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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 001-15153
BLOCKBUSTER INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1655102
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 Elm Street
Dallas, Texas 75270
Telephone (214) 854-3000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Number of shares of common stock outstanding at October 31, 1999:
Class A common stock, par value $.01 per share: 31,002,666
Class B common stock, par value $.01 per share: 144,000,000
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BLOCKBUSTER INC.
INDEX TO FORM 10-Q
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Operations (Unaudited)--for the Three Months
and Nine Months ended September 30, 1998 and September 30, 1999........ 3
Consolidated Balance Sheets--at December 31, 1998 and September 30, 1999
(Unaudited)............................................................ 4
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)--
for the nine months ended September 30, 1999........................... 5
Consolidated Statements of Cash Flows (Unaudited)--for the Nine Months
ended September 30, 1998 and September 30, 1999........................ 6
Notes to Consolidated Financial Statements (Unaudited).................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 24
PART II--OTHER INFORMATION
Item 5. Other Information................................................. 25
Item 6. Exhibits and Reports on Form 8-K.................................. 25
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
BLOCKBUSTER INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1998 1999 1998 1999
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Rental revenues..................... $ 817.8 $ 951.4 $2,341.4 $2,790.7
Merchandise sales................... 155.4 138.9 423.0 413.5
Other revenues...................... 12.2 22.5 42.2 63.3
-------- --------- -------- --------
985.4 1,112.8 2,806.6 3,267.5
-------- --------- -------- --------
Cost of sales:
Cost of rental revenues............. 269.5 322.8 1,166.1 949.0
Cost of merchandise sold............ 124.2 108.6 344.0 320.6
-------- --------- -------- --------
393.7 431.4 1,510.1 1,269.6
-------- --------- -------- --------
Gross profit........................ 591.7 681.4 1,296.5 1,997.9
Operating expenses:
General and administrative.......... 437.6 489.6 1,271.5 1,441.8
Advertising......................... 54.0 63.2 125.4 182.9
Depreciation........................ 52.4 56.8 156.8 163.1
Amortization of intangibles......... 42.3 43.2 127.3 128.7
-------- --------- -------- --------
586.3 652.8 1,681.0 1,916.5
-------- --------- -------- --------
Operating income (loss)............... 5.4 28.6 (384.5) 81.4
Interest expense.................... (7.8) (30.7) (21.1) (90.6)
Interest income..................... 1.1 0.7 3.3 1.8
Other items, net.................... 0.4 1.7 0.4 1.5
-------- --------- -------- --------
Income (loss) before income taxes..... (0.9) 0.3 (401.9) (5.9)
Benefit (provision) for income
taxes.............................. (19.8) (17.7) 80.0 (52.4)
Equity in income (loss) of
affiliated companies, net of tax... (0.8) (1.7) (1.8) (4.1)
-------- --------- -------- --------
Net income (loss)..................... $ (21.5) $ (19.1) $ (323.7) $ (62.4)
======== ========= ======== ========
Net income (loss) per share:
Basic and diluted................... $ (0.15) $ (0.12) $ (2.25) $ (0.42)
======== ========= ======== ========
Weighted average shares outstanding:
Basic and diluted................... 144.0 161.2 144.0 149.8
======== ========= ======== ========
Unaudited pro forma net income (loss)
per share:
Basic and diluted................... $ (0.11) $ (0.36)
========= ========
Unaudited pro forma weighted average
shares outstanding:
Basic and diluted................... 175 175
========= ========
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
BLOCKBUSTER INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents......................... $ 99.0 $ 122.0
Receivables, less allowances of $22.7 (1998) and
$10.4 (1999)..................................... 124.8 114.1
Merchandise inventories........................... 277.4 254.2
Prepaid assets.................................... 130.5 148.9
--------- ---------
Total current assets............................ 631.7 639.2
Rental library, net................................. 441.2 500.6
Deferred income taxes............................... 92.5 2.6
Property and equipment, net......................... 995.3 1,098.5
Intangibles, net.................................... 6,055.6 6,015.8
Other assets........................................ 58.5 68.7
--------- ---------
$ 8,274.8 $ 8,325.4
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................. $ 448.6 $ 368.6
Accrued expenses.................................. 361.8 360.0
Current portion of long-term debt................. -- 157.1
Current portion of capital lease obligations...... 22.2 22.2
Deferred income taxes............................. 13.6 8.5
--------- ---------
Total current liabilities....................... 846.2 916.4
Notes payable to Viacom............................. 1,576.4 --
Long-term debt, less current portion................ -- 1,040.0
Capital lease obligations, less current portion..... 138.8 117.3
Other liabilities................................... 75.5 72.7
--------- ---------
2,636.9 2,146.4
--------- ---------
Commitments and contingencies (see Note 7)
Stockholders' equity:
Preferred stock, par value $.01 per share; 100.0
shares authorized; no shares issued or
outstanding...................................... -- --
Class A common stock, par value $.01 per share;
400.0 shares authorized; 31.0 shares issued and
outstanding...................................... -- 0.3
Class B common stock, par value $.01 per share;
500.0 shares authorized; 144.0 shares issued and
outstanding...................................... -- 1.4
Additional paid-in capital........................ -- 6,227.1
Retained earnings (deficit)....................... -- (4.1)
Viacom's net equity investment.................... 5,695.8 --
Accumulated other comprehensive loss--foreign
currency translation adjustment.................. (57.9) (45.7)
--------- ---------
Total stockholders' equity...................... 5,637.9 6,179.0
--------- ---------
$ 8,274.8 $ 8,325.4
========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
BLOCKBUSTER INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999
-----------------
Shares Amounts
------- ---------
<S> <C> <C>
Class A common stock:
Balance, beginning of year.................................. -- $ --
Initial public offering, net proceeds....................... 31.0 0.3
------- ---------
Balance, end of period...................................... 31.0 $ 0.3
======= =========
Class B common stock:
Balance, beginning of year.................................. -- $ --
Issuance of Class B common stock to Viacom.................. 144.0 1.4
------- ---------
Balance, end of period...................................... 144.0 $ 1.4
======= =========
Additional paid-in capital:
Balance, beginning of year.................................. $ --
Issuance of Class B common stock to Viacom.................. 5,796.7
Initial public offering, net proceeds....................... 430.4
---------
Balance, end of period...................................... $ 6,227.1
=========
Viacom's net equity investment:
Balance, beginning of year.................................. $ 5,695.8
Other transactions with Viacom, net......................... 160.6
Net income (loss) prior to initial public offering.......... (58.3)
Issuance of Class B common stock to Viacom.................. (5,798.1)
---------
Balance, end of period...................................... $ --
=========
Accumulated other comprehensive loss:
Balance, beginning of year.................................. $ (57.9)
Other comprehensive income (loss)--foreign currency
translation adjustment..................................... 12.2
---------
Balance, end of period...................................... $ (45.7)
=========
Retained earnings (deficit):
Balance, beginning of year.................................. $ --
Net income (loss) subsequent to initial public offering..... (4.1)
---------
Balance, end of period...................................... $ (4.1)
=========
Total stockholders' equity.................................. $ 6,179.0
=========
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
BLOCKBUSTER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1998 1999
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ (323.7) $ (62.4)
Adjustments to reconcile net income (loss) to net cash
flow provided by operating activities:
Depreciation and amortization......................... 1,238.3 783.2
Deferred income taxes................................. (39.4) 85.0
Equity in loss of affiliated companies, net of tax.... 1.8 4.1
Gain on sales of store operations..................... -- (8.3)
Change in operating assets and liabilities:
(Increase) decrease in receivables.................... (7.7) 10.7
(Increase) decrease in merchandise inventories........ (5.4) 25.1
Increase in prepaid and other assets.................. (31.6) (27.7)
Increase (decrease) in accounts payable............... 32.6 (78.9)
Increase (decrease) in accrued expenses and other
liabilities.......................................... 41.6 (6.6)
-------- ---------
Net cash flow provided by operating activities............ 906.5 724.2
-------- ---------
Cash flows from investing activities:
Rental library purchases................................ (611.7) (543.1)
Capital expenditures.................................... (108.8) (266.7)
Cash used for acquisitions.............................. (25.1) (110.9)
Proceeds from sales of store operations................. -- 18.9
Investments in affiliated companies..................... 4.7 (1.0)
-------- ---------
Net cash flow used in investing activities................ (740.9) (902.8)
-------- ---------
Cash flows from financing activities:
Proceeds from new credit agreement...................... -- 1,665.0
Repayments on new credit agreement...................... -- (467.9)
Proceeds from term loan................................. 46.6 --
Repayment of term loan.................................. (46.6) --
Net borrowings from (repayments of) notes due to Viacom. 34.2 (1,576.4)
Net proceeds from the issuance of common stock.......... -- 430.7
Capital lease payments.................................. (26.4) (26.4)
(Repayments to) capital contributions from Viacom, net.. (216.7) 176.8
-------- ---------
Net cash flow (used in) provided by financing activities.. (208.9) 201.8
-------- ---------
Effect of exchange rate changes on cash................... (2.2) (0.2)
-------- ---------
Net (decrease) increase in cash and cash equivalents...... (45.5) 23.0
Cash and cash equivalents at beginning of year............ 129.6 99.0
-------- ---------
Cash and cash equivalent at end of period................. $ 84.1 $ 122.0
======== =========
Supplemental cash flow information:
Cash payments for interest.............................. $ 17.5 $ 81.0
Non-cash investing and financing activities:
Property and equipment acquired under capitalized
leases................................................. $ 3.7 $ 5.2
</TABLE>
See notes to unaudited consolidated financial statements.
6
<PAGE>
BLOCKBUSTER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts in millions)
Note 1--Basis of Presentation
Blockbuster Inc. and its subsidiaries (the "Company" or "Blockbuster") own,
operate and franchise 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 consolidated financial statements and related notes for the three and
nine month periods ended September 30, 1998 and 1999 and as of December 31,
1998 and September 30, 1999 have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC"). The
consolidated financial statements for the periods prior to the Company's
initial public offering discussed below (the "Offering") are presented on a
carve-out basis and reflect the historical results of operations, financial
position and cash flows of the Company, including entities owned by Blockbuster
or purchased from affiliates of Viacom Inc. ("Viacom") in the case of certain
of its international operations. In this context, no historical direct
ownership relationship existed among the various entities comprising
Blockbuster prior to the Offering; accordingly, Viacom and its subsidiaries'
net investment in Blockbuster was included in Viacom's net equity investment in
the consolidated financial statements.
As a part of the reorganization transactions (discussed below), the Company
purchased stock and/or assets from affiliates of Viacom with cash funded by a
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 were historically treated as intercompany notes in the
accompanying consolidated financial statements. The 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 was recognized as an
adjustment to stockholders' equity (see Note 4).
Prior to the Offering, the following transactions were 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 was reflected as an interest-bearing note in
the accompanying December 31, 1998 consolidated balance sheet, (3) effective
June 21, 1999, the Company entered into a term and revolving credit agreement
with a syndicate of lenders which was used to repay debt owed to Viacom and to
pay a portion of the purchase price to acquire certain international operations
from affiliates of Viacom, (4) effective on or about June 23, 1999, the Company
purchased certain international operations of the Company from affiliates of
Viacom, (5) effective August 3, 1999, the Company was recapitalized with Class
A common stock and Class B common stock of which 144,000,000 shares of Class B
common stock were simultaneously issued to Viacom International Inc. in
exchange for 100 shares of common stock of the Company (which represented all
of the issued and outstanding common stock of the Company at that time) and,
(6) effective on the Offering date, Blockbuster's intercompany cash
transactions with Viacom were capitalized into Viacom's net equity investment.
On August 10, 1999 the Company sold shares of Class A common stock to the
public which began trading on the New York Stock Exchange on August 11, 1999.
The Offering consisted of 31,000,000 shares of Class A common stock sold at a
price to the public of $15 per share. Proceeds from the Offering aggregated
$430.7 million, net of underwriting discounts and commissions of $22.1 million
and Offering expenses of $12.2 million. The gross proceeds from the Offering,
net of underwriting discounts and commissions, $442.9 million, were used to pay
down the Company's short-term revolver due June 19, 2000 (see Note 6).
Subsequent to the
7
<PAGE>
BLOCKBUSTER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(Tabular amounts in millions)
Offering, through Viacom International Inc.'s ownership of 100 percent of the
Company's Class B common stock, Viacom owns approximately 82 percent of the
Company's common stock representing approximately 96 percent of the combined
voting power of all classes of voting stock of Blockbuster. The holders of
Class A 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
matters to be voted on by stockholders.
In the opinion of management, the accompanying financial statements include
all recurring adjustments and normal accruals necessary to present fairly the
Company's financial position and its results of operations and cash flows 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 more
detailed audited financial statements for the year ended December 31, 1998,
included in the Company's prospectus dated August 10, 1999.
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.
Net Income (Loss) Per Share
Effective August 3, 1999, as discussed above, the Company was recapitalized
to provide for Class A common stock and Class B common stock. In accordance
with SEC Staff Accounting Bulletin No. 98, the capitalization of Class B
common stock has been retroactively reflected for the purposes of presenting
net income (loss) per share for the periods prior to the Offering.
Unaudited pro forma basic and diluted net income (loss) per share includes
the shares of both Class A and Class B common stock outstanding as of the date
of the Offering. Unaudited pro forma basic and diluted net income (loss) per
share are the same since the Company options granted in connection with the
Offering have an exercise price equal to the initial offering price. Pro forma
basic and diluted net income (loss) per share have been presented for the most
recent interim periods.
Comprehensive Income (Loss)
Comprehensive income (loss) for the three months and nine months ended
September 30 was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1998 1999 1998 1999
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net income (loss)............. $ (21.5) $ (19.1) $ (323.7) $ (62.4)
Foreign currency translation
adjustment................... (4.5) 5.7 (16.9) 12.2
--------- --------- --------- --------
Total comprehensive income
(loss)................... $ (26.0) $ (13.4) $ (340.6) $ (50.2)
========= ========= ========= ========
</TABLE>
8
<PAGE>
BLOCKBUSTER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(Tabular amounts in millions)
Note 2--Change in Accounting Method for Rental Library
Effective April 1, 1998, Blockbuster adopted an accelerated method of
amortizing its videocassette and game rental library. Blockbuster adopted this
new method of amortization because it implemented a new business model,
including revenue sharing agreements with Hollywood studios, which 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 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 was applied to the rental library that was held
at April 1, 1998. The adoption of the new method of amortization was 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 in the second quarter of 1998. The
charge represented an adjustment to the carrying value of the rental tapes due
to the new method of accounting.
The Company believes that the new amortization method developed for
Blockbuster's new business model results 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, the 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 3--Related Party Transactions
Effective with the Offering, Blockbuster and Viacom have entered into a
transition services agreement whereby Viacom is providing 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 approximates 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 similar
transaction. Prior to the Offering the allocation of
these expenses was generally based on actual costs incurred by Viacom. The
charges for such services for the
9
<PAGE>
BLOCKBUSTER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(Tabular amounts in millions)
three months ended September 30, 1998 and 1999 were $3.2 million and $1.3
million, respectively, and $9.0 million and $7.7 million, respectively, for the
nine months ended September 30, 1998 and 1999.
Viacom also pays certain insurance premiums on behalf of the Company.
Insurance expense related to these premiums was $4.1 million and $2.0 million
for the three months ended September 30, 1998 and 1999, respectively, and $11.9
million and $9.1 million, respectively, for the nine months ended September 30,
1998 and 1999. Viacom also has a noncontributory defined benefit pension plan
in which the Company's employees are covered and provides other employee
benefits. The Company's employees participated in Viacom's 401(k) savings plan
until April 1999. At that time the Company set up its own 401(k) savings plan
that mirrors the Viacom 401(k) savings plan. The Company continues to invest
matching contributions in Viacom's Class B common stock. Viacom has charged the
Company $1.2 million and $1.5 million for pension and 401(k) savings plan
expenses for the three months ended September 30, 1998 and 1999, respectively,
and $3.8 million and $4.2 million, respectively, for the nine months ended
September 30, 1998 and 1999.
Viacom generally does not charge the Company interest on intercompany
balances except for intercompany debt associated with certain foreign
operations, the note associated with the $1.4 billion dividend payable to
Viacom International Inc. and the notes associated with the acquisition of
franchise operations discussed in Note 4. Interest expense related to
intercompany debt for the three months ended September 30, 1998 was $2.7
million, and $5.6 million and $49.1 million, respectively, for the nine months
ended September 30, 1998 and 1999. There was no related party interest expense
for the three months ended September 30, 1999.
The Company, through the normal course of business, is involved in
transactions with companies owned by or affiliated with Viacom. The Company
purchases certain videocassettes for rental and sale directly from Paramount
Pictures Corporation. Total purchases were $43.9 million and $43.1 million for
the three months ended September 30, 1998 and 1999, respectively, and $86.2
million and $76.6 million, respectively, for the nine months ended September
30, 1998 and 1999. The Company also purchases certain home video games from
Midway Games, Inc. Total amounts paid for purchases were $6.9 million and $0.1
million for the three months ended September 30, 1998 and 1999, respectively,
and $13.4 million and $9.8 million, respectively, for the nine months ended
September 30, 1998 and 1999.
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 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 $21.5 million remains in current liabilities
at September 30, 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.
Note 4--Notes Payable to Viacom
On December 31, 1998, the Company declared a cash dividend in the amount of
$1.4 billion payable to Viacom International Inc. in the form of an interest-
bearing promissory note. On January 24, 1999, Blockbuster acquired 69 stores
from a franchisee which was funded with the proceeds of two notes payable to
Viacom which approximated $77 million. These notes bore interest at LIBOR plus
1% and were repaid with proceeds from the Company's new credit agreement on or
about June 23, 1999 as discussed in Note 6.
10
<PAGE>
BLOCKBUSTER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(Tabular amounts in millions)
On or about June 23, 1999, the Company purchased certain of its
international operations from affiliates of Viacom. The total amount paid for
the international operations was $222 million. Approximately $65 million of
funds under the Company's new credit agreement, as discussed in Note 6, was
used towards the purchase price. The remaining $157 million was paid with cash
from Viacom and has been recognized as a capital contribution in Viacom's net
equity investment.
Note 5--Sales of Store Operations
During the nine months ended September 30, 1999, Blockbuster sold certain
stores to franchisees for $14.9 million and $8.3 million as part of the
Company's strategy to maintain an optimal mix of Company-operated and
franchised stores. As a result of these sales, Blockbuster received $14.2
million and $4.7 million in cash and $0.7 million and $3.6 million in notes
receivable and recognized gains of $6.0 million and $2.3 million, as a
reduction of general and administrative expenses. The principal and accrued
interest on the notes are due on June 30, 2000 and October 25, 2004,
respectively and bear interest at prime plus 1% (8.250% at September 30, 1999)
and 9%, respectively.
Note 6--Credit Agreement
On June 21, 1999, Blockbuster entered into a $1.9 billion unsecured credit
agreement ( the "Blockbuster Credit Agreement") with a syndicate of banks. The
Blockbuster Credit Agreement is comprised of a $700 million revolver due July
1, 2004, a $600 million term loan due in quarterly installments beginning April
1, 2002 and ending July 1, 2004, and a $600 million revolver due June 19, 2000,
which was subsequently reduced with proceeds from the Offering as described
below. Interest rates are based on the prime rate or LIBOR at Blockbuster's
option at the time of borrowing. A varying commitment fee is charged on the
unused amount of the revolver.
The Blockbuster Credit Agreement contains covenants, which among other
things, relate to the payment of dividends, repurchase of Blockbuster's common
stock or other distributions and also require compliance with financial
covenants with respect to a maximum leverage ratio and a minimum fixed charge
ratio.
On June 23, 1999, Blockbuster borrowed $1.6 billion, comprised of $400
million borrowed under the long-term revolver, $600 million borrowed under the
term loan, and $600 million under the short-term revolver. The weighted average
interest rate at September 30, 1999 for these borrowings was 7.2%. The proceeds
of the borrowings were used to pay amounts owed to Viacom. Blockbuster has
repaid $442.9 million of the short-term revolver through proceeds from the
Offering. These proceeds permanently reduced Blockbuster's commitments under
the Blockbuster Credit Agreement from $1.9 billion to approximately $1.46
billion.
Note 7--Commitments and Contingencies
Certain leases transferred in connection with the sale of Music to
Wherehouse 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 consolidated financial statements. If
Wherehouse defaults, related losses could materially affect future operating
income.
11
<PAGE>
BLOCKBUSTER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(Tabular amounts in millions)
Pursuant to a tax matters agreement entered into between the Company and
Viacom effective as of the consummation of the Offering, the Company is
generally responsible for, among other things, any taxes imposed on Viacom or
its subsidiaries as a result of the split-off or other similar transaction
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 or similar transaction.
On July 21, 1999, Ruben Loredo, doing business as Five Palms Video,
purporting to act as a class representative on behalf of himself and all others
similarly situated, filed a complaint in the District Court of Bexar County,
Texas, against Blockbuster. Blockbuster removed the case to the United States
District Court for the Western District of Texas, and the plaintiff has filed a
motion to have the case remanded to the state court. The plaintiff asserts that
by entering into and operating under the Company's revenue-sharing agreements,
the Company has attempted to and conspired with the studios to monopolize and
restrain competition in the market for the retail rental of videocassettes. The
plaintiff is seeking triple the amount of his alleged actual damages and triple
the amount of alleged actual damages of those similarly situated, under the
Texas Free Enterprise and Antitrust Act. The dollar amount that the plaintiff
is alleging as the actual damages to himself and those similarly situated is
not set forth in his complaint. The Company believes that the plaintiff's
position is completely without merit, and the Company intends to vigorously
defend itself in the litigation.
In addition, another party, purporting to act as a class representative on
behalf of itself and all others similarly situated, filed a substantially
similar complaint in the United States District Court for the Western District
of Texas against Viacom and the studios' home video subsidiaries that have
operated under these revenue-sharing agreements with Blockbuster. This
plaintiff is seeking triple the amount of alleged actual damages to itself and
triple the amount of alleged actual damages of those similarly situated, as
well as preliminary and permanent injunctive relief prohibiting any unlawful
attempt or conspiracy to monopolize the market for the retail rental of
videocassettes. If Viacom is required to pay any damage award as a result of
this litigation, Viacom may seek indemnification for its losses from the
Company pursuant to the terms of a release and indemnification agreement
entered into between the Company and Viacom effective as of the consummation of
the Offering.
The Company is a defendant from time to time in other 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.
Note 8--Long-Term Management Incentive Plan
On July 15, 1999, Blockbuster's Board of Directors adopted the 1999 Long-
Term Management Incentive Plan (the "Plan") for the benefit of its employees
and directors. The Company applies Accounting Principles Board Opinion 25
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plan. An aggregate of 25,000,000
shares of Class A common stock is reserved for issuance under the Plan, which
provides for the issuance of stock-based incentive awards, including 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. Options to purchase 11,481,908 shares of Class A common stock were
granted under the Plan effective as of August 11, 1999. The exercise price of
these options
12
<PAGE>
BLOCKBUSTER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(Tabular amounts in millions)
was equal to the initial public offering price. The options will generally vest
over a five year period beginning on the first anniversary of the date of the
grant.
Note 9--Subsequent Events and Other Matters
On October 20, 1999, the Board of Directors declared a cash dividend of
$0.02 per share of Class A and Class B common stock, payable November 22, 1999,
to stockholders of record at the close of business on November 1, 1999. The
total dividend payment will approximate $3.5 million of which approximately
$2.9 million will be paid to Viacom International Inc.
On November 3, 1999 the Company and America Online, Inc. ("America Online")
announced a three-year strategic alliance. As part of the agreement, America
Online will make a $30 million investment, representing approximately 2.75%
ownership, in Blockbuster.com that will be used for, among other things, joint
development of broadband content and delivery. If an initial public offering of
Blockbuster.com is not completed within 18 months of the closing of the
transaction, America Online will have the option to recover its investment plus
cost of capital.
Viacom has announced that, subject to Viacom board approval, which will be
based on an assessment of market conditions, and the receipt of a supplemental
tax ruling from the Internal Revenue Service reflecting a proposed merger
between Viacom and CBS Corporation ("CBS"), it intends to split-off Blockbuster
by offering to exchange all of its shares of Blockbuster for shares of Viacom's
common stock. Viacom has no obligation to effect the split-off either before or
after the merger. Viacom has indicated that it cannot give any assurance as to
whether or not or when the split-off will occur or as to the terms of the
split-off if it does occur, or whether or not the split-off, if it does occur,
will be tax-free.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's discussion and analysis of the consolidated results of
operations and financial condition should be read in conjunction with the
Consolidated Financial Statements and the related Notes.
Results of Operations
The following table sets forth results of operations for the three and nine
months ended September 30, 1998 and 1999 and other financial data and store
data:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------- ------------------
1998 1999 1998 1999
------ -------- -------- --------
(In millions, except margin, per
share amounts and worldwide store
data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues............................... $985.4 $1,112.8 $2,806.6 $3,267.5
Cost of sales.......................... 393.7 431.4 1,510.1 1,269.6
------ -------- -------- --------
Gross profit........................... 591.7 681.4 1,296.5 1,997.9
Operating expenses..................... 586.3 652.8 1,681.0 1,916.5
------ -------- -------- --------
Operating income (loss)................ 5.4 28.6 (384.5) 81.4
Interest expense....................... (7.8) (30.7) (21.1) (90.6)
Interest income........................ 1.1 0.7 3.3 1.8
Other items, net....................... 0.4 1.7 0.4 1.5
------ -------- -------- --------
Income (loss) before income taxes...... (0.9) 0.3 (401.9) ( 5.9)
Benefit (provision) for income taxes... (19.8) (17.7) 80.0 (52.4)
Equity in loss of affiliated companies,
net of tax............................ (0.8) (1.7) (1.8) (4.1)
------ -------- -------- --------
Net income (loss).................... $(21.5) $ (19.1) $ (323.7) $ ( 62.4)
====== ======== ======== ========
Cash Flow Data:
Cash flows from operating activities... $ 906.5 $ 724.2
Cash flows used for investing
activities............................ (740.9) (902.8)
Cash flows from (used for) financing
activities............................ (208.9) 201.8
Other Data:
Depreciation........................... $ 52.4 $ 56.8 $ 156.8 $ 163.1
Amortization of intangibles............ 42.3 43.2 127.3 128.7
EBITDA (1)............................. 100.1 128.6 (100.4) 373.2
Net income (loss) plus intangible
amortization, net of tax (1) (2)...... $ 19.6 $ 22.0 $ (200.6) $ 60.8
Margins:
Rental margin (3)...................... 67.0% 66.1% 50.2% 66.0%
Merchandise margin (4)................. 20.1% 21.8% 18.7% 22.5%
Gross margin (5)....................... 60.0% 61.2% 46.2% 61.1%
Worldwide Store Data:
Same store revenues increase (6)....... 18.2% 5.7% 12.7% 10.3%
Total stores at end of period.......... 6,233 6,860 6,233 6,860
</TABLE>
- --------
(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 earnings, 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.
14
<PAGE>
(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 over the prior comparable period.
Special Item Charge
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 videocassette
and video game rental inventory.
The following is a summary of the impact of the above-described special item
charge on our operating results during the periods presented.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------- ----------------
1998 1999 1998 1999
------ ------ -------- ------
(In millions)
<S> <C> <C> <C> <C>
Operating income (loss)................... -- -- $ (424.3) --
Net income (loss)......................... -- -- (273.1) --
</TABLE>
Excluding this special item charge, operating results would have been as
follows:
<TABLE>
<CAPTION>
Three Months
Ended September Nine Months Ended
30, September 30,
--------------- -----------------
1998 1999 1998 1999
------ -------- -------- --------
<S> <C> <C> <C> <C>
Revenues............................... $985.4 $1,112.8 $2,806.6 $3,267.5
Cost of sales.......................... 393.7 431.4 1,085.8 1,269.6
------ -------- -------- --------
Gross profit........................... 591.7 681.4 1,720.8 1,997.9
Operating expenses..................... 586.3 652.8 1,681.0 1,916.5
------ -------- -------- --------
Operating income (loss), excluding
special item charge................... $ 5.4 $ 28.6 $ 39.8 $ 81.4
====== ======== ======== ========
</TABLE>
Three Months Ended September 30, 1999 Compared To Three Months Ended September
30, 1998
Revenues. Revenues of $1,112.8 million for the three months ended September
30, 1999 increased $127.4 million, or 12.9%, from $985.4 million for the three
months ended September 30, 1998. The increase in revenues was primarily due to
increases in worldwide same store revenues of 5.7% for the three months ended
September 30, 1999 as compared to the corresponding period of 1998 and an
increase in the number of systemwide stores of 627 to 6,860 at September 30,
1999 from 6,233 at September 30, 1998. The increase in same store revenues was
principally due to increases in the number of domestic rental transactions of
6.5%, on a same store basis, and increased sales of previously viewed
videotapes, for the three month period ended September 30, 1999 as compared to
the corresponding period of the prior year. Also contributing to the increase
in comparable store sales was an increase in the average price per rental
transaction.
Rental revenue growth of $133.6 million, or 16.3%, for the three months
ended September 30, 1999 was the principal reason for the increase in total
revenue. The increase in rental revenue was primarily due to the increase in
the number of company-operated stores of 523 and the increase in rental
transactions driven by:
. further increases in purchases under our revenue-sharing agreements,
which resulted in continued improvements in the quantity and selection of
newly released videos;
. the impact of our advertising campaigns aimed at marketing the improved
customer experience; and
15
<PAGE>
. the implementation of more competitive pricing and rental terms.
Rental revenues include base rental fees and extended viewing fees. Extended
viewing fees of $172.3 million for the three months ended September 30, 1999
increased $21.3 million, or 14.1%, from $151.0 million for the comparable three
months ended September 30, 1998 due to the increase in rental transactions and
the number of company-operated stores. As a percentage of total revenues,
extended viewing fees were 15.5% for the three months ended September 30, 1999
as compared to 15.3% for the comparable three month period of 1998. Base rental
fees and extended viewing fees vary from market to market.
Merchandise sales declined $16.5 million, or 10.6%, for the three months
ended September 30, 1999 compared to the three months ended September 30, 1998.
The decrease in merchandise sales was primarily related to our allocation of
more retail shelf space to previously viewed videotapes and the release of
Titanic in the third quarter of 1998.
Cost of Sales. Cost of sales of $431.4 million for the three month period
ended September 30, 1999 increased $37.7 million from $393.7 million for the
three months ended September 30, 1998. Cost of sales as a percentage of total
revenues for the three month period ended September 30, 1999 decreased to 38.8%
from 40.0% for the comparable three month period of 1998.
Gross Profit. Gross profit of $681.4 million for the three months ended
September 30, 1999 increased $89.7 million, from $591.7 million in the third
quarter of 1998. Gross profit as a percentage of total revenues, or gross
margin, increased to 61.2% in the third quarter of 1999 from 60.0% in the third
quarter of 1998. This increase in total gross margin was primarily attributable
to an increase in the proportion of rental revenue, which produces higher
margins than merchandise sales. Rental margins decreased to 66.1% for the three
months ended September 30, 1999 from 67.0% for the corresponding period of 1998
primarily due to lower margins on sales of previously viewed videotapes in
connection with a sales promotion.
Operating Expenses. Total operating expenses of $652.8 million in the third
quarter of 1999 increased $66.5 million from $586.3 million in the third
quarter of 1998 primarily due to an increase in the number of company-operated
stores of 523 to 5,746 at September 30, 1999 from 5,223 at September 30, 1998.
Total operating expenses decreased as a percentage of total revenues to 58.7%
in the third quarter of 1999 from 59.5% in the third quarter of 1998. The
increases 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 44.0% in the third quarter
of 1999 from 44.4% in the third quarter of 1998 reflecting the benefits of
leveraging our cost structure to an increasing revenue base. General and
administrative expense of $489.6 million in the third quarter of 1999
increased $52.0 million from $437.6 million in the third quarter of 1998.
The dollar increase in general and administrative expense primarily
resulted from compensation increases of $26.0 million related to hiring
additional personnel to support our store growth and increased store
traffic and a $17.3 million increase in occupancy costs as a result of an
increase in the number of company-operated stores. In addition, other
corporate and store expenses increased $8.7 million due primarily to the
growth in our business.
Advertising Expense. Advertising expenses of $63.2 million in the third
quarter of 1999 increased $9.2 million from $54.0 million in the third
quarter of 1998. As a percentage of total revenues, advertising expense
increased to 5.7% in the third quarter of 1999 from 5.5% in the third
quarter of 1998. These increases were primarily the result of our planned
increased investment in advertising and marketing which began in the second
quarter of 1998, inclusive of increases in the BLOCKBUSTER REWARDS program.
Interest Expense. Interest expense of $30.7 million for the three months
ended September 30, 1999, increased $22.9 million as compared to $7.8 million
for the three months ended September 30, 1998. The increase was primarily
attributable to debt incurred under our new credit agreement in order to repay
Viacom approximately $1.6 billion in connection with a promissory note issued
by us as a dividend to Viacom International Inc. and advances by Viacom to us
for various acquisitions.
16
<PAGE>
Benefit (Provision) for Income Taxes. We recognized a provision for income
taxes of $17.7 million in the third quarter of 1999 as compared to $19.8
million in the third quarter of 1998.
Equity in Income (Loss) of Affiliated Companies, Net of Tax. The equity in
income (loss) of affiliated companies, net of tax was a loss of $1.7 million
for the three months ended September 30, 1999 as compared to a loss of $0.8
million for the three months ended September 30, 1998 primarily related to
increased losses in the Company's joint venture in Italy.
Net Income (Loss). For the reasons described above, the net loss of $19.1
million for the third quarter of 1999 reflects a reduction in net loss of $2.4
million from a net loss of $21.5 million for the third quarter of 1998.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
Revenues. Revenues of $3,267.5 million for the nine months ended September
30, 1999 increased $460.9 million, or 16.4%, from $2,806.6 million for the nine
months ended September 30, 1998. The increase in revenues was primarily due to
increases in worldwide same store revenues of 10.3% for the nine months ended
September 30, 1999 as compared to the corresponding period of 1998 and an
increase in the number of systemwide stores of 627 to 6,860 at September 30,
1999 from 6,233 at September 30, 1998. The increase in same store revenues was
principally due to increases in the number of domestic rental transactions of
6.5%, on a same store basis, and increased sales of previously viewed
videotapes, for the nine month period ended September 30, 1999 as compared to
the corresponding period of the prior year.
Rental revenue growth of $449.3 million, or 19.2%, for the nine months ended
September 30, 1999 was the principal reason for the increase in total revenue.
The increase in rental revenue was primarily due to the increase in the number
of company-operated stores of 523 and 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;
. the implementation of more competitive pricing and rental terms.
Rental revenues include base rental fees and extended viewing fees. Extended
viewing fees of $516.4 million for the nine months ended September 30, 1999
increased $90.8 million, or 21.3%, from $425.6 million for the comparable nine
months ended September 30, 1998 due to the increase in rental transactions and
the number of company-operated stores. As a percentage of total revenues,
extended viewing fees increased to 15.8% for the nine month period of 1999 as
compared to 15.2% in 1998. Base rental fees and extended viewing fees vary from
market to market.
Merchandise sales declined $9.5 million, or 2.2%, for the nine months ended
September 30, 1999 compared to the nine months ended September 30, 1998. The
decrease in merchandise sales was primarily related to our allocation of more
retail shelf space to previously viewed videotapes.
Cost of Sales. Cost of sales of $1,269.6 million for the nine month period
ended September 30, 1999 decreased $240.5 million from $1,510.1 million for the
nine months ended September 30, 1998. Cost of sales as a percentage of total
revenues for the nine month period ended September 30, 1999 decreased to 38.9%
from 53.8% for the comparable nine month period of 1998. Excluding the special
item charge of $424.3 million in the second quarter of 1998, cost of sales for
the nine month period increased $183.8 million, or 16.9%, primarily due to an
increase in cost of rental revenues of $207.2 million for the nine months ended
September 30, 1999. As a percentage of revenues, cost of sales excluding the
special item charge increased to 38.9% for the nine months ended September 30,
1999 as compared to 38.7% for the comparable nine month period of 1998.
Gross Profit. Gross profit of $1,997.9 million for the nine months ended
September 30, 1999 increased $701.4 million, from $1,296.5 million in the nine
months ended September 30, 1998. For the nine months ended September 30, 1999,
gross profit as a percentage of total revenues increased to 61.1% from 46.2% in
the
17
<PAGE>
comparable nine months ended September 30, 1998. Gross margin for the nine
months ended September 30, 1998 and 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 $1,916.5 million for the
nine months ended September 30, 1999 increased $235.5 million from $1,681.0
million for the nine months ended September 30, 1998, primarily due to an
increase in the number of company-operated stores of 523 to 5,746 at September
30, 1999 from 5,223 at September 30, 1998. Total operating expenses decreased
as a percentage of total revenues to 58.7% in 1999 from 59.9% in 1998. The
increases 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 44.1% in the nine months
ended September 30, 1999 from 45.3% in the nine months ended September 30,
1998 reflecting the benefits of leveraging our cost structure to an
increasing revenue base. General and administrative expense of $1,441.8
million in the nine months ended September 30, 1999, increased $170.3
million from $1,271.5 million in the nine months ended September 30, 1998.
The dollar increase for the nine months ended September 30, 1999 primarily
resulted from compensation increases of $90.8 million related to hiring
additional personnel to support our store growth and increased store
traffic. Occupancy costs increased $36.9 million largely as a result of an
increase in the number of company-operated stores. Other corporate and
store expenses increased $42.6 million due primarily to the growth of our
business.
Advertising Expense. Advertising expenses of $182.9 million for the nine
months ended September 30, 1999 increased $57.5 million from $125.4 million
in the nine months ended September 30, 1998. As a percentage of total
revenues, advertising expense increased to 5.6% in the nine months ended
September 30, 1999 from 4.5% in the nine months ended September 30, 1998.
These increases reflect our planned increased investment in advertising and
marketing which began in the second quarter of 1998.
Interest Expense. Interest expense of $90.6 million for the nine months
ended September 30, 1999, increased $69.5 million as compared to $21.1 million
for the nine months ended September 30, 1998. The increase was primarily
attributable to interest expense associated with approximately $1.6
indebtedness to Viacom relating to a promissory note issued by us as a dividend
to Viacom International Inc. and advances by Viacom to us for various
acquisitions.
Benefit (Provision) for Income Taxes. We recognized a provision for income
taxes of $52.4 million for the nine months ended September 30, 1999 as compared
to a benefit for income taxes of $80.0 million for the nine months ended
September 30, 1998. The fluctuation in the provision is primarily due to the
tax benefit associated with the special item charge recorded in the second
quarter of 1998.
Equity in Income (Loss) of Affiliated Companies, Net of Tax. The equity in
income (loss) of affiliated companies, net of tax was a loss of $4.1 million
for the nine months ended September 30, 1999 as compared to a loss of $1.8
million for the nine months ended September 30, 1998 primarily due to increased
losses in the Company's joint venture operations in Italy.
Net Income (Loss). For the reasons described above, the net loss of $62.4
million for the nine months ended September 30, 1999 reflects a reduction in
net loss of $261.3 million from a net loss of $323.7 million for the nine
months ended September 30, 1998.
Liquidity and Capital Resources
Liquidity Prior to and Upon Our Separation From Viacom
Prior to our initial public offering of Class A common stock, our capital
investments and acquisitions were 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. Prior to our initial public offering, Viacom
18
<PAGE>
deposited sufficient cash in our bank accounts to meet our daily obligations
and withdrew excess funds from those accounts. These transactions were
included in advances from Viacom in the consolidated balance sheets and
consolidated statements of cash flows. The amounts owed to Viacom prior to our
initial public offering were capitalized into Viacom's net equity investment.
Excess operating cash flow and additional funding from Viacom was used
primarily for opening and acquiring new stores, the refurbishment, remodeling
and relocation of exiting stores and the purchase of videocassette inventory.
Prior to our initial public offering our capital structure was established
which replaced our reliance on Viacom's cash management system. At the time of
our initial public offering, all cash accounts were settled and, since such
time, we have no longer participated in Viacom's cash management system. As
such, no further amounts will be deposited in or withdrawn from our accounts
by Viacom.
In October 1998, BLOCKBUSTER MUSIC stores were sold to Wherehouse
Entertainment Inc. 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, joint ventures,
commitments and payments of principal and interest on any borrowings, with
internally generated funds, in addition to various external sources of funds
which may be available to us. The external sources of funds include our credit
agreement and amendments thereto and 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.
At September 30, 1999, we were in compliance with all financial covenants
under our credit agreement.
Cash Flows
Operating Activities. Net cash flows from operating activities decreased
$182.3 million from $906.5 million for the nine months ended September 30,
1998 to $724.2 million for the nine months ended September 30, 1999 primarily
due to an increase in revenue sharing payments of $245.8 million resulting
from the increased use of revenue sharing in 1999. 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. In addition, a decrease in accounts payable of $78.9 million
compared to an increase of $32.6 million for the same period in 1998
contributed to a decrease in cash flow provided by operating activities. These
decreases to operating cash flows were partially offset by a decrease in
inventory in the amount of $25.1 million as compared to an increase in the
corresponding period in 1998 of $5.4 million and a decrease in net deferred
income taxes in the amount of $85.0 million as compared to an increase in the
corresponding period in 1998 of $39.4 million.
Investing Activities. Net cash used for investing activities increased
$161.9 million from $740.9 million for the nine months ended September 30,
1998 to $902.8 million for the nine months ended September 30, 1999 as a
result of a $157.9 million increase in capital expenditures for new store
openings and store remodeling in 1999 and a $85.8 million increase in cash
used for store acquisitions. These increases were partially offset by a
decrease in the cost of rental library purchases, as the percentage of product
purchased through revenue sharing increased in 1999 as compared to 1998.
19
<PAGE>
Major components of investing activities are detailed below:
<TABLE>
<CAPTION>
Nine Months
Ended September
30,
----------------
1998 1999
------- -------
(In millions)
<S> <C> <C>
Cash flows from investing activities:
Rental library purchases............................. $(611.7) $(543.1)
Capital expenditures................................. (108.8) (266.7)
Cash used for acquisitions........................... (25.1) (110.9)
Proceeds from sales of store operations.............. -- 18.9
Other................................................ 4.7 (1.0)
------- -------
Net cash flow used for investing activities............ $(740.9) $(902.8)
======= =======
</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 $384.8 million
will be incurred in 1999, of which $221.3 million is anticipated to relate to
new, relocated and remodeled stores and the conversion of acquired stores,
$40.5 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
$410.7 million to $201.8 million in the nine months ended September 30, 1999 as
compared to the use of funds of $208.9 million in the nine months ended
September 30, 1998.
On December 31, 1998, we declared a $1.4 billion dividend in the form of a
promissory note to Viacom International Inc. In the first quarter of 1999, we
issued other promissory notes of about $77 million to Viacom International Inc.
relating to our purchase of video stores. On June 23, 1999 we paid these notes
including accrued and unpaid interest with the proceeds of the borrowings under
the credit agreement described below.
On June 21, 1999, Blockbuster entered into a $1.9 billion unsecured credit
agreement with a syndicate of banks. The credit agreement is comprised of a
$700 million revolver due July 1, 2004, a $600 million term loan due in
quarterly installments beginning April 1, 2002 and ending July 1, 2004, and a
$600 million revolver due June 19, 2000, which was subsequently permanently
reduced with proceeds from the initial public offering. Interest rates are
based on the prime rate or LIBOR at Blockbuster's option at the time of
borrowing. A varying committment fee is charged on the unused amount of the
revolver. On June 23, 1999, we borrowed $1.6 billion under the credit
agreement, all of which was used to:
. 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;
. repay debt owed to Viacom International Inc. and its affiliates; and
. 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. At September 30, 1999, we had available
$260.0 million of our borrowing capacity under our credit agreement.
20
<PAGE>
On August 10, 1999 we sold to the public 31 million shares of our Class A
common stock for $15 per share. Proceeds from the offering aggregated $430.7
million, net of underwriting discounts and commissions of $22.1 million and
Offering expenses of $12.2 million. The gross proceeds from the offering, net
of underwriting discounts and commissions, $442.9 million, were used to pay
down the short-term revolving loan due June 19, 2000.
On October 20, 1999 our board of directors declared a cash dividend of $0.02
per share of Class A and Class B common stock, payable November 22, 1999, to
our stockholders of record at the close of business on November 1, 1999. The
total dividend payment will be about $3.5 million, of which Viacom
International Inc. will be paid about $2.9 million.
On November 3, 1999 Blockbuster and America Online, Inc. announced a three-
year strategic alliance. As part of the agreement, America Online will make a
$30 million investment, representing about 2.75% ownership, in Blockbuster.com
that will be used for, among other things, joint development of broadband
content and delivery. If an initial public offering of Blockbuster.com is not
completed within 18 months of the closing of the transaction, America Online
will have the option to recover its investment plus cost of capital.
We believe that cash flow from operations, our current credit agreement 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 to use for general corporate purposes.
However, we cannot assure you that we will be able to access capital markets in
the future on terms that will be satisfactory to us.
Other Financial Measurements: Working Capital
At September 30, 1999, we had cash and cash equivalents of $122.0 million.
Working capital, however, reflected a deficit of $277.2 million due to the
accounting treatment of our videocassette rental library. 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.
Recent Accounting Pronouncements
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 have reviewed our year 2000 issues based upon three areas: applications,
infrastructure, and business partners.
21
<PAGE>
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 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 assessed 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, as of October 31, 1999, is as follows:
Applications
We have completed the inventory, assessment, remediation and testing phases
with respect to all 16 critical domestic and six critical international
applications which primarily relate to point-of-sale, warehousing and
distribution and finance/payroll. We have completed the inventory and
assessment phases of all non-critical worldwide applications. Substantially all
of the non-critical worldwide applications have been remediated and tested. The
remaining applications are scheduled for completion through the remainder of
1999.
Infrastructure
We have completed the domestic and international inventory, assessment,
remediation and testing phases with respect to all hardware systems.
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
22
<PAGE>
financial condition. Although we have little or no control over the
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 and assessment phase of our
business partners and have tested for compliance of all of our critical
business partners. 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 $11.5 million, $10.6 million of which has been incurred through October
29, 1999. We do not expect this to have a material adverse effect on our
results of operations, financial position or liquidity.
Disclosure Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. When used
in this Quarterly Report, these forward-looking statements generally can be
identified by use of statements that include words such as "anticipate,"
"will," "expect," "estimate," "believe," "intend," "plan," "could," "may,"
"future" and similar expressions and variations thereof. Forward-looking
statements relating to such matters as our financial condition and operations
are based on our management's current intent, belief or expectations regarding
us and our industry. These forward-looking statements are not guarantees of
future performance and involve risks, uncertainties and assumptions that are
difficult to predict. In addition, 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
23
<PAGE>
what is expressed or forecasted in such forward-looking statements. We
undertake no obligation to update publicly any forward-looking statement for
any reason, even if new information becomes available or other events occur in
the future.
A variety of factors could cause our actual results to differ materially
from the anticipated results or other expectations expressed in our forward-
looking statements. Such factors include, among others, new technologies,
changes in current distribution practices of studios, changes in our revenue-
sharing agreements, risks associated with the implementation of our new
business model and planned store expansion, risks associated with our year 2000
remediation efforts, and risks associated with our separation from, and
potential conflicts of interest with, Viacom. We refer you to the detailed
discussion of these and other risk factors contained in our registration
statement on Form S-1, as declared effective on August 9, 1999.
Item 3. 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. However, on June 23, 1999, the Company borrowed $1.6
billion, comprised of $400 million borrowed under the long-term revolver, $600
million borrowed under the term loan, and $600 million under the short-term
revolver. Total outstanding borrowings at September 30, 1999 were $1,197.1.
Interest rates are based on the prime rate in the United States or LIBOR (plus
a margin based on leverage ratios) at our option at the time of borrowing. The
weighted average interest rate at September 30, 1999 for these borrowings was
7.2%. We anticipate managing our future interest rate exposure by using a mix
of fixed and floating interest rate debt and, if appropriate, financial
derivative instruments.
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. As of September 30, 1999, we had not entered into any
foreign currency hedging activities. We anticipate managing our future foreign
exchange risk by using foreign currency forward contracts to hedge against
foreign currency exchange fluctuations. The purpose of any contracts entered
into will be to reduce any adverse fluctuations in earnings and cash flows
associated with the foreign exchange rate fluctuations.
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 19.2% of our total
revenues. Our operations in Europe constitute 9.6% 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 our financial condition or results of operations.
24
<PAGE>
PART II--OTHER INFORMATION
Item 5. Other Information
On November 3, 1999, Blockbuster and America Online, Inc. announced a three-
year strategic alliance. As part of the agreement, America Online will make a
$30 million investment, representing about 2.75% ownership, in Blockbuster.com
that will be used for, among other things, joint development of broadband
content and delivery. If an initial public offering of Blockbuster.com is not
completed within 18 months of the closing of the transaction, America Online
will have the option to recover its investment plus cost of capital.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of Blockbuster
Inc. (1)
3.2 Bylaws of Blockbuster Inc. (1)
4.1 Specimen Class A Common Stock Certificate of Blockbuster Inc.
(2)
10.1 Initial Public Offering and Split-Off Agreement, dated August
16, 1999, among Blockbuster Inc., Viacom International Inc. and
Viacom Inc. (2)
10.2 Release and Indemnification Agreement, dated August 16, 1999,
between Blockbuster Inc. and Viacom Inc. (2)
10.3 Transition Services Agreement, dated August 16, 1999, between
Blockbuster Inc. and Viacom Inc. (2)
10.4 Registration Rights Agreement, dated August 16, 1999, between
Blockbuster Inc. and Viacom Inc. (2)
10.5 Tax Matters Agreement, dated August 16, 1999, between
Blockbuster Inc. and Viacom Inc. (2)
27.1 Financial Data Schedule. (2)
</TABLE>
- --------
(1) Previously filed as an exhibit to Blockbuster Inc.'s Registration Statement
on Form S-1 (File No. 333-77899) and incorporated herein by reference.
(2) Filed herewith.
(b) Reports on Form 8-K
None.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Blockbuster Inc.
/s/ Larry J. Zine
By: _________________________________
Larry J. Zine
Executive Vice President, Chief
Financial Officer (on behalf of
the Registrant and in his
capacity as principal financial
officer)
Date: November 15, 1999
26
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibits Description
-------- -------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of
Blockbuster Inc. (1)
3.2 Bylaws of Blockbuster Inc. (1)
4.1 Specimen Class A Common Stock Certificate of Blockbuster Inc.
(2)
10.1 Initial Public Offering and Split-Off Agreement, dated August
16, 1999, among Blockbuster Inc., Viacom International Inc.
and Viacom Inc. (2)
10.2 Release and Indemnification Agreement, dated August 16, 1999,
between Blockbuster Inc. and Viacom Inc. (2)
10.3 Transition Services Agreement, dated August 16, 1999, between
Blockbuster Inc. and Viacom Inc. (2)
10.4 Registration Rights Agreement, dated August 16, 1999, between
Blockbuster Inc. and Viacom Inc. (2)
10.5 Tax Matters Agreement, dated August 16, 1999, between
Blockbuster Inc. and Viacom Inc. (2)
27.1 Financial Data Schedule. (2)
</TABLE>
- --------
(1) Previously filed as an exhibit to Blockbuster Inc.'s Registration Statement
on Form S-1 (File No. 333-77899) and incorporated herein by reference.
(2) Filed herewith.
<PAGE>
EXHIBIT 4.1
<TABLE>
<S> <C> <C> <C> <C>
062610 INCORPORATED UNDER THE LAWS CLASS A
OF THE STATE OF DELAWARE COMMON STOCK
[BLOCKBUSTER LOGO]
PAR VALUE $0.01
NUMBER SHARES
THIS CERTIFICATE IS TRANSFERABLE CUSIP 093679 10 8
C IN NEW YORK, NEW YORK SEE REVERSE FOR CERTAIN DEFINITIONS
BLOCKBUSTER INC.
This is to certify that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE CLASS A COMMON STOCK OF
Blockbuster Inc. (the "Corporation"), transferable on the books of the Corporation
by the holder hereof in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate and the shares represented hereby
are issued and shall be held subject to all of the provisions of the Amended and
Restated Certificate of Incorporation and Bylaws of the Corporation, each as from
time to time amended (copies of which are on file with the Transfer Agent), to all
of which the holder by acceptance hereof assents. This Certificate is not valid until
countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
/s/ JOHN ANTIOCO [CORPORATE SEAL OF BLOCKBUSTER]
Dated:
CHAIRMAN OF THE BOARD
[VIGNETTE] COUNTERSIGNED AND REGISTERED
FIRST CHICAGO TRUST COMPANY OF NEW YORK
TRANSFER AGENT AND REGISTRAR
/s/ EDWARD B. STEAD
BY
SECRETARY
AUTHORIZED SIGNATURE
AMERICAN BANK NOTE COMPANY
</TABLE>
<PAGE>
[BLOCKBUSTER LOGO]
Blockbuster Inc.
The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof of
the Corporation, and the qualifications, limitations or restrictions of such
preferences and/or rights. A stockholder may make the request to the Corporation
or to its Transfer Agent and Registrar.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- __________Custodian___________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of Under Uniform Gifts to Minors
survivorship and not as tenants Act________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, ________________________________________ hereby sell,
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING
POSTAL ZIP CODE, OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------- Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- --------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated
------------------------------
X
NOTICE: -----------------------------------
THIS SIGNATURE(S) TO (SIGNATURE)
THIS ASSIGNMENT MUST
CORRESPOND WITH THE
NAME(S) AS WRITTEN
UPON THE FACE OF THE
CERTIFICATE IN EVERY
PARTICULAR WITHOUT
ALTERNATION OR EN- X
LARGEMENT OR ANY -----------------------------------
CHANGE WHATEVER. (SIGNATURE)
THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AND ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
-----------------------------------------
SIGNATURE(S) GUARANTEED BY:
----------------------------------------
<PAGE>
EXHIBIT 10.1
INITIAL PUBLIC OFFERING AND SPLIT-OFF AGREEMENT
DATED AS OF AUGUST 16, 1999
AMONG
VIACOM INC.
VIACOM INTERNATIONAL INC.
AND
BLOCKBUSTER INC.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
Section 1.01. Definitions.................................................. 1
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
<PAGE>
Page
----
ARTICLE VI
ASSIGNMENT AND ASSUMPTION
Section 6.01. Assignment of Obligations....................................19
Section 6.02. Assumption of Obligations....................................19
Section 6.03. Assignment of Certain Employment Agreements..................19
Section 6.04. Assumption of Certain Employment Agreements..................19
ARTICLE VII
OPTIONS
Section 7.01. Options......................................................19
Section 7.02. Notice.......................................................20
Section 7.03. Option Exercise and Payment..................................20
Section 7.04. Effect of Failure to Exercise................................21
Section 7.05. IPO..........................................................21
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....................................................23
Section 9.02. Termination..................................................23
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.....................................................24
Section 10.05. Performance..................................................24
Section 10.06. References; Construction.....................................24
Section 10.07. Amendments...................................................24
Section 10.08. Successors and Assignment....................................24
Section 10.09. Severability.................................................24
Section 10.10. Entire Agreement.............................................25
Section 10.11. Notices......................................................25
ii
<PAGE>
Section 10.12. Governing Law................................................25
Section 10.13. Counterparts.................................................26
EXHIBITS
Exhibit A Form of Release and Indemnification Agreement
Exhibit B Form of Transition Services Agreement
Exhibit C Form of Registration Rights Agreement
Exhibit D Form of Tax Matters Agreement
iii
<PAGE>
INITIAL PUBLIC OFFERING AND SPLIT-OFF AGREEMENT
-----------------------------------------------
INITIAL PUBLIC OFFERING AND SPLIT-OFF AGREEMENT (this "Agreement")
---------
dated as of August 16, 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 $0.01 per share of Blockbuster.
"Blockbuster Class B Common Stock" means the class B common stock, par
--------------------------------
value $0.01 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).
2
<PAGE>
"Blockbuster Public Filings" has the meaning ascribed thereto in
--------------------------
Section 5.01(xii).
"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 is 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
7
<PAGE>
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.
8
<PAGE>
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
9
<PAGE>
to the Blockbuster Common Stock, (iii) the preparation, printing and 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
10
<PAGE>
Information it is compelled by law to disclose, (b) use all commercially
reasonable efforts to obtain reliable 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.
11
<PAGE>
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
12
<PAGE>
"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
----------------
13
<PAGE>
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 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
14
<PAGE>
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.
(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
15
<PAGE>
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 (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
16
<PAGE>
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 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.
17
<PAGE>
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 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.
18
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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 under the Wherehouse Stock Purchase
Agreement and any ancillary agreements executed in connection therewith.
Section 6.03. Assignment of Certain Employment Agreements. On or
-------------------------------------------
about the Split-Off Date, Viacom will transfer, convey, set over and assign to
Blockbuster any and all employment agreements between "Blockbuster Entertainment
Group, a business unit of Viacom," and the employees who are a party to such
employment agreements.
Section 6.04. Assumption of Certain Employment Agreements. On or
-------------------------------------------
about the Split-Off Date, Blockbuster will undertake, assume and agree to
perform all of the duties, obligations and liabilities of "Blockbuster
Entertainment Group, a business unit of Viacom," under the employment agreements
referred to in Section 6.03 herein.
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
19
<PAGE>
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. 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
20
<PAGE>
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%.
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
21
<PAGE>
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
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.
22
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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 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.
23
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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.
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.
24
<PAGE>
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
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
25
<PAGE>
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
(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: /s/ MICHAEL D. FRICKLAS
----------------------------------------
Name: Michael D. Fricklas
Title: Sr. Vice President, General
Counsel and Secretary
VIACOM INTERNATIONAL INC.
By: /s/ MICHAEL D. FRICKLAS
----------------------------------------
Name: Michael D. Fricklas
Title: Sr. Vice President and
General Counsel
BLOCKBUSTER INC.
By: /s/ EDWARD B. STEAD
----------------------------------------
Name: Edward B. Stead
Title: Exec. Vice President, General
Counsel and Secretary
<PAGE>
Exhibit A
---------
Form of Release and Indemnification Agreement
[Filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q]
<PAGE>
Exhibit B
---------
Form of Transition Services Agreement
[Filed as Exhibit 10.3 to this Quarterly Report on Form 10-Q]
<PAGE>
Exhibit C
---------
Form of Registration Rights Agreement
[Filed as Exhibit 10.4 to this Quarterly Report on Form 10-Q]
<PAGE>
Exhibit D
---------
Form of Tax Matters Agreement
[Filed as Exhibit 10.5 to this Quarterly Report on Form 10-Q]
<PAGE>
EXHIBIT 10.2
RELEASE AND INDEMNIFICATION AGREEMENT
DATED AS OF AUGUST 16, 1999
BY AND BETWEEN
VIACOM INC.
AND
BLOCKBUSTER INC.
<PAGE>
TABLE OF CONTENTS
Page
----
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
<PAGE>
RELEASE AND INDEMNIFICATION AGREEMENT
-------------------------------------
RELEASE AND INDEMNIFICATION AGREEMENT (this "Agreement") dated as of
---------
August 16, 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,
- -------
<PAGE>
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.
---------
"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.
2
<PAGE>
"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.
3
<PAGE>
"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.
4
<PAGE>
and 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 Costs 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
5
<PAGE>
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
6
<PAGE>
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
7
<PAGE>
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,
8
<PAGE>
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.
(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, 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 guarantee, security interest or protective covenant,
Blockbuster shall give the same guarantee, security interest or protective
9
<PAGE>
covenant 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, that Viacom's consent shall not be required if
--------
the surviving corporation of the consolidation or merger or the acquiror of
assets agrees to assume all of the obligations of Blockbuster hereunder (without
release of any assignor); provided, however, that this Section 4.04 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
10
<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 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
11
<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 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.
12
<PAGE>
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: MICHAEL D. FRICKLAS
----------------------------------
Name: Michael D. Fricklas
Title: Sr. Vice President, General
Counsel and Secretary
BLOCKBUSTER INC.
By: EDWARD B. STEAD
----------------------------------
Name: Edward B. Stead
Title: Exec. Vice President, General
Counsel and Secretary
<PAGE>
EXHIBIT 10.3
TRANSITION SERVICES AGREEMENT
DATED AS OF AUGUST 16, 1999
BY AND BETWEEN
VIACOM INC.
AND
BLOCKBUSTER INC.
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
FEES AND TERM
Section 1.01. Price and Payment...............................................1
Section 1.02. Term............................................................2
ARTICLE IISERVICES
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
<PAGE>
TRANSITION SERVICES AGREEMENT
-----------------------------
TRANSITION SERVICES AGREEMENT (this "Agreement") dated as of
---------
August 16, 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 ($150,000) per month, which is based
- -------------------------
upon Viacom's cost in providing these services. The 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
<PAGE>
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
2
<PAGE>
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,
3
<PAGE>
damages, losses, costs, expenses (including, but not limited to, settlements,
judgments, court costs 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
4
<PAGE>
minimize its duration and has given prompt written notice to Blockbuster, then
Viacom's 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
5
<PAGE>
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
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;
6
<PAGE>
(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;
(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.
7
<PAGE>
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: /s/ MICHAEL D. FRICKLAS
-----------------------------------
Name: Michael D. Fricklas
Title: Sr. Vice President, General Counsel
and Secretary
BLOCKBUSTER INC.
By: /s/ EDWARD B. STEAD
-----------------------------------
Name: Edward B. Stead
Title: Exec. Vice President, General Counsel
and Secretary
<PAGE>
EXHIBIT 10.4
REGISTRATION RIGHTS AGREEMENT
DATED AS OF AUGUST 16, 1999
BY AND BETWEEN
VIACOM INC.
AND
BLOCKBUSTER INC.
<PAGE>
TABLE OF CONTENTS
Page
----
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 August
---------
16, 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 $0.01 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:
<PAGE>
"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.
"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.
2
<PAGE>
"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
3
<PAGE>
or any state securities or blue sky law then in effect or (iv) they shall have
ceased to be outstanding.
"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
4
<PAGE>
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.
"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
5
<PAGE>
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 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.
6
<PAGE>
(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 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
7
<PAGE>
Securities Act of all Registrable Securities which Blockbuster has been so
requested to register, to the extent 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
8
<PAGE>
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 (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
9
<PAGE>
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 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
10
<PAGE>
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 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
11
<PAGE>
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 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
12
<PAGE>
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 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
13
<PAGE>
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 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.
14
<PAGE>
(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 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 be 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
15
<PAGE>
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 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.
16
<PAGE>
(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, 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
17
<PAGE>
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 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:
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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 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
19
<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 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.
20
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
the day and year first above written.
VIACOM INC.
By: /s/ MICHAEL D. FRICKLAS
----------------------------------
Name: Michael D. Fricklas
Title: Sr. Vice President
BLOCKBUSTER INC.
By: /s/ EDWARD B. STEAD
----------------------------------
Name: Edward B. Stead
Title: Exec. Vice President, General
Counsel and Secretary
<PAGE>
EXHIBIT 10.5
TAX MATTERS AGREEMENT
---------------------
THIS TAX MATTERS AGREEMENT (the "Agreement"), dated as of August 16,
1999 (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 liabilities for years in which the Blockbuster Consolidated Group is so
included, and certain other matters relating to taxes.
1
<PAGE>
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 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
2
<PAGE>
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 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-
3
<PAGE>
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 years resulting from the Blockbuster Consolidated Group
joining or leaving the Viacom Consolidated Group.
4
<PAGE>
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 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
5
<PAGE>
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 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
6
<PAGE>
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 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
7
<PAGE>
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 information
required by Viacom on a timely basis consistent with current practices of the
Viacom Consolidated Group.
8
<PAGE>
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
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-
9
<PAGE>
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 "Adjustment") relating to the treatment of
a Blockbuster Consolidated Return Item for an
10
<PAGE>
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.
11
<PAGE>
(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
12
<PAGE>
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.
13
<PAGE>
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 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
14
<PAGE>
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 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
15
<PAGE>
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 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
16
<PAGE>
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:
(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
17
<PAGE>
(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 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.
18
<PAGE>
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.
(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
19
<PAGE>
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 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.
20
<PAGE>
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.
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.
--------
21
<PAGE>
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.
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
22
<PAGE>
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
August 16, 1999.
Viacom Inc.
By: /s/ Michael D. Fricklas
-----------------------------
Name: Michael D. Fricklas
Title: Sr. Vice President,
General Counsel and
Secretary
Blockbuster Inc.
By: /s/ Edward B. Stead
-----------------------------
Name: Edward B. Stead
Title: Executive Vice President
General Counsel and
Secretary
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the unaudited financial statements as of and for the nine months ended
September 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 122
<SECURITIES> 0
<RECEIVABLES> 125
<ALLOWANCES> 10
<INVENTORY> 254
<CURRENT-ASSETS> 639
<PP&E> 1,853
<DEPRECIATION> 754
<TOTAL-ASSETS> 8,325
<CURRENT-LIABILITIES> 916
<BONDS> 1,197
0
0
<COMMON> 2
<OTHER-SE> 6,177
<TOTAL-LIABILITY-AND-EQUITY> 8,325
<SALES> 3,204
<TOTAL-REVENUES> 3,268
<CGS> 1,270
<TOTAL-COSTS> 1,270
<OTHER-EXPENSES> 1,917
<LOSS-PROVISION> 71
<INTEREST-EXPENSE> 91
<INCOME-PRETAX> (6)
<INCOME-TAX> 52
<INCOME-CONTINUING> (62)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (62)
<EPS-BASIC> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
