<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1999
REGISTRATION NO. 333-77899
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
BLOCKBUSTER INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7841 52-1655102
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
1201 ELM STREET
DALLAS, TEXAS 75270
(214) 854-3000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
--------------------------
EDWARD B. STEAD
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
BLOCKBUSTER INC.
1201 ELM STREET
DALLAS, TEXAS 75270
(214) 854-3000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
Copies to:
<TABLE>
<S> <C> <C>
STEPHEN T. GIOVE MICHAEL D. FRICKLAS KENNETH A. LEFKOWITZ
SHEARMAN & STERLING VIACOM INC. HUGHES HUBBARD & REED LLP
599 LEXINGTON AVENUE 1515 BROADWAY ONE BATTERY PARK PLAZA
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10036 NEW YORK, NEW YORK 10004-1482
(212) 848-4000 (212) 258-6000 (212) 837-6000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective. If any of the
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one to be used
in connection with a U.S. and Canadian offering of the registrant's class A
common stock and one to be used in connection with a concurrent international
offering of the class A common stock. The international prospectus will be
identical to the U.S. prospectus except that it will have different front and
back cover pages. The form of U.S. prospectus is included herein and is followed
by the alternate pages to be used in the international prospectus which differ
from those used in the U.S. prospectus. Each of the alternate pages for the
international prospectus included herein has been labeled "Alternate Page for
International Prospectus." Final forms of each prospectus will be filed with the
Securities and Exchange Commission under Rule 424(b) of the General Rules and
Regulations under the Securities Act of 1933.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED , 1999
P R O S P E C T U S
SHARES
[BLOCKBUSTER LOGO]
BLOCKBUSTER INC.
CLASS A COMMON STOCK
$ PER SHARE
---------
We are selling shares of our class A common stock. Of the shares
of class A common stock that we are selling, shares are being offered in
the United States and Canada by a syndicate of U.S. underwriters and
shares are being offered concurrently outside the United States and Canada by a
syndicate of international underwriters.
In addition, the U.S. underwriters may purchase up to additional
shares of our class A common stock under some circumstances. The international
underwriters may also purchase up to additional shares of our class A
common stock under some circumstances.
This is an initial public offering of our class A common stock. We currently
expect the initial public offering price to be between $ and $ per share, and
have applied to have the class A common stock listed on the New York Stock
Exchange under the symbol "BBI."
Following this offering, we will have two classes of authorized common
stock, the class A common stock and class B common stock. The rights of the
holders of class A common stock and class B common stock are identical, except
with respect to voting and conversion.
--------------
INVESTING IN THE CLASS A COMMON STOCK INVOLVES CERTAIN RISKS. WE REFER YOU
TO "RISK FACTORS" BEGINNING ON PAGE 9.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
1999.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ------------
<S> <C> <C>
Initial Public Offering Price.................................................................. $ $
Underwriting Discounts and Commissions......................................................... $ $
Proceeds to Blockbuster Inc. (before expenses)................................................. $ $
</TABLE>
--------------
JOINT BOOK-RUNNING MANAGERS
SALOMON SMITH BARNEY BEAR, STEARNS & CO. INC.
---------
CREDIT SUISSE FIRST BOSTON
GOLDMAN, SACHS & CO.
J.P. MORGAN & CO.
BANC OF AMERICA SECURITIES LLC
ING BARING FURMAN SELZ LLC
PAINEWEBBER INCORPORATED
SCHRODER & CO. INC.
SG COWEN
WIT CAPITAL CORPORATION
, 1999
<PAGE>
[ARTWORK]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Prospectus Summary................................................................... 3
Risk Factors......................................................................... 9
Separation from Viacom............................................................... 18
Use of Proceeds...................................................................... 20
Dividend Policy...................................................................... 21
Capitalization....................................................................... 22
Dilution............................................................................. 23
Selected Combined Historical and Pro Forma Financial and Operating Data.............. 24
Unaudited Pro Forma Combined Financial Data.......................................... 26
Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... 31
Video Industry Overview.............................................................. 47
Business............................................................................. 51
Management........................................................................... 74
Related Party Transactions........................................................... 88
Principal Stockholder................................................................ 94
Description of Capital Stock......................................................... 95
Description of Credit Agreement...................................................... 101
Shares Eligible for Future Sale...................................................... 103
Material United States Federal Tax Consequences to Non-United States Holders......... 104
Underwriting......................................................................... 107
Legal Matters........................................................................ 111
Experts.............................................................................. 111
Where You Can Find More Information.................................................. 111
Index to Combined Financial Statements............................................... F-1
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS"
SECTION AND THE COMBINED FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF CLASS A COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES
ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS
OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF CLASS A COMMON STOCK. UNLESS OTHERWISE INDICATED OR
UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL INFORMATION IN THIS PROSPECTUS GIVES
EFFECT TO THE AMENDMENT TO OUR CERTIFICATE OF INCORPORATION TO CHANGE, AMONG
OTHER THINGS, THE AMOUNT AND TYPE OF COMMON STOCK THAT WE CAN AUTHORIZE.
BLOCKBUSTER-REGISTERED TRADEMARK-, BLOCKBUSTER VIDEO-REGISTERED TRADEMARK-,
BLOCKBUSTER FAVORITES-TM-, BLOCKBUSTER GIFTCARD-REGISTERED TRADEMARK-,
BLOCKBUSTER GIFTCARDS-TM-, BLOCKBUSTER REWARDS-TM-, BLOCKBUSTER ENTERTAINMENT
AWARDS-REGISTERED TRADEMARK-, KIDPRINT-REGISTERED TRADEMARK-, BLOCKBUSTER
MUSIC-REGISTERED TRADEMARK- AND XTRA-VISION ARE OUR TRADEMARKS.
OUR COMPANY
We are the world's leading retailer of rentable home videocassettes, DVDs
and video games, with about 6,500 stores in the United States and 26 other
countries as of March 31, 1999. We operate primarily under the highly recognized
BLOCKBUSTER brand name, which, according to The Gallup Organization, achieves
nearly 100% recognition with active movie renters in the United States. Based on
1998 industry estimates from Paul Kagan Associates, Inc., a video industry
analyst, we estimate that our company-operated and franchised stores attained a
U.S. market share in excess of 27%, over three times greater than that of our
nearest competitor. In the United States, our customer transaction database
contains information on about 87 million accounts, and we estimate that about
59% of the population lives within three miles of one of our stores. Our
revenues in 1998 increased 17.5% from 1997, with about 79% of these revenues
generated in the United States and about 21% generated outside of the United
States. Nearly 60 million people worldwide have rented in excess of 970 million
movies and video games from us or our franchisees within the last 12 months. For
the year ended December 31, 1998, we and our franchisees recorded worldwide
revenues of about $4.7 billion, which includes $3.9 billion from our company
operations and $0.8 billion from our franchised stores.
Under the management team led by John F. Antioco, our chairman, president
and chief executive officer, we developed and implemented a new business model
that focuses on our core rental business and significantly improves customer
satisfaction. Most significantly, we entered into domestic revenue-sharing
agreements with all of the major Hollywood movie studios. Under these
agreements, we agree to share our U.S. rental revenue with the studios for a
limited period of time. We believe that these agreements have significant
benefits to us, including:
- substantially increasing the number of newly released videos in our stores
to better satisfy customer demand;
- contributing to an increase in revenues resulting from an increase in the
total number of transactions and the number of videocassettes rented per
transaction; and
- aligning the studios' economic interests more closely with ours because
they share a portion of the rental revenue with us for a period of time.
Under our new business model, quarterly domestic same store rental revenues
increased 8.6%, 17.5%, 20.0%, 20.5% and 23.1% in the first through fourth
quarters of 1998 compared to 1997 and the first quarter of 1999 compared to the
first quarter of 1998, respectively.
3
<PAGE>
INDUSTRY OVERVIEW
According to Paul Kagan Associates, the U.S. videocassette and DVD rental
and sales industry grew from $15.7 billion in revenue in 1997 to $17.1 billion
in 1998 and is expected to reach $22.0 billion in 2002. Paul Kagan Associates
estimates that in 1998, 83.5 million, or 81.5%, of the 102.5 million total U.S.
households owned a VCR. According to Paul Kagan Associates, 19.7 million VCRs
and DVD players were sold in the United States in 1998, and it expects sales to
reach 21.5 million units by 2002.
The home video industry is highly fragmented, with single store owners
currently operating about 49% of all locations that rent video titles. We
believe that there are several competitive advantages of being a large home
video chain and therefore believe individual stores and small chains in the home
video industry will continue to consolidate with national and regional chains.
STRATEGY
BUSINESS MODEL
We believe our business model gives us an advantage over other large home
video chains and a significant advantage over our single store competitors. The
key elements of our business model are to:
- provide a large number of copies and a broad selection of movie titles;
- operate conveniently located and highly visible stores;
- offer superior and consistent customer service;
- optimize our pricing to local market conditions;
- nationally advertise and market our BLOCKBUSTER brand name and the
differences between us and our competitors;
- use our extensive customer transaction database to effectively operate and
market our business; and
- improve our efficiency and lower our costs through self distribution.
GROWTH STRATEGY
The goal of our growth strategy is to increase our U.S. systemwide market
share from 27%, as of December 31, 1998, to over 40% within the next three years
and to significantly increase our market share in those countries outside the
United States where it is profitable to do so. The key elements of our growth
strategy are to:
- increase our same store revenues;
- expand our domestic store base;
- expand our international store base;
- expand our worldwide franchise program;
- apply the benefits of our greater size by spreading fixed costs across our
expanding operations;
- pursue strategic acquisitions; and
- pursue new technologies and products related to rentable home
entertainment which capitalize on our brand name.
4
<PAGE>
RISK FACTORS
We operate in a highly fragmented and competitive market. Our business model
and growth strategy are subject to risks which are described under "Risk
Factors." The following are among the risks which may adversely affect our
future financial performance or our ability to effectively compete in our
market:
- introduction and acceptance of new technologies;
- adverse changes in the movie studios' current distribution and pricing
policies;
- uncertainties with respect to our new business model; and
- obstacles to our U.S. and international new store expansion.
SEPARATION FROM VIACOM
We are currently an indirect wholly owned subsidiary of Viacom, Inc.
Immediately after the completion of this offering, Viacom will own none of the
outstanding shares of our class A common stock and 100% of the outstanding
shares of our class B common stock. Accordingly, Viacom will own common stock
representing about % of our equity value, or about % if the
underwriters exercise their over-allotment options in full, and about % of
the combined voting power of our outstanding common stock, or about % if
the underwriters exercise their over-allotment options in full. Viacom has
rights protecting its ability to control at least 80% of our equity value and
the combined voting power of our two outstanding classes of common stock. We
refer you to "Related Party Transactions -- Agreements Between Viacom and Us --
Initial Public Offering and Split-off Agreement" for additional information with
respect to these rights. Viacom has announced that, if it receives a favorable
tax ruling from the Internal Revenue Service, it currently intends to distribute
all of its holdings in our common stock to its stockholders who participate in
an exchange offer intended to qualify for tax-free treatment under Section 355
of the Internal Revenue Code. Viacom has the sole discretion to determine if and
when such split-off will occur and all terms of such split-off. If Viacom
determines to make the distribution, it will occur some time after the later of
(1) September 29, 1999, the five-year anniversary of the merger of Viacom and
Blockbuster Entertainment Corporation and (2) unless the underwriters consent to
an earlier date, 180 days after the completion of this offering. For additional
information on the risks associated with Viacom not completing the split-off, we
refer you to "Risk Factors -- Risk Factors Relating to Our Separation from
Viacom."
THIS OFFERING
This offering is for shares of our class A common stock in the United
States and Canada and the concurrent offering of shares of our class A
common stock outside of the United States and Canada. In this prospectus, a
reference to each offering is a reference to both offerings. The closing of each
offering is conditioned upon the closing of the other.
<TABLE>
<S> <C>
Class A common stock offered by us:
Offering in the United States and Canada... shares
Offering outside of the United States and
Canada................................... shares
Total offering........................... shares
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Common stock outstanding after this offering:
Class A common stock....................... shares(1)
Class B common stock....................... shares(2)
Total common stock....................... shares(1)
Voting rights; Conversion.................... The holders of class A common stock and class
B common stock have identical rights, except
with respect to voting and conversion.
Holders of class A common stock are entitled
to one vote per share and holders of class B
common stock are entitled to five votes per
share. Holders of the class A common stock
and class B common stock generally vote
together as a single class. We refer you to
"Description of Capital Stock -- Common Stock
-- Voting rights." Under some circumstances,
the class B common stock converts
automatically or at the option of Viacom into
class A common stock. We refer you to
"Description of Capital Stock -- Common Stock
-- Conversion."
Use of proceeds.............................. We intend to use all of the net proceeds from
this offering to repay a portion of our
borrowings under our credit agreement which
we describe in "Description of Credit
Agreement." For a full discussion of the use
of proceeds, we refer you to "Use of
Proceeds."
Dividend policy.............................. Subject to our financial performance,
limitations under our credit agreement and
action by our board of directors, we
currently intend to pay dividends on a
quarterly basis, at an initial rate of $
per share, commencing with the first
declaration in for payment in . We
refer you to "Dividends."
</TABLE>
- ------------------------
(1) This assumes that the underwriters do not exercise their over-allotment
options. We refer you to "Underwriting."
(2) Viacom beneficially owns all of the class B common stock.
OUR COMPANY INFORMATION
Our principal executive offices are located at 1201 Elm Street, Dallas,
Texas 75270 and our telephone number is (214) 854-3000.
6
<PAGE>
SUMMARY COMBINED FINANCIAL DATA
The summary combined historical and pro forma financial data presented below
should be read in conjunction with the combined financial statements and interim
combined financial statements and notes thereto, the "Unaudited Pro Forma
Combined Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PRO FORMA AS PRO FORMA AS
YEAR ENDED OR AT DECEMBER 31, THREE MONTHS ENDED ADJUSTED YEAR ADJUSTED THREE
OR AT MARCH 31, ENDED MONTHS ENDED OR
------------------------------- -------------------- DECEMBER 31, AT MARCH 31,
1996 1997 1998 1998 1999 1998(1) 1999(1)
--------- --------- --------- --------- --------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE AND WORLDWIDE STORE DATA)
STATEMENT OF OPERATIONS
DATA(2):
Revenues..................... $ 2,942.1 $ 3,313.6 $ 3,893.4 $ 931.2 $ 1,113.0
Gross profit................. 1,928.4 1,953.1 1,937.0 604.6 671.2
Operating income (loss)(3)... 267.6 (214.6) (359.2) 67.0 48.6
Income (loss) before income
taxes...................... 249.2 (269.3) (394.7) 61.0 20.0
Net income (loss)............ 77.8 (318.2) (336.6) 15.8 (3.4)
Pro forma net income per
share--basic and
diluted(4).................
Pro forma weighted average
shares outstanding--basic
and diluted(4).............
BALANCE SHEET DATA:
Cash and cash equivalents.... $ 58.6 $ 129.6 $ 99.0 $ 72.9 $ 75.0
Rental library, net.......... 676.0 734.5 441.2 750.2 457.3
Intangibles, net............. 6,309.6 6,192.7 6,055.6 6,161.0 6,074.3
Total assets................. 8,794.6 8,731.0 8,274.8 8,617.0 8,300.5
Long-term debt, less current
portion(5)................. 249.0 331.3 1,715.2 352.2 1,824.6
Stockholders' equity(5)...... 7,784.4 7,617.6 5,637.9 7,603.8 5,662.2
CASH FLOW DATA:
Cash flows from operating
activities(6).............. $ 985.0 $ 991.3 $ 1,234.5 $ 242.3 $ 166.5
Cash flows from (used for)
investing activities(6).... (1,235.1) (1,188.1) (1,022.2) (232.6) (325.4)
Cash flows from (used for)
financing activities(6).... 208.8 269.3 (241.1) (65.9) 135.6
OTHER DATA:
EBITDA(7)(8)(9).............. $ 599.3 $ 207.9 $ 23.7 $ 161.9 $ 143.4
Net income (loss) plus
intangible amortization,
net of tax(9)(10)(11)...... 239.6 (155.0) (172.5) 56.8 37.8
Amortization of
intangibles................ 166.2 168.7 170.2 42.6 43.0
Depreciation................. 165.5 253.8 212.7 52.3 51.8
Capital expenditures......... 323.7 262.2 175.0 38.5 59.8
WORLDWIDE STORE DATA:
Company-operated stores at
end of period.............. 4,472 5,105 5,283 5,076 5,438
Franchised and joint venture
stores at end of period.... 845 944 1,098 942 1,061
Total stores at end of
period..................... 5,317 6,049 6,381 6,018 6,499
Same store revenues increase
(decrease)(12)............. 5.1% (1.8)% 13.3% 7.6% 17.0%
</TABLE>
See footnotes on the following page.
7
<PAGE>
(1) For information regarding the pro forma adjustments made to our historical
financial data, we refer you to "Unaudited Pro Forma Combined Financial
Data."
(2) The statement of operations data for the periods presented do not fully
reflect the trends in our business as we had significantly different
business models during these periods resulting in significant charges. As a
result, our statement of operations data for the periods presented are not
comparable.
(3) Operating income (loss) reflects (1) the $50.2 million restructuring charge
recorded in 1996 primarily related to our corporate relocation and
elimination of third party distributors; (2) $220.3 million of the $250
million charge recorded in 1997 primarily related to inventory write-downs,
closure of underperforming stores and additional expenses associated with
our corporate relocation; and (3) the $424.3 million charge recorded in 1998
related to a change in accounting for videocassette and game rental
amortization. The following table presents operating income (loss) excluding
the impact of these special item charges:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Operating income (loss).......................................................... $ 267.6 $ (214.6) $ (359.2)
Impact of special item charges................................................... 50.2 220.3 424.3
--------- --------- ---------
Operating income, excluding special item charges................................. $ 317.8 $ 5.7 $ 65.1
</TABLE>
(4) Our historical capital structure is not indicative of our prospective
capital structure because no direct ownership relationship existed among all
the various units comprising our company. Accordingly, historical earnings
per share has not been presented in the combined financial statements. Pro
forma weighted average shares outstanding reflect all shares of class B
common stock issued and outstanding which are owned by Viacom and the class
A common stock to be issued in this offering as if these shares had been
outstanding since the beginning of each respective period.
(5) This reflects the December 31, 1998 declaration of a $1.4 billion dividend
payable to Viacom in the form of an interest-bearing promissory note.
(6) For information regarding the cash flows data, we refer you to the combined
statements of cash flows on page F-6 and the interim combined statements of
cash flow on page F-29.
(7) EBITDA represents net income (loss) before equity in loss of affiliated
companies (net of tax), benefit (provision) for income taxes, interest
income, interest expense, other items (net), depreciation and amortization
of intangibles. EBITDA may differ in the method of calculation from
similarly titled measures used by other companies.
(8) EBITDA includes: (1) the $50.2 million restructuring charge recorded in 1996
primarily related to our corporate relocation and elimination of third-party
distributors; (2) the $175.2 million effect on EBITDA of the $250 million
charge recorded in 1997 primarily related to inventory write-downs, closure
of underperforming stores and additional expenses associated with our
corporate relocation; and (3) the $424.3 million charge recorded in 1998
related to a change in accounting for videocassette and game rental
amortization. We refer you to notes 3 and 4 of our combined financial
statements included elsewhere in this prospectus.
(9) "EBITDA" and "net income (loss) plus intangible amortization, net of tax"
are presented here to provide additional information about our operations.
These items should be considered in addition to, but not as a substitute for
or superior to, operating income, net income, cash flow and other measures
of financial performance prepared in accordance with generally accepted
accounting principles.
(10) Net income (loss) plus intangible amortization, net of tax, includes: (1)
the $50.2 million restructuring charge recorded in 1996 primarily related to
our corporate relocation and elimination of third-party distributors; (2)
the $250 million charge recorded in 1997 primarily related to inventory
write-downs, closure of underperforming stores and additional expenses
associated with our corporate relocation; and (3) the $424.3 million charge
recorded in 1998 related to a change in accounting for videocassette and
game rental amortization. We refer you to notes 3 and 4 of our combined
financial statements included elsewhere in this prospectus.
(11) Intangible amortization, net of tax, included in this item is primarily
related to goodwill.
(12) A store is included in the same store revenue calculation after it has been
opened and operated by us for more than 52 weeks. An acquired store becomes
part of the same store base in the 53rd week after its acquisition and
conversion. The percentage change is computed by comparing total net
revenues for same stores as defined above at the end of the applicable
reporting period with total net revenues from these same stores for the
comparable period in the prior year.
8
<PAGE>
RISK FACTORS
You should carefully consider the risks described below and the other
information contained in this prospectus before making a decision to invest in
our class A common stock. We have separated the risks into three groups:
- risks that relate to our business and industry;
- risks that relate to our expected separation from Viacom; and
- risks that relate to the securities market and ownership in our stock.
In addition, the risks described below are not the only ones facing us. We
have only described the risks we consider to be the most material. However,
there may be additional risks that are viewed by us as not material or are not
presently known to us.
If any of the events described below were to occur, our business, prospects,
financial condition, results of operations or cash flows could be materially
adversely affected. When we say below that something could or will have a
material adverse effect on us, we mean that it could or will have one or more of
these effects. In any such case, the price of our common stock could decline,
and you could lose all or part of your investment in our company.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of factors both in
and out of our control, including the risks faced by us described below and
elsewhere in this prospectus.
RISK FACTORS RELATING TO OUR BUSINESS AND INDUSTRY
We are subject to the following risks, which include risks that relate to
our industry:
OUR BUSINESS MAY BE MATERIALLY ADVERSELY AFFECTED BY NEW TECHNOLOGIES
New digital technologies, such as near-video-on-demand and video-on-demand,
and others could have a material adverse effect on us. This is especially true
if:
- newly released movies are made widely available by the studios to these
technologies at the same time, or before, they are made available to video
stores for rental; and
- these technologies are widely accepted by consumers.
THE WIDESPREAD AVAILABILITY OF ADDITIONAL CHANNELS ON SATELLITE AND DIGITAL
CABLE SYSTEMS MAY SIGNIFICANTLY REDUCE PUBLIC DEMAND FOR OUR PRODUCTS. Recent
advances in direct broadcast satellite and cable technologies may adversely
affect public demand for video store rentals. If direct broadcast satellite and
digital cable were to become widely available and accepted, this could cause a
smaller number of movies to be rented if viewers favor the expanded number of
conventional channels and expanded programming, including sporting events,
offered through these services. If this were to occur, it could have a material
adverse effect on us. Direct broadcast satellite providers transmit numerous
channels of programs by satellite transmission into subscribers' homes. Recently
developed technology has presented cable providers with the opportunity to use
digital technology to transmit many additional channels of programs over cable
lines to subscribers' homes.
In addition, because of this increased availability of channels, direct
broadcast satellite and digital cable providers have been able to enhance their
pay-per-view business by:
- substantially increasing the number and variety of movies they can offer
their subscribers on a pay-per-view basis; and
- providing more frequent and convenient start times for the most popular
movies.
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This is referred to within our industry and by others as near-video-on-demand.
If near-video-
on-demand were to become more widely available and accepted, pay-per-view
purchases could significantly increase. Near-video-on-demand allows the consumer
to avoid trips to the video store for rentals and returns of movies which also
eliminates the chance they will incur an extended viewing fee. However, newly
released movies are currently made available by the studios for rental prior to
being made available on a near-video-on-demand basis. Near-video-on-demand also
does not allow the consumer to start, stop and rewind the movie. Increases in
the size of this pay-per-view market could lead to an earlier distribution
window for movies on pay-per-view if the studios perceive this to be a better
way to maximize their revenue.
WE MAY EVENTUALLY HAVE TO COMPETE WITH THE WIDESPREAD AVAILABILITY OF
VIDEO-ON-DEMAND, WHICH MAY SIGNIFICANTLY REDUCE THE DEMAND FOR OUR PRODUCTS.
Some digital cable providers have begun testing technology designed to transmit
movies on demand with interactive capabilities such as start, stop and rewind.
This is referred to within our industry and by others as video-on-demand.
Video-on-demand is currently available in some test markets. However,
video-on-demand competes with other uses of cable infrastructure, such as the
ability to provide internet access and basic telephone services, some of which
may provide higher returns for operators. Video-on-demand could have a material
adverse effect on us if:
- video-on-demand could be profitably provided at a reasonable price; and
- newly released movies were made available at the same time, or before,
they were made available to the video stores for rental.
OUR INDUSTRY WOULD LOSE A SIGNIFICANT COMPETITIVE ADVANTAGE IF THE MOVIE STUDIOS
ADVERSELY CHANGE THEIR CURRENT DISTRIBUTION PRACTICES
A significant competitive advantage that our industry currently enjoys over
most other movie distribution channels except theatrical release is the early
timing of our distribution "window." This window is exclusive against most other
forms of non-theatrical movie distribution, such as pay-per-view, premium
television, basic cable and network and syndicated television. The length of the
window for movie rental varies, typically ranging from 30 to 90 days for
domestic video stores and from 120 to 180 days for international video stores.
Thereafter, movies are made sequentially available to television distribution
channels.
We could be materially adversely affected if:
- the video store windows were no longer the first following the theatrical
release;
- the length of the video store windows were shortened; or
- the video store windows were no longer as exclusive as they are now;
because newly released movies would be made available earlier on these other
forms of non-theatrical movie distribution. As a result, consumers would no
longer need to wait until after the video store distribution window to view a
newly released movie on these other distribution channels.
Although we believe that the studios have a significant interest in
maintaining a viable home video rental industry, because the order, length and
exclusivity of each window for each distribution channel is determined solely by
the studio releasing the movie, we cannot predict the impact, if any, of any
future decisions by the studios.
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BECAUSE MARGINS ON SELL-THROUGH PRODUCTS ARE LOWER THAN RENTAL MARGINS, WE COULD
BE MATERIALLY ADVERSELY AFFECTED IF A GREATER PROPORTION OF NEWLY RELEASED
MOVIES WERE INITIALLY PRICED AS A SELL-THROUGH PRODUCT IN THE UNITED STATES AND
CONSUMERS DESIRED TO OWN THESE MOVIES
Sell-through retail margins are generally lower than rental margins. Some of
our competitors, such as mass merchandisers, warehouse clubs and Internet sites,
can distribute and sell these sell-through movies at lower costs and/or may
operate at lower margins than us. As a result, our sell-through business, which
is described below, in the United States represented only 7.0% of our domestic
revenues for 1998. We believe our profitability would be adversely affected if
we did not derive most of our revenues from the higher margin rental business.
Although we believe that industry economics will dictate that most new releases
on videocassettes and DVDs will continue to be initially priced for rental, we
could be materially adversely affected if:
- a greater proportion of either release format were initially priced as
sell-through merchandise in the United States; and
- consumers desired to own, and not rent, these movies.
In general, studios initially price their movies at prices that are too high
to generate significant consumer demand for purchase. Recently, however, the
studios have released a limited number of movies at prices intended to generate
consumer demand to purchase rather than rent them. This is referred to as
sell-through pricing. Movies priced for sell-through are not subject to our
revenue-sharing agreements. However, if enough consumers desired to rent rather
than own these sell-through priced movies, the adverse effect of sell-through
may be offset, in part or in full, by the improved margins we would obtain from
renting sell-through movies because these movies have low initial wholesale
prices and are not generally subject to revenue-sharing.
SIGNIFICANT BENEFITS WOULD BE LOST AND WE WOULD BE MATERIALLY ADVERSELY AFFECTED
IF OUR REVENUE-SHARING AGREEMENTS WERE MATERIALLY ADVERSELY CHANGED OR
DISCONTINUED
If our revenue-sharing agreements are materially adversely changed or
discontinued, significant benefits, as described in the summary of this
prospectus, would be lost. This in turn would have a material adverse effect on
us.
Historically, we generally paid the major studios or their licensees between
$60 and $70 per videocassette for major theatrical releases that were priced for
rental in the United States. In 1998, we entered into revenue-sharing agreements
with the major studios in the United States. These agreements generally have
terms ranging from two to five years. Under these agreements, we pay only a
minimal up front cost per videocassette and agree to share our U.S. rental
revenue with the studios for a limited period of time. In addition, we agree to
take a minimum number of copies of each movie title that is released by a studio
in any U.S. movie theater. We also agree to take, in some cases, a minimum
number of movies that are not released by a studio in any U.S. movie theater.
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IF THE AVERAGE SALES PRICE FOR THE PREVIOUSLY VIEWED TAPES OBTAINED UNDER
REVENUE-SHARING IS NOT AT OR ABOVE AN EXPECTED PRICE, OUR EXPECTED GROSS MARGINS
MAY BE ADVERSELY AFFECTED
Under our revenue-sharing agreements, we expect to earn revenues in two
ways:
- revenues resulting from the rental of the videocassettes; and
- revenues resulting from the sales of the previously viewed tapes to the
public after the period of time after their useful lives as rental
products.
To achieve our expected gross margins, we need to sell these previously viewed
tapes at or above an expected price. If the average sales price of these
previously viewed tapes is not at or above this expected price, our gross
margins under our revenue-sharing agreements may be adversely affected.
As a result of revenue-sharing, we will need to sell significantly more
previously viewed tapes than in the past. Even though revenue-sharing was not
fully implemented during all of 1998, domestically we sold about 17.6 million
previously viewed tapes in 1998, as compared to 1997 when we sold about 7.8
million previously viewed tapes. This represents about a 126% increase in sales.
We cannot assure you that we will be able to sell, on average, these previously
viewed tapes at or above the expected price since we do not have extensive
experience in selling previously viewed tapes in these quantities.
Other factors that affect our ability to sell these previously viewed tapes at
expected prices, include:
- consumer desire to own the particular movie; and
- the number of previously viewed tapes available for sale by others to the
public.
In addition, after the expiration of the video store distribution window,
the sales of previously viewed tapes also compete with newly released videos
which are priced for sell-through.
WE HAVE HAD LIMITED EXPERIENCE WITH OUR NEW BUSINESS MODEL AND CANNOT ASSURE YOU
THAT WE WILL OPERATE PROFITABLY IN THE FUTURE UNDER THIS NEW MODEL
Because we have had limited experience with our new business model, we
cannot assure you that we will have net income in future periods. Beginning in
the second quarter of 1997, we developed our new business model to refocus on
our core rental business. We have experienced significant losses during this
transitional period. We had net losses of $318.2 million in 1997 and $336.6
million in 1998. We also had a net loss of $3.4 million for the first quarter of
1999.
WE MAY BE UNABLE TO FULLY EXECUTE OUR NEW STORE EXPANSION
Although we believe that we have personnel and other resources required to
implement our store expansion goals, we cannot assure you that we will be able
to execute our new store expansion within the expected time frame. If we are
unable to execute this expansion, it would be detrimental to our goals of
increasing market share, increasing same store revenues and applying the
benefits of our size. We intend to proceed with a significant expansion. Over
each of the next three years, we expect to open:
- about 500 new company-operated stores in the United States;
- about 200 new franchise stores in the United States;
- about 170 new company-operated stores in markets outside the United
States; and
- about 125 new franchise and/or joint venture stores in markets outside the
United States.
In order to meet our store expansion goals within this three-year period, we
will be required to invest considerable time in implementing these plans.
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WE CANNOT ASSURE YOU AS TO THE PROFITABILITY OF NEWLY OPENED STORES
In connection with our growth strategy, we expect to open new
company-operated stores in markets, regions or countries where we have limited
or no operating history. As a result, we cannot assure you that
- these newly opened stores will achieve revenue or profitability levels
comparable to those of our existing stores; or
- that these stores will achieve such revenue or profitability levels within
the time periods estimated by us.
NEWLY OPENED STORES MAY ADVERSELY AFFECT THE PROFITABILITY OF PRE-EXISTING
STORES
We expect to open smaller company-operated stores in markets where we
already have significant operations in order to maximize our market share within
these markets. Although we have a customized store development approach, we
cannot assure you that these smaller newly opened stores will not adversely
affect the revenues and profitability of those pre-existing stores in any given
market.
WE MAY BE LIABLE FOR LEASE PAYMENTS RELATED TO BLOCKBUSTER MUSIC STORES
In October 1998, about 380 BLOCKBUSTER MUSIC stores were sold to Wherehouse
Entertainment Inc. Some of the leases transferred in connection with this sale
had previously been guaranteed either by Viacom or its affiliates. If Wherehouse
defaults with respect to these leases, related losses could adversely affect our
future operating income. As of March 31, 1999, the average remaining term of
these leases was 4.1 years. We have agreed to indemnify Viacom with respect to
any amount paid under these guarantees. We estimate that, as of the time of the
sale, we were contingently liable for about $84 million with respect to base
rent for the remaining term of these leases if Wherehouse defaults on all of
these leases. This amount has not been discounted to present value. Our
contingent liability will vary over time depending on the lease terms remaining.
We have not recorded any reserves related to this contingent liability in our
combined financial statements.
WE COULD BE MATERIALLY AND ADVERSELY AFFECTED IF OUR CENTRALIZED DOMESTIC
DISTRIBUTION CENTER IS SHUT DOWN
Our domestic distribution system is centralized. This means that we ship
nearly all of the products to our U.S. company-operated stores, including newly
released videos purchased under the revenue-sharing agreements, through our
distribution center. If our distribution center is shut down for any reason we
could incur significantly higher costs and longer lead times associated with
distributing our videocassettes and other products to our stores.
AS A PARTICIPANT IN THE HOME VIDEO INDUSTRY, WE ARE SUBJECT TO GOVERNMENTAL
REGULATION PARTICULAR TO OUR INDUSTRY
Any finding that we have been or are in noncompliance with respect to the
laws affecting our business could result in, among other things, governmental
penalties or private litigant damages which could have a material adverse effect
on us. We are subject to various international, U.S. federal and state laws that
govern the offer and sale of our franchises because we act as a franchisor. In
addition, because we operate video stores and develop new video stores, we are
subject to various international, U.S. federal and state laws that govern, among
other things, the disclosure and retention of our video rental records and
access and use of our video stores by disabled persons, and are subject to
various state and local licensing, zoning, land use, construction and
environmental regulations. Furthermore, changes in existing laws, including
environmental and employment laws, new laws or increases in the minimum wage may
increase our costs. Our obligation to comply with, and the effects of, the above
governmental regulations are increased by the magnitude of our operations.
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WE MAY BE ADVERSELY AFFECTED IF OUR YEAR 2000 REMEDIATION EFFORTS ARE NOT
SUCCESSFUL
We are highly dependent upon the proper functioning of our computer and
infrastructure systems as well as those of our third party vendors. The failure
of our systems, or those of our third party vendors, to be year 2000 compliant
could have a material adverse effect on us. The possible consequences of a
failure include, among others:
- incomplete or inaccurate accounting, recording or processing of rentals
and sales of videocassettes, DVDs, video games and other products and the
reporting of this information;
- delays or failures in ordering, shipment and distribution of
videocassettes, DVDs, video games and other products;
- the creation of uncertainty about our customer database; or
- the inability to consummate credit and debit card and check transactions.
If a potential year 2000 problem is not remedied, potential risks to us
include business interruption, financial loss, harm to our reputation and legal
liability. We refer you to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for additional information.
RISK FACTORS RELATING TO OUR SEPARATION FROM VIACOM
We are subject to the following risks in connection with our expected
separation from Viacom:
WE WILL BE CONTROLLED BY VIACOM AS LONG AS IT OWNS A MAJORITY OF THE COMBINED
VOTING POWER OF OUR TWO CLASSES OF COMMON STOCK AND OUR OTHER STOCKHOLDERS WILL
BE UNABLE TO AFFECT THE OUTCOME OF STOCKHOLDER VOTING DURING THIS TIME
AFTER THE COMPLETION OF THIS OFFERING, WE WILL BE CONTROLLED BY VIACOM. We
have two classes of common stock:
- class A common stock, which entitles the holder to one vote per share; and
- class B common stock, which entitles the holder to five votes per share,
on all matters submitted to our stockholders. After the completion of this
offering, Viacom will own in excess of a majority of the combined voting power
of our outstanding common stock. As a result, Viacom will be able to determine
the outcome of all corporate actions requiring stockholder approval. Because
Viacom has the ability to control us, it has the power to act without taking the
best interests of our company into consideration. For example, Viacom will
continue to control decisions with respect to:
- the direction and policies of our company, including the election and
removal of directors;
- mergers or other business combinations involving us;
- the acquisition or disposition of assets by us;
- future issuances of our common stock or other securities;
- the incurrence of debt by us;
- the payment of dividends, if any, on our common stock; and
- amendments to our certificate of incorporation and bylaws.
Any of these provisions could be used by Viacom for its own advantage to the
detriment of our other stockholders and our company. This in turn may have an
adverse affect on the price of our class A common stock.
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VIACOM HAS NO OBLIGATION TO COMPLETE THE SPLIT-OFF. Viacom has the sole
discretion to determine the timing and all terms of any split-off and is under
no obligation to effect the split-off. We cannot assure you as to whether or not
or when the split-off will occur, or as to the terms of the split-off. If Viacom
does not complete the split-off, Viacom will continue to control us.
THERE ARE POTENTIAL CONFLICTS OF INTEREST WITH RESPECT TO OUR RELATIONSHIP WITH
VIACOM BECAUSE VIACOM CONTROLS US AND OUR BUSINESS OBJECTIVES MAY DIFFER
Because Viacom controls us and our business objectives may differ, there are
potential conflicts of interest between Viacom and us regarding, among other
things:
- our past and ongoing relationship with Viacom, including, but not limited
to, Viacom's control of our tax matters for years in which we are
consolidated with Viacom for tax purposes, the acquisition of
videocassettes from Paramount Pictures Corporation, an indirect subsidiary
of Viacom, and the agreements between Viacom and us relating to this
offering and the split-off;
- potential competitive business activities; and
- sales or distributions by Viacom of all or part of its ownership interest
in our company.
We cannot assure you that we will be able to resolve any potential conflicts
or that, if resolved, we would not be able to receive a more favorable
resolution if we were dealing with someone who was not controlling us.
THREE OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO
DIRECTORS AND EXECUTIVE OFFICERS OF VIACOM
Prior to our split-off from Viacom, we expect that three members of our
board of directors will be directors and executive officers of Viacom. These
directors will have obligations to us as well as to Viacom and may have
conflicts of interest with respect to matters potentially or actually involving
or affecting us. Our certificate of incorporation contains provisions designed
to facilitate resolution of these potential conflicts which we believe will
assist our directors in fulfilling their fiduciary duties to our stockholders.
These provisions do not, however, eliminate or limit the fiduciary duty of
loyalty of our directors under applicable Delaware law. Subject to applicable
Delaware law, by becoming a stockholder in our company, you will be deemed to
have notice of and have consented to these provisions of our certificate of
incorporation. Although these provisions are designed to resolve such conflicts
between us and Viacom fairly, we cannot assure you that any conflicts will be so
resolved. We refer you to "Description of Capital Stock -- Some of the
Provisions of Our Certificate of Incorporation and Bylaws" for more information.
OUR HISTORICAL COMBINED FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR
RESULTS AS A SEPARATE COMPANY
Since September 1994, our operations have been conducted by various entities
owned directly or indirectly by Viacom. Following this offering, we will be
required to supplement our financial, administrative and other resources to
provide services necessary to operate successfully as an independent public
company. In addition, the financial information included in this prospectus may
not necessarily reflect our results of operations, financial position and cash
flows in the future or what the results of operations, financial position or
cash flows would have been had we been a separate, stand-alone entity during the
periods presented. The financial information included in this prospectus does
not reflect many significant changes that will occur in our capital structure,
funding and operations as a result of our separation from Viacom and this
offering. For additional information, we refer you to "Related Party
Transactions," "Unaudited Pro Forma Combined Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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RISK FACTORS RELATING TO THE SECURITIES MARKET AND OWNERSHIP OF OUR STOCK
There are risks related to the securities market that you should consider in
connection with your investment in and ownership of our stock. These risks
include limitations on our ability to execute some types of business
combinations and change of control transactions.
WE CANNOT PREDICT THE EFFECT THAT THE SPLIT-OFF WILL HAVE ON THE PRICE OF OUR
COMMON STOCK; THE PRICE OF OUR COMMON STOCK COULD BE MATERIALLY AND ADVERSELY
AFFECTED BY SALES OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK IN THE PUBLIC
MARKET
We cannot predict the effect that the split-off will have on the price of
your class A common stock. The split-off could involve the distribution of about
shares of our common stock by Viacom to its stockholders who participate in an
exchange offer representing about % of the equity value of our company. All of
those shares would be eligible for immediate resale in the public market, other
than any shares held by our affiliates. Viacom has the sole discretion to
determine the timing, structure and terms of the split-off or other distribution
of its shares of our common stock.
Conversely, if the split-off or other similar transaction is not completed,
Viacom will have the right to require us to register its shares of our common
stock under the U.S. securities laws for sale in the public market. For a
further explanation of this right, we refer you to "Related Party Transactions
- -- Agreements Between Viacom and Us -- Registration Rights Agreement." Sales by
Viacom or others of substantial amounts of our common stock in the public
market, or the perception that such sales might occur, could have a material
adverse effect on the price of your class A common stock.
THERE MAY BE AN ADVERSE EFFECT ON THE PRICE OF OUR CLASS A COMMON STOCK DUE TO
DISPARATE VOTING RIGHTS OF OUR CLASS A COMMON STOCK AND OUR CLASS B COMMON STOCK
AND, POSSIBLY, DIFFERENCES IN THE LIQUIDITY OF THE TWO CLASSES
The differential in the voting rights of the class A common stock and class
B common stock could adversely affect the price of the class A common stock to
the extent that investors or any potential future purchaser of our common stock
ascribe value to the superior voting rights of the class B common stock. The
holders of class A common stock and class B common stock generally have
identical rights except that holders of class A common stock are entitled to one
vote per share while holders of class B common stock are entitled to five votes
per share on all matters to be voted on by stockholders. Holders of class A
common stock and class B common stock are entitled to separate class votes on
amendments to our certificate of incorporation that would alter or adversely
affect the powers, preferences or special rights of the shares of their
respective classes. In addition, it is possible that differences in the
liquidity between the two classes may develop, which could result in price
differences. We refer you to "Description of Capital Stock."
OUR ANTI-TAKEOVER PROVISIONS MAY DELAY OR PREVENT A CHANGE OF CONTROL OF OUR
COMPANY, WHICH COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK
The existence of some provisions in our corporate documents and Delaware law
may delay or prevent a change in control of our company, which could adversely
affect the price of our common stock. Our certificate of incorporation and
bylaws contain some provisions that may make the acquisition of control of our
company more difficult, including provisions relating to the nomination,
election and removal of directors and limitations on actions by our
stockholders. In addition, Delaware law also imposes some restrictions on
mergers and other business combinations between us and any holder of 15% or more
of our outstanding common stock. Viacom, however, is generally exempted from
these provisions and will have special rights so long as it owns at least a
majority of the combined voting power of our two classes of common stock
outstanding. We refer you to "Description of Capital Stock" for a summary of
these anti-takeover provisions.
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In addition, we have entered into a tax matters agreement with Viacom with
respect to several tax matters relating to this offering and the split-off,
which will require, among other things, that until two years after the
completion of the split-off, we cannot voluntarily enter into certain
transactions, including any merger transaction or any transaction involving the
sale of our capital stock without the consent of Viacom. In addition, we have
agreed under this tax matters agreement to indemnify Viacom for any tax
liability incurred as a result of the failure of the split-off to qualify as a
tax-free transaction due to a takeover of our company or any other transaction
involving our capital stock, assets or businesses regardless of whether or not
such transaction is within our control. We refer you to "Related Party
Transactions -- Agreements Between Viacom and Us -- Tax Matters Agreement."
OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY FOLLOWING THE OFFERING AND YOU COULD
LOSE ALL OR PART OF YOUR INVESTMENT AS A RESULT
We, Viacom and the underwriters will negotiate to determine the initial
public offering price. You may not be able to resell your shares at or above the
initial public offering price due to a number of factors. These factors, some or
all of which are beyond our control, include:
- actual or anticipated fluctuations in our operating results;
- changes in expectations as to our future financial performance or changes
in financial estimates of securities analysts;
- success of our operating and growth strategies;
- operating and stock price performance of other comparable companies; and
- realization of any of the risks described in these Risk Factors.
In addition, the stock market recently has experienced extreme volatility
that often has been unrelated or disproportionate to the operating performance
of particular companies. These broad market and industry fluctuations may
adversely affect the trading price of our common stock, regardless of our actual
operating performance.
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SEPARATION FROM VIACOM
SET FORTH IN THIS SECTION IS VIACOM'S CURRENT INTENTION AS TO OUR POSSIBLE
SEPARATION FROM VIACOM. VIACOM HAS THE SOLE DISCRETION TO DETERMINE THE TIMING
AND ALL TERMS OF ANY SPLIT-OFF AND IS UNDER NO OBLIGATION TO EFFECT THE
SPLIT-OFF. WE CANNOT ASSURE YOU AS TO WHETHER OR NOT OR WHEN THE SPLIT-OFF WILL
OCCUR, OR AS TO THE TERMS OF THE SPLIT-OFF.
OVERVIEW
Our business and operations were previously conducted by Blockbuster
Entertainment Corporation, which was incorporated in Delaware in 1982 and
entered the movie rental business in 1985. On September 29, 1994, Blockbuster
Entertainment Corporation was merged with and into Viacom. Since the merger, our
business and operations have been conducted by various subsidiaries of Viacom.
Recently, our business and operations were either (1) merged into Blockbuster
Inc. or (2) purchased by Blockbuster Inc. or one of its subsidiaries.
Blockbuster Inc., an indirect subsidiary of Viacom, was incorporated under a
different name on October 16, 1989 in Delaware.
Viacom has announced that, if it receives a favorable tax ruling from the
Internal Revenue Service, it currently intends to distribute all of its holdings
in our common stock to stockholders who tender shares of Viacom common stock in
an exchange offer described below. This transaction is intended to qualify for
tax-free treatment under Section 355 of the Internal Revenue Code. Viacom has
the sole discretion to determine if and when such split-off will occur and all
terms of such split-off. If Viacom determines to make the distribution, it will
occur some time after the later of (1) September 29, 1999, the five-year
anniversary of the merger of Viacom and Blockbuster Entertainment Corporation
and (2) unless the underwriters consent to an earlier date, 180 days after the
completion of this offering. For additional information of the risks associated
with Viacom not completing the split-off, we refer you to "Risk Factors -- Risk
Factors Relating to Our Separation from Viacom."
Viacom is not obligated to consummate the split-off, and neither Viacom nor
we have any intention of purchasing or redeeming the shares issued in this
offering if the split-off is not consummated. In addition, if the split-off is
ultimately consummated, Viacom does not have any obligation with respect to the
timing or any of the terms of the split-off. We refer you to "Risk Factors --
Risk Factors Relating to Our Separation from Viacom -- Viacom has no obligation
to complete the split-off."
The split-off is intended to establish us as a stand-alone entity with
objectives separate from those of other businesses of Viacom. We and Viacom
believe that the split-off will resolve management, systemic, competitive and
other problems that have arisen from the operation of various different
businesses under a common parent corporation. In addition, although we have no
specific plans, we believe that the split-off will allow us to facilitate the
expansion of our business by making acquisitions by issuing our stock and by
entering into partnerships and other agreements. The split-off will also allow
us to modify our compensation structure to be more in line with that used by
other retailers and provide incentives to our employees that are more closely
linked to our performance. In order to accomplish the split-off, we and Viacom
have undertaken or intend to undertake the transactions described below,
including this offering.
PRE-OFFERING TRANSACTIONS
CONSOLIDATION OF BLOCKBUSTER SUBSIDIARIES. In September and November 1998,
numerous U.S. subsidiaries of Viacom International Inc., a wholly owned
subsidiary of Viacom, each of which were directly or indirectly involved in our
business, were merged with and into our current legal entity, which is named
"Blockbuster Inc." On or about June 23, 1999, we and/or some of our subsidiaries
purchased stock or assets from affiliates of Viacom in order to acquire the
non-U.S. operations of our business that we did not already own at that time for
a purchase price of about $222 million. We paid about $65 million of this
purchase price from borrowings under the credit agreement. We paid the remaining
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portion of the purchase price with cash that was contributed to us from our
parent, Viacom International Inc.
DIVIDEND NOTE AND ACQUISITION NOTES. On December 31, 1998, we declared a
dividend in the form of a promissory note in the principal amount of $1.4
billion to Viacom International Inc. (the "Dividend Note"). In addition, in the
first quarter of 1999, we issued promissory notes in the aggregate principal
amount of about $77 million to Viacom International Inc. in order to obtain
funds for an acquisition of video stores (the "Acquisition Notes"). We paid the
Dividend Note and the Acquisition Notes, together with any accrued and unpaid
interest, with the proceeds of the borrowings under the credit agreement
described below.
CREDIT AGREEMENT. On June 21, 1999, we entered into a $1.9 billion term and
revolving credit agreement with a syndicate of lenders. For a more complete
description of the credit agreement, we refer you to "Description of Credit
Agreement." On June 23, 1999, we borrowed $1.6 billion under this 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 the Dividend Note and the Acquisition Notes, together with any
accrued and unpaid interest; and
- pay the fees and expenses related to the origination of the credit
agreement to the syndicate of lenders.
We refer you to "Use of Proceeds."
AGREEMENTS BETWEEN VIACOM AND US. In order to complete this offering and
the split-off, we and Viacom have entered into a number of agreements. In
addition, there are other agreements between Viacom and us not related to either
this offering or the split-off. We refer you to "Related Party Transactions --
Agreements Between Viacom and Us."
THE OFFERING
We expect to offer about % of our class A common stock in this offering.
As a result, immediately after the completion of this offering, Viacom will own
none of the outstanding shares of our class A common stock and 100% of the
outstanding shares of our class B common stock, which will represent about %
of the equity value and % of the voting power of our outstanding common stock.
Until such time as Viacom holds less than 50% of the combined voting power of
all classes of our common stock outstanding, Viacom will be able to control the
vote on all matters submitted to our stockholders, including the election of
directors and the approval of extraordinary corporate transactions. We refer you
to "Risk Factors -- Risk Factors Relating to Our Separation from Viacom -- After
the completion of this offering, we will be controlled by Viacom." We are
conducting this offering as one of the steps to effectuate a potential
split-off.
POST-OFFERING TRANSACTIONS
EXCHANGE OFFER. Viacom intends to offer to exchange its shares of our
common stock for shares of Viacom's class A common stock and Viacom's class B
common stock. In connection with the request for a tax ruling from the Internal
Revenue Service, Viacom has represented that National Amusements, Inc., the
largest single stockholder of Viacom, will not participate in the exchange
offer.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by us from the sale of shares of class
A common stock in this offering are estimated to be about $ million, or
about $ million if the underwriters exercise their over-allotment options
in full, after deducting underwriting discounts and commissions and estimated
offering expenses. All of the net proceeds of this offering will be used to
repay some of the borrowings under our credit agreement. The first $ million
will be used to repay all or a portion of the $600 million revolving loan
maturing on June 19, 2000. Any remaining proceeds will be used pro rata to repay
a portion of the $700 million revolving loan maturing on July 1, 2004 and a
portion of the $600 million term loan maturing on July 1, 2004.
Borrowings under the credit agreement accrue interest at a rate equal to the
interest rates prevailing on the date of determination in the London interbank
market for the interest period selected by us, plus a margin over this rate. For
a more complete description of the credit agreement, we refer you to
"Description of Credit Agreement."
We have used or will use the borrowings under the credit agreement:
- to pay about $65 million which is a portion of the purchase price to
affilaites of Viacom to acquire the non-U.S. operations of our business
that we did not already own;
- to repay a promissory note issued by us to Viacom International Inc. in
the principal amount of $1.4 billion plus accrued and unpaid interest as a
dividend;
- to repay promissory notes issued by us to Viacom International Inc. in the
aggregate principal amount of about $77 million plus accrued and unpaid
interest for the acquisition of video stores;
- to pay the fees and expenses of about $15 million related to the
origination of the credit agreement to the syndicate of lenders; and
- for working capital and general corporate purposes.
20
<PAGE>
DIVIDEND POLICY
Following this offering, our dividend practices with respect to our common
stock will be determined and may be changed from time to time by our board of
directors. Under Delaware law and our certificate of incorporation, our board of
directors is not required to declare dividends on our common stock. We currently
intend to pay dividends on a quarterly basis, at an initial rate of $ per
share, commencing with the first declaration in for payment in . Our
board of directors is free to change our dividend practices at any time from
time to time and to decrease or increase the dividend paid, or to not pay a
dividend, on our common stock on the basis of our results of operations,
financial condition, cash requirements and future prospects and other factors
deemed relevant by our board of directors. Furthermore, our credit agreement
limits our ability to pay dividends. We refer you to "Description of Credit
Agreement" for additional information.
21
<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents, short-term
borrowings and capitalization:
(1) at March 31, 1999; and
(2) giving pro forma effect to:
- the borrowings under the credit agreement and the application of the
amounts borrowed thereunder;
- this offering and the application of the net proceeds to be received
from the sale of the shares of class A common stock offered hereby at
an initial offering price of $ per share, after deducting the
underwriting discounts and commissions and the estimated offering
expenses; and
- the conversion of Viacom's net equity investment in our company into
shares of class B common stock.
We refer you to "Use of Proceeds" and "Description of Credit Agreement" for
additional information relating to the application of the net proceeds from this
offering and the credit agreement.
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------------
PRO FORMA
ADJUSTED FOR
THIS
HISTORICAL OFFERING(1)
----------- ---------------
<S> <C> <C>
(DOLLARS IN MILLIONS)
Cash and cash equivalents............................................................. $ 75.0 $
----------- ---------------
----------- ---------------
Debt: (2)
Short-term borrowings, including current portion of credit agreement and capital
lease obligations................................................................. 22.3
----------- ---------------
Long-term debt:
Notes payable to Viacom........................................................... 1,690.4
Long-term debt, third party credit agreement, less current portion................ --
Capital lease obligations, less current portion................................... 134.2
----------- ---------------
Total long-term debt, less current portion...................................... 1,824.6
----------- ---------------
Total debt...................................................................... 1,846.9
----------- ---------------
Stockholders' equity:
Class A common stock, par value $0.01 per share, shares authorized, shares
issued and outstanding pro forma (3) (4).......................................... --
Class B common stock, par value $0.01 per share, shares authorized, shares
issued and outstanding pro forma (4).............................................. --
Additional paid-in capital.......................................................... --
Viacom's net equity investment...................................................... 5,723.8
Accumulated other comprehensive loss-foreign currency translation adjustment........ (61.6)
----------- ---------------
Total stockholders' equity (4).................................................. 5,662.2
----------- ---------------
Total capitalization.................................................................. $ 7,509.1 $
----------- ---------------
----------- ---------------
</TABLE>
- ------------------------------
(1) We refer you to "Unaudited Pro Forma Combined Financial Data."
(2) For a description of our borrowings, we refer you to note 7 of our combined
financial statements for the three years ended December 31, 1998 and note 3
of our interim combined financial statements.
(3) Excludes shares of class A common stock issuable upon conversion of
the class B common stock and shares reserved for the exercise of
options granted under our employee compensation plans. We refer you to
"Management."
(4) The pro forma assumes that the underwriters have not exercised their
over-allotment options. If the underwriters exercise their over-allotment
options in full, the number of issued and outstanding shares of class A
common stock and class B common stock will increase to and ,
respectively. In addition, it is estimated that total stockholders' equity
will increase to $ , with a corresponding decrease in the amount
outstanding under our credit agreement. We refer you to "Use of Proceeds."
22
<PAGE>
DILUTION
As of March 31, 1999, we had a net tangible book value of $ or $
per share. After giving effect to our sale of shares of class A common
stock offered hereby (assuming the underwriters do not exercise their
over-allotment options) at an initial public offering price of $ per share,
after deducting the underwriting discount and commission and estimated offering
expenses, our pro forma net tangible book value as of March 31, 1999 would have
been about $ or $ per share. This represents an immediate increase in
net tangible book value of $ per share to the existing stockholder and an
immediate dilution of $ per share to new investors. The following table
illustrates this per share dilution.
<TABLE>
<CAPTION>
PER SHARE
----------
<S> <C>
Initial public offering price per share........................................... $
Net tangible book value before this offering(1).................................
Increase attributable to new investors..........................................
Pro forma net tangible book value after this offering.............................
----------
Dilution per share to new investors (2)........................................... $
----------
----------
</TABLE>
- ------------------------
(1) Assuming the transactions described in "Prospectus Summary -- Separation
from Viacom" and "Separation from Viacom -- Pre-Offering Transactions" had
occurred on March 31, 1999, this represents our net tangible book value
(tangible assets less total liabilities) as of March 31, 1999 divided by the
number of shares of class B common stock owned by Viacom.
(2) If the underwriters' over-allotment options are exercised in full, the
dilution per share to new investors will be $ per share.
The following table summarizes, as of March 31, 1999, the relative
investment of the existing stockholder and new investors, giving pro forma
effect to the sale by us of the shares of class A common stock offered in this
offering.
<TABLE>
<CAPTION>
TOTAL CASH
SHARES PURCHASED CONSIDERATION AVERAGE
-------------------- -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholder....................................... % $ % $
New Investors.............................................. % %
--------- --------- --------- --------- ---------
Total.................................................. 100.0% $ 100.0% $
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The foregoing computations do not include shares of class A common stock
issuable upon the exercise of options granted under our employee compensation
plans. We refer you to "Management."
23
<PAGE>
SELECTED COMBINED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table sets forth our selected combined historical and pro
forma financial data as of the dates and for the periods indicated. The selected
statement of operations and balance sheet data for the years ended December 31,
1996 through 1998 are derived from our audited combined financial statements.
The selected statement of operations data for the nine months ended September
30, 1994, the three months ended December 31, 1994, the year ended December 31,
1995 and the three months ended March 31, 1998 and 1999 and the selected balance
sheet data as of December 31, 1994 and 1995 and March 31, 1998 and 1999 are
derived from our unaudited combined financial statements prepared by us, which
in our opinion, include all normal, recurring adjustments necessary for a fair
presentation of the financial position at such dates and the results of
operations for such respective periods. The financial information herein may not
necessarily reflect results of operations, financial position and cash flows of
our company in the future or what the results of operations, financial position
and cash flows would have been had we been a separate, stand-alone entity during
the periods presented.
The pro forma financial data have been derived from the unaudited pro forma
combined financial data which were prepared by us to illustrate the estimated
effects of the transactions to reorganize our company and the application of the
net offering proceeds. For a more complete description of these transactions we
refer you to "Unaudited Pro Forma Combined Financial Data" and notes thereto
included elsewhere in this prospectus. In addition, the unaudited pro forma
combined financial data do not purport to represent what the results of
operations or financial position of our company would actually have been if the
transactions to reorganize our company and the application of the net offering
proceeds had in fact occurred on such dates or to project the results of
operations or financial position of our company for any future period or date.
The following data should be read in conjunction with, and are qualified by
reference to, the combined financial statements and related notes thereto, the
"Unaudited Pro Forma Combined Financial Data" and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
24
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NINE MONTHS THREE MONTHS
ENDED ENDED OR AT YEAR ENDED OR AT DECEMBER 31, OR AT MARCH 31,
SEPTEMBER 29, DECEMBER 31, ------------------------------------------ --------------------
1994(1) 1994 1995 1996(2) 1997(3) 1998(4) 1998 1999
------------- --------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE AND WORLDWIDE STORE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues...................... $ 1,468.0 $ 546.3 $ 2,403.3 $ 2,942.1 $ 3,313.6 $ 3,893.4 $ 931.2 $ 1,113.0
Gross profit.................. 1,030.9 431.0 1,705.4 1,928.4 1,953.1 1,937.0 604.6 671.2
Operating expenses............ 742.9 273.6 1,275.2 1,660.8 2,167.7 2,296.2 537.6 622.6
Operating income (loss)....... 288.0 157.4 430.2 267.6 (214.6) (359.2) 67.0 48.6
Interest expense, net, and
other items................. (16.6) (2.4) (11.0) (18.4) (54.7) (35.5) (6.0) (28.6)
Income (loss) before income
taxes....................... 271.4 155.0 419.2 249.2 (269.3) (394.7) 61.0 20.0
Benefit (provision) for income
taxes....................... (127.1) (71.8) (227.7) (167.4) (30.0) 59.4 (45.2) (23.4)
Equity in income (loss) of
affiliated companies, net of
tax......................... 1.7 -- (48.6) (4.0) (18.9) (1.3) -- --
Net income (loss)............. $ 146.0 $ 83.2 $ 142.9 $ 77.8 $ (318.2) $ (336.6) $ 15.8 $ (3.4)
Pro forma net income (loss)
per share--basic and diluted
(6).........................
Pro forma weighted average
shares outstanding--basic
and diluted (6).............
BALANCE SHEET DATA:
Cash and cash equivalents..... $ 55.2 $ 100.3 $ 58.6 $ 129.6 $ 99.0 $ 72.9 $ 75.0
Rental library, net........... 291.1 519.5 676.0 734.5 441.2 750.2 457.3
Intangibles, net.............. 6,147.1 6,531.3 6,309.6 6,192.7 6,055.6 6,161.0 6,074.3
Total assets.................. 8,249.7 8,570.9 8,794.6 8,731.0 8,274.8 8,617.0 8,300.5
Long-term debt, less current
portion (7)................. 296.3 168.3 249.0 331.3 1,715.2 352.2 1,824.6
Stockholders' equity (7)...... 7,274.9 7,737.2 7,784.4 7,617.6 5,637.9 7,603.8 5,662.2
WORLDWIDE STORE DATA:
Company-operated stores at end
of period................... 3,067 3,692 4,472 5,105 5,283 5,076 5,438
Franchised and joint venture
stores at end of period..... 1,002 821 845 944 1,098 942 1,061
Total stores at end of
period...................... 4,069 4,513 5,317 6,049 6,381 6,018 6,499
Same store revenues increase
(decrease)(8)............... 5.1% (1.8)% 13.3% 7.6% 17.0%
<CAPTION>
PRO FORMA
AS
ADJUSTED
THREE
PRO FORMA AS MONTHS
ADJUSTED ENDED
YEAR ENDED OR AT
DECEMBER 31, MARCH 31,
1998(5) 1999(5)
------------ ----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................
Gross profit..................
Operating expenses............
Operating income (loss).......
Interest expense, net, and
other items.................
Income (loss) before income
taxes.......................
Benefit (provision) for income
taxes.......................
Equity in income (loss) of
affiliated companies, net of
tax.........................
Net income (loss).............
Pro forma net income (loss)
per share--basic and diluted
(6).........................
Pro forma weighted average
shares outstanding--basic
and diluted (6).............
BALANCE SHEET DATA:
Cash and cash equivalents.....
Rental library, net...........
Intangibles, net..............
Total assets..................
Long-term debt, less current
portion (7).................
Stockholders' equity (7)......
WORLDWIDE STORE DATA:
Company-operated stores at end
of period...................
Franchised and joint venture
stores at end of period.....
Total stores at end of
period......................
Same store revenues increase
(decrease)(8)...............
</TABLE>
- ------------------------------
(1) The statement of operations data for the nine months ended September 29,
1994 represents Blockbuster Entertainment Corporation as an independent
company relating solely to the videocassette and video game rental business
prior to its acquisition by Viacom. In September 1994, Blockbuster
Entertainment Corporation merged with and into Viacom. All financial data
subsequent to September 29, 1994 reflects Viacom's basis of accounting
established in purchase accounting effective with its acquisition and now
reflected on our financial statements.
(2) During 1996 we recognized a restructuring charge of $50.2 million primarily
relating to our corporate relocation and elimination of third party
distributors.
(3) During 1997 we recognized charges totaling $250 million primarily related to
inventory write-downs, closure of underperforming stores, write-offs
attributable to international joint ventures and additional expenses
incurred in connection with our corporate relocation.
(4) During 1998 we changed our method of amortizing our videocassette and video
game rental inventory. This newly adopted method represents a more
accelerated method of amortization. The adoption of this new method of
amortization was accounted for as a change in accounting estimate effected
by a change in accounting principle and, accordingly, we recorded a non-cash
charge of $424.3 million recognized as cost of sales.
(5) For information regarding the pro forma adjustments made to our historical
financial data, we refer you to "Unaudited Pro Forma Combined Financial
Data."
(6) Our historical capital structure is not indicative of our prospective
capital structure since no direct ownership relationship existed among all
the various units comprising our company. Accordingly, historical earnings
per share has not been presented in the combined financial statements. Pro
forma weighted average shares outstanding reflect all shares of class B
common stock issued and outstanding which are owned by Viacom and the class
A common stock to be issued in this offering as if these shares had been
outstanding since the beginning of each respective period.
(7) This reflects the December 31, 1998 declaration of a $1.4 billion dividend
payable to Viacom in the form of an interest-bearing promissory note.
(8) A store is included in the same store revenue calculation after it has been
open and owned by us for more than 52 weeks. An acquired store becomes part
of the same store base in the 53rd week after acquisition and conversion.
The percentage change is computed by comparing total net revenues for same
stores as defined above at the end of the applicable reporting period with
total net revenues from these same stores for the comparable period in the
prior year.
25
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The unaudited pro forma combined statements of operations of our company for
the year ended December 31, 1998 and the three months ended March 31, 1999, and
the unaudited pro forma combined balance sheet as of March 31, 1999 have been
prepared based on our combined financial statements and interim combined
financial statements and related notes presented elsewhere in this prospectus.
This data is based on various assumptions and includes the adjustments explained
in the related notes. The unaudited pro forma combined statements of operations
and the unaudited pro forma combined balance sheet have been prepared as if the
transactions described in the following paragraph had occurred as of the
beginning of the respective periods presented, and as of March 31, 1999,
respectively.
On December 31, 1998, we declared a dividend in the form of an
interest-bearing promissory note of $1.4 billion. Additionally, in the first
quarter of 1999, promissory notes were issued to Viacom International Inc. in
the aggregate principal amount of about $77 million in order to obtain funds for
the acquisition of video stores. Prior to this offering, the following
transactions occurred:
- we purchased some non-U.S. operations of our business from affiliates of
Viacom for an aggregate purchase price of about $222 million using about
$65 million of proceeds of the credit agreement discussed below and about
$157 million in contributed capital from Viacom;
- we entered into a $1.9 billion credit agreement;
- we borrowed about $1.6 billion under the credit facility and the proceeds
were used as follows:
(1) to pay about $65 million which is a portion of the purchase price to
affiliates of Viacom to acquire the non-U.S. operations of our
business that we did not already own;
(2) to repay the Dividend Note of $1.4 billion and the Acquisition Notes
of about $77 million;
(3) to pay about $43 million in accrued and unpaid interest due Viacom
under the Dividend Note and Acquisition Notes; and
(4) to pay the fees and expenses of about $15 million relating to the
origination of the credit agreement.
- we and Viacom entered into a transition services agreement with respect to
cash management, accounting, legal, management information systems,
financial and tax services as well as employee benefit plan and insurance
administration.
We refer you to "Description of Credit Agreement," "Use of Proceeds" and
"Related Party Transactions -- Agreements Between Viacom and Us."
The unaudited pro forma combined financial data do not purport to represent
what the results of operations or financial position of our company would
actually have been if this offering and the other transactions described above
had in fact occurred on such dates or to project the results of operations or
financial position of our company for any future date or period. This data
should be read in conjunction with the combined financial statements and related
notes, the interim combined financial statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
We believe the estimates and assumptions used to prepare the unaudited pro
forma combined financial data provide a reasonable basis for presenting the
significant effects of this offering and the transactions discussed above, and
that the pro forma adjustments give appropriate effect to the estimates and
assumptions and are properly applied in the unaudited pro forma combined
financial data.
26
<PAGE>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------
PRO FORMA
ADJUSTED FOR
PRO FORMA OFFERING THIS
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS OFFERING
--------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues................................... $ 3,893.4 $ $ 3,893.4 $ $
Cost of sales.............................. 1,956.4 1,956.4
Operating expenses, excluding amortization
of intangibles(1)........................ 2,126.0 2,126.0
Amortization of intangibles................ 170.2 170.2
--------- ----------- ----------- ----- ------------
Operating income (loss).................... (359.2) (359.2)
(108.4)(2)
Interest expense and other items, net...... (35.5) (3.0)(3) (146.9) (5)
--------- ----------- ----------- ----- ------------
Income (loss) before income taxes.......... (394.7) (111.4) (506.1)
Benefit (provision) for income taxes....... 59.4 43.5(4) 102.9 (6)
Equity in loss of affiliated companies, net
of tax................................... (1.3) (1.3)
--------- ----------- ----------- ----- ------------
Net income (loss).......................... $ (336.6) $ (67.9) $ (404.5) $ $
--------- ----------- ----------- ----- ------------
--------- ----------- ----------- ----- ------------
Earnings (loss) per share -- basic and
diluted.................................. $ (7)
------------
------------
Weighted average shares outstanding --
basic and diluted........................ (7)
------------
------------
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues................................... $ 1,113.0 $ $ 1,113.0 $ $
Cost of sales.............................. 441.8 441.8
Operating expenses, excluding amortization
of intangibles(1)........................ 579.6 579.6
Amortization of intangibles................ 43.0 43.0
--------- ----------- ----------- ----- ------------
Operating income (loss).................... 48.6 48.6
(2.0)(2)
Interest expense, net...................... (28.6) (0.8)(3) (31.4) (5)
--------- ----------- ----------- ----- ------------
Income (loss) before income taxes.......... 20.0 (2.8) 17.2
Benefit (provision) for income taxes....... (23.4) 1.1(4) (22.3) (6)
--------- ----------- ----------- ----- ------------
Net income (loss).......................... $ (3.4) $ (1.7) $ (5.1) $ $
--------- ----------- ----------- ----- ------------
--------- ----------- ----------- ----- ------------
Earnings (loss) per share -- basic and
diluted.................................. $ (7)
------------
------------
Weighted average shares outstanding --
basic and diluted........................ (7)
------------
------------
</TABLE>
- ------------------------
(1) We believe that additional general and administrative expense resulting from
the transition services agreement and from the addition of personnel to
fulfill certain functions previously provided by Viacom will not differ
materially from the allocated general and administrative expense from Viacom
of $12.5 million for the year ended December 31, 1998 and $3.1 million for
the three months ended March 31, 1999.
27
<PAGE>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
(2) This reflects additional interest expense primarily relating to the funding
of the $1.6 billion in borrowings under the credit agreement to fund
promissory notes payable to Viacom International Inc. and the partial
funding of the purchase from affiliates of Viacom of the non-U.S. operations
of our business that we did not already own. The additional interest expense
was calculated by multiplying the $1.6 billion of debt outstanding during
the periods presented, assuming the bank borrowings were outstanding at the
beginning of each respective period, by an average annual interest rate of
7.3% for the year ended December 31, 1998 and 6.7% for the three months
ended March 31, 1999. These amounts were reduced by the historical related
party interest cost of $8.4 million for the year ended December 31, 1998 and
$24.8 million for the three months ended March 31, 1999. This rate
represents the average of the one-month LIBOR rate as of the end of each
month in each respective period plus 1.75%. If interest rates were to
increase or decrease by 0.125 of 1%, our company's related interest expense
would be expected to increase or decrease by about $2.0 million annually and
$0.5 million quarterly.
(3) This represents amortization of deferred bank fees incurred in connection
with our credit agreement.
(4) This reflects the income tax benefit associated with adjustments described
in footnotes (2) and (3) above.
(5) This reflects the reduction in interest expense as a result of the use of
all of the net proceeds of this offering to repay $ of borrowings under
the $1.9 billion credit agreement.
(6) This reflects the income tax provision associated with the adjustment in
footnote (5) above.
(7) The pro forma basic earnings (loss) per share includes both the class A
common stock and class B common stock expected to be outstanding as of the
date of this offering. The pro forma diluted earnings (loss) per share does
not differ from basic earnings (loss) per share as the exercise price of
employee stock options expected to be outstanding will be equal to the
initial public offering price. Therefore, no dilution is expected.
28
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA OFFERING ADJUSTED FOR
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS THIS OFFERING
----------- --------------- ------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Cash and cash equivalents............. $ 75.0 $ $ $ $
Receivables, net...................... 132.5
Merchandise inventories............... 276.6
Prepaid assets........................ 146.4
----------- ------- ------------- ------- ---------------
Total current assets............ 630.5
Rental library, net................... 457.3
Deferred income taxes................. 74.3
Property and equipment, net........... 1,005.3
Intangibles, net...................... 6,074.3
Other assets.......................... 58.8 15.0(1)
----------- ------- ------------- ------- ---------------
Total assets.................... $ 8,300.5 $ 15.0 $ $ $
----------- ------- ------------- ------- ---------------
----------- ------- ------------- ------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable...................... $ 350.8 $ $ $ $
Accrued expenses...................... 325.7
Current portion of long-term debt and
capital lease obligations........... 22.3 (4)
Short-term borrowings................. -- 600.0(1)
Deferred income taxes................. 11.1
----------- ------- ------------- ------- ---------------
Total current liabilities....... 709.9
Notes payable to Viacom............... 1,690.4 (1,690.4)(1)
Long-term debt, less current
portion............................. 1,000.0(1) (4)
Capital lease obligations, less
current portion..................... 134.2
Other liabilities..................... 103.8
----------- ------- ------------- ------- ---------------
Total liabilities............... 2,638.3
Stockholders' equity:
Class A common stock, par value $.01
per share; shares authorized,
shares issued and outstanding
pro forma......................... -- (3)
Class B common stock, par value $.01
per share; shares
authorized, shares issued and
outstanding pro forma............. -- (2)
Additional paid-in capital.......... -- (2) (3)
Viacom's net equity investment...... 5,723.8 105.4(1)
(2)
Accumulated other comprehensive
loss-foreign currency translation
adjustment........................ (61.6)
----------- ------- ------------- ------- ---------------
Total stockholder's equity...... 5,662.2
----------- ------- ------------- ------- ---------------
Total liabilities and
stockholders' equity.......... $ 8,300.5 $ $ $ $
----------- ------- ------------- ------- ---------------
----------- ------- ------------- ------- ---------------
</TABLE>
29
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
- ------------------------
(1) This reflects the application of $1.6 billion in borrowings under our $1.9
billion credit agreement to primarily repay the $1.477 billion in promissory
notes payable to Viacom, pay about $22.3 million in accrued but unpaid
interest (classified as Notes payable to Viacom) due Viacom at March 31,
1999, pay about $15.0 million in bank fees incurred pursuant to the credit
agreement with the remaining $85.7 million used to pay a portion of the
purchase price to affiliates of Viacom for the non-U.S. operation of our
business that we did not already own (reflected as a partial retirement of
historical intercompany debt in the accompanying unaudited pro forma balance
sheet). At March 31, 1999 the historical intercompany debt due Viacom for
some of our non-U.S. operations was about $191.1 million. Accordingly, about
$105.4 million (intercompany debt at March 31, 1999 of $191.1 million less
the partial payment of $85.7 million) has been recognized as an increase in
Viacom's net equity investment in the accompanying pro forma balance sheet.
(2) This reflects conversion of Viacom's net equity investment in our company
into shares of class B common stock.
(3) This reflects the receipt of $ in net proceeds from this offering.
Proceeds are calculated based on the assumed sale of shares at $
per share, net of underwriting discounts and commissions of $ million,
and estimated offering expenses of $ million. The pro forma adjustments
assume that the underwriters have not exercised their over-allotment
options. If the underwriters exercise their over-allotment options in full,
the number of issued and outstanding shares of class A common stock and
class B common stock will increase to and , respectively, and it
is estimated that stockholders' equity will increase to $ with a
corresponding decrease to the amount outstanding under our credit agreement.
We refer you to "Use of Proceeds."
(4) This reflects the use of all of the net proceeds from this offering to repay
$ of borrowing under the $1.9 billion credit agreement as described in
"Use of Proceeds."
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
COMBINED FINANCIAL STATEMENTS AND RELATED NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS.
GENERAL
Blockbuster entered into the video rental business in 1985 and is the
world's leading retailer of rentable home videocassettes, DVDs and video games.
Our 6,500 stores offer a wide selection of entertainment products for rent or
purchase. Our business model was significantly modified in 1997 to refocus on
videocassette rental, improving the customer experience and satisfying customer
demand earlier for newly released videos. During 1998, our customers' responses
were very favorable with a revenue increase of 17.5%, an increase in same store
revenues of 13.3% and an increase in domestic rental transactions of 14.4% as
compared to 1997.
The combined financial statements for the periods presented do not fully
reflect the trends in our business as we had significantly different business
models during these periods. In addition, the periods presented include
significant charges which relate to these business model changes. As a result
and as further explained below, our results of operations for those periods are
not comparable.
In connection with our merger with Viacom in 1994, we valued our
videocassette rental library at fair market value, which formed the basis for
subsequent amortization of this inventory over a period of up to 36 months. Such
fair market value proved, on average, to be lower than the cost of rental
videocassettes acquired after the merger. As a result, amortization was lower
with respect to rental videocassettes acquired in the 1994 merger than rental
videocassettes purchased after the merger. This lower amortization favorably
affected results in 1996 and, to a lesser extent, in 1997. Amortization in 1996
and in 1997 also increased as a result of increased purchases of videocassettes.
In 1996, we decided to offer not only our traditional video rental and
related merchandise but various other merchandise categories, including
clothing, books and magazines. We also decided to move our corporate
headquarters from Ft. Lauderdale, Florida to Dallas, Texas and to build an
850,000 square foot distribution center to handle our existing and new products
and eliminate third party distribution. These changes resulted in a $50.2
million charge.
Following significant management changes in 1997, we determined that the new
merchandise lines that had been added in 1996 were not as profitable as our core
rental business. As a result, we refocused our merchandise lines and in the
second quarter of 1997, we recorded charges amounting to $250 million, $100.8
million of which related to a reduction in the carrying value of some of our
retail merchandise inventory.
In recognizing that we could not purchase enough videocassettes at the
"full" cost to satisfy customer demand without significantly increasing our
risk, we changed our business model. In 1998, in order to increase the quantity
and selection of newly released video titles and satisfy our customers' demand
for newly released videos earlier, we entered into revenue-sharing agreements
with the major movie studios. Prior to our change to a revenue-sharing business
model, our videocassette rental library was purchased at "full" cost, generally
between $60 and $70 per videocassette for major theatrical releases that were
priced for rental in the United States. The implementation of revenue-sharing
dramatically affected our cost of sales as we changed our business model from a
primarily fixed to a primarily variable cost approach. Starting in the second
quarter of 1998, revenue-sharing payments to the movie studios became a
significant component of our cost of sales. In addition, we shortened the period
over which we amortize the up front cost of acquiring most newly released
videocassettes to three months. In connection with this change in method of
accounting for our videocassette rental library, we recorded a $424.3 million
charge to reflect a reduction in the carrying value of this library.
31
<PAGE>
We have a substantial amount of intangible assets on our combined financial
statements. As of March 31, 1999, we had net intangible assets of $6,074.3
million, which represented about 73% of our total assets and about 107% of our
stockholders' equity. Our intangible assets consist primarily of goodwill. This
goodwill was primarily created when Viacom acquired our business and operations
in 1994 for a purchase price in excess of the fair market value of our tangible
net assets at that time. This goodwill was originally recorded on Viacom's
financial statements in connection with Viacom's acquisition of our business and
operations and is now recorded as an asset on our combined financial statements.
This goodwill generally represents our BLOCKBUSTER name. We evaluate on a
regular basis whether or not events and circumstances have occurred to indicate
that all or a portion of the carrying amount of these intangible assets may
require an adjustment or a change to the amortization period.
RESULTS OF OPERATIONS
The following table sets forth results of operations and other financial
data.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT MARGIN AND WORLDWIDE STORE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................ $ 2,942.1 $ 3,313.6 $ 3,893.4 $ 931.2 $ 1,113.0
Cost of sales........................................... 1,013.7 1,360.5 1,956.4 326.6 441.8
--------- --------- --------- --------- ---------
Gross profit............................................ 1,928.4 1,953.1 1,937.0 604.6 671.2
Operating expenses...................................... 1,660.8 2,167.7 2,296.2 537.6 622.6
--------- --------- --------- --------- ---------
Operating income (loss)................................. 267.6 (214.6) (359.2) 67.0 48.6
Interest expense........................................ (22.0) (30.8) (27.7) (6.9) (29.2)
Interest income......................................... 3.6 3.7 4.0 0.9 0.6
Other items, net........................................ -- (27.6) (11.8) -- --
--------- --------- --------- --------- ---------
Income (loss) before income taxes....................... 249.2 (269.3) (394.7) 61.0 20.0
Benefit (provision) for income taxes.................... (167.4) (30.0) 59.4 (45.2) (23.4)
Equity in loss of affiliated companies, net of tax...... (4.0) (18.9) (1.3) -- --
--------- --------- --------- --------- ---------
Net income (loss)....................................... $ 77.8 $ (318.2) $ (336.6) $ 15.8 $ (3.4)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
CASH FLOW DATA:
Cash flows from operating activities.................... $ 985.0 $ 991.3 $ 1,234.5 $ 242.3 $ 166.5
Cash flows from (used for) investing activities......... (1,235.1) (1,188.1) (1,022.2) (232.6) (325.4)
Cash flows from (used for) financing activities......... 208.8 269.3 (241.1) (65.9) 135.6
OTHER DATA:
Depreciation............................................ $ 165.5 $ 253.8 $ 212.7 $ 52.3 $ 51.8
Amortization of intangibles............................. 166.2 168.7 170.2 42.6 43.0
EBITDA(1)............................................... 599.3 207.9 23.7 161.9 143.4
Net income (loss) plus intangible amortization, net of
tax(1)(2)............................................. $ 239.6 $ (155.0) $ (172.5) $ 56.8 $ 37.8
MARGINS:
Rental margin(3)........................................ 74.1% 69.6% 54.6% 71.9% 65.7%
Merchandise margin(4)................................... 19.3 7.4 19.8 22.1 19.7
Gross margin(5)......................................... 65.5 58.9 49.8 64.9 60.3
WORLDWIDE STORE DATA:
Same store revenues increase (decrease)(6).............. 5.1% (1.8)% 13.3% 7.6% 17.0%
Total stores at end of period........................... 5,317 6,049 6,381 6,018 6,499
</TABLE>
SEE FOOTNOTES ON THE FOLLOWING PAGE
32
<PAGE>
(1) "EBITDA" and "Net income (loss) plus intangible amortization, net of tax"
are presented here to provide additional information about our operations.
These items should be considered in addition to, but not as a substitute for
or superior to, operating income, net income, cash flow and other measures
of financial performance prepared in accordance with generally accepted
accounting principles. EBITDA may differ in the method of calculation from
similarly titled measures used by other companies.
(2) Intangible amortization, net of tax, included in this item is primarily
related to goodwill.
(3) Rental gross profit as a percentage of rental revenues.
(4) Merchandise gross profit as a percentage of merchandise revenues.
(5) Gross profit as a percentage of total revenues.
(6) This represents the increase (decrease) over the prior comparable period.
SPECIAL ITEM CHARGES
During the fourth quarter of 1996, we recorded a $50.2 million restructuring
charge associated with the relocation of our headquarters to Dallas, Texas and
the elimination of third party distributors.
During the second quarter of 1997, we recorded a $250 million special item
charge principally associated with a write-down of excess inventory of $100.8
million, operating charges for domestic and international reorganization, store
closings and additional corporate relocation costs. This special item charge
also included write-offs attributable to our joint venture operations in Japan
recorded as equity in loss of affiliated companies, net of tax.
During the second quarter of 1998, we recorded a $424.3 million special item
charge associated with a change in the method of accounting for videocassettes
and video game rental inventory.
The following is a summary of the impact of the above described special item
charges on our operating results during the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Operating income................................... $ (50.2) $ (220.3) $ (424.3) $ -- $ --
Net income......................................... (30.1) (174.7) (273.1) -- --
</TABLE>
Excluding the above-described special item charges, operating results would
have been as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenues................................................ $ 2,942.1 $ 3,313.6 $ 3,893.4 $ 931.2 $ 1,113.0
Cost of sales........................................... 1,013.7 1,259.7 1,532.1 326.6 441.8
--------- --------- --------- --------- ---------
Gross profit............................................ 1,928.4 2,053.9 2,361.3 604.6 671.2
Operating expenses...................................... 1,610.6 2,048.2 2,296.2 537.6 622.6
--------- --------- --------- --------- ---------
Operating income, excluding special item charges........ $ 317.8 $ 5.7 $ 65.1 $ 67.0 $ 48.6
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
33
<PAGE>
FIRST QUARTER ENDED MARCH 31, 1999 COMPARED TO FIRST QUARTER ENDED MARCH 31,
1998
REVENUES. Revenues of $1,113.0 million for the first quarter of 1999
increased $181.8 million, or 19.5%, from $931.2 million for the first quarter of
1998 primarily due to a 17.0% increase in same store revenues, a 14.2% increase
in domestic rental transactions and the net addition of 362 company-operated
stores. Revenue growth consisted primarily of an increase of $180.8 million, or
23.4%, in rental revenues to $952.0 million for the first quarter of 1999,
principally due to the increase in rental transactions driven by:
- a substantial increase in the quantity and selection of newly released
videos provided through revenue-sharing agreements;
- the impact of our advertising campaigns aimed at marketing the improved
customer experience; and
- the implementation of more competitive pricing and rental terms.
COST OF SALES. Cost of sales of $441.8 million for the first quarter of
1999 increased $115.2 million from $326.6 million for the first quarter of 1998.
Cost of sales as a percentage of total revenues increased to 39.7% in the first
quarter of 1999 from 35.1% in the first quarter of 1998. This increase was
primarily attributable to an increase in cost of rental revenues of $110.5
million from the first quarter of 1998 to the first quarter of 1999.
During the first quarter of 1998, our new business model of revenue-sharing
with the studios was not fully implemented. The increased cost of rental
revenues in the first quarter of 1999 was principally related to increases in
revenue-sharing payments made to movie studios and increased rental revenues.
Pursuant to the change in accounting adopted on April 1, 1998, revenue-sharing
payments were expensed as incurred and rental tape amortization was accelerated.
During the first quarter of 1999, payments made pursuant to our revenue-sharing
agreements and costs associated with the sale of previously viewed tapes and
previously played games increased $159.5 million as compared to the first
quarter of 1998. This increase is partially offset by a decrease in rental tape
amortization of $49.0 million.
GROSS PROFIT. Gross profit of $671.2 million for the first quarter of 1999
increased $66.6 million from $604.6 million for the first quarter of 1998. Gross
profit as a percentage of total revenues, or gross margin, decreased to 60.3% in
the first quarter of 1999 from 64.9% in the first quarter of 1998. Gross margin
for the first quarter of 1998 and the first quarter of 1999 are not comparable
because of the change in accounting implemented in the second quarter of 1998
related to our new business model.
OPERATING EXPENSES. Total operating expenses of $622.6 million in the first
quarter of 1999 increased $85.0 million from $537.6 million in the first quarter
of 1998. Total operating expenses decreased as a percentage of total revenues to
55.9% in the first quarter of 1999 from 57.7% in the first quarter of 1998. The
increase in total operating expenses resulted from the following:
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense,
which includes expenses incurred at the store and corporate level, decreased
as a percentage of total revenues to 42.4% in the first quarter of 1999 from
44.1% in the first quarter of 1998. General and administrative expense of
$472.1 million in the first quarter of 1999 increased $61.4 million from
$410.7 million in the first quarter of 1998. The dollar increase in general
and administrative expense primarily resulted from compensation increases of
$32.2 million related to hiring additional personnel to support our store
growth. Occupancy cost increased $7.1 million largely as a result of an
increase in the number of stores. Other corporate and store expenses
increased $22.1 million due primarily to the growth in our business.
ADVERTISING EXPENSE. Advertising expense of $55.7 million in the first
quarter of 1999 increased $23.7 million from $32.0 million in the first
quarter of 1998. As a percentage of total
34
<PAGE>
revenues, advertising expense increased to 5.0% in the first quarter of 1999
from 3.4% in the first quarter of 1998. This reflects our continued
investment in advertising and marketing which increased beginning in the
second quarter of 1998.
INTEREST EXPENSE. Interest expense of $29.2 million in the first quarter of
1999 increased $22.3 million from $6.9 million in the first quarter of 1998
reflecting interest expense associated with a $1.4 billion dividend note issued
to Viacom on December 31, 1998 and other promissory notes issued to Viacom in
January 1999 related to the purchase of video stores.
PROVISION FOR INCOME TAXES. The provision for income taxes of $23.4 million
for the first quarter of 1999 decreased $21.8 million from $45.2 million for the
first quarter of 1998 primarily due to the decrease in pre-tax income.
NET INCOME (LOSS). For the reasons described above, net loss of $3.4
million for the first quarter of 1999 reflected a decrease in net income of
$19.2 million from net income of $15.8 million for the first quarter of 1998.
COMPARISON OF 1998 TO 1997
REVENUES. Revenues of $3,893.4 million in 1998 increased $579.8 million, or
17.5%, from $3,313.6 million in 1997 largely as a result of a 13.3% growth in
our same store revenues which increased primarily as a result of a 14.4%
increase in our domestic rental transactions and the net addition of 178
company-operated stores. Revenue growth consisted primarily of increases in
rental transactions driven by:
- a substantial increase in the quantity and selection of newly released
videos provided through revenue-sharing agreements;
- the impact of our advertising campaigns aimed at marketing the improved
customer experience;
- the implementation of more competitive pricing and rental terms; and
- the increased popularity of game rentals.
Merchandise sales also contributed to revenue growth increasing $24.0
million, or 4.0%, over the prior year largely as a result of the video release
of TITANIC, an increase in the number of company-operated stores and improved
merchandising campaigns in some markets.
COST OF SALES. Cost of sales of $1,956.4 million in 1998 increased $595.9
million from $1,360.5 million in 1997. Cost of sales as a percentage of total
revenues increased to 50.2% in 1998 from 41.1% in 1997. Excluding the special
item charges of $424.3 million in 1998 and $100.8 million in 1997, cost of sales
increased $272.4 million primarily as a result of revenue-sharing payments to
movie studios and cost of merchandise sales. Commencing on April 1, 1998, we
substantially increased our purchases of videocassette rental product through
revenue-sharing arrangements with the movie studios. Pursuant to our new
business model and our change in accounting method adopted on April 1, 1998,
revenue-sharing payments are expensed as incurred and the cost of rental product
amortization has been accelerated. Payments made pursuant to our revenue-sharing
agreements and costs associated with the sale of previously viewed tapes and
previously played games increased $314.3 million in 1998 as compared to 1997.
Partially offsetting the increased expense due primarily to revenue-sharing is a
decrease in rental tape amortization of $88.3 million. This decrease is due to
the decline in the up front costs of rental product purchased pursuant to
revenue-sharing. Our total cost of merchandise sold of $495.5 million increased
$46.4 million in 1998 from $449.1 million in 1997.
GROSS PROFIT. Gross profit as a percentage of revenues, or gross margin,
decreased to 49.8% in 1998 from 58.9% in 1997. Excluding the special item
charges of $424.3 million in 1998 and $100.8 million in 1997, gross profit
decreased as a percentage of revenues to 60.6% in 1998 from 62.0% in 1997. Gross
margins for 1998 and 1997 are not comparable because of the special item charges
recorded in the second quarter of each year and the change in accounting
implemented in the second
35
<PAGE>
quarter of 1998 related to our new business model. Merchandise margins declined
in 1998 as compared to 1997 due to increased markdowns and promotional
activities during 1998.
OPERATING EXPENSES. Total operating expenses of $2,296.2 million in 1998
increased $128.5 million from $2,167.7 million in 1997. Total operating expenses
as a percentage of total revenues decreased to 59.0% in 1998 from 65.4% in 1997.
The increase in total operating expenses resulted from the following:
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense,
which includes expense incurred at the store and corporate level, decreased
as a percentage of total revenues to 44.5% in 1998 from 48.5% in 1997.
Excluding the special item charge of $74.4 million related to relocation and
occupancy costs in 1997, general and administrative expense of $1,732.3
million in 1998 increased $201.0 million from $1,531.3 million in 1997 due
to compensation increases of $81.3 million, a $73.9 million increase in
other corporate and store expenses and a $45.8 million increase in occupancy
cost. Store labor cost increased because of an increase in the number of
store personnel, the increase in the number of company-operated stores and
an increase in minimum wage from $4.75 per hour to $5.15 per hour which
became effective in September 1997. The increase in the number of store
personnel reflects our commitment to better serve our customers and support
our revenue growth. The increase in occupancy cost was primarily
attributable to an increase in the number of stores.
ADVERTISING EXPENSE. Advertising expense of $181.0 million in 1998
increased $41.5 million from $139.5 million in 1997. As a percentage of
total revenues, advertising expense increased to 4.6% in 1998 from 4.2% in
1997. This increase was primarily due to additional promotional and
advertising activity in order to increase customer awareness of the greater
quantity and selection of newly released videos, our improved customer
service, and the improved selection of BLOCKBUSTER FAVORITES.
DEPRECIATION. Depreciation expense of $212.7 million in 1998 decreased
$41.1 million from $253.8 million in 1997. Excluding the special item charge
of $45.1 million in 1997 associated with domestic and international
reorganization and store closings, depreciation expense increased $4.0
million in 1998 from 1997 reflecting net store growth.
Excluding the 1998 and 1997 special item charges, total operating expenses
increased $248.0 million in 1998 from 1997.
INTEREST EXPENSE. Interest expense of $27.7 million in 1998 decreased $3.1
million from $30.8 million in 1997.
OTHER ITEMS, NET. Other items of $11.8 million in 1998 decreased $15.8
million from $27.6 million in 1997 largely due to the recognition of non-cash
expenses of $10.5 million and $27.1 million in 1998 and 1997, respectively, to
write-down non-strategic investments to their net realizable value.
BENEFIT (PROVISION) FOR INCOME TAXES. We recognized a benefit for income
taxes of $59.4 million in 1998 as compared to a provision for income taxes of
$30.0 million in 1997. This change was primarily attributable to the mix of
domestic and foreign income or losses. We did not recognize a benefit for
foreign losses, as it is more likely than not that the benefit will not be
realized. Goodwill associated with Viacom's acquisition of our business and
operations and which is now recorded on our finanical statements is not
amortizable for tax purposes. Excluding the non-deductible amortization of
intangibles, the annual effective tax rates would have been 24.6% in 1998 and
(25.8%) in 1997.
EQUITY IN LOSS OF AFFILIATED COMPANIES, NET OF TAX. The equity in loss of
affiliated companies, net of tax, decreased primarily due to the fact that we
recognized a pre-tax charge of $29.4 million in 1997 associated with our
investment in our Japanese joint venture.
36
<PAGE>
NET INCOME (LOSS). For the reasons described above, net loss of $336.6
million in 1998 increased $18.4 million from a loss of $318.2 million in 1997.
Excluding the special item charges in 1998 and 1997, net loss declined $80.0
million to $63.5 million in 1998 from $143.5 million in 1997.
COMPARISON OF 1997 TO 1996
REVENUES. Revenues of $3,313.6 million in 1997 increased $371.5 million, or
12.6%, from $2,942.1 million in 1996 principally due to the net addition of 633
company-operated stores over the prior year but was offset by a 1.8% decline in
same store revenues and a lower number of rental transactions. Rental revenues
increased $277.1 million, or 11.6%, driven by the increase in company-operated
stores but were much lower than anticipated as a result of fewer active
customers and rental transactions. Merchandise sales increased $102.7 million,
or 20.9%, over the prior year due to improved product offerings in our
significant international markets.
COST OF SALES. Cost of sales of $1,360.5 million in 1997 increased $346.8
million from $1,013.7 million in 1996. Cost of sales as a percentage of total
revenues increased to 41.1% in 1997 from 34.5% in 1996. Excluding the special
item charge of $100.8 million in 1997, cost of sales increased $246.0 million
primarily due to an increase of amortization expense in 1997 as compared to 1996
resulting from a smaller percentage of our amortization expense in 1997 being
attributable to the lower cost of videocassette rental library acquired in 1994.
GROSS PROFIT. Gross profit as a percentage of total revenues, or gross
margin, decreased to 58.9% in 1997 from 65.5% in 1996. Excluding the special
item charge of $100.8 million in 1997, gross profit decreased to 62.0% in 1997
from 65.5% in 1996. Gross margins for 1997 and 1996 are not comparable because
of the special item charges recorded in the second quarter of 1997.
OPERATING EXPENSES. Total operating expenses of $2,167.7 million in 1997
increased $506.9 million from $1,660.8 million in 1996. Total operating expenses
as a percentage of total revenues increased to 65.4% in 1997 from 56.4% in 1996.
The increase in total operating expenses resulted from the following:
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
as a percentage of total revenues increased to 48.5% in 1997 from 39.5% in
1996. Excluding the $74.4 million special item charge in 1997, general and
administrative expense of $1,531.3 million in 1997 increased $367.7 million
from $1,163.6 million in 1996 due to compensation increases of $135.2
million, a $111.5 million increase in other corporate and store expenses and
a $121.0 million increase in occupancy cost. The increase in compensation
expense was due primarily to increases in the minimum wage in late 1996 from
$4.25 per hour to $4.75 per hour and in late 1997 from $4.75 per hour to
$5.15 per hour and an increase in the number of company-operated stores. In
addition, in connection with our relocation to Dallas, we incurred higher
salary expense due to the hiring of temporary employees until positions were
filled in Dallas. We also paid higher salaries overall due to the strong
labor demand in the Dallas market. The increase in occupancy cost was
primarily attributable to an increase in the number of stores.
ADVERTISING EXPENSE. Advertising expense of $139.5 million in 1997
increased $24.2 million from $115.3 million in 1996. As a percentage of
total revenues, advertising expense increased to 4.2% in 1997 from 3.9% in
1996. This increase was primarily due to increased promotions designed to
increase customer traffic.
DEPRECIATION. Depreciation expense of $253.8 million in 1997 increased
$88.3 million from $165.5 million in 1996. Excluding the $45.1 million
special item charge in 1997, depreciation expense increased $43.2 million in
1997 principally due to the purchases of equipment, fixtures and leasehold
improvements associated with our store growth and the accelerated
depreciation on the warehouse equipment located at our former distribution
center in Garland, Texas.
37
<PAGE>
RESTRUCTURING CHARGE. We incurred a $50.2 million restructuring charge
in 1996 associated with the relocation of our headquarters to Dallas, Texas
and the elimination of third party distributors.
Excluding the 1997 and 1996 special item charges, total operating expenses
increased $437.6 million in 1997 from 1996.
INTEREST EXPENSE. Interest expense of $30.8 million in 1997 increased $8.8
million from $22.0 million in 1996. This increase is primarily due to an
increase in interest bearing debt owed to Viacom incurred to help finance our
international operations.
OTHER ITEMS, NET. Other items of $27.6 million in 1997 reflect a non-cash
write-down of investments to their estimated net realizable value. During 1997,
as part of our strategic initiatives, management made the decision to dispose of
investments that did not relate to our core business.
BENEFIT (PROVISION) FOR INCOME TAXES. We recognized provisions for income
taxes of $30.0 million in 1997 and $167.4 million in 1996. The decrease was
primarily attributable to the mix of domestic and foreign income or losses. We
did not recognize a benefit for foreign losses, as it is more likely than not
that the benefit will not be realized. In addition, goodwill associated with
Viacom's acquisition of our business and operations and which is now reflected
on our financial statements is not amortizable for tax purposes. Excluding the
non-deductible amortization of intangibles, the annual effective tax rates would
have been (25.8)% in 1997 and 41.8% in 1996.
EQUITY IN LOSS OF AFFILIATED COMPANIES, NET OF TAX. Equity in loss of
affiliated companies, net of tax, increased $14.9 million in 1997 over the prior
year. This increase was primarily due to a pre-tax charge of $29.4 million in
1997 associated with our investment in our Japanese joint venture.
NET INCOME (LOSS). For the reasons described above, in 1997, we recognized
a net loss of $318.2 million as compared to net income of $77.8 million in 1996.
Excluding the special item charges in 1997 and 1996, 1997 reflects a net loss of
$143.5 million as compared to net income of $107.9 million in 1996.
GENERAL ECONOMIC TRENDS, QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
We anticipate that our business will be affected by general economic and
other consumer trends. Our business is subject to fluctuations in future
operating results due to a variety of factors, many of which are outside of our
control. These fluctuations may be caused by, among other things:
- the number, timing and performance of new or acquired stores;
- public acceptance and interest in newly released videos;
- our mix of products rented and sold;
- our expansion into new markets and geographic locations;
- additional and existing competition and their pricing actions;
- marketing programs and new release acquisition costs;
- seasonality, particularly in April and May, due in part to improved
weather and Daylight Savings Time, and in September and October, due in
part to the start of school and the introduction of new television
programs;
- special events, such as the Olympics and the World Cup;
- changing technologies; and
- other factors affecting retailers in general.
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The following table sets forth quarterly statement of operations data for
the nine quarters ended March 31, 1999. This quarterly information includes the
special item charges recognized in the second quarter of each of 1997 and 1998
discussed above and described in notes 3 and 4 of the combined financial
statements and in our opinion, includes all normal recurring adjustments
necessary for a fair presentation of the information for the periods covered.
This data should be read in conjunction with the combined financial statements
and the notes thereto. The quarterly operating results are not necessarily
indicative of the operating results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30(1) SEPTEMBER 30 DECEMBER 31
--------- ----------- ------------- ------------
(IN MILLIONS, EXCEPT PERCENTAGE AMOUNTS)
<S> <C> <C> <C> <C>
1997
Revenues..................................................... $ 823.8 $ 765.3 $ 817.7 $ 906.8
Gross profit................................................. 538.3 370.5 504.5 539.8
Operating income (loss)...................................... 71.2 (263.6) (14.8) (7.4)
Net income (loss)............................................ (19.3) (227.3) (37.8) (33.8)
Net income (loss) plus intangible amortization,
net of tax................................................. 21.5 (186.5) 3.0 7.0
Same store revenues increase (decrease) (2).................. (1.2)% (2.3)% (1.5)% (1.0)%
1998
Revenues..................................................... $ 931.2 $ 890.0 $ 985.4 $ 1,086.8
Gross profit................................................. 604.6 100.2 591.7 640.5
Operating income (loss)...................................... 67.0 (456.9) 5.4 25.3
Net income (loss)............................................ 15.8 (318.0) (21.5) (12.9)
Net income (loss) plus intangible amortization,
net of tax................................................. 56.8 (277.0) 19.6 28.1
Same store revenues increase (2)............................. 7.6% 12.6% 18.2% 14.5%
1999
Revenues..................................................... $ 1,113.0
Gross profit................................................. 671.2
Operating income (loss)...................................... 48.6
Net income (loss)............................................ (3.4)
Net income (loss) plus intangible amortization,
net of tax................................................. 37.8
Same store revenues increase (2)............................. 17.0%
</TABLE>
- ------------------------
(1) The table below presents the second quarter of 1997 and 1998 excluding
special item charges:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE
30,
--------------------
1997 1998
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Revenues................................................................................... $ 765.3 $ 890.0
Gross profit............................................................................... 471.3 524.5
Operating income (loss).................................................................... (43.3) (32.6)
Net income (loss).......................................................................... (52.6) (44.9)
Net income (loss) plus intangible amortization, net of tax................................. (11.8) (3.9)
</TABLE>
(2) This represents the increase (decrease) over the prior comparable period.
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LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY PRIOR TO AND UPON OUR SEPARATION FROM VIACOM
Our capital investments and acquisitions have been financed with a
combination of cash flow from operations and advances from Viacom. We generate
cash from operations predominantly from the rental of videocassettes and we have
substantial operating cash flow because most of our revenue is received in cash
and cash equivalents. Under Viacom's centralized cash management system, Viacom
deposits sufficient cash in our bank accounts to meet our daily obligations and
withdraws excess funds from those accounts. These transactions are included in
advances from Viacom in the combined balance sheets and combined statements of
cash flows. Excess operating cash flow and additional funding from Viacom had
been used primarily for opening and acquiring new stores, the refurbishment,
remodeling and relocation of existing stores and the purchase of videocassette
inventory.
In October 1998, BLOCKBUSTER MUSIC stores were sold to Wherehouse. Some of
the leases transferred in connection with this sale had previously been
guaranteed either by Viacom or its affiliates. The remaining lease terms expire
on various dates through 2007. We have agreed to indemnify Viacom with respect
to any amount paid under these guarantees. At the time of the sale, the
contingent liability for base rent was about $84 million on an undiscounted
basis, with respect to these guarantees. We have not recognized any reserves
related to this contingent liability. If Wherehouse defaults, related payments
could be funded from operating cash flow.
We expect to fund our future anticipated cash requirements, including the
anticipated cash requirements for capital expenditures and payments of principal
and interest on any borrowings, with funds generated from our operations in
addition to various external funds which may be available to us. The external
sources of funds may include future issuances of debt, equity or other
securities. We believe that such internally and externally generated funds will
provide us with adequate liquidity and capital necessary for the next twelve
months.
CASH FLOWS
OPERATING ACTIVITIES. Net cash flows from operating activities decreased
$75.8 million from $242.3 million for the first quarter of 1998 to $166.5
million for the first quarter of 1999 primarily due to the first quarter 1999
net loss of $3.4 million as compared to net income of $15.8 million for the
first quarter of 1998. Significant changes in non-cash items include a $13.2
million decrease in amortization and depreciation expenses and a decrease in
deferred income taxes of $25.3 million. Revenue-sharing payments reduce cash
flow from operating activities. However, this reduction is partially offset by a
decline in videocassette purchases included in investing activities.
Net cash flows from operating activities increased $243.2 million from
$991.3 million in 1997 to $1,234.5 million in 1998 primarily due to stronger
operating results, excluding the non-cash items, and improved payment terms with
vendors, partially offset by prepayments for revenue-sharing and an increased
investment in retail merchandise inventory.
Net cash flow from operating activities increased $6.3 million from $985.0
million in 1996 to $991.3 million in 1997 and was primarily attributable to
slowing of our investment in merchandise inventory in 1997, reflecting our
change in focus from retail to rental.
INVESTING ACTIVITIES. Net cash used for investing activities increased
$92.8 million from $232.6 million for the first quarter of 1998 to $325.4
million for the first quarter of 1999 as a result of a $21.3 million increase in
capital expenditures for new store openings in 1999 and a $83.2 million increase
in cash used for store acquisitions as compared to the first quarter of 1998.
Net cash used for investing activities decreased $165.9 million from
$1,188.1 million in 1997 to $1,022.2 million in 1998 primarily due to the lower
up front costs associated with revenue-sharing titles
40
<PAGE>
compared to traditional pricing of $42.1 million. Capital expenditures of $175.0
million decreased $87.2 million due to a reduction in new store openings in 1998
as compared to 1997. Cash used for acquisitions of $34.2 million decreased $44.8
million as a result of our change in focus from expansions through acquisitions
to enhancing existing store performance.
Net cash used for investing activities decreased $47.0 million from $1,235.1
million in 1996 to $1,188.1 million in 1997. This decrease was primarily due to
a $61.5 million decrease in capital expenditures attributable to the reduction
in new store openings and a $75.4 million decrease in cash used for
acquisitions. These decreases were partially offset by increased rental library
purchases of $108.7 million and cash received primarily from the disposition of
our Ft. Lauderdale headquarters of $19.1 million.
The major components of investing activities are detailed below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- --------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS)
Cash flows from investing activities:
Rental library purchases............................. $ (751.5) $ (860.2) $ (818.1) $ (194.9) $ (181.0)
Capital expenditures................................. (323.7) (262.2) (175.0) (38.5) (59.8)
Cash used for acquisitions........................... (154.4) (79.0) (34.2) (1.8) (85.0)
Other................................................ (5.5) 13.3 5.1 2.6 0.4
---------- ---------- ---------- --------- ---------
Net cash flow from (used for) investing
activities........................................... $ (1,235.1) $ (1,188.1) $ (1,022.2) $ (232.6) $ (325.4)
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
</TABLE>
Our capital expenditures include store equipment and fixtures, remodeling of
some existing stores, implementation and upgrading of office and store
technology and the opening of new store locations. Each new store opening
requires initial capital expenditures, including leasehold improvements,
inventory, equipment and costs related to site locations, lease negotiations and
construction permits. We plan to evaluate and pursue new sites within the video
rental industry in both the United States and in international markets and will
require capital and/or ongoing infrastructure enhancements to support our
expansion strategies in developing markets and for acquisitions.
We currently anticipate that capital expenditures of about $330.0 million
will be incurred in 1999, of which $213.0 million is anticipated to relate to
new, relocated and, remodeled stores and the conversion of acquired stores,
$25.0 million is anticipated to relate to an upgraded store point of sale system
to provide better service to our customers, and the balance of which relates to
general corporate purposes. We expect the total investment per new store to
approximate $0.4 million, which includes rental and merchandise inventory,
leasehold improvements, signage and furniture, fixtures and equipment. However,
the cost of opening a new store can vary based on size, construction costs in a
particular market and other factors.
FINANCING ACTIVITIES. Net cash flow from financing activities increased
$201.5 million to $135.6 million in the first quarter of 1999 as compared to the
use of funds of $65.9 million in the first quarter of 1998 primarily as a result
of additional net borrowings from Viacom.
Net cash flow from financing activities decreased $510.4 million from $269.3
million in 1997 to a net cash use of $241.1 million in 1998 as a result of
repayment made to Viacom.
Net cash flow from financing increased $60.5 million from $208.8 million in
1996 to $269.3 million in 1997 as a result of advances from Viacom.
On December 31, 1998, we declared a $1.4 billion dividend in the form of
promissory note to Viacom International Inc. In the first quarter of 1999, we
issued other promissory notes of about
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<PAGE>
$77 million to Viacom International Inc. relating to our purchase of video
stores. We will pay both these notes including accrued and unpaid interest as
well as any other notes owed to Viacom International Inc. or its affiliates with
the proceeds of the borrowings under the credit agreement described below.
On June 21, 1999, we entered into a $1.9 billion term and revolving credit
agreement with a syndicate of lenders. 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
- to pay fees and expenses related to the origination of the credit
agreement.
The credit agreement is intended to replace our reliance on Viacom's centralized
cash management system. Upon completion of this offering and after giving effect
to the foregoing financing transactions, we expect to have outstanding $
billion of long-term indebtedness. For a more complete description of the credit
agreement, we refer you to "Description of Credit Agreement."
We believe that cash flow from operations and future borrowings, will
provide us with adequate liquidity and capital necessary to continue to fund our
daily operations and expansion strategy in the next two to three years.
Depending upon our growth opportunities and other factors, we may, from time to
time, consider the issuance of debt, equity or other securities, to refinance
debt or for general corporate purposes. However, we can not assure you that we
will be able to access capital markets in the future on terms that are
satisfactory to us.
OTHER FINANCIAL MEASUREMENTS: WORKING CAPITAL
At March 31, 1999, we had cash and cash equivalents of $75.0 million.
Working capital, however, reflected a deficit of $79.4 million due to the
accounting treatment of our videocassette rental library. Under generally
accepted accounting principles, videocassette rental inventories are accounted
for as non-current assets and are excluded from the computation of working
capital. The acquisition cost of videocassette rental inventories, however, is
reported as a current liability and, accordingly, is included in the computation
of working capital. Consequently, we believe working capital is not as
significant a measure of financial condition for companies in the home video
industry as it is for companies in some other industries. Because of this
accounting treatment, we may, from time to time, operate with a working capital
deficit.
At December 31, 1997 and 1998, we had cash and cash equivalents of $129.6
million and $99.0 million, respectively. Working capital reflected a deficit of
$85.2 million and $214.5 million, respectively.
AVAILABILITY OF FOREIGN NET OPERATING LOSSES
Foreign net operating losses, which are fully reserved, may not be available
to us after the split-off. At December 31, 1998, our foreign net operating
losses were $42.5 million.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks including interest rates on our debt
and foreign exchange rates.
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<PAGE>
INTEREST RATE RISK
Historically, we have had no material interest rate risk associated with
debt used to finance our operations due to limited borrowings and our
relationship with Viacom. Subsequent to this offering, we intend to manage our
interest rate exposure using a mix of fixed and floating interest rate debt and,
if appropriate, financial derivative instruments.
FOREIGN EXCHANGE RISK
Operating in international markets involves exposure to movements in
currency exchange rates. Currency exchange rate movements typically also reflect
economic growth, inflation, interest rates, government actions and other
factors. As currency exchange rates fluctuate, translation of the statements of
operations of our international businesses into U.S. dollars may affect
year-over-year comparability and could cause us to adjust our financing and
operating strategies.
On January 1, 1999, eleven member countries of the European Union
established fixed conversion rates between their existing, or local, currencies
and one common currency, the euro. The euro trades on currency exchanges and may
be used in business transactions. Conversion to the euro eliminates currency
exchange risk between the participating member countries. Beginning January
2002, new euro-denominated bills and coins will be issued, and local currencies
will be withdrawn from circulation.
Our operations outside the United States constitute 20.6% of our total
revenues. Our operations in Europe constitute 11.0% of the total revenues. The
majority of these sales are from Great Britain, which has not adopted the euro.
Numerous issues are raised by the euro currency conversion including the
need to adapt computer and financial systems and business processes and
equipment. Due to these uncertainties, we cannot reasonably estimate the
long-term effects one common currency may have on pricing, costs, and the
resulting impact, if any, on financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred. The SOP is effective for financial statements
for fiscal years beginning after December 15, 1998. We adopted SOP 98-5
effective January 1, 1998. Adoption of SOP 98-5 had no material effect on our
combined financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") effective for fiscal years beginning after June
15, 2000. We anticipate that due to our limited use of derivative instruments,
the adoption of SFAS 133 effective January 1, 2001, will not have a material
effect on our financial statements.
YEAR 2000 COMPLIANCE
OVERVIEW
The widespread use of computer programs that rely on two-digit dates to
perform computations and decision-making functions may cause computer systems to
malfunction prior to or in the year 2000 and lead to significant business delays
and disruptions in the United States and internationally. We have implemented a
year 2000 program in order to identify, assess and mitigate our year 2000 risks.
As part of our program, we have hired independent consultants to assist in the
review and oversight of our program, as well as to perform some testing
operations. In addition, we have established a project management team to
monitor our program.
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<PAGE>
We are reviewing our year 2000 issues based upon three areas: applications,
infrastructure and business partners.
Applications cover the software systems resident on mainframe,
mid-range, network and personal computers. We define an application as one
or a collection of programs directly related to a common system. For
example, a financial application may include all the general ledger and
accounts receivable software code used to process information. In addition,
our applications have been segregated into critical and non-critical
applications. Critical applications are software systems which, if not
operational, could have a material impact on our business operations.
Infrastructure includes computers, data and voice communications
networks, and other equipment which use embedded chip processors such as
inventory movement systems, telephone systems and others.
Business partners include franchisees, third party vendors, customers
and other service providers whose systems may interface with us or whose own
operations are important to our daily operations.
These three areas have been addressed using a five phase program: inventory,
assessment, remediation, testing and contingency planning.
- Phase 1 inventories the respective applications, hardware and business
partners.
- Phase 2 assesses the possible impact of a year 2000 error on the
continuing operation of each identified application, hardware system or
business partner relationship and subsequently determines the risk of year
2000 noncompliance to operations and assigns priorities.
- Phase 3 establishes and implements specific plans for the remediation of
applications and hardware systems and for the determination of business
partners' compliance.
- Phase 4 tests each application and hardware system and reviews business
partners' compliance under the plans established in phase 3, to ensure
that year 2000 issues no longer exist.
- Phase 5 establishes and implements contingency plans in the event internal
or external systems are not compliant.
Changes may occur to our operations during the implementation of our year
2000 program or subsequent to the completion of each phase, therefore, we may
periodically revise our plans. We continue to review and test systems for year
2000 compliance as changes occur.
STATE OF READINESS
Our year 2000 progress is as follows:
APPLICATIONS
We have completed the inventory and assessment phases. We have identified 16
critical domestic and 6 critical international applications which primarily
relate to point-of-sale, warehousing and distribution and finance/payroll. A
significant number of critical and non-critical worldwide applications have been
remediated and tested and the remaining applications are scheduled for
completion by August 1999.
INFRASTRUCTURE
We have completed the domestic and international inventory and assessment
phases. A majority of the systems with embedded processors have completed the
remediation and testing phases. The remaining hardware systems remediation will
be completed by August 1999.
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<PAGE>
BUSINESS PARTNERS
During the course of business operations, we rely on third party business
partners to distribute products and to provide services. These business partners
include financial institutions, governmental agencies and utilities. The
disruption of the ability to receive services or to distribute our products
could adversely affect our financial condition. Although we have little or no
control over the remediation and testing of these third party systems, we are
taking appropriate action to determine the level of year 2000 compliance of
third parties. These actions include, but are not limited to, requesting written
confirmation of a business or business system's year 2000 compliance; directly
meeting with business management; and, performing additional independent tests.
We have identified 11 critical business partners and have requested written
confirmation from all of these partners as to their year 2000 compliance. Each
of these 11 business partners has responded to our request for information. One
has indicated it is year 2000 compliant and the others have indicated they
expect to be year 2000 compliant before December 31, 1999.
We have substantially completed the inventory phase and are in the
assessment phase of business partners and expect this phase to be completed by
the second quarter of 1999. The determination of third party year 2000
compliance will continue through the end of the year.
CONTINGENCY PLANS AND RISKS
As the remediation, testing and review of each application, infrastructure
item and business partners occurs, we are determining the need for contingency
plans. Where appropriate, plans addressing both operational and technical
alternatives are being developed. This phase has begun and will continue through
the end of 1999.
Our goal is to achieve timely and substantial year 2000 compliance, with
remediation work assigned based upon how critical each system is to our
business. Due to the general uncertainty inherent in the year 2000 problem,
resulting in part from the uncertainty of compliance by third parties upon which
we rely, we are unable to determine at this time what the consequences of the
year 2000 problem will be. Our year 2000 program can only minimize, but cannot
eliminate, the risks of third party non-compliance. If we, or one of these third
parties upon which we rely, fail to adequately address the year 2000 problem, it
could disrupt our business. The possible consequences of a failure include
incomplete or inaccurate accounting, recording or processing of rentals and
sales of videocassettes, video games and other products and the reporting of
this information; delays or failures in ordering, shipment and distribution of
videocassettes, video games and other products; the creation of uncertainty
about our customer database; or inability to consummate credit and debit card
and check transactions. We will continue to devote the necessary resources to
complete our year 2000 program and contingency plans and believe that such
completion will significantly mitigate operational and financial risks.
COSTS
Costs of our year 2000 program have been expensed as incurred. The estimated
costs to complete our year 2000 program is currently expected to total about $11
million, $8.5 million of which has been incurred to date. We do not expect this
to have a material adverse effect on our results of operations, financial
position or liquidity.
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This prospectus contains forward-looking statements relating to our
operations that are based on our current expectations, estimates and projections
about us and the home video industry. Words such as "expects," "intends,"
"plans," "projects," "believes," "estimates" and other similar expressions are
used to identify such forward-looking statements. These statements are not
guarantees of future
45
<PAGE>
performance and involve risks, uncertainties and assumptions that are difficult
to predict. Further, some forward-looking statements are based upon assumptions
as to future events that may not prove to be accurate. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in such forward-looking statements. We undertake no obligation to update
publicly any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future.
A number of important factors could cause actual results to differ
materially from those indicated by such forward-looking statements. Such factors
include, among others, those set forth in this prospectus under the heading
"Risk Factors."
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<PAGE>
VIDEO INDUSTRY OVERVIEW
DOMESTIC HOME VIDEO INDUSTRY
According to Paul Kagan Associates, the U.S. videocassette and DVD rental
and sales industry grew from $15.7 billion in revenue in 1997 to $17.1 billion
in 1998 and this analyst expects it to reach $22.0 billion in 2002. Paul Kagan
Associates estimates that, in 1998, 83.5 million, or 81.5%, of the 102.5 million
total U.S. households owned a VCR. The number of VCRs that were sold in the
United States in 1998 was estimated by Paul Kagan Associates to be 18.8 million,
a 3.5% increase from 1997, which represents the largest number of VCRs sold in
any single year. In addition, Paul Kagan Associates estimates that about 900,000
DVD players were sold in the United States during 1998. According to Paul Kagan
Associates, the VCR and DVD markets will continue to grow as the number of
multi-VCR households is expected to increase from 37.0 million in 1998 to 43.8
million by 2002 and the number of VCRs and DVD players sold in 2002 is expected
to reach 21.5 million.
As part of a November 1997 survey, the Video Software Dealers Association
revealed that each week nearly one-quarter of all U.S. households make a trip to
their video store, and each month almost three-fourths of all U.S. households
with children rent at least one videocassette. We believe that the following
factors, among others, make video rental a preferred medium of entertainment for
millions of customers:
- the opportunity to browse among a very broad selection of movies;
- the control over viewing, such as the ability to control start, stop,
pause, fast-forward and rewind;
- the opportunity to view recently released movies prior to their
availability for viewing in the home through other mediums such as
pay-per-view, pay television, basic cable television and network and
syndicated television; and
- the opportunity to entertain one or more people for a reasonable price.
The home video industry is highly fragmented. However, the home video
industry has experienced consolidation in recent years, as video store chains
have gained significant market share from single store operators. Based upon
information disclosed by Video Store Magazine and Paul Kagan Associates, the
five largest video store chains have a 41% market share of all U.S. consumer
video rentals in 1998. Dun & Bradstreet, as cited by the Video Software Dealers
Association, estimates that by the first quarter of 1999 there were about 24,590
independent video stores in the United States, down from about 26,960 in the
first quarter of 1998. About 49% of all locations that rent video titles are
currently operated by single store owners. In addition, according to the Video
Software Dealers Association, more than 14,000 of these single store operators
generate annual revenues of less than $220,000. We believe that small stores and
chains in the home video industry will continue to consolidate with national and
regional chains and that such consolidation will offer us numerous acquisition
opportunities. We believe that there are several competitive advantages of being
a large home video chain, including marketing efficiencies, brand recognition,
access to more copies of each videocassette through direct revenue-sharing
agreements, sophisticated information systems, greater access to prime real
estate locations, greater access to capital and competitive pricing made
possible by size and operating efficiencies. Even if there is significant
consolidation, however, we expect that the home video industry will remain
fragmented.
Historically, the major studios or their licensees released movies to video
stores at wholesale prices generally between $60 and $70 per videocassette for
major theatrical releases that were priced for rental in the United States. The
studios still release movies at relatively high wholesale prices unless the
movie is subject to a revenue-sharing agreement or a quantity discount program
or is designated by the studios as a sell-through movie. The studios attempt to
maximize total revenue from newly released
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<PAGE>
video titles by maintaining the high wholesale price during the first four
months to one year after a movie is released. Thereafter, in order to promote
sales to consumers, the major studios release the movies at a substantially
lower price, which movies generally sell at retail for about $10 to $20 per
videocassette.
Since the late 1980s, revenue-sharing agreements have been available to home
video chains and independent video dealers through deals brokered by
distributors such as Rentrak Corporation and SuperComm, Inc. More recently, the
major studios have entered into revenue-sharing agreements directly with several
large video chains. Under these new agreements, video stores share with the
studios an agreed-upon percentage of the video stores' rental revenue for a
limited period of time in exchange for minimal up-front payments for the
videocassettes by the video stores. This percentage generally declines over a
period of weeks following the initial release of the movie. The video stores
also agree to take a minimum number of copies of each movie that is released by
a studio in any U.S. movie theater. The video stores may also agree to take a
minimum number of movies that are not released by a studio in any U.S. movie
theater. The revenue-sharing agreements, subject to limitations and exceptions,
allow the video stores to sell previously viewed tapes to their customers.
We believe that the revenue-sharing agreements have the following
significant benefits to participating video stores:
- they provide these stores with the opportunity to substantially increase
the quantity and selection of newly released video titles that they stock;
- they increase revenues as a result of the increase in total number of
transactions per store and number of videocassettes rented per
transaction; and
- they align the studios' economic interests more closely with the interests
of the video stores.
In addition, we believe that revenue-sharing has increased the revenues
received on an annual basis by the studios through increased rental activity on
new releases as well as greater distribution and revenues on non-hit movies
through minimum output provisions.
In addition to wholesale pricing and revenue-sharing agreements, studios
release some movies at relatively low initial prices which movies generally are
sold by retailers for $10 to $20 per videocassette. Because the wholesale price
is relatively low and these movies are not subject to the revenue-sharing
agreements, retailers generally purchase these movies primarily for sale and
such movies are referred to as sell-through movies. These typically consist of
movies for children and other movies that have unique characteristics or other
mass ownership appeal, such as THE RUGRATS MOVIE and TITANIC.
INTERNATIONAL HOME VIDEO INDUSTRY
According to Paul Kagan Associates, the potential market for home video
rentals is growing at a faster pace outside the United States than within the
domestic market. According to Paul Kagan Associates, the number of households
outside of the United States and Canada which own a VCR is expected to grow from
about 264 million in 1996 to about 353 million by 2001. Currently, we operate in
26 countries outside of the United States.
Some of the attributes of the home video industry outside of the United
States are similar to those of the home video industry within the United States.
For example, the major studios generally release movies outside of the United
States according to the same sequential windows as the release of movies within
the United States, though the international windows tend to last for a longer
period of time. In general, however, the home video industry outside of the
United States does not mirror the home video industry within the United States.
For example, most countries have different systems of supply and distribution of
movie titles. Revenue-sharing agreements, which have proliferated within the
U.S. home video industry among large home video chains, generally have not yet
spread into markets
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outside of the United States. In addition, competition in most international
markets generally tends to be more fragmented, with few large home video chains.
MOVIE STUDIO DEPENDENCE ON VIDEO RENTAL INDUSTRY
According to Paul Kagan Associates, total U.S. movie studio and independent
supplier revenue increased about 11% per year from $9.0 billion in 1994 to $13.8
billion in 1998. Paul Kagan Associates also indicates that the video rental
industry is the largest single source of U.S. revenue to movie distributors,
representing about $6.7 billion, or 48.5%, of the $13.8 billion of movie revenue
in 1998. The following table represents Paul Kagan Associates' estimates of
revenues of total movie distributor revenue.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN MILLIONS)
U.S. home video........................ $ 4,612 $ 5,264 $ 6,181 $ 6,311 $ 6,690
Other U.S. revenue..................... 4,398 5,359 5,942 6,431 7,108
--------- --------- --------- --------- ---------
Total U.S. revenue................. 9,010 10,623 12,123 12,742 13,798
--------- --------- --------- --------- ---------
International home video............... $ 3,443 $ 4,230 $ 4,464 $ 4,406 $ 4,185
Other international revenue............ 4,515 4,964 6,010 6,400 6,904
--------- --------- --------- --------- ---------
Total international revenue........ 7,958 9,194 10,474 10,806 11,089
--------- --------- --------- --------- ---------
Total revenue.................... $ 16,968 $ 19,817 $ 22,597 $ 23,548 $ 24,887
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Of the many movies produced by major studios and released in the United
States each year, relatively few are profitable for the studios based on box
office revenues alone. In addition to purchasing box office hits, video rental
stores, including those operated by us, purchase movies on videocassette and DVD
that were not successful at the box office, thus providing the movie studios
with a reliable source of revenue for almost all of their movies. We believe
that the consumer is more likely to view movies which were not box office hits
on a rented videocassette or DVD than on most other formats because video rental
stores provide an inviting opportunity to browse and make an impulse choice
among a very broad selection of movie titles. In addition, we believe the
relatively low cost of video rentals encourages consumers to rent films they
might not pay to view at a theater.
Historically, new technologies have led to the creation of additional
distribution channels for movie studios. Movie studios seek to maximize their
revenues by releasing movies in sequential release date "windows" to various
movie distribution channels. After the initial theatrical release, studios make
their movies available to video stores for a specified period of time. This
window is exclusive against most other forms of non-theatrical movie
distribution, such as pay-per-view, premium television, basic cable and network
and syndicated television. The current length of the window for video stores
varies, typically ranging from 30 to 90 days for domestic video stores and from
120 to 180 days for international video stores. Thereafter, movies are made
sequentially available to other television distribution channels. This method of
sequential release allows the movie studios to increase their total revenue
while minimizing the adverse effect on the revenue derived from previously
established channels. With the advent of revenue-sharing and the incremental
revenues associated with such agreements, most movie studios have lengthened the
video store window for many box office hits.
HOME VIDEO GAME INDUSTRY
The home video game industry has historically been affected by changing
technology, limited hardware platform life cycles and hit-or-miss software
titles. In addition, video games typically generate most of their rental revenue
during the first twelve months after their release. We believe that during
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this time period, the differential between the retail price and a rental price
of a new video game is typically high enough to make rentals an attractive
alternative to the customer. According to Adams Media Research and VidTrac, the
total domestic home video game market generated about $2.0 billion in software
sales and $495 million in rental revenue in 1997. These markets grew to about
$2.7 billion and about $800 million in 1998, respectively, which represents a
36.8% and 61.7% increase, respectively. Adams Media Research estimates that
video game software sales will reach about $3.4 billion in 2002, a 25% increase
over the $2.7 billion in software sales in 1998.
Based upon estimates of Gerard Klauer Mattison & Co., Inc., we believe that
most of the recent growth in the home video game industry has been fueled by the
success of the Sony PlayStation-TM- and Nintendo 64-TM- and their respective
video games. As of March 31, 1999, the installed base of Sony PlayStation and
Nintendo 64 within the United States was about 15.7 million and 10.6 million
units, respectively. We expect that the home video game industry will continue
to grow with the anticipated U.S. introduction of Sega's Dreamcast-TM- and the
Sony PlayStation II-TM-.
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BUSINESS
We are the world's leading retailer of rentable home videocassettes, DVDs
and video games, with about 6,500 stores in the United States and 26 other
countries as of March 31, 1999. We operate primarily under the highly recognized
BLOCKBUSTER brand name, which, according to The Gallup Organization, achieves
nearly 100% recognition with active movie renters in the United States. Our U.S.
Internet site, WWW.BLOCKBUSTER.COM, provides information about our stores and
products, delivers content regarding certain movies and entertainment programs
and serves as our electronic commerce venue. Our revenues in 1998 increased
17.5% from 1997, with about 79% of these revenues generated in the United States
and about 21% generated outside of the United States. Nearly 60 million people
worldwide have rented in excess of 970 million movies and video games from us or
our franchisees within the last 12 months. For the year ended December 31, 1998,
we and our franchisees recorded worldwide revenues of about $4.7 billion, which
includes $3.9 billion from our company operations and $0.8 billion from our
franchised stores.
Our business and operations were previously conducted by Blockbuster
Entertainment Corporation which was incorporated in Delaware in 1982 and entered
the movie rental business in 1985. On September 29, 1994, Blockbuster
Entertainment Corporation was acquired by and merged with and into Viacom. The
board of directors of Blockbuster Entertainment Corporation determined that the
merger of Blockbuster Entertainment Corporation and Viacom was consistent with,
and in furtherance of, the long-term business strategy of Blockbuster
Entertainment Corporation at that time and was in the best interests of its
stockholders. Accordingly, the board of directors of Blockbuster Entertainment
Corporation voted for, and recommended that the stockholders of Blockbuster
Entertainment Corporation vote in favor of, the merger. Since the merger, our
business and operations have been conducted by various indirect subsidiaries of
Viacom. In the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section, we discuss the general development of our
business over the last several years. In this section, we describe our current
business model and strategy. Recently, our business and operations were either
(1) merged into Blockbuster Inc. or (2) purchased by Blockbuster Inc. and/or one
of its subsidiaries in order to effectuate this offering and facilitate a
potential split-off. Blockbuster Inc., an indirect subsidiary of Viacom, was
incorporated under a different name on October 16, 1989 in Delaware.
Our brand recognition and leading market position have allowed us to create
one of the strongest entertainment franchises in the United States. Based on
1998 industry estimates from Paul Kagan Associates, we estimate that our
company-operated and franchised stores attained a U.S. market share in excess of
27%, over three times greater than that of our nearest competitor. We have
developed this leading position based on a business model which provides our
customers with superior convenience, selection and service at attractive prices.
We estimate that about 59% of the U.S. population lives within three miles of
one of our stores and our customer transaction database contains information on
about 87 million customer accounts.
Of the 26 markets in which we operated outside the United States, we held
leading market positions in Great Britain, Canada and the Republic of Ireland
and Northern Ireland as of March 31, 1999. Historically, the international video
retailing markets have been highly fragmented with varying distribution patterns
in each market. We believe that the economies of scale that we are able to bring
to each market, combined with our worldwide name recognition and established
distribution agreements, provide us with significant international growth
opportunities.
In 1997, John F. Antioco was recruited to serve as our chairman, president
and chief executive officer, selected in part for his significant multi-store
retail experience. Under the management team led by Mr. Antioco, we began to
develop a new business model which refocused on our core rental business. When
substantially implemented in the second quarter of 1998, this business model led
to a significant improvement in customer satisfaction. Most significantly, we
entered into domestic revenue-
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sharing agreements with various motion picture studios. The studios include the
six major motion picture studios: Buena Vista Home Video, a division of the Walt
Disney Company, Columbia Tri-Star Home Video Inc., 20th Century Fox Home
Entertainment Inc., Paramount Pictures Corporation an affiliate of Viacom,
Universal Studios Home Video and Warner Home Video. These agreements are
generally referred to as output agreements, because they require us to
distribute most of the rental titles released on videocassette by these studios.
The quantity of each title obtained is generally determined by a contractual
formula.
We refer to these agreements as revenue-sharing agreements because they
provide that we will share our U.S. rental revenue from the videos with the
studio for a stated period of time, generally 26 weeks. These agreements enable
us to provide the most popular newly released video titles to our customers more
quickly, in greater quantity and on a more efficient basis. We believe these
agreements also have the following significant benefits:
- substantially increasing the number of newly released videos in our stores
to better satisfy customer demand;
- contributing to an increase in revenues resulting from an increase in the
total number of transactions and the number of videocassettes rented per
transaction; and
- aligning the studios' economic interests more closely with ours because
they share a portion of the rental revenue with us for a period of time.
In addition to revenue-sharing, we have made other changes that have
increased our same store revenues while providing enhanced revenue opportunities
for the studios. Some of these other changes include, among others, improving
our product allocation system to more effectively allocate newly released videos
among our stores based upon the likelihood of rental frequency by store and
improving our direct marketing programs and advertising campaigns. Reflecting
this turnaround, quarterly domestic same store rental revenues increased 8.6%,
17.5%, 20.0%, 20.5% and 23.1% in the first through fourth quarters of 1998
compared to 1997 and the first quarter of 1999 compared to the first quarter of
1998, respectively.
BUSINESS MODEL
Our current business model is designed to increase customer traffic and
transaction size by improving customer satisfaction and ultimately generate
higher sales volume per store. We believe our business model gives us an
advantage over other large home video chains and a significant advantage over
our single store competitors. We are applying key elements of our business model
to our international operations. The key elements of our business model are
discussed below.
BROAD SELECTION AND LARGE NUMBER OF MOVIES
We strive to be the leader in satisfying customer demand by stocking each of
our stores with more copies and a wider variety of newly released movies than
our competitors. In large part, our revenue-sharing agreements and our ability
to self-distribute have allowed us to implement this strategy in the United
States. For the year ended December 31, 1998, which reflects nine months under
our new business model, we obtained on average 130% more copies of each
videocassette per store and 49% more video titles than the prior year. In
addition to newly released video titles, we offer a broad selection of
time-tested popular movies and a wide variety of independent and lower-cost
movies that we acquire and are generally only available at our stores for a
specified period of time.
Our goal is to stock each of our stores with a selection and quantity of
merchandise which is optimal for that store. Using our customer transaction
database, we determine on a store-by-store basis the number of copies of each
new release which are to be offered by each store. Our objective is to stock the
top 1,000 most commonly rented popular movies as part of our BLOCKBUSTER
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FAVORITES. In addition, we use our customer transaction database to periodically
review each store's inventory of BLOCKBUSTER FAVORITES and identify movie titles
within this category which have not been rented for a period of time. We offer
these previously viewed tapes for sale and replace them with movies which we
believe our customers are interested in renting.
CONVENIENT AND VISIBLE STORES OF OPTIMAL SIZE AND LOCATION
We maintain a strong presence throughout the United States with an estimated
59% of the U.S. population living within three miles of one of our stores. Our
experienced store development team can quickly identify the optimal sites for
our new stores within our targeted markets through the use of our extensive real
estate and customer transaction databases. We have developed three distinct
store formats which are tailored to maximize our penetration in each market.
These three formats include our "new" traditional store format, which is about
4,800 square feet, our seam store format, which is about 2,500-3,500 square
feet, and our store-in-store format, which is about 1,000-1,200 square feet. In
addition to stores, we have begun to deploy video vending machines on an
experimental basis.
In 1998, we began a comprehensive program to remodel our company-operated
stores worldwide. We expect to fit most of our company-operated stores with new
interior signage. We also expect to remodel the interior and exterior of some of
our company-operated stores in order to enhance our customer's shopping
experience. During 1998, we remodeled about 700 company-operated stores
worldwide.
SUPERIOR AND CONSISTENT CUSTOMER SERVICE
We focus on providing superior service to all of our customers. An essential
aspect of continuing to improve customer service has been our focus on improving
the in-store experience of each customer. We have worked to improve the quality
of our staff through recruitment, compensation, training and employee
appreciation and incentive programs. These programs encourage and empower our
store employees to gain experience and product knowledge in order to effectively
meet the needs of our customers. In addition, our domestic customers are
eligible to participate in our BLOCKBUSTER REWARDS premium membership program,
which allows our customers to earn free rentals. Our most active customers are
automatically enrolled in the BLOCKBUSTER REWARDS Gold program which offers
additional free rental benefits and the ability to reserve movies. These
programs are designed to develop customer loyalty by encouraging our customers
to rent movies only from our stores.
COMPETITIVE PRICING
Our goal is to optimize on a store-by-store basis the price at which we rent
our video titles. In 1998, we initiated a dual pricing strategy that
differentiated pricing between newly released video titles and BLOCKBUSTER
FAVORITES, whereby the BLOCKBUSTER FAVORITES were priced lower than the newly
released video titles. We believe that our customers perceive this two-tiered
pricing as more appropriate in light of the differences between the demand for
the newly released video titles and the BLOCKBUSTER FAVORITES. Our customer
transaction database provides us with the ability to adjust our overall pricing
strategy for each U.S. store based on local market conditions, including local
prices established by our competitors. In addition, we have implemented a new
policy in our company-operated stores, setting the rental term of our
BLOCKBUSTER FAVORITES, our video games and some of our newly released video
titles to a period ranging from two to five evenings. Previously, all rentals
were due after two evenings.
NATIONAL ADVERTISING AND MARKETING PROGRAMS
Our large U.S. store base and our extensive customer database enable us to
be the only home video chain that actively maintains a national advertising and
marketing program, including network
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television, national promotions and local television and radio. For the year
ended December 31, 1998, we incurred about $181 million in advertising expenses.
In addition, some of our business partners, including the studios, allow us to
direct a significant amount of their advertising expenditures. Furthermore, the
studios incur additional expenditures to promote their newly released movies.
Our advertising and marketing provide information regarding one or more key
points of difference between ourselves and the competition. We have pursued an
aggressive advertising and marketing campaign in order to promote awareness of
the BLOCKBUSTER name. Our primary goal is to make our name so recognizable that
any time a person wishes to rent a movie, he or she will first consider coming
to one of our stores. Our advertising and marketing tries to convey the message
that a visit to one of our stores will allow the customer to experience the
magic of the movies.
USE THE CUSTOMER TRANSACTION DATABASE
We have developed and utilized an extensive customer transaction database
with about 87 million customer accounts in the United States. This database
enables us to effectively operate and market our business. For example, we are
able to directly communicate with our customers on a targeted and customized
basis relating to our products and programs. We are also able to stock each of
our company-operated stores with the quantity and selection of merchandise which
is optimal to that store.
SELF DISTRIBUTION CAPABILITIES
We have constructed and launched a highly-automated distribution center in
McKinney, Texas which allows us to distribute substantially all of our products
to our domestic company-operated stores. We believe that our distribution center
gives us a significant competitive advantage over our competitors which use
third party distributors because we are able to process and distribute a greater
quantity of products while reducing costs and improving service to our stores.
In particular, we mechanically repackage our newly released videos to make them
suitable for rental at our stores. Previously, this activity had been performed
manually at each store. In addition, our distribution center gives us the
capacity to accommodate our planned store expansion without incurring
significant expenditures. For example, between 1997 and the end of 1999, we
anticipate that we will have tripled the number of videocassettes processed and
distributed to our stores. We also believe these distribution capabilities were
a major factor in our ability to successfully implement our revenue-sharing
agreements to provide superior movie selection to our customers.
GROWTH STRATEGY
We believe that our growth strategy will further establish our company as
the leading home video chain in the world. Our goal is to increase our
systemwide U.S. market share from 27%, as of December 31, 1998, to over 40%
within the next three years and to significantly increase our market share in
those countries outside the United States where we believe it is profitable to
do so. We believe that our growth objectives can be met because:
- the home video industry is highly fragmented both in the United States and
internationally;
- consolidation has already begun and will continue; and
- the advantages created by our new business model positioned us to increase
our market share.
As explained more fully below, our growth will principally be driven by an
increase in our same store revenues, an expansion of both our company-operated
and franchisee-operated store base in the United States and internationally and
by spreading our expenses over a larger revenue base.
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INCREASE SAME STORE REVENUES
By implementing each element of our business model, we believe that we will
increase same store revenues by:
- increasing the number of movies or video games that a customer rents on
each visit to our stores;
- continuing to grow our active customer base as we increase our market
share;
- increasing the number of times that active customers visit our stores;
- expanding our offering of rentable home entertainment, such as DVDs and
video games; and
- further increasing the quantity of videocassettes in our stores.
EXPAND DOMESTIC STORE BASE
Based on our current store prototypes, we believe that the potential exists
for 4,000 additional new traditional video stores in the United States. Over the
next three years, we expect to add about 500 company-operated stores per year to
our U.S. store base. We plan to open most of these new stores in the 70 largest
markets in the United States. With the use of our extensive customer transaction
database and real estate database, our experienced store development team
identifies markets with growth opportunities and responds to these opportunities
with the appropriate store location and store format, which store format ranges
from about 1,000 to 4,800 square feet. We believe that through our site
selection process and flexible store formats, our new stores will generate
sufficient revenue to recover our capital investment in a short period of time
without significantly reducing the revenues of our existing stores.
EXPAND INTERNATIONAL STORE BASE
Our international strategy is focused on expanding in markets where we
already have an established market position and in less mature markets.
Although, as of March 31, 1999, we operated stores in 26 markets outside of the
United States, 90% of our international rental revenue was generated by our top
seven international markets. These markets are Great Britain, Canada, the
Republic of Ireland together with Northern Ireland, Mexico, Australia, Spain and
Taiwan. We believe that the growth opportunities in these markets are
significant because they are highly fragmented and our respective market share
in each of these countries is generally estimated by us to be less than 40%. We
expect to open over 400 new company-operated stores in these seven markets over
the next three years. We also plan to open over 100 new company-operated stores
over the next three years in international markets other than our top seven
markets. As in the United States, we use different store prototypes in response
to local real estate and market conditions. In addition, we have developed and
use a new country entry model which targets development of a specified range of
a number of company-operated stores and franchised stores at which point
economies of scale can be used to reduce corporate overhead costs and national
advertising expenses.
EXPAND WORLDWIDE FRANCHISE PROGRAM
Over the next three years, we expect to add about 200 franchised stores per
year to our franchised U.S. store base and about 125 franchised stores per year
to our international store base. This includes joint ventures in which we own a
minority interest. We also intend to convert company-operated stores in smaller
markets into franchised stores by selling these stores to franchisees. These
franchisees would also commit to develop additional new franchised stores in
their respective markets. As of March 31, 1999, we had about 75 franchisees
operating 640 U.S. franchised stores and 421 international franchised stores.
For the year ended December 31, 1998, we had revenues of $60.7 million relating
to our
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franchise operations, or about 1.6% of our 1998 revenues. In order to accomplish
this objective, we have refined our franchise approval process, hired personnel
exclusively dedicated to the development of new franchises and launched a
campaign to attract prospective franchisees. In order to increase the
attractiveness of our U.S. franchise program, by the end of 1999 we expect to
make our revenue-sharing agreements with the studios available to our U.S.
franchisees, which will provide them with an option to increase their quantity
and selection of movies.
APPLY THE BENEFITS OF GREATER SIZE
Our leading market position enables us to derive significant economies of
scale and operating efficiencies that are not necessarily available to our
smaller competitors. We are able to achieve efficiencies on both a store level
basis and a systemwide basis. On a store level basis, the increase in the volume
of transactions and the consequent increase in revenues per store as a result of
our business model provides us with the opportunity to reduce our labor costs as
a percentage of revenues. On a systemwide basis, we believe that we can reduce
our distribution costs and selling, general and administrative expenses as a
percentage of our revenues.
PURSUE STRATEGIC ACQUISITIONS
For the year ended December 31, 1998, we acquired 51 video stores. Thus far
in 1999, we have acquired or are under contract to acquire about 190 video
stores. We will continue to review potential acquisitions, including
acquisitions of video rental chains and stores operated by our franchisees as
well as acquisitions in complementary businesses which will enable us to take
advantage of the highly recognized BLOCKBUSTER brand name, our extensive
customer transaction database and our existing distribution system.
PURSUE NEW TECHNOLOGIES AND PRODUCTS
Our leading market position and recognizable brand name allow us to take
advantage of developing technologies and products related to rentable home
entertainment. For example, we are aggressively seeking to develop our online
retailing. We currently are redesigning our U.S. Internet site,
WWW.BLOCKBUSTER.COM, to capitalize on:
- our existing customer relationships;
- our extensive customer transaction database;
- recognition of the BLOCKBUSTER brand name;
- our studio relationships;
- our distribution center capabilities; and
- our existing store base.
We expect to increase our online retail sales of videocassettes, DVDs,
compact discs and BLOCKBUSTER
GIFTCARDS. We also expect to begin online sale of previously viewed tapes, video
games, previously played video games and other entertainment products.
In addition, we have already tracked the success of DVDs in the marketplace
and have introduced DVDs for rental and sale in about 750 domestic stores and in
some markets outside of the United States. As DVDs become more widely accepted
by the public we intend to rent and sell DVDs in all of our stores.
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CUSTOMER TRANSACTION DATABASE
We have developed and utilize an extensive U.S. customer transaction
database with about 87 million accounts. This database has tracked customer
names, addresses, phone numbers, transaction histories, demographic information
and, recently, e-mail addresses. We also maintain a customer transaction
database in each of the countries in which we operate outside of the United
States. As of March 1999, the following chart summarizes the number of our
systemwide U.S. customer accounts that have been active for the periods shown:
[Bar graph which shows that:
1. about 17.8 million customers rented or purchased a product from one of our
stores within the last 30 days;
2. about 28.4 million customers rented or purchased a product from one of our
stores within the last three months;
3. about 34.5 million customers rented or purchased a product from one of our
stores within the last six months;
4. about 39.1 million customers rented or purchased a product from one of our
stores within the last nine months;
5. about 42.2 million customers rented or purchased a product from one of our
stores within the last year; and
6. about 86.8 million customers have rented or purchased a product from one of
our stores.]
We consider our customer transaction database to be one of our core assets,
which we currently use to:
- communicate with and market directly to our customers on a national basis;
- develop programs to reward our most loyal customers;
- strategically locate potential new store sites based on demographics and
unique trade areas; and
- customize and improve the allocation of merchandise on a store-by-store
basis, based on local demographics and prior rental history of our
customers.
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Over time, we believe we will use the information we collect and the
relationships we have developed with our customers through our database to:
- evaluate new industry trends such as DVDs and the digital broadcast
system;
- further develop and enhance our promotional and marketing strategy through
e-mail and other channels of distribution;
- help customers choose and rent movies by analyzing their previous viewing
history;
- promote our internet site and services; and
- capitalize on new home delivery systems for filmed entertainment as these
systems become economically viable.
MERCHANDISING
We offer a wide selection of movies and video games for rent and purchase.
We stock each of our company-operated stores with the quantity and selection of
merchandise which we believe is optimal for that particular store.
The breakdown of the domestic revenues generated from the rental and sale of
such products for the year end December 31, 1998 is as follows:
[Pie graph which shows a breakdown of our domestic revenue as follows:
1 about 71.1% of our domestic revenues was generated by movie rentals;
2 about 9.4% of our domestic revenues was generated by video game rentals;
3 about 5.2% of our domestic revenues was generated by previously viewed tapes
and previously played video game sales;
4 about 7.0% of our domestic revenues was generated by sell-through movie
sales; and
5 about 7.3% of our domestic revenues was generated from the rental and sale
of other items.]
VIDEOCASSETTE AND VIDEOCASSETTE PLAYER RENTALS. Our typical traditional
domestic store generally carries about 6,100 different movie titles available
for rent, which include about 600 newly released video titles and about 5,500
BLOCKBUSTER FAVORITES. About 81% of 1998 domestic rental revenues were from the
rentals of newly released movies. In some of our stores, we rent videocassette
players. Under our revenue-sharing agreements, we are able to make available a
substantial number of additional copies of each newly released video in order to
satisfy our customers' demand shortly after the movie is released. In addition,
we are able to offer substantially more newly released video titles which
increases the variety of movies available in our stores. Our average customer
rents two videocassettes every time he or she visits one of our stores. Our
stores outside of the United States generally carry fewer movies due to their
smaller store sizes.
VIDEOCASSETTE SALES. We generally offer sell-through movies for sale for
about $10 to $20 per videocassette. These typically consist of:
- classic movies that we believe have ownership appeal;
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- childrens' movies; and
- new releases that are priced for sell-through.
We also offer for sale previously viewed tapes to the public after the period of
time after their useful lives as rental products. These previously viewed tapes
are generally rewrapped and are sold at low prices.
DVDS AND DVD PLAYERS. We currently rent and sell about 300 different DVD
titles, about 66% of which are available for rent and 34% of which are available
for sale in about 750 domestic stores and in some markets outside of the United
States. We also rent DVD players in these stores. As DVDs become more widely
accepted in the marketplace we expect to increase the number of our stores that
rent and sell DVDs.
VIDEO GAMES AND VIDEO GAME CONSOLES. We rent video games for use with Sony
PlayStation-TM-, Nintendo-TM- and other video game platforms in all of our
domestic stores and many of our international stores. In these stores, we also
sell previously played video games and rent the video game consoles. In
addition, we sell new games in most of our stores in markets outside of the
United States.
OTHER PRODUCTS. For the convenience of our customers, we sell VCR
accessories, such as blank videocassettes and videocassette cleaning equipment,
and a limited selection of snacks and beverages in all of our stores.
Occasionally, we sell licensed products to complement our selection of movies.
Also, we sell music compact discs and cassette tapes in some of our stores and
on our U.S. Internet site.
STORES AND STORE OPERATIONS
SITE SELECTION. We have developed a comprehensive model which we use to
find suitable locations for company-operated stores and markets for franchise
stores. We seek to locate our company-operated stores in geographic areas with
population and customer concentrations that enable us to better allocate
available resources and manage operating efficiencies in inventory management,
advertising, marketing, distribution, training and store supervision. We are
targeting the remaining markets for the opportunity to develop franchises.
Accordingly, we are targeting the 70 largest markets in the United States to
develop company-operated stores and we are targeting the remaining markets for
new franchise development.
Within each targeted market, we identify potential sites for new and
replacement stores by evaluating market dynamics, some of which include
population demographics, psychographics, customer penetration levels and
competition. We use our extensive real estate database and customer transaction
database to continuously monitor market conditions and select strategic store
locations. Our experienced store development team is capable of securing store
leases and preparing sites for operation, a process which typically takes about
six months. We use our knowledge of market areas and rely upon the familiarity
of our brand name to enhance our ability to obtain prime store locations,
negotiate favorable lease terms with landlords and enter into multiple store
leases.
STORE DEVELOPMENT. For the periods presented, the following table
summarizes opened stores, acquired stores, closed stores, and sold stores.
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OUR WORLDWIDE STORE COUNT INFORMATION
<TABLE>
<CAPTION>
NUMBER OF FRANCHISED
NUMBER OF AND/OR JOINT VENTURE TOTAL
COMPANY-OPERATED STORES STORES STORES
----------------------------------- ------------------------------------- -----------
DOMESTIC INTERNAT'L TOTAL DOMESTIC INTERNAT'L TOTAL DOMESTIC
----------- ----------- --------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STORES AT 12/31/94.............. 2,065 1,002 3,067 725 277 1,002 2,790
Open.......................... 313 142 455 86 56 142 399
Acquired...................... 195 165 360 -- 3 3 195
Closed........................ (33) (154) (187) (18) (29) (47) (51)
Sold.......................... (3) -- (3) (150) (129) (279) (153)
----- ----- --------- ----- ----- --------- -----
STORES AT 12/31/95.............. 2,537 1,155 3,692 643 178 821 3,180
Open.......................... 367 211 578 78 92 170 445
Acquired...................... 200 98 298 2 -- 2 202
Closed........................ (36) (58) (94) (17) (10) (27) (53)
Sold.......................... (2) -- (2) (71) (50) (121) (73)
----- ----- --------- ----- ----- --------- -----
STORES AT 12/31/96.............. 3,066 1,406 4,472 635 210 845 3,701
Open.......................... 345 163 508 82 94 176 427
Acquired...................... 57 258 315 7 -- 7 64
Closed........................ (114) (69) (183) (14) (10) (24) (128)
Sold.......................... (7) -- (7) (19) (41) (60) (26)
----- ----- --------- ----- ----- --------- -----
STORES AT 12/31/97.............. 3,347 1,758 5,105 691 253 944 4,038
Open.......................... 174 165 339 53 141 194 227
Acquired...................... 46 5 51 -- 21 21 46
Closed........................ (70) (121) (191) (24) (10) (34) (94)
Sold.......................... -- (21) (21) (22) (5) (27) (22)
----- ----- --------- ----- ----- --------- -----
STORES AT 12/31/98.............. 3,497 1,786 5,283 698 400 1,098 4,195
Open.......................... 60 51 111 13 22 35 73
Acquired...................... 86 -- 86 -- -- -- 86
Closed........................ (25) (17) (42) (2) (1) (3) (27)
Sold.......................... -- -- -- (69) -- (69) (69)
----- ----- --------- ----- ----- --------- -----
STORES AT 3/31/99............... 3,618 1,820 5,438 640 421 1,061 4,258
----- ----- --------- ----- ----- --------- -----
----- ----- --------- ----- ----- --------- -----
<CAPTION>
INTERNAT'L TOTAL
----------- ---------
<S> <C> <C>
STORES AT 12/31/94.............. 1,279 4,069
Open.......................... 198 597
Acquired...................... 168 363
Closed........................ (183) (234)
Sold.......................... (129) (282)
----- ---------
STORES AT 12/31/95.............. 1,333 4,513
Open.......................... 303 748
Acquired...................... 98 300
Closed........................ (68) (121)
Sold.......................... (50) (123)
----- ---------
STORES AT 12/31/96.............. 1,616 5,317
Open.......................... 257 684
Acquired...................... 258 322
Closed........................ (79) (207)
Sold.......................... (41) (67)
----- ---------
STORES AT 12/31/97.............. 2,011 6,049
Open.......................... 306 533
Acquired...................... 26 72
Closed........................ (131) (225)
Sold.......................... (26) (48)
----- ---------
STORES AT 12/31/98.............. 2,186 6,381
Open.......................... 73 146
Acquired...................... -- 86
Closed........................ (18) (45)
Sold.......................... -- (69)
----- ---------
STORES AT 3/31/99............... 2,241 6,499
----- ---------
----- ---------
</TABLE>
We plan to open most of our new company-operated stores in the largest 70
markets in the United States. Based upon our current store model, we believe
that there is the potential for 4,000 additional new traditional video stores in
the United States.
Outside the United States, we plan to open most of our new company-operated
stores in the seven markets where we already have a significant presence. In
addition, we plan to add franchised and joint venture stores in other
international markets.
STORE FORMAT. In the past, we have sought to locate stores in locations
that were convenient and visible to the public. We intend to continue to
conveniently locate store locations by incorporating an "appropriate" store
format using our extensive customer transaction database and real estate
database to maximize revenues without significantly decreasing the revenues of
our nearby stores. To do so, we have designed three store formats:
- NEW TRADITIONAL STORES. These stores are about 4,800 square feet and have
been or will be constructed in markets where store-to-population ratios
are low and where we believe market conditions are optimal. On average,
each new traditional store carries about 600 different newly released
video titles and about 4,000 total copies of these movies and about 5,500
different BLOCKBUSTER FAVORITES and about 6,900 total copies of these
movies.
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- SEAM STORES. These stores are about 2,500-3,500 square feet and have been
or will be constructed in order to compete:
a. in markets that are located in between our traditional stores without
significantly decreasing the market shares of those traditional
stores; and
b. in rural areas.
On average, each seam store carries about 500 different newly released
video titles and about 3,000 copies of these movies and about 3,500
different BLOCKBUSTER FAVORITES and about 5,000 total copies of these
movies.
- STORE-IN-STORES. These stores are about 1,000-1,400 square feet and have
been or will be constructed within a department store, supermarket or
other store. This strategy is being pursued to further expand our presence
and meet demand in mature markets where we already have a strong presence.
On average, each store-in-store carries about 500 different newly released
video titles and about 2,400 copies of these movies and about 2,200
different BLOCKBUSTER FAVORITES and about 2,700 total copies of these
movies.
We also periodically examine whether the formats of our existing stores are
optimal for their location and may downsize or relocate existing stores as
opportunities arise.
STORE LAYOUT. We design our stores to provide a recognizable distinctive
format offering an extensive selection of products in an attractive design aimed
at capturing the magic of the movies. We believe that our trademark blue and
yellow colors which dominate most of our stores make them easily recognizable to
video rental customers. The internal layout of our stores allows our customers
to easily distinguish new video releases, BLOCKBUSTER FAVORITES, DVDs, video
games and other products. Each domestic store typically contains a perimeter
wall, an internal area and a check-out area.
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Below is a graphic of our new store layout.
[Diagram of our internal store layout.]
STORE OPERATIONS. Our U.S. company-operated stores generally operate under
substantially similar hours of operation. Domestic stores are open 365 days a
year, with daily hours generally from 10:00 a.m. to 12:00 midnight. The hours of
operation for franchised stores vary widely depending on the franchise.
Typically, each U.S. store employs 16 people, including two assistant store
managers and one store manager. A large part of the in-store experience depends
upon the knowledge of our staff. We carry out periodic customer service audits
at all of our stores to understand, satisfy and exceed our customers'
expectations. In addition, as store traffic and same store revenues have
increased, we have been able to achieve significant labor savings through higher
productivity. We have achieved additional labor savings because our distribution
center more efficiently performs tasks of packaging videocassettes which were
previously done manually. International store operations vary by country.
STORE LOCATIONS. At March 31, 1999, in the United States and its
territories, we operated 3,618 stores and our franchisees operated 640 stores.
The following map sets forth the number of domestic stores we operated,
including stores operated by our franchisees, as of March 31, 1999:
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[Map of U.S.A. and its territories showing our total number of stores
(Company-operated and franchised stores) in each state and territory as
follows:]
<TABLE>
<CAPTION>
TOTAL
STATE OR TERRITORY(1) STORES(2)
- ----------------------------------------------------------------------------------------------------- -------------
<S> <C>
ALABAMA.............................................................................................. 49
ALASKA............................................................................................... 12
ARIZONA.............................................................................................. 78
ARKANSAS............................................................................................. 17
CALIFORNIA........................................................................................... 514
COLORADO............................................................................................. 100
CONNECTICUT.......................................................................................... 49
DELAWARE............................................................................................. 8
DISTRICT OF COLUMBIA................................................................................. 7
FLORIDA.............................................................................................. 325
GEORGIA.............................................................................................. 171
HAWAII............................................................................................... 19
IDAHO................................................................................................ 8
ILLINOIS............................................................................................. 203
INDIANA.............................................................................................. 70
IOWA................................................................................................. 24
KANSAS............................................................................................... 49
KENTUCKY............................................................................................. 40
LOUISIANA............................................................................................ 66
MAINE................................................................................................ 5
MARYLAND............................................................................................. 108
MASSACHUSETTS........................................................................................ 104
MICHIGAN............................................................................................. 141
MINNESOTA............................................................................................ 46
MISSISSIPPI.......................................................................................... 28
MISSOURI............................................................................................. 86
MONTANA.............................................................................................. 7
NEBRASKA............................................................................................. 27
NEW HAMPSHIRE........................................................................................ 19
NEW JERSEY........................................................................................... 97
NEW MEXICO........................................................................................... 22
NEW YORK............................................................................................. 249
NEVADA............................................................................................... 37
NORTH CAROLINA....................................................................................... 106
NORTH DAKOTA......................................................................................... 6
OHIO................................................................................................. 155
OKLAHOMA............................................................................................. 51
OREGON............................................................................................... 39
PENNSYLVANIA......................................................................................... 137
PUERTO RICO.......................................................................................... 43
RHODE ISLAND......................................................................................... 24
SOUTH CAROLINA....................................................................................... 63
SOUTH DAKOTA......................................................................................... 5
TENNESSEE............................................................................................ 68
TEXAS................................................................................................ 455
UTAH................................................................................................. 41
VERMONT.............................................................................................. 5
VIRGINIA............................................................................................. 119
VIRGIN ISLANDS....................................................................................... 2
WASHINGTON........................................................................................... 63
WEST VIRGINIA........................................................................................ 11
WISCONSIN............................................................................................ 73
WYOMING.............................................................................................. 5
GUAM................................................................................................. 2
DOMESTIC STORE TOTAL................................................................................. 4,258
</TABLE>
At March 31, 1999, outside of the United States, we operated 1,820 stores,
and our franchisees and joint ventures in which we own a minority interest
operated 421 stores. The following table sets forth, by country, the approximate
number of stores we operated and stores our franchisees operated as of March 31,
1999.
<TABLE>
<CAPTION>
NUMBER OF FRANCHISED
NUMBER OF COMPANY- OPERATED AND/OR JOINT VENTURE
COUNTRY(1) STORES STORES TOTAL(2)(3)
- ---------------------------------------------------- --------------------------- ----------------------- ---------------
<S> <C> <C> <C>
Great Britain....................................... 661 -- 661
Canada.............................................. 351 -- 351
Ireland (Republic) and Northern Ireland............. 220 -- 220
Australia........................................... 130 82 212
Mexico.............................................. 128 18 146
Italy............................................... -- 128 128
Spain............................................... 94 2 96
Brazil.............................................. -- 64 64
Chile............................................... 57 -- 57
Taiwan.............................................. 59 -- 59
Argentina........................................... 49 -- 49
Denmark............................................. 44 -- 44
Japan(4)............................................ -- 38 38
China (Hong Kong)................................... 14 -- 14
Portugal............................................ -- 15 15
Colombia............................................ -- 14 14
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
COMPANY-
OPERATED NUMBER OF FRANCHISED
COUNTRY(1) STORES AND/OR JOINT VENTURE STORES TOTAL(2)(3)
- --------------------------------------------------------- --------------- ------------------------------- -----------
<S> <C> <C> <C>
Venezuela................................................ -- 12 12
Israel................................................... -- 12 12
New Zealand.............................................. 11 -- 11
Thailand................................................. -- 10 10
Peru..................................................... -- 9 9
Ecuador.................................................. -- 6 6
Panama................................................... -- 6 6
El Salvador.............................................. -- 4 4
Uruguay.................................................. 2 -- 2
Poland................................................... -- 1 1
----- --- -----
International Store Total................................ 1,820 421 2,241
----- --- -----
----- --- -----
</TABLE>
- ------------------------
(1) We reached an agreement with a franchisee to begin to operate in the
Philippines by the end of 1999.
(2) This does not include stores leased or owned but not operating.
(3) In addition to the stores listed in the chart, as of March 31, 1999, there
were 37 video vending machines being tested in Spain, Canada and Great
Britain.
(4) We have reached an agreement to sell our interest in our Japanese joint
venture.
ADVERTISING AND MARKETING
Worldwide, in the year ended December 31, 1998, we incurred about $181
million in advertising expenses, which include about $142 million in the United
States and about $39 million internationally. In addition, some of our business
partners, including the studios, allow us to direct a significant amount of
their advertising expenditures. Furthermore, the studios also incur additional
expenditures to promote their newly released movies.
NATIONAL AND LOCAL ADVERTISING CAMPAIGN. In 1998, we launched a national
advertising campaign in order to support our business model. We are the only
home video chain that actively maintains a national advertising campaign. This
campaign consists of network and local television, local advertising and local
radio. We use our customer transaction database to target our direct mailings at
different customer groups. We expect to incur about $235 million in advertising
expenses in 1999, an increase of about 30%. We expect this increase to include
more television, outdoor and transit advertising.
Our national and local advertising campaign is designed based upon our
proprietary research. This is done on a national basis and we also focus our
efforts on a local basis in order to adjust to each local environment. We obtain
information from our customer transaction database, our real estate database and
outside research agencies. We have concentrated on the following factors to
formulate and adjust our advertising:
- our market share;
- our level of store development and brand awareness relative to our
competitors within the relevant market;
- local demographics; and
- other local competitive issues.
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Our advertising campaign focuses on the two areas discussed below.
- OUT-OF-STORE ADVERTISING. We advertise on television, transit and other
like media. We also use our research to customize our direct mailings to
address overall demographic trends and individual customer transaction
history.
- IN-STORE ADVERTISING. We use leading edge graphics and visual
merchandising in our stores in order to give our customers the feeling
that a trip to our stores captures the magic of the movies.
INNOVATIVE MARKETING PROGRAMS. Because of our large store base and our
leading brand awareness throughout the United States and many other markets, we
have been able to implement the following programs in the United States and the
same or similar programs in many of our international markets.
- NATIONAL PROMOTIONS. In 1999, we have planned several one-of-a-kind
national promotional events, each several weeks in duration, designed to
attract customers and increase the number of times that active customers
visit our stores due to the event's novelty and "prize" appeal. To date,
these are the only nationally advertised events in our industry. For
example, in our "Trip-a-day Giveaway" program, each day between January
19, 1999 and March 1, 1999, we gave a different customer a free trip to
places such as Las Vegas or the Cannes Film Festival. In addition, for the
last five years, we have sponsored the internationally televised
BLOCKBUSTER ENTERTAINMENT AWARDS, in which over 25 million votes were cast
in 58 categories in our stores and on our U.S. website in 1999. On June
16, 1999, the BLOCKBUSTER ENTERTAINMENT AWARDS were televised within the
United States to a television audience of over 6 million households and
have been or are scheduled to be televised in over 60 other countries.
- NEW RELEASE GUARANTEES. Because of the substantial number of copies of
videocassettes that we are able to provide in our stores, we are able to
offer a guarantee that some of our selected newly released video titles
will be in stock or the customer will receive a coupon that can be
redeemed for a free rental of that movie within the following 30 days.
- BLOCKBUSTER REWARDS PROGRAM. This premium membership program is designed
to offer benefits to our customers and enhance customer loyalty by
encouraging our customers to rent movies only from our stores. The program
was implemented in February of 1999 and as of March 31, 1999, there were
about 2.7 million people enrolled in the BLOCKBUSTER REWARDS program in
the United States. In general, for a $9.95 fee, our customers can join the
BLOCKBUSTER REWARDS program and earn free movie or video game rentals,
exclusive promotional offers and other benefits. Some high volume renters
are automatically enrolled as BLOCKBUSTER REWARDS Gold members which earns
them additional benefits, such as additional free movie or video game
rentals and the ability to reserve movies by telephone. We expect to
implement versions of this program in Canada and Mexico by the end of
September 1999.
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- BLOCKBUSTER GIFTCARDS. Our national point-of-sale system in the United
States presents us with a unique opportunity for our customers to purchase
stored value BLOCKBUSTER GIFTCARDS which can be redeemed at any of our
stores nationwide. The BLOCKBUSTER GIFTCARD is a plastic prepaid card
available in amounts ranging from $5 to $50. Some of the cards have
attractive designs, such as movie images, and are marketed as "Limited
Edition Cards." The BLOCKBUSTER GIFTCARDS are also currently available in
Great Britain and Canada. For the year ended December 31, 1998, we sold
$121 million of BLOCKBUSTER GIFTCARDS, which was a 16.9% increase in sales
as compared to the year ended December 31, 1997.
- CROSS-PROMOTIONAL MARKETING PROGRAMS. On an ongoing basis, since 1997, we
have implemented cross-promotional marketing programs with other
well-known companies such as Coca-Cola, Taco Bell, General Motors and
Burger King. As a result of our participation in these programs, we
benefit from marketing by our business partners which features our brand.
- COMMUNITY SERVICE. We also sponsor and promote leadership events in many
of the communities in which we operate. For example, as part of our
"Community Service Videos" program, we provide free videocassettes in some
of our stores on subjects, such as breast cancer. We also offer annually
our KIDPRINT program in most of our U.S. stores. Under this complimentary
program, parents can have one of our staff members videotape their child's
mannerisms, appearance and voice for emergency identification purposes.
INTERNET: WWW.BLOCKBUSTER.COM
We have several Internet sites worldwide. The primary objective of our sites
is to drive traffic to our video stores with content regarding promotions such
as BLOCKBUSTER REWARDS. In addition, our U.S. Internet site also conducts
electronic commerce and provides information about us and some of the products
that we offer in our stores. This site also offers previews of movies soon to be
released in our stores. In addition, we sell on our U.S. Internet site
videocassettes, DVDs, compact discs and BLOCKBUSTER GIFTCARDS. For a complete
discussion of our online strategy, we refer you to "--Growth Strategy -- Pursue
New Technologies and Products."
During the fourth quarter of 1999, we expect to introduce features to our
U.S. Internet site that we expect will attract online users. Some of these
features will include:
- increased electronic commerce offerings and capabilities;
- entertainment news and information;
- increased site and search speed;
- information about movies;
- integrated promotions between our in-store and online businesses; and
- suggestions of movies based upon a customer's evaluation of selected
films.
SUPPLIERS
The following is a description of the suppliers of our domestic
company-operated stores and our franchised stores. Our international stores are
supplied by a variety of suppliers.
SUPPLIERS OF VIDEOCASSETTES AND DVDS
COMPANY-OPERATED STORES. Our U.S. stores receive a substantial portion of
their videocassettes under the revenue-sharing agreements. We have entered into
domestic revenue-sharing agreements
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with, among others, all of the major studios. Under these agreements, we share
our U.S. rental revenues with the studios for a limited period of time,
generally 26 weeks.
In addition to this revenue-sharing component, common to each agreement is
some provision for disposition of the video products at the conclusion of the
rental period. This may involve sale of the product by us as a previously viewed
tape, return of the tape to the studio, destruction of the tape, or some
combination of these elements.
Most revenue-sharing agreements also have some minimal up front payment
associated with each copy of a videocassette.
This revenue-sharing concept is relatively new to us and our industry and we
believe the terms of these agreements are critical to our competitive position.
While the terms of our revenue-sharing agreement vary from studio to studio, we
believe, based upon various assumptions, that the overall economic
revenue-sharing model is designed to achieve gross margins of about 60% on the
rental product we obtain under these agreements. We cannot assure you, however,
that we can achieve such gross margins under our revenue-sharing agreements.
None of these agreements are exclusive to us and the studios are free to enter
into similar or better agreements with our competitors.
The agreements with the studios expire by their terms at various times over
the next three years beginning in the fourth quarter of the year 2000. We have
already renewed one of the agreements with a studio and are currently engaged in
negotiations with another studio to extend our agreement.
For most of our revenue-sharing videocassettes, the major studios send the
master videocassettes to a duplicator for copying and then they are shipped to
our distribution center. In addition, we purchase sell-through movies,
direct-to-video movies and movies sold at traditional wholesale prices, as well
as DVDs, from major studios, independent studios and independent suppliers,
generally pursuant to negotiated agreements.
FRANCHISED STORES. We require each franchisee to comply with guidelines
that set forth the minimum amount and selection of movies to be kept in its
store's inventory. Franchisees typically obtain videocassettes and DVDs from
their own suppliers. However, if we have purchased the exclusive distribution
rights to a movie, the franchisee may obtain that movie from us. By the end of
1999, we expect to make our revenue-sharing agreements with the studios
available to our U.S. franchisees, which will provide them with an option to
increase their quantity and selection of movies.
OTHER SUPPLIERS
SUPPLIERS OF VIDEO GAMES. For our company-operated stores, we purchase
video game software primarily from five suppliers: Sony; Nintendo; Midway;
Acclaim; and Electronic Arts. These suppliers deliver the video game software
and video game accessories to our distribution center. We then distribute the
video game software and video game accessories to our stores. Franchisees are
responsible for obtaining video games from their own suppliers.
SUPPLIERS OF VCRS, DVD PLAYERS AND VIDEO GAME CONSOLES. In our
company-operated stores, we purchase our VCRs primarily from Ingram
Entertainment Incorporated, DVD players primarily from Phillips Electronics and
video game consoles primarily from Phillips Sales and Nintendo. Franchisees are
responsible for obtaining VCRs, DVD players and video game consoles from their
own suppliers.
SUPPLIERS OF FOOD AND BEVERAGES AND ACCESSORIES. Other than our specially
branded microwave popcorn and accessories, which are distributed by our U.S.
distribution center, suppliers distribute all of our snacks and beverages
directly to our company-operated stores. Franchisees are responsible for
obtaining snacks and beverages and accessories from their own suppliers.
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DISTRIBUTION AND INVENTORY MANAGEMENT
In the first quarter of 1998, we began operation of our new,
state-of-the-art distribution center in McKinney, Texas, which is near our
corporate headquarters. Our 850,000 square foot distribution center is a
highly-automated, centralized facility which we use to restock products,
repackage videocassettes and process returns, as well as provide for some office
space. It supports all of our company-operated stores in the United States. As
of March 31, 1999, we employed about 830 employees at the distribution center.
Our distribution center operates six days a week, 24 hours a day.
DISTRIBUTION. At our distribution center, we receive substantially all of
our videocassettes and video games. We repackage the newly released
videocassettes to make them suitable for rent for our stores, a process which
had previously been done manually by our store employees before we built our
distribution center. In addition, we repackage previously viewed tapes to make
them available for sale. Our distribution center is also designed to be able to
handle individual customer orders, which would be necessary if we decided to
distribute our products sold on our U.S. Internet site directly to our
customers. Currently, our Internet sales are distributed by independent
distributors.
We distributed about 86 million units of our products last year from our
distribution center. About 34.5 million of those units were videocassettes
repackaged for rental at our stores. The distribution center has allowed us to
significantly decrease our distribution costs as compared to the costs we
previously incurred using third-party distributors. While we currently process a
high volume of products due to our successful implementation of our
revenue-sharing agreements, we can support a significant increase in sales
volume without significant additional investment. As we add more volume to our
distribution center, we will be able to further take advantage of our cost
efficiencies. The February 1999 issue of MODERN MATERIALS HANDLING, a leading
trade publication, has recognized our distribution center for its "distribution
excellence."
We use a network of third-party warehouses for delivery to our stores. We
ship our products to these warehouses located strategically throughout the
United States, which in turn, deliver them to our stores. Franchisees generally
obtain their products directly from suppliers, except for accessories, supplies
and movies to which we have our exclusive distribution rights, which domestic
franchisees receive from our distribution center. Distribution of our products
to our stores in markets outside the United States is coordinated through our
international offices.
INVENTORY MANAGEMENT. Because we have a centralized distribution center, we
are able to keep strict control over the amount and flow of our products at any
given time. We scan all products as they enter, flow through and exit our
distribution center.
Once our products reach our stores, we focus on strict inventory control.
Our sophisticated inventory management system is integrated with our
point-of-sale system, which allows us to manage our inventory on a
store-by-store basis. We allocate our products to our stores based on the
transaction history of each store and we monitor our stores' in-stock positions.
We also typically take physical inventory at each store on a monthly basis.
MANAGEMENT INFORMATION SYSTEMS
We believe that the accurate and efficient management of purchasing,
inventory and sales records is important to our future success. We maintain
information, updated daily, regarding revenues, current and historical sales and
rental activity, demographics of store customers and videocassette rental
patterns. This information can be organized by store, region, state, country or
for all operations.
We maintain a satellite-based national point-of-sale system in the United
States which is linked with a datacenter located in our distribution center. The
point-of-sale system tracks all of our products distributed from the
distribution center to each store using scanned bar code information. All rental
and sales transactions are recorded by the point-of-sale system when scanned at
the time of customer
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checkout. At the end of each day, the point-of-sale system transmits store data
from operations to the datacenter and the customer transaction database by
satellite.
All of our company-operated stores, except in the Republic of Ireland and
Nothern Ireland, and most of our franchisees use our point-of-sale system upon
opening or conversion into a company-operated store. Within the next three
years, we currently plan to update the computers and the software that run the
point-of-sale system in order to decrease the overhead costs of each store and
speed up the checkout process. We currently have a direct link via satellite
with most of our domestic company-operated stores and by the end of 1999, our
company-operated stores in Canada will also be linked via satellite. Also by the
end of 1999, many of our domestic franchised stores will be linked via
satellite.
In addition, we have established processes for evaluating and managing the
risks and costs that may arise as a result of year 2000 software failures. We
are making necessary modifications to the identified software and we intend to
complete them by August 1999. We do not anticipate that we will incur
significant operating expenses or be required to invest heavily to improve our
computer systems in order to be year 2000 compliant, and we do not anticipate
that business operations will be disrupted. We refer you to "Risk Factors --
Risk Factors Relating to Our Business and Industry -- We May Be Adversely
Affected if Our year 2000 Remediation Efforts Are Not Successful" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FRANCHISE OPERATIONS
At March 31, 1999, our franchisees operated 640 stores in the United States
and our franchisees and minority-operated joint ventures operated 421 stores
internationally. Our franchisees generally are responsible for obtaining their
own supplies and coordinating their own distribution system. In the future,
however, we expect our U.S. franchisees to participate in our revenue-sharing
agreements and, as a result, they would rely upon our distribution center to
receive some portion of their videocassettes. Using our distribution center
would allow our franchisees to share in the cost savings that our distribution
center provides to us.
Under our current U.S. franchising program, we enter into a development
agreement and a franchise agreement with the franchisee. Pursuant to the terms
of a typical development agreement, we grant the franchisee the right to develop
one or a specified number of stores at an approved location or locations within
a defined geographic area and within a specified time. We generally charge the
franchisee a development fee in advance for each store to be developed during
the term of the development agreement. The typical franchise agreement is a
long-term agreement that governs the operations of the store. We generally
require the franchisee to pay us a one-time franchise fee and continuing royalty
fees, service fees and monthly payments for maintenance of the proprietary
software. In addition, we provide optional product and support services to our
franchisees for which we sometimes receive fees. We require our franchisees to
contribute funds for national advertising and marketing programs and we also
require that franchisees spend an additional amount for local advertising. Each
franchisee has sole responsibility for all financial commitments relating to the
development, opening and operation of its stores, including rent, utilities,
payroll and other capital and incidental expenses. We employ people to inspect
our franchised stores.
We cannot assure you that our franchisees will be able to achieve
profitability levels in their businesses sufficient to pay our franchise fees.
Furthermore, we cannot assure you that we will be successful in marketing and
selling new franchises or that any new franchisees will be able to obtain
desirable locations and acceptable leases.
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INTERNATIONAL OPERATIONS
We are the leading international retailer of rentable home movies and video
games. As a result, we believe we are well positioned to take advantage of the
overall growth in the home video industry outside of the United States. As of
March 31, 1999, we had 2,241 stores operating under "BLOCKBUSTER" and other
names located throughout 26 markets outside of the United States. Of these
stores, 421 of such stores were operated through our franchisees and/or joint
ventures in which we own a minority interest.
We have focused on seven priority markets outside of the United States.
Based on the number of stores, our largest market is Great Britain. We began
operations in Great Britain in 1989 and, through acquisitions, have grown to
over 661 locations, including video vending machines, as of March 31, 1999. We
began operations in Canada, our second largest market, in 1990 and have grown to
351 stores, as of March 31, 1999. In the Republic of Ireland and Northern
Ireland, our third largest market, we acquired Xtra-vision PLC in 1997 and
continue to operate under the XTRA-VISION brand name due to its strong local
brand awareness. As of March 31, 1999, we have 220 stores in the Republic of
Ireland and Northern Ireland. In addition, we began operations in Mexico in
1991, Australia in 1993, Spain in 1995 and Taiwan in 1997. For a complete
listing of all of our operations outside of the United States, we refer you to
the chart set forth in "-- Stores and Store Operations -- Store Locations."
We maintain offices for each major region and most of the countries in which
we operate in order to manage, among other things:
- store development and operations;
- marketing; and
- the purchasing, supplying and distribution of each store's products.
The international home video and video game industry varies from country to
country due to, among other things:
- political and economic systems and risks; and
- legal standards and regulations, such as those relating to foreign
ownership rights, unauthorized copying, intellectual property rights,
labor and employment matters, trade regulation and business practices,
franchising and taxation.
Thus, because of all of these variables, we cannot assure you that we can
operate profitably in these international markets.
COMPETITION
We operate in a highly competitive environment. We believe our most
significant competition comes from (a) non-videocassette providers of home
viewing entertainment and (b) video stores and other retailers that rent or sell
movies.
COMPETITION WITH NON-VIDEOCASSETTE PROVIDERS OF HOME VIEWING
ENTERTAINMENT. These providers include direct broadcast satellite, cable,
digital terrestrial, network and syndicated television. We believe that our most
significant competitive risk in this area comes from direct broadcast satellite
and digital cable television. Further growth in the direct broadcast satellite
and digital cable subscriber bases could cause a smaller number of
videocassettes and DVDs to be rented if viewers were favor the expanded number
of conventional channels and expanded programming, including sporting events,
offered through these services. We refer you to "Risk Factors -- The widespread
availability of additional channels on satellite and digital cable systems may
significantly reduce public demand for our merchandise." Direct broadcast
satellite, digital cable and "traditional" cable providers not only offer
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numerous channels of conventional television, but they also offer pay-per-view
movies, which permit a subscriber to pay a fee to see a selected movie.
COMPETITION WITH VIDEO STORES AND OTHER RETAILERS THAT RENT OR SELL
MOVIES. These retailers include, among others:
- local, regional and national video stores;
- mass merchant retailers;
- supermarkets, pharmacies and convenience stores; and
- Internet sites.
We believe that the principal factors we face in competing with video stores
are:
- convenience and visibility of store locations;
- quality, quantity and variety of titles;
- pricing; and
- customer service.
OTHER COMPETITION. In some markets, we also compete against the illegal
duplication and sales of movies and video games. In addition to all of the modes
of competition discussed above, we compete for the general public's
entertainment dollar and leisure time activities including with, among others,
movie theaters, Internet-related activities, live theater and sporting events.
We cannot assure you that competing pressures we face will not have a
material adverse effect on us.
We refer you to "Risk Factors -- Risk Factors Relating to Our Business and
Industry -- Our Business May Be Materially Adversely Affected by New
Technologies" for a discussion of competitive risks related to new technology.
PROPERTIES
Our corporate headquarters are located at 1201 Elm Street, Dallas, Texas
75270 and consist of about 219,239 square feet of space leased pursuant to an
agreement which expires on June 30, 2007. The distribution center is located at
3000 Redbud Blvd., McKinney, Texas 75069 and consists of about 850,000 square
feet of space leased pursuant to an agreement which expires on December 31,
2012. We have set up our payroll and benefits center in Spartanburg, South
Carolina.
We have several main offices that manage our international operations. We
have offices in: Uxbridge, England; Plantation, Florida; Toronto, Ontario;
Melbourne, Australia; and Taipei, Taiwan. In addition, for most countries in
which we operate a store, we maintain an office to coordinate our operations
within that country.
We lease substantially all of our existing store sites, including buildings
and improvements. These leases generally have a term of five to ten years and
provide options to renew for between ten and fifteen additional years. We expect
that most future stores will also occupy leased properties.
INTELLECTUAL PROPERTY
We own a number of trademarks, trade names and service marks including,
among others, BLOCKBUSTER, BLOCKBUSTER VIDEO, BLOCKBUSTER FAVORITES, BLOCKBUSTER
GIFTCARD, BLOCKBUSTER GIFTCARDS, BLOCKBUSTER REWARDS, BLOCKBUSTER ENTERTAINMENT
AWARDS, KIDPRINT, BLOCKBUSTER MUSIC, XTRA-VISION and the blue
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and yellow ticket stub and the blue and yellow awning outside our stores. In
addition, we own the rights to the "blockbuster.com" Internet domain name. We
consider our intellectual property rights to be among our most valuable assets.
LEGAL PROCEEDINGS
We are subject to various legal proceedings in the course of conducting our
business, including our business as a franchisor. However, we believe that such
proceedings are not likely to result in judgments that will have a material
adverse effect on our business.
REGULATION
DOMESTIC REGULATION
We are subject to various federal, state and local laws that govern the
access and use of our video stores by disabled people and the disclosure and
retention of video rental records. We also must comply with various regulations
affecting our business, including state and local advertising, consumer
protection, credit protection, licensing, zoning, land use, construction,
environmental and minimum wage and other labor and employment regulations.
We are also subject to the Federal Trade Commission's Trade Regulation Rule
entitled "Disclosure Requirements and Prohibitions Concerning Franchising and
Business Opportunity Ventures" and state laws and regulations that govern (1)
the offer and sale of franchises and (2) franchise relationships. If we want to
offer and sell a franchise, we are required by the rule mentioned above to
furnish each prospective franchisee a current franchise offering circular prior
to the offer or sale of a franchise. In addition, a number of states require
that we, as franchisors, comply with that state's registration or filing
requirements prior to offering or selling a franchise in the state and to
provide a prospective franchisee with a current franchise offering circular
complying with the state's laws, prior to the offer or sale of the franchise.
Although we cannot make any assurances, we intend to maintain a franchise
offering circular that complies with all applicable federal and state franchise
sales and other applicable laws. However, if we are unable to comply with
federal franchise sales and disclosure laws and regulations, we will be unable
to offer and sell franchises anywhere in the United States. In addition, if we
are unable to comply with the franchise sales and disclosure laws and
regulations of any state that regulates the offer and sale of franchises, we
will be unable to offer and sell franchises in such state.
We are required to update our franchise offering circular annually, as well
as to amend it during the course of the year, to reflect material changes
regarding our franchise offering and to comply with changes in disclosure
requirements. The occurrence of any such material changes may, from time to
time, require us to stop offering and selling franchises until our franchise
offering circular is updated and amended. We cannot assure you that our
franchising program will not be adversely affected because compliance with
applicable law necessitates that we cease offering and selling franchises in
some states until our franchise offering circular is revised, updated and
approved by the applicable authorities, or because of our failure or inability
to comply with existing or future franchise sales and disclosure laws.
We are also subject to a number of state laws and regulations that regulate
some substantive aspects of the franchisor-franchisee relationship, including:
- those governing the termination or non-renewal of a franchise agreement,
such as requirements that:
(a) "good cause" exist as a basis for such termination; and
(b) a franchisee be given advance notice of, and a right to cure, a
default prior to termination;
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- requirements that the franchisor deal with its franchisees in good faith;
- prohibitions against interference with the right of free association among
franchisees; and
- those regulating discrimination among franchisees in charges, royalties or
fees.
Compliance with federal and state franchise laws is costly and
time-consuming, and we cannot assure you that we will not encounter difficulties
or delays in this area or that it will not require significant capital for
franchising activities.
INTERNATIONAL REGULATION
We are subject to various international laws that govern the disclosure and
retention of video rental records. For example, the laws pertaining to the use
of the customer database in some markets outside of the United States are more
restrictive than the relevant laws in the United States.
We must comply with various regulations affecting our business, including
advertising, consumer protection, credit protection, franchising, licensing,
zoning, land use, construction, environmental, labor and employment regulations.
Similar to the United States, some foreign countries have franchise
registration and disclosure laws affecting the offer and sale of franchises
within their borders and to their citizens. They are not often as extensive and
onerous as laws and regulations applicable in the United States. However, like
the United States, failure to comply with such laws could limit or preclude our
ability to expand through franchising in those countries.
EMPLOYEES
As of March 31, 1999, we employed about 80,700 persons, including about
61,400 persons employed within the United States and about 19,300 persons
employed outside of the United States. Within the United States, about 58,700
were employed in domestic company-operated stores and 2,700 were employed in
various other operations, including our corporate, administrative and
distribution functions. Of the total number of U.S. employees, about 17,100 were
full-time and 44,300 were part-time. We believe that our employee relations are
good.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information concerning our current directors and
executive officers. There are no family relationships among any directors or
officers. The ages listed below are as of April 30, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------------- ----------- ----------------------------------------------------
<S> <C> <C>
John F. Antioco..................................... 49 Chairman of the Board of Directors, President and
Chief Executive Officer
Mark T. Gilman...................................... 35 Executive Vice President, Real Estate, Franchising
and New Business Development
James Notarnicola................................... 47 Executive Vice President, Chief Marketing Officer
Gary J. Peterson.................................... 48 Executive Vice President, Chief Operations Officer
Alva J. Phillips.................................... 54 Executive Vice President, Chief Information Officer
Michael K. Roemer................................... 50 Executive Vice President, Domestic Video Operations
Edward B. Stead..................................... 52 Executive Vice President, General Counsel and
Secretary
Nigel Travis........................................ 49 Executive Vice President and President, Worldwide
Retail Operations
Dean M. Wilson...................................... 41 Executive Vice President, Merchandising
Larry J. Zine....................................... 44 Executive Vice President, Chief Financial Officer
Philippe P. Dauman.................................. 45 Director
Thomas E. Dooley.................................... 42 Director
Sumner M. Redstone.................................. 75 Director
</TABLE>
JOHN F. ANTIOCO has served as our chairman of the board of directors,
president and chief executive officer since 1997. From 1996 until 1997, Mr.
Antioco served as president and chief executive officer for Taco Bell
Corporation. Mr. Antioco served as chairman of the board of directors of The
Circle K Corporation, an operator of convenience stores, from 1995 until 1996,
and as its president and chief executive officer from 1993 until 1996. Mr.
Antioco joined Circle K as chief operating officer in 1991. Mr. Antioco serves
as chairman of the board of directors of Main Street & Main Inc. and as a
director for CSK Auto Corporation.
MARK T. GILMAN has served as our executive vice president, real estate,
franchising and new business development since 1997 and served as our senior
vice president, strategic systems from 1996 until 1997. Prior to joining us,
during 1996, Mr. Gilman served as senior vice president, development, for
Hollywood Entertainment Corporation, a national retail video chain, where he was
responsible for domestic development and construction. From 1994 until 1996, Mr.
Gilman served as director of operations development for Wal-Mart Corporation,
where he was responsible for developing real estate and merchandising systems.
JAMES NOTARNICOLA has served as our executive vice president, chief
marketing officer since June 1998 and served as our executive vice president,
marketing and administration from 1997 until 1998. From 1978 until 1997, Mr.
Notarnicola served in many capacities at 7-Eleven Inc., which was formerly known
as The Southland Corporation, including vice president of marketing from 1995
until 1997 and general manager of advertising and promotion from 1990 until
1995.
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GARY J. PETERSON has served as our executive vice president, chief
operations officer since 1998 and served as our executive vice president,
distribution and information systems from 1996 until 1998. From 1993 until 1996,
Mr. Peterson served as chief operating officer for Southeast Frozen Foods, where
he oversaw all operations of the frozen food wholesaler/distributor. Mr.
Peterson has also served as senior vice president of operations services for
Thrifty Drug Stores.
ALVA J. PHILLIPS has served as our executive vice president, chief
information officer since 1997 and served as our senior vice president of
information services from 1995 until 1997. From 1993 until 1995, Mr. Phillips
was employed by Integrated Systems Solutions Corporation, a wholly-owned
subsidiary of International Business Machines Corporation, where he served as
project manager for the Eckerd Corporation account and oversaw, among other
matters, the development and implementation of a satellite based store
communications system. From 1988 until 1993, Mr. Phillips served as senior vice
president of management information services for Rite Aid, where he was
responsible for developing in-store pharmacy, merchandising and distribution
systems to support the company's 2,600 store locations.
MICHAEL K. ROEMER has served as our executive vice president, domestic video
operations since 1998 and served as our senior vice president, domestic video
operations from 1997 until 1998. From 1995 until 1997, Mr. Roemer served as an
independent consultant for major companies such as Frito Lay, where he assisted
with new product development, distribution and business process planning. Prior
to consulting, Mr. Roemer worked at 7-Eleven Inc. from 1966 to 1995. From 1993
until 1995, in his capacity as senior vice president of merchandising for
7-Eleven, Mr. Roemer oversaw merchandising operations of 7-Eleven stores in the
United States and Canada.
EDWARD B. STEAD has served as our executive vice president and general
counsel since 1997, as well as our secretary since 1999. From 1988 until 1996,
Mr. Stead served in the following capacities with Apple Computer, Inc.,
including vice president and general counsel from 1989 until 1995, vice
president, general counsel and secretary from 1993 until 1995, and senior vice
president, general counsel and secretary from 1995 to 1996. Prior to joining
Apple, Mr. Stead served as senior vice president, general counsel and secretary
of Cullinet Software, Inc. Mr. Stead also served as a member of the legal
advisory board of the National Association of Securities Dealers from 1993 until
1997 and has been a member of the American Law Institute since 1996.
NIGEL TRAVIS has served as our executive vice president and president,
worldwide retail operations, since 1998 and served as our president,
international operations, from 1997 until 1998. From 1994 until 1997, Mr. Travis
served in various other capacities for us, including senior vice president,
Europe. Prior to joining us, Mr. Travis served as senior vice president and
managing director, Europe, the Middle East and Africa for Burger King
Corporation. Mr. Travis, a British national, serves as senior non-executive
director of Limelight PLC in the United Kingdom.
DEAN M. WILSON has served as our executive vice president, merchandising,
since 1998. From 1995 until 1998, Mr. Wilson held a number of positions with us,
including senior vice president-general merchandising manager, vice
president-product retail and director of product management international. Prior
to joining us, from 1990 until 1995, Mr. Wilson served as divisional merchandise
manager of video for Trans World Entertainment, a music and video retailer. Mr.
Wilson began his retail career in the executive training program with May
Company.
LARRY J. ZINE has served as our executive vice president, chief financial
officer since 1999. From 1996 until 1999, Mr. Zine served as chief financial
officer for Petro Stopping Centers, L.P., where he was responsible for all
operations. During 1999, Mr. Zine also served as president of Petro. From 1981
until 1996, Mr. Zine worked for The Circle K Corporation, an operator of
convenience stores, and was named executive vice president and chief financial
officer in 1988.
PHILIPPE P. DAUMAN was elected as one of our directors in January 1995. Mr.
Dauman has been deputy chairman of Viacom since January 1996 and its executive
vice president since 1994. From 1993
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until 1998, Mr. Dauman also served as general counsel and secretary of Viacom.
Mr. Dauman is a director of National Amusements, Inc., Spelling Entertainment
Group Inc. and Lafarge Corporation.
THOMAS E. DOOLEY was elected as one of our directors in May 1999. Mr. Dooley
has been deputy chairman of Viacom since 1996 and its executive vice president
since 1994. From 1992 until 1994, Mr. Dooley served as senior vice president,
corporate development of Viacom. Mr. Dooley is a director of Spelling
Entertainment Group Inc.
SUMNER M. REDSTONE was elected as one of our directors in May 1999. Mr.
Redstone has been the chairman of the board of Viacom since 1987 and its chief
executive officer since 1996. Mr. Redstone has served as chairman of the board
of National Amusements, Inc. since 1986 and its president and chief executive
officer since 1967. Mr. Redstone is chairman of the board of Spelling
Entertainment Group Inc.
COMPOSITION OF OUR BOARD OF DIRECTORS
Our board of directors currently has six members, including our chairman of
the board of directors, Mr. John F. Antioco, three individuals who are currently
executive officers and directors of Viacom, Messrs. Sumner M. Redstone, Philippe
P. Dauman and Thomas E. Dooley, and two outside directors. Our board of
directors will be divided into three classes serving staggered terms. Directors
in each class will be elected to serve for three year terms and until their
successors are elected or qualified. Each year, the directors of one class will
stand for election as their terms of office expire. The Class I directors will
have terms of office expiring in 2000; the Class II directors will have terms of
office expiring in 2001; and the Class III directors will have terms of office
expiring in 2002. The three directors who are currently executive officers and
directors of Viacom have advised us that they will resign from our board of
directors following the completion of the split-off.
COMMITTEES OF OUR BOARD OF DIRECTORS
Our board of directors has appointed an audit committee, a compensation
committee and a senior executive compensation committee.
AUDIT COMMITTEE. The functions of the audit committee, which consists of
the two outside directors, include:
- reviewing with the independent accountants the plans and results of the
annual audit;
- approving the audit and non-audit services performed by such independent
accountants;
- reviewing the scope and results of our internal auditing procedures;
- reviewing the adequacy of our system of internal accounting controls; and
- reviewing the annual financial statements prepared for release to our
stockholders and the public.
COMPENSATION COMMITTEE. The compensation committee currently consists of
Messrs. Sumner M. Redstone, Philippe P. Dauman and Thomas E. Dooley and the two
outside directors. Except with respect to matters entrusted to the senior
executive compensation committee, the functions of the compensation committee
include:
- reviewing our general compensation strategy;
- reviewing the terms of employment agreements for executives earning over a
specified amount; and
- administering our compensation and benefit plans, other than our stock
option plan and senior executive short-term incentive plan.
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SENIOR EXECUTIVE COMPENSATION COMMITTEE. The functions of the senior
executive compensation committee, which currently consists of the two outside
directors, include:
- reviewing and approving compensation for executives if their compensation
is, or may become, subject to Section 162(m) of the Internal Revenue Code,
including the terms of employment agreements for such executives;
- administering our senior executive short-term incentive plan, determining
the executives who will participate in the plan, establishing performance
targets and determining specific bonuses for the participants; and
- administering our stock option plan and approving individual stock option
grants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In fiscal 1998, we did not have a compensation committee or any other
committee serving a similar function. Decisions as to the compensation of our
executive officers were made by the senior executive compensation committee or
the compensation committee of the board of directors of Viacom, as applicable.
Mr. Redstone and National Amusements, Inc. own an aggregate of approximately
25.2% of the common stock of Midway Games Inc. During the 1996, 1997 and 1998
fiscal years, we paid about $8.4 million, $12.5 million and $19.1 million,
respectively, for purchases of home video games from Midway. We believe that the
terms of these purchases were no less favorable to us than would have been
obtainable from parties in which there was no such ownership interest. We expect
to purchase video games from Midway in the future.
COMPENSATION OF OUR DIRECTORS
Our directors who do not serve as officers or employees for us or Viacom are
called outside directors and are entitled to receive directors' fees and are
eligible to participate in our stock option plan and our deferred compensation
plan described below.
DIRECTORS' FEES. Outside directors will receive the following fees:
- an annual retainer of $40,000 for membership on our board of directors:
$20,000 of which will be paid in cash and $20,000 of which will be paid in
class A common stock;
- a per meeting attendance fee of $1,000 for each meeting of the board of
directors; and
- a per meeting attendance fee of $1,000 for each meeting of the audit
committee, compensation committee and senior executive compensation
committee, but only if these meetings are held on a different day than the
meeting of the board of directors and the committee member has to travel
to participate in a committee meeting. Only one fee will be paid for
attendance at more than one committee meeting held on the same day.
EQUITY-BASED COMPENSATION. At the time of the offering, our outside
directors will receive a one-time grant of stock options to purchase 10,000
shares of our class A common stock pursuant to our stock option plan described
below at a per share exercise price that will be equal to the price of a share
of our class A common stock on the date of the offering.
DEFERRED COMPENSATION PLAN. Outside directors may defer payment of the cash
portion of their retainer and their attendance fees pursuant to our unfunded
deferred compensation plan; amounts deferred will be deemed invested in the
number of stock units equal to the number of shares of class A common stock
these amounts would purchase when deferred. We offer this plan to our outside
directors as a tax-deferred retirement and estate planning tool. As such,
payment will be made in a cash lump sum or in three or five annual cash
installments starting after the director terminates service with the board. The
value of the stock units is determined by reference to the fair market value of
the
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class A common stock when the director terminates service and, in the case of
installment payments, credited with interest until the installment payment date.
In the event of the director's death prior to receiving all payments due him
under the plan, the director's designated beneficiary or, in the absence of a
designated beneficiary, the director's estate, will receive a cash payment of
the entire amount to which the director was entitled.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
No present officer or director currently owns any shares of our common
stock, all of which are currently owned by Viacom, other than Mr. Redstone to
whom beneficial ownership of these shares is attributed. The following table
sets forth the number of shares of each class of Viacom's common stock
beneficially owned on March 31, 1999, by each of our directors, the executive
officers named in the summary compensation table below and all of our directors
and executive officers as a group. Except as otherwise noted, the individual
director or executive officer had sole voting and investment power with respect
to such securities.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF EQUITY SECURITIES
-------------------------------------------------------------------
TITLE OF NUMBER OF NUMBER OF PERCENT
NAME EQUITY SECURITY EQUITY SHARES OPTION SHARES(1) OF CLASS
- ---------------------------------------- ------------------ ---------------- ---------------- -----------
<S> <C> <C> <C> <C>
John F. Antioco......................... class A common -- -- *
class B common 5,010 )(3 --
Philippe P. Dauman...................... class A common 2,380(3) -- *
class B common 29,778(3) 973,332 *
Thomas E. Dooley........................ class A common 4,866(3) -- *
class B common 17,286(3) 947,332 *
James Notarnicola....................... class A common -- -- *
class B common 75(3) -- *
Gary J. Peterson........................ class A common -- -- *
class B common 741(3) -- *
Sumner M. Redstone...................... class A common 93,658,988(4) -- 66.8%
class B common 104,334,988(4) 1,499,998 18.8%
Edward B. Stead......................... class A common -- -- *
class B common -- -- *
Nigel Travis............................ class A common 40 -- *
class B common 374 -- *
Current Blockbuster directors and
officers as a group other than Messrs.
Dauman, Dooley and Redstone (10
persons).............................. class A common 40(3) -- *
class B common 7,816(3) 6,000 *
</TABLE>
- ------------------------
* Less than 1%.
(1) Includes shares subject to options to purchase such shares which on March
31, 1999 were unexercised but were exercisable within a period of 60 days
from that date. Figures in this column reflect an adjustment for Viacom's
two-for-one common stock split effected in March 1999. These shares are
excluded from the column headed "Number of Equity Shares".
(2) 5,000 shares held jointly with spouse.
(3) Includes shares and rights equal in value to shares held through Viacom's
401(k) and Excess 401(k) Plans as of December 31, 1998.
(4) Except for 160 shares of each class of Viacom's common stock owned directly
by Mr. Redstone, all of these shares are owned of record by National
Amusements, Inc. Mr. Redstone is the chairman and the beneficial owner of
the controlling interest in National Amusements, Inc. and, accordingly,
beneficially owns all such shares.
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COMPENSATION OF OUR EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE. The following summary compensation table sets
forth information regarding compensation for fiscal 1998 paid to our chief
executive officer and each of our four other most highly compensated executive
officers who were serving as such on December 31, 1998.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------- -------------
OTHER SECURITIES ALL
ANNUAL UNDERLYING OTHER
SALARY BONUS COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) (#)(3) ($)
- ------------------------------------------------ --------- --------- --------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
John F. Antioco................................. 1998 1,200,000 4,750,000(4) -- 196,320 323(5)
Chairman of the Board of Directors, President
and Chief Executive Officer
James Notarnicola............................... 1998 374,363 300,000 -- 10,000 2,615(6)
Executive Vice President, Chief Marketing
Officer
Gary J. Peterson................................ 1998 397,500 300,000 -- 5,000 5,895(6)
Executive Vice President, Chief Operations
Officer
Edward B. Stead................................. 1998 369,923 282,050 19,127(7) -- --
Executive Vice President, General Counsel and
Secretary
Nigel Travis.................................... 1998 361,483(8) 386,618 159,109(8 (9) 10,000 45,234(10)
Executive Vice President and President,
Worldwide Retail Operations
</TABLE>
- ------------------------
(1) This reflects bonus earned during fiscal 1998. In some instances, we paid
all or a portion of the bonus during the next fiscal year.
(2) In accordance with the rules of the SEC, we have omitted perquisites
totaling less than $50,000.
(3) This reflects options to acquire shares of Viacom's class B common stock.
All figures in this column reflect an adjustment for Viacom's two-for-one
common stock split effected in March 1999.
(4) $1,000,000 of Mr. Antioco's 1998 bonus amount represents the 1998
installment of his sign-on bonus.
(5) This consists of our contributions to Viacom's 401(k) Plan.
(6) This consists of our contributions to Viacom's 401(k) and Excess 401(k)
Plans.
(7) Consists of reimbursement for taxes.
(8) Mr. Travis was transferred from our U.K. payroll to our U.S. payroll in
August 1998. Payments made in British Pounds have been converted to U.S.
Dollars using a year-to-date average conversion rate of 1.64897 U.S. Dollars
to 1.00 British Pound.
(9) Includes $96,219 relating to relocation expenses, $47,285 of reimbursement
for taxes, and other executive perquisites none of which exceed 25% of the
total perquisites reported as other annual compensation.
(10) This consists of employer contributions to our U.K. defined contribution
and supplemental plans, but does not include amounts accrued but not
contributed to Mr. Travis' account during 1998. Amounts disclosed reflect a
conversion from British Pounds to U.S. Dollars at an average conversion rate
for 1998 of 1.65655.
79
<PAGE>
OPTION GRANTS DURING 1998 FISCAL YEAR. The following table provides
information related to options to purchase Viacom's class B common stock granted
during fiscal 1998 to the executive officers named in the summary compensation
table above.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------
NUMBER OF
SHARES OF
VIACOM'S % OF TOTAL
CLASS B OPTIONS EXERCISE
COMMON STOCK GRANTED TO OR BASE GRANT DATE
UNDERLYING EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME OPTIONS (1) FISCAL 1998(2) ($/SH)(3) DATE VALUE($)(4)
- ------------------------- ------------- --------------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C>
August 20,
John F. Antioco.......... 196,320(5) 1.45 30.5625 2008 2,549,961
August 20,
James Notarnicola........ 10,000(5) 0.07 30.5625 2008 129,888
August 20,
Gary J. Peterson......... 5,000(5) 0.04 30.5625 2008 64,944
Edward B. Stead.......... -- -- -- -- --
August 20,
Nigel Travis............. 10,000(5) 0.07 30.5625 2008 129,888
</TABLE>
- ------------------------
(1) All share numbers have been adjusted to reflect Viacom's two-for-one common
stock split that was effected in the form of a stock dividend in March 1999.
(2) Reflects percentage of total grants to all employees of Viacom. Percentage
of total grants to all of our employees were as follows: John F. Antioco:
38.77%; James Notarnicola: 1.98%; Gary J. Peterson: 0.99%; Edward B. Stead:
0%; and Nigel Travis: 1.98%.
(3) Exercise prices which were originally equal to the fair market value of
Viacom's class B common stock on the date of grant have been adjusted to
reflect Viacom's two-for-one common stock split that was effected in the
form of a stock dividend in March 1999.
(4) Based on the Black-Scholes option pricing model adapted for use in valuing
executive stock options. The actual value, if any, an executive may realize
will depend on the excess of the stock price over the exercise price on the
date the option is exercised. There is no assurance that the value realized
by an executive will be at or near the value estimated by the Black-Scholes
option pricing model. The grant date values presented in the table were
determined in part using the following assumptions. No adjustments were made
for non-transferability or risk of forfeiture:
<TABLE>
<S> <C>
Expected volatility.......................................................... 32.73%
Risk-free rate of return..................................................... 5.45%
Dividend yield............................................................... 0.00%
Time of exercise............................................................. 6 years
</TABLE>
The approach used in developing the assumptions upon which the Black-Scholes
valuation was done is consistent with the requirements of the Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."
(5) The options become exercisable with respect to one-third of the shares
covered thereby on each of August 20, 2000, 2001 and 2002.
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<PAGE>
OPTION EXERCISES DURING 1998 FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES. The following table provides information related to:
- options to purchase Viacom's common stock exercised during fiscal 1998 by
the executive officers named in the summary compensation table above; and
- the number and value of options to purchase Viacom's class B common stock
held at December 31, 1998 by such executive officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AS OF DECEMBER 31, OPTIONS AS OF DECEMBER 31,
1998(1)(2) 1998($)
-------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
SHARES
ACQUIRED ON VALUE
NAME EXERCISE(#)(2) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ------------- ------------ ----------- ------------- ----------- -------------
John F. Antioco...................... -- -- -- 1,196,320 -- 23,013,810
James Notarnicola.................... -- -- -- 90,000 -- 1,804,375
Gary J. Peterson..................... 9,666(3) 145,594 -- 124,334 -- 2,584,201
Edward B. Stead...................... -- -- -- 100,000 -- 1,725,000
Nigel Travis......................... 18,250(4) 94,193 6,000 102,000 117,000 2,044,625
</TABLE>
- ------------------------
(1) This reflects options to acquire Viacom's class B common stock.
(2) Figures in these columns reflect an adjustment for Viacom's two-for-one
common stock split effected in March 1999.
(3) This reflects the exercise of options to acquire 9,666 shares of Viacom's
class B common stock.
(4) This reflects the exercise of options to acquire 2,060 shares of Viacom's
class A common stock and 16,190 shares of Viacom's class B common stock.
COMPENSATION FOR SERVICES AFTER A SEPARATION FROM VIACOM
In the event of our separation from Viacom in a split-off or other similar
transaction, up to 100 of our employees, including Messrs. Notarnicola,
Peterson, Stead and Travis, may be employed by a subsidiary of Viacom to provide
separate services to Viacom, such as legal, financial and managerial services,
following such separation. These employees, if employed, will receive
compensation commensurate with services provided and will be expected to provide
such services until no later than December 31, 2002. During this period, in
accordance with the Viacom stock option plan, any options to purchase Viacom
common stock held by these employees will continue to vest and be held subject
to the terms and conditions of the original grant.
PENSION PLANS
DEFINED BENEFIT PENSION PLAN. We and some of our subsidiaries participate
in a non-contributory qualified defined benefit pension plan and an excess
pension plan for some of our highly compensated employees, both sponsored by
Viacom. Our employees became eligible to participate in these plans effective
January 1, 1996, with credit for past service on and after September 29, 1994
for eligibility and vesting purposes. An eligible employee will receive a
benefit at retirement that is based upon the employee's number of years of
benefit service and average annual compensation, including salary and bonus, for
the highest 60 consecutive months out of the final 120 months immediately
preceding retirement. Under the terms of the excess pension plan, such
compensation is limited to the greater of base salary as of December 31, 1995
and $750,000. The benefits under Viacom's excess pension plan
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<PAGE>
are not subject to the Internal Revenue Code provisions that limit the
compensation used to determine benefits and the amount of annual benefits
payable under Viacom's qualified pension plans. At this time, we do not intend
to sponsor a defined benefit plan or an excess benefit plan following the
split-off, but expect that our employees will continue to participate in
Viacom's plans until that time.
It is anticipated that Viacom will retain the accrued liability for benefits
under these plans for our employees. The following table illustrates, for
representative average annual pensionable compensation and years of benefit
service classifications, the annual retirement benefit that would be payable to
employees under both the non-contributory defined benefit pension plan and the
excess pension plan if they retired in 1998 at age 65, based on the
straight-life annuity form of benefit payment and not subject to deduction or
offset.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------------------
REMUNERATION 5 10 15 20 25 30
- ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$150,000................................ $ 12,347 $ 24,694 $ 37,041 $ 49,387 $ 61,734 $ 74,081
300,000................................ 25,472 50,944 76,416 101,887 127,359 152,831
450,000................................ 38,597 77,193 115,791 154,387 192,984 231,581
600,000................................ 51,722 103,444 155,166 206,887 258,609 310,331
750,000................................ 64,847 129,694 194,541 259,387 324,234 389,081
900,000................................ 77,972 155,944 233,916 311,887 389,859 467,831
</TABLE>
The number of years of benefit service that have been credited, as of
December 31, 1998, for Messrs. Antioco, Notarnicola, Peterson and Stead are six
months, six months, two years and four months, respectively. Mr. Travis does not
participate in either the pension plan or the excess pension plan sponsored by
Viacom.
1999 LONG-TERM MANAGEMENT INCENTIVE PLAN
In connection with the offering, we intend to adopt our 1999 Long-Term
Management Incentive Plan.
GENERAL DESCRIPTION OF THE PLAN
The following is a description of the material features of the plan. The
full text of the plan is filed as an exhibit to the registration statement. The
plan provides for grants of stock options to purchase shares of class A common
stock, stock appreciation rights, restricted shares of class A common stock,
restricted share units and phantom shares, the terms and conditions of which are
described in more detail below. About 8,000 of our key employees are eligible
for grants under the plan. Compensation relating to awards under the plan is
generally intended to qualify as "qualified performance-based compensation"
which is excluded from the $1,000,000 limit on deductible compensation set forth
in Section 162(m) of the Internal Revenue Code.
The maximum aggregate number of shares of class A common stock that may be
granted under the plan, whether reserved for issuance upon grants of stock
options or stock appreciation rights or granted as restricted shares, is 25
million. Shares of class A common stock covered by expired or terminated stock
options, stock appreciation rights and restricted shares that are forfeited
under the terms of the plan or stock appreciation rights or restricted share
units that are exercised for cash will not be counted in applying such limit on
grants under the plan. The maximum aggregate number of shares of class A common
stock that may be granted subject to the stock options or stock appreciation
rights or granted as restricted shares or restricted share units and phantom
shares that may be granted to any executive during the five-year period that the
plan will remain in effect is 5 million. Grants
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<PAGE>
under the plan are authorized by the senior executive compensation committee in
its sole discretion. For this reason it is not possible to determine the
benefits or amounts that will be received by any particular employees or group
of employees in the future.
ADMINISTRATION
The plan will be administered by the senior executive compensation committee
or such other committee as our board of directors shall determine, which selects
from among the group of eligible employees, those who will become participants
and receive grants under the plan. The committee will be comprised of at least
two directors, each of whom must be a "non-employee director" within the meaning
of Rule 16b-3 of the Securities Exchange Act of 1934 and an "outside director"
within the meaning of Section 162(m) of the Internal Revenue Code.
STOCK OPTIONS
Stock options can be either incentive stock options or options that do not
qualify as incentive stock options for federal income tax purposes, called
non-qualified stock options, as determined by the committee.
Subject to some limits described below, the committee determines the number
of stock options granted, the exercise price of the stock options, the vesting
schedule applicable to such stock options, the period during which they can be
exercised and any applicable performance goal requirements. The per share
exercise price of incentive stock options cannot be less than 100% or, in the
case of a 10% stockholder, 110% of the fair market value on the date of grant of
a share of class A common stock. No stock option can be exercised more than ten
years after the date of grant. The exercise price of a stock option must be paid
in full at the time of exercise in cash or, in the discretion of the committee,
in shares of class A common stock or other company securities designated by the
committee or in a combination of cash and shares or such other securities.
If the participant's employment terminates for any reason other than death,
permanent disability or for "cause," his stock options may be exercised to the
extent exercisable on the date of termination, for six months after the date of
such termination or such longer period, not in excess of two years from the date
of grant, as may be determined by the committee but not beyond the expiration
date of such stock option. In the event of a participant's death, his stock
options may be exercised to the extent exercisable at the date of death by the
person who acquired the right to exercise such stock options by will or the laws
of descent and distribution or permitted transfer for one year after such death
or such longer period as may, in a special case, be fixed by the committee but
not beyond the expiration date of such stock options. In the event of a
participant's permanent disability, he may exercise his stock options to the
extent exercisable at the onset of such disability for one year after such date
or such longer period, not in excess of two years after such date, as may be
determined by the committee but not beyond the expiration date of such stock
options. If a participant's employment is terminated for "cause," then, unless
the committee determines otherwise, all stock options, whether or not then
vested, will be forfeited by the participant effective as of the date of such
termination.
STOCK APPRECIATION RIGHTS
The committee may grant stock appreciation rights under the plan only in
tandem with stock options, either at the time of grant or by amendment at any
time prior to the exercise, expiration or termination of such stock options.
Each stock appreciation right entitles the holder to surrender the related stock
option in lieu of exercise for an amount equal to the excess of the fair market
value of a share of class A common stock on the date the holder exercises the
stock appreciation right subject to the stock option over the exercise price of
such stock option. This amount will be paid in cash or, in the discretion of the
committee, in shares of class A common stock or other company securities
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<PAGE>
designated by the committee or in a combination of cash and shares or such other
securities. No stock appreciation right can be exercised unless the related
stock option is then exercisable.
RESTRICTED SHARES AND RESTRICTED SHARE UNITS
The committee may grant restricted shares under the plan. A "restricted
share" is a contractual right to receive a share of class A common stock subject
to restrictions as determined by the committee. Any restricted shares granted
under the plan will be subject to a vesting schedule established by the
committee. The committee may, in its discretion, accelerate the dates on which
restricted shares vest. Stock certificates representing the number of restricted
shares granted to a participant will be registered in the participant's name as
of the date of grant but remain held by the company. The participant will have
all rights as a holder of such shares of class A common stock except that:
(1) the participant will not be entitled to delivery of such certificates
until the shares represented thereby have vested;
(2) the restricted shares cannot be sold, transferred, assigned, pledged or
otherwise encumbered or disposed of until such shares have vested; and
(3) if the participant's employment terminates for any reason or, in the
event of the participant's death or permanent disability, the restricted
shares will be forfeited as of the date of such event, unless, in a
special case, the committee determines otherwise with respect to some or
all of the unvested restricted shares.
In addition to restricted shares, the committee may grant restricted
share units, subject to terms and conditions as established by the
committee.
PHANTOM SHARES
The value of any phantom shares granted under the plan will be determined by
reference to the fair market value of a share of class A common stock. Cash
payments made with respect to such phantom shares are based, subject to any
applicable limit on the maximum amount payable, on any increase in value
("appreciation value") determined as of valuation dates over their "initial
value." The plan empowers the committee to determine the initial value of the
phantom shares as of the date of grant. The plan further empowers the committee
to determine the valuation dates, but not later than the eighth anniversary of
the date of grant, applicable to a grant of phantom shares, the period during
which the phantom shares vest and any limit on the maximum amount of
appreciation value payable for the phantom shares.
If a participant's employment terminates for any reason other than for
"cause" or, in the event of the participant's death or permanent disability,
then, unless the committee determines otherwise, the cash payments for such
participant's phantom shares will be the lesser of the appreciation value
determined as of the date of such termination or event or as of the originally
scheduled valuation dates and such payments will be made after the originally
scheduled valuation dates. All rights with respect to phantom shares that are
not vested as of the date of such termination or event, as the case may be, will
be relinquished by the participant. If a participant's employment is terminated
for "cause," all phantom shares, whether or not vested, will be forfeited by the
participant.
ADJUSTMENTS
In the event of a merger, consolidation, stock split, dividend,
distribution, combination, reclassification or recapitalization that changes the
character or amount of the class A common stock, the committee will make such
adjustments as it deems appropriate to the number of shares of class A common
stock subject to any stock options or stock appreciation rights or the number of
restricted
84
<PAGE>
shares, restricted share units or phantom shares granted to each participant,
the exercise price of any outstanding stock options or stock appreciation rights
or the "initial value" of any outstanding phantom shares, and the maximum number
of shares of class A common stock that may be granted under the plan or the
aggregate number of shares that may be granted to any participant.
TRANSFER RESTRICTIONS, ETC.
The rights of a participant with respect to the stock options, stock
appreciation rights, restricted shares or phantom shares granted under the plan
are not transferable by the participant other than by will or the laws of
descent and distribution. Except as described above, no grant under the plan
entitles a participant to any rights of a holder of shares of class A common
stock, nor will any grant be construed as giving any employee a right to
continued employment with us.
AMENDMENT AND TERM OF THE PLAN
The plan may be terminated and may be altered, amended, suspended or
terminated at any time, in whole or in part, by our board of directors;
provided, however, that:
(1) no alteration or amendment will be effective without stockholder
approval if such approval is required by law or under the rules of the
New York Stock Exchange, the Nasdaq National Market or any stock exchange
on which our common stock is listed; and
(2) no such termination, suspension, alteration or amendment may adversely
alter or affect the terms of any then outstanding options previously
granted without the consent of the affected optionee.
GRANTS AS OF THIS OFFERING
Our outside directors will be granted stock options to purchase 10,000
shares of our class A common stock at a per share exercise price equal to the
price of a share of our class A common stock on the date of the offering. We
intend to grant options to our executives prior to the offering, the amounts of
which have not yet been determined.
SENIOR EXECUTIVE SHORT-TERM INCENTIVE PLAN
In connection with the offering, we intend to adopt our Senior Executive
Short-Term Incentive Plan.
GENERAL DESCRIPTION OF THE PLAN
The following is a description of the material features of the plan. The
full text of the plan is filed as an exhibit to the registration statement. The
plan provides objective performance-based annual bonuses for selected senior
executives of Blockbuster, subject to a maximum limit, as described in more
detail below. Amounts paid under the plan are intended to qualify as "qualified
performance-based compensation" which is excluded from the $1,000,000 limit on
deductible compensation set forth in Section 162(m) of the Internal Revenue
Code. Awards under the plan are determined by the senior executive compensation
committee.
ADMINISTRATION
The plan is administered by the senior executive compensation committee,
which is authorized to approve awards to selected executive officers at the
level of Senior Vice President or above. The committee that administers the plan
must be comprised of at least two directors, each of whom must be an "outside
director" within the meaning of Section 162(m) of the Internal Revenue Code.
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<PAGE>
AWARDS
The committee establishes performance criteria and target awards for each
participant for each fiscal calendar year not later than 90 days after the
beginning of the year or, for the fiscal period beginning upon the completion of
the offering, before 25% of such period has elapsed. The performance criteria
relate to our operating income, net earnings and/or cash flow. "Operating
income" is defined as revenues less operating expenses, other than depreciation,
amortization and non-recurring charges; "net earnings" is defined as earnings
from continuing operations; and "cash flow" is defined as operating income less
cash capital expenditures and increases or decreases in working capital and in
other balance sheet investments.
Shortly after the end of each performance period, the committee certifies
whether the performance criteria have been achieved; subject to the committee's
right, in its sole discretion, to reduce the amount of the award to any
participant to reflect the committee's assessment of the participant's
individual performance or for any other reason. These awards are payable in cash
as soon as practicable thereafter.
To receive payment of an award, the participant must have remained in the
continuous employ of Blockbuster through the end of the applicable performance
period. If Blockbuster terminates a participant's employment for any reason
other than for "cause" or if a participant becomes "permanently disabled" or
dies during a performance period, the participant or his estate shall be
awarded, unless his employment agreement provides otherwise, a pro rata portion
of the award for such performance period, subject to the committee's right, in
its sole discretion, to reduce the amount of such award to reflect the
committee's assessment of the participant's individual performance prior to the
termination of the participant's employment, the participant's becoming
permanently disabled or the participant's death, as the case may be, or for any
other reason.
MAXIMUM ANNUAL AWARD
The plan provides that the maximum annual award to any participant for any
calendar year is determined by multiplying such participant's "salary" in effect
on the date of the adoption of the plan by eight. "Salary" is defined as the sum
of (1) the participant's base salary on the date of the adoption of the plan,
and (2) an amount equal to the annual rate of any compensation for such year
deferred pursuant to the participant's employment agreement in effect on the
date of the adoption of the plan until no earlier than the year after the
participant ceases to be a executive officer of our company. The plan provides
that, in the case of any participant hired after the date of the adoption of the
plan, the participant's "salary" for this purpose would be the sum of (x) the
participant's base salary on the date of hire, and (y) an amount equal to the
annual rate of any compensation for the year of hire deferred pursuant to this
employment agreement in effect on the date of hire until no earlier than the
year after the participant ceases to be an executive officer of our company;
provided that the "salary" for any participant hired after the date of the
adoption of the plan shall not exceed 1.5 times the highest "salary" on the date
of the adoption of the plan of any participant in the plan.
ADJUSTMENTS
In the event that, during a performance period, any recapitalization,
reorganization, merger, acquisition, divestiture, consolidation, spin-off,
combination, liquidation, dissolution, sale of assets or other similar corporate
transaction or event, or any extraordinary event, or any other event which
distorts the applicable performance criteria occurs involving us or one of our
subsidiaries, the committee will adjust or modify, in its sole discretion, the
calculation of operating income, net earnings and/or cash flow, or the
applicable performance goals, to the extent necessary to prevent reduction or
enlargement of participants' awards for such performance period attributable to
such transaction or event.
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<PAGE>
TRANSFER RESTRICTIONS, ETC.
The rights of a participant with respect to awards under the plan are not
transferable by the participant other than by will or the laws of descent and
distribution. No award under the plan will be construed as giving any employee a
right to continued employment with our company.
AMENDMENT
The board of directors may at any time alter, amend, suspend or terminate
the plan in whole or in part; provided, however, that no alteration or amendment
will be effective without stockholder approval if such approval is required by
law.
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RELATED PARTY TRANSACTIONS
We have set forth below a summary description of the material agreements
between Viacom and us (1) relating to this offering and the split-off and (2)
relating to other matters not concerning this offering or the split-off. Some of
these agreements have been filed with the SEC as exhibits to the registration
statement of which this prospectus is a part.
AGREEMENTS BETWEEN VIACOM AND US RELATING TO THIS OFFERING OR THE SPLIT-OFF
INITIAL PUBLIC OFFERING AND SPLIT-OFF AGREEMENT
GENERAL. We have entered into an initial public offering and split-off
agreement with Viacom which governs our respective rights and duties with
respect to some offerings of our common stock and other securities, including
this offering, and the split-off, and sets forth certain covenants we have
agreed to for various periods following this offering and the split-off.
Although Viacom has announced that it currently plans to complete the split-off,
and we have agreed to cooperate with Viacom in all respects to complete the
split-off or similar transaction, it is not obligated to do so. We cannot assure
you as to whether or not or when the split-off will occur or as to the terms of
the split-off. We refer you to "Risk Factors -- Risk Factors Relating to Our
Separation from Viacom."
OFFERINGS OF SECURITIES OF BLOCKBUSTER AND THE SPLIT-OFF. We have agreed
that we will cooperate with Viacom in all respects to accomplish
- any primary offerings of our common stock and other securities prior to
the split-off or other similar transaction; and
- the split-off or similar transaction.
We have also agreed that, at Viacom's direction, we will promptly take all
actions necessary or desirable to effect these transactions, including the
registration under the Securities Act of Viacom's shares of our capital stock.
Viacom has the sole discretion to determine whether to proceed with all or part
of the split-off and all terms of the split-off, including the form, structure
and terms of any transaction(s) and/or offering(s) to effect the split-off and
the timing of and conditions to the completion of the split-off.
EXPENSES. In general, unless otherwise provided for in the initial public
offering and split-off agreement or any other agreement, we and Viacom will pay
our respective costs and expenses incurred in connection with any offering of
our securities prior to the split-off or other similar transaction, including
this offering, and the split-off.
- EXPENSES RELATING TO PRIMARY OFFERINGS OF SECURITIES OF BLOCKBUSTER. We
have generally agreed to pay all costs and expenses relating to any
primary offerings of our common stock and our other securities prior to
the split-off or other similar transaction, including this offering. In
particular, we will pay the underwriting discounts and commissions.
- EXPENSES RELATING TO THE SPLIT-OFF. Viacom has generally agreed to pay all
costs and expenses relating to the split-off or other similar transaction.
ACCESS TO INFORMATION. Generally, we and Viacom have agreed to provide each
other with, upon written request and subject to specified conditions, and for a
specified period of time, access to information relating to the assets, business
and operations of the requesting party. We and Viacom have agreed to keep our
books and records for a specified period of time. Also, we and Viacom have
agreed to cooperate with the other party to allow access to each others'
employees to the extent they are necessary to discuss and explain all requested
information mentioned above and with respect to any claims brought against the
other relating to the conduct of our business prior to completion of the
split-off or similar transaction.
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COVENANTS. We have agreed that, for so long as Viacom is required to
consolidate our results of operations and financial position, we will:
- provide Viacom with financial information regarding our company and our
subsidiaries;
- provide Viacom copies of all quarterly and annual financial information
and other reports and documents we intend to file with the SEC prior to
such filings, as well as final copies upon filing, and to actively consult
with Viacom with respect to any changes made to these reports;
- provide Viacom with copies of our budgets and financial projections, as
well as the opportunity to meet with our management to discuss such
budgets and projections;
- consult with Viacom regarding the timing and content of earnings releases
and cooperate fully and cause our accountants to cooperate fully with
Viacom in connection with any of its public filings;
- not change our auditors without Viacom's prior written consent, and use
our reasonable best efforts to enable our auditors to complete their audit
of our financial statements such that they will date their opinion the
same date that they date their opinion on Viacom's financial statements;
- provide to Viacom and its auditors all information required for Viacom to
meet its schedule for the filing and distribution of its financial
statements;
- make our books and records available to Viacom and its auditors, so that
they may conduct reasonable audits relating to our financial statements;
- adhere to specified accounting standards;
- agree with Viacom on any changes to our accounting policies; and
- agree with Viacom regarding our accounting estimates and principles.
OTHER COVENANTS. The initial public offering and split-off agreement will
also provide that for so long as Viacom beneficially owns 50% or more of our
outstanding shares of common stock, we may not take any action or enter into any
commitment or agreement which may reasonably be anticipated to result, with or
without notice and with or without lapse of time, or otherwise, in a
contravention, or an event of default, by Viacom of:
- any provision of applicable law or regulation, including but not limited
to provisions pertaining to the Internal Revenue Code, or the Employee
Retirement Income Security Act of 1974, as amended;
- any provision of Viacom's certificate of incorporation or by-laws;
- any credit agreement or other material instrument binding upon Viacom; or
- any judgment, order or decree of any governmental body, agency or court
having jurisdiction over Viacom or any of its assets.
ASSIGNMENT AND ASSUMPTION. Under the initial public offering and split-off
agreement, Viacom International Inc. will assign to us its rights and
obligations under the agreement related to the sale of the BLOCKBUSTER MUSIC
video stores to Wherehouse. We have agreed to accept this assignment.
OPTIONS. We will grant to Viacom International Inc. a continuing option,
assignable to Viacom and any of its subsidiaries, to purchase, under specified
circumstances, additional shares of our class B common stock or any shares of
our nonvoting capital stock. These options may be exercised immediately prior to
the issuance of any of our equity securities, other than in this offering or
upon the exercise of the underwriters' over-allotment options:
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- with respect to our class B common stock, only to the extent necessary to
maintain its then-existing percentage of equity value and combined voting
power of our two outstanding classes of common stock; and
- with respect to shares of nonvoting capital stock, to the extent necessary
to own 80% of each outstanding class of such stock.
The purchase price of the shares of class B common stock purchased upon any
exercise of the options, subject to specified exceptions, will be based on the
market price of the class A common stock. The purchase price of nonvoting
capital stock will be the price at which such stock may be purchased by third
parties. This option will terminate when Viacom or its affiliates own less than
45% of the equity of our Company.
INDEMNIFICATION PROCEDURES. The initial public offering and split-off
agreement will set forth the procedures that Viacom and we are to undertake if
either of us demanded to be indemnified by the other under any indemnification
right given in any of the agreements between Viacom and us relating to this
offering or the split-off, other than the tax matters agreement referred to
below.
RELEASE AND INDEMNIFICATION AGREEMENT
We and Viacom will enter into a release and indemnification agreement under
which we and Viacom have agreed to indemnify each other and we and Viacom have
agreed to release each other with respect to some matters.
INDEMNIFICATION RELATING TO OUR ASSETS, BUSINESSES AND OPERATIONS. We have
agreed to indemnify and hold harmless Viacom and some of its affiliates and
their respective officers, directors, employees, agents, heirs, executors,
successors and assigns against any payments, losses, liabilities, damages,
claims and expenses and costs arising out of or relating to:
- our past, present and future assets, businesses and operations and other
assets, businesses and operation or managed by us or persons previously
associated with us, except for assets, businesses and operations of
Paramount Parks, Spelling Entertainment Group Inc. and its subsidiaries,
including Republic Entertainment Inc. and Worldvision Inc., Showtime
Networks Inc., Virgin Interactive Entertainment Limited and Virgin
Interactive Entertainment Inc.; and
- payments, expenses and costs paid by Viacom to a third party associated
with the transfer of our assets, businesses and operations from some of
Viacom entities to Blockbuster Inc. and its subsidiaries.
Viacom has similarly agreed to indemnify us and some of our affiliates and
our and their respective officers, directors, employees, agents, heirs,
executors, successors and assigns for Viacom's past, present and future assets,
businesses and operations, except for assets, businesses and operations for
which we have agreed to indemnify Viacom. In addition, the transition services
agreement, the registration rights agreement and the tax matters agreement
referred to below provide for indemnification between us and Viacom relating to
the substance of such agreements.
INDEMNIFICATION RELATING TO THIS OFFERING AND OTHER OFFERINGS. We have
generally agreed to indemnify Viacom and some of its affiliates against all
liabilities arising out of any material untrue statements and omissions in any
prospectus and any related registration statement filed with the SEC relating to
this offering or any other primary offering of our common stock or our other
securities prior to the date of the split-off or other similar transaction.
However, our indemnification of Viacom does not apply to information relating to
Viacom, excluding information relating to us. Viacom has agreed to indemnify us
for this information.
INDEMNIFICATION RELATING TO THE SPLIT-OFF. We have generally agreed to
indemnify Viacom and some of its affiliates against all liabilities arising out
of any material untrue statements and omissions in any
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and all registration statements, information statements and/or other documents
filed with the SEC in connection with the split-off or other similar
transaction. However, our indemnification of Viacom does not apply to
information relating to Viacom, excluding information relating to us. Viacom has
agreed to indemnify us for this information.
RELEASE RELATING TO ACTIONS BY VIACOM RELATED TO VIACOM'S AND OUR ASSETS,
BUSINESSES AND OPERATIONS. Except for the rights and obligations of Viacom and
us which relate to the agreements between Viacom and us relating to this
offering or the split-off, we have released Viacom and some of its subsidiaries
and affiliates and their respective officers, directors, employees, agents,
heirs, executors, successors and assigns for all losses for any and all past
actions and failures to take actions relating to Viacom's and our assets,
businesses and operations. Viacom has similarly released us.
TRANSITION SERVICES AGREEMENT
We and Viacom will enter into a transition services agreement under which
Viacom will provide to us agreed-upon cash management, accounting, legal,
management information systems, financial and tax services and employee benefit
plan and insurance administration. These services may be changed upon agreement
between Viacom and us. We will pay Viacom a fee for these services equal to
Viacom's cost in providing these services. The fee will be payable monthly in
arrears, 15 days after the close of each month. We believe that the fee for
these services is no less favorable than could have been obtained by us
internally or from someone who had not controlled us. We have also agreed to pay
or reimburse Viacom for any out-of-pocket payments, costs and expenses
associated with these services. The transition services agreement expires upon
the closing of the split-off or similar transaction. We cannot assure you that
we will be able to provide these services internally or find a third party
provider on acceptable terms, if at all, after the expiration of the transition
services agreement.
In addition, some of our executives may be employed by Viacom to provide
transition services following the split-off. For a description of this
arrangement, we refer you to "Management -- Compensation for Services After a
Separation from Viacom."
REGISTRATION RIGHTS AGREEMENT
We and Viacom will enter into a registration rights agreement which requires
us upon request of Viacom to use our reasonable best efforts to register under
the applicable federal and state securities laws any of the shares of our equity
securities of or owned by Viacom for sale in accordance with Viacom's intended
method of disposition, and will take such other actions as may be necessary to
permit the sale in other jurisdictions, subject to specified limitations. Viacom
will also have the right to include the shares of our equity securities it
beneficially owns in other registrations of these equity securities we initiate.
Except for our legal and accounting fees and expenses, the registration rights
agreement provides that Viacom will generally pay all or its pro rata portion of
out-of-pocket costs and expenses relating to each such registration that Viacom
requests or in which Viacom participates. Subject to specified limitations, the
registration rights will be assignable by Viacom and its assigns. The
registration rights agreement will contain indemnification and contribution
provisions which are customary in transactions similar to those contemplated by
this prospectus.
TAX MATTERS AGREEMENT
Following this offering, we and some of our subsidiaries will continue to be
included in the consolidated group of Viacom for U.S. federal income tax
purposes and the combined, consolidated or unitary group of Viacom for various
state and local income tax purposes (the "consolidated group"). Prior to the
completion of this offering, we and Viacom will enter into a tax matters
agreement. For taxable years and portions thereof prior to the date of this
offering, Viacom will pay all taxes for the consolidated group including any
liability resulting from adjustments to tax returns relating to such taxable
years or portions thereof. We and our subsidiaries will continue to be liable
for all taxes that
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are imposed on a separate return basis or on a combined, consolidated or unitary
basis on a group of companies that includes only us and our subsidiaries. The
tax matters agreement requires us and Viacom to make payments to each other
equal to the amount of income taxes which would be paid by us, subject to some
adjustments, as if we and each of our subsidiaries included in the consolidated
group were to file our own combined, consolidated or unitary, or, where only one
of our entities is included in the consolidated group, separate, federal, state
and local income tax returns for any taxable year or portion thereof beginning
after the date of this offering in which we are included in the consolidated
group. This includes any amounts determined to be due as a result of a
redetermination of the tax liability of the consolidated group arising from an
audit or otherwise. With respect to some tax items attributable to periods
following the date of this offering during which we are included in the
consolidated group, such as foreign tax credits, alternative minimum tax
credits, net operating losses and net capital losses, we will have a right of
reimbursement or offset, which will be determined based on the extent to which,
and the time at which, such credits or losses could have been used by us or our
subsidiaries if we had not been included in the consolidated group. This right
to reimbursement or offset continues regardless of whether we are a member of
the consolidated group at the time the attributes could have been used. We are
only entitled to reimbursement for carryback items that we could use on a stand
alone basis to the extent that such items result in an actual tax savings for
the consolidated group. The tax matters agreement also requires us, if so
requested by Viacom, to surrender some tax losses of our subsidiaries that are
resident in the United Kingdom for 1998 and earlier years to Viacom's United
Kingdom subsidiaries without any right to compensation. We have also agreed to
pay Viacom an amount equal to any tax benefit we receive from the exercise of
Viacom stock options by our employees including in years that we are no longer
included in the Viacom consolidated group. We will also pay Viacom the amount of
any income taxes with respect to income tax returns that include only us, which
returns, as described below, will be filed by Viacom.
Viacom will continue to have all the rights of a parent of a consolidated
group filing consolidated federal income tax returns. Viacom will have similar
rights provided for by applicable state and local law with respect to a parent
of a combined, consolidated or unitary group. Viacom will be the sole and
exclusive agent for us in any and all matters relating to income taxes of the
consolidated group. Viacom will have sole and exclusive responsibility for the
preparation and filing of all income tax returns or amended returns with respect
to the consolidated group. Viacom will have the sole right to contest or
compromise any asserted tax adjustment or deficiency and to file, litigate or
compromise any claim for refund on behalf of the consolidated group, except that
Viacom shall not be entitled to compromise any such matter in a manner that
would affect our liability under the tax matters agreement without our consent,
which may not be withheld unreasonably. Under the tax matters agreement, Viacom
will have similar authority with regard to income tax returns that we file on a
separate basis and related tax proceedings. Viacom's authority with respect to
periods during which we are included in the consolidated group will continue to
apply even with respect to tax returns which are filed and for proceedings which
are conducted after the split-off which relate to such periods. This agreement
may result in conflicts of interest between us and Viacom.
Provided that Viacom continues to beneficially own, directly or indirectly,
at least 80% of the combined voting power and the value of our outstanding
capital stock, we will be included for federal income tax purposes in the
consolidated group of which Viacom is the common parent. It is the present
intention of Viacom and its subsidiaries to continue to file a single
consolidated federal income tax return. In certain circumstances, some of our
subsidiaries also will be included with some subsidiaries of Viacom, other than
our subsidiaries, in combined, consolidated or unitary income tax groups for
state and local tax purposes. Each member of the consolidated group for federal
income tax purposes is liable for the federal income tax liability of each other
member of the consolidated group. Similar principles apply with respect to
members of a combined group for state and local tax purposes. Accordingly,
although the tax matters agreement will allocate tax liabilities between us and
Viacom during the period in which we are included in the consolidated group, we
could be liable for the
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federal income tax liability of any other member of the consolidated group in
the event any such liability is incurred, and not discharged, by such other
member. The tax matters agreement will provide, however, that Viacom will
indemnify us to the extent that, as a result of being a member of the
consolidated group, we become liable for the federal income tax liability of any
other member of the consolidated group, other than our subsidiaries.
Viacom will obtain a private letter ruling from the Internal Revenue Service
prior to any split-off transaction as described above in "Separation from
Viacom." In connection with seeking such ruling request, some representations
have been and will be made to the Internal Revenue Service regarding our
business. In the tax matters agreement, we have agreed that during the two year
period following a split-off we and our subsidiaries will not enter into some
types of transactions, including sales of assets, mergers, liquidations, stock
issuances, and stock redemptions, without the consent of Viacom unless Viacom
receives a ruling from the Internal Revenue Service or an opinion of counsel to
the effect that such transaction will not adversely affect the tax-free status
of the split-off. We will generally be responsible for, among other things, any
taxes imposed on Viacom or its subsidiaries as a result of the split-off failing
to qualify as a tax-free transaction on account of any breach of our
representations or agreements or any action or failure to act by us or our
subsidiaries or any transaction involving our, or our subsidiaries', assets,
stock or business following the split-off, regardless of whether such
transaction is within our control.
OTHER AGREEMENTS
REVENUE-SHARING
We have a revenue-sharing agreement with Paramount, which is an affiliate of
Viacom. Under this agreement, we have agreed to share an agreed-upon percentage
of our rental revenue with Paramount for a limited period of time in exchange
for minimal up front payments for videocassettes priced for rental. This
percentage generally declines over a period of weeks following the initial
release of the movie. We also agree to take a minimum number of copies of each
movie released by Paramount. This agreement, subject to limitations, allows us
to sell the previously viewed tapes to our customers.
OTHER AGREEMENTS
There are various other agreements between us and Viacom and its affiliates
which we believe are not material to us. We believe the terms of these
agreements approximate those which would be available from third parties.
OTHER RELATED PARTY TRANSACTIONS
RELATED PARTY TRANSACTION
We refer you to "Management -- Compensation Committee Interlocks and Insider
Participation" with respect to a related party transaction.
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PRINCIPAL STOCKHOLDER
All of the shares of class B common stock outstanding prior to the
completion of this offering are beneficially owned by Viacom. Upon completion of
this offering, Viacom will beneficially own 100% of the class B common stock.
Except for Viacom, we are not aware of any person or group that will
beneficially own more than 5% of the outstanding shares of our common stock
following this offering.
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DESCRIPTION OF CAPITAL STOCK
THE FOLLOWING DESCRIPTION IS ONLY A SUMMARY OF THE MATERIAL PROVISIONS OF
OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS. WE REFER YOU
TO THE MORE DETAILED PROVISIONS OF (1) OUR CERTIFICATE OF INCORPORATION AND
BYLAWS, COPIES OF WHICH ARE FILED WITH THE SEC AS EXHIBITS TO THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS IS A PART AND (2) APPLICABLE LAW.
Our authorized capital stock consists of shares of capital stock, of which
- shares are designated as class A common stock, par value $ .01
per share;
- shares are designated as class B common stock, par value $ .01
per share; and
- shares of preferred stock, par value $ .01 per share, of which no
shares of preferred stock are outstanding as of the date hereof.
Of the shares of common stock designated as class A common stock, shares, or
about % of the equity value of our company, are being offered in connection
with this offering, assuming that the underwriters do not exercise their
over-allotment options. Of the shares of common stock designated as class B
common stock, shares, or about % of the equity value of our company, will be
outstanding and held by Viacom upon consummation of the offering, assuming the
underwriters do not exercise their over-allotment options. Each of the class A
common stock and the class B common stock constitutes a series of common stock
under the General Corporation Law of the State of Delaware.
COMMON STOCK
VOTING RIGHTS. Holders of class A common stock and holders of class B
common stock generally have identical rights, except:
- holders of class A common stock are entitled to one vote per share; and
- holders of class B common stock are entitled to five votes per share;
with respect to each matter presented to our stockholders on which the holders
of common stock are entitled to vote. The holders of class A common stock and
class B common stock are not entitled to cumulate their votes in the election of
directors. Generally, all matters to be voted on by our stockholders must be
approved by a majority, or, in the case of election of directors, by a
plurality, of the votes entitled to be cast by all shares of class A common
stock and class B common stock present in person or represented by proxy, voting
together as a single class. In particular, amendments to our certificate of
incorporation must generally be approved by a majority of the combined voting
power of both classes of common stock, voting together as a single class.
However, the approval of 75% of the combined voting power is required to amend
some provisions of our certificate of incorporation and bylaws as described
below. In addition, amendments to our certificate of incorporation that would
alter or change the powers, preferences or special rights of either class of
common stock so as to affect them adversely also must be approved by a majority
of the votes entitled to be cast by the holders of the shares affected by the
amendment, voting as a separate class. Holders of class A common stock are not
entitled to vote on any change in the powers or other rights of the class B
common stock that would not adversely affect the rights of class A common stock.
For example, any provision for the conversion of the class B common stock into
class A common stock on a one-for-one basis is not considered to adversely
affect the rights of the class A common stock.
DIVIDENDS. Holders of class A common stock and class B common stock will
share equally in any dividend declared by our board of directors, subject to any
preferential rights of any outstanding
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preferred stock. Dividends consisting of shares of class A common stock and
class B common stock may be paid only as follows:
- shares of class A common stock may be paid only to holders of shares of
class A common stock, and shares of class B common stock may be paid only
to holders of class B common stock; and
- shares shall be paid proportionally with respect to each outstanding share
of class A common stock and class B common stock.
CONVERSION. Each share of class B common stock held by Viacom or any of its
affiliates may be converted into a share of class A common stock at the class B
holder's option prior to the split-off or other similar transaction. However, if
20% or less of the value of our outstanding stock is issued by us in this
offering or otherwise prior to the split-off or similar transaction, each share
of class B common stock will automatically convert into one share of class A
common stock immediately prior to the split-off or other similar transaction,
unless and to the extent that Viacom has received an opinion of counsel that
such conversion provision is likely to prevent or materially delay the issuance
of Internal Revenue Service rulings requested by Viacom or will otherwise create
a significant risk of a material adverse tax consequence to Viacom or its
stockholders. After the split-off or other similar transaction, any outstanding
shares of class B common stock will no longer be convertible into shares of
class A common stock.
OTHER RIGHTS. Unless approved by a majority of each class of common stock,
in the event of our reorganization or consolidation with one or more
corporations or a merger with another corporation in which shares of our common
stock are converted into or exchangeable for shares of stock, other securities
or property, including cash, all holders of our common stock, regardless of
class, will be entitled to receive the same kind and number of shares of stock
and other securities and property, including cash except that the relative
voting rights of the classes may be retained. In the event of a liquidation,
dissolution or winding-up of our company, all holders of common stock,
regardless of class, are entitled to share ratably in any assets available for
distributions to holders of shares of common stock.
The outstanding shares of our common stock are, and the shares of class A
common stock being offered to you will be, upon your payment, validly issued,
fully paid and nonassessable.
No shares of any class of common stock (1) are subject to redemption or (2)
have any preemptive rights to purchase additional shares of common stock.
PREFERRED STOCK
Our board of directors is empowered, without approval of our stockholders,
to cause shares of preferred stock to be issued from time to time in one or more
series, with the numbers of shares of each series and the designation, powers,
privileges, preferences and rights of the shares of each such series and the
qualifications, limitations and restrictions thereof as fixed by our board of
directors. Among the specific matters that may be determined by our board of
directors are:
- the designation of each series;
- the number of shares of each series;
- the rate of dividends, if any;
- whether dividends, if any, shall be cumulative or noncumulative;
- the terms of redemption, if any;
- the amount payable in the event of any voluntary or involuntary
liquidation, dissolution or winding-up of the affairs of our company;
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- rights and terms of conversion or exchange, if any;
- restrictions on the issuance of shares of the same series or any other
series, if any; and
- voting rights, if any.
Our board of directors may, without stockholder approval, issue preferred
stock with voting and other rights that could adversely affect all of the rights
of the holders of class A common stock and class B common stock, including, but
without limitation, their voting power. We have no present plans to issue any
shares of preferred stock. The ability of our board of directors to issue
preferred stock without stockholder approval could have the effect of delaying,
deferring or preventing a change in control of us or the removal of our existing
management.
LIMITATION ON LIABILITY OF DIRECTORS
Our certificate of incorporation provides that our directors will not be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability imposed by law, as in effect
from time to time:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for any act or omission not in good faith or which involved intentional
misconduct or a knowing violation of law;
- for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of Delaware corporate law; or
- for any transaction from which the director derived an improper personal
benefit.
The inclusion of this provision in our certificate of incorporation may have
the effect of reducing the likelihood of derivative litigation against our
directors, and may discourage or deter stockholders or us from bringing a
lawsuit against our directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefitted us and our
stockholders.
ANTI-TAKEOVER EFFECTS OF SOME OF THE PROVISIONS OF OUR CERTIFICATE OF
INCORPORATION AND BYLAWS AND SECTION 203 OF DELAWARE CORPORATE LAW
Some of the provisions of our certificate of incorporation and bylaws and
Section 203 of Delaware corporate law could have the following effects, among
others:
- delaying, deferring or preventing a change in control;
- delaying, deferring or preventing the removal of our existing management;
- deterring potential acquirors from making an offer to our stockholders;
and
- limiting our stockholders' opportunity to realize premiums over prevailing
market prices of our common stock in connection with offers by potential
acquirors.
This could be the case notwithstanding that a majority of our stockholders might
benefit from such a change in control or offer. The following is a summary of
these provisions.
SOME OF THE PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS
CLASSIFIED BOARD OF DIRECTORS. Our certificate of incorporation and bylaws
provide for our board of directors to be divided into three classes of directors
serving staggered three-year terms. Each class, to the extent possible, will be
equal in number. The size of our board of directors will not be less than three
nor more than twelve. Each class holds office until the third annual
stockholders' meeting for
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election of directors following the most recent election of such class, except
that the initial terms of the three classes expire in 2000, 2001 and 2002,
respectively.
DIRECTORS, AND NOT STOCKHOLDERS, FIX THE SIZE OF OUR BOARD OF
DIRECTORS. Our certificate of incorporation and bylaws provide that the number
of directors shall be fixed from time to time exclusively pursuant to a
resolution adopted by a majority of our board of directors, but in no event
shall it consist of less than three nor more than twelve.
DIRECTORS ARE REMOVED FOR CAUSE ONLY. Our certificate of incorporation and
bylaws provide that, on or after the time when Viacom and its affiliates own
less than a majority of the combined voting power of our outstanding common
stock, which we refer to this as the "trigger date," our directors may be
removed only for "cause" by the affirmative vote of the holders of at least a
majority of the combined voting power of our outstanding voting common stock.
Cause is narrowly defined in our certificate of incorporation. However, prior to
the trigger date, our directors may be removed with or without cause.
BOARD VACANCIES TO BE FILLED BY REMAINING DIRECTORS, AND NOT
STOCKHOLDERS. Our certificate of incorporation and bylaws provide that any
vacancies on our board of directors will be filled by the affirmative vote of
the majority of the remaining directors, even if less than a quorum, or by a
sole remaining director. In any event, no vacancy shall be filled by our
stockholders.
NO STOCKHOLDER ACTIONS BY WRITTEN CONSENT. Our bylaws provide that, on or
after the trigger date, stockholders may not act by written consent in lieu of a
meeting. However, prior to the trigger date, stockholders may act by written
consent.
NO SPECIAL MEETINGS CALLED BY STOCKHOLDERS. Our bylaws provide that, on or
after the trigger date, special meetings of the stockholders may not be called
by the stockholders and instead may be called only by
- any officer at the request of a majority of our board of directors;
- our chairman; or
- our president.
However, prior to the trigger date, special meetings may be called by
holders of at least the majority of the combined voting power of our outstanding
common stock.
ADVANCE NOTICE FOR STOCKHOLDER MEETINGS. Our bylaws contain provisions
requiring that advance notice be delivered to us of any business to be brought
by a stockholder before an annual meeting and providing for procedures to be
followed by stockholders in nominating persons for election to our board of
directors. Generally, such advance notice provisions require that the
stockholder must give written notice to us not less than 90 days nor more than
120 days before the first anniversary of the preceding year's annual meeting of
stockholders. Our bylaws provide that the notice must set forth specific
information regarding the stockholder and each director nominee by the
stockholder or other business proposed by the stockholder. Our certificate of
incorporation and by-laws provide that as long as Viacom beneficially owns 10%
or more of the combined voting power of the outstanding common stock, Viacom is
exempt from the foregoing provision.
SUPERMAJORITY VOTE REQUIRED TO AMEND SPECIFIED PROVISIONS. Our certificate
of incorporation and bylaws provide that the provisions described above may only
be amended by holders of at least 75% of the combined voting power of our
outstanding common stock.
SECTION 203 OF DELAWARE CORPORATE LAW
Our company is a Delaware corporation and subject to Section 203 of Delaware
corporate law. Generally, Section 203 prohibits a publicly held Delaware company
from engaging in a "business
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combination" with an "interested stockholder" for a period of three years after
the time such stockholder became an interested stockholder unless, as described
below, specified conditions are satisfied. Thus, it may make acquisition of
control of our company more difficult. The prohibitions in Section 203 of
Delaware corporate law do not apply if:
- prior to the time the stockholder became an interested stockholder, the
board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming
an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
- at or subsequent to the time the stockholder became an interested
stockholder, the business combination is approved by the board of
directors and authorized by the affirmative vote of at least 66 2/3% of
the outstanding voting stock that is not owned by the interested
stockholder.
Under Section 203 of Delaware corporate law, a "business combination"
includes:
- any merger or consolidation of the corporation with the interested
stockholder;
- any sale, lease, exchange or other disposition, except proportionately as
a stockholder of such corporation, to or with the interested stockholder
of assets of the corporation having an aggregate market value equal to 10%
or more of either the aggregate market value of all the assets of the
corporation or the aggregate market value of all the outstanding stock of
the corporation;
- transactions resulting in the issuance or transfer by the corporation of
stock of the corporation to the interested stockholder;
- transactions involving the corporation which have the effect of increasing
the proportionate share of the corporation's stock of any class or series
which is owned by the interested stockholder; or
- transactions in which the interested stockholder receives financial
benefits provided by the corporation.
Under Section 203 of Delaware corporate law, an "interested stockholder"
generally is
- any person that owns 15% or more of the outstanding voting stock of the
corporation;
- any person that is an affiliate or associate of the corporation and was
the owner of 15% or more of the outstanding voting stock of the
corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether or not such person
is an interested stockholder; and
- the affiliates or associates of either of the above-stated categories
person.
Because Viacom owned more than 15% of our voting stock before we became a
public company in this offering, Section 203 of Delaware corporate law by its
terms is currently not applicable to business combinations with Viacom even
though Viacom owns 15% or more of our outstanding stock. If any other person
acquires 15% or more of our outstanding stock, such person will be subject to
the provisions of Section 203 of the Delaware corporate law.
Under some circumstances, Section 203 of Delaware corporate law makes it
more difficult for an "interested stockholder" to effect various business
combinations with us for a three-year period, although our stockholders may
elect to exclude us from the restrictions imposed thereunder. By virtue
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of its beneficial ownership of our class B common stock, Viacom is in a position
to elect to exclude us from the restrictions under Section 203. Currently,
Viacom has no intention to do so.
TRANSACTIONS WITH INTERESTED PARTIES
Our certificate of incorporation includes provisions addressing potential
conflicts of interest between us and Viacom and its non-Blockbuster-related
subsidiaries. In addition, our certificate of incorporation includes provisions
regulating and defining our conduct as they may involve us and Viacom and our
and its subsidiaries, directors and officers. Our certificate of incorporation
provides that no contract:
- between us and Viacom or any of its non-Blockbuster-related subsidiaries;
or
- between us and any entity in which one or more of our directors has a
financial interest, which we refer to this type of entity as a "related
entity"; or
- between us and any officer or director of our company, Viacom, any
subsidiary of Viacom or any related entity;
shall be void or voidable because:
- Viacom, any non-Blockbuster-related subsidiary of Viacom or any related
entity, or any of their or our officers or directors are parties to the
contract; or
- any of those officers or directors is present at, participates in or votes
to authorize the contract.
CORPORATE OPPORTUNITIES
Our certificate of incorporation provides that, except as Viacom may
otherwise agree in writing, neither Viacom nor any non-Blockbuster-related
subsidiary of Viacom shall have a duty to refrain from engaging directly or
indirectly in the same or similar business activities or lines of business as
ours.
The foregoing provisions of our certificate of incorporation shall expire on
the date that Viacom and its affiliates no longer owns at least 20% of the
combined voting power of our outstanding common stock and no person who is a
director or officer of our company is also a director or officer of Viacom or
its subsidiaries.
The affirmative vote of the holders of more than 75% of the combined voting
power of our common stock is required to alter, amend or repeal in a manner
adverse to the interests of Viacom, or adopt any provision adverse to the
interests of Viacom including provisions with respect to the interested party
and corporate opportunity provisions described above. Accordingly, so long as
Viacom and its affiliates own at least 25% of the combined voting power of our
outstanding common stock, it can prevent any such alteration, amendment, repeal
or adoption.
TRANSFER AGENT AND REGISTRAR
EquiServe, L.P. will serve as the transfer agent and registrar for our
common stock.
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DESCRIPTION OF CREDIT AGREEMENT
THE FOLLOWING IS A SUMMARY OF THE MATERIAL PROVISIONS OF THE CREDIT
AGREEMENT. A COPY OF THE CREDIT AGREEMENT IS FILED AS AN EXHIBIT HERETO.
On June 21, 1999, we entered into a $1.9 billion credit agreement with a
syndicate of lenders. The credit agreement is comprised of three tranches.
Tranche A is a $700 million revolving loan maturing on July 1, 2004. Tranche B
is a $600 million term loan also maturing on July 1, 2004. Tranche C is a $600
million revolving loan which matures on June 19, 2000. On June 23, 1999, we
borrowed $1.6 billion under this credit agreement.
We have used or will use the borrowings under the credit agreement:
- to pay about $65 million which is a portion of the purchase price to
affiliates of Viacom to acquire the non-U.S. operations of our business
that we did not already own;
- to repay a promissory note issued by us to Viacom International Inc. as a
dividend in the principal amount of $1.4 billion plus accrued and unpaid
interest;
- to repay promissory notes issued by us to Viacom International Inc. in the
aggregate principal amount of about $77 million plus accrued and unpaid
interest for acquisitions of video stores;
- to pay the fees and expenses of about $15 million related to the
origination of the credit agreement to the syndicate of lenders; and
- for working capital and general corporate purposes.
The credit agreement contains provisions for the mandatory prepayment of
loans as follows:
- If we issue equity securities, unless we are Investment Grade, as defined
in the credit agreement, we will be required to use 25% of the net cash
proceeds to repay the Tranche A loan and Tranche B loan, on a pro rata
basis, until $400 million of loans have been repaid;
- If we incur indebtedness in a capital market transaction, unless we are
Investment Grade, we are required to use 75% of the net cash proceeds to
repay the Tranche A and Tranche B loans, on a pro rata basis, until $400
million, including amounts repaid from an issuance of equity stated above,
have been repaid; and
- If we sell assets, other than to franchisees, we will be required to use
50% of the net cash proceeds from such sales over $100 million, to repay
the Tranche A and Tranche B loans, on a pro rata basis, until $500 million
of the loans have been repaid.
Borrowings under the credit agreement accrue interest at a rate equal to the
interest rates prevailing on the date of determination in the London interbank
market for the interest period selected by us, plus a margin over this rate. The
margin and the commitment fees on the undrawn portion of the facility vary based
on specified leverage ratios.
The credit agreement contains customary covenants for us not to, among other
things:
- grant liens;
- merge;
- sell substantially all of our assets;
- enter into speculative interest rate or currency hedges;
- incur debt above $175 million at the subsidiary level;
- pay dividends on or repurchase our common stock or make other
distributions, in each case other than dividends of $90 million, $115
million, $130 million, $145 million and $160 million in the first five
years following the completion of this offering, respectively;
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- transfer assets to subsidiaries; and
- invest in or make loans to any business, other than investments or loans
that are reasonably related to the operation or growth of our core rental
business.
We will also be required to comply with financial covenants with respect to: (1)
maximum leverage ratio and (2) a minimum fixed charge coverage ratio. The credit
agreement also contains some customary affirmative covenants.
Events of default under the credit agreement include, among others: failure
to pay principal and interest when due, breach of some of the representations
and warranties, failure to perform or observe some of the covenants, bankruptcy,
and change of control. Under the credit agreement, change of control includes:
- control of 50% or more of our outstanding common stock by persons other
than Viacom or National Amusements, Inc.;
- our board of directors ceases to be controlled by our continuing
directors; or
- we enter into a merger or purchase agreement which cedes power to control
our management or policies prior to consummation of the merger or
purchase, as applicable.
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SHARES ELIGIBLE FOR FUTURE SALE
The shares of our class A common stock sold in this offering, or
shares if the underwriters exercise their over-allotment options in full,
will be freely tradable without restriction under the Securities Act of 1933, as
amended, except for any such shares which may be acquired by an "affiliate" of
ours, as that term is defined in Rule 144 promulgated under the Securities Act,
which shares will remain subject to the resale limitations of Rule 144.
The shares of our class B common stock that will be held by Viacom
after this offering constitute "restricted securities" within the meaning of
Rule 144, and will be eligible for sale by Viacom in the open market after this
offering, subject to some contractual lockup provisions and the applicable
requirements of Rule 144, both of which are described below. We have granted
some registration rights to Viacom. We refer you to "Related Party Transactions
- -- Agreements Between Viacom and Us -- Registration Rights Agreement."
Generally, Rule 144 provides that a person who has beneficially owned
"restricted securities" for at least one year is entitled to sell on the open
market in brokers' transactions within any three month period a number of shares
that does not exceed the greater of:
- 1% of the then outstanding shares of the common stock; and
- the average weekly trading volume in the common stock on the open market
during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to some post-sale notice requirements and
the availability of current public information concerning us.
In the event that any person is deemed to be our affiliate, and such
affiliate purchases shares of our class A common stock pursuant to this offering
or acquires shares of our class A common stock pursuant to our employee benefit
plan, the shares held by such person are required under Rule 144 to be sold in
brokers' transactions, subject to the volume limitations described above. Shares
properly sold in reliance upon Rule 144 to persons who are not affiliates are
thereafter freely tradable without restriction.
Sales of substantial amounts of our common stock in the open market, or the
availability of such shares for sale, could adversely affect the price of our
common stock. Viacom has advised us that it intends to offer its common stock in
a tax-free split-off expected to be completed within 12 months from the date a
favorable tax ruling is received from the Internal Revenue Service. We refer you
to "Summary -- Separation from Viacom," "Separation from Viacom" and "Risk
Factors -- Risk Factors Relating to the Securities Market and Ownership of Our
Stock -- We Cannot Predict the Effect that the Split-off Will Have on the Price
of Our Common Stock; The Price of Our Common Stock Could Be Adversely Affected
by Sales of Substantial Amounts of Our Common Stock in the Public Market." Any
shares distributed by Viacom will be eligible for immediate resale to the public
market without restrictions by persons other our affiliates. Our affiliates
would be subject to the restrictions of Rule 144 described above other than the
one-year holding period requirement.
We and our officers and directors and Viacom and its officers and directors
have agreed that, for a period of 180 days from the date of this prospectus, we
and our officers and directors and Viacom and its officers and directors will
not, without the prior written consent of Salomon Smith Barney Inc. and Salomon
Brothers International Limited, dispose of or hedge any shares of our class A
common stock or any securities convertible into or exchangeable for class A
common stock. Salomon Smith Barney Inc. and Salomon Brothers International
Limited in their sole discretion may release any of the securities subject to
these lock-up agreements at any time without notice. This offering is
specifically exempted from this agreement. We refer you to "Underwriting."
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MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a discussion of the material United States federal income
and estate tax consequences of the ownership and disposition of the class A
common stock applicable to Non-United States Holders of such class A common
stock. For the purpose of this discussion, a "Non-United States Holder" is any
holder that for United States federal income tax purposes is not a "United
States person," as defined below. This discussion does not address all aspects
of United States federal income and estate taxation that may be relevant in
light of such Non-United States Holder's particular facts and circumstances,
such as being a U.S. expatriate, and does not address any tax consequences
arising under the laws of any state, local or non-United States taxing
jurisdiction. Furthermore, the following discussion is based on current
provisions of the Internal Revenue Code of 1986, as amended, and administrative
and judicial interpretations thereof, all as in effect on the date hereof, and
all of which are subject to change, possibly with retroactive effect. We have
not and will not seek a ruling from the Internal Revenue Service with respect to
the United States federal income and estate tax consequences described below,
and as a result, there can be no assurance that the Internal Revenue Service
will not disagree with or challenge any of the conclusions set forth in this
discussion. For purposes of this discussion, the term "United States person"
means:
- a citizen or resident of the United States;
- a corporation, partnership, or other entity created or organized in the
United States or under the laws of the United States or of any political
subdivision thereof;
- an estate whose income is included in gross income for United States
federal income tax purposes regardless of its source; or
- a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States persons who
have the authority to control all substantial decisions of the trust.
DIVIDENDS
If we pay a dividend, any dividend paid to a Non-United States Holder of
class A common stock generally will be subject to United States withholding tax
either at a rate of 30% of the gross amount of the dividend or such lower rate
as may be specified by an applicable tax treaty. Dividends received by a
Non-United States Holder which are effectively connected with a United States
trade or business conducted by such Non-United States Holder are exempt from
such withholding tax. However, such effectively connected dividends, net of some
types of deductions and credits, are taxed at the same graduated rates
applicable to United States persons.
In addition to the graduated tax described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a United
States trade or business of the corporate Non-United States Holder may also be
subject to a branch profits tax at a rate of 30% or such lower rate as may be
specified by an applicable tax treaty.
A Non-United States Holder of class A common stock that is eligible for a
reduced rate of withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate claim for refund
with the Internal Revenue Service.
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GAIN ON DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
his class A common stock unless:
- such gain is effectively connected with a United States trade or business
of the Non-United States Holder, which gain, in the case of a corporate
Non-United States Holder, must also be taken into account for branch
profits tax purposes;
- the Non-United States Holder is an individual who holds such class A
common stock as a capital asset within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended, and who is present in the
United States for a period or periods aggregating 183 days or more during
the calendar year in which such sale or disposition occurs and some other
conditions are met; or
- we are or have been a "United States real property holding corporation"
for federal income tax purposes at any time within the shorter of the
five-year period preceding such disposition or such holder's holding
period.
We have determined that we are not and do not believe that we will become a
"United States real property holding corporation" for United States federal
income tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, we must report annually to the Internal Revenue Service the
amount of dividends paid, the name and address of the recipient, and the amount,
if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax
treaties or other agreements, the Internal Revenue Service may make its reports
available to tax authorities in the recipient's country of residence.
Dividends paid to a Non-United States Holder at an address within the United
States may be subject to backup withholding at a rate of 31% if the Non-United
States Holder fails to establish that it is entitled to an exemption or to
provide a correct taxpayer identification number and other information to the
payer. Backup withholding will generally not apply to dividends paid to
Non-United States Holders at an address outside the United States on or prior to
December 31, 2000 unless the payer has knowledge that the payee is a United
States person. Under recently finalized Treasury Regulations regarding
withholding and information reporting (we refer to these regulations as the "New
Regulations"), payment of dividends to Non-United States Holders at an address
outside the United States after December 31, 2000 may be subject to backup
withholding at a rate of 31% unless such non-United States Holder satisfies
certification requirements.
The payment of the proceeds of the disposition of class A common stock to or
through the United States office of a broker is subject to information reporting
and backup withholding at a rate of 31% unless the holder certifies its
non-United States status under penalties of perjury or otherwise establishes an
exemption. Generally, the payment of the proceeds of the disposition by a
Non-United States Holder of class A common stock outside the United States to or
through a foreign office of a broker will not be subject to backup withholding
but will be subject to information reporting requirements if the broker is:
- a United States person;
- a "controlled foreign corporation" for United States tax purposes; or
- a foreign person 50% or more of whose gross income for specified periods
is from the conduct of a United States trade or business unless such
broker has documentary evidence in its files of the holder's non-United
States status and some conditions are met or the holder otherwise
establishes an exemption.
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Under the New Regulations backup withholding may apply to any payment made after
December 31, 2000 which the broker is required to report if such broker has
actual knowledge that the payee is a United States person.
In general, the New Regulations, do not significantly alter the substantive
withholding and information reporting requirements but would alter the
procedures for claiming benefits of an income tax treaty and change the
certification procedures relating to the receipt by intermediaries of payments
on behalf of the beneficial owner of shares of class A common stock. Non-United
States Holders should consult their tax advisors regarding the effect, if any,
of the New Regulations on an investment in the class A common stock. The New
Regulations are generally effective for payments made after December 31, 2000.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.
ESTATE TAX
An individual Non-United States Holder who owns class A common stock at the
time of his death or had made some types of lifetime transfers of an interest in
class A common stock will be required to include the value of such class A
common stock in such holder's gross estate for United States federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
THE FOREGOING DISCUSSION IS A SUMMARY OF THE PRINCIPAL FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF CLASS A
COMMON STOCK BY NON-UNITED STATES HOLDERS. ACCORDINGLY, INVESTORS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE INCOME TAX CONSEQUENCES OF
THE OWNERSHIP AND DISPOSITION OF CLASS A COMMON STOCK, INCLUDING THE APPLICATION
AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING
JURISDICTION.
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UNDERWRITING
We intend to offer our class A common stock in the United States and Canada
through a number of U.S. underwriters as well as outside the United States and
Canada through a number of international managers. Salomon Smith Barney Inc. and
Bear, Stearns & Co. Inc. are acting as U.S. representatives of each of the U.S.
underwriters named below. Salomon Brothers International Limited and Bear,
Stearns International Limited are acting as International Representatives of
each of the international managers named below. Subject to the terms and
conditions stated in a U.S. underwriting agreement dated the date hereof between
us and each of the U.S. underwriters, and an international underwriting
agreement dated the date hereof between us and each of the international
managers, each U.S. underwriter and each international manager named below has
severally agreed to purchase, and we have agreed to sell to such U.S.
underwriter and such international manager, the number of shares set forth
opposite the name of such U.S. underwriter and such international manager.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER SHARES
- ---------------------------------------------------------------------------------- -----------
<S> <C>
Salomon Smith Barney Inc..........................................................
Bear, Stearns & Co. Inc...........................................................
Credit Suisse First Boston Corporation............................................
Goldman, Sachs & Co...............................................................
J.P. Morgan Securities Inc........................................................
Banc of America Securities LLC....................................................
ING Baring Furman Selz LLC........................................................
PaineWebber Incorporated..........................................................
Schroder & Co. Inc................................................................
SG Cowen Securities Corporation...................................................
Wit Capital Corporation...........................................................
-----------
Subtotal......................................................................
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGER SHARES
- ---------------------------------------------------------------------------------- -----------
<S> <C>
Salomon Brothers International Limited............................................
Bear, Stearns International Limited...............................................
Credit Suisse First Boston (Europe) Limited.......................................
Goldman Sachs International.......................................................
J.P. Morgan Securities Ltd........................................................
Bank of America International Limited.............................................
ING Barings Limited, as agent for ING Bank N.V.,
London Branch...................................................................
PaineWebber International (U.K.) Ltd..............................................
J. Henry Schroder & Co. Limited...................................................
SG Cowen International L.P........................................................
-----------
Subtotal......................................................................
Total.........................................................................
-----------
-----------
</TABLE>
The U.S. underwriters and the international managers are collectively
referred to as the underwriters. Representatives refers to the U.S.
representatives and the international representatives collectively. The initial
public offering price per share and the total underwriting discounts and
commissions per share of class A common stock are identical under the U.S.
underwriting agreement and the international underwriting agreement.
The U.S. underwriting agreement and the international underwriting agreement
each provide that the obligations of the several underwriters to purchase the
shares included in this offering are subject to approval of some legal matters
by counsel and to some other conditions set forth in those
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agreements. The several underwriters are obligated to purchase all the shares,
other than those covered by the over-allotment options described below, if they
purchase any of the shares. Under some circumstances, under the U.S.
underwriting agreement and the international underwriting agreement, the
commitments of non-defaulting underwriters may be increased. The closings with
respect to the sale of shares of class A common stock to be purchased by the
U.S. underwriters and the international managers are conditioned upon one
another. The underwriters reserve the right to withdraw, cancel or modify such
offer and to reject orders in whole or in part.
The underwriters propose to offer some of the shares directly to the public
at the initial public offering price set forth on the cover page of this
prospectus and some of the shares to some dealers at the initial public offering
price less a concession not in excess of $ per share. The underwriters
may allow, and such dealers may reallow, a concession not in excess of
$ per share on sales to some other dealers. If all of the shares are
not sold at the initial offering price, the representatives may change the
public offering price and the other selling terms. The representatives have
advised us that the underwriters do not intend to confirm any sales to any
accounts over which they exercise discretionary authority.
We have granted to the U.S. underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to additional shares of our
class A common stock at the public offering price less the underwriting
discounts and commissions. The U.S. underwriters may exercise such option solely
for the purpose of covering over-allotments, if any, in connection with this
offering. To the extent such option is exercised, each U.S. underwriter will be
obligated, subject to some conditions, to purchase a number of additional shares
about proportionate to such U.S. underwriter's initial purchase commitment.
We also have granted to the international managers an option, exercisable
for 30 days from the date of this prospectus, to purchase up to additional
shares of our class A common stock to cover over-allotments, if any, on terms
similar to those granted to the U.S. underwriters.
At our request, some of the underwriters have reserved up to % of the
shares of class A common stock for sale at the initial public offering price to
persons who are directors, officers or employees of us, or who are otherwise
associated with us and our affiliates, and who have advised us of their desire
to purchase these shares through a directed share program. The number of shares
of class A common stock available for sale to the general public will be reduced
to the extent of sales of shares under the directed share program to any of the
persons for whom they have been reserved. Any shares not so purchased will be
offered by the underwriters on the same basis as all other shares of class A
common stock offered in the offering. We have agreed to indemnify those
underwriters against some liabilities and expenses, including liabilities under
the Securities Act of 1933 in connection with the sales of shares under the
directed share program.
We and our officers and directors and Viacom and its officers and directors
have agreed that, for a period of 180 days from the date of this prospectus, we
and our officers and directors and Viacom and its officers and directors will
not, without the prior written consent of Salomon Smith Barney Inc. and Salomon
Brothers International Limited, dispose of or hedge any shares of our class A
common stock or any securities convertible into or exchangeable for class A
common stock. Salomon Smith Barney Inc. and Salomon Brothers International
Limited in their sole discretion may release any of the securities subject to
these lock-up agreements at any time without notice.
Prior to this offering, there has been no public market for the class A
common stock. Consequently, the initial public offering price for the shares was
determined by negotiations between us and Viacom, on the one hand, and the U.S.
representatives and the international representatives, on the other. Among the
factors considered in determining the initial public offering price were our
results of operations, our current financial condition, our future prospects,
our markets, the economic conditions in and future prospects for the industry in
which we compete, our management, and
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currently prevailing general conditions in the equity securities markets,
including current market valuations of publicly traded companies considered
comparable to Blockbuster. We cannot assure you, however, that the prices at
which the shares will sell in the public market after this offering will not be
lower than the price at which they are sold by the underwriters or that an
active trading market in the class A common stock will develop and continue
after this offering.
The following table shows the underwriting discounts and commissions to be
paid to the U.S. underwriters and the international managers by us in connection
with this offering. These amounts are shown assuming both no exercise and full
exercise of the underwriters' options to purchase additional shares of class A
common stock.
<TABLE>
<CAPTION>
PAID BY BLOCKBUSTER
--------------------------
<S> <C> <C>
NO EXERCISE FULL EXERCISE
----------- -------------
Per share......................................................... $ $
Total............................................................. $ $
----------- -------------
----------- -------------
</TABLE>
The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the terms of the intersyndicate agreement, the U.S. underwriters and the
international managers are permitted to sell shares of our class A common stock
to each other for purposes of resale at the initial public offering price, less
an amount not greater than the selling concession. Under the terms of the
intersyndicate agreement, the U.S. underwriters and any dealer to whom they sell
shares of our class A common stock will not offer to sell or sell shares of our
class A common stock to persons who are non-U.S. or non-Canadian persons, and
the international managers and any dealer to whom they sell shares of our class
A common stock will not offer to sell or sell shares of our class A common stock
to U.S. persons or to Canadian persons or to persons they believe intend to
resell to U.S. or Canadian persons, except in the case of transactions under the
terms of the intersyndicate agreement.
For investors outside the United States: neither we nor any underwriter has
taken or will take any action in any jurisdiction that would permit a public
offering of the class A common stock or possession or distribution of this
prospectus in any jurisdiction where action for that purpose is required, other
than in the United States. Both we and the underwriters require that persons who
come into possession of this prospectus must inform themselves about and observe
any restrictions as to the offering of the class A common stock and the
distribution of this prospectus.
Each underwriter has agreed that:
- it has not offered or sold and will not offer or sell any shares of class
A common stock to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or
disposing of investments, as principal or agent, for the purposes of their
businesses or otherwise in circumstances which have not resulted and will
not result in an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995 or the
Financial Services Act 1986;
- it has complied, and will comply, with all applicable provisions of the
Financial Services Act 1986 of Great Britain with respect to anything done
by it in relation to the shares of class A common stock in, from or
otherwise involving the United Kingdom; and
- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issuance
of the shares of class A common stock, other than any document required or
permitted to be published by listing rules under Part IV of the Financial
Services Act 1986, to a person who is of a kind described in Article 11(3)
of the Financial Services Act of 1986 (Investment Advertisements)
(Exemptions) Order 1996 of Great Britain or is a person to whom the
document may otherwise lawfully be issued or passed on.
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The shares of class A common stock have not been and will not be qualified
for sale in Canada or any of its provinces or territories and may not be offered
or sold directly or indirectly in any province or territory of Canada except
pursuant to an exemption from the applicable prospectus filing requirements, and
otherwise in compliance with the applicable securities laws and regulations of
the relevant province or territory. The underwriters intend to rely on these
exemptions for offers and sales of class A common stock in Canada.
In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may over-allot, or engage in syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of class A common stock in excess of the number of shares to be purchased
by the underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the class A common stock in
the open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of bids or purchases
of class A common stock made for the purpose of preventing or retarding a
decline in the market price of the class A common stock while the offering is in
progress. Penalty bids permit the underwriters to reclaim a selling concession
from a syndicate member when Salomon Smith Barney Inc., in covering syndicate
short positions or making stabilizing purchases, repurchases shares originally
sold by that syndicate member. These activities may cause the price of the class
A common stock to be higher than the price that otherwise would exist in the
open market in the absence of such transactions. These transactions may be
effected on the New York Stock Exchange or in the over-the-counter market, or
otherwise and, if commenced, may be discontinued at any time.
We estimate that the expenses of this offering, exclusive of the
underwriting discounts and commissions, payable by it will be $ .
The U.S. representatives and some of the underwriters or their affiliates
have performed some investment banking and advisory services for us, Viacom and
each of our affiliates from time to time for which they have received customary
fees and expenses. The U.S. representatives and underwriters may, from time to
time, engage in transactions with and perform services for us, Viacom and each
of our affiliates in the ordinary course of their business. In particular,
Citibank N.A., an affiliate of each of Salomon Smith Barney Inc. and Salomon
Brothers International Limited, is the lead arranger on our new credit agreement
and will receive in excess of 10% of the net proceeds of this offering.
Accordingly, this offering will be conducted in accordance with Rule 2710(c)(8)
of the National Association of Securities Dealers, Inc. which requires that the
public offering price of an equity security be no higher than the price
recommended by a "qualified independent underwriter" which has participated in
the preparation of the registration statement and performed its usual standard
of due diligence. Bear, Stearns & Co. Inc. has agreed to act as "qualified
independent underwriter" for this offering and the public offering price of the
class A common stock will be no higher than the price recommended by Bear,
Stearns & Co. Inc. We refer you to "Description of Credit Agreement" and "Use of
Proceeds."
We have agreed to indemnify the U.S. underwriters and the international
managers against some types of liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments the U.S. underwriters or
the international managers may be required to make in respect of any of those
liabilities.
110
<PAGE>
LEGAL MATTERS
Some legal matters with respect to the validity of the shares of common
stock offered hereby will be passed upon for us by Shearman & Sterling, and for
the underwriters by Hughes Hubbard & Reed LLP. Hughes Hubbard & Reed LLP has
provided legal services to us, Viacom and our respective affiliates, from time
to time, for which they have received customary fees and expenses.
EXPERTS
Our financial statements as of December 31, 1997 and 1998 and for each of
the three years in the period ended December 31, 1998 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given upon their authority
as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement, as amended, on Form S-1
under the Securities Act with respect to the class A common stock offered
hereby. This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules thereto. Some items are
omitted in accordance with the rules and regulations of the SEC. For further
information about us and our class A common stock, reference is made to the
registration statement and the exhibits and any schedules filed therewith.
Statements contained in this prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance, if
such contract or document is filed as an exhibit, reference is made to the copy
of such contract or other documents filed as an exhibit to the registration
statement, each statement being qualified in all respects by such reference. A
copy of the registration statement, including the exhibits and schedules
thereto, may be read and copied at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices at Seven
World Trade Center, New York, New York 10048 and 500 West Madison Street,
Chicago, Illinois 60661. Information on the operation of the Public Reference
Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site at http://www.sec.gov, from which interested persons
can electronically access the registration statement, including the exhibits and
any schedules thereto.
As a result of this offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934, as amended.
We will fulfill our obligations with respect to such requirements by filing
periodic reports and other information with the SEC. We intend to furnish our
stockholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm. We also maintain our U.S.
Internet site at http://WWW.BLOCKBUSTER.COM. Our U.S. Internet site and the
information contained therein or connected thereto shall not be deemed to be
incorporated into this prospectus or the registration statement of which it
forms a part.
111
<PAGE>
BLOCKBUSTER INC.
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
AUDITED COMBINED FINANCIAL STATEMENTS:
Report of Independent Accountants............................................... F-2
Combined Statements of Operations--Years Ended December 31, 1996, 1997 and
1998.......................................................................... F-3
Combined Balance Sheets--at December 31, 1997 and 1998.......................... F-4
Combined Statements of Changes in Stockholder's Equity--Years Ended December 31,
1996, 1997 and 1998........................................................... F-5
Combined Statements of Cash Flows--Years Ended December 31, 1996, 1997 and
1998.......................................................................... F-6
Notes to Combined Financial Statements.......................................... F-7
INTERIM COMBINED FINANCIAL STATEMENTS (UNAUDITED):
Interim Combined Statements of Operations (Unaudited) for the Three Months Ended
March 31, 1998 and 1999....................................................... F-27
Interim Combined Balance Sheets--at December 31, 1998 and March 31, 1999
(Unaudited)................................................................... F-28
Interim Combined Statements of Cash Flows (Unaudited)--for the Three Months
Ended March 31, 1998 and 1999................................................. F-29
Notes to Interim Combined Financial Statements (Unaudited)...................... F-30
</TABLE>
Some supplementary financial statement schedules have been omitted
because the information required to be set forth therein is either not
applicable
or is shown in the financial statements or notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Viacom Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of changes in stockholder's equity, and of
cash flows present fairly, in all material respects, the financial position of
Blockbuster Inc. at December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Dallas, Texas
May 4, 1999
F-2
<PAGE>
BLOCKBUSTER INC.
COMBINED STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
REVENUES:
Rental revenues.............................................................. $ 2,386.9 $ 2,664.0 $ 3,219.6
Merchandise sales............................................................ 491.3 594.0 618.0
Other revenues............................................................... 63.9 55.6 55.8
--------- --------- ---------
2,942.1 3,313.6 3,893.4
--------- --------- ---------
COST OF SALES:
Cost of rental revenues...................................................... 617.2 810.6 1,460.9
Cost of merchandise sold..................................................... 396.5 549.9 495.5
--------- --------- ---------
1,013.7 1,360.5 1,956.4
--------- --------- ---------
Gross profit................................................................. 1,928.4 1,953.1 1,937.0
OPERATING EXPENSES:
General and administrative................................................... 1,163.6 1,605.7 1,732.3
Advertising.................................................................. 115.3 139.5 181.0
Depreciation................................................................. 165.5 253.8 212.7
Amortization of intangibles.................................................. 166.2 168.7 170.2
Restructuring charge......................................................... 50.2 -- --
--------- --------- ---------
1,660.8 2,167.7 2,296.2
--------- --------- ---------
Operating income (loss)........................................................ 267.6 (214.6) (359.2)
Interest expense............................................................. (22.0) (30.8) (27.7)
Interest income.............................................................. 3.6 3.7 4.0
Other items, net............................................................. -- (27.6) (11.8)
--------- --------- ---------
Income (loss) before income taxes.............................................. 249.2 (269.3) (394.7)
Benefit (provision) for income taxes......................................... (167.4) (30.0) 59.4
Equity in loss of affiliated companies, net of tax........................... (4.0) (18.9) (1.3)
--------- --------- ---------
Net income (loss).............................................................. $ 77.8 $ (318.2) $ (336.6)
--------- --------- ---------
--------- --------- ---------
UNAUDITED PRO FORMA EARNINGS (LOSS) PER SHARE:
Basic and diluted............................................................ $ --
---------
---------
UNAUDITED PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted............................................................ --
---------
---------
</TABLE>
See notes to combined financial statements.
F-3
<PAGE>
BLOCKBUSTER INC.
COMBINED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 129.6 $ 99.0
Receivables, less allowances of $22.3 (1997) and $22.7 (1998)............................ 114.8 124.8
Merchandise inventories.................................................................. 281.3 277.4
Deferred income taxes.................................................................... 6.7 --
Prepaid assets........................................................................... 95.5 130.5
--------- ---------
Total current assets................................................................... 627.9 631.7
Rental library, net........................................................................ 734.5 441.2
Deferred income taxes...................................................................... 31.3 92.5
Property and equipment, net................................................................ 1,085.2 995.3
Intangibles, net........................................................................... 6,192.7 6,055.6
Other assets............................................................................... 59.4 58.5
--------- ---------
$ 8,731.0 $ 8,274.8
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable......................................................................... $ 362.4 $ 448.6
Accrued expenses......................................................................... 267.0 361.8
Current portion of capital lease obligations............................................. 36.7 22.2
Deferred income taxes.................................................................... -- 13.6
Short-term borrowings.................................................................... 47.0 --
--------- ---------
Total current liabilities.............................................................. 713.1 846.2
Notes payable to Viacom.................................................................... 175.8 1,576.4
Capital lease obligations, less current portion............................................ 155.5 138.8
Other liabilities.......................................................................... 69.0 75.5
--------- ---------
1,113.4 2,636.9
--------- ---------
Commitments and contingencies (Note 12)
Stockholder's equity:
Viacom's net equity investment........................................................... 7,666.5 5,695.8
Accumulated other comprehensive loss--foreign currency
translation adjustment................................................................. (48.9) (57.9)
--------- ---------
Total stockholder's equity............................................................. 7,617.6 5,637.9
--------- ---------
$ 8,731.0 $ 8,274.8
--------- ---------
--------- ---------
</TABLE>
See notes to combined financial statements.
F-4
<PAGE>
BLOCKBUSTER INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
ACCUMULATED
VIACOM'S OTHER TOTAL
NET EQUITY COMPREHENSIVE COMPREHENSIVE STOCKHOLDER'S
INVESTMENT INCOME (LOSS) INCOME (LOSS) EQUITY
---------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996.................................. $ 7,754.1 $ (16.9) $ 7,737.2
Comprehensive income
Net income................................................ 77.8 $ 77.8 77.8
Other comprehensive income (loss):
Cumulative translation adjustment....................... 9.8 9.8 9.8
-------
Total comprehensive income............................ $ 87.6
-------
-------
Net contribution to Viacom.................................. (40.4) (40.4)
---------- ------- -------------
BALANCE AT DECEMBER 31, 1996................................ 7,791.5 (7.1) 7,784.4
Comprehensive income
Net loss.................................................. (318.2) $ (318.2) (318.2)
Other comprehensive income (loss):
Cumulative translation adjustment....................... (38.6) (38.6) (38.6)
Reclassification of foreign currency translation gain
realized.............................................. (3.2) (3.2) (3.2)
-------
Total comprehensive loss.............................. $ (360.0)
-------
-------
Net receipt from Viacom..................................... 193.2 193.2
---------- ------- -------------
BALANCE AT DECEMBER 31, 1997................................ 7,666.5 (48.9) 7,617.6
Comprehensive income
Net loss.................................................. (336.6) $ (336.6) (336.6)
Other comprehensive income (loss):
Cumulative translation adjustment....................... (9.0) (9.0) (9.0)
-------
Total comprehensive loss.............................. $ (345.6)
-------
-------
Dividend payable to Viacom.................................. (1,400.0) (1,400.0)
Net contribution to Viacom.................................. (234.1) (234.1)
---------- ------- -------------
BALANCE AT DECEMBER 31, 1998................................ $ 5,695.8 $ (57.9) $ 5,637.9
---------- ------- -------------
---------- ------- -------------
</TABLE>
See notes to combined financial statements.
F-5
<PAGE>
BLOCKBUSTER INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................. $ 77.8 $ (318.2) $ (336.6)
Adjustments to reconcile net income (loss) to net cash flow provided by
operating activities:
Depreciation and amortization............................................... 948.9 1,222.4 1,518.8
Deferred income taxes....................................................... 26.7 121.5 (8.1)
Write-down of investments................................................... -- 27.1 10.5
Restructuring charge........................................................ 50.2 -- --
Equity in loss of affiliated companies, net of tax.......................... 4.0 18.9 1.3
Other....................................................................... -- (0.3) --
Change in operating assets and liabilities:
Increase in receivables..................................................... (39.5) (7.8) (10.9)
Increase in merchandise inventories......................................... (73.1) (51.4) (0.4)
Increase in prepaid and other assets........................................ (20.3) (15.6) (40.0)
Increase (decrease) in accounts payable..................................... 49.0 (41.4) 67.9
Increase (decrease) in accrued expenses and other liabilities............... (38.7) 36.1 32.0
--------- --------- ---------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES................................. 985.0 991.3 1,234.5
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Rental library purchases...................................................... (751.5) (860.2) (818.1)
Capital expenditures.......................................................... (323.7) (262.2) (175.0)
Cash used for acquisitions.................................................... (154.4) (79.0) (34.2)
Proceeds from sale of property and equipment.................................. -- 19.1 0.3
Investments in affiliated companies........................................... (5.5) (5.8) 4.8
--------- --------- ---------
NET CASH FLOW USED IN INVESTING ACTIVITIES...................................... (1,235.1) (1,188.1) (1,022.2)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on (repayments of) credit facility............................. 25.8 22.3 (46.6)
Proceeds from term loan....................................................... -- -- 46.6
Net borrowings from notes due to Viacom....................................... 69.7 106.1 0.6
Capital lease payments........................................................ (24.9) (33.2) (34.8)
Advances from (repayments to) Viacom, net..................................... 138.2 174.1 (206.9)
--------- --------- ---------
NET CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES........................ 208.8 269.3 (241.1)
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH......................................... (0.4) (1.5) (1.8)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................ (41.7) 71.0 (30.6)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................................. 100.3 58.6 129.6
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR........................................ $ 58.6 $ 129.6 $ 99.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to combined financial statements.
F-6
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(TABULAR DOLLARS IN MILLIONS)
NOTE 1--DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The business and operations of Blockbuster Inc. (collectively, the "Company"
or "Blockbuster") consists of various wholly owned entities owned directly or
indirectly by Viacom International Inc. which is a wholly owned subsidiary of
Viacom Inc. ("Viacom"). During 1998, Viacom announced its intention that
Blockbuster would offer in an initial public offering a portion of its common
stock. This initial public offering is Viacom's first step in the planned
divestiture of Blockbuster Inc. The Company owns, operates and franchises
videocassette rental and sales stores in the United States and a number of
foreign countries. The Company offers pre-recorded videocassettes primarily for
rental and also offers titles for purchase on a "sell-through" (retail) basis.
In addition, the Company offers video games for rental and sale and sells
certain other entertainment-related merchandise.
The Company's business and operations were originally conducted by
Blockbuster Entertainment Corporation which was incorporated in Delaware in 1982
and entered the movie rental business in 1985. On September 29, 1994,
Blockbuster Entertainment Corporation was merged with and into Viacom. Since the
merger and during the period covered by the accompanying combined financial
statements, operations of the Company were conducted by various subsidiaries of
Viacom. Viacom's acquisition of the Company in 1994 was accounted for as a
purchase, and accordingly, its basis in the acquired assets and liabilities has
been pushed down to Blockbuster. Viacom's initial investment and all subsequent
cash advances, with the exception of cash advanced to fund the Company's
international operations, have been classified as contributed capital and no
interest expense or income has been allocated to the Company in the accompanying
combined financial statements.
As a part of the Reorganization Transactions (see discussion below), the
Company will purchase stock or assets from affiliates of Viacom with cash funded
by the bank credit agreement or contributed by Viacom in order to acquire
certain international operations of the Company. Advances from Viacom to
Blockbuster to fund these operations have been treated as intercompany notes in
the accompanying combined financial statements. Any difference between the
recorded intercompany notes payable to Viacom and the ultimate amount of the
purchase price for the stock or assets of these operations will be recognized as
an adjustment to Stockholders' Equity.
Prior to the Company's initial public offering (the "Offering") the
following transactions have been or will be completed: (1) in late 1998 numerous
U.S. subsidiaries of Viacom International Inc., a wholly-owned subsidiary of
Viacom, each of which were directly or indirectly involved in the Company's
operations, were merged with and into the Company, (2) on December 31, 1998 the
Company declared a $1.4 billion dividend payable to Viacom International Inc.
which has been reflected as an interest-bearing note in the accompanying
combined balance sheet, (3) the Company will purchase certain international
operations of the Company from affiliates of Viacom, (4) the Company will enter
into a term and revolving credit agreement with a syndicate of lenders which
will be used to fund debt owed to Viacom and to pay a portion of the purchase
price to acquire certain international operations from affiliates of Viacom, and
(5) the Company will be recapitalized with Class A common stock and Class B
common stock. These transactions are collectively referred to as the
Reorganization Transactions.
The Company expects to offer Class A common stock in the Offering.
Immediately following the Offering, Viacom will own none of the outstanding
shares of the Class A common stock and 100% of the outstanding shares of the
Class B common stock, which will represent no less than 80% of the combined
voting interest of the Company's then outstanding common stock. Viacom has
expressed its current intention to achieve a complete separation between the
Company and itself through a
F-7
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 1--DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
subsequent stock split-off or other back-up distribution. Viacom has the sole
discretion to determine the timing and all terms of the split-off or other
backup distribution, and is under no obligation to effect such separation. There
can be no assurance as to whether or when such a separation will occur, or as to
the terms of such separation.
The accompanying combined financial statements are presented on a carve-out
basis and reflect the combined historical results of operations, financial
position and cash flows of the Company including entities currently owned by
Blockbuster or to be purchased from Viacom in the case of its international
operations. In this context, no direct ownership relationship existed among all
the various entities comprising Blockbuster; accordingly, Viacom and its
subsidiaries' net investment in Blockbuster is included in the Stockholder's
Equity in the combined financial statements.
For all periods presented, certain expenses reflected in the combined
financial statements include allocation of corporate expenses from Viacom (see
Note 10). All such costs and expenses have been deemed to have been paid by the
Company to Viacom in the period in which the costs were recorded. Allocations of
current income taxes receivable or payable are deemed to have been remitted, in
cash, by or to Viacom in the period the related income taxes were recorded.
Management believes that the foregoing allocations were made on a reasonable
basis; however, the allocations of costs and expenses do not necessarily
indicate the costs that would have been or will be incurred by the Company on a
stand-alone basis. Also, the financial statements may not necessarily reflect
the financial position, results of operations and cash flows of the Company in
the future or what the financial position, results of operations or cash flows
would have been if the Company had been a separate, stand-alone company during
the periods presented.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could subsequently differ from those estimates.
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of the Company and
investments of more than 50% in subsidiaries and other entities. Investments in
affiliated companies over which the Company has a significant influence or
ownership of more than 20% but less than or equal to 50% are accounted for under
the equity method. Investments of 20% or less are accounted for under the cost
method. All significant intercompany transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Cash equivalents are defined as short-term (original maturities of three
months or less) highly liquid investments.
F-8
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MERCHANDISE INVENTORIES
Merchandise inventories consist primarily of prerecorded videocassette
retail inventory, video games and confectionery items and is stated at the lower
of cost or market. Merchandise inventory costs are determined using the weighted
average method, the use of which approximates the first-in, first-out basis.
RENTAL LIBRARY, NET
Effective April 1, 1998, Blockbuster adopted an accelerated method of
amortizing videocassette and game rental library in order to more closely match
expenses in proportion with anticipated revenues from revenue sharing agreements
(see Note 3).
Rental library and related accumulated amortization at December 31, are as
follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Rental library......................................................... $ 1,742.8 $ 2,011.5
Less: accumulated amortization......................................... 1,008.3 1,570.3
--------- ---------
Rental library, net.................................................... $ 734.5 $ 441.2
--------- ---------
--------- ---------
</TABLE>
Rental amortization expense, excluding the charge (see Note 3), approximated
$617.2 million (1996), $799.9 million (1997) and $711.6 million (1998).
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation expense is computed
principally by the straight-line method over the estimated useful lives as
follows:
<TABLE>
<S> <C>
Building.................................... 25 to 31.5 years
Building improvements....................... 10 years
Leasehold improvements...................... 4 to 10 years
Equipment and other......................... 3 to 10 years
Furniture and fixtures...................... 3 to 10 years
</TABLE>
Balances of major classes of assets and accumulated depreciation at December
31, are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Land, building and building improvements............................... $ 64.6 $ 56.3
Leasehold improvements................................................. 563.2 637.7
Equipment and other.................................................... 347.6 386.2
Furniture and fixtures................................................. 308.7 294.0
Capital leases......................................................... 244.4 248.3
--------- ---------
Total................................................................ 1,528.5 1,622.5
Less: accumulated depreciation......................................... 443.3 627.2
--------- ---------
Property and equipment, net............................................ $ 1,085.2 $ 995.3
--------- ---------
--------- ---------
</TABLE>
Maintenance and repair costs are charged to expense as incurred.
Improvements that extend the useful life of the assets are capitalized.
Depreciation expense, including capital lease amortization, was
F-9
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
$165.5 million (1996), $253.8 million (1997) and $212.7 million (1998).
Depreciation expense related to capital leases was $31.7 million (1996), $30.6
million (1997) and $29.7 million (1998).
INTANGIBLES
Intangible assets at December 31, consist of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Goodwill............................................................... $ 6,721.5 $ 6,752.7
Trademarks............................................................. 11.7 11.8
--------- ---------
Total................................................................ 6,733.2 6,764.5
Less: accumulated amortization......................................... 540.5 708.9
--------- ---------
Intangibles, net....................................................... $ 6,192.7 $ 6,055.6
--------- ---------
--------- ---------
</TABLE>
The cost of acquired businesses in excess of the fair value of tangible
assets and liabilities acquired ("goodwill"), which principally relates to
Viacom's acquisition of the Company and the resulting pushdown of goodwill
associated with the transaction, is amortized using the straight-line method
over estimated useful lives not exceeding 40 years. Amortization expense related
to intangible assets was $166.2 million (1996), $168.7 million (1997) and $170.2
million (1998).
Trademarks are amortized on a straight-line basis over the estimated
remaining economic lives, not exceeding 40 years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1997 and 1998, the Company's carrying value of financial
instruments approximates fair value due to the short-term maturities of these
instruments or variable rates of interest. During 1996, 1997 and 1998, no
financial instruments were held or issued for trading purposes.
IMPAIRMENT OF LONG-LIVED ASSETS
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed Of." SFAS 121 requires that the Company
assess long-lived assets (primarily property, plant and equipment and goodwill)
for impairment whenever there is an indication that the carrying amount of the
assets may not be recoverable. Recoverability is determined by comparing the
forecasted undiscounted cash flows generated by these assets to the assets' net
carrying value. The amount of impairment loss, if any, will generally be
measured as the difference between the net book value of the assets and their
estimated fair value. Impairment review of long-lived assets associated with the
Company's stores is performed on a market by market basis.
ADVERTISING EXPENSES
Advertising costs are expensed the first time the advertising takes place.
GIFT CARD LIABILITY
Gift card liabilities are recorded at the time of sale with the costs of
designing, printing and distributing the cards recorded as expense as incurred.
The liability is relieved and revenue recognized upon redemption of the gift
cards at any Blockbuster video store.
F-10
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenues are generally recognized at the time of sale or rental. Rental
revenue includes sales of previously viewed videocassettes and previously played
video games.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The financial statements of the Company's foreign operations were prepared
in their respective local currencies and translated into U.S. dollars for
reporting purposes. The assets and liabilities are translated at exchange rates
in effect at the balance sheet date, while results of operations are translated
at average exchange rates for the respective periods. The cumulative effects of
exchange rate changes on net assets are included as a part of accumulated other
comprehensive loss in 1996, 1997 and 1998. Net foreign currency transaction
gains and losses were not significant for any of the years presented, except for
1997, in which the Company recognized a gain of approximately $8.0 million,
which is included in general and administrative expenses in the Combined
Statements of Operations.
HEDGING ACTIVITY
The Company has historically been considered in Viacom's overall risk
management strategy. As a part of this strategy, Viacom uses certain financial
instruments to reduce its exposure to adverse movements in foreign-exchange
rates. Viacom allocates to the Company the income and expense associated with
certain of these financial instruments used to hedge foreign currency movements.
Allocated net expense and the related notional amounts for these financial
instruments were immaterial in all years presented.
The Company is exposed to credit loss in the event of nonperformance by
counterparties to the financial instrument contracts. However, the Company does
not anticipate nonperformance by the other parties and no material loss would be
expected from their nonperformance.
CAPITALIZED SOFTWARE COSTS
The Company capitalizes qualifying costs related to developing or obtaining
internal-use software. Capitalization of costs begins after the conceptual
formulation stage has been completed. Capitalized costs are depreciated over the
estimated useful life of the software which ranges between three and five years.
Capitalized costs at December 31, 1997 and 1998 totaled $10.6 million and $11.1
million, net of accumulated depreciation of $7.0 million and $10.5 million,
respectively. In January 1998, the American Institute of Certified Public
Accountants (the "AICPA") issued Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").
SOP 98-1 becomes effective for all fiscal years beginning after December 15,
1998. The Company's policy falls within the guidelines of SOP 98-1.
START-UP COSTS
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 becomes effective for
all fiscal years beginning after December 15, 1998. The Company's policy falls
within the guidelines of SOP 98-5.
F-11
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income taxes are provided based on the liability method of accounting
pursuant to SFAS 109, "Accounting for Income Taxes" ("SFAS 109"). Deferred
income taxes are recorded to reflect the tax benefit and consequences of future
years' differences between the tax bases of assets and liabilities and their
financial reporting basis. The Company records a valuation allowance to reduce
deferred tax assets if it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
EARNINGS (LOSS) PER SHARE
The Company's historical capital structure is not indicative of its
prospective capital structure since no direct ownership relationship existed
among all the various units comprising Blockbuster. Accordingly, historical
earnings per share has not been presented in the combined financial statements.
Unaudited pro forma basic and diluted earnings per share includes the shares
of both Class A and Class B common shares assumed to be outstanding as of the
date of the Offering. Unaudited pro forma basic and diluted earnings per share
are the same since there are currently no Company options outstanding. Pro forma
basic and diluted earnings per share have been presented for the most recent
annual period.
COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998 the Company adopted SFAS 130, "Reporting
Comprehensive Income" ("SFAS 130"), effective for fiscal years beginning after
December 15, 1997. SFAS 130 establishes standards for reporting and display of
comprehensive income (loss) and its components in financial statements.
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It consists of net income (loss) and other
gains and losses affecting stockholder's equity that, under generally accepted
accounting principles, are excluded from net income, such as unrealized gains
and losses on investments available for sale, foreign currency translation gains
and losses and minimum pension liability. Currency translation is the only item
of other comprehensive income impacting the Company. There is no tax effect
associated with comprehensive income (loss) as the foreign currency translation
adjustments are associated with operations located in foreign jurisdictions with
operating losses.
SEGMENT INFORMATION AND PENSION DISCLOSURES
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), effective for fiscal years
beginning after December 15, 1997. SFAS 131 establishes revised standards for
public companies relating to the reporting of financial and descriptive
information about their operating segments in financial statements. In February
1998, the FASB issued SFAS 132, "Employer's Disclosures about Pensions and Other
Post Retirement Benefits" ("SFAS 132"), which is effective for fiscal years
beginning after December 15, 1997. SFAS 132 standardizes the disclosure
requirements for pension and other post retirement benefits and requires
additional information on benefit obligations and the fair value of plan assets.
Implementation of SFAS 131 and SFAS 132 have not had a material effect on the
financial statements as currently presented.
F-12
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This new accounting standard
will require that derivative instruments be measured at fair value and
recognized in the balance sheet as either assets or liabilities, as the case may
be. The treatment of changes in the fair value of a derivative (i.e., gains and
losses) will depend on its intended use and designation. Gains and losses on
derivatives designated as hedges against the cash flow effect of a forecasted
transaction will initially be reported as a component of comprehensive income
and, subsequently, reclassified into income when the forecasted transaction
affects income. Gains and losses on all other forms or derivatives will be
recognized in income in the period of change. The Company will adopt SFAS 133
effective January 1, 2001 and anticipates that its adoption will not have a
material effect on its financial statements.
NOTE 3--CHANGE IN ACCOUNTING METHOD FOR RENTAL LIBRARY
Effective April 1, 1998, Blockbuster adopted an accelerated method of
amortizing videocassette and game rental library. Blockbuster has adopted this
new method of amortization because it has implemented a new business model,
including revenue sharing agreements with Hollywood studios, which has
dramatically increased the number of videocassettes in the stores and is
satisfying consumer demand over a shorter period of time. Revenue sharing allows
Blockbuster to purchase videocassettes at a lower product cost than the
traditional buying arrangements, with a percentage of the net rental revenues
shared with the studios over a contractually determined period of time. As the
new business model results in a greater proportion of rental revenue over a
shorter period of time, Blockbuster has changed its method of amortizing rental
library in order to more closely match expenses in proportion with the
anticipated revenues to be generated therefrom.
Pursuant to the new accounting method, the Company records base stock
videocassettes (generally less than five copies per title for each store) at
cost and amortizes a portion of these costs on an accelerated basis over three
months, generally to $8 per unit, with the remaining base stock videocassette
cost amortized on a straight-line basis over 33 months to an estimated $4
salvage value. The cost of non-base stock videocassettes (generally greater than
four copies per title for each store) are amortized on an accelerated basis over
three months to an estimated $4 salvage value. Video games are amortized on an
accelerated basis over a 12 month period to an estimated $10 salvage value.
Revenue sharing payments are expensed when revenues are earned pursuant to the
applicable contractual arrangements.
The new method of accounting has been applied to rental library that was
held at April 1, 1998. The adoption of the new method of amortization has been
accounted for as a change in accounting estimate effected by a change in
accounting principle and, accordingly, the Company recorded a non-cash pre-tax
charge of $424.3 million to cost of rental revenues. The charge represents an
adjustment to the carrying value of the rental tapes due to the new method of
accounting.
F-13
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
The Company believes that the new amortization method developed for
Blockbuster's new business model will result in a better matching of revenue and
expense recognition. Under the new model, cost of sales attributable to
videocassettes is comprised of revenue sharing payments, which are expensed when
the related revenue is recognized, amortization of product costs and residual
values of previously viewed tapes and games upon sale.
Prior to April 1, 1998 videocassette rental library was recorded at cost and
amortized over its estimated economic life. Base stock videocassettes (generally
1 to 4 copies per title for each store) were amortized over 36 months on a
straight-line basis. Non-base stock videocassettes (generally the fifth and
succeeding copies per title for each store) were amortized over six months on a
straight-line basis. Video game library was amortized on a straight-line basis
over a period of 12 to 24 months.
NOTE 4--SPECIAL ITEM CHARGES AND RESTRUCTURING
During the second quarter of 1997, the Company shifted its strategic
emphasis from retailing a broad assortment of merchandise to focusing on its
core rental business. Rationalization of the retail product lines such as sell
through video, confectionery items, literature, music and fashion merchandise
allowed the Company to devote more management time and attention, as well as
retail floor selling space, to its rental video and game business. In addition,
as part of its efforts to improve the performance of its operations, the Company
adopted a plan to close consistently underperforming stores primarily located in
the United States, United Kingdom and Australia and to exit the German market.
The Company also recognized a charge associated with its joint venture
operations in Japan.
As a result, the Company recorded a pre-tax charge of approximately $250
million (the "Charge"). The Charge consisted principally of $100.8 million
recognized as cost of merchandise sold for a reduction in the carrying value of
excess merchandise inventories, $69.6 million for the reorganizing of operations
and closing of underperforming stores and $39.3 million recognized as general
and administrative expenses, primarily related to additional relocation costs
incurred in connection with the move of the Company's employees, corporate
offices and data center from Fort Lauderdale, Florida to Dallas, Texas. In
addition, the Charge consisted of $29.4 million, recognized as part of the
equity in loss of affiliated companies, associated with the Company's debt
guarantee of joint venture operations in Japan. Through December 31, 1998, the
Company has fully satisfied its obligations related to the debt guarantee.
The $69.6 million charge is comprised of a $41.8 million non-cash impairment
charge associated with long-lived assets and a $27.8 million charge for lease
exit obligations. These amounts have been recognized as depreciation expense and
general and administrative expense, respectively. Through December 31, 1998, the
Company has paid and charged approximately $12.8 million against the lease exit
obligations.
Also in the second quarter of 1997, as part of the Company's strategic
initiatives, management made the decision to dispose of certain investments that
did not relate to the Company's core business. The Company recognized a non-cash
charge of $27.1 million to write down these non-strategic investments to their
net realizable value. This charge is reflected in "Other items, net" in the
Combined Statements of Operations.
During 1998, the Company revised its estimate of net realizable value
associated with certain investments referred to above. An additional provision
of approximately $10.5 million was recognized in the fourth quarter to reflect
this change in estimate and was included in "Other items, net".
F-14
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 4--SPECIAL ITEM CHARGES AND RESTRUCTURING (CONTINUED)
During the fourth quarter of 1996, the Company adopted a plan to relocate
its corporate headquarters from Fort Lauderdale to Dallas and eliminate third
party distributors. As a result of such plan, the Company recognized a
restructuring charge of approximately $50.2 million. The restructuring charge
reflects a $25.0 million reserve for estimated severance benefits payable to
approximately 650 employees who did not relocate to Dallas. The Company, through
the restructuring charge, also recognized $11.6 million of other costs of
exiting Fort Lauderdale (primarily related to the disposition of its corporate
headquarters) and $13.6 million for eliminating third party distributors. The
Company's relocation to Dallas was completed during the second quarter of 1997
at which time the Company recorded additional period costs associated with the
move, as discussed above. Through December 31, 1998, the Company paid and
charged approximately $25.0 million against the severance liability and
approximately $11.4 million against the Fort Lauderdale exit costs.
NOTE 5--STOCK OPTION PLANS
Certain of the Company's employees have been granted Viacom stock options
under Viacom's Long-term Incentive Plans (the "Plans"). The purpose of the Plans
is to benefit and advance the interests of Viacom by rewarding certain key
employees for their contributions to the financial success of Viacom and thereby
motivating them to continue to make such contributions in the future. The Plans
provide for fixed grants of equity-based interests pursuant to awards of phantom
shares, stock options, stock appreciation rights, restricted shares or other
equity-based interests and for subsequent payments of cash with respect to
phantom shares or stock appreciation rights based, subject to certain limits, on
their appreciation in value over stated periods of time. The stock options
generally vest over a four to six year period from the date of grant and expire
10 years after the date of grant.
The Company has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation". In accordance with the provisions of
SFAS 123, the Company applies Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for the Plans and accordingly, does not recognize compensation
expense for its stock option plans because Viacom typically does not issue
options at exercise prices below the market value at date of grant. Had
compensation expense for Viacom's stock option plans applicable to the Company's
employees been determined based upon the fair value at the grant date for awards
consistent with the methodology prescribed by SFAS 123, the Company's combined
pretax income would have decreased by $1.6 million ($1.0 million after tax),
$2.2 million ($1.4 million after tax) and $4.1 million ($2.6 million after tax)
in 1996, 1997 and 1998, respectively. These pro forma effects may not be
representative of expense in future periods since the estimated fair value of
stock options on the date of grant is amortized to expense over the vesting
period. Additional options may be granted in future years. Options issued prior
to January 1, 1995 were excluded from the computation.
F-15
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 5--STOCK OPTION PLANS (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Expected dividend yield (a)................................. -- -- --
Expected stock price volatility............................. 32.65% 31.75% 32.72%
Risk-free interest rate..................................... 6.43% 6.04% 5.46%
Expected life of options (years)............................ 6.0 6.0 6.0
</TABLE>
- ------------------------------
(a) Viacom has not declared any cash dividends on its common stock for any of
the periods presented and has no present intention of so doing.
On February 25, 1999, the Board of Directors of Viacom declared a 2-for-1
common stock split, effected in the form of a dividend. The additional shares
were issued on March 31, 1999 to shareholders of record on March 15, 1999. All
stock options and per share amounts have been adjusted to reflect the stock
split for all periods presented.
The weighted-average fair value of each option as of the grant date was
$8.13, $6.59 and $12.89 in 1996, 1997 and 1998, respectively.
The following table summarizes stock option activity under the various plans
as it relates to Blockbuster's employees:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED-AVERAGE
OUTSTANDING EXERCISE PRICE
------------ -----------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1995.................................. 20,398,918 $ 15.49
------------
Granted..................................................... 1,155,600 18.23
Exercised................................................... 7,039,854 15.15
Canceled.................................................... 1,333,634 16.90
------------
BALANCE AT DECEMBER 31, 1996.................................. 13,181,030 15.77
------------
Granted..................................................... 2,596,000 15.32
Exercised................................................... 2,778,348 14.58
Canceled.................................................... 2,766,482 15.76
------------
BALANCE AT DECEMBER 31, 1997.................................. 10,232,200 15.98
------------
Granted..................................................... 506,320 30.31
Exercised................................................... 7,102,920 14.39
Canceled.................................................... 414,356 16.00
------------
BALANCE AT DECEMBER 31, 1998.................................. 3,221,244 $ 21.75
------------
------------
</TABLE>
F-16
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 5--STOCK OPTION PLANS (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable Viacom stock options issued to Blockbuster employees at December
31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------ ------------------------
WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES OPTIONS LIFE (YEARS) PRICE OPTIONS PRICE
- -------------- ---------- --------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
$ 10 to $15 20,000 8.62 $ 14.94 -- --
15 to 20 2,340,540 8.47 15.46 23,398 $ 17.50
20 to 25 14,000 9.01 21.47 -- --
25 to 30 -- -- -- -- --
30 to 35 487,320 9.61 30.57 -- --
3 to 25(a) 359,384(a) 4.16 14.29 359,384 14.29
---------- ---------
3,221,244 382,782
---------- ---------
---------- ---------
</TABLE>
- ------------------------
(a) Represents information for options assumed with the Viacom acquisition of
Blockbuster.
NOTE 6--ACCRUED EXPENSES
The Company's accrued expenses consist of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
Accrued compensation................................................. $ 42.7 $ 55.9
Accrued gift card liability.......................................... 46.7 65.9
Accrued sales tax.................................................... 27.8 24.5
Accrued property tax................................................. 27.0 38.9
Accrued revenue sharing.............................................. -- 38.0
Restructuring reserve................................................ 23.4 14.2
Store closure reserves............................................... 25.3 15.0
Assigned music liabilities (see Note 10)............................. -- 43.7
Other................................................................ 74.1 65.7
--------- ---------
$ 267.0 $ 361.8
--------- ---------
--------- ---------
</TABLE>
NOTE 7--DEBT
Effective February 1996, the Company, along with three other Viacom
affiliates, entered into a Cdn$75 million credit facility, secured by Viacom.
The Company had outstanding approximately Cdn $65.8 million of bankers
acceptances as of December 31, 1997 ($47.0 million at December 31, 1997 exchange
rates). Interest on outstanding borrowings is equal to the Canadian bankers
acceptance rate plus 40 basis points, 3.5% and 5.1% at December 31, 1996 and
1997, respectively. Interest expense related to the Canadian facility was $.3
million and $2.0 million for the years ended December 31, 1996 and 1997,
respectively.
F-17
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 7--DEBT (CONTINUED)
In March 1998, the Company entered into a 10 year term loan for Cdn $65.8
million to repay the existing credit facility. In June 1998, the note was sold
to a Viacom affiliate and accordingly, is reflected as part of notes payable to
Viacom.
Funds advanced by Viacom to the Company to fund certain international
operations have been recognized as intercompany loans. These intercompany loans
will be purchased and retired by the Company with borrowings from the Company's
credit agreement as part of its Reorganization Transactions as described in Note
1. Interest expense charged by Viacom approximated $4.1 million, $10.1 million
and $8.4 million for the years 1996, 1997 and 1998, respectively and reflects
market-based rates.
Interest expense related to capital leases was $17.6 million, $18.7 million
and $18.5 million for the years ended December 31, 1996, 1997 and 1998,
respectively. See Note 12 for further information regarding capital lease
obligations.
On December 31, 1998, the Company declared a dividend in the form of an
interest bearing (London Interbank Offered Rate "LIBOR" plus 1%, 6.12% at
December 31, 1998) promissory note to Viacom International Inc. in the principal
amount of $1.4 billion.
NOTE 8--VIACOM'S NET EQUITY INVESTMENT
Viacom funds the working capital requirements of the Company based upon a
centralized cash management system. The Viacom's net equity investment includes
accumulated equity as well as any non-interest bearing payable and receivable
due to/from Viacom resulting from cash transfers and other intercompany
activity. Viacom generally does not charge the Company interest on intercompany
balances except for intercompany debt associated with certain foreign operations
(see Note 7).
NOTE 9--OTHER ITEMS, NET
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
Write-down of investments (Note 4)................................... $ -- $ 27.1 $ 10.5
Other................................................................ -- .5 1.3
--------- --------- ---------
TOTAL OTHER ITEMS, NET............................................... $ -- $ 27.6 $ 11.8
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-18
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 10--RELATED PARTY TRANSACTIONS
Viacom provides the Company with certain general and administrative
services, including insurance, legal, treasury, financial and other corporate
functions. The allocation of expenses was generally based on actual costs
incurred and such costs were apportioned to the Company based upon the average
of certain specified ratios of revenues and net assets. The charges for such
services were $9.8 million (1996), $9.2 million (1997) and $12.5 million (1998).
Management believes that the methodologies used to allocate these charges are
reasonable, however, these allocations of costs and expenses do not necessarily
indicate the cash and expenses that would have been or will be incurred by the
Company on a stand-alone basis. Viacom also pays insurance premiums on behalf of
the Company for certain worker's compensation, property, general liability, and
group insurance policies. Insurance expense related to these policies was $13.2
million (1996), $13.3 million (1997) and $16.0 million (1998) and is reflected
as a component of general and administrative expenses in the Combined Statements
of Operations. See Note 13 for pension plan and additional employee benefit
costs charged by Viacom to the Company. These services between Viacom and the
Company will continue after the Offering pursuant to the transition services
described below.
Blockbuster and Viacom will enter into a transition services agreement
whereby Viacom will provide the Company cash management, accounting, management
information systems, legal, financial and tax services as well as employee
benefit plan and insurance administration. These services may change upon
agreement between Viacom and the Company. The fee for these services will
approximate Viacom's cost and could be subject to adjustment. The Company has
agreed to pay or reimburse Viacom for any out-of-pocket payments, costs and
expenses associated with these services. The services agreement expires upon the
closing of a split-off or backup distribution.
The Company, through the normal course of business, is involved in
transactions with companies owned by or affiliated with Viacom or certain of its
board members. The Company purchases certain videocassettes for rental and sale
directly from Paramount Pictures Corporation. Total purchases were $7.6 million,
$77.5 million and $110.1 million for the years ended December 31, 1996, 1997 and
1998, respectively. The Company purchases certain home video games from Midway
Games Inc. Total amounts paid for purchases were $8.4 million, $12.5 million and
$19.1 million for the years ended December 31, 1996, 1997 and 1998,
respectively.
In conjunction with the sale by a related party of Blockbuster Music
("Music") to Wherehouse Entertainment, Inc. ("Wherehouse"), the Company assumed
certain liabilities as a result of the disposition of Blockbuster Music with a
corresponding reduction to Viacom's net equity investment. The nature of these
liabilities was predominantly for obligations related to closed Music stores
excluded from the sale and to a lesser extent certain transaction costs and
various costs to complete the transition of operations from Music to Wherehouse.
These liabilities at the date of assignment aggregated approximately $67 million
of which $43.7 million remains in current liabilities at December 31, 1998.
All other transactions with companies owned by or affiliated with Viacom did
not have a material impact on the financial position or results of operations
presented herein. See Note 7 regarding intercompany loans related to the
Company's international operations.
F-19
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 11--INCOME TAXES
The Company has been included in combined federal, state and local income
tax returns filed by Viacom. However, the tax benefit (expense) reflected in the
Combined Statements of Operations and deferred tax assets and liabilities
reflected in the Combined Balance Sheets have been prepared as if such benefits
were computed on a separate return basis. The current income tax liabilities for
the periods presented have been satisfied by Viacom. Any tax losses generated by
the Company have been utilized by Viacom to reduce its combined taxable income.
These amounts have been reflected in Viacom's net equity investment in the
Combined Balance Sheets.
The Company and Viacom will enter into a tax matters agreement which
provides that subsequent to the Offering the Company will continue to be
included in the Viacom U.S. federal consolidated income tax return and certain
consolidated, combined, and unitary state tax returns. The tax matters agreement
requires the Company and Viacom to make payments to each other equal to the
amount of income taxes which would be paid by the Company, subject to certain
adjustments, if the Company had filed a stand alone return for any taxable year
or portion thereof beginning after the date of this offering in which the
Company is included in the Viacom group. With respect to certain tax attributes
such as net operating losses, tax credits and capital losses, the Company will
have the right of reimbursement or offset, which will be determined based on the
extent such tax attributes could be utilized by the Company if it had not been
included in the Viacom group. The right to reimbursement or offset will arise
regardless of whether the Company is a member of the Viacom group at the time
the attributes could have been used.
The tax matters agreement also requires the Company, if so requested by
Viacom, to surrender certain tax losses of our subsidiaries that are resident in
the United Kingdom for 1998 and earlier years to Viacom's United Kingdom
Operations without any rights to compensation.
The tax matters agreement specifies that Viacom will indemnify the Company
against any and all tax adjustments to Viacom's consolidated federal and
consolidated, combined and unitary state tax returns from September 29, 1994
through the date of the Offering.
The net operating loss carryforwards at December 31, 1998 are primarily
attributable to domestic ($8.2 million) and foreign ($42.5 million) subsidiaries
of the Company. These losses are subject to certain restrictions and limitations
in accordance with domestic and foreign tax laws. A valuation allowance has been
provided primarily related to foreign loss carryforwards and certain foreign
restructuring reserves as the Company believes that it is more likely than not
that these tax benefits will not be realized. Of the total amount, $27.5 million
has no expiration date, $0.7 million expires in 1998, $1.1 million expires in
1999 and $21.4 million expires thereafter.
Losses accounted for under the equity method of accounting are shown net of
tax in the Combined Statements of Operations. Included in equity in loss of
affiliated companies, net of tax of $4.0 million (1996), $18.9 million (1997)
and $1.3 million (1998) are tax benefits of $0.5 million and $12.7 million for
1996 and 1997, respectively, and a tax provision of $0.2 million for 1998.
F-20
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 11--INCOME TAXES (CONTINUED)
Income (loss) before income taxes are attributable to the following
jurisdictions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
United States.................................................. $ 283.3 $ (167.3) $ (313.6)
Foreign........................................................ (34.1) (102.0) (81.1)
--------- --------- ---------
$ 249.2 $ (269.3) $ (394.7)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Components of the income tax benefit (expense) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
Current:
Federal........................................................ $ (119.1) $ 89.7 $ 51.2
State and local................................................ (19.4) 3.4 3.0
Foreign........................................................ (3.5) (1.6) (2.9)
--------- --------- ---------
(142.0) 91.5 51.3
Deferred......................................................... (25.4) (121.5) 8.1
--------- --------- ---------
$ (167.4) $ (30.0) $ 59.4
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation of the U.S. federal statutory tax rate to the Company's
effective tax rate on income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
Statutory U.S. tax provision (benefit) rate..................... 35.0% (35.0)% (35.0)%
Amortization of non-deductible goodwill......................... 24.1 23.5 15.6
State and local taxes, net of federal tax benefit............... 1.7 (1.6) (4.1)
Effect of foreign operations.................................... 7.1 23.9 8.6
Other, net...................................................... (.7) .3 (.1)
--- --------- ---------
Effective tax provision (benefit) rate.......................... 67.2% 11.1% (15.0)%
--- --------- ---------
--- --------- ---------
</TABLE>
F-21
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 11--INCOME TAXES (CONTINUED)
The following is a summary of the deferred tax accounts in accordance with
SFAS 109:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
Deferred tax assets:
Reserves and accrued liabilities........................................... $ 39.8 $ 38.6
Book-tax basis differences in rental library and other assets.............. -- 60.1
Book-tax basis differences in investments.................................. 17.9 10.7
Net operating loss carryforwards........................................... 50.2 50.7
--------- ---------
Total deferred tax assets.................................................... 107.9 160.1
Less: Valuation allowance.................................................... (67.1) (67.6)
--------- ---------
Net deferred tax assets...................................................... 40.8 92.5
--------- ---------
Deferred tax liabilities:
Deferred expenses.......................................................... -- (13.6)
Book-tax basis differences in rental library and other assets.............. (2.8) --
--------- ---------
Total deferred tax liabilities............................................... (2.8) (13.6)
--------- ---------
Total net deferred tax assets.............................................. $ 38.0 $ 78.9
--------- ---------
--------- ---------
</TABLE>
NOTE 12--COMMITMENTS AND CONTINGENCIES
The Company has long-term noncancelable lease commitments for various real
and personal property and office space which expire at various dates. Certain
leases contain renewal and escalation clauses. Generally, leases are five to ten
years with extended renewal options.
At December 31, 1998, minimum rental payments under noncancelable leases are
as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
----------- ---------
<S> <C> <C>
1999..................................................................... $ 369.9 $ 47.6
2000..................................................................... 319.3 39.3
2001..................................................................... 262.6 32.0
2002..................................................................... 210.8 28.0
2003..................................................................... 183.2 27.0
2004 and thereafter...................................................... 601.5 43.8
----------- ---------
Total minimum lease payments............................................. $ 1,947.3 217.7
-----------
-----------
Less amount representing interest........................................ (56.7)
---------
Present value of net minimum payments.................................... $ 161.0
---------
---------
</TABLE>
Rent expense was $269.8 million (1996), $355.3 million (1997) and $409.8
million (1998). Subtenant rental income was $5.0 million (1996), $4.8 million
(1997) and $5.6 million (1998). Future minimum lease payments have not been
reduced by future minimum subtenant rental income of $30.6 million. No
contingent rentals were paid during the three years ended December 31, 1998.
F-22
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 12--COMMITMENTS AND CONTINGENCIES (CONTINUED)
In October 1998, Music stores were sold to Wherehouse. Certain of the leases
transferred in connection with this sale had previously been guaranteed either
by Viacom or its affiliates. The remaining lease terms expire through various
dates through 2007. Blockbuster has agreed to indemnify Viacom with respect to
any amount paid under these guarantees. At the time of sale, the contingent
liability for base rent approximated $84 million, on an undiscounted basis, with
respect to these guarantees. The Company has not recognized any reserves related
to this contingent liability in the accompanying combined financial statements.
If Wherehouse defaults, related losses could materially affect future operating
income.
Pursuant to the tax matters agreement, the Company will generally be
responsible for, among other things, any taxes imposed on Viacom or its
Subsidiaries as a result of the split-off failing to qualify as a tax-free
transaction on account of any breach of the Company's representations or
agreements or any action or failure to act by the Company or any transaction
involving the Company's assets, stock or business (regardless of whether such
transaction is within its control) following the split-off.
The Company is a defendant from time to time in lawsuits incidental to its
business. Based on currently available information, the Company believes that
resolution of these known contingencies would not have a material adverse impact
on the Company's financial statements or liquidity. However, there can be no
assurances that future costs would not be material to results of operations or
liquidity of the Company for a particular future period. In addition, the
Company's estimates of future costs are subject to change as circumstances
change and additional information becomes available during the course of
litigation.
NOTE 13--PENSION PLANS AND OTHER EMPLOYEE BENEFITS
Viacom has a noncontributory defined benefit pension plan covering
substantially all of its employees, including the employees of the Company
during 1996, 1997 and 1998. Retirement benefits are based principally on years
of service and salary. Viacom also offers participation in a 401(k) savings plan
to the employees of the Company and has charged the Company for pension and
401(k) savings plan expenses of $4.6 million (1996), $4.6 million (1997) and
$5.3 million (1998).
Viacom also provides other employee benefits to the Company's employees,
including certain postemployment benefits, medical, dental, life and disability
insurance costs.
Management believes that the methodologies used to allocate pension and
other employee benefit charges to the Company are reasonable.
Viacom intends to spin off a Blockbuster Entertainment Investment Plan from
the Viacom Investment Plan, the provisions of which will mirror those of the
Viacom Investment Plan. The Company will continue to invest matching
contributions in Viacom's Class B common stock.
NOTE 14--ACQUISITIONS
During 1996, 1997 and 1998, the Company acquired or invested in several
businesses that own and operate videocassette rental stores. The aggregate
purchase price, consisting of cash consideration, for
F-23
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 14--ACQUISITIONS (CONTINUED)
these businesses approximated $154.4 million (1996), $79.0 million (1997) and
$34.2 million (1998) and was primarily allocated to video rental library,
property and equipment, and intangible assets.
All acquisitions were accounted for under the purchase method and,
accordingly, the operating results of the acquired businesses are included in
the combined results of operations of the Company since their respective date of
acquisition. Pro forma results of operations have not been presented due to the
immateriality of the acquisitions.
NOTE 15--EQUITY INVESTMENTS
The Company has a 50% interest in a joint venture located in Japan which
owns and operates videocassette rental stores. As discussed in Note 4, during
1997 the Company recognized a charge of $29.4 million (approximately $17.6
million net of tax) related to debt guarantees in recognition of the joint
venture's financial condition. The Company has also recognized its proportionate
share of this joint venture's net operating loss to the extent of its investment
which were as follows: $11.9 million (1996) and $12.1 million (1997). Through
December 31, 1998, the Company had fully satisfied its obligations related to
its Japan debt guarantees. As of December 31, 1997 and 1998, the Company had no
remaining net investment in its Japan joint venture and intends to dispose of
its interest in this joint venture in 1999.
NOTE 16--SUPPLEMENTAL CASH FLOW INFORMATION
Cash flows from operating activities included cash payments as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash payments for interest............................................................... $ 17.9 $ 20.4 $ 27.2
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
Retail stores acquired under capitalized leases........................................ $ 40.6 $ 14.4 $ 3.8
</TABLE>
On December 31, 1998, the Company declared a cash dividend in the amount of
$1.4 billion payable to Viacom in the form of an interest-bearing promissory
note to Viacom International Inc.
All income tax obligations have been satisfied by Viacom as the Company has
been included in Viacom's combined tax return.
NOTE 17--OPERATIONS BY GEOGRAPHIC AREA
The Company operates in one industry segment: rental and retail sales of
videocassettes, video games and other entertainment related merchandise. The
principal geographic areas of the Company's operations are the United States and
Europe. Operations in Latin America, Australia, Canada and Asia are classified
in "International--all other".
F-24
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 17--OPERATIONS BY GEOGRAPHIC AREA (CONTINUED)
The following table shows revenues and long-lived assets by geographic area.
Transfers between geographic areas were not significant.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
United States................................................................ $ 2,427.9 $ 2,611.5 $ 3,090.1
Europe....................................................................... 259.1 355.9 427.9
International--all other..................................................... 255.1 346.2 375.4
--------- --------- ---------
Total revenues........................................................... $ 2,942.1 $ 3,313.6 $ 3,893.4
--------- --------- ---------
--------- --------- ---------
LONG-LIVED ASSETS(1):
United States(2)............................................................. $ 7,484.6 $ 7,395.5 $ 6,942.2
Europe....................................................................... 371.2 380.9 362.8
International--all other..................................................... 306.4 295.4 245.6
--------- --------- ---------
Total long-lived assets.................................................. $ 8,162.2 $ 8,071.8 $ 7,550.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Includes all non-current assets, except deferred income taxes.
(2) Includes substantially all intangible assets.
NOTE 18--QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1998 and 1997 appears below:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1997(1) QUARTER QUARTER QUARTER QUARTER TOTAL YEAR
- ------------------------------------------------------------ --------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Revenue..................................................... $ 823.8 $ 765.3 $ 817.7 $ 906.8 $ 3,313.6
Gross profit................................................ $ 538.3 $ 370.5 $ 504.5 $ 539.8 $ 1,953.1
Net income (loss)........................................... $ (19.3) $ (227.3) $ (37.8) $ (33.8) $ (318.2)
<CAPTION>
1998(2)
- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue..................................................... $ 931.2 $ 890.0 $ 985.4 $ 1,086.8 $ 3,893.4
Gross profit................................................ $ 604.6 $ 100.2 $ 591.7 $ 640.5 $ 1,937.0
Net income (loss)........................................... $ 15.8 $ (318.0) $ (21.5) $ (12.9) $ (336.6)
</TABLE>
- ------------------------
(1) The second quarter of 1997 included a pre-tax charge of approximately $250
million principally representing a reduction in the carrying value of excess
retail inventory and a reserve for the reorganization of international
operations and closing of under performing stores in domestic and
international markets as well as additional expenses associated with the
Company's corporate relocation (see Note 4). In addition, the Company
recognized a non-cash charge of $27.1 million to write down certain
non-strategic investments to their estimated net realizable value.
(2) The second quarter of 1998 included a $424.3 million charge for a change in
estimate effected by a change in accounting principle for rental library.
During the fourth quarter of 1998, the Company
F-25
<PAGE>
BLOCKBUSTER INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS)
NOTE 18--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
revised its estimate of net realizable value associated with the planned
disposition of certain non-strategic investments and recognized an
additional provision of approximately $10.5 million (See Note 3 and 4).
F-26
<PAGE>
BLOCKBUSTER INC.
INTERIM COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
<S> <C> <C>
1998 1999
--------- ---------
REVENUES:
Rental revenues......................................................................... $ 771.2 $ 952.0
Merchandise sales....................................................................... 141.3 143.0
Other revenues.......................................................................... 18.7 18.0
--------- ---------
931.2 1,113.0
--------- ---------
COST OF SALES:
Cost of rental revenues................................................................. 216.5 327.0
Cost of merchandise sold................................................................ 110.1 114.8
--------- ---------
326.6 441.8
--------- ---------
Gross profit............................................................................ 604.6 671.2
OPERATING EXPENSES:
General and administrative.............................................................. 410.7 472.1
Advertising............................................................................. 32.0 55.7
Depreciation............................................................................ 52.3 51.8
Amortization of intangibles............................................................. 42.6 43.0
--------- ---------
537.6 622.6
--------- ---------
Operating income.......................................................................... 67.0 48.6
Interest expense........................................................................ (6.9) (29.2)
Interest income......................................................................... 0.9 0.6
--------- ---------
Income before income taxes................................................................ 61.0 20.0
Provision for income taxes.............................................................. (45.2) (23.4)
--------- ---------
Net income (loss)......................................................................... $ 15.8 $ (3.4)
--------- ---------
--------- ---------
UNAUDITED PRO FORMA EARNINGS (LOSS) PER SHARE:
Basic and diluted....................................................................... $ --
---------
---------
UNAUDITED PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted....................................................................... --
---------
---------
</TABLE>
See notes to unaudited interim combined financial statements.
F-27
<PAGE>
BLOCKBUSTER INC.
INTERIM COMBINED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 99.0 $ 75.0
Receivables, less allowances of $22.7 (1998) and $20.4 (1999)............... 124.8 132.5
Merchandise inventories..................................................... 277.4 276.6
Prepaid assets.............................................................. 130.5 146.4
-------- --------------
Total current assets...................................................... 631.7 630.5
Rental library, net........................................................... 441.2 457.3
Deferred income taxes......................................................... 92.5 74.3
Property and equipment, net................................................... 995.3 1,005.3
Intangibles, net.............................................................. 6,055.6 6,074.3
Other assets.................................................................. 58.5 58.8
-------- --------------
$ 8,274.8 $ 8,300.5
-------- --------------
-------- --------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable............................................................ $ 448.6 $ 350.8
Accrued expenses............................................................ 361.8 325.7
Current portion of capital lease obligations................................ 22.2 22.3
Deferred income taxes....................................................... 13.6 11.1
-------- --------------
Total current liabilities................................................. 846.2 709.9
Notes payable to Viacom....................................................... 1,576.4 1,690.4
Capital lease obligations, less current portion............................... 138.8 134.2
Other liabilities............................................................. 75.5 103.8
-------- --------------
2,636.9 2,638.3
Commitments and contingencies (Note 5)
Stockholder's equity:
Viacom's net equity investment.............................................. 5,695.8 5,723.8
Accumulated other comprehensive loss--foreign currency translation
adjustment................................................................ (57.9) (61.6)
-------- --------------
Total stockholder's equity................................................ 5,637.9 5,662.2
-------- --------------
$ 8,274.8 $ 8,300.5
-------- --------------
-------- --------------
</TABLE>
See notes to unaudited interim combined financial statements.
F-28
<PAGE>
BLOCKBUSTER INC.
INTERIM COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
<S> <C> <C>
1998 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................................... $ 15.8 $ (3.4)
Adjustments to reconcile net income (loss) to net cash flow provided by operating
activities:
Depreciation and amortization......................................................... 279.4 266.2
Deferred income taxes................................................................. 60.4 35.1
Change in operating assets and liabilities:
Increase in receivables............................................................... (4.5) (7.9)
Decrease in merchandise inventories................................................... 7.3 2.5
Increase in prepaid and other assets.................................................. (29.8) (17.7)
Decrease in accounts payable.......................................................... (72.5) (96.4)
Decrease in accrued expenses and other liabilities.................................... (13.8) (11.9)
--------- ---------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES........................................... 242.3 166.5
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Rental library purchases................................................................ (194.9) (181.0)
Capital expenditures.................................................................... (38.5) (59.8)
Cash used for acquisitions.............................................................. (1.8) (85.0)
Investments in affiliated companies..................................................... 2.6 0.4
--------- ---------
NET CASH FLOW USED IN INVESTING ACTIVITIES................................................ (232.6) (325.4)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of credit facility....................................................... (46.6) --
Proceeds from term loan................................................................. 46.6 --
Net borrowings from (repayments of) notes due to Viacom................................. (26.8) 114.0
Capital lease payments.................................................................. (8.3) (9.4)
Advances from (repayments to) Viacom, net............................................... (30.8) 31.0
--------- ---------
NET CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES.................................. (65.9) 135.6
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................................................... (0.5) (0.7)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................................. (56.7) (24.0)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................................ 129.6 99.0
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................................ $ 72.9 $ 75.0
--------- ---------
--------- ---------
</TABLE>
See notes to unaudited interim combined financial statements.
F-29
<PAGE>
BLOCKBUSTER INC.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1-BASIS OF PRESENTATION
The interim combined financial statements and related notes of the business
and operations of Blockbuster Inc. (collectively, the "Company" or
"Blockbuster"), which consists of various wholly owned entities owned directly
or indirectly by Viacom Inc., ("Viacom"), for the three months ended March 31,
1998 and 1999 and as of December 31, 1998 and March 31, 1999 have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
and are unaudited. The interim combined financial statements are presented on a
carve-out basis and reflect the combined historical results of operations,
financial position and cash flows of the Company including entities currently
owned by Blockbuster or, in the case of certain international operations, to be
purchased from Viacom. In this context, no direct ownership relationship existed
among the various entities comprising Blockbuster; accordingly, Viacom and its
subsidiaries' net investment in Blockbuster is included in the Stockholder's
equity in the interim combined financial statements.
In the opinion of management, the interim combined financial statements
include all recurring adjustments and normal accruals necessary to present
fairly the Company's combined financial position and its combined results of
operations for the dates and periods presented. Results for interim periods are
not necessarily indicative of the results to be expected during the remainder of
the current year or for any future period. All significant intercompany accounts
and transactions have been eliminated in consolidation.
These financial statements should be read in conjunction with the audited
combined financial statements and notes thereto for the years ended December 31,
1996, 1997 and 1998 presented herein.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMPREHENSIVE INCOME
Comprehensive income (loss) for the three months ended March 31 was as
follows:
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
(IN MILLIONS)
Net income (loss).......................................................... $ 15.8 $ (3.4)
Currency translation adjustment............................................ 13.1 (3.7)
--------- ---------
Total comprehensive income (loss).......................................... $ 28.9 $ (7.1)
--------- ---------
--------- ---------
</TABLE>
NOTE 2-RELATED PARTY TRANSACTIONS
Viacom provides the Company with certain general and administrative
services, including insurance, legal, treasury, financial and other corporate
functions. The allocations of expenses was generally based on actual costs
incurred and such costs were apportioned to the Company based upon the average
of certain specified ratios of revenues and net assets. The charges for such
services for the
F-30
<PAGE>
BLOCKBUSTER INC.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2-RELATED PARTY TRANSACTIONS (CONTINUED)
three months ended March 31, 1998 and 1999 were $3.0 million and $3.1 million,
respectively. Management believes that the methodologies used to allocate these
charges are reasonable, however, these allocations of costs and expenses do not
necessarily indicate the cash and expenses that would have been or will be
incurred by the Company on a stand-alone basis. Viacom also pays insurance
premiums on behalf of the Company for certain worker's compensation, property,
general liability, and group insurance policies. Insurance expense related to
these policies was $3.8 million and $3.6 million for the three months ended
March 31, 1998 and 1999, respectively. Viacom also has a noncontributory defined
benefit pension plan in which the Company's employees are covered and provides
other employee benefits, including participation in a 401(k) savings plan.
Viacom has charged the Company $1.4 million and $1.2 million for pension and
401(k) savings plan expenses for the three months ended March 31, 1998 and 1999,
respectively.
Viacom generally does not charge the Company interest on intercompany
balances except for intercompany debt associated with certain foreign
operations, the notes associated with the $1.4 billion dividend payable to
Viacom discussed in Note 1 of the Combined Financial Statements and notes
associated with the acquisition of franchise operations discussed in Note 3
herein. Interest expense for the three months ended March 31, 1998 and 1999 was
$1.9 million and $24.8 million, respectively.
Blockbuster and Viacom will enter into a transition services agreement
whereby Viacom will provide the Company with cash management, accounting,
management information systems, legal, financial and tax services as well as
employee benefit plan and insurance administration. These services may change
upon agreement between Viacom and the Company. The fee for these services will
approximate Viacom's cost and could be subject to adjustment. The Company has
agreed to pay or reimburse Viacom for any out-of-pocket payments, costs and
expenses associated with these services. The services agreement expires upon the
closing of a split-off or backup distribution.
The Company, through the normal course of business, is involved in
transactions with companies owned by or affiliated with Viacom or certain of its
Board members. The Company purchases certain videocassettes for rental and sales
directly from Paramount Pictures Corporation. Total purchases were $0.2 million
and $14.0 million for the three months ended March 31, 1998 and 1999,
respectively. The Company also purchases certain home video games from Midway
Games, Inc. Total amounts paid for purchases were $3.9 million and $4.2 million
for the three months ended March 31, 1998 and 1999, respectively. These
transactions have been recognized in the Interim Combined Financial Statements.
In conjunction with the sale by a related party of Blockbuster Music
("Music") to Wherehouse Entertainment, Inc. ("Wherehouse"), the Company assumed
certain liabilities as a result of the disposition of Blockbuster Music with a
corresponding reduction to Viacom's net equity investment. The nature of these
liabilities was predominantly for obligations related to closed Music stores
excluded from the sale and, to a lesser extent, certain transaction costs and
various costs to complete the transaction of operations from Music to
Wherehouse. These liabilities at the date of assignment aggregated approximately
$67 million of which $31.8 million remains in current liabilities at March 31,
1999.
All other transactions with companies owned by or affiliated with Viacom did
not have a material impact on the financial position or results of operations
presented herein.
F-31
<PAGE>
BLOCKBUSTER INC.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3-NOTES PAYABLE TO VIACOM
On December 31, 1998, the Company declared a cash dividend in the amount of
$1.4 billion payable to Viacom in the form of an interest-bearing promissory
note. On January 24, 1999, Blockbuster acquired 69 stores from a franchisee. The
purchase was funded with the proceeds of two notes payable to Viacom which
approximated $77 million. These notes bear interest at LIBOR plus 1% and will be
repaid with proceeds from the revolving credit agreement prior to the Company's
initial public offering as discussed in Note 1 of the combined financial
statements.
NOTE 4-EARNINGS (LOSS) PER SHARE
The Company's historical capital structure is not indicative of its
prospective structure since no direct ownership relationship existed among all
the various units comprising Blockbuster. Accordingly, historical earnings per
share have not been presented in the interim combined financial statements.
Unaudited pro forma basic and diluted earnings per share include the shares
of both Class A and Class B common shares deemed to be outstanding as of the
date of the Offering. Unaudited pro forma basic and diluted earnings per share
are the same since there are currently no Company options outstanding. Pro forma
basic and diluted earnings per share have been presented for the most recent
annual and interim periods.
NOTE 5-COMMITMENTS AND CONTINGENCIES
In October 1998, Music stores were sold to Wherehouse. Certain of the leases
transferred in connection with this sale had previously been guaranteed either
by Viacom or its affiliates. The remaining lease terms expire on various dates
through 2007. Blockbuster has agreed to indemnify Viacom with respect to any
amount paid under these guarantees. At the time of the sale, the contingent
liability for base rent approximated $84 million, on an undiscounted basis, with
respect to these guarantees. The Company has not recognized any reserves related
to this contingent liability in the accompanying interim combined financial
statements. If Wherehouse defaults, related losses could materially affect
future operating income.
Pursuant to the tax matters agreement, the Company will generally be
responsible for, among other things, any taxes imposed by Viacom or its
Subsidiaries as a result of the split-off failing to qualify as a tax-free
transaction on account of any breach of the Company's representations or
agreements or any action or failure to act by the Company or any transactions
involving the Company's assets, stock or business (regardless of whether such
transaction is within its control) following the split-off.
The Company is a defendant from time to time in lawsuits incidental to its
business. Based on currently available information, the Company believes that
resolution of these known contingencies would not have a material adverse impact
on the Company's financial statements or liquidity. However, there can be no
assurances that future costs would not be material to results of operations or
liquidity of the Company for a particular period. In addition, the Company's
estimates of future costs are subject to change as circumstances change and
additional information becomes available during the course of litigation.
F-32
<PAGE>
BLOCKBUSTER INC.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6-CREDIT AGREEMENT
On June 21, 1999, the Company entered into a $1.9 billion credit agreement
with a syndicate of lenders. The credit agreement is comprised of a $700 million
revolving loan maturing on July 1, 2004, a $600 million term loan also maturing
on July 1, 2004 and a $600 million revolving loan which matures on June 19,
2000. On June 23, 1999, the Company borrowed $1.6 billion under this credit
agreement to fund the following:
- a portion of the purchase price to acquire certain international
operations of the business to be purchased from Viacom;
- to repay a promissory note issued to Viacom International Inc. as a
dividend in the principal amount of $1.4 billion plus accrued and unpaid
interest;
- to repay promissory notes to Viacom International Inc. in the aggregate
principal amount of about $77 million plus accrued and unpaid interest for
acquisitions of video stores; and
- to pay the fees and expenses of about $15 million related to the
origination of the credit agreement to the syndicate of lenders.
Borrowings under the credit agreement accrue interest at a rate equal to the
interest rates prevailing on the date of determination in the London interbank
market for the interest period selected by the Company, plus a margin over this
rate. The margin and the commitment fees on the undrawn portion of the facility
vary based on specified leverage ratios.
The credit agreement contains customary covenants including, covenants that
limit the Company's ability to pay dividends on or repurchase the Company's
common stock or make other distributions, in each case other than dividends of
$90 million, $115 million, $130 million, $145 million and $160 million in the
first five years following the completion of this offering, respectively.
The credit agreement also requires compliance with financial covenants with
respect to: (1) maximum leverage ratio and (2) a minimum fixed charge coverage
ratio.
F-33
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
Blockbuster Inc.
Class A Common Stock
[BLOCKBUSTER LOGO]
------
P R O S P E C T U S
, 1 9 9 9
---------
SALOMON SMITH BARNEY
BEAR, STEARNS & CO. INC.
------
CREDIT SUISSE FIRST BOSTON
GOLDMAN, SACHS & CO.
J.P. MORGAN & CO.
-------
BANC OF AMERICA SECURITIES LLC
ING BARING FURMAN SELZ LLC
PAINEWEBBER INCORPORATED
SCHRODER & CO. INC.
SG COWEN
WIT CAPITAL CORPORATION
Until , 1999, all dealers that buy, sell or trade our class A
common stock, whether or not they are participating in this offering, may be
required to deliver a prospectus. This is in addition to the dealers' obligation
to deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
<PAGE>
P R O S P E C T U S
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION, DATED , 1999
SHARES
[BLOCKBUSTER LOGO]
BLOCKBUSTER INC.
CLASS A COMMON STOCK
$ PER SHARE
---------
We are selling shares of our class A common stock. Of the shares
of class A common stock that we are selling, shares are being offered
outside the United States and Canada by a syndicate of international
underwriters and shares are being offered concurrently in the United
States and Canada by a syndicate of U.S. underwriters.
In addition, the international underwriters may purchase up to
additional shares of our class A common stock under some circumstances. The U.S.
underwriters may also purchase up to additional shares of our class A
common stock under some circumstances.
This is an initial public offering of our class A common stock. We currently
expect the initial public offering price to be between $ and $ per
share, and have applied to have the class A common stock listed on the New York
Stock Exchange under the symbol "BBI."
Following this offering, we will have two classes of authorized common
stock, the class A common stock and class B common stock. The rights of the
holders of class A common stock and class B common stock are identical, except
with respect to voting and conversion.
--------------
INVESTING IN THE CLASS A COMMON STOCK INVOLVES CERTAIN RISKS. WE REFER YOU
TO "RISK FACTORS" BEGINNING ON PAGE 9.
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
1999.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ------------
<S> <C> <C>
Initial Public Offering Price.................................................................. $ $
Underwriting Discounts and Commissions......................................................... $ $
Proceeds to Blockbuster Inc. (before expenses)................................................. $ $
</TABLE>
--------------
JOINT BOOK-RUNNING MANAGERS
SALOMON SMITH BARNEY INTERNATIONAL BEAR, STEARNS INTERNATIONAL LIMITED
----------
CREDIT SUISSE FIRST BOSTON
GOLDMAN SACHS INTERNATIONAL
J.P. MORGAN SECURITIES LTD.
BANK OF AMERICA INTERNATIONAL LIMITED
ING BARINGS
PAINEWEBBER INTERNATIONAL
SCHRODERS
SG COWEN
, 1999
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
BLOCKBUSTER INC.
CLASS A COMMON STOCK
[BLOCKBUSTER LOGO]
------
P R O S P E C T U S
, 1 9 9 9
---------
SALOMON SMITH BARNEY INTERNATIONAL
BEAR, STEARNS INTERNATIONAL LIMITED
------
CREDIT SUISSE FIRST BOSTON
GOLDMAN SACHS INTERNATIONAL
J.P. MORGAN SECURITIES LTD.
-------
BANK OF AMERICA INTERNATIONAL LIMITED
ING BARINGS
PAINEWEBBER INTERNATIONAL
SCHRODERS
SG COWEN
Until , 1999, all dealers that buy, sell or trade our class A common
stock, whether or not they are participating in this offering, may be required
to deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC registration fee................................................ $ *
NASD filing fee..................................................... *
NYSE listing fee.................................................... *
Blue Sky fees and expenses.......................................... *
Attorneys' fees and expenses........................................ *
Accountants' fees and expenses...................................... *
Transfer Agent's and Registrar's fees and expenses.................. *
Miscellaneous....................................................... *
---------
Total........................................................... *
---------
---------
</TABLE>
- ------------------------
* To be supplied by amendment
The amounts set forth above are estimates except for the SEC registration
fee and the NASD filing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides, in summary,
that directors and officers of Delaware corporations are entitled, under certain
circumstances, to be indemnified against all expenses and liabilities, including
attorney's fees, incurred by them as a result of suits brought against them in
their capacity as a director or officer, if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action or proceeding, if they had
no reasonable cause to believe their conduct was unlawful; provided that no
indemnification may be made against expenses in respect of any claim, issue or
matter as to which they shall have been adjudged to be liable to the Company,
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, they are fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper. Any such indemnification may be made by the Company only as authorized
in each specific case upon a determination by the shareholders or disinterested
directors that indemnification is proper because the indemnitee has met the
applicable standard of conduct.
The Company's Amended and Restated Certificate of Incorporation provides
that no director of the Company shall be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability: (1) for any breach of the director's duty of loyalty to
the Company or its stockholders; (2) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (3) in
respect of certain unlawful dividend payments or stock redemptions or purchases;
or (4) for any transaction from which the director derived an improper personal
benefit.
The Company's Certificate of Incorporation and By-Laws provide for
indemnification of its directors and officers to the fullest extent permitted by
Delaware law, as the same may be amended from time to time.
Section 8 of the Underwriting Agreement (Exhibit 1.1 hereto) contains
provisions for certain indemnification rights to the directors and officers of
the Registrant.
In addition, the Company maintains liability insurance for its directors and
officers.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
See the index to the exhibits.
(B) FINANCIAL STATEMENT SCHEDULES.
The schedules have been omitted because of the absence of circumstances
under which they could be required.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities, other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding, is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933
shall be deemed to be part of this registration statement as of the
time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the U.S. Underwriting Agreement and the
International Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in Dallas,
Texas on July 2, 1999.
<TABLE>
<S> <C> <C>
BLOCKBUSTER INC.
BY: /S/ EDWARD B. STEAD
-----------------------------------------
Edward B. Stead
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ ---------------------------
<C> <S>
* Chairman, President and
- ------------------------------ Chief Executive Officer
John F. Antioco
Executive Vice President,
* Chief Financial Officer
- ------------------------------ and Chief Accounting
Larry J. Zine Officer
* Director
- ------------------------------
Philippe P. Dauman
* Director
- ------------------------------
Thomas E. Dooley
* Director
- ------------------------------
Sumner M. Redstone
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ EDWARD B. STEAD
-------------------------
Edward B. Stead
ATTORNEY-IN-FACT
<CAPTION>
Dated: July 2, 1999
<CAPTION>
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
*3.1 Amended and Restated Certificate of Incorporation of the Registrant.
*3.2 Bylaws of the Registrant.
*4.1 Specimen Certificate representing Class A Common Stock.
**5.1 Opinion of Shearman & Sterling as to the legality of the Common Stock.
**10.1 Form of Initial Public Offering and Split-Off Agreement among the Registrant, Viacom International
Inc. and Viacom Inc.
**10.2 Form of Release and Indemnification Agreement between the Registrant and Viacom Inc.
**10.3 Form of Transition Services Agreement between the Registrant and Viacom Inc.
**10.4 Form of Registration Rights Agreement between the Registrant and Viacom Inc.
**10.5 Form of Tax Matters Agreement between the Registrant and Viacom Inc.
**+10.6 Revenue-Sharing Agreement, dated as of November 21, 1997, between the Registrant and the party named
therein.
**+10.7 Revenue-Sharing Agreement, dated as of September 29, 1998, between the Registrant and the party named
therein.
**+10.8 Revenue-Sharing Agreement, dated as of August 25, 1998, between the Registrant and the party named
therein.
**+10.9 Revenue-Sharing Agreement, dated as of October 13, 1998, between the Registrant and the party named
therein.
**+10.10 Revenue-Sharing Agreement, dated as of January 20, 1999, between the Registrant and the party named
therein.
*10.11 Employment Agreement between the Registrant and , dated .
*10.12 Employment Agreement between the Registrant and , dated .
*10.13 Employment Agreement between the Registrant and , dated .
*10.14 Employment Agreement between the Registrant and , dated .
*10.15 Employment Agreement between the Registrant and , dated .
*10.16 Deferred Compensation Plan for Outside Directors.
*10.17 1999 Long-Term Management Incentive Plan.
*10.18 Senior Executive Short-Term Incentive Plan.
10.19 Credit Agreement, dated as of June 21, 1999 between the Registrant and the banks named therein.
*21.1 List of Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
**23.2 Consent of Shearman & Sterling (included in its opinion in Exhibit 5.1).
**24.1 Powers of Attorney (included on signature page in this Registration Statement).
*27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
** Filed previously.
+ Exhibits for which Registrant is seeking confidential treatment for certain
portions. The confidential material in such exhibits has been redacted and
separately filed with the Securities and Exchange Commission.
<PAGE>
Exhibit 10.19
================================================================================
$1,900,000,000
CREDIT AGREEMENT,
dated as of
June 21, 1999,
among
BLOCKBUSTER INC.,
AS BORROWER,
THE BANKS NAMED HEREIN,
AS BANKS,
CITIBANK, N.A.,
AS THE ADMINISTRATIVE AGENT,
THE BANK OF NEW YORK,
AS THE DOCUMENTATION AGENT,
and
BANK OF AMERICA NT&SA,
and
CHASE SECURITIES INC.,
AS THE SYNDICATION AGENTS
SALOMON SMITH BARNEY INC., BANC OF AMERICA
SECURITIES LLC, BNY CAPITAL MARKETS, INC., CHASE
SECURITIES INC. AND J.P. MORGAN SECURITIES INC.
AS ARRANGERS
SALOMON SMITH BARNEY INC.
AS LEAD ARRANGER AND BOOK MANAGER
================================================================================
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
1.1. Defined Terms............................................................1
1.2. Computation of Time Periods.............................................17
1.3. Accounting Terms........................................................17
ARTICLE II
THE TRANCHE A LOANS
2.1. The Tranche A Loans.....................................................17
2.2. Making the Tranche A Loans..............................................18
2.3. Termination/Reduction of the Tranche A Loan Commitments.................20
2.4. Repayment of the Tranche A Loan.........................................21
2.5. Optional Prepayments of the Tranche A Loan..............................21
2.6. Limitation on use of Tranche A Loan Proceeds............................21
ARTICLE III
THE TRANCHE B LOANS
3.1. The Tranche B Loans.....................................................21
3.2. Making the Tranche B Loans..............................................22
3.3. Repayment of the Tranche B Loans........................................23
3.4. Optional Prepayments of the Tranche B Loans.............................24
ARTICLE IV
THE TRANCHE C LOANS
4.1. The Tranche C Loans.....................................................24
4.2. Making the Tranche C Loans..............................................25
i
<PAGE>
4.3. Termination/Reduction of the Tranche C Loan Commitments.................27
4.4. Repayment of the Tranche C Loan.........................................27
4.5. Optional Prepayments of the Tranche C Loan..............................27
ARTICLE V
CONVERSION, INTEREST, PAYMENTS, FEES, ETC.
5.1. Conversion/Continuation Option..........................................28
5.2. Interest................................................................28
5.3. Interest Rate Determination and Protection..............................29
5.4. Fees....................................................................30
5.5. Increased Costs.........................................................30
5.6. Illegality..............................................................32
5.7. Capital Adequacy........................................................32
5.8. Payments and Computations...............................................33
5.9. Sharing of Payments, Etc................................................34
5.10. Replacement Banks......................................................35
5.11. Mandatory Prepayment...................................................35
ARTICLE VI
CONDITIONS OF LENDING
6.1. Conditions Precedent to the Effectiveness of this Agreement.............36
6.2. Additional Conditions Precedent to the Making of the Initial Loans......37
6.3. Conditions Precedent to the Making of Each Loan.........................37
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
7.1. Corporate Existence; Compliance with Law................................38
7.2. Corporate Power; Authorization; Enforceable Obligations.................38
7.3. Taxes...................................................................39
7.4. Financial Information...................................................40
7.5. Litigation..............................................................40
ii
<PAGE>
7.6. Margin Regulations......................................................40
7.7. ERISA...................................................................40
7.8. No Defaults.............................................................41
7.9. Investment Company Act..................................................41
7.10. Insurance..............................................................41
7.11. Environmental Protection...............................................42
7.12. Title and Liens........................................................42
7.13. Trademarks, Copyrights, Etc............................................42
7.14. Franchises.............................................................42
7.15. Year 2000 Issue........................................................42
7.16. Disclosure.............................................................42
ARTICLE VIII
FINANCIAL COVENANTS
8.1. Total Leverage Ratio....................................................44
8.2. Fixed Charge Coverage Ratio.............................................44
ARTICLE IX
AFFIRMATIVE COVENANTS
9.1. Compliance with Laws, Etc...............................................45
9.2. Payment of Taxes, Etc...................................................45
9.3. Maintenance of Insurance................................................45
9.4. Preservation of Corporate Existence, Etc................................45
9.5. Books and Access........................................................45
9.6. Maintenance of Properties, Etc..........................................45
9.7. Application of Proceeds.................................................46
9.8. Financial Statements....................................................46
9.9. Reporting Requirements..................................................47
iii
<PAGE>
ARTICLE X
NEGATIVE COVENANTS
10.1. Liens, Etc.............................................................49
10.2. Mergers................................................................49
10.3. Substantial Asset Sale.................................................50
10.4. Transactions with Affiliates...........................................50
10.5. Margin Stock...........................................................50
10.6. Subsidiary Indebtedness................................................50
10.7. Other Restrictions on Indebtedness.....................................50
10.8. Dividends and Purchase of Stock........................................50
10.9. Limitation on Transfers of Assets to Subsidiary........................51
10.10. Loans and Investments.................................................51
ARTICLE XI
EVENTS OF DEFAULT
11.1. Events of Default......................................................51
ARTICLE XII
THE ARRANGERS AND THE FACILITY AGENTS
12.1. Authorization and Action...............................................54
12.2. Arrangers' and Facility Agents' Reliance, Etc..........................55
12.3. Citibank, N.A., The Bank of New York, Bank of America NT&SA, Chase
Securities Inc., Morgan Guaranty Trust Company of New York and
their Affiliates.......................................................55
12.4. Bank Credit Decision...................................................56
12.5. Determinations Under Sections 6.1, 6.2 and 6.3.........................56
12.6. Indemnification........................................................56
12.7. Successor Facility Agents..............................................57
iv
<PAGE>
ARTICLE XIII
MISCELLANEOUS
13.1. Amendments, Etc........................................................57
13.2. Notices, Etc...........................................................58
13.3. No Waiver; Remedies....................................................58
13.4. Costs; Expenses; Indemnities...........................................58
13.5. Right of Set-Off.......................................................60
13.6. Binding Effect.........................................................60
13.7. Assignments and Participations; Additional Banks.......................61
13.8. Promissory Notes ......................................................62
13.9. GOVERNING LAW; SEVERABILITY............................................62
13.10. SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL......................63
13.11. Confidentiality.......................................................63
13.12. Section Titles........................................................64
13.13. Execution in Counterparts.............................................64
SCHEDULES
Schedule I - Commitments
Schedule 10.6 - Facilities in Existence on the Date of this Agreement
EXHIBITS
Exhibit A - Form of Notice of Borrowing
Exhibit B - Form of Notice of Conversion or Continuation
Exhibit C-1 - Form of Shearman & Sterling Opinion
Exhibit C-2 - Form of Edward B. Stead Opinion
Exhibit D - Form of Assignment and Acceptance
v
<PAGE>
CREDIT AGREEMENT, dated as of June 21, 1999, (this "Agreement") among
BLOCKBUSTER INC., a Delaware corporation (the "Borrower"), the Bank parties
hereto from time to time, CITIBANK, N.A., as the Administrative Agent, THE BANK
OF NEW YORK, as the Documentation Agent, THE BANK OF AMERICA NT&SA, as a
Syndication Agent and CHASE SECURITIES INC., as a Syndication Agent.
W I T N E S E T H:
WHEREAS, the Borrower has requested the Banks to commit to lend to the
Borrower (i) up to $700 million on a 5-year revolving basis ("Tranche A") and
(ii) up to $600 million in term loans ("Tranche B") for refinancing of certain
existing indebtedness of the Borrower and for general corporate purposes; and
WHEREAS, the Borrower has requested the Tranche C Loan Banks to commit to
lend to the Borrower up to $600 million on a 364-day revolving basis ("Tranche
C") for refinancing of certain existing indebtedness of the Borrower and for
general corporate purposes; and
WHEREAS, the Banks are willing to make available such commitments on the
terms and conditions provided herein;
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements contained herein, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
1.1. DEFINED TERMS. As used in this Agreement, the following terms have
the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
"AFFILIATE AGREEMENTS" means the Initial Public Offering and Split-Off
Agreement among the Borrower, Viacom International Inc. and Viacom Inc., the
Release and Indemnification Agreement between the Borrower and Viacom Inc., the
Transition Services Agreement between the Borrower and Viacom Inc., the
Registration Rights Agreement between the Borrower and Viacom Inc., each of
which is described in the Preliminary Prospectus, and the Tax Matters Agreement.
1
<PAGE>
"ADMINISTRATIVE AGENT" means Citibank, N.A., in its capacity as the
Administrative Agent, or any successor in such capacity.
"AFFILIATE" means, as to any Person, any Subsidiary of such Person and
any other Person which, directly or indirectly, controls, is controlled by or is
under common control with such Person. For the purposes of this definition,
"control" means the possession of the power to direct or cause the direction of
management and policies of any Person, whether through the ownership of voting
securities, by contract or otherwise.
"AGREEMENT" means this Credit Agreement, as modified, amended or
supplemented from time to time.
"APB 16 AND 17" means Accounting Principles Board Opinions Nos. 16 and 17
as in effect at the time that any addition or adjustment required thereunder is
to be made to the financial statements of a Person.
"APPLICABLE EURODOLLAR RATE MARGIN" shall mean on any date the percentage
set forth below opposite the Total Leverage Ratio applicable to the Borrower on
such date:
TOTAL LEVERAGE RATIO LIBOR SPREAD
-------------------- ------------
greater than 4.50x 2.25%
equal to or greater than 3.75x but less than or equal to 4.50x 1.75%
equal to or greater than 3.00x but less than 3.75x 1.50%
less than 3.00x 1.25%
; PROVIDED, HOWEVER, that until the first anniversary of the Initial Funding
Date, the LIBOR Spread shall be the greater of (x) the percentage specified
above and (y) 1.75%.
"APPLICABLE LENDING OFFICE" means, with respect to each Bank, its
Domestic Lending Office in the case of a Base Rate Loan, and its Eurodollar
Lending Office in the case of a Eurodollar Rate Loan.
"ARRANGERS" means each of Salomon Smith Barney Inc., Banc of America
Securities LLC, BNY Capital Markets, Inc., Chase Securities Inc. and J.P. Morgan
Securities Inc., acting in such capacity.
"ASSIGNMENT AND ACCEPTANCE" has the meaning specified in Section 13.7(a).
"BANKS" means the lenders listed on the signature pages hereof, and such
other lenders as may become parties hereto from time to time pursuant to Section
13.7.
2
<PAGE>
"BASE RATE" means, for any day, a fluctuating interest rate per annum as
shall be in effect for such day, which rate per annum shall be equal at all
times to the higher of
(a) the rate of interest announced publicly by the
Administrative Agent in New York, New York as the Administrative
Agent's base rate in effect for such day; and
(b) the Federal Funds Rate for such day plus 1/2 of one
percent per annum.
"BASE RATE LOAN" means any Loan or portion thereof that bears interest
with reference to the Base Rate.
"BORROWER" has the meaning specified in the recitals hereof.
"BORROWING" means a Tranche A Loan Borrowing, a Tranche B Loan Borrowing
or a Tranche C Loan Borrowing.
"BUSINESS DAY" means a day of the year on which banks are not required or
authorized to close in New York City and, if the applicable Business Day relates
to a Eurodollar Rate Loan, a day on which dealings are also carried on in
Dollars in the London interbank market.
"CAPITAL LEASE PRINCIPAL PAYMENTS" means, for any period, amounts
recorded as principal payments of capitalized leases on the financial statements
of the Borrower prepared in accordance with GAAP.
"CAPITALIZED LEASES" means, as applied to any Person, any lease of
property by such Person recorded as a capitalized lease on the financial
statements of such Person prepared in accordance with GAAP.
"CAPITAL MARKET TRANSACTION" means the issuance or incurrence of any
Indebtedness for borrowed money (other than borrowings hereunder) or the
issuance of any Equity or other securities, excluding Commercial Paper, in each
case whether by means of any public offering or private placement but excluding
debt to commercial banks or other investors, a principal investment objective of
which is extending credit by making or purchasing bank loans, or debt that is
syndicated in the commercial bank market.
"CASH EQUIVALENTS" means (i) securities with maturities of one year or
less from the date of acquisition issued or fully guaranteed or insured by the
United States government or any agency thereof, (ii) certificates of deposit,
time deposits, bankers'
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acceptances and repurchase agreements of any commercial bank rated at least A-3
by Moody's, (iii) negotiable Eurodollar certificates of deposit and time
deposits issued by a London affiliate of a U.S. commercial bank or Canadian bank
qualified under the preceding clause (ii) if such affiliate's long-term debt is
rated A-3 or better by Moody's and (iv) commercial paper of an issuer rated at
least A-1+ by S&P or P-1 by Moody's, or carrying an equivalent rating by a
nationally recognized rating agency, if both of the two named rating agencies
cease publishing ratings of investments.
"CODE" means the Internal Revenue Code of 1986 (or any successor
legislation thereto), as amended from time to time.
"COMBINED CARVE OUT FINANCIAL STATEMENTS" has the meaning specified in
Section 7.4(a).
"COMMERCIAL PAPER" means (i) any unsecured promissory note of the
Borrower with a maturity at the time of issuance not exceeding nine months,
exclusive of days of grace, issued by the Borrower pursuant to a commercial
paper program and (ii) any unsecured borrowing by Borrower due within 9 months,
exclusive of days of grace, pursuant to money market or other similar short term
uncommitted credit lines.
"COMMITMENT" means, as to any Bank, such Bank's aggregate Tranche A Loan
Commitment, Tranche B Loan Commitment and/or Tranche C Loan Commitment and
"Commitments" means, as to all of the Banks, the aggregate of the Tranche A Loan
Commitments, Tranche B Loan Commitments and Tranche C Loan Commitments of all
the Banks.
"COMMITMENT FEE" has the meaning specified in Section 5.4(a).
"CONTAMINANT" means any waste, pollutant, hazardous substance, toxic
substance, hazardous waste, special waste, petroleum or petroleum derived
substance or waste, or any constituent of such substance or waste, including any
substance regulated under any Environmental Law.
"CONTINUING DIRECTORS" means the directors of the Borrower on the
Effective Date and each other director, if such other director's nomination for
election to the Board of Directors of the Borrower is recommended by a majority
of the then Continuing Directors.
"CORE BUSINESS" means the Borrower's operation as a domestic and
international retailer of rentable home videocassettes, DVDs, video games, and
allied and successor products.
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"DEFAULT" means any event which with the passing of time or the giving of
notice or both would become an Event of Default.
"DOCUMENTATION AGENT" means The Bank of New York, in its capacity as the
Documentation Agent, or any successor in such capacity.
"DOLLARS" and the sign "$" each mean the lawful money of the United
States of America.
"DOMESTIC LENDING OFFICE" means, with respect to any Bank, the office of
such Bank as such Bank may from time to time specify to the Borrower and the
Administrative Agent.
"EARNINGS FROM OPERATIONS" means, at any time, for the Borrower and its
Subsidiaries, revenues PLUS equity in earnings of affiliated companies, LESS (i)
operating costs and expenses (including any payments under guarantees of leases)
and (ii) cost of sales.
"EBITDA" means, at any time , the Earnings from Operations of the
Borrower and its Subsidiaries on a consolidated basis as set forth in the
statement of operations of the Borrower and its Subsidiaries for the immediately
preceding four Fiscal Quarters (adjusted for all Fiscal Quarters in such period
to account for material dispositions during such four Fiscal Quarters to third
parties other than franchisees), PLUS (to the extent previously deducted) (a)
the sum of the following expenses of the Borrower and its Subsidiaries for such
period: (i) depreciation expense, (ii) amortization expense (including all
amortization expenses recognized in accordance with APB 16 and 17 but excluding
amortization of videocassettes), (iii) in the event that, during such period,
the Borrower or any of its Subsidiaries acquires all or substantially all of the
assets or Equity of any other Person or any Equity in any other Person that is
reported on an equity basis, the EBITDA of such Person, as determined in
accordance with the terms of this defini tion, shall be included in the EBITDA
of the Borrower for all Fiscal Quarters during such period, (iv) all other
non-cash charges and (v) interest charges related to securitization and
financing transactions, the accounting treatment of which is governed by any
Financial Accounting Standards Board statement LESS (b) the proportional EBITDA
of the interests held by any other Person in entities fully consolidated with
the Borrower and its Subsidiaries, as determined in accordance with the terms of
this definition.
"ENVIRONMENTAL LAW" means the Comprehensive Environmental Response,
Compensation, and Liability Act (42 U.S.C. ss. 9601 eT Seq.), the Hazardous
Material Transportation Act (49 U.S.C. ss. 1801 eT Seq.), the Resource
Conservation and Recovery Act (42 U.S.C. ss. 6901 eT Seq.), the Federal Water
Pollution Control Act (33 U.S.C. ss. 1251 eT Seq.), the Clean Air Act (42 U.S.C.
ss. 7401 ET seq.), the Toxic Substances Control Act (15 U.S.C. ss. 2601 eT
Seq.), and the Occupational Safety and
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Health Act (29 U.S.C. ss. 651 eT Seq.), in each case as amended or
supplemented from time to time, and any analogous future federal or present
or future state or local statutes, including, without limitation, transfer of
ownership notification statutes such as the New Jersey Environmental Cleanup
Responsibility Act (N.J. Stat. Ann. ss. 13:1K-6 eT Seq.) and the Connecticut
Industrial Transfer Law of 1985 (Conn. Gen. Stat. ss. 22a-134 eT Seq.) and
the regulations promulgated pursuant thereto.
"ENVIRONMENTAL LIABILITIES AND COSTS" means, as to any Person, all
liabilities, obligations, responsibilities, Remedial Actions, losses, damages,
punitive damages, consequential damages, treble damages, costs and expenses
(including, without limitation, all reasonable fees, disbursements and expenses
of counsel, expert and consulting fees, and costs of investigation and
feasibility studies), fines, penalties, sanctions and interest incurred as a
result of any claim or demand, by any Person, whether based in contract, tort,
implied or express warranty, strict liability, any criminal or civil statute,
including any Environmental Law, Permit, order or agreement with any
Governmental Authority or other Person, arising from environmental, health or
safety conditions, or the Release or threatened Release of a Contaminant into
the environment, resulting from the past, present or future operations of such
Person or its Subsidiaries.
"ENVIRONMENTAL LIEN" means any Lien in favor of any Governmental
Authority for Environmental Liabilities and Costs.
"EQUITY" means all shares, options, equity interests, general or limited
partnership interests, joint venture interests or participations or other
equivalents (regardless of how designated) of or in a corporation, partnership
or other entity, whether voting or non-voting, and including, without
limitation, common stock, preferred stock, purchase rights, warrants or options
for, or any security substantially similar to, any of the foregoing.
"ERISA" means the Employee Retirement Income Security Act of 1974 (or any
successor legislation thereto) and the rules and regulations promulgated
thereunder, as amended from time to time.
"ERISA AFFILIATE" shall mean a corporation, partnership or other entity
which is considered one employer with the Borrower under Section 4001 of ERISA
or Section 414 of the Code.
"ERISA EVENT" means (i) a Reportable Event with respect to a Title IV
Plan; (ii) the withdrawal of the Borrower, any of its Subsidiaries or any ERISA
Affiliate from a Title IV Plan subject to Section 4063 of ERISA during a plan
year in which it was a substantial employer, as defined in Section 4001(a)(2) of
ERISA; (iii) the filing of a
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notice of intent to terminate a Title IV Plan or the treatment of a plan
amendment as a termination under Section 4041 of ERISA; or (iv) the institution
of proceedings to terminate a Title IV Plan or Multiemployer Plan by the PBGC.
"EUROCURRENCY LIABILITIES" has the meaning specified in Regulation D.
"EURODOLLAR LENDING OFFICE" means, with respect to any Bank, the office
of such Bank specified as its "Eurodollar Lending Office" opposite its name on
Schedule I (or, if no such office is specified, its Domestic Lending Office) or
such other office of such Bank as such Bank may from time to time specify to the
Borrower and the Administrative Agent.
"EURODOLLAR RATE" means, for any Interest Period, the rate of interest
per annum determined by the Administrative Agent to be the offered rate per
annum at which deposits in Dollars appears on the Telerate Page 3750 (or any
successor page) as of 11:00 A.M. (London time), or in the event such offered
rate is not available from the Telerate Page, the average (rounded upward to the
nearest whole multiple of 1/16 of 1% per annum, if such average is not such a
multiple) of the rates offered by the principal office of each of the Reference
Banks in London, England to prime banks in the London interbank market at 11:00
A.M. (London time), two Business Days before the first day of such Interest
Period for deposit in dollars in an amount substantially equal to the aggregate
Eurodollar Rate Loans to which such Interest Period relates and for a period
equal to such Interest Period.
"EURODOLLAR RATE LOAN" means any Loan or portion thereof that bears
interest at a rate determined with reference to the Eurodollar Rate.
"EURODOLLAR RATE RESERVE PERCENTAGE" means, for any Bank for any Interest
Period, the reserve percentage applicable during such Interest Period (or if
more than one such percentage shall be so applicable, the daily average of such
percentages for those days in such Interest Period during which any such
percentage shall be so applicable) under Regulation D for determining the actual
reserve requirement incurred by such Bank (including, without limitation, any
emergency, supplemental or other marginal reserve requirement) with respect to
liabilities or assets consisting of or including Eurocurrency Liabilities having
a term equal to such Interest Period.
"EVENT OF DEFAULT" has the meaning specified in Section 11.1.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FACILITY AGENTS" means each of the Administrative Agent, the
Documentation Agent and the Syndication Agents.
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"FEDERAL FUNDS RATE" means, for any day, a fluctuating interest rate per
annum equal for such day to the weighted average of the rates on overnight
federal funds transactions with members of the Federal Reserve System arranged
by federal funds brokers, as published for such day (or, if such day is not a
Business Day, for the next preceding Business Day) by the Federal Reserve Bank
of New York, or, if such rate is not so published for any day that is a Business
Day, the average of the quotations for such day on such transactions received by
the Administrative Agent from three federal funds brokers of recognized standing
selected by it.
"FINAL JUDGMENT" has the meaning specified in Section 11.1(f).
"FISCAL QUARTER" means any three month period ending March 31, June 30,
September 30 or December 31 of any Fiscal Year.
"FISCAL YEAR" means each twelve-month period ending December 31.
"FIXED CHARGE COVERAGE RATIO" means, for any period, the ratio of the sum
of EBITDA for the immediately preceding four Fiscal Quarters PLUS Operating
Lease Payments for such four Fiscal Quarters to the sum of Interest Payments for
the immediately preceding four Fiscal Quarters PLUS Operating Lease Payments for
such four Fiscal Quarters PLUS Capital Lease Principal Payments for such four
Fiscal Quarters PLUS the greater of the actual dividends paid on any class of
Equity during the preceding four Fiscal Quarters and 60% of the maximum
permitted dividends payable pursuant to Section 10.8 during such four Fiscal
Quarters.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect from time to time and set forth in the rules,
regulations, opinions and pronouncements of the Accounting Principles Board and
the American Institute of Certified Public Accountants and the statements and
pronouncements of the Financial Accounting Standards Board, or in such other
statements by such other entity as may be in general use by significant segments
of the accounting profession and which are applicable to the circumstances as of
the date of determination.
"GAAS" means generally accepted auditing standards in the United States
of America as in effect from time to time and set forth in the rules,
regulations, opinions and pronouncements of the Accounting Principles Board and
the American Institute of Certified Public Accountants and the statements and
pronouncements of the Financial Accounting Standards Board, or in such other
statements by such other entity as may be in general use by significant segments
of the accounting profession and which are applicable to the circumstances as of
the date of determination.
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"GOVERNMENTAL AUTHORITY" means any nation or government, any state or
other political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"GRANTING BANK" has the meaning specified in Section 13.7(h).
"INDEBTEDNESS" of any Person means at any date, without duplication, (i)
all obligations of such Person for borrowed money (including, without
limitation, in the case of the Borrower, the obligations of the Borrower for
borrowed money under this Agreement), (ii) all obligations of such Person
evidenced by bonds, debentures, notes or other similar instruments, (iii) all
obligations of such Person to pay the deferred purchase price of Property or
services, except as provided below, (iv) all obligations of such Person as
lessee under Capitalized Leases, (v) all Indebtedness of others secured by a
Lien on any Property of such Person, whether or not such Indebtedness is assumed
by such Person, (vi) all Indebtedness of others directly or indirectly
guaranteed or otherwise assumed by such Person, including any obligations of
others endorsed (otherwise than for collection or deposit in the ordinary course
of business) or discounted or sold with recourse by such Person, or in respect
of which such Person is otherwise directly or indirectly liable, including,
without limitation any Indebtedness in effect guaranteed by such Person through
any agreement (contingent or otherwise) to purchase, repurchase or otherwise
acquire such obligation or any security therefor, or to provide funds for the
payment or discharge of such obligation, or to maintain the solvency or any
balance sheet or other financial condition of the obligor of such obligation,
but excluding guarantees of Capitalized Leases of other Persons in an aggregate
amount not in excess of $50 million and (vii) all obligations of such Person as
issuer, customer or account party under letters of credit or bankers'
acceptances that are either drawn or that back financial obligations that would
otherwise be Indebtedness; provided, however, that in each of the foregoing
clauses (i) through (vii), Indebtedness shall not include obligations (other
than under this Agreement) with respect to the production, distribution and
acquisition of motion pictures or other programming rights, talent or publishing
rights which obligations are specifically secured by such rights or by an
assignment of payments from the exploitation of such rights.
"INDEMNIFIED LIABILITY" has the meaning specified in Section 13.4(b).
"INDEMNIFIED PERSON" has the meaning specified in Section 13.4(b).
"INFORMATION MEMORANDUM" means the confidential information memorandum,
dated May, 1999, and the attachments thereto.
"INITIAL FUNDING DATE" means the date on which the conditions set forth
in Sections 6.1, 6.2 and 6.3 are satisfied or waived and the initial Loans are
made hereunder.
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"INTEREST PAYMENTS" means, for any period, consolidated cash interest
expense (including interest expense attributable to Capitalized Leases) of the
Borrower and its Subsidiaries with respect to all outstanding Indebtedness of
the Borrower and its Subsidiaries.
"INTEREST PERIOD" means, (a) in the case of Base Rate Loans, the period
commencing on the date such Loans are made or on the date of conversion of such
Loans from Eurodollar Rate Loans and ending on the last day of each Fiscal
Quarter, and (b) in the case of Eurodollar Rate Loans, (i) initially, the period
commencing on the date such Loans are made or on the date of conversion of such
Loans or portions thereof from Base Rate Loans and ending one, two, three or six
months thereafter, as selected by the Borrower in its Notice of Borrowing or
Notice of Conversion or Continuation given to the Administrative Agent pursuant
to Section 2.2, 3.2, 4.2 or 5.1, as the case may be, and (ii) thereafter, if
such Loans are renewed, in whole or in part, as Eurodollar Rate Loans pursuant
to Section 5.1, the period commencing on the last day of the immediately
preceding Interest Period therefor and ending one, two, three or six months
thereafter, as selected by the Borrower in its Notice of Conversion or
Continuation given to the Administrative Agent pursuant to Section 5.1, subject,
however, to the following:
(i) if any Interest Period would otherwise end on a day that is
not a Business Day, such Interest Period shall be extended to the next
succeeding Business Day, unless the result of such extension for any
Eurodollar Rate Loan would be to extend such Interest Period into another
calendar month, in which event such Interest Period shall end on the
immediately preceding Business Day;
(ii) any Interest Period in respect of Eurodollar Rate Loans that
begins on the last Business Day of a calendar month (or on a day for
which there is no numerically corresponding day in the calendar month at
the end of such Interest Period) shall end on the last Business Day of a
calendar month;
(iii) no Interest Period may extend beyond the applicable
Termination Date;
(iv) the Borrower may not select any Interest Period in respect of
Loans in an aggregate amount less than $5,000,000; and
(v) there shall be outstanding at any one time no more than 10
Interest Periods in the aggregate.
"IRS" means the Internal Revenue Service, or any successor thereto.
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"INVESTMENT GRADE RATING" means (i) a rating of BBB- or higher by S&P and
(ii) a rating of Baa3 or higher by Moody's on the Borrower's unsecured senior
debt.
"LEAD ARRANGER" means Salomon Smith Barney Inc., acting in such capacity.
"LIEN" means any mortgage, deed of trust, pledge, hypothecation,
assignment, deposit arrangement, encumbrance, lien (statutory or other),
security interest or preference, priority or other security agreement or
preferential arrangement of any kind or nature whatsoever, including, without
limitation, any conditional sale or other title retention agreement.
"LOAN DOCUMENTS" means this Agreement and any notes that have been issued
hereunder.
"LOANS" means, collectively, the Tranche A Loans, Tranche B Loans and
Tranche C Loans.
"MAJORITY BANKS" means, at any time, unless otherwise indicated in this
Agreement, the vote of Banks having at least 51% of the aggregate amount of the
Tranche A Loan Commitments, the Tranche B Loan Commitments and the Tranche C
Loan Commitments, taken together and voting as a single group; PROVIDED,
HOWEVER, that, for purposes of this definition, if the Commitment of any Bank
shall have been terminated, or any Bank has defaulted in its obligation to fund
any Loan hereunder, the then aggregate unpaid principal amount of the
outstanding Loans of such Bank hereunder shall be deemed to be such Bank's
Commitment.
"MARGIN STOCK" has the meaning specified in Regulation U.
"MATERIAL ADVERSE CHANGE" means a change that has resulted or would
result in a Material Adverse Effect.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on the
business, financial condition, operations or Properties of the Borrower and its
Subsidiaries taken as a whole.
"MATERIAL CREDIT AGREEMENT CHANGE" means a change that has materially
adversely affected or would materially adversely affect the legality, validity
or enforceability of any payment obligation of the Borrower.
"MATERIAL SUBSIDIARY" of any Person means any "significant subsidiary" of
such Person as defined in Regulation S-X, as amended from time to time,
promulgated under the Securities Act of 1933, as amended.
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"MOODY'S" means Moody's Investors Service, Inc.
"MULTIEMPLOYER PLAN" means a multiemployer plan, as defined in Section
4001(a)(3) of ERISA, to which the Borrower, any of its Subsidiaries or any ERISA
Affiliate is making, is obligated to make, has made or been obligated to make,
contributions on behalf of participants who are or were employed by any of them.
"NET CASH PROCEEDS" means:
(a) in reference to asset sales, proceeds in cash as and when
received by the Borrower or any of its Subsidiaries (including cash paid
in respect of any Indebtedness received) from the sale by the Borrower or
any of its Subsidiaries to any Person (other than the Borrower or any of
its wholly owned Subsidiaries or its franchisees) of any asset outside of
the ordinary course of business (including, without limitation, the sale
of any facility, division, plant or other real property or interest in
real property), net of the direct costs relating to such sale, including,
without limitation, (i) legal, accounting and investment banking fees and
sale commissions, (ii) taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax
sharing arrangements in each case arising directly from such sale), (iii)
amounts required to be applied to the repayment of Indebtedness relating
to the asset that is the subject of such sale and not otherwise provided
for by the terms of such sale, and (iv) reasonable reserves for purchase
price adjustments; PROVIDED, HOWEVER, that cash proceeds of any asset
sale shall not be deemed "Net Cash Proceeds" until a period of 9 months
has elapsed following the Borrower's receipt thereof without the
reinvestment of such proceeds (A) in a manner not prohibited by Section
10.10(a)(ii) or (B) in capital expenditures for new store construction in
excess of budgeted amounts for the relevant period (or, in each case,
binding contracts to make such investments have been entered into within
such period); and
(b) in reference to Capital Market Transactions by any Person, the
proceeds in cash received from such Capital Market Transactions, net of
all issuance costs.
For purposes of this definition, proceeds received by any Subsidiary of the
Borrower other than a wholly owned Subsidiary shall be deemed to be Net Cash
Proceeds received by the Borrower only in an amount proportionate to the equity
ownership interest of the Borrower in the Subsidiary receiving such proceeds.
"NOTICE OF BORROWING" means a notice of the Borrower substantially in the
form of Exhibit A hereto specifying therein (i) the date of the proposed
Borrowing, (ii) the aggregate amount of such proposed Borrowing, (iii) the
amount thereof, if any, requested to be Eurodollar Rate Loans, (iv) the initial
Interest Period or Interest Periods
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for any such Eurodollar Rate Loans and (v) whether such Borrowing is to be a
Tranche A Loan Borrowing, a Tranche B Loan Borrowing or a Tranche C Loan
Borrowing.
"NOTICE OF CONVERSION OR CONTINUATION" has the meaning specified in
Section 5.1.
"OPERATING LEASE PAYMENTS" means, for any period, amounts recorded as
operating lease expenses on the financial statements of the Borrower prepared in
accordance with GAAP.
"PBGC" means the Pension Benefit Guaranty Corporation, or any successor
thereto.
"PENSION PLAN" means an employee pension benefit plan, as defined in
Section 3(2) of ERISA (other than a Multiemployer Plan), which is not an
individual account plan, as defined in Section 3(34) of ERISA, and which the
Borrower, any of its Subsidiaries or any ERISA Affiliate now or in the future
maintains, contributes to or has an obligation to contribute to on behalf of
participants who are or were employed by any of them.
"PERMIT" means any permit, approval, authorization, license, variance or
permission required from a Governmental Authority under an applicable
Requirement of Law.
"PERSON" means an individual, partnership, corporation (including a
business trust), joint stock company, trust, unincorporated association, joint
venture or other entity, or Governmental Authority.
"PLAN" shall mean an employee benefit plan as defined in Section 3(3) of
ERISA which is maintained or contributed to by the Borrower or an ERISA
Affiliate.
"PRELIMINARY PROSPECTUS" means the preliminary prospectus contained in
the Form S-1 filed by the Borrower with the SEC on May 6, 1999, as such may have
been amended prior to the date hereof.
"PROPERTY" means any interest in any kind of property or asset, whether
real, personal or mixed, and whether tangible or intangible, including, without
limitation, the right to use, transmit, display, license or otherwise
temporarily or permanently benefit from the possession of, control of or access
to any film, television program, trademark, trade name, copyright, service mark
or any other type of intellectual or intangible property.
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"QUALIFIED PLAN" means an employee pension benefit plan, as defined in
Section 3(2) of ERISA, which is intended to be tax-qualified under Section
401(a) of the Code, and which the Borrower, any of its Subsidiaries or any ERISA
Affiliate now or in the future maintains, contributes to or has an obligation to
contribute to on behalf of participants who are or were employed by any of them.
"RATABLE PORTION" means, with respect to any Bank, (i) with respect to
the Tranche A Loans, Tranche B Loans and Tranche C Loans, respectively, the
percentage obtained by dividing the amount of such Bank's Tranche A Loan
Commitment, Tranche B Loan Commitment or Tranche C Loan Commitment, as the case
may be, by the aggregate amount of all of such Tranche A Loan Commitments,
Tranche B Loan Commitments or Tranche C Loan Commitments of all the Banks,
respectively, and (ii) with respect to the aggregate amount of all Commitments,
the percentage obtained by dividing the aggregate Commitment of such Bank by the
aggregate amount of all Commitments of all the Banks PROVIDED, HOWEVER, that,
for purposes of this definition, if any Bank has defaulted in its obligation to
fund any Loan hereunder, the then aggregate unpaid principal amount of the
outstanding Loans of such Bank hereunder, shall be deemed to be such Bank's
Commitment.
"REFERENCE BANKS" means Citibank, N.A., The Bank of New York, Bank of
America NT&SA, Chase Securities Inc., Morgan Guaranty Trust Company of New York.
"REGISTER" has the meaning specified in Section 13.7(g) hereof.
"REGULATION D" means Regulation D of the Board of Governors of the
Federal Reserve System (or any successor thereto), as in effect from time to
time, or any successor thereto.
"REGULATION T" means Regulation T of the Board of Governors of the
Federal Reserve System (or any successor thereto), as in effect from time to
time, or any successor thereto.
"REGULATION U" means Regulation U of the Board of Governors of the
Federal Reserve System (or any successor thereto), as in effect from time to
time, or any successor thereto.
"REGULATION X" means Regulation X of the Board of Governors of the
Federal Reserve System (or any successor thereto), as in effect from time to
time, or any successor thereto.
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"RELEASE" means, as to any Person, any release, spill, emission, leaking,
pumping, injection, deposit, disposal, discharge, disbursal, leaching or
migration into the indoor or outdoor environment or into or out of any property
owned by such Person, including the movement of Contaminants through or in the
air, soil, surface water, ground water or property.
"REMEDIAL ACTION" means all actions required to (i) clean up, remove,
treat or in any other way address Contaminants in the indoor or outdoor
environment, (ii) prevent the Release or threat of Release or minimize the
further Release of Contaminants so they do not migrate or endanger or threaten
to endanger public health or welfare or the indoor or outdoor environment, or
(iii) perform pre-remedial studies and investigations and post-remedial
monitoring and care.
"REPORTABLE EVENT" means any of the events described in Section
4043(b)(1), (2), (3), (5), (6), (8) or (9) of ERISA.
"REQUIREMENTS OF LAW" means all applicable laws, including federal, state
and local laws, rules, regulations, orders, decrees or other determinations of
an arbitrator, court or other Governmental Authority, and including the
requirements of ERISA and Environmental Law.
"RESPONSIBLE FINANCIAL OFFICER" means any of the chief financial officer,
treasurer, assistant treasurer or controller.
"S&P" means Standard & Poor's Ratings Group.
"SCHEDULED TRANCHE A LOAN COMMITMENT REDUCTION DATE" has the meaning
specified in Section 2.3(a).
"SEC" means the Securities and Exchange Commission.
"SINGLE-EMPLOYER PLAN" shall mean a single-employer plan as defined in
section 4001(a)(15) of ERISA which is subject to the provisions of Title IV of
ERISA.
"SPC" has the meaning specified in Section 13.7(h).
"SUBSIDIARY" means, with respect to any Person, any corporation,
partnership or other business entity of which more than 50% of the outstanding
Equity having ordinary voting power to elect a majority of the board of
directors of such entity (irrespective of whether, at the time, Equity of any
other class or classes of such entity shall have or might have voting power by
reason of the happening of any contingency) is, or of which more than 50% of the
interests in which are, at the time, directly or indirectly, owned by such
Person and/or one or more Subsidiaries of such Person. In addition, with
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<PAGE>
respect to the Borrower, "Subsidiary" shall be deemed at all times to include
each company identified as a subsidiary in the consolidated financial statements
of the Borrower included in the Preliminary Prospectus whether or not at the
date of such financial statements such company's Equity, or a portion thereof,
is owned by an Affiliate of the Borrower.
"SYNDICATION AGENTS" means each of Bank of America NT&SA and Chase
Securities Inc., acting in such capacity, or any successor in such capacity.
"TAX AFFILIATE" means, as to any Person, (i) any Subsidiary of such
Person, or (ii) any Affiliate of such Person with which such Person files or is
required to file consolidated, combined or unitary tax returns.
"TAX MATTERS AGREEMENT" means the Tax Matters Agreement to be entered
into between Viacom Inc. and Borrower, as amended from time to time, which is
described in the Preliminary Prospectus.
"TERMINATION DATE" means (i) as to any Tranche A Loan Commitment, the
Tranche A Loan Commitment Termination Date, (ii) as to any Tranche B Loan
Commitment, the Tranche B Final Repayment Date, or (iii) as to any Tranche C
Loan Commitment, the Tranche C Loan Commitment Termination Date, as the case may
be.
"TITLE IV PLAN" means a Pension Plan, other than a Multiemployer Plan,
which is covered by Title IV of ERISA.
"TOTAL DEBT" of the Borrower and its Subsidiaries means, on any date, the
total outstanding Indebtedness of the Borrower and its Subsidiaries on a
consolidated basis; PROVIDED that for purposes of calculating the Total Leverage
Ratio, Total Debt shall be reduced by 65% of cash, Cash Equivalents and
short-term investments held by the Borrower and its Subsidiaries on a
consolidated basis.
"TOTAL LEVERAGE RATIO" means the ratio of Total Debt to EBITDA.
"TRANCHE" means any of Tranche A, Tranche B, or Tranche C.
"TRANCHE A" has the meaning specified in the recitals to this Agreement.
"TRANCHE A LOAN" means a Loan made to the Borrower pursuant to Section
2.1.
"TRANCHE A LOAN BORROWING" means a borrowing by the Borrower consisting
of Tranche A Loans made on the same day by the Banks ratably according to their
respective Tranche A Loan Commitments.
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"TRANCHE A LOAN COMMITMENT" has the meaning specified in Section 2.1(a).
"TRANCHE A LOAN COMMITMENT TERMINATION DATE" means the earlier of (i)
July 1, 2004 and (ii) the date of the earlier termination in whole of the
Tranche A Loan Commitments pursuant to the terms hereof, including pursuant to
Section 11.1.
"TRANCHE B" has the meaning specified in the recitals to this Agreement.
"TRANCHE B LOAN" means a Loan made to the Borrower pursuant to Section
3.1.
"TRANCHE B LOAN BORROWING" means a borrowing by the Borrower consisting
of Tranche B Loans made on the same day by the Banks ratably according to their
respective Tranche B Loan Commitments.
"TRANCHE B LOAN COMMITMENT" has the meaning specified in Section 3.1(a).
"TRANCHE C" has the meaning specified in the recitals to this Agreement.
"TRANCHE C LOAN" means a Loan made to the Borrower pursuant to Section
4.1.
"TRANCHE C LOAN BORROWING" means a borrowing by the Borrower consisting
of a Tranche C Loan made on the same day by Tranche C Loan Banks.
"TRANCHE C LOAN COMMITMENT" has the meaning specified in Section 4.1.(a)
"TRANCHE C LOAN COMMITMENT TERMINATION DATE" means the earlier of (i)
June 19, 2000 and (ii) the date of the earlier termination in whole of all of
the Tranche C Loan Commitments pursuant to the terms hereof, including pursuant
to Section 11.1.
"WITHDRAWAL LIABILITY" means, as to any Person, at any time, the
aggregate amount of the liabilities, if any, of such Person pursuant to Section
4201 of ERISA.
1.2. COMPUTATION OF TIME PERIODS. In this Agreement, in the computation
of periods of time from a specified date to a later specified date, the word
"from" means "from and including" and the words "to" and "until" each mean "to
but excluding" and the word "through" means "to and including".
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1.3. ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP.
The parties hereto agree, however, that in the event that any change in
accounting principles from those used in the preparation of the financial
statements referred to in Section 7.4(a) is hereafter occasioned by the
promulgation of rules, regulations, pronouncements, opinions and statements by
or required by the Financial Accounting Standards Board or Accounting Principles
Board or the American Institute of Certified Public Accountants (or successors
thereto or agencies with similar functions) and such change materially affects
the calculation of any component of any financial covenant, standard or term
contained in this Agreement, the Administrative Agent and the Borrower shall
negotiate in good faith to amend such financial covenants, standards or terms
found in this Agreement (other than in respect of financial statements to be
delivered hereunder) so that, upon adoption of such changes, the criteria for
evaluation of the Borrower's and its Subsidiaries' financial condition shall be
the same after such change as if such change had not been made; PROVIDED,
HOWEVER, that (i) any such amendments shall not become effective for purposes of
this Agreement unless approved by the Majority Banks and (ii) if the Borrower
and the Majority Banks cannot agree on such an amendment, then the calculations
under such financial covenants, standards or terms shall continue to be computed
without giving effect to such change in accounting principles.
ARTICLE II
THE TRANCHE A LOANS
2.1. THE TRANCHE A LOANS. (a) THE TRANCHE A LOANS. On the terms and
subject to the conditions contained in this Agreement, each Bank severally
agrees to make Tranche A Loans to the Borrower from time to time on any Business
Day during the period from the Initial Funding Date until the Tranche A Loan
Commitment Termination Date in an aggregate amount not to exceed at any time
outstanding the amount set forth opposite such Bank's name on Schedule I as its
"Tranche A Loan Commitment" (as adjusted from time to time by reason of
assignments in accordance with the provisions of Section 13.7 and as such amount
may be reduced pursuant to Section 2.3, such Bank's "Tranche A Loan
Commitment"); PROVIDED, HOWEVER, that, following the making of each such
proposed Tranche A Loan, the aggregate amount of all Tranche A Loans, together
with the aggregate face amount of Commercial Paper outstanding, shall not exceed
the aggregate amount of the Tranche A Loan Commitments of the Banks at such
time. Within the limits of each Bank's Tranche A Loan Commitment, amounts
borrowed under this Section 2.1(a) and prepaid pursuant to Section 2.5 may be
reborrowed under this Section 2.1(a).
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(b) EVIDENCE OF DEBT. (i) Each Bank shall maintain in accordance with its
usual practice an account or accounts evidencing the Indebtedness to such Bank
resulting from each Tranche A Loan made by such Bank to the Borrower from time
to time, including the amounts of principal and interest payable and paid to
such Bank from time to time hereunder.
(ii) The Register maintained by the Administrative Agent pursuant to
Section 13.7(g) shall include a "Tranche A Loan contract control account" for
each Bank, in which account shall be recorded (A) the date and amount of each
Tranche A Loan Borrowing hereunder, (B) the amount and type of each Bank's
Tranche A Loan comprising such Borrowing and any Interest Period applicable
thereto, (C) the amount of any principal or interest due and payable or to
become due and payable from the Borrower to each Bank with respect to each such
Tranche A Loan hereunder and (D) the amount of any sum received by the
Administrative Agent from the Borrower with respect to such Tranche A Loans
hereunder and each Bank's Ratable Portion thereof.
(iii) The entries made in the Register in respect of the Tranche A Loans
shall be conclusive and binding for all purposes, absent manifest error.
2.2. MAKING THE TRANCHE A LOANS. (a) Each Tranche A Loan Borrowing shall
be made upon receipt of a Notice of Borrowing, given by the Borrower to the
Administrative Agent not later than (i) 9:30 A.M. (New York City time) on the
Business Day of the proposed Tranche A Loan Borrowing, in the event such Tranche
A Loan Borrowing is to be comprised of Base Rate Loans, and (ii) 11:00 A.M. (New
York City time) on the third Business Day prior to the date of the proposed
Tranche A Loan Borrowing, in the event such Tranche A Loan Borrowing is to be
comprised of Eurodollar Rate Loans.
(b) The Administrative Agent shall give to each Bank prompt notice (but
in any event on the same day) of its receipt of a Notice of Borrowing in respect
of Tranche A Loans and, if Eurodollar Rate Loans are properly requested in such
Notice of Borrowing, upon its determination thereof, notice of the applicable
interest rate under Section 5.3(b). Each Bank shall, before 11:00 A.M. (or in
the case of a Tranche A Loan Borrowing being made on the same day, before 12:00
noon) (New York City time) on the date of the proposed Tranche A Loan Borrowing,
make available for the account of its Applicable Lending Office to the
Administrative Agent at its address referred to in Section 13.2, in immediately
available funds, such Bank's Ratable Portion of such proposed Tranche A Loan
Borrowing. After the Administrative Agent's receipt of such funds and upon
fulfillment of the applicable conditions set forth in Article VI, the
Administrative Agent will make such funds available to the Borrower at the
Administrative Agent's aforesaid address.
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(c) Each Tranche A Loan Borrowing pursuant to this Section 2.2 shall be
in an aggregate amount of not less than $5,000,000 or an integral multiple of
$5,000,000 in excess thereof.
(d) Each Notice of Borrowing pursuant to this Section 2.2 shall be
irrevocable and binding on the Borrower. In the case of any proposed Tranche A
Loan Borrowing comprised of Eurodollar Rate Loans, the Borrower shall indemnify
each Bank against any loss, cost or expense incurred by such Bank as a result of
any failure to fulfill on or before the date specified in such Notice of
Borrowing for such proposed Borrowing the applicable conditions set forth in
Article VI, including, without limitation, any loss (excluding loss of the
margin payable in accordance with Section 5.2 on the amount of principal not
borrowed as a result of such failure), cost or expense incurred by reason of the
liquidation or reemployment of deposits or other funds acquired by such Bank to
fund any Eurodollar Rate Loan to be made by such Bank as part of such proposed
Tranche A Loan Borrowing when such Eurodollar Rate Loan, as a result of such
failure, is not made on such date.
(e) Unless the Administrative Agent shall have received notice from a
Bank prior to the date of any proposed Tranche A Loan Borrowing pursuant to this
Section 2.2 that such Bank will not make available to the Administrative Agent
such Bank's Ratable Portion of such Tranche A Loan Borrowing, the Administrative
Agent may assume that such Bank has made such Ratable Portion available to the
Administrative Agent on the date of such Tranche A Loan Borrowing in accordance
with this Section 2.2 and the Administrative Agent may, in reliance upon such
assumption, make available to the Borrower on such date a corresponding amount.
If and to the extent that such Bank shall not have so made such Ratable Portion
available to the Administrative Agent and the Administrative Agent has so made
available such amount, such Bank and the Borrower severally agree to repay to
the Administrative Agent forthwith on demand such corresponding amount together
with interest thereon, for each day from the date such amount is made available
to the Borrower until the date such amount is repaid to the Administrative
Agent, at (i) in the case of the Borrower, the interest rate applicable at the
time to the Tranche A Loan comprising such Tranche A Loan Borrowing and (ii) in
the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the
Administrative Agent such corresponding amount, such amount so repaid shall
constitute such Bank's Tranche A Loan as part of such Borrowing for purposes of
this Agreement. If the Borrower shall repay to the Administrative Agent such
corresponding amount, such payment shall not relieve such Bank of any obligation
it may have to the Borrower hereunder.
(f) The failure of any Bank to make the Tranche A Loan to be made by it
as part of any Tranche A Loan Borrowing pursuant to this Section 2.2 shall not
relieve any other Bank of its obligation, if any, hereunder to make its Tranche
A Loan on the date
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of such Borrowing, but no Bank shall be responsible for the failure of any
other Bank to make the Tranche A Loan to be made by such other Bank on the date
of any such Tranche A Loan Borrowing.
2.3. TERMINATION/REDUCTION OF THE TRANCHE A LOAN COMMITMENTS. (a)
OPTIONAL REDUCTIONS. The Borrower shall have the right, upon at least three
Business Days' prior notice to the Administrative Agent, to terminate in whole
or permanently reduce ratably in part the unused portions of the respective
Tranche A Loan Commitments of the Banks; PROVIDED, HOWEVER, that each partial
reduction shall be in the aggregate amount of not less than $5,000,000 or an
integral multiple of $5,000,000 in excess thereof; optional reductions may be
allocated against Scheduled Tranche A Loan Commitment Reduction Dates in any
manner requested by the Borrower.
(b) PAYMENT OF COMMITMENT FEE. Simultaneously with any termination or
reduction of the Tranche A Loan Commitments pursuant to this Section 2.3, the
Borrower shall pay to the Administrative Agent for the account of each Bank the
applicable Commitment Fee, if any, on the amount of the Tranche A Loan
Commitments so terminated or reduced and owed to such Bank through the date of
such termination or reduction.
2.4. REPAYMENT OF THE TRANCHE A LOAN. The Borrower shall repay the
aggregate outstanding principal amount of the Tranche A Loans (together with all
accrued but unpaid interest thereon) in full on the Tranche A Loan Commitment
Termination Date.
2.5. OPTIONAL PREPAYMENTS OF THE TRANCHE A LOAN. The Borrower may, upon
at least three Business Days' prior notice (or at least one Business Day's prior
notice in the case of Base Rate Loans), to the Administrative Agent stating the
proposed date and aggregate principal amount of the prepayment, and if such
notice is given the Borrower shall, prepay the aggregate outstanding principal
amount of the Tranche A Loans comprising a part of the same Tranche A Loan
Borrowing, in whole or ratably in part, together with accrued interest to the
date of such prepayment on the principal amount prepaid; PROVIDED, HOWEVER, that
the Borrower shall indemnify the Banks pursuant to Section 13.4(c) in the event
that any prepayment of any Eurodollar Rate Loans shall be made on a day other
than the last day of an Interest Period for such Loans; and PROVIDED FURTHER,
HOWEVER, that each partial prepayment permitted under this Section 2.5 shall be
in an aggregate amount not less than $5,000,000 or integral multiples of
$1,000,000 in excess thereof.
2.6. LIMITATION ON USE OF TRANCHE A LOANS. Borrower may not directly or
indirectly use the proceeds of any Tranche A Loans to repay any portion of
outstanding Tranche C Loans except (A) after the Borrower shall have completed
an initial public offering of its common stock, (B) following the application of
all Net Cash Proceeds
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from such initial public offering of its common stock and other Capital Market
Transactions occurring prior to or simultaneously with such initial public
offering as set forth in Section 5.11(b)(i) and (c)(i), respectively, and (C) in
an amount not to exceed $1.2 billion less the aggregate outstanding principal
amount of Tranche A Loans and Tranche B Loans prior to the closing of an initial
public offering of the Borrower's common stock.
ARTICLE III
THE TRANCHE B LOANS
3.1. THE TRANCHE B LOANS. (a) THE TRANCHE B LOANS. On the terms and
subject to the conditions contained in this Agreement, each Bank severally
agrees to make a Tranche B Loan to the Borrower on the Initial Funding Date in
an amount not to exceed the amount set forth opposite such Bank's name on
Schedule I as its "Tranche B Loan Commitment" (as adjusted from time to time by
reason of assignments in accordance with the provisions of Section 13.7 as such
amount may be reduced pursuant to Section 3.3, such Bank's "Tranche B Loan
Commitment").
(b) EVIDENCE OF DEBT. (i) Each Bank shall maintain in accordance with its
usual practice an account or accounts evidencing the Indebtedness to such Bank
resulting from the Tranche B Loan made by such Bank to the Borrower, including
the amounts of principal and interest payable and paid to such Bank from time to
time hereunder.
(ii) The Register maintained by the Administrative Agent pursuant to
Section 13.7(g) shall include a "Tranche B Loan contract control account" for
each Bank, in which account shall be recorded (A) the date and amount of any
Tranche B Loan Borrowing hereunder, (B) the amount and type of each Bank's
Tranche B Loan comprising such Borrowing and any Interest Period applicable
thereto, (C) the amount of any principal or interest due and payable or to
become due and payable from the Borrower to each Bank with respect to each such
Tranche B Loan hereunder and (D) the amount of any sum received by the
Administrative Agent from the Borrower with respect to such Tranche B Loans
hereunder and each Bank's Ratable Portion thereof.
(iii) The entries made in the Register in respect of Tranche B Loans
shall be conclusive and binding for all purposes, absent manifest error.
3.2. MAKING THE TRANCHE B LOANS. (a) The Tranche B Loan Borrowing shall
be made upon receipt of a Notice of Borrowing, given by the Borrower to the
Administrative Agent not later than (i) 9:30 A.M. (New York City time) on the
Initial Funding Date, in the event the Tranche B Loan Borrowing is to be
comprised of Base Rate Loans, and (ii) 11:00 A.M. (New York City time) on the
third Business Day prior to
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the Initial Funding Date, in the event the Tranche B Loan Borrowing is to be
comprised of Eurodollar Rate Loans.
(b) The Administrative Agent shall give to each Bank prompt
notice (but in any event on the same day) of its receipt of a Notice of
Borrowing in respect of Tranche B Loans and, if Eurodollar Rate Loans are
properly requested in such Notice of Borrowing, upon its determination thereof,
notice of the applicable interest rate under Section 5.3(b). Each Bank shall,
before 11:00 A.M. (or in the case of a Tranche B Loan Borrowing being made on
the same day, before 12:00 noon) (New York City time) on the date of the
proposed Tranche B Loan Borrowing, make available for the account of its
Applicable Lending Office to the Administrative Agent at its address referred to
in Section 13.2, in immediately available funds, such Bank's Ratable Portion of
such proposed Tranche B Loan Borrowing. After the Administrative Agent's receipt
of such funds and upon fulfillment of the applicable conditions set forth in
Article VI, the Administrative Agent will make such funds available to the
Borrower at the Administrative Agent's above-referenced address.
(c) The Notice of Borrowing shall be irrevocable and binding
on the Borrower. In the case of a proposed Tranche B Loan Borrowing comprised of
Eurodollar Rate Loans, the Borrower shall indemnify each Bank against any loss,
cost or expense incurred by such Bank as a result of any failure to fulfill on
or before the date specified in the Notice of Borrowing the applicable
conditions set forth in Article VI, including, without limitation, any loss
(excluding loss of the margin payable in accordance with Section 5.2 on the
amount of principal not borrowed as a result of such failure), cost or expense
incurred by reason of the liquidation or reemployment of deposits or other funds
acquired by such Bank to fund the Eurodollar Rate Loan to be made by such Bank
as part of the proposed Tranche B Loan Borrowing when such Eurodollar Rate Loan,
as a result of such failure, is not made on such date.
(d) Unless the Administrative Agent shall have received notice
from a Bank prior to the date of the proposed Tranche B Loan Borrowing that such
Bank will not make available to the Administrative Agent such Bank's Ratable
Portion of the Tranche B Loan Borrowing, the Administrative Agent may assume
that such Bank has made such Ratable Portion available to the Administrative
Agent on the date of the Tranche B Loan Borrowing in accordance with this
Section 3.2 and the Administrative Agent may, in reliance upon such assumption,
make available to the Borrower on such date a corresponding amount. If and to
the extent that such Bank shall not have so made such Ratable Portion available
to the Administrative Agent and the Administrative Agent has so made available
such amount, such Bank and the Borrower severally agree to repay to the
Administrative Agent forthwith on demand such corresponding amount together with
interest thereon, for each day from the date such amount is made available to
the Borrower until the date such amount is repaid to the Administrative Agent,
at (i) in the case of the Borrower, the interest rate applicable at the time to
the Tranche B Loans
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comprising the Tranche B Loan Borrowing and (ii) in the case of such Bank, the
Federal Funds Rate. If such Bank shall repay to the Administrative Agent such
corresponding amount, such amount so repaid shall constitute such Bank's Tranche
B Loan as part of such Borrowing for purposes of this Agreement. If the Borrower
shall repay to the Administrative Agent such corresponding amount, such payment
shall not relieve such Bank of any obligation it may have to the Borrower
hereunder.
(e) The failure of any Bank to make its Tranche B Loan shall
not relieve any other Bank of its obligation, if any, hereunder to make its
Tranche B Loan on the date of such Borrowing, but no Bank shall be responsible
for the failure of any other Bank to make the Tranche B Loan to be made by such
other Bank.
3.3. REPAYMENT OF THE TRANCHE B LOANS. The principal amount of
the Tranche B Loan of each Bank shall be payable in quarterly installments on
January 1, April 1, July 1 and October 1 of each year, commencing April 1, 2002,
and ending on July 1, 2004 (the "Tranche B Final Repayment Date"), in an amount
equal to such Bank's Ratable Portion of the quarterly amounts set forth in
column (y) below opposite the period specified in column (x) during which such
date occurs:
(x) (y)
Required Quarterly Amounts
Quarter of Tranche B Loan Reductions
------- ----------------------------
April 1, 2002 50,000,000
July 1, 2002 50,000,000
October 1, 2002 50,000,000
January 1, 2003 50,000,000
April 1, 2003 75,000,000
July 1, 2003 75,000,000
October 1, 2003 75,000,000
January 1, 2004 75,000,000
April 1, 2004 50,000,000
July 1, 2004 50,000,000
The amounts under (y) shall be adjusted in the amounts and in the manner
required under Section 3.4.
3.4. OPTIONAL PREPAYMENTS OF THE TRANCHE B LOANS. The Borrower
may, upon at least three Business Days' prior notice (or at least one Business
Day's prior notice in the case of Base Rate Loans) to the Administrative Agent
stating the proposed date and aggregate principal amount of the prepayment, and
if such notice is given the Borrower shall, prepay the outstanding principal
amount of the Tranche B Loans, in whole or in part, together with accrued
interest to the date of such prepayment; PROVIDED, HOWEVER, that the Borrower
shall indemnify the Banks pursuant to Section 13.4(c) in the event that
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any prepayment of any Eurodollar Rate Loans shall be made on a day other than
the last day of an Interest Period for such Loans. Amounts borrowed under
Section 3.1(a) and prepaid pursuant to this Section 3.4 may not be reborrowed.
Upon any prepayment of the Tranche B Loans, the Tranche B Loan Commitment shall
be reduced by the amount of any such prepayment.
ARTICLE IV
THE TRANCHE C LOANS
4.1. THE TRANCHE C LOANS. (a) THE TRANCHE C LOANS. On the
terms and subject to the conditions contained in this Agreement, each Bank
severally agrees to make Tranche C Loans to the Borrower from time to time on
any Business Day during the period from the Initial Funding Date until the
Tranche C Loan Commitment Termination Date in an aggregate amount not to exceed
at any time outstanding the amount set forth opposite such Bank's name on
Schedule I as its "Tranche C Loan Commitment" (as adjusted from time to time by
reason of assignments in accordance with the provisions of Section 13.7 and as
such amount may be reduced pursuant to Section 4.3 the "Tranche C Loan
Commitment"). Within the limits of the Tranche C Loan Commitment, amounts
borrowed under this Section 4.1(a) and prepaid pursuant to Section 4.5 may be
reborrowed under this Section 4.1(a).
(b) EVIDENCE OF DEBT. (i) Each Bank shall maintain in
accordance with its usual practice an account or accounts evidencing the
Indebtedness resulting from each Tranche C Loan made by such Bank to the
Borrower from time to time, including the amounts of principal and interest
payable and paid to such Bank from time to time hereunder.
(ii) The Register maintained by the Administrative Agent
pursuant to Section 13.7(g) shall include a "Tranche C Loan contract control
account", in which account shall be recorded (A) the date and amount of each
Tranche C Loan Borrowing hereunder, (B) the amount and type of each Bank's
Tranche C Loan comprising such Borrowing and any Interest Period applicable
thereto, (C) the amount of any principal or interest due and payable or to
become due and payable from the Borrower to each Bank with respect to each such
Tranche C Loan hereunder and (D) the amount of any sum received by the
Administrative Agent from the Borrower with respect to such Tranche C Loans
hereunder and each Bank's Ratable Portion thereof.
(iii) The entries made in the Register in respect of the
Tranche C Loans shall be conclusive and binding for all purposes, absent
manifest error.
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4.2. MAKING THE TRANCHE C LOANS. (a) Each Tranche C Loan
Borrowing shall be made upon receipt of a Notice of Borrowing, given by the
Borrower to the Administrative Agent not later than (i) 9:30 A.M. (New York City
time) on the Business Day of the proposed Tranche C Loan Borrowing, in the event
such Tranche C Loan Borrowing is to be comprised of Base Rate Loans, and (ii)
11:00 A.M. (New York City time) on the third Business Day prior to the date of
the proposed Tranche C Loan Borrowing, in the event such Tranche C Loan
Borrowing is to be comprised of Eurodollar Rate Loans.
(b) The Administrative Agent shall give each Bank prompt
notice (but in any event on the same day) of its receipt of a Notice of
Borrowing in respect of Tranche C Loans and, if Eurodollar Rate Loans are
properly requested in such Notice of Borrowing, upon its determination thereof,
notice of the applicable interest rate under Section 5.3(b). Each Bank shall,
before 11:00 A.M. (or in the case of a Tranche C Loan Borrowing being made on
the same day, before 12:00 noon) (New York City time) on the date of the
proposed Tranche C Loan Borrowing, make available for the account of its
Applicable Lending Office to the Administrative Agent at its address referred to
in Section 13.2, in immediately available funds, the amount of the Tranche C
Loan Borrowing. After the Administrative Agent's receipt of such funds and upon
fulfillment of the applicable conditions set forth in Article VI, the
Administrative Agent will make such funds available to the Borrower at the
Administrative Agent's aforesaid address.
(c) Each Tranche C Loan Borrowing pursuant to this Section 4.2
shall be in an aggregate amount of not less than $5,000,000 or an integral
multiple of $5,000,000 in excess thereof.
(d) Each Notice of Borrowing pursuant to this Section 4.2
shall be irrevocable and binding on the Borrower. In the case of any proposed
Tranche C Loan Borrowing comprised of Eurodollar Rate Loans, the Borrower shall
indemnify each Bank against any loss, cost or expense incurred by it as a result
of any failure to fulfill on or before the date specified in such Notice of
Borrowing for such proposed Borrowing the applicable conditions set forth in
Article VI, including, without limitation, any loss (excluding loss of the
margin payable in accordance with Section 5.2 on the amount of principal not
borrowed as a result of such failure), cost or expense incurred by reason of the
liquidation or reemployment of deposits or other funds acquired by such Bank to
fund any Eurodollar Rate Loan to be made by it as part of such proposed Tranche
C Loan Borrowing when such Eurodollar Rate Loan, as a result of such failure, is
not made on such date.
(e) Unless the Administrative Agent shall have received notice
from a Bank prior to the date of any proposed Tranche C Loan Borrowing pursuant
to this Section 4.2 that it will not make available to the Administrative Agent
funds for such Tranche C Loan Borrowing, the Administrative Agent may assume
that such Bank has
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made such funds available to the Administrative Agent on the date of such
Tranche C Loan Borrowing in accordance with this Section 4.2 and the
Administrative Agent may, in reliance upon such assumption, make available to
the Borrower on such date a corresponding amount. If and to the extent that such
Bank shall not have so made such funds available to the Administrative Agent and
the Administrative Agent has so made available such amount, such Bank and the
Borrower severally agree to repay to the Administrative Agent forthwith on
demand such corresponding amount together with interest thereon, for each day
from the date such amount is made available to the Borrower until the date such
amount is repaid to the Administrative Agent, at (i) in the case of the
Borrower, the interest rate applicable at the time to the Tranche C Loan
comprising such Tranche C Loan Borrowing and (ii) in the case of such Bank, the
Federal Funds Rate. If such Bank shall repay to the Administrative Agent such
corresponding amount, such amount so repaid shall constitute such Bank's Tranche
C Loan as part of such Borrowing for purposes of this Agreement. If the Borrower
shall repay to the Administrative Agent such corresponding amount, such payment
shall not relieve such Bank of any obligation it may have to the Borrower
hereunder.
(f) The failure of any Bank to make its Tranche C Loan shall
not relieve any other Bank of its obligation, if any, hereunder to make its
Tranche C Loan on the date of such Borrowing, but no Bank shall be responsible
for the failure of any other Bank to make the Tranche C Loan to be made by such
other Bank.
4.3. TERMINATION/REDUCTION OF THE TRANCHE C LOAN COMMITMENTS.
(a) OPTIONAL REDUCTIONS. The Borrower shall have the right, upon at least three
Business Days' prior notice to the Administrative Agent, to terminate in whole
or permanently reduce ratably in part the unused portions of the Tranche C Loan
Commitment; PROVIDED, HOWEVER, that each partial reduction shall be in the
aggregate amount of not less than $5,000,000 or an integral multiple of
$5,000,000 in excess thereof.
(b) PAYMENT OF COMMITMENT FEE. Simultaneously with any
termination or reduction of the Tranche C Loan Commitment pursuant to this
Section 4.3, the Borrower shall pay to the Administrative Agent for the account
of each Bank the applicable Commitment Fee, if any, on the amount of the Tranche
C Loan Commitment so terminated or reduced and owed to such Bank through the
date of such termination or reduction.
4.4. REPAYMENT OF THE TRANCHE C LOAN. The Borrower shall repay
the outstanding principal amount of the Tranche C Loan (together with all
accrued but unpaid interest thereon) in full on the Tranche C Loan Commitment
Termination Date.
4.5. OPTIONAL PREPAYMENTS OF THE TRANCHE C LOAN. The Borrower
may, upon at least three Business Days' prior notice (or at least one Business
Day's prior notice in the case of Base Rate Loans), to the Administrative Agent
stating the proposed date
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and aggregate principal amount of the prepayment, and if such notice is given
the Borrower shall, prepay the outstanding principal amount of the Tranche C
Loan comprising a part of the same Tranche C Loan Borrowing, in whole or ratably
in part, together with accrued interest to the date of such prepayment on the
principal amount prepaid; PROVIDED, HOWEVER, that the Borrower shall indemnify
the Banks pursuant to Section 13.4(c) in the event that any prepayment of any
Eurodollar Rate Loans shall be made on a day other than the last day of an
Interest Period for such Loans; and PROVIDED FURTHER, HOWEVER, that each partial
prepayment permitted under this Section 4.5 shall be in an aggregate amount not
less than $5,000,000 or integral multiples of $1,000,000 in excess thereof.
ARTICLE V
CONVERSION, INTEREST, PAYMENTS, FEES, ETC.
5.1. CONVERSION/CONTINUATION OPTION. The Borrower may elect (i) at any
time to convert Base Rate Loans or any portion thereof to Eurodollar Rate Loans
or (ii) at the end of any Interest Period with respect thereto, to convert
Eurodollar Rate Loans or any portion thereof into Base Rate Loans, or to
continue such Eurodollar Rate Loans or any portion thereof as Eurodollar Rate
Loans for an additional Interest Period; PROVIDED, HOWEVER, that the aggregate
of the Eurodollar Rate Loans of the Borrower so converted or so continued for
each Interest Period must be in the amount of $5,000,000 or an integral multiple
of $5,000,000 in excess thereof. Each such election shall be in substantially
the form of Exhibit B hereto (a "Notice of Conversion or Continuation") and
shall be made by giving the Administrative Agent at least one Business Day's, in
the case of a conversion to a Base Rate Loan, and three Business Days', in the
case of a conversion to or a continuation of a Eurodollar Rate Loan, prior
written notice thereof specifying (A) the amount and type of conversion or
continuation, (B) in the case of a conversion to or a continuation of Eurodollar
Rate Loans, the Interest Period therefor, and (C) in the case of a conversion
the date of conversion (which date shall be a Business Day and, if a conversion
from a Eurodollar Rate Loan, shall also be the last day of the Interest Period
therefor). The Administrative Agent shall promptly (but in any event on the same
day) notify each Bank of its receipt of a Notice of Conversion or Continuation
and of the contents thereof. Notwithstanding the foregoing, no conversion in
whole or in part of Base Rate Loans to Eurodollar Rate Loans, and no
continuation in whole or in part of Eurodollar Rate Loans upon the expiration of
any Interest Period therefor, shall be permitted at any time at which an Event
of Default shall have occurred and be continuing. If, within the time period
required under the terms of this Section 5.1, the Administrative Agent does not
receive a Notice of Conversion or Continuation from the Borrower containing an
election to continue all or any portion of the Eurodollar Rate Loans for an
additional Interest Period or to convert all or any portion of such Loans, then,
upon the expiration of the Interest Period therefor, such Loans or the portions
thereof for which an
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election to continue or convert has not been made will be automatically
converted to Base Rate Loans. Each Notice of Conversion or Continuation shall be
irrevocable.
5.2. INTEREST. The Borrower shall pay interest on the unpaid
principal amount of each Loan from the date thereof until the principal amount
thereof shall be paid in full, at the following rates per annum:
(a) BASE RATE LOANS. For Base Rate Loans, at a rate per annum
equal at all times to the Base Rate in effect from time to time,
payable quarterly in arrears on the last day of each September,
December, March and June, and on the date any Base Rate Loan is
converted or paid in full.
(b) EURODOLLAR RATE LOANS. For Eurodollar Rate Loans, at a
rate per annum equal at all times during the applicable Interest Period
for each Eurodollar Rate Loan to the sum of the Eurodollar Rate for
such Interest Period plus the Applicable Eurodollar Rate Margin,
payable in arrears (i) on the last day of such Interest Period and (ii)
if such Interest Period has a duration of more than three months, on
each day during such Interest Period that occurs every three months
from the first day of such Interest Period.
(c) DEFAULT RATE OF INTEREST. If any amount of principal of
any Loan is not paid when due, whether at stated maturity, by
acceleration or otherwise, the interest rate applicable to any such
amount shall be increased by 2.00% per annum, payable on demand, and if
any interest, fee or other amount payable hereunder is not paid when
due, such amount shall bear interest at a rate per annum equal at all
times to the Base Rate in effect from time to time plus 2.00% per annum
payable on demand.
5.3. INTEREST RATE DETERMINATION AND PROTECTION. (a) In the
event that the Eurodollar Rate is not available from the Telerate Page, the
Eurodollar Rate for each Interest Period for Eurodollar Rate Loans shall be
determined by the Administrative Agent on the basis of applicable rates
furnished to and received by the Administrative Agent from the Reference Banks
two Business Days before such Interest Period. Each Reference Bank agrees to
furnish to the Administrative Agent timely information for the purpose of
determining each Eurodollar Rate. If any of the Reference Banks shall not
furnish such timely information to the Administrative Agent for the purpose of
determining any such interest rate, the Administrative Agent shall determine
such interest rate on the basis of timely information furnished by the other
Reference Bank or Reference Banks.
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(b) The Administrative Agent shall give prompt notice to the
Borrower and the Banks of the applicable interest rate determined by the
Administrative Agent for purposes of Section 5.2(a) or (b), and the applicable
rate, if any, furnished by each Reference Bank for the purpose of determining
the applicable interest rate under Section 5.2(b).
(c) If, with respect to Eurodollar Rate Loans, the Majority
Banks determine in good faith and notify the Administrative Agent that the
Eurodollar Rate for any Interest Period will not adequately reflect the cost to
such Banks of making such Loans or funding or maintaining their respective
Eurodollar Rate Loans for such Interest Period, the Administrative Agent shall
forthwith so notify the Borrower and the Banks, whereupon
(i) each Eurodollar Rate Loan will automatically, on the last
day of the then existing Interest Period therefor, convert into a Base
Rate Loan unless the Majority Banks notify the Administrative Agent
that the circumstances causing such conversion no longer exist and the
Borrower delivers a timely Notice of Conversion or Continuation with
respect to such Loans; and
(ii) the obligations of the Banks to make Eurodollar Rate
Loans or to convert Base Rate Loans into Eurodollar Rate Loans shall be
suspended until the Administrative Agent shall notify the Borrower and
the Banks that the circumstances causing such suspension no longer
exist.
5.4. FEES. (a) The Borrower will pay on the last day of each
Fiscal Quarter to each of the Banks in arrears a fee (the "Commitment Fee")
accruing from the Initial Funding Date, in the case of each Bank listed on the
signature pages hereof, and from any later effective date of the assignment
pursuant to which it became a Bank, in the case of each other Bank, until the
applicable Termination Date, on such Bank's aggregate average daily unused
Commitment as in effect from time to time at the rate set forth below opposite
the Total Leverage Ratio applicable to the Borrower on such date:
Total Leverage Ratio Commitment Fee
-------------------- --------------
greater than 4.50x 0.50%
equal to or greater than 3.75x but less than or equal to 4.50x 0.40%
equal to or greater than 3.00x but less than 3.75x 0.35%
less than 3.00x 0.25%
; PROVIDED, HOWEVER, that until the first anniversary of the Initial Funding
Date, the Commitment Fee shall be the greater of (x) the percentage specified
above and (y) 0.40%.
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(b) The Borrower has agreed to pay to the Banks and Arrangers
certain other fees which are earned on the date of the signing of this Agreement
and payable on the Initial Funding Date as separately agreed.
5.5. INCREASED COSTS. (a) If, due to either (i) the
introduction of or any change (other than any change by way of imposition or
increase of reserve requirements included in the Eurodollar Rate Reserve
Percentage) in, or in the interpretation of, any law or regulation or (ii) the
compliance with any guideline or request from any central bank or other
Governmental Authority (whether or not having the force of law), there shall be
any increase in the cost (other than with respect to income, franchise or
withholding taxes or other taxes of a similar nature) to any Bank of agreeing to
make or making, funding or maintaining any Eurodollar Rate Loans, then (A) such
Bank shall, as soon as such Bank becomes aware of such increased cost, but in
any event not later than 60 days after such increased cost was incurred, deliver
to the Borrower and the Administrative Agent a certificate stating (1) the
actual amount of such increased cost incurred by such Bank and (2) that it is
such Bank's customary practice, from and after the date of this Agreement, to
charge its borrowers for increased costs incurred by it; (B) the Borrower shall,
within 30 days after its receipt of such certificate, at its sole option, either
(1) pay to the Administrative Agent for the account of such Bank amounts
sufficient to compensate such Bank for the increased cost incurred by it as set
forth in the certificate referred to above or (2) replace such Bank in
accordance with the provisions of Section 5.10, PROVIDED that if the Borrower
does not exercise the option specified in clause (2) above within 30 days after
receipt of the certificate referred to above, then (x) such Bank shall deliver
to the Borrower and the Administrative Agent a second certificate stating the
increased cost incurred by such Bank and (y) the Borrower shall promptly upon
receipt of such second certificate pay to the Administrative Agent for the
account of such Bank amounts sufficient to compensate such Bank for such
increased cost; and (C) such Bank shall use its reasonable best efforts to
designate another of its then existing offices as its Applicable Lending Office
if the making of such designation would, without any detrimental effect to such
Bank, avoid the need for, or reduce the amount of, future increased costs which
are probable of being incurred by such Bank. The amount of increased costs
payable by the Borrower to any Bank as stated in any such certificate delivered
to the Borrower and the Administrative Agent pursuant to the provisions of this
Section 5.5(a) shall be conclusive and binding for all purposes, absent manifest
error. In determining any such amount, such Bank may use reasonable averaging
and attribution methods. If the Borrower so notifies the Administrative Agent
within five Business Days after receipt of any certificate delivered to the
Borrower pursuant to the provisions of this Section 5.5(a), the Borrower may
either (x) prepay in full all Eurodollar Rate Loans of such Bank then
outstanding in accordance with Section 5.8 and, additionally, reimburse such
Bank for such increased cost in accordance with this Section 5.5(a) or (y)
convert all Eurodollar Rate Loans of all Banks then outstanding into Base Rate
Loans in accordance with Section 5.1 and, additionally, reimburse such Bank for
such increased cost in accordance with this Section 5.5(a).
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(b) If any Bank shall be required under Regulation D to
maintain reserves with respect to liabilities or assets consisting of or
including Eurocurrency Liabilities, then (i) such Bank shall, within 60 days
after the end of any Interest Period with respect to any Eurodollar Rate Loan
during which such Bank was so required to maintain such reserves, deliver to the
Borrower and the Administrative Agent a certificate stating (A) that such Bank
was required to maintain reserves and as a result such Bank incurred additional
costs in connection with making Eurodollar Rate Loans, (B) in reasonable detail,
such Bank's computations of the amount of additional interest payable by the
Borrower pursuant to the provisions of this Section 5.5(b) and (C) that it is
such Bank's customary practice, from and after the date of this Agreement, to
charge its borrowers for reserves so maintained by it, and (ii) the Borrower
shall, promptly upon receipt of any such certificate, pay to the Administrative
Agent, for the account of such Bank, additional interest on the unpaid principal
amount of each Eurodollar Rate Loan of such Bank outstanding during the Interest
Period with respect to which the above-referenced certificate was delivered to
the Borrower, at a rate per annum equal to the difference obtained by
subtracting (x) the Eurodollar Rate for such Interest Period from (y) the rate
obtained by dividing such Eurodollar Rate by a percentage equal to 100% minus
the Eurodollar Rate Reserve Percentage of such Bank for such Interest Period.
The amount of interest payable by the Borrower to any Bank as stated in any
certificate delivered to the Borrower and the Administrative Agent pursuant to
the provisions of this Section 5.5(b) shall be conclusive and binding for all
purposes, absent manifest error.
(c) The payments required under Sections 5.5(a) and (b) are in
addition to any other payments and indemnities required under this Agreement.
5.6. ILLEGALITY. Notwithstanding any other provision of this
Agreement, if the introduction of or any change in or in the interpretation of
any law or regulation, in each case after the date hereof, shall make it
unlawful, or any central bank or other Governmental Authority shall assert that
it is unlawful, for any Bank or its Eurodollar Lending Office to make Eurodollar
Rate Loans or to continue to fund or maintain Eurodollar Rate Loans, then, on
notice thereof and demand therefor by such Bank to the Borrower through the
Administrative Agent, (i) the obligation of such Bank to make or to continue
Eurodollar Rate Loans and to convert Base Rate Loans into Eurodollar Rate Loans
shall be suspended until such Bank through the Administrative Agent shall notify
the Borrower that the circumstances causing such suspension no longer exist and
(ii) the Borrower shall forthwith prepay in full all Eurodollar Rate Loans of
such Bank then outstanding, together with interest accrued thereon, unless the
Borrower, within five Business Days of such notice and demand, converts all
Eurodollar Rate Loans of all Banks then outstanding into Base Rate Loans in
accordance with the notice periods of Section 5.1; PROVIDED, HOWEVER, that
before making any such demand, each Bank agrees to use its reasonable best
efforts to designate another of its then existing offices as its Applicable
Lending Office if the making of such a designation would, without any
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detrimental effect to such Bank, cause the making of Eurodollar Rate Loans to
not be subject to this Section 5.6.
5.7. CAPITAL ADEQUACY. If any Bank shall, at any time,
reasonably determine that (a) the adoption (i) after the date of this Agreement,
of any capital adequacy guidelines or (ii) at any time, of any other applicable
law, government rule, regulation or order regarding capital adequacy of banks or
bank holding companies, (b) any change in (i) any of the foregoing or (ii) the
interpretation or administration of any of the foregoing by any Governmental
Authority, central bank or comparable agency or (c) compliance with any policy,
guideline, directive or request regarding capital adequacy (whether or not
having the force of law and whether or not failure to comply therewith would be
unlawful) of any Governmental Authority, central bank or comparable agency,
would have the effect of reducing the rate of return on the capital of such Bank
to a level below that which such Bank could have achieved but for such adoption,
change or compliance (taking into consideration the policies of such Bank with
respect to capital adequacy in effect immediately before such adoption, change
or compliance) and (x) such reduction is as a consequence of the Commitment of,
or the making, converting or continuing of any Loans by, such Bank hereunder and
(y) such reduction is reasonably deemed by such Bank to be material, then (1)
such Bank shall deliver to the Borrower and the Administrative Agent a
certificate stating the reduction in the rate of return such Bank will in the
future suffer as a result of its Commitment or the making, converting or
continuing any Loans by it to the Borrower hereunder and (2) the Borrower shall,
within 30 days after its receipt of such certificate, at its sole option, either
(A) pay to the Administrative Agent for the account of such Bank from time to
time as specified by such Bank such amount as shall be sufficient to compensate
such Bank for such reduced return, or (B) replace such Bank in accordance with
the provisions of Section 5.10; PROVIDED, HOWEVER, that if the Borrower does not
exercise the option specified in clause (B) above within 30 days after receipt
of the certificate referred to above, then (1) such Bank shall deliver to the
Borrower and the Administrative Agent a second certificate stating the reduction
in the rate of return of such Bank and (2) the Borrower shall promptly pay, as
specified by such Bank, to the Administrative Agent for the account of such Bank
amounts sufficient to compensate such Bank for the reduction in its rate of
return. The amount stated in any certificate delivered to the Borrower pursuant
to the provisions of this Section 5.7 shall be conclusive and binding for all
purposes, absent manifest error. In determining any such amount, such Bank may
use reasonable averaging and attribution methods. The payments required under
this Section 5.7 are in addition to any other payments and indemnities required
hereunder.
5.8. PAYMENTS AND COMPUTATIONS. (a) The Borrower shall make
each payment payable by it hereunder not later than 11:00 A.M. (New York City
time) on the day when due, in Dollars, to the Administrative Agent at its
address referred to in Section 13.2 in immediately available funds without
set-off or counterclaim. The Administrative Agent will promptly thereafter (but
in any event on the same day) cause to be distributed
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like funds relating to the payment of principal or interest or fees ratably
(other than amounts payable pursuant to Section 5.5, 5.6 or 5.7) to the Banks
for the account of their respective Applicable Lending Offices, and like funds
relating to the payment of any other amount payable to any Bank to such Bank for
the account of its Applicable Lending Office, in each case to be applied in
accordance with the terms of this Agreement. Payment received by the
Administrative Agent after 11:00 A.M. (New York City time) shall be deemed to be
received on the next Business Day; PROVIDED, HOWEVER, that the Administrative
Agent shall use its reasonable best efforts to invest any amounts so received by
the Administrative Agent in overnight investments satisfactory to the Borrower,
and any earnings on any such investments shall be for the Borrower's account and
may be credited against any interest payable hereunder during such period.
(b) All computations of the Commitment Fee or of interest
based on the rate of interest specified in clause (a) of the definition of Base
Rate and of fees shall be made by the Administrative Agent on the basis of a
year of 365 or 366 days, as the case may be, and all computations of interest
based on the Eurodollar Rate or the Federal Funds Rate shall be made by the
Administrative Agent on the basis of a year of 360 days, in each case for the
actual number of days (including the first day but excluding the last day)
occurring in the period for which such interest and fees are payable. All
computations of the Commitment Fee shall be based on the aggregate average daily
unused Commitment of each Bank. Each determination by the Administrative Agent
of an interest rate hereunder shall be conclusive and binding for all purposes,
absent manifest error.
(c) Whenever any payment hereunder shall be stated to be due
on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day, and such extension of time shall in such case be
included in the computation of payment of interest or fees, as the case may be.
(d) Unless the Administrative Agent shall have received notice
from the Borrower prior to the date on which any payment is due to the Banks
hereunder that the Borrower will not make such payment in full, the
Administrative Agent may assume that the Borrower has made such payment in full
to the Administrative Agent on such date and the Administrative Agent may, in
reliance upon such assumption, cause to be distributed to each Bank on such due
date an amount equal to the amount then due such Bank. If and to the extent that
the Borrower shall not have so made such payment in full to the Administrative
Agent, each Bank shall repay to the Administrative Agent forthwith on demand
such amount distributed to such Bank together with interest thereon, for each
day from the date such amount is distributed to such Bank until the date such
Bank repays such amount to the Administrative Agent, at the Federal Funds Rate.
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5.9. SHARING OF PAYMENTS, ETC. If any Bank shall obtain any
payment (whether voluntary, involuntary, through the exercise of any right of
set-off, or otherwise) on account of the Loans made by it (other than pursuant
to Section 5.5, 5.6 or 5.7) in excess of its Ratable Portion of payments on
account of the Loans obtained by all the Banks, such Bank shall forthwith
purchase from the other Banks such participations in the Loans made by them as
shall be necessary to cause such purchasing Bank to share the excess payment
ratably with each of them; PROVIDED, HOWEVER, that if all or any portion of such
excess payment is thereafter recovered from such purchasing Bank, such purchase
from each Bank shall be rescinded and each such Bank shall repay to the
purchasing Bank the purchase price to the extent of such recovery together with
an amount equal to such Bank's ratable share (according to the proportion of (i)
the amount of such Bank's required repayment to (ii) the total amount so
recovered from the purchasing Bank) of any interest or other amount paid or
payable by the purchasing Bank in respect of the total amount so recovered. The
Borrower agrees that any Bank so purchasing a participation from another Bank
pursuant to this Section 5.9 may, to the fullest extent permitted by law,
exercise all its rights of payment (including the right of set-off) with respect
to such participation as fully as if such Bank were the direct creditor of the
Borrower in the amount of such participation.
5.10. REPLACEMENT BANKS. Upon the election of the Borrower to
replace any Bank pursuant to the provisions of Section 5.5(a)(B)(2) or
5.7(2)(B), the Borrower shall provide to the Administrative Agent a notice
setting forth the replacement Bank or Banks, and the Bank being so replaced
shall take all actions as may be necessary to transfer to such replacement Bank
or Banks all of the rights and obligations of such Bank hereunder and such
replacement Bank or Banks shall pay to the Bank being so replaced the amount
outstanding of all Loans made by such Bank hereunder (with appropriate
provisions for other amounts due to the Bank being replaced), all as though such
replacement Bank or Banks were an assignee or assignees of such Bank to which
such Bank were making an assignment in accordance with the provisions of Section
13.7.
5.11. MANDATORY PREPAYMENT. (a) The Borrower shall prepay
Tranche A Loans and Tranche C Loans to the extent necessary to ensure that (i)
the aggregate amount of all Tranche A Loans and Tranche C Loans outstanding will
not at any time exceed the Tranche A Loan Commitments and Tranche C Loan
Commitments, respectively, of the Banks and (ii) the aggregate amount of all
Tranche A Loans, together with the aggregate face amount of Commercial Paper
outstanding, will not at any time exceed the aggregate amount of the Tranche A
Loan Commitments of the Banks. Any prepayments required to assure that the
aggregate unused amount of the Tranche A Loan Commitments is not less than the
face amount of outstanding Commercial Paper shall be applied to the Tranche A
Loans.
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(b) If the Borrower issues Equity in one or more transactions
(other than issuances of common stock in connection with the exercise of stock
options issued pursuant to employee stock option plans), it shall prepay the
Loans and permanently reduce Commitments as follows: (i) the Tranche C Loan
Commitment shall be permanently reduced by 100% of the amount of Net Cash
Proceeds from such Equity issuance until the Tranche C Loan Commitment has been
reduced to zero and (ii) after the Tranche C Loan Commitment has been reduced to
zero, at any time while the Borrower shall not have an Investment Grade Rating,
the Tranche A Loan Commitment shall be permanently reduced and the Tranche B
Loans shall be repaid, pro rata between such Tranches and pro rata among the
remaining scheduled reductions within each Tranche, in an aggregate amount equal
to 25% of the Net Cash Proceeds from such Equity issuance until the aggregate
amount of all such Tranche A Commitment reductions and Tranche B Loan
prepayments, hereunder and under (c)(ii) below, shall equal $400 million.
(c) If the Borrower incurs Indebtedness in a Capital Market
Transaction, it shall prepay the Loans and permanently reduce Commitments
hereunder as follows: (i) up to the first $300 million of Net Cash Proceeds from
such Capital Market Transaction shall be applied to reduce the Tranche C Loan
Commitment until the Tranche C Loan Commitment has been reduced to zero, and
(ii) following such reduction, at any time while the Borrower shall not have an
Investment Grade Rating, the Tranche A Loan Commitment shall be permanently
reduced and the Tranche B Loans shall be repaid, pro rata between such Tranches
and pro rata among the remaining scheduled reductions within each Tranche, in an
aggregate amount equal to 75% of the Net Cash Proceeds from such Capital Markets
Transaction until the aggregate amount of all such Tranche A Commitment
reductions and Tranche B Loan prepayments, hereunder and under (b)(ii) above,
shall equal $400 million.
(d) If there shall be a simultaneous issuance of Equity under
(b) above and an incurrence of Indebtedness under (c) above, for purposes of
this Section 5.11, the issuance of Equity shall be deemed to occur first and the
Loans and Commitments will be prepaid and reduced accordingly.
(e) The Borrower shall prepay the Loans and permanently reduce
Commitments hereunder with Net Cash Proceeds from asset sales other than to
franchisees as follows: (i) the first $100 million of such Net Cash Proceeds
from such sales may be retained by Borrower without making any related loan
repayment or Commitment reduction, and (ii) at any time that the Borrower shall
not have an Investment Grade Rating, the Tranche A Loan Commitment shall be
permanently reduced and the Tranche B Loans shall be prepaid, pro rata between
such Tranches and pro rata among the remaining scheduled reductions within each
Tranche, in an aggregate amount equal to 50% of the amount of such Net Cash
Proceeds from such sales in excess of $100 million until the aggregate amount of
reduction and prepayments under this clause (e) from Net Cash Proceeds of such
sales equals $500 million.
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ARTICLE VI
CONDITIONS OF LENDING
6.1. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS
AGREEMENT. The effectiveness of this Agreement is subject to satisfaction of the
conditions precedent that the Administrative Agent shall have received the
following, in form and substance satisfactory to the Administrative Agent, and
in sufficient copies for each Bank that requests a copy:
(a) Certified copies of (i) appropriate resolutions of the
Board of Directors (or authorized committee thereof) of the Borrower
approving each Loan Document and (ii) all documents evidencing any
other necessary corporate action and required governmental and any
third party approvals, licenses and consents with respect to each Loan
Document.
(b) A copy of the certificate of incorporation of the Borrower
certified as of a recent date by the Secretary of State of the
jurisdiction of its incorporation, together with certificates of such
official attesting to the good standing of the Borrower, and a copy of
the By-Laws of the Borrower certified by its Secretary or one of its
Assistant Secretaries.
(c) A certificate of the Secretary or an Assistant Secretary
of the Borrower certifying the names and true signatures of its
officers who have been authorized to execute and deliver each Loan
Document and each other document and certificate to be executed or
delivered hereunder on behalf of the Borrower.
(d) Favorable opinions of Shearman & Sterling, counsel to the
Borrower and Edward B. Stead, General Counsel of the Borrower, in
substantially the form of Exhibit C-1 and C-2 hereto, respectively.
6.2. ADDITIONAL CONDITIONS PRECEDENT TO THE MAKING OF THE
INITIAL LOANS. The effectiveness of this Agreement and making of any Loans
simultaneously thereunder and thereafter is subject to the further conditions
precedent that on the date of such Loans the following statements shall be true:
(a) The Borrower shall have paid all costs, accrued and unpaid
fees and expenses referred to in Sections 5.4(b) and 13.4 (including,
without limitation, the legal fees and expenses referred to in Section
13.4(a)), in each case to the extent then due and payable.
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(b) All Indebtedness of the Borrower under (i) the $1.4
billion note dated December 31, 1998, (ii) the $76,262,875 note dated
January 11, 1999, and (iii) the $399,435 note dated February 24, 1999,
each from the Borrower to Viacom International Inc. shall have been (or
shall simultaneously be) repaid.
6.3. CONDITIONS PRECEDENT TO THE MAKING OF EACH LOAN. The
obligation of each Bank to make any Loan, including the initial Loans (unless
otherwise indicated), shall be subject to the further conditions precedent that
the following statements shall be true on the date of such Loan, before and
after giving effect thereto and to the application of the proceeds therefrom
(and the acceptance by the Borrower of the proceeds of such Loan shall
constitute a representation and warranty by the Borrower that on the date of
such Loan such statements are true):
(a) The representations and warranties contained in Article
VII hereof (other than those stated to be made as of a particular date)
are true and correct in all material respects on and as of such date as
though made on and as of such date.
(b) No event has occurred and is continuing, or would result
from the Loans being made on such date, which constitutes a Default or
an Event of Default.
(c) Except on the date of the Initial Funding Date, after
giving effect to the application of the proceeds from the Loans being
requested, the Borrower owns, directly or indirectly, 100% of the
Equity of all companies identified as "subsidiaries" of the Borrower in
the combined financial statements of Borrower that were filed with the
Preliminary Prospectus.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
To induce the Banks to enter into this Agreement, the Borrower
represents and warrants to the Banks as follows:
7.1. CORPORATE EXISTENCE; COMPLIANCE WITH LAW. The Borrower
and each Material Subsidiary (i) is a corporation duly incorporated, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation; (ii) is duly qualified and in good standing as a foreign
corporation under the laws of each other jurisdiction in which the failure so to
qualify is reasonably probable to have a Material Adverse Effect; (iii) has all
requisite corporate power and authority to conduct its business as now being
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conducted and as proposed to be conducted; (iv) is in compliance with its
articles or certificate of incorporation and by-laws; and (v) is in compliance
with all applicable Requirements of Law except such non-compliance as would not
have a Material Adverse Effect.
7.2. CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS.
(a) The execution, delivery and performance by the Borrower of this Agreement or
any other Loan Document:
(i) are within its corporate powers;
(ii) have been duly authorized by all necessary corporate
action;
(iii) do not (A) contravene its certificate of incorporation
or by-laws, (B) violate any law or regulation (including, without
limitation, Regulations T, U or X of the Board of Governors of the
Federal Reserve System), or any order or decree of any court or
governmental instrumentality, except those as to which the failure to
comply would not have a Material Adverse Effect, (C) conflict with or
result in the breach of, or constitute a default under, any instrument,
document or agreement binding upon and material to the Borrower, or (D)
result in the creation or imposition of any Lien upon any of the
Property of the Borrower or any of its Subsidiaries; and
(iv) do not require the consent of, authorization by, approval
of, notice to, or filing or registration with, any Governmental
Authority (except for filing copies of Loan Documents with the
Securities and Exchange Commission).
(b) This Agreement and each other Loan Document has been duly
executed and delivered by the Borrower, and is the legal, valid and binding
obligation of the Borrower, enforceable against it in accordance with its terms,
except where such enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or limiting creditors'
rights generally or equitable principles relating to enforceability.
7.3. TAXES. All federal, and all material state, local and
foreign tax returns, reports and statements required to be filed by the Borrower
or any of its Subsidiaries have been filed with the appropriate governmental
agencies in all jurisdictions in which such returns, reports and statements are
required to be filed. All consolidated, combined or unitary returns which
include the Borrower or any of its Subsidiaries have been filed with the
appropriate governmental agencies in all jurisdictions in which such returns,
reports and statements are required to be filed except where such filing is
being contested or may be contested. All federal, and all material state, local
and foreign taxes, charges and other impositions of the Borrower, its
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Subsidiaries or any consolidated, combined or unitary group which includes the
Borrower or any of its Subsidiaries which are due and payable have been timely
paid prior to the date on which any fine, penalty, interest, late charge or loss
may be added thereto for non-payment thereof except where contested in good
faith and by appropriate proceedings if adequate reserves therefor have been
established on the books of the Borrower or such Subsidiary in accordance with
GAAP. Proper and accurate amounts have been withheld by or on behalf of the
Borrower and each of its Subsidiaries from their respective employees for all
periods in full and complete compliance with the tax, social security and
unemployment withholding provisions of applicable federal, state, local and
foreign law and such withholdings have been timely paid to the respective
governmental agencies, in all material respects. Neither the Borrower nor any of
its Tax Affiliates has agreed or has been requested to make any adjustment under
Section 481(a) of the Code by reason of a change in accounting method or
otherwise relating to the Borrower or any of its Subsidiaries which will affect
a taxable year of the Borrower or a Tax Affiliate ending after December 31,
1998, which has not been reflected in the financial statements delivered
pursuant to Section 9.8 and which would have a Material Adverse Effect. The
Borrower has no obligation under any tax sharing agreement or other tax sharing
arrangement, other than the Tax Matters Agreement and tax sharing agreements or
other tax sharing arrangements providing for payments to Subsidiaries of the
Borrower which are Tax Affiliates, which do not have a Material Adverse Effect.
7.4. FINANCIAL INFORMATION. (a) The combined financial
statements of the Borrower presented on a carve out basis and reflecting the
combined historical results of operations, financial position and cash flows of
the Borrower including entities currently owned by the Borrower or to be
purchased from Viacom Inc. or its Subsidiaries in the case of certain of its
international operations (the "Combined Carve Out Financial Statements") for the
Fiscal Year ended December 31, 1998, for the Fiscal Quarter ended March 31, 1999
and any other quarterly or annual Combined Carve Out Financial Statements are
respectively complete and correct in all material respects as of such respective
dates, and have been prepared in accordance with GAAP and fairly present the
financial condition and results of operations of the Borrower and its
Subsidiaries on a combined basis as of such respective dates (subject, in the
case of such interim reports, to changes resulting from normal year-end
adjustments).
(b) Since December 31, 1998, there has been no Material
Adverse Change or Material Credit Agreement Change.
(c) None of the Borrower or any Subsidiary of the Borrower had
at December 31, 1998 any obligation, contingent liability, or liability for
taxes or long-term leases material to the Borrower and its Subsidiaries taken as
a whole which is not reflected in the balance sheets referred to in subsection
(a) above or in the notes thereto.
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7.5. LITIGATION. There are no pending, or to the best
knowledge of the Borrower threatened, actions, investigations or proceedings
against or affecting the Borrower or any of its Subsidiaries before any court,
governmental agency or arbitrator in which, individually or in the aggregate,
there is a reasonable probability of an adverse decision that could have a
Material Adverse Effect or result in a Material Credit Agreement Change.
7.6. MARGIN REGULATIONS. The Borrower is not engaged in the
business of extending credit for the purpose of purchasing or carrying Margin
Stock, and no proceeds of any Borrowing will be used to purchase or carry any
Margin Stock or to extend credit to others for the purpose of purchasing or
carrying any Margin Stock in violation of Regulation U.
7.7. ERISA. (a) No liability under Sections 4062, 4063, 4064
or 4069 of ERISA has been or is expected by the Borrower to be incurred by the
Borrower or any ERISA Affiliate with respect to any Plan which is a
Single-Employer Plan in an amount that could reasonably be expected to have a
Material Adverse Effect.
(b) No Plan which is a Single-Employer Plan had an accumulated
funding deficiency, whether or not waived, as of the last day of the most recent
fiscal year of such Plan ended prior to the date hereof. Neither the Borrower
nor any ERISA Affiliate is (A) required to give security to any Plan which is a
Single-Employer Plan pursuant to Section 401(a)(29) of the Code or Section 307
of ERISA, or (B) subject to a Lien in favor of such a Plan under Section 302(f)
of ERISA.
(c) Each Plan of the Borrower, each of its Subsidiaries and
each of its ERISA Affiliates is in compliance in all material respects with the
applicable provisions of ERISA and the Code, except where the failure to comply
would not result in any Material Adverse Effect.
(d) Neither the Borrower nor any of its Subsidiaries has
incurred a tax liability under Section 4975 of the Code or a penalty under
Section 502(i) of ERISA in respect of any Plan which has not been paid in full,
except where the incurrence of such tax or penalty would not result in a
Material Adverse Effect.
(e) None of the Borrower, any of its Subsidiaries or any ERISA
Affiliate has incurred or reasonably expects to incur any Withdrawal Liability
under Section 4201 of ERISA as a result of a complete or partial withdrawal from
a Multiemployer Plan which will result in Withdrawal Liability to the Borrower,
any of its Subsidiaries or any ERISA Affiliate in an amount that could
reasonably be expected to have a Material Adverse Effect.
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7.8. NO DEFAULTS. Neither the Borrower nor any of its
Subsidiaries is in breach of or default under or with respect to any instrument,
document or agreement binding upon the Borrower or such Subsidiary which breach
or default is reasonably probable to have a Material Adverse Effect or result in
the creation of a Lien on any Property of the Borrower or its Subsidiaries.
7.9. INVESTMENT COMPANY ACT. The Borrower is not an
"investment company" or an "affiliated person" of, or "promoter" or "principal
underwriter" for, an "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended. The making of the Loans by the
Banks, the application of the proceeds and repayment thereof by the Borrower and
the consummation of the transactions contemplated by this Agreement will not
violate any provision of such act or any rule, regulation or order issued by the
Securities and Exchange Commission thereunder.
7.10. INSURANCE. All policies of insurance of any kind or
nature owned by the Borrower and its Subsidiaries are maintained with
financially sound and reputable insurers. The Borrower currently maintains
insurance with respect to its Properties and business and causes its
Subsidiaries to maintain insurance with respect to their Properties and business
against loss or damage of the kinds customarily insured against by corporations
engaged in the same or similar business and similarly situated, of such types
and in such amounts as are customarily carried under similar circumstances by
such other corporations including, without limitation, workers' compensation
insurance.
7.11. ENVIRONMENTAL PROTECTION. (a) There are no known
conditions or circumstances associated with the currently or previously owned or
leased properties or operations of the Borrower or its Subsidiaries or tenants
which may give rise to any Environmental Liabilities and Costs which would have
a Material Adverse Effect; and
(b) No Environmental Lien has attached to any Property of the
Borrower or any of its Subsidiaries which would have a Material Adverse Effect.
7.12. TITLE AND LIENS. Each of the Borrower and each of its
Subsidiaries has good and marketable title to its owned real properties and owns
or leases all its other material Properties, in each case, as shown on its most
recent balance sheet, and none of such Properties is subject to any Lien except
as permitted under this Agreement.
7.13. TRADEMARKS, COPYRIGHTS, ETC. The Borrower and each of
its Subsidiaries own or have the rights to such trademarks, service marks, trade
names, copyrights, licenses or rights in any thereof, as in the aggregate are
adequate in the reasonable judgment of the Borrower for the conduct of the
business of the Borrower and its Subsidiaries as now conducted.
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7.14. FRANCHISES. The Borrower (i) is not in default under any
franchise agreement or area development agreement between the Borrower and any
of its franchisees, and (ii) is in compliance with all state and federal
franchise laws applicable to the Borrower, except in each case as would not have
a Material Adverse Effect.
7.15. YEAR 2000 ISSUE. The Borrower has reviewed its
operations and that of its Subsidiaries and has inquired of any third parties
with which the Borrower or any of its Subsidiaries has a material relationship
to evaluate the extent to which the business or operations of the Borrower or
any of its Subsidiaries will be affected by the Year 2000 Issue. As a result of
such review and inquiry, the Borrower has no reason to believe, and does not
believe, that the Year 2000 Issue will have a Material Adverse Effect or result
in any material loss or interference with the Borrower's consolidated business
or operations. The "Year 2000 Issue" as used herein means any significant risk
that computer hardware or software used in the receipt, transmission,
processing, manipulation, storage, retrieval, retransmission or other
utilization of data or in the operation of mechanical or electrical systems of
any kind will not, in the case of dates or time periods occurring after December
31, 1999, function at least as effectively as in the case of dates or time
periods occurring prior to January 1, 2000.
7.16. DISCLOSURE. (a) All written information relating to the
Borrower and its Subsidiaries which has been delivered to the Banks by or on
behalf of the Borrower in connection with the Loan Documents prior to the
Initial Funding Date (other than the Information Memorandum, as to which
representations are made in paragraph (b) below) was complete and correct in all
material respects, taken as a whole. Any financial projections and other
information regarding anticipated future plans or developments contained therein
was based upon good faith estimates and assumptions believed by the Borrower to
be reasonable at the time made, it being recognized by the Banks that such
projections and other information regarding future events are not to be viewed
as facts and that actual results or developments during the period or periods
covered may differ from the delivered projections and other prospective
information.
(b) The Borrower has reviewed the Information Memorandum and
confirms that the estimates and projections with respect to the Borrower and its
business (and the assumptions used to reach such projections) contained therein
were, to the extent prepared or provided by or on behalf of the Borrower, (i)
prepared by the management of the Borrower in good faith, and (ii) are believed
by such management to be reasonable. Notwithstanding the foregoing, such
estimates and projections (and the assumptions used for each such projection)
may or may not prove to be correct and the Borrower makes no representation or
warranty as to such information.
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The Borrower also confirms that, as of the date of the
Information Memorandum, to the best of the Borrower's knowledge, all other
information contained in the Information Memorandum (except as described below),
to the extent concerning the Borrower and its business and to the extent
contained in the Preliminary Prospectus is correct in all material respects and
does not contain any untrue statements of material fact or omit to state a
material fact necessary in order to make the statement contained therein not
materially misleading in light of the circumstances under which such statements
were made. It is understood that during the course of the registration process
with the SEC, the information contained in the Preliminary Prospectus may have
been, and may be amended or supplemented pursuant to amendments filed with the
SEC, and the Borrower has provided and will provide to the Banks any such
amendments for the purpose of updating the information contained in the
Information Memorandum. To the extent that any such amendments update or change
information contained in the Information Memorandum, the Information Memorandum
shall be deemed amended with respect to such information, and the representation
above will only apply to the Information Memorandum, as so amended.
ARTICLE VIII
FINANCIAL COVENANTS
As long as any of the Loans shall remain unpaid or any Bank
shall have any Commitment hereunder, unless otherwise agreed by the written
consent of the Majority Banks:
8.1. TOTAL LEVERAGE RATIO. The Total Leverage Ratio shall not
exceed, as of the last day of any Fiscal Quarter during the periods described
below, the amount specified with respect to such period:
Total Leverage Ratio
--------------------
June 30, 1999-December 31, 2000 4.75x
March 31-December 31, 2001 4.50x
March 31-December 31, 2002 4.25x
March 31-December 31, 2003 4.00x
March 31, 2004 and thereafter 3.75x
; PROVIDED, HOWEVER, that if the Borrower issues common stock in an initial
public offering, then the Total Leverage Ratio shall not exceed, as of the last
day of any Fiscal Quarter during the periods described below, the amount
specified with respect to such period:
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Total Leverage Ratio
--------------------
June 30, 1999-December 31, 2000 4.00x
March 31-December 31, 2001 3.75x
March 31, 2002 and thereafter 3.50x
8.2. FIXED CHARGE COVERAGE RATIO. The Fixed Charge Coverage Ratio shall
not be less than, as of the last day of any Fiscal Quarter during the periods
described below, the amount specified with respect to such period:
Fixed Charge
Coverage Ratio
--------------
June 30, 1999-March 31, 2000 1.15x
June 30, 2000-March 31, 2001 1.20x
June 30, 2001-March 31, 2002 1.25x
June 30, 2001-March 31, 2003 1.30x
June 30, 2003-March 31, 2004 1.35x
June 30, 2004 and thereafter 1.40x
ARTICLE IX
AFFIRMATIVE COVENANTS
As long as any of the Loans shall remain unpaid or any Bank shall have
any Commitment hereunder, unless otherwise agreed by the written consent of the
Majority Banks:
9.1. COMPLIANCE WITH LAWS, ETC. The Borrower shall comply, and cause each
of its Subsidiaries to comply, in all material respects with all Requirements of
Law and all franchises except such non-compliance as would not have a Material
Adverse Effect or result in a Material Credit Agreement Change.
9.2. PAYMENT OF TAXES, ETC. The Borrower and any consolidated, combined
or unitary group which includes the Borrower or any of its Subsidiaries shall
pay and discharge, and cause each Subsidiary of the Borrower to pay and
discharge, before the same shall become delinquent, all lawful claims, taxes,
assessments and governmental charges or levies except where contested in good
faith, by proper proceedings, and where adequate reserves therefor have been
established on the books of the Borrower or such Subsidiary in accordance with
GAAP.
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9.3. MAINTENANCE OF INSURANCE. The Borrower shall maintain,
and cause each of its Subsidiaries to maintain, insurance with responsible and
reputable insurance companies or associations in such amounts and covering such
risks as is usually carried by companies engaged in similar businesses and
owning similar properties in the same general areas in which the Borrower or
such Subsidiary operates. The Borrower will furnish to the Administrative Agent
from time to time such information as may be requested as to such insurance.
9.4. PRESERVATION OF CORPORATE EXISTENCE, ETC. The Borrower
shall preserve and maintain, and cause each of its Subsidiaries to preserve and
maintain, their respective corporate existences; PROVIDED, HOWEVER, that the
corporate existence of any Subsidiary may be terminated if, in the good faith
judgment of the board of directors or the chief financial officer of the
Borrower, such termination is in the best interest of the Borrower and such
termination would not have a Material Adverse Effect.
9.5. BOOKS AND ACCESS. The Borrower shall, and shall cause
each of its Subsidiaries to, keep proper books of record and accounts in
conformity with GAAP, and upon reasonable notice and at such reasonable times
during the usual business hours as often as may be reasonably requested, permit
representatives of the Administrative Agent, at its own initiative or at the
request of any Bank, to make inspections of its Properties, to examine its
books, accounts and records and make copies and memoranda thereof and to discuss
its affairs and finances with its officers or directors and independent public
accountants.
9.6. MAINTENANCE OF PROPERTIES, ETC. The Borrower shall
maintain and preserve, and cause each of its Subsidiaries to maintain and
preserve, all of its Properties which are used or useful in the conduct of its
business in good working order and condition and, from time to time make or
cause to be made all appropriate repairs, renewals and replacements, except
where the failure to do so would not have a Material Adverse Effect.
9.7. APPLICATION OF PROCEEDS. The Borrower shall use the
proceeds of the Loans (i) to refinance certain Indebtedness existing at the date
hereof of the Borrower and (ii) for other general corporate purposes.
9.8. FINANCIAL STATEMENTS. The Borrower shall furnish to the
Banks:
(a) as soon as available but not later than sixty (60) days
after the close of each of the first three (3) Fiscal Quarters of each Fiscal
Year of the Borrower during which the Borrower is not subject to the reporting
requirements of the Exchange Act, the Combined Carve Out Financial Statements as
at the end of such Fiscal Quarter and (in the case of the second and third
Fiscal Quarters) for the period from the beginning of the then
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current Fiscal Year to the end of such Fiscal Quarter, setting forth in each
case in comparative form the combined figures for the corresponding periods of
the previous Fiscal Year, all in reasonable detail and certified by a
Responsible Financial Officer of the Borrower as fairly presenting, in
accordance with GAAP, the financial condition and results of operations of the
Borrower and its Subsidiaries on a combined basis, subject to changes resulting
from normal year-end audit adjustments;
(b)(i) as soon as is available but no later than one hundred
twenty (120) days after the close of each Fiscal Year of the Borrower during
which the Borrower is not subject to the reporting requirements of the Exchange
Act, Combined Carve Out Financial Statements as at the end of such year, setting
forth in each case in comparative form the combined figures for the previous
Fiscal Year, all in reasonable detail and certified in the case of the combined
financial statements by PricewaterhouseCoopers LLP or another firm of nationally
recognized independent public accountants, which report shall state without
qualification as to the scope of the audit or as to going concern that such
combined financial statements present fairly the financial position and the
results of operations as at the dates and for the periods indicated in
conformity with GAAP and that the audit by such accountants in connection with
such combined financial statements has been made in accordance with GAAS, and
(ii) as soon as available but not later than one hundred twenty (120) days after
the close of each Fiscal Year of the Borrower, a certificate from such
accounting firm in the course of the regular audit of the business of the
Borrower and its Subsidiaries, which audit was conducted by such accounting firm
in accordance with GAAS, such accounting firm obtained no knowledge that an
Event of Default or Default has occurred and is continuing or, if in the opinion
of such accounting firm, an Event of Default or Default has occurred and is
continuing, a statement as to the nature thereof.
(c) as soon as available but not later than sixty (60) days
after the close of each of the first three (3) Fiscal Quarters of each Fiscal
Year of the Borrower during which the Borrower is subject to the reporting
requirements of the Exchange Act, consoli dated balance sheets of the Borrower
and its Subsidiaries as at the end of such Fiscal Quarter and the related
consolidated statements of operations, the consolidated statement of
shareholders' equity and the consolidated statement of cash flows of the
Borrower and its Subsidiaries for such Fiscal Quarter and (in the case of the
second and third Fiscal Quarters) for the period from the beginning of the then
current Fiscal Year to the end of such Fiscal Quarter (along with business
segment information customarily prepared by the Borrower), setting forth in each
case in comparative form the consolidated figures for the corresponding periods
of the previous Fiscal Year, all in reasonable detail and certified by a
Responsible Financial Officer of the Borrower as fairly presenting, in
accordance with GAAP, the financial condition and results of operations of the
Borrower and its Subsidiaries, subject to changes resulting from normal year-end
audit adjustments;
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(d) (i) as soon as available but no later than one hundred
twenty (120) days after the close of each Fiscal Year of the Borrower during
which the Borrower is subject to the reporting requirements of the Exchange Act,
consolidated balance sheets of the Borrower and its Subsidiaries as at the end
of such year and the related consolidated statements of operations, the
consolidated statement of shareholders' equity and the consolidated statement of
cash flows of the Borrower and its Subsidiaries for such year (along with
business segment information customarily prepared by the Borrower), setting
forth in each case in comparative form the consolidated figures for the previous
Fiscal Year, all in reasonable detail and certified in the case of the
consolidated financial statements by PricewaterhouseCoopers LLP or another firm
of nationally recognized independent public accountants, which report shall
state without qualification as to the scope of the audit or as to going concern
that such consolidated financial statements present fairly the financial
position and the results of operations as at the dates and for the periods
indicated in conformity with GAAP and that the audit by such accountants in
connection with such consolidated financial statements has been made in
accordance with GAAS, and (ii) as soon as available but not later than one
hundred twenty (120) days after the close of each Fiscal Year of the Borrower, a
certificate from such accounting firm that in the course of the regular audit of
the business of the Borrower and its Subsidiaries, which audit was conducted by
such accounting firm in accordance with GAAS, such accounting firm obtained no
knowledge that an Event of Default or Default has occurred and is continuing or,
if in the opinion of such accounting firm, an Event of Default or Default has
occurred and is continuing, a statement as to the nature thereof;
(e) together with each delivery of financial statements of the
Borrower pursuant to clauses (a), (b), (c) and (d) above, a certificate issued
by a Responsible Financial Officer of the Borrower (i) demonstrating compliance
at the end of the accounting period described in such statements with the
financial covenants contained herein and (ii) containing in reasonable detail
the component figures contained in the respective total figures stated in such
certificate; and
(f) together with each delivery of financial statements of the
Borrower and its Subsidiaries pursuant to clauses (a), (b), (c) and (d) above, a
certificate signed by a Responsible Financial Officer of the Borrower stating
that (i) such officer is familiar with both this Agreement and the business and
financial condition of the Borrower, and (ii) no Event of Default or Default has
occurred and is continuing or if an Event of Default or Default has occurred and
is continuing a statement as to the nature thereof, and whether or not the same
shall have been cured.
9.9. REPORTING REQUIREMENTS. The Borrower shall furnish to
the Administrative Agent for distribution to the Banks:
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(a) from time to time as the Administrative Agent may
reasonably request, copies of such statements, lists of Property, accounts,
budgets, forecasts, reports or information prepared by or for the Borrower or
within the Borrower's control;
(b) promptly and in any event within thirty (30) days after
the Borrower, any of its Subsidiaries or any ERISA Affiliate knows that any
ERISA Event has occurred (other than a Reportable Event for which notice to the
PBGC is waived), a written statement of a Responsible Financial Officer of the
Borrower describing such ERISA Event and the action, if any, which the Borrower,
any of its Subsidiaries or any ERISA Affiliate proposes to take with respect
thereto, and a copy of any notice filed with the PBGC or the IRS pertaining
thereto;
(c) promptly and in any event within thirty (30) days after
notice or knowledge thereof, notice that the Borrower or any of its Subsidiaries
becomes subject to the tax on prohibited transactions imposed by Section 4975 of
the Code, together with a copy of Form 5330;
(d) promptly after the commencement thereof, notice of all
actions, suits and proceedings before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
against or affecting the Borrower or any of its Subsidiaries, in which there is
a reasonable probability of an adverse decision which would have a Material
Adverse Effect;
(e) promptly upon the Borrower or any of its Subsidiaries
learning of (i) any Event of Default or any Default, or (ii) any Material Credit
Agreement Change, telephonic notice specifying the nature of such Event of
Default, Default or Material Credit Agreement Change, including the anticipated
effect thereof, which notice shall be promptly confirmed in writing within five
days;
(f) promptly after the sending or filing thereof, copies of
all reports which the Borrower sends to its security holders generally, and
copies of all reports and registration statements which the Borrower or any of
its Subsidiaries files with the Securities and Exchange Commission or any
national securities exchange;
(g) promptly upon, and in any event within 30 days of, the
Borrower or any of its Subsidiaries learning of any of the following:
(i) notice that any Property of the Borrower or any of its
Subsidiaries is subject to any Environmental Liens individually or in
the aggregate which would have a Material Adverse Effect; or
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(ii) any proposed acquisition of stock, assets or real estate, or
any proposed leasing of Property, or any other action by the Borrower
or any of its Subsidiaries in which there is a reasonable probability
that the Borrower or any of its Subsidiaries would be subject to any
material Environmental Liabilities and Costs, PROVIDED that, in the
event of any such proposed acquisition or lease, the Borrower must
furnish to the Banks evidence in a form acceptable to the Banks that
the proposed acquisition will not have a Material Adverse Effect;
(h) prior to the effectiveness thereof, information relating
to any proposed change in the accounting treatment or reporting practices of the
Borrower and its Subsidiaries the nature or scope of which materially affects
the calculation of any component of any financial covenant, standard or term
contained in this Agreement; and
(i) from time to time, such other information and materials as
the Administrative Agent may reasonably request.
ARTICLE X
NEGATIVE COVENANTS
So long as any of the Loans shall remain unpaid or any Bank
shall have any Commitment hereunder, without the written consent of the Majority
Banks:
10.1. LIENS, ETC. The Borrower shall not, directly or
indirectly, create or suffer to exist, or permit any of its Subsidiaries to
create or suffer to exist, any Lien upon or with respect to any of its
Properties, whether now owned or hereafter acquired, or assign, or permit any of
its Subsidiaries to assign, any right to receive income, in each case to secure
or provide for the payment of any Indebtedness of any Person, except:
(i) purchase money Liens or purchase money security interests
upon or in any Property acquired or held by the Borrower or any
Subsidiary of the Borrower in the ordinary course of business to secure
the purchase price of such Property or to secure Indebtedness incurred
solely for the purpose of financing the acquisition of such Property;
(ii) Liens existing on Property at the time of its acquisition
(other than any such Lien created in contemplation of such
acquisition);
(iii) Liens on Property of Persons which become Subsidiaries
after the Initial Funding Date securing Indebtedness existing, with
respect to any such Person, on the date such Person becomes a
Subsidiary (other than any such Lien created in contemplation of such
Person becoming a Subsidiary);
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(iv) Liens on Property of Persons which become Subsidiaries
after the Initial Funding Date securing Indebtedness incurred by such
Person after the date such Person becomes a Subsidiary; PROVIDED,
HOWEVER, that the aggregate principal amount of Indebtedness referred
to in this clause (iv) secured by Liens shall not exceed $10,000,000 at
any time outstanding; and
(v) any Lien securing the renewal, extension or refunding of
any Indebtedness secured by any Lien permitted by clause (i), (ii),
(iii) or (iv) above.
10.2. MERGERS. The Borrower shall not, nor shall it permit any
of its Subsidiaries representing a substantial portion of the assets of the
Borrower and its Subsidiaries taken as a whole to, merge or consolidate in any
transaction in which such entity is not the surviving Person other than in
mergers of any Subsidiary into the Borrower or any other wholly owned Subsidiary
of the Borrower.
10.3. SUBSTANTIAL ASSET SALE. The Borrower shall not, and
shall not permit any of its Subsidiaries to, sell, in one or one or more related
transactions, assets constituting all or a substantial portion of consolidated
assets of the Borrower and its Subsidiaries taken as a whole to any Person.
10.4. TRANSACTIONS WITH AFFILIATES. The Borrower shall not
engage in, and will not permit any of its Subsidiaries to engage in, any
transaction with an Affiliate of the Borrower or of such Subsidiary (other than
transactions in the ordinary course of business between a Subsidiary and its
parent or among Subsidiaries of the Borrower and other than transactions
pursuant to the Affiliate Agreements) except on terms no less favorable to the
Borrower or such Subsidiaries than as would be obtained in a comparable
arm's-length transaction.
10.5. MARGIN STOCK. The Borrower shall not permit more than
twenty-five percent (25%) of the value, within the meaning of Regulation U, as
determined by any reasonable method, of the assets of the Borrower and its
Subsidiaries, to be Margin Stock, nor will the Borrower use the proceeds of any
Loan to purchase or carry any Margin Stock in violation of Regulation U.
10.6. SUBSIDIARY INDEBTEDNESS. The Borrower shall not permit
any of its Subsidiaries to incur Indebtedness other than (a) under existing
facilities identified on Schedule 10.6 to this Agreement or any replacement
facilities thereto which in the aggregate do not exceed the amounts of the
commitments on such Schedule, (b) Indebtedness for borrowed money in an
aggregate amount at any time outstanding of not more than $75 million (less the
aggregate amount outstanding under Section 10.7(b)) and (c) Indebtedness for
Capitalized Leases incurred in the ordinary course of its business.
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10.7. OTHER RESTRICTIONS ON INDEBTEDNESS. The Borrower shall
not incur Indebtedness maturing earlier than six months after the last then
applicable Commitment Termination Date other than (a) Commercial Paper and (b)
up to $75 million at any time outstanding (less the aggregate amount outstanding
under Section 10.6(b)) and on terms no more onerous than the terms hereof.
10.8. DIVIDENDS AND PURCHASE OF STOCK. The Borrower shall not
declare any dividends (other than dividends payable in common stock of the
Borrower) on any shares of any class of its common stock, or apply any of its
property or assets to the purchase, redemption or other retirement of, or set
apart any sum for the payment of any dividends on, or for the purchase,
redemption or other retirement of, or make any other distribution by reduction
of common stock or otherwise in respect of, any shares of any class of common
stock of the Borrower, or permit any Subsidiary so to do, or permit any
Subsidiary to purchase or acquire any shares of any class of common stock of the
Borrower, except for amounts applied to the payment of quarterly ordinary common
stock dividends that on an annualized basis do not exceed an aggregate of $90
million in the first four Fiscal Quarters following any initial public issuance
of its common stock, $115 million for the next following four Fiscal Quarters,
$130 million for the next following four Fiscal Quarters, $145 million for the
next following four Fiscal Quarters and $160 million for the next following four
Fiscal Quarters; PROVIDED, HOWEVER, that the Borrower shall not pay any such
dividends if there then exists, or the payment thereof should cause, a breach in
the financial covenants set forth in Article VIII.
10.9. LIMITATION ON TRANSFERS OF ASSETS TO SUBSIDIARY. The
Borrower shall not convey, assign, contribute or otherwise transfer any of its
property, business or assets, whether now owned or hereinafter acquired to any
Subsidiary (except for insignificant and de minimus transfers made in the
ordinary course of its business operations).
10.10. LOANS AND INVESTMENTS. (a) The Borrower shall not
purchase or acquire the obligations or stock of, or any other interest in, or
make loans or advances to, any Person (an "Investment"), or permit any
Subsidiary so to do, other than Investments in (i) Cash Equivalents and (ii) any
Investment that is reasonably related to its operation of or growth strategy for
its Core Business, provided however, that the Borrower may make, or permit a
Subsidiary to make, an Investment that is not reasonably related to its
operation of or growth strategy for its Core Business (a "Non-core Investment")
if, after giving pro forma effect to the making of such Non-core Investment, the
Core Business and businesses that are reasonably related thereto continue to
represent the significant preponderance of the Borrower's consolidated business
and operations, taken as a whole.
(b) The Borrower shall not, and shall not permit any of its
Subsidiaries to, enter into any interest rate cap agreements, interest rate swap
agreements, interest rate future or option contracts, currency swap agreements,
currency future or option contracts or other similar agreements or arrangements
for speculative purposes (but such
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agreements may be entered into for purposes of hedging in the ordinary course of
business).
ARTICLE XI
EVENTS OF DEFAULT
11.1. EVENTS OF DEFAULT. If any of the following events
("Events of Default") shall occur and be continuing:
(a) The Borrower shall fail to pay (i) any principal when due
in accordance with the terms and provisions of this Agreement or any
other Loan Document, or (ii) any interest on any amounts due hereunder
or thereunder, or any fee or any other amount due hereunder or
thereunder within three Business Days after the same becomes due and
payable; or
(b) Any representation or warranty made by the Borrower in
this Agreement or any other Loan Document or by the Borrower (or any of
its officers) in connection with this Agreement or any other Loan
Document shall prove to have been incorrect in any material respect
when made; or
(c) The Borrower shall fail to perform or observe (i) the
provisions of Section 10.2, 10.3 or 10.8, or (ii) any other term,
covenant or agreement contained in this Agreement or any other Loan
Document, which failure in this clause (ii) shall remain unremedied for
fifteen days after the earlier of the date on which (A) telephonic
notice thereof shall have been given to the Administrative Agent by the
Borrower pursuant to Section 9.9(e), or (B) written notice thereof
shall have been given to the Borrower by the Administrative Agent or
any Bank; or
(d) The Borrower or any of its Subsidiaries shall fail to pay
any principal of, or premium or interest on, any Indebtedness in an
aggregate principal amount of $25,000,000 or more (excluding
Indebtedness hereunder) of the Borrower or such Subsidiary, when the
same becomes due and payable (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise); or any other event
shall occur or condition shall exist under any agreement or instrument
relating to any such Indebtedness, if the effect of such event or
condition is to accelerate, or to permit the acceleration of, the
maturity of such Indebtedness or to terminate any commitment to lend;
or any such Indebtedness shall be declared to be due and payable, or
required to be prepaid (other than by a regularly scheduled required
prepayment), prior to the stated maturity thereof and, with respect to
all of the foregoing, after the expiration of any applicable grace
period or the giving of any required notice or both; PROVIDED, HOWEVER,
that no extension of any grace
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period applicable to any such Indebtedness shall be taken into
account for the purposes of this subsection (d); or
(e) The Borrower or any of its Material Subsidiaries shall
generally not pay its debts as such debts become due, or shall admit in
writing its inability to pay its debts generally, or shall make a
general assignment for the benefit of creditors, or any proceedings
shall be instituted by or against the Borrower or any of its Material
Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or
seeking liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief, or composition of it or its debts under
any law relating to bankruptcy, insolvency or reorganization or relief
of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, trustee or other similar official for it or
for a material part of its Property employed in its business or any
writ, attachment, execution or similar process shall be issued or
levied against a material part of the Property employed in the business
of the Borrower and its Subsidiaries taken as a whole, and, in the case
of any such proceedings instituted against the Borrower or any of its
Material Subsidiaries (but not instituted by it), either such
proceedings shall remain undismissed or unstayed for a period of 60
days or any of the actions sought in such proceedings shall occur; or
the Borrower or any of its Material Subsidiaries shall take any
corporate action to authorize any of the actions set forth above in
this subsection (e); or
(f) Any order for the payment of money or judgment of any
court, not appealable or not subject to certiorari or appeal (a "Final
Judgment"), which, with other outstanding Final Judgments, exceeds an
aggregate of $25,000,000 shall be rendered against the Borrower or any
of its Material Subsidiaries and, within 60 days after entry thereof,
such Final Judgment shall not have been discharged; or
(g) (i) With respect to any Plan, a final determination is
made that a prohibited transaction within the meaning of Section 4975
of the Code or Section 406 of ERISA occurred which results in direct or
indirect liability of the Borrower or any of its Material Subsidiaries,
(ii) with respect to any Title IV Plan, the filing of a notice to
voluntarily terminate any such plan in a distress termination, (iii)
with respect to any Multiemployer Plan, the Borrower, any of its
Material Subsidiaries or any of its or their ERISA Affiliates shall
incur any Withdrawal Liability, or (iv) with respect to any Qualified
Plan, the Borrower, any of its Material Subsidiaries or any of its or
their ERISA Affiliates shall incur an accumulated funding deficiency or
request a funding waiver from the IRS; PROVIDED, HOWEVER, that the
events listed in clauses (i)-(iv) hereof shall constitute Events of
Default only if the liability, deficiency or waiver request of the
Borrower, any of its Material Subsidiaries or any of its or their ERISA
Affiliates, as finally determined, exceeds $25,000,000 in any case set
forth in clauses (i)-(iv) above, or exceeds $25,000,000 in the
aggregate for all such cases; and, PROVIDED
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FURTHER, HOWEVER, that with respect to the events listed in clauses
(i), (iii) and (iv) hereof there shall be no Event of Default if the
liability of the Borrower, the relevant Material Subsidiary or the
relevant ERISA Affiliate is satisfied in full or in accordance with the
due dates therefor; or
(h) This Agreement or any other Loan Document shall cease to
be valid or enforceable for any reason in any material respect; or
(i) (i) any Person or group of Persons shall have acquired
beneficial ownership (within the meaning of Rule 13d-3 promulgated by
the SEC under the Exchange Act) of 50% or more of the outstanding
shares of common stock of the Borrower other than Viacom Inc. or
National Amusements, Inc.; or (ii) the Board of Directors of the
Borrower shall not consist of a majority of Continuing Directors; or
(iii) any Person or group of Persons (within the meaning of Section 13
or 14 of the Exchange Act) shall have entered into a merger or purchase
agreement with the Borrower pursuant to which such Person or Persons
shall have acquired a present power to exercise, directly or
indirectly, control over the management or policies of the Borrower;
then, and in any such event, the Administrative Agent (i) shall at the request,
or may with the consent, of the Majority Banks, by notice to the Borrower,
declare the obligation of each Bank to make Loans to be terminated, whereupon
the same shall forthwith terminate, and (ii) shall at the request, or may with
the consent, of the Majority Banks, by notice to the Borrower, declare all
amounts due under this Agreement and all interest thereon to be forthwith due
and payable, whereupon all amounts due under this Agreement and all such
interest and all such amounts shall become and be forthwith due and payable;
PROVIDED, HOWEVER, that if Borrower shall fail to make payment as provided in
Section 11.1(a) above with respect to the Tranche C Loan only, then for taking
action authorized hereby for such violation of Section 11.1(a) (and not with
respect to any other action that may be authorized hereby for a breach of any
other paragraph in Section 11.1 as a result of the Borrower's failure),
"Majority Banks" shall mean either of (i) the vote of Banks having at least 51%
of the aggregate amount of the Tranche C Loan Commitments, taken together and
voting as a single group or (ii) the vote of Banks having at least 51% of the
aggregate amount of the Tranche A Loan Commitments, Tranche B Loan Commitments
and Tranche C Loan commitments, taken together and voting as a single group; and
PROVIDED, FURTHER, HOWEVER, that upon an actual or deemed entry of an order for
relief with respect to the Borrower or any of its Material Subsidiaries under
the federal Bankruptcy Code, (A) the obligation of each Bank to make Loans shall
automatically be terminated and (B) all amounts due under this Agreement and all
such interest and all such amounts shall automatically and without further
notice become and be due and payable. In addition to the remedies set forth
above, the Administrative Agent may exercise any other remedies provided for by
this Agreement in accordance with the terms hereof or any other remedies
provided by applicable law.
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ARTICLE XII
THE ARRANGERS AND THE FACILITY AGENTS
12.1. AUTHORIZATION AND ACTION. Each Bank hereby appoints and
authorizes each Facility Agent to take such action as agent on its behalf and to
exercise such powers under this Agreement as are delegated to such Facility
Agent by the terms hereof, together with such powers as are reasonably
incidental thereto. As to any matters not expressly provided for by this
Agreement, no Facility Agent shall be required to exercise any discretion or
take any action, but each shall be required to act or to refrain from acting
(and shall be fully protected in so acting or refraining from acting) upon the
instructions of the Majority Banks (or when expressly required hereunder, all
the Banks), and such instructions shall be binding upon all Banks; PROVIDED,
HOWEVER, that no Facility Agent shall be required to take any action that
exposes such Facility Agent to personal liability or that is contrary to this
Agreement or applicable law. Each Facility Agent agrees to give to each Bank
prompt notice of each notice given to it by the Borrower pursuant to the terms
of this Agreement.
12.2. ARRANGERS' AND FACILITY AGENTS' RELIANCE, ETC. Neither
the Arrangers, the Facility Agents, their Affiliates nor any of their respective
directors, officers, agents or employees shall be liable for any action taken or
omitted to be taken by any of them under or in connection with this Agreement,
except for its own gross negligence or willful misconduct. Without limitation of
the generality of the foregoing, (i) any Arrangers or Facility Agent may consult
with legal counsel (including counsel to the Borrower), independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken in good faith by it in accordance with the
advice of such counsel, accountants or experts; (ii) neither the Arrangers nor
the Facility Agents make any warranty or representation to any Bank and none of
them shall be responsible to any Bank for any statements, warranties or
representations made in or in connection with this Agreement; (iii) neither the
Arrangers nor the Facility Agents shall have any duty to ascertain or to inquire
as to the performance or observance of any of the terms, covenants or conditions
of this Agreement on the part of the Borrower or to inspect the Properties
(including the books and records) of the Borrower; (iv) neither the Arrangers
nor the Facility Agents shall be responsible to any Bank for the due execution,
legality, validity, enforceability, genuineness, sufficiency or value of this
Agreement or any other instrument or document furnished pursuant hereto; and (v)
neither the Arrangers nor the Facility Agents shall incur liability under or in
respect of this Agreement by acting upon any notice, consent, certificate or
other instrument or writing (which may be by telegram, cable or telex) believed
by it to be genuine and signed or sent by the proper party or parties.
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12.3. CITIBANK, N.A., THE BANK OF NEW YORK, BANK OF AMERICA
NT&SA, CHASE SECURITIES INC., MORGAN GUARANTY TRUST COMPANY OF NEW YORK AND
THEIR AFFILIATES. With respect to the Commitments of Citibank, N.A., The Bank of
New York, Bank of America NT&SA, Chase Securities Inc. and Morgan Guaranty Trust
Company of New York, respectively, and the Loans made by each of them, each of
Citibank, N.A., The Bank of New York, Bank of America NT&SA, Chase Securities
Inc. and Morgan Guaranty Trust Company of New York shall have the same rights
and powers under this Agreement as any other Bank and may exercise the same as
though it were not an Arranger or Facility Agent, as the case may be; and the
term "Bank" or "Banks" shall, unless otherwise expressly indicated, include each
of Citibank, N.A., The Bank of New York, Bank of America NT&SA, Chase Securities
Inc. and Morgan Guaranty Trust Company of New York in their individual
capacities. Each of Citibank, N.A., The Bank of New York, Bank of America NT&SA,
Chase Securities Inc. and Morgan Guaranty Trust Company of New York and their
Affiliates may accept deposits from, lend money to, act as trustee under
indentures of, and generally engage in any kind of business with, the Borrower,
any of its Subsidiaries and any Person who may do business with or own
securities of the Borrower or any such Subsidiary, all as if Citibank, N.A., The
Bank of New York, Bank of America NT&SA, Chase Securities Inc. and Morgan
Guaranty Trust Company of New York, as the case may be, were not an Arranger or
Facility Agent, as the case may be, and without any duty to account therefor to
the Banks.
12.4. BANK CREDIT DECISION. Each Bank acknowledges that it
has, independently and without reliance upon the Facility Agents, the Arrangers,
or any other Bank, and based on the financial statements referred to in Article
VII and such other documents and information as it has deemed appropriate, made
its own credit analysis and decision to enter into this Agreement. Each Bank
also acknowledges that it will, independently and without reliance upon the
Facility Agents, the Arrangers, or any other Bank and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under this Agreement.
12.5. DETERMINATIONS UNDER SECTIONS 6.1, 6.2 AND 6.3. For
purposes of determining compliance with the conditions specified in Sections
6.1, 6.2 and 6.3, each Bank shall be deemed to have consented to, approved or
accepted, or to be satisfied with each document or other matter required
thereunder to be consented to or approved by or acceptable or satisfactory to
the Banks unless an officer of the Administrative Agent responsible for the
transactions contemplated by this Agreement shall have received notice from such
Bank prior to the applicable Borrowing specifying its objection thereto (unless
such objection shall have been withdrawn by notice to the Administrative Agent
to that effect or such Bank shall have made available to the Administrative
Agent such Bank's ratable portion of such Borrowing).
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12.6. INDEMNIFICATION. Each Bank agrees to indemnify the
Facility Agents, the Arrangers and their respective Affiliates, and their
respective directors, officers, employees, agents and advisors (to the extent
not reimbursed by the Borrower), ratably according to such Bank's Ratable
Portion of the Commitments, from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements (including, without limitation, fees and disbursements
of legal counsel) of any kind or nature whatsoever which may be imposed on,
incurred by, or asserted against, any such Person in any way relating to or
arising out of this Agreement or any action taken or omitted by any such Person
under this Agreement; PROVIDED, HOWEVER, that no Bank shall be liable for any
portion of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements resulting from any such
Person's gross negligence or willful misconduct. Without limitation of the
foregoing, each Bank agrees to reimburse any such Person promptly upon demand
for its ratable share of any out-of-pocket expenses (including fees and
disbursements of one counsel) incurred by such Person in connection with the
preparation, execution, delivery, administration, modification, amendment or
enforcement (whether through negotiations, legal proceedings or otherwise) of,
or legal advice in respect of rights or responsibilities under, this Agreement,
to the extent that such Person is not reimbursed for such expenses by the
Borrower.
12.7. SUCCESSOR FACILITY AGENTS. Any Facility Agent may resign
at any time by giving written notice thereof to the Banks and the Borrower and
may be removed at any time with or without cause by the Majority Banks. Upon any
such resignation or removal, the Majority Banks shall have the right to appoint
a successor to such Facility Agent. If no successor to such Facility Agent shall
have been so appointed by the Majority Banks, and shall have accepted such
appointment, within 30 days after retiring Facility Agent's giving of notice of
resignation or the Majority Banks' removal of such retiring Facility Agent, then
such retiring Facility Agent on behalf of the Banks, shall appoint a successor
Facility Agent (which successor Facility Agent shall be a Bank or another
commercial bank organized under the laws of the United States of America or of
any State thereof and having a combined capital and surplus of at least
$50,000,000). Upon the acceptance of any appointment as a Facility Agent
hereunder by any successor Facility Agent, such successor Facility Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Facility Agent, and such retiring Facility Agent
shall be discharged from its duties and obligations under this Agreement. After
any retiring Facility Agent's resignation or removal hereunder, the provisions
of this Article XII shall inure to its benefit as to any actions taken or
omitted to be taken by it while it was Facility Agent.
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ARTICLE XIII
MISCELLANEOUS
13.1. AMENDMENTS, ETC. No amendment or waiver of any provision
of this Agreement, nor consent to any departure by the Borrower therefrom, shall
in any event be effective unless the same shall be in writing and signed by the
Majority Banks, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given; PROVIDED,
HOWEVER, that, in addition to such approval by the Majority Banks, no amendment,
waiver or consent shall, unless in writing signed by all the Banks in a
particular Tranche hereof, do any of the following: (a) waive any of the
conditions specified in Section 6.1, 6.2 or 6.3 with respect to Loans to be made
under such Tranche; (b) increase the Commitments of such Banks or subject such
Banks to any additional obligations; (c) change the principal of, or decrease
the interest on, any amounts payable hereunder with respect to such Tranche or
reduce the amount of any Commitment Fee payable to such Banks hereunder; (d)
postpone any date fixed for any scheduled payment of any Commitment Fee, or
scheduled payment of principal of, or interest on, any amounts, payable with
respect to the Tranche of such Banks; provided that all the Tranche C Loan Banks
may extend the Tranche C Loan Commitment Termination Date (in one or more
extensions) by (i) a total of 180 days (for all extensions taken together)
without Majority Bank approval, and (ii) more than 180 days only with the
approval of 51% of the aggregate amount of the Tranche A Loan Commitments and
Tranche B Loan Commitments, taken together and voting as a single group,
PROVIDED, FURTHER, HOWEVER, that no amendment, waiver or consent shall modify
the allocations set forth in Section 5.11 unless signed by 51% of the aggregate
amount of the particular Tranche affected by such amendment, waiver or consent
taken together and voting as a single group. In addition, no amendment shall,
unless in writing signed by all the Banks, do any of the following: (a) change
the definition of Majority Banks; (b) amend this Section 13.1; or (c) amend
clause (i) of Section 13.6; and PROVIDED FURTHER, that no amendment, waiver or
consent shall at any time, unless in writing and signed by the Administrative
Agent in addition to the Persons required above to take such action, affect the
rights or duties of the Administrative Agent under this Agreement.
13.2. NOTICES, ETC. Except as otherwise set forth herein, all
notices and other communications provided for hereunder shall be in writing
(including telegraphic, telex, telecopy or cable communication) and mailed,
telegraphed, telexed, telecopied, cabled or delivered by hand, if to the
Borrower, at its address at 1201 Elm Street, Dallas, Texas 75270, Attn:
Treasurer, with a copy to Viacom at its address at 1515 Broadway, New York, New
York 10036, Attention: Treasurer; if to any Bank, at its Domestic Lending Office
specified opposite its name on Schedule I; and if to the Administrative Agent,
at its address at 2 Penns Way, Suite 200, New Castle, Delaware 19720, Attention:
Christian Laughton, or his successor; or, as to the Borrower, any Bank or the
Administrative Agent, at such other address as shall be designated by such party
in a
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written notice to the other parties and, as to each other party, at such other
address as shall be designated by such party in a written notice to the Borrower
and the Administrative Agent. All such notices and communications shall, when
mailed, telegraphed, telexed, telecopied, cabled or delivered, be effective when
deposited in the mails, delivered to the telegraph company, confirmed by telex
answerback, telecopied with confirmation of receipt, delivered to the cable
company or delivered by hand to the addressee or its agent, respectively, except
that notices and communications to the Administrative Agent pursuant to Article
II, III, IV, V or XIII shall not be effective until received by the
Administrative Agent.
13.3. NO WAIVER; REMEDIES. No failure on the part of any Bank,
the Arrangers or any Facility Agent to exercise, and no delay in exercising, any
right hereunder shall operate as a waiver thereof; nor shall any single or
partial exercise of any such right preclude any other or further exercise
thereof or the exercise of any other right. The remedies herein provided are
cumulative and not exclusive of any remedies provided by law.
13.4. COSTS; EXPENSES; INDEMNITIES. (a) The Borrower agrees to
pay on demand all costs and expenses in connection with the preparation,
execution, delivery, administration, modification and amendment of this
Agreement, the other Loan Documents and the other documents to be delivered
hereunder or thereunder, including, without limitation, the specified reasonable
fees and out-of-pocket expenses of one counsel to the Facility Agents and the
Arrangers with respect thereto and with respect to advising the Facility Agents
and the Arrangers as to their rights and responsibilities under this Agreement,
and all costs and expenses of the Arrangers, the Facility Agents and the Banks
(including, without limitation, reasonable counsel fees and expenses) in
connection with the enforcement (whether through negotiations, legal proceedings
or otherwise) of this Agreement, the other Loan Documents and the other
documents to be delivered hereunder and thereunder.
(b) The Borrower agrees to defend, indemnify and hold harmless
each of the Facility Agents, the Arrangers and the Banks and their respective
affiliates and their respective directors, officers, attorneys, agents,
employees, successors and assigns (each, an "Indemnified Person") from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, claims, judgments, suits, costs, expenses and disbursements of any kind
or nature whatsoever (including, without limitation, fees and disbursements of
counsel of the Facility Agents, the Arrangers or the Banks) which may be
incurred by or asserted or awarded against any Indemnified Person, in each case
arising in any manner of or in connection with or by reason of this Agreement,
the other Loan Documents, the Commitments or any undertakings in connection
therewith, or the proposed or actual application of the proceeds of the Loans
(all of the foregoing collectively, the "Indemnified Liabilities") and will
reimburse each Indemnified Person on a current basis for all expenses (including
counsel fees as they are incurred by such party) in connection
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with investigating, preparing or defending any such action, claim or suit,
whether or not in connection with pending or threatened litigation irrespective
of whether such Indemnified Person is designated a party thereto; PROVIDED that
the Borrower shall not have any liability hereunder to any Indemnified Person
with respect to Indemnified Liabilities which are determined by a final and
nonappealable judgment of a court of competent jurisdiction to have arisen
primarily from the gross negligence or willful misconduct of such Indemnified
Person; and PROVIDED FURTHER, that if the Borrower has determined in good faith
that such Indemnified Liabilities were primarily the result of such Indemnified
Person's gross negligence or willful misconduct, it shall not be obligated to
pay such Indemnified Liabilities until a court of competent jurisdiction has
determined whether such Indemnified Person acted with gross negligence or
willful misconduct. If for any reason the foregoing indemnification is
unavailable to an Indemnified Person or insufficient to hold an Indemnified
Person harmless, then the Borrower shall contribute to the amount paid or
payable by such Indemnified Person as a result of any Indemnified Liability in
such proportion as is appropriate to reflect not only the relative benefits
received by the Borrower and each Facility Agent, each Arranger and each Bank,
but also the relative fault of the Borrower and each Facility Agent, each
Arranger and each Bank, as well as any other relevant equitable considerations.
The foregoing indemnity shall be in addition to any rights that any Indemnified
Person may have at common law or otherwise, including, but not limited to, any
right to contribution.
(c) If any Bank receives any payment of principal of, or is
subject to a conversion of, any Eurodollar Rate Loan other than on the last day
of an Interest Period relating to such Loan, as a result of any payment or
conversion made by the Borrower or acceleration of the maturity of the amounts
due under this Agreement pursuant to Section 11.1 or for any other reason, the
Borrower shall, upon demand by such Bank (with a copy of such demand to the
Administrative Agent), pay to the Administrative Agent for the account of such
Bank any amounts required to compensate such Bank for any additional losses,
costs or expenses which it may reasonably incur as a result of such payment or
conversion, including, without limitation, any loss (excluding loss of the
margin payable in accordance with Section 5.2 on the amount of principal so
paid, or any loss), cost or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by such Bank to fund or
maintain such Loan. The foregoing obligations of the Borrower contained in
paragraphs (a), (b) and (c) of this Section 13.4, and the obligations of the
Borrower contained in Sections 5.5(b) and 5.7, shall survive the payment of the
Loans.
13.5. RIGHT OF SET-OFF. Upon (i) the occurrence and during the
continuance of any Event of Default and (ii) the making of the request or the
granting of the consent specified by Section 11.1 to authorize the
Administrative Agent to declare all amounts under this Agreement due and payable
pursuant to the provisions of Section 11.1 or the automatic acceleration of such
amounts pursuant to the proviso to that Section, each Bank is hereby authorized
at any time and from time to time, to the fullest extent
61
<PAGE>
permitted by law, to set off and apply any and all deposits (general or special,
time or demand, provisional or final) at any time held and other indebtedness at
any time owing by such Bank to or for the credit or the account of the Borrower
against any and all of the obligations of the Borrower now or hereafter existing
under this Agreement irrespective of whether or not such Bank shall have made
any demand under this Agreement and although such obligations may be unmatured.
Each Bank agrees promptly to notify the Borrower after any such set-off and
application made by such Bank; PROVIDED, HOWEVER, that the failure to give such
notice shall not affect the validity of such set-off and application. The rights
of each Bank under this Section 13.5 are in addition to any other rights and
remedies (including, without limitation, any other rights of set-off) which such
Bank may have.
13.6. BINDING EFFECT. Subject to Article VI hereunder, this
Agreement shall become effective when it shall have been executed by the
Borrower and each of the Facility Agents and when the Administrative Agent shall
have been notified by each of the Banks that such Bank has executed it and
thereafter shall be binding upon and inure to the benefit of the Borrower, each
of the Facility Agents and each of the Banks and their respective successors and
assigns, except that (i) the Borrower shall have no right to assign its rights
or obligations hereunder or any interest herein (and any such purported
assignment shall be void) without the prior consent of the Banks except in
connection with any (x) merger or consolidation permitted under Section 10.2 or
(y) merger, consolidation or sale of assets consented to by the Majority Banks,
and (ii) no Bank may sell, transfer, assign, pledge or grant participations in
any of its Loans or any of its rights or obligations hereunder except in
accordance with Section 13.7 or as expressly required hereunder.
13.7. ASSIGNMENTS AND PARTICIPATIONS; ADDITIONAL BANKS. (a)
Any Bank may, at any time, by notice substantially in the form of Exhibit D
hereto (each, an "Assignment and Acceptance") delivered to the Administrative
Agent for its acceptance and recording, together with a recording fee in the
amount of $2,500, assign all or any part of its rights and obligations and
delegate its duties under this Agreement (A) to any other Bank or any Affiliate
of any Bank which actually controls, is controlled by, or is under common
control with such Bank or to any Federal Reserve Bank (in either case without
limitation as to amount), or (B) with the prior consent of the Administrative
Agent and Borrower (such consent not to be unreasonably withheld), to any other
Person (but if in part, in a minimum amount of $5,000,000 or, if less, the
balance of such Bank's Commitment; PROVIDED, HOWEVER, that unless otherwise
consented to by the Administrative Agent and Borrower (such consent not to be
unreasonably withheld), each assigning Bank must assign an identical percentage
of a Loan and its related Commitment.
62
<PAGE>
(b) Any Bank may at any time sell or grant participations in
its Commitment, or the obligations owing to or from any Person existing under
this Agreement; PROVIDED, HOWEVER, that (i) as between such Bank and the
Borrower, the existence of such participations shall not give rise to any direct
rights or obligations between the Borrower and the participants; (ii) such Bank
shall remain solely responsible to the other parties hereto for the performance
of such obligations; (iii) the Borrower, the Facility Agents and the other Banks
shall continue to deal solely and directly with such Bank in connection with
such Bank's rights and obligations under this Agreement; and (iv) no such sale
or grant of a participation shall, without the consent of the Borrower, require
the Borrower to file a registration statement with the Securities and Exchange
Commission or apply to qualify the Commitments or the Loans under the securities
laws of any state.
(c) If an assignment is made by any Bank in accordance with
the provisions of paragraph (a) above, upon acceptance and recording by the
Administrative Agent, and approval by the Borrower, where applicable, of each
Assignment and Acceptance, (i) the assignee thereunder shall become a party to
this Agreement and the Borrower shall release and discharge the assigning Bank
from its duties, liabilities or obligations under this Agreement to the extent
the same are so assigned and delegated by such Bank, PROVIDED that no such
consent, release or discharge shall have effect until the Borrower shall have
received a fully executed copy of the Assignment and Acceptance relating to such
assignment and (ii) Schedule II shall be deemed amended to give effect to such
assignment. The Borrower agrees that each such disposition will give rise to a
direct obligation of the Borrower to any such assignee.
(d) The Borrower authorizes each Bank to disclose to any
prospective assignee or participant and any assignee or participant any and all
financial information in such Bank's possession concerning the Borrower and this
Agreement; PROVIDED, HOWEVER, that, prior to any such disclosure, the assignee
or participant or proposed assignee or participant shall agree to preserve the
confidentiality of any confidential information relating to the Borrower
received by it from such Bank in accordance with Section 13.10.
(e) Any Bank which sells or grants participations in any Loans
or its Commitment may not grant to the participants the right to vote other than
on amendments, consents, waivers, modifications or other actions which change
the principal amount of, postpone the scheduled maturity of, or decrease the
interest rates applicable to, any Loans under, or increase the amount of, such
Commitment (except with respect to participating Affiliates actually controlled
by, controlling or under common control with, such Bank); PROVIDED, HOWEVER,
that as between the Bank and the Borrower, only the Bank shall be entitled to
cast such votes.
63
<PAGE>
(f) No participant in any Bank's rights or obligations shall
be entitled to receive any greater payment under Section 5.5 or 5.7 than such
Bank would have been entitled to receive with respect to the rights
participated, and no participation shall be sold or granted to any Person as to
which the events specified in Section 5.6 have occurred on or before the date of
participation.
(g) The Administrative Agent shall maintain at its address
referred to in Section 13.2 a copy of each Assignment and Acceptance received by
it and a register, containing the terms of each Assignment and Acceptance, for
the recordation of the names and addresses of each Bank and the Commitment of,
and principal amount of the Loans owing to, each Bank from time to time (the
"Register"). The entries in the Register shall be conclusive and binding for all
purposes, absent manifest error, and the Borrower, the Banks and the Facility
Agents may treat each Person whose name is recorded in the Register as a Bank
hereunder for all purposes of this Agreement. The Register shall be available
for inspection by the Borrower, any Bank or any Facility Agent at any reasonable
time and from time to time upon reasonable prior notice.
(h) Notwithstanding anything to the contrary contained herein,
any Bank (a "GRANTING BANK") may grant to a special purpose funding vehicle (a
"SPC"), identified as such in writing from time to time by the Granting Bank to
the Administrative Agent and the Borrower, the option to provide to the Borrower
all or any part of any Borrowing that such Granting Bank would otherwise be
obligated to make to the Borrower pursuant to this Agreement; PROVIDED THAT, (i)
nothing herein shall constitute a commitment by any SPC to make any Borrowing,
and (ii) if SPC elects not to exercise such option or otherwise fails to provide
all or any part of such Borrowing, the Granting Bank shall be obligated to make
such Borrowing pursuant to the terms hereof. The making of a Borrowing by a SPC
hereunder shall utilize the Commitment of the Granting Bank to the same extent,
and as if, such Borrowing were made by such Granting Bank. Each party hereto
hereby agrees that no SPC shall be liable for any indemnity or similar payment
obligation under this Agreement (all liability for which shall remain with the
Granting Bank), as long as and to the extent that the Granting Bank provides
such indemnity or makes such payment. In furtherance of the foregoing, each
party hereto hereby agrees (which agreement shall survive the termination of
this Agreement) that, prior to the date that is one year and one day after the
payment in full of all outstanding commercial paper or other senior indebtedness
of any SPC, it will not institute against, or join any other person in
instituting against, such SPC any bankruptcy, reorganization, arrangement,
insolvency or liquidation proceedings under the laws of the United States or any
state thereof. In addition, notwithstanding anything to the contrary contained
in this Section 13.7, any SPC may with notice to, and with the prior written
consent (not to be unreasonably withheld) of, the Borrower and the
Administrative Agent, assign all or a portion of its interests in any Borrowing
to the Granting Bank or to any financial institutions (consented to by the
Borrower and Administrative Agent) providing liquidity and/or credit support to
or for the account of such SPC to support the funding or
64
<PAGE>
maintenance of Borrowings. The Granting Bank shall not disclose any confidential
information to the SPC unless the SPC has been made aware of Section 13.11 of
the Agreement and shall have agreed to be bound by the provisions of said
Section 13.11 as if it were a party to this Agreement. This section may not be
amended without the written consent of each Granting Bank, all or any part of
whose advance is being funded by a SPC at the time of such amendment. No SPC,
whether or not such SPC shall have funded any portion of any Borrowing
hereunder, shall be deemed a Bank hereunder for any purpose, including but not
limited to, the granting of any amendment or waiver of any provision of this
Agreement or the other Loan Documents, or the taking of any action pursuant to
this Agreement, and shall not be entitled to direct its Granting Bank with
respect to any such consent, waiver, or action, and its Granting Bank shall be
deemed the Bank hereunder for all such purposes.
13.8. PROMISSORY NOTES. At the request of a Lender in writing
addressed to the Administrative Agent, with a copy to the Borrower, accompanied
by a processing fee of $2,500, the Borrower's obligations to repay any Loans by
a Bank shall be evidenced by one or more notes, in a form customary for large
syndicated commercial loan transactions. Such note shall be in the maximum
aggregate principal amount of the Loans evidenced thereby, or, if less, the
unpaid principal amount thereof at the due date of such Loans and stated to
mature on the applicable Termination Date, and bear interest from its date until
paid in full on the principal amount of the Loans outstanding thereunder payable
at the rates and in the manner provided herein. Transfer of such notes, and the
Loans evidenced thereby, shall be subject to the provisions of Section 13.7.
13.9. GOVERNING LAW; SEVERABILITY. THIS AGREEMENT AND THE
RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS
MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. WHEREVER POSSIBLE, EACH
PROVISION OF THIS AGREEMENT SHALL BE INTERPRETED IN SUCH MANNER AS TO BE
EFFECTIVE AND VALID UNDER APPLICABLE LAW, BUT IF ANY PROVISION OF THIS AGREEMENT
SHALL BE PROHIBITED BY OR INVALID UNDER APPLICABLE LAW, SUCH PROVISION SHALL BE
INEFFECTIVE TO THE EXTENT OF SUCH PROHIBITION OR INVALIDITY, WITHOUT
INVALIDATING THE REMAINDER OF SUCH PROVISION OR THE REMAINING PROVISIONS OF THIS
AGREEMENT.
65
<PAGE>
13.10. SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL.
(a) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS
AGREEMENT OR ANY DOCUMENT RELATED HERETO MAY BE BROUGHT IN THE COURTS OF THE
STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT
OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWER
HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTIES, GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE PARTIES HERETO
HEREBY IRREVOCABLY WAIVE ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY
OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON
CONVENIENS, WHICH ANY OF THEM MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY
SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS.
(b) The Borrower irrevocably consents to the service of
process of any of the aforementioned courts in any such action or proceeding by
the mailing of copies thereof by registered or certified mail, postage prepaid,
to the Borrower at its address specified for notices in or pursuant to Section
13.2 hereof, such service to become effective 30 days after such mailing.
(c) Nothing contained in this Section 13.9 shall affect the
right of any Arrangers, any Facility Agent or any Bank to serve process in any
other manner permitted by law or commence legal proceedings or otherwise proceed
against the Borrower in any other jurisdiction.
(d) Each of the parties hereto waives any right it may have to
trial by jury in any proceeding arising out of this Agreement.
13.11. CONFIDENTIALITY. Each Bank, each Arranger and each
Facility Agent agrees to keep confidential information obtained by it pursuant
hereto (or otherwise obtained from the Borrower in connection with this
Agreement) confidential in accordance with such Person's customary practices and
agrees that it will only use such information in connection with the
transactions contemplated by this Agreement and not disclose any of such
information other than (i) to such Person's employees, counsel, representatives
and agents who are or are expected to be involved in the evaluation of such
information in connection with the transactions contemplated by this Agreement
and who in each case agree to be bound by the provisions of this sentence, (ii)
to the extent that disclosure by such Person is required, or to the extent that
such Person has been advised by counsel that disclosure is required, in order to
comply with any law, regulation or judicial order or requested or required by
bank regulators or auditors or other Governmental Authority, (iii) to assignees
or participants of the Loans or Commitments
66
<PAGE>
or potential assignees or participants of the Loans or Commitments who in each
case agree in writing to be bound by the provisions of this sentence or (iv) to
the extent that such information has otherwise been disclosed or made public
other than by such Person, or such Person's employees, counsel, representatives
or agents, in violation of this Section 13.10.
13.12. SECTION TITLES. The Section titles contained in this
Agreement are and shall be without substantive meaning or content of any kind
whatsoever and are not a part of the agreement between the parties hereto.
13.13. EXECUTION IN COUNTERPARTS. This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement.
67
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Credit Agreement
to be duly executed as of the date first above written.
BLOCKBUSTER INC., as Borrower
By: /s/ Larry J. Zine
----------------------------------
Name: Larry J. Zine
Title: Executive Vice President
and Chief Financial Officer
THE BANK OF NEW YORK, as the
Documentation Agent and a Bank
By: /s/ Geoffrey C. Brooks
----------------------------------
Name: Geoffrey C. Brooks
Title: Vice President
CITIBANK, N.A., as the Administrative Agent
and a Bank
By: /s/ Eileen G. Ogimachi
----------------------------------
Name: Eileen G. Ogimachi
Title: Attorney-in-fact
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, as a Bank
By: /s/ Robert Bottamedi
----------------------------------
Name: Robert Bottamedi
Title: Vice President
<PAGE>
BANK OF AMERICA NT&SA, as a Syndication
Agent and a Bank
By: /s/ Thomas J. Kane
----------------------------------
Name: Thomas J. Kane
Title: Vice President
CHASE MANHATTAN BANK, as a Syndication
Agent and a Bank
By: /s/ Bruce E. Langenkamp
----------------------------------
Name: Bruce E. Langenkamp
Title: Vice President
THE BANK OF NOVA SCOTIA, as a Bank
By: /s/ Vince J. Fitzgerald, Jr.
----------------------------------
Name: Vince J. Fitzgerald, Jr.
Title: Authorized Signatory
BANK ONE, TEXAS, N.A., as a Bank
By: /s/ William B. Winters
----------------------------------
Name: William B. Winters
Title: Vice President
BANKBOSTON, N.A., as a Bank
By: /s/ Robert F. Milordi
----------------------------------
Name: Robert F. Milordi
Title: Vice President
<PAGE>
BEAR STEARNS CORPORATE LENDING INC.,
as a Bank
By: /s/ Michael L. Offen
----------------------------------
Name: Michael L. Offen
Title: Executive Vice President
CREDIT SUISSE FIRST BOSTON, as a Bank
By: /s/ Kristin Lepri
----------------------------------
Name: Kristin Lepri
Title: Associate
By: /s/ Todd C. Morgan
----------------------------------
Name: Todd C. Morgan
Title: Director
FIRST UNION NATIONAL BANK, as a Bank
By: /s/ David Kraybill
----------------------------------
Name: David Kraybill
Title: Vice President
GOLDMAN SACHS CREDIT PARTNERS L.P., as
a Bank
By: /s/ Stephen B. King
----------------------------------
Name: Stephen B. King
Title: Authorized Signatory
<PAGE>
THE INDUSTRIAL BANK OF JAPAN, LIMITED,
as a Bank
By: /s/ William Kennedy
----------------------------------
Name: William Kennedy
Title: Senior Vice President
SOCIETE GENERALE, NEW YORK BRANCH,
as a Bank
By: /s/ Elaine Khalil
----------------------------------
Name: Elaine Khalil
Title: Vice President
ROYAL BANK OF CANADA, as a Bank
By: /s/ Kevin K. Cornwell
----------------------------------
Name: Kevin K. Cornwell
Title: Managing Director
THE MITSUBISHI TRUST AND BANKING
CORPORATION, as a Bank
By: /s/ Toshihiro Hayashi
----------------------------------
Name: Toshihiro Hayashi
Title: Senior Vice President
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Commitments
-----------------------------------------------------------------------------------------
INVESTOR Tranche A Tranche B Tranche C Total
Loan Commitments Loan Commitments Loan Commitments
---------------------- --------------------- ---------------------- --------------------
<S> <C> <C> <C> <C>
ARRANGERS
Citibank, N.A. $ 102,307,692.31 $ 87,692,307.69 $ 600,000,000.00 $ 790,000,000.00
Bank of America NT&SA $ 53,846,153.85 $ 46,153,846.15 $ $ 100,000,000.00
The Bank of New York $ 53,846,153.85 $ 46,153,846.15 $ $ 100,000,000.00
Chase Manhattan Bank $ 53,846,153.85 $ 46,153,846.15 $ $ 100,000,000.00
Morgan Guaranty Trust Company $ 53,846,153.85 $ 46,153,846.15 $ $ 100,000,000.00
of New York
MANAGING AGENT
The Bank of Nova Scotia $ 40, 384,615.38 $ 34,615,384.62 $ $ -75,000,000.00
Bank One, Texas, N.A. $ 40,384,615.38 $ 34,615,384.62 $ $ 75,000,000.00
BankBoston, N.A. $ 40,384,615.38 $ 34,615,384.62 $ $ 75,000,000.00
Bear Stearns Corporate Lending $ 40,384,615.38 $ 34,615,384.62 $ $ 75,000,000.00
Inc.
Credit Suisse First Boston $ 40,384,615.38 $ 34,615,384.62 $ $ 75,000,000.00
First Union National Bank $ 40,384,615.38 $ 34,615,384.62 $ $ 75,000,000.00
Goldman Sachs Credit Partners L.P. $ 40,384,615.38 $ 34,615,384.62 $ $ 75,000,000.00
Industrial Bank of Japan, Limited $ 40,384,615.38 $ 34,615,384.62 $ $ 75,000,000.00
Societe Generale, New York Branch $ 40,384,615.38 $ 34,615,384.62 $ $ 75,000,000.00
PARTICIPANTS
Royal Bank of Canada $ 13, 461,538.46 $ 11,538,461.54 $ $ 25,000,000.00
The Mitsubishi Trust and Banking $ 5,384,615.38 $ 4,615,384.62 $ $ 10,000,000.00
Corporation
---------------------- --------------------- ---------------------- --------------------
TOTAL $ 700,000,000.00 $ 600,000,000.00 $ 600,000,000.00 $1,900,000,000.00
---------------------- --------------------- ---------------------- --------------------
</TABLE>
<PAGE>
SCHEDULE 10.6
EXISTING BLOCKBUSTER FACILITIES
WITH MATURITIES LESS THAN ONE YEAR
AND/OR AVAILABLE TO SUBSIDIARIES
US$ EQUIVALENT
--------------
A) Blockbuster UK/Ireland/Europe $ 65,000,000
B) Blockbuster Canada $ 35,000,000
-------------
Total $ 100,000,000
<PAGE>
EXHIBIT A
FORM OF NOTICE OF BORROWING
[DATE]
Citibank, N.A.
as Administrative Agent for
the Banks parties to the
Credit Agreement referred to below
399 Park Avenue
New York, New York 10021
Attention: John Makrinos
Fax No.: (718) 248-4844
Robert F. Parr
Fax No.: (212) 793-6873
Ladies and Gentlemen:
The undersigned refers to the Credit Agreement, dated as of June 21,
1999, among Blockbuster Inc., as Borrower ("Blockbuster"), the Banks named
therein, as Banks, Cititbank, N.A., as the Administrative agent; The Bank of New
York, as the Documentation agent, Bank America NT&SA, a Syndication Agent, and
Chase Securities Inc., as a Syndication Agent (such agreement, as it may be
amended, supplemented or otherwise modified being the "Credit Agreement", the
terms defined therein being used herein as therein defined), and hereby gives
you notice, irrevocably, pursuant to Section [2.2], [3.2] and [4.2] of the
Credit Agreement that the undersigned hereby requests a [Tranche A Loan
Borrowing] [Tranche B Loan Borrowing] [Tranche C Loan Borrowing] under the
Credit Agreement, and in that connection sets forth below the information
relating to such proposed [Tranche A] [Tranche B] [Tranche C] Borrowing as
required by Sections [2.2(a)], [3.2(a)] and [4.2(a)], of the Credit Agreement:
(i) The Business Day of the proposed [Tranche A] [Tranche B] [Tranche C]
Loan Borrowing is .
A-1
<PAGE>
(ii) The aggregate amount of the Borrowing constituting the Proposed
[Tranche A] [Tranche B] [Tranche C] Loan Borrowing is $ principal amount of
[Eurodollar] [Prime] Rate Loans [having an Interest Period of ].
Very truly yours,
BLOCKBUSTER INC.
By:
-----------------------------------
Name:
Title:
A-2
<PAGE>
EXHIBIT B
FORM OF CONVERSION OR CONTINUATION
----------------------------------
[DATE]
Citibank, N.A.
as Administrative Agent for
the Banks parties to the
Credit Agreement referred to below
399 Park Avenue
New York, New York 10021
Attention: John Makrinos
Fax No.: (718) 248-4844
Robert F. Parr
Fax No.: (212) 793-6873
Ladies and Gentlemen:
The undersigned refers to the Credit Agreement, dated as of June 21,
1999, among Blockbuster Inc., as Borrower ("Blockbuster"), the Banks named
therein, as Banks, Cititbank, N.A., as the Administrative agent, The Bank of New
York, as the Documentation agent, Bank America NT&SA, a Syndication Agent, and
Chase Securities Inc., as a Syndication Agent (such agreement, as it may be
amended, supplemented or otherwise modified being the "Credit Agreement", the
terms defined therein being used herein as therein defined), this notice
represents the Borrower's request pursuant to Section 5.1 of the Credit
Agreement to [convert] [continue] $ in principal amount of presently outstanding
Loans bearing interest at a rate based on the [Base Rate] [Eurodollar Rate
having a Interest Period of and ending on ], to Loans bearing interest rate at a
rate based on the [Base Rate], [Eurodollar Rate], on [ ] [the last day of such
Interest Period]. [The Interest Period for such amounts requested to be
converted to bear interest at a rate based on the Eurodollar Rate is month(s).]
B-1
<PAGE>
The undersigned certifies that, before and after giving effect to the
foregoing, no Event of Default haws occurred and is continuing or would result
therefrom.
BLOCKBUSTER INC.
By:
-----------------------------------
Name:
Title:
B-2
<PAGE>
EXHIBIT D
FORM OF ASSIGNMENT AND ACCEPTANCE
---------------------------------
Reference is made to the Credit Agreement, dated as of June ___, 1999 (as
amended, modified or supplemented from time to time, the "CREDIT AGREEMENT"),
among Blockbuster Inc., and the Banks, Documentation Agent, Administrative
Agent, and Syndication Agents. Capitalized terms defined in the Credit Agreement
are used herein with the same meanings.
Section 1. ASSIGNMENT AND ACCEPTANCE. The Assignor identified in ANNEX 1
hereto (the "ASSIGNOR") hereby sells and assigns, without recourse, to the
Assignee identified in ANNEX 1 hereto (the "ASSIGNEE"), and the Assignee hereby
purchases and assumes, without recourse, from the Assignor, effective as of the
Effective Date set forth in ANNEX 1 hereto, the interests set forth on Annex 1
hereto (the "ASSIGNED INTEREST") in the Assignor's rights and obligations under
the Credit Agreement, including, without limitation, the interests set forth on
ANNEX 1 in the Commitment of the Assignor on such Effective Date and the Loans
owing to the Assignor which are outstanding on the Effective Date. From and
after the Effective Date (i) the Assignee shall be a party to and be bound by
the provisions of the Credit Agreement and, to the extent of the interests
assigned by this Assignment and Acceptance, have the rights and obligations of a
Bank thereunder and (ii) the Assignor shall, to the extent of the interests
assigned by this Assignment and Acceptance, relinquish its rights and be
released from its obligations under the Credit Agreement.
Section 2. OTHER DOCUMENTATION. This Assignment and Acceptance is being
delivered to the Administrative Agent together with a properly completed
Administrative Questionnaire, attached as ANNEX 2 hereto, if the Assignee is not
already a Bank under the Credit Agreement.
Section 3. REPRESENTATIONS AND WARRANTIES OF THE ASSIGNOR. The Assignor
(i) represents and warrants that, as of the date hereof, it is the legal and
beneficial owner of the interest being assigned by it hereunder and that such
interest is held by it free and clear of any adverse claim; (ii) makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with the
Credit Agreement, or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of the Credit Agreement, or any other
instrument or document executed or furnished pursuant thereto;
and (iii) makes no representation or warranty and assumes no responsibility with
respect to the financial condition of the Borrower or the performance or
observance by the Borrower of any of its obligations under the Credit Agreement
or any other instrument or document furnished pursuant thereto.
D-1
<PAGE>
Section 4. REPRESENTATIONS AND WARRANTIES OF THE ASSIGNEE. The Assignee
(a) confirms that it has received a copy of the Credit Agreement, together with
copies of the financial statements delivered on or before the date hereof
pursuant to Sections 7.4 and 9.8 thereof and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into this Assignment and Acceptance; (b) agrees that it will,
independently and without reliance upon the Administrative Agent, the Assignor
or any other Bank and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking any action under the Loan Documents; (c) appoints and authorizes the
Administrative Agent to take such action as agent on its behalf and to exercise
such powers under the Loan Documents as are delegated to the Administrative
Agent by the terms thereof, together with such powers as are reasonably
incidental thereto; (d) agrees that it will perform in accordance with their
terms all of the obligations which by the terms of the Loan Documents are
required to be performed by it as a Bank; and (e) if the Assignee is organized
under the laws of a jurisdiction outside the United States, confirms to the
Borrower (and is providing to the Administrative Agent and the Borrower Internal
Revenue Service form 1001 or 4224, as appropriate, or any successor form
prescribed by the Internal Revenue Service) that (i) the Assignee is entitled to
benefits under an income tax treaty to which the United States is a party that
reduces the rate of withholding tax on payments under the Credit Agreement or
(ii) that the income receivable pursuant to the Credit Agreement is effectively
connected with the conduct of a trade or business in the United States.
SECTION 5. GOVERNING LAW. THIS ASSIGNMENT AND ACCEPTANCE AND THE RIGHTS
AND OBLIGATIONS OF THE PARTIES, HERETO SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE
AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment and
Acceptance to be executed by their respective officers thereunto duly
authorized, as of the date first above written, such execution being made on
ANNEX 1 hereto.
D-2
<PAGE>
ANNEX 1 TO ASSIGNMENT AND ACCEPTANCE
Date of Assignment:
Legal Name of Assignor:
Legal Name of Assignee:
Assignee's Address for Notices:
Effective Date of Assignment (may not be fewer than two Business Days after the
Date of Assignment):
<TABLE>
<CAPTION>
Principal Amount Assigned Percentage Assigned of Loan
------------------------- ---------------------------
<S> <C> <C>
Commitment Assigned: $ %
Tranche A Loans: $ Percentage assigned (set forth, to at
least 8 decimals, as percentage of the
aggregate Loans and the aggregate
Commitments, as applicable of all
Banks thereunder).
Tranche B Loans: $
Tranche C Loans: $
The terms set forth above
are hereby agreed to: Consent given:
_________________, as Assignor ______________, as Administrative Agent
By:__________________________ By:______________________
Name: Name:
Title: Title:
_________________, as Assignee BLOCKBUSTER INC.
By:__________________________ By:__________________________
Name: Name:
Title: Title:
</TABLE>
<PAGE>
ANNEX 2 TO ASSIGNMENT AND ACCEPTANCE
LEGAL NAME OF ASSIGNEE TO APPEAR IN DOCUMENTATION:
GENERAL INFORMATION
DOMESTIC LENDING OFFICE:
Institution Name:
Street Address:
City, State, Country, Zip Code:
EURODOLLAR LENDING OFFICE:
Institution Name:
Street Address:
City, State, Country, Zip Code:
CONTACTS/NOTIFICATION METHODS
CREDIT CONTACTS:
Primary Contact:
Street Address:
City, State, Country, Zip Code:
Phone Number:
FAX Number:
Backup Contact:
Street Address:
City, State, Country, Zip Code:
Phone Number:
FAX Number:
<PAGE>
ADMINISTRATIVE CONTACTS -- BORROWINGS, PAYDOWNS, INTEREST, FEES, ETC.
Contact:
Street Address:
City, State, Country, Zip Code:
Phone Number:
FAX Number:
PAYMENT INSTRUCTIONS
Name of bank where funds are to be transferred:
Routing Transit/ABA number of bank where funds are to be transferred:
Name of Account, if applicable:
Account Number:
Additional Information:
TAX WITHHOLDING
Non Resident Alien ________ Y* ________ N
* Form 4224 Enclosed
Tax ID Number ___________________________
MAILINGS
Please specify who should receive financial information:
Name:
Street Address:
City, State, Country, Zip Code:
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated May 4, 1999 relating to the financial statements of Blockbuster
Inc., which appears in such Registration Statement. We also consent to the
reference to us under the heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Dallas, Texas
July 2, 1999
