EXHIBIT 99.(a)
MANAGEMENT SERVICES AGREEMENT
This management services agreement (this "Agreement") is
made as of April 17, 1995 among Discovery Zone, Inc. (the
"Company"), Blockbuster Entertainment Group ("Blockbuster"), a
division of Viacom Inc. ("Viacom"), and Viacom.
WHEREAS, upon consummation of the transactions contemplated
by the Stock Purchase Agreement (the "Viacom Stock Purchase
Agreement") among DKB, Inc., Xxxxx X. Xxxxx June, 1992 Non-Exempt
Trust and Xxxxx X. Xxxxx June, 1992 Non-Exempt Trust, as sellers,
Xxxxxx X. Xxxxx, Xxxxx X. Xxxxx and Xxxxx X. Xxxxx, as
guarantors, and Viacom and Blockbuster Discovery Investment,
Inc., as purchasers, Viacom will own 49.99% of the outstanding
common stock of the Company;
WHEREAS, the Company has entered into an agreement with
Blockbuster Family Fun, Inc. and Family Entertainment Centers,
Inc. to acquire Blockbuster's Block Party business (the "Block
Party Acquisition");
WHEREAS, Blockbuster has experience in multi-unit operations
in the entertainment industry;
WHEREAS, the parties hereto mutually agree that Blockbuster
should take over the operational and administrative functions of
the Company by providing certain management services for the
Company; and
WHEREAS, in return for such management services, the Company
has agreed to (i) issue to Viacom warrants, having substantially
the terms set forth on Exhibit A hereto (the "Warrants"), to
purchase preferred stock of the Company and (ii) reimburse
Blockbuster for the costs and expenses incurred in its provision
of management services to the Company;
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements hereinafter contained and other
valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto, intending to be legally
bound, hereby agree as follows:
SECTION 1. Services to be Provided to the Company.
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(a) General Duties. Blockbuster shall provide the
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overall coordination and supervision of the business of the
Company and its subsidiaries and shall direct and manage the
day-to-day operations and business affairs of the Company
and its subsidiaries. Blockbuster shall follow the policies
and directives of the Board of
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Directors of the Company and shall observe the same
fiduciary duties of care and loyalty to the Company and its
stockholders as would be imposed upon an officer or officers
of the Company.
(b) Specific Services. The services to be provided
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by Blockbuster for the Company under this Agreement shall be
the following corporate and local level services:
(i) General executive services, including
periodic advice and consultation with respect to the
affairs of the Company;
(ii) General management and supervisory
services, including business planning and development
services, as well as assistance in any acquisitions and
dispositions of assets;
(iii) General financial, accounting and
payroll services, including (A) general accounting
(billing/invoicing, accounts payable services, accounts
receivables management and collection services and
maintenance of general ledgers), (B) cash management
and banking services, (C) budget preparation and (D)
accounting and financial services associated with the
preparation and filing of reports to federal, state and
local governmental organizations, including those
associated with the preparation and filing of reports
to the United States Securities and Exchange Commission
(the "SEC");
(iv) supply and purchasing services;
(v) sales, marketing and promotional services,
including local advertising;
(vi) legal and tax services, including (A)
regular and periodic advice and consultations with
respect to legal and tax matters related to the
Company, (B) the preparation and filing of, and
assistance with respect to, tax returns and reports to
the SEC and other governmental agencies, (C)
preparation of contracts, leases and other legal
instruments and (D) the management of the defense or
prosecution of litigation, and of other legal services
furnished by outside counsel, and making
recommendations with respect thereto;
(vii) insurance services, including the
inclusion, to the extent agreed upon by Blockbuster and
the Company, of the Company as a loss payee under
insurance policies maintained by Blockbuster, and
processing and administration of insurance claims;
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(viii) real estate property selection, acquisition
and leasing services as well as property management;
(ix) services related to public relations and
investor relations, including contacts with various
news and trade publication media and securities
analysts;
(x) corporate secretary services, including
assistance in convening meetings of directors and
stockholders and preparing the minutes of such
meetings, preparing consents of directors and
stockholders, preparing periodic reports to the SEC and
the National Association of Securities Dealers, Inc.,
and other services normally associated with this
function;
(xi) human resource and personnel
administration services, including (A) employee and
labor relations, (B) compensation and benefits, (C)
hiring, promoting, demoting, discharging and
transferring employees and (D) providing incentive and
severance packages to employees; provided, however,
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that, except as set forth in any specific employee
compensation or benefit plan, the services provided by
Blockbuster hereunder shall in no event cause
Blockbuster, its board of directors or any member
thereof, its officers, employees, consultants or agents
to be considered to be fiduciaries with respect to any
employee compensation or benefit plan, program or
arrangement maintained for the Company's employees, nor
shall Blockbuster, its board of directors or any member
thereof, its officers, employees, consultants or agents
have any authority whatsoever regarding any fiduciary
decision to be made with respect to any such plan,
program or arrangement, or regarding the selection,
appointment or retention of any individual or entity
that performs or will perform any functions or
responsibilities of a fiduciary nature with respect to
any such plan, program or arrangement; and
(xii) such other services as are necessary or
appropriate for the overall coordination and
supervision of the business of the Company and its
subsidiaries and the management of the day-to-day
operations and business affairs of the Company and its
subsidiaries, including, but not limited to, management
of construction, food service, games, research and
development, computer systems development and
maintenance, and employee training.
(c) Consultants and Experts. From time to time,
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Blockbuster may employ consultants, experts (including
attorneys and accountants) or other third party service
providers in connection with the performance of
Blockbuster's duties under this Agreement. Payment for the
services rendered by such consultants and experts shall be
in accordance with the provisions of Section 2 hereof.
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(d) Resources. Blockbuster will make such resources
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(including, without limitation, computer software and access
to third party vendors) available to the Company as
Blockbuster reasonably deems necessary in the performance of
its duties under this Agreement. Notwithstanding anything
in this Agreement to the contrary, Blockbuster shall not be
obligated to provide the Company with any services or access
to any Viacom or Blockbuster property except as expressly
specified in Section 1(b) above.
(e) Executive Personnel. The general executive
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services described in subsection (b)(i) above include
providing personnel who will serve as officers of the
Company. The number and title of such officer positions,
subject to the oversight and approval of the Board of
Directors of the Company, shall be determined by Blockbuster
and such positions may be filled by persons who are also
employees and officers of Viacom or Blockbuster Entities.
Such officers may include the Chief Executive Officer, the
President, the Chief Operating Officer, the Controller, the
General Counsel, the Treasurer, the Chief Financial Officer,
the Secretary, one or more Executive Vice Presidents and one
or more Vice Presidents. Compensation for the services of
such personnel will be paid by the Company in accordance
with the provisions of Section 2.
(f) Access. During the term of this Agreement,
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Blockbuster shall be entitled to have reasonable access at
all reasonable times to the premises and relevant records of
the Company for the purpose of providing the foregoing
services and the Company shall cooperate fully with
Blockbuster to provide any information or assistance as
necessary or appropriate in connection with the provision of
the foregoing services.
(g) Limitation on Rights; Notification.
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Blockbuster's rights under this Agreement do not include the
right to exercise any of the rights of the Company set forth
in this Agreement, which shall remain with a special
committee of the Board of Directors of the Company (the
"Special Committee"), comprised of independent directors as
such term is defined in the Schedule D to the By-Laws of
National Association of Securities Dealers, Inc.
("Independent Directors"), or any agent appointed by such
committee. Blockbuster agrees to promptly notify the Board
of Directors of the Company of any event or condition of
which Blockbuster becomes aware in the performance of its
duties hereunder which could reasonably be expected to have
a material effect on the assets, business, financial
condition or operations of the Company; provided that a
failure to so notify the Board of Directors shall not result
in liability to Blockbuster except to the extent the Company
is materially prejudiced thereby.
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SECTION 2. Compensation for Services.
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(a) Quarterly Fee. The Company will pay to
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Blockbuster or any agent designated by Blockbuster a
quarterly fee equal to the actual costs, fees, expenses and
reimbursements of the services provided, and a fair and
reasonable allocation of overhead, during the preceding
calendar quarter. In the case of overhead, such cost shall
be determined by allocating an appropriate percentage of
Blockbuster's and Blockbuster Entities' overhead to the
Company. Without limiting the generality of the foregoing,
such costs shall include, without limitation:
(i) Salaries of any of the Company's officers who
are officers or employees of Blockbuster or any
Blockbuster Entity and other employees of Blockbuster
or Blockbuster Entities who provide services to the
Company (collectively, "Blockbuster Employees"), and
the cost of employee benefit and bonus programs and
other employee costs for the Blockbuster Employees.
With respect to any Blockbuster Employee who does not
provide full-time services to the Company, the costs of
such salary, employee benefits and bonus programs, and
other employee costs, will be pro rated according to a
reasonable estimate of the amount of time such
Blockbuster Employee spends on the Company's business
in relation to the amount of time such person spends on
all matters for Blockbuster or a Blockbuster Entity and
its affiliates, including the Company;
(ii) Travel and entertainment expenses of
Blockbuster Employees, which are incurred in the course
of providing services to the Company under this
Agreement;
(iii) The actual cost of any third party
services, such as law firms, engineering firms, public
relations firms, consultants and accountants, as well
as other fees, charges, taxes (excluding any taxes on
Blockbuster's compensation under this Agreement) and
dues paid for by Blockbuster or any Blockbuster Entity
in the performance of this Agreement; and
(iv) Miscellaneous fees and expenses,
including a fair and reasonable allocation of overhead,
incurred by Blockbuster and any Blockbuster Entity and
any agents thereof in providing services to the Company
under this Agreement. Overhead, includes, but is not
limited to, the cost of office space, furniture,
computer systems, software and equipment, supplies,
postage, utilities, telephone, other equipment, freight
and handling, maintenance and taxes.
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(b) Payment of Quarterly Fee. Blockbuster will
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submit to the Company a quarterly statement of the fee due
hereunder. The statement shall include the method of
calculation of the fee in reasonable detail and shall be
supported, if applicable, by vouchers and such other
information as may be reasonably requested by the Company.
Within 10 days of Blockbuster's delivery of the statement,
the Company shall pay Blockbuster the amount of the fee due;
provided, however, that if the Company reasonably objects to
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any fee or portion thereof, the Company may withhold the
amount disputed, provided that the Company furnishes to
Blockbuster a detailed written statement of the Company's
objection (a "Dispute Notice"). If the Company withholds
all or any portion of any fees and delivers a Dispute Notice
in accordance with the preceding sentence, the parties shall
endeavor in good faith to resolve such dispute. If such
dispute is not resolved by the parties within 30 days after
delivery of a Dispute Notice, the dispute shall be submitted
to a firm of independent certified public accountants
appointed by the parties. The decision of such accountants
shall be determined within 30 days after such appointment
and shall be final and binding upon the parties. Promptly,
but in no event later than two business days following the
resolution of any such dispute, the Company shall pay
Blockbuster the amount of the fee due, if any (as determined
by the parties hereto or by the independent certified public
accountants), together with interest thereon at LIBOR plus
.75% per annum or the maximum permitted by law, whichever is
lower, accruing from tenth day following the Company's
receipt of the applicable fee statement. "LIBOR" means the
rate per annum (rounded upwards, if necessary to the next
higher one hundred-thousandth of a percentage point) for
deposits in United States dollars for a one-month period,
which appears on the display designated as Page 3750 on the
Telerate Service (or such other page as may replace Page
3750 on that service or such other service as may be
nominated by the British Bankers' Association as the
information vendor for the purposes of displaying British
Bankers' Association Interest Settlement Rates for United
States dollar deposits) on the tenth day following the
Company's receipt of the applicable fee statement (or if
such day is not a day on which such rate is quoted, the next
succeeding day on which such rate is quoted) and as adjusted
on each one month anniversary of such date (or if such day
is not a day on which such rate is quoted, the next
succeeding day on which such rate is quoted) until the fee
determined to be due is paid by the Company. Blockbuster
shall bear the expenses of such accounting firm if the
amount of the fee due as determined by such accounting firm
is less than 90% of the amount disputed (95% if the amount
disputed is an annual fee); otherwise, the Company shall
bear the expenses of such accounting firm.
.
(c) Company's Right to Inspect. At the request of
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the Special Committee made not more frequently than once in
any calendar year (regardless of whether any Dispute Notice
has been presented by the Company) and at any time on and
after the presentation of a Dispute Notice (and for so long
as such dispute remains unresolved),
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the Company shall have the right during normal business
hours, and with reasonable notice to Blockbuster, to
inspect, or cause to be inspected, the business, bookkeeping
and accounting records of Blockbuster relating to its
services under this Agreement. The Special Committee may,
at the Company's cost, engage independent certified public
accountants or other representatives to assist it in the
examination of such records and Blockbuster shall cooperate
with such accountants or other representatives in any such
inspection.
(d) Issuance of the Warrants to Viacom. In addition
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to the quarterly fee, in consideration of the services
provided by Blockbuster, the Company will issue the Warrants
to Viacom on or prior to the Effective Date.
SECTION 3. Limitation of Liability; Indemnification.
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(a) Limitation of Liability. Subject to Section 3(e)
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hereof, neither Blockbuster nor any Blockbuster Entity nor
any of their officers, directors, employees, consultants or
agents shall be liable to the Company or any Company Entity,
or to any officer, director, employee, consultant or agent
of the Company or any Company Entity, for any cost, damage,
expense or loss, including, without limitation, any special,
indirect, consequential or punitive damages of the Company
or any Company Entity, or any such officer, director,
employee, consultant or agent, arising as a result of or in
connection with any service, advice or data Blockbuster or
any Blockbuster Entity may provide or fail to provide to the
Company or any Company Entity pursuant to this Agreement.
(b) Indemnification of Blockbuster. Subject to
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Section 3(e) hereof, the Company shall indemnify Blockbuster
and each Blockbuster Entity, and each of their officers,
directors, employees, consultants and agents, and shall hold
Blockbuster and each Blockbuster Entity and each such
officer, director, employee, consultant and agent harmless
against any damage, loss, cost or expense (including court
costs and reasonable attorneys' fees as they are incurred)
which Blockbuster and any Blockbuster Entity, or any such
officer, director, employee, consultant or agent may sustain
or incur by reason of any claim, demand, suit or recovery by
any person or entity (i) arising in connection with this
Agreement, (ii) arising out of Blockbuster's or any
Blockbuster Entity's, or any such officer's, director's,
employee's, consultant's or agent's performance of
Blockbuster's obligations under this Agreement, including,
without limitation, arising out of any service, advice or
data Blockbuster or any Blockbuster Entity may provide to
the Company or (iii) arising out of the failure of the
Company or any Company Entity to perform the Company's
obligations pursuant to this Agreement. Notwithstanding the
immediately preceding sentence the Company shall not be
liable under the foregoing indemnification provision (x) to
the extent any damage, loss, cost or expense is finally
judicially
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determined to have resulted from the willful misconduct or
gross negligence of Blockbuster, such Blockbuster Entity or
such officer, director, employee, consultant or agent in the
performance of its obligations under Section 1 hereof, (y)
to the extent any damage, loss, cost or expense arises out
of a willful breach by Blockbuster of any of Blockbuster's
obligations under this Agreement (other than its obligations
under Section 1 hereof) or (z) for any damage, loss, cost or
expense with respect to shareholder litigation arising in
connection with of the announcement or signing of this
Agreement.
(c) Indemnification of the Company. Notwithstanding
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Section 3(a) hereof, Blockbuster shall indemnify the Company
and each Company Entity, and each of their officers,
directors, employees, consultants and agents, and shall hold
the Company and each Company Entity and each such officer,
director, employee, consultant and agent harmless against
any damage, loss, cost or expense (including court costs and
reasonable attorneys' fees) which the Company, any Company
Entity, or any of their officers, directors, employees,
consultants or agents may sustain or incur by reason of any
claim, demand, suit or recovery by any person or entity
arising out of Blockbuster's or any Blockbuster Entity's
performance (or nonperformance) of Blockbuster's obligations
pursuant to this Agreement but only (subject to 3(e) hereof)
to the extent any damage, loss, cost or expense is finally
judicially determined to have resulted from the willful
misconduct or gross negligence of Blockbuster, any
Blockbuster Entity or any of their officers, directors,
employees, consultants or agents.
(d) Blockbuster Entity; Company Entity. As used
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herein, "Blockbuster Entity" shall mean Viacom and any
entity that (1) is affiliated with Blockbuster, excluding
the Company, and (2) provides services to the Company under
this Agreement on behalf of Blockbuster. As used herein,
"Company Entity" shall mean affiliates of the Company,
excluding Blockbuster or any Blockbuster Entity.
(e) Certain Liabilities. The limitations on the
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liability of Blockbuster or a Blockbuster Entity contained
in Section 3(a) and Section 3(c), and the rights of
Blockbuster to indemnification under Section 3(b), shall not
apply to any breach by Viacom of its obligations or
covenants under Section 17(b) or Section 18 hereof.
SECTION 4. Effective Date; Termination.
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(a) Effective Date. This Agreement shall not be
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effective until the date on which the transactions
contemplated by both the Viacom Stock Purchase Agreement and
the Block Party Acquisition (if not otherwise terminated in
accordance with its terms) shall have been consummated;
provided, however, that the Company's representations in
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Section 22 hereof are true and complete, and the Company is
in
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compliance with the covenants of Section 22 hereof, on such
date; provided, however, that Blockbuster, in its sole
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discretion, may waive the requirements of this sentence (but
in no event earlier than the expiration or termination of
the waiting period, if any, imposed by the Xxxx-Xxxxx-Xxxxxx
Antitrust Improvements Act of 1976, as amended), in which
case, this Agreement shall become effective on the date
Blockbuster notifies the Company of such waiver. The date
on which this Agreement becomes effective pursuant to the
preceding sentence is referred to herein as the "Effective
Date".
(b) Term. The initial term of this Agreement shall
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commence on the Effective Date and end on the fifth
anniversary thereof. Thereafter, this Agreement shall
continue for consecutive one-year terms until it is
terminated in accordance with this section. This Agreement
may be terminated by Blockbuster or the Company at the end
of the initial term or any one-year renewal by written
notice given to the other party not less than six months
prior to such termination. Notwithstanding the foregoing,
(i) either the Company or Blockbuster may, at its option,
terminate this Agreement upon two days' written notice to
the other party, after June 30, 1995, if the Effective Date
shall not have occurred on or prior to such date; (ii)
either the Company or Blockbuster may, at its option,
terminate this Agreement upon 60 days' written notice to the
other party if (x) such other party has materially breached
any of its obligations under this Agreement, (y) such notice
specifies, in reasonable detail, the nature of such breach
and (z) any breach specified in such notice has not been
remedied or cured during the 60-day period following the
delivery of such notice; provided, however, that if during
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such 60-day period Blockbuster has undertaken good faith
efforts toward remedying such breach, then such period shall
be extended for a period equal to the lesser of (A) 120 days
and (B) the amount of time in which such breach could
reasonably be cured; and (iii) the provisions of Sections 3,
15, 17(b) and 18 and the performances of the duties of
subsections (b), (c) and (d) of this Section 4 shall survive
any such termination.
(c) Severance Payments. The Company will pay to
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Blockbuster all of the employee severance costs incurred and
paid by Blockbuster or any Blockbuster Entity to employees
or officers of Blockbuster or any Blockbuster Entity (which
severance costs on average shall not materially exceed the
average costs of severance payments paid to other similarly
situated employees and officers of Blockbuster) whose duties
included rendering services to the Company (provided that
such severance costs will be prorated for any employee who
rendered less than substantially all of his or her time to
the Company within the 90 days prior to termination; such
proration shall be determined based on the amount of time
such employee rendered service to the Company compared to
the amount of time such employee rendered service to other
Blockbuster business since the Effective Date) and who are
terminated by Blockbuster
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in connection with the termination of this Agreement on or
within four months after the termination of this Agreement.
(d) Termination Expenses. For a period of six months
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after the termination of this Agreement, Blockbuster shall
take such actions as are reasonably necessary to close out
the services provided by Blockbuster hereunder, including
providing all reasonable assistance and cooperation in
connection with transferring the performance of the services
provided by Blockbuster under this Agreement from
Blockbuster to the persons or entities designated by the
Company to thereafter perform such services. The Company
shall be directly liable, and shall reimburse Blockbuster in
accordance with the provisions of Section 2 hereof for any
amounts paid by Blockbuster or any Blockbuster Entity, for
all services rendered, including all costs and expenses
incurred by Blockbuster or any Blockbuster Entity
(including, without limitation, fees and expenses of third
parties (including accountants)) during such period to close
out accounts, books and records of the Company maintained on
its behalf by Blockbuster or any Blockbuster Entity and to
take other such actions as are reasonably necessary to close
out and transfer the services provided by Blockbuster
hereunder, including, without limitation, final audits
involving the Company and any Company Entity.
SECTION 5. Independent Contractor. The Company
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acknowledges and agrees that Blockbuster has been retained to act
solely as management service provider to the Company. In such
capacity, Blockbuster shall act as an independent contractor, and
any duties of Blockbuster arising out of its engagement pursuant
to this letter agreement shall be owed solely to the Company and
not to any security holder of the Company.
SECTION 6. Company Corporate Powers. Nothing herein
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shall be construed to relieve the directors and officers of the
Company or the Company Entities from the performance of their
respective duties or limit the exercise of their powers. Nothing
herein shall give Blockbuster the power to take any actions on
behalf of the Company or the Company Entities that are solely
within the authority of such entity's board of directors or
shareholders or other governing body.
SECTION 7. Force Majeure. If Blockbuster is unable,
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wholly or in part, by reason of any occurrence beyond the
reasonable control of Blockbuster, to carry out any obligation
under this Agreement, the performance of such obligation, to the
extent and during the time that it is so affected, shall be
suspended.
SECTION 8. Amendment. This Agreement may not be amended
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except by a written instrument signed by all of the parties
hereto.
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SECTION 9. Entire Agreement. This Agreement constitutes
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the entire agreement between the parties and supersedes all prior
agreements, representations, warranties, statements, promises,
information, arrangements and understandings, whether oral or
written, express or implied, with respect to the subject matter
of this Agreement.
SECTION 10. Severability. If any provision of this
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Agreement shall be waived, or be invalid or unenforceable, the
remaining provisions of this Agreement shall be unaffected
thereby and shall remain binding and in full force and effect,
and in the case any provision is found to be invalid or
unenforceable, each of the parties shall use its best efforts to
find and employ an alternative means to achieve the same or
substantially the same results as that contemplated by such
provision.
SECTION 11. Governing Law. This Agreement shall be
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governed by, and be construed in accordance with, the laws of the
State of Delaware applicable to contracts executed and to be
performed entirely in that state.
SECTION 12. Submission to Jurisdiction. Any legal action
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or proceeding with respect to this Agreement may be brought in
the courts of the State of New York or, to the extent permitted
by applicable law, of the United States for the Southern District
of New York and, by execution and delivery of this Agreement,
each of the parties hereto hereby irrevocably accepts for itself
and in respect of its property, generally and unconditionally,
the jurisdiction of the aforesaid courts.
SECTION 13. Headings. The underlined headings of
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paragraphs in this Agreement are included for reference only and
are not a part of this Agreement.
SECTION 14. Counterparts. This Agreement may be executed
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in counterparts, each of which when so executed shall be deemed
to be an original, and such counterparts together shall
constitute one and the same agreement.
SECTION 15. Confidentiality. Neither Blockbuster nor any
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Blockbuster Entity shall use for personal benefit, disclose,
communicate or divulge any of the legal, financial or business
information of the Company which is proprietary to the Company.
Notwithstanding the prohibitions of the immediately preceding
sentence, Blockbuster's and each Blockbuster Entity's
confidentiality obligations shall exclude the following: (i) any
information known by Blockbuster or such Blockbuster Entity prior
to disclosure by the Company; (ii) information disclosed to
Blockbuster or such Blockbuster Entity by a third party, unless
the third party was, to the best of Blockbuster's or such
Blockbuster Entity's knowledge, under a duty not to disclose or
use the information or unless the third party was, to the best of
Blockbuster's knowledge, not in rightful possession of such
information; (iii) information which is or becomes generally
known in the pertinent trade or industry; (iv) such information
is disclosed by the Company or its affiliates to other persons
who are not bound by confidential
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undertakings; or (v) such information is required to be disclosed
by law, rule, regulation or judicial process (in which case
Blockbuster shall, to the extent practicable, notify the Company
prior to such disclosure).
SECTION 16. Assignment. None of the parties hereto shall
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have the right (a) to assign, transfer or convey any of its
rights or interest under this Agreement, or (b) except as
contemplated by Section 1(c), to delegate any of its duties or
obligations under this Agreement. Notwithstanding the foregoing,
Blockbuster shall be entitled to assign its rights and
obligations to any of its affiliates.
SECTION 17. Board of Directors. (a) On the Effective
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Date, all non-Viacom directors except Xxxxxx X. Xxxxx will resign
as members of the Board of Directors. Upon resignation of the
aforementioned members of the Board of Directors, the Company
will exercise all authority under applicable law (subject to the
fiduciary obligations of the Board of Directors of the Company to
the Company's stockholders) to cause nominees designated by
Viacom to be elected or appointed to the Company's Board of
Directors to fill such vacancies. Notwithstanding Section 4(a)
hereof, on the date of this Agreement, Xx. Xxxxx will resign as
Chief Executive Officer and Xxxxxx X. Xxxxxxx will be appointed
interim Chief Executive Officer of the Company.
(b) Viacom shall, until such time as final, nonappealable
judgments shall have been entered in the actions entitled In re
Discovery Zone, Inc. Securities Litigation and Xxxxxxx Xxxxxxxxx
v. Discovery Zone, Inc., et al., in the United States District
Court for the Northern District of Illinois, or such action shall
have been otherwise settled, and in all related actions, suits or
other proceedings which may hereafter be filed or commenced
(collectively, the "Securities Litigation"), take all actions
(including causing its representatives on the Board of Directors
of the Company to take all actions, subject to their fiduciary
duties to the Company's stockholders) that are necessary to (i)
cause there to be created a Special Litigation Committee of three
members of the Board of Directors of the Company (the "Special
Litigation Committee") having power (to the extent permitted by
law) to supervise the conduct of the Securities Litigation and
make recommendations to the Board with respect to material
decisions with respect to the Securities Litigation, including
settlements; provided that the Special Litigation Committee shall
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have the power to enter into a settlement agreement pursuant to
which the Company would not be obligated to pay any money and
which settlement agreement does not contain any other terms or
conditions which are adverse to the Company; and (ii) cause
Messrs. Xxxxx and Xxxxxxx (for so long as they are directors) and
an Independent Director to be members of the Special Litigation
Committee.
(c) For so long as Xxxxxx Xxxxx is a director of the
Company, neither Blockbuster nor Viacom shall take any action to
reduce the amount of directors and officers liability
13
insurance coverage for directors and officers of the Company
below the amount in effect on the date of this Agreement.
(d) The parties hereto agree that Section 17(b) and (c) are
intended to be for the benefit of, and shall be specifically
enforceable by, Xxxxxx Xxxxx.
SECTION 18. Viacom Covenants. (a) Neither Viacom nor any
----------------
of its subsidiaries will, from and after the Effective Date and
until the earlier of (i) the date that (w) directors, officers,
employees or representatives of Viacom or any of its affiliates
cease to constitute a majority of the Board of Directors of the
Company and (x) Viacom beneficially owns less than 30% of the
outstanding voting stock of the Company and (ii) the tenth
anniversary of the date of this Agreement, engage in a
transaction that would constitute a Rule 13e-3 (as such rule is
in effect as of the date of this Agreement under the Exchange
Act) transaction involving the Company, unless such transaction
includes as a condition to the consummation of such transaction
that (A) if such transaction occurs prior to the second annual
meeting of the stockholders of the Company occurring after the
date of this Agreement, the holders of a majority of the shares
of common stock of the Company not owned by Viacom or its
subsidiaries that are present (whether in person or by proxy) and
entitled to vote at the meeting of stockholders called to vote on
such transaction shall have voted in favor thereof and (B) a
special committee (the "Independent Committee") of the Board of
Directors of the Company comprised solely of Independent
Directors of the Company shall have (i) approved the terms and
conditions of the transaction and (ii) received from its
financial advisor a written opinion addressed to the Independent
Committee substantially to the effect that the consideration to
be received by the stockholders of the Company (other than Viacom
or its subsidiaries) in the transaction is fair to such
stockholders from a financial point of view.
(b) The parties hereto agree that irreparable damage would
occur in the event the provisions of Section 18(a) of this
Agreement were not performed in accordance with their specific
terms and that the parties shall be entitled to specific
performance of the terms thereof, in addition to any other remedy
at law or in equity.
SECTION 19. No Breach; Consents and Approvals. (a) The
---------------------------------
execution and delivery of this Agreement by the Company do not,
and the consummation of the transactions contemplated hereby will
not (i) violate or conflict with the Certificate of Incorporation
or the Bylaws of the Company or any of its subsidiaries or (ii)
except as set forth on Schedule 19 attached hereto, constitute a
breach or default (or an event that with notice or lapse of time
or both would become a breach or default) of, or give rise to any
lien, third party right of termination, cancellation, material
modification or acceleration, under any material agreement,
understanding or undertaking to which the Company or any of its
subsidiaries is a party or by which it or any them is bound or
violate or conflict with any law, rule, regulation, judgment,
decree or order to which it or any of them is subject.
14
(b) The execution and delivery of this Agreement by
Blockbuster and Viacom do not, and the consummation of the
transactions contemplated hereby will not (i) violate or conflict
with the Certificate of Incorporation or the Bylaws of Viacom or
any of its subsidiaries or (ii) constitute a breach or default
(or an event that with notice or lapse of time or both would
become a breach or default) of, or give rise to any lien, third
party right of termination, cancellation, material modification
or acceleration, under any material agreement, understanding or
undertaking to which Viacom or any of its subsidiaries is a party
or by which it or any them is bound or violate or conflict with
any law, rule, regulation, judgment, decree or order to which it
or any of them is subject.
SECTION 20. Severance Terms.
---------------
(a) For purposes of this Section 20, (i) "Transition
Period" shall mean the period commencing on the Effective Date
and ending 30 days thereafter, (ii) "Officers" shall mean those
employees of the Company set forth on Schedule 20(ii) hereto,
(iii) "Level A Employees" shall mean those employees of the
Company set forth on Schedule 20(iii) hereto, (iv) "Level B
Employees" shall mean those employees of the Company set forth on
Schedule 20(iv) hereto and (v) "Employees" shall mean
collectively all Officers, Level A Employees and Level B
Employees.
(b) Each Employee who remains an employee of the Company
during the Transition Period shall be entitled to: (i) a cash
payment from the Company (the "Severance Payment") on the date of
termination (other than for cause, as defined in the Company's
1993 Employee Stock Option Plan) of such Employee's employment
with the Company by the Company (including a relocation demand)
equal to the greater of (x) the amount such Employee would be
entitled to under an employment agreement with the Company or its
subsidiary and (y) six months of such Employee's annual base
salary at the time of such termination, in the case of an
Officer, three months of such Employee's annual base salary at
the time of such termination, in the case of a Level A Employee,
and one month of such Employee's annual base salary at the time
of such termination, in the case of a Level B Employee, (ii) a
one-year period commencing on the Effective Date during which to
exercise any options under the 1993 Employee Stock Option Plan of
the Company held by such Employee as of the Effective Date.
(c) Each Employee who remains an employee of the Company
after the Transition Period shall be entitled to a cash payment
from the Company, in addition to the Severance Payment, on the
date of termination (other than for cause, as defined in the
Company's stock option plans) of such Employee's employment with
the Company by the Company (including a relocation demand) equal
to one week's base salary at the time of such termination for
each week such Employee remained after the Transition Period, up
to a maximum of three month's base salary.
15
(d) Blockbuster agrees to make Group Outplacement Services
(as hereinafter defined) available to all employees of the
Company whose employment is terminated by the Company other than
for cause (each, a "Terminated Employee"). For purposes of this
Section 20(d), "Group Outplacement Services" shall consist of a
one-day resume preparation program provided by a resume
preparation firm chosen by Blockbuster in its sole discretion.
Such Group Outplacement Services shall be provided to each
Terminated Employee not later than ten (10) business days
following such employee's date of termination.
SECTION 21. Publicity. Notwithstanding Section 4(a)
---------
hereof, from the date of this Agreement, no public release or
announcement related to this Agreement or the transactions
contemplated hereby will be issued by any party hereto without
the prior approval of the other parties, except that any party
may make such public disclosure which it believes in good faith
to be required by law (in which case such party will consult with
the other parties prior to making such disclosure).
SECTION 22. Representations and Covenants of the Company.
--------------------------------------------
Notwithstanding Section 4(a) hereof, except as specified herein,
during the period from the date of this Agreement to the
Effective Date, neither the Company nor any of its subsidiaries
(i) will, directly or indirectly, issue any equity securities
(other than upon the exercise of vested options or exercisable
--------------------------------------------------------------
warrants outstanding on the date hereof) and or securities
--------------------------------------------
convertible into or exerciseable or exchangeable for equity
securities or grant any employee stock options, pay any bonuses,
amend or enter into any employee benefits plans, stock option
plans, any other employee plans or employee contracts (other
than, except in the case of Officers, in the ordinary course of
business, consistent with past practice) or otherwise change the
terms of compensation for any of its employees (other than,
except in the case of Officers, in the ordinary course of
business, consistent with past practice) or settle the Securities
Litigation, in each case without the prior written consent of
Blockbuster, provided that Blockbuster will not withhold its
consent to any settlement of the Securities Litigation which does
not obligate the Company to pay any money and does not contain
any terms or conditions adverse to the Company and (ii) will run
its business in the ordinary course in accordance with past
practice.
SECTION 23. Waiver of Jury Trial. Each of Blockbuster
--------------------
and the Company (in its own behalf and, to the extent permitted
by applicable law, on behalf of its shareholders) waives all
right to trial by jury in any action, proceeding or counterclaim
(whether based upon contract, tort or otherwise) related to or
arising out of Agreement, or the actions or failure to act in the
negotiation, administration, performance or enforcement thereof.
16
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
DISCOVERY ZONE, INC.
By: /s/ Xxxxx X. Xxxxx
------------------------
Name: Xxxxx X. Xxxxx
Title: Senior Vice President -
Development
BLOCKBUSTER ENTERTAINMENT GROUP,
a division of Viacom Inc.
By: /s/ Xxxx X. Xxxxxxxx
-------------------------
Name: Xxxx X. Xxxxxxxx
Title: Vice President
VIACOM INC.
By: /s/ Xxxxxx X. Xxxxxxx
-------------------------
Name: Xxxxxx X. Xxxxxxx
Title: Assistant Secretary
EXHIBIT A
---------
WARRANT TERM SHEET
Number of Warrants . . 157,821 Series A Warrants, 157,821
Series B Warrants and 157,821
Series C Warrants.
Exercise Price . . . . The Series A Warrants will entitle
Viacom to purchase an aggregate of
157,821 shares of Convertible
Voting Participating Preferred
Stock, par value $.01 per share
("DZI Preferred Stock"), of
Discovery Zone, Inc. ("DZI") at an
exercise price of $249.000 per
preferred share, subject to
adjustment. The Series B Warrants
will entitle Viacom to purchase an
aggregate of 157,821 shares of DZI
Preferred Stock at an exercise
price of $286.344 per preferred
share, subject to adjustment. The
Series C Warrants will entitle
Viacom to purchase an aggregate of
157,821 shares of DZI Preferred
Stock at an exercise price of
$343.608 per preferred share,
subject to adjustment.
Term . . . . . . . . . The Warrants will expire in five
years from the Effective Date,
provided, however, that the term of
-------- -------
the Warrants shall be extended for
additional one-year terms in the
event and as long as that the
Management Services Agreement is
continued for any period after the
initial term thereof; provided,
--------
further, that (i) the Series A
-------
Warrants will expire on the date
the Management Services Agreement
is terminated by (x) DZI because of
a material breach by Blockbuster
Entertainment Group ("BEG") or (y)
Blockbuster (other than termination
for a material breach by DZI), in
each case if such termination
occurs prior to the first
anniversary of the Effective Date,
(ii) the Series B Warrants will
expire on the date the Management
Services Agreement is terminated by
(x) DZI because of a material
breach by BEG or (y) Blockbuster
(other than termination for a
material breach by DZI), in each
case if such termination occurs
prior to the second anniversary of
the Effective Date and (iii) the
Series C Warrants
A-2
will expire on the date the
Management Services Agreement is
terminated by (x) DZI because of a
material breach by BEG or (y)
Blockbuster (other than termination
for a material breach by DZI), in
each case if such termination
occurs prior to the third
anniversary of the Effective Date.
Exerciseability . . . . The Warrants shall be exerciseable,
in whole or in part, on or after
December 16, 1998, unless and until
the Warrants have expired as
described above under "Term";
provided that in the event of a
--------
change in control (as defined in
the DZI XXXXx) of DZI or a sale of
a sufficient number of shares of
Common Stock such that Viacom owns
less than 20% of the total number
of DZI shares of Common Stock
outstanding or upon mutual
agreement, the exercise period for
the Warrants would be accelerated;
provided further, that in no event
-------- -------
will the Warrants be exerciseable
prior to (x) the first anniversary
of the Effective Date, with respect
to the Series A Warrants, (y) the
second anniversary of the Effective
Date, with respect to the Series B
Warrants and (z) the third
anniversary of the Effective Date,
with respect to the Series C
Warrants; provided further, that to
-------- -------
the extent shareholder approval is
required under the rules and
regulations of the NASD to exercise
any portion of the Series A
Warrants, such Warrants will not
become exercisable unless and until
such approval is obtained.
Antidilution Adjustments
The exercise price per share of DZI
Preferred Stock will be adjusted
pursuant to customary antidilution
provisions, including, dividends,
liquidations, certain mergers and
consolidations, stock splits, stock
dividends, subdivisions or
combinations with respect to the
Common Stock.
Transferability . . . . The Warrants will not be
transferable by Viacom other than
to any of its affiliates.
A-3
Terms of DZI Preferred Stock
Maturity . . . . . . . Perpetual.
Dividends . . . . . . . Non-cumulative dividends equal to
the greater of (i) 5% of the
liquidation preference per share of
DZI Preferred Stock, when, as and
if declared by the Board of
Directors and (ii) an amount equal
to the pro rata share of dividends
paid with respect to the Common
Stock (determined based on the
number of shares of Common Stock
each share of DZI Preferred Stock
would be convertible into), which
will rank senior to the Common
Stock and junior to any other
preferred stock.
Conversion Rights . . . Convertible, in the aggregate
(assuming all Warrants vest) into
11,363,112 shares of Common Stock
automatically immediately but only
following the sale of the DZI
Preferred Stock by Viacom to an
unaffiliated third party.
Voting Rights . . . . . Each share of DZI Preferred Stock
will be entitled to such number of
votes equal to the number of shares
of Common Stock it is convertible
into and, except as required by
law, will vote together as one
class with the Common Stock on all
matters submitted for stockholder
approval.
Liquidation Preference $.10 per share of DZI Preferred
Stock, and thereafter equally with
Common Stock based on number of
shares of Common Stock it is
convertible into.
Antidilution Adjustments
The number of shares of Common
Stock each share of DZI Preferred
Stock is convertible into will be
adjusted pursuant to customary
antidilution provisions, including,
dividends, liquidations, certain
mergers and consolidations, stock
splits, stock dividends,
subdivisions or combinations with
respect to the Common Stock and
"below then current market price"
issuances of Common Stock.
A-4
Registration Rights . . The holders of DZI Preferred Stock
will be entitled to the
registration rights summarized
below.
TERM SHEET FOR REGISTRATION RIGHTS
Demand Registration: The holders of DZI Preferred Stock shall be
entitled to require DZI to file a registration
statement with respect to a public offering of
the DZI Common Stock for which their DZI Preferred
Stock is exercisable (the "Registrable
Securities") on one occasion; provided that no such
demand may be made within 180 days after the
effective date of any registration statement as to
which the holders could have exercised piggyback
registration rights as described below; and
provided further that such demand registration may
not be for a shelf registration of Registrable
Securities. Such demand right may be exercised
by a majority of the DZI Common Stock for which
the DZI Preferred Stock is then exercisable that
are entitled to registration rights as provided
herein. Any such registration shall be subject to
the piggyback registration rights granted to any
other person by DZI; provided that DZI shall not
grant any registration rights to any person after
the Effective Date that permit the cut-back by such
person of Registrable Securities included in a
demand registration thereof.
Limitations on Demand
Registration Rights: Any demand for registration will be required to
cover a number of Registrable Securities having a
fair market value of not less than $25,000,000 at
the time of such demand. If a demand registration
is requested and prior to that time (i) DZI has in
good faith commenced the preparation of a
registration statement for an underwritten public
offering and (ii) the managing underwriter for such
offering determines, and set forth in writing to
the holders of the DZI Preferred Stock requesting
such registration (the "Participating Holders"),
its good faith opinion that the proposed offering
by the Participating Holders will materially and
adversely affect such DZI public offering,
DZI will be permitted to defer (a "Transactional
Deferral") the filing of such demand registration
on behalf of the Participating Holders until the
earliest of (a) the abandonment of such offering
by DZI, (b) 60 days after receipt by the
Participating Holders of the opinion of the
managing underwriter described above (unless the
A-5
DZI offering has become effective on or prior to
such 60th day) or (c) if the DZI offering has
commenced on or prior to such 60th day, 90 days
after the effective date of such offering (or such
shorter period as may be requested by the
underwriter for such offering). DZI will not be
permitted to defer a demand registration by the
Participating Holders on the basis of a
Transactional Deferral more than once in any
12-month period. DZI may postpone for not more
than 90 days in any 365-day period the filing of a
demand registration on behalf of the Participating
Holders if DZI is advised by legal counsel that
such filing will require disclosure of material
information that DZI has a bona fide business
reason for preserving as confidential and the
disclosure of which, DZI determines reasonably and
in good faith, would have a material adverse effect
on DZI. If DZI defers any registration statement
as provided herein and the Participating Holders
determine not to proceed with such registration
on or prior to the end of such deferral
period, the holders' one registration demand will
be reinstated.
Piggyback Registration: If DZI proposes to register a primary or secondary
offering of its securities (except an Excluded
Registration, as hereinafter defined), any holder
of DZI Preferred Stock having registration rights
(a "Requesting Holder") will be entitled to include
Registrable Securities in such registration (which
Registrable Securities, in the case of a
registration to effect an underwritten offering,
shall include only Registrable Securities of the
same type as those being registered by the person
initiating such registration, if the managing
underwriter for such offering determines that the
inclusion of other types of Registrable Securities
would materially and adversely affect such
offering). An "Excluded Registration" means (i)
any registration of DZI securities to be issued
pursuant to a stock option or employee benefit
plan, (ii) a registration of DZI securities
to be issued to or for the benefit of, or resold
by, the owners of one or more businesses,
franchises, development or management rights or
other assets to be acquired by DZI in
consideration, in whole or part, of such
securities, (iii) any registration in connection
with the issuance by DZI of (x) securities or
rights convertible into or exchangeable for
shares of DZI Common Stock having a conversion or
exchange premium at the time of initial offering of
such securities or rights of at least 10% in excess
of the then fair market value of the DZI Common
Stock or (y) warrants
A-6
exercisable for shares of DZI Common Stock having
an exercise price at the time of the initial
offering of such warrants of at least 50% in excess
of the then fair market value of the DZI Common
Stock, and (iv) any registration effected pursuant
to the registration rights granted to XxXxxxxx'x
Corporation.
Limitation on Participation
in DZI Registrations: The right to participate in a registration of
securities by DZI will be subject to customary
rights to cut-back the selling stockholder's
participation in an underwritten public offering
wherein the managing underwriter determines that
the number of shares that are proposed to be sold
would materially and adversely affect the offering.
If such cut-back rights are exercised in
connection with an underwritten offering, (i)
first, all securities DZI or the other person or
persons initiating such offering proposes to
sell for its own account shall be included and (ii)
second, Registrable Securities and securities
requested to be included by other holders of
registration rights from DZI shall be included pro
rata based on the number of shares of DZI Common
Stock held by each of them at the time the
registration statement is to be filed.
Expenses: In connection with any demand registration, DZI
will pay all out-of-pocket expenses of DZI incurred
in connection therewith, including registration and
filing fees, blue sky fees, printing expenses, and
fees and expenses of outside counsel and
independent auditors to DZI, so long as such
registration can be filed on Form S-3 and requires
no audit activities (other than the preparation
of a customary comfort letter) by DZI's independent
public accountants. With respect to any other type
of demand registration, such expenses of DZI shall
be split 50/50. DZI and the Participating Holders
shall each bear all of their own internal expenses
associated with any such offering. The
Participating Holders will pay their pro rata share
of underwriting discounts, commissions, selling
concessions and stock transfer taxes applicable
to the sale by the holders of Registrable
Securities pursuant to a registration provided
for herein and all fees and disbursements of any
legal counsel, investment banker, accountant or
other professional advisor retained by a holder
("Selling Expenses"). With respect to a piggyback
registration, DZI will pay all of the out-of-pocket
expenses of such
A-7
registration, except the Requesting Holder's pro
rata share of Selling Expenses.
Underwriting: In connection with a demand registration involving
an underwritten public offering, DZ will, if
requested by the underwriters for such offering,
enter into an underwriting agreement with such
underwriters containing terms and provisions
customarily contained in underwriting agreements
for secondary distributions, except contribution
provisions. In connection with any piggyback
registration involving an underwritten offering,
the Company may require that all Registrable
Securities be included on the same terms and
conditions as shall be applicable to other
securities being sold by the underwriters in such
offering.
Other Provisions: If requested by the managing underwriter of a DZI
public offering, the holders of the DZI Preferred
Stock having registration rights will agree not to
sell any Registrable Securities or other DZI
Common Stock held by them, during the 30 days
prior to and the 90 days after the effectiveness
of the registration statement for such offering
(or such shorter period as requested by such
underwriter), except for sales as part of such
offering and private sales. If requested by the
managing underwriter for the demand registration
contemplated hereby, DZI will agree not to sell
any DZI Common Stock, or securities exercisable or
exchangeable or convertible for DZI Common Stock,
subject to customary exceptions, for 90 days after
the effective date of the demand registration
statement.
Termination of Registration
Rights: The registration rights granted hereunder will
terminate as to any Registrable Securities (and
such securities shall no longer constitute
"Registrable Securities"), the holder of
which can sell all Registrable Securities held by
such holder under Rule 144 under the Securities Act
of 1933, as amended, within a nine-month period.
Transfer of Rights: A holder of DZI Preferred Stock may transfer
registration rights to any transferee if at least
25% of the original number of shares of the DZI
Preferred Stock are being transferred.
A-8
