SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
SCHEDULE 13D
(Amendment No. 6)
Under the Securities Exchange Act of 1934
DISCOVERY ZONE, INC.
(Name of Issuer)
Common Stock, Par Value $.01 Per Share
(Title of Class of Securities)
25468B 10 7
(CUSIP Number)
Philippe P. Dauman, Esq.
Viacom Inc.
1515 Broadway
New York, New York 10036
Telephone: (212) 258-6000
(Name, Address and Telephone Number of
Person Authorized to Receive Notices and
Communications)
Copy to:
Creighton O' M. Condon, Esq.
Shearman & Sterling
599 Lexington Avenue
New York, NY 10022
Telephone: (212) 848-4000
April 17, 1995
(Date of Event which Requires Filing of this Statement)
========================================
If the filing person has previously filed a statement on
Schedule 13G to report the acquisition which is the subject
of this Schedule 13D, and is filing this schedule because of
Rule 13d-1(b)(3) or (4), check the following box [ ].
Check the following box if a fee is being paid with this
statement [ ].
Page 1
CUSIP No. 25468B 10 7
(1) Name of Reporting Person
S.S. or I.R.S. Identification No. of Above Person
VIACOM INC.
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I.R.S. Identification No. 04-2949533
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(2) Check the Appropriate Box if a Member of Group (See
Instructions)
[ ] (a)
----------------------------------------
[ ] (b)
----------------------------------------
(3) SEC Use Only
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(4) Sources of Funds (See Instructions)
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(5) Check if Disclosure of Legal Proceedings is Required
Pursuant to Items 2(d) or 2(e).
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(6) Citizenship or Place of Organization Delaware
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Number of (7) Sole Voting Power
----------------------------
Shares
----------------------------------------------------
Beneficially (8) Shared Voting Power 24,220,354
--------------------------
Owned by
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Each (9) Sole Dispositive
Power
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Reporting
----------------------------------------------------
Person (10) Shared Dispositive Power 24,220,354
---------------------
With
---------- ----------------------------------------------------
(11) Aggregate Amount Beneficially Owned by Each Reporting Person
24,220,354
---------------------------------------------------
(12) Check if the Aggregate Amount in Row (11) Excludes Certain
Shares (See Instructions)
----------------------------------
------------------------------------------------------------
(13) Percent of Class Represented by Amount in Row (11)
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49.6%
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(14) Type of Reporting Person (See Instructions) CO
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Page 2
CUSIP No. 25468B 10 7
(1) Name of Reporting Person
S.S. or I.R.S. Identification No. of Above Person
SUMNER M. REDSTONE
------------------------------------------------------------
S.S. No.
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(2) Check the Appropriate Box if a Member of Group (See
Instructions)
[ ] (a)
---------------------------------------------
[ ] (b)
---------------------------------------------
(3) SEC Use Only
------------------------------------------------
------------------------------------------------------------
(4) Sources of Funds (See Instructions)
------------------------
------------------------------------------------------------
(5) Check if Disclosure of Legal Proceedings is Required
Pursuant to Items 2(d) or 2(e).
-----------------------------
(6) Citizenship or Place of Organization United States
------------------------
------------------------------------------------------------
Number of (7) Sole Voting Power
---------------------------
Shares
----------------------------------------------------
Beneficially (8) Shared Voting Power 24,220,354
-------------------------
Owned by
----------------------------------------------------
Each (9) Sole Dispositive Power
-----------------------
Reporting
-------------------------------------------------
Person (10) Shared Dispositive Power 24,220,354
----------------------
With
---------- ------------------------------------------
(11) Aggregate Amount Beneficially Owned by Each Reporting Person
24,220,354
------------------------------------------------------------
(12) Check if the Aggregate Amount in Row (11) Excludes Certain
Shares (See Instructions)
-----------------------------------
------------------------------------------------------------
(13) Percent of Class Represented by Amount in Row (11)
----------
49.6%
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(14) Type of Reporting Person (See Instructions) IN
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Page 3
This Amendment No. 6 amends the Statement on Schedule 13D filed with
the Securities and Exchange Commission on June 3, 1993, as amended (the
"Statement") by Sumner M. Redstone and Viacom Inc. ("Viacom"). This Amendment
No. 6 is filed with respect to the shares of common stock, par value $.01 per
share (the "Common Stock"), of Discovery Zone, Inc., a Delaware corporation
(the "Issuer"), with its principal offices located at 205 North Michigan
Avenue, Chicago, Illinois 60601. Capitalized terms used but not defined
herein have the meanings assigned to such terms in the Statement.
Item 2. Identity and Background.
-----------------------
Item 2 is hereby amended and supplemented to reflect changes in the
directors and executive officers of Viacom as set forth on Schedule I attached
hereto. Schedule I sets forth the following information with respect to each
such person:
(i) name;
(ii) business address (or residence where indicated); and
(iii) present principal occupation or employment and the name,
principal business and address of any corporation or other organization in which
such employment is conducted.
All of the directors and executive officers of Viacom are citizens of
the United States.
During the last five years, neither Viacom nor any person named in
Schedule I attached hereto (including Sumner M. Redstone) has been convicted in
a criminal proceeding of a judicial or administrative body of competent
jurisdiction and as a result of such proceeding was or is subject to a judgment,
decree or final order enjoining future violations of, or prohibiting or
mandating activities subject to, federal or state securities laws or finding any
violation with respect to such laws.
Item 4. Purpose of Transaction.
----------------------
Item 4 of the Statement is hereby amended and supplemented as follows:
Viacom and Blockbuster Entertainment Group, a division of
Viacom ("Blockbuster"), have entered into a five-year Management Services
Agreement dated April 17, 1995 (the "Management Services Agreement") with
the Issuer. Blockbuster has agreed to assume the management of the operational
and administrative functions of the Issuer, subject to certain closing
conditions. Blockbuster will be reimbursed for the costs and expenses incurred
in the provision of management services to the Issuer, and the Issuer will
issue to Viacom, on the effective date of the Management Services Agreement,
warrants (the "Warrants") to purchase an aggregate of 473,463 shares of a
new class of noncumulative convertible voting participating preferred stock
(the "Preferred Stock") of the Issuer.
Page 4
The Warrants will be divided into three classes, Series A Warrants,
Series B Warrants and Series C Warrants, which will be exerciseable for an equal
number of shares of Preferred Stock, will vest on the first, second and third
anniversaries of the effective date of the Management Services Agreement and,
except under certain circumstances, will not be exercisable until December 16,
1998. Each share of Preferred Stock issuable upon exercise of the Warrants
will have a liquidation preference of $.10 per share, will be entitled to
noncumulative dividends in an amount equal to the greater of (x) 5% of the
liquidation preference per share, when, as and if declared by the board of
directors of the Issuer and (y) a pro rata share of the dividends paid with
respect to the Common Stock (based on the number of shares of Common Stock the
Preferred Stock is convertible into), will vote with the Common Stock as one
class on all matters submitted to the stockholders of the Issuer (based on the
number of shares of Common Stock the Preferred Stock is convertible into) and
will automatically convert into 24 shares of Common Stock, subject to
adjustment, immediately but only following a sale of the Preferred Stock to a
person unaffiliated with Viacom. The exercise prices for the Series A Warrants,
Series B Warrants and Series C Warrants per share of the Common Stock into which
the Preferred Stock is convertible are $10.375, $11.931 and $14.317,
respectively.
In addition, the non-Viacom directors of the Issuer other than Donald
F. Flynn have agreed to resign on the effective date of the Management Services
Agreement and the Issuer's current directors have agreed to cause nominees
designated by Viacom to be appointed to Issuer's board of directors. Donald
F. Flynn has resigned as Chief Executive Officer of the Issuer and Steven R.
Berrard, the Chief Executive Officer of Blockbuster, has been appointed
interim Chief Executive Officer of the Issuer.
Pursuant to a Stock Purchase Agreement dated as of April 17, 1995 (the
"Stock Purchase Agreement") among DKB, Inc., Kevin F. Flynn June, 1992 Non-
Exempt Trust and Brian J. Flynn June, 1992 Non-Exempt Trust, as sellers (the
"Sellers"), Donald F. Flynn, Kevin F. Flynn and Brian J. Flynn, as guarantors,
and Viacom and its indirect wholly owned subsidiary Blockbuster Discovery
Investment, Inc. ("BDI"), as purchasers (the "Purchasers"), subject to
regulatory and other closing conditions, (i) Viacom, through BDI, has agreed
to purchase 3,818,649 shares of Common Stock at a price of $6.50 per share
from the Sellers, following the exercise by the Sellers of warrants to acquire
shares of Common Stock, (ii) in order to allow the Purchasers to maintain their
ownership percentage of Common Stock at 49.99%, the Sellers have agreed to
grant to the Purchasers a two-year option to acquire up to 2,210,695 shares of
Common Stock at a price equal to 75% of their market price; provided, however,
-------- -------
that such price shall never be less than $6.50 or more than $12.50 per share,
and (iii) the Sellers have agreed to grant to the Purchasers a two-year right
of first offer covering an additional 1,205,156 shares of Common Stock.
Following the acquisition of the shares of Common Stock by the Sellers, upon
exercise of their warrants, and the purchase of the 3,818,649 shares of Common
Stock pursuant to the Stock Purchase Agreement, Viacom will own approximately
49% of the outstanding Common Stock, based upon the number of shares of Common
Stock outstanding as of April 17, 1995.
Pursuant to a letter agreement dated April 17, 1995 (the "Letter
Agreement") among the Issuer, Blockbuster Family Fun, Inc. and Family
Entertainment Centers, Inc., the Issuer has agreed to acquire, subject to
regulatory and other conditions, the assets of two entertainment centers
currently operated under the "Block Party" name and mark from subsidiaries of
Viacom for the lesser of the cost of the entertainment centers and $15,000,000,
payable in ten year subordinated notes of the Issuer.
Page 5
A copy of the press release issued by the Issuer on April 17, 1995
relating to the foregoing transactions, the Management Services Agreement, the
Stock Purchase Agreement and the Letter Agreement are attached hereto as
exhibits and are incorporated herein by reference.
Item 5. Interest in Securities of the Issuer.
------------------------------------
See Item 4 for information which may be required by this Item 5.
Item 6. Contracts, Arrangements, Understandings or Relationships with Respect
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to Securities of the Issuer.
---------------------------
See Item 4 for information which may be required by this Item 6.
Item 7. Material to be Filed as Exhibits.
--------------------------------
A. Management Services Agreement dated April 17, 1995, among the Issuer,
Blockbuster and Viacom.
B. Stock Purchase Agreement dated as of April 17, 1995 among DKB, Inc.,
Kevin F. Flynn June, 1992 Non-Exempt Trust and Brian J. Flynn June,
1992 Non-Exempt Trust, as sellers, Donald F. Flynn, Kevin F. Flynn and
Brian J. Flynn, as guarantors, and Viacom and BDI, as purchasers.
C. Letter Agreement dated April 17, 1995 among the Issuer, Blockbuster
Family Fun, Inc. and Family Entertainment Centers, Inc.
D. Press release issued by the Issuer on April 17, 1995.
Page 6
Signature
- - ---------
After reasonable inquiry and to the best of our knowledge and belief,
we certify that the information set forth in this Statement is true, complete
and correct.
April 18, 1995 VIACOM INC.
By /s/ Michael D. Fricklas
------------------------------------------------
Name: Michael D. Fricklas
Title: Senior Vice President
and Deputy General Counsel
Page 7
Signature
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this Statement is true, complete and
correct.
April 18, 1995
*
---------------------------------------------
Sumner M. Redstone, Individually
*By /s/ Philippe P. Dauman
------------------------------------------
Philippe P. Dauman
Attorney-in-Fact under the
Limited Power of Attorney filed
as Exhibit 99.2 to the Statement,
Amendment No. 4.
Page 8
Schedule I
Executive Officers
Name and Address
of Corporation or
Business or Principal Occupation Other Organization in
Name Residence Address or Employment Which Employed
---- ----------------- ------------- --------------
Sumner M. Redstone* Viacom Inc. and Chairman of the Board of National Amusements, Inc.
Viacom International Inc. Viacom Inc. and Viacom 200 Elm Street
1515 Broadway International Inc.; Dedham, MA 02026
New York, NY 10036 Chairman of the Board Viacom Inc. and
and President, Chief Viacom International Inc.
Executive Officer of 1515 Broadway
National Amusements Inc. New York, NY 10036
H. Wayne Huizenga* Blockbuster Entertainment Vice-Chairman of the Blockbuster Entertainment
Group Board of Viacom Inc. and Group
One Blockbuster Plaza Chairman of Blockbuster One Blockbuster Plaza
Fort Lauderdale, FL Entertainment Group; Fort Lauderdale, FL 33301
33301 Chairman of the Board of
Huizenga Holdings, Inc.
Frank J. Biondi, Jr.* Viacom Inc. and President, Chief Viacom Inc. and
Viacom International Inc. Executive Officer of Viacom International Inc.
1515 Broadway Viacom Inc. and Viacom 1515 Broadway
New York, NY 10036 International Inc. New York, NY 10036
Vaughn A. Clarke Viacom Inc. and Sr. VP, Treasurer of Viacom Inc. and
Viacom International Inc. Viacom Inc. and Viacom Viacom International Inc.
1515 Broadway International Inc. 1515 Broadway
New York, NY 10036 New York, NY 10036
Philippe P. Dauman* Viacom Inc. and Executive VP, General Viacom Inc. and
Viacom International Inc. Counsel, Chief Viacom International Inc.
1515 Broadway Administrative Officer 1515 Broadway
New York, NY 10036 and Secretary of Viacom New York, NY 10036
Inc. and Viacom
International Inc.
Thomas E. Dooley Viacom Inc. and Executive VP, Finance, Viacom Inc. and
Viacom International Inc. Corporate Development Viacom International Inc.
1515 Broadway and Communications of 1515 Broadway
New York, NY 10036 Viacom Inc. and Viacom New York, NY 10036
International Inc.
Carl Folta Viacom Inc. and Sr. VP, Corporate Viacom Inc. and
Viacom International Inc. Relations of Viacom Inc. Viacom International Inc.
1515 Broadway and Viacom International 1515 Broadway
New York, NY 10036 Inc. New York, NY 10036
Michael D. Fricklas Viacom Inc. and Sr. VP, Deputy General Viacom Inc. and
Viacom International Inc. Counsel and Assistant Viacom International Inc.
1515 Broadway Secretary of Viacom Inc. 1515 Broadway
New York, NY 10036 and Viacom International New York, NY 10036
Inc.
____________________
* Director
Page 9
Name and Address
of Corporation or
Business or Principal Occupation Other Organization in
Name Residence Address or Employment Which Employed
---- ----------------- ------------- --------------
Susan Gordon Viacom Inc. and VP, Controller and Chief Viacom Inc. and
Viacom International Inc. Accounting Officer of Viacom International Inc.
1515 Broadway Viacom Inc. and Viacom 1515 Broadway
New York, NY 10036 International Inc. New York, NY 10036
Rudolph L. Hertlein Viacom Inc. and Sr. VP of Viacom Inc. Viacom Inc. and
Viacom International Inc. and Viacom International Viacom International Inc.
1515 Broadway Inc. 1515 Broadway
New York, NY 10036 New York, NY 10036
Edward D. Horowitz Viacom Inc. and Sr. VP, Technology of Viacom Inc. and
Viacom International Inc. Viacom Inc. and Viacom Viacom International Inc.
1515 Broadway International Inc.; 1515 Broadway
New York, NY 10036 Chairman, Chief New York, NY 10036
Executive Officer of
Viacom Interactive
Henry Leingang Viacom Inc. and Sr. VP, Chief Viacom Inc. and
Viacom International Inc. Information Officer of Viacom International Inc.
1515 Broadway Viacom Inc. and Viacom 1515 Broadway
New York, NY 10036 International Inc. New York, NY 10036
William A. Roskin Viacom Inc. and Sr. VP, Human Resources Viacom Inc. and
Viacom International Inc. and Administration of Viacom International Inc.
1515 Broadway Viacom Inc. and Viacom 1515 Broadway
New York, NY 10036 International Inc. New York, NY 10036
George S. Smith, Jr. Viacom Inc. and Sr. VP, Chief Financial Viacom Inc. and
Viacom International Inc. Officer of Viacom Inc. Viacom International Inc.
1515 Broadway and Viacom International 1515 Broadway
New York, NY 10036 Inc. New York, NY 10036
Mark M. Weinstein Viacom Inc. and Sr. VP, Government Viacom Inc. and
Viacom International Inc. Affairs of Viacom Inc. Viacom International Inc.
1515 Broadway and Viacom International 1515 Broadway
New York, NY 10036 Inc. New York, NY 10036
Directors
George S. Abrams Winer & Abrams Attorney, Winer & Abrams Winer & Abrams
1 Court Street 1 Court Street
Boston, MA 02108 Boston, MA 02108
Steven R. Berrard Blockbuster Entertainment President and Chief Blockbuster Entertainment
Group Executive Officer of the Group
One Blockbuster Plaza Blockbuster One Blockbuster Plaza
Fort Lauderdale, FL Entertainment Group Fort Lauderdale, FL 33301
33301
Page 10
Name and Address
of Corporation or
Business or Principal Occupation Other Organization in
Name Residence Address or Employment Which Employed
---- ----------------- ------------- --------------
William C. Ferguson NYNEX Corporation Chairman of the Board NYNEX Corporation
335 Madison Avenue and Chief Executive 335 Madison Avenue
New York, NY 10017 Officer of NYNEX New York, NY 10017
Corporation
George D. Johnson, Jr. Blockbuster Entertainment President -- Domestic Blockbuster Entertainment
Group Consumer Division of the Group
One Blockbuster Plaza Blockbuster One Blockbuster Plaza
Fort Lauderdale, FL Entertainment Group Fort Lauderdale, FL 33301
33301
Ken Miller C.S. First Boston Vice Chairman of C.S. C.S. First Boston
Park Avenue Plaza First Boston Park Avenue Plaza
55 East 52nd Street 55 East 52nd Street
New York, NY 10055 New York, NY 10055
Shari Redstone National Amusements, Inc. Executive Vice President National Amusements, Inc.
200 Elm Street of National Amusements, 200 Elm Street
Dedham, MA 02026 Inc. Dedham, MA 02026
Brent D. Redstone National Amusements, Inc. Self-Employed
Showtime Networks Inc.
8101 East Prentice Ave.
Englewood, CO 80111
Frederic V. Salerno NYNEX Corporation Vice Chairman--Finance NYNEX Corporation
335 Madison Avenue and Business Development 335 Madison Avenue
New York, NY 10017 of NYNEX Corporation New York, NY 10017
William Schwartz Yeshiva University VP for Academic Affairs Yeshiva University
2495 Amsterdam Avenue (chief academic officer) 2495 Amsterdam Avenue
New York, NY 10033 of Yeshiva University New York, NY 10033
Page 11
Exhibit Index
Exhibit No. Description Page No.
- - ---------- ----------- --------
A. Management Services Agreement dated April 17, 1995, among the
Issuer, Blockbuster and Viacom.
B. Stock Purchase Agreement dated as of April 17, 1995 among DKB,
Inc., Kevin F. Flynn June, 1992 Non-Exempt Trust and Brian J.
Flynn June, 1992 Non-Exempt Trust, as sellers, Donald F. Flynn,
Kevin F. Flynn and Brian J. Flynn, as guarantors, and Viacom and
BDI, as purchasers.
C. Letter agreement dated April 17, 1995 among the Issuer,
Blockbuster Family Fun, Inc. and Family Entertainment Centers,
Inc.
D. Press release issued by the Issuer on April 17, 1995.
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., Kevin F. Flynn June, 1992 Non-Exempt
Trust and Brian J. Flynn June, 1992 Non-Exempt Trust, as sellers,
Donald F. Flynn, Kevin F. Flynn and Brian J. Flynn, 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.
--------------------------------------
(a) General Duties. Blockbuster shall provide the
--------------
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
2
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
-----------------
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;
3
(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,
-------- -------
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,
-----------------------
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.
4
(d) Resources. Blockbuster will make such resources
---------
(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
-------------------
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,
------
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.
----------------------------------
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.
5
SECTION 2. Compensation for Services.
-------------------------
(a) Quarterly Fee. The Company will pay to
-------------
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.
6
(b) Payment of Quarterly Fee. Blockbuster will
------------------------
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
-------- -------
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
--------------------------
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),
7
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
----------------------------------
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.
----------------------------------------
(a) Limitation of Liability. Subject to Section 3(e)
-----------------------
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
------------------------------
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
8
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
------------------------------
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
----------------------------------
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
-------------------
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.
---------------------------
(a) Effective Date. This Agreement shall not be
--------------
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
-------- -------
Section 22 hereof are true and complete, and the Company is
in
9
compliance with the covenants of Section 22 hereof, on such
date; provided, however, that Blockbuster, in its sole
-------- -------
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 Hart-Scott-Rodino
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
----
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
-------- -------
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
------------------
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
10
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
--------------------
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
----------------------
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
------------------------
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,
-------------
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
---------
except by a written instrument signed by all of the parties
hereto.
11
SECTION 9. Entire Agreement. This Agreement constitutes
----------------
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
------------
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
-------------
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
--------------------------
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
--------
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
------------
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
---------------
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
12
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
----------
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
------------------
Date, all non-Viacom directors except Donald F. Flynn 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, Mr. Flynn will resign as
Chief Executive Officer and Steven R. Berrard 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 Bernard Weisburgh
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
--------
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. Flynn and Berrard (for so long as they are directors) and
an Independent Director to be members of the Special Litigation
Committee.
(c) For so long as Donald Flynn 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, Donald Flynn.
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/ Kevin F. Flynn
------------------------
Name: Kevin F. Flynn
Title: Senior Vice President -
Development
BLOCKBUSTER ENTERTAINMENT GROUP,
a division of Viacom Inc.
By: /s/ Adam D. Phillips
-------------------------
Name: Adam D. Phillips
Title: Vice President
VIACOM INC.
By: /s/ Thomas W. Hawkins
-------------------------
Name: Thomas W. Hawkins
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 LYONs) 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 McDonald's
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
Exhibit 99.(b)
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is dated as of this
17th day of April, 1995 by and among DKB, Inc., a Delaware corporation
("DKB"), Kevin F. Flynn June, 1992 Non-Exempt Trust (the "KFF Trust"), and
Brian J. Flynn June, 1992 Non-Exempt Trust (the "BJF Trust"), (each of DKB,
the KFF Trust and the BJF Trust, a "Seller" and collectively, the
"Sellers") and Donald F. Flynn, Kevin F. Flynn and Brian J. Flynn
(collectively, the "Guarantors"), and Viacom Inc., a Delaware corporation
("Viacom") and its indirect wholly-owned subsidiary Blockbuster Discovery
Investment, Inc., a Delaware corporation ("BDI"; for purposes hereof,
references to "Viacom" shall mean Viacom Inc. or BDI, as the context
requires).
RECITALS
DKB owns 2,556,605 shares of common stock ("Common Stock") of
Discovery Zone, Inc., a Delaware corporation ("DZI"). The KFF Trust owns
2,556,516 shares of Common Stock. The BJF Trust owns 2,556,516 shares of
Common Stock.
Viacom (as successor in interest to Blockbuster Entertainment
Corporation ("Blockbuster")) and the Sellers and the Guarantors, among
others, entered into an Option Exercise Agreement dated as of September 2,
1994 (the "Option Exercise Agreement"), pursuant to which Viacom acquired a
number of shares of Common Stock sufficient to increase its equity
ownership interest in DZI from approximately 20% to 49.9%. Viacom
currently owns 24,220,354 shares of Common Stock ("Viacom's Holdings"),
representing approximately 49% of the issued and outstanding shares of
Common Stock.
Viacom and DZI mutually agree that Blockbuster shall assume management
of the operational and administrative functions of DZI and designate a
majority of the members of the Board of Directors of DZI. Concurrently
with the execution of this Agreement, Viacom and DZI are entering into a
Management Services Agreement to effect these transactions. As part of
these transactions, Viacom desires to purchase from the Sellers the number
of shares of Common Stock as set forth herein and the Sellers desire to
sell such shares to Viacom, all as hereinafter provided and on the terms
and subject to the conditions hereinafter set forth.
COVENANTS
NOW, THEREFORE, Viacom, the Sellers and the Guarantors, in
consideration of the agreements, covenants and conditions contained herein,
hereby make the following representations and warranties, give the
following covenants and agree as follows:
ARTICLE I
Purchase and Sale of the Shares
Section 1.1 Purchase and Sale. The Sellers agree to and will sell,
transfer, assign and deliver to BDI at the Closing, free and clear of all
liens, pledges, encumbrances, security interests, claims and equities of
every kind, and BDI agrees to and will purchase and accept from the
Sellers, on the terms and subject to the conditions and limitations set
forth in this Agreement, an aggregate of 3,823,647 shares of Common Stock
(the "Shares"). Each of DKB, the KFF Trust and the BJF Trust will deliver
1,274,549 shares of Common Stock.
2
ARTICLE II
Purchase Price
Section 2.1 Amount of the Purchase Price. As consideration for the
Shares (the "Purchase Price"), Viacom agrees, subject to the terms,
conditions and limitations set forth in this Agreement, to pay to or for
the account of each Seller an amount in cash equal to $6.50 per Share sold
by such Seller.
ARTICLE III
Closing
Section 3.1 Closing. The closing of the purchase of the Shares
(the "Closing") shall take place at the offices of Pedersen & Houpt, 161
North Clark Street, Suite 3100, Chicago, Illinois, at 10:00 a.m. (Chicago
time) on the third business day following the termination or the expiration
of the waiting period imposed by the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act") for the filings made
pursuant to Sections 7.3 and 8.3 hereof by the parties; provided that if
any of the conditions which are set forth in Articles IX and X of this
Agreement have not been satisfied (or waived) by said date, then the
Closing shall take place on a subsequent date as soon as practicable after
the satisfaction or waiver of such conditions. The date on which the
Closing occurs is referred to herein as the "Closing Date."
Section 3.2 Procedure at the Closing. At the Closing, the parties
hereto agree to take the following steps in the order listed below
(provided, however, that upon their completion all such steps shall be
deemed to have occurred simultaneously):
(a) The Sellers shall deliver to Viacom, in form and substance
reasonably satisfactory to Viacom, the certificates described in Section
9.1 hereof and all other previously undelivered
3
documents required to be delivered by the Sellers to Viacom at or prior to
the Closing pursuant to the terms of this Agreement.
(b) Viacom shall deliver to the Sellers, in form and substance
reasonably satisfactory to the Sellers, the certificate described in
Section 10.1 hereof and all other previously undelivered documents required
to be delivered by Viacom to the Sellers at or prior to the Closing
pursuant to the terms of this Agreement.
(c) The Sellers shall deliver certificates for the Shares being
purchased, duly endorsed in blank or accompanied by stock powers executed
in blank, in form satisfactory to Viacom and with all required stock
transfer tax stamps affixed.
(d) Viacom shall deliver to each Seller $6.50 for each Share
delivered by such Seller, by wire transfer of immediately available funds
to an account of such Seller designated to Viacom in writing not less than
two business days prior to the Closing.
(e) Viacom and each Seller shall execute and deliver cross receipts
acknowledging, in the case of Viacom, receipt from such Seller of the
Shares purchased from such Seller and, in the case of a Seller, the portion
of the Purchase Price received by such Seller.
(f) DKB shall deliver to Viacom an incumbency certificate as to those
officers executing this Agreement on its behalf.
(g) The parties shall deliver such other documents and certificates
as may be reasonably required to close the transaction.
4
ARTICLE IV
Representations and Warranties of Sellers
Concerning the Transaction
In order to induce Viacom to enter into this Agreement and to
consummate the transactions contemplated hereby, each Seller makes the
representations and warranties set forth below with respect to itself only,
each of which is independently relied upon by Viacom regardless of any
other investigation made or information obtained by Viacom, and each of
which is correct and complete as of the date of this Agreement and will be
correct and complete as of the Closing Date (as though made then and as
though the Closing Date were substituted for the date of this Agreement
throughout this Article IV).
Section 4.1 Organization, Good Standing and Power of the Seller.
If such Seller is a corporation, such Seller is a corporation duly
organized, validly existing and in good standing under the laws of its
state of incorporation. Such Seller has all requisite power and authority
to own, lease and operate its properties and to carry on its business as
now being conducted, and is duly qualified to do business and in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification necessary,
other than in such jurisdictions where the failure to so qualify would not
have a material adverse effect on such Seller or delay or prevent the
Seller from performing its obligations under this Agreement. If a Seller
is a trust, such trust has been duly formed under the laws of the state of
its formation.
Section 4.2 Authorization. Such Seller has full power and
authority and legal capacity to enter into this Agreement and to perform
its obligations under this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this
Agreement and all other agreements, instruments and documents contemplated
hereby to be executed by such
5
Seller and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary action of such Seller. This
Agreement and all other agreements, instruments and documents contemplated
hereby to be executed by such Seller are (or upon execution and delivery
thereof by such Seller will be) valid and binding agreements of such
Seller, enforceable against such Seller in accordance with their respective
terms except (i) as the same may be limited by applicable bankruptcy,
insolvency, moratorium or similar laws of general application relating to
or affecting creditors' rights, including the effect of statutory or other
laws regarding fraudulent conveyances and preferential transfers, and (ii)
for the limitations imposed by general principles of equity (as opposed to
those principles applicable only to trusts).
Section 4.3 No Breach. The execution and delivery of this
Agreement by such Seller do not, and the consummation of the transactions
contemplated hereby will not, (i) violate or conflict with, in the case of
a corporate Seller, the certificate or articles of incorporation of such
Seller or the bylaws or code of regulations of such Seller or, in the case
of a Seller which is a trust, such Seller's trust agreement or applicable
law with respect to the obligations of a trustee or other fiduciary, 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 such Seller or, in the case of a corporate Seller, any of its
subsidiaries or shareholders or, in the case of a trust Seller, any of its
beneficiaries or trustees is a party or by which it or any of 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. For purposes of this
Agreement, a "subsidiary" of any Seller shall mean any corporation,
partnership, joint venture, association or other entity, wherever and
however organized, in which such Seller owns directly or indirectly or has
the
6
right to acquire a majority of the capital stock, equity or beneficial
interests, is a general partner, or otherwise controls management of, by
having the right or ability to designate a majority of the directors or
members of the governing body thereof, whether by agreement or otherwise.
Section 4.4 Consents and Approvals. Neither the execution and
delivery of this Agreement by each Seller nor the consummation of the
transactions contemplated hereby will require any consent, approval,
authorization or permit of, or filing with or notification to, any
governmental or regulatory authority, any court or tribunal or any other
person or entity, except (i) where the failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or
notifications, would not prevent or delay such Seller from performing its
obligations under this Agreement; (ii) the filing of any reports or forms
required by "blue sky" regulations; (iii) filings required by the HSR Act;
(iv) the filing of reports required under the Securities Exchange Act of
1934, as amended (the "Exchange Act"); (v) filings required with the
National Association of Securities Dealers, Inc.; and (vi) filings required
to be made by Viacom or its affiliates.
Section 4.5 The Shares. At the Closing Date and upon the exercise
of certain warrants, each of the Sellers will own its Shares (and its
shares of Common Stock subject to Article XI (the "Additional Shares"))
free and clear of all liens, encumbrances, mortgages, pledges, security
interests, restrictions, prior assignments and claims of any kind or nature
whatsoever (collectively, "Liens"). The Shares (and Additional Shares)
owned by each Seller at Closing will have been duly and validly authorized
and issued, and will be fully paid and nonassessable and will not be
subject to any voting trust, stockholders agreement, proxies or other
agreements with respect to voting or transfer other than agreements to
which Viacom or its affiliates are a party. The KFF Trust as Seller
represents and warrants that the sole trustee and the sole beneficiary of
such Seller is Kevin F. Flynn, and Kevin F. Flynn and Robert W. Flynn are
the sole members of the advisory committee
7
of such Seller. The BJF Trust as Seller represents and warrants that the
sole trustee and the sole beneficiary of such Seller is Brian J. Flynn, and
Brian J. Flynn and Robert W. Flynn are the sole members of the advisory
committee of such Seller. The Shares owned by each Seller at Closing will
have been approved for trading on the Nasdaq National Market.
Section 4.6 McDonald's Co-Sale Agreement. The parties acknowledge
that Donald F. Flynn ("Flynn") and McDonald's Corporation ("McDonald's")
are parties to a Co-Sale Agreement dated as of August 30, 1994 (the "Co-
Sale Agreement") pursuant to which, among other things, Flynn has the
obligation to notify McDonald's not less than five business days prior to
the execution of a definitive agreement relating to the sale or transfer of
Common Stock by Flynn (the "Notice Provisions") and McDonald's has the
right to participate in such contemplated sale or transfer with respect to
the number of shares of Common Stock equal to the greater of (i) one-half
of the number of shares of Common Stock subject to the contemplated sale,
and (ii) the number of shares of Common Stock subject to the contemplated
sale multiplied by a fraction, the numerator of which is the aggregate
number of shares then beneficially owned by McDonald's and the denominator
of which is the sum of the aggregate number of shares then beneficially
owned by McDonald's and the aggregate number of shares then beneficially
owned by Flynn (which fraction as of the date of this Agreement is 67.06%).
Notwithstanding anything to the contrary elsewhere in this Agreement, the
failure by Flynn to comply with the Notice Provisions shall not be a breach
of any representation or warranty of the Sellers in this Agreement. Viacom
acknowledges that McDonald's may decide to exercise its rights to
participate in the transactions contemplated by this Agreement in
accordance with the terms of the Co-Sale Agreement.
8
ARTICLE V
Representations and Warranties of Sellers Concerning DZI
In order to induce Viacom to enter into this Agreement and to
consummate the transactions contemplated hereby, and subject to the
disclosure schedule attached hereto and incorporated herein by reference
(the "DZI Disclosure Schedule"), each Seller makes the representations and
warranties set forth below with respect to DZI, each of which is
independently relied upon by Viacom regardless of any other investigation
made or information obtained by Viacom (except as set forth in Section
5.11), and each of which is correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as
though made then and as though the Closing Date were substituted for the
date of this Agreement throughout this Article V). As used in this Article
V, "Knowledge of the Sellers" means the actual knowledge after reasonable
investigation of any of the Sellers or the Guarantors. As used
hereinafter, the term "DZI Material Adverse Effect" shall mean a material
adverse effect on the assets, business, financial condition, or operations
of DZI and its subsidiaries considered as one enterprise.
Section 5.1 Subsidiaries of DZI. All subsidiaries of DZI are set
forth in Section 5.1 of the DZI Disclosure Schedule. DZI owns the
percentage of capital stock or equity interest of each of the subsidiaries
set forth in said Section 5.1 free and clear, except as set forth in said
Section 5.1, of all Liens. Except as set forth in Section 5.1 of the DZI
Disclosure Schedule and exclusive of the ownership of less than five
percent of the outstanding securities of any class registered under the
Exchange Act, neither DZI nor any of its subsidiaries owns, directly or
indirectly, of record or beneficially, any capital stock or equity interest
or investment in any corporation, partnership, joint venture, association
or other entity.
9
Section 5.2 Organization, Good Standing and Power of DZI and its
Subsidiaries. DZI and each of its subsidiaries is a corporation or limited
partnership duly organized or formed, validly existing and in good standing
under the laws of its state of organization or formation. DZI and each of
its subsidiaries has all requisite power and authority to own, lease and
operate its properties and to carry on its business as now being conducted,
and is duly qualified to do business and in good standing in each
jurisdiction in which the nature of its business or the ownership or
leasing of its properties makes such qualification necessary, other than in
such jurisdictions where the failure to so qualify would not have a DZI
Material Adverse Effect.
Section 5.3 DZI Charter Documents, DZI Capital Structure. The
Sellers have delivered or made available to Viacom true and complete copies
of the certificate of incorporation of DZI (the "Certificate of
Incorporation") and the bylaws, as amended, of DZI (the "Bylaws"). The
authorized capital stock of DZI consists of 260,000,000 shares, of which
250,000,000 are shares of Common Stock and 10,000,000 are shares of
preferred stock, par value $.01 per share (the "DZI Preferred Stock"). As
of the date of this Agreement, 48,864,721 shares of Common Stock were
validly authorized and issued, fully paid, and nonassessable, and no shares
of DZI Preferred Stock were issued or outstanding. Except for (i) an
aggregate of 4,025,990 shares of Common Stock issuable pursuant to
outstanding options under the Discovery Zone, Inc. 1993 Employee Stock
Option Plan and 119,355 shares issuable under such Plan pursuant to options
not yet granted; (ii) an aggregate of 333,334 shares of Common Stock
issuable pursuant to outstanding options under the Discovery Zone, Inc.
1993 Stock Option Plan for Non-Employee Directors and 250,000 shares
issuable under such Plan pursuant to options not yet granted (collectively,
the Plans referred to in clauses (i) and (ii), the "DZI Option Plans"),
(iii) an aggregate of 1,165,500 shares of Common Stock issuable upon the
exercise of outstanding warrants issued to former partners of DKB
Investments, L.P. other than
10
the Sellers, (iv) a maximum of 3,954,477 shares of DZI Common Stock as may
be issued by DZI upon conversion of its Liquid Yield Option Notes due 2013
(the "LYONS"), and such other shares of Common Stock as may be issued upon
the exercise by any holder of the LYONS of its rights to require DZI to
repurchase such LYONS, and (v) such shares of Common Stock as may be issued
by DZI in connection with pending acquisitions as set forth on Schedule
5.3, no other shares of common stock or DZI Preferred Stock or any rights,
agreements, or commitments of any kind obligating DZI to issue or sell any
other shares of Common Stock or DZI Preferred Stock were outstanding or
were authorized by DZI. The number of the Outstanding Shares set forth in
the certificate to be delivered pursuant to Section 9.7 immediately prior
to the Closing will be correct as of the Closing.
Section 5.4 No Breach; Consents and Approvals. Neither the
execution and delivery of this Agreement by each Seller nor the execution
of the Management Services Agreement by the Company, nor the consummation
of the transactions contemplated hereby and thereby would, (i) violate or
conflict with the Certificate of Incorporation or the Bylaws of DZI or any
of its subsidiaries or (ii) except as set forth in Section 5.4 of the DZI
Disclosure Schedule, 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 DZI or any of its subsidiaries is a
party or by which it or any of 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. Except as set forth in Section 5.4 of the DZI Disclosure
Schedule, neither the execution and delivery of this Agreement by each
Seller nor the consummation of the transactions contemplated hereby will
require any consent, approval, authorization or permit of, or filing with
or notification
11
to, any governmental or regulatory authority, any court or tribunal or any
other person or entity with respect to DZI or any of its subsidiaries,
except (i) where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would
not prevent or delay such Seller from performing its obligations under this
Agreement and would not have a DZI Material Adverse Effect, and (ii) the
filings specified in clauses (ii) through (vi) of Section 4.4.
Section 5.5 SEC Documents. The Sellers have delivered or made
available to Viacom a true and complete copy of each report, schedule,
registration statement and definitive proxy statement, including exhibits
filed therewith (but excluding exhibits incorporated therein by reference
and not attached thereto), filed by DZI with the Securities and Exchange
Commission ("SEC") since June 3, 1993 (the "SEC Documents"), which, to the
Knowledge of the Sellers, are all the documents (other than preliminary
materials) that DZI was required to file with the SEC since such date.
Except to the extent information contained therein has been revised or
superseded by a later filed SEC Document, as of their respective dates and
as of the date hereof, (i) none of the SEC Documents contained or contains
any untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading; and (ii) the financial statements of DZI included in the SEC
Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with generally
accepted accounting principles during the periods presented (except as may
be indicated in the notes thereto or, in the case of the unaudited
statements, as permitted by Form 10-Q of the SEC) and fairly present
(subject, in the case of the unaudited statements, to normal, recurring
audit adjustments) the financial position of DZI and its
12
consolidated subsidiaries as of the date thereof and the results of their
operations and their cash flows for the periods then ended.
Section 5.6 Litigation. Except as disclosed in the SEC Documents,
there is no suit, action or proceeding pending or, to the Knowledge of the
Sellers, threatened against or affecting DZI or any of its subsidiaries
that will have a DZI Material Adverse Effect, nor is there any judgment,
decree, injunction, rule or order of any governmental authority, court of
competent jurisdiction or arbitrator outstanding against DZI or any of its
subsidiaries having, or which in the future will have, a DZI Material
Adverse Effect.
Section 5.7 Absence of Adverse Changes. Except as disclosed in the
SEC Documents, since December 31, 1994, DZI and its subsidiaries have
conducted their respective businesses only in the ordinary course, and
there has not been (i) any damage, destruction or loss, whether covered by
insurance or not, which has or will have a DZI Material Adverse Effect, or
(ii) any transaction, commitment, dispute or other event or condition of
any character (whether or not in the ordinary course of business)
individually or in the aggregate having, or which in the future will have,
a DZI Material Adverse Effect.
Section 5.8 Compliance With Laws. To the Knowledge of the Sellers,
(a) DZI and its subsidiaries are in compliance with all laws, regulations
and orders applicable to them except with respect to failures to comply
with laws, ordinances, rules or regulations which, if fully enforced, would
not have a DZI Material Adverse Effect and (b) since June 30, 1993, neither
DZI nor its subsidiaries has been cited, fined or otherwise notified of any
asserted past or present failure to comply with any laws, except with
respect to failures to comply which, if repeated, would not have a DZI
Material Adverse Effect, and, to the Knowledge of the Sellers, no
proceeding with respect to any such violation is contemplated.
13
Section 5.9 Environmental Matters.
(a) Neither DZI nor any of its subsidiaries has transported, stored,
treated or disposed of, nor has any of them allowed or arranged for any
third parties to transport, store, treat or dispose of Hazardous Substances
(as hereinafter defined) or other waste to or at any location other than a
site lawfully permitted to receive such Hazardous Substances or other waste
for such purposes, nor has any of them performed, arranged for or permitted
by any method or procedure such transportation, storage, treatment or
disposal in contravention of any laws or regulations. Neither DZI nor any
of its subsidiaries has disposed, or permitted or arranged for any third
parties to dispose, of Hazardous Substances or other waste upon any of the
real property now or previously owned or leased by DZI or any of its
subsidiaries (the "Real Property"), except as permitted by law. For
purposes of this Section 5.9, the term "Hazardous Substances" shall have
the meaning given it in the Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. Sec.Sec. 9601, et seq.), as amended,
and the regulations promulgated pursuant thereto ("CERCLA"), or any similar
state law.
(b) With respect to any parcel of Real Property, there has not
occurred since, in the case of owned or previously owned Real Property, the
date of the acquisition thereof and in the case of leased or previously
leased Real Property, the commencement date of the lease covering such Real
Property, or, to the Knowledge of the Sellers, before such date, nor is
there presently occurring, a release of any Hazardous Substance on, into
or, to the Knowledge of the Sellers, beneath the surface of such parcel of
Real Property. For purposes of this Section 5.9, the term "release" shall
mean releasing, spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, disposing or dumping.
(c) Neither DZI nor any of its subsidiaries has transported or
disposed, nor has any of them permitted or arranged for any third parties
to transport or dispose, any Hazardous Substances or
14
other waste to or at a site which, pursuant to CERCLA or any similar state
law, (i) has been placed on the National Priorities List or its state
equivalent, or (ii) the Environmental Protection Agency or the relevant
state agency has proposed or, to the Knowledge of the Sellers, is proposing
to place on the National Priorities List or its state equivalent. Neither
DZI nor any of its subsidiaries has received notice, nor do any of them
have knowledge of any facts which could give rise to any notice, that DZI
or any of is subsidiaries is a potentially responsible party for a federal
or state environmental cleanup site or for corrective action under CERCLA
or any other applicable law or regulation. Neither DZI nor any of its
subsidiaries has submitted nor was any of them required to submit any
notice pursuant to Section 103(c) of CERCLA with respect to any of the Real
Property. Neither DZI nor any of its subsidiaries has received any written
request for information in connection with any federal or state
environmental cleanup site. Neither DZI nor any of its subsidiaries has
been required to or has not undertaken any response or remedial actions or
clean-up actions of any kind at the request of any federal state or local
governmental entity, or at the request of any other person or entity.
(d) Except as set forth on Section 5.9 of the DZI Disclosure
Schedule, neither DZI nor any subsidiary uses, or has used, any Underground
Storage Tanks, and there are not now nor, to the Knowledge of the Sellers,
have there ever been, any Underground Storage Tanks on any of the Real
Property. For purposes of this Section 5.9, the term "Underground Storage
Tanks" shall have the meaning given it in the Resource Conservation and
Recovery Act (42 U.S.C. Sec.Sec. 6901, et seq.).
(e) Except as set forth in Section 5.9 of the DZI Disclosure
Schedule, there are no laws, regulations, ordinances, licenses, permits or
orders relating to environmental or worker safety matters requiring any
work, repairs, construction or capital expenditures with respect to the
assets or properties of DZI or any of its subsidiaries.
15
Section 5.10(A) Employee Benefit Plans. Except as set forth in
Section 5.10(A) of the DZI Disclosure Schedule (which Section 5.10(A) of
the DZI Disclosure Schedule the parties acknowledge that the Sellers shall
deliver within five business days from the date of this Agreement):
(a) (i) Each employee benefit plan, including but not limited to those
plans as defined in Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), maintained currently or in the past by
DZI or any of its subsidiaries, (ii) each employee benefit plan for which
DZI or any of its subsidiaries could incur liability under Section 4069 of
ERISA in the event such plan has been or were to be terminated and (iii)
each plan in respect of which DZI or any subsidiary thereof could incur
liability under Section 4212(c) of ERISA (collectively the "Benefit Plans")
is now and always has been operated and administered in accordance with all
applicable requirements of ERISA, the Internal Revenue Code of 1986, as
amended (the "Code") and the terms of such benefit plans, in all material
respects. No legal action, suit or claim is pending or, to the Knowledge
of the Sellers, threatened with respect to any Benefit Plan and, to the
Knowledge of the Sellers, no fact or event exists that could give rise to
any such action, suit or claim. The terms and conditions of each Benefit
Plan conform in all material respects with all applicable provisions of
ERISA and the Code. Each Benefit Plan which is an employee pension benefit
plan, as defined in Section 3(2) of ERISA, and which is intended to be
"qualified" within the meaning of Section 401(a) of the Code ("Pension
Plan"), has been determined by the Internal Revenue Service to be so
qualified, and, to the Knowledge of the Sellers, no fact or event has
occurred since the date of such determination by the Internal Revenue
Service to adversely affect the qualified status of any such Benefit Plans.
16
(b) There has been no prohibited transaction (within the meaning of
Section 406 of ERISA or Section 4975 of the Code) with respect to any
Benefit Plan which would have a DZI Material Adverse Effect. Neither DZI
nor any of its subsidiaries has incurred any liability for any penalty or
tax arising under Section 4971, 4972, 4980, 4980B or 6652 of the Code or
any liability under Section 502 of ERISA, and, to the Knowledge of the
Sellers, no fact or event exists which could give rise to any such
liability. None of the Pension Plans which is subject to Title IV of ERISA
has completely or partially terminated, or been the subject of a reportable
event as defined in Section 4043 of ERISA. No liability under or arising
out of or by operation of Subtitle D of Title IV of ERISA has been incurred
by DZI or any of its subsidiaries with respect to a Pension Plan and no
fact or event exists which would give rise to such liabilities.
(c) The aggregate amount of unfunded benefit liabilities under all
Pension Plans which are defined benefit pension plans did not, as of the
latest valuation date for such plans, exceed $1,000,000. No Pension Plan
which is a defined benefit pension plan has incurred any accumulated
funding deficiency (whether or not waived) as defined in Section 412 of the
Code.
(d) There are no multi-employer plans, as defined in Section
4001(a)(3) of ERISA, to which DZI or any of its subsidiaries either
contributes or has had an obligation to contribute during the prior five
years, or under which DZI or any of its subsidiaries has any present or
future obligation or liability.
Section 5.10(B) Taxes. Except as set forth in Section 5.10(B) of the
DZI Disclosure Schedule (which Section 5.10(B) of the DZI Disclosure
Schedule the parties acknowledge that the Sellers shall deliver within five
business days from the date of this Agreement):
(a) Except for any breach or inaccuracy of the following
representations and warranties which would not have a DZI Material Adverse
Effect, (i) all returns and reports in respect of Taxes
17
required to be filed with respect to DZI and each subsidiary (including the
consolidated federal income tax return of DZI and any state Tax return that
includes DZI or any subsidiary thereof on a consolidated or combined basis)
have been timely filed; (ii) all Taxes required to be shown on such returns
and reports or otherwise due have been timely paid; (iii) all such returns
and reports (insofar as they relate to the activities or income of DZI or
any subsidiary thereof) are true, correct and complete in all material
respects; (iv) no adjustment relating to such returns has been proposed
formally or informally by any Tax authority and, to the Knowledge of
Sellers, no basis exists for any such adjustment; (v) there are no pending
or, to the Knowledge of Sellers, threatened actions or proceedings for the
assessment or collection of Taxes against DZI or any subsidiary thereof or
(insofar as either could result in liability of DZI or any subsidiary
thereof on the basis of joint and/or several liability) any corporation
that was included in the filing of a return with DZI or any subsidiary
thereof on a consolidated or combined basis; (vi) there are no outstanding
waivers or agreements extending the statutes of limitations for any period
with respect to any Tax to which DZI or any subsidiary may be subject;
(vii) no consent under Section 341(f) of the Code has been filed with
respect to DZI or any subsidiary thereof; (viii) there are no Tax liens on
any assets of DZI or any subsidiary thereof; (ix) neither DZI nor any
subsidiary thereof is a party to any agreement or arrangement that would
result, separately or in the aggregate, in the payment of any "excess
parachute payments" within the meaning of Section 280G of the Code; (x) no
acceleration of the vesting schedule for any property that is substantially
unvested within the meaning of the regulations under Section 83 of the Code
will occur in connection with the transactions contemplated by this
Agreement; (xi) each subsidiary of DZI has been and continues to be a
member of the affiliated group (within the meaning of Section 1504(a)(1) of
the Code) for which DZI files a consolidated return as the common parent,
and has not been includible in any other
18
consolidated return for any taxable period for which the statute of
limitations has not expired; (xii) neither DZI nor any subsidiary thereof
is subject to any accumulated earnings tax penalty or personal holding
company tax; (xiii) neither DZI nor any subsidiary thereof is a party to
any tax sharing or tax allocation agreement or arrangement; and (xiv)
adequate reserves are provided in the financial statements included in the
1994 Form 10-K of DZI to satisfy all liability of DZI and its subsidiaries
for Taxes for all periods through December 31, 1994.
(b) "Tax" or "Taxes" means any and all taxes, fees, levies,
duties, tariffs, imposts, and other charges of any kind (together with any
and all interest, penalties, additions to tax and additional amounts
imposed with respect thereto) imposed by any government or taxing
authority, including, without limitation: taxes or other charges on or with
respect to income, franchises, windfall or other profits, gross receipts,
property, sales, use, capital stock, payroll, employment, social security,
workers' compensation, unemployment compensation, or net worth; taxes or
other charges in the nature of excise, withholding, ad valorem, stamp,
transfer, value added, or gains taxes; license, registration and
documentation fees; and customs duties, tariffs, and similar charges.
ARTICLE VI
Representations and Warranties of Viacom
In order to induce the Sellers to enter into this Agreement and to
consummate the transactions contemplated hereby, Viacom makes the
representations and warranties set forth below, each of which is
independently relied upon by the Sellers regardless of any other
investigation made or information obtained by the Sellers, and each of
which is correct and complete as of the date of this Agreement and will be
correct and complete as of the Closing Date (as though made then and as
though the Closing Date were substituted for the date of this Agreement
throughout this Article VI).
19
Section 6.1 Organization, Power, Authority, Authorization and
Binding Obligation. (a) Viacom is a corporation duly organized, validly
existing and in good standing under the laws of the state of its
incorporation and has all requisite power and authority necessary to enter
into this Agreement and to carry out the transactions and agreements
contemplated hereby.
(b) The execution, delivery and performance of this Agreement and all
other agreements, instruments and documents contemplated hereby to be
executed by Viacom and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action of
Viacom. This Agreement and all other agreements and instruments
contemplated hereby to be executed by Viacom are (or upon execution and
delivery thereof by Viacom will be) valid and binding agreements of Viacom
enforceable against Viacom in accordance with their respective terms except
(i) as the same may be limited by applicable bankruptcy, insolvency,
moratorium or similar laws of general application relating to or affecting
creditors' rights, including the effect of statutory or other laws
regarding fraudulent conveyances and preferential transfers, and (ii) for
the limitations imposed by general principles of equity.
Section 6.2 No Breach; Consents and Approvals. The execution and
delivery of this Agreement by 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 (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 Viacom or any of its
subsidiaries is bound or violate or conflict with any law, rule,
regulation, judgment, decree or order to which it or any of them is
subject, except as would not prevent or delay Viacom from performing its
20
obligations under this Agreement. Neither the execution and delivery of
this Agreement by Viacom nor the consummation of the transactions
contemplated hereby will require any consent, approval, authorization or
permit of, or filing with or notification to, any governmental or
regulatory authority, any court or tribunal or any other person or entity,
except (i) where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would
not prevent or delay Viacom from performing its obligations under this
Agreement, (ii) the filing of reports required under the Exchange Act,
(iii) filings required by the HSR Act, (iv) filings required to be made by
the Sellers or their affiliates, (v) filings required to be made under any
applicable blue sky laws and regulations, and (vi) filings required by the
American Stock Exchange, Inc., if any.
Section 6.3 Purchase for Investment. Viacom is acquiring the
Shares for investment and not with a view to any distribution thereof in
contravention of the Securities Act of 1933.
ARTICLE VII
Additional Covenants of the Sellers
Section 7.1 Reasonable Efforts. The Sellers will use their
reasonable efforts to cause to be satisfied as soon as practicable and
prior to the Closing Date all of the conditions set forth in Article IX to
the obligations of Viacom to consummate transactions contemplated by this
Agreement to occur on the Closing Date.
Section 7.2 No Disclosure. Without the prior written consent of
Viacom, none of the Sellers will, prior to the Closing Date, disclose any
term or condition of this Agreement to any person or entity except that
such disclosure may be made if required pursuant to the requirements of law
(in which case the Seller making disclosure shall consult with Viacom prior
to making such disclosure).
21
Section 7.3 Antitrust Law Compliance. Each of the Sellers has
caused to be prepared and filed with the Federal Trade Commission and the
United States Department of Justice the notification required to be filed
with respect to the transactions contemplated hereby under the HSR Act or
any rules and regulations promulgated thereunder. Each of the Sellers has
caused such filing, and shall cause any future filings made by it or on its
behalf, to be true and accurate in all material respects and responsive to
the requirements of the HSR Act and any such rules and regulations. Each
of the Sellers shall use its reasonable efforts to obtain an early
termination of the applicable waiting period, and shall make any further
filings pursuant thereto that may be necessary. Each of the Sellers agrees
to make available to Viacom such information relative to it or DZI as may
be required for the preparation of such notification or filings by Viacom
under the HSR Act and any rules or regulations promulgated thereunder.
Section 7.4 Conduct Prior to Closing. The Sellers will not, and
will use their reasonable efforts, consistent with their fiduciary duties
to the stockholders of DZI, to cause DZI not to, take any action, or omit
to take any action, the result of which would cause any of the
representations and warranties made by the Sellers herein to become untrue.
ARTICLE VIII
Additional Covenants of Viacom
Section 8.1 Reasonable Efforts. Viacom will use its reasonable
efforts to cause to be satisfied as soon as practicable and prior to the
Closing Date all of the conditions set forth in Article X to the
obligations of the Sellers to consummate the transactions contemplated by
this Agreement to occur on the Closing Date.
22
Section 8.2 No Disclosure. Without the prior written consent of
the Sellers, Viacom will not, prior to the Closing Date, disclose any term
or condition of this Agreement to any person or entity except that such
disclosure may be made if required pursuant to the requirements of law (in
which case Viacom shall consult with the Sellers prior to making such
disclosure).
Section 8.3 Antitrust Law Compliance. Viacom has prepared and
filed with the Federal Trade Commission and the United States Department of
Justice the notification required to be filed with respect to the
transactions contemplated hereby under the HSR Act or any rules and
regulations promulgated thereunder. Viacom has caused such filing, and
shall cause any future filing made by it or on its behalf, to be true and
accurate in all material respects and responsive to the requirements of the
HSR Act and any such rules and regulations. Viacom shall use its
reasonable efforts to obtain an early termination of the applicable waiting
period, and shall make any further filings pursuant thereto that may be
necessary. Viacom agrees to make available to the Sellers such information
relative to it as may be required for the preparation of such notification
or filings by or on behalf of the Sellers under the HSR Act and any rules
or regulations promulgated thereunder.
Section 8.4 Conduct Prior to Closing. Viacom will not, and will
cause its subsidiaries not to, take any action, or omit to take any action,
the result of which would cause any of the representations and warranties
made by it herein to become untrue.
ARTICLE IX
Conditions to the Obligations of Viacom
The obligations of Viacom to consummate the purchase of the Shares
shall be subject to the fulfillment at or prior to the Closing Date of each
of the following conditions:
23
Section 9.1 Accuracy of Representations and Warranties and
Compliance with Obligations. The representations and warranties of the
Sellers contained in this Agreement shall have been true and correct in all
material respects at and as of the date hereof, and they shall be true and
correct in all material respects at and as of the Closing Date, with the
same force and effect as though made at and as of that time. Each of the
Sellers shall have performed and complied in all material respects with all
of each of their respective obligations required by this Agreement to be
performed or complied with at or prior to the Closing Date. Each of the
Sellers shall have delivered to Viacom certificates, dated as of the
Closing Date and signed by an authorized officer of such Seller in the case
of a Seller that is a corporation, or a trustee of such Seller in the case
of a Seller that is a trust, certifying that the representations and
warranties of such Seller are thus true and correct in all material
respects and that all such obligations of such Seller have been thus
performed and complied with in all material respects.
Section 9.2 Certified Resolutions. DKB shall have delivered to
Viacom copies of the resolutions adopted by the board of directors of DKB
authorizing the transactions contemplated by this Agreement, certified in
each case as of the Closing Date, by the Secretary or an Assistant
Secretary of DKB. Each of the KFF Trust and the BJF Trust shall have
delivered to Viacom certified copies of actions taken by its advisory
committee authorizing the transactions contemplated by this Agreement.
Section 9.3 No Adverse Litigation. (a) No action, suit,
investigation or proceeding shall have been instituted by any person not
affiliated with any of the parties hereto or by any governmental agency to
restrain, prohibit, invalidate, or otherwise challenge the legality of the
purchase of the Shares or any other transaction contemplated hereby, which
action, suit, investigation or proceeding will have resulted in a temporary
restraining order, preliminary or
24
permanent injunction, or other order preventing consummation of the
purchase of the Shares or any other transaction contemplated hereby, and
which order or injunction is then in effect.
(b) No action, suit, investigation or proceeding shall have been
instituted by any person not affiliated with any of the parties hereto or
by any governmental agency to collect damages arising out of the purchase
of the Shares or any other transaction contemplated hereby, which action,
suit, investigation or proceeding is reasonably likely to succeed and is
reasonably likely to result in a material liability on the part of Viacom
or any of its respective affiliates.
Section 9.4 HSR Act Waiting Period. The waiting period and any
extension thereof, imposed by the HSR Act with respect to the transactions
contemplated by this Agreement shall have expired or been terminated.
Section 9.5 No Material Adverse Change. Since December 31, 1994,
there shall not have been any material adverse change in the assets,
business, financial condition, or operations of DZI and its subsidiaries
considered as one enterprise.
Section 9.6 Outstanding Shares. The Sellers shall have caused DZI
to deliver a certificate as of the opening of business on the Closing Date
certifying the number of shares issued by DZI between the date of this
Agreement and the Closing Date.
Section 9.7 Management Services Agreement. The Management Services
Agreement shall be in full force and effect and the parties thereto shall
be in compliance with their obligations thereunder (including compliance as
of the "Effective Date" (as defined in the Management Services Agreement)
with Sections 2(d) and 17 thereunder).
Section 9.8 Outstanding Shares. The Sellers shall have caused DZI
to deliver a certificate certifying the number of issued and outstanding
shares of Common Stock as of the opening of business on the Closing Date.
25
ARTICLE X
Conditions to Obligations of the Sellers
The obligations of the Sellers to consummate the sale of the Shares
shall be subject to the fulfillment at or prior to the Closing Date of each
of the following conditions:
Section 10.1 Accuracy of Representations and Warranties and
Compliance with Obligations. The representations and warranties of each of
Viacom contained in this Agreement shall have been true and correct in all
material respects at and as of the date hereof, and they shall be true and
correct in all material respects at and as of the Closing Date with the
same force and effect as though made at and as of that time. Viacom shall
have performed and complied in all material respects with all of its
respective obligations required by this Agreement to be performed or
complied with at or prior to the Closing Date. Viacom shall have delivered
to the Sellers a certificate, dated as of the Closing Date and signed by an
authorized officer of Viacom, certifying that the representations and
warranties of Viacom are thus true and correct in all material respects and
that all such obligations of Viacom have been thus performed and complied
with in all material respects.
Section 10.2 Certified Resolutions. Viacom shall have delivered to
the Sellers copies of the resolutions adopted by its board of directors
authorizing the transactions contemplated by this Agreement, certified as
of the Closing Date by the Secretary or an Assistant Secretary of Viacom.
Section 10.3 No Adverse Litigation. (a) No action, suit,
investigation or proceeding shall have been instituted by any person not
affiliated with any of the parties hereto or by any governmental agency to
restrain, prohibit, invalidate, or otherwise challenge the legality of the
sale of the Shares or any other transaction contemplated hereby, which
action, suit, investigation or proceeding will have resulted in a temporary
restraining order, preliminary or permanent injunction,
26
or other order preventing consummation of the sale of the Shares or any
other transaction contemplated hereby, and which order or injunction is
then in effect.
(b) No action, suit, investigation or proceeding will have been
instituted by any person not affiliated with any of the parties hereto or
by any governmental agency to collect damages arising out of the sale of
the Shares or any other transaction contemplated hereby, which action,
suit, investigation or proceeding is reasonably likely to succeed and is
reasonably likely to result in a material liability on the part of the
Sellers, DZI or any of their respective affiliates.
Section 10.4 HSR Act Waiting Period. The waiting period and any
extension thereof imposed by the HSR Act with respect to the transactions
contemplated by this Agreement shall have expired or been terminated.
Section 10.5 Management Services Agreement. The Management Services
Agreement, shall be in full force and effect and the parties thereto shall
be in compliance with their obligations thereto.
ARTICLE XI
Certain Actions After the Closing and Additional Agreements
Section 11.1 Execution of Further Documents. From and after the
Closing, upon the reasonable request of Viacom, any of the Sellers shall
execute, acknowledge and deliver all such further transfers, assignments,
conveyances, endorsements, consents and assurances as may be required to
convey and transfer to and vest in Viacom and protect its right, title and
interest in the Shares from such Seller, and as may be appropriate
otherwise to carry out the transactions contemplated by this Agreement to
which such Seller is a party.
27
Section 11.2 Holdback and Option Agreement. (a) During the
Holdback Period (as defined below), the Sellers jointly agree that the
Sellers and the Guarantors will hold and will not directly or indirectly
sell, transfer, assign, pledge or otherwise dispose of or encumber (each, a
"Transfer") an aggregate of 2,210,695 (which number shall be reduced by (a)
the product of 49.99% and the result obtained by subtracting the aggregate
number of shares of Common Stock issued by the Company in connection with
the pending acquisitions set forth in Section 5.3 of the DZI Disclosure
Schedule from 500,000; and (b) on the anniversary of the date of this
Agreement (the "Anniversary Date"), the result obtained by subtracting (i)
the difference between 49.99% of the outstanding shares of Common Stock on
the Anniversary Date and 28,044,001, from (ii) the number of shares of
Common Stock purchased by Viacom pursuant to the Top-Up Option up to and
including the Anniversary Date (the adjustments in (a) and (b) are
hereinafter collectively referred to as the "Adjustments") shares of Common
Stock (the "Holdback Shares"), other than (i) pursuant to a tender or
exchange offer for substantially all the outstanding shares of DZI Common
Stock or in a merger transaction in which substantially all the outstanding
shares of DZI Common Stock are converted into other consideration (each, a
"Stockholder Transaction"), or (ii) a transfer to any affiliate of any such
Seller or Guarantor (provided that the restrictions of this Section 11.2
will continue to be applicable to the affiliate after such Transfer and
such affiliate shall assume such Seller's obligations under this Article XI
with respect to any Holdback Shares so transferred in writing). For
purposes of this Section 11.2(a), the term "Holdback Period" shall mean the
period commencing on the date hereof and ending upon the earliest to occur
of (i) the termination of the Management Services Agreement in accordance
with its terms, (ii) the second anniversary of the date of this Agreement,
or (iii) a Transfer pursuant to a Stockholder Transaction.
28
(b) The Sellers hereby jointly and severally grant to Viacom an
irrevocable option to purchase the number of Holdback Shares (up to a
maximum of 2,210,695 (subject to the Adjustments) shares of Common Stock)
necessary to increase Viacom's ownership interest in the outstanding shares
of Common Stock of DZI up to 49.99% (the "Top-Up Option"). The exercise
price per share (the "Exercise Price") of the Top-Up Option shall be equal
to 75% of the Average Closing Price (as defined below); provided that
notwithstanding anything to the contrary elsewhere herein, the exercise
price of the Top-Up Option shall never be less than $6.50 or more than
$12.50 per share. The Top-Up Option shall be exercisable in whole or in
part at any time and from time to time during the Holdback Period, except
during a bona fide Stockholder Transaction of which Viacom has knowledge.
Upon the expiration of the Holdback Period, the Top-Up Option and all
rights and obligations relating thereto shall terminate. For purposes of
this Section 11.2(b), the term "Average Closing Price" shall mean the
average closing price of the shares of Common Stock on the Nasdaq National
Market (or, if the Common Stock is not then traded on the Nasdaq National
Market, the composite closing price of the shares of Common Stock on the
securities exchanges on which the Common Stock may then be traded), as
reported in The Wall Street Journal (Midwest Edition), on the twenty
business days ending on the second business day before the date of the
Option Closing (as defined below) of any exercise of the Top-Up Option.
(c) In the event that Viacom elects to exercise all or any portion of
the Top-Up Option, Viacom shall give written notice of exercise to the
Sellers (the "Exercise Notice"). The closing of the purchase and sale of
the Holdback Shares pursuant to an exercise of the Top-Up Option (the
"Option Closing") shall occur at such place and time and on such date as
shall be specified by Viacom in the Exercise Notice; provided, however,
that the parties acknowledge that such Closing may be conducted by
facsimile, overnight courier, wire transfer or similar means; and provided,
29
further, that in no event shall the Option Closing occur earlier than 10
days or later than 15 days after receipt of the Exercise Notice by the
Sellers. At the Option Closing (i) Viacom shall pay to the Sellers the
aggregate Exercise Price for the number of Holdback Shares being purchased
as set forth in the applicable Exercise Notice by wire transfer of
immediately available funds, and (ii) the Sellers will deliver to Viacom a
stock certificate or stock certificates representing the shares of Common
Stock being purchased pursuant to the exercise of the Top-Up Option, duly
endorsed in blank or accompanied by stock powers executed in blank, in form
satisfactory to Viacom and with all required stock transfer tax stamps
affixed.
(d) In the event of any change in the outstanding shares of Common
Stock by reason of any stock dividend, stock split, reverse stock split,
recapitalization, combination, exchange of shares, merger, consolidation,
reorganization or the like or any other change in the corporate or capital
structure of DZI that would have the effect of altering any party's rights
or obligations under this Section 11.2, the number and kind of shares of
Common Stock or other securities of DZI subject to the first sentence of
this Section 11.2(a) and the Top-Up Option and the Exercise Price shall be
adjusted appropriately so as to restore each party to its rights hereunder.
(e) The parties hereto agree that irreparable damage would occur in
the event any provision of this Article XI is not performed in accordance
with the terms hereof and that Viacom shall be entitled to specific
performance of the terms hereof, in addition to any other remedy at law or
equity.
Section 11.3 Right of First Offer. (a) During the two-year period
commencing on the date of this Agreement, the Sellers jointly agree that
the Sellers will hold and will not directly or indirectly sell or otherwise
dispose of (a "Sale") an aggregate of 1,205,156 shares of Common Stock,
plus any Holdback Shares no longer subject to the provisions of Section
11.2 hereof
30
(together, the "Held Shares"), except in compliance with this Section 11.3.
If at any time a Seller wishes to make a Sale of any of its Held Shares to
any Person, it shall deliver to Viacom by facsimile to the principal
offices of Blockbuster (Attention: General Counsel) a written notice of
its desire to make such Sale (an "Offer Notice"). The Offer Notice shall
specify such Seller's desire to make such Sale (which shall be for cash
only), the number of Held Shares such Seller wishes to sell (the "Offered
Shares") and the cash price per Held Share at which, and any other terms
upon which, such Seller proposes to sell the Offered Shares (the "Offer
Terms").
(b) The receipt of an Offer Notice by Viacom from a Seller shall
constitute an offer by such Seller to sell to Viacom (or its affiliates)
the Offered Shares at the cash price and upon the other terms set forth in
the Offer Terms. In the case of DKB during the "Restricted Period" (as
defined in the Co-Sale Agreement), such offer shall be irrevocable for five
business days after receipt of such Officer Notice by Viacom. In the case
of DKB not during the Restricted Period and in the case of the KFF Trust
and the BJF Trust, such offer shall be irrevocable for three hours (if the
market value of the Offered Shares is equal to or less than $5,000,000) or
for 24 hours (if the market value of the Offered Shares is more than
$5,000,000) after receipt of such Offer Notice by Viacom (the respective
period during which the offer shall remain irrevocable is hereinafter
referred to as the "Waiting Period"). During the Waiting Period, Viacom
(or its affiliate) shall have the right to accept such offer as to all (but
not less than all) of the Offered Shares by giving a written notice of
acceptance (the "Notice of Acceptance") to such Seller prior to the
expiration of the Waiting Period. If Viacom (or its affiliate) so accepts
a Seller's offer (an "Accepting Party"), such Person will purchase the
Offered Shares for cash from such Seller, at the cash price and upon the
other terms set forth in the Offer Terms.
31
(c) The consummation of any such purchase by and sale to the
Accepting Party shall take place on such date, not later than five business
days after receipt of the Notice of Acceptance from the Accepting Party by
a Seller, as the Accepting Party and such Seller shall select. Upon the
consummation of such purchase and sale, such Seller shall deliver to the
Accepting Party certificates evidencing the Offered Shares purchased and
sold duly endorsed in blank or accompanied by written instruments of
transfer in form reasonably satisfactory to the Accepting Party duly
executed by such Seller.
(d) In the event that (i) Viacom shall have received an Offer Notice
from a Seller but such Seller shall not have received from Viacom (or from
Viacom's affiliate) a Notice of Acceptance as to the Offered Shares prior
to the expiration of the Waiting Period following receipt of such Offer
Notice or (ii) the Accepting Party shall have given a Notice of Acceptance
to such Seller but shall have failed to consummate, other than as a result
of the fault of such Seller, a purchase of the Offered Shares with respect
to which such Notice of Acceptance was given within five business days
after receipt of the Notice of Acceptance by such Seller, then such Seller
may make a Sale of such Offered Shares so long as all the Offered Shares
are sold or otherwise disposed of (A) within 90 days after the date of
receipt of such Offer Notice by Viacom and (B) at, or in excess of, the
price and otherwise on terms no less favorable to the purchaser thereof
than the Offer Terms; provided, however, that in the case of subsection
(d)(ii) above, Viacom shall be responsible for the amount that the average
of the high and low prices of the Common Stock (as quoted in The Wall
Street Journal) on the fifth business day after receipt of the Notice of
Acceptance by such Seller is less than the bid price of the Common Stock at
the time of receipt of the Notice of Acceptance by such Seller.
32
ARTICLE XII
Indemnification
Section 12.1 Agreement by the Sellers to Indemnify.
(a) Subject to the limitations contained in this Section 12.1, each
of the Sellers, jointly and severally agrees that such Seller will defend,
indemnify and hold Viacom and its respective affiliates harmless in respect
of the aggregate of all indemnifiable damages of Viacom. For this purpose,
"indemnifiable damages" of Viacom means the aggregate of all expenses,
damages, losses, costs, deficiencies and liabilities (including related and
reasonable counsel fees and expenses, and compensatory and demonstrable
consequential damages) incurred or suffered by Viacom as a direct result of
(i) any inaccurate representation or warranty made by such Seller in or
pursuant to this Agreement, or (ii) any default in the performance of any
of the covenants or agreements made by such Seller in this Agreement;
provided, however, that any such expenses, damages, losses, costs,
deficiencies and liabilities resulting from any item or items relating to a
common set of facts or circumstances in connection with a breach of any
representation or warranty made herein shall not be considered
"indemnifiable damages" unless the amount involved is greater than $10,000;
provided, further, however that "indemnifiable damages" shall not include
any expenses, damages, losses, costs, deficiencies or liabilities incurred
as a result of any inaccuracy, breach or default of any provision of
Sections 5.10(A) or 5.10(B) hereof.
(b) Each of the representations and warranties made by the Sellers in
this Agreement shall survive until and including the first anniversary of
the Closing Date, and thereafter all such representations and warranties
shall be extinguished; provided, however, the representations and
warranties made by the Sellers in Article IV hereof shall in each case
survive forever, the representations and warranties made by the Sellers in
Section 5.8 shall survive for the applicable
33
statute of limitations period, except to the extent that other
representations and warranties in this Agreement reference compliance with
specific laws, regulations or orders, which such representations and
warranties shall survive until and including the first anniversary of the
Closing Date, the representations and warranties made by the Sellers in
Section 5.9 shall survive for a period of seven years and six months from
the Closing Date, and the representations and warranties made by the
Sellers in Sections 5.10(A) or 5.10(B) shall survive through the Closing.
No claim for the recovery of indemnifiable damages based upon the
inaccuracy of such representations and warranties may be asserted by Viacom
after such representations and warranties shall be thus extinguished;
provided, however, that claims first asserted within the applicable period
(whether or not the amount of any such claim has become ascertainable
within such period) shall not thereafter be barred.
(c) The Sellers shall only be liable for any claim for indemnifiable
damages arising out of any inaccuracy of any representation or warranty
contained in Article V hereof if the aggregate amount of all such
indemnifiable damages payable by all Sellers exceeds $500,000, in which
case the Sellers shall be liable for all indemnifiable damages arising out
of such inaccuracies, including the first $500,000. No Seller shall be
liable for any claim for indemnifiable damages arising out of the
inaccuracy of any representation and warranty or the default in the
performance of any covenant or agreement made by any other Seller as to
itself only. The aggregate amount of indemnifiable damages payable by any
Seller shall not exceed such Seller's share of the Purchase Price.
(d) The remedies provided for in this Section 12.1 shall be the sole
monetary remedy available to Viacom under this Agreement, and there shall
be no remedy (other than with respect to Section 9.1 hereof) available to
Viacom under this Agreement for any inaccuracy, breach or default of any
provisions of Sections 5.10(A) and 5.10(B) hereof.
Section 12.2 Agreement by Viacom to Indemnify.
34
(a) Subject to the limitations contained in this Section 12.2, Viacom
agrees that it will defend, indemnify and hold the Sellers and their
respective affiliates harmless in respect of the aggregate of all
indemnifiable damages of the Sellers. For this purpose, "indemnifiable
damages" of the Sellers means the aggregate of all expenses, losses, costs,
deficiencies, liabilities and damages (including related and reasonable
counsel fees and expenses, and compensatory and demonstrable consequential
damages) incurred or suffered by the Sellers as a direct result of any (i)
inaccurate representation or warranty made by Viacom in or pursuant to this
Agreement, or (ii) default in the performance of any of the covenants or
agreements made by Viacom in this Agreement; provided, however, that any
such expenses, damages, losses, costs, deficiencies and liabilities
resulting from any item or items relating to a common set of facts or
circumstances in connection with a breach of any representation or warranty
made herein shall not be considered "indemnifiable damages" unless the
amount involved is greater than $10,000.
(b) Each of the representations and warranties made by Viacom in this
Agreement shall survive forever.
(c) Viacom shall be liable only for any claim for indemnifiable
damages arising out of any inaccuracy of any representation or warranty if
the aggregate amount of all such indemnifiable damages exceeds $500,000, in
which case Viacom shall be liable for all indemnifiable damages arising out
of such inaccuracies, including the first $500,000. The aggregate amount
of indemnifiable damages payable by Viacom to all Sellers shall not exceed
the Purchase Price.
(d) The remedies provided for in this Section 12.2 shall be the sole
monetary remedy available to the Sellers under this Agreement or otherwise.
Section 12.3 Indemnification Procedures for Third Party Claims. In
the event that subsequent to the Closing Date any claim is asserted by a
third party against a party hereto as to
35
which such party is entitled to indemnification hereunder, such party (the
"indemnified party") shall as promptly as possible notify the party
obligated to indemnify it (the "indemnifying party") thereof in writing.
No delay on the part of the indemnified party to notify the indemnifying
party of a claim shall relieve any obligation of the indemnifying party to
indemnify the indemnified party with respect to such claim unless (and then
solely to the extent) the indemnifying party is prejudiced in its ability
to defend against the subject claim by the delay in such notification. The
indemnifying party shall have the right, upon written notice to the
indemnified party within ten (10) days after receipt from the indemnified
party of notice of such claim, to conduct at its expense and with counsel
of its choice reasonably satisfactory to the indemnified party the defense
against such claim in its own name, or, if necessary, in the name of the
indemnified party. In the event that the indemnifying party shall fail to
give such notice, it shall be deemed to have elected not to conduct the
defense of the subject claim, and in such event the indemnified party shall
have the right to conduct such defense and to compromise and settle the
claim without prior consent of the indemnifying party, and the indemnifying
party will remain responsible for all indemnifiable damages suffered by the
indemnified party relating to the subject claim. In the event that the
indemnifying party does elect to conduct the defense of the subject claim,
the indemnified party will cooperate with and make available to the
indemnifying party such assistance and materials as may be reasonably
requested by it, all at the expense of the indemnifying party, and the
indemnified party shall have the right at its expense to participate in the
defense, provided that the indemnified party shall have the right to
compromise and settle the claim only with the prior written consent of the
indemnifying party (such consent not to be unreasonably withheld). The
indemnifying party will not consent to the entry of any judgment with
respect to a subject claim or enter into any settlement with respect
thereto which does not include a provision whereby the plaintiff or
claimant
36
releases the indemnified party from all liability with respect thereto or
in cases involving equitable relief, puts the indemnified party in the same
position as it was prior to the initiation of the claim, without the prior
written consent of the indemnified party (such consent not to be
unreasonably withheld so long as such settlement or judgment only involves
the payment of money damages).
Section 12.4 Credit Provisions. In the event that, notwithstanding
the limitations contained in this Article XII, an indemnifying party
nevertheless becomes liable to an indemnified party hereunder, the
indemnifying party shall be entitled to a credit or offset against any such
liability of an amount equal to the value of any net tax benefit realized
by the indemnified party in connection with the loss or damage suffered by
the indemnified party which forms the basis of the indemnifying party's
liability hereunder and the receipt of the indemnification payment by the
indemnified party.
ARTICLE XIII
Miscellaneous
Section 13.1 [Intentionally omitted.]
Section 13.2 Brokers' Commission. Each Seller will indemnify and
hold harmless Viacom from the commission, fee or claim of any person, firm
or corporation employed or retained or claiming to be employed or retained
by such Seller to bring about, or to represent it in, the transactions
contemplated hereby. Viacom will indemnify and hold harmless each of the
Sellers from the commission, fee or claim of any person, firm or
corporation employed or retained or claiming to be employed or retained by
Viacom to bring about, or to represent it in, the transactions contemplated
hereby.
Section 13.3 Amendment and Modification. The parties hereto may
amend, modify and supplement this Agreement in such manner as may be agreed
upon by them in writing.
37
Section 13.4 Binding Effect. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective
successors, assignees, heirs and legal representatives. Nothing in this
Agreement shall confer upon any person, firm or corporation not a party to
this Agreement, or the legal representatives of such person, firm or
corporation, any rights or remedies of any nature or kind whatsoever by
reason of this Agreement.
Section 13.5 Entire Agreement. This Agreement, the DZI Disclosure
Schedule and the Exhibits attached hereto contain the entire agreement of
the parties hereto with respect to the purchase of the Shares and the
Holdback Shares and the other transactions contemplated herein and
supersede all prior understandings and agreements of the parties with
respect to the subject matter hereof.
Section 13.6 Headings. The descriptive headings in this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
Section 13.7 Execution in Counterpart. This Agreement may be
executed in any number of counterparts, each of which shall be deemed an
original.
Section 13.8 Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given when received,
whether personally, by telegram, telex, facsimile transmission (followed by
regular mail) or registered or certified mail (return receipt requested) to
the parties at the following addresses (or at such other address for a
party as shall be specified by like notice):
If to Viacom,
addressed to:
Blockbuster Entertainment Group
One Blockbuster Plaza
Ft. Lauderdale, Florida 33301
Attention: General Counsel
Fax No.: (305) 832-3909
38
with a copy to: Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
Attention: Creighton Condon
Fax No.: (212) 848-7179
If to any of the Sellers,
addressed to:
Flynn Enterprises, Inc.
676 North Michigan Avenue
Suite 4000
Chicago, Illinois 60611
Attention: General Counsel
Fax No.: (312) 280-3730
with a copy to:
Pedersen & Houpt
161 North Clark Street
Suite 3100
Chicago, Illinois 60601
Attention: James K. Stucko
Fax No.: (312) 641-6895
Section 13.9 Governing Law. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of Delaware applicable
to contracts made and to be performed therein, without regard to the
conflicts of laws principles thereof.
Section 13.10 Publicity. No press release or other public
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 13.11 Termination. Anything to the contrary herein
notwithstanding, this Agreement may be terminated and the transactions
contemplated hereby may be abandoned:
39
(i) by the mutual written consent of all of the parties hereto
at any time prior to the Closing Date;
(ii) by the Sellers in the event of the material breach by Viacom
of any provision of this Agreement (it being agreed that if the breach
in question is a breach by Viacom of any representation or warranty
contained in Article VI of this Agreement, such breach will not be
considered a material breach unless it would result in Viacom being
unable to consummate the transactions contemplated hereby), which
breach is not remedied by Viacom within 30 days after receipt of
notice thereof from the Sellers;
(iii) by Viacom in the event of the material breach by any of the
Sellers of any provision of this Agreement (it being agreed that if
the breach in question is a breach by the Sellers of any
representation or warranty contained in Article V of this Agreement,
such breach will not be considered a material breach unless it would
result in the Sellers being unable to consummate the transactions
contemplated hereby or in a DZI Material Adverse Effect, which breach
is not remedied by the Sellers within 30 days after receipt of the
notice thereof from Viacom; or
(iv) by any party hereto if the Closing has not taken place by
June 30, 1995. If this Agreement is terminated pursuant to clause
(a)(i) above, no party shall have any liability for any cost, expense,
loss of anticipated profit or any further obligation for breach of
warranty or otherwise to any other party to this Agreement. Any
termination of this Agreement pursuant to clauses (a) (ii), (iii) or
(iv) above shall be without prejudice to any other rights or remedies
of the respective parties.
40
Section 13.12 Expenses. Whether or not the transactions contemplated
hereby are consummated, all costs and expenses incurred in connection with
the transactions contemplated hereby shall be paid by the party incurring
such expenses.
Section 13.13 Notice of Developments. From time to time until or on
the Closing Date, Viacom, on the one hand, and the Sellers, on the other
hand, shall promptly give written notice to the other of any matter
hereafter arising of which the notifying party becomes aware which, if
existing or occurring at the date of this Agreement, would have been
required to be disclosed herein. However, no such disclosure made pursuant
to this Section 13.13 shall be deemed to supplement any disclosure schedule
or cure any breach of any representation, warranty or covenant.
Section 13.14 Guarantees. Donald F. Flynn hereby unconditionally
guarantees the full and prompt payment of the liabilities and the
performance of all of the obligations of, and the accuracy of the
representations and warranties made by, DKB hereunder. Kevin F. Flynn
hereby unconditionally guarantees the full and prompt payment of the
liabilities and the performance of all of the obligations of, and the
accuracy of the representations and warranties made by, the KFF Trust
hereunder. Brian J. Flynn hereby unconditionally guarantees the full and
prompt payment of the liabilities and the performance of all of the
obligations of, and the accuracy of the representations and warranties made
by, the BJF Trust hereunder.
41
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the day and year first above written.
SELLERS:
DKB, INC. VIACOM INC.
By: /s/ Donald Flynn By: /s/ Thomas W. Hawkins
--------------------- ------------------------
Name: Donald F. Flynn Name: Thomas W. Hawkins
------------------- ----------------------
Title: President Title: Assistant Secretary
------------------ ----------------------
Kevin F. Flynn June, 1992 Non-Exempt Trust
By: /s/ Kevin F. Flynn BLOCKBUSTER DISCOVERY
------------------------------ INVESTMENT, INC.
Trustee
Brian J. Flynn June, 1992 Non-Exempt Trust By: /s/ Adam D. Phillips
------------------------------
Name: Adam D. Phillips
----------------------------
Title: Vice President
----------------------------
By: /s/ Brian J. Flynn
----------------------------
Trustee
GUARANTORS:
/s/ Donald F. Flynn
- - ---------------------
Donald F. Flynn
/s/ Kevin F. Flynn
- - ---------------------
Kevin F. Flynn
/s/ Brian J. Flynn
- - ---------------------
Brian J. Flynn
42
Exhibit 99.(c)
BLOCKBUSTER ENTERTAINMENT LOGO
VIA TELECOPIER
--------------
(312) 616-3830
--------------
April 17, 1995
Discovery Zone, Inc.
205 North Michigan Avenue
Suite 3400
Chicago, IL 60601
Attn: Donald F. Flynn
Gentlemen:
This letter sets forth our agreement with respect to the purchase
from Blockbuster Family Fun, Inc., a Delaware corporation (the "Seller"),
of certain assets, properties and businesses of the Seller by Discovery
Zone, Inc., a Delaware corporation (the "Purchaser"), for the consideration
set forth herein. Such assets, properties and businesses (the "Center
Assets") pertain to the ownership and operation of two (2) family
entertainment centers operating under the name and mark "Block Party" (the
"Centers"), the addresses of which are set forth on Exhibit A attached
hereto. The parties hereto agree and acknowledge that subject to
satisfaction or waiver of the conditions to closing specified in Paragraph
3 below, this letter constitutes an obligation binding on the parties
hereto.
1. Purchase Price. The purchase price for the Center Assets
--------------
will be an amount equal to the lesser of (i) out-of-pocket expenses
incurred in the development and operation of the Centers and
(ii) $15,000,000.00 (the "Original Principal Balance")
payable by the delivery of a promissory note (the "Note") of the
Purchaser dated the date upon which the transactions contemplated
hereby are consummated. The Note will have a term of ten (10) years
and will accrue interest at a variable rate equal to LIBOR plus .75%.
----
For purposes of this letter, "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 at Page 3570 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) and as adjusted on the first day of
each calendar month following the Closing Date (as hereinafter
defined)
Discovery Zone, Inc.
April 17, 1995
Page 2
(or if such day is not a day on which such rate is quoted, the next
succeeding day on which such rate is quoted). Interest accruing on the
then-outstanding principal balance of the Note will be due and payable
in arrears on the first day of each August, November, February and May
following the Closing Date (each, an "Interest Payment Date").
Commencing on the third anniversary of the Closing Date, the Purchaser
shall pay to the Seller on each Interest Payment Date an amount equal
to the interest accruing on the Note plus the following amounts,
----
which amounts will be payable in four (4) equal installments on each
Interest Payment Date during any such year:
(a) During Year 4, the result obtained by multiplying the
Original Principal Balance by a fraction, the numerator of which
is 7 and the denominator of which is 28;
(b) During Year 5, the result obtained by multiplying the
Original Principal Balance by a fraction, the numerator of which
is 6 and the denominator of which is 28;
(c) During Year 6, the result obtained by multiplying the
Original Principal Balance by a fraction, the numerator of which
is 5 and the denominator of which is 28;
(d) During Year 7, the result obtained by multiplying the
Original Principal Balance by a fraction, the numerator of which
is 4 and the denominator of which is 28;
(e) During Year 8, the result obtained by multiplying the
Original Principal Balance by a fraction, the numerator of which
is 3 and the denominator of which is 28;
(f) During Year 9, the result obtained by multiplying the
Original Principal Balance by a fraction, the numerator of which
is 2 and the denominator of which is 28; and
(g) During Year 10, the result obtained by multiplying the
Original Principal Balance by a fraction, the numerator of which
is 1 and the denominator of which is 28.
Discovery Zone, Inc.
April 17, 1995
Page 3
The Seller will have the right to prepay the Note in whole or in part
from time-to-time without penalty. The Purchaser will assume
liabilities of the Seller under real property and personal property
leases related to the operation of the Centers (the "Assumed
Liabilities"). Taxes (to the extent prepaid) and real estate rentals
will be prorated as of the Closing Date.
2. The Closing. The closing (the "Closing") of the purchase and
-----------
sale of the Center Assets will occur on the third business day
following satisfaction or waiver of the conditions to closing set
forth in Paragraph 3 (such day of Closing being hereinafter referred
to as the "Closing Date").
3. Definitive Agreements. The Purchaser and the Seller will
---------------------
negotiate in good faith one or more definitive agreements concerning
the purchase and sale of the Center Assets (the "Center Definitive
Agreement(s)"). The Purchaser and Blockbuster Entertainment Group, a
division of Viacom Inc. ("Blockbuster") will cooperate with each other
in the event Blockbuster determines it shall receive certain tax
benefits by structuring the transaction as a sale of all outstanding
capital stock (the "Stock Sale") of the Seller to the Purchaser
followed by an election by the Purchaser under Section 338(h)(10) of
the Internal Revenue Code of 1986, as amended. In the event of a Stock
Sale, the transaction will be structured to the extent possible to
mirror the economics, representations, warranties, covenants and
conditions to closing of the Center Definitive Agreement(s) and
Blockbuster will indemnify the Purchaser and hold it harmless for all
liabilities other than the Assumed Liabilities. The Center Definitive
Agreement(s) will contain representations, warranties and covenants
substantially identical to those found in that certain Agreement and
Plan of Merger (the "Merger Agreement"), dated as of September 2,
1994, by and among the Purchaser, Columbus Acquisition, Inc.,
Blockbuster Entertainment Corporation and Blockbuster Children's
Amusement Corporation; provided, however, that such representations,
-----------------
warranties and covenants may be revised only to reflect the differing
transaction structures. The Center Definitive Agreement(s) will also
contain indemnification provisions substantially identical to those
contained in the Merger Agreement; provided, however, that the baskets
-----------------
set forth in Sections 11.1 and 11.2 of the Merger Agreement will be
reduced proportionally based upon the difference in consideration
between the Merger
Discovery Zone, Inc.
April 17, 1995
Page 4
Agreement and the Center Definitive Agreement(s). The Center
Definitive Agreement(s) will contain conditions to closing
substantially identical to those contained in that certain Stock
Purchase Agreement (the "Purchase Agreement"), dated as of the date
hereof, among DKB, Inc., Kevin F. Flynn June, 1992 Non-Exempt Trust,
Brian J. Flynn June, 1992 Non-Exempt Trust, Donald F. Flynn, Kevin F.
Flynn, Brian J. Flynn, Viacom Inc. and Blockbuster Discovery
Investment, Inc.; provided, however, that such conditions to closing
-----------------
may be revised only to reflect the differing transaction structures.
Notwithstanding anything to the contrary herein, the Center Definitive
Agreement(s) will also contain conditions for a limited due diligence
review by the Purchaser to be completed by the close of business on
April 21, 1995, which review will be deemed satisfactory unless it
reveals (i) a material misstatement in the balance sheets or profit
and loss statements previously delivered to the Purchaser, (ii) a
material agreement or contract entered into by the Purchaser is not
enforceable, or (iii) the Purchaser does not have good title to a
material asset which it otherwise claims to own free and clear of any
liens or encumbrances (the "Materiality Conditions"). For a
Materiality Condition to prevent Closing, the Seller must have first
been given a reasonable opportunity not longer than ten (10) business
days to cure such Materiality Condition. In the event there is a
Materiality Condition that is not cured as provided herein, the
parties agree, without prejudice to the rights of the Purchaser to
terminate this agreement, to discuss in good faith a reduction of the
Original Principal Balance. The Center Definitive Agreement(s) will
provide for a six-month royalty-free license from Blockbuster
Entertainment Inc. to the Purchaser of the mark "Block Party".
4. Access to Information. Promptly following execution of this
---------------------
agreement in principle, the Seller will provide the Purchaser, its
officers, directors, employees, agents and representatives with access
to all information concerning the Centers and all officers of the
Seller (at reasonable times and with reasonable advance notice) in
order to permit the Purchaser to perform a thorough legal, financial
and business investigation of the Centers.
5. Confidentiality. Each of the Purchaser, the Seller and FEC agrees
---------------
that it will not, and will use its best efforts to cause its officers,
directors, employees, affiliates, agents and representatives not to,
disclose the subject matter or terms of this agreement in principle or
any confidential information exchanged in connection
Discovery Zone, Inc.
April 17, 1995
Page 5
therewith, or issue any news release or make any other public
statement with respect thereto, without the prior written consent of
the other parties hereto, except as required by law, rule, regulation
or judicial process (in which case the party required to disclose such
information shall, to the extent practicable, notify the other parties
prior to such disclosure).
6. Expenses. Whether the transactions contemplated hereby are
--------
consummated, each of the parties hereto will bear its own expenses
(including attorneys fees and expenses) in connection with the
negotiation and execution of the Center Definitive Agreement(s) and
the consummation of the transactions contemplated thereby.
7. Governing Law. This agreement in principle will be governed
-------------
by and construed in accordance with the laws of the State of Delaware.
8. Termination. This agreement will terminate on the earlier to
-----------
occur of (i) the date of closing of the transactions contemplated by
the Purchase Agreement or (ii) June 30, 1995, without liability or
obligation on the part of any party hereto other than for a breach of
the provisions of the first sentence of Paragraph 3 and Paragraphs 5
and 6; provided, however, that this agreement may be terminated by the
-----------------
mutual agreement of the parties hereto.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
Discovery Zone, Inc.
April 17, 1995
Page 6
Please acknowledge your acceptance of and agreement with the
terms of this letter by signing and returning the enclosed copy.
Very truly yours,
BLOCKBUSTER FAMILY FUN, INC.
/s/ Adam D. Phillips
-------------------------------
By: Adam D. Phillips
Its: Vice President
BLOCKBUSTER ENTERTAINMENT INC., a
division of Viacom Inc.
/s/ Adam D. Phillips
-------------------------------
By: Adam D. Phillips
Its: Vice President
Accepted and agreed to this
_____ day of April, 1995:
DISCOVERY ZONE, INC.
/s/ Donald F. Flynn
- - ------------------------------
By: Donald F. Flynn
Its: Chairman and Chief Executive Officer
EXHIBIT A
---------
TO
--
AGREEMENT IN PRINCIPLE
----------------------
(1) Blockbuster Block Party
4595 San Mateo Boulevard
Albuquerque, New Mexico
(2) Blockbuster Block Party
4102 Claire Drive
Indianapolis, Indiana
EXHIBIT 99.(d)
VIACOM ENTERS INTO MANAGEMENT AGREEMENT WITH
DISCOVERY ZONE
CHICAGO, April 17 -- Discovery Zone Inc. (NASDAQ:
ZONE) today announced that the Blockbuster Entertainment Group
of Viacom, Inc. (AMEX: VIA, VIA.B) has entered into a five-
year Management Services Agreement with Discovery Zone.
The Company said that Discovery Zone Chairman and
CEO Donald F. Flynn will remain chairman and a member of the
board of directors, and Steven R. Berrard, president and chief
executive officer of Blockbuster has been elected as interim
Discovery Zone chief executive until a replacement is named.
Discovery Zone board members not affiliated with Viacom will
resign effective at closing.
Discovery Zone also announced that the Flynn family
will complete the previously announced exercise of outstanding
warrants to acquire additional shares of Discovery Zone common
stock, investing $26,700,000. Blockbuster Entertainment, in
order to retain its 49.9 percent ownership of Discovery Zone
common stock, will purchase an aggregate of 3,823,647 shares
of Discovery Zone common stock from the Flynn family.
"This management agreement is a major milestone in
the growth and evolution of Discovery Zone," said Flynn.
"Viacom's wealth of brands and Blockbuster's expertise as one
of the premier entertainment retailers in the world will
enrich the overall experience in all of our FunCenters.
Additionally, Viacom's infrastructure and strong position in
the entertainment industry should lead to a reduction in
operating expenses and additional marketing opportunities,
while the grant of the warrants will give Viacom strong
incentives to enhance shareholder value."
"We have had a long, successful relationship with
Discovery Zone as a shareholder, former franchisee and joint
venture partner," said Berrard. "Don Flynn and Discovery Zone
Management have pioneered the concept of the children's
FunCenter and established the Company as the nationally
recognized leader in children's destination-based
entertainment. Now, with this management agreement we will
have the opportunity to build on its success, further leverage
our assets, improve the Company's operations and increase its
profitability."
The Management Services Agreement is for a term of
five years, with successive one-year extensions. Under the
Management Agreement, Discovery Zone will reimburse
Blockbuster for its costs incurred and will grant to
Blockbuster warrants to acquire an aggregate of up to 473,463
shares of a new class of non-cumulative, convertible,
participating preferred stock. The terms of the agreement
have been approved by an independent committee of Discovery
Zone's Board of Directors.
Each share of preferred stock will be convertible
into 24 shares of Discovery Zone common stock by any holder
who is not affiliated with Blockbuster. The warrants, a Class
A Warrant, a Class B Warrant and a Class C Warrant, will be
exercisable for an equal number of shares of preferred stock
and will vest on the first, second and third anniversaries of
the effective date of the management agreement, with exercise
prices per share of preferred stock of $249.000, $286.344 and
$343.608, respectively.
Blockbuster also will sell its "Block Party"
entertainment centers to Discovery Zone for net book value of
$15 million payable in subordinated notes.
It is anticipated that these transactions, which are
subject to customary closing conditions, will close sometime
during the second quarter.
Discovery Zone, Inc. is the nation's leading
operator of children's indoor entertainment and fitness
facilities.
Blockbuster Entertainment Group is a unit of Viacom
Inc. with businesses in entertainment retailing, television
and film production, live entertainment and pay cable. The
Group is composed of Blockbuster Video, Blockbuster Music,
Blockbuster International, Spelling Entertainment, Showtime
Networks Inc. and Paramount Parks, as well as Discovery Zone
FunCenters.
Viacom Inc. is a worldwide leader in entertainment
and publishing. In addition to Blockbuster Entertainment,
Viacom's operations include Paramount Pictures, Paramount
Television, MTV Networks, Simon & Shuster, radio and
television stations, cable systems serving approximately 1.1
million customers in the United States and movie theaters in
11 countries.
