-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F6L9r9jXe+WmdR5R7lqrsavK/P1B60VKCPOPuInugJdiHufpAs3WdlBK0jJnS7Do sGFvji0i/DXHGQK5iMErdg== 0000930661-01-000794.txt : 20010330 0000930661-01-000794.hdr.sgml : 20010330 ACCESSION NUMBER: 0000930661-01-000794 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLOCKBUSTER INC CENTRAL INDEX KEY: 0001085734 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-VIDEO TAPE RENTAL [7841] IRS NUMBER: 521655102 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-15153 FILM NUMBER: 1583006 BUSINESS ADDRESS: STREET 1: 1201 ELM STREET CITY: DALLAS STATE: TX ZIP: 75270 BUSINESS PHONE: 2148543000 MAIL ADDRESS: STREET 1: 1201 ELM STREET CITY: DALLAS STATE: TX ZIP: 75270 10-K405 1 0001.txt FORM 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K ---------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 001-15153 ---------------- BLOCKBUSTER INC. (Exact name of registrant as specified in its charter) DELAWARE 52-1655102 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) ---------------- 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) ---------------- Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- Class A Common Stock, $.01 par value per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 16, 2001, 31,014,696 shares of class A common stock, $.01 par value per share, and 144,000,000 shares of class B common stock, $.01 par value per share, were outstanding. The aggregate market value of the registrant's common stock held by non-affiliates was about $419,961,551, based on the closing price of $13.64 per share of class A common stock as reported on the New York Stock Exchange composite tape on that date. (For purposes of determination of the above-stated amounts, only directors, executive officers and 10% or greater stockholders of the registrant have been deemed affiliates.) DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the annual meeting of stockholders of the registrant to be held during 2001 are incorporated by reference into Part III of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- BLOCKBUSTER INC. INDEX TO FORM 10-K
Page ---- PART I Item 1. Business............................................................................... 1 Item 2. Properties............................................................................. 17 Item 3. Legal Proceedings...................................................................... 17 Item 4. Submission of Matters to a Vote of Security Holders.................................... 18 PART II Item 5. Market for Our Common Equity and Related Stockholder Matters........................... 19 Item 6. Selected Financial Data................................................................ 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 30 Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 42 Item 8. Financial Statements and Supplementary Data............................................ 43 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure... 69 PART III Item 10. Directors and Executive Officers of the Registrant..................................... 70 Item 11. Executive Compensation................................................................. 70 Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 70 Item 13. Certain Relationships and Related Transactions......................................... 70 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 71
PART I Item 1. Business BLOCKBUSTER OVERVIEW Blockbuster Inc. is the world's leading retailer of rentable home videocassettes, DVDs and video games, with close to 7,700 stores in the United States, its territories and 25 other countries as of December 31, 2000. According to The Gallup Organization, our BLOCKBUSTER(R) brand achieves nearly 100% recognition with active movie renters in the United States. During 2000, while our core video store business continued to grow, we also extended our business and our brand into additional home entertainment distribution channels. 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 Inc. Subsequent to the merger, our business and operations were conducted by various indirect subsidiaries of Viacom. Over the year and one-half period prior to our initial public offering in August 1999, our business and operations were either (1) merged into Blockbuster Inc. or (2) purchased by Blockbuster Inc. and/or one of its subsidiaries. Blockbuster Inc., an indirect subsidiary of Viacom, was incorporated under a different name on October 16, 1989 in Delaware. Viacom, through its ownership of 144 million shares of our class B common stock, owns common stock representing about 82% of our equity value and about 96% of the combined voting power of our outstanding common stock. In 1999, Viacom announced that it intended to split-off Blockbuster by offering to exchange all of its shares of Blockbuster common stock for shares of Viacom's common stock. The split-off was subject to approval by Viacom's Board of Directors and an assessment of market conditions. Viacom has stated that it no longer has any plans for the split-off of Blockbuster. Beginning in the fourth quarter of 1999, we began reporting in two segments: (i) home videocassette, DVD and video game rental and retailing, which we refer to as our video segment, and (ii) new media (formerly called new technologies). Information relating to our segments is included in Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 17 to our Consolidated Financial Statements included in this document. Intellectual Property We own, or have applications pending with respect to, a number of trademarks, trade names and service marks, including, among others, BLOCKBUSTER(R), BLOCKBUSTER VIDEO(R), BLOCKBUSTER FAVORITES(TM), BLOCKBUSTER GIFTCARD(R), BLOCKBUSTER GIFTCARDS(TM), BLOCKBUSTER REWARDS(R), BLOCKBUSTER ENTERTAINMENT AWARDS(R), blockbuster.com(R), BLOCKBUSTER Pre-Viewed(R), KIDPRINT(R), THE GIFT OF ENTERTAINMENT(R), BRINGING ENTERTAINMENT HOME(TM), XTRA-VISION, our ticket design in blue and yellow and in black and white, and the blue and yellow awning outside our stores. In addition, we own the rights to the "blockbuster.com" Internet domain name, among others. We consider our intellectual property rights to be among our most valuable assets. INDUSTRY OVERVIEW Domestic Home Video--Movies According to Paul Kagan Associates, at-home movie consumer spending in the United States increased from $10.1 billion in 1990 to $20.6 billion in 2000 and is projected to increase to $31.1 billion by 2010. The U.S. retail home video industry represented about $19.3 billion of the 2000 revenues, according to Kagan, but is expected to decline as a percentage of overall at-home movie consumer spending over the next ten years. Although close to 90% of U.S. households with a television already own a VCR, we believe that consumer 1 interest in DVD as a new rental format could offset the effect that this high penetration rate is expected to have on growth in VHS rental. According to Kagan, the number of U.S. DVD households more than doubled during 2000 and is expected to grow to over 65 million by 2010. 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. In addition, since August of 2000, two of our chain store competitors have filed for Chapter 11 bankruptcy protection, and a third has sold all of its stores. We believe that the combination of the following factors, among others, continue to make video rental a preferred medium of entertainment for millions of customers: . the opportunity to entertain one or more people at home for a reasonable price; . the opportunity to browse among a very broad selection of movies; and . the ability to control the viewing experience, such as the ability to start, stop, pause, fast-forward and rewind. In addition, a significant competitive advantage that the video rental industry currently enjoys over most other movie distribution channels except theatrical release is the early timing of its distribution "window." 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 about 45- 60 days for domestic video stores. Thereafter, movies are made sequentially available to television distribution channels. We believe the implementation in 1998 of revenue-sharing arrangements directly with the studios has also benefited the video rental industry. 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 initially release VHS movies at relatively high wholesale prices unless the movie is subject to a revenue-sharing arrangement or a quantity discount program or is designated as a "sell-through" movie. Sell-through movies typically consist of movies for children and other movies that have unique characteristics or other mass ownership appeal, such as Toy Story 2 and Erin Brockovich. Because the studios release these movies at relatively low initial prices, or "sell-through" pricing, retailers generally purchase these movies primarily for sale. The studios also eventually reduce the cost of VHS movies that are initially priced only for rental in order to promote sales to consumers. For titles acquired under U.S. revenue-sharing agreements, video stores generally share with the studios an agreed-upon percentage of the video stores' rental revenue for a limited period of time in exchange for minimal fixed payments for the videocassettes by the video stores. This percentage may decline over a period of weeks following the initial release of the movie. The video stores may 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 videotapes to their customers. We believe that the revenue-sharing agreements have resulted in the following significant benefits to participating video stores: . they have provided these stores with the opportunity to substantially increase the quantity and selection of newly released video titles that they stock; . they have increased revenues as a result of the increase in total number of transactions per store and number of videocassettes rented per transaction; and . they have aligned the studios' economic interests more closely with the interests of the video stores. 2 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. These revenue-sharing arrangements generally do not currently apply to DVDs. However, unlike traditional VHS wholesale purchasing arrangements, DVDs are currently typically released at sell-through prices ranging from about $15 to $25. In addition, unlike VHS movies, the majority of DVDs are currently released for sale at the same time as they are released for rental. International Home Video--Movies 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 windows in many of the international countries tend to last for a longer period of time. However, other attributes of the home video industry outside of the United States do not necessarily mirror the home video industry within the United States. For example, most countries have different systems of supply and distribution of movie titles. In addition, although revenue-sharing agreements have been introduced into many international markets, they are not yet as common as they are within the U.S. home video industry. In addition, competition in many of our international markets tends to be more fragmented, with few large home video chains. Movie Studio Dependence on Video Rental Industry According to Kagan, total U.S. movie studio and independent supplier revenue in the United States grew at a compound annual rate of about 8.2% per year from $13.0 billion in 1996 to $17.8 billion in 2000. Kagan also indicates that the video rental industry is the largest single source of U.S. revenue to U.S. movie distributors, representing about $7.9 billion, or 44.3%, of the $17.8 billion of revenue in 2000. The following table represents Kagan's estimates of total movie distributor revenue.
Year Ended December 31, --------------------------------------- 1996 1997 1998 1999 2000 ------- ------- ------- ------- ------- (in millions) U.S. home video (rental and retail).... $ 6,152 $ 6,306 $ 6,811 $ 7,206 $ 7,900 Other U.S. revenue..................... 6,883 7,393 8,067 9,129 9,948 ------- ------- ------- ------- ------- Total U.S. revenue................... 13,035 13,699 14,878 16,335 17,848 ------- ------- ------- ------- ------- International home video............... $ 4,432 $ 4,406 $ 4,436 $ 4,650 $ 4,770 Other international revenue............ 7,298 7,834 8,949 9,712 10,383 ------- ------- ------- ------- ------- Total international revenue.......... 11,730 12,240 13,385 14,362 15,153 ------- ------- ------- ------- ------- Total revenue...................... $24,765 $25,939 $28,263 $30,697 $33,001 ======= ======= ======= ======= =======
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 and DVD rentals encourages consumers to rent films they might not pay to view at a theater. 3 Home Video Game Industry The home video game industry has historically been affected by changing technology, limited hardware platform lifecycles and hit-or-miss software titles. According to VidTrac, the total domestic home video game market generated about $800 million in rental revenue in 1998. This market grew to about $880 million in 1999, which represented a 10.0% increase. However, the cyclical nature of the video game industry was evidenced during 2000. According to VidTrac, domestic rental revenue for the home video game market increased only 4.3% to about $919 million in 2000. According to industry experts, the slower growth in 2000 was driven by an anticipated increase in platform options during 2001 and shortages of Sony PlayStation 2 hardware, which was not released until the fourth quarter. Despite the slowdown in the home video game industry during 2000, we expect 2001 to be a pivotal year in the industry due to increasing household penetration of PlayStation 2 and the anticipated introduction of Nintendo's GameCube and Game Boy Advance and Microsoft's Xbox during 2001. OUR BUSINESS Blockbuster is the world's leading retailer of rentable home videocassettes, DVDs and video games, with close to 7,700 stores in the United States, its territories and 25 other countries as of December 31, 2000. According to The Gallup Organization, our BLOCKBUSTER brand achieves nearly 100% recognition with active movie renters in the United States. Our worldwide revenues in 2000 increased 11.1% from 1999, with about 80.7% of the worldwide revenues generated in the United States and about 19.3% generated outside of the United States. Our brand recognition and leading market position have allowed us to create one of the strongest entertainment franchises in the United States. During 2000, while continuing to increase our market share of the domestic video rental business, we also leveraged our brand and expanded into additional distribution channels. We have developed our leading position based on a business model that we believe provides our customers with superior convenience, selection and service at attractive prices. We estimate that about 70% of the U.S. population lives within a ten-minute drive of one of our stores. In addition, our customer transaction database contains information on more than 51 million U.S. and Canadian member accounts that were active in the year ended December 31, 2000. In 1997, we began to develop a new business model that refocused on our core rental business. When substantially implemented in the second quarter of 1998, this business model led to a significant improvement in customer satisfaction. Most significantly, we entered into domestic revenue-sharing agreements with various motion picture studios. The studios include the six major motion picture studios: Buena Vista Home Video, a division of the Walt Disney Company; Columbia Tri-Star Home Video Inc., a Sony Corporation subsidiary; 20th Century Fox Home Entertainment Inc.; Paramount Pictures Corporation, a Viacom subsidiary; Universal Studios Home Video; and Warner Home Video. These agreements are generally referred to as output agreements, because they generally 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. These agreements have enabled us to satisfy consumer demand for the most popular newly released video titles in greater quantity and on a more efficient basis and have resulted in the benefits discussed under "--Industry Overview--Domestic Home Video--Movies" above. 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 improving our product allocation system to more effectively allocate newly released videos among our stores based upon the projected rental frequency by store and improving our direct marketing programs and advertising campaigns. Reflecting these improvements, domestic same store rental revenues increased 16.9%, 11.4% and 4.1% in 1998, 1999 and 2000, respectively. 4 Business Model Our business model is designed to deliver long-term sustainable growth in our core business and to use our capital and resources in areas of business that we believe will provide incremental growth and return on investment. We have had three consecutive years of same store revenue growth and believe we can capitalize on the continued growth in our core video store business by exploring additional home entertainment distribution channels that provide incremental revenue and gross profit opportunities. We believe our unique combination of core assets such as our highly recognized global brand, our expansive customer and store base and our substantial marketing skills give us an advantage over other video retailers, including large chain stores as well as single-store competitors. In addition, our global presence allows us to capitalize on opportunities worldwide. The key elements of our business model are discussed below. Continued Customer Satisfaction Enhancements We strive to be the leader in satisfying customer demand by stocking each of our stores with the selection, quantity and format of merchandise desired by our customers. In 1998, we implemented revenue-sharing arrangements directly with major motion picture studios in response to consumer demand for more newly released videos. These arrangements, combined with our self-distribution capabilities, have allowed us to stock each of our U.S. stores with a quantity and variety of newly released videocassettes that is necessary to satisfy customer demand. We have continued to manage our merchandise mix in response to changing consumer demands such as the significant increase in demand for DVDs over the past year. DVDs represented about 10.1% of our net domestic rental revenues during the fourth quarter of 2000. Based on our expectation that demand for DVDs will continue to grow, we expect DVDs to represent 20-25% of our net domestic rental revenues by the end of 2001. We also continue to focus on providing superior service to our customers through enhancements to the in- store experience. For example, as part of our initiative to improve speed-of- service, we launched online rental reservations in two markets during 2000, and, assuming consumer acceptance, we intend to roll out this program nationally in 2001. Increased Store Profitability Blockbuster has attained a strong store presence throughout the United States, with an estimated 70% of the U.S. population living within a ten-minute drive of one of our stores. During 2000, we also continued to increase our system-wide U.S. video rental market share as a result of our ability to satisfy our customers. We are able to derive significant economies of scale and operating efficiencies on our increasing revenue base that are not necessarily available to our store-based competitors. We are able to achieve efficiencies on both a store-level basis and a system-wide basis as a result of our business model, which is designed to reduce our labor costs, distribution costs and general and administrative expenses as a percentage of our revenues. As a result of our expansive store presence, our strong market share and the continued consolidation in the home video rental industry, we intend to improve the profitability of our existing stores while growing our store base in a disciplined manner. We plan to add most of our new stores in markets that we believe provide the greatest opportunity for incremental growth. Our customer transaction and real estate databases enable our experienced store development team to assess . which markets are most likely to offer growth opportunities with minimal cannibalization of our existing stores; . whether the store growth in any particular market should be effected through new or franchised stores or through acquisition; and . the appropriate store format, in the case of new company-operated stores. 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. We continue to explore ways to maximize the use of our store space to generate incremental profit. In September 2000, as part of our model to increase store profitability, we began marketing and soliciting 5 DIRECTV System equipment and DIRECTV(R) programming packages in about 3,800 of our U.S. store locations and, within a few months, established ourselves as one of the leading retailers of DIRECTV in the United States. At the same time, through our marketing programs, we used this business to generate traffic to our stores. We believe that this achievement demonstrates that our stores can support home entertainment products beyond our traditional core offerings. In February 2001, we entered into a strategic alliance with RadioShack Corporation for the purpose of introducing a RadioShack store-within-a-store concept inside BLOCKBUSTER stores. We intend to introduce RadioShack stores-within-a-store in 130 of our stores during 2001 as proof of concept. Leveraging of our Core Assets Our extensive advertising and marketing capabilities allow us to promote awareness of the BLOCKBUSTER brand and our initiatives to satisfy consumer demands. Our ultimate objective is to make our name so recognizable and our strengths so visible that consumers will see no reason to go elsewhere for the products and services that we offer. Our large U.S. store base and our extensive customer database enable us to be the only home video chain that actively maintains a national advertising and marketing program, including network television, national promotions and local television and radio. During 2000, in order to convey Blockbuster's ability to respond to consumer demand for DVD and to position ourselves as the ultimate destination for DVD rentals, we marketed our DVD Satisfaction Guarantee program and our DVD Rental Pass. Our customer transaction database, along with programs like our BLOCKBUSTER REWARDS premium membership program, also enable us to directly communicate with our customers on a targeted and customized basis about products and programs of interest to them. Our goal is to continue to increase our one-to-one marketing efforts, with BLOCKBUSTER REWARDS being a key component of that objective. We have also leveraged our core business assets to extend our brand to new home entertainment distribution channels that position us to share in the projected growth in the overall home entertainment industry. In late 2000, we launched a technical trial of our entertainment-on-demand service in four U.S. markets. During 2001, we plan to co-brand with DIRECTV its pay-per-view movie service, which would establish our brand in the pay-per-view segment of the home entertainment industry. Merchandising We offer a wide selection of movies and video games for rent and purchase. Our goal is to stock each of our stores with a selection, quantity and format of merchandise that is customized for that store. The breakdown of net domestic revenues generated from the rental and sale of such products for the year ended December 31, 2000 was as follows: [Pie graph which shows a breakdown of domestic revenue follows: 1. Movie rentals: 71.9% 2. Video game rentals: 9.2% 3. Previously viewed tapes, DVDs and video game sales: 7.3% 4. Sell-through movie sales: 5.7% 5. Other: 5.9%] 6 Using our customer transaction database, we determine on a store-by-store basis the number of copies of each newly released movie that is to be offered by each U.S. store. About 69.1% of 2000 net domestic rental revenues were from the rentals of newly released movies on videocassette. We also offer a broad selection of time-tested popular movies, or "BLOCKBUSTER FAVORITES," and a wide variety of independent and lower-cost movies that currently are generally exclusively available at our stores for a specified period of time. In response to consumer demand, during 2000, we significantly increased our DVD inventory, including both new releases and BLOCKBUSTER FAVORITES. DVD rentals represented about 7.5% of net domestic rental revenues in 2000 and about 10.1% of net domestic rental revenues in the fourth quarter of 2000. Our customer transaction database allows us to periodically review each store's inventory of BLOCKBUSTER FAVORITES and identify movie titles within this category that have not been rented for a period of time. We offer these previously viewed movies for sale and replace them with movies that we believe our customers are more interested in renting. We also sell some previously viewed new release movies. We rent video games for use with Sony PlayStation, Nintendo and other video game platforms in the majority of our domestic stores and many of our international stores. In these stores, we also sell previously played video games. In addition, we sell new video games in most of our stores in markets outside of the United States. We also rent video game consoles, as well as VHS and DVD players, in most of our domestic company-operated stores and sell other complementary products. Stores and Store Operations Site Selection. We have developed a comprehensive model that we use to find suitable locations for company-operated stores and markets for franchise stores. We seek to locate our 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. Our franchise program provides us with an additional avenue for expanding our consumer reach. Outside the United States, we plan to open most of our new company-operated stores in the seven markets in which we already have a significant presence, as discussed under "--International Operations," below. In addition, we plan to add franchise and joint venture stores in other international markets. 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. Store Development. During 2000, we increased our number of U.S. and international company-operated stores by 303 and 72, respectively, and our U.S. and international franchise and joint venture stores by 95 and 54, respectively. Store Format. We seek to locate stores in spots that are convenient and visible to the public. We intend to continue to conveniently locate our stores 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 generally operate one of three store formats. Our traditional store format is more than 4,000 square feet and is used in markets in which store-to-population ratios are low and in which we believe market conditions are optimal. We use a smaller store format to compete (i) primarily in rural areas or (ii) in markets that are located between our traditional stores without significantly decreasing the market shares of those traditional stores. We also use a store- in-store format within department stores, supermarkets and other stores in order to further expand our presence and meet demand in mature markets in which we already have a strong presence. 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 Operations. Our U.S. company-operated stores generally operate under substantially similar hours of operation. Domestic stores are generally 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, 7 each U.S. store employs 11 people, including three assistant store managers and one store manager. International store operations vary by country. Store Locations. At December 31, 2000, in the United States and its territories, we operated 4,273 stores and our franchisees operated 918 stores. The following map sets forth the number of domestic stores we operated, including stores operated by our franchisees, as of December 31, 2000: [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: TOTAL STATE OF TERRITORY(1) STORES(2) - ------------------------------------------- --------- ALABAMA................................................... 58 ALASKA.................................................... 15 ARIZONA................................................... 108 ARKANSAS.................................................. 18 CALIFORNIA................................................ 641 COLORADO.................................................. 120 CONNECTICUT............................................... 56 DELAWARE.................................................. 11 DISTRICT OF COLUMBIA...................................... 7 FLORIDA................................................... 374 GEORGIA................................................... 189 HAWAII.................................................... 21 IDAHO..................................................... 11 ILLINOIS.................................................. 249 INDIANA................................................... 91 IOWA...................................................... 27 KANSAS.................................................... 55 KENTUCKY.................................................. 66 LOUISIANA................................................. 74 MAINE..................................................... 5 MARYLAND.................................................. 132 MASSACHUSETTS............................................. 120 MICHIGAN.................................................. 168 MINNESOTA................................................. 54 MISSISSIPPI............................................... 37 MISSOURI.................................................. 97 MONTANA................................................... 10 NEBRASKA.................................................. 31 NEW HAMPSHIRE............................................. 19 NEW JERSEY................................................ 125 NEW MEXICO................................................ 28 NEW YORK.................................................. 284 NEVADA.................................................... 52 NORTH CAROLINA............................................ 121 NORTH DAKOTA.............................................. 6 OHIO...................................................... 176 OKLAHOMA.................................................. 68 OREGON.................................................... 89 PENNSYLVANIA.............................................. 186 PUERTO RICO............................................... 41 RHODE ISLAND.............................................. 26 SOUTH CAROLINA............................................ 71 SOUTH DAKOTA.............................................. 8 TENNESSEE................................................. 85 TEXAS..................................................... 542 UTAH...................................................... 51 VERMONT................................................... 5 VIRGINIA.................................................. 127 VIRGIN ISLANDS............................................ 2 WASHINGTON................................................ 132 WEST VIRGINIA............................................. 17 WISCONSIN................................................. 77 WYOMING................................................... 6 GUAM...................................................... 2] 8 At December 31, 2000, outside of the United States, we operated 1,981 stores, and our franchisees and joint ventures in which we own a minority interest operated 505 stores. The following table sets forth, by country, the number of stores operated by us and stores operated by our franchisees and joint ventures as of December 31, 2000.
Number of Number of Franchised and/or Company-Operated Joint Venture COUNTRY (1) Stores Stores Total(1)(2) - ----------- ---------------- ----------------- ----------- Great Britain.................. 674 -- 674 Canada......................... 353 -- 353 Australia...................... 133 112 245 Ireland (Republic) and Northern Ireland....................... 212 -- 212 Mexico......................... 199 4 203 Italy.......................... -- 169 169 Spain.......................... 105 5 110 Taiwan......................... 86 8 94 Brazil......................... -- 73 73 Argentina...................... 80 -- 80 Chile.......................... 62 -- 62 Denmark........................ 55 -- 55 China (Hong Kong).............. 19 -- 19 Thailand....................... -- 26 26 New Zealand.................... -- 22 22 Portugal....................... -- 16 16 Colombia....................... -- 14 14 Venezuela...................... -- 13 13 Israel......................... -- 12 12 Peru........................... -- 10 10 Panama......................... -- 8 8 Ecuador........................ -- 5 5 El Salvador.................... -- 6 6 Uruguay........................ 3 -- 3 The Philippines................ -- 2 2 ----- --- ----- International Store Total...... 1,981 505 2,486 ===== === =====
- -------- (1) This does not include non-operating stores that are leased or owned. (2) In addition to the stores listed in the chart, as of December 31, 2000, there were 91 video vending machines being tested in Great Britain, Spain and Italy. Marketing and Advertising We design our marketing and advertising campaigns to maximize the leverage of our marketing and advertising expenditures. We obtain information from our customer transaction database, our real estate database and outside research agencies to formulate and adjust our advertising based on: . our market share; . our level of store development and brand awareness relative to our competitors within the relevant market; . our evaluation of new industry trends; . local demographics; and . other local competitive issues. 9 Our large store base and leading brand awareness have enabled us to implement programs such as BLOCKBUSTER REWARDS, BLOCKBUSTER GIFTCARDS, cross- promotional marketing programs and national promotional events, including the internationally televised BLOCKBUSTER ENTERTAINMENT AWARDS. In addition, we have recently expanded our new release guarantee program to selected DVD titles. Worldwide, in the year ended December 31, 2000, we incurred about $215.3 million in advertising expenses, which includes about $159.4 million in the United States and about $55.9 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, which we believe drives consumers to our stores. Franchise Operations We believe our franchising program is an effective way to expand our consumer reach. At December 31, 2000, our franchisees operated 918 stores in the United States and our franchisees and minority-owned joint ventures operated 505 stores internationally. Our franchisees generally are responsible for obtaining their own supplies and coordinating their own distribution system. However, as a result of making revenue-sharing agreements available to our U.S. franchisees in the fourth quarter of 1999, some of our U.S. franchisees are now participating in our revenue-sharing agreements. Accordingly, these U.S. franchisees rely upon our distribution center to receive some portion of their videocassettes. 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 a permitted location or locations within a defined geographic area and within a specified time. We generally charge the franchisee a development fee at the time of execution of the development agreement 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 our 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 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 and to advise our operators. 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. International Operations We are the leading international retailer of rentable home movies and video games. As of December 31, 2000, we had 2,486 stores operating under the BLOCKBUSTER brand and other brand names owned by us located throughout 25 markets outside of the United States. Of these stores, 505 were operated through our franchisees and joint ventures in which we own a minority interest. About 19.3% of our worldwide revenues in 2000 were generated outside the United States. Our global presence allows us to capitalize on opportunities worldwide. We believe this gives us a competitive advantage over competitors that are solely dependent on their domestic business. During 2000, we continued to extend the reach of our revenue-sharing model in some of our international markets. 10 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 have grown to 674 locations, excluding video vending machines, as of December 31, 2000. We began operations in Canada, our second largest international market, in 1990 and have grown to 353 stores, as of December 31, 2000. We began operations in Mexico in 1991 and opened our 200th company-operated store in January 2001. In Australia, we began operations in 1993 and have grown to 245 company-operated and franchised stores as of December 31, 2000. In the Republic of Ireland and Northern Ireland, we acquired Xtra-vision PLC in 1997 and continue to operate under the XTRA-VISION brand due to its strong local brand awareness. As of December 31, 2000, we had 212 stores in the Republic of Ireland and Northern Ireland. In addition, we have operated in Spain and Argentina since 1995. 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, and format and technical standards. Thus, because of all of these variables, we cannot assure you that we can operate profitably in these international markets. Blockbuster.com Our primary focus for blockbuster.com is to support our stores and drive store revenues through promotional devices. During 2000, we reduced the site's e-commerce offerings and instead focused on other features such as: . entertainment news and information; . 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. In addition, during 2000, we integrated our online capabilities with our store systems and launched a two-market pilot of our online rental reservations system. This system, which we intend to roll out on a national basis in 2001, would allow consumers to search a store's inventory, reserve a title and pre- pay through our site. We are also exploring initiatives designed to integrate the capabilities of blockbuster.com with our future entertainment-on-demand services. As part of a cost reduction initiative, we are outsourcing some of our infrastructure services, including our e-commerce function, to third-party providers. Suppliers The following is a description of the suppliers to our domestic company- operated and franchised stores. Our international stores are supplied by a variety of suppliers. 11 Company-operated Stores. Our U.S. company-operated stores receive a substantial portion of their videocassettes under our revenue-sharing agreements. We typically purchase DVDs directly from the studios under normal business arrangements. Under our revenue-sharing arrangements, 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 the 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 videotape, return of the videotape to the studio, destruction of the videotape, or some combination of these elements. Most revenue-sharing agreements also have a minimum payment requirement, all or part of which is associated with either the number of videocassettes we purchase or domestic box office receipts and the then current number of our stores. Such agreements also generally require us to take a minimum number of copies of each qualifying movie released by the supplier. We believe the terms of our revenue-sharing agreements are critical to our competitive position. While the terms of our revenue-sharing agreements vary from studio to studio, we believe, based on various assumptions, that our 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 major studios expire by their terms at various times over the next two years. For most of our revenue-sharing videocassettes, the major studios send the master videocassettes to a duplicator for copying and then the copies are shipped to our distribution center. In addition, we purchase sell-through movies, direct-to-video movies and movies sold at traditional wholesale prices from major studios, independent studios and independent suppliers, generally pursuant to normal business arrangements. We purchase our video game hardware and software, as well our VCRs, DVD players and other complementary products, from a variety of suppliers. 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 and are also responsible for obtaining some of the other complementary products from their own suppliers. However, if we have purchased the exclusive distribution rights to a movie or if a franchisee participates with us under the revenue-sharing agreements, the franchisee may obtain that movie from us. We have made our revenue-sharing arrangements with the studios available to our U.S. franchisees, which provides them with an option to increase their quantity and selection of movies. During 2001, we anticipate that some of our franchisees will also begin participating in our DIRECTV offering. Distribution and Inventory Management In the first quarter of 1998, we began operation of our 850,000 square foot state-of-the-art distribution center in McKinney, Texas, which is near our corporate headquarters. The distribution center is a highly automated, centralized facility that we use to restock products, repackage videocassettes and process returns, as well as to provide some office space. We believe our distribution center gives us a significant advantage over our competitors that use third-party distributors because we are able to process and distribute a greater quantity of products while reducing costs and improving services to our stores. The distribution center supports all of our company-operated stores in the United States and operates six days a week, 24 hours a day. As of December 31, 2000, we employed about 890 employees at our distribution center. At our distribution center, we receive substantially all of our videocassettes and video games. We mechanically repackage the newly released videocassettes to make them suitable for rent at our stores, a 12 process that had previously been handled manually by our store employees. We expect to begin repackaging newly released DVDs for rental during 2001. We use a network of third-party warehouses for delivery to our U.S. 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 for which we have 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. 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 rental patterns. This information can be organized by store, region, state, country or for all operations. Most of our company-operated stores and franchisees use our point-of-sale system. Our national point-of-sale system in the United States 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 U.S. 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 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. Competition We operate in a highly competitive environment. We believe our most significant competition comes from (a) providers of direct delivery home viewing entertainment and (b) video stores and other retailers that rent or sell movies. Competition with Providers of Direct Delivery Home Viewing Entertainment. These providers include direct broadcast satellite, cable, digital terrestrial, network and syndicated television. We believe that a significant competitive risk to our video store business comes from direct broadcast satellite, digital cable television and high-speed Internet access. In response to this competition, in 2000, we entered the direct broadcast satellite market through our alliance with DIRECTV and began testing our entertainment-on-demand service. 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 to favor the expanded number of conventional channels and expanded programming, including sporting events, offered through these services. Direct broadcast satellite, digital cable and "traditional" cable providers not only offer 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. See "Cautionary Statements--The widespread availability of additional channels on satellite and digital cable systems may significantly reduce public demand for our products." 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; 13 . quality, quantity and variety of titles; . pricing; and . customer service. Other Competition. In some markets, we also compete against the illegal duplication and sale 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 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 our company. 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 a franchisor, 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 that state. We are required to update our franchise offering circular annually, as well as to amend it during the course of the year, to reflect material changes regarding our franchise offering and to comply with changes in disclosure requirements. The occurrence of any such material changes may, from time to time, require us to stop offering and selling franchises until our franchise offering circular is updated and amended. We cannot assure you that our franchising program will not be adversely affected because compliance with applicable law necessitates that we cease offering and selling franchises in some states until our franchise offering circular is revised, updated and approved by the applicable authorities, or because of our failure or inability to comply with existing or future franchise sales and disclosure laws. We are also subject to a number of state laws and regulations that regulate some substantive aspects of the franchisor-franchisee relationship, including: . those governing the termination or non-renewal of a franchise agreement, such as requirements that: (a) "good cause" exist as a basis for such termination; and (b) a franchisee be given advance notice of, and a right to cure, a default prior to termination; . requirements that the franchisor deal with its franchisees in good faith; 14 . 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 we 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, as in 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 December 31, 2000, we employed about 95,800 persons, including about 74,200 persons employed within the United States and about 21,600 persons employed outside of the United States. Of the total number of U.S. employees, about 21,500 were full-time and about 52,700 were part-time. We believe that our employee relations are good. Executive Officers of the Registrant The following information regarding our executive officers is as of March 26, 2001.
Name Age Position - ---- --- ---------------------------------------------------- John F. Antioco....... 51 Chairman of the Board of Directors, President and Chief Executive Officer Mark T. Gilman........ 37 Executive Vice President and President, New Media Division James Notarnicola..... 49 Executive Vice President and Chief Marketing Officer Michael K. Roemer..... 52 Executive Vice President and Chief Operations Officer, North America Operations Edward B. Stead....... 54 Executive Vice President, General Counsel and Secretary Nigel Travis.......... 51 Executive Vice President and President, Worldwide Stores Division Dean M. Wilson........ 43 Executive Vice President and Chief Merchandising Officer, Worldwide Larry J. Zine......... 46 Executive Vice President and Chief Financial Officer
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 Incorporated and as a director for CSK Auto Corporation. Mr. Antioco is also a member of the board of governors of the Boys & Girls Clubs of America. 15 Mark T. Gilman has served as our executive vice president and president, new media division, since April 2000 and served as our executive vice president and chief worldwide development officer, store operations, from December 1999 until April 2000. Mr. Gilman also served as our executive vice president and chief development and franchising officer from July 1999 until December 1999. Mr. Gilman served as our executive vice president of real estate-franchising and new business development from 1997 until 1999, 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 and chief marketing officer since June 1998 and served as our executive vice president of 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. Michael K. Roemer has served as our executive vice president and chief operations officer, North America operations, since March 2001 and served as our executive vice president and chief operations officer, USA store operations, from December 1999 until March 2001. Mr. Roemer also served as our executive vice president, domestic video operations, from 1998 until December 1999. From 1997 until 1998, Mr. Roemer served as our senior vice president, domestic video operations. From 1995 until 1997, Mr. Roemer served as an independent consultant for such major companies 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. Mr. Roemer currently serves as a director of Brazos Country Foods, Inc. Edward B. Stead has served as our executive vice president and general counsel since 1997 and as our secretary since 1999. From 1988 until 1996, Mr. Stead served in various capacities with Apple Computer, Inc., including senior vice president, general counsel and secretary. Prior to joining Apple, Mr. Stead held positions with Cullinet Software, Inc. and International Business Machines Corporation. Mr. Stead currently serves on the board of directors of the Mexican American Legal Defense and Education Fund and is also a member of the legal advisory board of the New York Stock Exchange. Nigel Travis has served as our executive vice president and president, worldwide stores division, since December 1999 and served as our executive vice president and president, worldwide retail operations, from 1998 until December 1999. Mr. Travis 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 a director of The Bombay Company, Inc. Mr. Travis is also a director of the Video Software Dealers Association. Dean M. Wilson has served as our executive vice president and chief merchandising officer, worldwide, since December 1999 and served as our executive vice president, merchandising, from 1998 until December 1999. From 1995 until 1998, Mr. Wilson held a number of positions with us, including senior vice president-general merchandise manager, vice president-retail and director of product international. Mr. Wilson's experience in the video industry spans over 16 years, with positions in the retail, distribution and studio aspects of the business. Prior to joining us, from 1990 until 1995, Mr. Wilson was employed by Trans World 16 Entertainment, a music and video retailer, where he served as divisional merchandise manager of video. Mr. Wilson began his retail career in the executive training programs with May Company and Dayton Hudson. Larry J. Zine has served as our executive vice president and 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. Mr. Zine currently serves as a director of MMH Holdings, Inc. and Petro. Item 2. Properties Our corporate headquarters are located at 1201 Elm Street, Dallas, Texas 75270 and consist of about 240,000 square feet of space leased pursuant to an agreement that 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 that expires on December 31, 2012. We have set up our payroll and benefits center in Spartanburg, South Carolina. We have an office in Uxbridge, England that manages most of our international operations. We also have head offices in Dublin, Ireland; Toronto, Ontario; Melbourne, Australia; and Taipei, Taiwan. In addition, for most countries in which we have company-operated stores, we maintain an office to coordinate our operations within that country. We lease substantially all of our existing store sites. 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. Item 3. Legal Proceedings On July 21, 1999, Ruben Loredo, doing business as Five Palms Video, purporting to act as a class representative on behalf of himself and all others similarly situated, filed a complaint in the District Court of Bexar County, Texas, against Blockbuster. The plaintiff asserted, among other things, that by entering into and operating under its revenue-sharing agreements with the major motion picture studios, Blockbuster has attempted to and conspired with the studios to monopolize and restrain competition in the market for the retail rental of videocassettes in violation of Texas law. In addition, three other parties, purporting to act as class representatives on behalf of themselves and all others similarly situated, filed a substantially similar complaint in the United States District Court for the Western District of Texas against Viacom and major motion picture studios and their home video subsidiaries that have operated under these revenue-sharing agreements with Blockbuster. These plaintiffs are seeking triple the amount of the alleged actual damages to themselves and triple the amount of alleged actual damages of those similarly situated, as well as preliminary and permanent injunctive relief prohibiting any unlawful attempt or conspiracy to monopolize the market for the retail rental of videocassettes. In April 2000, Ruben Loredo voluntarily dismissed the state court action without prejudice, and Ruben Loredo and Blockbuster were added as parties plaintiff and defendant, respectively, in the federal court action. In January 2000, the federal court plaintiffs added California state law claims to the pending federal antitrust claims. On March 16, 2001, the federal judge in the United States District Court for the Western District of Texas denied the plaintiffs' request for class certification of both the federal and California claims. In January 2001, the same plaintiffs, in addition to other individual plaintiffs, filed a similar complaint in California state court seeking monetary damages. In addition to any damage award to which Blockbuster might be directly subject, if Viacom is required to pay any damage award as a result of the federal or state court action, Viacom may seek indemnification for its losses from Blockbuster under the release and indemnification agreement entered into between Viacom and Blockbuster. Blockbuster believes the plaintiffs' positions in both actions are without merit and intends to vigorously defend itself in the litigation. 17 On May 7, 1999, Lynn Adams, Khristine Schoggins, and Debbie Lenke, purporting to act as class representatives on behalf of themselves and for a class comprised of certain Blockbuster store managers who worked in California, filed a complaint in District Court in Orange County, California against Blockbuster. The plaintiffs claim that they should be classified as non-exempt and are thus owed overtime payments under California law. The dollar amount that plaintiffs seek as damages to themselves and those similarly situated is not set forth in the complaint. In January 2001, the trial court judge certified a class. In February 2001, the California Court of Appeals denied Blockbuster's petition for a writ of mandate. Blockbuster's petition for review is pending before the Supreme Court of California. Blockbuster believes the plaintiffs' position is without merit and intends to vigorously defend itself in the litigation. Blockbuster is a defendant in 13 putative class action lawsuits filed by customers in state courts in Illinois, California, Ohio, Maryland, Texas and New York between February 1999 and March 2001. These cases allege common law and statutory claims for fraud and/or deceptive practices and/or unlawful business practices regarding Blockbuster's policies for customers who choose to keep rental product beyond the initial rental term. Some of the cases also allege that these policies impose unlawful penalties and/or result in unjust enrichment. The dollar amounts that plaintiffs seek as damages to themselves and those similarly situated are not set forth in the complaints. Blockbuster believes the plaintiffs' positions in these suits are without merit and intends to vigorously defend itself in the litigation. We are subject to various other legal proceedings in the course of conducting our business, including our business as a franchisor. However, we believe that these proceedings are not likely to result in judgments that will have a material adverse effect on our business. Item 4. Submission of Matters to a Vote of Security Holders None. 18 PART II Item 5. Market for Our Common Equity and Related Stockholder Matters The shares of Blockbuster class A common stock are listed and traded on the NYSE under the symbol "BBI." Our class A common stock began trading on August 11, 1999, following our initial public offering. The following table contains, for the periods indicated, the high and low sales prices per share of our class A common stock as reported on the NYSE composite tape and the cash dividends per share of our class A common stock:
Cash High Low Dividends(1) -------- -------- ------------ Fiscal Year Ended December 31, 1999 Quarter Ended September 30, 1999 (from August 11, 1999)............................ $16.8750 $12.4375 $ -- Quarter Ended December 31, 1999............... $17.1250 $11.3750 $0.02 Cash High Low Dividends(1) -------- -------- ------------ Fiscal Year Ended December 31, 2000 Quarter Ended March 31, 2000.................. $14.8750 $ 9.2500 $0.02 Quarter Ended June 30, 2000................... $11.6250 $ 8.8750 $0.02 Quarter Ended September 30, 2000.............. $12.0625 $ 8.4375 $0.02 Quarter Ended December 31, 2000............... $ 9.9375 $ 6.8750 $0.02
- -------- (1) We have paid and currently intend to pay a quarterly dividend of $0.02 per share on our common stock. Our board of directors is free to change our dividend practices 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 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 to $90 million, $115 million, $130 million, $145 million and $160 million in the first five years beginning in August 1999. The number of holders of record of shares of our class A common stock as of March 16, 2001 was 273. Viacom currently owns all of the outstanding shares of our class B common stock and more than 82% of the equity value of Blockbuster. The shares of our class B common stock are not listed nor traded on any stock exchange or other market. Item 6. Selected Financial Data The following table sets forth Blockbuster's selected consolidated historical financial and operating 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 2000 are derived from Blockbuster's audited consolidated financial statements. The financial information herein may not necessarily reflect Blockbuster's results of operations, financial position and cash flows in the future or what its results of operations, financial position and cash flows would have been had it been a separate, stand-alone entity during the periods presented. 19 BLOCKBUSTER SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OPERATING DATA The following data should be read in conjunction with, and are qualified by reference to, the consolidated financial statements and related notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this document.
Year Ended or At December 31, ------------------------------------------------- 1996(1) 1997(2) 1998(3) 1999 2000(4) -------- -------- -------- -------- -------- (In millions, except per share amounts and worldwide data) Statement of Operations Data: Revenues................... $2,942.1 $3,313.6 $3,893.4 $4,463.5 $4,960.1 Operating income (loss).... 267.6 (214.6) (359.2) 121.7 75.7 Net income (loss).......... $ 77.8 $ (318.2) $ (336.6) $ (69.2) $ (75.9) Net income (loss) per share--basic and diluted(5)................ $ 0.54 $ (2.21) $ (2.34) $ (0.44) $ (0.43) Dividends per share........ $ -- $ -- $ -- $ 0.02 $ 0.08 Weighted average shares outstanding--basic and diluted(5)................ 144.0 144.0 144.0 156.1 175.0 Balance Sheet Data: Cash and cash equivalents.. $ 58.6 $ 129.6 $ 99.0 $ 119.6 $ 194.2 Total assets............... 8,794.6 8,731.0 8,274.8 8,540.8 8,548.9 Long-term debt, including capital leases, less current portion(6)........ 249.0 331.3 1,715.2 1,138.4 1,136.5 Stockholders' equity(6).... 7,784.4 7,617.6 5,637.9 6,125.0 6,008.4 Worldwide Store Data: Company-operated stores at end of year............... 4,472 5,105 5,283 5,879 6,254 Franchised and joint venture stores at end of year...................... 845 944 1,098 1,274 1,423 Total stores at end of year...................... 5,317 6,049 6,381 7,153 7,677 Same store revenue increase (decrease)(7)............. 5.1% (1.8)% 13.3% 8.3% 5.6%
- -------- (1) During 1996 we recognized a restructuring charge of $50.2 million primarily relating to our corporate relocation and elimination of third party distributors. (2) During 1997 we recognized charges totaling $250 million primarily related to inventory write-downs, closure of under-performing stores, write-offs attributable to international joint ventures and additional expenses incurred in connection with our corporate relocation. (3) 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. (4) As described in Note 5 to our consolidated financial statements, we recognized a non-cash charge of $31.6 million in the fourth quarter of 2000, related to the impairment of certain hardware and capitalized software costs in our new media segment. This charge is reflected in depreciation expense. (5) As described in Note 1 to our consolidated financial statements, we were recapitalized to provide for class A common stock and class B common stock in 1999. In accordance with SEC Staff Accounting Bulletin No. 98, the capitalization of the class B common stock has been retroactively reflected for the purposes of presenting historical net income (loss) per share for periods prior to the initial public offering. (6) This reflects the December 31, 1998 declaration of a $1.4 billion dividend payable to Viacom International Inc. in the form of an interest-bearing promissory note. (7) 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 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. 20 CAUTIONARY STATEMENTS This annual report on Form 10-K contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, words such as "expect," "may," "estimate," "anticipate," "will," "believe," "intend," "plan," "future," "could," and similar expressions and variations thereof. Similarly, statements that describe our objectives, plans or goals are forward-looking. Our forward-looking statements are based on management's current intent, belief, expectations, estimates and projections regarding our company and our industry. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties, assumptions and other factors that are difficult to predict, including those discussed below. Therefore, actual results may vary materially from what is expressed in or indicated by our forward-looking statements. We undertake no obligation to update publicly any forward-looking statement for any reason, even if new information becomes available or other events occur in the future. CAUTIONARY STATEMENTS RELATING TO OUR VIDEO STORE BUSINESS We Cannot Predict the Impact That New or Improved Technologies May Have on Our Video Store Business. New digital technologies, such as video-on-demand and other new technologies, could have a material adverse effect on our video store business. In particular, our video store business could be impacted 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 more widely available and accepted, this could cause a smaller number of movies to be rented if viewers were to favor the expanded number of conventional channels and expanded content, including movies, specialty programming and sporting events, offered through these services. If this were to occur, it could have a material adverse effect on our video store business. Direct broadcast satellite providers transmit numerous channels of programs by satellite transmission into subscribers' homes. In addition, cable providers are taking advantage of digital technology to transmit many additional channels of television programs over cable lines to subscribers' homes. Because of the 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. If these enhanced pay-per-view services become more widely available and accepted, pay-per-view purchases could significantly increase. Pay-per-view allows the consumer to avoid trips to the video store for rentals and returns of movies, which also eliminates the chance they will incur additional costs for keeping a movie beyond its initial rental term. However, newly released movies are currently made available by the studios for rental prior to being made available on a pay-per-view basis. Pay-per-view also does not allow the consumer to start, stop and rewind the movie or fully control start times. Increases in the size of the 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. 21 Our video store business may eventually have to compete with the widespread availability of video-on-demand and similar technologies, which may significantly reduce the demand for our products. Some digital cable providers and a limited number of Internet content providers have begun implementing technology referred to as "video-on-demand." This technology transmits movies and other entertainment content with interactive capabilities such as start, stop and rewind. In addition to being available from a small number of cable providers, video-on-demand has been introduced over the Internet, as high-speed Internet access has greatly increased the speed and quality of viewing content, including feature-length films, on personal computers. Through technical trials in four markets, we have tested our entertainment-on-demand service, which delivered video-on-demand to consumers' television sets via digital subscriber lines and fiber optic connections. The future of video-on-demand services, including services provided by us, is uncertain, however. Video-on-demand could have a material adverse effect on our video store business 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. Another new technology that could have an effect on our video store business is the personal video recorder. A personal video recorder allows consumers to automatically and digitally record programs to create a customized television line-up for viewing at any time. This technology also enables consumers to pause, rewind, instant replay and playback in slow motion any live television broadcast. We cannot predict the impact that this new technology will have on our business. Our Video Rental Business Would Lose a Significant Competitive Advantage if the Movie Studios Were to Adversely Change Their Current Distribution Practices. A significant competitive advantage that the video store industry currently enjoys over most other movie distribution channels except theatrical release is the early timing of the video store distribution "window." After the initial theatrical release, studios make their movies available to video stores for specified periods of time. This window is exclusive against most other forms of non-theatrical movie distribution, such as pay-per-view, video-on-demand, premium television, basic cable and network and syndicated television. The current length of the window for video stores varies, typically ranging from 45 to 60 days for domestic video stores and longer for international video stores. Thereafter, movies are made sequentially available to television distribution channels. Our video store business 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. We believe that the studios have a significant interest in maintaining a viable video rental industry. However, 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. Our Video Store Business Could be Adversely Impacted by Labor Conditions Affecting the Motion Picture Industry Our video store business is dependent on the availability of motion pictures produced by writers and actors subject to collective bargaining agreements. Labor conditions in the motion picture industry could result in work stoppages that could adversely affect our ability to acquire new titles and, therefore, could have an adverse impact on our revenues. 22 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 we can. As a result, our sell-through business, which is described below, in the United States represented only 10.9% of our domestic revenues for 2000. 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 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 VHS 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 these movies 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 were to desire to rent rather than own these sell-through priced movies, the adverse effect of sell-through might 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. Prior to implementing our revenue-sharing agreements, 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. These agreements generally have terms ranging from two to five years. For titles purchased under these agreements, we generally pay only a minimal fixed cost per videocassette and agree to share our U.S. rental revenue with the studios for a limited period of time. In addition, we generally 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. The revenue-sharing arrangements provide us with significant benefits, as discussed in "Item 1. Business--Industry Overview--Domestic Home Video-- Movies." If our revenue-sharing agreements are materially adversely changed or discontinued, we will lose these benefits. We would likely either have to purchase videocassette at high wholesale prices or we would purchase only sell- through movies, which would also be available for sale to consumers. This would have a material adverse effect on our video store business. If the Average Sales Price for the Previously Viewed Videotapes 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 videotapes to the public after the end of their useful lives as rental products. To achieve our expected gross margins, we need to sell these previously viewed videotapes at or above an expected price. If the average sales price of these previously viewed videotapes is not at or above this expected price, our gross margins under our revenue-sharing agreements may be adversely affected. 23 Due to the terms of our current revenue-sharing arrangements and the resulting increase in volume of videocassettes that we obtain, we need to sell significantly more previously viewed videotapes than we did previously. During 2000, we sold about 34.6 million previously viewed videotapes, a 343.6% increase over 1997. We anticipate that we will need to turn our inventory of previously viewed videotapes more quickly in the future in order to make room in our stores for additional DVDs and other new initiatives, such as our strategic alliance with RadioShack. For more information on our new store initiatives, we refer you to "Item 1. Business--Our Business--Business Model." Therefore, we cannot assure you that in the future we will be able to sell, on average, our previously viewed videotapes at or above the expected price. Other factors that could affect our ability to sell these previously viewed videotapes at expected prices include: . consumer desire to own the particular movie; . the number of previously viewed videotapes available for sale by others to the public; and . the increasing popularity of the DVD format. In addition, after the expiration of the video store distribution window, the sales of previously viewed videotapes also compete with newly released videos that are priced for sell-through. We Have Had Limited Experience with Our New Store Initiatives and Cannot Assure You When or If These Initiatives Will Have a Positive Impact on Our Profitability. During the past year, we have announced our intention to offer an expanded selection of products and services in our stores. During the fall of 2000, we began selling DIRECTV in our company-operated stores, and in February 2001, we announced a strategic alliance that would place RadioShack stores within our stores. For more information on these initiatives, we refer you to "Item 1. Business--Our Business--Business Model." The implementation of these and other similar initiatives in our stores may involve significant investments by us of time and money. Because we have limited experience with these new initiatives, we cannot assure you that they will be successful or profitable either over the short or long term. 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 could be detrimental to our goals that relate to increasing our market share and leveraging our store base. We expect to add 200-250 company-operated stores over the course of 2001, the majority of which will be domestic. However, we will be reviewing our expansion plans on a quarter-by-quarter basis and, depending on the market share gains, returns on our investment and other factors, we may reduce or increase the number of stores we plan to open. We Cannot Assure You as to the Profitability of Newly Added Stores. In connection with our growth strategy, we may add 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 added 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. 24 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 because 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 to Wherehouse, 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 consolidated financial statements. Our Business Model is Substantially Dependent on the Functionality of Our Centralized Domestic Distribution Center. 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 were to become non-operational 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. CAUTIONARY STATEMENTS RELATING TO OUR NEW MEDIA BUSINESS Our New Media Business Could be Adversely Affected if Blockbuster is Unable to Compete Effectively in the Digital Market for its Products. Digital delivery of content is a new and rapidly evolving market. In response to the growth of digital delivery systems, we tested our entertainment-on-demand service for the digital delivery of movies to consumers' homes. In the future, we may explore introducing a more widely available, commmercial version of our entertainment-on-demand service and also other means of delivering digital entertainment into consumers homes. However, the demand for entertainment-on-demand services is new and unproven, and there is uncertainty regarding demand for these products in the future. Several factors could adversely affect our ability to deliver movies digitally, including: . obtaining the right, on acceptable terms, from movie studios to electronically distribute a sufficient quantity of movies by digital means; . obtaining the right, on acceptable terms, to electronically deliver movies and other entertainment digitally from local telephone companies, cable system operators and other entities who own the broadband distribution systems necessary for the distribution of digital entertainment; 25 . the technological ability to distribute entertainment digitally on a cost-effective basis; . the widespread adoption by consumers of technology that is adequate to receive and display digital content in a manner which is acceptable to them; . our ability to attract customers to our entertainment services and meet their expectations with respect to content, pricing, service, navigation and other features; and . competition from other companies offering to electronically deliver movies on-demand over the Internet or by other digital means. Our Ability to Deliver Entertainment-on-Demand and Other New Media Services Is Dependent Upon Our Relationships with Technology Providers. We do not have all of the necessary technology or expertise to deliver our Internet, entertainment-on-demand or other New Media services without the use of third parties. Therefore, our New Media businesses, including our Internet site, are and will be largely dependent on our ability to create and maintain good business relationships with technology providers. We cannot assure you that we will be able to reach commercially reasonable terms with all of our potential technology providers. We cannot assure you that any existing relationships with technology providers will not be terminated by either party or that we will be able to renew existing agreements on satisfactory terms. If we are unable to reach agreements with necessary technology providers, or if our agreements with technology providers are terminated and we are unable to replace their services, we cannot assure you that we will be able to operate our New Media businesses according to our current expectations. Dependence on third-party technology providers also means that we may not be able to accurately predict or control all aspects of the timing or expense related to our New Media businesses. If our technology providers are unable to complete their work in accordance with our deadlines, our services could be unexpectedly interrupted or delayed. In addition, our estimates and expectations with respect to the expenses associated with our New Media businesses are in part dependent on the information provided to us by our technology providers. To the extent that our technology providers encounter unexpected expenses, we may be required to share in those costs or change the specifications for our services. Our contracts with our technology providers may permit us to recover damages from technology providers who fail to meet deadlines or to estimate costs accurately, but we cannot assure you that those amounts will be sufficient to compensate us fully for our losses. Third-Party Infringement Claims Against Us or Our Technology Providers Could Result In Delays in New Services, the Loss of Customers or Costly and Time- Consuming Litigation. There has been a substantial amount of litigation in the Internet and broadband technology industry regarding intellectual property rights. It is possible that in the future third parties may claim that the technology used to operate our current or future New Media businesses infringe their intellectual property rights. We expect that providers of digital entertainment services will increasingly be subject to infringement claims as the number of products and services and competitors in that industry grows and the functionality of products in different industry segments overlaps. Any such claims against us, with or without merit, could be time-consuming, result in costly litigation, cause interruptions or delays in our services or require us or our technology providers to enter into royalty or licensing agreements in order to secure continued access to required technology. Royalty or licensing agreements, if required, may not be available on terms acceptable to us and our technology providers. Claims of intellectual property infringement may also require us to pay significant damages or subject us to an injunction against the operation of part or all of our New Media businesses. Any successful claim of intellectual property infringement against us could have an immediate and significant impact on our ability to carry on our New Media businesses. 26 If Our Intellectual Property Is Not Protected Adequately, We May Be Less Competitive in the Market. As our New Media businesses expand, we are becoming increasingly dependent on technology. Our success in these new businesses depends in large part on protecting intellectual property developed or acquired by us. We rely upon a combination of trademark, copyright, patent and trade secret laws to protect our rights in our intellectual property. We may license our intellectual property and impose restrictions on our licensees' ability to utilize those assets. In addition, we seek to avoid disclosure of our trade secrets, including but not limited to requiring those persons with access to our proprietary information to execute confidentiality agreements with us. On a regular basis, we review our intellectual property to determine whether we should apply for patent protection on certain assets. If we decide to apply for patents, it is possible that no patents will issue from the patent applications. It is also possible that any patents that we do obtain may be invalid or unenforceable. It is also possible that any patent issued to us may not provide us with any competitive advantages. Moreover, we may not develop future proprietary products or technologies that are patentable, and the patents of others may seriously limit our ability to conduct our business. In this regard, we have not performed any comprehensive analysis of patents of others that may limit our ability to conduct our business. Our efforts to protect our proprietary rights may not succeed. Copyright and trade secret laws afford only limited protection for our proprietary rights. Unauthorized parties may be able to copy aspects of our products or services or to obtain and use information that we regard as confidential and proprietary. Policing unauthorized use of our intellectual property is difficult. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States. Our means of protecting our proprietary rights may not be adequate and our competitors may independently develop similar technology, duplicate our products and services or design around patents issued to us or our technology providers. We may not be able to detect infringement or enforce our patent or other rights and, as a result, our competitive position in the market may suffer. CAUTIONARY STATEMENTS RELATING TO OUR RELATIONSHIP WITH VIACOM Our Historical Consolidated 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. Effective with our initial public offering in August 1999, we entered into a transition services agreement with Viacom pursuant to which Viacom is currently providing us with certain financial, administrative and other resources. Prior to our initial public offering, certain costs and expenses reflected in our consolidated financial statements included allocations of corporate expenses from Viacom. These and other allocations of costs and expenses do not necessarily indicate the costs that would have been or would be incurred by us as a separate, stand-alone entity. Also, the financial information included in this Form 10-K may not necessarily reflect our financial position, results of operations, and cash flows in the future or what the financial position, results of operations, and cash flows would have been had we been a separate, stand-alone entity during the periods presented. For additional information, we refer you to "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 1 to our Consolidated Financial Statements. 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. We are currently controlled by Viacom. We have two classes of common stock: . class A common stock, which entitles the holder to one vote per share; and 27 . class B common stock, which entitles the holder to five votes per share, on all matters submitted to our stockholders. Viacom owns in excess of a majority of the combined voting power of our outstanding common stock. As a result, Viacom is 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 other stockholders into consideration. For example, Viacom can 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. This in turn may have an adverse affect on the price of our class A common stock. 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 any possible 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. Four of Our Directors May Have Conflicts of Interest Because They Are Also Directors or Executive Officers of Viacom. Four members of our board of directors are directors and/or executive officers of Viacom. These directors 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, stockholders in our company are 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. 28 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. 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 outstanding classes of common stock. In addition, we have entered into a tax matters agreement with Viacom, which requires, among other things, that 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. 29 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes thereto appearing elsewhere in this document. General Blockbuster Inc. is the world's leading retailer of rentable home videocassettes, DVDs and video games, with close to 7,700 stores in the United States, its territories and 25 other countries as of December 31, 2000. During 2000, while our core video business continued to grow, we extended our business and our brand into additional home entertainment distribution channels, as discussed below. Viacom, through its ownership of 144 million shares of our class B common stock, owns common stock representing about 82% of our equity value and about 96% of the combined voting power of our outstanding common stock. In 1999, Viacom announced that it intended to split-off Blockbuster by offering to exchange all of its shares of Blockbuster common stock for shares of Viacom's common stock. The split-off was subject to approval by Viacom's Board of Directors and an assessment of market conditions. Viacom has stated that it no longer has any plans for the split-off of Blockbuster. We implemented a new business model in 1998 in recognition that we could not purchase enough videocassettes at the "full" cost to satisfy customer demand without significantly increasing our risk. In order to increase the quantity and selection of newly released video titles and satisfy our customers' demand for newly released videos, we entered into revenue-sharing agreements with the major motion picture 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 it 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 fixed cost of acquiring newly released videocassettes to three months. In connection with this change in method of accounting for our videocassette and video game rental library, we recorded a $424.3 million charge in 1998 to reflect a reduction in the carrying value of this library. We strive to be the leader in satisfying customer demand by stocking each of our stores with the selection, quantity and format of merchandise desired by our customers. We have continued to manage our merchandise mix in response to changing consumer demands such as the significant increase in demand for DVDs over the past year. DVDs represented about 10.1% of our net domestic rental revenues during the fourth quarter of 2000. Based on our expectation that demand for DVDs will continue to grow, we expect DVDs to represent 20-25% of our net domestic rental revenues by the end of 2001. In 2000, we announced a multi-year agreement with DIRECTV to expand our traditional video rental business for the first time to pay-per-view via the DIRECTV service and to cross market each other's products. We receive a commission for each DIRECTV system and service sold by us through our stores and through other channels, as well as a monthly residual based on the number of active DIRECTV customers acquired through us. Since the September 2000 launch of DIRECTV sales in approximately 3,800 of our stores, we have sold over 100,000 DIRECTV systems, quickly establishing ourselves as one of the nation's leading retailers of DIRECTV systems. We receive a portion of the pay-per-view revenue generated by customers we acquire for DIRECTV. Additionally, as part of the agreement, we will receive a portion of the incremental revenues generated by some of DIRECTV's pay-per-view movie channels upon our co-branding, which we expect to occur in 2001. In 2001, we entered into a strategic alliance with RadioShack Corporation under which RadioShack will operate store-within-a-store areas inside selected Blockbuster locations. In 2001, the companies will launch 30 Phase I of the strategic alliance in approximately 130 of our stores in at least four markets. At the end of Phase I, the companies will determine whether they will proceed to Phase II, which would be a rollout of the concept to as many stores as possible in the United States, anticipated to occur during 2002. RadioShack will pay a license fee to us for each location and both companies will share in the operating income (loss), as defined, generated by the store- within-a-store areas. We have a substantial amount of intangible assets on our consolidated financial statements. As of December 31, 2000, we had net intangible assets of $5,809.2 million, which represented 68.0% of our total assets and 96.7% 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 consolidated financial statements. This goodwill generally represents the BLOCKBUSTER brand. 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. Business Segment Information Beginning in the fourth quarter of 1999, we began reporting in two segments: (i) home videocassette, DVD and video game rental and retailing, which we refer to as our video segment, and (ii) new media (formerly new technologies). (i) Video As of December 31, 2000, the video segment operated 6,254 video stores and its franchisees and/or joint ventures operated 1,423 video stores located throughout the United States, its territories and 25 other countries. (ii) New Media Through our new media segment, we operate our Internet site, blockbuster.com, and our Digital Networks division, which is responsible for exploring various forms of electronic entertainment delivery, including entertainment-on-demand. We evaluate performance based on many factors. Two of the primary measures that we use are EBITDA and operating income (loss). EBITDA is defined as net loss before equity in income (loss) of affiliated companies (net of tax), benefit (provision) for income taxes, interest income (expense), depreciation, amortization of intangibles and other items, net. Our EBITDA measure may differ in the method of calculation from similarly titled measures used by other companies. Operating income is defined as income before interest income (expense), equity in income (loss) of affiliated companies (net of tax) and benefit (provision) for income taxes. 31 The following table sets forth summarized financial information relating to our segments:
Year Ended December 31, ---------------------------- 1998 1999 2000 -------- -------- -------- (In millions) Revenues Video........................................... $3,893.4 $4,463.3 $4,959.1 New media....................................... -- 0.2 1.0 -------- -------- -------- Total revenues................................ $3,893.4 $4,463.5 $4,960.1 ======== ======== ======== EBITDA(1) Video........................................... $ 23.7 $ 520.6 $ 588.2 New media....................................... -- (6.6) (53.4) -------- -------- -------- Total EBITDA.................................. $ 23.7 $ 514.0 $ 534.8 ======== ======== ======== Operating income (loss) Video........................................... $ (359.2) $ 128.7 $ 172.5 New media....................................... -- (7.0) (96.8) -------- -------- -------- Total operating income (loss)................. $ (359.2) $ 121.7 $ 75.7 ======== ======== ========
- -------- (1) "EBITDA" is presented here to provide additional information about Blockbuster's operations. EBITDA should be considered in addition to, but not as a substitute for, or superior to, operating income (loss), net income (loss), cash flow and other measures of financial performance prepared in accordance with generally accepted accounting principles. 32 Results of Operations Consolidated Results The following table sets forth consolidated results of operations and other financial data.
Year Ended December 31, ------------------------------- 1998 1999 2000 --------- --------- --------- (In millions, except margin and worldwide store data) Statement of Operations Data: Revenues..................................... $ 3,893.4 $ 4,463.5 $ 4,960.1 Cost of sales................................ 1,956.4 1,762.5 2,036.0 --------- --------- --------- Gross profit................................. 1,937.0 2,701.0 2,924.1 Operating expenses........................... 2,296.2 2,579.3 2,848.4 --------- --------- --------- Operating income (loss)...................... (359.2) 121.7 75.7 Interest expense............................. (27.7) (119.3) (116.5) Interest income.............................. 4.0 3.2 7.3 Other items, net............................. (11.8) (0.2) 1.7 --------- --------- --------- Income (loss) before income taxes............ (394.7) 5.4 (31.8) Benefit (provision) for income taxes......... 59.4 (71.8) (45.4) Equity in income (loss) of affiliated companies, net of tax....................... (1.3) (2.8) 1.3 --------- --------- --------- Net loss..................................... $ (336.6) $ (69.2) $ (75.9) ========= ========= ========= Cash Flow Data: Cash flows from operating activities......... $ 1,234.5 $ 1,142.8 $ 1,320.8 Cash flows used for investing activities..... (1,022.2) (1,258.1) (1,056.8) Cash flows from (used in) financing activities.................................. (241.1) 137.2 (187.2) Other Data: Depreciation................................. $ 212.7 $ 220.5 $ 279.0 Amortization of intangibles.................. 170.2 171.8 180.1 EBITDA(1).................................... 23.7 514.0 534.8 Net loss plus intangible amortization, net of tax(1)(2)................................... $ (172.5) $ 94.8 $ 93.3 Margins: Rental margin(3)............................. 54.6% 66.0% 64.4% Merchandise margin(4)........................ 19.8 21.0 21.4 Gross margin(5).............................. 49.8 60.5 59.0 Worldwide Store Data: Same store revenues increase(6).............. 13.3% 8.3% 5.6% Total system-wide stores at end of period.... 6,381 7,153 7,677
- -------- (1) "EBITDA" and "Net 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 (loss), net income (loss), 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 sales. (5) Gross profit as a percentage of total revenues. (6) A store is included in the same store revenues 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 stores at the end of the applicable reporting period with total net revenues from these same stores for the comparable period in the prior year. 33 Non-Cash Charges During the second quarter of 1998, we recorded a $424.3 million non-cash charge associated with a change in the method of accounting for videocassettes and video game rental library. During the fourth quarter of 2000, we determined that the carrying value of certain hardware and capitalized software components of our new media segment, primarily related to the e-commerce portion of blockbuster.com, exceeded the estimated undiscounted future cash flows to be generated by those assets. As a result, we recorded an impairment charge of approximately $31.6 million. This charge is included in depreciation expense in the Consolidated Statements of Operations for the year ended December 31, 2000. The following is a summary of the impact of the above-described non-cash charges on our operating results:
Year Ended December 31, -------------------------------- 1998 1999 2000 -------- -------- -------- Effect on operating income (loss)......... $ (424.3) $ -- $ (31.6) Effect on net loss........................ (273.1) -- (19.0) Excluding the above described non-cash charges, operating results would have been as follows: Year Ended December 31, --------------------------- 1998 1999 2000 -------- -------- -------- Revenues.................................. $3,893.4 $4,463.5 $4,960.1 Cost of sales............................. 1,532.1 1,762.5 2,036.0 -------- -------- -------- Gross profit.............................. 2,361.3 2,701.0 2,924.1 Operating expenses........................ 2,296.2 2,579.3 2,816.8 -------- -------- -------- Operating income, excluding non-cash charges.................................. $ 65.1 $ 121.7 $ 107.3 ======== ======== ========
Comparison of 2000 to 1999 Revenues. Revenues of $4,960.1 million in 2000 increased $496.6 million, or 11.1%, from $4,463.5 million in 1999. The increase in revenues was primarily due to increases in worldwide same store revenues of 5.6% and a net increase in the number of company-operated stores of 375 to 6,254 at December 31, 2000 from 5,879 at December 31, 1999. The increase in worldwide same store revenues was principally due to a 4.3% increase in same store revenues from our domestic operations and an 11.6% increase in same store revenues from our international operations. The increase in domestic same store revenues was primarily driven by an increase in video rental revenues, which include both VHS and DVD rental revenues. Rental Revenues. Rental revenues, which also includes sales of previously viewed products, of $4,161.7 million in 2000 increased $403.2 million, or 10.7%, from $3,758.5 million in 1999. The increase in rental revenues was primarily due to an increase in domestic same store rental revenues of 4.1%, the net increase in the number of company-operated stores of 375 and an increase in international same store rental revenues of 15.5%. The increase in domestic same store rental revenues was primarily driven by an increase in video rental revenues, which include both VHS and DVD rental revenues. Also contributing to the increase were (i) an increase in the average domestic rental spend per customer and (ii) a favorable box office advantage between titles that became available in 2000 as compared to the titles that became available in 1999. In addition, worldwide previously viewed product sales, which includes sales of previously viewed videotapes, video games and DVDs, increased 17.0% for the year ended December 31, 2000 as compared to the year ended December 31, 1999. For the year ended December 31, 2000, revenues generated by rental product that was kept beyond the initial rental period were $795.8 million, or 16.0% of total revenues, compared to $692.6 million, or 15.5% of total revenues for 1999. Merchandise Sales. Merchandise sales of $704.8 million in 2000 increased $89.7 million, or 14.6%, from $615.1 million in 1999. The primary reasons for the increase in merchandise sales were (i) the net increase in the number of company-operated stores of 375 and (ii) an increase in sales of DVDs. 34 Cost of Sales. Cost of sales of $2,036.0 million in 2000 increased $273.5 million, or 15.5%, from $1,762.5 million in 1999. Cost of sales as a percentage of total revenues increased to 41.0% in 2000 from 39.5% in 1999. The increase in cost of sales was primarily due to the net increase in the number of company-operated stores of 375. The increase in cost of sales as a percentage of revenues was primarily due to (i) the increase in revenues generated through revenue-sharing arrangements as a percentage of our total revenues, as revenue- sharing arrangements on average have lower gross margins than do traditional buying arrangements, (ii) a decrease in margins on game rentals, as several platforms are nearing the end of their lifecycles, and (iii) a decrease in margins on previously viewed product sales generated by lower average unit selling prices as a result of increased copy depth. We are continually evaluating our product mix and product offerings, as well as related strategic alliances, to try to optimize our stores' revenues and gross profit. In 2000, we began marketing and soliciting DIRECTV system equipment and DIRECTV(R) programming packages in our stores, and since our September 2000 launch, we have sold over 100,000 DIRECTV systems. In February 2001, we entered into a strategic alliance with RadioShack under which RadioShack will operate store- within-a-store areas inside selected Blockbuster locations. After the initial rollout of the RadioShack store-within-a-store in 2001, we will determine whether we will proceed with a nationwide rollout. Additionally, we intend to continue to increase our stores' depth of DVDs in response to accelerated consumer acceptance of the DVD format. Our initiatives to optimize our stores' revenues and gross profit may cause us to alter the product mix in our stores. This may cause us to rationalize our stores' existing product mix, which could result in a non-cash charge. Gross Profit. Gross profit of $2,924.1 million in 2000 increased $223.1 million, or 8.3%, from $2,701.0 million in 1999. For 2000, gross profit as a percentage of total revenues decreased to 59.0% from 60.5% in 1999. The decrease in gross margin percentage was due to the increase in cost of sales as a percentage of revenues described above. Operating Expenses. Total operating expenses of $2,848.4 million in 2000 increased $269.1 million, or 10.4%, from $2,579.3 million in 1999. Excluding the impairment charge of approximately $31.6 million, total operating expenses of $2,816.8 million increased $237.5 million, or 9.2%, from $2,579.3 million in 1999. This increase was primarily due to a net increase of 375 company-operated stores and the increase in total operating expenses related to our new media segment of $57.8 million to $64.8 million in 2000 from $7.0 million in 1999. The new media operating expenses increased from 1999 to 2000 primarily due to 2000 being the first full year of operations for blockbuster.com. Excluding the impairment charge, total operating expenses decreased as a percentage of total revenues to 56.8% in 2000 from 57.8% in 1999 due to better leveraging of our video segment operating expenses over an increased revenue base. We expect operating expenses as a percentage of revenues to continue to decline in 2001. Excluding the impairment charge, the increase in total operating expenses also resulted from the following: General and Administrative Expense. General and administrative expense, which includes expenses incurred at the store, regional, and corporate levels and expenses relating to our new media business, remained consistent as a percentage of total revenues at 43.8% for both 2000 and 1999. General and administrative expense of $2,174.0 million in 2000 increased $220.8 million, or 11.3%, from $1,953.2 million in 1999. The dollar increase in 2000 resulted from compensation increases of $107.4 million related to additional personnel needed to support our store growth, DIRECTV initiatives, and our new media business. Occupancy costs increased $55.2 million largely as a result of an increase in the number of company- operated stores. Other corporate and store expenses increased $58.2 million due primarily to the growth of our business, including our DIRECTV and new media initiatives, and a decrease in the net gain recognized on the refranchising of stores of approximately $18.2 million from 1999 to 2000. Advertising Expense. Advertising expense of $215.3 million in 2000 decreased $18.5 million, or 7.9%, from $233.8 million in 1999. As a percentage of total revenues, advertising expense decreased to 4.3% in 2000 from 5.2% in 1999. These decreases reflect our planned decrease in general promotional advertising. We are now focusing our advertising dollars on specific brand advertising, direct marketing vehicles such as BLOCKBUSTER REWARDS(TM), our alliance with DIRECTV, and other targeted consumer advertising. 35 Depreciation Expense. Depreciation expense of $279.0 million in 2000 increased $58.5 million, or 26.5%, as compared to $220.5 million in 1999. Excluding the impairment charge of $31.6 million, depreciation expense of $247.4 million in 2000 increased $26.9 million, or 12.2%, as compared to $220.5 million in 1999. The increase in depreciation expense was primarily attributable to the net increase of 375 company-operated stores. Interest Expense. Interest expense of $116.5 million in 2000 decreased $2.8 million, or 2.3%, as compared to $119.3 million in 1999. The decrease in interest expense was due to lower capital lease levels and lower debt levels, partially offset by the higher interest rates on our credit facility compared to the interest rates on the notes payable to Viacom, which were outstanding through June 23, 1999. Provision for Income Taxes. We recognized a provision for income taxes of $45.4 million in 2000 as compared to $71.8 million in 1999. The 2000 and 1999 provisions reflect permanent differences resulting from the non-deductibility of goodwill amortization associated with Viacom's acquisition of us in 1994 and tax operating losses from certain foreign countries. We did not recognize a benefit for these foreign jurisdictions, in which we incurred losses, in our 1999 and 2000 tax provisions as it is currently more likely than not that the benefit will not be realized. The provision for income taxes decreased due to lower earnings before taxes and lower operating losses from foreign jurisdictions. We review our net operating losses on a country by country basis and may determine in the future that some or all of the net operating losses generated in the past will be utilized in the future. Equity in Income (Loss) of Affiliated Companies, Net of Tax. Equity in income of affiliated companies, net of tax of $1.3 million in 2000 increased $4.1 million as compared to a loss of $2.8 million in 1999, primarily due to an increase in income from our joint venture operations in Italy. Net Loss. For the reasons described above, the consolidated net loss of $75.9 million in 2000 reflects an increase in net loss of $6.7 million, or 9.7%, from a net loss of $69.2 million in 1999. Excluding the impairment charge, the consolidated net loss of $56.9 million reflects a decrease in net loss of $12.3 million from a net loss of $69.2 million in 1999. Excluding the new media segment, the net loss of $14.7 million reflects a decrease in net loss of $50.2 million from a net loss of $64.9 million in 1999. SEGMENT RESULTS Video Video revenues of $4,959.1 million in 2000 increased $495.8 million, or 11.1%, from $4,463.3 million in 1999. The increase in revenues was primarily due to increases in worldwide same store revenues of 5.6% and a net increase in the number of company-operated stores of 375. The increase in worldwide same store revenues was principally due to an increase in the average domestic rental spend per customer, a 4.3% increase in same store revenues from our domestic operations and an 11.6% increase in same store revenues from our international operations. The increase in domestic same store revenues was primarily driven by an increase in video rental revenues, which include both VHS and DVD rental revenues. Operating income increased $43.8 million, or 34.0%, to $172.5 million in 2000 from $128.7 million in the prior year. Results for 2000 reflect the increased revenues discussed above and the leveraging of our operating expenses over an increased revenue base. Video operating expenses as a percentage of total video revenues decreased to 55.5% in 2000 from 57.6% in 1999 due to better leveraging of our video segment operating expenses over an increased revenue base. New Media (formerly New Technologies) New media revenues of $1.0 million in 2000 consisted primarily of sales through the Internet of sell-through videocassettes and DVDs. Operating loss for our new media segment was $96.8 million in 2000, as compared to an operating loss of $7.0 million in 1999. Excluding the impairment charge, operating loss was 36 $65.2 million in 2000. The operating loss increased from 1999 to 2000 primarily due to 2000 being the first full year of operations for blockbuster.com. The loss reflects costs incurred to advertise our website, to hire additional people to support the website, to enhance the website's functionality and to negotiate and structure new ventures related to our entertainment-on-demand services, which are currently in the development stage. During the fourth quarter of 2000, we shifted the focus of our Internet site, blockbuster.com from e-commerce offerings to other features designed to support our stores and drive store revenues. We refer you to "Item 1. Business--Our Business-- Blockbuster.com." We are outsourcing segments of our website development and maintenance related to our e-commerce business. We expect costs associated with our new media segment in 2001 to be about 30% lower than the full year 2000 excluding the impairment charge, primarily due to our outsourcing of segments of our website development and maintenance related to our e-commerce business and lower marketing costs. Also, during 2000, we integrated our online capabilities with our store systems and launched a two-market pilot of our online rental reservations system. We are also exploring initiatives designed to integrate the capabilities of blockbuster.com with our future entertainment- on-demand services. Comparison of 1999 to 1998 Revenues. Revenues of $4,463.5 million in 1999 increased $570.1 million, or 14.6%, from $3,893.4 million in 1998. The increase in revenues was primarily due to increases in worldwide same store revenues of 8.3% in 1999 as compared to 1998 and an increase in the number of company-operated stores of 596 to 5,879 at December 31, 1999 from 5,283 at December 31, 1998. The increase in same store revenues was principally due to increases in the average domestic rental fee, the increased number of domestic rental transactions of 3.4% and increased sales of previously viewed videotapes for the year ended December 31, 1999 as compared to the corresponding period of the prior year. Rental Revenues. Rental revenues of $3,758.5 million in 1999, which also includes sales of previously viewed videotapes and extended viewing fees, increased $538.9 million, or 16.7%, from $3,219.6 million in 1998. The increase in rental revenue was primarily due to the increase in the number of company- operated stores of 596, an increase in the average domestic rental fee and the increase in rental transactions. Previously viewed product sales, which includes previously viewed videotapes, video games and DVDs, increased 48.4% to $285.0 million in 1999 from $192.0 million in 1998, primarily driven by operating a full year under the revenue-sharing model which produces a much larger quantity of previously viewed videotapes available for sale than our previous business model. As a percentage of total revenues, sales of previously viewed product increased to 6.4% for 1999 as compared to 4.9% in 1998. Extended viewing fees of $692.6 million in 1999 increased $108.7 million, or 18.6%, from $583.9 million in 1998 due to the increase in same store rental transactions and the number of company-operated stores. As a percentage of total revenues, extended viewing fees increased to 15.5% for 1999 as compared to 15.0% in 1998. Base rental fees and extended viewing fees vary from market to market. Merchandise Sales. Merchandise sales declined $2.9 million, or 0.5%, in 1999 compared to 1998. The two primary reasons for the decrease in merchandise sales were (i) our efforts to refocus the sale of music CDs from all company-operated stores in 1998 to an average of 1,100 stores in 1999 and (ii) the video release of Titanic in the third quarter of 1998. The decrease in CD sales and sell- through videocassettes was mostly offset by increases in sales of DVD titles, increased sales of licensed merchandise and increased confection sales. Cost of Sales. Cost of sales of $1,762.5 million in 1999 decreased $193.9 million, or 9.9%, from $1,956.4 million in 1998. Cost of sales as a percentage of total revenues in 1999 decreased to 39.5% from 50.2% in 1998. Excluding the special item charge of $424.3 million in the second quarter of 1998, cost of sales for the year increased $230.4 million, or 15.0%, primarily as a result of an increase in revenue resulting in an increase in revenue-sharing payments of $276.4 million and increased costs of sales associated with previously viewed videotapes of $74.0 million, partially offset by a decrease in the amortization of rental product of $110.5 million and decreased cost of merchandise sales of $9.5 million. Commencing on April 1, 1998, we substantially increased our purchases of videocassette rental product through revenue-sharing arrangements with the movie studios. The increases in purchases under the revenue-sharing model have significantly 37 increased our costs associated with revenue-sharing payments, which are expensed as the associated rental revenue is earned. The increase in revenue- sharing payments was partially offset by a decrease in the amortization of rental product. The decrease in rental product amortization was due to the decline in the fixed costs of rental product purchased under the revenue- sharing agreements. The decrease in merchandise cost of sales was primarily due to decreased sales of sell-through videos as compared to the prior year, which included the release of Titanic, and decreased sales of music CDs which have traditionally had lower margins than our other retail products. Gross Profit. Gross profit of $2,701.0 million in 1999 increased $764.0 million, or 39.4%, from $1,937.0 million in 1998. For 1999, gross profit as a percentage of total revenues increased to 60.5% from 49.8% in 1998. Excluding the special item charge of $424.3 million in 1998, gross profit as a percent of revenue was 60.5% for 1999 versus 60.6% for 1998. Operating Expenses. Total operating expenses of $2,579.3 million in 1999 increased $283.1 million, or 12.3%, from $2,296.2 million in 1998, primarily due to a net increase in the number of company-operated stores of 596 to 5,879 at December 31, 1999 from 5,283 at December 31, 1998. Total operating expenses decreased as a percentage of total revenues to 57.8% in 1999 from 59.0% in 1998. The increases in total operating expenses resulted from the following: General and Administrative Expense. General and administrative expense, which includes expenses incurred at the store, regional and corporate level, decreased as a percentage of total revenues to 43.8% in 1999 from 44.5% in 1998 reflecting the benefits of leveraging our cost structure to an increasing revenue base. General and administrative expense of $1,953.2 million in 1999 increased $220.9 million, or 12.8%, from $1,732.3 million in 1998. The dollar increase in 1999 primarily resulted from compensation increases of $128.0 million related to additional personnel needed to support our store growth and increased store traffic. Occupancy costs increased $52.1 million largely as a result of an increase in the number of company-operated stores. Other corporate and store expenses increased $40.8 million due primarily to the growth of our business. During 1999 we began selling some of our company-operated stores to existing and new franchisees in markets where their expertise can be leveraged to improve our overall operating performance, while retaining ownership of key U.S. and international markets. We expect that the loss of store level profits from the disposal of these stores will be largely mitigated by increased franchisee fees from stores franchised, lower field and general and administrative expenses and reduced interest costs due to the reduction of debt from the after-tax cash proceeds from our refranchising activities. Included as a reduction of general and administrative expenses in 1999 was $19.9 million of refranchising gains. Advertising Expense. Advertising expense of $233.8 million in 1999 increased $52.8 million, or 29.2%, from $181.0 million in 1998. As a percentage of total revenues, advertising expense increased to 5.2% in 1999 from 4.6% in 1998. These increases reflected our planned increased investment in advertising and marketing principally due to additional media, direct mail and other promotions related to our various programs such as BLOCKBUSTER REWARDS, Million Dollar Days and other programs. Interest Expense. Interest expense of $119.3 million in 1999 increased $91.6 million, as compared to $27.7 million in 1998. The increase was primarily related to debt incurred under our new credit agreement in order to repay Viacom about $1.6 billion in connection with promissory notes issued by us for the payment of a dividend to Viacom International Inc. and advances by Viacom to us for various acquisitions. Benefit (Provision) for Income Taxes. We recognized a provision for income taxes of $71.8 million in 1999 as compared to a benefit for income taxes of $59.4 million in 1998. The fluctuation in the provision is primarily due to the tax benefit associated with the special item charge recorded in the second quarter of 1998. The 1999 and 1998 provision reflects permanent differences resulting from the non-deductibility of goodwill amortization associated with Viacom's acquisition of us in 1994 and tax operating losses from certain foreign countries. We did not recognize a benefit for these foreign jurisdictions, which incurred losses, in our 1999 tax provision, as it is currently more likely than not that the benefit will not be realized. 38 Equity in Income (Loss) of Affiliated Companies, Net of Tax. The equity in income (loss) of affiliated companies, net of tax was a loss of $2.8 million in 1999 as compared to a loss of $1.3 million in 1998 primarily due to increased losses in our joint venture operations in Italy. Net Income (Loss). For the reasons described above, the net loss of $69.2 million in 1999 reflects a reduction in net loss of $267.4 million from a net loss of $336.6 million in 1998. SEGMENT RESULTS Video Video revenues increased $569.9 million, or 14.6%, for the year, primarily due to increases in rental revenues of 16.7% and a net increase of 772 system- wide video stores in operation. Same store revenues increased 8.3% over the prior year as a result of increases in the average domestic rental fee, a 3.4% increase in domestic rental transactions and increased sales of previously viewed videotapes. Operating income increased $487.9 million to $128.7 million in 1999 from a loss of $359.2 million in the prior year. Results for 1998 reflect the implementation of a new business model and a special item charge in the second quarter of $424.3 million to adjust the carrying value of videocassettes and game rental inventory under a new method of amortization. Excluding the impact of the 1998 charge, video's operating income increased $63.6 million, or 97.7%, to $128.7 million in 1999 from $65.1 million in 1998, primarily due to the increased revenues discussed above and leveraging our operating expenses to an increased revenue base. Our operating expenses as a percentage of total video revenues decreased from 59.0% in 1998 to 57.6% for the same period of 1999. New Media (formerly New Technologies) New media revenues of $0.2 million in 1999 consisted primarily of sales through the Internet of sell-through videocassettes and previously viewed videotapes and commissions from the sale of Blockbuster GIFTCARDS. Operating loss for our new media business segment was $7.0 million. This loss reflects start-up costs incurred to advertise our new website, hire additional people to support the new website and consulting and maintenance costs to bring the website up to full functionality. Liquidity and Capital Resources Liquidity and Capital Resources We generate cash from operations predominantly from the rental and retail sale of videocassettes, video games and DVDs and we have substantial operating cash flow because most of our revenue is received in cash and cash equivalents. We expect to fund our future anticipated cash requirements, including the anticipated cash requirements for capital expenditures, joint ventures, commitments and payments of principal and interest on any borrowings, with internally generated funds, as well as with funds available under our credit facility. We believe that these two sources of funds will provide us with adequate liquidity and capital necessary for the next twelve months. However, we may seek to issue debt and/or equity securities in the future to the extent we determine that the issuance of securities would serve to maximize our capital structure or would otherwise be advantageous to our company. In October 1998, BLOCKBUSTER MUSIC stores were sold to Wherehouse Entertainment Inc. Some of the leases transferred in connection with this sale had previously been guaranteed either by Viacom or its affiliates. The remaining terms of these leases 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 are expected to be funded from operating cash flow. Related losses due to default could materially affect future operating income. 39 Capital Structure On June 21, 1999, we entered into a $1.9 billion unsecured credit agreement with a syndicate of banks. The credit agreement initially was comprised of a $700 million long-term revolver due July 1, 2004; a $600 million term loan due in quarterly installments beginning April 1, 2002 and ending July 1, 2004; and a $600 million short-term revolver, which was paid down and retired during 2000, as discussed below. Interest rates under the credit agreement are based on the prime rate or LIBOR at our option at the time of borrowing. A variable commitment fee based on the total leverage ratio is charged on the unused amount of the revolver (.25% at December 31, 2000). The credit agreement contains certain restrictive covenants, which, among other things, relate to the payment of dividends, repurchase of our common stock or other distributions and also require compliance with certain financial covenants with respect to a maximum leverage ratio and a minimum fixed charge coverage ratio. At December 31, 2000, the Company was in compliance with all financial covenants under the credit agreement. On June 23, 1999, we borrowed $1.6 billion, comprised of $400 million borrowed under the long-term revolver, $600 million borrowed under the term loan, and $600 million under the short-term revolver. The proceeds of the borrowings were used to pay amounts owed to Viacom. We repaid $442.9 million of the short-term revolver through proceeds from our initial public offering. We repaid the remaining $157.1 million of the short-term revolver during the year ended December 31, 2000. These payments permanently reduced our borrowing capacity under the credit agreement from $1.9 billion to $1.3 billion. We had $278.0 million of available borrowing capacity under the long-term revolver at December 31, 2000. The weighted average interest rate at December 31, 2000 for these borrowings was 8.0%. We entered into two additional lines of credit with banks for an aggregate of $75.0 million in the fourth quarter of 1999. There were no outstanding amounts under these two lines of credit at December 31, 2000. Consolidated Cash Flows Operating Activities. Net cash flows from operating activities increased $178.0 million, or 15.6%, from $1,142.8 million for the year ended December 31, 1999 to $1,320.8 million for the year ended December 31, 2000. The most significant reason for the increase was an improvement in income before depreciation and amortization, which increased by $120.6 million. An $82.8 million increase in net cash provided by changes in operating assets and liabilities also contributed to the increase in net cash flows from operating activities. Investing Activities. Net cash used in investing activities decreased $201.3 million from $1,258.1 million in 1999 to $1,056.8 million in 2000 primarily as a result of a decrease in capital expenditures of $152.9 million and a $78.0 million decrease in cash used for store acquisitions, partially offset by a $31.3 million decrease in proceeds from sales of store operations. Our capital expenditures decreased primarily due to an upgrade of the store point-of-sale system that occurred during 1999 and fewer new store openings in 2000 than in 1999. The decrease in cash used for acquisitions was primarily due to a large acquisition of 69 stores from a franchisee in the first quarter of 1999. 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, and construction permits. We plan to evaluate and pursue new sites within the video rental industry in both the United States and in certain international markets and will require capital and/or ongoing infrastructure enhancements to support acquisitions and our expansion strategies in developing markets. We currently expect to add approximately 200 to 250 net new stores in 2001. We currently anticipate that capital expenditures of about $150.0 million will be incurred in 2001 in the video segment, and capital 40 expenditures of about $11 million will be incurred in 2001 in the new media segment. The projected decrease in capital spending from 2000 is due primarily to planned decreases in (i) expenditures in our new media segment and (ii) new store builds. The anticipated decrease in new store builds is due to the change in the competitive landscape. Financing Activities. Net cash used in financing activities for the year ended December 31, 2000 of $187.2 million represented a $324.4 million decrease from net cash provided by financing activities of $137.2 million in 1999. The decrease in cash flows from financing activities was primarily attributable to items associated with our initial public offering in 1999, including: (i) net proceeds of $430.1 million from our initial public offering, and (ii) capital contributions of $157 million made by Viacom for the purchase of certain of our international operations from affiliates of Viacom in connection with our initial public offering. These items were partially offset by net debt repayments during 1999 of $389.3 million, compared to 2000 when we paid down debt by $142.9 million. Other Financial Measurements: Working Capital At December 31, 2000, we had cash and cash equivalents of $194.2 million. Working capital, however, reflected a deficit of $323.7 million due to the accounting treatment of our rental library. Our rental library is accounted for as a non-current asset and is excluded from the computation of working capital. Liabilities associated with the acquisition costs of rental product, however, are reported as current liabilities and, accordingly, are 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. Availability of Foreign Net Operating Losses As more fully discussed in Note 11 to the Consolidated Financial Statements we are required, if so requested by Viacom, to surrender certain tax losses of our United Kingdom subsidiaries for 1998 and earlier years to Viacom without any compensation. At December 31, 2000 our foreign net operating loss tax assets, which are fully reserved, were $51.1 million. 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, a distinct seasonal pattern to the home video and video games business, particularly weaker business 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, and those factors set forth above under "Cautionary Statements." Market Risk We are exposed to various market risks including interest rates on our debt and foreign exchange rates. In the normal course of business we employ established policies and procedures to manage these risks. Interest Rate Risk Historically, we have had no material interest rate risk associated with debt used to finance our operations due to limited borrowings and our relationship with Viacom. However, on June 23, 1999, we borrowed $1.6 billion. Total outstanding borrowings at December 31, 2000 under this credit agreement were $1,022.0 million. Interest rates are based on the prime rate in the United States or LIBOR (plus a margin based on leverage 41 ratios) at our option at the time of borrowing. The weighted average interest rate at December 31, 2000 for these borrowings was 8.0%. In March 2001, we entered into two interest rate swaps with Viacom in order to obtain a fixed interest rate with respect to $400 million of our outstanding floating rate debt. The swaps fixed $200 million of our outstanding debt at an interest rate of 5.0135% for two years and the other $200 million at an interest rate of 5.1190% for two and one-half years. Our effective interest rates also include a LIBOR spread, currently 1.25%, which is subject to change under the terms of our credit agreement. The swaps are subject to termination in the event that (i) Viacom ceases to own greater than 80% of our outstanding common stock or (ii) we no longer have any obligations under the term loan portion of our credit agreement. 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. Operating income would have increased by an additional $2.8 million if foreign exchange rates in 2000 were consistent with 1999. 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 transition period for the introduction of the Euro will be between January 1, 1999 and June 30, 2002. 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. Numerous issues are raised by the Euro currency conversion including the need to adapt computer and financial systems and business processes and equipment. Due to these uncertainties, we cannot reasonably estimate the long- term effects one common currency may have on pricing, costs, and the resulting impact, if any, on our financial condition or results of operations. However, we believe that we have and will continue to take appropriate steps to assess and address Euro conversion issues and currently do not expect that our business will be adversely affected by such conversion in any material respect. Our operations outside the United States constituted 19.3% of our total revenues in 2000. Our operations in Europe constituted 9.5% of our total revenues. The majority of these sales are from Great Britain, which had not adopted the Euro in 2000. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") effective for fiscal years beginning after June 15, 2000. We adopted SFAS 133 effective January 1, 2001, and its adoption resulted in an immaterial effect on our financial statements. We adopted the provisions of SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" in the fourth quarter of 2000. We also adopted Emerging Issues Task Force Issue No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, in the fourth quarter of 2000. The effect of the adoption of these standards was immaterial. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Response to this item is included in "Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations--Market Risk." 42 Item 8. Financial Statements and Supplementary Data BLOCKBUSTER INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Audited Consolidated Financial Statements: Report of Independent Accountants....................................... 44 Consolidated Statements of Operations--Years Ended December 31, 1998, 1999 and 2000.......................................................... 45 Consolidated Balance Sheets--at December 31, 1999 and 2000.............. 46 Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Loss--Years Ended December 31, 1998, 1999 and 2000....... 47 Consolidated Statements of Cash Flows--Years Ended December 31, 1998, 1999 and 2000.......................................................... 48 Notes to Consolidated Financial Statements.............................. 49
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 consolidated financial statements or notes thereto. 43 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Blockbuster Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders' equity and comprehensive income, and of cash flows present fairly, in all material respects, the financial position of Blockbuster Inc. at December 31, 1999 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America 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 our opinion. PricewaterhouseCoopers LLP Dallas, Texas February 9, 2001 44 BLOCKBUSTER INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except per share amounts)
Year Ended December 31, ---------------------------- 1998 1999 2000 -------- -------- -------- Revenues: Rental revenues................................ $3,219.6 $3,758.5 $4,161.7 Merchandise sales.............................. 618.0 615.1 704.8 Other revenues................................. 55.8 89.9 93.6 -------- -------- -------- 3,893.4 4,463.5 4,960.1 -------- -------- -------- Cost of sales: Cost of rental revenues........................ 1,460.9 1,276.5 1,481.9 Cost of merchandise sold....................... 495.5 486.0 554.1 -------- -------- -------- 1,956.4 1,762.5 2,036.0 -------- -------- -------- Gross profit................................... 1,937.0 2,701.0 2,924.1 -------- -------- -------- Operating expenses: General and administrative..................... 1,732.3 1,953.2 2,174.0 Advertising.................................... 181.0 233.8 215.3 Depreciation................................... 212.7 220.5 279.0 Amortization of intangibles.................... 170.2 171.8 180.1 -------- -------- -------- 2,296.2 2,579.3 2,848.4 -------- -------- -------- Operating income (loss).......................... (359.2) 121.7 75.7 Interest expense............................... (27.7) (119.3) (116.5) Interest income................................ 4.0 3.2 7.3 Other items, net............................... (11.8) (0.2) 1.7 -------- -------- -------- Income (loss) before income taxes................ (394.7) 5.4 (31.8) Benefit (provision) for income taxes........... 59.4 (71.8) (45.4) Equity in income (loss) of affiliated companies, net of tax......................... (1.3) (2.8) 1.3 -------- -------- -------- Net loss......................................... $ (336.6) $ (69.2) $ (75.9) ======== ======== ======== Net loss per share: Basic and diluted.............................. $ (2.34) $ (0.44) $ (0.43) ======== ======== ======== Weighted average shares outstanding: Basic and diluted.............................. 144.0 156.1 175.0 ======== ======== ======== Cash dividends per common share.................. $ -- $ 0.02 $ 0.08 ======== ======== ========
See notes to consolidated financial statements. 45 BLOCKBUSTER INC. CONSOLIDATED BALANCE SHEETS (In millions, except per share amounts)
December 31, December 31, 1999 2000 ------------ ------------ Assets Current assets: Cash and cash equivalents.......................... $ 119.6 $ 194.2 Receivables, less allowances of $11.4 (1999) and $8.6 (2000)....................................... 130.8 185.8 Merchandise inventories............................ 281.3 242.2 Prepaid assets and other current assets............ 180.9 177.3 -------- -------- Total current assets............................. 712.6 799.5 Rental library....................................... 577.6 646.7 Receivable from Viacom............................... 41.1 134.9 Property and equipment, net.......................... 1,148.3 1,079.4 Intangibles, net..................................... 5,975.9 5,809.2 Other assets......................................... 85.3 79.2 -------- -------- $8,540.8 $8,548.9 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable................................... $ 499.4 $ 592.7 Accrued expenses................................... 422.5 473.7 Current portion of long-term debt.................. 157.1 8.0 Current portion of capital lease obligations....... 29.7 24.8 Deferred taxes..................................... 22.7 24.0 -------- -------- Total current liabilities........................ 1,131.4 1,123.2 Long-term debt, less current portion................. 1,030.0 1,039.0 Capital lease obligations, less current portion...... 108.4 97.5 Deferred taxes....................................... 72.3 207.2 Other liabilities.................................... 73.7 73.6 -------- -------- 2,415.8 2,540.5 -------- -------- Commitments and contingencies (Note 12) Stockholders' equity: Preferred stock, par value $.01 per share; 100.0 shares authorized; no shares issued or outstanding....................................... -- -- Class A common stock, par value $.01 per share; 400.0 shares authorized; 31.0 shares issued and outstanding....................................... 0.3 0.3 Class B common stock, par value $.01 per share; 500.0 shares authorized; 144.0 shares issued and outstanding....................................... 1.4 1.4 Additional paid-in capital......................... 6,180.3 6,166.4 Retained deficit................................... (10.9) (86.8) Accumulated other comprehensive loss--foreign currency translation adjustment................... (46.1) (72.9) -------- -------- Total stockholders' equity....................... 6,125.0 6,008.4 ======== ======== $8,540.8 $8,548.9 ======== ========
See notes to consolidated financial statements. 46 BLOCKBUSTER INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS (In millions)
Year ended December 31, --------------------------------------------------- 1998 1999 2000 ---------------- ---------------- --------------- Shares Amount Shares Amount Shares Amount ------ --------- ------ --------- ------ -------- Class A common stock: Balance, beginning of year................... -- $ -- -- $ -- 31.0 $ 0.3 Initial public offering, net proceeds........... -- -- 31.0 0.3 -- -- ----- --------- ----- --------- ----- -------- Balance, end of year.... -- $ -- 31.0 $ 0.3 31.0 $ 0.3 ===== ========= ===== ========= ===== ======== Class B common stock: Balance, beginning of year................... -- $ -- -- $ -- 144.0 $ 1.4 Issuance of class B com- mon stock to Viacom.... -- -- 144.0 1.4 -- -- ----- --------- ----- --------- ----- -------- Balance, end of year.... -- $ -- 144.0 $ 1.4 144.0 $ 1.4 ===== ========= ===== ========= ===== ======== Additional paid-in capi- tal: Balance, beginning of year................... $ -- $ -- $6,180.3 Issuance of class B com- mon stock to Viacom.... -- 5,754.0 -- Initial public offering, net proceeds........... -- 429.8 -- Issuance of class A com- mon stock.............. -- -- 0.1 Cash dividends.......... -- (3.5) (14.0) --------- --------- -------- Balance, end of year.... $ -- $ 6,180.3 $6,166.4 ========= ========= ======== Viacom's net equity in- vestment: Balance, beginning of year................... $ 7,666.5 $ 5,695.8 $ -- Dividend payable to Viacom................. (1,400.0) -- -- Other transactions with Viacom, net............ (234.1) 118.0 -- Net loss prior to ini- tial public offering... (336.6) (58.3) -- Issuance of class B com- mon stock to Viacom.... -- (5,755.5) -- --------- --------- -------- Balance, end of year.... $ 5,695.8 $ -- $ -- ========= ========= ======== Accumulated other compre- hensive loss: Balance, beginning of year................... $ (48.9) $ (57.9) $ (46.1) Other comprehensive in- come (loss): Foreign currency translation.......... (9.0) 11.8 (26.8) --------- --------- -------- Balance, end of year.... $ (57.9) $ (46.1) $ (72.9) ========= ========= ======== Retained deficit: Balance, beginning of year................... $ -- $ -- $ (10.9) Net loss subsequent to initial public offer- ing.................... -- (10.9) (75.9) --------- --------- -------- Balance, end of year.... $ -- $ (10.9) $ (86.8) ========= ========= ======== Total stockholders' eq- uity .................. $ 5,637.9 $ 6,125.0 $6,008.4 ========= ========= ======== Comprehensive loss: Net loss................ $ (336.6) $ (69.2) $ (75.9) Other comprehensive in- come (loss): Foreign currency translation.......... (9.0) 11.8 (26.8) --------- --------- -------- Total comprehensive loss................... $ (345.6) $ (57.4) $ (102.7) ========= ========= ========
See notes to consolidated financial statements. 47 BLOCKBUSTER INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions)
Year Ended December 31, ------------------------------- 1998 1999 2000 --------- --------- --------- Cash flows from operating activities: Net loss.................................... $ (336.6) $ (69.2) $ (75.9) Adjustments to reconcile net loss to net cash flow provided by operating activities: Depreciation and amortization............. 1,518.8 1,067.4 1,194.7 Deferred taxes............................ (8.1) 173.9 136.2 Write-down of investments................. 10.5 -- -- Equity in (income) loss of affiliated com- panies, net of tax....................... 1.3 2.8 (1.3) Gain on sales of store operations......... -- (19.9) (1.7) Gain on sale of non-core investment....... -- -- (1.9) Common stock issued to non-employee direc- tors..................................... -- -- 0.1 Change in operating assets and liabilities: Increase in receivables................... (10.9) (7.3) (56.4) Increase in receivable from Viacom........ -- (41.1) (93.8) (Increase) decrease in merchandise inven- tories................................... (0.4) (5.2) 35.8 (Increase) decrease in prepaid and other assets................................... (40.0) (58.0) 12.9 Increase in accounts payable.............. 67.9 59.3 101.4 Increase in accrued expenses and other li- abilities................................ 32.0 40.1 70.7 --------- --------- --------- Net cash flow provided by operating activities................................... 1,234.5 1,142.8 1,320.8 --------- --------- --------- Cash flows from investing activities: Rental library purchases.................... (818.1) (808.7) (810.0) Capital expenditures........................ (175.0) (374.4) (221.5) Cash used for acquisitions.................. (34.2) (111.7) (33.7) Proceeds from sale of property and equip- ment....................................... 0.3 1.7 1.7 Proceeds from sales of store operations..... -- 36.1 4.8 Proceeds from sale of non-core investment... -- -- 7.1 Investments in affiliated companies......... 4.8 (1.1) (5.2) --------- --------- --------- Net cash flow used in investing activities.... (1,022.2) (1,258.1) (1,056.8) --------- --------- --------- Cash flows from financing activities: Proceeds from credit agreement.............. -- 1,750.0 125.0 Repayments on credit agreement.............. -- (562.9) (290.1) Proceeds from term loan..................... (46.6) -- -- Repayment of term loan...................... 46.6 -- -- Proceeds from equipment term loan........... -- -- 26.5 Repayments on equipment term loan........... -- -- (4.3) Net borrowings from (repayments to) Viacom.. 0.6 (1,576.4) -- Net proceeds from the issuance of common stock...................................... -- 430.1 -- Cash dividends.............................. -- (3.5) (14.0) Capital contributions from (repayments to) Viacom, net................................ (206.9) 134.1 -- Capital lease payments...................... (34.8) (34.2) (30.3) --------- --------- --------- Net cash flow provided by (used in) financing activities................................... (241.1) 137.2 (187.2) --------- --------- --------- Effect of exchange rate changes on cash....... (1.8) (1.3) (2.2) --------- --------- --------- Net increase (decrease) in cash and cash equivalents.................................. (30.6) 20.6 74.6 Cash and cash equivalents at beginning of year......................................... 129.6 99.0 119.6 --------- --------- --------- Cash and cash equivalents at end of year...... $ 99.0 $ 119.6 $ 194.2 ========= ========= =========
See notes to consolidated financial statements. 48 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in millions except per share amounts) Note 1--Basis of Presentation Blockbuster Inc. and its subsidiaries (the "Company" or "Blockbuster") operate and franchise entertainment related stores in the United States and a number of other countries. The Company offers pre-recorded videocassettes and DVDs 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 other entertainment related merchandise. The consolidated financial statements for the periods prior to the Company's initial public offering (the "Offering") are presented on a carve-out basis and reflect the historical results of operations and cash flows of the Company, including entities owned by Blockbuster or purchased from affiliates of Viacom Inc. ("Viacom") in the case of certain of its international operations. In this context, no historical direct ownership relationship existed among some of the various entities comprising Blockbuster prior to the Offering; accordingly, Viacom and its subsidiaries' net investment in Blockbuster was included in Viacom's net equity investment in the consolidated financial statements prior to the Offering. As a part of the reorganization transactions (discussed below), the Company purchased stock and/or assets from affiliates of Viacom with cash funded by a bank credit agreement or contributed by Viacom in order to acquire certain international operations of the Company. Advances from Viacom to Blockbuster to fund these operations were historically treated as intercompany notes in the accompanying consolidated financial statements. The difference between the recorded intercompany notes payable to Viacom and the ultimate amount of the purchase price for the stock or assets of these operations was recognized as an adjustment to stockholders' equity. For all periods prior to the Offering, certain expenses reflected in the consolidated financial statements included an allocation of corporate expenses from Viacom. All such costs and expenses were 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 were 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 consolidated financial statements for the periods prior to the Offering may not necessarily reflect the results of operations or cash flows of the Company in the future or what the results of operations or cash flows would have been if the Company had been a separate, stand-alone company during the periods presented. Prior to the Offering, the following transactions were completed: (1) in late 1998, numerous U.S. subsidiaries of Viacom International Inc., a wholly owned subsidiary of Viacom, each of which were directly or indirectly involved in the Company's operations, were merged with and into the Company, (2) on December 31, 1998, the Company declared a $1.4 billion dividend payable to Viacom International Inc. in the form of an interest-bearing note, (3) effective June 21, 1999, the Company entered into a term and revolving credit agreement with a syndicate of lenders which was used to repay debt owed to Viacom and to pay a portion of the purchase price to acquire certain international operations from affiliates of Viacom, (4) effective on or about June 23, 1999, the Company purchased certain international operations of the Company from affiliates of Viacom, (5) effective August 3, 1999, the Company was recapitalized with class A common stock and class B common stock of which 144,000,000 shares of class B common stock were simultaneously issued to Viacom International Inc. in exchange for 100 shares of common stock of the Company (which represented all of the issued and outstanding common stock of the Company at that time) and, (6) effective on the Offering date, Blockbuster's intercompany cash transactions with Viacom were capitalized into Viacom's net equity investment. 49 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tabular dollars in millions except per share amounts) On August 10, 1999 the Company sold to the public 31 million shares of class A common stock for $15 per share. Proceeds from the Offering aggregated $430.1 million, net of underwriting discounts and commissions of $22.1 million and Offering expenses of $12.8 million. Of the gross proceeds from the Offering, $442.9 million was used to pay down the short-term revolving loan due June 19, 2000 and permanently reduced the Company's borrowing capacity (see Note 10). Subsequent to the Offering, through Viacom International Inc.'s ownership of 100 percent of the Company's class B common stock, Viacom owns approximately 82 percent of the Company's common stock representing approximately 96 percent of the combined voting power of all classes of voting stock of Blockbuster. The holders of class A and class B common stock generally have identical rights, except that holders of class A common stock are entitled to one vote per share while holders of class B common stock are entitled to five votes per share on matters to be voted on by stockholders. 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 Consolidation The consolidated 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 using the equity method. Investments of 20% or less are accounted for using 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. Merchandise Inventories Merchandise inventories consist primarily of pre-recorded videocassette retail inventory, DVDs, video games, licensed merchandise and confectionery items and are 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 Effective April 1, 1998, Blockbuster adopted an accelerated method of amortizing its videocassette and game rental library in order to more closely match expenses in proportion with anticipated revenues from the revenue-sharing business model (see Note 3). Rental amortization expense approximated $711.6 million (1998), excluding the charge in 1998 (see Note 3), $675.1 million (1999), and $735.6 million (2000). 50 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tabular dollars in millions except per share amounts) 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: 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
Balances of major classes of assets and accumulated depreciation at December 31 are as follows:
1999 2000 -------- -------- Land, building and building improvements.................. $ 49.2 $ 47.3 Leasehold improvements.................................... 755.8 781.5 Equipment and other....................................... 549.3 600.2 Furniture and fixtures.................................... 321.5 332.9 Capital leases............................................ 250.2 210.7 -------- -------- Total................................................... 1,926.0 1,972.6 Less: accumulated depreciation............................ 777.7 893.2 -------- -------- Property and equipment, net............................... $1,148.3 $1,079.4 ======== ========
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 $212.7 million (1998), $220.5 million (1999) and $279.0 million (2000). Depreciation expense related to capital leases was $29.7 million (1998), $24.0 million (1999) and $23.5 million (2000). Sales of store assets are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts with any resulting gain or loss reflected in general and administrative expense. Retirements and disposals are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts with any remaining net book value reflected as increased depreciation expense. Store Closures Reserves for store closures are established by calculating the present value of the remaining lease obligation, adjusted for estimated subtenant agreements or lease buyouts, if any, and are expensed along with any leasehold improvements. Store furniture and equipment are either transferred at historical cost to another location or written down to their net realizable value and sold. Intangible Assets Intangible assets include the cost of acquired businesses in excess of the fair market value of tangible assets and liabilities acquired ("goodwill"), and principally relate to Viacom's acquisition of the Company in 1994. Blockbuster's intangible assets are stated at historical allocated cost less accumulated amortization. Blockbuster amortizes intangible assets on a straight-line basis as follows: for goodwill, over the estimated 51 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tabular dollars in millions except per share amounts) useful life, not exceeding 40 years; for trademarks, over the estimated remaining economic life, not exceeding 40 years; and for reacquired franchise rights, not exceeding 20 years, the life of the franchise agreement. Amortization expense related to intangible assets was $170.2 million (1998), $171.8 million (1999) and $180.1 million (2000). Intangible assets at December 31 consist of the following:
1999 2000 -------- -------- Goodwill................................................. $6,807.8 $6,816.1 Other intangibles (trademarks and reacquired franchise rights)................................................. 25.0 25.9 -------- -------- Total.................................................. 6,832.8 6,842.0 Less: accumulated amortization........................... 856.9 1,032.8 -------- -------- Intangibles, net......................................... $5,975.9 $5,809.2 ======== ========
Impairment of Long-Lived Assets The Company assesses long-lived assets (primarily property 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 (see Note 5). Impairment review of long- lived assets associated with the Company's stores is performed on a market by market basis and country by country basis. Fair Value of Financial Instruments At December 31, 1999 and 2000, the Company's carrying value of financial instruments approximated fair value due to the short-term maturities of these instruments or variable rates of interest. During 1998, 1999 and 2000, no financial instruments were held or issued for trading purposes. The Company's receivables do not represent significant concentrations of credit risk at December 31, 2000, due to the wide variety of customers, markets and geographic areas to which the Company's products and services are sold. 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 1998, 1999 and 2000. Net foreign currency transaction gains and losses were not significant for any of the years presented. Rental Revenue and Merchandise Sales Revenues are generally recognized at the time of sale or rental. Rental revenue includes sales of previously rented product, including video tapes, DVDs and video games. 52 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tabular dollars in millions except per share amounts) Franchise Fees The Company executes franchise agreements covering retail locations which provide the terms of the arrangement with the franchisee. The franchise agreements generally require an initial fee, an area development fee for each store opened and continuing fees based upon a percentage of sales. The Company recognizes initial fees as revenue when all initial services, as required by the franchise agreement, have been substantially performed. Area development fees are recognized upon the opening of the applicable franchise store and when all services related to such store as required by the franchise agreement have been substantially performed. Continuing fees based upon a percentage of sales are recognized when earned. Direct costs of sales and servicing of franchise agreements are charged to expense as incurred. BLOCKBUSTER REWARDS Revenue Blockbuster's premium membership program is designed to enhance customer loyalty by encouraging customers to rent movies only from Blockbuster. For an annual fee, a customer can join the BLOCKBUSTER REWARDS program and earn free movie or video game rentals. The fee, less direct costs, is recognized ratably as revenue over the period benefited. Advertising Expenses Advertising costs are expensed the first time the advertising takes place. Media (television and print) placement costs are expensed in the month the advertising appears. 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 is recognized upon redemption of the gift cards at any Blockbuster store. Refranchising Gains (Losses) Refranchising gains (losses) include gains or losses on sales of company- operated stores to franchisees. The Company includes direct administrative costs of refranchising in the gain or loss calculation. Gains (losses) are recognized on store refranchising as a component of general and administrative expense. Gains are recognized when the sale transaction closes, the franchisee has a minimum amount of the purchase price in at-risk equity and when the Company is satisfied that the franchisee can meet its current obligations. Income Taxes Income taxes are provided based on the liability method of accounting. Deferred 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. Net Loss Per Share Basic loss per share ("EPS") is computed by dividing the net loss applicable to common shares by the weighted average number of common shares outstanding during the period. Diluted EPS adjusts the basic 53 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tabular dollars in millions except per share amounts) weighted average number of common shares outstanding by the assumed conversion of convertible securities and exercise of stock options only in periods in which such effect would have been dilutive. Options to purchase approximately 13.7 million shares of class A common stock were outstanding as of December 31, 2000 and were excluded from the computation of the weighted average shares for diluted EPS because their inclusion would be anti-dilutive. The table below presents a reconciliation of weighted average shares used in the calculation of basic and diluted EPS:
Year Ended December 31, ----------------------- 1998 1999 2000 ------- ------- ------- Weighted average shares for basic EPS................... 144.0 156.1 175.0 Incremental shares for stock options.................... -- -- -- ------- ------- ------- Weighted average shares for diluted EPS................. 144.0 156.1 175.0 ======= ======= =======
Comprehensive Loss Comprehensive loss 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 loss and other gains and losses affecting stockholders' equity that, under generally accepted accounting principles, are excluded from net loss, 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 loss as the foreign currency translation adjustments are associated with operations located in foreign jurisdictions with operating tax losses. Recent Accounting Pronouncements In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), effective for fiscal years beginning after June 15, 2000, as amended by Statements 137 and 138 in June 1999 and June 2000, respectively. These statements require companies to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The statements also established new accounting rules for hedging instruments which, depending on the nature of the hedge, require that changes in the fair value of the derivatives either be offset against the change in fair value of assets, liabilities or firm commitments through earnings, or be recognized in other comprehensive income until the hedged item is recognized in earnings. Blockbuster adopted SFAS 133, as amended, on January 1, 2001, which resulted in an immaterial impact on its consolidated results of operations and financial position. The Company adopted the provisions of SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" in the fourth quarter of 2000. The Company also adopted Emerging Issues Task Force Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent," in the fourth quarter of 2000. The effect of the adoption of these standards was not material. Note 3--Change in Accounting Method for Rental Library Effective April 1, 1998, Blockbuster adopted an accelerated method of amortizing its videocassette and game rental library. Blockbuster adopted this new method of amortization because it implemented a new business model, including revenue-sharing agreements with Hollywood studios, which dramatically increased 54 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tabular dollars in millions except per share amounts) the number of videocassettes in the stores and is satisfying consumer demand over a shorter period of time. Revenue-sharing allows Blockbuster to acquire videocassettes at a lower initial product cost than the traditional buying arrangements, with a percentage of the net rental revenues shared with the studios over a contractually determined period of time. As the new business model results in a greater proportion of rental revenue over a shorter period of time, Blockbuster changed its method of amortizing rental library in order to more closely match expenses in proportion with the anticipated revenues to be generated therefrom. Pursuant to the new accounting method, the Company records base stock videocassettes (generally less than five copies per title for each store) at cost and amortizes a portion of these costs on an accelerated basis over three months, 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 is amortized on an accelerated basis over three months to an estimated $4 salvage value. Video games and base-stock DVDs are amortized on an accelerated basis over a 12-month period to an estimated $10 and $4 salvage value, respectively. Revenue-sharing payments are expensed when revenues are earned pursuant to the applicable contractual arrangements. The new method of accounting was applied to the rental library that was held at April 1, 1998. The adoption of the new method of amortization was accounted for as a change in accounting estimate effected by a change in accounting principle and, accordingly, the Company recorded a non-cash pre-tax charge of $424.3 million to cost of rental revenues in the second quarter of 1998. The charge represented an adjustment to the carrying value of the rental tapes due to the new method of accounting. The Company believes that the amortization method developed for Blockbuster's business model results in better matching of revenue and expense recognition. Under Blockbuster's model, cost of sales attributable to rental product is comprised of revenue-sharing payments, which are expensed when the related revenue is recognized, amortization of product costs and residual values of previously rented product upon sale. Note 4--Special Item Charges During 1997, the Company recognized a $27.8 million charge for lease exit obligations in conjunction with a store closure program. Through December 31, 2000, the Company has paid and charged approximately $22.4 million against the lease exit obligations. During 1998, the Company revised its estimate of net realizable value associated with certain, non-strategic investments which were originally written down by $27.1 million in 1997. An additional provision related to one of the investments of approximately $10.5 million was recognized in the fourth quarter of 1998 to reflect this change in estimate and was included in "Other items, net." During 2000, the Company recognized a pre-tax gain of $1.9 million included in "Other items, net," upon the sale of this investment. Note 5--New Media Impairment Charge During the fourth quarter of 2000, the Company determined that the carrying value of certain hardware and capitalized software components of its new media segment, primarily related to the e-commerce portion of blockbuster.com, exceeded the estimated undiscounted future cash flows to be generated by those assets. As a result, the Company recorded an impairment charge of approximately $31.6 million. This charge is included in depreciation expense in the Consolidated Statements of Operations for the year ended December 31, 2000. 55 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tabular dollars in millions except per share amounts) Note 6--Stock Option Plans The Company has adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). 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 stock option plans because Blockbuster and Viacom typically do not issue options at exercise prices below the market value at date of grant. Had compensation expense for Viacom's and Blockbuster'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 consolidated pretax income would have decreased by $4.1 million ($2.6 million after tax or $0.02 per basic and diluted share), $12.3 million ($7.5 million after tax or $0.05 per basic and diluted share) and $21.9 million ($13.1 million after tax or $0.08 per basic and diluted share) in 1998, 1999 and 2000, 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, and additional options may be granted in future years. Options issued prior to January 1, 1995 were excluded from the computation. Blockbuster Long-Term Management Incentive Plan On July 15, 1999, Blockbuster's Board of Directors adopted the Blockbuster Inc. 1999 Long-Term Management Incentive Plan (the "Plan") for the benefit of its employees and directors. An aggregate of 25,000,000 shares of class A common stock was reserved for issuance under the Plan, which provides for the issuance of stock-based incentive awards, including stock options to purchase shares of class A common stock, stock appreciation rights, restricted shares of class A common stock, restricted share units and phantom shares. The purpose of the Plan is to benefit and advance the interests of Blockbuster by rewarding certain key employees and non-employee directors for their contributions to the financial success of Blockbuster and thereby motivating them to continue to make such contributions in the future. Outstanding stock options granted in 1999 generally vest over a five-year period from the date of grant and generally expire 10 years after the date of grant and outstanding stock options granted in 2000 generally vest over a four-year period from the date of grant and generally expire 10 years after the date of grant. 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:
1999 2000 ---- ---- Expected dividend yield (a)...................................... 0.6% 1.0% Expected stock price volatility.................................. 45.0% 45.0% Risk-free interest rate.......................................... 6.2% 6.1% Expected life of options (years)................................. 7.0 7.0
- -------- (a) Management's current intention is to pay dividends of $0.02 per share each quarter on both class A common stock and class B common stock. The weighted-average fair value of each option as of the grant date was $7.98 in 1999 and $5.63 in 2000. 56 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tabular dollars in millions except per share amounts) The following table summarizes stock option activity pursuant to Blockbuster's stock option plan:
Options Weighted-Average Outstanding Exercise Price ----------- ---------------- Balance at December 31, 1998.................... -- $ -- Granted....................................... 11,573,108 14.99 Exercised..................................... -- -- Cancelled..................................... 337,629 15.00 ---------- Balance at December 31, 1999.................... 11,235,479 14.99 Granted....................................... 4,695,235 11.04 Exercised..................................... -- -- Cancelled..................................... 2,235,173 14.47 ---------- Balance at December 31, 2000.................... 13,695,541 $13.72 ==========
The following table summarizes information concerning currently outstanding and exercisable Blockbuster stock options issued to Blockbuster employees and directors at December 31, 2000:
Outstanding Exercisable ------------------------------------------------- -------------------------- Range of Remaining Contractual Weighted-Average Weighted-Average Exercise Price Options Life (Years) Exercise Price Options Exercise Price -------------- ---------- --------------------- ---------------- --------- ---------------- $11 4,349,665 9.6 $11.00 -- $ -- 13 to 15 9,345,876 8.7 14.99 1,923,326 14.99 ---------- --------- 13,695,541 1,923,326 ========== =========
Viacom's Long-term Incentive Plan Certain of the Company's employees have been granted Viacom stock options under Viacom's Long-term Incentive Plans (the "Viacom Plans"). The purpose of the Viacom 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 Viacom 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 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:
1998 1999 ---- ---- Expected dividend yield (b)...................................... -- -- Expected stock price volatility.................................. 32.7% 29.6% Risk-free interest rate.......................................... 5.5% 6.1% Expected life of options (years)................................. 6.0 7.5
- -------- (b) 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. The weighted-average fair value of each option as of the grant date was $12.97 and $19.89 in 1998 and 1999, respectively. 57 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tabular dollars in millions except per share amounts) The following table summarizes stock option activity under Viacom's various plans as it relates to Blockbuster's employees:
Options Weighted-Average Outstanding Exercise Price ----------- ---------------- Balance at December 31, 1997....................... 10,232,200 $14.65 Granted.......................................... 506,320 30.31 Exercised........................................ 7,102,920 14.39 Cancelled........................................ 414,356 16.00 ---------- Balance at December 31, 1998....................... 3,221,244 17.51 Granted.......................................... 40,000 42.13 Exercised........................................ 634,052 14.88 Cancelled........................................ 153,198 15.02 ---------- Balance at December 31, 1999....................... 2,473,994 18.74 Granted.......................................... -- -- Exercised........................................ 409,440 15.78 Cancelled........................................ 119,320 20.77 ---------- Balance at December 31, 2000....................... 1,945,234 $19.24 ==========
The following table summarizes information concerning currently outstanding and exercisable Viacom stock options held by Blockbuster employees at December 31, 2000:
Outstanding Exercisable --------------------------------------------------- ------------------------ Range of Remaining Contractual Weighted-Average Weighted-Average Exercise Price Options Life (Years) Exercise Price Options Exercise Price -------------- --------- --------------------- ---------------- ------- ---------------- $10 to $15 15,000 6.62 $14.94 5,000 $14.94 15 to 20 1,342,068 6.56 15.33 519,401 15.33 30 to 35 425,654 7.64 30.56 140,761 30.56 35 to 45 40,000 8.25 42.69 -- -- 3 to 25(c) 122,512(c) 2.65 15.56 122,512 15.56 --------- ------- 1,945,234 787,674 ========= =======
- -------- (c) Represents information for options assumed with the Viacom acquisition of Blockbuster. Note 7--Accrued Expenses The Company's accrued expenses consist of the following:
At December 31, ------------- 1999 2000 ------ ------ Accrued compensation.......................................... $ 70.1 $ 88.3 Accrued gift card liability................................... 89.3 98.8 Accrued taxes other than income taxes......................... 82.9 82.5 Accrued revenue-sharing....................................... 56.7 107.4 Store closure reserves........................................ 15.4 14.8 Assigned Music liabilities.................................... 18.9 13.3 Deferred reward card revenue.................................. 14.5 15.8 Other......................................................... 74.7 52.8 ------ ------ $422.5 $473.7 ====== ======
58 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tabular dollars in millions except per share amounts) Note 8--Related Party Transactions Effective with the Offering, Blockbuster and Viacom entered into a transition services agreement whereby Viacom is providing the Company with cash management, accounting, management information systems, legal, financial and tax services as well as employee benefit plan and insurance administration primarily for the periods prior to the Offering and during the transitional period subsequent to the Offering. These services may change upon agreement between Viacom and the Company. The fee for these services approximates Viacom's cost and could be subject to adjustment. The Company has agreed to pay or reimburse Viacom for any out-of-pocket payments, costs and expenses associated with these services. The services agreement expires upon the closing of a split-off or similar transaction. The charges for services were $12.5 million (1998), $7.7 million (1999) and $1.8 million (2000). Viacom paid certain 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 $16.0 million (1998), $10.4 million (1999) and $2.0 million (2000) and is reflected as a component of general and administrative expenses in the Consolidated Statements of Operations. See Note 13 for pension plan and additional employee benefit costs charged by Viacom to the Company. Viacom generally did not charge the Company interest on intercompany balances except for intercompany debt associated with certain foreign operations, the note associated with the $1.4 billion dividend payable to Viacom International Inc. and the notes associated with the acquisition of franchise operations. See Note 9 for interest expense charged by Viacom to the Company. The Company, through the normal course of business, is involved in transactions with companies owned by or affiliated with Viacom. The Company purchases certain videocassettes and DVDs for rental and sale directly from Paramount Pictures Corporation ("Paramount") and Showtime Networks, Inc. ("Showtime"). Total purchases from Paramount were $110.1 million, $112.0 million and $129.9 million for the years ended December 31, 1998, 1999 and 2000, respectively. Total purchases from Showtime were $4.9 million and $4.2 million for the years ended December 31, 1999 and 2000, respectively. There were no purchases from Showtime in 1998. The Company also purchases certain home video games from Midway Games, Inc. Total amounts paid for purchases were $19.1 million, $15.7 million and $5.6 million for the years ended December 31, 1998, 1999 and 2000, respectively. In 1999, the Company entered into a U.S. promotional and customer database services and licenses agreement with MTV Networks ("MTVN"), a business unit of Viacom. Pursuant to this agreement, for one year, Blockbuster agreed to provide certain promotional and database services to MTVN and grant a U.S. license to MTVN to use the Company's U.S. customer database internally and/or sublicense the database for internal use to affiliates of MTVN that are direct or indirect wholly-owned subsidiaries of Viacom and to MTVI Group, L.P. and its direct and indirect affiliates for internal use. In return, MTVN paid Blockbuster $18 million. MTVN had an option to extend in perpetuity the license to use the customer database. Blockbuster had recognized revenue from this transaction over the estimated useful life of the agreement, which was expected to exceed one year. During the third quarter of 2000, MTVN elected not to exercise this option and, as a result, Blockbuster has no further obligation to MTVN. Accordingly, the remaining deferred revenue of $12.3 million was recognized in the third quarter of 2000 and is reflected in "Other revenues" in the Consolidated Statements of Operations for the year ended December 31, 2000. In conjunction with the sale by a related party of Blockbuster Music ("Music") to Wherehouse Entertainment, Inc. ("Wherehouse"), the Company assumed certain liabilities as a result of the disposition of Music with a corresponding reduction to Viacom's net equity investment. The nature of these liabilities was 59 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tabular dollars in millions except per share amounts) predominantly for lease obligations associated with 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 total liabilities at the date of assignment aggregated approximately $67 million of which $13.3 million remains in current liabilities at December 31, 2000. All other transactions with companies owned by or affiliated with Viacom did not have a material impact on the financial position or results of operations presented herein. Note 9--Notes Payable to Viacom In March 1998, the Company entered into a ten-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, was reflected as part of notes payable to Viacom which was subsequently retired. Funds advanced by Viacom to the Company to fund certain international operations were recognized as intercompany loans. These intercompany loans were 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. On December 31, 1998, the Company declared a cash dividend in the amount of $1.4 billion payable to Viacom International Inc. in the form of an interest- bearing promissory note. On January 24, 1999, Blockbuster acquired 69 stores from a franchisee, which was funded with the proceeds of two notes payable to Viacom, which approximated $77 million. These notes bore interest at LIBOR plus 1% and were repaid with proceeds from the Company's new credit agreement on or about June 23, 1999 as discussed in Note 10. On or about June 23, 1999, the Company purchased certain of its international operations from affiliates of Viacom. The total amount paid for the international operations was $222 million. Approximately $65 million of funds were provided under the Company's new credit agreement, as discussed in Note 10. The remaining $157 million was paid with cash from Viacom and has been recognized as a capital contribution in Viacom's net equity investment. Interest expense charged by Viacom approximated $8.4 million and $49.1 million for the years 1998 and 1999, respectively. Note 10--Credit Agreement and Other Debt On June 21, 1999, Blockbuster entered into a $1.9 billion unsecured credit agreement (the "Blockbuster Credit Agreement") with a syndicate of banks. The Blockbuster Credit Agreement was comprised of a $700 million long-term revolver due July 1, 2004; a $600 million term loan due in quarterly installments beginning April 1, 2002 and ending July 1, 2004; and a $600 million short-term revolver, which was paid down during 2000. The repayment of the short-term revolver permanently reduced the borrowing capacity under the Blockbuster Credit Agreement from $1.9 billion to $1.3 billion. Interest rates under the Blockbuster Credit Agreement are based on the prime rate or LIBOR at Blockbuster's option at the time of borrowing. A variable commitment fee based on the total leverage ratio is charged on the unused amount of the revolver (.25% at December 31, 2000). The Blockbuster Credit Agreement contains certain restrictive covenants, which, among other things, relate to the payment of dividends, repurchase of Blockbuster's common stock or other distributions and also require compliance with certain financial covenants with respect to a maximum leverage ratio and a minimum 60 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tabular dollars in millions except per share amounts) fixed charge coverage ratio. At December 31, 2000, the Company was in compliance with all financial covenants under the Blockbuster Credit Agreement. On June 23, 1999, Blockbuster borrowed $1.6 billion, comprised of $400 million borrowed under the long-term revolver, $600 million borrowed under the term loan, and $600 million under the short-term revolver. The proceeds of the borrowings were used to pay amounts owed to Viacom. Blockbuster repaid $442.9 million of the short-term revolver through proceeds from the Offering. The Company repaid the remaining $157.1 million of the short-term revolver during the year ended December 31, 2000. The Company had $278.0 million of available borrowing capacity under the long-term revolver at December 31, 2000. The weighted average interest rate at December 31, 2000 for these borrowings was 8.0%. Blockbuster entered into two additional lines of credit with banks for an aggregate of $75.0 million in the fourth quarter of 1999. There were no outstanding amounts under these two lines of credit at December 31, 2000. In April 2000, the Company borrowed $26.5 million in order to finance the purchase of certain equipment. The financing bears interest at 8.0%, is payable in monthly installments through April 2005, and is secured by a lien on the equipment. At December 31, 2000, the Company has $22.2 million outstanding under this financing. Short-term debt consists of the following:
At December 31, ----------------- 1999 2000 -------- -------- Short-term revolving credit facility, interest rate 7.9% at December 31, 1999..................................... $ 157.1 $ -- Current maturities of equipment term loan, interest rate of 8.0%, payable monthly through April 2005, secured by certain equipment........................................ -- 6.7 Current maturities of all other obligations............... -- 1.3 -------- -------- Total current portion of long-term debt................. $ 157.1 $ 8.0 ======== ======== Long-term debt, excluding current maturities, consists of the following: At December 31, ----------------- 1999 2000 -------- -------- Term loan, interest rate 7.8% at December 31, 1999 and 7.9% at December 31, 2000 due in quarterly installments beginning April 2002..................................... $ 600.0 $ 600.0 Long-term revolving credit facility, interest rate 8.0% at December 31, 1999, and 8.0% at December 31, 2000, due July 2004................................................ 430.0 422.0 Equipment term loan, interest rate of 8.0%, payable monthly through April 2005, secured by certain equipment................................................ -- 15.5 All other obligations..................................... -- 1.5 -------- -------- Total long-term debt.................................... $1,030.0 $1,039.0 ======== ========
61 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tabular dollars in millions except per share amounts) Maturities on debt are as follows: 2001................................................................ $ 8.0 2002................................................................ 158.8 2003................................................................ 279.3 2004................................................................ 599.9 2005................................................................ 1.0 -------- $1,047.0 ========
Interest expense related to capital leases was $18.5 million, $16.0 million and $13.9 million for the years ended December 31, 1998, 1999 and 2000, respectively. See Note 12 for further information regarding capital lease obligations. Note 11--Income Taxes The Company is included in consolidated federal, state and local income tax returns filed by Viacom. However, the tax benefit (provision) reflected in the Consolidated Statements of Operations and deferred tax assets and liabilities reflected in the Consolidated Balance Sheets have been prepared as if such benefit (provision) were computed on a separate return basis. The current income tax liabilities for the periods presented prior to the Offering were paid by Viacom. Any tax losses generated by the Company have been utilized by Viacom to reduce its consolidated taxable income. Accordingly, these amounts were reflected in Viacom's net equity investment in the Consolidated Balance Sheets. The Company and Viacom have entered into a tax matters agreement which provides that subsequent to the closing of the Offering on August 16, 1999 the Company will continue to be included in the Viacom federal consolidated income tax return and certain consolidated, combined and unitary state tax returns. The tax matters agreement requires the Company to make payments to Viacom 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 August 16, 1999 in which the Company is included in the Viacom group. With respect to 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. Included in the Receivable from Viacom balance in the accompanying Consolidated Balance Sheets were income tax receivables of $130.9 million and $41.1 million as of December 31, 2000 and 1999, respectively. 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. There is also a requirement for the Company, if so requested by Viacom, to surrender certain tax losses of United Kingdom subsidiaries for 1998 and earlier years to Viacom without any 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 August 16, 1999. The Company's tax effected net operating loss carryforwards at December 31, 2000 are primarily attributable to domestic $(8.2) million and foreign subsidiaries $(51.1) million. 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 deferred tax assets as the Company believes that it is more likely than not that these tax benefits will not be realized or will be subject to 62 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tabular dollars in millions except per share amounts) surrender to Viacom without compensation. The Company continually reviews the net operating losses on a country by country basis and may determine in the future that some or all of the net operating losses generated in the past will be utilizable in the future. Of the total tax effected net operating losses, $21.7 million has no expiration date, $1.6 million expires in 2001 and $36.0 million expires thereafter. Income (loss) accounted for under the equity method of accounting is shown net of tax in the Consolidated Statements of Operations. Included in equity in income (loss) of affiliated companies, net of tax of $(1.3) million (1998), $(2.8) million (1999) and $1.3 million (2000) are a tax provision of $0.2 million for 1998, a tax benefit of $0.4 million for 1999 and a tax provision of $0.8 million for 2000. Income (loss) before income taxes are attributable to the following jurisdictions:
Year Ended December 31, ------------------------- 1998 1999 2000 ------- ------- ------- United States................................... $(313.6) $ 28.5 $ (32.1) Foreign......................................... (81.1) (23.1) 0.3 ------- ------- ------- $(394.7) $ 5.4 $ (31.8) ======= ======= ======= Components of the income tax benefit (provision) are as follows: Year Ended December 31, ------------------------- 1998 1999 2000 ------- ------- ------- Current: Federal....................................... $ 51.2 $ 95.4 $ 86.1 State and local............................... 3.0 14.0 7.9 Foreign....................................... (2.9) (7.3) (3.2) ------- ------- ------- 51.3 102.1 90.8 Deferred........................................ 8.1 (173.9) (136.2) ------- ------- ------- $ 59.4 $ (71.8) $ (45.4) ======= ======= ======= The following table reconciles the income tax benefit (provision) at the expected U.S. statutory rate to that in the financial statements: Year Ended December 31, ------------------------- 1998 1999 2000 ------- ------- ------- Statutory U.S. tax benefit (provision).......... $ 138.2 $ (1.9) $ 11.1 Amortization of non-deductible goodwill......... (61.5) (58.4) (58.4) State and local taxes, net of federal tax benefit........................................ 16.2 0.5 1.5 Effect of foreign operations.................... (33.9) (9.8) (0.8) Other, net...................................... 0.4 (2.2) 1.2 ------- ------- ------- Tax benefit (provision)......................... $ 59.4 $ (71.8) $ (45.4) ======= ======= =======
63 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tabular dollars in millions except per share amounts) The following is a summary of the deferred tax accounts in accordance with SFAS 109:
Year Ended December 31, ---------------- 1999 2000 ------- ------- Deferred tax assets: Reserves and accrued liabilities....................... $ 15.9 $ 18.4 Book-tax basis differences in investments.............. 19.7 20.5 Net operating loss carryforwards....................... 55.9 59.3 ------- ------- Total deferred tax assets.............................. 91.5 98.2 Less valuation allowance............................... (72.8) (76.2) ------- ------- Net deferred tax assets................................ 18.7 22.0 ------- ------- Deferred tax liabilities: Deferred expenses...................................... (22.7) (24.0) Book-tax basis differences in rental library and other assets................................................ (91.0) (229.2) ------- ------- Total deferred tax liabilities......................... (113.7) (253.2) ------- ------- Total net deferred tax liabilities..................... $ (95.0) $(231.2) ======= =======
Note 12--Commitments and Contingencies The Company has long-term non-cancellable 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, 2000, minimum rental payments under non-cancellable leases are as follows:
Operating Capital --------- ------- 2001....................................................... $ 453.7 $ 36.5 2002....................................................... 397.2 32.0 2003....................................................... 359.5 28.1 2004....................................................... 270.7 22.7 2005....................................................... 190.4 18.6 2006 and thereafter........................................ 513.6 26.9 -------- ------ Total minimum lease payments............................... $2,185.1 $164.8 ======== Less amount representing interest.......................... 42.5 ------ Present value of net minimum payments...................... $122.3 ======
Rent expense was $409.8 million (1998), $454.0 million (1999) and $475.9 million (2000). Subtenant rental income was $5.6 million (1998), $7.4 million (1999) and $12.5 million (2000). Future minimum lease payments have not been reduced by future minimum subtenant rental income of $75.9 million. In October 1998, Music stores were sold to Wherehouse. Certain leases transferred in connection with the sale of Music to Wherehouse had previously been guaranteed either by Viacom or its affiliates. The remaining lease terms expire on various dates through 2007. Blockbuster has agreed to indemnify Viacom with respect to any amount paid under these guarantees. At the time of the sale, the contingent liability for base rent approximated $84 million, on an undiscounted basis, with respect to these guarantees. The Company has not recognized any reserves related to this contingent liability in the accompanying consolidated financial statements. If Wherehouse defaults, related losses could materially affect future operating income. 64 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tabular dollars in millions except per share amounts) Pursuant to a tax matters agreement entered into between the Company and Viacom effective as of the consummation of the Offering, the Company is generally responsible for, among other things, any taxes imposed on Viacom or its subsidiaries as a result of a split-off or other similar transaction failing to qualify as a tax-free transaction on account of any breach of the Company's representations or agreements or any action or failure to act by the Company or any transactions involving the Company's assets, stock or business (regardless of whether such transaction is within its control) following a split-off or similar transaction. On July 21, 1999, Ruben Loredo, doing business as Five Palms Video, purporting to act as a class representative on behalf of himself and all others similarly situated, filed a complaint in the District Court of Bexar County, Texas, against Blockbuster. The plaintiff asserted, among other things, that by entering into and operating under its revenue-sharing agreements with the major motion picture studios, Blockbuster has attempted to and conspired with the studios to monopolize and restrain competition in the market for the retail rental of videocassettes in violation of Texas law. In addition, three other parties, purporting to act as class representatives on behalf of themselves and all others similarly situated, filed a substantially similar complaint in the United States District Court for the Western District of Texas against Viacom and major motion picture studios and their home video subsidiaries that have operated under these revenue-sharing agreements with Blockbuster. These plaintiffs are seeking triple the amount of the alleged actual damages to themselves and triple the amount of alleged actual damages of those similarly situated, as well as preliminary and permanent injunctive relief prohibiting any unlawful attempt or conspiracy to monopolize the market for the retail rental of videocassettes. In April 2000, Ruben Loredo voluntarily dismissed the state court action without prejudice, and Ruben Loredo and Blockbuster were added as parties plaintiff and defendant, respectively, in the federal court action. In January 2000, the federal court plaintiffs added California state law claims to the pending federal antitrust claims. On March 16, 2001, the federal judge in the United States District Court for the Western District of Texas denied the plaintiffs' request for class certification of both the federal and California claims. In January 2001, the same plaintiffs, in addition to other individual plaintiffs, filed a similar complaint in California state court seeking monetary damages. In addition to any damage award to which Blockbuster might be directly subject, if Viacom is required to pay any damage award as a result of the federal or state court action, Viacom may seek indemnification for its losses from Blockbuster under the release and indemnification agreement entered into between Viacom and Blockbuster. Blockbuster believes the plaintiffs' positions in both actions are without merit and intends to vigorously defend itself in the litigation. On May 7, 1999, Lynn Adams, Khristine Schoggins, and Debbie Lenke, purporting to act as class representatives on behalf of themselves and for a class comprised of certain Blockbuster store managers who worked in California, filed a complaint in District Court in Orange County, California against Blockbuster. The plaintiffs claim that they should be classified as non-exempt and are thus owed overtime payments under California law. The dollar amount that plaintiffs seek as damages to themselves and those similarly situated is not set forth in the complaint. In January 2001, the trial court judge certified a class. In February 2001, the California Court of Appeals denied Blockbuster's petition for a writ of mandate. Blockbuster's petition for review is pending before the Supreme Court of California. Blockbuster believes the plaintiffs' position is without merit and intends to vigorously defend itself in the litigation. Blockbuster is a defendant in 13 putative class action lawsuits filed by customers in state courts in Illinois, California, Ohio, Maryland, Texas and New York between February 1999 and March 2001. These cases allege common law and statutory claims for fraud and/or deceptive practices and/or unlawful business practices regarding Blockbuster's policies for customers who choose to keep rental product beyond the initial rental term. Some of the cases also allege that these policies impose unlawful penalties and/or result in unjust enrichment. The dollar amounts that plaintiffs seek as damages to themselves and those similarly situated are not set forth in the complaints. Blockbuster believes the plaintiffs' positions in these suits are without merit and intends to vigorously defend itself in the litigation. 65 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tabular dollars in millions except per share amounts) The Company is a defendant from time to time in other lawsuits incidental to its business. Based on currently available information, the Company believes that resolution of these known contingencies would not have a material adverse impact on the Company's financial statements or liquidity. However, there can be no assurances that future costs would not be material to results of operations or liquidity of the Company for a particular period. In addition, the Company's estimates of future costs are subject to change as circumstances change and additional information becomes available during the course of litigation. Note 13--Pension Plans and Other Employee Benefits Viacom has a noncontributory defined benefit pension plan in which the Company's employees were covered through December 31, 1999. Effective January 1, 2000, Blockbuster ceased to be a participating employer in Viacom's pension plan. The Company's employees were also offered participation in Viacom's 401(k) savings plan through April 1999. At that time, the Company set up its own 401(k) savings plan that generally mirrors the Viacom 401(k) savings plan. Account balances in the Viacom plan were transferred to the new Blockbuster 401(k) savings plan. Through June 30, 2000, the Company invested matching contributions in Viacom's Class B Common Stock. On July 1, 2000, the Company began investing matching contributions in Blockbuster's class A common stock. The Company incurred pension and 401(k) savings plan expenses of $5.3 million (1998), $5.6 million (1999) and $1.6 million (2000) related to the plans discussed above. Management believes that the methodologies used to allocate pension charges to the Company are reasonable. Note 14--Sales of Store Operations to Franchisees In 1999, Blockbuster sold certain stores to franchisees for $66.4 million as part of the Company's strategy to maintain an optimal mix of company-operated and franchised stores. As a result of these sales, Blockbuster received $36.1 million in cash and $30.3 million in notes receivable and recognized a net gain of $19.9 million for the year ended December 31, 1999, as a reduction of general and administrative expenses. In 2000, Blockbuster sold certain stores to franchisees for $5.7 million. As a result of these sales, Blockbuster received $4.8 million in cash, $0.9 million in notes receivable and recognized a net gain of $1.7 million as a reduction of general and administrative expenses. Note 15--Acquisitions During 1998, 1999 and 2000, the Company acquired several businesses that own and operate videocassette rental stores. The aggregate purchase price, consisting of cash consideration and notes for these businesses approximated $34.2 million (1998), $111.7 million (1999) and $33.7 million (2000) 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 consolidated 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. 66 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tabular dollars in millions except per share amounts) Note 16--Supplemental Cash Flow Information Cash flows from operating activities included cash payments as follows:
Year Ended December 31, ------------------- 1998 1999 2000 ----- ------ ------ Cash payments for interest............................. $27.2 $109.3 $112.6 Supplemental schedule of non-cash financing and investing activities: Notes received from sales of store operations (see Note 14)............................................ $ -- $ 30.3 $ 0.9 Retail stores acquired under capital leases.......... 3.8 11.8 14.6
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 prior to the Offering have been satisfied by Viacom as the Company has been included in Viacom's consolidated tax return. Subsequent to the Offering, the Company will continue to be included in Viacom's consolidated tax return so long as we are controlled by Viacom; however, after all applicable net operating loss carryforwards have been utilized, and the Company's income tax receivable from Viacom has been eliminated, to the extent the Company will have a tax liability on a stand- alone basis, such amounts will be remitted to Viacom. Note 17--Operating Segments and Geographic Area Beginning in the fourth quarter of 1999, Blockbuster began reporting in two segments: (i) home videocassette, DVD and video game rental and retailing, which Blockbuster refers to as the video segment, and (ii) new media (formerly called new technologies). (i) Video As of December 31, 2000, the video segment operated 6,254 video stores and its franchisees and/or joint ventures operated 1,423 video stores located throughout the United States, its territories and 25 other countries. (ii) New Media Through the new media segment Blockbuster operates its Internet site, blockbuster.com, and the Digital Networks division, which is responsible for exploring various forms of electronic entertainment delivery including entertainment-on-demand. The Company's reportable operating segments have been determined in accordance with the Company's internal management structure, which is organized based on products and services. The Company evaluates performance based on many factors. One of the primary measures is operating income. Operating income is defined as income before interest income (expense), equity in income (loss) of affiliated companies (net of tax), other items, net and benefit (provision) for income taxes. 67 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tabular dollars in millions except per share amounts) The following tables set forth the Company's financial results by operating segments.
Year Ended December 31, ---------------------------- 1998 1999 2000 -------- -------- -------- Revenues: Video...................................... $3,893.4 $4,463.3 $4,959.1 New media.................................. -- 0.2 1.0 -------- -------- -------- Total revenues........................... $3,893.4 $4,463.5 $4,960.1 ======== ======== ======== Operating income (loss): Video...................................... $ (359.2) $ 128.7 $ 172.5 New media(1)............................... -- (7.0) (96.8) -------- -------- -------- Total operating income (loss)............ $ (359.2) $ 121.7 $ 75.7 ======== ======== ======== Depreciation and amortization (including tape amortization): Video...................................... $1,518.8 $1,067.0 $1,151.3 New media(1)............................... -- 0.4 43.4 -------- -------- -------- Total depreciation and amortization...... $1,518.8 $1,067.4 $1,194.7 ======== ======== ======== Total assets: Video...................................... $8,274.8 $8,505.0 $8,538.9 New media.................................. -- 35.8 10.0 -------- -------- -------- Total assets............................. $8,274.8 $8,540.8 $8,548.9 ======== ======== ======== Capital expenditures: Video...................................... $ 175.0 $ 341.1 $ 203.5 New media.................................. -- 33.3 18.0 -------- -------- -------- Total capital expenditures............... $ 175.0 $ 374.4 $ 221.5 ======== ======== ========
- -------- (1) As described in Note 5, we recognized a charge of $31.6 million related to the impairment of certain hardware and capitalized software costs in our new media segment. This charge is reflected in depreciation expense. Information regarding the Company's operations by geographic area is presented below. 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." Intercompany transfers between geographic areas are not significant.
Year Ended or at December 31, -------------------------- 1998 1999 2000 -------- -------- -------- Revenues: United States.................................. $3,090.1 $3,596.8 $4,003.3 Europe......................................... 427.9 440.5 469.7 International-all other........................ 375.4 426.2 487.1 -------- -------- -------- Total revenues............................... $3,893.4 $4,463.5 $4,960.1 ======== ======== ======== Long-lived assets(1): United States(2)............................... $6,942.2 $7,145.2 $7,004.7 Europe......................................... 362.8 357.3 337.5 International-all other........................ 245.6 284.6 272.3 -------- -------- -------- Total long-lived assets...................... $7,550.6 $7,787.1 $7,614.5 ======== ======== ========
- -------- (1) Includes all non-current assets, except deferred income taxes and Viacom receivable. (2) Includes substantially all of the Company's intangible assets. 68 BLOCKBUSTER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Tabular dollars in millions except per share amounts) Note 18--Quarterly Financial Data (unaudited) Summarized quarterly financial data for 1999 and 2000 appears below:
First Second Third Fourth Total Quarter Quarter Quarter Quarter(1) Year -------- -------- -------- ---------- -------- 1999 Revenue.................... $1,113.0 $1,041.7 $1,112.8 $1,196.0 $4,463.5 Gross profit............... $ 671.2 $ 645.3 $ 681.4 $ 703.1 $2,701.0 Net loss................... $ (3.4) $ (39.9) $ (19.1) $ (6.8) $ (69.2) Net loss per share: basic and diluted............... $ (0.02) $ (0.28) $ (0.12) $ (0.04) $ (0.44) 2000 Revenue.................... $1,211.1 $1,214.4 $1,193.8 $1,340.8 $4,960.1 Gross profit............... $ 714.7 $ 713.0 $ 721.7 $ 774.7 $2,924.1 Net loss................... $ (4.1) $ (27.9) $ (19.3) $ (24.6) $ (75.9) Net loss per share: basic and diluted............... $ (0.02) $ (0.16) $ (0.11) $ (0.14) $ (0.43)
- -------- (1) As described in Note 5, we recognized an impairment charge of $31.6 million in the fourth quarter of 2000 related to the impairment of certain hardware and capitalized software costs in our new media segment. This charge is reflected in depreciation expense. Note 19--Subsequent Events (unaudited) On January 30, 2001, the Board of Directors declared a cash dividend of $0.02 per share on class A and class B common stock, payable March 12, 2001, to stockholders of record at the close of business on February 19, 2001. The total dividend payment was approximately $3.5 million of which approximately $2.9 million was paid to Viacom International Inc. In February 2001, the Company entered into a strategic alliance with RadioShack Corporation under which RadioShack will operate store-within-a-store areas inside selected Blockbuster locations. In 2001, the companies will launch Phase I of the strategic alliance in approximately 130 Blockbuster stores in at least four markets. At the end of Phase I, the companies will determine whether they will proceed to Phase II, which would be a rollout of the concept to as many stores as possible in the United States, anticipated to occur during 2002. RadioShack will pay a license fee to Blockbuster for each location and both companies will share in the operating income (loss), as defined, generated by the store-within-a-store areas. In March 2001, the Company entered into two interest rate swaps with Viacom in order to obtain a fixed interest rate with respect to $400 million of its outstanding floating rate debt. The swaps fixed $200 million of the Company's outstanding debt at an interest rate of 5.0135% for two years and the other $200 million at an interest rate of 5.1190% for two and one-half years. The Company's effective interest rates also include a LIBOR spread, currently 1.25%, which is subject to change under the terms of the Blockbuster Credit Agreement. The swaps are subject to termination in the event that (i) Viacom ceases to own greater than 80% of the Company's outstanding common stock or (ii) the Company no longer has any obligations under the term loan portion of the Blockbuster Credit Agreement. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. 69 PART III Item 10. Directors and Executive Officers of the Registrant. The information required by this item regarding our directors is set forth in our Proxy Statement for our 2001 Annual Meeting of Stockholders under the heading "Election of Directors," which information is incorporated herein by reference. The information required by this item regarding our executive officers is set forth under the heading "Executive Officers of the Registrant" in Part I of this Form 10-K, which information is incorporated herein by reference. Item 11. Executive Compensation. The information required by this item is set forth in our Proxy Statement for our 2001 Annual Meeting of Stockholders under the heading "Executive Compensation," which information is incorporated herein by reference. Information contained in the Proxy Statement under the headings "Executive Compensation--Report of the Senior Executive Compensation Committee on Executive Compensation" and "Comparative Performance Graph" is not incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is set forth in our Proxy Statement for our 2001 Annual Meeting of Stockholders under the heading "Security Ownership of Certain Beneficial Owners and Management," which information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The information required by this item is set forth in our Proxy Statement for our 2001 Annual Meeting of Stockholders under the heading "Certain Relationships and Related Transactions," which information is incorporated herein by reference. 70 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Financial Statements. See Index to Consolidated Financial Statements on page 43 of this Form 10-K. (b) Financial Statement Schedules. None. (c) Exhibits. 3.1 Amended and Restated Certificate of Incorporation of Blockbuster Inc.(1) 3.2 Bylaws of Blockbuster Inc.(2) 4.1 Specimen Class A Common Stock Certificate of Blockbuster Inc.(3) 10.1 Initial Public Offering and Split-Off Agreement among Blockbuster Inc., Viacom International Inc. and Viacom Inc.(3) 10.2 Release and Indemnification Agreement between Blockbuster Inc. and Viacom Inc.(3) 10.3 Transition Services Agreement between Blockbuster Inc. and Viacom Inc.(3) 10.4 Registration Rights Agreement between Blockbuster Inc. and Viacom Inc.(3) 10.5 Tax Matters Agreement between Blockbuster Inc. and Viacom Inc.(3) 10.6 Revenue-Sharing Agreement, dated as of November 21, 1997, between Blockbuster Inc. and Buena Vista Home Entertainment, Inc.(1)+ 10.7 Revenue-Sharing Agreement, dated as of September 29, 1998, between Blockbuster Inc. and Twentieth Century Fox Home Entertainment, Inc.(1)+ 10.8 Revenue-Sharing Agreement, dated as of August 25, 1998, between Blockbuster Inc. and Columbia TriStar Home Video, Inc.(1)+ 10.9 Revenue-Sharing Agreement, dated as of January 20, 1999, between Blockbuster Inc. and Warner Home Video, a division of Time Warner Entertainment Company, L.P.(1)+ 10.10 Revenue-Sharing Term Sheet, dated as of July 29, 1999, between Blockbuster Inc. and Paramount Home Video.(1)+ 10.11 Employment Agreement between Blockbuster Inc. and John F. Antioco, dated July 15, 1999.(1)(5) 10.12 Employment Agreement between Blockbuster Inc. and Alva J. Phillips, Jr., commencing November 23, 1999.(4)(5) 10.13 Addendum to the Employment Agreement between Blockbuster Inc. and Alva J. Phillips, Jr., dated December 20, 2000.(4)(5) 10.14 Employment Agreement between Blockbuster Entertainment Group, a business unit of Viacom Inc., and Alva J. Phillips, Jr., dated as of January 1, 1998.(2)(5) 10.15 Amendment to the Employment Agreement between Blockbuster Entertainment Group, a business unit of Viacom Inc., and Alva J. Phillips, Jr., dated December 1, 1998.(2)(5) 10.16 Employment Agreement between Blockbuster Inc. and Michael K. Roemer, commencing December 27, 1999.(4)(5) 10.17 Employment Agreement between Blockbuster Entertainment Group, a business unit of Viacom Inc., and Michael K. Roemer, dated as of June 1, 1998.(4)(5) 10.18 Amendment to the Employment Agreement between Blockbuster Entertainment Group, a business unit of Viacom Inc., and Michael K. Roemer, dated December 1, 1998.(4)(5)
71 10.19 Employment Agreement between Blockbuster Inc. and Nigel Travis, commencing December 27, 1999.(4)(5) 10.20 Addendum to the Employment Agreement between Blockbuster Inc. and Nigel Travis, dated December 18, 2000.(4)(5) 10.21 Employment Agreement between Blockbuster Entertainment Group, a business unit of Viacom Inc., and Nigel Travis, dated June 1, 1998.(1)(5) 10.22 Amendment to the Employment Agreement between Blockbuster Entertainment Group, a business unit of Viacom Inc., and Nigel Travis, dated December 1, 1998.(1)(5) 10.23 Employment Agreement between Blockbuster Inc. and Larry Zine, commencing November 23, 1999.(4)(5) 10.24 Employment Agreement between Blockbuster Entertainment Group, a business unit of Viacom Inc., and Larry Zine, dated April 1, 1999.(3)(5) 10.25 Amendment to the Employment Agreement between Blockbuster Entertainment Group, a business unit of Viacom Inc., and Larry Zine, dated April 2, 1999.(3)(5) 10.26 Blockbuster Inc. 1999 Long-Term Management Incentive Plan.(1)(5) 10.27 Blockbuster Inc. Senior Executive Short-Term Incentive Plan.(1)(5) 10.28 Credit Agreement, dated as of June 21, 1999, between Blockbuster Inc. and the banks named therein.(1) 21.1 List of Subsidiaries of Blockbuster Inc.(4) 23.1 Consent of PricewaterhouseCoopers LLP.(4)
- -------- (1) Previously filed as an exhibit to Blockbuster Inc.'s Registration Statement on Form S-1 (333-77899) and incorporated herein by reference. (2) Previously filed as an exhibit to Blockbuster Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1999, and incorporated herein by reference. (3) Previously filed as an exhibit to Blockbuster Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999, and incorporated herein by reference. (4) Filed herewith. (5) The exhibit is a management contract or compensatory plan or arrangement. + Exhibits for which Blockbuster Inc. has received confidential treatment for certain portions. The confidential material in such exhibits has been redacted and separately filed with the Securities and Exchange Commission as part of Blockbuster Inc.'s Registration Statement on Form S-1 (333-77899), as amended. (d) Reports on Form 8-K None. 72 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BLOCKBUSTER INC. /s/ John F. Antioco By: _________________________________ John F. Antioco Chairman of the Board, President and Chief Executive Officer March 28, 2001 Date: _______________________________ Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- By: /s/ John F. Antioco Chairman of the Board, March 28, 2001 ____________________________________ President and Chief John F. Antioco Executive Officer (Principal Executive Officer) By: /s/ Larry J. Zine Executive Vice President and March 28, 2001 ____________________________________ Chief Financial Officer Larry J. Zine (Principal Financial and Accounting Officer) By: /s/ Philippe P. Dauman Director March 28, 2001 ____________________________________ Philippe P. Dauman By: /s/ Linda Griego Director March 28, 2001 ____________________________________ Linda Griego By: /s/ Mel Karmazin Director March 28, 2001 ____________________________________ Mel Karmazin By: /s/ John L. Muething Director March 28, 2001 ____________________________________ John L. Muething By: /s/ Sumner M. Redstone Director March 28, 2001 ____________________________________ Sumner M. Redstone By: /s/ Fredric G. Reynolds Director March 28, 2001 ____________________________________ Fredric G. Reynolds
73 EXHIBIT INDEX 3.1 Amended and Restated Certificate of Incorporation of Blockbuster Inc.(1) 3.2 Bylaws of Blockbuster Inc.(2) 4.1 Specimen Class A Common Stock Certificate of Blockbuster Inc.(3) 10.1 Initial Public Offering and Split-Off Agreement among Blockbuster Inc., Viacom International Inc. and Viacom Inc.(3) 10.2 Release and Indemnification Agreement between Blockbuster Inc. and Viacom Inc.(3) 10.3 Transition Services Agreement between Blockbuster Inc. and Viacom Inc.(3) 10.4 Registration Rights Agreement between Blockbuster Inc. and Viacom Inc.(3) 10.5 Tax Matters Agreement between Blockbuster Inc. and Viacom Inc.(3) 10.6 Revenue-Sharing Agreement, dated as of November 21, 1997, between Blockbuster Inc. and Buena Vista Home Entertainment, Inc.(1)+ 10.7 Revenue-Sharing Agreement, dated as of September 29, 1998, between Blockbuster Inc. and Twentieth Century Fox Home Entertainment, Inc.(1)+ 10.8 Revenue-Sharing Agreement, dated as of August 25, 1998, between Blockbuster Inc. and Columbia TriStar Home Video, Inc.(1)+ 10.9 Revenue-Sharing Agreement, dated as of January 20, 1999, between Blockbuster Inc. and Warner Home Video, a division of Time Warner Entertainment Company, L.P.(1)+ 10.10 Revenue-Sharing Term Sheet, dated as of July 29, 1999, between Blockbuster Inc. and Paramount Home Video.(1)+ 10.11 Employment Agreement between Blockbuster Inc. and John F. Antioco, dated July 15, 1999.(1)(5) 10.12 Employment Agreement between Blockbuster Inc. and Alva J. Phillips, Jr., commencing November 23, 1999.(4)(5) 10.13 Addendum to the Employment Agreement between Blockbuster Inc. and Alva J. Phillips, Jr., dated December 20, 2000.(4)(5) 10.14 Employment Agreement between Blockbuster Entertainment Group, a business unit of Viacom Inc., and Alva J. Phillips, Jr., dated as of January 1, 1998.(2)(5) 10.15 Amendment to the Employment Agreement between Blockbuster Entertainment Group, a business unit of Viacom Inc., and Alva J. Phillips, Jr., dated December 1, 1998.(2)(5) 10.16 Employment Agreement between Blockbuster Inc. and Michael K. Roemer, commencing December 27, 1999.(4)(5) 10.17 Employment Agreement between Blockbuster Entertainment Group, a business unit of Viacom Inc., and Michael K. Roemer, dated as of June 1, 1998.(4)(5) 10.18 Amendment to the Employment Agreement between Blockbuster Entertainment Group, a business unit of Viacom Inc., and Michael K. Roemer, dated December 1, 1998.(4)(5) 10.19 Employment Agreement between Blockbuster Inc. and Nigel Travis, commencing December 27, 1999.(4)(5) 10.20 Addendum to the Employment Agreement between Blockbuster Inc. and Nigel Travis, dated December 18, 2000.(4)(5) 10.21 Employment Agreement between Blockbuster Entertainment Group, a business unit of Viacom Inc., and Nigel Travis, dated June 1, 1998.(1)(5)
10.22 Amendment to the Employment Agreement between Blockbuster Entertainment Group, a business unit of Viacom Inc., and Nigel Travis, dated December 1, 1998.(1)(5) 10.23 Employment Agreement between Blockbuster Inc. and Larry Zine, commencing November 23, 1999.(4)(5) 10.24 Employment Agreement between Blockbuster Entertainment Group, a business unit of Viacom Inc., and Larry Zine, dated April 1, 1999.(3)(5) 10.25 Amendment to the Employment Agreement between Blockbuster Entertainment Group, a business unit of Viacom Inc., and Larry Zine, dated April 2, 1999.(3)(5) 10.26 Blockbuster Inc. 1999 Long-Term Management Incentive Plan.(1)(5) 10.27 Blockbuster Inc. Senior Executive Short-Term Incentive Plan.(1)(5) 10.28 Credit Agreement, dated as of June 21, 1999, between Blockbuster Inc. and the banks named therein.(1) 21.1 List of Subsidiaries of Blockbuster Inc.(4) 23.1 Consent of PricewaterhouseCoopers LLP.(4)
- -------- (1) Previously filed as an exhibit to Blockbuster Inc.'s Registration Statement on Form S-1 (333-77899) and incorporated herein by reference. (2) Previously filed as an exhibit to Blockbuster Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1999, and incorporated herein by reference. (3) Previously filed as an exhibit to Blockbuster Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999, and incorporated herein by reference. (4) Filed herewith. (5) The exhibit is a management contract or compensatory plan or arrangement. + Exhibits for which Blockbuster Inc. has received confidential treatment for certain portions. The confidential material in such exhibits has been redacted and separately filed with the Securities and Exchange Commission as part of Blockbuster Inc.'s Registration Statement on Form S-1 (333-77899), as amended. EX-10.12 2 0002.txt ALVA J. PHILLIPS EMPLOYMENT AGREEMENT Exhibit 10.12 October 13, 2000 Alva J. Phillips, Jr. 2610 Allen Street #1402 Dallas, TX 75204 Dear Joe: Blockbuster Inc. ("Blockbuster"), 1201 Elm Street, Dallas, Texas 75270, agrees to employ you and you agree to accept employment with Blockbuster upon the following terms and conditions (the "Agreement"): 1. Term. The term of this Agreement shall commence on November 23, ----- 1999 and end on March 1, 2000, and will be automatically renewed on March 1 of each year for a term of three (3) years commencing on the date of automatic renewal, unless terminated by Blockbuster pursuant to Paragraph 8(a) or (b) or otherwise. As used in this Agreement, the "Term" refers to the period beginning on the initial commencement date of this Agreement and ending on the following March 1st or, if the term of your employment has been automatically renewed pursuant to this Paragraph 1, the period beginning on the date of automatic renewal and ending on the third anniversary of the date of automatic renewal, notwithstanding any earlier termination pursuant to Paragraph 8(a) or (b) or otherwise. 2. Duties. You agree to devote your entire business time, attention ------- and energies to the business of Blockbuster and its subsidiaries during your employment. You will be Executive Vice President and Chief Information Officer of Blockbuster, and you agree to perform all duties reasonable and consistent with that or such comparable office as the Chief Executive Officer (the "CEO") of Blockbuster or other individual designated by the CEO of Blockbuster may assign to you from time to time. 3. Compensation. ------------- (a) Salary. For all the services rendered by you in any ------- capacity under this Agreement, Blockbuster agrees to pay you Thirty-two thousand eighty-three Dollars and fifty Cents ($32,083.50) a month in base salary ("Salary"), less applicable deductions and withholding taxes, in accordance with Blockbuster's payroll practices as they may exist from time to time. (b) Bonus Compensation. You also will receive bonus ------------------- compensation ("Bonus") in accordance with Blockbuster's Short-Term Incentive Plan or, if applicable, Blockbuster's Senior Executive Short-Term Incentive Plan, each as may be amended from time to time (either of such plans, as applicable, to be hereinafter referred to as the "STIP") and as follows: (i) Your target bonus ("Target Bonus") for each calendar year will be 50% of your Salary on November 1st of the calendar year; provided that, for any years in which you are a participant in Blockbuster's Senior Executive Short-Term Incentive Plan, for purposes of this Section 3(b)(i), your Target Bonus will be based on your Salary as defined in such plan. Your Bonus may be prorated for any portion of the calendar year that you were employed under this Agreement. (ii) Your Bonus for any calendar year will be payable, less applicable deductions and withholding taxes, by the end of the first quarter of the following year. Alva J. Phillips, Jr. October 13, 2000 Page 2 4. Benefits. You will participate in such vacation, medical, dental, --------- life insurance, long-term disability insurance, 401(k), long-term incentive and other plans as Blockbuster may have or establish from time to time and in which you would be entitled to participate under the terms of the plan. This provision, however, will not be construed to either require Blockbuster to establish any welfare, compensation or long-term incentive plans, or to prevent the modification or termination of any plan once established, and no action or inaction with respect to any plan will affect this Agreement. 5. Business Expenses; Car Allowance and Insurance. During your ----------------------------------------------- employment under this Agreement, Blockbuster will reimburse you for such reasonable travel and other expenses incurred in the performance of your duties consistent with Blockbuster's then applicable expense reimbursement policies for Blockbuster executives at comparable position levels. You shall be entitled to a car lease in accordance with Blockbuster's policies, as same may be amended from time to time. 6. Non-Competition, Confidential Information, Etc. ----------------------------------------------- (a) Non-Competition. You agree that your employment with --------------- Blockbuster is on an exclusive basis and that, while you are employed by Blockbuster, you will not engage in any other business activity which is in conflict with your duties and obligations (including your commitment of time) under this Agreement. You agree that, during the Non-Compete Period (as defined below), you will not directly or indirectly engage in or participate as an owner, partner, stockholder, officer, employee, director, agent of or consultant for any Blockbuster Competitor (as defined below) and will perform no services for a Blockbuster Competitor similar to any services performed for Blockbuster; provided, however, that this provision will not prevent you from investing as - -------- ------- less than a one (1%) percent stockholder in the securities of any company listed on a national securities exchange or quoted on an automated quotation system. The Non-Compete Period will cover the entire Term plus any period after the Term for which you receive payments pursuant to Paragraph 8(c)(i). A Blockbuster Competitor is any business entity which engages in the acquisition, aggregation, or delivery of audio or video entertainment , including but not limited to the rental or sale of video, DVD, or other movie product, equipment, or video games, either (i) in electronic, digital, or internet commerce, or (ii) in one or more geographic areas where Blockbuster has its operations (or is engaged in real estate site selection or has taken other steps toward the commencement of operations), either alone or in association with another entity. In every case, the good faith judgment of Blockbuster will be conclusive as to whether a business entity constitutes a Blockbuster Competitor. You agree that this non- compete covenant is ancillary to an otherwise enforceable agreement, including but not limited to the confidentiality covenant and the payment provisions in Paragraph 3. (b) Confidential Information. You agree that, during the Term and ------------------------ at any time thereafter, (i) you will not (a) use for any purpose other than the duly authorized business of Blockbuster conducted in the course of your employment at Blockbuster or, (b) disclose to any third party, any business information, technological information, intellectual property, trade secrets and other information belonging to Blockbuster or any of its affiliated companies or relating to Blockbuster's business, technology, or customers ("Confidential Information"), including, without limitation, any written (including in any electronic form) or oral communication incorporating Confidential Information in any way; and (ii) you will comply with any and all confidentiality obligations of Blockbuster to a third party, whether arising under a written agreement or otherwise. Information will not be deemed Confidential Information which (x) is or becomes generally available to the public other than as a result of a disclosure by you or at your direction or by any other person who directly or indirectly receives such information from you, or (y) is or becomes available to you on a non-confidential basis from a source which is entitled to disclose it to you. (c) No Employee Solicitation. You agree that, during the Term and ------------------------ for one (1) year thereafter, you will not, directly or indirectly, engage, employ or solicit the employment or consulting services of any person who is then or has been within six (6) months prior to the time of such action, an employee of Blockbuster or any of its affiliated companies. Alva J. Phillips, Jr. October 13, 2000 Page 3 (d) Blockbuster Ownership. Any inventions, discoveries, ideas, ---------------------- processes, programs, systems, improvements or contributions (whether or not patentable), including but not limited to any useful process, method, formula or, technique that is conceived, developed or discovered by you during your employment by Blockbuster shall be the sole property of Blockbuster. Any works of authorship or other materials created by you, in any form (including in any electronic form), created by you in the course of employment with Blockbuster and/or any of its affiliated companies and any works in progress resulting from such employment will be works-made-for hire pursuant to 17 U.S.C., Section 201 (the Copyright Act) and Blockbuster will be deemed the sole owner throughout the universe of any and all rights of every nature in and to such works (including, without limitation, any copyrights, patents, trade secrets and trademarks), whether such rights are now known or hereafter defined or discovered, with the right to use the works in perpetuity in any manner Blockbuster determines in its sole discretion without any further payment to you. If, for any reason, any of such results and proceeds are not legally deemed a work-made-for-hire and/or there are any rights in such results and proceeds which do not accrue to Blockbuster under the preceding sentence, then you hereby irrevocably assign and agree to assign any and all of your rights, title and interest thereto, including, without limitation, any and all copyrights, patents, trade secrets, trademarks, and/or other rights of every nature in the work, whether known or hereafter defined or discovered, and Blockbuster will have the right to use the work in perpetuity throughout the universe in any manner Blockbuster determines in its sole discretion without any further payment to you. You will, as may be requested by Blockbuster from time to time, do any and all things which Blockbuster may deem useful or desirable to establish or document Blockbuster's rights in any such results and proceeds, including, without limitation, the execution of appropriate copyright, trademark and/or patent applications, assignments or similar documents and, if you are unavailable or unwilling to execute such documents, you hereby irrevocably designate the CEO or his designee as your attorney-in-fact with the power to execute such documents on your behalf. To the extent you have any rights in the results and proceeds of your services under this Agreement that cannot be assigned as described above, you unconditionally and irrevocably waive the enforcement of such rights. This Paragraph 6(d) is subject to, and does not limit, restrict, or constitute a waiver by Blockbuster or any of its affiliated companies of any ownership rights to which Blockbuster or any of its affiliated companies may be entitled by operation of law by virtue of being your employer. (e) Litigation. You agree that, during the Term and the pendancy ---------- of any litigation or other proceeding, and at any time thereafter, (i) you will not communicate with anyone (other than your own attorneys or tax advisors), except to the extent necessary in the performance of your duties under this Agreement, with respect to the facts or subject matter of any pending or potential litigation, or regulatory or administrative proceeding involving Blockbuster or any of Blockbuster's affiliated companies, other than any litigation or other proceeding in which you are a party-in-opposition, without giving prior notice to Blockbuster or Blockbuster's counsel; and (ii) in the event that any other party attempts to obtain information or documents from you with respect to matters possibly related to such litigation or other proceeding, you will promptly notify Blockbuster's counsel before providing such information or documents. (f) No Right to Give Interviews, Write Books, or Articles. During ----------------------------------------------------- the Term and at any time thereafter, except as authorized by Blockbuster, you will not (i) give any interviews or speeches, or (ii) prepare or assist any person or entity in the preparation of any books, articles, television or motion picture productions or other creations, in either case, concerning Blockbuster or any of its affiliated companies or any of their respective officers, directors, agents, employees, suppliers or customers. (g) Return of Property. All documents, data, recordings, or other ------------------ property, whether tangible or intangible, including all information stored in electronic form, obtained or prepared by or for you and utilized by you in the course of your employment with Blockbuster or any of its affiliated companies, will remain the exclusive property of Blockbuster. In the event of the termination of your employment for any reason, Blockbuster reserves the right, to the extent permitted by law and in addition to any other remedy Blockbuster may have, to deduct from any monies otherwise payable to you the following: (i) all amounts you may owe to Blockbuster or any of its affiliated companies at the time of or Alva J. Phillips, Jr. October 13, 2000 Page 4 subsequent to the termination of your employment with Blockbuster, and (ii) the value of the Blockbuster property which you retain in your possession after the termination of your employment with Blockbuster. In the event that the law of any state or other jurisdiction requires the consent of any employee for such deductions, this Agreement will serve as such consent. (h) Non-Disparagement. You agree that, during the Term and at any ----------------- time thereafter, you will not, in any communications with the press or other media or any customer, client or supplier of Blockbuster or any of its affiliated companies, criticize, ridicule or make any statement which disparages or is derogatory of Blockbuster or any of its affiliated companies or any of their respective directors or officers. (i) Injunctive Relief. Blockbuster has entered into this Agreement in ----------------- order to obtain the benefit of your unique skills, talent, and experience. You acknowledge and agree that any violation of paragraphs 6(a) through (h) of this Agreement will result in irreparable damage to Blockbuster, and, accordingly, Blockbuster shall be entitled to obtain injunctive and other equitable relief for any breach or threatened breach of such paragraphs, in addition to any other remedies available to Blockbuster. (j) Survival; Modification of Terms. Your obligations under Paragraph ------------------------------- 6(a) through (i) will remain in full force and effect for the entire period provided therein notwithstanding the termination of your employment for any reason or the expiration of the Term. You and Blockbuster agree that the restrictions and remedies contained in paragraphs 6(a) through (i) are reasonable and that it is your intention and the intention of Blockbuster that such restrictions and remedies will be enforceable to the fullest extent permissible by law. If a court of competent jurisdiction will find that any such restriction or remedy is unenforceable but would be enforceable if some part were deleted or the period or area of application reduced, then such restriction or remedy will apply with the modification necessary to make it enforceable. 7. Disability. If you become "disabled" within the meaning of such term ---------- under Blockbuster's Short-Term Disability ("STD") program and its Long-Term Disability ("LTD") program during the Term (such condition is referred to as a "Disability"), you will receive compensation under the STD program for the first twenty-six (26) weeks of consecutive absence in accordance with its terms. Thereafter, you will be eligible to receive benefits under the LTD program in accordance with its terms. If you have not returned to work by December 31st of a calendar year during the Term, you will receive bonus compensation for the calendar year(s) during the Term in which you receive compensation under the STD program, determined as follows: (i) for the portion of the calendar year from January 1st until the date on which you first receive compensation under the STD program, bonus compensation will be determined in accordance with the STIP (i.e., based upon Blockbuster's achievement of specified --- goals and Blockbuster's good faith estimate of your achievement of your personal goals, if applicable) and prorated for such period; and (ii) for any subsequent portion of the calendar year and any portion of the following calendar year in which you receive compensation under the STD program, bonus compensation will be in an amount based on Blockbuster's achievement of specified goals and prorated for such period(s). Bonus compensation under this Paragraph 7 will be paid, less applicable deductions and withholding taxes, by the end of the first quarter of the year(s) following the year as to which such bonus compensation is payable. You will not receive bonus compensation for any portion of the calendar year(s) during the Term while you receive benefits under the LTD program. For the periods that you receive compensation and benefits under the STD and LTD programs, such compensation and benefits and the bonus compensation provided under this Paragraph 7 are in lieu of Salary and Bonus under Alva J. Phillips, Jr. October 13, 2000 Page 5 paragraphs 3(a) and (b). Notwithstanding anything to the contrary in this Agreement, the Term will not automatically extend in the event you are receiving benefits under the STD or LTD programs. 8. Termination. ----------- (a) Termination for Cause. Blockbuster may, at its option, terminate ---------------------- your employment under this Agreement forthwith for Cause and thereafter will have no further obligations under this Agreement, including, without limitation, any obligation to pay Salary or Bonus or provide benefits. Cause will mean: (i) dishonesty; (ii) embezzlement, fraud, or other conduct which would constitute a felony; (iii) unauthorized disclosure of Confidential Information; (iv) your failure to obey a material lawful directive that is appropriate to your position from an executive(s) in your reporting line; (v) your material breach of this Agreement; or (vi) your failure (except in the event of your disability) or refusal to substantially perform your material obligations under this Agreement. (b) Termination Without Cause. Blockbuster may terminate your ------------------------- employment under this Agreement without Cause at any time during the Term by written notice to you. (c) Termination Payments/Benefits. If your employment terminates ----------------------------- under Paragraph 8(b), you will thereafter receive, less applicable withholding taxes, and conditioned on your execution of a General Release and Waiver of Claims substantially in the form attached hereto as an Addendum: (i) your Salary, as in effect on the date on which your employment terminates, for thirty-six (36) months after the date of such termination, paid in accordance with Blockbuster's then effective payroll practices; (ii) bonus compensation for the calendar year in which such termination occurs, payable by the end of the first quarter of the following year, determined as follows: (x) for the portion of the calendar year from January 1st until the date of the termination, bonus compensation will be determined in accordance with the STIP (i.e., based on --- Blockbuster's achievement of specified goals and Blockbuster's good faith estimate of your achievement of your personal goals, if applicable) and prorated for such period; and (y) for the remaining portion of such calendar year during the Term, bonus compensation will be in an amount based on Blockbuster's achievement of specified goals, and prorated for such period; (iii) bonus compensation for each subsequent calendar year or portion thereof during the Term, in an amount based on Blockbuster's achievement of specified goals, prorated for any partial calendar year, and payable by the end of the first quarter of the following year; (iv) medical and dental insurance coverage provided under COBRA at no cost to you (except as hereafter described) pursuant to Blockbuster's then-current benefit plans until the end of the Term or, if earlier, the date on which you become eligible for medical and dental coverage from a third party; provided, that, -------- during the period that Blockbuster provides you with this coverage, an amount equal to the applicable COBRA premiums (or such other amount as may be required by law) will be included in your income for tax purposes to the extent required by law and Blockbuster may withhold taxes from your compensation for this purpose; and provided, further, that you may elect to continue -------- ------- your medical and dental Alva J. Phillips, Jr. October 13, 2000 Page 6 insurance under COBRA at you own expense for the balance, if any, of the period required by law; (v) your car allowance until the end of the Term, paid in accordance with Blockbuster's then effective payroll practices; (vi) life insurance coverage until the end of the Term, pursuant to Blockbuster's then-current policy in the amount then furnished to Blockbuster employees at no cost (the amount of such coverage will be reduced by the amount of life insurance coverage furnished to you at no cost by a third party employer); and (vii) stock options granted to you under Blockbuster's Long-Term Management Incentive Plan ("LTMIP") which are exercisable on or prior to the date of termination of your employment under Paragraph 8(b) hereof and that would have vested and become exercisable on or before the last date of the Term will be exercisable until six (6) months after the date of such termination or, if earlier, the expiration date of the stock options. You will be required to mitigate the amount of any payment provided for in (i), (ii), (iii) and (v) of this Paragraph 8(c) by seeking other employment, and the amount of such payments will be reduced by any compensation earned by you from any source, including, without limitation, salary, sign-on or annual bonus compensation, consulting fees, commission payments, car allowance and, in the event you receive significantly more long-term compensation than you received from Blockbuster, Blockbuster's good faith estimate of the present value of the portion of such long-term compensation in excess of the long-term compensation from Blockbuster; provided, that mitigation will not be required, and no -------- reduction for other compensation will be made, for twelve (12) months after the termination of your employment. You agree to notify Blockbuster with respect to any such compensation earned by you during the period when such mitigation is required and to promptly respond to any inquiries from Blockbuster with respect to such compensation or your efforts to fulfill your mitigation obligations under this provision. (d) Termination of Benefits. Notwithstanding anything in this ----------------------- Agreement to the contrary (except as otherwise provided in Paragraph 8(c) with respect to medical and dental benefits and life insurance), participation in all Blockbuster benefit plans and programs (including, without limitation, vacation accrual, the 401(k) plan, the pension plan and the related excess plans, LTD and accidental death and dismemberment and business travel and accident insurance) will terminate upon the termination of your employment except to the extent otherwise expressly provided in such plans or programs and subject to any vested rights you may have under the terms of such plans or programs. The foregoing will not apply to the LTMIP and, after the termination of your employment, your rights under the LTMIP will be governed by the terms of the LTMIP option agreements and the applicable LTMIP plans together with Paragraph 8(c)(vii). (e) Resignation from Official Positions. If your employment with ----------------------------------- Blockbuster terminates for any reason, you will be deemed to have resigned at that time from any and all officer or director positions that you may have held with Blockbuster or any of its then-current or previously affiliated companies and all board seats or other positions in other entities you held on behalf of Blockbuster. If, for any reason, this Paragraph 8(e) is deemed insufficient to effectuate such resignation, you agree to execute, upon the request of Blockbuster, any documents or instruments which Blockbuster may deem necessary or desirable to effectuate such resignation or resignations, and you hereby authorize the Secretary and any Assistant Secretary of Blockbuster to execute any such documents or instruments as your attorney-in-fact. 9. Death. In the event of your death prior to the end of the Term while ----- actively employed, your beneficiary or estate will receive (i) your Salary up to the date on which the death occurs; (ii) any Bonus earned in the prior year but not yet paid; and (iii) bonus compensation for the calendar year in Alva J. Phillips, Jr. October 13, 2000 Page 7 which the death occurs, determined in accordance with the STIP (i.e., based upon ---- Blockbuster's achievement of specified goals and Blockbuster's good faith estimate of your achievement of your personal goals, if applicable) and pro- rated for the portion of the year through the date of death, payable, less applicable deductions and withholding taxes, by the end of first quarter of the following year. In the event of your death after the termination of your employment while you are entitled to receive compensation under Paragraph 8(c)(i) your beneficiary or estate will receive (x) any Salary payable under Paragraph 8(c)(i) up to the date on which the death occurs; (y) any bonus compensation earned under Paragraph 8(c)(ii) with respect to the prior year but not yet paid; and (z) any bonus compensation for the calendar year in which the death occurs, determined in accordance with Paragraph 8(c)(ii) and pro-rated for the portion of the year through the date of death, payable, less applicable deductions and withholding taxes, by the end of the first quarter of the following year. Notwithstanding anything to the contrary in this Agreement, the Term will terminate as of the date of your death. 10. No Acceptance of Payments. You represent that you have not ------------------------- accepted or given nor will you accept or give, directly or indirectly, any money, services or other valuable consideration from or to anyone other than Blockbuster for the inclusion of any matter as part of any film, television program or other production produced, distributed and/or developed by Blockbuster and/or any of its affiliated companies. 11. Equal Opportunity Employer. You recognize that Blockbuster is an -------------------------- equal opportunity employer. You agree that you will comply with Blockbuster policies regarding employment practices and with applicable federal, state and local laws prohibiting discrimination on the basis of race, color, sex, religion, national origin, citizenship, age, marital status, sexual orientation, disability or veteran status. 12. Employee Statement of Business Conduct. You acknowledge you have -------------------------------------- read and agree that you will comply with the Blockbuster Employee Statement of Business Conduct as it may be amended from time to time. 13. Notices. All notices under this Agreement must be given in ------- writing, by personal delivery or by mail, at the parties' respective addresses shown on this Agreement (or any other address designated in writing by either party), with a copy, in the case of Blockbuster, to the attention of the General Counsel of Blockbuster. Any notice given by mail will be deemed to have been given three (3) days following such mailing. 14. Assignment. This is an Agreement for the performance of personal ---------- services by you and may not be assigned by you or Blockbuster except that Blockbuster may assign this Agreement to any affiliated company of or any successor in interest to Blockbuster. 15. TEXAS LAW AND JURISDICTION. YOU ACKNOWLEDGE THAT THIS AGREEMENT -------------------------- HAS BEEN EXECUTED, IN WHOLE OR IN PART, IN TEXAS, AND YOUR EMPLOYMENT DUTIES ARE PRIMARILY PERFORMED IN TEXAS. ACCORDINGLY, YOU AGREE THAT THIS AGREEMENT AND ALL MATTERS OR ISSUES ARISING OUT OF OR RELATING TO YOUR BLOCKBUSTER EMPLOYMENT WILL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS ENTERED INTO AND PERFORMED ENTIRELY THEREIN. ANY ACTION TO ENFORCE THIS AGREEMENT WILL BE BROUGHT SOLELY IN THE STATE OR FEDERAL COURTS LOCATED IN THE CITY OF DALLAS. 16. No Implied Contract. The parties intend to be bound only upon -------------------- execution of a written agreement and no negotiation, exchange of draft or partial performance will be deemed to imply an agreement. Neither the continuation of employment nor any other conduct will be deemed to imply a continuing agreement upon the expiration of the Term. Alva J. Phillips, Jr. October 13, 2000 Page 8 17. Entire Understanding. This Agreement contains the entire -------------------- understanding of the parties hereto relating to the subject matter contained in this Agreement, and can be changed only by a writing signed by both parties. 18. Void Provisions. If any provision of this Agreement, as applied --------------- to either party or to any circumstances, will be found by a court of competent jurisdiction to be unenforceable but would be enforceable if some part were deleted or the period or area of application were reduced, then such provision will apply with the modification necessary to make it enforceable, and will in no way affect any other provision of this Agreement or the validity or enforceability of this Agreement. 19. Effect of Viacom Agreement. If the terms of your employment are -------------------------- currently governed by an agreement entered into between you and Blockbuster Entertainment Group, a business unit of Viacom Inc. ("Viacom") ("Viacom Agreement"), the Viacom Agreement, along with the applicable Viacom stock option agreement(s), will continue to govern your rights with respect to stock options granted to you under Viacom's 1994 and 1997 Long Term Management Incentive Plans and any successor or other plans until such time as Viacom distributes all or substantially all of its shares of Blockbuster common stock to stockholders of Viacom (a "Split-Off"). In addition to any rights set forth in the applicable Viacom stock option agreement(s), Viacom has indicated to Blockbuster that, in the event of a Split-Off, any options to purchase Viacom common stock ("Viacom Stock Options") that are held by you (i) that are exercisable at the date you cease to be a Viacom employee as a result of the Split-Off (the "Termination Date") and (ii) to the extent the terms of your employment are subject to a Viacom Agreement, that would have become exercisable during the employment term of the Viacom Agreement will remain outstanding and will be exercisable by you for a period of six (6) months after the Termination Date or, if earlier, the expiration date of the stock options. By executing this Agreement, you hereby acknowledge and agree that, in the event of the foregoing, your only remaining right with respect to the Viacom Agreement will be your right to exercise your Viacom Stock Options and Viacom will be released from any and all other obligations and liabilities under the Viacom Agreement. 20. Supersedes Prior Agreement. Subject to Paragraph 19, this -------------------------- Agreement supersedes and cancels all prior agreements relating to your employment by Blockbuster or any of its affiliated companies with respect to the period covered by the Term. Alva J. Phillips, Jr. October 13, 2000 Page 9 If the foregoing correctly sets forth our understanding, please sign, date and return all three (3) copies of this Agreement to the undersigned for execution on behalf of Blockbuster; after this Agreement has been executed by Blockbuster and a fully-executed copy returned to you, it will constitute a binding agreement between us. Very truly yours, BLOCKBUSTER INC. By: /s/ Larry J. Zine _______________________________ Larry J. Zine Executive Vice President and Chief Financial Officer ACCEPTED AND AGREED: /s/ Alva J. Phillips, Jr. - ----------------------------- Alva J. Phillips, Jr. Date: 12/15/2000 ----------------------- Alva J. Phillips, Jr. October 13, 2000 Page 10 GENERAL RELEASE AND WAIVER OF CLAIMS ------------------------------------ a. Release of Claims. As consideration by you, you agree on behalf of ----------------- yourself, successors and assigns, to release and forever discharge Blockbuster and its subsidiaries, parent and affiliated companies, employees, officers and directors, and their respective assigns, from any and all manner of claims, debts, demands, damages, liabilities and causes of action, whether known or unknown, from the beginning of time, which you, or your successors and assigns, may have had or may presently have, relating to or arising out of the employment relationship or the termination of said relationship including, but not limited to, causes of action for libel, slander, breach of contract, impairment of economic opportunity, intentional infliction of emotional distress or any other tort, or claims under federal, state, or local constitutions, statutes, regulations, ordinances or common law, including, but not limited to, the Employee Retirement Income Security Act of 1974; the Civil Rights Acts of 1866, 1871, 1964 and 1991; the Age Discrimination in Employment Act, as amended by the Older Workers Benefit Protection Act of 1990; the Rehabilitation Act of 1973; the Equal Pay Act of 1963; the Americans with Disabilities Act of 1990; and, the Family and Medical Leave Act of 1993. b. Post-Release Claims. You do not waive any rights or claims that may ------------------- arise after the date this Release is executed. c. No Admission. Nothing contained in this Release constitutes an ------------ admission of liability by Blockbuster concerning any aspect of your employment with or separation from Blockbuster. d. Confidentiality. You acknowledge that, during the course of the --------------- employment relationship, you were privy to confidential and proprietary business information belonging to Blockbuster, the unauthorized disclosure of which could cause serious and irreparable injury to Blockbuster and its affiliates. The information includes, but is not limited to, information concerning existing and prospective expansion plans; existing and potential financing sources and arrangements; existing and prospective marketing plans and activities; proprietary computer software programs and applications; business plans and strategies and other non-public information. You agree to hold and safeguard the confidential information in trust for Blockbuster, its successors and assigns, and agree that you will not, at any time, misappropriate, use for your own advantage, disclose or otherwise make available to anyone who is not an officer of Blockbuster, for any reason, any of the confidential information, regardless of whether the confidential information was developed or prepared by you or others. You agree not to remove any writings containing confidential information from Blockbuster's premises or possession without Blockbuster's express consent. You agree to promptly return to Blockbuster all confidential information in your possession or under your control (whether in original, copy, or disk form). Before disclosing any confidential information under compulsion of legal process, you agree to promptly give notice to Blockbuster of the fact that you have been served with legal process pursuant to which the disclosure of confidential information may be requested. Such notice will be given within sufficient time to permit Blockbuster to intervene in the matter or to take such other actions as may be necessary or appropriate to protect its interest in its confidential business information. The scope of this Release is not limited to information that is patented, patentable, copyrighted or technically classifiable as a trade secret. These restrictions will not apply to confidential information which is or becomes generally available to the public other than as a result of a disclosure by you or any other person who directly or indirectly receives such information from you, or is or becomes available to you on a non-confidential basis from a source which is entitled to disclose it to you. e. Cooperation. Subject to reimbursement by Blockbuster of reasonable ----------- out-of-pocket costs and expenses, you agree to cooperate fully with Blockbuster and its counsel with respect to any matter (including litigation, investigation or governmental proceeding) which relates to matters with which you were involved during the term of your employment with Blockbuster. Such cooperation will include appearing from time to time at the offices of Blockbuster or Blockbuster's counsel for conferences and interviews and in general providing the officers of Blockbuster and its counsel with the full benefit of your knowledge with respect to any such matter. You agree to render such cooperation in a timely fashion and at such times as may be mutually agreeable to the parties concerned. Alva J. Phillips, Jr. October 13, 2000 Page 11 f. Litigation. You agree that, during the pendency of any litigation or ---------- other proceeding, and anytime thereafter, (x) you will not communicate with anyone (other than your attorneys and tax advisors) with respect to the facts or subject matter of any pending or potential litigation, or regulatory or administrative proceeding involving Blockbuster or any of its officers, directors, agents, employees, suppliers or customers, other than any litigation or other proceeding in which you are a party-in-opposition, without giving prior notice to Blockbuster's General Counsel, and (y) in the event that any other party attempts to obtain information or documents from you with respect to matters possibly related to such litigation or other proceeding, you will promptly so notify Blockbuster's General Counsel. g. Confidentiality of Release. This Release and the terms hereof are -------------------------- confidential. You agree not to disclose this Release or its provisions to any person except to your attorney or tax advisor. h. Rights upon Breach. For breach of any provision of this Release, the ------------------ parties will have such remedies and rights as are customarily available at law or in equity, except that, in any action or proceeding brought to enforce this Release or to recover damages for its breach, the prevailing party will be entitled to recover, should it substantially prevail in the matter, reasonable attorneys' fees and litigation expenses. In the event you, or any party acting on your behalf, breach this Release, Blockbuster's obligations imposed herein will be extinguished and Blockbuster will not be obligated to continue performance under this Release. In such a case, you will be required to re-pay Blockbuster all consideration received pursuant to this Release and this Release will act as a complete and total bar to any recovery. i. Injunctive Relief. The legal remedies for the breach of this Release ----------------- would not be adequate and, in addition to any other remedies available at law, these provisions may be specifically enforced by temporary or permanent injunctive or other equitable relief. j. Texas Law and Jurisdiction. THIS AGREEMENT WILL BE GOVERNED BY AND -------------------------- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, IRRESPECTIVE OF THE CONFLICT OF LAWS RULES. FURTHERMORE, BECAUSE YOU AND BLOCKBUSTER AGREE THAT THE TEXAS COURTS ARE THE EXCLUSIVE FORUM FOR RESOLVING ANY DISPUTES ARISING OUT OF THIS AGREEMENT OR YOUR EMPLOYMENT, THE PARTIES SUBMIT THEMSELVES TO THE PERSONAL JURISDICTION OF THE TEXAS COURTS. k. Advice of Counsel. You are herein advised to discuss this Release with ----------------- an attorney of your choice before signing it. l. No Parol Evidence. This Release represents the full understanding ----------------- between you and Blockbuster, and no parol evidence will be relevant to supplement or explain this Release. m. Void Provisions. Should any provision of this Release be found --------------- unenforceable, the remainder of the Release, in its modified form, will nonetheless be fully enforceable. n. Headings. The headings of the sections are included solely for --------- convenience. If the headings and the text of the Release conflict, the text shall control. All references to sections are to the Release unless otherwise indicated. o. Review and Revocation. You acknowledge that you have been given at --------------------- least twenty-one (21) days to review and consider this Release, and may revoke acceptance within seven (7) days of the execution of this Release. This Release will become effective and enforceable immediately upon the expiration of the revocation period. EX-10.13 3 0003.txt ADDENDUM TO PHILLIPS EMPLOYMENT AGREEMENT EXHIBIT 10.13 December 7, 2000 Mr. Alva J. Phillips, Jr. 2610 Allen Street No. 1402 Dallas, Texas 75204 Dear Joe: I would like to confirm your continued eligibility and participation in the following compensation programs connected with your Blockbuster Inc. employment, in addition to those described in your employment agreement, effective as of the date of such employment agreement. This letter will serve as an addendum to your employment agreement with Blockbuster Inc. Salary Increases - ---------------- For the year 2001, your annual salary increase will be no less than $20,000 per year. Retention Bonus - --------------- For the year 2001, you will be paid a retention bonus of $50,000 based on the following criteria: (1) 60% of the bonus if you are in "good standing" with the company; and (2) 40% of the bonus for accomplishment of key objectives. Joe, if the foregoing correctly sets forth your understanding, please sign one copy of this letter and return it to me whereupon this letter shall constitute a binding agreement between you and Blockbuster. Sincerely yours, /s/ Larry J. Zine Larry J. Zine EVP, Chief Financial Officer Accepted and Agreed: /s/ Alva J. Phillips, Jr. - --------------------------- Alva J. Phillips, Jr. 12/20/2000 - --------------------------- Date EX-10.16 4 0004.txt MICHAEL ROEMER EMPLOYMENT AGREEMENT (12/27/1999) Exhibit 10.16 October 13, 2000 Michael K. Roemer 4145 Shenandoah Dallas, TX 75205 Dear Mike: Blockbuster Inc. ("Blockbuster"), 1201 Elm Street, Dallas, Texas 75270, agrees to employ you and you agree to accept employment with Blockbuster upon the following terms and conditions (the "Agreement"): 1. Term. The term of this Agreement shall commence on December 27, ----- 1999 and end on March 1, 2000, and will be automatically renewed on March 1 of each year for a three (3) year term commencing on the date of automatic renewal, unless terminated by Blockbuster pursuant to Paragraph 8(a) or (b) or otherwise. As used in this Agreement, the "Term" refers to the period beginning on the initial commencement date of this Agreement and ending on the following March 1st or, if the term of your employment has been automatically renewed pursuant to this Paragraph 1, the period beginning on the date of automatic renewal and ending on the third anniversary of the date of the automatic renewal, notwithstanding any earlier termination pursuant to Paragraph 8(a) or (b) or otherwise. 2. Duties. You agree to devote your entire business time, attention ------- and energies to the business of Blockbuster and its subsidiaries during your employment. You will be Executive Vice President and Chief Operating Officer USA of Blockbuster, and you agree to perform all duties reasonable and consistent with that or such comparable office as the President Worldwide Stores of Blockbuster or other individual designated by the Chief Executive Officer (the "CEO") of Blockbuster may assign to you from time to time. 3. Compensation. ------------- (a) Salary. For all the services rendered by you in any capacity ------ under this Agreement, Blockbuster agrees to pay you Thirty-two thousand five hundred Dollars ($32,500) a month in base salary ("Salary"), less applicable deductions and withholding taxes, in accordance with Blockbuster's payroll practices as they may exist from time to time. (b) Bonus Compensation. You also will receive bonus compensation ------------------ ("Bonus") in accordance with Blockbuster's Short-Term Incentive Plan or, if applicable, Blockbuster's Senior Executive Short-Term Incentive Plan, each as may be amended from time to time (either of such plans, as applicable, to be hereinafter referred to as the "STIP") and as follows: (i) Your target bonus ("Target Bonus") for each calendar year will be 50% of your Salary on November 1st of the calendar year; provided that, for any years in which you are a participant in Blockbuster's Senior Executive Short-Term Incentive Plan, for purposes of this Section 3(b)(i), your Target Bonus will be based on your Salary as defined in such plan. Your Bonus may be prorated for any portion of the calendar year that you were employed under this Agreement. (ii) Your Bonus for any calendar year will be payable, less applicable deductions and withholding taxes, by the end of the first quarter of the following year. Michael K. Roemer October 13, 2000 Page 2 4. Benefits. You will participate in such vacation, medical, dental, life -------- insurance, long-term disability insurance, 401(k), long-term incentive and other plans as Blockbuster may have or establish from time to time and in which you would be entitled to participate under the terms of the plan. This provision, however, will not be construed to either require Blockbuster to establish any welfare, compensation or long-term incentive plans, or to prevent the modification or termination of any plan once established, and no action or inaction with respect to any plan will affect this Agreement. 5. Business Expenses; Car Allowance and Insurance. During your employment ---------------------------------------------- under this Agreement, Blockbuster will reimburse you for such reasonable travel and other expenses incurred in the performance of your duties consistent with Blockbuster's then applicable expense reimbursement policies for Blockbuster executives at comparable position levels. You will receive a car allowance and car insurance for one (1) vehicle in accordance with Blockbuster's policies, as same may be amended from time to time. 6. Non-Competition, Confidential Information, Etc. ----------------------------------------------- (a) Non-Competition. You agree that your employment with Blockbuster is on an exclusive basis and that, while you are employed by Blockbuster, you will not engage in any other business activity which is in conflict with your duties and obligations (including your commitment of time) under this Agreement. You agree that, during the Non-Compete Period (as defined below), you will not directly or indirectly engage in or participate as an owner, partner, stockholder, officer, employee, director, agent of or consultant for any Blockbuster Competitor (as defined below) and will perform no services for a Blockbuster Competitor similar to any services performed for Blockbuster; provided, however, that this provision will not prevent you from investing as - -------- ------- less than a one (1%) percent stockholder in the securities of any company listed on a national securities exchange or quoted on an automated quotation system. The Non-Compete Period will cover the entire Term plus any period after the Term for which you receive payments pursuant to Paragraph 8(c)(i). A Blockbuster Competitor is any business entity which engages in the acquisition, aggregation, or delivery of audio or video entertainment , including but not limited to the rental or sale of video, DVD, or other movie product, equipment, or video games, either (i) in electronic, digital, or internet commerce, or (ii) in one or more geographic areas where Blockbuster has its operations (or is engaged in real estate site selection or has taken other steps toward the commencement of operations), either alone or in association with another entity. In every case, the good faith judgment of Blockbuster will be conclusive as to whether a business entity constitutes a Blockbuster Competitor. You agree that this non- compete covenant is ancillary to an otherwise enforceable agreement, including but not limited to the confidentiality covenant and the payment provisions in Paragraph 3. (b) Confidential Information. You agree that, during the Term and at ------------------------ any time thereafter, (i) you will not (a) use for any purpose other than the duly authorized business of Blockbuster conducted in the course of your employment at Blockbuster or, (b) disclose to any third party, any business information, technological information, intellectual property, trade secrets and other information belonging to Blockbuster or any of its affiliated companies or relating to Blockbuster's business, technology, or customers ("Confidential Information"), including, without limitation, any written (including in any electronic form) or oral communication incorporating Confidential Information in any way; and (ii) you will comply with any and all confidentiality obligations of Blockbuster to a third party, whether arising under a written agreement or otherwise. Information will not be deemed Confidential Information which (x) is or becomes generally available to the public other than as a result of a disclosure by you or at your direction or by any other person who directly or indirectly receives such information from you, or (y) is or becomes available to you on a non-confidential basis from a source which is entitled to disclose it to you. (c) No Employee Solicitation. You agree that, during the Term and for ------------------------ one (1) year thereafter, you will not, directly or indirectly, engage, employ or solicit the employment or consulting services of any person who is then or has been within six (6) months prior to the time of such action, an employee of Blockbuster or any of its affiliated companies. Michael K. Roemer October 13, 2000 Page 3 (d) Blockbuster Ownership. Any inventions, discoveries, ideas, ---------------------- processes, programs, systems, improvements or contributions (whether or not patentable), including but not limited to any useful process, method, formula or, technique that is conceived, developed or discovered by you during your employment by Blockbuster shall be the sole property of Blockbuster. Any works of authorship or other materials created by you, in any form (including in any electronic form), created by you in the course of employment with Blockbuster and/or any of its affiliated companies and any works in progress resulting from such employment will be works-made-for hire pursuant to 17 U.S.C., Section 201 (the Copyright Act) and Blockbuster will be deemed the sole owner throughout the universe of any and all rights of every nature in and to such works (including, without limitation, any copyrights, patents, trade secrets and trademarks), whether such rights are now known or hereafter defined or discovered, with the right to use the works in perpetuity in any manner Blockbuster determines in its sole discretion without any further payment to you. If, for any reason, any of such results and proceeds are not legally deemed a work-made-for-hire and/or there are any rights in such results and proceeds which do not accrue to Blockbuster under the preceding sentence, then you hereby irrevocably assign and agree to assign any and all of your rights, title and interest thereto, including, without limitation, any and all copyrights, patents, trade secrets, trademarks, and/or other rights of every nature in the work, whether known or hereafter defined or discovered, and Blockbuster will have the right to use the work in perpetuity throughout the universe in any manner Blockbuster determines in its sole discretion without any further payment to you. You will, as may be requested by Blockbuster from time to time, do any and all things which Blockbuster may deem useful or desirable to establish or document Blockbuster's rights in any such results and proceeds, including, without limitation, the execution of appropriate copyright, trademark and/or patent applications, assignments or similar documents and, if you are unavailable or unwilling to execute such documents, you hereby irrevocably designate the CEO or his designee as your attorney-in-fact with the power to execute such documents on your behalf. To the extent you have any rights in the results and proceeds of your services under this Agreement that cannot be assigned as described above, you unconditionally and irrevocably waive the enforcement of such rights. This Paragraph 6(d) is subject to, and does not limit, restrict, or constitute a waiver by Blockbuster or any of its affiliated companies of any ownership rights to which Blockbuster or any of its affiliated companies may be entitled by operation of law by virtue of being your employer. (e) Litigation. You agree that, during the Term and the pendancy of ----------- any litigation or other proceeding, and at any time thereafter, (i) you will not communicate with anyone (other than your own attorneys or tax advisors), except to the extent necessary in the performance of your duties under this Agreement, with respect to the facts or subject matter of any pending or potential litigation, or regulatory or administrative proceeding involving Blockbuster or any of Blockbuster's affiliated companies, other than any litigation or other proceeding in which you are a party-in-opposition, without giving prior notice to Blockbuster or Blockbuster's counsel; and (ii) in the event that any other party attempts to obtain information or documents from you with respect to matters possibly related to such litigation or other proceeding, you will promptly notify Blockbuster's counsel before providing such information or documents. (f) No Right to Give Interviews, Write Books, or Articles. During the ----------------------------------------------------- Term and at any time thereafter, except as authorized by Blockbuster, you will not (i) give any interviews or speeches, or (ii) prepare or assist any person or entity in the preparation of any books, articles, television or motion picture productions or other creations, in either case, concerning Blockbuster or any of its affiliated companies or any of their respective officers, directors, agents, employees, suppliers or customers. (g) Return of Property. All documents, data, recordings, or other ------------------ property, whether tangible or intangible, including all information stored in electronic form, obtained or prepared by or for you and utilized by you in the course of your employment with Blockbuster or any of its affiliated companies, will remain the exclusive property of Blockbuster. In the event of the termination of your employment for any reason, Blockbuster reserves the right, to the extent permitted by law and in addition to any other remedy Blockbuster may have, to deduct from any monies otherwise payable to you the following: (i) all amounts you may owe to Blockbuster or any of its affiliated companies at the time of or Michael K. Roemer October 13, 2000 Page 4 subsequent to the termination of your employment with Blockbuster, and (ii) the value of the Blockbuster property which you retain in your possession after the termination of your employment with Blockbuster. In the event that the law of any state or other jurisdiction requires the consent of any employee for such deductions, this Agreement will serve as such consent. (h) Non-Disparagement. You agree that, during the Term and at any ----------------- time thereafter, you will not, in any communications with the press or other media or any customer, client or supplier of Blockbuster or any of its affiliated companies, criticize, ridicule or make any statement which disparages or is derogatory of Blockbuster or any of its affiliated companies or any of their respective directors or officers. (i) Injunctive Relief. Blockbuster has entered into this Agreement in ----------------- order to obtain the benefit of your unique skills, talent, and experience. You acknowledge and agree that any violation of paragraphs 6(a) through (h) of this Agreement will result in irreparable damage to Blockbuster, and, accordingly, Blockbuster shall be entitled to obtain injunctive and other equitable relief for any breach or threatened breach of such paragraphs, in addition to any other remedies available to Blockbuster. (j) Survival; Modification of Terms. Your obligations under Paragraph ------------------------------- 6(a) through (i) will remain in full force and effect for the entire period provided therein notwithstanding the termination of your employment for any reason or the expiration of the Term. You and Blockbuster agree that the restrictions and remedies contained in paragraphs 6(a) through (i) are reasonable and that it is your intention and the intention of Blockbuster that such restrictions and remedies will be enforceable to the fullest extent permissible by law. If a court of competent jurisdiction will find that any such restriction or remedy is unenforceable but would be enforceable if some part were deleted or the period or area of application reduced, then such restriction or remedy will apply with the modification necessary to make it enforceable. 7. Disability. If you become "disabled" within the meaning of such term ---------- under Blockbuster's Short-Term Disability ("STD") program and its Long-Term Disability ("LTD") program during the Term (such condition is referred to as a "Disability"), you will receive compensation under the STD program for the first twenty-six (26) weeks of consecutive absence in accordance with its terms. Thereafter, you will be eligible to receive benefits under the LTD program in accordance with its terms. If you have not returned to work by December 31st of a calendar year during the Term, you will receive bonus compensation for the calendar year(s) during the Term in which you receive compensation under the STD program, determined as follows: (i) for the portion of the calendar year from January 1st until the date on which you first receive compensation under the STD program, bonus compensation will be determined in accordance with the STIP (i.e., based upon Blockbuster's achievement of specified --- goals and Blockbuster's good faith estimate of your achievement of your personal goals, if applicable) and prorated for such period; and (ii) for any subsequent portion of the calendar year and any portion of the following calendar year in which you receive compensation under the STD program, bonus compensation will be in an amount based on Blockbuster's achievement of specified goals and prorated for such period(s). Bonus compensation under this Paragraph 7 will be paid, less applicable deductions and withholding taxes, by the end of the first quarter of the year(s) following the year as to which such bonus compensation is payable. You will not receive bonus compensation for any portion of the calendar year(s) during the Term while you receive benefits under the LTD program. For the periods that you receive compensation and benefits under the STD and LTD programs, such compensation and benefits and the bonus compensation provided under this Paragraph 7 are in lieu of Salary and Bonus under Michael K. Roemer October 13, 2000 Page 5 paragraphs 3(a) and (b). Notwithstanding anything to the contrary in this Agreement, the Term will not automatically extend in the event you are receiving benefits under the STD or LTD programs. 8. Termination. ----------- (a) Termination for Cause. Blockbuster may, at its option, terminate --------------------- your employment under this Agreement forthwith for Cause and thereafter will have no further obligations under this Agreement, including, without limitation, any obligation to pay Salary or Bonus or provide benefits. Cause will mean: (i) dishonesty; (ii) embezzlement, fraud, or other conduct which would constitute a felony; (iii) unauthorized disclosure of Confidential Information; (iv) your failure to obey a material lawful directive that is appropriate to your position from an executive(s) in your reporting line; (v) your material breach of this Agreement; or (vi) your failure (except in the event of your disability) or refusal to substantially perform your material obligations under this Agreement. (b) Termination Without Cause. Blockbuster may terminate your ------------------------- employment under this Agreement without Cause at any time during the Term by written notice to you. (c) Termination Payments/Benefits. If your employment terminates ----------------------------- under Paragraph 8(b), you will thereafter receive, less applicable withholding taxes, and conditioned on your execution of a General Release and Waiver of Claims substantially in the form attached hereto as an Addendum: (i) your Salary, as in effect on the date on which your employment terminates, for twenty-four (24) months after the date of such termination, paid in accordance with Blockbuster's then effective payroll practices; (ii) bonus compensation for the calendar year in which such termination occurs, payable by the end of the first quarter of the following year, determined as follows: (x) for the portion of the calendar year from January 1st until the date of the termination, bonus compensation will be determined in accordance with the STIP (i.e., based on --- Blockbuster's achievement of specified goals and Blockbuster's good faith estimate of your achievement of your personal goals, if applicable) and prorated for such period; and (y) for the remaining portion of such calendar year during the Term, bonus compensation will be determined based on Blockbuster's achievement of specified goals and will be prorated for such period; (iii) bonus compensation for each subsequent calendar year or portion thereof during the Term, determined based on Blockbuster's achievement of specified goals, prorated for any partial calendar year, and payable by the end of the first quarter of the following year; (iv) medical and dental insurance coverage provided under COBRA at no cost to you (except as hereafter described) pursuant to Blockbuster's then-current benefit plans until the end of the Term or, if earlier, the date on which you become eligible for medical and dental coverage from a third party; provided, that, -------- during the period that Blockbuster provides you with this coverage, an amount equal to the applicable COBRA premiums (or such other amount as may be required by law) will be included in your income for tax purposes to the extent required by law and Blockbuster may withhold taxes from your compensation for this purpose; and provided, further, that you may elect to -------- ------- continue your medical and dental Michael K. Roemer October 13, 2000 Page 6 insurance under COBRA at your own expense for the balance, if any, of the period required by law; (v) your car allowance until the end of the Term, paid in accordance with Blockbuster's then effective payroll practices; (vi) life insurance coverage until the end of the Term, pursuant to Blockbuster's then-current policy in the amount then furnished to Blockbuster employees at no cost (the amount of such coverage will be reduced by the amount of life insurance coverage furnished to you at no cost by a third party employer); and (vii) stock options granted to you under Blockbuster's Long-Term Management Incentive Plan ("LTMIP") which are exercisable on or prior to the date of termination of your employment under Paragraph 8(b) hereof and that would have vested and become exercisable on or before the last date of the Term will be exercisable until six (6) months after the date of such termination or, if earlier, the expiration date of the stock options. You will be required to mitigate the amount of any payment provided for in (i), (ii), (iii) and (v) of this Paragraph 8(c) by seeking other employment, and the amount of such payments will be reduced by any compensation earned by you from any source, including, without limitation, salary, sign-on or annual bonus compensation, consulting fees, commission payments, car allowance and, in the event you receive significantly more long-term compensation than you received from Blockbuster, Blockbuster's good faith estimate of the present value of the portion of such long-term compensation in excess of the long-term compensation from Blockbuster; provided, that mitigation will not be required, and no -------- reduction for other compensation will be made, for twelve (12) months after the termination of your employment. You agree to notify Blockbuster with respect to any such compensation earned by you during the period when such mitigation is required and to promptly respond to any inquiries from Blockbuster with respect to such compensation or your efforts to fulfill your mitigation obligations under this provision. (d) Termination of Benefits. Notwithstanding anything in this ----------------------- Agreement to the contrary (except as otherwise provided in Paragraph 8(c) with respect to medical and dental benefits and life insurance), participation in all Blockbuster benefit plans and programs (including, without limitation, vacation accrual, the 401(k) plan, excess plans, LTD and accidental death and dismemberment and business travel and accident insurance) will terminate upon the termination of your employment except to the extent otherwise expressly provided in such plans or programs and subject to any vested rights you may have under the terms of such plans or programs. The foregoing will not apply to the LTMIP and, after the termination of your employment, your rights under the LTMIP will be governed by the terms of the LTMIP option agreements and the applicable LTMIP plans together with Paragraph 8(c)(vii). (e) Resignation from Official Positions. If your employment with ----------------------------------- Blockbuster terminates for any reason, you will be deemed to have resigned at that time from any and all officer or director positions that you may have held with Blockbuster or any of its then-current or previously affiliated companies and all board seats or other positions in other entities you held on behalf of Blockbuster. If, for any reason, this Paragraph 8(e) is deemed insufficient to effectuate such resignation, you agree to execute, upon the request of Blockbuster, any documents or instruments which Blockbuster may deem necessary or desirable to effectuate such resignation or resignations, and you hereby authorize the Secretary and any Assistant Secretary of Blockbuster to execute any such documents or instruments as your attorney-in-fact. 9. Death. In the event of your death prior to the end of the Term ----- while actively employed, your beneficiary or estate will receive (i) your Salary up to the date on which the death occurs; (ii) any Bonus earned in the prior year but not yet paid; and (iii) bonus compensation for the calendar year in which the death occurs, determined in accordance with the STIP (i.e., based upon ---- Blockbuster's Michael K. Roemer October 13, 2000 Page 7 achievement of specified goals and Blockbuster's good faith estimate of your achievement of your personal goals, if applicable) and pro-rated for the portion of the year through the date of death, payable, less applicable deductions and withholding taxes, by the end of first quarter of the following year. In the event of your death after the termination of your employment while you are entitled to receive compensation under Paragraph 8(c)(i) your beneficiary or estate will receive (x) any Salary payable under Paragraph 8(c)(i) up to the date on which the death occurs; (y) any bonus compensation earned under Paragraph 8(c)(ii) with respect to the prior year but not yet paid; and (z) any bonus compensation for the calendar year in which the death occurs, determined in accordance with Paragraph 8(c)(ii) and pro-rated for the portion of the year through the date of death, payable, less applicable deductions and withholding taxes, by the end of the first quarter of the following year. Notwithstanding anything to the contrary in this Agreement, the Term will terminate as of the date of your death. 10. No Acceptance of Payments. You represent that you have not ------------------------- accepted or given nor will you accept or give, directly or indirectly, any money, services or other valuable consideration from or to anyone other than Blockbuster for the inclusion of any matter as part of any film, television program or other production produced, distributed and/or developed by Blockbuster and/or any of its affiliated companies. 11. Equal Opportunity Employer. You recognize that Blockbuster is an -------------------------- equal opportunity employer. You agree that you will comply with Blockbuster policies regarding employment practices and with applicable federal, state and local laws prohibiting discrimination on the basis of race, color, sex, religion, national origin, citizenship, age, marital status, sexual orientation, disability or veteran status. 12. Employee Statement of Business Conduct. You acknowledge you have -------------------------------------- read and agree that you will comply with the Blockbuster Employee Statement of Business Conduct as it may be amended from time to time. 13. Notices. All notices under this Agreement must be given in ------- writing, by personal delivery or by mail, at the parties' respective addresses shown on this Agreement (or any other address designated in writing by either party), with a copy, in the case of Blockbuster, to the attention of the General Counsel of Blockbuster. Any notice given by mail will be deemed to have been given three (3) days following such mailing. 14. Assignment. This is an Agreement for the performance of personal ---------- services by you and may not be assigned by you or Blockbuster except that Blockbuster may assign this Agreement to any affiliated company of or any successor in interest to Blockbuster. 15. TEXAS LAW AND JURISDICTION. YOU ACKNOWLEDGE THAT THIS AGREEMENT -------------------------- HAS BEEN EXECUTED, IN WHOLE OR IN PART, IN TEXAS, AND YOUR EMPLOYMENT DUTIES ARE PRIMARILY PERFORMED IN TEXAS. ACCORDINGLY, YOU AGREE THAT THIS AGREEMENT AND ALL MATTERS OR ISSUES ARISING OUT OF OR RELATING TO YOUR BLOCKBUSTER EMPLOYMENT WILL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS ENTERED INTO AND PERFORMED ENTIRELY THEREIN. ANY ACTION TO ENFORCE THIS AGREEMENT WILL BE BROUGHT SOLELY IN THE STATE OR FEDERAL COURTS LOCATED IN THE CITY OF DALLAS. 16. No Implied Contract. The parties intend to be bound only upon -------------------- execution of a written agreement and no negotiation, exchange of draft or partial performance will be deemed to imply an agreement. Neither the continuation of employment nor any other conduct will be deemed to imply a continuing agreement upon the expiration of the Term. 17. Entire Understanding. This Agreement contains the entire -------------------- understanding of the parties hereto relating to the subject matter contained in this Agreement, and can be changed only by a writing signed by both parties. Michael K. Roemer October 13, 2000 Page 8 18. Void Provisions. If any provision of this Agreement, as applied --------------- to either party or to any circumstances, will be found by a court of competent jurisdiction to be unenforceable but would be enforceable if some part were deleted or the period or area of application were reduced, then such provision will apply with the modification necessary to make it enforceable, and will in no way affect any other provision of this Agreement or the validity or enforceability of this Agreement. 19. Effect of Viacom Agreement. If the terms of your employment are -------------------------- currently governed by an agreement entered into between you and Blockbuster Entertainment Group, a business unit of Viacom Inc. ("Viacom") ("Viacom Agreement"), the Viacom Agreement, along with the applicable Viacom stock option agreement(s), will continue to govern your rights with respect to stock options granted to you under Viacom's 1994 and 1997 Long Term Management Incentive Plans and any successor or other plans until such time as Viacom distributes all or substantially all of its shares of Blockbuster common stock to stockholders of Viacom (a "Split-Off"). In addition to any rights set forth in the applicable Viacom stock option agreement(s), Viacom has indicated to Blockbuster that, in the event of a Split-Off, any options to purchase Viacom common stock ("Viacom Stock Options") that are held by you (i) that are exercisable at the date you cease to be a Viacom employee as a result of the Split-Off (the "Termination Date") and (ii) to the extent the terms of your employment are subject to a Viacom Agreement, that would have become exercisable during the employment term of the Viacom Agreement will remain outstanding and will be exercisable by you for a period of six (6) months after the Termination Date or, if earlier, the expiration date of the stock options. By executing this Agreement, you hereby acknowledge and agree that, in the event of the foregoing, your only remaining right with respect to the Viacom Agreement will be your right to exercise your Viacom Stock Options and Viacom will be released from any and all other obligations and liabilities under the Viacom Agreement. 20. Supersedes Prior Agreement. Subject to Paragraph 19, this -------------------------- Agreement supersedes and cancels all prior agreements relating to your employment by Blockbuster or any of its affiliated companies with respect to the period covered by the Term. Michael K. Roemer October 13, 2000 Page 9 If the foregoing correctly sets forth our understanding, please sign, date and return all three (3) copies of this Agreement to the undersigned for execution on behalf of Blockbuster; after this Agreement has been executed by Blockbuster and a fully-executed copy returned to you, it will constitute a binding agreement between us. Very truly yours, BLOCKBUSTER INC. By: /s/ Larry J. Zine ---------------------------- Larry J. Zine Executive Vice President and Chief Financial Officer ACCEPTED AND AGREED: /s/ Michael K. Roemer - ---------------------------- Michael K. Roemer Date: 10/30/00 ----------------------- Michael K. Roemer October 13, 2000 Page 10 GENERAL RELEASE AND WAIVER OF CLAIMS ------------------------------------ a. Release of Claims. As consideration by you, you agree on behalf of ----------------- yourself, successors and assigns, to release and forever discharge Blockbuster and its subsidiaries, parent and affiliated companies, employees, officers and directors, and their respective assigns, from any and all manner of claims, debts, demands, damages, liabilities and causes of action, whether known or unknown, from the beginning of time, which you, or your successors and assigns, may have had or may presently have, relating to or arising out of the employment relationship or the termination of said relationship including, but not limited to, causes of action for libel, slander, breach of contract, impairment of economic opportunity, intentional infliction of emotional distress or any other tort, or claims under federal, state, or local constitutions, statutes, regulations, ordinances or common law, including, but not limited to, the Employee Retirement Income Security Act of 1974; the Civil Rights Acts of 1866, 1871, 1964 and 1991; the Age Discrimination in Employment Act, as amended by the Older Workers Benefit Protection Act of 1990; the Rehabilitation Act of 1973; the Equal Pay Act of 1963; the Americans with Disabilities Act of 1990; and, the Family and Medical Leave Act of 1993. b. Post-Release Claims. You do not waive any rights or claims that may ------------------- arise after the date this Release is executed. c. No Admission. Nothing contained in this Release constitutes an ------------ admission of liability by Blockbuster concerning any aspect of your employment with or separation from Blockbuster. d. Confidentiality. You acknowledge that, during the course of the --------------- employment relationship, you were privy to confidential and proprietary business information belonging to Blockbuster, the unauthorized disclosure of which could cause serious and irreparable injury to Blockbuster and its affiliates. The information includes, but is not limited to, information concerning existing and prospective expansion plans; existing and potential financing sources and arrangements; existing and prospective marketing plans and activities; proprietary computer software programs and applications; business plans and strategies and other non-public information. You agree to hold and safeguard the confidential information in trust for Blockbuster, its successors and assigns, and agree that you will not, at any time, misappropriate, use for your own advantage, disclose or otherwise make available to anyone who is not an officer of Blockbuster, for any reason, any of the confidential information, regardless of whether the confidential information was developed or prepared by you or others. You agree not to remove any writings containing confidential information from Blockbuster's premises or possession without Blockbuster's express consent. You agree to promptly return to Blockbuster all confidential information in your possession or under your control (whether in original, copy, or disk form). Before disclosing any confidential information under compulsion of legal process, you agree to promptly give notice to Blockbuster of the fact that you have been served with legal process pursuant to which the disclosure of confidential information may be requested. Such notice will be given within sufficient time to permit Blockbuster to intervene in the matter or to take such other actions as may be necessary or appropriate to protect its interest in its confidential business information. The scope of this Release is not limited to information that is patented, patentable, copyrighted or technically classifiable as a trade secret. These restrictions will not apply to confidential information which is or becomes generally available to the public other than as a result of a disclosure by you or any other person who directly or indirectly receives such information from you, or is or becomes available to you on a non-confidential basis from a source which is entitled to disclose it to you. e. Cooperation. Subject to reimbursement by Blockbuster of reasonable ----------- out-of-pocket costs and expenses, you agree to cooperate fully with Blockbuster and its counsel with respect to any matter (including litigation, investigation or governmental proceeding) which relates to matters with which you were involved during the term of your employment with Blockbuster. Such cooperation will include appearing from time to time at the offices of Blockbuster or Blockbuster's counsel for conferences and interviews and in general providing the officers of Blockbuster and its counsel with the full benefit of your knowledge with respect to any such matter. You agree to render such cooperation in a timely fashion and at such times as may be mutually agreeable to the parties concerned. Michael K. Roemer October 13, 2000 Page 11 f. Litigation. You agree that, during the pendency of any litigation or ---------- other proceeding, and anytime thereafter, (x) you will not communicate with anyone (other than your attorneys and tax advisors) with respect to the facts or subject matter of any pending or potential litigation, or regulatory or administrative proceeding involving Blockbuster or any of its officers, directors, agents, employees, suppliers or customers, other than any litigation or other proceeding in which you are a party-in-opposition, without giving prior notice to Blockbuster's General Counsel, and (y) in the event that any other party attempts to obtain information or documents from you with respect to matters possibly related to such litigation or other proceeding, you will promptly so notify Blockbuster's General Counsel. g. Confidentiality of Release. This Release and the terms hereof are -------------------------- confidential. You agree not to disclose this Release or its provisions to any person except to your attorney or tax advisor. h. Rights upon Breach. For breach of any provision of this Release, the ------------------ parties will have such remedies and rights as are customarily available at law or in equity, except that, in any action or proceeding brought to enforce this Release or to recover damages for its breach, the prevailing party will be entitled to recover, should it substantially prevail in the matter, reasonable attorneys' fees and litigation expenses. In the event you, or any party acting on your behalf, breach this Release, Blockbuster's obligations imposed herein will be extinguished and Blockbuster will not be obligated to continue performance under this Release. In such a case, you will be required to re-pay Blockbuster all consideration received pursuant to this Release and this Release will act as a complete and total bar to any recovery. i. Injunctive Relief. The legal remedies for the breach of this Release ----------------- would not be adequate and, in addition to any other remedies available at law, these provisions may be specifically enforced by temporary or permanent injunctive or other equitable relief. j. Texas Law and Jurisdiction. THIS AGREEMENT WILL BE GOVERNED BY AND -------------------------- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, IRRESPECTIVE OF THE CONFLICT OF LAWS RULES. FURTHERMORE, BECAUSE YOU AND BLOCKBUSTER AGREE THAT THE TEXAS COURTS ARE THE EXCLUSIVE FORUM FOR RESOLVING ANY DISPUTES ARISING OUT OF THIS AGREEMENT OR YOUR EMPLOYMENT, THE PARTIES SUBMIT THEMSELVES TO THE PERSONAL JURISDICTION OF THE TEXAS COURTS. k. Advice of Counsel. You are herein advised to discuss this Release with ----------------- an attorney of your choice before signing it. l. No Parol Evidence. This Release represents the full understanding ----------------- between you and Blockbuster, and no parol evidence will be relevant to supplement or explain this Release. m. Void Provisions. Should any provision of this Release be found --------------- unenforceable, the remainder of the Release, in its modified form, will nonetheless be fully enforceable. n. Headings. The headings of the sections are included solely for -------- convenience. If the headings and the text of the Release conflict, the text shall control. All references to sections are to the Release unless otherwise indicated. o. Review and Revocation. You acknowledge that you have been given at --------------------- least twenty-one (21) days to review and consider this Release, and may revoke acceptance within seven (7) days of the execution of this Release. This Release will become effective and enforceable immediately upon the expiration of the revocation period. EX-10.17 5 0005.txt MICHAEL ROEMER EMPLOYMENT AGREEMENT (6/1/1998) EXHIBIT 10.17 As of June 1, 1998 Michael K. Roemer 4145 Shenandoah Dallas, TX 75205 Dear Michael: Blockbuster Entertainment Group ("Blockbuster"), a business unit of Viacom Inc. ("Viacom"), currently having an address at 1201 Elm Street, Dallas, Texas 75270, agrees to employ you and you agree to accept such employment on the terms and conditions set forth herein. 1. Term. The term of your employment hereunder shall commerce on June 1, ---- 1998 and, unless terminated by Blockbuster pursuant to paragraph 8 hereof, shall continue through and until May 31, 2001. The period from June 1, 1998 through May 31, 2001 shall hereinafter be referred to as the "Employment Term" notwithstanding any earlier termination pursuant to paragraph 8. 2. Duties. During the Employment Term, you agree to devote your entire ------ business time, attention and energies to the business of Blockbuster. You will be Blockbuster's Executive Vice President, Domestic Video Operations and you agree to perform such duties, an such other duties reasonable and consistent with such office as may be assigned to you from time to time by the President, Retail Operations of Blockbuster or such other individual as may be designated by the Chairman and Chief Executive Officer of Blockbuster (the "CEO"). Your principal place of business shall be in the greater metropolitan Dallas, Texas area. 3. Compensation. ------------ (a) Salary. For all the services rendered by you in any ------ capacity hereunder, Blockbuster agrees to pay you the sum of Three Hundred Thousand Dollars ($300,000) per annum ("Salary"), payable in accordance with Blockbuster's then effective payroll practices. Your Salary will be reviewed during the first quarter of each calendar year during the Employment Term, commencing with the first quarter of 1999, and will, at that time, be increased by a percentage that is generally consistent with the range of percentages by which the salaries of other comparable executives are then increased. (b) Bonus. In addition to your Salary, you shall be entitled to ----- receive bonus compensation for each of the calendar years during the Employment Term, determined and payable as follows ("Bonus"): (i) Your Bonus for each of the calendar years during the Employment Term will be based upon a measurement of performance against objectives in accordance with the Viacom Short-Term Incentive Plan, as the same may be amended from time to time. (i) Your Target Bonus for each of the calendar years during the Employment Term shall be 50% of Salary which may be prorated for any partial calendar year during the Employment Term. (ii) Your Bonus for any calendar year shall be payable by February 28 of the following year. 4. Benefits. You shall be entitled to participate in such vacation, -------- medical, dental and life insurance, 401(k), pension and other plans as Blockbuster may have or establish from time to time and in which you would be entitled to participate pursuant to the terms thereof. The foregoing, however, shall not be construed to require Blockbuster to establish any such plans or to prevent the modification or termination of such plans once established, and no such action or failure thereof shall affect this Agreement. It is further understood and agreed that all benefits you may be entitled to as an employee of Blockbuster shall be based upon your Salary, as set forth in paragraph 3(a) hereof, and not upon any bonus compensation due, payable or paid to you hereunder, except where the benefit plan expressly provides otherwise. 5. Business Expenses. During your employment with Blockbuster, you shall ----------------- be reimbursed for such reasonable travel and other expenses incurred in the performance of your duties hereunder as are customarily reimbursed to comparable executives of Blockbuster. You shall be entitled to a car allowance in accordance with Blockbuster's policy. 6. Exclusive Employment, Confidential Information, Etc. ---------------------------------------------------- (a) Non-Competition. You agree that your employment hereunder is on --------------- an exclusive basis, and that as long as you are employed by Blockbuster, you will not engage in any other business activity which is in conflict with your duties and obligations hereunder. You agree that during the Employment Term and for a period of one (1) year thereafter you shall not directly or indirectly engage in or participate as an owner, partner, shareholder, officer, employee, director, agent of or consultant for any business that competes with any of the principal business activities of Blockbuster; provided, however, that nothing -------- ------- herein shall prevent you from investing as less than a one percent (1%) shareholder in the securities of any company listed on a national securities exchange or quoted on an automated quotation system. Notwithstanding anything to the contrary in this Agreement, your obligations under the second sentence of this paragraph 6(a) shall survive a termination of your employment with Blockbuster and remain in full force and effect for the period set forth therein regardless of the reason for your termination (or lack thereof). (b) Confidential Information. You agree that you shall not, during ------------------------ the Employment Term or at any time thereafter, use for your own purposes, or disclose to or for the benefit of any third party, any trade secret or other confidential information of Blockbuster, 2 Viacom or any of Viacom's affiliates (except as may be required by law or in the performance of your duties hereunder consistent with Blockbuster's policies) and that you will comply with any confidentiality obligations of Blockbuster or Viacom to a third party, whether under agreement or otherwise. Notwithstanding the foregoing, confidential information shall be deemed not to include information which (i) is or becomes generally available to the public other than as a result of a disclosure by you or any other person who directly or indirectly receives such information from you or at your direction or (ii) is or become available to you on a non-confidential basis from a source which is entitled to disclose it to you. (c) No Employee Solicitation. You agree that, during the Employment ------------------------ Term and for one (1) year thereafter, you shall not, directly or indirectly, engage, employ, or solicit the employment of any person who is then or has been within six (6)months prior thereto, an employee of Blockbuster, Viacom or any of Viacom's affiliates. (d) Blockbuster Ownership. The results and proceeds of your --------------------- services hereunder, including, without limitation, any works of authorship resulting from your services during your employment with Blockbuster, Viacom and /or any of Viacom's affiliates and any works in progress, shall be works-made- for-hire and Blockbuster shall be deemed the sole owner throughout the universe of any and all rights of whatsoever nature therein, whether or not now or hereafter known, existing, contemplated, recognized or developed, with the right to use the same in perpetuity in any manner Blockbuster determines in its sole discretion without any further payment to you whatsoever. If, for any reason, any of such results and proceeds shall not legally be a work-for-hire and/or there are any rights which do not accrue to Blockbuster under the preceding sentence, then you hereby irrevocably assign and agree to assign any and all of your right, title and interest thereto, including, without limitation, any and all copyrights, patents, trade secrets, trademarks and/or other rights of whatsoever nature therein, whether or not now or hereafter known, existing contemplated, recognized or developed to Blockbuster, and Blockbuster shall have the right to use the same in perpetuity throughout the universe in any manner Blockbuster determines without any further payment to you whatsoever. You shall, from time to time, as may be requested by Blockbuster, do any and all things which Blockbuster may deem useful or desirable to establish or document Blockbuster's exclusive ownership of any and all rights in any such results and proceeds, including, without limitation, the execution of appropriate copyright and/or patent applications or assignments. To the extent you have any rights in the results and proceeds of your services that cannot be assigned in the manner described above, you unconditionally and irrevocably waive the enforcement of such rights. This paragraph 6(d) is subject to, and shall not be deemed to limit, restrict, or constitute any waiver by Blockbuster of any rights of ownership to which Blockbuster may be entitled by operation of law by virtue of Blockbuster being your employer. (e) Litigation. You agree that, during the Employment Term, for one ---------- (1) year thereafter and, if longer, during the pendency of any litigation or other proceeding, (i) you shall not communicate with anyone (other than your own attorneys and tax advisors and, except to the extent necessary in the performance of your duties hereunder) with respect to the 3 facts or subject matter of any pending or potential litigation, or regulatory or administrative proceeding involving Blockbuster or Viacom or any of their officers, directors, agents, employees, suppliers or customers, other than any litigation or other proceeding in which you are a party-in-opposition, without giving prior notice to Blockbuster's General Counsel, and (ii) in the event that any other party attempts to obtain information or documents from you with respect to matters possibly related to such litigation or other proceeding, you shall promptly so notify Blockbuster's General Counsel. (f) No Right to Give Interviews or Write Books, Articles, Etc. You ---------------------------------------------------------- agree that during the Employment Term and for a period of one (1) year thereafter, except as authorized by Blockbuster or Viacom, you shall not (i) give any interviews or speeches, or (ii) prepare or assist any person or entity in the preparation of any books, articles, television or motion picture productions or other creations, in either case, concerning Blockbuster Viacom or any of Viacom's affiliates or any of their officers, directors, agents employees, suppliers or customers. (g) Return of Property. All documents, date, recordings, or other ------------------ property, whether tangible or intangible, including all information stored in electronic form, obtained or prepared by or for you and utilized by you in the course of your employment with Blockbuster shall remain the exclusive property of Blockbuster. In the event of the termination of your employment for any reason, Blockbuster reserves the right, to the extent permitted by law and in addition to any other remedy Blockbuster may have, to deduct from any monies otherwise payable to you the following: (i) the full amount of any debt you owe to Blockbuster, Viacom or any of Viacom's affiliates at the time of or subsequent to the termination of your employment with Blockbuster, and (ii) the value of the Blockbuster property which you retain in your possession after the termination of your employment with Blockbuster. In the event that the law of any state or other jurisdiction requires the consent of an employee for such deductions, this Agreement shall serve as such consent. You acknowledge and agree that the foregoing remedy shall not be the sole and exclusive remedy of Blockbuster with respect to a breach of this paragraph 6(g). (h) Non-Disparagement. You agree that you shall not, during the ----------------- Employment Term and for a period of one (1) year thereafter, criticize, ridicule or make any statement which disparages or is derogatory of Blockbuster, Viacom or any of Viacom's affiliates or any of their officers, directors, agents or employees. (i) Injunctive Relief. Blockbuster has entered into this Agreement ------------------ in order to obtain the benefit of your unique skills, talent, and experience. You acknowledge and agree that any violation of paragraphs 6(a) through (h) hereof will result in irreparable harm to Blockbuster and Viacom for which damages are not readily ascertainable. Accordingly, you agree that Blockbuster and/or Viacom may obtain injunctive and other equitable relief for any breach or threatened breach of such paragraphs, in addition to any other remedies available to Blockbuster and/or Viacom. 4 (j) Survival; Modification of Terms. Your obligations under ------------------------------- paragraphs 6(a) through (i) hereof shall remain in full force and effect for the entire period provided therein notwithstanding the termination of the Employment Term pursuant to paragraph 8 hereof or otherwise. You and Blockbuster agree that the restrictions and remedies contained in paragraph 6(a) through (i) are reasonable and that it is your intention and the intention of Blockbuster that such restrictions and remedies shall be enforceable to the fullest extent permissible by law. If it shall be found by a court of competent jurisdiction that any such restriction or remedy is unenforceable but would be enforceable if some part thereof were deleted or the period or area of application reduced, then such restriction or remedy shall apply with such modification as shall be necessary to make it enforceable. 7. Incapacity. In the event you become medically disabled and cannot ---------- substantially perform your duties at any time during the Employment Term, the CEO, at any time after such disability has continued for 30 consecutive days, may determine that Blockbuster requires such duties and responsibilities be performed by another executive. In the event you become disabled, you will first receive benefits under Blockbuster's short-term disability program for the first 26 weeks of consecutive absence in accordance with its terms. Thereafter, you will be eligible to receive benefits under the Blockbuster Long-Term Disability ("LTD") program in accordance with its terms. Upon receipt of benefits under the LTD program, you will also be entitled to receive a pro-rated Target Bonus for the calendar year in which such benefits commence. 8. Termination. ----------- (a) Termination for Cause. Blockbuster may, at its option, terminate --------------------- this Agreement forthwith for "cause", and Blockbuster shall thereafter have no further obligations under this Agreement, including, without limitation, any obligation to pay Salary or Bonus or provide benefits under this Agreement. For purposes of this Agreement, "cause" shall mean (i) the commission of a felony or the commission of any other act involving dishonesty, disloyalty or fraud with respect to Blockbuster, Viacom or any of Viacom's affiliates, (ii) conduct bringing, or having the potential to bring, Blockbuster, Viacom or any of Viacom's affiliates into substantial public disgrace or disrepute, (iii) willful misconduct with respect to BLockbuster, Viacom or any of Viacom's affiliates, or (iv) any material breach of this Agreement (including, without limitation, your failure, neglect of or refusal to substantially perform your obligations hereunder as set forth in paragraphs 2 and 11 hereof), except in the event of your disability as set forth in paragraph 7. Anything herein to the contrary notwithstanding, Blockbuster will give you written notice prior to terminating this Agreement for your material breach setting forth the exact nature of any alleged breach and the conduct required to cure such breach. Except for a breach which by its nature cannot be cured, you shall have ten (10) business days from the giving of such notice within which to cure. (b) Good Reason Termination. You may terminate your employment ----------------------- hereunder for "Good Reason" at any time during the Employment Term by written notice to Blockbuster not more than thirty (30) days after the occurrence of the event constituting "Good 5 Reason". Such notice shall state an effective date earlier than thirty (30) business days after the date it is given. Blockbuster shall have ten (10) business from the giving such notice within which to cure. Good Reason shall mean (x) the breach by Blockbuster of any of its material obligations hereunder, or (y) without your prior written consent, other than in connection with the termination of your employment for "cause" (as defined above) or in connection with your permanent disability, the assignment to you by Blockbuster or Viacom of duties substantially inconsistent with the duties of an officer of Blockbuster. (c) Termination without Cause. Blockbuster may terminate your ------------------------- employment hereunder without "cause" (as defined above) at any time during the Employment Term by written notice to you. (d) Termination Payments, Etc. In the event that your employment ------------------------- terminates pursuant to paragraph 8(b) or 8(c) hereof, you shall be entitled to receive, subject to applicable withholding taxes: (i) your Salary as provided in paragraph 3(a) until the end of the Employment Term, payable in accordance with Blockbuster's then effective payroll practices; (ii) bonus compensation for each calendar year during the Employment Term equal to your Target Bonus as set forth in paragraph 3(b) (iii) your car allowance as provided in paragraph 5 until the end of the Employment Term, payable in accordance with Blockbuster's then effective payroll practices; (iv) medical and dental insurance coverage under Blockbuster's then current benefit plans pursuant to COBRA until the end of the Employment Term or, if earlier, the date on which you become eligible for medical and dental coverage from a third party employer; during this period, Blockbuster will pay an amount equal to the applicable COBRA premiums (or such other amounts as may be required by applicable law) (which amount will be included in your income for tax purposes to the extent required by applicable law); at the end of such period, you may elect to continue your medical and dental insurance coverage at your own expense for the balance, if any, of the period required by law; (v) life insurance coverage pursuant to Blockbuster's then current policies until the end of the Employment Term (the amount of Salary covered by such insurance to be reduced by the amount of any salary payable to you by a third party); and 6 (vi) stock options granted to you under Viacom's 1997 Long- Term Management Incentive Plan and any successor plans (collectively, the "LTMIP") which are exercisable on or prior to the date of the termination of your employment under paragraph 8(b) or 8(c) hereof or that would have vested and become exercisable on or before the last date of the Employment Term will be exercisable until six (6) months after the date of such termination or, if earlier, the expiration date of the stock options; provided, however, you shall be required to mitigate the amount of any payment - -------- ------- provided for in (i), (ii) and (iii) of this paragraph 8(d) by seeking other employment or otherwise, and the amount of any such payment provided for in (i), (ii) and (iii) shall be reduced by any compensation earned by you from a third person except that mitigation shall not be required for twelve (12) months after the termination of your employment or for the period commencing with the termination of your employment and ending on the last day of the Employment Term, whichever is shorter. The payments provided for in (i) above are in lieu of any severance or income continuation or protection under any Blockbuster or Viacom plan that may now or hereafter exist. The payments and benefits to be provided pursuant to this paragraph 8(d) shall constitute liquidated damages, and shall be deemed to satisfy and be in full and final settlement of all obligations of Blockbuster to you under this Agreement. (e) Termination of Benefits. Notwithstanding anything in this ----------------------- Agreement to the contrary (except as otherwise provided in paragraph 8(d) with respect to medical, dental and life insurance), coverage under all Blockbuster benefit plans and programs (including, without limitation, vacation, the 401(k) plan, the pension plan, LTD, car insurance and accidental death and dismemberment and business travel and accident insurance) will terminate upon the termination of your employment except to the extent otherwise expressly provided in such plans or programs. (f) Non-Renewal Notice. Blockbuster shall notify you in writing in ------------------ the event that Blockbuster elects not to extend or renew this Agreement. If Blockbuster gives you such notice less than twelve (12) months before the end of the Employment Term or your employment terminates pursuant to paragraph 8(b) or 8(c) hereof during the twelve (12) months of the Employment Term, you shall be entitled to receive your Salary as provided in paragraph 3(a), payable in accordance with Blockbuster's then effective payroll practices, subject to applicable withholding requirements, for the period commencing after the end of the Employment Term which, when added to the portion of the Employment Term, if any, remaining when the notice is given or the termination occurs, equals twelve (12) months. The payments provided for in this paragraph 8(f) are in lieu of any severance or income continuation or protection under any Blockbuster or Viacom plan that may now or hereafter exist. You shall be required to mitigate the amount of any payment provided for in this paragraph 8(f) by seeking other employment or otherwise, and the amount of any such 7 payment provided hereunder shall be reduced by any compensation earned by you from a third person. 9. Death. If you die prior to the end of the Employment Term, your ----- beneficiary or estate shall be entitled to receive your Salary up to the date on which the death occurs and a pro-rated Target Bonus. 10. Section 317 and 507 of the Federal Communications Act. You represent ----------------------------------------------------- that you have not accepted or given nor will you accept or give, directly or indirectly, any money, services or other valuable consideration from or to anyone other than Blockbuster for the inclusion of any matter as part of any film, television program or other production produced, distributed and/or developed by Blockbuster, Viacom and/or any of Viacom's affiliates. 11. Equal Opportunity Employer. You acknowledge that Blockbuster is an -------------------------- equal opportunity employer. You agree that you will comply with Blockbuster policies and applicable federal, state, and local laws prohibiting discrimination on the basis of race, color, creed, national origin, age, sex or disability. 12. Notices. All notices required to be given hereunder shall be given in ------- writing, by personal delivery or by mail at the respective addresses of the parties hereto set forth above, or at such other address as may be designated in writing by either party, and in the case of Blockbuster, to the attention of the General Counsel of Blockbuster. Any notice given by mail shall be deemed to have been given three days following such mailing. 13. Assignment. This is an Agreement for the performance of personal ---------- services by you and may not be assigned by you. Blockbuster or Viacom may assign this Agreement to Viacom or any affiliate of Viacom or any purchaser of all or substantially all of the assets of Blockbuster or Viacom or any successor in interest to Viacom or Blockbuster. 14. Governing Law. This Agreement and all matters or issues collateral ------------- thereto shall be governed by the laws of the State of Texas. 15. No Implied Contract. Nothing contained in this Agreement shall be ------------------- construed to impose any obligation on Blockbuster to renew this Agreement or any portion thereof. The parties intend to be bound only upon execution of a written agreement and no negotiation, exchange of drat or partial performance shall be deemed to imply an agreement. Neither the continuation of employment nor any other conduct shall be deemed to imply a continuing agreement upon the expiration of this Agreement. 16. Entire Understanding. This Agreement contains the entire -------------------- understanding of the parties hereto relating to the subject matter herein contained, and can be changed only by a writing signed by both parties hereto. 8 17. Void Provisions. If any provision of this Agreement, as applied to --------------- either party or to any circumstances, shall be adjudged by a court to be void or unenforceable, the same shall be deemed stricken from this Agreement and shall in no way affect any other provision of this Agreement or the validity or enforceability of this Agreement. ***** If the foregoing correctly sets forth our understanding, please sign and date one copy of this letter and return it to the undersigned whereupon this letter shall constitute a binding agreement between us. Very truly yours, BLOCKBUSTER ENTERTAINMENT GROUP By: /s/ Steven J. Becker ---------------------------------- Steven J. Becker Senior Vice President Worldwide Human Resources ACCEPTED AND AGREED: /s/ Michael K. Roemer - ------------------------------ Michael K. Roemer 9 EX-10.18 6 0006.txt AMENDMENT TO ROEMER EMPLOYMENT AGREEMENT EXHIBIT 10.18 Viacom Inc 1515 Broadway New York NY 10036-5794 William A. Roskin Senior Vice President Human Resources and Administration Tel 212 258 6230 Fax 212 846 1716 VIACOM December 1, 1998 Michael K. Roemer 4145 Shenandoah Dallas, TX 75205 Dear Michael: This is to confirm our understanding that your employment agreement dated as of June 1, 1998 shall be amended to change the last day of the employment term from May 31, 2001 to May 31, 2002. Except as amended hereby, your employment agreement shall remain in full force and effect. Please sign and return the attached copy of this letter to indicate your agreement with the foregoing. Very truly yours, /s/ WILLIAM ROSKIN ACCEPTED AND AGREED: /s/ Michael K. Roemer - ------------------------- Michael K. Roemer EX-10.19 7 0007.txt NIGEL TRAVIS EMPLOYMENT AGREEMENT EXHIBIT 10.19 October 13, 2000 Nigel Travis 5109 Heather Court Flower Mound, TX 75028 Dear Nigel: Blockbuster Inc. ("Blockbuster"), 1201 Elm Street, Dallas, Texas 75270, agrees to employ you and you agree to accept employment with Blockbuster upon the following terms and conditions (the "Agreement"): 1. Term. The term of this Agreement shall commence on December 27, ----- 1999, and end on March 1, 2000, and will be automatically renewed on March 1 of each year for a term of three (3) years commencing on the date of automatic renewal, unless terminated by Blockbuster pursuant to Paragraph 8(a) or (b) or otherwise. As used in this Agreement, the "Term" refers to the period beginning on the initial commencement date of this Agreement and ending on the following March 1st or, if the term of your employment has been automatically renewed pursuant to this Paragraph 1, the period beginning on the date of automatic renewal and ending on the third anniversary of the date of automatic renewal, notwithstanding any earlier termination pursuant to Paragraph 8(a) or (b) or otherwise. 2. Duties. You agree to devote your entire business time, attention ------- and energies to the business of Blockbuster and its subsidiaries during your employment. You will be Executive Vice President and President Worldwide Store Operations of Blockbuster, and you agree to perform all duties reasonable and consistent with that or such comparable office as the Chief Executive Officer (the "CEO") of Blockbuster or other individual designated by the CEO of Blockbuster may assign to you from time to time. 3. Compensation. ------------- (a) Salary. For all the services rendered by you in any capacity ------- under this Agreement, Blockbuster agrees to pay you Forty-five thousand eight hundred thirty-three Dollars and thirty-three Cents ($45,833.33) a month in base salary ("Salary"), less applicable deductions and withholding taxes, in accordance with Blockbuster's payroll practices as they may exist from time to time. (b) Bonus Compensation. You also will receive bonus compensation ------------------- ("Bonus") in accordance with Blockbuster's Short-Term Incentive Plan or, if applicable, Blockbuster's Senior Executive Short-Term Incentive Plan, each as may be amended from time to time (either of such plans, as applicable, to be hereinafter referred to as the "STIP") and as follows: (i) Your target bonus ("Target Bonus") for each calendar year will be 50% of your Salary on November 1st of the calendar year; provided that, for any years in which you are a participant in Blockbuster's Senior Executive Short-Term Incentive Plan, for purposes of this Section 3(b)(i), your Target Bonus will be based on your Salary as defined in such plan. Your Bonus may be prorated for any portion of the calendar year that you were employed under this Agreement. (ii) Your Bonus for any calendar year will be payable, less applicable deductions and withholding taxes, by the end of the first quarter of the following year. Nigel Travis October 13, 2000 Page 2 4. Benefits. You will participate in such vacation, medical, dental, --------- life insurance, long-term disability insurance, 401(k), long-term incentive and other plans as Blockbuster may have or establish from time to time and in which you would be entitled to participate under the terms of the plan. This provision, however, will not be construed to either require Blockbuster to establish any welfare, compensation or long-term incentive plans, or to prevent the modification or termination of any plan once established, and no action or inaction with respect to any plan will affect this Agreement. 5. Business Expenses; Car Allowance and Insurance. During your ----------------------------------------------- employment under this Agreement, Blockbuster will reimburse you for such reasonable travel and other expenses incurred in the performance of your duties consistent with Blockbuster's then applicable expense reimbursement policies for Blockbuster executives at comparable position levels. You will receive a car allowance and car insurance for one (1) vehicle in accordance with Blockbuster's policies, as same may be amended from time to time. 6. Non-Competition, Confidential Information, Etc. ---------------------------------------------- (a) Non-Competition. You agree that your employment with --------------- Blockbuster is on an exclusive basis and that, while you are employed by Blockbuster, you will not engage in any other business activity which is in conflict with your duties and obligations (including your commitment of time) under this Agreement. You agree that, during the Non-Compete Period (as defined below), you will not directly or indirectly engage in or participate as an owner, partner, stockholder, officer, employee, director, agent of or consultant for any Blockbuster Competitor (as defined below) and will perform no services for a Blockbuster Competitor similar to any services performed for Blockbuster; provided, however, that this provision will not prevent you from investing as - -------- ------- less than a one (1%) percent stockholder in the securities of any company listed on a national securities exchange or quoted on an automated quotation system. The Non-Compete Period will cover the entire Term plus any period after the Term for which you receive payments pursuant to Paragraph 8(c)(i). A Blockbuster Competitor is any business entity which engages in the acquisition, aggregation, or delivery of audio or video entertainment , including but not limited to the rental or sale of video, DVD, or other movie product, equipment, or video games, either (i) in electronic, digital, or internet commerce, or (ii) in one or more geographic areas where Blockbuster has its operations (or is engaged in real estate site selection or has taken other steps toward the commencement of operations), either alone or in association with another entity. In every case, the good faith judgment of Blockbuster will be conclusive as to whether a business entity constitutes a Blockbuster Competitor. You agree that this non- compete covenant is ancillary to an otherwise enforceable agreement, including but not limited to the confidentiality covenant and the payment provisions in Paragraph 3. (b) Confidential Information. You agree that, during the Term and ------------------------ at any time thereafter, (i) you will not (a) use for any purpose other than the duly authorized business of Blockbuster conducted in the course of your employment at Blockbuster or, (b) disclose to any third party, any business information, technological information, intellectual property, trade secrets and other information belonging to Blockbuster or any of its affiliated companies or relating to Blockbuster's business, technology, or customers ("Confidential Information"), including, without limitation, any written (including in any electronic form) or oral communication incorporating Confidential Information in any way; and (ii) you will comply with any and all confidentiality obligations of Blockbuster to a third party, whether arising under a written agreement or otherwise. Information will not be deemed Confidential Information which (x) is or becomes generally available to the public other than as a result of a disclosure by you or at your direction or by any other person who directly or indirectly receives such information from you, or (y) is or becomes available to you on a non-confidential basis from a source which is entitled to disclose it to you. (c) No Employee Solicitation. You agree that, during the Term and ------------------------ for one (1) year thereafter, you will not, directly or indirectly, engage, employ or solicit the employment or consulting services of any person who is then or has been within six (6) months prior to the time of such action, an employee of Blockbuster or any of its affiliated companies. Nigel Travis October 13, 2000 Page 3 (d) Blockbuster Ownership. Any inventions, discoveries, ideas, ---------------------- processes, programs, systems, improvements or contributions (whether or not patentable), including but not limited to any useful process, method, formula or, technique that is conceived, developed or discovered by you during your employment by Blockbuster shall be the sole property of Blockbuster. Any works of authorship or other materials created by you, in any form (including in any electronic form), created by you in the course of employment with Blockbuster and/or any of its affiliated companies and any works in progress resulting from such employment will be works-made-for hire pursuant to 17 U.S.C., Section 201 (the Copyright Act) and Blockbuster will be deemed the sole owner throughout the universe of any and all rights of every nature in and to such works (including, without limitation, any copyrights, patents, trade secrets and trademarks), whether such rights are now known or hereafter defined or discovered, with the right to use the works in perpetuity in any manner Blockbuster determines in its sole discretion without any further payment to you. If, for any reason, any of such results and proceeds are not legally deemed a work-made-for-hire and/or there are any rights in such results and proceeds which do not accrue to Blockbuster under the preceding sentence, then you hereby irrevocably assign and agree to assign any and all of your rights, title and interest thereto, including, without limitation, any and all copyrights, patents, trade secrets, trademarks, and/or other rights of every nature in the work, whether known or hereafter defined or discovered, and Blockbuster will have the right to use the work in perpetuity throughout the universe in any manner Blockbuster determines in its sole discretion without any further payment to you. You will, as may be requested by Blockbuster from time to time, do any and all things which Blockbuster may deem useful or desirable to establish or document Blockbuster's rights in any such results and proceeds, including, without limitation, the execution of appropriate copyright, trademark and/or patent applications, assignments or similar documents and, if you are unavailable or unwilling to execute such documents, you hereby irrevocably designate the CEO or his designee as your attorney-in-fact with the power to execute such documents on your behalf. To the extent you have any rights in the results and proceeds of your services under this Agreement that cannot be assigned as described above, you unconditionally and irrevocably waive the enforcement of such rights. This Paragraph 6(d) is subject to, and does not limit, restrict, or constitute a waiver by Blockbuster or any of its affiliated companies of any ownership rights to which Blockbuster or any of its affiliated companies may be entitled by operation of law by virtue of being your employer. (e) Litigation. You agree that, during the Term and the pendancy of ----------- any litigation or other proceeding, and at any time thereafter, (i) you will not communicate with anyone (other than your own attorneys or tax advisors), except to the extent necessary in the performance of your duties under this Agreement, with respect to the facts or subject matter of any pending or potential litigation, or regulatory or administrative proceeding involving Blockbuster or any of Blockbuster's affiliated companies, other than any litigation or other proceeding in which you are a party-in-opposition, without giving prior notice to Blockbuster or Blockbuster's counsel; and (ii) in the event that any other party attempts to obtain information or documents from you with respect to matters possibly related to such litigation or other proceeding, you will promptly notify Blockbuster's counsel before providing such information or documents. (f) No Right to Give Interviews, Write Books, or Articles. During the ------------------------------------------------------ Term and at any time thereafter, except as authorized by Blockbuster, you will not (i) give any interviews or speeches, or (ii) prepare or assist any person or entity in the preparation of any books, articles, television or motion picture productions or other creations, in either case, concerning Blockbuster or any of its affiliated companies or any of their respective officers, directors, agents, employees, suppliers or customers. (g) Return of Property. All documents, data, recordings, or other ------------------ property, whether tangible or intangible, including all information stored in electronic form, obtained or prepared by or for you and utilized by you in the course of your employment with Blockbuster or any of its affiliated companies, will remain the exclusive property of Blockbuster. In the event of the termination of your employment for any reason, Blockbuster reserves the right, to the extent permitted by law and in addition to any other remedy Blockbuster may have, to deduct from any monies otherwise payable to you the following: (i) all amounts you may owe to Blockbuster or any of its affiliated companies at the time of or Nigel Travis October 13, 2000 Page 4 subsequent to the termination of your employment with Blockbuster, and (ii) the value of the Blockbuster property which you retain in your possession after the termination of your employment with Blockbuster. In the event that the law of any state or other jurisdiction requires the consent of any employee for such deductions, this Agreement will serve as such consent. (h) Non-Disparagement. You agree that, during the Term and at any ----------------- time thereafter, you will not, in any communications with the press or other media or any customer, client or supplier of Blockbuster or any of its affiliated companies, criticize, ridicule or make any statement which disparages or is derogatory of Blockbuster or any of its affiliated companies or any of their respective directors or officers. (i) Injunctive Relief. Blockbuster has entered into this Agreement ----------------- in order to obtain the benefit of your unique skills, talent, and experience. You acknowledge and agree that any violation of paragraphs 6(a) through (h) of this Agreement will result in irreparable damage to Blockbuster, and, accordingly, Blockbuster shall be entitled to obtain injunctive and other equitable relief for any breach or threatened breach of such paragraphs, in addition to any other remedies available to Blockbuster. (j) Survival; Modification of Terms. Your obligations under -------------------------------- Paragraph 6(a) through (i) will remain in full force and effect for the entire period provided therein notwithstanding the termination of your employment for any reason or the expiration of the Term. You and Blockbuster agree that the restrictions and remedies contained in paragraphs 6(a) through (i) are reasonable and that it is your intention and the intention of Blockbuster that such restrictions and remedies will be enforceable to the fullest extent permissible by law. If a court of competent jurisdiction will find that any such restriction or remedy is unenforceable but would be enforceable if some part were deleted or the period or area of application reduced, then such restriction or remedy will apply with the modification necessary to make it enforceable. 7. Disability. If you become "disabled" within the meaning of such term ---------- under Blockbuster's Short-Term Disability ("STD") program and its Long-Term Disability ("LTD") program during the Term (such condition is referred to as a "Disability"), you will receive compensation under the STD program for the first twenty-six (26) weeks of consecutive absence in accordance with its terms. Thereafter, you will be eligible to receive benefits under the LTD program in accordance with its terms. If you have not returned to work by December 31st of a calendar year during the Term, you will receive bonus compensation for the calendar year(s) during the Term in which you receive compensation under the STD program, determined as follows: (i) for the portion of the calendar year from January 1st until the date on which you first receive compensation under the STD program, bonus compensation will be determined in accordance with the STIP (i.e., based upon Blockbuster's achievement of specified goals and Blockbuster's good faith estimate of your achievement of your personal goals, if applicable) and prorated for such period; and (ii) for any subsequent portion of the calendar year and any portion of the following calendar year in which you receive compensation under the STD program, bonus compensation will be in an amount based on Blockbuster's achievement of specified goals and prorated for such period(s). Bonus compensation under this Paragraph 7 will be paid, less applicable deductions and withholding taxes, by the end of the first quarter of the year(s) following the year as to which such bonus compensation is payable. You will not receive bonus compensation for any portion of the calendar year(s) during the Term while you receive benefits under the LTD program. For the periods that you receive compensation and benefits under the STD and LTD programs, such compensation and benefits and the bonus compensation provided under this Paragraph 7 are in lieu of Salary and Bonus under Nigel Travis October 13, 2000 Page 5 paragraphs 3(a) and (b). Notwithstanding anything to the contrary in this Agreement, the Term will not automatically extend in the event you are receiving benefits under the STD or LTD programs. 8. Termination. ----------- (a) Termination for Cause. Blockbuster may, at its option, terminate ---------------------- your employment under this Agreement forthwith for Cause and thereafter will have no further obligations under this Agreement, including, without limitation, any obligation to pay Salary or Bonus or provide benefits. Cause will mean: (i) dishonesty; (ii) embezzlement, fraud, or other conduct which would constitute a felony; (iii) unauthorized disclosure of Confidential Information; (iv) your failure to obey a material lawful directive that is appropriate to your position from an executive(s) in your reporting line; (v) your material breach of this Agreement; or (vi) your failure (except in the event of your disability) or refusal to substantially perform your material obligations under this Agreement. (b) Termination Without Cause. Blockbuster may terminate your ------------------------- employment under this Agreement without Cause at any time during the Term by written notice to you. (c) Termination Payments/Benefits. If your employment terminates ----------------------------- under Paragraph 8(b), you will thereafter receive, less applicable withholding taxes, and conditioned on your execution of a General Release and Waiver of Claims substantially in the form attached hereto as an Addendum: (i) your Salary, as in effect on the date on which your employment terminates, for thirty-six (36) months after the date of such termination, paid in accordance with Blockbuster's then effective payroll practices; (ii) bonus compensation for the calendar year in which such termination occurs, payable by the end of the first quarter of the following year, determined as follows: (x) for the portion of the calendar year from January 1st until the date of the termination, bonus compensation will be determined in accordance with the STIP (i.e., based on --- Blockbuster's achievement of specified goals and Blockbuster's good faith estimate of your achievement of your personal goals, if applicable) and prorated for such period; and (y) for the remaining portion of such calendar year during the Term, bonus compensation will be in an amount based on Blockbuster's achievement of specified goals, and prorated for such period; (iii) bonus compensation for each subsequent calendar year or portion thereof during the Term, in an amount based on Blockbuster's achievement of specified goals, prorated for any partial calendar year, and payable by the end of the first quarter of the following year; (iv) medical and dental insurance coverage provided under COBRA at no cost to you (except as hereafter described) pursuant to Blockbuster's then-current benefit plans until the end of the Term or, if earlier, the date on which you become eligible for medical and dental coverage from a third party; provided, that, -------- during the period that Blockbuster provides you with this coverage, an amount equal to the applicable COBRA premiums (or such other amount as may be required by law) will be included in your income for tax purposes to the extent required by law and Blockbuster may withhold taxes from your compensation for this purpose; and provided, further, that you may elect to continue -------- ------- your medical and dental Nigel Travis October 13, 2000 Page 6 insurance under COBRA at you own expense for the balance, if any, of the period required by law; (v) your car allowance until the end of the Term, paid in accordance with Blockbuster's then effective payroll practices; (vi) life insurance coverage until the end of the Term, pursuant to Blockbuster's then-current policy in the amount then furnished to Blockbuster employees at no cost (the amount of such coverage will be reduced by the amount of life insurance coverage furnished to you at no cost by a third party employer); and (vii) stock options granted to you under Blockbuster's Long-Term Management Incentive Plan ("LTMIP") which are exercisable on or prior to the date of termination of your employment under Paragraph 8(b) hereof and that would have vested and become exercisable on or before the last date of the Term will be exercisable until six (6) months after the date of such termination or, if earlier, the expiration date of the stock options. You will be required to mitigate the amount of any payment provided for in (i), (ii), (iii) and (v) of this Paragraph 8(c) by seeking other employment, and the amount of such payments will be reduced by any compensation earned by you from any source, including, without limitation, salary, sign-on or annual bonus compensation, consulting fees, commission payments, car allowance and, in the event you receive significantly more long-term compensation than you received from Blockbuster, Blockbuster's good faith estimate of the present value of the portion of such long-term compensation in excess of the long-term compensation from Blockbuster; provided, that mitigation will not be required, and no -------- reduction for other compensation will be made, for twelve (12) months after the termination of your employment. You agree to notify Blockbuster with respect to any such compensation earned by you during the period when such mitigation is required and to promptly respond to any inquiries from Blockbuster with respect to such compensation or your efforts to fulfill your mitigation obligations under this provision. (d) Termination of Benefits. Notwithstanding anything in this ----------------------- Agreement to the contrary (except as otherwise provided in Paragraph 8(c) with respect to medical and dental benefits and life insurance), participation in all Blockbuster benefit plans and programs (including, without limitation, vacation accrual, the 401(k) plan, the pension plan and the related excess plans, LTD and accidental death and dismemberment and business travel and accident insurance) will terminate upon the termination of your employment except to the extent otherwise expressly provided in such plans or programs and subject to any vested rights you may have under the terms of such plans or programs. The foregoing will not apply to the LTMIP and, after the termination of your employment, your rights under the LTMIP will be governed by the terms of the LTMIP option agreements and the applicable LTMIP plans together with Paragraph 8(c)(vii). (e) Resignation from Official Positions. If your employment with ----------------------------------- Blockbuster terminates for any reason, you will be deemed to have resigned at that time from any and all officer or director positions that you may have held with Blockbuster or any of its then-current or previously affiliated companies and all board seats or other positions in other entities you held on behalf of Blockbuster. If, for any reason, this Paragraph 8(e) is deemed insufficient to effectuate such resignation, you agree to execute, upon the request of Blockbuster, any documents or instruments which Blockbuster may deem necessary or desirable to effectuate such resignation or resignations, and you hereby authorize the Secretary and any Assistant Secretary of Blockbuster to execute any such documents or instruments as your attorney-in-fact. 9. Death. In the event of your death prior to the end of the Term ----- while actively employed, your beneficiary or estate will receive (i) your Salary up to the date on which the death occurs; (ii) any Bonus earned in the prior year but not yet paid; and (iii) bonus compensation for the calendar year in Nigel Travis October 13, 2000 Page 7 which the death occurs, determined in accordance with the STIP (i.e., based upon ---- Blockbuster's achievement of specified goals and Blockbuster's good faith estimate of your achievement of your personal goals, if applicable) and pro- rated for the portion of the year through the date of death, payable, less applicable deductions and withholding taxes, by the end of first quarter of the following year. In the event of your death after the termination of your employment while you are entitled to receive compensation under Paragraph 8(c)(i) your beneficiary or estate will receive (x) any Salary payable under Paragraph 8(c)(i) up to the date on which the death occurs; (y) any bonus compensation earned under Paragraph 8(c)(ii) with respect to the prior year but not yet paid; and (z) any bonus compensation for the calendar year in which the death occurs, determined in accordance with Paragraph 8(c)(ii) and pro-rated for the portion of the year through the date of death, payable, less applicable deductions and withholding taxes, by the end of the first quarter of the following year. Notwithstanding anything to the contrary in this Agreement, the Term will terminate as of the date of your death. 10. No Acceptance of Payments. You represent that you have not accepted ------------------------- or given nor will you accept or give, directly or indirectly, any money, services or other valuable consideration from or to anyone other than Blockbuster for the inclusion of any matter as part of any film, television program or other production produced, distributed and/or developed by Blockbuster and/or any of its affiliated companies. 11. Equal Opportunity Employer. You recognize that Blockbuster is an -------------------------- equal opportunity employer. You agree that you will comply with Blockbuster policies regarding employment practices and with applicable federal, state and local laws prohibiting discrimination on the basis of race, color, sex, religion, national origin, citizenship, age, marital status, sexual orientation, disability or veteran status. 12. Employee Statement of Business Conduct. You acknowledge you have -------------------------------------- read and agree that you will comply with the Blockbuster Employee Statement of Business Conduct as it may be amended from time to time. 13. Notices. All notices under this Agreement must be given in writing, ------- by personal delivery or by mail, at the parties' respective addresses shown on this Agreement (or any other address designated in writing by either party), with a copy, in the case of Blockbuster, to the attention of the General Counsel of Blockbuster. Any notice given by mail will be deemed to have been given three (3) days following such mailing. 14. Assignment. This is an Agreement for the performance of personal ---------- services by you and may not be assigned by you or Blockbuster except that Blockbuster may assign this Agreement to any affiliated company of or any successor in interest to Blockbuster. 15. TEXAS LAW AND JURISDICTION. YOU ACKNOWLEDGE THAT THIS AGREEMENT -------------------------- HAS BEEN EXECUTED, IN WHOLE OR IN PART, IN TEXAS, AND YOUR EMPLOYMENT DUTIES ARE PRIMARILY PERFORMED IN TEXAS. ACCORDINGLY, YOU AGREE THAT THIS AGREEMENT AND ALL MATTERS OR ISSUES ARISING OUT OF OR RELATING TO YOUR BLOCKBUSTER EMPLOYMENT WILL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS ENTERED INTO AND PERFORMED ENTIRELY THEREIN. ANY ACTION TO ENFORCE THIS AGREEMENT WILL BE BROUGHT SOLELY IN THE STATE OR FEDERAL COURTS LOCATED IN THE CITY OF DALLAS. 16. No Implied Contract. The parties intend to be bound only upon -------------------- execution of a written agreement and no negotiation, exchange of draft or partial performance will be deemed to imply an agreement. Neither the continuation of employment nor any other conduct will be deemed to imply a continuing agreement upon the expiration of the Term. Nigel Travis October 13, 2000 Page 8 17. Entire Understanding. This Agreement contains the entire -------------------- understanding of the parties hereto relating to the subject matter contained in this Agreement, and can be changed only by a writing signed by both parties. 18. Void Provisions. If any provision of this Agreement, as applied to --------------- either party or to any circumstances, will be found by a court of competent jurisdiction to be unenforceable but would be enforceable if some part were deleted or the period or area of application were reduced, then such provision will apply with the modification necessary to make it enforceable, and will in no way affect any other provision of this Agreement or the validity or enforceability of this Agreement. 19. Effect of Viacom Agreement. If the terms of your employment are -------------------------- currently governed by an agreement entered into between you and Blockbuster Entertainment Group, a business unit of Viacom Inc. ("Viacom") ("Viacom Agreement"), the Viacom Agreement, along with the applicable Viacom stock option agreement(s), will continue to govern your rights with respect to stock options granted to you under Viacom's 1994 and 1997 Long Term Management Incentive Plans and any successor or other plans until such time as Viacom distributes all or substantially all of its shares of Blockbuster common stock to stockholders of Viacom (a "Split-Off"). In addition to any rights set forth in the applicable Viacom stock option agreement(s), Viacom has indicated to Blockbuster that, in the event of a Split-Off, any options to purchase Viacom common stock ("Viacom Stock Options") that are held by you (i) that are exercisable at the date you cease to be a Viacom employee as a result of the Split-Off (the "Termination Date") and (ii) to the extent the terms of your employment are subject to a Viacom Agreement, that would have become exercisable during the employment term of the Viacom Agreement will remain outstanding and will be exercisable by you for a period of six (6) months after the Termination Date or, if earlier, the expiration date of the stock options. By executing this Agreement, you hereby acknowledge and agree that, in the event of the foregoing, your only remaining right with respect to the Viacom Agreement will be your right to exercise your Viacom Stock Options and Viacom will be released from any and all other obligations and liabilities under the Viacom Agreement. 20. Supersedes Prior Agreement. Subject to Paragraph 19, this Agreement -------------------------- supersedes and cancels all prior agreements relating to your employment by Blockbuster or any of its affiliated companies with respect to the period covered by the Term. Nigel Travis October 13, 2000 Page 9 If the foregoing correctly sets forth our understanding, please sign, date and return all three (3) copies of this Agreement to the undersigned for execution on behalf of Blockbuster; after this Agreement has been executed by Blockbuster and a fully-executed copy returned to you, it will constitute a binding agreement between us. Very truly yours, BLOCKBUSTER INC. By: /s/ Larry J. Zine ---------------------------- Larry J. Zine Executive Vice President and Chief Financial Officer ACCEPTED AND AGREED: /s/ Nigel Travis - ---------------------------- Nigel Travis Date: 12/18/00 ----------------------- Nigel Travis October 13, 2000 Page 10 GENERAL RELEASE AND WAIVER OF CLAIMS ------------------------------------ a. Release of Claims. As consideration by you, you agree on behalf of ----------------- yourself, successors and assigns, to release and forever discharge Blockbuster and its subsidiaries, parent and affiliated companies, employees, officers and directors, and their respective assigns, from any and all manner of claims, debts, demands, damages, liabilities and causes of action, whether known or unknown, from the beginning of time, which you, or your successors and assigns, may have had or may presently have, relating to or arising out of the employment relationship or the termination of said relationship including, but not limited to, causes of action for libel, slander, breach of contract, impairment of economic opportunity, intentional infliction of emotional distress or any other tort, or claims under federal, state, or local constitutions, statutes, regulations, ordinances or common law, including, but not limited to, the Employee Retirement Income Security Act of 1974; the Civil Rights Acts of 1866, 1871, 1964 and 1991; the Age Discrimination in Employment Act, as amended by the Older Workers Benefit Protection Act of 1990; the Rehabilitation Act of 1973; the Equal Pay Act of 1963; the Americans with Disabilities Act of 1990; and, the Family and Medical Leave Act of 1993. b. Post-Release Claims. You do not waive any rights or claims that may ------------------- arise after the date this Release is executed. c. No Admission. Nothing contained in this Release constitutes an ------------ admission of liability by Blockbuster concerning any aspect of your employment with or separation from Blockbuster. d. Confidentiality. You acknowledge that, during the course of the --------------- employment relationship, you were privy to confidential and proprietary business information belonging to Blockbuster, the unauthorized disclosure of which could cause serious and irreparable injury to Blockbuster and its affiliates. The information includes, but is not limited to, information concerning existing and prospective expansion plans; existing and potential financing sources and arrangements; existing and prospective marketing plans and activities; proprietary computer software programs and applications; business plans and strategies and other non-public information. You agree to hold and safeguard the confidential information in trust for Blockbuster, its successors and assigns, and agree that you will not, at any time, misappropriate, use for your own advantage, disclose or otherwise make available to anyone who is not an officer of Blockbuster, for any reason, any of the confidential information, regardless of whether the confidential information was developed or prepared by you or others. You agree not to remove any writings containing confidential information from Blockbuster's premises or possession without Blockbuster's express consent. You agree to promptly return to Blockbuster all confidential information in your possession or under your control (whether in original, copy, or disk form). Before disclosing any confidential information under compulsion of legal process, you agree to promptly give notice to Blockbuster of the fact that you have been served with legal process pursuant to which the disclosure of confidential information may be requested. Such notice will be given within sufficient time to permit Blockbuster to intervene in the matter or to take such other actions as may be necessary or appropriate to protect its interest in its confidential business information. The scope of this Release is not limited to information that is patented, patentable, copyrighted or technically classifiable as a trade secret. These restrictions will not apply to confidential information which is or becomes generally available to the public other than as a result of a disclosure by you or any other person who directly or indirectly receives such information from you, or is or becomes available to you on a non-confidential basis from a source which is entitled to disclose it to you. e. Cooperation. Subject to reimbursement by Blockbuster of reasonable ----------- out-of-pocket costs and expenses, you agree to cooperate fully with Blockbuster and its counsel with respect to any matter (including litigation, investigation or governmental proceeding) which relates to matters with which you were involved during the term of your employment with Blockbuster. Such cooperation will include appearing from time to time at the offices of Blockbuster or Blockbuster's counsel for conferences and interviews and in general providing the officers of Blockbuster and its counsel with the full benefit of your knowledge with respect to any such matter. You agree to render such cooperation in a timely fashion and at such times as may be mutually agreeable to the parties concerned. Nigel Travis October 13, 2000 Page 11 f. Litigation. You agree that, during the pendency of any litigation or ---------- other proceeding, and anytime thereafter, (x) you will not communicate with anyone (other than your attorneys and tax advisors) with respect to the facts or subject matter of any pending or potential litigation, or regulatory or administrative proceeding involving Blockbuster or any of its officers, directors, agents, employees, suppliers or customers, other than any litigation or other proceeding in which you are a party-in-opposition, without giving prior notice to Blockbuster's General Counsel, and (y) in the event that any other party attempts to obtain information or documents from you with respect to matters possibly related to such litigation or other proceeding, you will promptly so notify Blockbuster's General Counsel. g. Confidentiality of Release. This Release and the terms hereof are -------------------------- confidential. You agree not to disclose this Release or its provisions to any person except to your attorney or tax advisor. h. Rights upon Breach. For breach of any provision of this Release, the ------------------ parties will have such remedies and rights as are customarily available at law or in equity, except that, in any action or proceeding brought to enforce this Release or to recover damages for its breach, the prevailing party will be entitled to recover, should it substantially prevail in the matter, reasonable attorneys' fees and litigation expenses. In the event you, or any party acting on your behalf, breach this Release, Blockbuster's obligations imposed herein will be extinguished and Blockbuster will not be obligated to continue performance under this Release. In such a case, you will be required to re-pay Blockbuster all consideration received pursuant to this Release and this Release will act as a complete and total bar to any recovery. i. Injunctive Relief. The legal remedies for the breach of this Release ----------------- would not be adequate and, in addition to any other remedies available at law, these provisions may be specifically enforced by temporary or permanent injunctive or other equitable relief. j. Texas Law and Jurisdiction. THIS AGREEMENT WILL BE GOVERNED BY AND -------------------------- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, IRRESPECTIVE OF THE CONFLICT OF LAWS RULES. FURTHERMORE, BECAUSE YOU AND BLOCKBUSTER AGREE THAT THE TEXAS COURTS ARE THE EXCLUSIVE FORUM FOR RESOLVING ANY DISPUTES ARISING OUT OF THIS AGREEMENT OR YOUR EMPLOYMENT, THE PARTIES SUBMIT THEMSELVES TO THE PERSONAL JURISDICTION OF THE TEXAS COURTS. k. Advice of Counsel. You are herein advised to discuss this Release ----------------- with an attorney of your choice before signing it. l. No Parol Evidence. This Release represents the full understanding ----------------- between you and Blockbuster, and no parol evidence will be relevant to supplement or explain this Release. m. Void Provisions. Should any provision of this Release be found --------------- unenforceable, the remainder of the Release, in its modified form, will nonetheless be fully enforceable. n. Headings. The headings of the sections are included solely for --------- convenience. If the headings and the text of the Release conflict, the text shall control. All references to sections are to the Release unless otherwise indicated. o. Review and Revocation. You acknowledge that you have been given at --------------------- least twenty-one (21) days to review and consider this Release, and may revoke acceptance within seven (7) days of the execution of this Release. This Release will become effective and enforceable immediately upon the expiration of the revocation period. EX-10.20 8 0008.txt ADDENDUM TO NIGEL TRAVIS EMPLOYMENT AGREEMENT EXHIBIT 10.20 [LOGO] November 13, 2000 Nigel Travis 5109 Heather Court Flower Mound, Texas 75028 Dear Nigel, I am pleased to confirm your continued eligibility and participation in the following benefits connected with your Blockbuster Inc. assignment in the US, in addition to those described in your employment agreement, effective as of the date of such employment agreement. This letter will serve as an addendum of your employment agreement with Blockbuster Inc. Pension - ------- While on assignment in the US, you will continue to participate in the Blockbuster Inc. Pension and Death Benefits Scheme at the current contribution level of 15% of Salary (as defined in your employment contract) on a tax-free basis. Such participation is in lieu of your eligibility to participate in the Company's Investment Plan (401(k)) and excess investment plan. Life Insurance/Assurance - ------------------------ While on assignment, you will be provided two times your annual salary in life insurance under the US life insurance benefit plan, or any other additional coverage that may be established for executives at your level. In addition, you will be covered at two times your annual salary under the UK life assurance plan. Between these two plans and any supplemental life insurance you may voluntarily elect under the US plan, your total life insurance/assurance shall not exceed six times your annual salary. Home Country Housing - -------------------- Assuming you continue to retain your UK residence during the assignment, the Company will extend the standard applicable provisions of its International Relocation Policy including: . Home Retention Allowance if you move back to your home in the UK, and . Reimbursement of Home Management Fees for the duration of your assignment. Car Allowance - ------------- The Company will provide you with one automobile under Blockbuster's executive lease plan. Your monthly lease payment under the plan will be up to $750 plus insurance for one automobile. Vacation & Holidays - ------------------- Vacation entitlement will continue to be determined in accordance with policy in effect within Blockbuster UK. You will adopt the work schedule, including hours of work, time off, and public holidays in accordance with the US. Home Leave - ---------- After each anniversary (twelve months) of your assignment, you and your dependents in the US will be eligible for a Home Leave. This may be taken after each twelve months of assignment (provided the assignment is scheduled to last at least another eight weeks), at a time that is mutually convenient for you and the Company. Home leave includes all dependents in the US living with you and dependent children in the UK visiting the US. Home Leave includes airfare, accommodations, and car rental. Meals and other incidentals are not included. Business-class travel is permitted to and from the UK for Home Leave. Storage of Household Goods - -------------------------- The Company will reimburse the cost of storing in your Home Location any goods you do not wish to ship to the US. Storage costs will be covered for the duration of your assignment. Tax Services - ------------ The Company will retain the services of an expert international tax advisor annually (currently Price Waterhouse Coopers) to assist in the preparation of your personal US and UK tax returns during any full or partial years of your assignment. Personal financial information provided to these advisors remains confidential and details of that information are not shared with the Company, except as necessary. Social Security, Medicare, and Workers' Compensation - ---------------------------------------------------- During the assignment, you and the Company will continue FICA contributions as required by the US Federal Government. It is also understood that you may continue to participate in the UK NIC by making voluntary contributions of (Pounds)325 per year. Please consider Dan Satterthwaite your contact person for this matter. Benefits for occupational injury or illness will be paid in accordance with legal requirements of the US. Assignment Completion - --------------------- At the end of your assignment, the Company will assist in your repatriation to the UK. This includes reimbursement of expenses associated with return travel, movement of household goods, resettlement allowance of one-months base salary (net), temporary living in the home country for up to 30 days, rental of a car for up to 15 days, and temporary storage of household goods in the U.S. for up to 90 days. Shipment of Household Pets - -------------------------- The Company will not pay costs associated with the relocation of household pets. All costs incurred, including transportation, kennel expenses, travel documentation, veterinary inspections, and quarantine costs will be your sole responsibility. Return Shipment - --------------- At the end of your assignment, the Company will pay for the return shipment of your household goods. On the return shipment, you may ship up to an additional 1,500 pounds of household goods beyond your original shipment. Nigel, if the foregoing correctly sets forth your understanding, please sign one copy of this letter and return it to me whereupon this letter shall constitute a binding agreement between you and Blockbuster. Sincerely yours, /s/ Larry J. Zine Larry J. Zine EVP, Chief Financial Officer Accepted and Agreed: /s/ Nigel Travis - ------------------------- Nigel Travis 12/18/00 - ------------------------- Date: EX-10.23 9 0009.txt LARRY ZINE EMPLOYMENT AGREEMENT EXHIBIT 10.23 October 13, 2000 Larry J. Zine 6607 Glendora Ave Dallas, TX 75203 Dear Larry: Blockbuster Inc. ("Blockbuster"), 1201 Elm Street, Dallas, Texas 75270, agrees to employ you and you agree to accept employment with Blockbuster upon the following terms and conditions (the "Agreement"): 1. Term. The term of this Agreement shall commence on November 23, 1999 ----- and end on March 1, 2000, and will be automatically renewed on March 1 of each year for a term of three (3) years commencing on the date of automatic renewal, unless terminated by Blockbuster pursuant to Paragraph 8(a) or (b) or otherwise. As used in this Agreement, the "Term" refers to the period beginning on the initial commencement date of this Agreement and ending on the following March 1st or, if the term of your employment has been automatically renewed pursuant to this Paragraph 1, the period beginning on the date of automatic renewal and ending on the third anniversary of the date of automatic renewal, notwithstanding any earlier termination pursuant to Paragraph 8(a) or (b) or otherwise. 2. Duties. You agree to devote your entire business time, attention ------- and energies to the business of Blockbuster and its subsidiaries during your employment. You will be Executive Vice President and Chief Financial Officer of Blockbuster, and you agree to perform all duties reasonable and consistent with that or such comparable office as the Chief Executive Officer (the "CEO") of Blockbuster or other individual designated by the CEO of Blockbuster may assign to you from time to time. 3. Compensation. ------------- (a) Salary. For all the services rendered by you in any capacity ------- under this Agreement, Blockbuster agrees to pay you Thirty-seven thousand five hundred Dollars ($37,500) a month in base salary ("Salary"), less applicable deductions and withholding taxes, in accordance with Blockbuster's payroll practices as they may exist from time to time. (b) Bonus Compensation. You also will receive bonus compensation ------------------- ("Bonus") in accordance with Blockbuster's Short-Term Incentive Plan or, if applicable, Blockbuster's Senior Executive Short-Term Incentive Plan, each as may be amended from time to time (either of such plans, as applicable, to be hereinafter referred to as the "STIP") and as follows: (i) Your target bonus ("Target Bonus") for each calendar year will be 50% of your Salary on November 1st of the calendar year; provided that, for any years in which you are a participant in Blockbuster's Senior Executive Short-Term Incentive Plan, for purposes of this Section 3(b)(i), your Target Bonus will be based on your Salary as defined in such plan. Your Bonus may be prorated for any portion of the calendar year that you were employed under this Agreement. (ii) Your Bonus for any calendar year will be payable, less applicable deductions and withholding taxes, by the end of the first quarter of the following year. Larry J. Zine October 13, 2000 Page 2 4. Benefits. You will participate in such vacation, medical, dental, --------- life insurance, long-term disability insurance, 401(k), long-term incentive and other plans as Blockbuster may have or establish from time to time and in which you would be entitled to participate under the terms of the plan. This provision, however, will not be construed to either require Blockbuster to establish any welfare, compensation or long-term incentive plans, or to prevent the modification or termination of any plan once established, and no action or inaction with respect to any plan will affect this Agreement. 5. Business Expenses; Car Allowance and Insurance. During your employment ---------------------------------------------- under this Agreement, Blockbuster will reimburse you for such reasonable travel and other expenses incurred in the performance of your duties consistent with Blockbuster's then applicable expense reimbursement policies for Blockbuster executives at comparable position levels. You shall be entitled to a car lease in accordance with Blockbuster's policies, as same may be amended from time to time. 6. Non-Competition, Confidential Information, Etc. ---------------------------------------------- (a) Non-Competition. You agree that your employment with Blockbuster ---------------- is on an exclusive basis and that, while you are employed by Blockbuster, you will not engage in any other business activity which is in conflict with your duties and obligations (including your commitment of time) under this Agreement. You agree that, during the Non-Compete Period (as defined below), you will not directly or indirectly engage in or participate as an owner, partner, stockholder, officer, employee, director, agent of or consultant for any Blockbuster Competitor (as defined below) and will perform no services for a Blockbuster Competitor similar to any services performed for Blockbuster; provided, however, that this provision will not prevent you from investing as - -------- ------- less than a one (1%) percent stockholder in the securities of any company listed on a national securities exchange or quoted on an automated quotation system. The Non-Compete Period will cover the entire Term plus any period after the Term for which you receive payments pursuant to Paragraph 8(c)(i). A Blockbuster Competitor is any business entity which engages in the acquisition, aggregation, or delivery of audio or video entertainment , including but not limited to the rental or sale of video, DVD, or other movie product, equipment, or video games, either (i) in electronic, digital, or internet commerce, or (ii) in one or more geographic areas where Blockbuster has its operations (or is engaged in real estate site selection or has taken other steps toward the commencement of operations), either alone or in association with another entity. In every case, the good faith judgment of Blockbuster will be conclusive as to whether a business entity constitutes a Blockbuster Competitor. You agree that this non- compete covenant is ancillary to an otherwise enforceable agreement, including but not limited to the confidentiality covenant and the payment provisions in Paragraph 3. (b) Confidential Information. You agree that, during the Term and at ------------------------ any time thereafter, (i) you will not (a) use for any purpose other than the duly authorized business of Blockbuster conducted in the course of your employment at Blockbuster or, (b) disclose to any third party, any business information, technological information, intellectual property, trade secrets and other information belonging to Blockbuster or any of its affiliated companies or relating to Blockbuster's business, technology, or customers ("Confidential Information"), including, without limitation, any written (including in any electronic form) or oral communication incorporating Confidential Information in any way; and (ii) you will comply with any and all confidentiality obligations of Blockbuster to a third party, whether arising under a written agreement or otherwise. Information will not be deemed Confidential Information which (x) is or becomes generally available to the public other than as a result of a disclosure by you or at your direction or by any other person who directly or indirectly receives such information from you, or (y) is or becomes available to you on a non-confidential basis from a source which is entitled to disclose it to you. (c) No Employee Solicitation. You agree that, during the Term and for ------------------------- one (1) year thereafter, you will not, directly or indirectly, engage, employ or solicit the employment or consulting services of any person who is then or has been within six (6) months prior to the time of such action, an employee of Blockbuster or any of its affiliated companies. Larry J. Zine October 13, 2000 Page 3 (d) Blockbuster Ownership. Any inventions, discoveries, ideas, ---------------------- processes, programs, systems, improvements or contributions (whether or not patentable), including but not limited to any useful process, method, formula or, technique that is conceived, developed or discovered by you during your employment by Blockbuster shall be the sole property of Blockbuster. Any works of authorship or other materials created by you, in any form (including in any electronic form), created by you in the course of employment with Blockbuster and/or any of its affiliated companies and any works in progress resulting from such employment will be works-made-for hire pursuant to 17 U.S.C., Section 201 (the Copyright Act) and Blockbuster will be deemed the sole owner throughout the universe of any and all rights of every nature in and to such works (including, without limitation, any copyrights, patents, trade secrets and trademarks), whether such rights are now known or hereafter defined or discovered, with the right to use the works in perpetuity in any manner Blockbuster determines in its sole discretion without any further payment to you. If, for any reason, any of such results and proceeds are not legally deemed a work-made-for-hire and/or there are any rights in such results and proceeds which do not accrue to Blockbuster under the preceding sentence, then you hereby irrevocably assign and agree to assign any and all of your rights, title and interest thereto, including, without limitation, any and all copyrights, patents, trade secrets, trademarks, and/or other rights of every nature in the work, whether known or hereafter defined or discovered, and Blockbuster will have the right to use the work in perpetuity throughout the universe in any manner Blockbuster determines in its sole discretion without any further payment to you. You will, as may be requested by Blockbuster from time to time, do any and all things which Blockbuster may deem useful or desirable to establish or document Blockbuster's rights in any such results and proceeds, including, without limitation, the execution of appropriate copyright, trademark and/or patent applications, assignments or similar documents and, if you are unavailable or unwilling to execute such documents, you hereby irrevocably designate the CEO or his designee as your attorney-in-fact with the power to execute such documents on your behalf. To the extent you have any rights in the results and proceeds of your services under this Agreement that cannot be assigned as described above, you unconditionally and irrevocably waive the enforcement of such rights. This Paragraph 6(d) is subject to, and does not limit, restrict, or constitute a waiver by Blockbuster or any of its affiliated companies of any ownership rights to which Blockbuster or any of its affiliated companies may be entitled by operation of law by virtue of being your employer. (e) Litigation. You agree that, during the Term and the pendancy of ----------- any litigation or other proceeding, and at any time thereafter, (i) you will not communicate with anyone (other than your own attorneys or tax advisors), except to the extent necessary in the performance of your duties under this Agreement, with respect to the facts or subject matter of any pending or potential litigation, or regulatory or administrative proceeding involving Blockbuster or any of Blockbuster's affiliated companies, other than any litigation or other proceeding in which you are a party-in-opposition, without giving prior notice to Blockbuster or Blockbuster's counsel; and (ii) in the event that any other party attempts to obtain information or documents from you with respect to matters possibly related to such litigation or other proceeding, you will promptly notify Blockbuster's counsel before providing such information or documents. (f) No Right to Give Interviews, Write Books, or Articles. During the ------------------------------------------------------ Term and at any time thereafter, except as authorized by Blockbuster, you will not (i) give any interviews or speeches, or (ii) prepare or assist any person or entity in the preparation of any books, articles, television or motion picture productions or other creations, in either case, concerning Blockbuster or any of its affiliated companies or any of their respective officers, directors, agents, employees, suppliers or customers. (g) Return of Property. All documents, data, recordings, or other ------------------ property, whether tangible or intangible, including all information stored in electronic form, obtained or prepared by or for you and utilized by you in the course of your employment with Blockbuster or any of its affiliated companies, will remain the exclusive property of Blockbuster. In the event of the termination of your employment for any reason, Blockbuster reserves the right, to the extent permitted by law and in addition to any other remedy Blockbuster may have, to deduct from any monies otherwise payable to you the following: (i) all amounts you may owe to Blockbuster or any of its affiliated companies at the time of or Larry J. Zine October 13, 2000 Page 4 subsequent to the termination of your employment with Blockbuster, and (ii) the value of the Blockbuster property which you retain in your possession after the termination of your employment with Blockbuster. In the event that the law of any state or other jurisdiction requires the consent of any employee for such deductions, this Agreement will serve as such consent. (h) Non-Disparagement. You agree that, during the Term and at any ----------------- time thereafter, you will not, in any communications with the press or other media or any customer, client or supplier of Blockbuster or any of its affiliated companies, criticize, ridicule or make any statement which disparages or is derogatory of Blockbuster or any of its affiliated companies or any of their respective directors or officers. (i) Injunctive Relief. Blockbuster has entered into this Agreement in ----------------- order to obtain the benefit of your unique skills, talent, and experience. You acknowledge and agree that any violation of paragraphs 6(a) through (h) of this Agreement will result in irreparable damage to Blockbuster, and, accordingly, Blockbuster shall be entitled to obtain injunctive and other equitable relief for any breach or threatened breach of such paragraphs, in addition to any other remedies available to Blockbuster. (j) Survival; Modification of Terms. Your obligations under Paragraph -------------------------------- 6(a) through (i) will remain in full force and effect for the entire period provided therein notwithstanding the termination of your employment for any reason or the expiration of the Term. You and Blockbuster agree that the restrictions and remedies contained in paragraphs 6(a) through (i) are reasonable and that it is your intention and the intention of Blockbuster that such restrictions and remedies will be enforceable to the fullest extent permissible by law. If a court of competent jurisdiction will find that any such restriction or remedy is unenforceable but would be enforceable if some part were deleted or the period or area of application reduced, then such restriction or remedy will apply with the modification necessary to make it enforceable. 7. Disability. If you become "disabled" within the meaning of such term ---------- under Blockbuster's Short-Term Disability ("STD") program and its Long-Term Disability ("LTD") program during the Term (such condition is referred to as a "Disability"), you will receive compensation under the STD program for the first twenty-six (26) weeks of consecutive absence in accordance with its terms. Thereafter, you will be eligible to receive benefits under the LTD program in accordance with its terms. If you have not returned to work by December 31st of a calendar year during the Term, you will receive bonus compensation for the calendar year(s) during the Term in which you receive compensation under the STD program, determined as follows: (i) for the portion of the calendar year from January 1st until the date on which you first receive compensation under the STD program, bonus compensation will be determined in accordance with the STIP (i.e., based upon Blockbuster's achievement of specified goals and Blockbuster's good faith estimate of your achievement of your personal goals, if applicable) and prorated for such period; and (ii) for any subsequent portion of the calendar year and any portion of the following calendar year in which you receive compensation under the STD program, bonus compensation will be in an amount based on Blockbuster's achievement of specified goals and prorated for such period(s). Bonus compensation under this Paragraph 7 will be paid, less applicable deductions and withholding taxes, by the end of the first quarter of the year(s) following the year as to which such bonus compensation is payable. You will not receive bonus compensation for any portion of the calendar year(s) during the Term while you receive benefits under the LTD program. For the periods that you receive compensation and benefits under the STD and LTD programs, such compensation and benefits and the bonus compensation provided under this Paragraph 7 are in lieu of Salary and Bonus under Larry J. Zine October 13, 2000 Page 5 paragraphs 3(a) and (b). Notwithstanding anything to the contrary in this Agreement, the Term will not automatically extend in the event you are receiving benefits under the STD or LTD programs. 8. Termination. ----------- (a) Termination for Cause. Blockbuster may, at its option, ---------------------- terminate your employment under this Agreement forthwith for Cause and thereafter will have no further obligations under this Agreement, including, without limitation, any obligation to pay Salary or Bonus or provide benefits. Cause will mean: (i) dishonesty; (ii) embezzlement, fraud, or other conduct which would constitute a felony; (iii) unauthorized disclosure of Confidential Information; (iv) your failure to obey a material lawful directive that is appropriate to your position from an executive(s) in your reporting line; (v) your material breach of this Agreement; or (vi) your failure (except in the event of your disability) or refusal to substantially perform your material obligations under this Agreement. (b) Termination Without Cause. Blockbuster may terminate your ------------------------- employment under this Agreement without Cause at any time during the Term by written notice to you. (c) Termination Payments/Benefits. If your employment terminates ----------------------------- under Paragraph 8(b), you will thereafter receive, less applicable withholding taxes, and conditioned on your execution of a General Release and Waiver of Claims substantially in the form attached hereto as an Addendum: (i) your Salary, as in effect on the date on which your employment terminates, for thirty-six (36) months after the date of such termination, paid in accordance with Blockbuster's then effective payroll practices; (ii) bonus compensation for the calendar year in which such termination occurs, payable by the end of the first quarter of the following year, determined as follows: (x) for the portion of the calendar year from January /1/st until the date of the termination, bonus compensation will be determined in accordance with the STIP (i.e., based on --- Blockbuster's achievement of specified goals and Blockbuster's good faith estimate of your achievement of your personal goals, if applicable) and prorated for such period; and (y) for the remaining portion of such calendar year during the Term, bonus compensation will be in an amount based on Blockbuster's achievement of specified goals, and prorated for such period; (iii) bonus compensation for each subsequent calendar year or portion thereof during the Term, in an amount based on Blockbuster's achievement of specified goals, prorated for any partial calendar year, and payable by the end of the first quarter of the following year; (iv) medical and dental insurance coverage provided under COBRA at no cost to you (except as hereafter described) pursuant to Blockbuster's then-current benefit plans until the end of the Term or, if earlier, the date on which you become eligible for medical and dental coverage from a third party; provided, that, -------- during the period that Blockbuster provides you with this coverage, an amount equal to the applicable COBRA premiums (or such other amount as may be required by law) will be included in your income for tax purposes to the extent required by law and Blockbuster may withhold taxes from your compensation for this purpose; and provided, further, that you may elect to continue -------- ------- your medical and dental Larry J. Zine October 13, 2000 Page 6 insurance under COBRA at you own expense for the balance, if any, of the period required by law; (v) your car allowance until the end of the Term, paid in accordance with Blockbuster's then effective payroll practices; (vi) life insurance coverage until the end of the Term, pursuant to Blockbuster's then-current policy in the amount then furnished to Blockbuster employees at no cost (the amount of such coverage will be reduced by the amount of life insurance coverage furnished to you at no cost by a third party employer); and (vii) stock options granted to you under Blockbuster's Long-Term Management Incentive Plan ("LTMIP") which are exercisable on or prior to the date of termination of your employment under Paragraph 8(b) hereof and that would have vested and become exercisable on or before the last date of the Term will be exercisable until six (6) months after the date of such termination or, if earlier, the expiration date of the stock options. You will be required to mitigate the amount of any payment provided for in (i), (ii), (iii) and (v) of this Paragraph 8(c) by seeking other employment, and the amount of such payments will be reduced by any compensation earned by you from any source, including, without limitation, salary, sign-on or annual bonus compensation, consulting fees, commission payments, car allowance and, in the event you receive significantly more long-term compensation than you received from Blockbuster, Blockbuster's good faith estimate of the present value of the portion of such long-term compensation in excess of the long-term compensation from Blockbuster; provided, that mitigation will not be required, and no -------- reduction for other compensation will be made, for twelve (12) months after the termination of your employment. You agree to notify Blockbuster with respect to any such compensation earned by you during the period when such mitigation is required and to promptly respond to any inquiries from Blockbuster with respect to such compensation or your efforts to fulfill your mitigation obligations under this provision. (d) Termination of Benefits. Notwithstanding anything in this ----------------------- Agreement to the contrary (except as otherwise provided in Paragraph 8(c) with respect to medical and dental benefits and life insurance), participation in all Blockbuster benefit plans and programs (including, without limitation, vacation accrual, the 401(k) plan, the pension plan and the related excess plans, LTD and accidental death and dismemberment and business travel and accident insurance) will terminate upon the termination of your employment except to the extent otherwise expressly provided in such plans or programs and subject to any vested rights you may have under the terms of such plans or programs. The foregoing will not apply to the LTMIP and, after the termination of your employment, your rights under the LTMIP will be governed by the terms of the LTMIP option agreements and the applicable LTMIP plans together with Paragraph 8(c)(vii). (e) Resignation from Official Positions. If your employment with ----------------------------------- Blockbuster terminates for any reason, you will be deemed to have resigned at that time from any and all officer or director positions that you may have held with Blockbuster or any of its then-current or previously affiliated companies and all board seats or other positions in other entities you held on behalf of Blockbuster. If, for any reason, this Paragraph 8(e) is deemed insufficient to effectuate such resignation, you agree to execute, upon the request of Blockbuster, any documents or instruments which Blockbuster may deem necessary or desirable to effectuate such resignation or resignations, and you hereby authorize the Secretary and any Assistant Secretary of Blockbuster to execute any such documents or instruments as your attorney-in-fact. 9. Death. In the event of your death prior to the end of the Term ----- while actively employed, your beneficiary or estate will receive (i) your Salary up to the date on which the death occurs; (ii) any Bonus earned in the prior year but not yet paid; and (iii) bonus compensation for the calendar year in Larry J. Zine October 13, 2000 Page 7 which the death occurs, determined in accordance with the STIP (i.e., based upon ---- Blockbuster's achievement of specified goals and Blockbuster's good faith estimate of your achievement of your personal goals, if applicable) and pro- rated for the portion of the year through the date of death, payable, less applicable deductions and withholding taxes, by the end of first quarter of the following year. In the event of your death after the termination of your employment while you are entitled to receive compensation under Paragraph 8(c)(i) your beneficiary or estate will receive (x) any Salary payable under Paragraph 8(c)(i) up to the date on which the death occurs; (y) any bonus compensation earned under Paragraph 8(c)(ii) with respect to the prior year but not yet paid; and (z) any bonus compensation for the calendar year in which the death occurs, determined in accordance with Paragraph 8(c)(ii) and pro-rated for the portion of the year through the date of death, payable, less applicable deductions and withholding taxes, by the end of the first quarter of the following year. Notwithstanding anything to the contrary in this Agreement, the Term will terminate as of the date of your death. 10. No Acceptance of Payments. You represent that you have not accepted ------------------------- or given nor will you accept or give, directly or indirectly, any money, services or other valuable consideration from or to anyone other than Blockbuster for the inclusion of any matter as part of any film, television program or other production produced, distributed and/or developed by Blockbuster and/or any of its affiliated companies. 11. Equal Opportunity Employer. You recognize that Blockbuster is an -------------------------- equal opportunity employer. You agree that you will comply with Blockbuster policies regarding employment practices and with applicable federal, state and local laws prohibiting discrimination on the basis of race, color, sex, religion, national origin, citizenship, age, marital status, sexual orientation, disability or veteran status. 12. Employee Statement of Business Conduct. You acknowledge you have -------------------------------------- read and agree that you will comply with the Blockbuster Employee Statement of Business Conduct as it may be amended from time to time. 13. Notices. All notices under this Agreement must be given in writing, ------- by personal delivery or by mail, at the parties' respective addresses shown on this Agreement (or any other address designated in writing by either party), with a copy, in the case of Blockbuster, to the attention of the General Counsel of Blockbuster. Any notice given by mail will be deemed to have been given three (3) days following such mailing. 14. Assignment. This is an Agreement for the performance of personal ---------- services by you and may not be assigned by you or Blockbuster except that Blockbuster may assign this Agreement to any affiliated company of or any successor in interest to Blockbuster. 15. TEXAS LAW AND JURISDICTION. YOU ACKNOWLEDGE THAT THIS AGREEMENT -------------------------- HAS BEEN EXECUTED, IN WHOLE OR IN PART, IN TEXAS, AND YOUR EMPLOYMENT DUTIES ARE PRIMARILY PERFORMED IN TEXAS. ACCORDINGLY, YOU AGREE THAT THIS AGREEMENT AND ALL MATTERS OR ISSUES ARISING OUT OF OR RELATING TO YOUR BLOCKBUSTER EMPLOYMENT WILL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS ENTERED INTO AND PERFORMED ENTIRELY THEREIN. ANY ACTION TO ENFORCE THIS AGREEMENT WILL BE BROUGHT SOLELY IN THE STATE OR FEDERAL COURTS LOCATED IN THE CITY OF DALLAS. 16. No Implied Contract. The parties intend to be bound only upon -------------------- execution of a written agreement and no negotiation, exchange of draft or partial performance will be deemed to imply an agreement. Neither the continuation of employment nor any other conduct will be deemed to imply a continuing agreement upon the expiration of the Term. Larry J. Zine October 13, 2000 Page 8 17. Entire Understanding. This Agreement contains the entire -------------------- understanding of the parties hereto relating to the subject matter contained in this Agreement, and can be changed only by a writing signed by both parties. 18. Void Provisions. If any provision of this Agreement, as applied to --------------- either party or to any circumstances, will be found by a court of competent jurisdiction to be unenforceable but would be enforceable if some part were deleted or the period or area of application were reduced, then such provision will apply with the modification necessary to make it enforceable, and will in no way affect any other provision of this Agreement or the validity or enforceability of this Agreement. 19. Effect of Viacom Agreement. If the terms of your employment are -------------------------- currently governed by an agreement entered into between you and Blockbuster Entertainment Group, a business unit of Viacom Inc. ("Viacom") ("Viacom Agreement"), the Viacom Agreement, along with the applicable Viacom stock option agreement(s), will continue to govern your rights with respect to stock options granted to you under Viacom's 1994 and 1997 Long Term Management Incentive Plans and any successor or other plans until such time as Viacom distributes all or substantially all of its shares of Blockbuster common stock to stockholders of Viacom (a "Split-Off"). In addition to any rights set forth in the applicable Viacom stock option agreement(s), Viacom has indicated to Blockbuster that, in the event of a Split-Off, any options to purchase Viacom common stock ("Viacom Stock Options") that are held by you (i) that are exercisable at the date you cease to be a Viacom employee as a result of the Split-Off (the "Termination Date") and (ii) to the extent the terms of your employment are subject to a Viacom Agreement, that would have become exercisable during the employment term of the Viacom Agreement will remain outstanding and will be exercisable by you for a period of six (6) months after the Termination Date or, if earlier, the expiration date of the stock options. By executing this Agreement, you hereby acknowledge and agree that, in the event of the foregoing, your only remaining right with respect to the Viacom Agreement will be your right to exercise your Viacom Stock Options and Viacom will be released from any and all other obligations and liabilities under the Viacom Agreement. 20. Supersedes Prior Agreement. Subject to Paragraph 19, this Agreement -------------------------- supersedes and cancels all prior agreements relating to your employment by Blockbuster or any of its affiliated companies with respect to the period covered by the Term. Larry J. Zine October 13, 2000 Page 9 If the foregoing correctly sets forth our understanding, please sign, date and return all three (3) copies of this Agreement to the undersigned for execution on behalf of Blockbuster; after this Agreement has been executed by Blockbuster and a fully-executed copy returned to you, it will constitute a binding agreement between us. Very truly yours, BLOCKBUSTER INC. By: /s/ John F. Antioco ------------------------------------ John F. Antioco Chairman and Chief Executive Officer ACCEPTED AND AGREED: /s/ Larry J. Zine - ---------------------------- Larry J. Zine Date: 12-29-00 ----------------------- Larry J. Zine October 13, 2000 Page 10 GENERAL RELEASE AND WAIVER OF CLAIMS ------------------------------------ a. Release of Claims. As consideration by you, you agree on behalf of ----------------- yourself, successors and assigns, to release and forever discharge Blockbuster and its subsidiaries, parent and affiliated companies, employees, officers and directors, and their respective assigns, from any and all manner of claims, debts, demands, damages, liabilities and causes of action, whether known or unknown, from the beginning of time, which you, or your successors and assigns, may have had or may presently have, relating to or arising out of the employment relationship or the termination of said relationship including, but not limited to, causes of action for libel, slander, breach of contract, impairment of economic opportunity, intentional infliction of emotional distress or any other tort, or claims under federal, state, or local constitutions, statutes, regulations, ordinances or common law, including, but not limited to, the Employee Retirement Income Security Act of 1974; the Civil Rights Acts of 1866, 1871, 1964 and 1991; the Age Discrimination in Employment Act, as amended by the Older Workers Benefit Protection Act of 1990; the Rehabilitation Act of 1973; the Equal Pay Act of 1963; the Americans with Disabilities Act of 1990; and, the Family and Medical Leave Act of 1993. b. Post-Release Claims. You do not waive any rights or claims that may ------------------- arise after the date this Release is executed. c. No Admission. Nothing contained in this Release constitutes an ------------ admission of liability by Blockbuster concerning any aspect of your employment with or separation from Blockbuster. d. Confidentiality. You acknowledge that, during the course of the --------------- employment relationship, you were privy to confidential and proprietary business information belonging to Blockbuster, the unauthorized disclosure of which could cause serious and irreparable injury to Blockbuster and its affiliates. The information includes, but is not limited to, information concerning existing and prospective expansion plans; existing and potential financing sources and arrangements; existing and prospective marketing plans and activities; proprietary computer software programs and applications; business plans and strategies and other non-public information. You agree to hold and safeguard the confidential information in trust for Blockbuster, its successors and assigns, and agree that you will not, at any time, misappropriate, use for your own advantage, disclose or otherwise make available to anyone who is not an officer of Blockbuster, for any reason, any of the confidential information, regardless of whether the confidential information was developed or prepared by you or others. You agree not to remove any writings containing confidential information from Blockbuster's premises or possession without Blockbuster's express consent. You agree to promptly return to Blockbuster all confidential information in your possession or under your control (whether in original, copy, or disk form). Before disclosing any confidential information under compulsion of legal process, you agree to promptly give notice to Blockbuster of the fact that you have been served with legal process pursuant to which the disclosure of confidential information may be requested. Such notice will be given within sufficient time to permit Blockbuster to intervene in the matter or to take such other actions as may be necessary or appropriate to protect its interest in its confidential business information. The scope of this Release is not limited to information that is patented, patentable, copyrighted or technically classifiable as a trade secret. These restrictions will not apply to confidential information which is or becomes generally available to the public other than as a result of a disclosure by you or any other person who directly or indirectly receives such information from you, or is or becomes available to you on a non-confidential basis from a source which is entitled to disclose it to you. e. Cooperation. Subject to reimbursement by Blockbuster of reasonable ----------- out-of-pocket costs and expenses, you agree to cooperate fully with Blockbuster and its counsel with respect to any matter (including litigation, investigation or governmental proceeding) which relates to matters with which you were involved during the term of your employment with Blockbuster. Such cooperation will include appearing from time to time at the offices of Blockbuster or Blockbuster's counsel for conferences and interviews and in general providing the officers of Blockbuster and its counsel with the full benefit of your knowledge with respect to any such matter. You agree to render such cooperation in a timely fashion and at such times as may be mutually agreeable to the parties concerned. Larry J. Zine October 13, 2000 Page 11 f. Litigation. You agree that, during the pendency of any litigation or ---------- other proceeding, and anytime thereafter, (x) you will not communicate with anyone (other than your attorneys and tax advisors) with respect to the facts or subject matter of any pending or potential litigation, or regulatory or administrative proceeding involving Blockbuster or any of its officers, directors, agents, employees, suppliers or customers, other than any litigation or other proceeding in which you are a party-in-opposition, without giving prior notice to Blockbuster's General Counsel, and (y) in the event that any other party attempts to obtain information or documents from you with respect to matters possibly related to such litigation or other proceeding, you will promptly so notify Blockbuster's General Counsel. g. Confidentiality of Release. This Release and the terms hereof are -------------------------- confidential. You agree not to disclose this Release or its provisions to any person except to your attorney or tax advisor. h. Rights upon Breach. For breach of any provision of this Release, the ------------------ parties will have such remedies and rights as are customarily available at law or in equity, except that, in any action or proceeding brought to enforce this Release or to recover damages for its breach, the prevailing party will be entitled to recover, should it substantially prevail in the matter, reasonable attorneys' fees and litigation expenses. In the event you, or any party acting on your behalf, breach this Release, Blockbuster's obligations imposed herein will be extinguished and Blockbuster will not be obligated to continue performance under this Release. In such a case, you will be required to re-pay Blockbuster all consideration received pursuant to this Release and this Release will act as a complete and total bar to any recovery. i. Injunctive Relief. The legal remedies for the breach of this Release ----------------- would not be adequate and, in addition to any other remedies available at law, these provisions may be specifically enforced by temporary or permanent injunctive or other equitable relief. j. Texas Law and Jurisdiction. THIS AGREEMENT WILL BE GOVERNED BY AND -------------------------- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, IRRESPECTIVE OF THE CONFLICT OF LAWS RULES. FURTHERMORE, BECAUSE YOU AND BLOCKBUSTER AGREE THAT THE TEXAS COURTS ARE THE EXCLUSIVE FORUM FOR RESOLVING ANY DISPUTES ARISING OUT OF THIS AGREEMENT OR YOUR EMPLOYMENT, THE PARTIES SUBMIT THEMSELVES TO THE PERSONAL JURISDICTION OF THE TEXAS COURTS. k. Advice of Counsel. You are herein advised to discuss this Release ----------------- with an attorney of your choice before signing it. l. No Parol Evidence. This Release represents the full understanding ----------------- between you and Blockbuster, and no parol evidence will be relevant to supplement or explain this Release. m. Void Provisions. Should any provision of this Release be found --------------- unenforceable, the remainder of the Release, in its modified form, will nonetheless be fully enforceable. n. Headings. The headings of the sections are included solely for --------- convenience. If the headings and the text of the Release conflict, the text shall control. All references to sections are to the Release unless otherwise indicated. o. Review and Revocation. You acknowledge that you have been given at --------------------- least twenty-one (21) days to review and consider this Release, and may revoke acceptance within seven (7) days of the execution of this Release. This Release will become effective and enforceable immediately upon the expiration of the revocation period. EX-21.1 10 0010.txt SUBSIDIARIES OF BLOCKBUSTER EXHIBIT 21.1 STATE OR OTHER JURISDICTION OF INCORPORATION OR SUBSIDIARY NAME ORGANIZATION - --------------- ------------ 2 Day Video, Inc. Texas 2 Day Video, Inc. of Georgia Georgia Ardnasillagh Limited United Kingdom Atlantic Associates, Inc. Delaware Big Planet Video, Inc. New Hampshire Blockbuster Airships, Inc. Delaware Blockbuster Amphitheater Corporation Delaware Blockbuster Argentina S. A. Argentina Blockbuster Australia Pty Ltd. Australia Blockbuster BEI (Taiwan) Ltd. Taiwan Blockbuster Canada Co. Nova Scotia Blockbuster Canada Inc. Delaware Blockbuster.com Holding Inc. Delaware Blockbuster.com LLC Delaware Blockbuster Computer Systems Corporation Florida Blockbuster de Mexico, S.A. de C.V. Mexico Blockbuster Distribution, Inc. Delaware Blockbuster Entertainment Corporation Delaware Blockbuster Entertainment Limited United Kingdom Blockbuster Global Services, Inc. Delaware Blockbuster Holdings Ireland Ireland Blockbuster Hong Kong Limited Hong Kong Blockbuster International Spain Inc. Delaware Blockbuster International (Taiwan) B.V. The Netherlands Blockbuster Investments LLC Delaware Blockbuster Mid-America, Inc. Delaware Blockbuster On-Line Services, Inc. Delaware Blockbuster Park Lands, Inc. Florida Blockbuster Park, Inc. Delaware Blockbuster SC Video Operating Corporation Delaware Blockbuster Services Inc. Delaware Blockbuster Technology Holding Corporation Delaware Blockbuster UK Limited United Kingdom Blockbuster Uruguay Ltda. Uruguay Blockbuster Video Acquisition Corp. Delaware Blockbuster Video Danmark A/S Denmark Blockbuster Video Espana, S.L. Spain Blockbuster Video International Corporation (Chile) Limitada Chile Blockbuster Video Italy, Inc. Delaware Blockbuster Video Superstores (Australia) Pty Ltd. Australia BS Hotel, Inc. Delaware Charlotte Amphitheater Corporation Delaware Cityvision Limited United Kingdom D.E.J. Productions Inc. Delaware Direcorp, S.A. de C.V. Mexico Family Entertainment Centers, Inc. Florida FLC Holding Corp. Florida Focus Video Pty Ltd. Australia Major Video Super Stores, Inc. Nevada Montgomery Acquisition, Inc. Delaware Sercorp, S.A. de C.V. Mexico Southeastern Home Video, Inc. Delaware T.V. Factory, Inc., The New York TS Video, Inc. Louisiana UI Video Stores Inc. Colorado Westside Amphitheater Corporation, The Arizona Xtra-Vision Limited Ireland EX-23.1 11 0011.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (nos. 333-30612 and 333-39068) of Blockbuster Inc. of our report dated February 9, 2001 relating to the consolidated financial statements appearing in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP Dallas, Texas March 28, 2001 -----END PRIVACY-ENHANCED MESSAGE-----