Exhibit 10.5
TAX MATTERS AGREEMENT
THIS TAX MATTERS AGREEMENT (the "Agreement"), dated as of
(the "IPO Date"), is entered into between Viacom Inc., a Delaware
corporation ("Viacom"), and Blockbuster Inc., a Delaware corporation,
("Blockbuster").
R E C I T A L S
A. Viacom is the common parent corporation of an affiliated
group of corporations which, together with any other corporations which may
become members of such affiliated group, is referred to as the "Viacom
Consolidated Group".
B. Blockbuster, if it were not included in the Viacom
Consolidated Group on the date hereof, would be the common parent corporation of
an affiliated group of corporations within the meaning of Section 1504 of the
Internal Revenue Code of 1986, as amended (the "Code"), which, together with any
other corporations which may become members of such affiliated group, is
referred to as the "Blockbuster Consolidated Group".
C. Viacom and Blockbuster desire to set forth in the Agreement
their agreement as to certain matters relating to the inclusion of the
Blockbuster Consolidated Group in the Viacom Consolidated Group, including the
allocation of tax
1
liabilities for years in which the Blockbuster Consolidated Group is so
included, and certain other matters relating to taxes.
The parties agree as follows:
1. FILING OF CONSOLIDATED RETURNS AND PAYMENT OF CONSOLIDATED
TAX LIABILITY.
For all taxable years in which Viacom files consolidated
federal income tax returns (any such return of the Viacom Consolidated Group for
any taxable year, a "Viacom Consolidated Return") and is entitled to include the
Blockbuster Consolidated Group in such returns under Sections 1501-1504, or
successor provisions, of the Code, Viacom shall include the Blockbuster
Consolidated Group in the consolidated federal income tax returns it files as
the common parent corporation of the Viacom Consolidated Group. Viacom,
Blockbuster, and the other members of the Viacom Consolidated Group shall file
any and all consents, elections or other documents and take any other actions
necessary or appropriate to effect the filing of such federal income tax
returns. For all taxable years in which the Blockbuster Consolidated Group is
included in the Viacom Consolidated Group, Viacom shall pay the entire federal
income tax liability of the Viacom Consolidated Group and shall indemnify and
hold harmless Blockbuster against any such liability; PROVIDED, HOWEVER, that
Blockbuster shall make payments to Viacom or receive payments from Viacom as
provided in the Agreement in settlement of the Blockbuster Consolidated Group's
share of the entire federal income tax liability of the Viacom Consolidated
Group for any taxable year (which term shall throughout the Agreement include
any short taxable year) beginning on or after the IPO Date during which the
Blockbuster Consolidated Group is included
2
in the Viacom Consolidated Group (any such taxable year, an "Agreement Year" and
any taxable year ending on or before the IPO Date, a "pre-Agreement Year"). For
purposes of this Agreement, the Blockbuster Consolidated Group shall be deemed
to have a taxable year beginning on January 1, 1999 and ending on the IPO Date
(which year shall be treated as a pre-Agreement Year), and the Blockbuster
Consolidated Group shall be deemed to have a taxable year beginning on the day
after the IPO Date and ending on December 31, 1999 (or, if earlier, the date on
which the Blockbuster Consolidated Group's actual taxable year beginning January
1, 1999 ends) which year shall be treated as an Agreement Year.
2. PRO FORMA BLOCKBUSTER RETURN.
For each Agreement Year, Viacom shall prepare a pro forma
consolidated federal income tax return for the Blockbuster Consolidated Group (a
"Pro Forma Blockbuster Return"). Except as otherwise provided herein, the Pro
Forma Blockbuster Return for each Agreement Year shall be prepared as if
Blockbuster filed a consolidated return on behalf of the Blockbuster
Consolidated Group for such taxable year; provided, however, that the Pro Forma
Blockbuster Return shall not include any deduction or other tax benefit
attributable to the exercise of an option to purchase Viacom stock by an
employee of Blockbuster (or its affiliates). The Pro Forma Blockbuster Return
shall reflect any carryovers of net operating losses, net capital losses, excess
tax credits, or other tax attributes from prior Agreement Years' Pro Forma
Blockbuster Returns which could have been utilized by the Blockbuster
Consolidated Group (excluding those attributes carried back pursuant to Section
5 herein) if the Blockbuster Consolidated Group had never been included in the
Viacom
3
Consolidated Group and all Pro Forma Blockbuster Returns had been actual
returns, but otherwise shall not reflect any tax benefits that arise from any
adjustment to a pre-Agreement Year or carryovers of any other tax attributes
from a pre-Agreement Year, regardless of whether such attributes were utilized
(on audit or otherwise) on a tax return of Viacom in a pre-Agreement Year. The
Pro Forma Blockbuster Return shall be prepared in a manner that reflects all
elections, positions, and methods used in the Viacom Consolidated Return that
must be applied on a consolidated basis and otherwise shall be prepared in a
manner consistent with the Viacom Consolidated Return. The provisions of the
Code that require consolidated computations, such as Sections 861, 1201-1212,
and 1231, shall be applied separately to the Blockbuster Consolidated Group.
Section 1.1502-13 of the Income Tax Regulations shall be applied as if the
Blockbuster Consolidated Group and the Viacom Consolidated Group (excluding the
members of the Blockbuster Group) were separate affiliated groups, except that
the Pro Forma Blockbuster Return shall also include any gains or losses of the
members of the Blockbuster Consolidated Group on transactions within the
Blockbuster Consolidated Group (including in years prior to the first Agreement
Year) which must be taken into account pursuant to Section 1.1502-13 of the
Income Tax Regulations and reflected on the Viacom Consolidated Return if the
Blockbuster Consolidated Group ceases to be included in the Viacom Consolidated
Group. For purposes of the Agreement, all determinations made as if the
Blockbuster Consolidated Group had never been included in the Viacom
Consolidated Group and as if all Pro Forma Blockbuster Returns were actual
returns shall reflect any actual short taxable
4
years resulting from the Blockbuster Consolidated Group joining or leaving the
Viacom Consolidated Group.
3. PRO FORMA BLOCKBUSTER RETURN PAYMENTS.
For each Agreement Year, Blockbuster shall make periodic
payments ("Periodic Payments") to Viacom in such amounts as determined by Viacom
based upon the estimated tax payments that would be due from the Blockbuster
Consolidated Group if it were not included in the Viacom Consolidated Group no
later than the dates on which payments of estimated tax would be due from the
Blockbuster Consolidated Group if it were not included in the Viacom
Consolidated Group. The balance of the tax due for an Agreement Year shall be
paid to Viacom no later than March 15 of the following year (the "Balance
Payment"). Blockbuster shall pay to Viacom no later than the date on which a
Viacom Consolidated Return for any Agreement Year is filed an amount equal to
the sum of (i) the federal income tax liability shown on the corresponding Pro
Forma Blockbuster Return prepared for the Agreement Year and (ii) the additions
to tax, if any, under Section 6655 of the Code that would have been imposed on
Blockbuster (treating the amount due to Viacom under (i) above as its federal
income tax liability and treating any periodic payments to Viacom pursuant to
the first sentence of this Section 3 as estimated payments under Section 6655 of
the Code) and which result from the inaccuracy of any information provided by
Blockbuster to Viacom pursuant to Section 5 hereof or from the failure of
Blockbuster to provide any requested information, reduced by (iii) the sum of
the amount of the Periodic Payments and the Balance Payment (collectively, the
"Total Periodic Payments"), plus (iv) any interest and additions to tax (other
than under Section 6655 of the Code) that would be
5
due under the Code if the Total Periodic Payments were actual payments of tax.
If Blockbuster's Total Periodic Payments to Viacom for any Agreement Year exceed
the amount of its liability under the preceding sentence, Viacom shall refund
such excess to Blockbuster within 30 days after filing the Viacom Consolidated
Return. For purposes of the Agreement, the term "federal income tax liability"
includes the tax imposed by Sections 11, 55 and 59A of the Code, or any
successor provisions to such Sections. Viacom shall notify Blockbuster of any
amounts due from Blockbuster to Viacom pursuant to this Section 3 no later than
5 business days prior to the date such payments are due and such payments shall
not be considered due until the later of the due date described above or the
fifth day from the notice from Viacom.
4. PAYMENTS FOR TAXABLE YEARS IN THE EVENT OF DECONSOLIDATION.
(a) PAYMENTS BY BLOCKBUSTER TO VIACOM. If for any taxable year
after the Blockbuster Consolidated Group ceases to be included in the Viacom
Consolidated Group (a "Post-Consolidation Year"), (i) the federal income tax
liability of the Blockbuster Consolidated Group is less than (ii) the federal
income tax liability that would have been imposed with respect to the same
period if the Blockbuster Consolidated Group had not been included in the Viacom
Consolidated Group for any Agreement Year, all Pro Forma Blockbuster Returns had
been actual returns for such years, and no carryovers of Blockbuster attributes
from pre-Agreement years were permitted, then Blockbuster shall pay to Viacom
the excess of (ii) over (i) within 10 days of the filing of the Blockbuster
Post-Consolidation Year return.
(b) PAYMENTS BY VIACOM TO BLOCKBUSTER. If for any
Post-Consolidation Year (i) the federal income tax liability of the Blockbuster
Consolidated Group is greater
6
than (ii) the federal income tax liability that would have been imposed with
respect to the same period if the Blockbuster Consolidated Group had not been
included in the Viacom Consolidated Group for any Agreement Year, all Pro Forma
Blockbuster Returns had been actual returns for such years, and no carryovers of
Blockbuster attributes from pre-Agreement Years were permitted, then Viacom
shall pay to Blockbuster the excess of (i) over (ii) within 10 days of
notification by Blockbuster to Viacom of the filing of the Blockbuster
Post-Consolidation Year return.
(c) DOCUMENTATION. Prior to the payment of any amounts due
pursuant to this Section 4, the parties shall exchange such information and
documentation as is reasonably satisfactory to each of them in order to
substantiate the amounts due pursuant to this Section 4. Any disputes as to such
amounts and documentation which cannot be resolved prior to the date a payment
is due shall be referred to an independent accounting firm whose fees shall paid
one half by Blockbuster and one half by Viacom.
(d) NO POST-CONSOLIDATION YEAR CARRYBACKS. If a Blockbuster
federal income tax return with respect to a Post-Consolidation Year reflects a
net operating loss, net capital loss, excess tax credits, or any other tax
attribute, such attribute may not be carried back to a Viacom tax return.
5. CARRYBACKS.
If a Pro Forma Blockbuster Return reflects a net operating
loss, net capital loss, excess tax credit or other tax attribute (a "Pro Forma
Blockbuster Attribute"), which is actually utilized in a Viacom Consolidated
Return (including any amendments thereto), then, within 30 days after the later
of (i) the due date for the Viacom
7
Consolidated Return (taking into account any extensions thereof) or (ii) the
date such Pro Forma Blockbuster Attribute is actually realized in cash (whether
directly or by offset), Viacom shall pay to Blockbuster an amount equal to the
lesser of (x) the refund which the Blockbuster Consolidated Group would have
received as a result of the carryback of such Pro Forma Blockbuster Attribute to
a Pro Forma Blockbuster Return for any prior Agreement Year or Years (determined
as if the first Agreement Year were the earliest taxable year to which such
attributes could be carried back) or (y) the tax savings or tax benefit realized
by Viacom with respect to the use of such Pro Forma Blockbuster Attribute in a
Viacom Consolidated Return. All calculations of deemed refunds pursuant to this
Section 5 shall include interest computed as if Blockbuster had filed a claim
for refund or an application for a tentative carryback adjustment pursuant to
Section 6411(a) of the Code on the date on which the Viacom Consolidated Return
is filed.
6. PREPARATION OF TAX PACKAGE AND OTHER FINANCIAL REPORTING
INFORMATION.
Blockbuster shall provide to Viacom in a format determined by
Viacom all information requested by Viacom as necessary to prepare the Viacom
Consolidated Return and the Pro Forma Blockbuster Return (the "Viacom Tax
Package"). The Viacom Tax Package with respect to any taxable year shall be
provided to Viacom on a basis consistent with current practices of the Viacom
Consolidated Group no later than April 1 of the following year. Blockbuster
shall also provide to Viacom information required to determine the Total
Periodic Payments, current federal taxable income, current and deferred tax
liabilities, tax reserve items, and any additional current or prior
8
information required by Viacom on a timely basis consistent with current
practices of the Viacom Consolidated Group.
7. RETURNS, AUDITS, REFUNDS, AMENDED RETURNS, LITIGATION,
ADJUSTMENTS AND RULINGS.
(a) RETURNS. Viacom shall have exclusive and sole
responsibility for the preparation and filing of the Viacom Consolidated Returns
(including requests for extensions thereof) and any other returns, amended
returns and other documents or statements required to be filed with the Internal
Revenue Service (the "IRS") in connection with the determination of the federal
income tax liability of the Viacom Consolidated Group.
(b) AUDITS; REFUND CLAIMS. Viacom will have exclusive and sole
responsibility and control with respect to the conduct of IRS examinations of
the returns filed by the Viacom Consolidated Group and any refund claims with
respect thereto. Blockbuster shall assist and cooperate with Viacom during the
course of any such proceeding. Viacom shall give Blockbuster notice of and
consult with Blockbuster with respect to any issues relating to items of income,
gain, loss, deduction or credit of any member of the Blockbuster Consolidated
Group (any such items, "Blockbuster Consolidated Return Items"). Viacom shall
not settle or otherwise compromise any Blockbuster Consolidated Return Item that
would result in additional liability for Blockbuster under this Agreement
without the written consent of Blockbuster, which consent shall not be
unreasonably withheld. If Blockbuster does not respond to Viacom's request for
consent within 30 days, Blockbuster shall be deemed to have consented.
Notwithstanding the foregoing, Viacom shall have the right in its sole
9
discretion to pay any disputed taxes and xxx for a refund in the forum of its
choice. In the case of any audit or litigation with respect to a Blockbuster
return for a Post-Consolidation Year, Blockbuster shall not settle or otherwise
compromise any matter relating to the treatment of any item arising in an
Agreement Year or a pre-Agreement Year in a manner which would affect the
liability of Viacom to Blockbuster or Blockbuster to Viacom pursuant to Section
4 without the consent of Viacom, which consent shall not be unreasonably
withheld.
(c) LITIGATION. If the federal income tax liability of the
Viacom Consolidated Group becomes the subject of litigation in any court, the
conduct of the litigation shall be controlled exclusively by Viacom. Blockbuster
shall assist and cooperate with Viacom during the course of litigation, and
Viacom shall consult with Blockbuster regarding any issues relating to
Blockbuster Consolidated Return Items.
(d) EXPENSES. Blockbuster shall reimburse Viacom for all
reasonable out-of-pocket expenses (including, without limitation, legal,
consulting and accounting fees) in the course of proceedings (i) described in
paragraphs (b) and (c) of this Section to the extent such expenses are
reasonably attributable to Blockbuster Consolidated Return Items for any
Agreement Year or (ii) relating to any assertion of liability attributable in
whole or in part to actions or events covered by Section 11.
(e) RECALCULATION OF PAYMENTS TO REFLECT ADJUSTMENTS. To the
extent that any audit, litigation or claim for refund with respect to a Viacom
Consolidated Return or a Blockbuster return for a Post-Consolidation Year
results in an additional payment of tax (including a payment of tax made
preliminary to commencing a refund claim or litigation) or a refund of tax (any
such additional payment or refund, an
10
"Adjustment") relating to the treatment of a Blockbuster Consolidated Return
Item for an Agreement Year, a corresponding adjustment shall be made to the
corresponding Pro Forma Blockbuster Return.
All calculations of payments made pursuant to Sections 3, 4,
and 5 of the Agreement shall be recomputed to reflect the effect of any
Adjustments on the relevant Pro Forma Blockbuster Return or on the liability of
the Blockbuster Consolidated Group for a Post-Consolidation Year. Within 5 days
after any such Adjustment, Blockbuster or Viacom, as appropriate, shall make
additional payments or refund payments to the other party reflecting such
Adjustment, plus interest pursuant to Section 8 of the Agreement calculated as
if payments by and to Blockbuster pursuant to Sections 3, 4, and 5 of the
Agreement and this Section 7 were payments and refunds of federal income taxes.
Blockbuster shall further pay to Viacom the amount of any penalties or additions
to tax incurred by the Viacom Consolidated Group as a result of an adjustment to
any Blockbuster Consolidated Return Item for an Agreement Year.
(f) RULINGS. Blockbuster shall assist and cooperate with
Viacom and take all actions requested by Viacom in connection with any ruling
requests submitted by Viacom to the IRS, including rulings unrelated to the
Distributions (defined in Section 11(a) below).
(g) APPLICABILITY WITH RESPECT TO ALL CONSOLIDATED RETURNS.
The provisions of Section 7(a), (b) and (c) above shall apply to Viacom
Consolidated Returns and Blockbuster Consolidated Return Items for all taxable
years in which the Blockbuster Consolidated Group (or any member thereof) is
includable in the Viacom Consolidated Group.
11
(h) DOCUMENT RETENTION, ACCESS TO RECORDS & USE OF PERSONNEL.
Until the expiration of the relevant statute of limitations (including
extensions), Blockbuster shall (i) retain records, documents, accounting data,
computer data and other information (collectively, the "Records") necessary for
the preparation, filing, review, audit or defense of all tax returns relevant to
an obligation, right or liability of either party under the Agreement; and (ii)
give Viacom reasonable access to such Records and to its personnel (insuring
their cooperation) and premises to the extent relevant to an obligation, right
or liability of either party under the Agreement. Prior to disposing of any such
Records, Blockbuster shall notify Viacom in writing of such intention and afford
Viacom the opportunity to take possession or make copies of such Records at its
discretion.
8. INTEREST.
Interest required to be paid by or to Blockbuster pursuant
to the Agreement shall, unless otherwise specified, be computed at the rate
and in the manner provided in the Code for interest on underpayments and
overpayments, respectively, of federal income tax for the relevant period.
Any payments required pursuant to the Agreement which are not made within the
time period specified in the Agreement shall bear interest at a rate equal to
two hundred basis points above the average interest rate on the senior bank
debt of Blockbuster.
9. FOREIGN, STATE AND LOCAL INCOME TAXES.
In the case of foreign, state or local taxes based on or
measured by the net income of the Viacom Consolidated Group, or any combination
of members thereof (other than solely with respect to members which are members
of the Blockbuster
12
Consolidated Group or which are members of the Viacom Consolidated Group but not
the Blockbuster Consolidated Group) on a combined, consolidated or unitary
basis, the provisions of the Agreement shall apply with equal force to such
foreign, state or local tax for each Agreement Year whether or not the
Blockbuster Consolidated Group is included in the Viacom Consolidated Group for
federal income tax purposes; PROVIDED, HOWEVER, that interest pursuant to the
first sentence of Section 8 of the Agreement shall be computed at the rate and
in the manner provided under such foreign, state or local law for interest on
underpayments and overpayments of such tax for the relevant period and
references to provisions of the Code throughout the Agreement shall be deemed to
be references to analogous provisions of state, local, and foreign law.
For any Agreement Year or pre-Agreement Year, Viacom shall
have the sole and exclusive control of (a) the determination of whether a
combined, consolidated or unitary tax return should be filed for any foreign,
state or local tax purpose and (b) all foreign, state or local income tax audits
and litigation with respect to any member of the Blockbuster Consolidated Group.
Blockbuster shall reimburse Viacom for all reasonable out-of-pocket expenses
(including, without limitation, legal, consulting and accounting fees) in the
course of proceedings described in the preceding sentence to the extent such
expenses are reasonably attributable to Blockbuster or any member of the
Blockbuster Consolidated Group.
Blockbuster shall provide to Viacom separate legal entity
reporting information with respect to any member of the Blockbuster Consolidated
Group as requested by Viacom on a timely basis.
Viacom will provide notice of and consult with Blockbuster
with respect to any issue relating to such audits and litigation and Blockbuster
will provide to Viacom
13
any information necessary to conduct such audits and litigation. Viacom shall
not settle or otherwise compromise any audits or litigation that would result in
additional liability for Blockbuster under this Section 9 without the written
consent of Blockbuster, which consent shall not be unreasonably withheld. If
Blockbuster does not respond to Viacom's request for consent within 30 days,
Blockbuster shall be deemed to have consented. Notwithstanding the foregoing,
Viacom shall have the right in its sole discretion to have Blockbuster pay any
disputed taxes and xxx for a refund in the forum of Viacom's choice.
Blockbuster shall be responsible for filing tax returns
relating to payroll, sales and use, property, withholding and similar taxes and
shall be responsible for the payment of such taxes.
For all taxable years prior to and including the taxable years
that Blockbuster is a member of the Viacom Consolidated Group, Blockbuster shall
have the sole and exclusive responsibility for all taxes based on or measured by
the net income which are determined solely by the income of the Blockbuster
Consolidated Group (or any combination of the members thereof including the
predecessors of such members) on a combined, consolidated, unitary or separate
company basis. Viacom, in consultation with the Chief Financial Officer of
Blockbuster, shall have sole and exclusive responsibility for the preparation of
returns relating to such taxes and the control of audits, controversies and
proceedings with respect thereto.
Notwithstanding the immediately preceding paragraph, in the
case of New York State and New York City taxes based on or measured by the net
income which are determined solely by the income of the Blockbuster Consolidated
Group (or any
14
combination of the members thereof including the predecessors of such members)
on a combined, consolidated, unitary or separate company basis, Viacom shall
have the sole and exclusive responsibility for such taxes and for the return
preparation and the control of audits, controversies and proceedings with
respect thereto.
10. UK TAX SURRENDERS.
If requested to do so by Viacom UK Limited ("VUKL"),
Blockbuster agrees that it will cause any of its direct or indirect subsidiaries
which, under the tax laws of the United Kingdom, are or have been regarded as
resident in the United Kingdom to consent under provisions of Chapter IV of Part
X of TA 1988 to the surrender of all or any part of their available tax losses
to VUKL or to any member of the United Kingdom tax group of which VUKL is the
principal member. This agreement is made in respect of all accounting periods
ended on or before December 31, 1998, and Blockbuster agrees to take or cause to
be taken all actions necessary to effect the loss surrender.
11. TAXES ATTRIBUTABLE TO THE DISTRIBUTIONS.
(a) ACTIONS INCONSISTENT WITH THE RULINGS. In the event that
stock of Blockbuster (or any successor thereto) is ultimately distributed to any
or all of Viacom's shareholders pursuant to transactions intended to qualify
under Section 355 of the Code, including a distribution of Blockbuster stock
from Viacom International Inc. to Viacom, (any such transaction, a
"Distribution" and collectively, the "Distributions"), Blockbuster shall not
take or fail to take, and shall not permit any other member of the Blockbuster
Consolidated Group or any other corporation or other entity that is directly or
indirectly more than 50 percent (by vote or value) owned by any member of the
Blockbuster Consolidated Group (any such entity, a "Blockbuster Affiliate" and
together
15
with the Blockbuster Consolidated Group, the "Blockbuster Entities") to take or
fail to take, any action if such act or failure to act would be inconsistent
with any ruling, including for all purposes of the Agreement any supplemental
rulings, (collectively, the "Rulings") issued by the IRS in connection with the
Distributions or any representation, covenant or information included in any
submission to the IRS in connection with the Rulings (together with the Rulings,
the "Rulings and Submissions").
(b) LIABILITY. Notwithstanding anything to the contrary in the
Agreement, Blockbuster and the Blockbuster Entities shall be jointly and
severally liable for, and shall indemnify and hold harmless Viacom and each
member of the Viacom Consolidated Group (other than members of the Blockbuster
Consolidated Group) from and against, on an after-tax basis, any and all taxes
(including interest, penalties and additions to tax) resulting from the
Distributions to the extent such taxes result from (i) any event or transaction
after the Distributions that involves the stock, assets, or business of the
Blockbuster Entities, whether or not such event or transaction is the result of
direct actions of, or within the control of, the Blockbuster Entities, (ii) any
act or failure to act on the part of any of the Blockbuster Entities after the
Distributions, (iii) the breach of any representation, covenant or information
regarding the Blockbuster Entities included in the Rulings and Submissions, or
(iv) any actions contemplated by Section 11(c) below, regardless of whether such
actions are permitted pursuant to Section 11(d) below.
(c) COVENANTS. Blockbuster agrees that during the two years
following the Distributions, Blockbuster will not, and will not permit any of
the Blockbuster Entities to:
16
(i) sell, exchange, distribute or otherwise transfer all or a
substantial portion of its assets or any stock or equity interest in
any of the Blockbuster Entities,
(ii) enter into any merger or liquidation transaction,
(iii) discontinue or otherwise fail to maintain the active
trade or business relied upon in connection with the Rulings and
Submissions,
(iv) purchase any of its outstanding stock other than through
stock purchases meeting the requirements of section 4.05(1)(b) of Rev.
Proc. 96-30,
(v) issue any stock or equity interests (except pursuant to
the exercise of employee stock options),
(vi) enter into any agreement for the sale or other
disposition of its stock or equity interests,
(vii) amend its certificate of incorporation (or other
organizational documents), whether through a stockholder vote or
otherwise, in a manner that affects the relative voting rights of the
separate classes of Blockbuster stock (including, without limitation,
through the conversion of one class of Blockbuster stock into another
class of Blockbuster stock), or
(viii) take any action inconsistent with the information,
representations or covenants included in the Rulings and Submissions or
that would result in the Distributions being taxable in whole or in
part to the Viacom Consolidated Group or Viacom's shareholders.
(d) EXCEPTIONS TO COVENANTS. Notwithstanding Section 11(c)
above, the Blockbuster Entities may take actions inconsistent with the covenants
contained in
17
such Section 11(c), if Viacom consents in writing to such actions, such consent
to be determined by Viacom in its sole discretion taking into account solely the
preservation of the tax-free status of the Distributions; provided, however,
that if such consent is not given, Blockbuster may request, which request may
not be unreasonably denied, that Viacom either:
(i) seek to obtain a ruling from the IRS that the actions in
question (the "Restricted Actions") will not result in the
Distributions being taxable to the Viacom Consolidated Group or
Viacom's shareholders (an "Additional Ruling"); provided, however, that
Viacom shall not be obligated to request such a ruling if it determines
in good faith that such request might have an adverse effect on the
Viacom Consolidated Group or Viacom's shareholders; or
(ii) seek an unqualified opinion of counsel from counsel
chosen by Viacom that the Restricted Actions will not result in the
Distributions being taxable to the Viacom Consolidated Group or
Viacom's shareholders (an "Unqualified Opinion").
If either an Additional Ruling or Unqualified Opinion is obtained in form and
substance acceptable to Viacom, the Blockbuster Entities may engage in such
Restricted Actions. Blockbuster agrees that Viacom is to have no liability for
any tax resulting from any Restricted Actions permitted pursuant to this Section
11(d) and agrees to indemnify and hold harmless Viacom against any such tax.
Blockbuster shall also bear all costs incurred by Viacom in connection with
considering whether to grant a request pursuant to this Section 11(d) or in
requesting and/or obtaining any Additional Ruling or Unqualified Opinion.
18
(e) RULINGS AND ADDITIONAL RULINGS. In its sole discretion and
control, Viacom shall have the right to obtain the Rulings and, if any, the
Additional Rulings. Blockbuster shall cooperate with Viacom and take all actions
requested by Viacom in connection with obtaining the Rulings and Additional
Rulings (including, without limitation, by making any representation or covenant
or providing any materials or information requested by Viacom or the IRS;
provided that Blockbuster shall not be required to make any representation or
covenant that is inconsistent with historical facts or as to future matters or
events over which it has no control).
12. DEDUCTIONS ATTRIBUTABLE TO OPTIONS.
Viacom shall determine whether Viacom or Blockbuster shall
file tax returns claiming the deductions attributable to the exercise of (i)
options to purchase stock of Viacom which are held by employees of Blockbuster
(or its affiliates) after the Distributions or by employees of both Viacom (or
its affiliates) and Blockbuster (or its affiliates) after the Distributions
and/or (ii) options to purchase stock of Blockbuster which were issued as a
result of a conversion of Viacom options and which resulted in a charge to the
earnings of Viacom at the time of such conversion for financial reporting
purposes. If it is determined that Viacom shall claim all such tax deductions,
Viacom shall be entitled to any such tax deductions and the tax returns of
Viacom and Blockbuster shall be prepared accordingly and Viacom shall be
responsible for the remittance of the employer's share of FICA and similar
taxes. To the extent any such deductions are disallowed because a tax authority
determines that Blockbuster should have claimed such deductions, Blockbuster
shall take all actions necessary to claim such deductions and pay to Viacom an
amount equal to the tax benefit of such
19
deductions. If it is determined that Blockbuster shall claim all such tax
deductions, Blockbuster shall be entitled to any such tax deductions and the tax
returns of Viacom and Blockbuster shall be prepared accordingly. Blockbuster
shall notify Viacom of the amount of tax deductions it intends to claim with
respect to the exercise of Viacom options and shall pay Viacom an amount equal
to the actual benefit of the related deductions (less any FICA or similar taxes
paid by Blockbuster) not later than 3 days prior to the due date of the
estimated tax payment immediately following when any member of the Blockbuster
Consolidated Group becomes entitled to any tax savings, refund, credit or other
offset attributable to such deduction. To the extent any such deductions are
disallowed because a tax authority determines that Viacom should have claimed
such deductions, Viacom shall pay to Blockbuster an amount equal to the actual
benefit received by Viacom as a result of the disallowance to the extent
Blockbuster has paid Viacom pursuant to the preceding sentence. For purposes of
the preceding sentence, such benefit shall be considered equal to the excess of
the amount of tax that would have been payable to a tax authority (or of the
refund that would have been receivable) by Viacom.
13. CONFIDENTIALITY.
Each of Viacom and Blockbuster agrees that any information
furnished pursuant to the Agreement is confidential and, except as and to the
extent required by law or otherwise during the course of an audit or litigation
or other administrative or legal proceeding, shall not be disclosed to other
persons. In addition, each of Viacom and Blockbuster shall cause its employees,
agents and advisors to comply with the terms of this Section 13.
20
14. SUCCESSORS AND ACCESS TO INFORMATION.
The Agreement shall be binding upon and inure to the benefit
of any successor to any of the parties, by merger, acquisition of assets or
otherwise, to the same extent as if the successor had been an original party to
the Agreement. If for any taxable year the Blockbuster Consolidated Group is no
longer included in the Viacom Consolidated Group, Viacom and Blockbuster agree
to provide to the other party any information reasonably required to complete
tax returns for taxable periods beginning after the Blockbuster Consolidated
Group is no longer included in a Viacom Consolidated Return, and each of Viacom
and Blockbuster will cooperate with respect to any audits or litigation relating
to any Viacom Consolidated Return.
15. GOVERNING LAW.
The Agreement shall be governed by and construed in accordance
with the laws of New York excluding (to the greatest extent permissible by law)
any rule of law that would cause the application of the laws of any jurisdiction
other than the State of New York.
16. HEADINGS.
The headings in the Agreement are for convenience only and
shall not be deemed for any purpose to constitute a part or to affect the
interpretation of the Agreement.
17. COUNTERPARTS.
The Agreement may be executed simultaneously in two or more
counterparts, each of which will be deemed an original, and it shall not be
necessary in making proof of the Agreement to produce or account for more than
one counterpart.
21
18. SEVERABILITY.
If any provision of the Agreement is held to be unenforceable
for any reason, it shall be adjusted rather than voided, if possible, in order
to achieve the intent of the parties to the maximum extent practicable. In any
event, all other provisions of the Agreement shall be deemed valid, binding, and
enforceable to their full extent.
19. TERMINATION.
The Agreement shall remain in force and be binding so long as
the applicable period of assessments (including extensions) remains unexpired
for any taxes contemplated by the Agreement; PROVIDED, HOWEVER, that neither
Viacom nor Blockbuster shall have any liability to the other party with respect
to tax liabilities for taxable years in which the Blockbuster Consolidated Group
is not included in the Viacom Consolidated Returns except as provided in
Sections 4, 11, and 12 of this Agreement.
20. SUCCESSOR PROVISIONS.
Any reference herein to any provisions of the Code or Treasury
Regulations shall be deemed to include any amendments or successor provisions
22
thereto as appropriate.
21. COMPLIANCE BY SUBSIDIARIES.
Viacom and Blockbuster each agree to cause all members of the
Viacom Consolidated Group and Blockbuster Consolidated Group (including
predecessors and successors to such members) to comply with the terms of the
Agreement.
IN WITNESS WHEREOF, each of the parties of the Agreement has
caused the Agreement to be executed by its duly authorized officer on this date
of , 1999.
Viacom Inc.
By:
------------------------------
Name:
Title:
Blockbuster Inc.
By:
------------------------------
Name:
Title:
23
