999 and March 1, 1999, we gave a different customer a free trip to
places such as Las Vegas or the Cannes Film Festival. In addition, for the
last four years, we have sponsored the internationally televised
BLOCKBUSTER ENTERTAINMENT AWARDS, in which a total of 15 million votes
were cast in 32 categories in our stores and on our U.S. website in 1998.
On June 16, 1999, the BLOCKBUSTER ENTERTAINMENT AWARDS were televised
within the United States to a television audience of more than over 7
million households and were also televised in over 60 other countries.
- NEW RELEASE GUARANTEES. Because of the substantial number of copies of
videocassettes that we are able to provide in our stores, we are able to
offer a guarantee that some of our selected newly released video titles
will be in stock or the customer will receive a coupon that can be
redeemed for a free rental of that movie within the following 30 days.
- BLOCKBUSTER REWARDS PROGRAM. This premium membership program is designed
to offer benefits to our customers and enhance customer loyalty by
encouraging our customers to rent movies only from our stores. The program
was implemented in February of 1999 and as of March 31, 1999, there were
about 2.7 million people enrolled in the BLOCKBUSTER REWARDS program in
the United States. In general, for a $9.95 fee, our customers can join the
BLOCKBUSTER REWARDS program and earn free movie or video game rentals,
exclusive promotional offers and other benefits. Some high volume renters
are automatically enrolled as BLOCKBUSTER REWARDS Gold members which earns
them additional benefits, such as additional free movie or video game
rentals and the ability to reserve movies by telephone. We expect to
implement versions of this program in Canada and Mexico by the end of
September 1999.
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- BLOCKBUSTER GIFTCARDS. Our national point-of-sale system in the United
States presents us with a unique opportunity for our customers to purchase
stored value BLOCKBUSTER GIFTCARDS which can be redeemed at any of our
stores nationwide. The BLOCKBUSTER GIFTCARD is a plastic prepaid card
available in amounts ranging from $5 to $50. Some of the cards have
attractive designs, such as movie images, and are marketed as "Limited
Edition Cards." The BLOCKBUSTER GIFTCARDS are also currently available in
Great Britain and Canada. For the year ended December 31, 1998, we sold
$121 million of BLOCKBUSTER GIFTCARDS, which was a 16.9% increase in sales
as compared to the year ended December 31, 1997.
- CROSS-PROMOTIONAL MARKETING PROGRAMS. On an ongoing basis, since 1997, we
have implemented cross-promotional marketing programs with other
well-known companies such as Coca-Cola, Taco Bell, General Motors and
Burger King. As a result of our participation in these programs, we
benefit from marketing by our business partners which features our brand.
- COMMUNITY SERVICE. We also sponsor and promote leadership events in many
of the communities in which we operate. For example, as part of our
"Community Service Videos" program, we provide free videocassettes in some
of our stores on subjects, such as breast cancer. We also offer annually
our KIDPRINT program in most of our U.S. stores. Under this complimentary
program, parents can have one of our staff members videotape their child's
mannerisms, appearance and voice for emergency identification purposes.
INTERNET: WWW.BLOCKBUSTER.COM
We have several Internet sites worldwide. The primary objective of our sites
is to drive traffic to our video stores with content regarding promotions such
as BLOCKBUSTER REWARDS. In addition, our U.S. Internet site also conducts
electronic commerce and provides information about us and some of the products
that we offer in our stores. This site also offers previews of movies soon to be
released in our stores. In addition, we sell on our U.S. Internet site
videocassettes, DVDs, compact discs and BLOCKBUSTER GIFTCARDS. For a complete
discussion of our online strategy, we refer you to "--Growth Strategy -- Pursue
New Technologies and Products."
During the fourth quarter of 1999, we expect to introduce features to our
U.S. Internet site that we expect will attract online users. Some of these
features will include:
- increased electronic commerce offerings and capabilities;
- entertainment news and information;
- increased site and search speed;
- information about movies;
- integrated promotions between our in-store and online businesses; and
- suggestions of movies based upon a customer's evaluation of selected
films.
SUPPLIERS
The following is a description of the suppliers of our domestic
company-operated stores and our franchised stores. Our international stores are
supplied by a variety of suppliers.
SUPPLIERS OF VIDEOCASSETTES AND DVDS
COMPANY-OPERATED STORES. Our U.S. stores receive a substantial portion of
their videocassettes under the revenue-sharing agreements. We have entered into
domestic revenue-sharing agreements
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<PAGE>
with, among others, all of the major studios. Under these agreements, we share
our U.S. rental revenues with the studios for a limited period of time,
generally 26 weeks.
In addition to this revenue-sharing component, common to each agreement is
some provision for disposition of the video products at the conclusion of the
rental period. This may involve sale of the product by us as a previously viewed
tape, return of the tape to the studio, destruction of the tape, or some
combination of these elements.
Most revenue-sharing agreements also have some minimal up front payment
associated with each copy of a videocassette.
This revenue-sharing concept is relatively new to us and our industry and we
believe the terms of these agreements are critical to our competitive position.
While the terms of our revenue-sharing agreement vary from studio to studio, we
believe, based upon various assumptions, that the overall economic
revenue-sharing model is designed to achieve gross margins of about 60% on the
rental product we obtain under these agreements. We cannot assure you, however,
that we can achieve such gross margins under our revenue-sharing agreements.
None of these agreements are exclusive to us and the studios are free to enter
into similar or better agreements with our competitors.
The agreements with the studios expire by their terms at various times over
the next three years beginning in the fourth quarter of the year 2000. We have
already renewed one of the agreements with a studio and are currently engaged in
negotiations with another studio to extend our agreement.
For most of our revenue-sharing videocassettes, the major studios send the
master videocassettes to a duplicator for copying and then they are shipped to
our distribution center. In addition, we purchase sell-through movies,
direct-to-video movies and movies sold at traditional wholesale prices, as well
as DVDs, from major studios, independent studios and independent suppliers,
generally pursuant to negotiated agreements.
FRANCHISED STORES. We require each franchisee to comply with guidelines
that set forth the minimum amount and selection of movies to be kept in its
store's inventory. Franchisees typically obtain videocassettes and DVDs from
their own suppliers. However, if we have purchased the exclusive distribution
rights to a movie, the franchisee may obtain that movie from us. By the end of
1999, we expect to make our revenue-sharing agreements with the studios
available to our U.S. franchisees, which will provide them with an option to
increase their quantity and selection of movies.
OTHER SUPPLIERS
SUPPLIERS OF VIDEO GAMES. For our company-operated stores, we purchase
video game software primarily from five suppliers: Sony; Nintendo; Midway;
Acclaim; and Electronic Arts. These suppliers deliver the video game software
and video game accessories to our distribution center. We then distribute the
video game software and video game accessories to our stores. Franchisees are
responsible for obtaining video games from their own suppliers.
SUPPLIERS OF VCRS, DVD PLAYERS AND VIDEO GAME CONSOLES. In our
company-operated stores, we purchase our VCRs primarily from Ingram
Entertainment Incorporated, DVD players primarily from Phillips Electronics and
video game consoles primarily from Phillips Sales and Nintendo. Franchisees are
responsible for obtaining VCRs, DVD players and video game consoles from their
own suppliers.
SUPPLIERS OF FOOD AND BEVERAGES AND ACCESSORIES. Other than our specially
branded microwave popcorn and accessories, which are distributed by our U.S.
distribution center, suppliers distribute all of our snacks and beverages
directly to our company-operated stores. Franchisees are responsible for
obtaining snacks and beverages and accessories from their own suppliers.
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DISTRIBUTION AND INVENTORY MANAGEMENT
In the first quarter of 1998, we began operation of our new,
state-of-the-art distribution center in McKinney, Texas, which is near our
corporate headquarters. Our 850,000 square foot distribution center is a
highly-automated, centralized facility which we use to restock products,
repackage videocassettes and process returns, as well as provide for some office
space. It supports all of our company-operated stores in the United States. As
of March 31, 1999, we employed about 800 employees, excluding the office
employees at the distribution center. Our distribution center operates six days
a week, 24 hours a day.
DISTRIBUTION. At our distribution center, we receive substantially all of
our videocassettes and video games. We repackage the newly released
videocassettes to make them suitable for rent for our stores, a process which
had previously been done manually by our store employees before we built our
distribution center. In addition, we repackage previously viewed tapes to make
them available for sale. Our distribution center is also designed to be able to
handle individual customer orders, which would be necessary if we decided to
distribute our products sold on our U.S. Internet site directly to our
customers. Currently, our Internet sales are distributed by independent
distributors.
We distributed about 86 million units of our products last year from our
distribution center. About 34.5 million of those units were videocassettes
repackaged for rental at our stores. The distribution center has allowed us to
significantly decrease our distribution costs as compared to the costs we
previously incurred using third-party distributors. While we currently process a
high volume of products due to our successful implementation of our
revenue-sharing agreements, we can support a significant increase in sales
volume without significant additional investment. As we add more volume to our
distribution center, we will be able to further take advantage of our cost
efficiencies. The February 1999 issue of MODERN MATERIALS HANDLING, a leading
trade publication, has recognized our distribution center for its "distribution
excellence."
We use a network of third-party warehouses for delivery to our stores. We
ship our products to these warehouses located strategically throughout the
United States, which in turn, deliver them to our stores. Franchisees generally
obtain their products directly from suppliers, except for accessories, supplies
and movies to which we have our exclusive distribution rights, which domestic
franchisees receive from our distribution center. Distribution of our products
to our stores in markets outside the United States is coordinated through our
international offices.
INVENTORY MANAGEMENT. Because we have a centralized distribution center, we
are able to keep strict control over the amount and flow of our products at any
given time. We scan all products as they enter, flow through and exit our
distribution center.
Once our products reach our stores, we focus on strict inventory control.
Our sophisticated inventory management system is integrated with our
point-of-sale system, which allows us to manage our inventory on a
store-by-store basis. We allocate our products to our stores based on the
transaction history of each store and we monitor our stores' in-stock positions.
We also typically take physical inventory at each store on a monthly basis.
MANAGEMENT INFORMATION SYSTEMS
We believe that the accurate and efficient management of purchasing,
inventory and sales records is important to our future success. We maintain
information, updated daily, regarding revenues, current and historical sales and
rental activity, demographics of store customers and videocassette rental
patterns. This information can be organized by store, region, state, country or
for all operations.
We maintain a satellite-based national point-of-sale system in the United
States which is linked with a datacenter located in our distribution center. The
point-of-sale system tracks all of our products distributed from the
distribution center to each store using scanned bar code information. All rental
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and sales transactions are recorded by the point-of-sale system when scanned at
the time of customer checkout. At the end of each day, the point-of-sale system
transmits store data from operations to the datacenter and the customer
transaction database by satellite.
All of our company-operated stores, except in the Republic of Ireland and
Nothern Ireland, and most of our franchisees use our point-of-sale system upon
opening or conversion into a company-operated store. Within the next three
years, we currently plan to update the computers and the software that run the
point-of-sale system in order to decrease the overhead costs of each store and
speed up the checkout process. We currently have a direct link via satellite
with most of our domestic company-operated stores and by the end of 1999, our
company-operated stores in Canada will also be linked via satellite. Also by the
end of 1999, many of our domestic franchised stores will be linked via
satellite.
In addition, we have established processes for evaluating and managing the
risks and costs that may arise as a result of year 2000 software failures. We
are making necessary modifications to the identified software and we intend to
complete them by August 1999. We do not anticipate that we will incur
significant operating expenses or be required to invest heavily to improve our
computer systems in order to be year 2000 compliant, and we do not anticipate
that business operations will be disrupted. We refer you to "Risk Factors --
Risk Factors Relating to Our Business and Industry -- We May Be Adversely
Affected if Our year 2000 Remediation Efforts Are Not Successful" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FRANCHISE OPERATIONS
At March 31, 1999, our franchisees operated 640 stores in the United States
and our franchisees and minority-operated joint ventures operated 421 stores
internationally. Our franchisees generally are responsible for obtaining their
own supplies and coordinating their own distribution system. In the future,
however, we expect our U.S. franchisees to participate in our revenue-sharing
agreements and, as a result, they would rely upon our distribution center to
receive some portion of their videocassettes. Using our distribution center
would allow our franchisees to share in the cost savings that our distribution
center provides to us.
Under our current U.S. franchising program, we enter into a development
agreement and a franchise agreement with the franchisee. Pursuant to the terms
of a typical development agreement, we grant the franchisee the right to develop
one or a specified number of stores at an approved location or locations within
a defined geographic area and within a specified time. We generally charge the
franchisee a development fee in advance for each store to be developed during
the term of the development agreement. The typical franchise agreement is a
long-term agreement that governs the operations of the store. We generally
require the franchisee to pay us a one-time franchise fee and continuing royalty
fees, service fees and monthly payments for maintenance of the proprietary
software. In addition, we provide optional product and support services to our
franchisees for which we sometimes receive fees. We require our franchisees to
contribute funds for national advertising and marketing programs and we also
require that franchisees spend an additional amount for local advertising. Each
franchisee has sole responsibility for all financial commitments relating to the
development, opening and operation of its stores, including rent, utilities,
payroll and other capital and incidental expenses. We employ people to inspect
our franchised stores.
We cannot assure you that our franchisees will be able to achieve
profitability levels in their businesses sufficient to pay our franchise fees.
Furthermore, we cannot assure you that we will be successful in marketing and
selling new franchises or that any new franchisees will be able to obtain
desirable locations and acceptable leases.
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INTERNATIONAL OPERATIONS
We are the leading international retailer of rentable home movies and video
games. As a result, we believe we are well positioned to take advantage of the
overall growth in the home video industry outside of the United States. As of
March 31, 1999, we had 2,241 stores operating under "BLOCKBUSTER" and other
names located throughout 26 markets outside of the United States. Of these
stores, 421 of such stores were operated through our franchisees and/or joint
ventures in which we own a minority interest.
We have focused on seven priority markets outside of the United States.
Based on the number of stores, our largest market is Great Britain. We began
operations in Great Britain in 1989 and, through acquisitions, have grown to
over 661 locations, including video vending machines, as of March 31, 1999. We
began operations in Canada, our second largest market, in 1990 and have grown to
351 stores, as of March 31, 1999. In the Republic of Ireland and Northern
Ireland, our third largest market, we acquired Xtra-vision PLC in 1997 and
continue to operate under the XTRA-VISION brand name due to its strong local
brand awareness. As of March 31, 1999, we have 220 stores in the Republic of
Ireland and Northern Ireland. In addition, we began operations in Mexico in
1991, Australia in 1993, Spain in 1995 and Taiwan in 1997. For a complete
listing of all of our operations outside of the United States, we refer you to
the chart set forth in "-- Stores and Store Operations -- Store Locations."
We maintain offices for each major region and most of the countries in which
we operate in order to manage, among other things:
- store development and operations;
- marketing; and
- the purchasing, supplying and distribution of each store's products.
The international home video and video game industry varies from country to
country due to, among other things:
(1) political and economic systems and risks; and
(2) legal standards and regulations, such as those relating to foreign
ownership rights, unauthorized copying, intellectual property rights,
labor and employment matters, trade regulation and business practices,
franchising and taxation.
Thus, because of all of these variables, we cannot assure you that we can
operate profitably in these international markets.
COMPETITION
We operate in a highly competitive environment. We believe our most
significant competition comes from (a) non-videocassette providers of home
viewing entertainment and (b) video stores and other retailers that rent or sell
movies.
COMPETITION WITH NON-VIDEOCASSETTE PROVIDERS OF HOME VIEWING
ENTERTAINMENT. These providers include direct broadcast satellite, cable,
digital terrestrial, network and syndicated television. We believe that our most
significant competitive risk in this area comes from direct broadcast satellite
and digital cable television. Further growth in the direct broadcast satellite
and digital cable subscriber bases could cause a smaller number of
videocassettes and DVDs to be rented if viewers were favor the expanded number
of conventional channels and expanded programming, including sporting events,
offered through these services. We refer you to "Risk Factors -- The widespread
availability of additional channels on satellite and digital cable systems may
significantly reduce public demand for our merchandise." Direct broadcast
satellite, digital cable and "traditional" cable providers not only offer
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numerous channels of conventional television, but they also offer pay-per-view
movies, which permit a subscriber to pay a fee to see a selected movie.
COMPETITION WITH VIDEO STORES AND OTHER RETAILERS THAT RENT OR SELL
MOVIES. These retailers include, among others: (1) local, regional and national
video stores; (2) mass merchant retailers; (3) supermarkets, pharmacies and
convenience stores; and (4) Internet sites. We believe that the principal
factors we face in competing with video stores are: (a) convenience and
visibility of store locations; (b) quality, quantity and variety of titles; (c)
pricing; and (d) customer service.
OTHER COMPETITION. In some markets, we also compete against the illegal
duplication and sales of movies and video games. In addition to all of the modes
of competition discussed above, we compete for the general public's
entertainment dollar and leisure time activities including with, among others,
movie theaters, Internet-related activities, live theater and sporting events.
We cannot assure you that competing pressures we face will not have a
material adverse effect on us.
We refer you to "Risk Factors -- Risk Factors Relating to Our Business and
Industry -- Our Business May Be Materially Adversely Affected by New
Technologies" for a discussion of competitive risks related to new technology.
PROPERTIES
Our corporate headquarters are located at 1201 Elm Street, Dallas, Texas
75270 and consist of about 219,239 square feet of space leased pursuant to an
agreement which expires on June 30, 2007. The distribution center is located at
3000 Redbud Blvd., McKinney, Texas 75069 and consists of about 850,000 square
feet of space leased pursuant to an agreement which expires on December 31,
2012. We have set up our payroll and benefits center in Spartanburg, South
Carolina.
We have several main offices that manage our international operations. We
have offices in: Uxbridge, England; Plantation, Florida; Toronto, Ontario;
Melbourne, Australia; and Taipei, Taiwan. In addition, for most countries in
which we operate a store, we maintain an office to coordinate our operations
within that country.
We lease substantially all of our existing store sites, including buildings
and improvements. These leases generally have a term of five to ten years and
provide options to renew for between ten and fifteen additional years. We expect
that most future stores will also occupy leased properties.
INTELLECTUAL PROPERTY
We own a number of trademarks, trade names and service marks including,
among others, BLOCKBUSTER, BLOCKBUSTER VIDEO, BLOCKBUSTER FAVORITES, BLOCKBUSTER
GIFTCARD, BLOCKBUSTER GIFTCARDS, BLOCKBUSTER REWARDS, BLOCKBUSTER ENTERTAINMENT
AWARDS, KIDPRINT, BLOCKBUSTER MUSIC, XTRA-VISION and the blue and yellow ticket
stub and the blue and yellow awning outside our stores. In addition, we own the
rights to the "blockbuster.com" Internet domain name. We consider our
intellectual property rights to be among our most valuable assets.
LEGAL PROCEEDINGS
We are subject to various legal proceedings in the course of conducting our
business, including our business as a franchisor. However, we believe that such
proceedings are not likely to result in judgments that will have a material
adverse effect on our business.
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REGULATION
DOMESTIC REGULATION
We are subject to various federal, state and local laws that govern the
access and use of our video stores by disabled people and the disclosure and
retention of video rental records. We also must comply with various regulations
affecting our business, including state and local advertising, consumer
protection, credit protection, licensing, zoning, land use, construction,
environmental and minimum wage and other labor and employment regulations.
We are also subject to the Federal Trade Commission's Trade Regulation Rule
entitled "Disclosure Requirements and Prohibitions Concerning Franchising and
Business Opportunity Ventures" and state laws and regulations that govern (1)
the offer and sale of franchises and (2) franchise relationships. If we want to
offer and sell a franchise, we are required by the rule mentioned above to
furnish each prospective franchisee a current franchise offering circular prior
to the offer or sale of a franchise. In addition, a number of states require
that we, as franchisors, comply with that state's registration or filing
requirements prior to offering or selling a franchise in the state and to
provide a prospective franchisee with a current franchise offering circular
complying with the state's laws, prior to the offer or sale of the franchise.
Although we cannot make any assurances, we intend to maintain a franchise
offering circular that complies with all applicable federal and state franchise
sales and other applicable laws. However, if we are unable to comply with
federal franchise sales and disclosure laws and regulations, we will be unable
to offer and sell franchises anywhere in the United States. In addition, if we
are unable to comply with the franchise sales and disclosure laws and
regulations of any state that regulates the offer and sale of franchises, we
will be unable to offer and sell franchises in such state.
We are required to update our franchise offering circular annually, as well
as to amend it during the course of the year, to reflect material changes
regarding our franchise offering and to comply with changes in disclosure
requirements. The occurrence of any such material changes may, from time to
time, require us to stop offering and selling franchises until our franchise
offering circular is updated and amended. We cannot assure you that our
franchising program will not be adversely affected because compliance with
applicable law necessitates that we cease offering and selling franchises in
some states until our franchise offering circular is revised, updated and
approved by the applicable authorities, or because of our failure or inability
to comply with existing or future franchise sales and disclosure laws.
We are also subject to a number of state laws and regulations that regulate
some substantive aspects of the franchisor-franchisee relationship, including:
- those governing the termination or non-renewal of a franchise agreement,
such as requirements that:
(a) "good cause" exist as a basis for such termination; and
(b) a franchisee be given advance notice of, and a right to cure, a
default prior to termination;
- requirements that the franchisor deal with its franchisees in good faith;
- prohibitions against interference with the right of free association among
franchisees; and
- those regulating discrimination among franchisees in charges, royalties or
fees.
Compliance with federal and state franchise laws is costly and
time-consuming, and we cannot assure you that we will not encounter difficulties
or delays in this area or that it will not require significant capital for
franchising activities.
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INTERNATIONAL REGULATION
We are subject to various international laws that govern the disclosure and
retention of video rental records. For example, the laws pertaining to the use
of the customer database in some markets outside of the United States are more
restrictive than the relevant laws in the United States.
We must comply with various regulations affecting our business, including
advertising, consumer protection, credit protection, franchising, licensing,
zoning, land use, construction, environmental, labor and employment regulations.
Similar to the United States, some foreign countries have franchise
registration and disclosure laws affecting the offer and sale of franchises
within their borders and to their citizens. They are not often as extensive and
onerous as laws and regulations applicable in the United States. However, like
the United States, failure to comply with such laws could limit or preclude our
ability to expand through franchising in those countries.
EMPLOYEES
As of March 31, 1999, we employed about 82,400 persons, including about
61,200 persons employed within the United States and about 21,200 persons
employed outside of the United States. Within the United States, about 59,000
were employed in domestic company-operated stores and 2,200 were employed in
various other operations, including our corporate, administrative and
distribution functions. Of the total number of U.S. employees, about 16,800 were
full-time and 44,400 were part-time. We believe that our employee relations are
good.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information concerning our current directors and
executive officers. There are no family relationships among any directors or
officers. The ages listed below are as of April 30, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------------- ----------- ----------------------------------------------------
<S> <C> <C>
John F. Antioco..................................... 49 Chairman of the Board of Directors, President and
Chief Executive Officer
Mark T. Gilman...................................... 35 Executive Vice President, Real Estate, Franchising
and New Business Development
James Notarnicola................................... 47 Executive Vice President, Chief Marketing Officer
Gary J. Peterson.................................... 48 Executive Vice President, Chief Operations Officer
Alva J. Phillips.................................... 54 Executive Vice President, Chief Information Officer
Michael K. Roemer................................... 50 Executive Vice President, Domestic Video Operations
Edward B. Stead..................................... 52 Executive Vice President, General Counsel and
Secretary
Nigel Travis........................................ 49 Executive Vice President and President, Worldwide
Retail Operations
Dean M. Wilson...................................... 41 Executive Vice President, Merchandising
Larry J. Zine....................................... 44 Executive Vice President, Chief Financial Officer
Philippe P. Dauman.................................. 45 Director
Thomas E. Dooley.................................... 42 Director
Sumner M. Redstone.................................. 75 Director
</TABLE>
JOHN F. ANTIOCO has served as our chairman of the board of directors,
president and chief executive officer since 1997. From 1996 until 1997, Mr.
Antioco served as president and chief executive officer for Taco Bell
Corporation. Mr. Antioco served as chairman of the board of directors of The
Circle K Corporation, an operator of convenience stores, from 1995 until 1996,
and as its president and chief executive officer from 1993 until 1996. Mr.
Antioco joined Circle K as chief operating officer in 1991. Mr. Antioco serves
as chairman of the board of directors of Main Street & Main Inc. and as a
director for CSK Auto Corporation.
MARK T. GILMAN has served as our executive vice president, real estate,
franchising and new business development since 1997 and served as our senior
vice president, strategic systems from 1996 until 1997. Prior to joining us,
during 1996, Mr. Gilman served as senior vice president, development, for
Hollywood Entertainment Corporation, a national retail video chain, where he was
responsible for domestic development and construction. From 1994 until 1996, Mr.
Gilman served as director of operations development for Wal-Mart Corporation,
where he was responsible for developing real estate and merchandising systems.
JAMES NOTARNICOLA has served as our executive vice president, chief
marketing officer since June 1998 and served as our executive vice president,
marketing and administration from 1997 until 1998. From 1978 until 1997, Mr.
Notarnicola served in many capacities at 7-Eleven Inc., which was formerly known
as The Southland Corporation, including vice president of marketing from 1995
until 1997 and general manager of advertising and promotion from 1990 until
1995.
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GARY J. PETERSON has served as our executive vice president, chief
operations officer since 1998 and served as our executive vice president,
distribution and information systems from 1996 until 1998. From 1993 until 1996,
Mr. Peterson served as chief operating officer for Southeast Frozen Foods, where
he oversaw all operations of the frozen food wholesaler/distributor. Mr.
Peterson has also served as senior vice president of operations services for
Thrifty Drug Stores.
ALVA J. PHILLIPS has served as our executive vice president, chief
information officer since 1997 and served as our senior vice president of
information services from 1995 until 1997. From 1993 until 1995, Mr. Phillips
was employed by Integrated Systems Solutions Corporation, a wholly-owned
subsidiary of International Business Machines Corporation, where he served as
project manager for the Eckerd Corporation account and oversaw, among other
matters, the development and implementation of a satellite based store
communications system. From 1988 until 1993, Mr. Phillips served as senior vice
president of management information services for Rite Aid, where he was
responsible for developing in-store pharmacy, merchandising and distribution
systems to support the company's 2,600 store locations.
MICHAEL K. ROEMER has served as our executive vice president, domestic video
operations since 1998 and served as our senior vice president, domestic video
operations from 1997 until 1998. From 1995 until 1997, Mr. Roemer served as an
independent consultant for major companies such as Frito Lay, where he assisted
with new product development, distribution and business process planning. Prior
to consulting, Mr. Roemer worked at 7-Eleven Inc. from 1966 to 1995. From 1993
until 1995, in his capacity as senior vice president of merchandising for
7-Eleven, Mr. Roemer oversaw merchandising operations of 7-Eleven stores in the
United States and Canada.
EDWARD B. STEAD has served as our executive vice president and general
counsel since 1997, as well as our secretary since 1999. From 1988 until 1996,
Mr. Stead served in the following capacities with Apple Computer, Inc.,
including vice president and general counsel from 1989 until 1995, vice
president, general counsel and secretary from 1993 until 1995, and senior vice
president, general counsel and secretary from 1995 to 1996. Prior to joining
Apple, Mr. Stead served as senior vice president, general counsel and secretary
of Cullinet Software, Inc. Mr. Stead also served as a member of the legal
advisory board of the National Association of Securities Dealers from 1993 until
1997 and has been a member of the American Law Institute since 1996.
NIGEL TRAVIS has served as our executive vice president and president,
worldwide retail operations, since 1998 and served as our president,
international operations, from 1997 until 1998. From 1994 until 1997, Mr. Travis
served in various other capacities for us, including senior vice president,
Europe. Prior to joining us, Mr. Travis served as senior vice president and
managing director, Europe, the Middle East and Africa for Burger King
Corporation. Mr. Travis, a British national, serves as senior non-executive
director of Limelight PLC in the United Kingdom.
DEAN M. WILSON has served as our executive vice president, merchandising,
since 1998. From 1995 until 1998, Mr. Wilson held a number of positions with us,
including senior vice president-general merchandising manager, vice
president-product retail and director of product management international. Prior
to joining us, from 1990 until 1995, Mr. Wilson served as divisional merchandise
manager of video for Trans World Entertainment, a music and video retailer. Mr.
Wilson began his retail career in the executive training program with May
Company.
LARRY J. ZINE has served as our executive vice president, chief financial
officer since 1999. From 1996 until 1999, Mr. Zine served as chief financial
officer for Petro Stopping Centers, L.P., where he was responsible for all
operations. During 1999, Mr. Zine also served as president of Petro. From 1981
until 1996, Mr. Zine worked for The Circle K Corporation, an operator of
convenience stores, and was named executive vice president and chief financial
officer in 1988.
PHILIPPE P. DAUMAN was elected as one of our directors in January 1995. Mr.
Dauman has been deputy chairman of Viacom since January 1996 and its executive
vice president since 1994. From 1993
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until 1998, Mr. Dauman also served as general counsel and secretary of Viacom.
Mr. Dauman is a director of National Amusements, Inc., Spelling Entertainment
Group Inc. and Lafarge Corporation.
THOMAS E. DOOLEY was elected as one of our directors in May 1999. Mr. Dooley
has been deputy chairman of Viacom since 1996 and its executive vice president
since 1994. From 1992 until 1994, Mr. Dooley served as senior vice president,
corporate development of Viacom. Mr. Dooley is a director of Spelling
Entertainment Group Inc.
SUMNER M. REDSTONE was elected as one of our directors in May 1999. Mr.
Redstone has been the chairman of the board of Viacom since 1987 and its chief
executive officer since 1996. Mr. Redstone has served as chairman of the board
of National Amusements, Inc. since 1986 and its president and chief executive
officer since 1967. Mr. Redstone is chairman of the board of Spelling
Entertainment Group Inc.
COMPOSITION OF OUR BOARD OF DIRECTORS
Our board of directors currently has six members, including our chairman of
the board of directors, Mr. John F. Antioco, three individuals who are currently
executive officers and directors of Viacom, Messrs. Sumner M. Redstone, Philippe
P. Dauman and Thomas E. Dooley, and two outside directors, and . Our
board of directors will be divided into three classes serving staggered terms.
Directors in each class will be elected to serve for three year terms and until
their successors are elected or qualified. Each year, the directors of one class
will stand for election as their terms of office expire. will be designated
as Class I directors, with their terms of office expiring in 2000; will be
designated as Class II directors, with their terms of office expiring in 2001;
will be designated as Class III directors, with their terms expiring in
2002. The three directors who are currently executive officers and directors of
Viacom have advised us that they will resign from our board of directors
following the completion of the split-off.
COMMITTEES OF OUR BOARD OF DIRECTORS
Our board of directors has appointed an audit committee, a compensation
committee and a senior executive compensation committee.
AUDIT COMMITTEE. The functions of the audit committee, which consists of
the two outside directors, include:
- reviewing with the independent accountants the plans and results of the
annual audit;
- approving the audit and non-audit services by such independent
accountants;
- reviewing the scope and results of our internal auditing procedures;
- reviewing the adequacy of our system of internal accounting controls; and
- reviewing the annual financial statements prepared for release to our
stockholders and the public.
COMPENSATION COMMITTEE. The compensation committee currently consists of
Messrs. Sumner M. Redstone, Philippe P. Dauman and Thomas E. Dooley and the two
outside directors. Except with respect to matters entrusted to the senior
executive compensation committee, the functions of the compensation committee
include:
- reviewing our general compensation strategy;
- reviewing the terms of employment agreements for executives earning over a
specified amount; and
- administering our compensation and benefit plans, other than our stock
option plan and senior executive short-term incentive plan.
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SENIOR EXECUTIVE COMPENSATION COMMITTEE. The functions of the senior
executive compensation committee, which currently consists of the two outside
directors, include:
- reviewing and approving compensation for executives if their compensation
is, or may become, subject to Section 162(m) of the Internal Revenue Code,
including the terms of employment agreements for such executives;
- administering our senior executive short-term incentive plan, determining
the executives who will participate in the plan, establishing performance
targets and determining specific bonuses for the participants; and
- administering our stock option plan and approving individual stock option
grants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In fiscal 1998, we did not have a compensation committee or any other
committee serving a similar function. Decisions as to the compensation of our
executive officers were made by the senior executive compensation committee or
the compensation committee of the board of directors of Viacom, as applicable.
Mr. Redstone and National Amusements, Inc. own an aggregate of approximately
25.2% of the common stock of Midway Games Inc. During the 1996, 1997 and 1998
fiscal years, we paid about $8.4 million, $12.5 million and $19.1 million,
respectively, for purchases of home video games from Midway. We believe that the
terms of these purchases were no less favorable to us than would have been
obtainable from parties in which there was no such ownership interest. We expect
to purchase video games from Midway in the future.
COMPENSATION OF OUR DIRECTORS
Our directors who do not serve as officers or employees for us or Viacom are
called outside directors and are entitled to receive directors' fees and are
eligible to participate in our deferred compensation plan described below.
DIRECTORS' FEES. Outside directors will receive the following fees:
- a quarterly retainer of $ for membership on our board of directors;
- a per meeting attendance fee of $ for each meeting of the board of
directors and for each meeting of the audit committee or compensation
committee or the senior executive compensation committee, to the extent
that the meeting of the senior executive compensation committee is not
held on the same day as the meeting of the compensation committee; and
- a $ annual retainer fee for the chairman of the audit committee and
for the chairman of the compensation committee.
No additional fees or retainers are paid for attendance at meetings of the
senior executive compensation committee held on the same day on which a meeting
of the compensation committee is held or for the chairman of the senior
executive compensation committee.
DEFERRED COMPENSATION PLAN. Outside directors may defer payment of their
retainer and attendance fees pursuant to our unfunded deferred compensation
plan; amounts deferred will be deemed invested in the number of stock units
equal to the number of shares of class A common stock such amounts would
purchase when deferred. We offer this plan to our outside directors as a tax-
deferred retirement and estate planning tool. As such, payment will be made in a
cash lump sum or in three or five annual cash installments starting after the
director terminates service with the board. The value of the stock units is
determined by reference to the fair market value of the class A common stock
when the director terminates service and, in the case of installment payments,
credited with interest. In the event of the director's death prior to receiving
all payments due him under the plan,
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the director's designated beneficiary or, in the absence of a designated
beneficiary, the director's estate, shall receive a cash payment of the entire
amount to which the director was entitled.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
No present officer or director currently owns any shares of our common
stock, all of which are currently owned by Viacom, other than Mr. Redstone to
whom beneficial ownership of these shares is attributed. The following table
sets forth the number of shares of each class of Viacom's common stock
beneficially owned on March 31, 1999, by each of our directors, the executive
officers named in the summary compensation table below and all of our directors
and executive officers as a group. Except as otherwise noted, the individual
director or executive officer had sole voting and investment power with respect
to such securities.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF EQUITY SECURITIES
----------------------------------------------------------------
TITLE OF NUMBER OF PERCENT
NAME EQUITY SECURITY EQUITY SHARES OPTION SHARES(1) OF CLASS
- ----------------------------------------------- ------------------ ------------- ---------------- -----------
<S> <C> <C> <C> <C>
John F. Antioco................................ class A common -- -- *
class B common 5,010 (3) --
Philippe P. Dauman............................. class A common 2,380(3) -- *
class B common 29,778(3) 973,332 *
Thomas E. Dooley............................... class A common 4,866(3) -- *
class B common 17,286(3) 947,332 *
James Notarnicola.............................. class A common -- -- *
class B common 75(3) -- *
Gary J. Peterson............................... class A common -- -- *
class B common 741(3) -- *
Sumner M. Redstone............................. class A common 93,658,988(4) -- 66.8%
class B common 104,334,988(4) 1,499,998 18.8%
Edward B. Stead................................ class A common -- -- *
class B common -- -- *
Nigel Travis................................... class A common 40 -- *
class B common 374 -- *
Current Blockbuster directors and officers as a
group other than Messrs. Dauman, Dooley and
Redstone (10 persons)........................ class A common 40(3) -- *
class B common 7,816(3) 6,000 *
</TABLE>
- ------------------------
* Less than 1%.
(1) Includes shares subject to options to purchase such shares which on March
31, 1999 were unexercised but were exercisable within a period of 60 days
from that date. Figures in this column reflect an adjustment for Viacom's
two-for-one common stock split effected in March 1999. These shares are
excluded from the column headed "Number of Equity Shares".
(2) 5,000 shares held jointly with spouse.
(3) Includes shares and rights equal in value to shares held through Viacom's
401(k) and Excess 401(k) Plans as of December 31, 1998.
(4) Except for 160 shares of each class of Viacom's common stock owned directly
by Mr. Redstone, all of these shares are owned of record by National
Amusements, Inc. Mr. Redstone is the chairman and the beneficial owner of
the controlling interest in National Amusements, Inc. and, accordingly,
beneficially owns all such shares.
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COMPENSATION OF OUR EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE. The following summary compensation table sets
forth information regarding compensation for fiscal 1998 paid to our chief
executive officer and each of our four other most highly compensated executive
officers who were serving as such on December 31, 1998.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------- -------------
OTHER SECURITIES ALL
ANNUAL UNDERLYING OTHER
SALARY BONUS COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) (#)(3) ($)
- ------------------------------------------------ --------- --------- --------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
John F. Antioco................................. 1998 1,200,000 4,750,000(4) -- 196,320 323(5)
Chairman of the Board of Directors, President
and Chief Executive Officer
James Notarnicola............................... 1998 374,363 300,000 -- 10,000 2,615(6)
Executive Vice President, Chief Marketing
Officer
Gary J. Peterson................................ 1998 397,500 300,000 -- 5,000 5,895(6)
Executive Vice President, Chief Operations
Officer
Edward B. Stead................................. 1998 369,923 282,050 19,127(7) -- --
Executive Vice President, General Counsel and
Secretary
Nigel Travis.................................... 1998 361,483(8) 386,618 159,109(8 (9) 10,000 45,234(10)
Executive Vice President and President,
Worldwide Retail Operations
</TABLE>
- ------------------------
(1) This reflects bonus earned during fiscal 1998. In some instances, we paid
all or a portion of the bonus during the next fiscal year.
(2) In accordance with the rules of the SEC, we have omitted perquisites
totaling less than $50,000.
(3) This reflects options to acquire shares of Viacom's class B common stock.
All figures in this column reflect an adjustment for Viacom's two-for-one
common stock split effected in March 1999.
(4) $1,000,000 of Mr. Antioco's 1998 bonus amount represents the 1998
installment of his sign-on bonus.
(5) This consists of our contributions to Viacom's 401(k) Plan.
(6) This consists of our contributions to Viacom's 401(k) and Excess 401(k)
Plans.
(7) Consists of reimbursement for taxes.
(8) Mr. Travis was transferred from our U.K. payroll to our U.S. payroll in
August 1998. Payments made in British Pounds have been converted to U.S.
Dollars using a year-to-date average conversion rate of 1.64897 U.S. Dollars
to 1.00 British Pound.
(9) Includes $96,219 relating to relocation expenses, $47,285 of reimbursement
for taxes, and other executive perquisites none of which exceed 25% of the
amount reported as other annual compensation.
(10) This consists of employer contributions to our U.K. defined contribution
and supplemental plans, but does not include amounts accrued but not
contributed to Mr. Travis' account during 1998. Amounts disclosed reflect a
conversion from British Pounds to U.S. Dollars at an average conversion rate
for 1998 of 1.65655.
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OPTION GRANTS DURING 1998 FISCAL YEAR. The following table provides
information related to options to purchase Viacom's class B common stock granted
during fiscal 1998 to the executive officers named in the summary compensation
table above.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------
NUMBER OF
SHARES OF
VIACOM'S % OF TOTAL
CLASS B OPTIONS EXERCISE
COMMON STOCK GRANTED TO OR BASE GRANT DATE
UNDERLYING EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME OPTIONS (1) FISCAL 1998(2) ($/SH)(3) DATE VALUE($)(4)
- ------------------------- ------------- --------------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C>
August 20,
John F. Antioco.......... 196,320(5) 1.45 30.5625 2008 2,549,961
August 20,
James Notarnicola........ 10,000(5) 0.07 30.5625 2008 129,888
August 20,
Gary J. Peterson......... 5,000(5) 0.04 30.5625 2008 64,944
Edward B. Stead.......... -- -- -- -- --
August 20,
Nigel Travis............. 10,000(5) 0.07 30.5625 2008 129,888
</TABLE>
- ------------------------
(1) All share numbers have been adjusted to reflect Viacom's two-for-one common
stock split that was effected in the form of a stock dividend in March 1999.
(2) Reflects percentage of total grants to all employees of Viacom. Percentage
of total grants to all of our employees were as follows: John F. Antioco:
38.77%; James Notarnicola: 1.98%; Gary J. Peterson: 0.99%; Edward B. Stead:
0%; and Nigel Travis: 1.98%.
(3) Exercise prices which were originally equal to the fair market value of
Viacom's class B common stock on the date of grant have been adjusted to
reflect Viacom's two-for-one common stock split that was effected in the
form of a stock dividend in March 1999.
(4) Based on the Black-Scholes option pricing model adapted for use in valuing
executive stock options. The actual value, if any, an executive may realize
will depend on the excess of the stock price over the exercise price on the
date the option is exercised. There is no assurance that the value realized
by an executive will be at or near the value estimated by the Black-Scholes
option pricing model. The grant date values presented in the table were
determined in part using the following assumptions. No adjustments were made
for non-transferability or risk of forfeiture:
<TABLE>
<S> <C>
Expected volatility.......................................................... 32.73%
Risk-free rate of return..................................................... 5.45%
Dividend yield............................................................... 0.00%
Time of exercise............................................................. 6 years
</TABLE>
The approach used in developing the assumptions upon which the Black-Scholes
valuation was done is consistent with the requirements of the Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."
(5) The options become exercisable with respect to one-third of the shares
covered thereby on each of August 20, 2000, 2001 and 2002.
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<PAGE>
OPTION EXERCISES DURING 1998 FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES. The following table provides information related to:
- options to purchase Viacom's common stock exercised during fiscal 1998 by
the executive officers named in the summary compensation table above; and
- the number and value of options to purchase Viacom's class B common stock
held at December 31, 1998 by such executive officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AS OF DECEMBER 31, OPTIONS AS OF DECEMBER 31,
1998(1)(2) 1998($)
-------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
SHARES
ACQUIRED ON VALUE
NAME EXERCISE(#)(2) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ------------- ------------ ----------- ------------- ----------- -------------
John F. Antioco...................... -- -- -- 1,196,320 -- 23,013,810
James Notarnicola.................... -- -- -- 90,000 -- 1,804,375
Gary J. Peterson..................... 9,666(3) 145,594 -- 124,334 -- 2,584,201
Edward B. Stead...................... -- -- -- 100,000 -- 1,725,000
Nigel Travis......................... 18,250(4) 94,193 6,000 102,000 117,000 2,044,625
</TABLE>
- ------------------------
(1) This reflects options to acquire Viacom's class B common stock.
(2) Figures in these columns reflect an adjustment for Viacom's two-for-one
common stock split effected in March 1999.
(3) This reflects the exercise of options to acquire 9,666 shares of Viacom's
class B common stock.
(4) This reflects the exercise of options to acquire 2,060 shares of Viacom's
class A common stock and 16,190 shares of Viacom's class B common stock.
COMPENSATION FOR SERVICES AFTER A SEPARATION FROM VIACOM
In the event of our separation from Viacom in a split-off or other similar
transaction, up to 100 of our employees, including Messrs. Antioco, Notarnicola,
Peterson, Stead and Travis, may be employed by a subsidiary of Viacom to provide
separate services to Viacom, such as legal, financial and managerial services,
following such separation. These employees, if employed, will receive
compensation commensurate with services provided and will be expected to provide
such services until no later than December 31, 2002. During this period, in
accordance with the Viacom stock option plan, any options to purchase Viacom
common stock held by these employees will continue to vest and be held subject
to the terms and conditions of the original grant.
PENSION PLANS
DEFINED BENEFIT PENSION PLAN. We and some of our subsidiaries participate
in a non-contributory qualified defined benefit pension plan and an excess
pension plan for some of our highly compensated employees, both sponsored by
Viacom. Our employees became eligible to participate in these plans effective
January 1, 1996, with credit for past service on and after September 29, 1994
for eligibility and vesting purposes. An eligible employee will receive a
benefit at retirement that is based upon the employee's number of years of
benefit service and average annual compensation, including salary and bonus, for
the highest 60 consecutive months out of the final 120 months immediately
preceding retirement. Under the terms of the excess pension plan, such
compensation is limited to the greater of base salary as of December 31, 1995
and $750,000. The benefits under Viacom's excess pension plan
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<PAGE>
are not subject to the Internal Revenue Code provisions that limit the
compensation used to determine benefits and the amount of annual benefits
payable under Viacom's qualified pension plans. At this time, we do not intend
to sponsor a defined benefit plan or an excess benefit plan following the
split-off, but expect that our employees will continue to participate in
Viacom's plans until that time.
It is anticipated that Viacom will retain the accrued liability for benefits
under these plans for our employees. The following table illustrates, for
representative average annual pensionable compensation and years of benefit
service classifications, the annual retirement benefit that would be payable to
employees under both the non-contributory defined benefit pension plan and the
excess pension plan if they retired in 1998 at age 65, based on the
straight-life annuity form of benefit payment and not subject to deduction or
offset.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------------------
REMUNERATION 5 10 15 20 25 30
- ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$150,000................................ 12,347 24,694 $ 37,041 $ 49,387 $ 61,734 $ 74,081
300,000................................ 25,472 50,944 76,416 101,887 127,359 152,831
450,000................................ 38,597 77,193 115,791 154,387 192,984 231,581
600,000................................ 51,722 103,444 155,166 206,887 258,609 310,331
750,000................................ 64,847 129,694 194,541 259,387 324,234 389,081
900,000................................ 77,972 155,944 233,916 311,887 389,859 467,831
</TABLE>
The number of years of benefit service that have been credited, as of
December 31, 1998, for Messrs. Antioco, Notarnicola, Peterson and Stead are six
months, six months, two years and four months. Mr. Travis does not participate
in either the pension plan or the excess pension plan sponsored by Viacom.
EMPLOYMENT AGREEMENTS
1999 LONG-TERM MANAGEMENT INCENTIVE PLAN
In connection with the offering, we have adopted our 1999 Long-Term
Management Incentive Plan.
GENERAL DESCRIPTION OF THE PLAN
The following is a description of the material features of the plan. The
full text of the plan is filed as an exhibit to the registration statement. The
plan provides for grants of stock options to purchase shares of class A common
stock, stock appreciation rights, restricted shares of class A common stock,
restricted share units and phantom shares, the terms and conditions of which are
described in more detail below. About of our key employees are eligible for
grants under the plan. Compensation relating to awards under the plan is
generally intended to qualify as "qualified performance-based compensation"
which is excluded from the $1,000,000 limit on deductible compensation set forth
in Section 162(m) of the Internal Revenue Code.
The maximum aggregate number of shares of class A common stock that may be
granted under the plan, whether reserved for issuance upon grants of stock
options or stock appreciation rights or granted as restricted shares, is .
Shares of class A common stock covered by expired or terminated stock options,
stock appreciation rights and restricted shares that are forfeited under the
terms of the plan or stock appreciation rights or restricted share units that
are exercised for cash will not be counted in applying such limit on grants
under the plan. The maximum aggregate number of shares of class A common stock
that may be granted subject to the stock options or stock appreciation rights or
granted as restricted shares or restricted share units and phantom shares that
may be granted to any executive
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<PAGE>
during the five-year period that the plan will remain in effect is . Grants
under the plan are authorized by the senior executive compensation committee in
its sole discretion. For this reason it is not possible to determine the
benefits or amounts that will be received by any particular employees or group
of employees in the future.
ADMINISTRATION
The plan will be administered by the senior executive compensation committee
or such other committee as our board of directors shall determine, which selects
from among the group of eligible employees, those who will become participants
and receive grants under the plan. The committee will be comprised of at least
two directors, each of whom must be a "non-employee director" within the meaning
of Rule 16b-3 of the Securities Exchange Act of 1934 and an "outside director"
within the meaning of Section 162(m) of the Internal Revenue Code.
STOCK OPTIONS
Stock options can be either incentive stock options or options that do not
qualify as incentive stock options for federal income tax purposes, called
non-qualified stock options, as determined by the committee.
Subject to some limits described below, the committee determines the number
of stock options granted, the exercise price of the stock options, the vesting
schedule applicable to such stock options, the period during which they can be
exercised and any applicable performance goal requirements. The per share
exercise price of incentive stock options cannot be less than 100% or, in the
case of a 10% stockholder, 110% of the fair market value on the date of grant of
a share of class A common stock. No stock option can be exercised more than ten
years after the date of grant. The exercise price of a stock option must be paid
in full at the time of exercise in cash or, in the discretion of the committee,
in shares of class A common stock or other company securities designated by the
committee or in a combination of cash and shares or such other securities.
If the participant's employment terminates for any reason other than death,
permanent disability or for "cause," his stock options may be exercised to the
extent exercisable on the date of termination, for six months after the date of
such termination or such longer period, not in excess of two years from the date
of grant, as may be determined by the committee but not beyond the expiration
date of such stock option. In the event of a participant's death, his stock
options may be exercised to the extent exercisable at the date of death by the
person who acquired the right to exercise such stock options by will or the laws
of the descent and distribution or permitted transfer for one year after such
death or such longer period as may, in a special case, be fixed by the committee
but not beyond the expiration date of such stock options. In the event of a
participant's permanent disability, he may exercise his stock options to the
extent exercisable at the onset of such disability for one year after such date
or such longer period, not in excess of two years after such date, as may be
determined by the committee but not beyond the expiration date of such stock
options. If a participant's employment is terminated for "cause," then, unless
the committee determines otherwise, all stock options, whether or not then
vested, will be forfeited by the participant effective as of the date of such
termination.
STOCK APPRECIATION RIGHTS
The committee may grant stock appreciation rights under the plan only in
tandem with stock options, either at the time of grant or by amendment at any
time prior to the exercise, expiration or termination of such stock options.
Each stock appreciation right entitles the holder to surrender the related stock
option in lieu of exercise for an amount equal to the excess of the fair market
value of a share of class A common stock on the date the holder exercises the
stock appreciation right subject to the stock option over the exercise price of
such stock option. This amount will be paid in cash or, in
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<PAGE>
the discretion of the committee, in shares of class A common stock or other
company securities designated by the committee or in a combination of cash and
shares or such other securities. No stock appreciation right can be exercised
unless the related stock option is then exercisable.
RESTRICTED SHARES AND RESTRICTED SHARE UNITS
The committee may grant restricted shares under the plan. A "restricted
share" is a contractual right to receive a share of class A common stock subject
to restrictions as determined by the committee. Any restricted shares granted
under the plan will be subject to a vesting schedule established by the
committee. The committee may, in its discretion, accelerate the dates on which
restricted shares vest. Stock certificates representing the number of restricted
shares granted to a participant will be registered in the participant's name as
of the date of grant but remain held by the company. The participant will have
all rights as a holder of such shares of class A common stock except that:
(1) the participant will not be entitled to delivery of such certificates
until the shares represented thereby have vested;
(2) the restricted shares cannot be sold, transferred, assigned, pledged or
otherwise encumbered or disposed of until such shares have vested; and
(3) if the participant's employment terminates for any reason or, in the
event of the participant's death or permanent disability, the restricted
shares will be forfeited as of the date of such event, unless, in a
special case, the committee determines otherwise with respect to some or
all of the unvested restricted shares.
In addition to restricted shares, the committee may grant restricted
share units, subject to terms and conditions as established by the
committee.
PHANTOM SHARES
The value of any phantom shares granted under the plan will be determined by
reference to the fair market value of a share of class A common stock. Cash
payments made with respect to such phantom shares are based, subject to any
applicable limit on the maximum amount payable, on any increase in value
("appreciation value") determined as of valuation dates over their "initial
value." The plan empowers the committee to determine the initial value of the
phantom shares as of the date of grant. The plan further empowers the committee
to determine the valuation dates, but not later than the eighth anniversary of
the date of grant, applicable to a grant of phantom shares, the period during
which the phantom shares vest and any limit on the maximum amount of
appreciation value payable for the phantom shares.
If a participant's employment terminates for any reason other than for
"cause" or, in the event of the participant's death or permanent disability,
then, unless the committee determines otherwise, the cash payments for such
participant's phantom shares will be the lesser of the appreciation value
determined as of the date of such termination or event or as of the originally
scheduled valuation dates and such payments will be made after the originally
scheduled valuation dates. All rights with respect to phantom shares that are
not vested as of the date of such termination or event, as the case may be, will
be relinquished by the participant. If a participant's employment is terminated
for "cause," all phantom shares, whether or not vested, will be forfeited by the
participant.
ADJUSTMENTS
In the event of a merger, consolidation, stock split, dividend,
distribution, combination, reclassification or recapitalization that changes the
character or amount of the class A common stock, the committee will make such
adjustments as it deems appropriate to the number of shares of class A
84
<PAGE>
common stock subject to any stock options or stock appreciation rights or the
number of restricted shares, restricted share units or phantom shares granted to
each participant, the exercise price of any outstanding stock options or stock
appreciation rights or the "initial value" of any outstanding phantom shares,
and the maximum number of shares of class A common stock that may be granted
under the plan or the aggregate number of shares that may be granted to any
participant.
TRANSFER RESTRICTIONS, ETC.
The rights of a participant with respect to the stock options, stock
appreciation rights, restricted shares or phantom shares granted under the plan
are not transferable by the participant other than by will or the laws of
descent and distribution. Except as described above, no grant under the plan
entitles a participant to any rights of a holder of shares of class A common
stock, nor will any grant be construed as giving any employee a right to
continued employment with us.
AMENDMENT AND TERM OF THE PLAN
The plan may be terminated and may be altered, amended, suspended or
terminated at any time, in whole or in part, by our board of directors;
PROVIDED, HOWEVER, that:
(1) no alteration or amendment will be effective without stockholder
approval if such approval is required by law or under the rules of the
New York Stock Exchange, the Nasdaq National Market or any stock exchange
on which our common stock is listed; and
(2) no such termination, suspension, alteration or amendment may adversely
alter or affect the terms of any then outstanding options previously
granted without the consent of the affected optionee.
GRANTS AS OF THIS OFFERING
SENIOR EXECUTIVE SHORT-TERM INCENTIVE PLAN
In connection with the offering, we have adopted our Senior Executive
Short-Term Incentive Plan.
GENERAL DESCRIPTION OF THE PLAN
The following is a description of the material features of the plan. The
full text of the plan is filed as an exhibit to the registration statement. The
plan provides objective performance-based annual bonuses for selected senior
executives of Blockbuster, subject to a maximum limit, as described in more
detail below. Amounts paid under the plan are intended to qualify as "qualified
performance-based compensation" which is excluded from the $1,000,000 limit on
deductible compensation set forth in Section 162(m) of the Internal Revenue
Code. Awards under the plan are determined by the senior executive compensation
committee.
ADMINISTRATION
The plan is administered by the senior executive compensation committee,
which is authorized to approve awards to selected executive officers at the
level of Executive Vice President or above. The committee that administers the
plan must be comprised of at least two directors, each of whom must be an
"outside director" within the meaning of Section 162(m) of the Internal Revenue
Code.
AWARDS
The committee establishes performance criteria and target awards for each
participant for each fiscal calendar year not later than 90 days after the
beginning of the year or, for the fiscal period
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<PAGE>
beginning upon the completion of the offering, before 25% of such period has
elapsed. The performance criteria relate to our operating income, net earnings
and/or cash flow. "Operating income" is defined as revenues less operating
expenses, other than depreciation, amortization and non-recurring charges; "net
earnings" is defined as earnings from continuing operations; and "cash flow" is
defined as operating income less cash capital expenditures and increases or
decreases in working capital and in other balance sheet investments.
Shortly after the end of each performance period, the committee certifies
whether the performance criteria have been achieved; subject to the committee's
right, in its sole discretion, to reduce the amount of the award to any
participant to reflect the committee's assessment of the participant's
individual performance or for any other reason. These awards are payable in cash
as soon as practicable thereafter.
To receive payment of an award, the participant must have remained in the
continuous employ of Blockbuster through the end of the applicable performance
period. If Blockbuster terminates a participant's employment for any reason
other than for "cause" or if a participant becomes "permanently disabled" or
dies during a performance period, the participant or his estate shall be
awarded, unless his employment agreement provides otherwise, a pro rata portion
of the award for such performance period, subject to the committee's right, in
its sole discretion, to reduce the amount of such award to reflect the
committee's assessment of the participant's individual performance prior to the
termination of the participant's employment, the participant's becoming
permanently disabled or the participant's death, as the case may be, or for any
other reason.
MAXIMUM ANNUAL AWARD
The plan provides that the maximum annual award to any participant for any
calendar year is determined by multiplying such participant's "salary" in effect
on by eight. "Salary" is defined as the sum of (1) the participant's
base salary on , and (2) an amount equal to the annual rate of any
compensation for such year deferred pursuant to the participant's employment
agreement in effect on until no earlier than the year after the
participant ceases to be a executive officer of our company. The plan provides
that, in the case of any participant hired after , the participant's
"salary" for this purpose would be the sum of (x) the participant's base salary
on the date of hire, and (y) an amount equal to the annual rate of any
compensation for the year of hire deferred pursuant to this employment agreement
in effect on the date of hire until no earlier than the year after the
participant ceases to be an executive officer of our company; PROVIDED that the
"salary" for any participant hired after shall not exceed 1.5 times the
highest "salary" on of any current participant in the plan. The current
salaries of the named executive officers are disclosed under "-- Employment
Agreements" above.
ADJUSTMENTS
In the event that, during a performance period, any recapitalization,
reorganization, merger, acquisition, divestiture, consolidation, spin-off,
combination, liquidation, dissolution, sale of assets or other similar corporate
transaction or event, or any extraordinary event, or any other event which
distorts the applicable performance criteria occurs involving us or one of our
subsidiaries, the committee will adjust or modify, in its sole discretion, the
calculation of operating income, net earnings and/or cash flow, or the
applicable performance goals, to the extent necessary to prevent reduction or
enlargement of participants' awards for such performance period attributable to
such transaction or event.
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<PAGE>
TRANSFER RESTRICTIONS, ETC.
The rights of a participant with respect to awards under the plan are not
transferable by the participant other than by will or the laws of descent and
distribution. No award under the plan will be construed as giving any employee a
right to continued employment with our company.
AMENDMENT
The board of directors may at any time alter, amend, suspend or terminate
the plan in whole or in part; PROVIDED, HOWEVER, that no alteration or amendment
will be effective without stockholder approval if such approval is required by
law.
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RELATED PARTY TRANSACTIONS
We have set forth below a summary description of the material agreements
between Viacom and us (1) relating to this offering and the split-off and (2)
relating to other matters not concerning this offering or the split-off. Some of
these agreements have been filed with the SEC as exhibits to the registration
statement of which this prospectus is a part.
AGREEMENTS BETWEEN VIACOM AND US RELATING TO THIS OFFERING OR THE SPLIT-OFF
INITIAL PUBLIC OFFERING AND SPLIT-OFF AGREEMENT
GENERAL. We have entered into an initial public offering and split-off
agreement with Viacom which governs our respective rights and duties with
respect to some offerings of our common stock and other securities, including
this offering, and the split-off, and sets forth certain covenants we have
agreed to for various periods following this offering and the split-off.
Although Viacom has announced that it currently plans to complete the split-off,
and we have agreed to cooperate with Viacom in all respects to complete the
split-off or similar transaction, it is not obligated to do so. We cannot assure
you as to whether or not or when the split-off will occur or as to the terms of
the split-off. We refer you to "Risk Factors -- Risk Factors Relating to Our
Separation from Viacom."
OFFERINGS OF SECURITIES OF BLOCKBUSTER AND THE SPLIT-OFF. We have agreed
that we will cooperate with Viacom in all respects to accomplish
- any primary offerings of our common stock and other securities prior to
the split-off or other similar transaction; and
- the split-off or similar transaction.
We have also agreed that, at Viacom's direction, we will promptly take all
actions necessary or desirable to effect these transactions, including the
registration under the Securities Act of Viacom's shares of our capital stock.
Viacom has the sole discretion to determine whether to proceed with all or part
of the split-off and all terms of the split-off, including the form, structure
and terms of any transaction(s) and/or offering(s) to effect the split-off and
the timing of and conditions to the completion of the split-off.
EXPENSES. In general, unless otherwise provided for in the initial public
offering and split-off agreement or any other agreement, we and Viacom will pay
our respective costs and expenses incurred in connection with any offering of
our securities prior to the split-off or other similar transaction, including
this offering, and the split-off.
- EXPENSES RELATING TO PRIMARY OFFERINGS OF SECURITIES OF BLOCKBUSTER. We
have generally agreed to pay all costs and expenses relating to any
primary offerings of our common stock and our other securities prior to
the split-off or other similar transaction, including this offering. In
particular, we will pay the underwriting discounts and commissions.
- EXPENSES RELATING TO THE SPLIT-OFF. Viacom has generally agreed to pay all
costs and expenses relating to the split-off or other similar transaction.
ACCESS TO INFORMATION. Generally, we and Viacom have agreed to provide each
other with, upon written request and subject to specified conditions, and for a
specified period of time, access to information relating to the assets, business
and operations of the requesting party. We and Viacom have agreed to keep our
books and records for a specified period of time. Also, we and Viacom have
agreed to cooperate with the other party with respect to any claims brought
against the other relating to the conduct of our business prior to completion of
the split-off or similar transaction.
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COVENANTS. We have agreed that, for so long as Viacom is required to
consolidate our results of operations and financial position, we will:
- provide Viacom with financial information regarding our company and our
subsidiaries;
- provide Viacom copies of all quarterly and annual financial information
and other reports and documents we intend to file with the SEC prior to
such filings, as well as final copies upon filing;
- provide Viacom with copies of our budgets and financial projections, as
well as the opportunity to meet with our management to discuss such
budgets and projections;
- consult with Viacom regarding the timing and content of earnings releases
and cooperate fully and cause our accountants to cooperate fully with
Viacom in connection with any of its public filings;
- not change our auditors without Viacom's prior written consent, which will
not be unreasonably withheld, and use our reasonable best efforts to
enable our auditors to complete their audit of our financial statements
such that they will date their opinion the same date that they date their
opinion on Viacom's financial statements;
- provide to Viacom and its auditors all information required for Viacom to
meet its schedule for the filing and distribution of its financial
statements;
- make our books and records available to Viacom and its auditors, so that
they may conduct reasonable audits relating to our financial statements;
- adhere to specified accounting standards;
- agree with Viacom on any changes to our accounting policies; and
- agree with Viacom regarding our accounting estimates and principles.
OTHER COVENANTS. The initial public offering and split-off agreement will
also provide that for so long as Viacom maintains beneficial ownership of a
majority of the total number of our outstanding shares of common stock, we may
not take any action or enter into any commitment or agreement which may
reasonably be anticipated to result, with or without notice and with or without
lapse of time, or otherwise, in a contravention, or an event of default, by
Viacom of:
- any provision of applicable law or regulation, including but not limited
to provisions pertaining to the Internal Revenue Code, or the Employee
Retirement Income Security Act of 1974, as amended;
- any provision of Viacom's certificate of incorporation or by-laws;
- any credit agreement or other material instrument binding upon Viacom; or
- any judgment, order or decree of any governmental body, agency or court
having jurisdiction over Viacom or any of its assets.
ASSIGNMENT AND ASSUMPTION. Under the initial public offering and split-off
agreement, Viacom International Inc. will assign to us its rights and
obligations under the agreement related to the sale of the BLOCKBUSTER MUSIC
video stores to Wherehouse. We have agreed to accept this assignment.
OPTIONS. We will grant to Viacom a continuing option, assignable to any of
its subsidiaries, to purchase, under specified circumstances, additional shares
of our class B common stock or any shares of our nonvoting capital stock. These
options may be exercised immediately prior to the issuance of any of our equity
securities, other than in this offering or upon the exercise of the
underwriters' over-allotment options:
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a. with respect to our class B common stock, only to the extent necessary
to maintain its then-existing percentage of equity value and combined
voting power of our two outstanding classes of common stock; and
b. with respect to shares of nonvoting capital stock, to the extent
necessary to own 80% of each outstanding class of such stock.
The purchase price of the shares of class B common stock purchased upon any
exercise of the options, subject to specified exceptions, will be based on the
market price of the class A common stock. The purchase price of nonvoting
capital stock will be the price at which such stock may be purchased by third
parties. This option will terminate when Viacom owns less than 45% of the equity
of our Company.
INDEMNIFICATION PROCEDURES. The initial public offering and split-off
agreement will set forth the procedures that Viacom and we are to undertake if
either of us demanded to be indemnified by the other under any indemnification
right given in any of the agreements between Viacom and us relating to this
offering or the split-off.
RELEASE AND INDEMNIFICATION AGREEMENT
We and Viacom will enter into a release and indemnification agreement under
which we and Viacom have agreed to indemnify each other and we and Viacom have
agreed to release each other with respect to some matters.
INDEMNIFICATION RELATING TO OUR ASSETS, BUSINESSES AND OPERATIONS. We have
agreed to indemnify and hold harmless Viacom and some of its affiliates and
their respective officers, directors, employees, agents, heirs, executors,
successors and assigns against any payments, losses, liabilities, damages,
claims and expenses and costs arising out of or relating to:
(1) our past, present and future assets, businesses and operations and other
assets, businesses and operation or managed by us or persons previously
associated with us, except for assets, businesses and operations of
Spelling Entertainment Group Inc. and its subsidiaries, including
Republic Entertainment Inc. and Worldvision Inc., Showtime Networks Inc.,
Virgin Interactive Entertainment Limited and Virgin Interactive
Entertainment Inc.; and
(2) payments, expenses and costs paid by Viacom to a third party associated
with the transfer of our assets, businesses and operations from some of
Viacom entities to Blockbuster Inc. and its subsidiaries.
Viacom has similarly agreed to indemnify us and some of our affiliates and
our and their respective officers, directors, employees, agents, heirs,
executors, successors and assigns for Viacom's past, present and future assets,
businesses and operations, except for assets, businesses and operations for
which we have agreed to indemnify Viacom. In addition, the transition services
agreement, the registration rights agreement, the tax matters agreement and the
tax letter agreement referred to below provide for indemnification between us
and Viacom relating to the substance of such agreements.
INDEMNIFICATION RELATING TO THIS OFFERING AND OTHER OFFERINGS. We have
generally agreed to indemnify Viacom and some of its affiliates against all
liabilities arising out of any material untrue statements and omissions in any
prospectus and any related registration statement filed with the SEC relating to
this offering or any other primary offering of our common stock or our other
securities prior to the date of the split-off or other similar transaction.
However, our indemnification of Viacom does not apply to information relating to
Viacom, excluding information relating to us. Viacom has agreed to indemnify us
for this information.
INDEMNIFICATION RELATING TO THE SPLIT-OFF. We have generally agreed to
indemnify Viacom and some of its affiliates against all liabilities arising out
of any material untrue statements and omissions in any
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and all registration statements, information statements and/or other documents
filed with the SEC in connection with the split-off or other similar
transaction. However, our indemnification of Viacom does not apply to
information relating to Viacom, excluding information relating to us. Viacom has
agreed to indemnify us for this information.
RELEASE RELATING TO ACTIONS BY VIACOM RELATED TO VIACOM'S AND OUR ASSETS,
BUSINESSES AND OPERATIONS. Except for the rights and obligations of Viacom and
us which relate to the agreements between Viacom and us relating to this
offering or the split-off, we have released Viacom and some of its subsidiaries
and affiliates and their respective officers, directors, employees, agents,
heirs, executors, successors and assigns for all losses for any and all past
actions and failures to take actions relating to Viacom's and our assets,
businesses and operations. Viacom has similarly released us.
TRANSITION SERVICES AGREEMENT
We and Viacom will enter into a transition services agreement under which
Viacom will provide to us agreed-upon cash management, accounting, legal,
management information systems, financial and tax services and employee benefit
plan and insurance administration. These services may be changed upon agreement
between Viacom and us. We will pay Viacom a fee for these services equal to
Viacom's cost in providing these services. The fee will be payable monthly in
arrears, 15 days after the close of each month. We believe that the fee for
these services is no less favorable than could have been obtained by us
internally or from someone who had not controlled us. We have also agreed to pay
or reimburse Viacom for any out-of-pocket payments, costs and expenses
associated with these services. The transition services agreement expires upon
the closing of the split-off or similar transaction. We cannot assure you that
we will be able to provide these services internally or find a third party
provider on acceptable terms, if at all, after the expiration of the transition
services agreement.
In addition, some of our executives may be employed by Viacom to provide
transition services following the split-off. For a description of this
arrangement, we refer you to "Management -- Compensation for Services After a
Separation from Viacom."
REGISTRATION RIGHTS AGREEMENT
We and Viacom will enter into a registration rights agreement which requires
us upon request of Viacom to use our reasonable best efforts to register under
the applicable federal and state securities laws any of the shares of our equity
securities of or owned by Viacom for sale in accordance with Viacom's intended
method of disposition, and will take such other actions as may be necessary to
permit the sale in other jurisdictions, subject to specified limitations. Viacom
will also have the right to include the shares of our equity securities it
beneficially owns in other registrations of these equity securities we initiate.
Except for our legal and accounting fees and expenses, the registration rights
agreement provides that Viacom will generally pay all or its pro rata portion of
out-of-pocket costs and expenses relating to each such registration that Viacom
requests or in which Viacom participates. Subject to specified limitations, the
registration rights will be assignable by Viacom and its assigns. The
registration rights agreement will contain the following indemnification and
contribution provisions:
- by Viacom and its permitted assigns for our benefit and the benefit of
related persons; and
- by us for the benefit of Viacom and the other persons entitled to effect
registrations of common stock and other securities pursuant to its terms
and related persons.
TAX MATTERS AGREEMENT
Following this offering, we and some of our subsidiaries will continue to be
included in the consolidated group of Viacom for U.S. federal income tax
purposes and the combined, consolidated or unitary group of Viacom for various
state and local income tax purposes (the "consolidated group"). Prior to the
completion of this offering, we and Viacom will enter into a tax matters
agreement. For
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taxable years and portions thereof prior to the date of this offering, Viacom
will pay all taxes for the consolidated group including any liability resulting
from adjustments to tax returns relating to such taxable years or portions
thereof. We and our subsidiaries will continue to be liable for all taxes that
are imposed on a separate return basis or on a combined, consolidated or unitary
basis on a group of companies that includes only us and our subsidiaries. The
tax matters agreement requires us and Viacom to make payments to each other
equal to the amount of income taxes which would be paid by us, subject to some
adjustments, as if we and each of our subsidiaries included in the consolidated
group were to file our own combined, consolidated or unitary, or, where only one
of our entities is included in the consolidated group, separate, federal, state
and local income tax returns for any taxable year or portion thereof beginning
after the date of this offering in which we are included in the consolidated
group. This includes any amounts determined to be due as a result of a
redetermination of the tax liability of the consolidated group arising from an
audit or otherwise. With respect to some tax items attributable to periods
following the date of this offering during which we are included in the
consolidated group, such as foreign tax credits, alternative minimum tax
credits, net operating losses and net capital losses, we will have a right of
reimbursement or offset, which will be determined based on the extent to which,
and the time at which, such credits or losses could have been used by us or our
subsidiaries if we had not been included in the consolidated group. This right
to reimbursement or offset continues regardless of whether we are a member of
the consolidated group at the time the attributes could have been used. We are
only entitled to reimbursement for carryback items that we could use on a stand
alone basis to the extent that such items result in an actual tax savings for
the consolidated group. The tax matters agreement also requires us, if so
requested by Viacom, to surrender some tax losses of our subsidiaries that are
resident in the United Kingdom for 1998 and earlier years to Viacom's United
Kingdom subsidiaries without any right to compensation. We have also agreed to
pay Viacom an amount equal to any tax benefit we receive from the exercise of
Viacom stock options by our employees including in years that we are no longer
included in the Viacom consolidated group. We will also pay Viacom the amount of
any income taxes with respect to income tax returns that include only us, which
returns, as described below, will be filed by Viacom.
Viacom will continue to have all the rights of a parent of a consolidated
group filing consolidated federal income tax returns. Viacom will have similar
rights provided for by applicable state and local law with respect to a parent
of a combined, consolidated or unitary group. Viacom will be the sole and
exclusive agent for us in any and all matters relating to income taxes of the
consolidated group. Viacom will have sole and exclusive responsibility for the
preparation and filing of all income tax returns or amended returns with respect
to the consolidated group. Viacom will have the sole right to contest or
compromise any asserted tax adjustment or deficiency and to file, litigate or
compromise any claim for refund on behalf of the consolidated group, except that
Viacom shall not be entitled to compromise any such matter in a manner that
would affect our liability under the tax matters agreement without our consent,
which may not be withheld unreasonably. Under the tax matters agreement, Viacom
will have similar authority with regard to income tax returns that we file on a
separate basis and related tax proceedings. Viacom's authority with respect to
periods during which we are included in the consolidated group will continue to
apply even with respect to tax returns which are filed and for proceedings which
are conducted after the split-off which relate to such periods. This agreement
may result in conflicts of interest between us and Viacom.
Provided that Viacom continues to beneficially own, directly or indirectly,
at least 80% of the combined voting power and the value of our outstanding
capital stock, we will be included for federal income tax purposes in the
consolidated group of which Viacom is the common parent. It is the present
intention of Viacom and its subsidiaries to continue to file a single
consolidated federal income tax return. In certain circumstances, some of our
subsidiaries also will be included with some subsidiaries of Viacom, other than
our subsidiaries, in combined, consolidated or unitary income tax groups for
state and local tax purposes. Each member of the consolidated group for federal
income tax purposes is liable for the federal income tax liability of each other
member of the consolidated group.
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Similar principles apply with respect to members of a combined group for state
and local tax purposes. Accordingly, although the tax matters agreement will
allocate tax liabilities between us and Viacom during the period in which we are
included in the consolidated group, we could be liable for the federal income
tax liability of any other member of the consolidated group in the event any
such liability is incurred, and not discharged, by such other member. The tax
matters agreement will provide, however, that Viacom will indemnify us to the
extent that, as a result of being a member of the consolidated group, we become
liable for the federal income tax liability of any other member of the
consolidated group, other than our subsidiaries.
Viacom will obtain a private letter ruling from the Internal Revenue Service
prior to any split-off transaction as described above in "Separation from
Viacom." In connection with seeking such ruling request, some representations
have been and will be made to the Internal Revenue Service regarding our
business. In the tax matters agreement, we have agreed that during the two year
period following a split-off we and our subsidiaries will not enter into some
types of transactions, including sales of assets, mergers, liquidations, stock
issuances, and stock redemptions, without the consent of Viacom unless Viacom
receives a ruling from the Internal Revenue Service or an opinion of counsel to
the effect that such transaction will not adversely affect the tax-free status
of the split-off. We will generally be responsible for, among other things, any
taxes imposed on Viacom or its subsidiaries as a result of the split-off failing
to qualify as a tax-free transaction on account of any breach of our
representations or agreements or any action or failure to act by us or our
subsidiaries or any transaction involving our, or our subsidiaries', assets,
stock or business following the split-off, regardless of whether such
transaction is within our control.
OTHER AGREEMENTS
REVENUE-SHARING
We have a revenue-sharing agreement with Paramount, which is an affiliate of
Viacom. Under this agreement we have agreed to share an agreed-upon percentage
of our rental revenue with Paramount for a limited period of time in exchange
for minimal up front payments for videocassettes priced for rental. This
percentage generally declines over a period of weeks following the initial
release of the movie. We also agree to take a minimum number of copies of each
movie released by Paramount. This agreement, subject to limitations, allows us
to sell the previously viewed tapes to our customers.
OTHER AGREEMENTS
There are various other agreements between us and Viacom and its affiliates
which we believe are not material to us. We believe the terms of these
agreements approximate those which would be available from third parties.
OTHER RELATED PARTY TRANSACTIONS
RELATED PARTY TRANSACTION
We refer you to "Management -- Compensation Committee Interlocks and Insider
Participation" with respect to a related party transaction.
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PRINCIPAL STOCKHOLDER
All of the shares of class B common stock outstanding prior to the
completion of this offering are beneficially owned by Viacom. Upon completion of
this offering, Viacom will beneficially own 100% of the class B common stock.
Except for Viacom, we are not aware of any person or group that will
beneficially own more than 5% of the outstanding shares of our common stock
following this offering.
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DESCRIPTION OF CAPITAL STOCK
THE FOLLOWING DESCRIPTION IS ONLY A SUMMARY OF THE MATERIAL PROVISIONS OF
OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS. WE REFER YOU
TO THE MORE DETAILED PROVISIONS OF (1) OUR CERTIFICATE OF INCORPORATION AND
BYLAWS, COPIES OF WHICH ARE FILED WITH THE SEC AS EXHIBITS TO THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS IS A PART AND (2) APPLICABLE LAW.
Our authorized capital stock consists of shares of capital stock, of which
- shares are designated as class A common stock, par value $ .01
per share;
- shares are designated as class B common stock, par value $ .01
per share; and
- shares of preferred stock, par value $ .01 per share, of which no
shares of preferred stock are outstanding as of the date hereof.
Of the shares of common stock designated as class A common stock, shares, or
about % of the equity value of our company, are being offered in connection
with this offering, assuming that the underwriters do not exercise their
over-allotment options. Of the shares of common stock designated as class B
common stock, shares, or about % of the equity value of our company, will be
outstanding and held by Viacom upon consummation of the offering, assuming the
underwriters do not exercise their over-allotment options. Each of the class A
common stock and the class B common stock constitutes a series of common stock
under the General Corporation Law of the State of Delaware.
COMMON STOCK
VOTING RIGHTS. Holders of class A common stock and holders of class B
common stock generally have identical rights, except:
- holders of class A common stock are entitled to one vote per share; and
- holders of class B common stock are entitled to five votes per share;
with respect to each matter presented to our stockholders on which the holders
of common stock are entitled to vote. The holders of class A common stock and
class B common stock are not entitled to cumulate their votes in the election of
directors. Generally, all matters to be voted on by our stockholders must be
approved by a majority, or, in the case of election of directors, by a
plurality, of the votes entitled to be cast by all shares of class A common
stock and class B common stock present in person or represented by proxy, voting
together as a single class. In particular, amendments to our certificate of
incorporation must generally be approved by a majority of the combined voting
power of both classes of common stock, voting together as a single class.
However, the approval of 75% of the combined voting power is required to amend
some provisions of our certificate of incorporation and bylaws as described
below. In addition, amendments to our certificate of incorporation that would
alter or change the powers, preferences or special rights of either class of
common stock so as to affect them adversely also must be approved by a majority
of the votes entitled to be cast by the holders of the shares affected by the
amendment, voting as a separate class. Holders of class A common stock are not
entitled to vote on any change in the powers or other rights of the class B
common stock that would not adversely affect the rights of class A common stock.
For example, any provision for the conversion of the class B common stock into
class A common stock on a one-for-one basis is not considered to adversely
affect the rights of the class A common stock.
DIVIDENDS. Holders of class A common stock and class B common stock will
share equally in any dividend declared by our board of directors, subject to any
preferential rights of any outstanding
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preferred stock. Dividends consisting of shares of class A common stock and
class B common stock may be paid only as follows:
- shares of class A common stock may be paid only to holders of shares of
class A common stock, and shares of class B common stock may be paid only
to holders of class B common stock; and
- shares shall be paid proportionally with respect to each outstanding share
of class A common stock and class B common stock.
CONVERSION. Each share of class B common stock held by Viacom or any of its
affiliates may be converted into a share of class A common stock at the class B
holder's option prior to the split-off or other similar transaction. However, if
20% or less of the value of our outstanding stock is issued by us in this
offering or otherwise prior to the split-off or similar transaction, each share
of class B common stock will automatically convert into one share of class A
common stock immediately prior to the split-off or other similar transaction,
unless and to the extent that Viacom has received an opinion of counsel that
such conversion provision is likely to prevent or materially delay the issuance
of Internal Revenue Service rulings requested by Viacom or will otherwise create
a significant risk of a material adverse tax consequence to Viacom or its
stockholders. After the split-off or other similar transaction, any outstanding
shares of class B common stock will no longer be convertible into shares of
class A common stock.
OTHER RIGHTS. Unless approved by a majority of each class of common stock,
in the event of our reorganization or consolidation with one or more
corporations or a merger with another corporation in which shares of our common
stock are converted into or exchangeable for shares of stock, other securities
or property, including cash, all holders of our common stock, regardless of
class, will be entitled to receive the same kind and number of shares of stock
and other securities and property, including cash except that the relative
voting rights of the classes may be retained. In the event of a liquidation,
dissolution or winding-up of our company, all holders of common stock,
regardless of class, are entitled to share ratably in any assets available for
distributions to holders of shares of common stock.
The outstanding shares of our common stock are, and the shares of class A
common stock being offered to you will be, upon your payment, validly issued,
fully paid and nonassessable.
No shares of any class of common stock (1) are subject to redemption or (2)
have any preemptive rights to purchase additional shares of common stock.
PREFERRED STOCK
Our board of directors is empowered, without approval of our stockholders,
to cause shares of preferred stock to be issued from time to time in one or more
series, with the numbers of shares of each series and the designation, powers,
privileges, preferences and rights of the shares of each such series and the
qualifications, limitations and restrictions thereof as fixed by our board of
directors. Among the specific matters that may be determined by our board of
directors are:
- the designation of each series;
- the number of shares of each series;
- the rate of dividends, if any;
- whether dividends, if any, shall be cumulative or noncumulative;
- the terms of redemption, if any;
- the amount payable in the event of any voluntary or involuntary
liquidation, dissolution or winding-up of the affairs of our company;
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- rights and terms of conversion or exchange, if any;
- restrictions on the issuance of shares of the same series or any other
series, if any; and
- voting rights, if any.
Our board of directors may, without stockholder approval, issue preferred
stock with voting and other rights that could adversely affect all of the rights
of the holders of class A common stock and class B common stock, including, but
without limitation, their voting power. We have no present plans to issue any
shares of preferred stock. The ability of our board of directors to issue
preferred stock without stockholder approval could have the effect of delaying,
deferring or preventing a change in control of us or the removal of our existing
management.
LIMITATION ON LIABILITY OF DIRECTORS
Our certificate of incorporation provides that our directors will not be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability imposed by law, as in effect
from time to time:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for any act or omission not in good faith or which involved intentional
misconduct or a knowing violation of law;
- for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of Delaware corporate law; or
- for any transaction from which the director derived an improper personal
benefit.
The inclusion of this provision in our certificate of incorporation may have
the effect of reducing the likelihood of derivative litigation against our
directors, and may discourage or deter stockholders or us from bringing a
lawsuit against our directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefitted us and our
stockholders.
ANTI-TAKEOVER EFFECTS OF SOME OF THE PROVISIONS OF OUR CERTIFICATE OF
INCORPORATION AND BYLAWS AND SECTION 203 OF DELAWARE CORPORATE LAW
Some of the provisions of our certificate of incorporation and bylaws and
Section 203 of Delaware corporate law could have the following effects, among
others:
- delaying, deferring or preventing a change in control;
- delaying, deferring or preventing the removal of our existing management;
- deterring potential acquirors from making an offer to our stockholders;
and
- limiting our stockholders' opportunity to realize premiums over prevailing
market prices of our common stock in connection with offers by potential
acquirors.
This could be the case notwithstanding that a majority of our stockholders might
benefit from such a change in control or offer. The following is a summary of
these provisions.
SOME OF THE PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS
CLASSIFIED BOARD OF DIRECTORS. Our certificate of incorporation and bylaws
provide for our board of directors to be divided into three classes of directors
serving staggered three-year terms. Each class, to the extent possible, will be
equal in number. The size of our board of directors will not be less than three
nor more than twelve. Each class holds office until the third annual
stockholders' meeting for
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election of directors following the most recent election of such class, except
that the initial terms of the three classes expire in 2000, 2001 and 2002,
respectively.
DIRECTORS, AND NOT STOCKHOLDERS, FIX THE SIZE OF OUR BOARD OF
DIRECTORS. Our certificate of incorporation and bylaws provide that the number
of directors shall be fixed from time to time exclusively pursuant to a
resolution adopted by a majority of our board of directors, but in no event
shall it consist of less than three nor more than twelve.
DIRECTORS ARE REMOVED FOR CAUSE ONLY. Our certificate of incorporation and
bylaws provide that, on or after the time when Viacom and its affiliates own
less than a majority of the combined voting power of our outstanding common
stock, which we refer to this as the "trigger date," our directors may be
removed only for "cause" by the affirmative vote of the holders of at least a
majority of the combined voting power of our outstanding voting common stock.
Cause is narrowly defined in our certificate of incorporation. However, prior to
the trigger date, our directors may be removed with or without cause.
BOARD VACANCIES TO BE FILLED BY REMAINING DIRECTORS, AND NOT
STOCKHOLDERS. Our certificate of incorporation and bylaws provide that any
vacancies on our board of directors will be filled by the affirmative vote of
the majority of the remaining directors, even if less than a quorum, or by a
sole remaining director. In any event, no vacancy shall be filled by our
stockholders.
NO STOCKHOLDER ACTIONS BY WRITTEN CONSENT. Our bylaws provide that, on or
after the trigger date, stockholders may not act by written consent in lieu of a
meeting. However, prior to the trigger date, stockholders may act by written
consent.
NO SPECIAL MEETINGS CALLED BY STOCKHOLDERS. Our bylaws provide that, on or
after the trigger date, special meetings of the stockholders may not be called
by the stockholders and instead may be called only by (1) any officer at the
request of a majority of our board of directors, (2) our chairman or (3) our
president and chief executive officer. However, prior to the trigger date,
special meetings may be called by holders of at least the majority of the
combined voting power of our outstanding common stock.
ADVANCE NOTICE FOR STOCKHOLDER MEETINGS. Our bylaws contain provisions
requiring that advance notice be delivered to us of any business to be brought
by a stockholder before an annual meeting and providing for procedures to be
followed by stockholders in nominating persons for election to our board of
directors. Generally, such advance notice provisions require that the
stockholder must give written notice to us not less than 90 days nor more than
120 days before the first anniversary of the preceding year's annual meeting of
stockholders. Our certificate of incorporation provides that as long as Viacom
and its affiliates owns 10% or more of the combined voting power of the
outstanding common stock, Viacom is exempt from the foregoing provision.
For our first annual meeting, which will be held in 2000, notice must be
given no earlier than , 2000 and no later than , 2000. In each case, the
notice must set forth specific information regarding such stockholder and each
director nominee or other business proposed by the stockholder, as applicable,
as provided in our bylaws.
SUPERMAJORITY VOTE REQUIRED TO AMEND SPECIFIED PROVISIONS. Our certificate
of incorporation and bylaws provide that the provisions described above may only
be amended by holders of at least 75% of the combined voting power of our
outstanding common stock.
SECTION 203 OF DELAWARE CORPORATE LAW
Our company is a Delaware corporation and subject to Section 203 of Delaware
corporate law. Generally, Section 203 prohibits a publicly held Delaware company
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the time such
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stockholder became an interested stockholder unless, as described below,
specified conditions are satisfied. Thus, it may make acquisition of control of
our company more difficult. The prohibitions in Section 203 of Delaware
corporate law do not apply if:
- prior to the time the stockholder became an interested stockholder, the
board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming
an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
- at or subsequent to the time the stockholder became an interested
stockholder, the business combination is approved by the board of
directors and authorized by the affirmative vote of at least 66 2/3% of
the outstanding voting stock that is not owned by the interested
stockholder.
Under Section 203 of Delaware corporate law, a "business combination"
includes:
- any merger or consolidation of the corporation with the interested
stockholder;
- any sale, lease, exchange or other disposition, except proportionately as
a stockholder of such corporation, to or with the interested stockholder
of assets of the corporation having an aggregate market value equal to 10%
or more of either the aggregate market value of all the assets of the
corporation or the aggregate market value of all the outstanding stock of
the corporation;
- transactions resulting in the issuance or transfer by the corporation of
stock of the corporation to the interested stockholder;
- transactions involving the corporation which have the effect of increasing
the proportionate share of the corporation's stock of any class or series
which is owned by the interested stockholder; or
- transactions in which the interested stockholder receives financial
benefits provided by the corporation.
Under Section 203 of Delaware corporate law, an "interested stockholder"
generally is
- any person that owns 15% or more of the outstanding voting stock of the
corporation;
- any person that is an affiliate or associate of the corporation and was
the owner of 15% or more of the outstanding voting stock of the
corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether or not such person
is an interested stockholder; and
- the affiliates or associates of either of the above-stated categories
person.
Because Viacom owned more than 15% of our voting stock before we became a
public company in this offering, Section 203 of Delaware corporate law by its
terms is currently not applicable to business combinations with Viacom even
though Viacom owns 15% or more of our outstanding stock. If any other person
acquires 15% or more of our outstanding stock, such person will be subject to
the provisions of Section 203 of the Delaware corporate law.
Under some circumstances, Section 203 of Delaware corporate law makes it
more difficult for an "interested stockholder" to effect various business
combinations with us for a three-year period, although our stockholders may
elect to exclude us from the restrictions imposed thereunder. By virtue of its
beneficial ownership of our class B common stock, Viacom is in a position to
elect to exclude us from the restrictions under Section 203. Currently, Viacom
has no intention to do so.
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TRANSACTIONS WITH INTERESTED PARTIES
Our certificate of incorporation includes provisions addressing potential
conflicts of interest between us and Viacom and its non-Blockbuster-related
subsidiaries. In addition, our certificate of incorporation includes provisions
regulating and defining our conduct as they may involve us and Viacom and our
and its subsidiaries, directors and officers. Our certificate of incorporation
provides that no contract:
- between us and Viacom or any of its non-Blockbuster-related subsidiaries;
or
- between us and any entity in which one or more of our directors has a
financial interest, which we refer to this type of entity as a "related
entity"; or
- between us and any officer or director of our company, Viacom, any
subsidiary of Viacom or any related entity;
shall be void or voidable because:
- Viacom, any non-Blockbuster-related subsidiary of Viacom or any related
entity, or any of their or our officers or directors are parties to the
contract; or
- any of those officers or directors is present at, participates in or votes
to authorize the contract.
CORPORATE OPPORTUNITIES
Our certificate of incorporation provides that, except as Viacom may
otherwise agree in writing, neither Viacom nor any non-Blockbuster-related
subsidiary of Viacom shall have a duty to refrain from engaging directly or
indirectly in the same or similar business activities or lines of business as
ours.
The foregoing provisions of our certificate of incorporation shall expire on
the date that Viacom and its affiliates no longer owns at least 20% of the
combined voting power of our outstanding common stock and no person who is a
director or officer of our company is also a director or officer of Viacom or
its subsidiaries.
The affirmative vote of the holders of more than 75% of the combined voting
power of our common stock is required to alter, amend or repeal in a manner
adverse to the interests of Viacom, or adopt any provision adverse to the
interests of Viacom including provisions with respect to the interested party
and corporate opportunity provisions described above. Accordingly, so long as
Viacom and its affiliates own at least 25% of the combined voting power of our
outstanding common stock, it can prevent any such alteration, amendment, repeal
or adoption.
TRANSFER AGENT AND REGISTRAR
will serve as the transfer agent and registrar for our common
stock.
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DESCRIPTION OF CREDIT AGREEMENT
THE FOLLOWING IS A SUMMARY OF THE MATERIAL PROVISIONS OF THE CREDIT
AGREEMENT. A COPY OF THE CREDIT AGREEMENT IS FILED AS AN EXHIBIT HERETO.
On , 1999, we entered into a $1.9 billion credit agreement with a
syndicate of lenders. The credit agreement is comprised of three tranches.
Tranche A is a $700 million revolving loan maturing on July 1, 2004. Tranche B
is a $600 million term loan also maturing on July 1, 2004. Tranche C is a $600
million revolving loan which matures on , 2000. On , 1999, we borrowed
$1.6 billion under this credit agreement.
We have used or will use the borrowings under the credit agreement:
- to pay about $65 million which is a portion of the purchase price to
affiliates of Viacom to acquire the non-U.S. operations of our business
that we did not already own;
- to repay a promissory note issued by us to Viacom International Inc. as a
dividend in the principal amount of $1.4 billion plus accrued and unpaid
interest;
- to repay promissory notes issued by us to Viacom International Inc. in the
aggregate principal amount of about $77 million plus accrued and unpaid
interest for acquisitions of video stores;
- to pay the fees and expenses of about $15 million related to the
origination of the credit agreement to the syndicate of lenders; and
- for working capital and general corporate purposes.
The credit agreement contains provisions for the mandatory prepayment of
loans as follows:
- If we issue equity securities, unless we are Investment Grade, as defined
in the credit agreement, we will be required to use 25% of the net cash
proceeds to repay the Tranche A loan and Tranche B loan, on a pro rata
basis, until $400 million of loans have been repaid;
- If we incur indebtedness in a capital market transaction, unless we are
Investment Grade, we are required to use 75% of the net cash proceeds to
repay the Tranche A and Tranche B loans, on a pro rata basis, until $400
million, including amounts repaid from an issuance of equity stated above,
have been repaid; and
- If we sell assets, other than to franchisees, we will be required to use
50% of the net cash proceeds from such sales over $100 million, to repay
the Tranche A and Tranche B loans, on a pro rata basis, until $500 million
of the loans have been repaid.
Borrowings under the credit agreement accrue interest at a rate equal to the
interest rates prevailing on the date of determination in the London interbank
market for the interest period selected by us, plus a margin over this rate. The
margin and the commitment fees on the undrawn portion of the facility vary based
on specified leverage ratios.
The credit agreement contains certain customary covenants for us not to,
among other things:
- grant liens;
- merge;
- sell substantially all of our assets;
- enter into speculative interest rate or currency hedges;
- incur debt above $175 million at the subsidiary level;
- pay dividends on or repurchase our common stock or make other
distributions, in each case other than dividends of $90 million, $115
million, $130 million, $145 million and $160 million in the first five
years following the completion of this offering, respectively;
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- transfer assets to subsidiaries; and
- invest in or make loans to any business, other than investments or loans
that are reasonably related to the operation or growth of our core rental
business.
We will also be required to comply with financial covenants with respect to: (1)
maximum leverage ratio and (2) a minimum fixed charge coverage ratio. The credit
agreement also contains some customary affirmative covenants.
Events of default under the credit agreement include, among others: failure
to pay principal and interest when due, breach of some of the representations
and warranties, failure to perform or observe some of the covenants, bankruptcy,
and change of control. Under the credit agreement, change of control includes:
- control of 50% or more of our outstanding common stock by persons other
than Viacom or National Amusements, Inc.;
- our board of directors ceases to be controlled by our continuing
directors; or
- we enter into a merger agreement which cedes power to control our
management or policies prior to consummation of the merger.
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SHARES ELIGIBLE FOR FUTURE SALE
The shares of our class A common stock sold in this offering, or
shares if the underwriters exercise their over-allotment options in full,
will be freely tradable without restriction under the Securities Act of 1933, as
amended, except for any such shares which may be acquired by an "affiliate" of
ours, as that term is defined in Rule 144 promulgated under the Securities Act,
which shares will remain subject to the resale limitations of Rule 144.
The shares of our class B common stock that will be held by Viacom
after this offering constitute "restricted securities" within the meaning of
Rule 144, and will be eligible for sale by Viacom in the open market after this
offering, subject to some contractual lockup provisions and the applicable
requirements of Rule 144, both of which are described below. We have granted
some registration rights to Viacom. We refer you to "Related Party Transactions
- -- Agreements Between Viacom and Us -- Registration Rights Agreement."
Generally, Rule 144 provides that a person who has beneficially owned
"restricted securities" for at least one year is entitled to sell on the open
market in brokers' transactions within any three month period a number of shares
that does not exceed the greater of:
- 1% of the then outstanding shares of the common stock; and
- the average weekly trading volume in the common stock on the open market
during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to some post-sale notice requirements and
the availability of current public information concerning us.
In the event that any person is deemed to be our affiliate, and such
affiliate purchases shares of our class A common stock pursuant to this offering
or acquires shares of our class A common stock pursuant to our employee benefit
plan, the shares held by such person are required under Rule 144 to be sold in
brokers' transactions, subject to the volume limitations described above. Shares
properly sold in reliance upon Rule 144 to persons who are not affiliates are
thereafter freely tradable without restriction.
Sales of substantial amounts of our common stock in the open market, or the
availability of such shares for sale, could adversely affect the price of our
common stock. Viacom has advised us that it intends to offer its common stock in
a tax-free split-off expected to be completed within 12 months from the date a
favorable tax ruling is received from the Internal Revenue Service. We refer you
to "Summary -- Separation from Viacom," "Separation from Viacom" and "Risk
Factors -- Risk Factors Relating to the Securities Market and Ownership of Our
Stock -- We Cannot Predict the Effect that the Split-off Will Have on the Price
of Our Common Stock; The Price of Our Common Stock Could Be Adversely Affected
by Sales of Substantial Amounts of Our Common Stock in the Public Market." Any
shares distributed by Viacom will be eligible for immediate resale to the public
market without restrictions by persons other our affiliates. Our affiliates
would be subject to the restrictions of Rule 144 described above other than the
one-year holding period requirement.
We and our officers and directors and Viacom and its officers and directors
have agreed that, for a period of 180 days from the date of this prospectus, we
and our officers and directors and Viacom and its officers and directors will
not, without the prior written consent of Salomon Smith Barney Inc. and Salomon
Brothers International Limited, dispose of or hedge any shares of our class A
common stock or any securities convertible into or exchangeable for class A
common stock. Salomon Smith Barney Inc. and Salomon Brothers International
Limited in their sole discretion may release any of the securities subject to
these lock-up agreements at any time without notice. This offering is
specifically exempted from this agreement. We refer you to "Underwriting."
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<PAGE>
MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a discussion of the material United States federal income
and estate tax consequences of the ownership and disposition of the class A
common stock applicable to Non-United States Holders of such class A common
stock. For the purpose of this discussion, a "Non-United States Holder" is any
holder that for United States federal income tax purposes is not a "United
States person," as defined below. This discussion does not address all aspects
of United States federal income and estate taxation that may be relevant in
light of such Non-United States Holder's particular facts and circumstances,
such as being a U.S. expatriate, and does not address any tax consequences
arising under the laws of any state, local or non-United States taxing
jurisdiction. Furthermore, the following discussion is based on current
provisions of the Internal Revenue Code of 1986, as amended, and administrative
and judicial interpretations thereof, all as in effect on the date hereof, and
all of which are subject to change, possibly with retroactive effect. We have
not and will not seek a ruling from the Internal Revenue Service with respect to
the United States federal income and estate tax consequences described below,
and as a result, there can be no assurance that the Internal Revenue Service
will not disagree with or challenge any of the conclusions set forth in this
discussion. For purposes of this discussion, the term "United States person"
means:
(1) a citizen or resident of the United States;
(2) a corporation, partnership, or other entity created or organized in the
United States or under the laws of the United States or of any political
subdivision thereof;
(3) an estate whose income is included in gross income for United States
federal income tax purposes regardless of its source; or
(4) a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States persons who
have the authority to control all substantial decisions of the trust.
DIVIDENDS
If we pay a dividend, any dividend paid to a Non-United States Holder of
class A common stock generally will be subject to United States withholding tax
either at a rate of 30% of the gross amount of the dividend or such lower rate
as may be specified by an applicable tax treaty. Dividends received by a
Non-United States Holder which are effectively connected with a United States
trade or business conducted by such Non-United States Holder are exempt from
such withholding tax. However, such effectively connected dividends, net of some
types of deductions and credits, are taxed at the same graduated rates
applicable to United States persons.
In addition to the graduated tax described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a United
States trade or business of the corporate Non-United States Holder may also be
subject to a branch profits tax at a rate of 30% or such lower rate as may be
specified by an applicable tax treaty.
A Non-United States Holder of class A common stock that is eligible for a
reduced rate of withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate claim for refund
with the Internal Revenue Service.
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<PAGE>
GAIN ON DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
his class A common stock unless:
(1) such gain is effectively connected with a United States trade or
business of the Non-United States Holder, which gain, in the case of a
corporate Non-United States Holder, must also be taken into account for
branch profits tax purposes;
(2) the Non-United States Holder is an individual who holds such class A
common stock as a capital asset within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended, and who is present in the
United States for a period or periods aggregating 183 days or more during
the calendar year in which such sale or disposition occurs and some other
conditions are met; or
(3) we are or have been a "United States real property holding corporation"
for federal income tax purposes at any time within the shorter of the
five-year period preceding such disposition or such holder's holding
period.
We have determined that we are not and do not believe that we will become a
"United States real property holding corporation" for United States federal
income tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, we must report annually to the Internal Revenue Service the
amount of dividends paid, the name and address of the recipient, and the amount,
if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax
treaties or other agreements, the Internal Revenue Service may make its reports
available to tax authorities in the recipient's country of residence.
Dividends paid to a Non-United States Holder at an address within the United
States may be subject to backup withholding at a rate of 31% if the Non-United
States Holder fails to establish that it is entitled to an exemption or to
provide a correct taxpayer identification number and other information to the
payer. Backup withholding will generally not apply to dividends paid to
Non-United States Holders at an address outside the United States on or prior to
December 31, 2000 unless the payer has knowledge that the payee is a United
States person. Under recently finalized Treasury Regulations regarding
withholding and information reporting (we refer to these regulations as the "New
Regulations"), payment of dividends to Non-United States Holders at an address
outside the United States after December 31, 2000 may be subject to backup
withholding at a rate of 31% unless such non-United States Holder satisfies
certification requirements.
The payment of the proceeds of the disposition of class A common stock to or
through the United States office of a broker is subject to information reporting
and backup withholding at a rate of 31% unless the holder certifies its
non-United States status under penalties of perjury or otherwise establishes an
exemption. Generally, the payment of the proceeds of the disposition by a
Non-United States Holder of class A common stock outside the United States to or
through a foreign office of a broker will not be subject to backup withholding
but will be subject to information reporting requirements if the broker is:
(1) a United States person;
(2) a "controlled foreign corporation" for United States tax purposes; or
(3) a foreign person 50% or more of whose gross income for specified periods
is from the conduct of a United States trade or business unless such
broker has documentary evidence in its files of the holder's non-United
States status and some conditions are met or the holder otherwise
establishes an exemption.
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Under the New Regulations backup withholding may apply to any payment made after
December 31, 2000 which the broker is required to report if such broker has
actual knowledge that the payee is a United States person.
In general, the New Regulations, do not significantly alter the substantive
withholding and information reporting requirements but would alter the
procedures for claiming benefits of an income tax treaty and change the
certification procedures relating to the receipt by intermediaries of payments
on behalf of the beneficial owner of shares of class A common stock. Non-United
States Holders should consult their tax advisors regarding the effect, if any,
of the New Regulations on an investment in the class A common stock. The New
Regulations are generally effective for payments made after December 31, 2000.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.
ESTATE TAX
An individual Non-United States Holder who owns class A common stock at the
time of his death or had made some types of lifetime transfers of an interest in
class A common stock will be required to include the value of such class A
common stock in such holder's gross estate for United States federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
THE FOREGOING DISCUSSION IS A SUMMARY OF THE PRINCIPAL FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF CLASS A
COMMON STOCK BY NON-UNITED STATES HOLDERS. ACCORDINGLY, INVESTORS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE INCOME TAX CONSEQUENCES OF
THE OWNERSHIP AND DISPOSITION OF CLASS A COMMON STOCK, INCLUDING THE APPLICATION
AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING
JURISDICTION.
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UNDERWRITING
We intend to offer our class A common stock in the United States and Canada
through a number of U.S. underwriters as well as outside the United States and
Canada through a number of international managers. Salomon Smith Barney Inc. and
Bear, Stearns & Co. Inc. are acting as U.S. representatives of each of the U.S.
underwriters named below. Salomon Brothers International Limited and Bear,
Stearns International Limited are acting as International Representatives of
each of the international managers named below. Subject to the terms and
conditions stated in a U.S. underwriting agreement dated the date hereof between
us and each of the U.S. underwriters, and an international underwriting
agreement dated the date hereof between us and each of the international
managers, each U.S. underwriter and each international manager named below has
severally agreed to purchase, and we have agreed to sell to such U.S.
underwriter and such international manager, the number of shares set forth
opposite the name of such U.S. underwriter and such international manager.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER SHARES
- ---------------------------------------------------------------------------------- -----------
<S> <C>
Salomon Smith Barney Inc..........................................................
Bear, Stearns & Co. Inc...........................................................
Credit Suisse First Boston Corporation............................................
Goldman, Sachs & Co...............................................................
J.P. Morgan Securities Inc........................................................
Banc of America Securities LLC....................................................
ING Baring Furman Selz LLC........................................................
PaineWebber Incorporated..........................................................
Schroder & Co. Inc................................................................
SG Cowen Securities Corporation...................................................
Wit Capital Corporation...........................................................
-----------
Subtotal......................................................................
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGER SHARES
- ---------------------------------------------------------------------------------- -----------
<S> <C>
Salomon Brothers International Limited............................................
Bear, Stearns International Limited...............................................
Credit Suisse First Boston (Europe) Limited.......................................
Goldman Sachs International.......................................................
J.P. Morgan Securities Ltd........................................................
Bank of America International Limited.............................................
ING Barings Limited, as agent for ING Bank N.V.,
London Branch...................................................................
PaineWebber International (U.K.) Ltd..............................................
J. Henry Schroder & Co. Limited...................................................
SG Cowen International L.P........................................................
-----------
Subtotal......................................................................
Total.........................................................................
-----------
-----------
</TABLE>
The U.S. underwriters and the international managers are collectively
referred to as the underwriters. Representatives refers to the U.S.
representatives and the international representatives collectively. The initial
public offering price per share and the total underwriting discounts and
commissions per share of class A common stock are identical under the U.S.
underwriting agreement and the international underwriting agreement.
The U.S. underwriting agreement and the international underwriting agreement
each provide that the obligations of the several underwriters to purchase the
shares included in this offering are subject to approval of some legal matters
by counsel and to some other conditions set forth in those
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agreements. The several underwriters are obligated to purchase all the shares,
other than those covered by the over-allotment options described below, if they
purchase any of the shares. Under some circumstances, under the U.S.
underwriting agreement and the international underwriting agreement, the
commitments of non-defaulting underwriters may be increased. The closings with
respect to the sale of shares of class A common stock to be purchased by the
U.S. underwriters and the international managers are conditioned upon one
another. The underwriters reserve the right to withdraw, cancel or modify such
offer and to reject orders in whole or in part.
The underwriters propose to offer some of the shares directly to the public
at the initial public offering price set forth on the cover page of this
prospectus and some of the shares to some dealers at the initial public offering
price less a concession not in excess of $ per share. The underwriters
may allow, and such dealers may reallow, a concession not in excess of
$ per share on sales to some other dealers. If all of the shares are
not sold at the initial offering price, the representatives may change the
public offering price and the other selling terms. The representatives have
advised us that the underwriters do not intend to confirm any sales to any
accounts over which they exercise discretionary authority.
We have granted to the U.S. underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to additional shares of our
class A common stock at the public offering price less the underwriting
discounts and commissions. The U.S. underwriters may exercise such option solely
for the purpose of covering over-allotments, if any, in connection with this
offering. To the extent such option is exercised, each U.S. underwriter will be
obligated, subject to some conditions, to purchase a number of additional shares
about proportionate to such U.S. underwriter's initial purchase commitment.
We also have granted to the international managers an option, exercisable
for 30 days from the date of this prospectus, to purchase up to additional
shares of our class A common stock to cover over-allotments, if any, on terms
similar to those granted to the U.S. underwriters.
At our request, certain of the underwriters have reserved up to % of the
shares of class A common stock for sale at the initial public offering price to
persons who are directors, officers or employees of us, or who are otherwise
associated with us and our affiliates, and who have advised us of their desire
to purchase these shares through a directed share program. The number of shares
of class A common stock available for sale to the general public will be reduced
to the extent of sales of shares under the directed share program to any of the
persons for whom they have been reserved. Any shares not so purchased will be
offered by the underwriters on the same basis as all other shares of class A
common stock offered in the offering. We have agreed to indemnify those certain
underwriters against certain liabilities and expenses, including liabilities
under the Securities Act of 1933 in connection with the sales of shares under
the directed share program.
We and our officers and directors and Viacom and its officers and directors
have agreed that, for a period of 180 days from the date of this prospectus, we
and our officers and directors and Viacom and its officers and directors will
not, without the prior written consent of Salomon Smith Barney Inc. and Salomon
Brothers International Limited, dispose of or hedge any shares of our class A
common stock or any securities convertible into or exchangeable for class A
common stock. Salomon Smith Barney Inc. and Salomon Brothers International
Limited in their sole discretion may release any of the securities subject to
these lock-up agreements at any time without notice.
Prior to this offering, there has been no public market for the class A
common stock. Consequently, the initial public offering price for the shares was
determined by negotiations between us and Viacom, on the one hand, and the U.S.
representatives and the international representatives, on the other. Among the
factors considered in determining the initial public offering price were our
results of operations, our current financial condition, our future prospects,
our markets, the economic conditions in and future prospects for the industry in
which we compete, our management, and
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currently prevailing general conditions in the equity securities markets,
including current market valuations of publicly traded companies considered
comparable to Blockbuster. We cannot assure you, however, that the prices at
which the shares will sell in the public market after this offering will not be
lower than the price at which they are sold by the underwriters or that an
active trading market in the class A common stock will develop and continue
after this offering.
The following table shows the underwriting discounts and commissions to be
paid to the U.S. underwriters and the international managers by us in connection
with this offering. These amounts are shown assuming both no exercise and full
exercise of the underwriters' options to purchase additional shares of class A
common stock.
<TABLE>
<CAPTION>
PAID BY BLOCKBUSTER
--------------------------
<S> <C> <C>
NO EXERCISE FULL EXERCISE
----------- -------------
Per share......................................................... $ $
Total............................................................. $ $
----------- -------------
----------- -------------
</TABLE>
The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the terms of the intersyndicate agreement, the U.S. underwriters and the
international managers are permitted to sell shares of our class A common stock
to each other for purposes of resale at the initial public offering price, less
an amount not greater than the selling concession. Under the terms of the
intersyndicate agreement, the U.S. underwriters and any dealer to whom they sell
shares of our class A common stock will not offer to sell or sell shares of our
class A common stock to persons who are non-U.S. or non-Canadian persons, and
the international managers and any dealer to whom they sell shares of our class
A common stock will not offer to sell or sell shares of our class A common stock
to U.S. persons or to Canadian persons or to persons they believe intend to
resell to U.S. or Canadian persons, except in the case of transactions under the
terms of the intersyndicate agreement.
Each underwriter has agreed that (1) it has not offered or sold and will not
offer or sell any shares of class A common stock to persons in the United
Kingdom except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments, as principal or agent, for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995 or the
Financial Services Act 1986, (2) it has complied, and will comply, with all
applicable provisions of the Financial Services Act 1986 of Great Britain with
respect to anything done by it in relation to the shares of class A common stock
in, from or otherwise involving the United Kingdom, and (3) it has only issued
or passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issuance of the shares of class A common
stock, other than any document required or permitted to be published by listing
rules under Part IV of the Financial Services Act 1986, to a person who is of a
kind described in Article 11(3) of the Financial Services Act of 1986
(Investment Advertisements) (Exemptions) Order 1996 of Great Britain or is a
person to whom the document may otherwise lawfully be issued or passed on.
The shares of class A common stock have not been and will not be qualified
for sale in Canada or any of its provinces or territories and may not be offered
or sold directly or indirectly in any province or territory of Canada except
pursuant to an exemption from the applicable prospectus filing requirements, and
otherwise in compliance with the applicable securities laws and regulations of
the relevant province or territory.
In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may over-allot, or engage in syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of class A common stock in excess of the number of shares to be purchased
by the underwriters in the offering, which creates a syndicate short position.
Syndicate
109
<PAGE>
covering transactions involve purchases of the class A common stock in the open
market after the distribution has been completed in order to cover syndicate
short positions. Stabilizing transactions consist of bids or purchases of class
A common stock made for the purpose of preventing or retarding a decline in the
market price of the class A common stock while the offering is in progress.
Penalty bids permit the underwriters to reclaim a selling concession from a
syndicate member when Salomon Smith Barney Inc., in covering syndicate short
positions or making stabilizing purchases, repurchases shares originally sold by
that syndicate member. These activities may cause the price of the class A
common stock to be higher than the price that otherwise would exist in the open
market in the absence of such transactions. These transactions may be effected
on the New York Stock Exchange or in the over-the-counter market, or otherwise
and, if commenced, may be discontinued at any time.
We estimate that the expenses of this offering, exclusive of the
underwriting discounts and commissions, payable by it will be $ .
The U.S. representatives and some of the underwriters or their affiliates
have performed some investment banking and advisory services for us, Viacom and
each of our affiliates from time to time for which they have received customary
fees and expenses. The U.S. representatives and underwriters may, from time to
time, engage in transactions with and perform services for us, Viacom and each
of our affiliates in the ordinary course of their business. In particular,
Citibank N.A., an affiliate of each of Salomon Smith Barney Inc. and Salomon
Brothers International Limited, is the lead arranger on our new credit agreement
and will receive in excess of 10% of the net proceeds of this offering.
Accordingly, this offering will be conducted in accordance with Rule 2710(c)(8)
of the National Association of Securities Dealers, Inc. which requires that the
public offering price of an equity security be no higher than the price
recommended by a "qualified independent underwriter" which has participated in
the preparation of the registration statement and performed its usual standard
of due diligence. Bear, Stearns & Co. Inc. has agreed to act as "qualified
independent underwriter" for this offering and the public offering price of the
class A common stock will be no higher than the price recommended by Bear,
Stearns & Co. Inc. We refer you to "Description of Credit Agreement" and "Use of
Proceeds."
We have agreed to indemnify the U.S. underwriters and the international
managers against some types of liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments the U.S. underwriters or
the international managers may be required to make in respect of any of those
liabilities.
110
<PAGE>
LEGAL MATTERS
Some legal matters with respect to the validity of the shares of common
stock offered hereby will be passed upon for us by Shearman & Sterling, and for
the underwriters by Hughes Hubbard & Reed LLP. Hughes Hubbard & Reed LLP has
provided legal services to us, Viacom and our respective affiliates, from time
to time, for which they have received customary fees and expenses.
EXPERTS
Our financial statements as of December 31, 1997 and 1998 and for each of
the three years in the period ended December 31, 1998 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given upon their authority
as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement, as amended, on Form S-1
under the Securities Act with respect to the class A common stock offered
hereby. This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules thereto. Some items are
omitted in accordance with the rules and regulations of the SEC. For further
information about us and our class A common stock, reference is made to the
registration statement and the exhibits and any schedules filed therewith.
Statements contained in this prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance, if
such contract or document is filed as an exhibit, reference is made to the copy
of such contract or other documents filed as an exhibit to the registration
statement, each statement being qualified in all respects by such reference. A
copy of the registration statement, including the exhibits and schedules
thereto, may be read and copied at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices at Seven
World Trade Center, New York, New York 10048 and 500 West Madison Street,
Chicago, Illinois 60661. Information on the operation of the Public Reference
Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site at http://www.sec.gov, from which interested persons
can electronically access the registration statement, including the exhibits and
any schedules thereto.
As a result of this offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934, as amended.
We will fulfill our obligations with respect to such requirements by filing
periodic reports and other information with the SEC. We intend to furnish our
stockholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm. We also maintain our U.S.
Internet site at http://WWW.BLOCKBUSTER.COM. Our U.S. Internet site and the
information contained therein or connected thereto shall not be deemed to be
incorporated into this prospectus or the registration statement of which it
forms a part.
111
<PAGE>
BLOCKBUSTER INC.
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
AUDITED COMBINED FINANCIAL STATEMENTS:
Report of Independent Accountants............................................... F-2
Combined Statements of Operations--Years Ended December 31, 1996, 1997 and
1998.......................................................................... F-3
Combined Balance Sheets--at December 31, 1997 and 1998.......................... F-4
Combined Statements of Changes in Stockholder's Equity--Years Ended December 31,
1996, 1997 and 1998........................................................... F-5
Combined Statements of Cash Flows--Years Ended December 31, 1996, 1997 and
1998.......................................................................... F-6
Notes to Combined Financial Statements.......................................... F-7
INTERIM COMBINED FINANCIAL STATEMENTS (UNAUDITED):
Interim Combined Statements of Operations (Unaudited) for the Three Months Ended
March 31, 1998 and 1999....................................................... F-27
Interim Combined Balance Sheets--at December 31, 1998 and March 31, 1999
(Unaudited)................................................................... F-28
Interim Combined Statements of Cash Flows (Unaudited)--for the Three Months
Ended March 31, 1998 and 1999................................................. F-29
Notes to Interim Combined Financial Statements (Unaudited)...................... F-30
</TABLE>
Some supplementary financial statement schedules have been omitted
because the information required to be set forth therein is either not
applicable
or is shown in the financial statements or notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Viacom Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of changes in stockholder's equity, and of
cash flows present fairly, in all material respects, the financial position of
Blockbuster Inc. at December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Dallas, Texas
May 4, 1999
F-2
<PAGE>
BLOCKBUSTER INC.
COMBINED STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
REVENUES:
Rental revenues.............................................................. $ 2,386.9 $ 2,664.0 $ 3,219.6
Merchandise sales............................................................ 491.3 594.0 618.0
Other revenues............................................................... 63.9 55.6 55.8
--------- --------- ---------
2,942.1 3,313.6 3,893.4
--------- --------- ---------
COST OF SALES:
Cost of rental revenues...................................................... 617.2 810.6 1,460.9
Cost of merchandise sold..................................................... 396.5 549.9 495.5
--------- --------- ---------
1,013.7 1,360.5 1,956.4
--------- --------- ---------
Gross profit................................................................. 1,928.4 1,953.1 1,937.0
OPERATING EXPENSES:
General and administrative................................................... 1,163.6 1,605.7 1,732.3
Advertising.................................................................. 115.3 139.5 181.0
Depreciation................................................................. 165.5 253.8 212.7
Amortization of intangibles.................................................. 166.2 168.7 170.2
Restructuring charge......................................................... 50.2 -- --
--------- --------- ---------
1,660.8 2,167.7 2,296.2
--------- --------- ---------
Operating income (loss)........................................................ 267.6 (214.6) (359.2)
Interest expense............................................................. (22.0) (30.8) (27.7)
Interest income.............................................................. 3.6 3.7 4.0
Other items, net............................................................. -- (27.6) (11.8)
--------- --------- ---------
Income (loss) before income taxes.............................................. 249.2 (269.3) (394.7)
Benefit (provision) for income taxes......................................... (167.4) (30.0) 59.4
Equity in loss of affiliated companies, net of tax........................... (4.0) (18.9) (1.3)
--------- --------- ---------
Net income (loss).............................................................. $ 77.8 $ (318.2) $ (336.6)
--------- --------- ---------
--------- --------- ---------
UNAUDITED PRO FORMA EARNINGS (LOSS) PER SHARE:
Basic and diluted............................................................ $ --
---------
---------
UNAUDITED PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted............................................................ --
---------
---------
</TABLE>
See notes to combined financial statements.
F-3
<PAGE>
BLOCKBUSTER INC.
COMBINED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 129.6 $ 99.0
Receivables, less allowances of $22.3 (1997) and $22.7 (1998)............................ 114.8 124.8
Merchandise inventories.................................................................. 281.3 277.4
Deferred income taxes.................................................................... 6.7 --
Prepaid assets........................................................................... 95.5 130.5
--------- ---------
Total current assets................................................................... 627.9 631.7
Rental library, net........................................................................ 734.5 441.2
Deferred income taxes...................................................................... 31.3 92.5
Property and equipment, net................................................................ 1,085.2 995.3
Intangibles, net........................................................................... 6,192.7 6,055.6
Other assets............................................................................... 59.4 58.5
--------- ---------
$ 8,731.0 $ 8,274.8
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable......................................................................... $ 362.4 $ 448.6
Accrued expenses......................................................................... 267.0 361.8
Current portion of capital lease obligations............................................. 36.7 22.2
Deferred income taxes.................................................................... -- 13.6
Short-term borrowings.................................................................... 47.0 --
--------- ---------
Total current liabilities.............................................................. 713.1 846.2
Notes payable to Viacom.................................................................... 175.8 1,576.4
Capital lease obligations, less current portion............................................ 155.5 138.8
Other liabilities.......................................................................... 69.0 75.5
--------- ---------
1,113.4 2,636.9
--------- ---------
Commitments and contingencies (Note 12)
Stockholder's equity:
Viacom's net equity investment........................................................... 7,666.5 5,695.8
Accumulated other comprehensive loss--foreign currency
translation adjustment................................................................. (48.9) (57.9)
--------- ---------
Total stockholder's equity............................................................. 7,617.6 5,637.9
--------- ---------
$ 8,731.0 $ 8,274.8
--------- ---------
--------- ---------
</TABLE>
See notes to combined financial statements.
F-4
<PAGE>
BLOCKBUSTER INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
ACCUMULATED
VIACOM'S OTHER TOTAL
NET EQUITY COMPREHENSIVE COMPREHENSIVE STOCKHOLDER'S
INVESTMENT INCOME (LOSS) INCOME (LOSS) EQUITY
---------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996.................................. $ 7,754.1 $ (16.9) $ 7,737.2
Comprehensive income
Net income................................................ 77.8 $ 77.8 77.8
Other comprehensive income (loss):
Cumulative translation adjustment....................... 9.8 9.8 9.8
-------
Total comprehensive income............................ $ 87.6
-------
-------
Net contribution to Viacom.................................. (40.4) (40.4)
---------- ------- -------------
BALANCE AT DECEMBER 31, 1996................................ 7,791.5 (7.1) 7,784.4
Comprehensive income
Net loss.................................................. (318.2) $ (318.2) (318.2)
Other comprehensive income (loss):
Cumulative translation adjustment....................... (38.6) (38.6) (38.6)
Reclassification of foreign currency translation gain
realized.............................................. (3.2) (3.2) (3.2)
-------
Total comprehensive loss.............................. $ (360.0)
-------
-------
Net receipt from Viacom..................................... 193.2 193.2
---------- ------- -------------
BALANCE AT DECEMBER 31, 1997................................ 7,666.5 (48.9) 7,617.6
Comprehensive income
Net loss.................................................. (336.6) $ (336.6) (336.6)
Other comprehensive income (loss):
Cumulative translation adjustment....................... (9.0) (9.0) (9.0)
-------
Total comprehensive loss.............................. $ (345.6)
-------
-------
Dividend payable to Viacom.................................. (1,400.0) (1,400.0)
Net contribution to Viacom.................................. (234.1) (234.1)
---------- ------- -------------
BALANCE AT DECEMBER 31, 1998................................ $ 5,695.8 $ (57.9) $ 5,637.9
---------- ------- -------------
---------- ------- -------------
</TABLE>
See notes to combined financial statements.
F-5
<PAGE>
BLOCKBUSTER INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................. $ 77.8 $ (318.2) $ (336.6)
Adjustments to reconcile net income (loss) to net cash flow provided by
operating activities:
Depreciation and amortization............................................... 948.9 1,222.4 1,518.8
Deferred income taxes....................................................... 26.7 121.5 (8.1)
Write-down of investments................................................... -- 27.1 10.5
Restructuring charge........................................................ 50.2 -- --
Equity in loss of affiliated companies, net of tax.......................... 4.0 18.9 1.3
Other....................................................................... -- (0.3) --
Change in operating assets and liabilities:
Increase in receivables..................................................... (39.5) (7.8) (10.9)
Increase in merchandise inventories......................................... (73.1) (51.4) (0.4)
Increase in prepaid and other assets........................................ (20.3) (15.6) (40.0)
Increase (decrease) in accounts payable..................................... 49.0 (41.4) 67.9
Increase (decrease) in accrued expenses and other liabilities............... (38.7) 36.1 32.0
--------- --------- ---------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES................................. 985.0 991.3 1,234.5
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Rental library purchases...................................................... (751.5) (860.2) (818.1)
Capital expenditures.......................................................... (323.7) (262.2) (175.0)
Cash used for acquisitions.................................................... (154.4) (79.0) (34.2)
Proceeds from sale of property and equipment.................................. -- 19.1 0.3
Investments in affiliated companies........................................... (5.5) (5.8) 4.8
--------- --------- ---------
NET CASH FLOW USED IN INVESTING ACTIVITIES...................................... (1,235.1) (1,188.1) (1,022.2)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on (repayments of) credit facility............................. 25.8 22.3 (46.6)
Proceeds from term loan....................................................... -- -- 46.6
Net borrowings from notes due to Viacom....................................... 69.7 106.1 0.6
Capital lease payments........................................................ (24.9) (33.2) (34.8)
Advances from (repayments to) Viacom, net..................................... 138.2 174.1 (206.9)
--------- --------- ---------
NET CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES........................ 208.8 269.3 (241.1)
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH......................................... (0.4) (1.5) (1.8)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................ (41.7) 71.0 (30.6)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................................. 100.3 58.6 129.6
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR........................................ $ 58.6 $ 129.6 $ 99.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to combined financial statements.
F-6
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(TABULAR DOLLARS IN MILLIONS)
NOTE 1--DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The business and operations of Blockbuster Inc. (collectively, the "Company"
or "Blockbuster") consists of various wholly owned entities owned directly or
indirectly by Viacom International Inc. which is a wholly owned subsidiary of
Viacom Inc. ("Viacom"). During 1998, Viacom announced its intention that
Blockbuster would offer in an initial public offering a portion of its common
stock. This initial public offering is Viacom's first step in the planned
divestiture of Blockbuster Inc. The Company owns, operates and franchises
videocassette rental and sales stores in the United States and a number of
foreign countries. The Company offers pre-recorded videocassettes primarily for
rental and also offers titles for purchase on a "sell-through" (retail) basis.
In addition, the Company offers video games for rental and sale and sells
certain other entertainment-related merchandise.
The Company's business and operations were originally conducted by
Blockbuster Entertainment Corporation which was incorporated in Delaware in 1982
and entered the movie rental business in 1985. On September 29, 1994,
Blockbuster Entertainment Corporation was merged with and into Viacom. Since the
merger and during the period covered by the accompanying combined financial
statements, operations of the Company were conducted by various subsidiaries of
Viacom. Viacom's acquisition of the Company in 1994 was accounted for as a
purchase, and accordingly, its basis in the acquired assets and liabilities has
been pushed down to Blockbuster. Viacom's initial investment and all subsequent
cash advances, with the exception of cash advanced to fund the Company's
international operations, have been classified as contributed capital and no
interest expense or income has been allocated to the Company in the accompanying
combined financial statements.
As a part of the Reorganization Transactions (see discussion below), the
Company will purchase stock or assets from affiliates of Viacom with cash funded
by the bank credit agreement or contributed by Viacom in order to acquire
certain international operations of the Company. Advances from Viacom to
Blockbuster to fund these operations have been treated as intercompany notes in
the accompanying combined financial statements. Any difference between the
recorded intercompany notes payable to Viacom and the ultimate amount of the
purchase price for the stock or assets of these operations will be recognized as
an adjustment to Stockholders' Equity.
Prior to the Company's initial public offering (the "Offering") the
following transactions have been or will be completed: (1) in late 1998 numerous
U.S. subsidiaries of Viacom International Inc., a wholly-owned subsidiary of
Viacom, each of which were directly or indirectly involved in the Company's
operations, were merged with and into the Company, (2) on December 31, 1998 the
Company declared a $1.4 billion dividend payable to Viacom International Inc.
which has been reflected as an interest-bearing note in the accompanying
combined balance sheet, (3) the Company will purchase certain international
operations of the Company from affiliates of Viacom, (4) the Company will enter
into a term and revolving credit agreement with a syndicate of lenders which
will be used to fund debt owed to Viacom and to pay a portion of the purchase
price to acquire certain international operations from affiliates of Viacom, and
(5) the Company will be recapitalized with Class A common stock and Class B
common stock. These transactions are collectively referred to as the
Reorganization Transactions.
The Company expects to offer Class A common stock in the Offering.
Immediately following the Offering, Viacom will own none of the outstanding
shares of the Class A common stock and 100% of the outstanding shares of the
Class B common stock, which will represent no less than 80% of the combined
voting interest of the Company's then outstanding common stock. Viacom has
expressed its current intention to achieve a complete separation between the
Company and itself through a
F-7
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 1--DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
subsequent stock split-off or other back-up distribution. Viacom has the sole
discretion to determine the timing and all terms of the split-off or other
backup distribution, and is under no obligation to effect such separation. There
can be no assurance as to whether or when such a separation will occur, or as to
the terms of such separation.
The accompanying combined financial statements are presented on a carve-out
basis and reflect the combined historical results of operations, financial
position and cash flows of the Company including entities currently owned by
Blockbuster or to be purchased from Viacom in the case of its international
operations. In this context, no direct ownership relationship existed among all
the various entities comprising Blockbuster; accordingly, Viacom and its
subsidiaries' net investment in Blockbuster is included in the Stockholder's
Equity in the combined financial statements.
For all periods presented, certain expenses reflected in the combined
financial statements include allocation of corporate expenses from Viacom (see
Note 10). All such costs and expenses have been deemed to have been paid by the
Company to Viacom in the period in which the costs were recorded. Allocations of
current income taxes receivable or payable are deemed to have been remitted, in
cash, by or to Viacom in the period the related income taxes were recorded.
Management believes that the foregoing allocations were made on a reasonable
basis; however, the allocations of costs and expenses do not necessarily
indicate the costs that would have been or will be incurred by the Company on a
stand-alone basis. Also, the financial statements may not necessarily reflect
the financial position, results of operations and cash flows of the Company in
the future or what the financial position, results of operations or cash flows
would have been if the Company had been a separate, stand-alone company during
the periods presented.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could subsequently differ from those estimates.
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of the Company and
investments of more than 50% in subsidiaries and other entities. Investments in
affiliated companies over which the Company has a significant influence or
ownership of more than 20% but less than or equal to 50% are accounted for under
the equity method. Investments of 20% or less are accounted for under the cost
method. All significant intercompany transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Cash equivalents are defined as short-term (original maturities of three
months or less) highly liquid investments.
F-8
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MERCHANDISE INVENTORIES
Merchandise inventories consist primarily of prerecorded videocassette
retail inventory, video games and confectionery items and is stated at the lower
of cost or market. Merchandise inventory costs are determined using the weighted
average method, the use of which approximates the first-in, first-out basis.
RENTAL LIBRARY, NET
Effective April 1, 1998, Blockbuster adopted an accelerated method of
amortizing videocassette and game rental library in order to more closely match
expenses in proportion with anticipated revenues from revenue sharing agreements
(see Note 3).
Rental library and related accumulated amortization at December 31, are as
follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Rental library......................................................... $ 1,742.8 $ 2,011.5
Less: accumulated amortization......................................... 1,008.3 1,570.3
--------- ---------
Rental library, net.................................................... $ 734.5 $ 441.2
--------- ---------
--------- ---------
</TABLE>
Rental amortization expense, excluding the charge (see Note 3), approximated
$617.2 million (1996), $799.9 million (1997) and $711.6 million (1998).
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation expense is computed
principally by the straight-line method over the estimated useful lives as
follows:
<TABLE>
<S> <C>
Building.................................... 25 to 31.5 years
Building improvements....................... 10 years
Leasehold improvements...................... 4 to 10 years
Equipment and other......................... 3 to 10 years
Furniture and fixtures...................... 3 to 10 years
</TABLE>
Balances of major classes of assets and accumulated depreciation at December
31, are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Land, building and building improvements............................... $ 64.6 $ 56.3
Leasehold improvements................................................. 563.2 637.7
Equipment and other.................................................... 347.6 386.2
Furniture and fixtures................................................. 308.7 294.0
Capital leases......................................................... 244.4 248.3
--------- ---------
Total................................................................ 1,528.5 1,622.5
Less: accumulated depreciation......................................... 443.3 627.2
--------- ---------
Property and equipment, net............................................ $ 1,085.2 $ 995.3
--------- ---------
--------- ---------
</TABLE>
Maintenance and repair costs are charged to expense as incurred.
Improvements that extend the useful life of the assets are capitalized.
Depreciation expense, including capital lease amortization, was
F-9
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
$165.5 million (1996), $253.8 million (1997) and $212.7 million (1998).
Depreciation expense related to capital leases was $31.7 million (1996), $30.6
million (1997) and $29.7 million (1998).
INTANGIBLES
Intangible assets at December 31, consist of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Goodwill............................................................... $ 6,721.5 $ 6,752.7
Trademarks............................................................. 11.7 11.8
--------- ---------
Total................................................................ 6,733.2 6,764.5
Less: accumulated amortization......................................... 540.5 708.9
--------- ---------
Intangibles, net....................................................... $ 6,192.7 $ 6,055.6
--------- ---------
--------- ---------
</TABLE>
The cost of acquired businesses in excess of the fair value of tangible
assets and liabilities acquired ("goodwill"), which principally relates to
Viacom's acquisition of the Company and the resulting pushdown of goodwill
associated with the transaction, is amortized using the straight-line method
over estimated useful lives not exceeding 40 years. Amortization expense related
to intangible assets was $166.2 million (1996), $168.7 million (1997) and $170.2
million (1998).
Trademarks are amortized on a straight-line basis over the estimated
remaining economic lives, not exceeding 40 years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1997 and 1998, the Company's carrying value of financial
instruments approximates fair value due to the short-term maturities of these
instruments or variable rates of interest. During 1996, 1997 and 1998, no
financial instruments were held or issued for trading purposes.
IMPAIRMENT OF LONG-LIVED ASSETS
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed Of." SFAS 121 requires that the Company
assess long-lived assets (primarily property, plant and equipment and goodwill)
for impairment whenever there is an indication that the carrying amount of the
assets may not be recoverable. Recoverability is determined by comparing the
forecasted undiscounted cash flows generated by these assets to the assets' net
carrying value. The amount of impairment loss, if any, will generally be
measured as the difference between the net book value of the assets and their
estimated fair value. Impairment review of long-lived assets associated with the
Company's stores is performed on a market by market basis.
ADVERTISING EXPENSES
Advertising costs are expensed the first time the advertising takes place.
GIFT CARD LIABILITY
Gift card liabilities are recorded at the time of sale with the costs of
designing, printing and distributing the cards recorded as expense as incurred.
The liability is relieved and revenue recognized upon redemption of the gift
cards at any Blockbuster video store.
F-10
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenues are generally recognized at the time of sale or rental. Rental
revenue includes sales of previously viewed videocassettes and previously played
video games.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The financial statements of the Company's foreign operations were prepared
in their respective local currencies and translated into U.S. dollars for
reporting purposes. The assets and liabilities are translated at exchange rates
in effect at the balance sheet date, while results of operations are translated
at average exchange rates for the respective periods. The cumulative effects of
exchange rate changes on net assets are included as a part of accumulated other
comprehensive loss in 1996, 1997 and 1998. Net foreign currency transaction
gains and losses were not significant for any of the years presented, except for
1997, in which the Company recognized a gain of approximately $8.0 million,
which is included in general and administrative expenses in the Combined
Statements of Operations.
HEDGING ACTIVITY
The Company has historically been considered in Viacom's overall risk
management strategy. As a part of this strategy, Viacom uses certain financial
instruments to reduce its exposure to adverse movements in foreign-exchange
rates. Viacom allocates to the Company the income and expense associated with
certain of these financial instruments used to hedge foreign currency movements.
Allocated net expense and the related notional amounts for these financial
instruments were immaterial in all years presented.
The Company is exposed to credit loss in the event of nonperformance by
counterparties to the financial instrument contracts. However, the Company does
not anticipate nonperformance by the other parties and no material loss would be
expected from their nonperformance.
CAPITALIZED SOFTWARE COSTS
The Company capitalizes qualifying costs related to developing or obtaining
internal-use software. Capitalization of costs begins after the conceptual
formulation stage has been completed. Capitalized costs are depreciated over the
estimated useful life of the software which ranges between three and five years.
Capitalized costs at December 31, 1997 and 1998 totaled $10.6 million and $11.1
million, net of accumulated depreciation of $7.0 million and $10.5 million,
respectively. In January 1998, the American Institute of Certified Public
Accountants (the "AICPA") issued Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").
SOP 98-1 becomes effective for all fiscal years beginning after December 15,
1998. The Company's policy falls within the guidelines of SOP 98-1.
START-UP COSTS
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 becomes effective for
all fiscal years beginning after December 15, 1998. The Company's policy falls
within the guidelines of SOP 98-5.
F-11
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income taxes are provided based on the liability method of accounting
pursuant to SFAS 109, "Accounting for Income Taxes" ("SFAS 109"). Deferred
income taxes are recorded to reflect the tax benefit and consequences of future
years' differences between the tax bases of assets and liabilities and their
financial reporting basis. The Company records a valuation allowance to reduce
deferred tax assets if it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
EARNINGS (LOSS) PER SHARE
The Company's historical capital structure is not indicative of its
prospective capital structure since no direct ownership relationship existed
among all the various units comprising Blockbuster. Accordingly, historical
earnings per share has not been presented in the combined financial statements.
Unaudited pro forma basic and diluted earnings per share includes the shares
of both Class A and Class B common shares assumed to be outstanding as of the
date of the Offering. Unaudited pro forma basic and diluted earnings per share
are the same since there are currently no Company options outstanding. Pro forma
basic and diluted earnings per share have been presented for the most recent
annual period.
COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998 the Company adopted SFAS 130, "Reporting
Comprehensive Income" ("SFAS 130"), effective for fiscal years beginning after
December 15, 1997. SFAS 130 establishes standards for reporting and display of
comprehensive income (loss) and its components in financial statements.
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It consists of net income (loss) and other
gains and losses affecting stockholder's equity that, under generally accepted
accounting principles, are excluded from net income, such as unrealized gains
and losses on investments available for sale, foreign currency translation gains
and losses and minimum pension liability. Currency translation is the only item
of other comprehensive income impacting the Company. There is no tax effect
associated with comprehensive income (loss) as the foreign currency translation
adjustments are associated with operations located in foreign jurisdictions with
operating losses.
SEGMENT INFORMATION AND PENSION DISCLOSURES
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), effective for fiscal years
beginning after December 15, 1997. SFAS 131 establishes revised standards for
public companies relating to the reporting of financial and descriptive
information about their operating segments in financial statements. In February
1998, the FASB issued SFAS 132, "Employer's Disclosures about Pensions and Other
Post Retirement Benefits" ("SFAS 132"), which is effective for fiscal years
beginning after December 15, 1997. SFAS 132 standardizes the disclosure
requirements for pension and other post retirement benefits and requires
additional information on benefit obligations and the fair value of plan assets.
Implementation of SFAS 131 and SFAS 132 have not had a material effect on the
financial statements as currently presented.
F-12
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This new accounting standard
will require that derivative instruments be measured at fair value and
recognized in the balance sheet as either assets or liabilities, as the case may
be. The treatment of changes in the fair value of a derivative (i.e., gains and
losses) will depend on its intended use and designation. Gains and losses on
derivatives designated as hedges against the cash flow effect of a forecasted
transaction will initially be reported as a component of comprehensive income
and, subsequently, reclassified into income when the forecasted transaction
affects income. Gains and losses on all other forms or derivatives will be
recognized in income in the period of change. The Company will adopt SFAS 133
effective January 1, 2001 and anticipates that its adoption will not have a
material effect on its financial statements.
NOTE 3--CHANGE IN ACCOUNTING METHOD FOR RENTAL LIBRARY
Effective April 1, 1998, Blockbuster adopted an accelerated method of
amortizing videocassette and game rental library. Blockbuster has adopted this
new method of amortization because it has implemented a new business model,
including revenue sharing agreements with Hollywood studios, which has
dramatically increased the number of videocassettes in the stores and is
satisfying consumer demand over a shorter period of time. Revenue sharing allows
Blockbuster to purchase videocassettes at a lower product cost than the
traditional buying arrangements, with a percentage of the net rental revenues
shared with the studios over a contractually determined period of time. As the
new business model results in a greater proportion of rental revenue over a
shorter period of time, Blockbuster has changed its method of amortizing rental
library in order to more closely match expenses in proportion with the
anticipated revenues to be generated therefrom.
Pursuant to the new accounting method, the Company records base stock
videocassettes (generally less than five copies per title for each store) at
cost and amortizes a portion of these costs on an accelerated basis over three
months, generally to $8 per unit, with the remaining base stock videocassette
cost amortized on a straight-line basis over 33 months to an estimated $4
salvage value. The cost of non-base stock videocassettes (generally greater than
four copies per title for each store) are amortized on an accelerated basis over
three months to an estimated $4 salvage value. Video games are amortized on an
accelerated basis over a 12 month period to an estimated $10 salvage value.
Revenue sharing payments are expensed when revenues are earned pursuant to the
applicable contractual arrangements.
The new method of accounting has been applied to rental library that was
held at April 1, 1998. The adoption of the new method of amortization has been
accounted for as a change in accounting estimate effected by a change in
accounting principle and, accordingly, the Company recorded a non-cash pre-tax
charge of $424.3 million to cost of rental revenues. The charge represents an
adjustment to the carrying value of the rental tapes due to the new method of
accounting.
F-13
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
The Company believes that the new amortization method developed for
Blockbuster's new business model will result in a better matching of revenue and
expense recognition. Under the new model, cost of sales attributable to
videocassettes is comprised of revenue sharing payments, which are expensed when
the related revenue is recognized, amortization of product costs and residual
values of previously viewed tapes and games upon sale.
Prior to April 1, 1998 videocassette rental library was recorded at cost and
amortized over its estimated economic life. Base stock videocassettes (generally
1 to 4 copies per title for each store) were amortized over 36 months on a
straight-line basis. Non-base stock videocassettes (generally the fifth and
succeeding copies per title for each store) were amortized over six months on a
straight-line basis. Video game library was amortized on a straight-line basis
over a period of 12 to 24 months.
NOTE 4--SPECIAL ITEM CHARGES AND RESTRUCTURING
During the second quarter of 1997, the Company shifted its strategic
emphasis from retailing a broad assortment of merchandise to focusing on its
core rental business. Rationalization of the retail product lines such as sell
through video, confectionery items, literature, music and fashion merchandise
allowed the Company to devote more management time and attention, as well as
retail floor selling space, to its rental video and game business. In addition,
as part of its efforts to improve the performance of its operations, the Company
adopted a plan to close consistently underperforming stores primarily located in
the United States, United Kingdom and Australia and to exit the German market.
The Company also recognized a charge associated with its joint venture
operations in Japan.
As a result, the Company recorded a pre-tax charge of approximately $250
million (the "Charge"). The Charge consisted principally of $100.8 million
recognized as cost of merchandise sold for a reduction in the carrying value of
excess merchandise inventories, $69.6 million for the reorganizing of operations
and closing of underperforming stores and $39.3 million recognized as general
and administrative expenses, primarily related to additional relocation costs
incurred in connection with the move of the Company's employees, corporate
offices and data center from Fort Lauderdale, Florida to Dallas, Texas. In
addition, the Charge consisted of $29.4 million, recognized as part of the
equity in loss of affiliated companies, associated with the Company's debt
guarantee of joint venture operations in Japan. Through December 31, 1998, the
Company has fully satisfied its obligations related to the debt guarantee.
The $69.6 million charge is comprised of a $41.8 million non-cash impairment
charge associated with long-lived assets and a $27.8 million charge for lease
exit obligations. These amounts have been recognized as depreciation expense and
general and administrative expense, respectively. Through December 31, 1998, the
Company has paid and charged approximately $12.8 million against the lease exit
obligations.
Also in the second quarter of 1997, as part of the Company's strategic
initiatives, management made the decision to dispose of certain investments that
did not relate to the Company's core business. The Company recognized a non-cash
charge of $27.1 million to write down these non-strategic investments to their
net realizable value. This charge is reflected in "Other items, net" in the
Combined Statements of Operations.
During 1998, the Company revised its estimate of net realizable value
associated with certain investments referred to above. An additional provision
of approximately $10.5 million was recognized in the fourth quarter to reflect
this change in estimate and was included in "Other items, net".
F-14
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 4--SPECIAL ITEM CHARGES AND RESTRUCTURING (CONTINUED)
During the fourth quarter of 1996, the Company adopted a plan to relocate
its corporate headquarters from Fort Lauderdale to Dallas and eliminate third
party distributors. As a result of such plan, the Company recognized a
restructuring charge of approximately $50.2 million. The restructuring charge
reflects a $25.0 million reserve for estimated severance benefits payable to
approximately 650 employees who did not relocate to Dallas. The Company, through
the restructuring charge, also recognized $11.6 million of other costs of
exiting Fort Lauderdale (primarily related to the disposition of its corporate
headquarters) and $13.6 million for eliminating third party distributors. The
Company's relocation to Dallas was completed during the second quarter of 1997
at which time the Company recorded additional period costs associated with the
move, as discussed above. Through December 31, 1998, the Company paid and
charged approximately $25.0 million against the severance liability and
approximately $11.4 million against the Fort Lauderdale exit costs.
NOTE 5--STOCK OPTION PLANS
Certain of the Company's employees have been granted Viacom stock options
under Viacom's Long-term Incentive Plans (the "Plans"). The purpose of the Plans
is to benefit and advance the interests of Viacom by rewarding certain key
employees for their contributions to the financial success of Viacom and thereby
motivating them to continue to make such contributions in the future. The Plans
provide for fixed grants of equity-based interests pursuant to awards of phantom
shares, stock options, stock appreciation rights, restricted shares or other
equity-based interests and for subsequent payments of cash with respect to
phantom shares or stock appreciation rights based, subject to certain limits, on
their appreciation in value over stated periods of time. The stock options
generally vest over a four to six year period from the date of grant and expire
10 years after the date of grant.
The Company has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation". In accordance with the provisions of
SFAS 123, the Company applies Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for the Plans and accordingly, does not recognize compensation
expense for its stock option plans because Viacom typically does not issue
options at exercise prices below the market value at date of grant. Had
compensation expense for Viacom's stock option plans applicable to the Company's
employees been determined based upon the fair value at the grant date for awards
consistent with the methodology prescribed by SFAS 123, the Company's combined
pretax income would have decreased by $1.6 million ($1.0 million after tax),
$2.2 million ($1.4 million after tax) and $4.1 million ($2.6 million after tax)
in 1996, 1997 and 1998, respectively. These pro forma effects may not be
representative of expense in future periods since the estimated fair value of
stock options on the date of grant is amortized to expense over the vesting
period. Additional options may be granted in future years. Options issued prior
to January 1, 1995 were excluded from the computation.
F-15
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 5--STOCK OPTION PLANS (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Expected dividend yield (a)................................. -- -- --
Expected stock price volatility............................. 32.65% 31.75% 32.72%
Risk-free interest rate..................................... 6.43% 6.04% 5.46%
Expected life of options (years)............................ 6.0 6.0 6.0
</TABLE>
- ------------------------------
(a) Viacom has not declared any cash dividends on its common stock for any of
the periods presented and has no present intention of so doing.
On February 25, 1999, the Board of Directors of Viacom declared a 2-for-1
common stock split, effected in the form of a dividend. The additional shares
were issued on March 31, 1999 to shareholders of record on March 15, 1999. All
stock options and per share amounts have been adjusted to reflect the stock
split for all periods presented.
The weighted-average fair value of each option as of the grant date was
$8.13, $6.59 and $12.89 in 1996, 1997 and 1998, respectively.
The following table summarizes stock option activity under the various plans
as it relates to Blockbuster's employees:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED-AVERAGE
OUTSTANDING EXERCISE PRICE
------------ -----------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1995.................................. 20,398,918 $ 15.49
------------
Granted..................................................... 1,155,600 18.23
Exercised................................................... 7,039,854 15.15
Canceled.................................................... 1,333,634 16.90
------------
BALANCE AT DECEMBER 31, 1996.................................. 13,181,030 15.77
------------
Granted..................................................... 2,596,000 15.32
Exercised................................................... 2,778,348 14.58
Canceled.................................................... 2,766,482 15.76
------------
BALANCE AT DECEMBER 31, 1997.................................. 10,232,200 15.98
------------
Granted..................................................... 506,320 30.31
Exercised................................................... 7,102,920 14.39
Canceled.................................................... 414,356 16.00
------------
BALANCE AT DECEMBER 31, 1998.................................. 3,221,244 $ 21.75
------------
------------
</TABLE>
F-16
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 5--STOCK OPTION PLANS (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable Viacom stock options issued to Blockbuster employees at December
31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------ ------------------------
WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES OPTIONS LIFE (YEARS) PRICE OPTIONS PRICE
- -------------- ---------- --------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
$ 10 to $15 20,000 8.62 $ 14.94 -- --
15 to 20 2,340,540 8.47 15.46 23,398 $ 17.50
20 to 25 14,000 9.01 21.47 -- --
25 to 30 -- -- -- -- --
30 to 35 487,320 9.61 30.57 -- --
3 to 25(a) 359,384(a) 4.16 14.29 359,384 14.29
---------- ---------
3,221,244 382,782
---------- ---------
---------- ---------
</TABLE>
- ------------------------
(a) Represents information for options assumed with the Viacom acquisition of
Blockbuster.
NOTE 6--ACCRUED EXPENSES
The Company's accrued expenses consist of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
Accrued compensation................................................. $ 42.7 $ 55.9
Accrued gift card liability.......................................... 46.7 65.9
Accrued sales tax.................................................... 27.8 24.5
Accrued property tax................................................. 27.0 38.9
Accrued revenue sharing.............................................. -- 38.0
Restructuring reserve................................................ 23.4 14.2
Store closure reserves............................................... 25.3 15.0
Assigned music liabilities (see Note 10)............................. -- 43.7
Other................................................................ 74.1 65.7
--------- ---------
$ 267.0 $ 361.8
--------- ---------
--------- ---------
</TABLE>
NOTE 7--DEBT
Effective February 1996, the Company, along with three other Viacom
affiliates, entered into a Cdn$75 million credit facility, secured by Viacom.
The Company had outstanding approximately Cdn $65.8 million of bankers
acceptances as of December 31, 1997 ($47.0 million at December 31, 1997 exchange
rates). Interest on outstanding borrowings is equal to the Canadian bankers
acceptance rate plus 40 basis points, 3.5% and 5.1% at December 31, 1996 and
1997, respectively. Interest expense related to the Canadian facility was $.3
million and $2.0 million for the years ended December 31, 1996 and 1997,
respectively.
F-17
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 7--DEBT (CONTINUED)
In March 1998, the Company entered into a 10 year term loan for Cdn $65.8
million to repay the existing credit facility. In June 1998, the note was sold
to a Viacom affiliate and accordingly, is reflected as part of notes payable to
Viacom.
Funds advanced by Viacom to the Company to fund certain international
operations have been recognized as intercompany loans. These intercompany loans
will be purchased and retired by the Company with borrowings from the Company's
credit agreement as part of its Reorganization Transactions as described in Note
1. Interest expense charged by Viacom approximated $4.1 million, $10.1 million
and $8.4 million for the years 1996, 1997 and 1998, respectively and reflects
market-based rates.
Interest expense related to capital leases was $17.6 million, $18.7 million
and $18.5 million for the years ended December 31, 1996, 1997 and 1998,
respectively. See Note 12 for further information regarding capital lease
obligations.
On December 31, 1998, the Company declared a dividend in the form of an
interest bearing (London Interbank Offered Rate "LIBOR" plus 1%, 6.12% at
December 31, 1998) promissory note to Viacom International Inc. in the principal
amount of $1.4 billion.
NOTE 8--VIACOM'S NET EQUITY INVESTMENT
Viacom funds the working capital requirements of the Company based upon a
centralized cash management system. The Viacom's net equity investment includes
accumulated equity as well as any non-interest bearing payable and receivable
due to/from Viacom resulting from cash transfers and other intercompany
activity. Viacom generally does not charge the Company interest on intercompany
balances except for intercompany debt associated with certain foreign operations
(see Note 7).
NOTE 9--OTHER ITEMS, NET
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
Write-down of investments (Note 4)................................... $ -- $ 27.1 $ 10.5
Other................................................................ -- .5 1.3
--------- --------- ---------
TOTAL OTHER ITEMS, NET............................................... $ -- $ 27.6 $ 11.8
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-18
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 10--RELATED PARTY TRANSACTIONS
Viacom provides the Company with certain general and administrative
services, including insurance, legal, treasury, financial and other corporate
functions. The allocation of expenses was generally based on actual costs
incurred and such costs were apportioned to the Company based upon the average
of certain specified ratios of revenues and net assets. The charges for such
services were $9.8 million (1996), $9.2 million (1997) and $12.5 million (1998).
Management believes that the methodologies used to allocate these charges are
reasonable, however, these allocations of costs and expenses do not necessarily
indicate the cash and expenses that would have been or will be incurred by the
Company on a stand-alone basis. Viacom also pays insurance premiums on behalf of
the Company for certain worker's compensation, property, general liability, and
group insurance policies. Insurance expense related to these policies was $13.2
million (1996), $13.3 million (1997) and $16.0 million (1998) and is reflected
as a component of general and administrative expenses in the Combined Statements
of Operations. See Note 13 for pension plan and additional employee benefit
costs charged by Viacom to the Company. These services between Viacom and the
Company will continue after the Offering pursuant to the transition services
described below.
Blockbuster and Viacom will enter into a transition services agreement
whereby Viacom will provide the Company cash management, accounting, management
information systems, legal, financial and tax services as well as employee
benefit plan and insurance administration. These services may change upon
agreement between Viacom and the Company. The fee for these services will
approximate Viacom's cost and could be subject to adjustment. The Company has
agreed to pay or reimburse Viacom for any out-of-pocket payments, costs and
expenses associated with these services. The services agreement expires upon the
closing of a split-off or backup distribution.
The Company, through the normal course of business, is involved in
transactions with companies owned by or affiliated with Viacom or certain of its
board members. The Company purchases certain videocassettes for rental and sale
directly from Paramount Pictures Corporation. Total purchases were $7.6 million,
$77.5 million and $110.1 million for the years ended December 31, 1996, 1997 and
1998, respectively. The Company purchases certain home video games from Midway
Games Inc. Total amounts paid for purchases were $8.4 million, $12.5 million and
$19.1 million for the years ended December 31, 1996, 1997 and 1998,
respectively.
In conjunction with the sale by a related party of Blockbuster Music
("Music") to Wherehouse Entertainment, Inc. ("Wherehouse"), the Company assumed
certain liabilities as a result of the disposition of Blockbuster Music with a
corresponding reduction to Viacom's net equity investment. The nature of these
liabilities was predominantly for obligations related to closed Music stores
excluded from the sale and to a lesser extent certain transaction costs and
various costs to complete the transition of operations from Music to Wherehouse.
These liabilities at the date of assignment aggregated approximately $67 million
of which $43.7 million remains in current liabilities at December 31, 1998.
All other transactions with companies owned by or affiliated with Viacom did
not have a material impact on the financial position or results of operations
presented herein. See Note 7 regarding intercompany loans related to the
Company's international operations.
F-19
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 11--INCOME TAXES
The Company has been included in combined federal, state and local income
tax returns filed by Viacom. However, the tax benefit (expense) reflected in the
Combined Statements of Operations and deferred tax assets and liabilities
reflected in the Combined Balance Sheets have been prepared as if such benefits
were computed on a separate return basis. The current income tax liabilities for
the periods presented have been satisfied by Viacom. Any tax losses generated by
the Company have been utilized by Viacom to reduce its combined taxable income.
These amounts have been reflected in Viacom's net equity investment in the
Combined Balance Sheets.
The Company and Viacom will enter into a tax matters agreement which
provides that subsequent to the Offering the Company will continue to be
included in the Viacom U.S. federal consolidated income tax return and certain
consolidated, combined, and unitary state tax returns. The tax matters agreement
requires the Company and Viacom to make payments to each other equal to the
amount of income taxes which would be paid by the Company, subject to certain
adjustments, if the Company had filed a stand alone return for any taxable year
or portion thereof beginning after the date of this offering in which the
Company is included in the Viacom group. With respect to certain tax attributes
such as net operating losses, tax credits and capital losses, the Company will
have the right of reimbursement or offset, which will be determined based on the
extent such tax attributes could be utilized by the Company if it had not been
included in the Viacom group. The right to reimbursement or offset will arise
regardless of whether the Company is a member of the Viacom group at the time
the attributes could have been used.
The tax matters agreement also requires the Company, if so requested by
Viacom, to surrender certain tax losses of our subsidiaries that are resident in
the United Kingdom for 1998 and earlier years to Viacom's United Kingdom
Operations without any rights to compensation.
The tax matters agreement specifies that Viacom will indemnify the Company
against any and all tax adjustments to Viacom's consolidated federal and
consolidated, combined and unitary state tax returns from September 29, 1994
through the date of the Offering.
The net operating loss carryforwards at December 31, 1998 are primarily
attributable to domestic ($8.2 million) and foreign ($42.5 million) subsidiaries
of the Company. These losses are subject to certain restrictions and limitations
in accordance with domestic and foreign tax laws. A valuation allowance has been
provided primarily related to foreign loss carryforwards and certain foreign
restructuring reserves as the Company believes that it is more likely than not
that these tax benefits will not be realized. Of the total amount, $27.5 million
has no expiration date, $0.7 million expires in 1998, $1.1 million expires in
1999 and $21.4 million expires thereafter.
Losses accounted for under the equity method of accounting are shown net of
tax in the Combined Statements of Operations. Included in equity in loss of
affiliated companies, net of tax of $4.0 million (1996), $18.9 million (1997)
and $1.3 million (1998) are tax benefits of $0.5 million and $12.7 million for
1996 and 1997, respectively, and a tax provision of $0.2 million for 1998.
F-20
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 11--INCOME TAXES (CONTINUED)
Income (loss) before income taxes are attributable to the following
jurisdictions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
United States.................................................. $ 283.3 $ (167.3) $ (313.6)
Foreign........................................................ (34.1) (102.0) (81.1)
--------- --------- ---------
$ 249.2 $ (269.3) $ (394.7)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Components of the income tax benefit (expense) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
Current:
Federal........................................................ $ (119.1) $ 89.7 $ 51.2
State and local................................................ (19.4) 3.4 3.0
Foreign........................................................ (3.5) (1.6) (2.9)
--------- --------- ---------
(142.0) 91.5 51.3
Deferred......................................................... (25.4) (121.5) 8.1
--------- --------- ---------
$ (167.4) $ (30.0) $ 59.4
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation of the U.S. federal statutory tax rate to the Company's
effective tax rate on income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
Statutory U.S. tax provision (benefit) rate..................... 35.0% (35.0)% (35.0)%
Amortization of non-deductible goodwill......................... 24.1 23.5 15.6
State and local taxes, net of federal tax benefit............... 1.7 (1.6) (4.1)
Effect of foreign operations.................................... 7.1 23.9 8.6
Other, net...................................................... (.7) .3 (.1)
--- --------- ---------
Effective tax provision (benefit) rate.......................... 67.2% 11.1% (15.0)%
--- --------- ---------
--- --------- ---------
</TABLE>
F-21
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 11--INCOME TAXES (CONTINUED)
The following is a summary of the deferred tax accounts in accordance with
SFAS 109:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
Deferred tax assets:
Reserves and accrued liabilities........................................... $ 39.8 $ 38.6
Book-tax basis differences in rental library and other assets.............. -- 60.1
Book-tax basis differences in investments.................................. 17.9 10.7
Net operating loss carryforwards........................................... 50.2 50.7
--------- ---------
Total deferred tax assets.................................................... 107.9 160.1
Less: Valuation allowance.................................................... (67.1) (67.6)
--------- ---------
Net deferred tax assets...................................................... 40.8 92.5
--------- ---------
Deferred tax liabilities:
Deferred expenses.......................................................... -- (13.6)
Book-tax basis differences in rental library and other assets.............. (2.8) --
--------- ---------
Total deferred tax liabilities............................................... (2.8) (13.6)
--------- ---------
Total net deferred tax assets.............................................. $ 38.0 $ 78.9
--------- ---------
--------- ---------
</TABLE>
NOTE 12--COMMITMENTS AND CONTINGENCIES
The Company has long-term noncancelable lease commitments for various real
and personal property and office space which expire at various dates. Certain
leases contain renewal and escalation clauses. Generally, leases are five to ten
years with extended renewal options.
At December 31, 1998, minimum rental payments under noncancelable leases are
as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
----------- ---------
<S> <C> <C>
1999..................................................................... $ 369.9 $ 47.6
2000..................................................................... 319.3 39.3
2001..................................................................... 262.6 32.0
2002..................................................................... 210.8 28.0
2003..................................................................... 183.2 27.0
2004 and thereafter...................................................... 601.5 43.8
----------- ---------
Total minimum lease payments............................................. $ 1,947.3 217.7
-----------
-----------
Less amount representing interest........................................ (56.7)
---------
Present value of net minimum payments.................................... $ 161.0
---------
---------
</TABLE>
Rent expense was $269.8 million (1996), $355.3 million (1997) and $409.8
million (1998). Subtenant rental income was $5.0 million (1996), $4.8 million
(1997) and $5.6 million (1998). Future minimum lease payments have not been
reduced by future minimum subtenant rental income of $30.6 million. No
contingent rentals were paid during the three years ended December 31, 1998.
F-22
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 12--COMMITMENTS AND CONTINGENCIES (CONTINUED)
In October 1998, Music stores were sold to Wherehouse. Certain of the leases
transferred in connection with this sale had previously been guaranteed either
by Viacom or its affiliates. The remaining lease terms expire through various
dates through 2007. Blockbuster has agreed to indemnify Viacom with respect to
any amount paid under these guarantees. At the time of sale, the contingent
liability for base rent approximated $84 million, on an undiscounted basis, with
respect to these guarantees. The Company has not recognized any reserves related
to this contingent liability in the accompanying combined financial statements.
If Wherehouse defaults, related losses could materially affect future operating
income.
Pursuant to the tax matters agreement, the Company will generally be
responsible for, among other things, any taxes imposed on Viacom or its
Subsidiaries as a result of the split-off failing to qualify as a tax-free
transaction on account of any breach of the Company's representations or
agreements or any action or failure to act by the Company or any transaction
involving the Company's assets, stock or business (regardless of whether such
transaction is within its control) following the split-off.
The Company is a defendant from time to time in lawsuits incidental to its
business. Based on currently available information, the Company believes that
resolution of these known contingencies would not have a material adverse impact
on the Company's financial statements or liquidity. However, there can be no
assurances that future costs would not be material to results of operations or
liquidity of the Company for a particular future period. In addition, the
Company's estimates of future costs are subject to change as circumstances
change and additional information becomes available during the course of
litigation.
NOTE 13--PENSION PLANS AND OTHER EMPLOYEE BENEFITS
Viacom has a noncontributory defined benefit pension plan covering
substantially all of its employees, including the employees of the Company
during 1996, 1997 and 1998. Retirement benefits are based principally on years
of service and salary. Viacom also offers participation in a 401(k) savings plan
to the employees of the Company and has charged the Company for pension and
401(k) savings plan expenses of $4.6 million (1996), $4.6 million (1997) and
$5.3 million (1998).
Viacom also provides other employee benefits to the Company's employees,
including certain postemployment benefits, medical, dental, life and disability
insurance costs.
Management believes that the methodologies used to allocate pension and
other employee benefit charges to the Company are reasonable.
Viacom intends to spin off a Blockbuster Entertainment Investment Plan from
the Viacom Investment Plan, the provisions of which will mirror those of the
Viacom Investment Plan. The Company will continue to invest matching
contributions in Viacom's Class B common stock.
NOTE 14--ACQUISITIONS
During 1996, 1997 and 1998, the Company acquired or invested in several
businesses that own and operate videocassette rental stores. The aggregate
purchase price, consisting of cash consideration, for
F-23
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 14--ACQUISITIONS (CONTINUED)
these businesses approximated $154.4 million (1996), $79.0 million (1997) and
$34.2 million (1998) and was primarily allocated to video rental library,
property and equipment, and intangible assets.
All acquisitions were accounted for under the purchase method and,
accordingly, the operating results of the acquired businesses are included in
the combined results of operations of the Company since their respective date of
acquisition. Pro forma results of operations have not been presented due to the
immateriality of the acquisitions.
NOTE 15--EQUITY INVESTMENTS
The Company has a 50% interest in a joint venture located in Japan which
owns and operates videocassette rental stores. As discussed in Note 4, during
1997 the Company recognized a charge of $29.4 million (approximately $17.6
million net of tax) related to debt guarantees in recognition of the joint
venture's financial condition. The Company has also recognized its proportionate
share of this joint venture's net operating loss to the extent of its investment
which were as follows: $11.9 million (1996) and $12.1 million (1997). Through
December 31, 1998, the Company had fully satisfied its obligations related to
its Japan debt guarantees. As of December 31, 1997 and 1998, the Company had no
remaining net investment in its Japan joint venture and intends to dispose of
its interest in this joint venture in 1999.
NOTE 16--SUPPLEMENTAL CASH FLOW INFORMATION
Cash flows from operating activities included cash payments as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash payments for interest............................................................... $ 17.9 $ 20.4 $ 27.2
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
Retail stores acquired under capitalized leases........................................ $ 40.6 $ 14.4 $ 3.8
</TABLE>
On December 31, 1998, the Company declared a cash dividend in the amount of
$1.4 billion payable to Viacom in the form of an interest-bearing promissory
note to Viacom International Inc.
All income tax obligations have been satisfied by Viacom as the Company has
been included in Viacom's combined tax return.
NOTE 17--OPERATIONS BY GEOGRAPHIC AREA
The Company operates in one industry segment: rental and retail sales of
videocassettes, video games and other entertainment related merchandise. The
principal geographic areas of the Company's operations are the United States and
Europe. Operations in Latin America, Australia, Canada and Asia are classified
in "International--all other".
F-24
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 17--OPERATIONS BY GEOGRAPHIC AREA (CONTINUED)
The following table shows revenues and long-lived assets by geographic area.
Transfers between geographic areas were not significant.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
United States................................................................ $ 2,427.9 $ 2,611.5 $ 3,090.1
Europe....................................................................... 259.1 355.9 427.9
International--all other..................................................... 255.1 346.2 375.4
--------- --------- ---------
Total revenues........................................................... $ 2,942.1 $ 3,313.6 $ 3,893.4
--------- --------- ---------
--------- --------- ---------
LONG-LIVED ASSETS(1):
United States(2)............................................................. $ 7,484.6 $ 7,395.5 $ 6,942.2
Europe....................................................................... 371.2 380.9 362.8
International--all other..................................................... 306.4 295.4 245.6
--------- --------- ---------
Total long-lived assets.................................................. $ 8,162.2 $ 8,071.8 $ 7,550.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Includes all non-current assets, except deferred income taxes.
(2) Includes substantially all intangible assets.
NOTE 18--QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1998 and 1997 appears below:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1997(1) QUARTER QUARTER QUARTER QUARTER TOTAL YEAR
- ------------------------------------------------------------ --------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Revenue..................................................... $ 823.8 $ 765.3 $ 817.7 $ 906.8 $ 3,313.6
Gross profit................................................ $ 538.3 $ 370.5 $ 504.5 $ 539.8 $ 1,953.1
Net income (loss)........................................... $ (19.3) $ (227.3) $ (37.8) $ (33.8) $ (318.2)
<CAPTION>
1998(2)
- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue..................................................... $ 931.2 $ 890.0 $ 985.4 $ 1,086.8 $ 3,893.4
Gross profit................................................ $ 604.6 $ 100.2 $ 591.7 $ 640.5 $ 1,937.0
Net income (loss)........................................... $ 15.8 $ (318.0) $ (21.5) $ (12.9) $ (336.6)
</TABLE>
- ------------------------
(1) The second quarter of 1997 included a pre-tax charge of approximately $250
million principally representing a reduction in the carrying value of excess
retail inventory and a reserve for the reorganization of international
operations and closing of under performing stores in domestic and
international markets as well as additional expenses associated with the
Company's corporate relocation (see Note 4). In addition, the Company
recognized a non-cash charge of $27.1 million to write down certain
non-strategic investments to their estimated net realizable value.
(2) The second quarter of 1998 included a $424.3 million charge for a change in
estimate effected by a change in accounting principle for rental library.
During the fourth quarter of 1998, the Company
F-25
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 18--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
revised its estimate of net realizable value associated with the planned
disposition of certain non-strategic investments and recognized an
additional provision of approximately $10.5 million (See Note 3 and 4).
F-26
<PAGE>
BLOCKBUSTER INC.
INTERIM COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
<S> <C> <C>
1998 1999
--------- ---------
REVENUES:
Rental revenues......................................................................... $ 771.2 $ 952.0
Merchandise sales....................................................................... 141.3 143.0
Other revenues.......................................................................... 18.7 18.0
--------- ---------
931.2 1,113.0
--------- ---------
COST OF SALES:
Cost of rental revenues................................................................. 216.5 327.0
Cost of merchandise sold................................................................ 110.1 114.8
--------- ---------
326.6 441.8
--------- ---------
Gross profit............................................................................ 604.6 671.2
OPERATING EXPENSES:
General and administrative.............................................................. 410.7 472.1
Advertising............................................................................. 32.0 55.7
Depreciation............................................................................ 52.3 51.8
Amortization of intangibles............................................................. 42.6 43.0
--------- ---------
537.6 622.6
--------- ---------
Operating income.......................................................................... 67.0 48.6
Interest expense........................................................................ (6.9) (29.2)
Interest income......................................................................... 0.9 0.6
--------- ---------
Income before income taxes................................................................ 61.0 20.0
Provision for income taxes.............................................................. (45.2) (23.4)
--------- ---------
Net income (loss)......................................................................... $ 15.8 $ (3.4)
--------- ---------
--------- ---------
UNAUDITED PRO FORMA EARNINGS (LOSS) PER SHARE:
Basic and diluted....................................................................... $ --
---------
---------
UNAUDITED PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted....................................................................... --
---------
---------
</TABLE>
See notes to unaudited interim combined financial statements.
F-27
<PAGE>
BLOCKBUSTER INC.
INTERIM COMBINED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 99.0 $ 75.0
Receivables, less allowances of $22.7 (1998) and $20.4 (1999)............... 124.8 132.5
Merchandise inventories..................................................... 277.4 276.6
Prepaid assets.............................................................. 130.5 146.4
-------- --------------
Total current assets...................................................... 631.7 630.5
Rental library, net........................................................... 441.2 457.3
Deferred income taxes......................................................... 92.5 74.3
Property and equipment, net................................................... 995.3 1,005.3
Intangibles, net.............................................................. 6,055.6 6,074.3
Other assets.................................................................. 58.5 58.8
-------- --------------
$ 8,274.8 $ 8,300.5
-------- --------------
-------- --------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable............................................................ $ 448.6 $ 350.8
Accrued expenses............................................................ 361.8 325.7
Current portion of capital lease obligations................................ 22.2 22.3
Deferred income taxes....................................................... 13.6 11.1
-------- --------------
Total current liabilities................................................. 846.2 709.9
Notes payable to Viacom....................................................... 1,576.4 1,690.4
Capital lease obligations, less current portion............................... 138.8 134.2
Other liabilities............................................................. 75.5 103.8
-------- --------------
2,636.9 2,638.3
Commitments and contingencies (Note 5)
Stockholder's equity:
Viacom's net equity investment.............................................. 5,695.8 5,723.8
Accumulated other comprehensive loss--foreign currency translation
adjustment................................................................ (57.9) (61.6)
-------- --------------
Total stockholder's equity................................................ 5,637.9 5,662.2
-------- --------------
$ 8,274.8 $ 8,300.5
-------- --------------
-------- --------------
</TABLE>
See notes to unaudited interim combined financial statements.
F-28
<PAGE>
BLOCKBUSTER INC.
INTERIM COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
<S> <C> <C>
1998 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................................... $ 15.8 $ (3.4)
Adjustments to reconcile net income (loss) to net cash flow provided by operating
activities:
Depreciation and amortization......................................................... 279.4 266.2
Deferred income taxes................................................................. 60.4 35.1
Change in operating assets and liabilities:
Increase in receivables............................................................... (4.5) (7.9)
Decrease in merchandise inventories................................................... 7.3 2.5
Increase in prepaid and other assets.................................................. (29.8) (17.7)
Decrease in accounts payable.......................................................... (72.5) (96.4)
Decrease in accrued expenses and other liabilities.................................... (13.8) (11.9)
--------- ---------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES........................................... 242.3 166.5
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Rental library purchases................................................................ (194.9) (181.0)
Capital expenditures.................................................................... (38.5) (59.8)
Cash used for acquisitions.............................................................. (1.8) (85.0)
Investments in affiliated companies..................................................... 2.6 0.4
--------- ---------
NET CASH FLOW USED IN INVESTING ACTIVITIES................................................ (232.6) (325.4)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of credit facility....................................................... (46.6) --
Proceeds from term loan................................................................. 46.6 --
Net borrowings from (repayments of) notes due to Viacom................................. (26.8) 114.0
Capital lease payments.................................................................. (8.3) (9.4)
Advances from (repayments to) Viacom, net............................................... (30.8) 31.0
--------- ---------
NET CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES.................................. (65.9) 135.6
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................................................... (0.5) (0.7)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................................. (56.7) (24.0)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................................ 129.6 99.0
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................................ $ 72.9 $ 75.0
--------- ---------
--------- ---------
</TABLE>
See notes to unaudited interim combined financial statements.
F-29
<PAGE>
BLOCKBUSTER INC.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1-BASIS OF PRESENTATION
The interim combined financial statements and related notes of the business
and operations of Blockbuster Inc. (collectively, the "Company" or
"Blockbuster"), which consists of various wholly owned entities owned directly
or indirectly by Viacom Inc., ("Viacom"), for the three months ended March 31,
1998 and 1999 and as of December 31, 1998 and March 31, 1999 have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
and are unaudited. The interim combined financial statements are presented on a
carve-out basis and reflect the combined historical results of operations,
financial position and cash flows of the Company including entities currently
owned by Blockbuster or, in the case of certain international operations, to be
purchased from Viacom. In this context, no direct ownership relationship existed
among the various entities comprising Blockbuster; accordingly, Viacom and its
subsidiaries' net investment in Blockbuster is included in the Stockholder's
equity in the interim combined financial statements.
In the opinion of management, the interim combined financial statements
include all recurring adjustments and normal accruals necessary to present
fairly the Company's combined financial position and its combined results of
operations for the dates and periods presented. Results for interim periods are
not necessarily indicative of the results to be expected during the remainder of
the current year or for any future period. All significant intercompany accounts
and transactions have been eliminated in consolidation.
These financial statements should be read in conjunction with the audited
combined financial statements and notes thereto for the years ended December 31,
1996, 1997 and 1998 presented herein.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMPREHENSIVE INCOME
Comprehensive income (loss) for the three months ended March 31 was as
follows:
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
(IN MILLIONS)
Net income (loss).......................................................... $ 15.8 $ (3.4)
Currency translation adjustment............................................ 13.1 (3.7)
--------- ---------
Total comprehensive income (loss).......................................... $ 28.9 $ (7.1)
--------- ---------
--------- ---------
</TABLE>
NOTE 2-RELATED PARTY TRANSACTIONS
Viacom provides the Company with certain general and administrative
services, including insurance, legal, treasury, financial and other corporate
functions. The allocations of expenses was generally based on actual costs
incurred and such costs were apportioned to the Company based upon the average
of certain specified ratios of revenues and net assets. The charges for such
services for the
F-30
<PAGE>
BLOCKBUSTER INC.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2-RELATED PARTY TRANSACTIONS (CONTINUED)
three months ended March 31, 1998 and 1999 were $3.0 million and $3.1 million,
respectively. Management believes that the methodologies used to allocate these
charges are reasonable, however, these allocations of costs and expenses do not
necessarily indicate the cash and expenses that would have been or will be
incurred by the Company on a stand-alone basis. Viacom also pays insurance
premiums on behalf of the Company for certain worker's compensation, property,
general liability, and group insurance policies. Insurance expense related to
these policies was $3.8 million and $3.6 million for the three months ended
March 31, 1998 and 1999, respectively. Viacom also has a noncontributory defined
benefit pension plan in which the Company's employees are covered and provides
other employee benefits, including participation in a 401(k) savings plan.
Viacom has charged the Company $1.4 million and $1.2 million for pension and
401(k) savings plan expenses for the three months ended March 31, 1998 and 1999,
respectively.
Viacom generally does not charge the Company interest on intercompany
balances except for intercompany debt associated with certain foreign
operations, the notes associated with the $1.4 billion dividend payable to
Viacom discussed in Note 1 of the Combined Financial Statements and notes
associated with the acquisition of franchise operations discussed in Note 3
herein. Interest expense for the three months ended March 31, 1998 and 1999 was
$1.9 million and $24.8 million, respectively.
Blockbuster and Viacom will enter into a transition services agreement
whereby Viacom will provide the Company with cash management, accounting,
management information systems, legal, financial and tax services as well as
employee benefit plan and insurance administration. These services may change
upon agreement between Viacom and the Company. The fee for these services will
approximate Viacom's cost and could be subject to adjustment. The Company has
agreed to pay or reimburse Viacom for any out-of-pocket payments, costs and
expenses associated with these services. The services agreement expires upon the
closing of a split-off or backup distribution.
The Company, through the normal course of business, is involved in
transactions with companies owned by or affiliated with Viacom or certain of its
Board members. The Company purchases certain videocassettes for rental and sales
directly from Paramount Pictures Corporation. Total purchases were $0.2 million
and $14.0 million for the three months ended March 31, 1998 and 1999,
respectively. The Company also purchases certain home video games from Midway
Games, Inc. Total amounts paid for purchases were $3.9 million and $4.2 million
for the three months ended March 31, 1998 and 1999, respectively. These
transactions have been recognized in the Interim Combined Financial Statements.
In conjunction with the sale by a related party of Blockbuster Music
("Music") to Wherehouse Entertainment, Inc. ("Wherehouse"), the Company assumed
certain liabilities as a result of the disposition of Blockbuster Music with a
corresponding reduction to Viacom's net equity investment. The nature of these
liabilities was predominantly for obligations related to closed Music stores
excluded from the sale and, to a lesser extent, certain transaction costs and
various costs to complete the transaction of operations from Music to
Wherehouse. These liabilities at the date of assignment aggregated approximately
$67 million of which $31.8 million remains in current liabilities at March 31,
1999.
All other transactions with companies owned by or affiliated with Viacom did
not have a material impact on the financial position or results of operations
presented herein.
F-31
<PAGE>
BLOCKBUSTER INC.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3-NOTES PAYABLE TO VIACOM
On December 31, 1998, the Company declared a cash dividend in the amount of
$1.4 billion payable to Viacom in the form of an interest-bearing promissory
note. On January 24, 1999, Blockbuster acquired 69 stores from a franchisee. The
purchase was funded with the proceeds of two notes payable to Viacom which
approximated $77 million. These notes bear interest at LIBOR plus 1% and will be
repaid with proceeds from the revolving credit agreement prior to the Company's
initial public offering as discussed in Note 1 of the combined financial
statements.
NOTE 4-EARNINGS (LOSS) PER SHARE
The Company's historical capital structure is not indicative of its
prospective structure since no direct ownership relationship existed among all
the various units comprising Blockbuster. Accordingly, historical earnings per
share have not been presented in the interim combined financial statements.
Unaudited pro forma basic and diluted earnings per share include the shares
of both Class A and Class B common shares deemed to be outstanding as of the
date of the Offering. Unaudited pro forma basic and diluted earnings per share
are the same since there are currently no Company options outstanding. Pro forma
basic and diluted earnings per share have been presented for the most recent
annual and interim periods.
NOTE 5-COMMITMENTS AND CONTINGENCIES
In October 1998, Music stores were sold to Wherehouse. Certain of the leases
transferred in connection with this sale had previously been guaranteed either
by Viacom or its affiliates. The remaining lease terms expire on various dates
through 2007. Blockbuster has agreed to indemnify Viacom with respect to any
amount paid under these guarantees. At the time of the sale, the contingent
liability for base rent approximated $84 million, on an undiscounted basis, with
respect to these guarantees. The Company has not recognized any reserves related
to this contingent liability in the accompanying interim combined financial
statements. If Wherehouse defaults, related losses could materially affect
future operating income.
Pursuant to the tax matters agreement, the Company will generally be
responsible for, among other things, any taxes imposed by Viacom or its
Subsidiaries as a result of the split-off failing to qualify as a tax-free
transaction on account of any breach of the Company's representations or
agreements or any action or failure to act by the Company or any transactions
involving the Company's assets, stock or business (regardless of whether such
transaction is within its control) following the split-off.
The Company is a defendant from time to time in lawsuits incidental to its
business. Based on currently available information, the Company believes that
resolution of these known contingencies would not have a material adverse impact
on the Company's financial statements or liquidity. However, there can be no
assurances that future costs would not be material to results of operations or
liquidity of the Company for a particular period. In addition, the Company's
estimates of future costs are subject to change as circumstances change and
additional information becomes available during the course of litigation.
F-32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
Blockbuster Inc.
Class A Common Stock
[BLOCKBUSTER LOGO]
------
P R O S P E C T U S
, 1 9 9 9
---------
SALOMON SMITH BARNEY
BEAR, STEARNS & CO. INC.
------
CREDIT SUISSE FIRST BOSTON
GOLDMAN, SACHS & CO.
J.P. MORGAN & CO.
-------
BANC OF AMERICA SECURITIES LLC
ING BARING FURMAN SELZ LLC
PAINEWEBBER INCORPORATED
SCHRODER & CO. INC.
SG COWEN
WIT CAPITAL CORPORATION
Until , 1999, all dealers that buy, sell or trade our class A
common stock, whether or not they are participating in this offering, may be
required to deliver a prospectus. This is in addition to the dealers' obligation
to deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
<PAGE>
P R O S P E C T U S
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION, DATED , 1999
SHARES
[BLOCKBUSTER LOGO]
BLOCKBUSTER INC.
CLASS A COMMON STOCK
$ PER SHARE
---------
We are selling shares of our class A common stock. Of the shares
of class A common stock that we are selling, shares are being offered
outside the United States and Canada by a syndicate of international
underwriters and shares are being offered concurrently in the United
States and Canada by a syndicate of U.S. underwriters.
In addition, the international underwriters may purchase up to
additional shares of our class A common stock under some circumstances. The U.S.
underwriters may also purchase up to additional shares of our class A
common stock under some circumstances.
This is an initial public offering of our class A common stock. We currently
expect the initial public offering price to be between $ and $ per
share, and have applied to have the class A common stock listed on the New York
Stock Exchange under the symbol "BBI."
Following this offering, we will have two classes of authorized common
stock, the class A common stock and class B common stock. The rights of the
holders of class A common stock and class B common stock are identical, except
with respect to voting and conversion.
--------------
INVESTING IN THE CLASS A COMMON STOCK INVOLVES CERTAIN RISKS. WE REFER YOU
TO "RISK FACTORS" BEGINNING ON PAGE 10.
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
1999.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ------------
<S> <C> <C>
Initial Public Offering Price.................................................................. $ $
Underwriting Discounts and Commissions......................................................... $ $
Proceeds to Blockbuster Inc. (before expenses)................................................. $ $
</TABLE>
--------------
JOINT BOOK-RUNNING MANAGERS
SALOMON SMITH BARNEY INTERNATIONAL BEAR, STEARNS INTERNATIONAL LIMITED
----------
CREDIT SUISSE FIRST BOSTON
GOLDMAN SACHS INTERNATIONAL
J.P. MORGAN SECURITIES LTD.
BANK OF AMERICA INTERNATIONAL LIMITED
ING BARINGS
PAINEWEBBER INTERNATIONAL
SCHRODERS
SG COWEN
, 1999
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
BLOCKBUSTER INC.
CLASS A COMMON STOCK
[BLOCKBUSTER LOGO]
------
P R O S P E C T U S
, 1 9 9 9
---------
SALOMON SMITH BARNEY INTERNATIONAL
BEAR, STEARNS INTERNATIONAL LIMITED
------
CREDIT SUISSE FIRST BOSTON
GOLDMAN SACHS INTERNATIONAL
J.P. MORGAN SECURITIES LTD.
-------
BANK OF AMERICA INTERNATIONAL LIMITED
ING BARINGS
PAINEWEBBER INTERNATIONAL
SCHRODERS
SG COWEN
Until , 1999, all dealers that buy, sell or trade our class A common
stock, whether or not they are participating in this offering, may be required
to deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC registration fee................................................ $ *
NASD filing fee..................................................... *
NYSE listing fee.................................................... *
Blue Sky fees and expenses.......................................... *
Attorneys' fees and expenses........................................ *
Accountants' fees and expenses...................................... *
Transfer Agent's and Registrar's fees and expenses.................. *
Miscellaneous....................................................... *
---------
Total........................................................... *
---------
---------
</TABLE>
- ------------------------
* To be supplied by amendment
The amounts set forth above are estimates except for the SEC registration
fee and the NASD filing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides, in summary,
that directors and officers of Delaware corporations are entitled, under certain
circumstances, to be indemnified against all expenses and liabilities, including
attorney's fees, incurred by them as a result of suits brought against them in
their capacity as a director or officer, if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action or proceeding, if they had
no reasonable cause to believe their conduct was unlawful; provided that no
indemnification may be made against expenses in respect of any claim, issue or
matter as to which they shall have been adjudged to be liable to the Company,
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, they are fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper. Any such indemnification may be made by the Company only as authorized
in each specific case upon a determination by the shareholders or disinterested
directors that indemnification is proper because the indemnitee has met the
applicable standard of conduct.
The Company's Amended and Restated Certificate of Incorporation provides
that no director of the Company shall be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability: (1) for any breach of the director's duty of loyalty to
the Company or its stockholders; (2) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (3) in
respect of certain unlawful dividend payments or stock redemptions or purchases;
or (4) for any transaction from which the director derived an improper personal
benefit.
The Company's Certificate of Incorporation and By-Laws provide for
indemnification of its directors and officers to the fullest extent permitted by
Delaware law, as the same may be amended from time to time.
Section 8 of the Underwriting Agreement (Exhibit 1.1 hereto) contains
provisions for certain indemnification rights to the directors and officers of
the Registrant.
In addition, the Company maintains liability insurance for its directors and
officers.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
See the index to the exhibits.
(B) FINANCIAL STATEMENT SCHEDULES.
The schedules have been omitted because of the absence of circumstances
under which they could be required.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities, other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding, is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933
shall be deemed to be part of this registration statement as of the
time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the U.S. Underwriting Agreement and the
International Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in Dallas,
Texas on June 18, 1999.
<TABLE>
<S> <C> <C>
BLOCKBUSTER INC.
BY: /S/ EDWARD B. STEAD
-----------------------------------------
Edward B. Stead
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ ---------------------------
<C> <S>
* Chairman, President and
- ------------------------------ Chief Executive Officer
John F. Antioco
Executive Vice President,
* Chief Financial Officer
- ------------------------------ and Chief Accounting
Larry J. Zine Officer
* Director
- ------------------------------
Philippe P. Dauman
* Director
- ------------------------------
Thomas E. Dooley
* Director
- ------------------------------
Sumner M. Redstone
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ EDWARD B. STEAD
-------------------------
Edward B. Stead
ATTORNEY-IN-FACT
<CAPTION>
Dated: June 18, 1999
<CAPTION>
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
*3.1 Amended and Restated Certificate of Incorporation of the Registrant.
*3.2 Bylaws of the Registrant.
*4.1 Specimen Certificate representing Class A Common Stock.
5.1 Opinion of Shearman & Sterling as to the legality of the Common Stock.
10.1 Form of Initial Public Offering and Split-Off Agreement among the Registrant, Viacom International
Inc. and Viacom Inc.
10.2 Form of Release and Indemnification Agreement between the Registrant and Viacom Inc.
10.3 Form of Transition Services Agreement between the Registrant and Viacom Inc.
10.4 Form of Registration Rights Agreement between the Registrant and Viacom Inc.
10.5 Form of Tax Matters Agreement between the Registrant and Viacom Inc.
**+10.6 Revenue-Sharing Agreement, dated as of November 21, 1997, between the Registrant and the party named
therein.
**+10.7 Revenue-Sharing Agreement, dated as of September 29, 1998, between the Registrant and the party named
therein.
**+10.8 Revenue-Sharing Agreement, dated as of August 25, 1998, between the Registrant and the party named
therein.
**+10.9 Revenue-Sharing Agreement, dated as of October 13, 1998, between the Registrant and the party named
therein.
**+10.10 Revenue-Sharing Agreement, dated as of January 20, 1999, between the Registrant and the party named
therein.
*10.11 Employment Agreement between the Registrant and , dated .
*10.12 Employment Agreement between the Registrant and , dated .
*10.13 Employment Agreement between the Registrant and , dated .
*10.14 Employment Agreement between the Registrant and , dated .
*10.15 Employment Agreement between the Registrant and , dated .
*10.16 Deferred Compensation Plan for Outside Directors.
*10.17 1999 Long-Term Management Incentive Plan.
*10.18 Senior Executive Short-Term Incentive Plan.
*10.19 Credit Agreement, dated between the Registrant and the banks named therein.
*21.1 List of Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Shearman & Sterling (included in its opinion in Exhibit 5.1).
**24.1 Powers of Attorney (included on signature page in this Registration Statement).
*27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
** Filed previously.
+ Exhibits for which Registrant is seeking confidential treatment for certain
portions. The confidential material in such exhibits has been redacted and
separately filed with the Securities and Exchange Commission.
<PAGE>
Exhibit 5.1
[SHEARMAN & STERLING LETTERHEAD]
, 1999
Blockbuster Inc.
1201 Elm Street
Dallas, Texas 75270
Ladies and Gentlemen:
We are acting as counsel for Blockbuster Inc., a Delaware
corporation (the "Company"), in connection with the filing by the Company with
the Securities and Exchange Commission of a Registration Statement on Form S-1
(No. 333-77899), as amended (the "Registration Statement"), and the prospectus
contained in the Registration Statement (the "Prospectus"), covering the
registration under the Securities Act of 1933, as amended (the "Act"), of
shares of the Company's class A common stock, par value $.01 per
share, to be sold by the Company, plus up to an additional shares of
class A common stock, to cover over-allotments, to be issued by the Company,
(collectively, the "Shares") as described in the Registration Statement.
In connection with the foregoing, we have examined the originals, or
copies certified or otherwise identified to our satisfaction, of such records,
documents, certificates and other instruments as in our judgment are necessary
or appropriate to enable us to render the opinion expressed below. In our
examination, we have assumed the genuineness of all signatures, the authenticity
of all documents submitted to us as originals and the conformity with the
originals of all documents submitted to us as copies.
Based upon the foregoing, we are of the opinion that the Shares to
be sold by the Company, upon the filing of an Amended and Restated Certificate
of Incorporation, will be duly authorized by the Company when issued and paid
for in the manner and at the price set forth in the Prospectus, will be validly
issued, fully paid and non-assessable.
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" contained in the Prospectus. In giving this consent, we do not thereby
concede that we come within the category of persons whose consent is required by
the Act or the general rules and regulations promulgated thereunder.
Very truly yours,
SHEARMAN & STERLING
<PAGE>
Exhibit 10.1
FORM OF INITIAL PUBLIC OFFERING AND SPLIT-OFF AGREEMENT
DATED AS OF , 1999
AMONG
VIACOM INC.
VIACOM INTERNATIONAL INC.
AND
BLOCKBUSTER INC.
<PAGE>
INITIAL PUBLIC OFFERING AND SPLIT-OFF AGREEMENT
INITIAL PUBLIC OFFERING AND SPLIT-OFF AGREEMENT (this
"AGREEMENT") dated as of , 1999, among Viacom Inc., a Delaware corporation
("VIACOM"), Viacom International Inc., a Delaware corporation and a wholly owned
subsidiary of Viacom ("VIACOM INTERNATIONAL"), and Blockbuster Inc., a Delaware
corporation and an indirect, wholly owned subsidiary of Viacom ("BLOCKBUSTER").
Certain capitalized terms used herein are defined in Article I of this
Agreement.
RECITALS
WHEREAS, since September 29, 1994, Viacom has owned and operated
the businesses and operations related to Blockbuster;
WHEREAS, Viacom presently intends to split off Blockbuster in a
tax-free transaction;
WHEREAS, prior to such split-off, Blockbuster proposes to issue
shares of its common stock in an initial public offering registered under the
Securities Act of 1933, as amended; and
WHEREAS, the parties intend in this Agreement, including the
Exhibits attached hereto, to set forth the principal arrangements between them
regarding such initial public offering and such split-off.
NOW, THEREFORE, in consideration of the premises and the
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01. DEFINITIONS. As used in this Agreement, the
following terms will have the following meanings, applicable both to the
singular and the plural forms of the terms described:
"AFFILIATES" means, with respect to any specified Person, any
Person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with such specified
Person; PROVIDED, HOWEVER, that prior to the Split-Off, Affiliates of
Blockbuster or Viacom shall only include Persons who would be affiliates of
Blockbuster or Viacom, respectively, assuming that the Split-Off had occurred
immediately prior to the determination as to whether such Person was an
affiliate of Blockbuster or Viacom, respectively.
<PAGE>
"AGREEMENT" has the meaning ascribed thereto in the Preamble.
"ANCILLARY AGREEMENTS" means the Registration Rights Agreement,
Transition Services Agreement, the Release and Indemnification Agreement and the
Tax Matters Agreement.
"ANNUAL FINANCIAL STATEMENTS" has the meaning ascribed thereto in
Section 5.01(v).
"APPLICABLE STOCK" means at any time the (i) shares of
Blockbuster Common Stock owned by Viacom and its Affiliates that were owned on
the date hereof, PLUS (ii) shares of Blockbuster Class B Common Stock purchased
by Viacom and its Affiliates pursuant to Article VII, PLUS (iii) shares of
Blockbuster Common Stock that were issued to Viacom and its Affiliates in
respect of shares described in either clause (i) or clause (ii) in any
reclassification, share combination, share subdivision, share dividend, share
exchange, merger, consolidation or similar transaction or event.
"BLOCKBUSTER" has the meaning ascribed thereto in the Preamble.
"BLOCKBUSTER BUSINESS" has the meaning ascribed thereto in
Section 2.01(a)(i) of the Release and Indemnification Agreement.
"BLOCKBUSTER CLASS A COMMON STOCK" means the class A common
stock, par value $0.10 per share of Blockbuster.
"BLOCKBUSTER CLASS B COMMON STOCK" means the class B common
stock, par value $0.10 per share of Blockbuster.
"BLOCKBUSTER CLASS B COMMON STOCK OPTION" has the meaning
ascribed thereto in Section 7.01(a).
"BLOCKBUSTER CLASS B COMMON STOCK OPTION NOTICE" has the meaning
ascribed thereto in Section 7.02.
"BLOCKBUSTER COMMON STOCK" means the Blockbuster Class B Common
Stock, the Blockbuster Class A Common Stock, any other class of Blockbuster's
capital stock representing the right to vote generally for the election of
directors and, for so long as Blockbuster continues to be a subsidiary
corporation includible in a consolidated federal income tax return of the Viacom
Group, any other security of Blockbuster treated as stock for purposes of
Section 1504 of the Code.
"BLOCKBUSTER PUBLIC DOCUMENTS" has the meaning ascribed thereto
in Section 5.01(viii).
"BLOCKBUSTER PUBLIC FILINGS" has the meaning ascribed thereto in
Section 5.01(xii).
2
<PAGE>
"BLOCKBUSTER TRANSFER AGENT" means the company designated by
Blockbuster as the transfer agent and registrar for the Blockbuster Class A
Common Stock and the Blockbuster Class B Common Stock.
"BLOCKBUSTER'S AUDITORS" has the meaning ascribed thereto in
Section 5.01(xiii).
"BUSINESS" means the Blockbuster Business or the Viacom Business,
as the case may be.
"BUSINESS DAY" means any day other than a Saturday, a Sunday, or
a day on which banking institutions located in the State of New York are
authorized or obligated by law or executive order to close.
"CODE" means the Internal Revenue Code of 1986, as amended from
time to time, together with the rules and regulations promulgated thereunder.
"CONFIDENTIAL INFORMATION" means, with respect to any party
hereto, (i) any Information concerning such party, its business or any of its
Affiliates that was obtained by another party hereto, (ii) any Information
concerning such party that is obtained by another party under Section 4.03, or
(iii) any other Information obtained by, or furnished to, another party hereto.
"CONTROL" means the possession, direct or indirect, of the power
to direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended from time to time, together with the rules and regulations promulgated
thereunder.
"INDEMNIFIED PARTY" means any Person who is entitled to received
payment or defense from an Indemnifying Party pursuant to this Agreement.
"INDEMNIFYING PARTY" means any party who is required to pay or
defend any other Person pursuant to this Agreement.
"INFORMATION" means all records, books, contracts, instruments,
computer data and other data.
"IPO" means the initial public offering by Blockbuster of shares
of Blockbuster Class A Common Stock as contemplated by the IPO Registration
Statement.
3
<PAGE>
"IPO EFFECTIVE DATE" means the date on which the IPO Registration
Statement is declared effective by the SEC.
"IPO REGISTRATION STATEMENT" means the Registration Statement on
Form S-1, Registration No. 333-77899, of Blockbuster, including all exhibits
thereto and as supplemented and amended from time to time.
"ISSUANCE EVENT" has the meaning ascribed thereto in Section
7.02.
"ISSUANCE EVENT DATE" has the meaning ascribed thereto in Section
7.02.
"LOSSES" has the meaning ascribed thereto in Section 2.01(a) of
the Release and Indemnification Agreement.
"MARKET PRICE" of any shares of Blockbuster Class A Common Stock
on any date means (i) the average of the last sale price of such shares on each
of the five trading days immediately preceding such date on the New York Stock
Exchange, Inc. or, if such shares are not listed thereon, on the principal
national securities exchange or automated interdealer quotation system on which
such shares are traded or (ii) if such sale prices are unavailable or such
shares are not so traded, the value of such shares on such date determined in
accordance with agreed-upon procedures reasonably satisfactory to Blockbuster
and Viacom.
"NONVOTING STOCK" means any class of Blockbuster' capital stock
not representing the right to vote generally for the election of directors.
"NONVOTING STOCK OPTION" has the meaning ascribed thereto in
Section 7.01(c).
"NONVOTING STOCK OPTION NOTICE" has the meaning ascribed thereto
in Section 7.02.
"OWNERSHIP PERCENTAGE" means, at any time, the fraction,
expressed as a percentage and rounded to the next highest thousandth of a
percent, whose numerator is the aggregate Value of the Applicable Stock and
whose denominator is the sum of the aggregate Value of the outstanding shares of
Blockbuster Common Stock; PROVIDED, HOWEVER, that any shares of Blockbuster
Common Stock issued by Blockbuster in violation of its obligations under Article
VII of this Agreement shall not be deemed outstanding for the purpose of
determining the Ownership Percentage. For purposes of this definition, "VALUE"
means, with respect to any share of stock, the value of such share determined by
Viacom under principles applicable for purposes of Section 1504 of the Code.
"OWNING PARTY" has the meaning ascribed thereto in Section 4.02.
4
<PAGE>
"PERSON" means any individual, corporation, limited or general
partnership, limited liability company, joint venture association, joint stock
company, trust unincorporated organization or government or any agency or
political subdivision thereof.
"PRIOR RELATIONSHIP" means the ownership relationship between
Viacom and Blockbuster at any time prior to the Split-Off Date.
"PUBLIC FILINGS" has the meaning ascribed thereto in Section
5.01(xii).
"QUARTERLY FINANCIAL STATEMENTS" has the meaning ascribed thereto
in Section 5.01(iv).
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement to be entered into on or before the IPO Effective Date between Viacom
and Blockbuster, in substantially the form attached hereto as Exhibit C.
"REGULATION S-K" means Regulation S-K of the General Rules and
Regulations promulgated by the SEC.
"REGULATION S-X" means Regulation S-X of the General Rules and
Regulations promulgated by the SEC.
"RELATED PARTIES" has the meaning ascribed thereto in Section
4.03.
"RELEASE AND INDEMNIFICATION AGREEMENT" means the Release and
Indemnification Agreement to be entered into on or before the IPO Effective Date
between Viacom and Blockbuster, in substantially the form attached hereto as
Exhibit A.
"REPRESENTATIVES" means directors, officers, employees, agents,
consultants, advisors, accountants, attorneys and representatives.
"REQUESTOR" has the meaning ascribed thereto in Section 4.03.
"RETENTION PERIOD" has the meaning ascribed thereto in Section
4.04.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended
from time to time, together with the rules and regulations promulgated
thereunder.
"SPLIT-OFF" means the distribution of Blockbuster Common Stock by
Viacom in one or more transactions occurring after the IPO that collectively
have the effect that all or a
5
<PAGE>
substantial part of the shares of Blockbuster Common Stock held by Viacom are
distributed to all or some of the stockholders of Viacom, whenever such
transaction(s) shall occur.
"SPLIT-OFF DATE" is the date upon which the Split-Off is
consummated.
"SUBSIDIARY" means, with respect to any Person, any other Person
a majority of the equity ownership or voting stock of which is at the time
owned, directly or indirectly, by such Person and/or one or more other
Subsidiaries of such Person; PROVIDED, HOWEVER, that prior to the Split-Off, a
Subsidiary of Viacom shall only include Persons who would be a Subsidiary of
Viacom assuming the Split-Off has occurred immediately prior to the
determination as to whether such Person were a Subsidiary of Viacom.
"TAX MATTERS AGREEMENT" means the Tax Matters Agreement to be
entered into on or before the IPO Effective Date between Viacom and Blockbuster,
in substantially the form as attached hereto as Exhibit D.
"THIRD PARTY CLAIM" has the meaning ascribed thereto in Section
8.01(b).
"TRANSITION SERVICES AGREEMENT" means the Transition Services
Agreement to be entered into on or before the IPO Effective Date between Viacom
and Blockbuster, in substantially the form attached hereto as Exhibit B.
"UNDERWRITING AGREEMENT" means the Underwriting Agreement between
Blockbuster and the underwriters relating to the IPO, as amended from time to
time.
"VIACOM" has the meaning ascribed thereto in the Preamble.
"VIACOM ANNUAL STATEMENTS" has the meaning ascribed thereto in
Section 5.01(xiv).
"VIACOM BUSINESS" means any assets, business or operations of
Viacom or any of its Affiliates other than the Blockbuster Business.
"VIACOM CLASS A COMMON STOCK" means the class A common stock, par
value $0.01 per share, of Viacom.
"VIACOM CLASS B COMMON STOCK" means the class B common stock, par
value $0.01 per share, of Viacom.
"VIACOM COMMON STOCK" means the Viacom Class A Common Stock and
the Viacom Class B Common Stock.
6
<PAGE>
"VIACOM GROUP" includes for federal income tax purposes, Viacom,
its Affiliates, Blockbuster and its Affiliates.
"VIACOM INTERNATIONAL" has the meaning ascribed thereto in the
Preamble.
"VIACOM PUBLIC FILINGS" has the meaning ascribed thereto in
Section 5.01(xii).
"VIACOM'S AUDITORS" has the meaning ascribed thereto in Section
5.01(xiv).
"VIACOM TRANSFER AGENT" means the company designated by Viacom as
the transfer agent and registrar for the Viacom Common Stock.
"WHEREHOUSE STOCK PURCHASE AGREEMENT" means the Stock Purchase
Agreement, dated as of August 10, 1998, between Viacom International and
Wherehouse Entertainment, Inc.
ARTICLE II
THE IPO AND THE SPLIT-OFF
Section 2.01. THE IPO AND OTHER PRIMARY OFFERINGS. Until the
Split-Off Date, Blockbuster shall consult with, and cooperate in all respects
with, Viacom in connection with any primary offering of the Blockbuster Common
Stock or any other securities of Blockbuster and shall, at Viacom's direction,
promptly take any and all actions necessary or desirable to consummate such
transactions.
Section 2.02. THE SPLIT-OFF. Viacom currently intends, following
the consummation of the IPO, to complete the Split-Off at a date after September
29, 1999. Viacom shall, in its sole and absolute discretion, determine whether
to proceed with all or part of the Split-Off and all terms of the Split-Off,
including, without limitation, the form, structure and terms of any
transaction(s) and/or offering(s) to effect the Split-Off and the timing of and
conditions to the consummation of the Split-Off. In addition, Viacom may at any
time and from time to time until the completion of the Split-Off abandon, modify
or change any or all of the terms of the Split-Off, including, without
limitation, by accelerating or delaying the timing of the consummation of all or
part of the Split-Off. Blockbuster shall cooperate with Viacom in all
commercially reasonable respects to accomplish the Split-Off and shall, at
Viacom's direction, promptly take any and all actions necessary or desirable to
effect the Split-Off, including, without limitation, the registration under the
Securities Act of Blockbuster Common Stock on an appropriate registration form
or forms to be designated by Viacom. Viacom shall select any investment
banker(s) and manager(s) in connection with the Split-Off, as well as any other
institutions providing services in connection with the Split-Off.
Section 2.03. CERTAIN STOCKHOLDER MATTERS. From and after the
distribution of Blockbuster Common Stock in connection with any transaction(s)
included as part of the
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Split-Off and until such Blockbuster Common Stock is duly transferred in
accordance with applicable law, Blockbuster shall regard the Persons receiving
Blockbuster Common Stock in such transaction(s) as record holders of Blockbuster
Common Stock in accordance with the terms of such transaction(s) without
requiring any action on the part of such Persons. Blockbuster agrees that,
subject to any transfers of such stock, (a) each such holder shall be entitled
to receive all dividends payable on, and exercise voting rights and all other
rights and privileges with respect to, the shares of Blockbuster Common Stock
then held by such holder and (b) each such holder shall be entitled, without any
action on the part of such holder, to receive one or more certificates
representing, or other evidence of ownership of, the shares of Blockbuster
Common Stock then held by such holder. Viacom shall cooperate, and shall
instruct the Viacom Transfer Agent to cooperate, with Blockbuster and the
Blockbuster Transfer Agent, and Blockbuster shall cooperate, and shall instruct
the Blockbuster Transfer Agent to cooperate, with Viacom and the Viacom Transfer
Agent, in connection with all aspects of the Split-Off and all other matters
relating to the issuance and delivery of certificates representing, or other
evidence of ownership of, the shares of Blockbuster Common Stock distributed to
the holders of Viacom Common Stock in connection with any transaction(s)
included as part of the Split-Off. Following the Split-Off, Viacom shall
promptly, but in no event no later than two business days thereafter, instruct
the Viacom Transfer Agent to deliver to the Blockbuster Transfer Agent true,
correct and complete copies of the stock and transfer records reflecting the
holders of Viacom Common Stock receiving shares of Blockbuster Common Stock in
connection with any transaction(s) included as part of the Split-Off.
Section 2.04. PRIOR RELATIONSHIP. Blockbuster, with respect to
Blockbuster and its Affiliates, and Viacom, with respect to Viacom and its
Affiliates, agree to take all commercially reasonable action to discontinue
their respective uses as promptly as is commercially reasonable of any printed
material that indicates an ownership or other relationship between or among
Viacom and Blockbuster or any of their respective Affiliates that has changed as
a result of the IPO, the Split-Off or any other transactions contemplated
hereby; PROVIDED that this Section 2.04 shall not prohibit the use of printed
material containing appropriate and accurate references to such relationship.
Section 2.05. FURTHER ASSURANCES REGARDING THE SPLIT-OFF. In
addition to the actions specifically provided for elsewhere in this Agreement,
Blockbuster shall, at Viacom's direction, use all commercially reasonable
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, all things commercially reasonably necessary, proper or expeditious under
applicable laws, regulations and agreements in order to consummate and make
effective the Split-Off as promptly as reasonably practicable. Without limiting
the generality of the foregoing, Blockbuster shall, at Viacom's direction,
cooperate with Viacom, and execute and deliver, or use all commercially
reasonable efforts to cause to have executed and delivered, all instruments,
including instruments of conveyance, assignment and transfer, and to make all
filings with, and to obtain all consents, approvals or authorizations of, any
domestic or foreign governmental or regulatory authority requested by Viacom in
order to consummate and make effective the Split-Off.
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ARTICLE III
EXPENSES
Section 3.01. GENERAL. Except as otherwise provided in this
Agreement, the Ancillary Agreements or any other agreement between the parties
relating to the IPO or the Split-Off, all costs and expenses of either party
hereto in connection with the IPO and the Split-Off shall be paid by the party
that incurs such costs and expenses.
Section 3.02. CERTAIN EXPENSES RELATING TO THE IPO AND ANY OTHER
PRIMARY OFFERINGS BY BLOCKBUSTER. Except for the fees and disbursements related
to Viacom's counsel, accountants and other advisors, Blockbuster shall pay or
cause to be paid all third party expenses relating to the IPO or any other
primary offering by Blockbuster prior to the Split-Off Date, including (i) the
preparation, printing and filing of the IPO Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto or any other registration statements, (ii) the preparation, printing and
delivery to any underwriters of any underwriting agreement, any agreement among
underwriters and any other documents as may be required in connection with the
offering, purchase, sale, issuance or delivery of the Blockbuster Common Stock
or any other securities of Blockbuster, (iii) the preparation, issuance and
delivery of the certificates for the Blockbuster Common Stock or any other
securities of Blockbuster to any underwriters or any other purchasers, including
any stock or other transfer taxes and any stamp or other duties payable upon the
sale, issuance or delivery of the Blockbuster Common Stock or any other
securities of Blockbuster to any underwriters or any other securities, (iv) the
qualification of the Blockbuster Common Stock or any other securities of
Blockbuster under the securities laws in accordance with any state (Blue Sky
laws), including filing fees and the reasonable fees and disbursements of
counsel for any underwriters in connection therewith and in connection with the
preparation of the Blue Sky Survey and any supplement thereto, (v) the printing
and delivery to any underwriters of copies of each preliminary prospectus, any
term sheets and of the final prospectus and any amendments or supplements
thereto, (vi) the preparation, printing and delivery to any underwriters of
copies of the Blue Sky Survey and any supplement thereto, (vii) the fees and
expenses of any transfer agent or registrar for the Blockbuster Common Stock or
any other securities of Blockbuster, (viii) the filing fees incident to, and the
reasonable fees and disbursements of counsel to any underwriters in connection
with, the review by the National Association of Securities Dealers, Inc. (the
"NASD") of the terms of the sale of the Blockbuster Common Stock or any other
securities of Blockbuster and (ix) the fees and expenses incurred in connection
with the listing of the Blockbuster Common Stock or any other securities of
Blockbuster on the New York Stock Exchange, any other national securities
exchange or any national over the counter quotation system.
Section 3.03. CERTAIN EXPENSES RELATING TO THE SPLIT-OFF.
Except for the fees and disbursements related to Blockbuster's counsel,
accountants and other advisors, Viacom shall pay or cause to be paid all
third party expenses relating to the Split-Off, including (i) the fees and
expenses of the underwriter or dealer-manager, (ii) the preparation,
printing, filing (including under federal and state securities laws), mailing
and publishing of the offering materials relating to the Blockbuster Common
Stock, (iii) the preparation, printing and
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delivery of any certificates or documents entered into in connection with the
Split-Off, (iv) the fees and expenses of any exchange agent, information
agent, transfer agent or registrar for the Blockbuster Common Stock, (v) the
fees and expenses incurred in connection with the listing of the Blockbuster
Common Stock with the NASD or the New York Stock Exchange, any other national
securities exchange or any national over the counter quotation system, if
applicable and (vi) any other fees incurred in connection with the Split-Off.
ARTICLE IV
ACCESS TO INFORMATION
Section 4.01. RESTRICTIONS ON DISCLOSURE OF INFORMATION. (a)
Without limiting any rights or obligations under any other agreement between or
among the parties hereto and/or any of their respective Affiliates relating to
confidentiality, for a period of three years following the date hereof, each of
the parties hereto agrees that it shall not, and shall not permit any of its
Affiliates or Representatives to, disclose any Confidential Information to any
Person, other than to such Affiliates or Representatives on a need-to-know basis
in connection with the purpose for which the Confidential Information was
originally disclosed. Such Information shall no longer be deemed Confidential
Information, to the extent that it is or was (i) in the public domain other than
by the breach of this Agreement or by breach of any other agreement between or
among the parties hereto and/or any of their respective Affiliates, (ii)
available to such party outside the context of the Prior Relationship on a
nonconfidential basis prior to its disclosure by the other party, (iii) lawfully
acquired outside the context of the Prior Relationship on a nonconfidential
basis or independently developed by, or on behalf of, such party by Persons who
do not have access to, or descriptions of, any such Confidential Information,
(iv) required to be disclosed by law, governmental order or the rules and
regulations of the SEC, or (v) mutually agreed to by the parties.
(b) Each of the parties hereto shall maintain, and shall cause
its respective Affiliates to maintain, policies and procedures, and develop such
further policies and procedures as shall from time to time become necessary or
appropriate, to ensure compliance with this Section 4.01.
Section 4.02. LEGALLY REQUIRED DISCLOSURE OF CONFIDENTIAL
INFORMATION. If any of the parties to this Agreement or any of their respective
Affiliates or Representatives become legally required to disclose any
Confidential Information, such disclosing party shall promptly notify the party
owning the Confidential Information (the "OWNING PARTY") and shall use all
commercially reasonable efforts to cooperate with the Owning Party so that the
Owning Party may seek a protective order or other appropriate remedy and/or
waive compliance with this Section 4.02. All expenses reasonably incurred in
seeking a protective order or other remedy shall be borne by the Owning Party.
If such protective order or other remedy is not obtained, or if the Owning Party
waives compliance with this Section 4.02, the disclosing party or its Affiliate
or Representative, as applicable, shall (a) disclose only that portion of the
Confidential Information it is compelled by law to disclose, (b) use all
commercially reasonable efforts to obtain reliable
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assurance requested by the Owning Party that confidential treatment will be
accorded such Confidential Information, and (c) promptly provide the Owning
Party with a copy of the Confidential Information so disclosed, in the same form
and format so disclosed, together with a description of all Persons to whom such
Confidential Information was disclosed.
Section 4.03. ACCESS TO INFORMATION. (a) During the Retention
Period, each of the parties hereto shall cooperate with and afford, and shall
cause their respective Affiliates, Representatives, Subsidiaries, successors
and/or assignees, and shall use reasonable efforts to cause joint ventures that
are not Affiliates (collectively, "RELATED PARTIES") to cooperate with, and
afford to the other party, reasonable access upon reasonable advance written
request to all information (other than information created after the Split-Off
Date (i) the disclosure of which would have the effect of waiving a legal
privilege, or (ii) which is the subject of a confidentiality agreement between
such party and a third party which prohibits disclosure to the other party,
PROVIDED that such party shall use all commercially reasonable efforts to obtain
such third party's consent to disclosure of such information) within such
party's or any Related Party's possession. Access to the requested information
shall be provided so long as it relates to the requesting party's (the
"REQUESTOR") assets, business and operations, and access is reasonably required
by the Requestor as a result of the parties' Prior Relationship for purposes of
auditing, accounting, claims or litigation (except for claims or litigation
between the parties hereto), employee benefits, regulatory or tax purposes or
fulfilling disclosure or reporting obligations including, without limitation,
information reasonably necessary for the preparation of reports required by or
filed under the Securities Act or the Exchange Act with respect to any period
entirely or partially prior to the Split-Off Date or any other reasonable
purpose.
(b) Each party agrees to cooperate fully to allow access to each
others employees (i) to the extent that they are reasonably necessary to discuss
and explain all requested Information with and to the requesting party and (ii)
with respect to any claims brought against the other involving the conduct of
the Blockbuster Business prior to the Split-Off Date.
Section 4.04. RECORD RETENTION. (a) BOOKS AND RECORDS. Viacom and
Blockbuster shall preserve and keep all of their respective books and records in
the possession of such party or its Related Parties, whether in electronic form
or otherwise, for no less than the later of (i) the record retention policy of
Viacom and Blockbuster as in effect as of the Split-Off Date or (ii) any period
as may be required by any laws, regulations or rulings promulgated thereunder of
any jurisdiction (or of any political subdivision or taxing authority thereof)
(the "RETENTION PERIOD"), at such party's sole cost and expense. Viacom shall
deliver to Blockbuster on the Split-Off Date any and all original corporate
organization books that Viacom has in its possession relating solely to the
Blockbuster Business, copies of which Viacom may retain at its own expense. Upon
reasonable prior written request, Viacom and Blockbuster shall deliver to the
other copies of any and all books and records that Viacom or Blockbuster, as the
case may be, has in its possession relating to the Blockbuster Business.
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ARTICLE V
COVENANTS
Section 5.01. FINANCIAL AND OTHER INFORMATION. Blockbuster (and
Viacom with respect to clause (xii) below) agrees that, for so long as Viacom is
required to consolidate Blockbuster's results of operations and financial
position (determined in accordance with generally accepted accounting principles
consistently applied):
(i) Blockbuster shall, and shall cause each of its Subsidiaries
to, maintain a system of internal accounting controls in accordance with
generally accepted accounting principles and SEC and tax related
requirements that will provide reasonable assurance that Blockbuster's
and such Subsidiaries' books, records and accounts fairly reflect all
transactions and dispositions of assets.
(ii) Blockbuster shall, and shall cause each of its Subsidiaries
to, maintain a fiscal year which commences and ends on the same dates as
does Viacom's fiscal year of each calendar year.
(iii) As soon as practicable, and in any event within ten
Business Days after the end of each month in each fiscal year of
Blockbuster, Blockbuster shall deliver to Viacom (a) a monthly
consolidated income statement and related schedules for Blockbuster and
its Subsidiaries and (b) a year-to-date consolidated income statement
and related schedules for Blockbuster and its Subsidiaries. As soon as
practicable, and in any event within 20 Business Days (x) after the end
of each of the first three quarters in each fiscal year of Blockbuster,
and (y) after the end of each such fiscal year, Blockbuster shall
deliver to Viacom a consolidated balance sheet and related schedules and
statement of cash flows and related schedules for Blockbuster and its
Subsidiaries for such fiscal quarter or year end, as the case may be.
(iv) As soon as practicable, and in any event within 35 days
after the end of each of the first three quarters in each fiscal year of
Blockbuster and no later than ten days before Blockbuster intends to
file its Quarterly Financial Statements (as defined below) with the SEC,
Blockbuster shall deliver to Viacom drafts of (A) the consolidated
financial statements of Blockbuster and its Subsidiaries (and notes
thereto) for such periods and for the period from the beginning of the
current fiscal year to the end of such quarter, setting forth in each
case in comparative form for each such fiscal quarter of Blockbuster the
consolidated figures (and notes thereto) for the corresponding quarter
and periods of the previous fiscal year and all in reasonable detail and
prepared in accordance with Article 10 of Regulation S-X, and (B) a
discussion and analysis by management of Blockbuster's and its
Subsidiaries' financial condition and results of operations for such
fiscal period, including, without limitation, an explanation of any
material adverse change, all in reasonable detail and prepared in
accordance with Item 303(b) of Regulation S-K. The information set forth
in subsections (A) and (B) above is herein referred to as the
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"QUARTERLY FINANCIAL STATEMENTS." No later than the earlier of (x) two
Business Days prior to the date Blockbuster publicly files the Quarterly
Financial Statements with the SEC or otherwise makes such Quarterly
Financial Statements publicly available or (y) two Business Days prior
to the date on which Viacom has notified Blockbuster that it intends to
file its quarterly financial statements with the SEC, Blockbuster shall
deliver to Viacom the substantially final form of the Quarterly
Financial Statements certified by the chief financial officer of
Blockbuster as presenting fairly, in all material respects, the
financial condition and results of operations of Blockbuster and its
Subsidiaries; PROVIDED that Blockbuster and Viacom shall actively
consult with each other regarding any changes (whether or not
substantive) which Blockbuster may consider making to its Quarterly
Financial Statements and related disclosures prior to the filing with
the SEC. In addition to the foregoing, no (a) Quarterly Financial
Statement or (b) any other document which refers, or contains
information with respect, to the ownership of Blockbuster by Viacom, the
separation of Blockbuster from Viacom or the Split-Off shall be filed
with the SEC or otherwise made public by Blockbuster or any of its
Subsidiaries without the prior consent of Viacom which shall not be
unreasonably withheld. In any event, Blockbuster shall deliver to Viacom
its final Quarterly Report on Form 10-Q no later than 45 days after the
end of each of the first three quarters in each fiscal year of
Blockbuster. If the time period required by the SEC for Blockbuster to
file its Quarterly Report on Form 10-Q is changed, Blockbuster and
Viacom shall renegotiate in good faith to set more appropriate time
periods relating to the dates as set forth in this Section 5.01(iv). As
soon as practicable but in no event two Business Days prior to issuance,
Blockbuster shall deliver to Viacom copies of substantially final drafts
of all of its quarterly earnings releases. In addition, within such two
day period, Blockbuster shall actively consult with Viacom regarding any
changes (other than typographical or other similar minor changes) to
such substantially final drafts. Immediately following the issuance
thereof, Blockbuster shall deliver to Viacom final copies of such
earnings releases. Viacom shall determine, in its sole discretion, the
timing of Blockbuster's quarterly earnings releases; provided that
Blockbuster and Viacom will consult with each other on such timing if
the senior management of Blockbuster notifies Viacom that Blockbuster
is required by law as advised by its counsel not to release its
earnings at such time as initially determined by Viacom.
(v) Blockbuster shall deliver to Viacom as soon as practicable,
and in any event within 60 days after the end of each fiscal year of
Blockbuster and no later than 15 days before Blockbuster intends to file
its Annual Financial Statements with the SEC, (A) drafts of the
consolidated financial statements of Blockbuster (and notes thereto) for
such year, setting forth in each case in comparative form the
consolidated figures (and notes thereto) for the previous fiscal year
and all in reasonable detail and prepared in accordance with Regulation
S-X and (B) a discussion and analysis by management of Blockbuster's and
its Subsidiaries' financial condition and results of operations for such
year, including, without limitation, an explanation of any material
adverse change, all in reasonable detail and prepared in accordance with
Item 303(a) of Regulation S-K. The information set forth in (A) and (B)
above is herein referred to as the "ANNUAL FINANCIAL STATEMENTS."
Blockbuster shall deliver to Viacom all material revisions to such
drafts as soon as any such revisions are prepared or made. No later than
the earlier of (x) five Business Days prior to the date Blockbuster
publicly files the Annual Financial Statements with the SEC
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or otherwise makes such Annual Financial Statements publicly available
or (y) five Business Days prior to the date on which Viacom has
notified Blockbuster that it intends to file its annual financial
statements with the SEC, Blockbuster shall deliver to Viacom the final
form of the Annual Financial Statements certified by the chief financial
officer of Blockbuster as presenting fairly, in all material respects,
the financial condition and results of operations of Blockbuster and its
Subsidiaries; PROVIDED that Blockbuster and Viacom shall actively
consult with each other regarding any changes (whether or not
substantive) which Blockbuster may consider making to its Annual
Financial Statements and related disclosures prior to the filing with
the SEC. In addition to the foregoing, no (a) Annual Financial Statement
or (b) any other document which refers, or contains information with
respect, to the ownership of Blockbuster by Viacom, the separation of
Blockbuster from Viacom or the Split-Off shall be filed with the SEC or
otherwise made public by Blockbuster or any of its Subsidiaries without
the prior consent of Viacom which shall not be unreasonably withheld. In
any event, Blockbuster shall deliver to Viacom its final Annual Report
on Form 10-K no later than 90 days after the end of each fiscal year of
Blockbuster. If the time period required by the SEC for Blockbuster to
file its Annual Report on Form 10-K is changed, Blockbuster and Viacom
shall renegotiate in good faith to set more appropriate time periods
relating to the dates as set forth in this Section 5.01(v). As soon as
practicable but in no event two Business Days prior to issuance,
Blockbuster shall deliver to Viacom copies of substantially final drafts
of its annual earnings releases. In addition, within such two day
period, Blockbuster shall actively consult with Viacom regarding any
changes (other than typographical or other similar minor changes) to
such substantially final drafts. Immediately following the issuance
thereof, Blockbuster shall deliver to Viacom final copies of the
earnings release. Viacom shall determine, in its sole discretion, the
timing of Blockbuster's annual earnings release; provided that
Blockbuster and Viacom will consult with each other on such timing if
the senior management of Blockbuster notifies Viacom that Blockbuster
is required by law as advised by its counsel not to release its
earnings at such time as initially determined by Viacom.
(vi) Blockbuster shall deliver to Viacom all Quarterly and Annual
Financial Statements of each Subsidiary of Blockbuster which is itself
required to file financial statements with the SEC or otherwise make
such financial statements publicly available, with such financial
statements to be provided in the same manner and detail and on the same
time schedule as those financial statements of Blockbuster required to
be delivered to Viacom pursuant to this Section 5.01.
(vii) All information provided by Blockbuster or any of its
Subsidiaries to Viacom pursuant to Sections 5.01(iii) through (vi)
inclusive shall be consistent in terms of format and detail and
otherwise with the procedures in effect on the date hereof with respect
to the provision of such financial information by the Blockbuster
Business and/or Blockbuster and its Subsidiaries, as applicable, to
Viacom (and, where appropriate, as presently presented in financial
reports to Viacom's Board of Directors), with such changes therein as
may be requested by Viacom from time to time consistent with changes in
reporting by sectors and Subsidiaries of Viacom in accordance with
generally accepted accounting principles.
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(viii) Blockbuster and each of its Subsidiaries which files
information with the SEC shall deliver to Viacom: (A) as soon as the
same are prepared, substantially final drafts of (x) all reports,
notices and proxy and information statements to be sent or made
available by Blockbuster or any of its Subsidiaries to their security
holders, (y) all regular, periodic and other reports to be filed under
Sections 13, 14 and 15 of the Exchange Act (including current reports on
Form 8-K and annual reports to stockholders), and (z) all registration
statements and prospectuses to be filed by Blockbuster or any of its
Subsidiaries with the SEC or any securities exchange pursuant to the
listed company manual (or similar requirements) of such exchange
(collectively, the documents identified in clauses (x), (y) and (z) are
referred to herein as "BLOCKBUSTER PUBLIC DOCUMENTS"); and (B) as soon
as practicable, but in no event later than [four] Business Days prior to
the date the same are printed, sent or filed, whichever is earliest,
substantially final drafts of all such Blockbuster Public Documents;
PROVIDED that Blockbuster and Viacom shall actively consult with each
other regarding any changes (whether or not substantive) which
Blockbuster may consider making to any of its Blockbuster Public
Documents and related disclosures prior to any anticipated filing with
the SEC. In addition to the foregoing, no (a) Blockbuster Public
Document or (b) any other document which refers, or contains information
with respect, to the ownership of Blockbuster by Viacom, the separation
of Blockbuster from Viacom or the Split-Off shall be filed with the SEC
or otherwise made public by Blockbuster or any of its Subsidiaries
without the prior consent of Viacom which consent shall not unreasonably
be withheld.
(ix) Blockbuster shall, as promptly as practicable, deliver to
Viacom copies of all annual and other budgets and financial projections
(consistent in terms of format and detail and otherwise with the
procedures in effect on the date hereof) relating to Blockbuster or any
of its Subsidiaries and shall provide Viacom an opportunity to meet with
management of Blockbuster to discuss such budgets and projections.
(x) With reasonable promptness, Blockbuster shall deliver to
Viacom such additional financial and other information and data with
respect to Blockbuster and its Subsidiaries and their business,
properties, financial positions, results of operations and prospects as
from time to time may be reasonably requested by Viacom.
(xi) Except with respect to Blockbuster's quarterly and annual
earnings releases, Blockbuster shall deliver to Viacom as soon as
practicable but in no event two Business Days prior to issuance, copies
of substantially final drafts of all press releases and other statements
to be made available by Blockbuster or any of its Subsidiaries to
employees of Blockbuster or any of its Subsidiaries or to the public
concerning material developments in the business, properties, earnings,
results of operations, financial condition or prospects of Blockbuster
or any of its Subsidiaries or the relationship between (A) Blockbuster
or any of its Subsidiaries and (B) Viacom or any of its Affiliates. In
addition, within such two day period, prior to the issuance of any such
press release or public statement, Blockbuster shall actively consult
with Viacom regarding any changes
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(other than typographical or other similar minor changes) to such
substantially final drafts. Immediately following the issuance thereof,
Blockbuster shall deliver to Viacom copies of final drafts of all press
releases and other public statements.
(xii) Viacom and Blockbuster shall cooperate fully, and cause
their respective accountants to cooperate fully, to the extent requested
by the other party in the preparation of the other party's public
earnings releases, annual reports on Form 10-K, quarterly reports on
Form 10-Q, any current reports on Form 8-K and any other proxy,
information and registration statements, reports, notices, prospectuses
and any other filings made by Viacom or Blockbuster with the SEC, any
national securities exchange or otherwise made publicly available
(collectively, "VIACOM PUBLIC FILINGS" and the "BLOCKBUSTER PUBLIC
FILINGS" and together, the "PUBLIC FILINGS"). Viacom and Blockbuster
agree to provide to each other all information that the other party
reasonably requests in connection with any Public Filings or that, in
the judgment of either party's, is required to be disclosed or
incorporated by reference therein under any law, rule or regulation.
Such information shall be provided by such party in a timely manner on
the dates requested by the other party (which may be earlier than the
dates on which such party otherwise would be required hereunder to have
such information available) to enable the other party to prepare, print
and release all Public Filings on such dates as such party shall
determine. Viacom and Blockbuster shall use its reasonable best efforts
to cause their respective accountants to consent to any reference to
them as experts in any Public Filing required under any law, rule or
regulation. If and to the extent requested by either party, the other
party shall diligently and promptly review all drafts of such Public
Filing and prepare in a diligent and timely fashion any portion of such
Public Filing pertaining to that party. Prior to any printing or public
release of any Public Filing, an appropriate executive officer of Viacom
or Blockbuster shall, if requested by the other party, certify that the
information provided by such party relating to such party, its
Affiliates or its business in such Public Filing is accurate, true and
correct in all material respects. Unless required by law, rule,
regulation or generally accepted accounted principle, Blockbuster shall
not publicly release any financial or other information which
significantly conflicts with the information with respect to
Blockbuster, any of its Affiliates or the Blockbuster Business that is
included in any Viacom Public Filing without Viacom's prior written
consent. Prior to the release or filing thereof, Viacom and Blockbuster
shall provide each other with a draft of any portion of a Public Filing
containing information relating to the other party and its Subsidiaries
and shall give such party an opportunity to review such information and
comment thereon; PROVIDED that the other party shall determine in its
sole discretion the final form and content of all Public Filings.
(xiii) Blockbuster shall not change its independent certified
public accountants ("BLOCKBUSTER'S AUDITORS") without Viacom's prior
consent.
(xiv) Blockbuster shall use its reasonable best efforts to enable
the Blockbuster Auditors to complete their audit such that they will
date their opinion on Blockbuster's
16
<PAGE>
audited annual financial statements on the same date that Viacom's
independent certified public accountants ("VIACOM'S AUDITORS") date
their opinion on Viacom's audited annual financial statements (the
"VIACOM ANNUAL STATEMENTS"), and to enable Viacom to meet its timetable
for the printing, filing and public dissemination of the Viacom Annual
Statements.
(xv) Blockbuster shall authorize Blockbuster's Auditors to make
available to Viacom's Auditors both the personnel who performed or are
performing the annual audit of Blockbuster and work papers related to
the annual audit of Blockbuster, in all cases within a reasonable time
prior to Blockbuster's Auditors' opinion date, so that Viacom's Auditors
are able to perform the procedures they consider necessary to take
responsibility for the work of Blockbuster's Auditors as it relates to
Viacom's Auditors' report on Viacom's statements, all within sufficient
time to enable Viacom to meet its timetable for the printing, filing and
public dissemination of the Viacom Annual Statements.
(xvi) Blockbuster shall provide Viacom's internal auditors access
to Blockbuster's and its Subsidiaries, books and records so that Viacom
may conduct reasonable audits relating to the financial statements
provided by Blockbuster pursuant hereto as well as to the internal
accounting controls and operations of Blockbuster and its Subsidiaries.
(xvii) Blockbuster shall give Viacom as much prior notice as is
reasonably practical of any proposed determination of, or any changes
in, its accounting estimates or accounting principles from those in
effect on the date hereof. Blockbuster will consult with Viacom and, if
requested by Viacom, Blockbuster will consult with Viacom's independent
public accountants with respect thereto. Blockbuster will not make such
determination or changes without Viacom's prior consent, which shall not
be unreasonably withheld.
(xviii) Notwithstanding clause (xvii) above, Blockbuster shall
make any changes in its accounting estimates or accounting principles
that are requested by Viacom in order for Blockbuster's accounting
estimates and principles to be consistent with those of Viacom.
Nothing in this Section 5.01 shall require Blockbuster to violate any agreement
with any of its customers, suppliers or other third parties regarding the
confidentiality of commercially sensitive information relating to that customer,
suppliers or other third parties or its business; PROVIDED that in the event
that Blockbuster is required under this Section 5.01 to disclose any such
information, Blockbuster shall use all commercially reasonable efforts to seek
to obtain such customer's, suppliers' or other third parties, consent to the
disclosure of such information.
For the purposes of these covenants, Viacom and Blockbuster
understand and appreciate that their mutual interests will be best served by
effecting a rapid and fair resolution of
17
<PAGE>
any claims or disputes which may arise out of this Section 5.01. Therefore, each
party agrees to use its reasonable best efforts to resolve all such disputes as
rapidly as possible on a fair and equitable basis. Toward this end, each party
agrees to develop and follow a process for presenting, rapidly assessing, and
settling claims and other disputes on a fair and equitable basis. If any dispute
or claim arising under this Section 5.01 cannot be readily resolved by the
parties, the parties agree to refer the matter to the chief financial officers
of each party who shall meet and attempt to resolve the dispute within fifteen
days from the date the dispute was brought before their attention. If any
dispute or claim arising under this Section 5.01 cannot be resolved by chief
financial officers, the parties agree to refer the matter to a senior auditing
partner of a nationally recognized accounting firm not currently providing
services to either party.
Section 5.02. NO VIOLATIONS. (a) For so long as the Ownership
Percentage is equal to or greater than 50%, Blockbuster covenants and agrees
that it will not take any action or enter into any commitment or agreement which
may reasonably be anticipated to result, with or without notice and with or
without lapse of time or otherwise, in a contravention or event of default by
any of its Affiliates of (i) any provisions of applicable law or regulation,
including but not limited to provisions pertaining to the Code or the Employee
Retirement Income Security Act of 1974, as amended, (ii) any provision of
Viacom's certificate of incorporation or bylaws, (iii) any credit agreement or
other material agreements (including agreements relating to covenants not to
compete) binding upon Viacom or (iv) any judgment, order or decree of any
governmental body, agency or court having jurisdiction over Viacom or any of its
respective assets.
(b) Blockbuster and Viacom agree to provide to the other any
information and documentation requested by the other for the purpose of
evaluating and ensuring compliance with Section 5.02(a) hereof.
(c) Notwithstanding the foregoing Section 5.01, nothing in this
Agreement is intended to limit or restrict in any way Viacom's right's as a
stockholder of Blockbuster.
Section 5.03. OTHER AGREEMENTS. On or prior to the consummation
of the IPO, Viacom and Blockbuster shall have executed and delivered to each
other each of the Ancillary Agreements.
ARTICLE VI
ASSIGNMENT AND ASSUMPTION
Section 6.01. ASSIGNMENT OF OBLIGATIONS. Pursuant to the
assignment provision of Section 10.07 of the Wherehouse Stock Purchase
Agreement, Viacom International hereby transfers, conveys, sets over and assigns
to Blockbuster any and all rights under the Wherehouse Stock Purchase Agreement
and any ancillary agreements executed in connection therewith.
Section 6.02. ASSUMPTION OF OBLIGATIONS. Blockbuster hereby
undertakes, assumes and agrees to perform all of the duties, obligations and
liabilities of Viacom International
18
<PAGE>
under the Wherehouse Stock Purchase Agreement and any ancillary agreements
executed in connection therewith.
ARTICLE VII
OPTIONS
Section 7.01. OPTIONS. (a) Blockbuster hereby grants to Viacom
International, on the terms and conditions set forth herein, a continuing right
(the "BLOCKBUSTER CLASS B COMMON STOCK OPTION") to purchase from Blockbuster, at
the times set forth herein, such number of shares of Blockbuster Class B Common
Stock as is necessary to allow the Viacom International to maintain the
Ownership Percentage. The exercise price for the shares of Blockbuster Class B
Common Stock purchased pursuant to the Blockbuster Class B Common Stock Option
shall be the Market Price of the Blockbuster Class A Common Stock as of the date
of first delivery of notice of exercise of the Blockbuster Class B Common Stock
Option by Viacom International to Blockbuster.
(b) The provisions of Section 7.01(a) hereof notwithstanding, the
Blockbuster Class B Common Stock Option granted pursuant to Section 7.01(a)
shall not apply and shall not be exercisable in connection with the issuance by
Blockbuster of any shares of Blockbuster Common Stock pursuant to any stock
option or other executive or employee benefit or compensation plan maintained by
Blockbuster, so long as, from and after the date hereof and prior to the
issuance of such shares, Blockbuster or Viacom International has repurchased
from shareholders and Blockbuster has not subsequently reissued a number of
shares equal or greater to the number of shares to be issued in any such
issuance.
(c) Blockbuster hereby grants to Viacom International, on the
terms and conditions set forth herein, a continuing right (the "NONVOTING STOCK
OPTION" and, together with the Blockbuster Class B Common Stock Option, the
"OPTIONS") to purchase from Blockbuster, at the times set forth herein, such
number of shares of Nonvoting Stock as is necessary to allow the Viacom
International to own 80 percent of each class of outstanding Nonvoting Stock.
The exercise price for the shares of Nonvoting Stock purchased pursuant to the
Nonvoting Stock Option shall be the price at which such Nonvoting Stock is then
being sold to third parties, or, if no Nonvoting Stock is being sold, the fair
market value thereof as determined in good faith by an independent investment
advisor.
Section 7.02. NOTICE. At least two business days prior to the
issuance of any shares of Blockbuster Common Stock (other than in connection
with the IPO, including the full exercise of all underwriters' over-allotment
options granted in connection therewith and other than issuances of Blockbuster
Common Stock Viacom International) or the first date on which any event could
occur that, in the absence of a full or partial exercise of the Blockbuster
Class B Common Stock Option, would result in a reduction in the Ownership
Percentage, Blockbuster will notify Viacom International in writing (a
"BLOCKBUSTER CLASS B COMMON STOCK OPTION NOTICE") of any plans it has to issue
such shares or the date on which such event could first occur.
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<PAGE>
At least two business days prior to the issuance of any shares of Nonvoting
Stock (other than issuances of Nonvoting Stock to Viacom International) or the
first date on which any event could occur that, in the absence of a full or
partial exercise of the Nonvoting Stock Option, would result in the Viacom
International owning less than 80 percent of each class of outstanding Nonvoting
Stock, Blockbuster will notify Viacom International in writing (a "NONVOTING
STOCK OPTION NOTICE" and, together with a Blockbuster Class B Common Stock
Option Notice, an "OPTION NOTICE") of any plans it has to issue such shares or
the date on which such event could first occur. Each Option Notice must specify
the date on which Blockbuster intends to issue such additional shares or on
which such event could first occur (such issuance or event being referred to
herein as an "ISSUANCE EVENT" and the date of such issuance or event as an
"ISSUANCE EVENT DATE"), the number of shares Blockbuster intends to issue or may
issue and the other terms and conditions of such Issuance Event.
Section 7.03. OPTION EXERCISE AND PAYMENT. The Blockbuster Class
B Common Stock Option may be exercised by Viacom International for a number of
shares equal to or less than the number of shares that are necessary for the
Viacom International to maintain, in the aggregate, the then-current Ownership
Percentage. The Nonvoting Stock Option may be exercised by Viacom International
for a number of shares equal to or less than the number of shares that are
necessary for the Viacom International to own, in the aggregate, 80 percent of
each class of outstanding Nonvoting Stock. Each Option may be exercised at any
time after receipt of an applicable Option Notice and prior to the applicable
Issuance Event Date by the delivery to Blockbuster of a written notice to such
effect specifying (i) the number of shares of Blockbuster Class B Common Stock
or Nonvoting Stock, as the case may be, to be purchased by Viacom International
and (ii) a calculation of the exercise price for such shares. Upon any such
exercise of either Option, Blockbuster will, prior to the applicable Issuance
Event Date, deliver to Viacom International, against payment therefor,
certificates (issued in the name of Viacom International) representing the
shares of Blockbuster Class B Common Stock or Nonvoting Stock, as the case may
be, being purchased upon such exercise. Payment for such shares shall be made by
wire transfer or intrabank transfer of immediately-available funds to such
account as shall be specified by Blockbuster, for the full purchase price for
such shares.
Section 7.04. EFFECT OF FAILURE TO EXERCISE. Except as provided
in Section 7.06, any failure by Viacom International to exercise either Option,
or any exercise for less than all shares purchasable under either Option, in
connection with any particular Issuance Event shall not affect Viacom
International's right to exercise the relevant Option in connection with any
subsequent Issuance Event.
Section 7.05. IPO. Notwithstanding the foregoing, Viacom
International shall not be entitled to exercise the Blockbuster Class B Common
Stock Option in connection with the IPO of the Blockbuster Class A Common Stock
if, upon the completion of the IPO, including the full exercise of all
underwriters' over-allotment options granted in connection therewith, the
Ownership Percentage would be greater than 80%.
20
<PAGE>
Section 7.06. TERMINATION OF OPTIONS. The Options shall terminate
upon the occurrence of any Issuance Event that, after considering Viacom
International's response thereto and to any other Issuance Events, results in
the Ownership Percentage being less than 45%, other than any Issuance Event in
violation of this Agreement.
ARTICLE VIII
INDEMNIFICATION
Section 8.01. INDEMNIFICATION PROCEDURES. (a) The indemnification
procedures set forth in Section 8.01(b) herein are applicable to any indemnity
granted pursuant to the Ancillary Agreements (other than the Tax Matters
Agreement).
(b) If a claim or demand is made against an Indemnified Party by
any Person who is not a party to the Ancillary Agreements (a "THIRD PARTY
CLAIM") as to which such Indemnified Party is entitled to indemnification
pursuant to the Ancillary Agreements, such Indemnified Party shall give the
Indemnifying Party notice of such Third Party Claim, as promptly as practicable,
but in any event no later than 15 days of the receipt by the Indemnified Party
of such notice; PROVIDED, HOWEVER, that the failure to provide such notice shall
not release the Indemnifying Party from any of its obligations under the
Ancillary Agreements except to the extent the Indemnifying Party is materially
prejudiced by such failure and shall not relieve the Indemnifying Party from any
other obligation or liability that it may have to any Indemnified Party
otherwise than under the Ancillary Agreements. If the Indemnifying Party
acknowledges in writing its obligations to indemnify the Indemnified Party
hereunder against any Losses that may result from such Third Party Claim, then
such Indemnifying Party shall be entitled to assume and control the defense of
such Third Party Claim at its expense and through counsel of its choice, subject
to the approval of the Indemnified Party (which approval shall not be
unreasonably withheld or delayed), if it gives notice of its intention to do so
to the Indemnified Party within 15 business days of the receipt of such notice
from the Indemnified Party; PROVIDED, HOWEVER, that if there exists or is
reasonably likely to exist a conflict of interest that would make it
inappropriate in the reasonable judgment of the Indemnified Party for the same
counsel to represent both the Indemnified Party and the Indemnifying Party, then
the Indemnified Party shall be entitled to retain its own counsel, in each
jurisdiction for which the Indemnified Party determines counsel is required to
participate in such defense, at the expense of the Indemnifying Party. In the
event the Indemnifying Party exercises the right to undertake any such defense
against any such Third Party Claim as provided above, the Indemnified Party
shall cooperate with the Indemnifying Party in such defense and make available
to the Indemnifying Party, at the Indemnifying Party's expense, all witnesses,
pertinent records, materials and information in the Indemnified Party's
possession or under the Indemnified Party's control relating thereto as is
reasonably required by the Indemnifying Party, subject to reimbursement of
reasonable out-of-pocket expenses. Similarly, in the event the Indemnified Party
is, directly or indirectly, conducting the defense against any such Third Party
Claim, the Indemnifying Party shall cooperate with the Indemnified Party in such
defense and make available to the Indemnified Party all such witnesses, records,
materials and information in the Indemnifying Party's possession or under the
Indemnifying Party's control
21
<PAGE>
relating thereto as is reasonably required by the Indemnified Party, subject to
reimbursement of reasonable out-of-pocket expenses. No such Third Party Claim
may be settled by the Indemnifying Party without the prior written consent of
the Indemnified Party (which shall not be unreasonably withheld or delayed)
unless such settlement is solely for money and includes an unconditional release
of each Indemnified Party from any and all Losses arising out of such action,
claim, suit or proceeding and would not otherwise adversely affect the
Indemnified Party. No such Third Party Claim may be settled by the Indemnified
Party without the prior written consent of the Indemnifying Party which shall
not be unreasonably withheld or delayed.
Notwithstanding the foregoing, the Indemnifying Party shall not
be entitled to assume the defense of any Third Party Claim and shall be liable
for the fees and expenses of counsel incurred by the Indemnified Party in
defending such Third Party Claim if the Third Party Claim seeks an order,
injunction or other equitable relief or relief for other than money damages
against the Indemnified Party which the Indemnified Party reasonably determines,
after conferring with its counsel, cannot be separated from any related claim
for money damages. If such equitable relief or other relief portion of the Third
Party Claim can be so separated from that for money damages, the Indemnifying
Party shall be entitled to assume the defense of the portion relating to money
damages.
ARTICLE IX
CONDITION TO CONSUMMATION OF TRANSACTIONS; TERMINATION
Section 9.01. CONDITION. Consummation of the transactions
provided for in this Agreement and the Ancillary Agreements is conditioned upon,
and shall only be effected upon or after (i) the final approval of the IPO by
the Board of Directors of Blockbuster and Viacom, (ii) the final approval of the
Split-Off by the Board of Directors of Viacom and (iii) the closing of the IPO.
Section 9.02. TERMINATION. This Agreement may be terminated and
the IPO and Split-Off abandoned by the Board of Directors of Viacom in its sole
discretion, without the approval of Blockbuster at any time prior to the IPO
Effective Date or Split-Off Date, as applicable. In the event of any such
termination, no party shall have any liability of any kind to the other party.
ARTICLE X
MISCELLANEOUS
Section 10.01. LIMITATION OF LIABILITY. Neither Viacom nor
Blockbuster shall be liable to the other for any special, indirect, incidental
or consequential damages of the other arising in connection with this Agreement.
Section 10.02. FURTHER ASSURANCES. Each party agrees to execute,
acknowledge, deliver, file, record and publish such further certificates,
amendments to certificates, instruments
22
<PAGE>
and documents, and do all such other acts and things as may be required by law,
or as may be required to carry out the intent and purposes of this Agreement and
the Ancillary Agreements and the translations contemplated thereby.
Section 10.03. WAIVER. The observance of any term of this
Agreement may be waived (either generally or in a particular instance and either
retroactively or prospectively) by the party entitled to enforce such term, but
such waiver shall be effective only if it is in writing signed by a duly
authorized officer of the party against which such waiver is to be asserted.
Unless other expressly provided in this Agreement, no delay or omission on the
part of any party in exercising any right or privilege under this Agreement
shall operate as a waiver thereof, nor shall any waiver on the part of any party
of any right or privilege under this Agreement operates as a waiver of any other
right or privilege under this Agreement nor shall any single or partial exercise
of any right or privilege preclude any other or future exercise thereof or the
exercise of any other right or privilege under this Agreement. No failure by
either party to take any action or assert any right or privilege hereunder shall
be deemed to be a waiver of such right or privilege in the event of the
continuation or repetition of the circumstances giving rise to such right unless
expressly waived in writing by the party against whom the existence of such
waiver is asserted.
Section 10.04. REMEDIES. Each of Viacom and Blockbuster
acknowledges and agrees that under certain circumstances the breach by Viacom or
any of its Affiliates or Blockbuster or any of its Affiliates of a term or
provision of this Agreement will materially and irreparably harm the other
party, that money damages will accordingly not be an adequate remedy for such
breach and that the non-defaulting party, in its sole discretion and in addition
to its rights under this Agreement and any other remedies it may have at law or
in equity, may apply to any court of law or equity of competent jurisdiction for
specific performance and/or other injunctive relief in order to enforce or
prevent any breach of the provisions of this Agreement.
Section 10.05. PERFORMANCE. Each of the parties hereto shall use
all commercially reasonable efforts to cause to be performed all actions,
agreements and obligations set forth herein to be performed by any Affiliate of
such party.
Section 10.06. REFERENCES; CONSTRUCTION. The table of contents
and the section and other headings and subheadings contained in this Agreement
and the exhibits hereto are solely for the purpose of reference, are not part of
the agreement of the parties hereto, and shall not in any way affect the meaning
or interpretation of this Agreement or any exhibit hereto. All references to
days or months shall be deemed references to calendar days or months. Unless the
context otherwise requires, any reference to a "Section" or an "Exhibit" shall
be deemed to refer to a section of this Agreement or an exhibit to this
Agreement, as applicable. The words "hereof," "herein" and "hereunder" and words
of similar import referring to this Agreement refer to this Agreement as a whole
and not to any particular provision of this Agreement. This Agreement shall be
construed without regard to any presumption or rule requiring construction or
interpretation against the party drafting or causing the document to be drafted.
23
<PAGE>
Section 10.07. AMENDMENTS. This Agreement shall not be
supplemented, amended or modified in any manner whatsoever (including without
limitation by course of dealing or of performance or usage of trade) except in
writing signed by the parties.
Section 10.08. SUCCESSORS AND ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and permitted assigns. Except as set forth below, this Agreement may
not be assigned by any party by operation of law or otherwise without the
express written consent of the other party (which consent may be granted or
withheld). The Option granted to Viacom International pursuant to Article VII
hereof may be assigned to Viacom or any Subsidiary of Viacom.
Section 10.09. SEVERABILITY. Wherever possible, each provision of
this Agreement shall be interpreted in such a manner as to be effective and
valid under applicable law. If any portion of this Agreement is declared invalid
for any reason in any jurisdiction, such declaration shall have no effect upon
the remaining portions of this Agreement, which shall continue in full force and
effect as if this Agreement had been executed with the invalid portions thereof
deleted; PROVIDED that the entirety of this Agreement shall continue in full
force and effect in all other jurisdictions.
Section 10.10. ENTIRE AGREEMENT. Other than the Ancillary
Agreements, this Agreement constitutes the entire agreement of the parties
hereto with respect to the subject matter hereof and thereof and supersede all
prior agreements, including Article 7 of the Asset Purchase Agreement dated June
7, 1999 between Viacom Entertainment Canada Inc. and Blockbuster Canada Inc.,
and undertakings, both written and oral, between the parties with respect to the
subject matter hereof and thereof.
Section 10.11. NOTICES. All notices, consents, requests,
approvals, and other communications provided for or required herein, and all
legal process in regard thereto, must be in writing and shall be deemed validly
given, made or served, (a) when delivered personally or sent by telecopy to the
facsimile number indicated below with a required confirmation copy sent in
accordance with subsection (c) below; or (b) on the next business day after
delivery to a nationally-recognized express delivery service with instructions
and payment for overnight delivery; or (c) on the fifth (5th) day after
deposited in any depository regularly maintained by the United States postal
service, postage prepaid, certified or registered mail, return receipt
requested, addressed to the following addresses or to such other address as the
party to be notified shall have specified to the other party in accordance with
this section:
If to Viacom:
Viacom Inc.
1515 Broadway
New York New York 10036
Attention: Michael D. Fricklas, General Counsel
24
<PAGE>
Phone Number: 212-258-6070
Fax Number: 212-258-6099
If to Blockbuster:
Blockbuster Inc.
1201 Elm Street
Dallas, Texas 75270
Attention: Ed Stead, General Counsel
Phone Number: 214-854-3499
Fax Number: 214-854-3677
Section 10.12. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York. Each of the
parties hereto agrees that any dispute relating to or arising from this
Agreement or the transactions contemplated hereby shall be resolved only in the
court of the State of New York sitting in the County of New York or the United
States District Court for the Southern District of New York and the appellate
court having jurisdiction of appeals in such courts. In that context, and
without limiting the generality of the foregoing, each of the parties hereby
irrevocably and unconditionally:
(a) submits for itself and its property in any legal suit, action
or proceeding relating to this Agreement or any transaction contemplated
hereby, or for recognition and enforcement of any judgment in respect
thereof, to the exclusive jurisdiction of the courts of the State of New
York sitting in the County of New York or the United States District
Court for the Southern District of New York and appellate court having
jurisdiction of appeals in such courts, and each of the parties hereto
irrevocably and unconditionally agrees that all claims in respect of any
such suit, action, or proceeding shall be heard and determined in such
New York State court or, to the extent permitted by law, in such federal
court;
(b) consents that any such suit, action or proceeding may and
shall be brought in such courts and waives any objection that it may now
or hereafter have to the venue or jurisdiction or any such action or
proceeding in such court or that such action or proceeding was brought
in an inconvenient forum and agrees not to plead or claim the same;
(c) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or
certified mail (or any substantially similar form of mail), postage
prepaid, to such party in its address as provided in Section 10.11
hereof;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by New York law; and
25
<PAGE>
(e) agrees that this Agreement has been entered into in the State
of New York and performed in part in the State of New York.
Section 10.13. COUNTERPARTS. This Agreement may be executed in
two or more counterparts, each of which shall be deemed an original, and all of
which shall constitute one and the same instrument.
26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and delivered as of the date and year first written above.
VIACOM INC.
By: ________________________________
Name:
Title:
VIACOM INTERNATIONAL INC.
By: ________________________________
Name:
Title:
BLOCKBUSTER INC.
By: ________________________________
Name:
Title:
<PAGE>
EXHIBIT A
Form of Release and Indemnification Agreement
[Filed as Exhibit 10.2 to the Registration Statement on Form S-1 of Blockbuster]
<PAGE>
EXHIBIT B
Form of Transition Services Agreement
[Filed as Exhibit 10.3 to the Registration Statement on Form S-1 of Blockbuster]
<PAGE>
EXHIBIT C
Form of Registration Rights Agreement
[Filed as Exhibit 10.4 to the Registration Statement on Form S-1 of Blockbuster]
<PAGE>
EXHIBIT D
Form of Tax Matters Agreement
[Filed as Exhibit 10.5 to the Registration Statement on Form S-1 of Blockbuster]
<PAGE>
TABLE OF CONTENTS
Page
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ARTICLE I
DEFINITIONS
Section 1.01. Definitions.....................................................2
ARTICLE II
THE IPO AND THE SPLIT-OFF
Section 2.01. The IPO and Other Primary Offerings.............................7
Section 2.02. The Split-Off...................................................7
Section 2.03. Certain Stockholder Matters.....................................7
Section 2.04. Prior Relationship..............................................8
Section 2.05. Further Assurances Regarding the Split-Off......................8
ARTICLE III
EXPENSES
Section 3.01. General.........................................................9
Section 3.02. Certain Expenses Relating to the IPO and any Other
Primary Offerings by Blockbuster................................9
Section 3.03. Certain Expenses Relating to the Split-Off......................9
ARTICLE IV
ACCESS TO INFORMATION
Section 4.01. Restrictions on Disclosure of Information......................10
Section 4.02. Legally Required Disclosure of Confidential Information........10
Section 4.03. Access to Information..........................................11
Section 4.04. Record Retention...............................................11
ARTICLE V
COVENANTS
Section 5.01. Financial and Other Information................................12
Section 5.02. No Violations..................................................18
Section 5.03. Other Agreements...............................................18
ARTICLE VI
ASSIGNMENT AND ASSUMPTION
<PAGE>
Page
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Section 6.01. Assignment of Obligations......................................18
Section 6.02. Assumption of Obligations......................................19
ARTICLE VII
OPTIONS
Section 7.01. Options........................................................19
Section 7.02. Notice.........................................................19
Section 7.03. Option Exercise and Payment....................................20
Section 7.04. Effect of Failure to Exercise..................................20
Section 7.05. IPO............................................................20
Section 7.06. Termination of Options.........................................21
ARTICLE VIII
INDEMNIFICATION
Section 8.01. Indemnification Procedures.....................................21
ARTICLE IX
CONDITION TO CONSUMMATION OF TRANSACTIONS; TERMINATION
Section 9.01. Condition......................................................22
Section 9.02. Termination....................................................22
ARTICLE X
MISCELLANEOUS
Section 10.01. Limitation of Liability........................................23
Section 10.02. Further Assurances.............................................23
Section 10.03. Waiver.........................................................23
Section 10.04. Remedies.......................................................23
Section 10.05. Performance....................................................23
Section 10.06. References; Construction.......................................23
Section 10.07. Amendments.....................................................24
Section 10.08. Successors and Assignment......................................24
Section 10.09. Severability...................................................24
Section 10.10. Entire Agreement...............................................24
Section 10.11. Notices........................................................24
Section 10.12. Governing Law..................................................25
Section 10.13. Counterparts...................................................26
EXHIBITS
Exhibit A Form of Release and Indemnification Agreement
ii
<PAGE>
Exhibit B Form of Transition Services Agreement
Exhibit C Form of Registration Rights Agreement
Exhibit D Form of Tax Matters Agreement
iii
<PAGE>
Exhibit 10.2
FORM OF RELEASE AND INDEMNIFICATION AGREEMENT
DATED AS OF , 1999
BY AND BETWEEN
VIACOM INC.
AND
BLOCKBUSTER INC.
<PAGE>
TABLE OF CONTENTS
Page
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ARTICLE I
DEFINITIONS
Section 1.01. Definitions.....................................................1
ARTICLE II
INDEMNIFICATION
Section 2.01. Indemnification by Blockbuster..................................4
Section 2.02. Indemnification by Viacom.......................................5
Section 2.03. Certain Tax Matters.............................................5
Section 2.04. Registration Indemnification....................................5
Section 2.05. Calculation of Indemnification Payments.........................7
Section 2.06. Indemnification Procedures......................................8
Section 2.07. Remedies Cumulative.............................................8
ARTICLE III
RELEASE
Section 3.01. General Release.................................................8
ARTICLE IV
MISCELLANEOUS
Section 4.01. Further Agreements..............................................9
Section 4.02. Amendments......................................................9
Section 4.03. Successors and Assignment.......................................9
Section 4.04. Consolidation, Merger and Sale of Assets........................9
Section 4.05. Severability...................................................10
Section 4.06. Entire Agreement...............................................10
Section 4.07. Notices........................................................10
Section 4.08. Governing Law..................................................11
Section 4.09. Counterparts...................................................12
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RELEASE AND INDEMNIFICATION AGREEMENT
RELEASE AND INDEMNIFICATION AGREEMENT (this "AGREEMENT") dated as
of , 1999 by and between VIACOM INC., a Delaware corporation ("VIACOM") and
BLOCKBUSTER INC., a Delaware corporation and an indirect, wholly owned
subsidiary of Viacom ("BLOCKBUSTER").
RECITALS
WHEREAS, on September 29, 1994, Viacom acquired the businesses
and operations of Blockbuster Entertainment Corporation, a Delaware Corporation
("BEC") through a merger of BEC with and into Viacom (the "MERGER");
WHEREAS, since the Merger, Viacom has owned and operated the
acquired businesses and operations of BEC and other related businesses and
operations and has made significant improvements and contributions thereto and
has transferred certain of the assets, businesses and operations acquired in the
Merger and certain other related assets, businesses and operations to
Blockbuster and its Subsidiaries (collectively, the "ASSET TRANSFERS");
WHEREAS, Viacom presently intends to split-off Blockbuster in a
tax-free transaction;
WHEREAS, prior to such split-off, Blockbuster proposes to issue
shares of its common stock in an initial public offering registered under the
Securities Act of 1933, as amended;
WHEREAS, in consideration of the foregoing and as a condition to
the willingness of the parties to proceed with the initial public offering,
Blockbuster has agreed to release and indemnify Viacom, and Viacom has agreed to
release and indemnify Blockbuster, as more fully described below; and
NOW, THEREFORE, in consideration of the mutual covenants set
forth in this Agreement and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
Section 1.01. DEFINITIONS. As used in this Agreement, the
following terms shall have the following meanings:
"AFFILIATES" means, with respect to any specified Person, any
Person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with such specified
Person; PROVIDED, HOWEVER, that prior to the Split-Off, Affiliates of
Blockbuster or Viacom shall only include Persons who would be affiliates of
<PAGE>
Blockbuster or Viacom, respectively, assuming that the Split-Off had occurred
immediately prior to the determination as to whether such Person was an
affiliate of Blockbuster or Viacom, respectively.
"AGREEMENT" has the meaning ascribed thereto in the Preamble.
"ASSET TRANSFERS" has the meaning ascribed thereto in the
Recitals.
"BEC" has the meaning ascribed thereto in the Recitals.
"BLOCKBUSTER" has the meaning ascribed thereto in the Preamble.
"BLOCKBUSTER BUSINESS" has the meaning ascribed thereto in
Section 2.01(a)(i).
"BLOCKBUSTER REGISTRATION STATEMENT" means any registration
statement (or any preliminary or final prospectus included therein), information
memorandum or other offering document relating to a primary offer and sale of
securities of Blockbuster prepared by Blockbuster or at its direction, in each
case including all exhibits thereto and as supplemented and amended from time to
time.
"BLOCKBUSTER SUBSIDIARY OBLIGORS" means, collectively, any direct
or indirect Subsidiary of Blockbuster that is or becomes an obligor on,
guarantees, or otherwise becomes directly or indirectly liable with respect to
any Senior Indebtedness of Blockbuster.
"INDEMNIFIED PARTY" means any Person who is entitled to received
payment or defense from an Indemnifying Party pursuant to this Agreement.
"INDEMNIFYING PARTY" means any party who is required to pay or
defend any other Person pursuant to this Agreement.
"IPO" means the initial public offering by Blockbuster of shares
of Blockbuster Class A Common Stock as contemplated by the IPO Registration
Statement.
"IPO AND SPLIT-OFF AGREEMENT" means Initial Public Offering and
Split-Off Agreement date as of the dated hereof among Viacom, Viacom
International Inc. and Blockbuster.
"IPO REGISTRATION STATEMENT" means the Registration Statement on
Form S-1, Registration No. 333-77899, of Blockbuster, including all exhibits
thereto and as supplemented and amended from time to time.
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"INTERCOMPANY AGREEMENTS" means this Agreement, the IPO and
Split-Off Agreement and the Transition Services Agreement, the Registration
Rights Agreement and the Tax Matters Agreement, each dated the date hereof by
and between the parties.
"LOSSES" has the meaning ascribed thereto in Section 2.01(a).
"MERGER" has the meaning ascribed thereto in the Recitals.
"PERSON" means any individual, corporation, limited or general
partnership, limited liability company, joint venture association, joint stock
company, trust unincorporated organization or government or any agency or
political subdivision thereof.
"REPRESENTATIVES" means directors, officers, employees, agents,
consultants, advisors, accountants, attorneys and representatives.
"SECURITIES ACT" means the Securities Act of 1933, as amended
from time to time, together with the rules and regulations promulgated
thereunder.
"SENIOR INDEBTEDNESS" means, with respect to a Person, (i) all
senior indebtedness of such Person for borrowed money, (ii) all senior
obligations of such Person evidenced by bonds, debentures, notes or other
similar instruments and (iii) all senior indebtedness of others secured by a
lien on any property of such person.
"SPLIT-OFF" means the distribution of Blockbuster Common Stock by
Viacom in one or more transactions occurring after the IPO that collectively
have the effect that all or a substantial part of shares of Blockbuster Common
Stock held by Viacom are distributed to all or some of the stockholders of
Viacom, whenever such transaction(s) shall occur.
"SPLIT-OFF REGISTRATION STATEMENT" means any registration
statement (or any preliminary or final prospectus included therein), information
memorandum or other offering document relating to the Split-Off, in each case
including all exhibits thereto and as supplemented and amended from time to
time.
"SUBSIDIARY" means with respect to any Person, any other Person a
majority of the equity ownership or voting stock of which is at the time owned,
directly or indirectly, by such Person and/or one or more other Subsidiaries of
such Person; PROVIDED, HOWEVER, that prior to the Split-Off, a Subsidiary of
Viacom shall only include Persons who would be a Subsidiary of Viacom assuming
the Split-Off has occurred immediately prior to the determination as to whether
such Person was a Subsidiary of Viacom.
"TRANSFER COSTS" means any payments, costs or expenses paid to a
third party associated with the Asset Transfers.
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"VIACOM" has the meaning ascribed thereto in the Preamble.
"VIACOM BUSINESS" has the meaning ascribed thereto in Section
2.02.
"VIACOM GUARANTEES" means guarantees of Viacom and its
Subsidiaries with respect to obligations arising out of or relating to the
Blockbuster Business, including without limitation guarantees or other
obligations under leases or other agreements relating to video and music stores,
offices, warehouses and equipment.
ARTICLE II
INDEMNIFICATION
Section 2.01. INDEMNIFICATION BY BLOCKBUSTER. (a) Blockbuster and
any Blockbuster Subsidiary Obligor jointly and severally agree to indemnify and
hold harmless Viacom and its past, present or future Subsidiaries and Affiliates
and any of their past, present or future Representatives, heirs, executors and
any of their successors and assigns against any and all payments, losses,
liabilities, damages, claims, and expenses (including without limitation,
attorney's fees and expenses incurred in good faith) and costs whatsoever
("LOSSES"), as incurred, arising out of or relating to:
(i) all assets, businesses and operations conducted, operated,
managed or owned, in whole or in part, by (A) BEC or any Person that was
any at time a Subsidiary or Affiliate of BEC, (B) Viacom or any Person
that was any at time a Subsidiary or Affiliate of Viacom that were the
responsibility of the chief executive officer of the Blockbuster
Entertainment operating unit of Viacom, (C) Blockbuster or any Person
that was at any time a Subsidiary or Affiliate of Blockbuster, or (D)
any successor, assign or Representative of any of the foregoing at any
time, whether before, at or after the IPO (including without limitation
any assets, businesses or operations that were purchased, newly started,
discontinued or sold) or any transaction related thereto or causes of
action arising therefrom (collectively, the "BLOCKBUSTER BUSINESS"); and
(ii) the Transfer Costs;
PROVIDED that, in case of clause (i) above, assets, businesses and operations
referred to therein shall (A) include, without limitation, home video retailing
(whether videocassette, laserdisc, digital versatile disc, digital video express
or otherwise and whether rental or sale or in a physical store or over the
Internet), video game retailing (whether rental or sale), music retailing, the
operation of children and adult entertainment centers (but this indemnification
shall not apply to assets, businesses and operations conducted by Paramount
Parks) and the development, marketing, sale and management of franchises related
to the foregoing assets, businesses and operations and the Viacom Guarantees and
(B) exclude all assets, businesses and operations of Spelling Entertainment
Group Inc. and its Subsidiaries (including Republic Entertainment Inc. and
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WorldVision Inc.), Showtime Networks Inc.,Virgin Interactive Entertainment
Limited and Virgin Interactive Entertainment Inc.
(b) To the extent that a Subsidiary of Blockbuster becomes a
Blockbuster Subsidiary Obligor, Blockbuster shall cause such Subsidiary to
become a party to this Agreement through an amendment hereto pursuant to which
such Blockbuster Subsidiary Obligor will expressly assume all of the
obligations, and acquire all of the rights, of Blockbuster under this Agreement.
Such assumption of obligations and acquisition of rights shall in no way
discharge Blockbuster from any of its obligations hereunder or diminish any of
Blockbuster's rights hereunder, as the case may be. Such amendment shall be (i)
executed and delivered to Viacom (and shall become effective) simultaneously
with the execution and delivery by such Blockbuster Subsidiary Obligor (and the
effectiveness) of the documentation pursuant to which it became a Blockbuster
Subsidiary Obligor and (ii) contain provisions reasonably satisfactory to Viacom
to maximize the likelihood that such amendment would not be subject to attack
under applicable fraudulent conveyance or similar laws.
(c) The obligations of the parties under this Section 2.01 shall
be in addition to any liability which any party may have to the other party.
Section 2.02. INDEMNIFICATION BY VIACOM. (a) Viacom agrees to
indemnify and hold harmless Blockbuster and its past, present or future
Subsidiaries and Affiliates and any of their past, present or future
Representatives, heirs and any of their executors, successors and assigns
against any and all Losses, as incurred, arising out of or relating to all
assets, businesses and operations conducted, operated, managed or owned, in
whole or in part, by Viacom or any Person that was at any time a Subsidiary or
Affiliate of Viacom or any predecessor, successor, assign or Representative of
any of the foregoing at any time whether before, at or after the IPO (including,
without limitation, any assets, businesses or operations that were purchased,
newly started, discontinued or sold) or any transaction related thereto or
causes of action arising therefrom other than the Blockbuster Business and
Transfer Losses which Blockbuster and any Blockbuster Subsidiary Obligor agree
to indemnify Viacom pursuant to Section 1.01) (the "VIACOM BUSINESS")
(b) The obligations of the parties under this Section 2.02 shall
be in addition to any liability which any party may have to the other party.
Section 2.03. CERTAIN TAX MATTERS. Notwithstanding anything to
the contrary herein, the rights and obligations of the parties with respect to
indemnification for the tax matters that are the subject matter of the Tax
Matters Agreement dated as of the date hereof between the parties thereto shall
be governed solely by such agreement.
Section 2.04. REGISTRATION INDEMNIFICATION. (a) Blockbuster and
any Blockbuster Subsidiary Obligor jointly and severally agree to indemnify and
hold harmless Viacom and each Person, if any, who controls Viacom within the
meaning of the Securities Act
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and Affiliates and Representatives of each of the foregoing from and against any
and all Losses (including, without limitation, any legal or other expenses
incurred in connection with defending or investigating any such action or
claim), as incurred, arising out of or relating to any untrue statement or
alleged untrue statement of a material fact contained in, or incorporated by
reference into (i) any Blockbuster Registration Statement filed at or prior to
the date of the Split-Off, including, without limitation, the IPO Registration
Statement and (ii) any Split-Off Registration Statement or any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except that
Blockbuster and any Blockbuster Subsidiary Obligor shall not be liable in any
such case to the extent that any such Losses are arising out of or relating to
any such untrue statement or omission or alleged untrue statement or omission
based upon information relating to Viacom furnished to Blockbuster in writing by
Viacom expressly for use therein. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of Viacom and shall
survive the transfer of such securities. In the case of an offering with respect
to which Viacom has designated the lead or managing underwriters (or Viacom is
offering securities of Blockbuster directly, without an underwriter), this
indemnity does not apply to any Loss arising out of or relating to any untrue
statement or alleged untrue statement or omission or alleged omission in any
preliminary prospectus or offering memorandum if a copy of a final prospectus or
offering memorandum was not sent or given by or on behalf of any underwriter (or
Viacom) to such Person asserting such Loss at or prior to the written
confirmation of the sale of the securities of Blockbuster as required by the
Securities Act and such untrue statement or omission had been corrected in such
final prospectus or offering memorandum.
(b) Viacom agrees to indemnify and hold harmless Blockbuster and
each Person, if any, who controls Blockbuster within the meaning of the
Securities Act and Affiliates and Representatives of each of the foregoing from
and against any and all Losses (including, without limitation, any legal or
other expenses incurred in connection with defending or investigating any such
action or claim), as incurred, arising out of or relating to any untrue
statement or alleged untrue statement of a material fact contained in, or
incorporated by reference into, (i) any Blockbuster Registration Statement filed
at or prior to the date of the Split-Off, including, without limitation, the IPO
Registration Statement, (ii) and any Split-Off Registration Statement, or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, but
only with reference to Losses arising out of or relating to any untrue statement
or omission or alleged untrue statement or omission based on information
relating to Viacom furnished to Blockbuster in writing by Viacom expressly for
use therein. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of Blockbuster and shall survive the
transfer of such securities. In the case of an offering with respect to which
Blockbuster has designated the lead or managing underwriters (or Blockbuster is
offering securities of Blockbuster directly, without an underwriter), this
indemnity does not apply to any Loss arising out of or relating to any untrue
statement or alleged untrue statement or omission or alleged omission in any
preliminary prospectus or offering memorandum if a copy of a final prospectus or
offering memorandum was not sent or given by or on behalf of any underwriter (or
Blockbuster) to such
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Person asserting such Loss at or prior to the written confirmation of the sale
of the securities of Blockbuster as required by the Securities Act and such
untrue statement or omission had been corrected in such final prospectus or
offering memorandum.
(c) If the indemnification provided for in this Section 2.04
shall for any reason be unavailable (other than in accordance with its terms) to
an Indemnified Party in respect of any Loss referred to therein, then each
Indemnifying Party shall, in lieu of indemnifying such Indemnified Party,
contribute to the amount paid or payable by such Indemnified Party as a result
of such Loss as between Blockbuster on the one hand and Viacom on the other, in
such proportion as is appropriate to reflect the relative fault of Blockbuster
and of Viacom in connection with such statements or omissions which resulted in
such Loss as well as any other relevant equitable considerations. The relative
fault of Blockbuster on the one hand and of Viacom on the other shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by such party, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission, but not by reference to Viacom's stock
ownership in Blockbuster. The amount paid or payable by an Indemnified Party as
a result of the Loss in respect thereof, referred to above in this paragraph (c)
shall be deemed to include, for purposes of this paragraph (c), any legal or
other expenses reasonably incurred by such Indemnified Party in connection with
investigating or defending any such action or claim. Blockbuster and Viacom
agree that it would not be just and equitable if contribution pursuant to this
Section 2.04 were determined by PRO RATA allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in this paragraph. Notwithstanding any other provisions of this Section 2.04,
Viacom shall not be required to contribute any amount in excess of the amount by
which the total price at which the securities of Blockbuster were offered by
Viacom to the public exceeds the amount of any damages which Viacom has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No party guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any party who was not guilty of such
fraudulent misrepresentation.
(d) Indemnification and contribution similar to that specified in
the preceding paragraphs of this Section 2.04 (with appropriate modifications)
shall be given by Blockbuster and Viacom with respect to any required
registration or other qualification of securities under any state law or
regulation or governmental authority.
(e) The obligations of the parties under this Section 2.04 shall
be in addition to any liability which any party may otherwise have to the other
party.
Section 2.05. CALCULATION OF INDEMNIFICATION PAYMENTS. (a) The
amount which any Indemnifying Party is required to pay to any Indemnified Party
pursuant to this Agreement shall be reduced (including, but not limited to,
retroactively) by any recovery, judgment, settlement or other amounts actually
recovered, including insurance proceeds, by such
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Indemnified Party with respect to such Losses. If an Indemnified Party shall
have received payment with respect to Losses and shall subsequently actually
receive a recovery, judgment, settlement or other amount with respect to such
Losses, then such Indemnified Party shall promptly, but in no event later than
15 business days after such recovery, judgment, settlement or other amount
actually received, pay to such Indemnifying Party a sum equal to the lesser of
(i) the amount of such recovery, judgment, settlement or other amount actually
received or (ii) the amount of payments actually received previously in respect
of such Loss.
(b) All amounts which any Indemnifying Party is required to pay
to any Indemnified Party pursuant to this Agreement shall be calculated on an
after-tax basis, taking into account the net present value of any tax cost
and/or tax benefit to the Indemnified Party in connection with such
indemnification payment and the applicable Loss.
Section 2.06. INDEMNIFICATION PROCEDURES. The indemnification
procedures set forth in Section 8.01(b) of the IPO and Split-Off Agreement are
incorporated herein and made a part hereof for all purposes as if fully set
forth herein and shall govern the parties' rights and obligations with respect
thereto.
Section 2.07. REMEDIES CUMULATIVE. The remedies provided in this
Agreement shall be cumulative and shall not preclude assertion by any
Indemnified Party of any other rights or the seeking of any and all other
remedies against any Indemnifying Party.
ARTICLE III
RELEASE
Section 3.01. GENERAL RELEASE. (a) Blockbuster for itself and on
behalf of its Subsidiaries hereby releases, remises and forever discharges each
of Viacom and its Subsidiaries or Affiliates and any of their Representatives
from any losses, obligation or responsibility for any and all past actions or
failures to take action, including any actions which may be deemed to have been
negligent or grossly negligent, relating to, resulting from or arising out of
the operation or conduct of any assets, businesses and operations managed or
operated by, or operationally related or ancillary to, directly or indirectly,
the Blockbuster Business and the Viacom Business, except for any Losses,
obligation or responsibility for any willful or intentional misconduct in the
operation or conduct of the Blockbuster Business or the Viacom Business prior to
the date hereof.
(b) Viacom for itself and on behalf of its Subsidiaries hereby
releases, remises and forever discharges each of Blockbuster and its
Subsidiaries or Affiliates and any of their Representatives from any losses,
obligation or responsibility for any and all past actions or failures to take
action, including any actions which may be deemed to have been negligent or
grossly negligent, relating or ancillary to, resulting from or arising out of
the operation or conduct of any assets, businesses and operations managed or
operated by, or operationally related to, directly or indirectly, the
Blockbuster Business and the Viacom Business, except for any Losses, obligation
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or responsibility for any willful or intentional misconduct in the operation or
conduct of the Blockbuster Business or the Viacom Business prior to the date
hereof.
(c) Nothing set forth in subsections (a) and (b) shall limit or
otherwise affect any party's rights or obligations pursuant to, or contemplated
by the Intercompany Agreements.
ARTICLE IV
MISCELLANEOUS
Section 4.01. FURTHER AGREEMENTS. (a) Blockbuster agrees, and
Blockbuster will cause its Subsidiaries, to do all things necessary to (i)
maintain and conduct its business and operations, in a commercially reasonable
manner, including without limitation (x) paying, on a timely basis, principal
and interest in respect to its debt and rent in respect to leases and (y)
complying with its obligations under any credit agreement, indenture, lease,
guarantee or other agreement or document, and (ii) minimize any obligation
Viacom or any of its Subsidiaries (other than Blockbuster and its Subsidiaries)
may have under any standby, letter of credit, guarantee or otherwise.
(b) Viacom agrees, and Viacom will cause its Subsidiaries, to do
all things necessary to (i) maintain and conduct its business and operations, in
a commercially reasonable manner, including without limitation (x) paying, on a
timely basis, principal and interest in respect to its debt and (y) complying
with its obligations under any credit agreement, indenture, lease, guarantee or
other agreement or document, and (ii) minimize any obligation Blockbuster or any
of its Subsidiaries may have under any standby, letter of credit, guarantee or
otherwise.
Section 4.02. AMENDMENTS. This Agreement shall not be
supplemented, amended or modified in any manner whatsoever (including without
limitation by course of dealing or of performance or usage of trade) except in
writing signed by the parties.
Section 4.03. SUCCESSORS AND ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and permitted assigns. Except as set forth in Section 4.04 hereof,
this Agreement may not be assigned by either party without the express written
consent of the other party (which consent shall not be unreasonably withheld).
Section 4.04. CONSOLIDATION, MERGER AND SALE OF ASSETS. Until
seven (7) years after the date hereof, in the event that Blockbuster
consolidates, merges, sells assets or engages in any other similar transaction
and Blockbuster is required, pursuant to an anti-consolidation, merger and/or
sale of assets covenant or other similar covenant contained in the then existing
credit agreement of Blockbuster, as it may be amended, restated, supplemented,
refinanced,
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extended or otherwise modified from time to time, to obtain the consent of the
banks who are parties thereto and, in obtaining such consent, such banks receive
a benefit, monetary or otherwise, Blockbuster shall give the same benefit(s)
PARI PASSU (if applicable) to Viacom; PROVIDED that if (x) there is no
anti-consolidation, merger and/or sale of assets covenant or other similar
covenant contained in such credit agreement at such time or (y) there is no such
credit agreement existing at such time, the anti-consolidation, merger and/or
sale of assets covenant or other similar covenant contained in the latest credit
agreement that contained such covenants will be incorporated by reference herein
and, if consent is required under such covenant, Blockbuster must obtain
Viacom's written consent prior to any consolidation, merger, sale of assets or
similar transaction; PROVIDED, HOWEVER, that this Section 2.05 does not apply if
the Split-Off (or other transaction whereby Blockbuster ceases to be a
Subsidiary of Viacom) has not been consummated.
Section 4.05. SEVERABILITY. Wherever possible, each provision of
this Agreement shall be interpreted in such a manner as to be effective and
valid under applicable law. If any portion of this Agreement is declared invalid
for any reason in any jurisdiction, such declaration shall have no effect upon
the remaining portions of this Agreement, which shall continue in full force and
effect as if this Agreement had been executed with the invalid portions thereof
deleted; PROVIDED, that the entirety of this Agreement shall continue in full
force and effect in all other jurisdictions.
Section 4.06. ENTIRE AGREEMENT. Other then the other Intercompany
Agreements, this Agreement constitutes the entire agreement of the parties
hereto with respect to the subject matter hereof and thereof and supersede all
prior agreements and undertakings, both written and oral, between the parties
with respect to the subject matter hereof and thereof.
Section 4.07. NOTICES. All notices, consents, requests,
approvals, and other communications provided for or required herein, and all
legal process in regard thereto, must be in writing and shall be deemed validly
given, made or served, (a) when delivered personally or sent by telecopy to the
facsimile number indicated below with a required confirmation copy sent in
accordance with subsection (c) below; or (b) on the next business day after
delivery to a nationally-recognized express delivery service with instructions
and payment for overnight delivery; or (c) on the fifth (5th) day after
deposited in any depository regularly maintained by the United States postal
service, postage prepaid, certified or registered mail, return receipt
requested, addressed to the following addresses or to such other address as the
party to be notified shall have specified to the other party in accordance with
this section:
If to Viacom:
Viacom Inc.
1515 Broadway
New York New York 10036
Attention: Michael D. Fricklas, General Counsel
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Phone Number: 212-258-6070
Fax Number: 212-258-6099
If to Blockbuster:
Blockbuster Inc.
1201 Elm Street
Dallas, Texas 75270
Attention: Ed Stead, General Counsel
Phone Number: 214-854-3499
Fax Number: 214-854-3677
Section 4.08. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York. Each of the
parties hereto agrees that any dispute relating to or arising from this
Agreement or the transactions contemplated hereby shall be resolved only in the
court of the State of New York sitting in the County of New York or the United
States District Court for the Southern District of New York and the appellate
court having jurisdiction of appeals in such courts. In that context, and
without limiting the generality of the foregoing, each of the parties hereby
irrevocably and unconditionally:
(a) submits for itself and its property in any legal suit, action
or proceeding relating to this Agreement or any transaction contemplated hereby,
or for recognition and enforcement of any judgment in respect thereof, to the
exclusive jurisdiction of the courts of the State of New York sitting in the
County of New York or the United States District Court for the Southern District
of New York and appellate court having jurisdiction of appeals in such courts,
and each of the parties hereto irrevocably and unconditionally agrees that all
claims in respect of any such suit, action, or proceeding shall be heard and
determined in such New York State court or, to the extent permitted by law, in
such federal court;
(b) consents that any such suit, action or proceeding may and
shall be brought in such courts and waives any objection that it may now or
hereafter have to the venue or jurisdiction or any such action or proceeding in
such court or that such action or proceeding was brought in an inconvenient
forum and agrees not to plead or claim the same;
(c) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or certified
mail (or any substantially similar form of mail), postage prepaid, to such party
in its address as provided in Section 4.07 hereof;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by New York law; and
(e) agrees that this Agreement has been entered into in the State
of New York and performed in part in the State of New York.
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Section 4.09. COUNTERPARTS. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, and all of
which shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
VIACOM INC.
By:
-----------------------------
Name:
Title:
BLOCKBUSTER INC.
By:
-----------------------------
Name:
Title:
13
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Exhibit 10.3
FORM OF TRANSITION SERVICES AGREEMENT
DATED AS OF , 1999
BY AND BETWEEN
VIACOM INC.
AND
BLOCKBUSTER INC.
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TABLE OF CONTENTS
Page
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ARTICLE I
FEES AND TERM
Section 1.01. Price and Payment...............................................1
Section 1.02. Term............................................................2
ARTICLE II
SERVICES
Section 2.01. Services........................................................2
ARTICLE III
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 3.01. Transitional Services...........................................3
Section 3.02. Indemnity by Service Receiver...................................3
Section 3.03. Indemnification Procedures......................................4
ARTICLE IV
MISCELLANEOUS
Section 4.01. Limitation of Liability.........................................4
Section 4.02. Relationship of the Parties.....................................4
Section 4.03. Force Majeure...................................................4
Section 4.04. Amendments......................................................5
Section 4.05. Successors and Assignment.......................................5
Section 4.06. Severability....................................................5
Section 4.07. Entire Agreement................................................5
Section 4.08. Notices.........................................................5
Section 4.09. Governing Law...................................................6
Section 4.10. Counterparts....................................................7
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TRANSITION SERVICES AGREEMENT
TRANSITION SERVICES AGREEMENT (this "AGREEMENT") dated as of ,
1999 by and between VIACOM INC., a Delaware corporation ("VIACOM") and
BLOCKBUSTER INC., a Delaware corporation and an indirect, wholly owned
subsidiary of Viacom ("BLOCKBUSTER").
RECITALS
WHEREAS, since September 29, 1994, Viacom has owned and operated
the businesses and operations related to Blockbuster;
WHEREAS, Viacom presently intends to split-off Blockbuster in a
tax-free transaction;
WHEREAS, prior to such split-off, Blockbuster proposes to issue
shares of its common stock in an initial public offering registered under the
Securities Act of 1933, as amended;
WHEREAS, prior to the initial public offering of Blockbuster,
Viacom has heretofore provided certain services to Blockbuster;
WHEREAS, Blockbuster has requested from Viacom that certain such
services continue for a limited period of time pursuant to this Agreement; and
WHEREAS, Viacom agreed to provide and Blockbuster agreed to be
provided with these services on terms and conditions set forth herein (Viacom as
such provider of transitional services referred to herein as the "SERVICE
PROVIDER" and Blockbuster as such receiver of transitional services referred to
herein as the "SERVICE RECEIVER").
NOW, THEREFORE, in consideration of the above premises and the
mutual covenants contained herein, it is agreed by and between the parties as
follows:
Capitalized terms not otherwise defined herein have the meaning given to
them in the Initial Public Offering and Split-Off Agreement dated as of the
dated hereof among Viacom, Viacom International Inc. and Blockbuster.
ARTICLE I
FEES AND TERM
Section 1.01. PRICE AND PAYMENT. (a) As consideration for the
transitional services to be provided to Blockbuster by Viacom under the terms of
this Agreement, Blockbuster shall initially pay to Viacom a services fee (the
"BLOCKBUSTER SERVICES FEE") of Dollars ($ ) per month, which is based upon
Viacom's cost in providing these services. The
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Blockbuster Services Fee only represents payment with respect to the
transitional services and not for other payments, costs expenses related to the
underlying transitional services themselves. The Blockbuster Services Fee shall
be payable by Blockbuster to Viacom in arrears 15 days after the close of each
month (prorated for any partial month) during the term of this Agreement. Any
transitional services provided by Viacom to Blockbuster beyond the transitional
services covered by the Blockbuster Services Fee shall be billed to Blockbuster
on a cost basis, or on such other basis as the parties may agree from time to
time. The Blockbuster Services Fee shall be reviewed and either increased or
reduced from time to time to account for Viacom's cost of providing the
transitional services hereunder.
(b) In addition to the Blockbuster Services Fee, Blockbuster
shall promptly pay or reimburse Viacom for any out-of-pocket payments, costs or
expenses incurred in good faith associated with, or related to, the underlying
transitional services provided by Viacom hereunder.
Section 1.02. TERM. The term of this Agreement (the "TERM") shall
commence on the date hereof and shall expire on the closing of the Split-Off.
ARTICLE II
SERVICES
Section 2.01. SERVICES. (a) Viacom agrees to, or will cause one
of its Subsidiaries to, provide the following transitional services (subject to
such modification or adjustment as may be mutually agreed upon by the parties)
to Blockbuster and its Subsidiaries or Affiliates during the Term:
(i) CERTAIN CASH MANAGEMENT SERVICES: Viacom shall assist
Blockbuster with certain of its treasury and cash
management needs, including foreign currency and certain
hedging activities, consistent with past practice.
(ii) CERTAIN EMPLOYEE BENEFIT PLANS ADMINISTRATION: Viacom
shall assist in the administration to certain employees of
Blockbuster and its Subsidiaries all benefit plans and a
401(k) plan consistent with past practice.
(iii) INSURANCE ADMINISTRATION: Viacom shall administer
insurance coverage on behalf of Blockbuster and its
Subsidiaries and Affiliates under Viacom's insurance
policies against certain risks and in amounts consistent
with past practice. To the extent any loss is incurred
by Blockbuster and its Subsidiaries or Affiliates, such
entity shall be responsible for the payment of any
deductible amounts related thereto and any amounts in
excess of applicable coverage limits. In the event that
the "aggregate stop loss" deductible is exceeded in any
insurance period, Blockbuster and its Subsidiaries and
Affiliates, on one hand, and Viacom and its Subsidiaries
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and Affiliates, on the other hand, shall be responsible
for their PRO RATA portion of such deductible based upon
the losses of such parties submitted to Viacom's insurance
carrier(s) in such period. To the extent that one party is
allocated more than its PRO RATA portion of the such
deductible due to the timing of losses submitted to
Viacom's insurance carrier(s), the other party shall
promptly pay the first party an amount so that each party
has been properly allocated its PRO RATA portion of the
aggregate stop loss deductible.
(iv) CERTAIN ACCOUNTING AND FINANCIAL SERVICES: Viacom shall
provide to Blockbuster internal audit supervision and
shall assist Blockbuster with its periodic and public
reporting requirements pursuant to the U.S. securities
laws.
(v) TAX DEPARTMENT: Viacom shall provide to Blockbuster tax
compliance, reporting and planning services for
international, U.S. federal, state and local tax matters
consistent with past practice and in compliance with the
Tax Matters Agreement.
(vi) CERTAIN LEGAL SERVICES: Viacom shall provide to
Blockbuster certain legal services consistent with past
practice.
(vii) CERTAIN MANAGEMENT INFORMATION SYSTEM SERVICES. Viacom
shall provide to Blockbuster certain management
information system services consistent with past practice.
ARTICLE III
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 3.01. TRANSITIONAL SERVICES. (a) In the absence of gross
negligence or reckless or willful misconduct on Service Provider's part, and
whether or not it is negligent, Service Provider shall not be liable for any
claims, liabilities, damages, losses, costs, expenses (including, but not
limited to, settlements, judgments, court costs and reasonable attorneys' fees),
fines and penalties, arising out of or relating to any actual or alleged injury,
loss or damage of any nature whatsoever in providing or failing to provide the
transitional services to Service Receiver.
(b) Service Provider's liability for damages to Service Receiver
for any cause whatsoever, and regardless of the form of action, whether in
contract or in tort, including gross negligence or willful misconduct, shall be
limited to the Blockbuster Services Fee.
Section 3.02. INDEMNITY BY SERVICE RECEIVER. (a) Service Receiver
shall indemnify, defend and hold Service Provider harmless against any and all
claims, liabilities, damages, losses, costs, expenses (including, but not
limited to, settlements, judgments, court costs
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and reasonable attorneys' fees) and any loss or damage of any nature whatsoever
(including, without limitation, loss of or damage to property, or damage to the
environment) ("LOSSES") arising out of or relating to the providing or failing
to provide the transitional services by such Service Provider except for Losses
which are the direct and sole result of gross negligence or willful misconduct
of the personnel of Service Provider.
(b) Any claim for indemnity under this Article must be made by
written notice to the indemnifying party within one (1) year after the discovery
thereof. Notwithstanding the foregoing, the indemnities contained in this
Article shall survive for a period of three (3) years after the Term.
Section 3.03. INDEMNIFICATION PROCEDURES. The indemnification
procedures set forth in Section 8.01(b) of the IPO and Split-Off Agreement are
incorporated herein and made a part hereof for all purposes as if fully set
forth herein and shall govern the parties' rights and obligations with respect
thereto.
ARTICLE IV
MISCELLANEOUS
Section 4.01. LIMITATION OF LIABILITY. Neither Viacom nor
Blockbuster shall be liable to the other for any special, indirect, incidental
or consequential damages of the other arising in connection with this Agreement.
Section 4.02. RELATIONSHIP OF THE PARTIES. It is expressly
understood and agreed that in rendering the transitional services hereunder,
Viacom is acting as an independent contractor and that this Agreement does not
constitute Viacom as an employee, agent or other representative of Blockbuster
for any purpose whatsoever. Viacom does not have the right or authority to enter
into any contract, warranty, guarantee or other undertaking in the name or for
the account of Blockbuster, or to assume or create any obligation or liability
of any kind, express or implied, on behalf of Blockbuster, or to bind
Blockbuster in any manner whatsoever, or to hold itself out as having any right,
power or authority to create any such obligation or liability on behalf of
Blockbuster or to bind Blockbuster in any manner whatsoever (except as to any
actions taken by Viacom at the express written request and direction of
Blockbuster).
Section 4.03. FORCE MAJEURE. In the event that Viacom is
prevented from performing, or is unable to perform, any of its obligations under
this Agreement due to any act of God, fire, casualty, flood, war, strike, lock
out, failure of public utilities, injunction or any act, exercise, assertion or
requirement of governmental authority, epidemic, destruction of production
facilities, insurrection, inability to procure materials, labor, equipment,
transportation or energy sufficient to meet manufacturing needs, or any other
cause beyond the reasonable control of Viacom, and if Viacom shall have used its
reasonable best efforts to avoid such occurrence and minimize its duration and
has given prompt written notice to Blockbuster, then Viacom's
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performance for the period of delay or inability to perform due to such
occurrence shall be suspended. Should Viacom fail to perform hereunder and shall
have provided proper notice to Blockbuster that it is unable to perform on
account of one or more reasons set forth in this section, Blockbuster may obtain
replacement services from a third party for the duration of such delay or
inability to perform, or for such longer period as Blockbuster shall be
reasonably required to commit to in order to obtain such replacement services
and the Blockbuster Services Fee shall be reduced accordingly.
Section 4.04. AMENDMENTS. This Agreement shall not be
supplemented, amended or modified in any manner whatsoever (including without
limitation by course of dealing or of performance or usage of trade) except in
writing signed by the parties.
Section 4.05. SUCCESSORS AND ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and permitted assigns. This Agreement may not be assigned by any
party by operation of law or otherwise without the express written consent of
the other party (which consent may be granted or withheld by such party).
Section 4.06. SEVERABILITY. Wherever possible, each provision of
this Agreement shall be interpreted in such a manner as to be effective and
valid under applicable law. If any portion of this Agreement is declared invalid
for any reason in any jurisdiction, such declaration shall have no effect upon
the remaining portions of this Agreement, which shall continue in full force and
effect as if this Agreement had been executed with the invalid portions thereof
deleted; PROVIDED that the entirety of this Agreement shall continue in full
force and effect in all other jurisdictions.
Section 4.07. ENTIRE AGREEMENT. Other than the IPO and Split-Off
Agreement, the Release and Indemnification Agreement, the Registration Rights
Agreement and the Tax Matters Agreement, this Agreement constitutes the entire
agreement of the parties hereto with respect to the subject matter hereof and
thereof and supersedes all prior agreements and undertakings, both written and
oral, between the parties with respect to the subject matter hereof and thereof.
Section 4.08. NOTICES. All notices, consents, requests,
approvals, and other communications provided for or required herein, and all
legal process in regard thereto, must be in writing and shall be deemed validly
given, made or served, (a) when delivered personally or sent by telecopy to the
facsimile number indicated below with a required confirmation copy sent in
accordance with subsection (c) below; or (b) on the next business day after
delivery to a nationally recognized express delivery service with instructions
and payment for overnight delivery; or (c) on the fifth (5th) day after
deposited in any depository regularly maintained by the United States postal
service, postage prepaid, certified or registered mail, return receipt
requested, addressed to the following addresses or to such other address as the
party to be notified shall have specified to the other party in accordance with
this section:
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If to Viacom:
Viacom Inc.
1515 Broadway
New York New York 10036
Attention: Michael D. Fricklas, General Counsel
Phone Number: 212-258-6070
Fax Number: 212-258-6099
If to Blockbuster:
Blockbuster Inc.
1201 Elm Street
Dallas, Texas 75270
Attention: Ed Stead, General Counsel
Phone Number: 214-854-3499
Fax Number: 214-854-3677
Section 4.09. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York. Each of the
parties hereto agrees that any dispute relating to or arising from this
Agreement or the transactions contemplated hereby shall be resolved only in the
Court of the State of New York sitting in the County of New York or the United
States District Court for the Southern District of New York and the appellate
courts having jurisdiction of appeals in such courts. In that context, and
without limiting the generality of the foregoing, each of the parties hereby
irrevocably and unconditionally:
(a) submits for itself and its property in any legal suit, action
or proceeding relating to this Agreement or transaction contemplated hereby, or
for recognition and enforcement of any judgment in respect thereof, to the
exclusive jurisdiction of the Courts of the State of New York sitting in the
County of New York or the United States District Court for the Southern District
of New York and appellate courts having jurisdiction of appeals in such courts,
and each of the parties hereto irrevocably and unconditionally agrees that all
claims in respect of any such suit, action, or proceeding shall be heard and
determined in such New York State court or, to the extent permitted by law, in
such federal court;
(b) consents that any such suit, action or proceeding may and
shall be brought in such courts and waives any objection that it may now or
hereafter have to the venue or jurisdiction or any such action or proceeding in
such court or that such action or proceeding was brought in an inconvenient
forum and agrees not to plead or claim the same;
(c) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or certified
mail (or any substantially similar form of mail), postage prepaid, to such party
in its address as provided in Section 4.08 hereof;
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(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by New York law; and
(e) agrees that this Agreement has been entered into in the State
of New York and performed in part in the State of New York.
Section 4.10. COUNTERPARTS. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, and all of
which shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
VIACOM INC.
By:
------------------------------
Name:
Title:
BLOCKBUSTER INC.
By:
------------------------------
Name:
Title:
7
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Exhibit 10.4
FORM OF REGISTRATION RIGHTS AGREEMENT
DATED AS OF , 1999
BY AND BETWEEN
VIACOM INC.
AND
BLOCKBUSTER INC.
<PAGE>
TABLE OF CONTENTS
Page
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ARTICLE I
DEFINITIONS
Section 1.01. Definitions.....................................................2
Section 1.02. Internal References.............................................5
ARTICLE II
REGISTRATION RIGHTS
Section 2.01. Demand Registration - Registrable Securities....................5
Section 2.02. Piggyback Registration..........................................7
Section 2.03. Expenses.......................................................10
Section 2.04. Registration and Qualification.................................10
Section 2.05. Conversion of Other Securities, Etc............................12
Section 2.06. Underwriting; Due Diligence....................................12
Section 2.07. Indemnification and Contribution...............................13
Section 2.08. Rule 144 and Form S-3..........................................16
Section 2.09. Transfer of Registration Rights................................16
Section 2.10. Holdback Agreement.............................................17
ARTICLE III
MISCELLANEOUS
Section 3.01. Limitation of Liability........................................17
Section 3.02. Subsidiaries...................................................17
Section 3.03. Term...........................................................17
Section 3.04. Further Assurances.............................................17
Section 3.05. Specific Performance...........................................17
Section 3.06. Amendments.....................................................18
Section 3.07. Successors and Assigns.........................................18
Section 3.08. Severability...................................................18
Section 3.09. Entire Agreement...............................................18
Section 3.10. Notices........................................................18
Section 3.11. Governing Law..................................................19
Section 3.12. Counterparts...................................................20
<PAGE>
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT") dated as of ,
1999 by and between VIACOM INC., a Delaware corporation ("VIACOM"), and
BLOCKBUSTER INC., a Delaware corporation and an indirect, wholly owned
subsidiary of Viacom ("BLOCKBUSTER").
RECITALS
WHEREAS, since September 29, 1994, Viacom has owned and operated
the businesses and operations related to Blockbuster;
WHEREAS, Viacom presently intends to split-off Blockbuster in a
tax-free transaction;
WHEREAS, prior to such split-off, Blockbuster proposes to issue
shares of its common stock in an initial public offering registered under the
Securities Act of 1933, as amended;
WHEREAS, Viacom beneficially owns all of the issued and
outstanding class B common stock, par value $0.10 per share, of Blockbuster (the
"BLOCKBUSTER CLASS B COMMON STOCK"); and
WHEREAS, the parties desire to enter into this Agreement to set
forth their agreement regarding certain registration rights with respect to
Blockbuster Class B Common Stock (and any other securities issued in respect
thereof or in exchange therefor).
NOW, THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Viacom and Blockbuster, for
themselves, their successors, and assigns, hereby agree as follows:
Capitalized terms not otherwise defined herein have the meaning
given to them in the IPO and Split-Off Agreement dated , 1999 among Viacom,
Viacom International and Blockbuster.
ARTICLE I
DEFINITIONS
Section 1.01. DEFINITIONS. As used in this Agreement, the
following terms will have the following meanings, applicable both to the
singular and the plural forms of the terms described:
"AFFILIATES" means, with respect to any specified Person, any
Person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under
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common control with such specified Person; PROVIDED, HOWEVER, that prior to the
Split-Off, Affiliates of Blockbuster or Viacom shall only include Persons who
would be affiliates of Blockbuster or Viacom, respectively, assuming that the
Split-Off had occurred immediately prior to the determination as to whether such
Person was an affiliate of Blockbuster or Viacom, respectively.
"AGREEMENT" has the meaning ascribed thereto in the Preamble.
"APPLICABLE STOCK" means at any time the (i) shares of
Blockbuster Common Stock owned by Viacom and its Affiliates that were owned on
the date hereof, PLUS (ii) shares of Blockbuster Class B Common Stock purchased
by Viacom and its Affiliates pursuant to Article VII of the Initial Public
Offering and Split-Off Agreement, PLUS (iii) shares of Blockbuster Common Stock
that were issued to Viacom and its Affiliates in respect of shares described in
either clause (i) or clause (ii) in any reclassification, share combination,
share subdivision, share dividend, share exchange, merger, consolidation or
similar transaction or event.
"BLOCKBUSTER" has the meaning ascribed thereto in the Preamble.
"BLOCKBUSTER CLASS A COMMON STOCK" means the class A common
stock, par value $.01 per share of Blockbuster.
"BLOCKBUSTER CLASS B COMMON STOCK" has the meaning ascribed
thereto in the Recitals.
"BLOCKBUSTER COMMON STOCK" means the Blockbuster Class B Common
Stock, the Blockbuster Class A Common Stock, any other class of Blockbuster's
capital stock representing the right to vote generally for the election of
directors and, for so long as Blockbuster continues to be a subsidiary
corporation includable in a consolidated federal income tax return of the Viacom
Group, any other security of Blockbuster treated as stock for purposes of
Section 1504 of the Internal Revenue Code of 1986, as amended.
"COMPANY SECURITIES" has the meaning ascribed thereto in Section
2.02(b).
"DISADVANTAGEOUS CONDITION" has the meaning ascribed thereto in
Section 2.01(a).
"HOLDER" means Viacom, its Affiliates and any Transferee.
"HOLDER SECURITIES" has the meaning ascribed thereto in Section
2.02(b).
"IPO" means the initial public offering by Blockbuster of shares
of Blockbuster Class A Common Stock as contemplated by the IPO Registration
Statement.
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"IPO AND SPLIT-OFF AGREEMENT" means the Initial Public Offering
and Split-Off Agreement dated as of the dated hereof among Viacom, Viacom
International and Blockbuster.
"IPO DATE" means the date of completion of the initial sale of
Blockbuster Class A Common Stock in the IPO.
"LOSSES" has the meaning ascribed thereto in Section 2.01(a) of
the Release and Indemnification Agreement.
"OTHER HOLDERS" has the meaning ascribed thereto in Section
2.02(c).
"OTHER SECURITIES" has the meaning ascribed thereto in Section
2.02.
"OWNERSHIP PERCENTAGE" means, at any time, the fraction,
expressed as a percentage and rounded to the next highest thousandth of a
percent, whose numerator is the aggregate Value of the Applicable Stock and
whose denominator is the sum of the aggregate Value of the outstanding shares of
Blockbuster Common Stock; PROVIDED, HOWEVER, that any shares of Blockbuster
Common Stock issued by Blockbuster in violation of its obligations under Article
VII of the IPO and Split-Off Agreement shall not be deemed outstanding for the
purpose of determining the Ownership Percentage. For purposes of this
definition, "VALUE" means, with respect to any share of stock, the value of such
share determined by Viacom under principles applicable for purposes of Section
1504 of the Internal Revenue Code of 1986, as amended.
"PERSON" means any individual, corporation, limited or general
partnership, limited liability company, joint venture association, joint stock
company, trust unincorporated organization or government or any agency or
political subdivision thereof.
"REGISTRABLE SECURITIES" means shares of Blockbuster Common Stock
and any stock or other securities into which or for which such Blockbuster
Common Stock may hereafter be changed, converted or exchanged and any other
shares or securities issued to Holders of such Blockbuster Common Stock (or such
shares or other securities into which or for which such shares are so changed,
converted or exchanged) upon any reclassification, share combination, share
subdivision, share dividend, share exchange, merger, consolidation or similar
transaction or event or pursuant to the Nonvoting Stock Option. As to any
particular Registrable Securities, such Registrable Securities shall cease to be
Registrable Securities when (i) a registration statement with respect to the
sale by the Holder thereof shall have been declared effective under the
Securities Act and such securities shall have been disposed of in accordance
with such registration statement, (ii) they shall have been distributed to the
public in accordance with Rule 144, (iii) they shall have been otherwise
transferred, new certificates for them not bearing a legend restricting further
transfer shall have been delivered by Blockbuster and subsequent disposition of
them shall not require registration or qualification of them under the
Securities Act or any state securities or blue sky law then in effect or (iv)
they shall have ceased to be outstanding.
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"REGISTRATION EXPENSES" means any and all reasonable expenses
incident to performance of or compliance with any registration of securities
pursuant to Article II, including, without limitation, (i) all expenses,
including filing fees, in connection with the preparation, printing and filing
of the registration statement, any preliminary prospectus or final prospectus,
any other offering document and amendments and supplements thereto and the
mailing and delivering of copies thereof to any underwriters and dealers; (ii)
the cost of printing or producing any agreements among underwriters,
underwriting agreements, and blue sky or legal investment memoranda, any selling
agreements and any other documents in connection with the offering, sale or
delivery of the securities to be disposed of; (iii) all expenses in connection
with the qualification of the securities to be disposed of for offering and sale
under state securities laws, including the fees and disbursements of counsel for
the underwriters of securities in connection with such qualification and in
connection with any blue sky and legal investment surveys; (iv) the filing fees
incident to securing any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of the securities to be
disposed of; (v) transfer agents' and registrars' fees and expenses and the fees
and expenses of any other agent or trustee appointed in connection with such
offering; (vi) all security engraving and security printing expenses; (vii) all
fees and expenses payable in connection with the listing of the securities on
any securities exchange or automated interdealer quotation system or the rating
of such securities and (ix) any other fees and disbursements of underwriters
customarily paid by issuers of securities.
"RULE 144" means Rule 144 (or any successor rule to similar
effect) promulgated under the Securities Act.
"RULE 415 OFFERING" means an offering on a delayed or continuous
basis pursuant to Rule 415 (or any successor rule to similar effect) promulgated
under the Securities Act.
"SEC" means the U.S. Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended
from time to time, together with the rules and regulations promulgated
thereunder.
"SELLING HOLDER" has the meaning ascribed thereto in Section
2.04(e).
"SPLIT-OFF" means the distribution of Blockbuster Common Stock by
Viacom in one or more transactions occurring after the IPO that collectively
have the effect that all or a substantial part of the shares of Blockbuster
Common Stock held by Viacom are distributed to all or some of the stockholders
of Viacom, whenever such transaction(s) shall occur.
"SUBSIDIARY" means with respect to any Person, any other Person a
majority of the equity ownership or voting stock of which is at the time owned,
directly or indirectly, by such Person and/or one or more other Subsidiaries of
such Person; PROVIDED, HOWEVER, that prior to the Split-Off, a Subsidiary of
Viacom shall only include Persons who would be a Subsidiary of
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Viacom assuming the Split-Off has occurred immediately prior to the
determination as to whether such Person were a Subsidiary of Viacom.
"TRANSFEREE" has the meaning ascribed thereto in Section 2.09.
"VIACOM" has the meaning ascribed thereto in the Preamble.
"VIACOM GROUP" means Viacom and its Affiliates and Blockbuster
and its Affiliates.
"VIACOM INTERNATIONAL" is Viacom International Inc., a Delaware
corporation and a wholly owned subsidiary of Viacom.
"VIACOM OWNERSHIP REDUCTION" means any decrease at any time in
the Ownership Percentage to less than 45%.
"VIACOM TRANSFEREE" has the meaning ascribed thereto in Section
2.09(a).
Section 1.02. INTERNAL REFERENCES. Unless the context indicates
otherwise, references to Articles, Sections and paragraphs shall refer to the
corresponding articles, sections and paragraphs in this Agreement and references
to the parties shall mean the parties to this Agreement.
ARTICLE II
REGISTRATION RIGHTS
Section 2.01. DEMAND REGISTRATION - REGISTRABLE SECURITIES. (a)
Upon written notice provided at any time after the IPO Date from any Holder of
Registrable Securities requesting that Blockbuster effect the registration under
the Securities Act of any or all of the Registrable Securities held by such
Holder, which notice shall specify the intended method or methods of disposition
of such Registrable Securities, Blockbuster shall use its reasonable best
efforts to effect the registration under the Securities Act and applicable state
securities laws of such Registrable Securities for disposition in accordance
with the intended method or methods of disposition stated in such request
(including in a Rule 415 Offering, if Blockbuster is then eligible to register
such Registrable Securities on Form S-3 (or a successor form) for such
offering); provided that:
(i) with respect to any registration statement filed, or to be
filed, pursuant to this Section 2.01, if Blockbuster shall furnish to
the Holders of Registrable Securities that have made such request a
certified resolution of the Board of Directors of Blockbuster (adopted
by the affirmative vote of a majority of the directors not designated by
Viacom or its Affiliates) stating that in the Board of Directors' good
faith judgment it would (because of the existence of, or in anticipation
of, any acquisition or financing activity, or
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the unavailability for reasons beyond Blockbuster' reasonable control of
any required financial statements, or any other event or condition of
similar significance to Blockbuster) be significantly disadvantageous (a
"DISADVANTAGEOUS CONDITION") to Blockbuster for such a registration
statement to be maintained effective, or to be filed and become
effective, and setting forth the general reasons for such judgment,
Blockbuster shall be entitled to cause such registration statement to be
withdrawn and the effectiveness of such registration statement
terminated, or, in the event no registration statement has yet been
filed, shall be entitled not to file any such registration statement,
until such Disadvantageous Condition no longer exists (notice of which
Blockbuster shall promptly deliver to such Holders). Upon receipt of any
such notice of a Disadvantageous Condition, such Holders shall forthwith
discontinue use of the prospectus contained in such registration
statement and, if so directed by Blockbuster, each such Holder will
deliver to Blockbuster all copies, other than permanent file copies then
in such Holder's possession, of the prospectus then covering such
Registrable Securities current at the time of receipt of such notice;
PROVIDED that the filing of any such registration statement may not be
delayed for a period in excess of 90 days due to the occurrence of any
particular Disadvantageous Condition;
(ii) after any Viacom Ownership Reduction, the Holders of
Registrable Securities may collectively exercise their rights under this
Section 2.01 on not more than three occasions (it being acknowledged
that prior to any Viacom Ownership Reduction, there shall be no limit to
the number of occasions on which such Holders (other than any Viacom
Transferees and their Affiliates (other than Viacom or its Affiliates))
may exercise such rights); and
(iii) The Holders of Registrable Securities shall not have the
right to exercise registration rights pursuant to this Section 2.01
within the 180-day period following the registration and sale of
Registrable Securities effected pursuant to a prior exercise of the
registration rights provided in this Section 2.01.
(b) Notwithstanding any other provision of this Agreement to the
contrary, a registration requested by a Holder of Registrable Securities
pursuant to this Section 2.01 shall not be deemed to have been effected (and,
therefore, not requested for purposes of paragraph (a) above), (i) unless it has
become effective, (ii) if after it has become effective such registration is
interfered with by any stop order, injunction or other order or requirement of
the SEC or other governmental agency or court for any reason other than a
misrepresentation or an omission by such Holder and, as a result thereof, the
Registrable Securities requested to be registered cannot be completely
distributed in accordance with the plan of distribution set forth in the related
registration statement or (iii) if the conditions to closing specified in the
purchase agreement or underwriting agreement entered into in connection with
such registration are not satisfied or waived other than by reason of some act
or omission by such Holder of Registrable Securities.
(c) In the event that any registration pursuant to this Section
2.01 shall involve, in whole or in part, an underwritten offering, the Holders
of a majority of the Registrable
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Securities to be registered shall have the right to designate an underwriter or
underwriters as the lead or managing underwriters of such underwritten offering
reasonably acceptable to Blockbuster and, in connection with each registration
pursuant to this Section 2.01, such Holders may select one counsel to represent
all such Holders.
(d) Blockbuster shall have the right to cause the registration of
additional equity securities for sale for the account of any Person (including,
without limitation, Blockbuster, and any existing or former directors, officers
or employees of Blockbuster and its Affiliates) in any registration of
Registrable Securities requested by the Holders pursuant to paragraph (a) above;
PROVIDED, HOWEVER, that if such Holders are advised in writing (with a copy to
Blockbuster) by a nationally recognized investment banking firm selected by such
Holders reasonably acceptable to Blockbuster (which shall be the lead
underwriter or a managing underwriter in the case of an underwritten offering)
that, in such firm's good faith view, all or a part of such additional equity
securities cannot be sold and the inclusion of such additional equity securities
in such registration would be likely to have an adverse effect on the price,
timing or distribution of the offering and sale of the Registrable Securities
then contemplated by any Holder, the registration of such additional equity
securities or part thereof shall not be permitted. The Holders of the
Registrable Securities to be offered may require that any such additional equity
securities be included in the offering proposed by such Holders on the same
conditions as the Registrable Securities that are included therein. In the event
that the number of Registrable Securities requested to be included in a
registration statement by the Holders thereof exceeds the number which, in the
good faith view of such investment banking firm, can be sold without adversely
affecting the price, timing, distribution or sale of securities in the offering,
the number shall be allocated pro rata among the requesting Holders on the basis
of the relative number of Registrable Securities then held by each such Holder
(provided that any number in excess of a Holder's request may be reallocated
among the remaining requesting Holders in a like manner).
Section 2.02. PIGGYBACK REGISTRATION. In the event that
Blockbuster at any time after the IPO Date proposes to register any of its
Blockbuster Common Stock, any other of its equity securities or securities
convertible into or exchangeable for its equity securities (collectively,
including Blockbuster Common Stock, "OTHER SECURITIES") under the Securities
Act, whether or not for sale for its own account, in a manner that would permit
registration of Registrable Securities for sale for cash to the public under the
Securities Act, it shall at each such time give prompt written notice to each
Holder of Registrable Securities of its intention to do so and of the rights of
such Holder under this Section 2.02. Subject to the terms and conditions hereof,
such notice shall offer each such Holder the opportunity to include in such
registration statement such number of Registrable Securities as such Holder may
request. Upon the written request of any such Holder made within 15 days after
the receipt of Blockbuster' notice (which request shall specify the number of
Registrable Securities intended to be disposed of and the intended method of
disposition thereof), Blockbuster shall use its reasonable best efforts to
effect, in connection with the registration of the Other Securities, the
registration under the Securities Act of all Registrable Securities which
Blockbuster has been so requested to register, to the extent
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required to permit the disposition (in accordance with such intended method of
disposition thereof) of the Registrable Securities so requested to be
registered; PROVIDED that:
(a) if, at any time after giving such written notice of its
intention to register any Other Securities and prior to the effective date of
the registration statement filed in connection with such registration,
Blockbuster shall determine for any reason not to register the Other Securities,
Blockbuster may, at its election, give written notice of such determination to
such Holders and thereupon Blockbuster shall be relieved of its obligation to
register such Registrable Securities in connection with the registration of such
Other Securities, without prejudice, however, to the rights of the Holders of
Registrable Securities immediately to request that such registration be effected
as a registration under Section 2.01 to the extent permitted thereunder;
(b) if the registration referred to in the first sentence of this
Section 2.02 is to be an underwritten registration on behalf of Blockbuster, and
a nationally recognized investment banking firm selected by Blockbuster advises
Blockbuster in writing that, in such firm's good faith view, the inclusion of
all or a part of such Registrable Securities in such registration would be
likely to have an adverse effect upon the price, timing or distribution of the
offering and sale of the Other Securities then contemplated, Blockbuster shall
include in such registration: (i) first, all Other Securities Blockbuster
proposes to sell for its own account ("COMPANY SECURITIES"); (ii) second, up to
the full number of Registrable Securities held by Holders constituting Viacom
and its Affiliates that are requested to be included in such registration
(Registrable Securities that are so held being sometimes referred to herein as
"HOLDER SECURITIES") in excess of the number of Company Securities to be sold in
such offering which, in the good faith view of such investment banking firm, can
be sold without adversely affecting such offering and the sale of the Other
Securities then contemplated (and (x) if such number is less than the full
number of such Holder Securities, such number shall be allocated by Viacom among
Viacom and its Affiliates and (y) in the event that such investment banking firm
advises that less than all of such Holder Securities may be included in such
offering, Viacom and its Affiliates may withdraw their request for registration
of their Registrable Securities under this Section 2.02 and 90 days subsequent
to the effective date of the registration statement for the registration of such
Other Securities request that such registration be effected as a registration
under Section 2.01 to the extent permitted thereunder); (iii) third, up to the
full number of Registrable Securities held by Holders (other than Viacom and its
Affiliates) of Registrable Securities that are requested to be included in such
registration in excess of the number of Company Securities and Holder Securities
to be sold in such offering which, in the good faith view of such investment
banking firm, can be so sold without so adversely affecting such offering (and
(x) if such number is less than the full number of such Registrable Securities,
such number shall be allocated pro rata among such Holders on the basis of the
number of Registrable Securities requested to be included therein by each such
Holder and (y) in the event that such investment banking firm advises that less
than all of such Registrable Securities may be included in such offering, such
Holders may withdraw their request for registration of their Registrable
Securities under this Section 2.02 and 90 days subsequent to the effective date
of the registration statement for the registration of such Other Securities
request that such registration be effected as a registration under Section 2.01
to the extent permitted
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thereunder); and (iv) fourth, up to the full number of the Other Securities
(other than Company Securities), if any, in excess of the number of Company
Securities and Registrable Securities to be sold in such offering which, in the
good faith view of such investment banking firm, can be so sold without so
adversely affecting such offering (and, if such number is less than the full
number of such Other Securities, such number shall be allocated pro rata among
the holders of such Other Securities (other than Company Securities) on the
basis of the number of securities requested to be included therein by each such
holder);
(c) if the registration referred to in the first sentence of this
Section 2.02 is to be an underwritten secondary registration on behalf of
holders of Other Securities (the "OTHER HOLDERS"), and the lead underwriter or
managing underwriter advises Blockbuster in writing that in their good faith
view, all or a part of such additional securities cannot be sold and the
inclusion of such additional securities in such registration would be likely to
have an adverse effect on the price, timing or distribution of the offering and
sale of the Other Securities then contemplated, Blockbuster shall include in
such registration the number of securities (including Registrable Securities)
that such underwriters advise can be so sold without adversely affecting such
offering, allocated pro rata among the Other Holders and the Holders of
Registrable Securities on the basis of the number of securities (including
Registrable Securities) requested to be included therein by each Other Holder
and each Holder of Registrable Securities; PROVIDED that if such registration
statement is to be filed at any time after a Viacom Ownership Reduction, if any,
and if such Other Holders have requested that such registration statement be
filed pursuant to demand registration rights granted to them by Blockbuster,
Blockbuster shall include in such registration: (i) Other Securities sought to
be included therein by the Other Holders pursuant to the exercise of such demand
registration rights; (ii) the number of Holder Securities sought to be included
in such registration in excess of the number of Other Securities sought to be
included in such registration by the Other Holders which in the good faith view
of such investment banking firm, can be so sold without so adversely affecting
such offering (and (x) if such number is less than the full number of such
Holder Securities, such number shall be allocated by Viacom among Viacom and its
Affiliates and (y) in the event that such investment banking firm advises that
less than all of such Holder Securities may be included in such offering, Viacom
and its Affiliates may withdraw their request for registration of their
Registrable Securities under this Section 2.02 and 90 days subsequent to the
effective date of the registration statement for the registration of such Other
Securities request that such registration be effected as a registration under
Section 2.01 to the extent permitted thereunder); and (iii) the number of
Registrable Securities sought to be included in such registration by Holders
(other than Viacom and its Affiliates) of Registrable Securities in excess of
the number of Other Securities and the number of Holder Securities sought to be
included in such registration which, in the good faith view of such investment
banking firm, can be so sold without so adversely affecting such offering (and
(x) if such number is less than the full number of such Registrable Securities,
such number shall be allocated pro rata among such Holders on the basis of the
number of Registrable Securities requested to be included therein by each such
Holder and (y) in the event that such investment banking firm advises that less
than all of such Registrable Securities may be included in such offering, such
Holders may withdraw their request for registration of their Registrable
Securities under this Section 2.02 and 90 days
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subsequent to the effective date of the registration statement for the
registration of such Other Securities request that such registration be effected
as a registration under Section 2.01 to the extent permitted thereunder);
(d) Blockbuster shall not be required to effect any registration
of Registrable Securities under this Section 2.02 incidental to the registration
of any of its securities in connection with mergers, acquisitions, exchange
offers, subscription offers, dividend reinvestment plans or stock option or
other executive or employee benefit or compensation plans; and
(e) no registration of Registrable Securities effected under this
Section 2.02 shall relieve Blockbuster of its obligation to effect a
registration of Registrable Securities pursuant to Section 2.01.
Section 2.03. EXPENSES. Except as provided herein, Viacom shall
pay all or its pro rata share of Registration Expenses with respect to a
particular offering (or proposed offering), as the case may be, except for fees,
disbursements and expenses related to Blockbuster's counsel, accountants and
other advisors. Notwithstanding the foregoing, each Holder and Blockbuster shall
be responsible for its own internal administrative and similar costs, which
shall not constitute Registration Expenses.
Section 2.04. REGISTRATION AND QUALIFICATION. If and whenever
Blockbuster is required to effect the registration of any Registrable Securities
under the Securities Act as provided in Sections 2.01 or 2.02, Blockbuster shall
as promptly as practicable:
(a) prepare, file and use its reasonable best efforts to cause to
become effective a registration statement under the Securities Act relating to
the Registrable Securities to be offered;
(b) prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection therewith
as may be necessary to keep such registration statement effective and to comply
with the provisions of the Securities Act with respect to the disposition of all
Registrable Securities until the earlier of (A) such time as all of such
Registrable Securities have been disposed of in accordance with the intended
methods of disposition set forth in such registration statement and (B) the
expiration of (i) six months after such registration statement becomes effective
or (ii) twenty four months after a registration statement filed in a Rule 415
Offering becomes effective; PROVIDED, that such respective periods shall be
extended for such number of days that equals the number of days elapsing from
(x) the date the written notice contemplated by paragraph (f) below is given by
Blockbuster to (y) the date on which Blockbuster delivers to the Holders of
Registrable Securities the supplement or amendment contemplated by paragraph (f)
below;
(c) furnish to the Holders of Registrable Securities and to any
underwriter of such Registrable Securities such number of conformed copies of
such registration statement and
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of each such amendment and supplement thereto (in each case including all
exhibits), such number of copies of the prospectus included in such registration
statement (including each preliminary prospectus and any summary prospectus), in
conformity with the requirements of the Securities Act, such documents
incorporated by reference in such registration statement or prospectus, and such
other documents, as the Holders of Registrable Securities or such underwriter
may reasonably request, and a copy of any and all transmittal letters or other
correspondence to or received from, the SEC or any other governmental agency or
self-regulatory body or other body having jurisdiction (including any domestic
or foreign securities exchange) relating to such offering;
(d) use its reasonable best efforts to register or qualify all
Registrable Securities covered by such registration statement under the
securities or blue sky laws of such jurisdictions as the Holders of such
Registrable Securities or any underwriter to such Registrable Securities shall
request, and use its reasonable best efforts to obtain all appropriate
registrations, permits and consents in connection therewith, and do any and all
other acts and things which may be necessary or advisable to enable the Holders
of Registrable Securities or any such underwriter to consummate the disposition
in such jurisdictions of its Registrable Securities covered by such registration
statement; PROVIDED, that Blockbuster shall not for any such purpose be required
to qualify generally to do business as a foreign corporation in any such
jurisdiction wherein it is not so qualified or to consent to general service of
process in any such jurisdiction;
(e) (i) use its reasonable best efforts to furnish to each Holder
of Registrable Securities included in such registration (each, a "SELLING
HOLDER") and to any underwriter of such Registrable Securities an opinion of
counsel for Blockbuster addressed to each Selling Holder and dated the date of
the closing under the underwriting agreement (if any) (or if such offering is
not underwritten, dated the effective date of the registration statement) and
(ii) use its reasonable best efforts to furnish to each Selling Holder a "COLD
COMFORT" letter addressed to each Selling Holder and signed by the independent
public accountants who have audited the financial statements of Blockbuster
included in such registration statement, in each such case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) as are customarily covered in opinions of
issuer's counsel and in accountants' letters delivered to underwriters in
underwritten public offerings of securities and such other matters as the
Selling Holders may reasonably request and, in the case of such accountants'
letter, with respect to events subsequent to the date of such financial
statements;
(f) as promptly as practicable, notify the Selling Holders in
writing (i) at any time when a prospectus relating to a registration pursuant to
Sections 2.01 or 2.02 is required to be delivered under the Securities Act of
the happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading and (ii) of any request by the SEC or any
other regulatory body or other body having jurisdiction for any amendment of or
supplement to any registration statement or other document
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relating to such offering, and in either such case, at the request of the
Selling Holders prepare and furnish to the Selling Holders a reasonable number
of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such Registrable
Securities, such prospectus shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
are made, not misleading;
(g) if reasonably requested by the lead or managing underwriters,
use its reasonable best efforts to list all such Registrable Securities covered
by such registration on each securities exchange and automated inter-dealer
quotation system on which a class of common equity securities of Blockbuster is
then listed;
(h) to the extent reasonably requested by the lead or managing
underwriters, send appropriate officers of Blockbuster to attend any "ROAD
SHOWS" scheduled in connection with any such registration, with all
out-of-pocket costs and expense incurred by Blockbuster or such officers in
connection with such attendance to be paid by Blockbuster; and
(i) furnish for delivery in connection with the closing of any
offering of Registrable Securities pursuant to a registration effected pursuant
to Sections 2.01 or 2.02 unlegended certificates representing ownership of the
Registrable Securities being sold in such denominations as shall be requested by
the Selling Holders or the underwriters.
Section 2.05. CONVERSION OF OTHER SECURITIES, ETC. In the event
that any Holder offers any options, rights, warrants or other securities issued
by it or any other Person that are offered with, convertible into or exercisable
or exchangeable for any Registrable Securities, the Registrable Securities
underlying such options, rights, warrants or other securities shall continue to
be eligible for registration pursuant to Sections 2.01 and 2.02.
Section 2.06. UNDERWRITING; DUE DILIGENCE. (a) If requested by
the underwriters for any underwritten offering of Registrable Securities
pursuant to a registration requested under this Article II, Blockbuster shall
enter into an underwriting agreement with such underwriters for such offering,
which agreement will contain such representations and warranties by Blockbuster
and such other terms and provisions as are customarily contained in underwriting
agreements with respect to secondary distributions, including, without
limitation, indemnification and contribution provisions substantially to the
effect and to the extent provided in Section 2.07, and agreements as to the
provision of opinions of counsel and accountants' letters to the effect and to
the extent provided in Section 2.04(e). The Selling Holders on whose behalf the
Registrable Securities are to be distributed by such underwriters shall be
parties to any such underwriting agreement and the representations and
warranties by, and the other agreements on the part of, Blockbuster to and for
the benefit of such underwriters, shall also be made to and for the benefit of
such Selling Holders. Such underwriting agreement shall also contain such
representations and warranties by such Selling Holders and such other terms and
provisions as are customarily contained in underwriting
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agreements with respect to secondary distributions, including, without
limitation, indemnification and contribution provisions substantially to the
effect and to the extent provided in Section 2.07.
(b) In connection with the preparation and filing of each
registration statement registering Registrable Securities under the Securities
Act pursuant to this Article II, Blockbuster shall give the Holders of such
Registrable Securities and the underwriters, if any, and their respective
counsel and accountants, such reasonable and customary access to its books and
records and such opportunities to discuss the business of Blockbuster with its
officers and the independent public accountants who have certified the financial
statements of Blockbuster as shall be necessary, in the opinion of such Holders
and such underwriters or their respective counsel, to conduct a reasonable
investigation within the meaning of the Securities Act.
Section 2.07. INDEMNIFICATION AND CONTRIBUTION. (a) In the case
of each offering of Registrable Securities made pursuant to this Article II,
Blockbuster agrees to indemnify and hold harmless, to the extent permitted by
law, each Selling Holder, each underwriter of Registrable Securities so offered
and each Person, if any, who controls any of the foregoing Persons within the
meaning of the Securities Act and the officers, directors, Affiliates, employees
and agents of each of the foregoing, against any and all Losses (including,
without limitation, any legal or other expenses incurred in connection with
defending or investigating any such action or claim), as incurred, arising out
of or relating to any untrue statement or alleged untrue statement of a material
fact contained in, or incorporated by reference into, in the registration
statement (or in any preliminary or final prospectus included therein) or in any
offering memorandum or other offering document relating to the offering and sale
of such Registrable Securities prepared by Blockbuster or at its direction, or
any amendment thereof or supplement thereto, or any omission by Blockbuster or
alleged omission by Blockbuster to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading;
except that Blockbuster shall not be liable to any Person in any such case to
the extent that any such Loss arising out of or relating to any untrue statement
or alleged untrue statement, or any omission or alleged omission, if such
statement or omission shall have been made in reliance upon and in conformity
with information relating to a Selling Holder, another holder of securities
included in such registration statement or underwriter furnished in writing to
Blockbuster by or on behalf of such Selling Holder, other holder or underwriter,
as the case may be, specifically for use in the registration statement (or in
any preliminary or final prospectus included therein), offering memorandum or
other offering document, or any amendment thereof or supplement thereto. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of any Selling Holder, any other holder or any underwriter
and shall survive the transfer of such securities. In the case of an offering
with respect to which a Selling Holder has designated the lead or managing
underwriters (or a Selling Holder is offering Registrable Securities directly,
without an underwriter), this indemnity does not apply to any Loss arising out
of or relating to any untrue statement or alleged untrue statement or omission
or alleged omission in any preliminary prospectus or offering memorandum if a
copy of a final prospectus or offering memorandum was not sent or given by or on
behalf of any underwriter (or such Selling Holder or other holder, as the case
may be) to such Person asserting such Loss at or prior to the written
confirmation of the
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sale of the Registrable Securities as required by the Securities Act and such
untrue statement or omission had been corrected in such final prospectus or
offering memorandum.
(b) In the case of each offering made pursuant to this Agreement,
each Selling Holder, by exercising its registration rights hereunder, agrees to
indemnify and hold harmless, and to cause each underwriter of Registrable
Securities included in such offering (in the same manner and to the same extent
as set forth in Section 2.07(a)) to agree to indemnify and hold harmless,
Blockbuster, each other underwriter who participates in such offering, each
other Selling Holder or other holder with securities included in such offering
and in the case of an underwriter, such Selling Holder or other holder, and each
Person, if any, who controls any of the foregoing within the meaning of the
Securities Act and the Affiliates and Representatives of each of the foregoing,
against any and all Losses (including, without limitation, any legal or other
expenses incurred in connection with defending or investigating any such action
or claim), as incurred, arising out of or relating to any untrue statement or
alleged untrue statement of a material fact contained in, or incorporated by
reference into, the registration statement (or in any preliminary or final
prospectus included therein) or in any offering memorandum or other offering
document relating to the offering and sale of such Registrable Securities
prepared by Blockbuster or at its direction, or any amendment thereof or
supplement thereto, or any omission by such Selling Holder or underwriter, as
the case may be, or alleged omission by such Selling Holder or underwriter, as
the case may be, of a material fact required to be stated therein or necessary
to make the statements therein not misleading, but in each case only to the
extent that such untrue statement of a material fact is contained in, or such
material fact is omitted from information relating to such Selling Holder or
underwriter, as the case may be, furnished in writing to Blockbuster by or on
behalf of such Selling Holder or underwriter, as the case may be, specifically
for use in such registration statement (or in any preliminary or final
prospectus included therein), offering memorandum or other offering document, or
any amendment thereof or supplement thereto. In the case of an offering made
pursuant to this Agreement with respect to which Blockbuster has designated the
lead or managing underwriters (or Blockbuster is offering securities directly,
without an underwriter), this indemnity does not apply to any Loss arising out
of or related to any untrue statement or alleged untrue statement or omission or
alleged omission in any preliminary prospectus or offering memorandum if a copy
of a final prospectus or offering memorandum was not sent or given by or on
behalf of any underwriter (or Blockbuster, as the case may be) to such Person
asserting such loss, liability, cost, claim or damage at or prior to the written
confirmation of the sale of the Registrable Securities as required by the
Securities Act and such untrue statement or omission had been corrected in such
final prospectus or offering memorandum.
(c) The indemnification procedures set forth in Section 8.01(b)
of the IPO and Split-Off Agreement are incorporated herein and made a part
hereof for all purposes as if fully set forth herein and shall govern the
parties' rights and obligations with respect thereto.
(d) If the indemnification provided for in this Section 2.07
shall for any reason be unavailable (other than in accordance with its terms) to
an Indemnified Party in respect of any Loss referred to therein, then each
Indemnifying Party shall, in lieu of indemnifying such
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Indemnified Party, contribute to the amount paid or payable by such Indemnified
Party as a result of such Loss (i) as between Blockbuster and the Selling
Holders on the one hand and the underwriters on the other, in such proportion as
shall be appropriate to reflect the relative benefits received by Blockbuster
and the Selling Holders on the one hand and the underwriters on the other hand
or, if such allocation is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits but also the relative
fault of Blockbuster and the Selling Holders on the one hand and the
underwriters on the other with respect to the statements or omissions which
resulted in such Loss as well as any other relevant equitable considerations and
(ii) as between Blockbuster on the one hand and each Selling Holder on the
other, in such proportion as is appropriate to reflect the relative fault of
Blockbuster and of each Selling Holder in connection with such statements or
omissions as well as any other relevant equitable considerations. The relative
benefits received by Blockbuster and the Selling Holders on the one hand and the
underwriters on the other shall be deemed to be in the same proportion as the
total proceeds from the offering (net of underwriting discounts and commissions
but before deducting expenses) received by Blockbuster and the Selling Holders
bear to the total underwriting discounts and commissions received by the
underwriters, in each case as set forth in the table on the cover page of this
prospectus. The relative fault of Blockbuster and the Selling Holders on the one
hand and of the underwriters on the other shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission to state a material fact relates to information supplied by
Blockbuster and the Selling Holders or by the underwriters. The relative fault
of Blockbuster on the one hand and of each Selling Holder on the other shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by such party, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission, but not by reference to any Indemnified
Party's stock ownership in Blockbuster. The amount paid or payable by an
Indemnified Party as a result of the Loss in respect thereof, referred to above
in this paragraph (d) shall be deemed to include, for purposes of this paragraph
(d), any legal or other expenses reasonably incurred by such Indemnified Party
in connection with investigating or defending any such action or claim.
Blockbuster and the Selling Holders agree that it would not be just and
equitable if contribution pursuant to this Section 2.07 were determined by PRO
RATA allocation (even if the underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in this paragraph. Notwithstanding any
other provisions of this Section 2.07, no Selling Holder shall be required to
contribute any amount in excess of the amount by which the total price at which
the Registrable Securities of such Selling Holder were offered to the public
exceeds the amount of any damages which such Selling Holder has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. Each Selling Holder's obligations to contribute pursuant to
this Section 2.07 are several in proportion to the proceeds of the offering
received by such Selling Holder bears to the total proceeds of the offering
received by all the Selling Holders and not joint. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall
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be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(e) Indemnification and contribution similar to that specified in
the preceding paragraphs of this Section 2.07 (with appropriate modifications)
shall be given by Blockbuster, the Selling Holders and underwriters with respect
to any required registration or other qualification of securities under any
state law or regulation or governmental authority.
(f) The obligations of the parties under this Section 2.07 shall
be in addition to any liability which any party may otherwise have to any other
party.
Section 2.08. RULE 144 AND FORM S-3. Commencing 90 days after the
IPO Date, Blockbuster shall use its reasonable best efforts to ensure that the
conditions to the availability of Rule 144 set forth in paragraph (c) thereof
shall be satisfied. Upon the request of any Holder of Registrable Securities,
Blockbuster will deliver to such Holder a written statement as to whether it has
complied with such requirements. Blockbuster further agrees to use its
reasonable efforts to cause all conditions to the availability of Form S-3 (or
any successor form) under the Securities Act of the filing of registration
statements under this Agreement to be met as soon as practicable after the IPO
Date. Notwithstanding anything contained in this Section 2.08, Blockbuster may
deregister under Section 12 of the Securities Exchange Act of 1934, as amended,
if it then is permitted to do so pursuant to said Act and the rules and
regulations thereunder.
Section 2.09. TRANSFER OF REGISTRATION RIGHTS. (a) Any Holder
may transfer all or any portion of its rights under Article II to (i) any
other transferee in respect of a number of Registrable Securities owned by
such Holder equal to or exceeding 3% of the outstanding Blockbuster Common
Stock at the time of the transfer (each transferee that receives such minimum
number of Registrable Securities shall be referred to herein as a
"TRANSFEREE"). Any transfer of registration rights pursuant to this Section
2.09(a) shall be effective upon receipt by Blockbuster of (i) written notice
from such Holder stating the name and address of any Transferee and
identifying the number of Registrable Securities with respect to which the
rights under this Agreement are being transferred and the nature of the
rights so transferred and (ii) a written agreement from such Transferee to be
bound by the terms of this Article II and Sections 3.03, 3.06, 3.07, 3.09,
and 3.11 of this Agreement. The Holders may exercise their rights hereunder
in such priority as they shall agree upon among themselves.
(b) Notwithstanding the foregoing, in the event that any
stockholder of Viacom receives restricted Registrable Securities in the
Split-Off and as a result of the Split-Off,
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such stockholder is "affiliated" with Blockbuster for purposes of the Securities
Act, such stockholder shall be entitled to the rights hereunder; provided,
however, that it shall only be entitled to request registration of Registrable
Securities pursuant to Section 2.01 only twice and such stockholder signs a
written agreement to be bound by the terms of this Agreement. Any such
stockholder for purposes of this Agreement shall be considered a "Holder."
Section 2.10. HOLDBACK AGREEMENT. If any registration pursuant to
this Article II shall be in connection with an underwritten public offering of
Registrable Securities, each Selling Holder agrees not to effect any public sale
or distribution, including any sale under Rule 144, of any equity security of
Blockbuster (otherwise than through the registered public offering then being
made), within 7 days prior to or 90 days (or such lesser period as the lead or
managing underwriters may permit) after the effective date of the registration
statement (or the commencement of the offering to the public of such Registrable
Securities in the case of Rule 415 offerings). Upon the reasonable request of
the underwriters, Blockbuster hereby also so agrees and agrees to use its
reasonable best efforts to cause each other holder of equity securities or
securities convertible into or exchangeable or exercisable for such securities
(other than in the case of equity securities, under dividend reinvestment plans
or employee stock plans) purchased from Blockbuster otherwise than in a public
offering to so agree.
ARTICLE III
MISCELLANEOUS
Section 3.01. LIMITATION OF LIABILITY. Neither Viacom nor
Blockbuster shall be liable to the other for any special, indirect, incidental
or consequential damages of the other arising in connection with this Agreement.
Section 3.02. SUBSIDIARIES. Viacom agrees and acknowledges that
Viacom shall be responsible for the performance by each of its Affiliates of the
obligations hereunder applicable to such Affiliate.
Section 3.03. TERM. This Agreement shall remain in effect until
all Registrable Securities held by Holders have been transferred by them to
Persons other than Transferees; PROVIDED that the provisions of Section 2.07
shall survive any such expiration.
Section 3.04. FURTHER ASSURANCES. Viacom and Blockbuster shall
execute, acknowledge and deliver, or cause to be executed, acknowledged and
delivered, such instruments and take such other action as may be necessary or
advisable to carry out their obligations under this Agreement and under any
exhibit, document or other instrument delivered pursuant hereto.
Section 3.05. SPECIFIC PERFORMANCE. The parties hereto
acknowledge and agree that irreparable damage would occur in the event that any
of the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. Accordingly, it is agreed that they
shall be entitled to an injunction or injunctions to prevent
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breaches of the provisions of this Agreement and to enforce specifically the
terms and provisions hereof in any court of competent jurisdiction in the United
States or any state thereof, in addition to any other remedy to which they may
be entitled at law or equity.
Section 3.06. AMENDMENTS. This Agreement shall not be
supplemented, amended or modified in any manner whatsoever (including without
limitation by course of dealing or of performance or usage of trade) except in
writing signed by the parties.
Section 3.07. SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon, and shall inure to the benefit of, the parties hereto and their
respective successors and assigns. Nothing contained in this Agreement, express
or implied, is intended to confer upon any other person or entity any benefits,
rights or remedies.
Section 3.08. SEVERABILITY. Wherever possible, each provision of
this Agreement shall be interpreted in such a manner as to be effective and
valid under applicable law. If any portion of this Agreement is declared invalid
for any reason in any jurisdiction, such declaration shall have no effect upon
the remaining portions of this Agreement, which shall continue in full force and
effect as if this Agreement had been executed with the invalid portions thereof
deleted; PROVIDED, that the entirety of this Agreement shall continue in full
force and effect in all other jurisdictions.
Section 3.09. ENTIRE AGREEMENT. Other than the IPO and Split-Off
Agreement, the Release and Indemnification Agreement, the Transition Services
Agreement and the Tax Matters Agreement, this Agreement constitutes the entire
agreement of the parties hereto with respect to the subject matter hereof and
thereof and supersede all prior agreements and undertakings, both written and
oral, between the parties with respect to the subject matter hereof and thereof.
Section 3.10. NOTICES. All notices, consents, requests,
approvals, and other communications provided for or required herein, and all
legal process in regard thereto, must be in writing and shall be deemed validly
given, made or served, (a) when delivered personally or sent by telecopy to the
facsimile number indicated below with a required confirmation copy sent in
accordance with subsection (c) below; or (b) on the next business day after
delivery to a nationally-recognized express delivery service with instructions
and payment for overnight delivery; or (c) on the fifth (5th) day after
deposited in any depository regularly maintained by the United States postal
service, postage prepaid, certified or registered mail, return receipt
requested, addressed to the following addresses or to such other address as the
party to be notified shall have specified to the other party in accordance with
this section:
If to Viacom:
Viacom Inc.
1515 Broadway
New York New York 10036
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Attention: Michael D. Fricklas, General Counsel
Phone Number: 212-258-6070
Fax Number: 212-258-6099
If to Blockbuster:
Blockbuster Inc.
1201 Elm Street
Dallas, Texas 75270
Attention: Ed Stead, General Counsel
Phone Number: 214-854-3499
Fax Number: 214-854-3677
Section 3.11. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York. Each of the
parties hereto agrees that any dispute relating to or arising from this
Agreement or the transactions contemplated hereby shall be resolved only in the
court of the State of New York sitting in the County of New York or the United
States District Court for the Southern District of New York and the appellate
courts having jurisdiction of appeals in such courts. In that context, and
without limiting the generality of the foregoing, each of the parties hereby
irrevocably and unconditionally:
(a) submits for itself and its property in any legal suit, action
or proceeding relating to this Agreement or any transaction contemplated hereby,
or for recognition and enforcement of any judgment in respect thereof, to the
exclusive jurisdiction of the courts of the State of New York sitting in the
County of New York or the United States District Court for the Southern District
of New York and appellate courts having jurisdiction of appeals in such courts,
and each of the parties hereto irrevocably and unconditionally agrees that all
claims in respect of any such suit, action, or proceeding shall be heard and
determined in such New York State court or, to the extent permitted by law, in
such federal court;
(b) consents that any such suit, action or proceeding may and
shall be brought in such courts and waives any objection that it may now or
hereafter have to the venue or jurisdiction or any such action or proceeding in
such court or that such action or proceeding was brought in an inconvenient
forum and agrees not to plead or claim the same;
(c) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or certified
mail (or any substantially similar form of mail), postage prepaid, to such party
in its address as provided in Section 3.06 hereof;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by New York law; and
(e) agrees that this Agreement has been entered into in the State
of New York and performed in part in the State of New York.
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Section 3.12. COUNTERPARTS. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, and all of
which shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this
Agreement the day and year first above written.
VIACOM INC.
By:
----------------------------------
Name:
Title:
BLOCKBUSTER INC.
By:
----------------------------------
Name:
Title:
<PAGE>
Exhibit 10.5
TAX MATTERS AGREEMENT
THIS TAX MATTERS AGREEMENT (the "Agreement"), dated as of
(the "IPO Date"), is entered into between Viacom Inc., a Delaware
corporation ("Viacom"), and Blockbuster Inc., a Delaware corporation,
("Blockbuster").
R E C I T A L S
A. Viacom is the common parent corporation of an affiliated
group of corporations which, together with any other corporations which may
become members of such affiliated group, is referred to as the "Viacom
Consolidated Group".
B. Blockbuster, if it were not included in the Viacom
Consolidated Group on the date hereof, would be the common parent corporation of
an affiliated group of corporations within the meaning of Section 1504 of the
Internal Revenue Code of 1986, as amended (the "Code"), which, together with any
other corporations which may become members of such affiliated group, is
referred to as the "Blockbuster Consolidated Group".
C. Viacom and Blockbuster desire to set forth in the Agreement
their agreement as to certain matters relating to the inclusion of the
Blockbuster Consolidated Group in the Viacom Consolidated Group, including the
allocation of tax
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liabilities for years in which the Blockbuster Consolidated Group is so
included, and certain other matters relating to taxes.
The parties agree as follows:
1. FILING OF CONSOLIDATED RETURNS AND PAYMENT OF CONSOLIDATED
TAX LIABILITY.
For all taxable years in which Viacom files consolidated
federal income tax returns (any such return of the Viacom Consolidated Group for
any taxable year, a "Viacom Consolidated Return") and is entitled to include the
Blockbuster Consolidated Group in such returns under Sections 1501-1504, or
successor provisions, of the Code, Viacom shall include the Blockbuster
Consolidated Group in the consolidated federal income tax returns it files as
the common parent corporation of the Viacom Consolidated Group. Viacom,
Blockbuster, and the other members of the Viacom Consolidated Group shall file
any and all consents, elections or other documents and take any other actions
necessary or appropriate to effect the filing of such federal income tax
returns. For all taxable years in which the Blockbuster Consolidated Group is
included in the Viacom Consolidated Group, Viacom shall pay the entire federal
income tax liability of the Viacom Consolidated Group and shall indemnify and
hold harmless Blockbuster against any such liability; PROVIDED, HOWEVER, that
Blockbuster shall make payments to Viacom or receive payments from Viacom as
provided in the Agreement in settlement of the Blockbuster Consolidated Group's
share of the entire federal income tax liability of the Viacom Consolidated
Group for any taxable year (which term shall throughout the Agreement include
any short taxable year) beginning on or after the IPO Date during which the
Blockbuster Consolidated Group is included
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in the Viacom Consolidated Group (any such taxable year, an "Agreement Year" and
any taxable year ending on or before the IPO Date, a "pre-Agreement Year"). For
purposes of this Agreement, the Blockbuster Consolidated Group shall be deemed
to have a taxable year beginning on January 1, 1999 and ending on the IPO Date
(which year shall be treated as a pre-Agreement Year), and the Blockbuster
Consolidated Group shall be deemed to have a taxable year beginning on the day
after the IPO Date and ending on December 31, 1999 (or, if earlier, the date on
which the Blockbuster Consolidated Group's actual taxable year beginning January
1, 1999 ends) which year shall be treated as an Agreement Year.
2. PRO FORMA BLOCKBUSTER RETURN.
For each Agreement Year, Viacom shall prepare a pro forma
consolidated federal income tax return for the Blockbuster Consolidated Group (a
"Pro Forma Blockbuster Return"). Except as otherwise provided herein, the Pro
Forma Blockbuster Return for each Agreement Year shall be prepared as if
Blockbuster filed a consolidated return on behalf of the Blockbuster
Consolidated Group for such taxable year; provided, however, that the Pro Forma
Blockbuster Return shall not include any deduction or other tax benefit
attributable to the exercise of an option to purchase Viacom stock by an
employee of Blockbuster (or its affiliates). The Pro Forma Blockbuster Return
shall reflect any carryovers of net operating losses, net capital losses, excess
tax credits, or other tax attributes from prior Agreement Years' Pro Forma
Blockbuster Returns which could have been utilized by the Blockbuster
Consolidated Group (excluding those attributes carried back pursuant to Section
5 herein) if the Blockbuster Consolidated Group had never been included in the
Viacom
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Consolidated Group and all Pro Forma Blockbuster Returns had been actual
returns, but otherwise shall not reflect any tax benefits that arise from any
adjustment to a pre-Agreement Year or carryovers of any other tax attributes
from a pre-Agreement Year, regardless of whether such attributes were utilized
(on audit or otherwise) on a tax return of Viacom in a pre-Agreement Year. The
Pro Forma Blockbuster Return shall be prepared in a manner that reflects all
elections, positions, and methods used in the Viacom Consolidated Return that
must be applied on a consolidated basis and otherwise shall be prepared in a
manner consistent with the Viacom Consolidated Return. The provisions of the
Code that require consolidated computations, such as Sections 861, 1201-1212,
and 1231, shall be applied separately to the Blockbuster Consolidated Group.
Section 1.1502-13 of the Income Tax Regulations shall be applied as if the
Blockbuster Consolidated Group and the Viacom Consolidated Group (excluding the
members of the Blockbuster Group) were separate affiliated groups, except that
the Pro Forma Blockbuster Return shall also include any gains or losses of the
members of the Blockbuster Consolidated Group on transactions within the
Blockbuster Consolidated Group (including in years prior to the first Agreement
Year) which must be taken into account pursuant to Section 1.1502-13 of the
Income Tax Regulations and reflected on the Viacom Consolidated Return if the
Blockbuster Consolidated Group ceases to be included in the Viacom Consolidated
Group. For purposes of the Agreement, all determinations made as if the
Blockbuster Consolidated Group had never been included in the Viacom
Consolidated Group and as if all Pro Forma Blockbuster Returns were actual
returns shall reflect any actual short taxable
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years resulting from the Blockbuster Consolidated Group joining or leaving the
Viacom Consolidated Group.
3. PRO FORMA BLOCKBUSTER RETURN PAYMENTS.
For each Agreement Year, Blockbuster shall make periodic
payments ("Periodic Payments") to Viacom in such amounts as determined by Viacom
based upon the estimated tax payments that would be due from the Blockbuster
Consolidated Group if it were not included in the Viacom Consolidated Group no
later than the dates on which payments of estimated tax would be due from the
Blockbuster Consolidated Group if it were not included in the Viacom
Consolidated Group. The balance of the tax due for an Agreement Year shall be
paid to Viacom no later than March 15 of the following year (the "Balance
Payment"). Blockbuster shall pay to Viacom no later than the date on which a
Viacom Consolidated Return for any Agreement Year is filed an amount equal to
the sum of (i) the federal income tax liability shown on the corresponding Pro
Forma Blockbuster Return prepared for the Agreement Year and (ii) the additions
to tax, if any, under Section 6655 of the Code that would have been imposed on
Blockbuster (treating the amount due to Viacom under (i) above as its federal
income tax liability and treating any periodic payments to Viacom pursuant to
the first sentence of this Section 3 as estimated payments under Section 6655 of
the Code) and which result from the inaccuracy of any information provided by
Blockbuster to Viacom pursuant to Section 5 hereof or from the failure of
Blockbuster to provide any requested information, reduced by (iii) the sum of
the amount of the Periodic Payments and the Balance Payment (collectively, the
"Total Periodic Payments"), plus (iv) any interest and additions to tax (other
than under Section 6655 of the Code) that would be
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due under the Code if the Total Periodic Payments were actual payments of tax.
If Blockbuster's Total Periodic Payments to Viacom for any Agreement Year exceed
the amount of its liability under the preceding sentence, Viacom shall refund
such excess to Blockbuster within 30 days after filing the Viacom Consolidated
Return. For purposes of the Agreement, the term "federal income tax liability"
includes the tax imposed by Sections 11, 55 and 59A of the Code, or any
successor provisions to such Sections. Viacom shall notify Blockbuster of any
amounts due from Blockbuster to Viacom pursuant to this Section 3 no later than
5 business days prior to the date such payments are due and such payments shall
not be considered due until the later of the due date described above or the
fifth day from the notice from Viacom.
4. PAYMENTS FOR TAXABLE YEARS IN THE EVENT OF DECONSOLIDATION.
(a) PAYMENTS BY BLOCKBUSTER TO VIACOM. If for any taxable year
after the Blockbuster Consolidated Group ceases to be included in the Viacom
Consolidated Group (a "Post-Consolidation Year"), (i) the federal income tax
liability of the Blockbuster Consolidated Group is less than (ii) the federal
income tax liability that would have been imposed with respect to the same
period if the Blockbuster Consolidated Group had not been included in the Viacom
Consolidated Group for any Agreement Year, all Pro Forma Blockbuster Returns had
been actual returns for such years, and no carryovers of Blockbuster attributes
from pre-Agreement years were permitted, then Blockbuster shall pay to Viacom
the excess of (ii) over (i) within 10 days of the filing of the Blockbuster
Post-Consolidation Year return.
(b) PAYMENTS BY VIACOM TO BLOCKBUSTER. If for any
Post-Consolidation Year (i) the federal income tax liability of the Blockbuster
Consolidated Group is greater
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than (ii) the federal income tax liability that would have been imposed with
respect to the same period if the Blockbuster Consolidated Group had not been
included in the Viacom Consolidated Group for any Agreement Year, all Pro Forma
Blockbuster Returns had been actual returns for such years, and no carryovers of
Blockbuster attributes from pre-Agreement Years were permitted, then Viacom
shall pay to Blockbuster the excess of (i) over (ii) within 10 days of
notification by Blockbuster to Viacom of the filing of the Blockbuster
Post-Consolidation Year return.
(c) DOCUMENTATION. Prior to the payment of any amounts due
pursuant to this Section 4, the parties shall exchange such information and
documentation as is reasonably satisfactory to each of them in order to
substantiate the amounts due pursuant to this Section 4. Any disputes as to such
amounts and documentation which cannot be resolved prior to the date a payment
is due shall be referred to an independent accounting firm whose fees shall paid
one half by Blockbuster and one half by Viacom.
(d) NO POST-CONSOLIDATION YEAR CARRYBACKS. If a Blockbuster
federal income tax return with respect to a Post-Consolidation Year reflects a
net operating loss, net capital loss, excess tax credits, or any other tax
attribute, such attribute may not be carried back to a Viacom tax return.
5. CARRYBACKS.
If a Pro Forma Blockbuster Return reflects a net operating
loss, net capital loss, excess tax credit or other tax attribute (a "Pro Forma
Blockbuster Attribute"), which is actually utilized in a Viacom Consolidated
Return (including any amendments thereto), then, within 30 days after the later
of (i) the due date for the Viacom
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Consolidated Return (taking into account any extensions thereof) or (ii) the
date such Pro Forma Blockbuster Attribute is actually realized in cash (whether
directly or by offset), Viacom shall pay to Blockbuster an amount equal to the
lesser of (x) the refund which the Blockbuster Consolidated Group would have
received as a result of the carryback of such Pro Forma Blockbuster Attribute to
a Pro Forma Blockbuster Return for any prior Agreement Year or Years (determined
as if the first Agreement Year were the earliest taxable year to which such
attributes could be carried back) or (y) the tax savings or tax benefit realized
by Viacom with respect to the use of such Pro Forma Blockbuster Attribute in a
Viacom Consolidated Return. All calculations of deemed refunds pursuant to this
Section 5 shall include interest computed as if Blockbuster had filed a claim
for refund or an application for a tentative carryback adjustment pursuant to
Section 6411(a) of the Code on the date on which the Viacom Consolidated Return
is filed.
6. PREPARATION OF TAX PACKAGE AND OTHER FINANCIAL REPORTING
INFORMATION.
Blockbuster shall provide to Viacom in a format determined by
Viacom all information requested by Viacom as necessary to prepare the Viacom
Consolidated Return and the Pro Forma Blockbuster Return (the "Viacom Tax
Package"). The Viacom Tax Package with respect to any taxable year shall be
provided to Viacom on a basis consistent with current practices of the Viacom
Consolidated Group no later than April 1 of the following year. Blockbuster
shall also provide to Viacom information required to determine the Total
Periodic Payments, current federal taxable income, current and deferred tax
liabilities, tax reserve items, and any additional current or prior
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information required by Viacom on a timely basis consistent with current
practices of the Viacom Consolidated Group.
7. RETURNS, AUDITS, REFUNDS, AMENDED RETURNS, LITIGATION,
ADJUSTMENTS AND RULINGS.
(a) RETURNS. Viacom shall have exclusive and sole
responsibility for the preparation and filing of the Viacom Consolidated Returns
(including requests for extensions thereof) and any other returns, amended
returns and other documents or statements required to be filed with the Internal
Revenue Service (the "IRS") in connection with the determination of the federal
income tax liability of the Viacom Consolidated Group.
(b) AUDITS; REFUND CLAIMS. Viacom will have exclusive and sole
responsibility and control with respect to the conduct of IRS examinations of
the returns filed by the Viacom Consolidated Group and any refund claims with
respect thereto. Blockbuster shall assist and cooperate with Viacom during the
course of any such proceeding. Viacom shall give Blockbuster notice of and
consult with Blockbuster with respect to any issues relating to items of income,
gain, loss, deduction or credit of any member of the Blockbuster Consolidated
Group (any such items, "Blockbuster Consolidated Return Items"). Viacom shall
not settle or otherwise compromise any Blockbuster Consolidated Return Item that
would result in additional liability for Blockbuster under this Agreement
without the written consent of Blockbuster, which consent shall not be
unreasonably withheld. If Blockbuster does not respond to Viacom's request for
consent within 30 days, Blockbuster shall be deemed to have consented.
Notwithstanding the foregoing, Viacom shall have the right in its sole
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discretion to pay any disputed taxes and sue for a refund in the forum of its
choice. In the case of any audit or litigation with respect to a Blockbuster
return for a Post-Consolidation Year, Blockbuster shall not settle or otherwise
compromise any matter relating to the treatment of any item arising in an
Agreement Year or a pre-Agreement Year in a manner which would affect the
liability of Viacom to Blockbuster or Blockbuster to Viacom pursuant to Section
4 without the consent of Viacom, which consent shall not be unreasonably
withheld.
(c) LITIGATION. If the federal income tax liability of the
Viacom Consolidated Group becomes the subject of litigation in any court, the
conduct of the litigation shall be controlled exclusively by Viacom. Blockbuster
shall assist and cooperate with Viacom during the course of litigation, and
Viacom shall consult with Blockbuster regarding any issues relating to
Blockbuster Consolidated Return Items.
(d) EXPENSES. Blockbuster shall reimburse Viacom for all
reasonable out-of-pocket expenses (including, without limitation, legal,
consulting and accounting fees) in the course of proceedings (i) described in
paragraphs (b) and (c) of this Section to the extent such expenses are
reasonably attributable to Blockbuster Consolidated Return Items for any
Agreement Year or (ii) relating to any assertion of liability attributable in
whole or in part to actions or events covered by Section 11.
(e) RECALCULATION OF PAYMENTS TO REFLECT ADJUSTMENTS. To the
extent that any audit, litigation or claim for refund with respect to a Viacom
Consolidated Return or a Blockbuster return for a Post-Consolidation Year
results in an additional payment of tax (including a payment of tax made
preliminary to commencing a refund claim or litigation) or a refund of tax (any
such additional payment or refund, an
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"Adjustment") relating to the treatment of a Blockbuster Consolidated Return
Item for an Agreement Year, a corresponding adjustment shall be made to the
corresponding Pro Forma Blockbuster Return.
All calculations of payments made pursuant to Sections 3, 4,
and 5 of the Agreement shall be recomputed to reflect the effect of any
Adjustments on the relevant Pro Forma Blockbuster Return or on the liability of
the Blockbuster Consolidated Group for a Post-Consolidation Year. Within 5 days
after any such Adjustment, Blockbuster or Viacom, as appropriate, shall make
additional payments or refund payments to the other party reflecting such
Adjustment, plus interest pursuant to Section 8 of the Agreement calculated as
if payments by and to Blockbuster pursuant to Sections 3, 4, and 5 of the
Agreement and this Section 7 were payments and refunds of federal income taxes.
Blockbuster shall further pay to Viacom the amount of any penalties or additions
to tax incurred by the Viacom Consolidated Group as a result of an adjustment to
any Blockbuster Consolidated Return Item for an Agreement Year.
(f) RULINGS. Blockbuster shall assist and cooperate with
Viacom and take all actions requested by Viacom in connection with any ruling
requests submitted by Viacom to the IRS, including rulings unrelated to the
Distributions (defined in Section 11(a) below).
(g) APPLICABILITY WITH RESPECT TO ALL CONSOLIDATED RETURNS.
The provisions of Section 7(a), (b) and (c) above shall apply to Viacom
Consolidated Returns and Blockbuster Consolidated Return Items for all taxable
years in which the Blockbuster Consolidated Group (or any member thereof) is
includable in the Viacom Consolidated Group.
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(h) DOCUMENT RETENTION, ACCESS TO RECORDS & USE OF PERSONNEL.
Until the expiration of the relevant statute of limitations (including
extensions), Blockbuster shall (i) retain records, documents, accounting data,
computer data and other information (collectively, the "Records") necessary for
the preparation, filing, review, audit or defense of all tax returns relevant to
an obligation, right or liability of either party under the Agreement; and (ii)
give Viacom reasonable access to such Records and to its personnel (insuring
their cooperation) and premises to the extent relevant to an obligation, right
or liability of either party under the Agreement. Prior to disposing of any such
Records, Blockbuster shall notify Viacom in writing of such intention and afford
Viacom the opportunity to take possession or make copies of such Records at its
discretion.
8. INTEREST.
Interest required to be paid by or to Blockbuster pursuant
to the Agreement shall, unless otherwise specified, be computed at the rate
and in the manner provided in the Code for interest on underpayments and
overpayments, respectively, of federal income tax for the relevant period.
Any payments required pursuant to the Agreement which are not made within the
time period specified in the Agreement shall bear interest at a rate equal to
two hundred basis points above the average interest rate on the senior bank
debt of Blockbuster.
9. FOREIGN, STATE AND LOCAL INCOME TAXES.
In the case of foreign, state or local taxes based on or
measured by the net income of the Viacom Consolidated Group, or any combination
of members thereof (other than solely with respect to members which are members
of the Blockbuster
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Consolidated Group or which are members of the Viacom Consolidated Group but not
the Blockbuster Consolidated Group) on a combined, consolidated or unitary
basis, the provisions of the Agreement shall apply with equal force to such
foreign, state or local tax for each Agreement Year whether or not the
Blockbuster Consolidated Group is included in the Viacom Consolidated Group for
federal income tax purposes; PROVIDED, HOWEVER, that interest pursuant to the
first sentence of Section 8 of the Agreement shall be computed at the rate and
in the manner provided under such foreign, state or local law for interest on
underpayments and overpayments of such tax for the relevant period and
references to provisions of the Code throughout the Agreement shall be deemed to
be references to analogous provisions of state, local, and foreign law.
For any Agreement Year or pre-Agreement Year, Viacom shall
have the sole and exclusive control of (a) the determination of whether a
combined, consolidated or unitary tax return should be filed for any foreign,
state or local tax purpose and (b) all foreign, state or local income tax audits
and litigation with respect to any member of the Blockbuster Consolidated Group.
Blockbuster shall reimburse Viacom for all reasonable out-of-pocket expenses
(including, without limitation, legal, consulting and accounting fees) in the
course of proceedings described in the preceding sentence to the extent such
expenses are reasonably attributable to Blockbuster or any member of the
Blockbuster Consolidated Group.
Blockbuster shall provide to Viacom separate legal entity
reporting information with respect to any member of the Blockbuster Consolidated
Group as requested by Viacom on a timely basis.
Viacom will provide notice of and consult with Blockbuster
with respect to any issue relating to such audits and litigation and Blockbuster
will provide to Viacom
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any information necessary to conduct such audits and litigation. Viacom shall
not settle or otherwise compromise any audits or litigation that would result in
additional liability for Blockbuster under this Section 9 without the written
consent of Blockbuster, which consent shall not be unreasonably withheld. If
Blockbuster does not respond to Viacom's request for consent within 30 days,
Blockbuster shall be deemed to have consented. Notwithstanding the foregoing,
Viacom shall have the right in its sole discretion to have Blockbuster pay any
disputed taxes and sue for a refund in the forum of Viacom's choice.
Blockbuster shall be responsible for filing tax returns
relating to payroll, sales and use, property, withholding and similar taxes and
shall be responsible for the payment of such taxes.
For all taxable years prior to and including the taxable years
that Blockbuster is a member of the Viacom Consolidated Group, Blockbuster shall
have the sole and exclusive responsibility for all taxes based on or measured by
the net income which are determined solely by the income of the Blockbuster
Consolidated Group (or any combination of the members thereof including the
predecessors of such members) on a combined, consolidated, unitary or separate
company basis. Viacom, in consultation with the Chief Financial Officer of
Blockbuster, shall have sole and exclusive responsibility for the preparation of
returns relating to such taxes and the control of audits, controversies and
proceedings with respect thereto.
Notwithstanding the immediately preceding paragraph, in the
case of New York State and New York City taxes based on or measured by the net
income which are determined solely by the income of the Blockbuster Consolidated
Group (or any
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combination of the members thereof including the predecessors of such members)
on a combined, consolidated, unitary or separate company basis, Viacom shall
have the sole and exclusive responsibility for such taxes and for the return
preparation and the control of audits, controversies and proceedings with
respect thereto.
10. UK TAX SURRENDERS.
If requested to do so by Viacom UK Limited ("VUKL"),
Blockbuster agrees that it will cause any of its direct or indirect subsidiaries
which, under the tax laws of the United Kingdom, are or have been regarded as
resident in the United Kingdom to consent under provisions of Chapter IV of Part
X of TA 1988 to the surrender of all or any part of their available tax losses
to VUKL or to any member of the United Kingdom tax group of which VUKL is the
principal member. This agreement is made in respect of all accounting periods
ended on or before December 31, 1998, and Blockbuster agrees to take or cause to
be taken all actions necessary to effect the loss surrender.
11. TAXES ATTRIBUTABLE TO THE DISTRIBUTIONS.
(a) ACTIONS INCONSISTENT WITH THE RULINGS. In the event that
stock of Blockbuster (or any successor thereto) is ultimately distributed to any
or all of Viacom's shareholders pursuant to transactions intended to qualify
under Section 355 of the Code, including a distribution of Blockbuster stock
from Viacom International Inc. to Viacom, (any such transaction, a
"Distribution" and collectively, the "Distributions"), Blockbuster shall not
take or fail to take, and shall not permit any other member of the Blockbuster
Consolidated Group or any other corporation or other entity that is directly or
indirectly more than 50 percent (by vote or value) owned by any member of the
Blockbuster Consolidated Group (any such entity, a "Blockbuster Affiliate" and
together
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with the Blockbuster Consolidated Group, the "Blockbuster Entities") to take or
fail to take, any action if such act or failure to act would be inconsistent
with any ruling, including for all purposes of the Agreement any supplemental
rulings, (collectively, the "Rulings") issued by the IRS in connection with the
Distributions or any representation, covenant or information included in any
submission to the IRS in connection with the Rulings (together with the Rulings,
the "Rulings and Submissions").
(b) LIABILITY. Notwithstanding anything to the contrary in the
Agreement, Blockbuster and the Blockbuster Entities shall be jointly and
severally liable for, and shall indemnify and hold harmless Viacom and each
member of the Viacom Consolidated Group (other than members of the Blockbuster
Consolidated Group) from and against, on an after-tax basis, any and all taxes
(including interest, penalties and additions to tax) resulting from the
Distributions to the extent such taxes result from (i) any event or transaction
after the Distributions that involves the stock, assets, or business of the
Blockbuster Entities, whether or not such event or transaction is the result of
direct actions of, or within the control of, the Blockbuster Entities, (ii) any
act or failure to act on the part of any of the Blockbuster Entities after the
Distributions, (iii) the breach of any representation, covenant or information
regarding the Blockbuster Entities included in the Rulings and Submissions, or
(iv) any actions contemplated by Section 11(c) below, regardless of whether such
actions are permitted pursuant to Section 11(d) below.
(c) COVENANTS. Blockbuster agrees that during the two years
following the Distributions, Blockbuster will not, and will not permit any of
the Blockbuster Entities to:
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(i) sell, exchange, distribute or otherwise transfer all or a
substantial portion of its assets or any stock or equity interest in
any of the Blockbuster Entities,
(ii) enter into any merger or liquidation transaction,
(iii) discontinue or otherwise fail to maintain the active
trade or business relied upon in connection with the Rulings and
Submissions,
(iv) purchase any of its outstanding stock other than through
stock purchases meeting the requirements of section 4.05(1)(b) of Rev.
Proc. 96-30,
(v) issue any stock or equity interests (except pursuant to
the exercise of employee stock options),
(vi) enter into any agreement for the sale or other
disposition of its stock or equity interests,
(vii) amend its certificate of incorporation (or other
organizational documents), whether through a stockholder vote or
otherwise, in a manner that affects the relative voting rights of the
separate classes of Blockbuster stock (including, without limitation,
through the conversion of one class of Blockbuster stock into another
class of Blockbuster stock), or
(viii) take any action inconsistent with the information,
representations or covenants included in the Rulings and Submissions or
that would result in the Distributions being taxable in whole or in
part to the Viacom Consolidated Group or Viacom's shareholders.
(d) EXCEPTIONS TO COVENANTS. Notwithstanding Section 11(c)
above, the Blockbuster Entities may take actions inconsistent with the covenants
contained in
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such Section 11(c), if Viacom consents in writing to such actions, such consent
to be determined by Viacom in its sole discretion taking into account solely the
preservation of the tax-free status of the Distributions; provided, however,
that if such consent is not given, Blockbuster may request, which request may
not be unreasonably denied, that Viacom either:
(i) seek to obtain a ruling from the IRS that the actions in
question (the "Restricted Actions") will not result in the
Distributions being taxable to the Viacom Consolidated Group or
Viacom's shareholders (an "Additional Ruling"); provided, however, that
Viacom shall not be obligated to request such a ruling if it determines
in good faith that such request might have an adverse effect on the
Viacom Consolidated Group or Viacom's shareholders; or
(ii) seek an unqualified opinion of counsel from counsel
chosen by Viacom that the Restricted Actions will not result in the
Distributions being taxable to the Viacom Consolidated Group or
Viacom's shareholders (an "Unqualified Opinion").
If either an Additional Ruling or Unqualified Opinion is obtained in form and
substance acceptable to Viacom, the Blockbuster Entities may engage in such
Restricted Actions. Blockbuster agrees that Viacom is to have no liability for
any tax resulting from any Restricted Actions permitted pursuant to this Section
11(d) and agrees to indemnify and hold harmless Viacom against any such tax.
Blockbuster shall also bear all costs incurred by Viacom in connection with
considering whether to grant a request pursuant to this Section 11(d) or in
requesting and/or obtaining any Additional Ruling or Unqualified Opinion.
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(e) RULINGS AND ADDITIONAL RULINGS. In its sole discretion and
control, Viacom shall have the right to obtain the Rulings and, if any, the
Additional Rulings. Blockbuster shall cooperate with Viacom and take all actions
requested by Viacom in connection with obtaining the Rulings and Additional
Rulings (including, without limitation, by making any representation or covenant
or providing any materials or information requested by Viacom or the IRS;
provided that Blockbuster shall not be required to make any representation or
covenant that is inconsistent with historical facts or as to future matters or
events over which it has no control).
12. DEDUCTIONS ATTRIBUTABLE TO OPTIONS.
Viacom shall determine whether Viacom or Blockbuster shall
file tax returns claiming the deductions attributable to the exercise of (i)
options to purchase stock of Viacom which are held by employees of Blockbuster
(or its affiliates) after the Distributions or by employees of both Viacom (or
its affiliates) and Blockbuster (or its affiliates) after the Distributions
and/or (ii) options to purchase stock of Blockbuster which were issued as a
result of a conversion of Viacom options and which resulted in a charge to the
earnings of Viacom at the time of such conversion for financial reporting
purposes. If it is determined that Viacom shall claim all such tax deductions,
Viacom shall be entitled to any such tax deductions and the tax returns of
Viacom and Blockbuster shall be prepared accordingly and Viacom shall be
responsible for the remittance of the employer's share of FICA and similar
taxes. To the extent any such deductions are disallowed because a tax authority
determines that Blockbuster should have claimed such deductions, Blockbuster
shall take all actions necessary to claim such deductions and pay to Viacom an
amount equal to the tax benefit of such
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deductions. If it is determined that Blockbuster shall claim all such tax
deductions, Blockbuster shall be entitled to any such tax deductions and the tax
returns of Viacom and Blockbuster shall be prepared accordingly. Blockbuster
shall notify Viacom of the amount of tax deductions it intends to claim with
respect to the exercise of Viacom options and shall pay Viacom an amount equal
to the actual benefit of the related deductions (less any FICA or similar taxes
paid by Blockbuster) not later than 3 days prior to the due date of the
estimated tax payment immediately following when any member of the Blockbuster
Consolidated Group becomes entitled to any tax savings, refund, credit or other
offset attributable to such deduction. To the extent any such deductions are
disallowed because a tax authority determines that Viacom should have claimed
such deductions, Viacom shall pay to Blockbuster an amount equal to the actual
benefit received by Viacom as a result of the disallowance to the extent
Blockbuster has paid Viacom pursuant to the preceding sentence. For purposes of
the preceding sentence, such benefit shall be considered equal to the excess of
the amount of tax that would have been payable to a tax authority (or of the
refund that would have been receivable) by Viacom.
13. CONFIDENTIALITY.
Each of Viacom and Blockbuster agrees that any information
furnished pursuant to the Agreement is confidential and, except as and to the
extent required by law or otherwise during the course of an audit or litigation
or other administrative or legal proceeding, shall not be disclosed to other
persons. In addition, each of Viacom and Blockbuster shall cause its employees,
agents and advisors to comply with the terms of this Section 13.
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14. SUCCESSORS AND ACCESS TO INFORMATION.
The Agreement shall be binding upon and inure to the benefit
of any successor to any of the parties, by merger, acquisition of assets or
otherwise, to the same extent as if the successor had been an original party to
the Agreement. If for any taxable year the Blockbuster Consolidated Group is no
longer included in the Viacom Consolidated Group, Viacom and Blockbuster agree
to provide to the other party any information reasonably required to complete
tax returns for taxable periods beginning after the Blockbuster Consolidated
Group is no longer included in a Viacom Consolidated Return, and each of Viacom
and Blockbuster will cooperate with respect to any audits or litigation relating
to any Viacom Consolidated Return.
15. GOVERNING LAW.
The Agreement shall be governed by and construed in accordance
with the laws of New York excluding (to the greatest extent permissible by law)
any rule of law that would cause the application of the laws of any jurisdiction
other than the State of New York.
16. HEADINGS.
The headings in the Agreement are for convenience only and
shall not be deemed for any purpose to constitute a part or to affect the
interpretation of the Agreement.
17. COUNTERPARTS.
The Agreement may be executed simultaneously in two or more
counterparts, each of which will be deemed an original, and it shall not be
necessary in making proof of the Agreement to produce or account for more than
one counterpart.
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18. SEVERABILITY.
If any provision of the Agreement is held to be unenforceable
for any reason, it shall be adjusted rather than voided, if possible, in order
to achieve the intent of the parties to the maximum extent practicable. In any
event, all other provisions of the Agreement shall be deemed valid, binding, and
enforceable to their full extent.
19. TERMINATION.
The Agreement shall remain in force and be binding so long as
the applicable period of assessments (including extensions) remains unexpired
for any taxes contemplated by the Agreement; PROVIDED, HOWEVER, that neither
Viacom nor Blockbuster shall have any liability to the other party with respect
to tax liabilities for taxable years in which the Blockbuster Consolidated Group
is not included in the Viacom Consolidated Returns except as provided in
Sections 4, 11, and 12 of this Agreement.
20. SUCCESSOR PROVISIONS.
Any reference herein to any provisions of the Code or Treasury
Regulations shall be deemed to include any amendments or successor provisions
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thereto as appropriate.
21. COMPLIANCE BY SUBSIDIARIES.
Viacom and Blockbuster each agree to cause all members of the
Viacom Consolidated Group and Blockbuster Consolidated Group (including
predecessors and successors to such members) to comply with the terms of the
Agreement.
IN WITNESS WHEREOF, each of the parties of the Agreement has
caused the Agreement to be executed by its duly authorized officer on this date
of , 1999.
Viacom Inc.
By:
------------------------------
Name:
Title:
Blockbuster Inc.
By:
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Name:
Title:
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated May 4, 1999 relating to the financial statements of Blockbuster
Inc., which appears in such Registration Statement. We also consent to the
reference to us under the heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Dallas, Texas
June 18, 1999
