SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
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Commission file number 1-9554
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VIACOM INTERNATIONAL INC.
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(Exact name of registrant as specified in its charter)
Delaware 04-2980402
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1515 Broadway, New York, N.Y. 10036
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (212) 258-6000
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Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2)
has been subject to such filing requirements for the
past 90 days. Yes X . No___.
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Number of shares of Common Stock Outstanding at July 31, 1994:
Common Stock, par value $.10 per share - 100
-1-
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements.
VIACOM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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(Unaudited; all amounts, except per share amounts, are in millions)
Three months ended
June 30,
---------------------------------
1994 1993
---- ----
Revenues $524.3 $495.8
Expenses:
Operating 224.5 211.3
Selling, general and administrative 164.0 141.3
Depreciation and amortization 41.3 34.3
----- -----
Total expenses 429.8 386.9
----- -----
Earnings from operations 94.5 108.9
Other income (expense):
Interest expense, net (37.1) (38.9)
Other items, net (See Note 7) 268.3 14.0
----- -----
Earnings before income taxes 325.7 84.0
Provision for income taxes (37.5) (40.3)
Equity in loss of affiliated companies,
net of tax (2.3) (.5)
------ -----
Net earnings before extraordinary
item, net of tax 285.9 43.2
Extraordinary loss, net to tax (11.9) --
------- -----
Net earnings $274.0 $43.2
====== =====
See notes to consolidated financial statements.
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VIACOM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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(Unaudited; all amounts, except per share amounts, are in millions)
Six months ended
June 30,
---------------------------------
1994 1993
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Revenues $1,025.1 $966.4
Expenses:
Operating 750.6 430.4
Selling, general and administrative 358.6 264.0
Depreciation and amortization 81.7 72.1
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Total expenses 1,190.9 766.5
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Earnings (loss) from operations (165.8) 199.9
Other income (expense):
Interest expense, net (71.1) (79.1)
Other items, net (See Note 7) 264.2 66.9
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Earnings before income taxes 27.3 187.7
Provision for income taxes (113.6) (72.9)
Equity in loss of affiliated companies,
net of tax (1.0) (0.1)
-------- ------
Net earnings (loss) before extraordinary
item and cumulative effect of change
in accounting principle (87.3) 114.7
Extraordinary loss, net of tax (11.9) --
Cumulative effect of change in accounting
principle -- 10.4
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Net earnings (loss) $ (99.2) $125.1
========= ======
See notes to consolidated financial statements.
-3-
VIACOM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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(All amounts are in millions)
June 30, December 31,
1994 1993
(Unaudited)
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Assets
Current Assets:
Cash and cash equivalents $ 39.3 $ 74.0
Receivables, less allowances of
$35.7 (1994) and $33.9 (1993) 369.4 351.7
Programming rights, deferred program costs and
distribution fees advanced and committed 345.2 356.5
Other current assets 99.2 95.7
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Total current assets 853.1 877.9
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Property and equipment, at cost 983.4 900.9
Less accumulated depreciation 386.4 347.2
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Net property and equipment 597.0 553.7
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Programming rights, deferred program costs and
distribution fees advanced and committed 536.3 789.5
Receivable from Viacom Inc.(Parent Company) 224.3 203.9
Intangibles, at amortized cost 2,085.0 2,128.9
Other assets 243.1 219.6
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$4,538.8 $4,773.5
======== ========
See notes to consolidated financial statements.
-4-
VIACOM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(All amounts, except share and per share amounts, are in millions)
June 30, December 31,
1994 1993
(Unaudited)
------------ -----------
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 52.4 $ 96.6
Accrued interest 19.1 20.5
Deferred income, current 41.3 50.9
Other accrued expenses 255.0 229.5
Income taxes 277.8 140.5
Participants share and residuals
payable 119.8 139.1
Program rights, current 169.1 198.0
Current portion of long-term debt 6.7 18.6
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Total current liabilities 941.2 893.7
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Long-term debt 2,222.9 2,411.8
Program rights, non-current 109.1 86.8
Other liabilities 177.8 195.9
Commitments and contingencies (See Note 5)
Shareholders' Equity:
Common Stock, par value $.10 per share;
100 shares authorized, issued and
outstanding -- --
Additional paid-in capital 912.3 912.3
Retained earnings 173.8 273.0
Cumulative translation adjustment 1.7 --
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1,087.8 1,185.3
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$4,538.8 $4,773.5
======== ========
See notes to consolidated financial statements.
-5-
VIACOM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Unaudited; all amounts are in millions)
Six months ended June 30,
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1994 1993
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Net cash flow from operating activities:
Net earnings (loss) $(99.2) $125.1
Adjustment to reconcile net earnings to net
cash flow from operating activities:
Merger-related charges 332.1 --
Depreciation and amortization 81.7 72.1
Gain on the sale of Lifetime, net of tax (164.4) --
Gain on the sale of the cable system, net of tax -- (45.8)
Gain on the sale of an investment held at cost,
net of tax -- (17.4)
Extraordinary loss, net of tax 11.9 --
Cumulative effect of change in accounting principle -- (10.4)
Increase in receivables (17.8) (39.2)
Increase (decrease) in accounts payable and
accrued expenses (54.2) 6.7
Increase in inventory and related liabilities, net (77.3) (89.4)
Increase in income taxes payable and deferred
income taxes, net 46.9 35.4
Increase (decrease) in receivable from Viacom Inc. (85.4) 1.4
Decrease in deferred income (16.2) (12.2)
Decrease in unbilled receivables 15.1 11.8
Other, net (5.9) 4.4
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Net cash flow from operating activities (32.7) 42.5
Investing Activities:
Capital expenditures (78.3) (59.5)
Investments in and advances to affiliated companies (17.9) (15.8)
Proceeds from sale of partnership interest in Lifetime 317.6 --
Proceeds from sale of the Wisconsin cable system -- 73.7
Proceeds from sale of investment held at cost -- 18.1
Proceeds from sale of transponders -- 51.0
Acquisitions -- (27.9)
Promissory note receivable from Viacom Inc. -- (40.0)
Deposits on transponders -- (46.7)
Other, net 6.1 --
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Net cash flow from investing activities 227.5 (47.1)
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Financing Activities:
Short-term borrowings (repayments) from banks, net (227.7) 22.8
Other, net (1.8) (1.6)
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Net cash flow from financing activities (229.5) 21.2
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Net increase (decrease) in cash and cash equivalents (34.7) 16.6
Cash and cash equivalents at beginning of the period 74.0 48.4
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Cash and cash equivalents at end of period $39.3 $65.0
===== =====
See notes to consolidated financial statements.
-6-
Viacom International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
In the opinion of management, the unaudited information for the interim
periods includes all the adjustments, which are of a normal recurring
nature, except for the merger-related charges associated with the merger
of Paramount Communications Inc. ("Paramount") (see Notes 2 and 3),
necessary for a fair statement of the interim financial information.
Interim results are not necessarily indicative of the results to be
expected for the full year. The consolidated balance sheet at December
31, 1993 was derived from Viacom International's Annual Report on Form 10-
K/A.
1) BASIS OF PRESENTATION
Viacom International Inc. ("Viacom International") is a wholly owned
subsidiary of Viacom Inc. Viacom Inc. is a holding company whose other
principal asset is its majority ownership of Paramount. Viacom
International is a diversified entertainment company with operations in
three principal segments: (i) Networks, (ii) Entertainment and (iii) Cable
Television and Broadcasting.
Certain amounts on the 1993 financial statements have been reclassified to
conform with the current presentation.
2) PARAMOUNT MERGER AND BLOCKBUSTER MERGER
On March 11, 1994, Viacom Inc. acquired a majority of the Paramount common
stock outstanding, at a price of $107 per share in cash. On July 7, 1994,
Paramount became a wholly owned subsidiary of Viacom Inc. (the "Paramount
Merger") at the effective time of a merger between Paramount and a
subsidiary of Viacom Inc.
On January 7, 1994, Viacom Inc. and Blockbuster Entertainment Corporation
("Blockbuster") entered into an agreement and plan of merger (the
"Blockbuster Merger Agreement") pursuant to which Blockbuster will be
merged with and into Viacom Inc. (the "Blockbuster Merger").
The Blockbuster Merger has been unanimously approved by the Boards of
Directors of each of the respective companies. The obligations of
Viacom Inc. and Blockbuster to consummate the merger is subject
to various conditions, including obtaining requisite stockholder
approval. National Amusements, Inc. ("NAI") has agreed to vote its
shares of Viacom Inc. in favor of the Blockbuster Merger; therefore
approval by Viacom Inc. of the Blockbuster Merger is assured.
In a letter to stockholders dated May 4,1994, H. Wayne Huizenga, the
Chairman of the Board of Blockbuster, stated that although the Blockbuster
Board continues to believe that the combination of Blockbuster with Viacom
Inc. and Paramount represents an excellent strategic opportunity, given
the stock prices as of the date of
-7-
Viacom International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
his letter, there could be no assurance that the Blockbuster Board would
be able to recommend the Blockbuster Merger Agreement to the Blockbuster
shareholders at the time of any shareholder meeting called to vote on the
Blockbuster Merger. Mr. Huizenga also stated, among other things, that
Blockbuster was unable to say whether or not the Blockbuster Merger would
go forward or whether or not any special meeting of Blockbuster
shareholders would be called to vote on the Blockbuster Merger.
The closing prices reported by the New York Stock Exchange of
Blockbuster's Common Stock and the American Stock Exchange of Viacom
Inc.'s Class A and Class B Common Stock as of the close of business on
January 6, 1994, the date prior to the announcement of the Blockbuster
Merger, were $29 7/8 per share, $47 per share and $42 3/4 per share,
respectively. Such prices as of May 3, 1994, the day prior to the
stockholders letter, were $26 3/4 per share, $26 per share and $24 1/4 per
share, respectively. Such prices were $28 1/8 per share, $41 per share,
and $36 13/64 per share, respectively, as of the close of business on
August 11, 1994.
3) PARAMOUNT MERGER-RELATED CHARGES
Included in earnings (loss) from operations are certain merger-related
charges to Viacom's pre-merger businesses, reflecting the integration of
these businesses with similar Paramount units, and related management and
strategic changes principally related to the merger with Paramount for the
six months ended June 30, 1994 are as follows:
Viacom Merger-
International Related
pre-merger Charges As reported
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(Millions of Dollars)
Networks $ 143.9 $ (73.4) $ 70.5
Entertainment $ 4.0 $ (224.0) $ (220.0)
Cable Television
and Broadcasting $ 67.8 $ (17.3) $ 50.5
Merger-related charges principally relate to adjustments of programming
assets based upon new management strategies and additional programming
sources resulting from the merger with Paramount. In addition, a merger-
related charge included in Corporate expenses reflects the combination of
the Viacom International and Paramount staffs.
-8-
Viacom International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4) BANK FINANCING AND DEBT
Total debt, which includes short-term and long-term debt, consists of the
following:
June 30, December 31,
1994 1993
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(Millions of dollars)
Notes payable to banks $1,687.4 $1,915.1
9.125% Senior Subordinated Notes due 1999 150.0 150.0
8.75% Senior Subordinated Reset Notes due
2001 100.0 100.0
10.25% Senior Subordinated Notes due 2001 200.0 200.0
Obligations under capital leases 92.2 65.3
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2,229.6
2,430.4
Less current portion 6.7 18.6
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$2,222.9 $2,411.8
======== ========
On July 1, 1994, Viacom Inc., entered into an aggregate $6.489
billion credit agreement (the "Viacom Credit Agreement") and Viacom
International and certain of it subsidiaries (the "Subsidiary
Obligors") entered into a $311 million credit agreement (the "Viacom
International Credit Agreement," collectively with the Viacom Credit
Agreement the "Credit Agreement") each with certain banks. The proceeds
of this Credit Agreement were used to refinance the previously existing
bank debt of Viacom Inc., Viacom International and Paramount. The
following is a summary description of the Credit Agreement. The
description does not purport to be complete and should be read in
conjunction with the Credit Agreement.
The Viacom Credit Agreement is comprised of (i) a $2.5 billion
senior unsecured 2-1/2 year revolving short term loan (the "Short-
Term Loan") maturing December 31, 1996, (ii) a $1.8 billion senior
unsecured 8 year reducing revolving loan (the "Revolving Loan")
maturing July 1, 2002 and (iii) a $2.189 billion 8 year term loan
maturing July 1, 2002 (the "Term Loan"), and is guaranteed by Viacom
International and Paramount. The Viacom International Credit
Agreement is comprised of a $311 million 8-year term loan to Viacom
International and certain of its subsidiaries maturing July 1, 2002,
and is guaranteed by Viacom Inc. and Paramount.
The interest rate on all loans made under the Credit Agreement is
based upon Citibank, N.A.'s base rate, the Federal Funds Rate or the
London Interbank Offered Rate and is affected by Viacom Inc.'s credit
rating. Viacom Inc. is permitted to issue commercial paper with a
maturity at the time of issuance not to exceed nine months, provided
that following each issuance of commercial paper the aggregate amount
of the Revolving Loans and Short-Term Loan outstanding, together with
the aggregate face amount of
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Viacom International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
commercial paper outstanding shall not exceed the aggregate amount of
the Revolving Loan commitment and the Short-Term Loan commitment at
such time.
Viacom Inc. is required to repay the outstanding principal amount of
the Short-Term Loan in full on December 31, 1996. Viacom Inc. is
required to repay the principal outstanding under the Term Loan and
the Viacom International Credit Agreement in quarterly payments of 3%
for the period commencing July 1, 1997 through October 1, 1997, 4%
for the period January 1, 1998 through October 1, 1999, 5% for the
period January 1, 2000 through October 1, 2000, and 6% for the period
January 1, 2001 through July 1, 2002. The Revolving Loan commitment
will be reduced by $90 million on July 1, 1998, $360 million on July
1, 1999, $360 million on July 1, 2000, $450 million on July 1, 2001
and $540 million on July 1, 2002. After giving effect to such
Revolving Loan commitment reductions, the principal amount
outstanding of such Revolving Loans can not exceed the aggregate
Revolving Loan commitment.
Viacom Inc. may prepay the loans and reduce commitments under the
Viacom Credit Agreement in whole or in part at any time. Viacom Inc.
is required, subject to certain conditions, to make prepayments under
the Short-Term Loan resulting from receipt of the first $2.5 billion
in the aggregate of net cash proceeds from asset sales other than in
the ordinary course of business or from capital market transactions.
In the event that a Subsidiary Obligor ceases to be a wholly owned
subsidiary of Viacom Inc. or Viacom International, the loans of such
Subsidiary Obligor shall be due and payable on the date on which such
subsidiary ceases to be a wholly owned subsidiary. If such event
occurs prior to December 31, 1996 or the repayment in full of all
Short-Term Loans, Viacom Inc. may elect to convert any outstanding
portion of the Short-Term Loan into additional Term Loans in an
amount equal to the principal amount of such Subsidiary Obligor's
loan.
The Credit Agreement contains certain covenants which, among other
things, require that Viacom Inc. maintain certain financial ratios
and impose on Viacom Inc. and its subsidiaries certain limitations on
substantial asset sales and merger into any other company in which
Viacom Inc. is not the surviving entity. The Viacom International
Credit Agreement also contains covenants which impose limitations on
the incurrence of borrowed money.
The Credit Agreement contains certain customary events of default and
provides that it is an event of default if National Amusements, Inc.
("NAI") fails to own at least 51% of the outstanding voting stock of
Viacom Inc.
Viacom Inc. is required to pay a commitment fee based on the
aggregate daily unborrowed portion of the loan commitments.
-10-
Viacom International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The Credit Agreement does not require compensating balances.
The proceeds from the Credit Agreement were used to refinance the
previously existing bank debt of Viacom Inc., Viacom International and
Paramount. Viacom International recognized an extraordinary loss from
the extinguishment of debt of $18.9 million, less a tax benefit of $7.0
million.
5) COMMITMENTS AND CONTINGENCIES
Those commitments of Viacom International for program license fees which
are not reflected in the balance sheet as of June 30, 1994, which are
estimated to aggregate approximately $1.9 billion, principally reflect
commitments under Showtime Networks Inc.'s ("SNI's") exclusive
arrangements with several motion picture companies. This estimate is
based upon a number of factors. A majority of such fees are payable
within the next seven years, as part of normal programming expenditures of
SNI. These commitments are contingent upon delivery of motion pictures,
which are not yet available for premium television exhibition and, in many
cases, have not yet been produced.
6) PROVISION FOR INCOME TAXES
The provision for income taxes represents federal, state and foreign
income taxes on earnings before income taxes.
The annual effective tax rates of 48% for 1993 and negative 4% for 1994
continue to be affected by amortization of acquisition costs which are not
deductible for tax purposes.
Due to the unusual and non-recurring nature of the gain on the sale of the
one-third partnership interest in Lifetime and the Wisconsin cable system,
their full income tax effect is reflected in the second quarter 1994 and
first quarter 1993 tax provision, respectively, and is excluded from the
estimated annual effective tax rate.
During the first quarter of 1993, Viacom International adopted Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"), on a prospective basis and recognized a cumulative benefit
from a change in accounting principle of $10.4 million.
-11-
Viacom International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7) OTHER ITEMS, NET
On April 4, 1994, Viacom International sold its one-third partnership
interest in Lifetime Television ("Lifetime") for approximately $317.6
million, which resulted in a pre-tax gain of approximately $267.4 million
in the second quarter of 1994. Proceeds from the sale were used to reduce
outstanding debt of Viacom International.
As part of the settlement of the Time Warner antitrust lawsuit, Viacom
International sold the stock of Viacom Cablevision of Wisconsin, Inc. to
Warner Communications Inc. ("Warner"). This transaction was effective on
January 1, 1993. As consideration for the stock, Warner paid the sum of
$46 million, $20 million of which was received during 1992, plus repayment
of debt in the amount of $49 million, resulting in a pre-tax gain of
approximately $55 million reflected in "Other items, net." Also reflected
in this line item is the net gain on the sale of a portion of an
investment held at cost and an adjustment to previously established non-
operating litigation reserves.
8) SUPPLEMENTAL CASH FLOW INFORMATION
Six months ended
June 30,
-------------------
1994 1993
---- ----
(Millions of dollars)
Cash payments for interest, net of amounts
capitalized $ 72.8 $ 81.1
Cash payments for income taxes $ 30.1 $ 28.6
-12-
Viacom International Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.
Management's discussion and analysis of the results of operations and
financial condition of Viacom International should be read in
conjunction with the Consolidated Financial Statements and related
Notes.
The following tables set forth revenues, depreciation and amortization,
earnings (loss) from operations, equity in pre-tax earnings of
affiliated companies, and earnings from operations plus equity in pre-
tax earnings by business segment for the three months and six months
ended June 30, 1994 and June 30, 1993:
Equity in
Earnings pre-tax Operations
from earnings of plus
Second quarter Depreciation operations affiliated equity
1994 Revenues & amortization (as reported) companies earnings
---- ------------------------------------------------------------------------------------------------
(Millions of dollars)
Networks $341.7 $13.1 $77.5 (3.3) $74.2
Entertainment 34.4 2.2 2.0 (0.2) 1.8
Cable Television
& Broadcasting 154.0 24.8 37.7 -- 37.7
Corporate -- 1.2 (22.7) -- (22.7)
Intercompany (5.8) -- -- -- --
----- ---- ----- ---- -----
Totals $524.3 $41.3 $94.5 $(3.5) $91.0
====== ===== ===== ====== =====
Equity in
Earnings pre-tax Operations
from earnings of plus
Second quarter Depreciation operations affiliated equity
1993 Revenues & amortization (as reported) companies earnings
---- ------------------------------------------------------------------------------------------------
(Millions of dollars)
Networks $305.5 $9.8 $65.1 0.3 $65.4
Entertainment 40.7 1.2 12.2 (1.0) 11.2
Cable Television
& Broadcasting 155.4 22.4 46.7 -- 46.7
Corporate -- 0.9 (15.1) -- (15.1)
Intercompany (5.8) -- -- -- --
----- ---- ----- ---- -----
Totals $495.8 $ 34.3 $108.9 $(0.7) $108.2
====== ===== ===== ====== =====
Equity in
Earnings pre-tax Operations
from earnings of plus
Six months ended Depreciation operations affiliated equity
June 30, 1994 Revenues & amortization (as reported) companies earnings
------------- ------------------------------------------------------------------------------------------------
(Millions of dollars)
Networks $656.6 25.0 $70.5 $(1.2) $69.3
Entertainment 84.6 5.1 (220.0) (0.4) (220.4)
Cable Television
& Broadcasting 295.3 49.4 49.5 -- 49.5
Corporate -- 2.2 (65.8) -- (65.8)
Intercompany (11.4) -- -- -- --
----- ---- ----- ---- -----
Totals $1,025.1 $81.7 $(165.8) $(1.6) $(167.4)
======== ===== ======== ====== ========
-13-
Equity in
Earnings pre-tax Operations
from earnings of plus
Six months ended Depreciation operations affiliated equity
June 30, 1993 Revenues & amortization (as reported) companies earnings
------------- ------------------------------------------------------------------------------------------------
(Millions of dollars)
Networks $574.5 $20.4 $121.6 $0.8 $122.4
Entertainment 105.1 3.5 25.3 (1.0) 24.3
Cable Television
& Broadcasting 298.3 46.4 82.5 -- 82.5
Corporate -- 1.8 (29.5) -- (29.5)
Intercompany (11.5) -- -- -- --
----- ---- ----- ---- -----
Totals $966.4 $72.1 $199.9 $(0.2) $199.7
====== ===== ====== ====== ======
Results of Operations
---------------------
Second quarter 1994 vs. Second quarter 1993
-------------------------------------------
Revenues increased 6%, or $28.5 million, to $524.3 million for the
second quarter of 1994. Earnings from operations decreased 13%, or
$14.4 million, to earnings of $94.5 million for the second quarter of
1994.
The net earnings of $274.0 million for the second quarter of 1994,
reflects net interest expense of $37.1 million, a pre-tax gain on the
sale of the one-third partnership interest in Lifetime of $267.4 million
and a provision for income taxes of $37.5 million. Net earnings of
$43.2 million for the second quarter of 1993, reflects net interest
expense of $38.9 million and a provision for income taxes of $40.3
million.
Networks (Basic cable and premium television networks)
MTV Networks ("MTVN") revenues increased 21% to $198.3 million for the
quarter ended June 30, 1994 from $163.9 million for the quarter ended
June 30, 1993: 73% of this increase was attributable to increased
advertising sales at each of the services; 21% to increased affiliate
fees at each of the services; and 6% to other revenue sources. The
increase in advertising sales and affiliate fees are principally due to
rate increases. The increases in other revenue sources are principally
due to revenues from new business ventures, including licensing and
merchandising. MTVN's earnings from operations increased 20% to $68.4
million for the quarter ended June 30, 1994 from $57.1 million for the
quarter ended June 30, 1993, reflecting the increased revenues,
partially offset by increased costs of operating the networks,
including start-up losses of MTV Latino, Nickelodeon Magazine and VH-1
U.K. aggregating $3.1 million.
Revenues of Showtime Networks Inc. ("SNI") increased 1% to $143.4
million for the quarter ended June 30, 1994 from $141.5 million for the
quarter ended June 30, 1993 due to: 1) an increase of $4.5 million in
revenues of Showtime Satellite Networks, Inc. ("SSN"), primarily due to
a 28% increase in SSN's subscriber
-14-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
base, which was principally attributable to the use of upgraded
scrambling technology, partially offset by a 1% decrease in average
rates and 2) a decrease of $2.3 million in revenues from sales of
Showtime and The Movie Channel from other than SSN, reflecting a 6%
increase in the combined subscriber base, while the average affiliate
rates decreased by 7%. SNI's premium movie services, Showtime, The
Movie Channel and FLIX, served approximately 12.4 million subscribers
as of June 30, 1994 and approximately 11.2 million subscribers as of
June 30, 1993. SNI's earnings from operations increased 14% to $9.1
million for the quarter ended June 30, 1994 from $8.0 million for the
quarter ended June 30, 1993, reflecting the increased revenues
partially offset by increased costs.
Entertainment (Television production and distribution
and New Media)
Viacom Entertainment revenues decreased 15% to $34.4 million for the
quarter ended June 30, 1994 from $40.7 million for the quarter ended
June 30, 1993. The revenue variance is principally due to decreased
syndication revenues. Lower sales to the broadcast, cable and other
markets reflect lower syndication revenues for The Cosby Show.
Earnings from operations decreased 83% to $2.0 million for the quarter
ended June 30, 1994 from $12.2 million for the quarter ended June 30,
1993, primarily reflecting the decreased revenues and $2.5 million of
start-up losses associated with Viacom New Media.
Cable Television and Broadcasting (Cable television systems and
Television and Radio stations)
Cable Television revenues decreased 4% to $103.5 million for the
quarter ended June 30, 1994 from $107.5 million for the quarter ended
June 30, 1993 due to: 1) a decrease of $6.0 million in basic revenue,
primarily due to a 10% decrease in rates for basic services, partially
offset by a 3% increase in basic customers; 2) a decrease of $2.2
million in premium revenue, primarily due to decreased rates; 3) an
increase of $2.7 million in equipment charges; and 4) an increase of
$1.7 million in other revenue sources. Total revenue per basic
customer per month decreased 6% to $30.94 in 1994 from $33.09 in 1993.
The revenue variances reflect the effect of the 1992 Cable Act rate
regulations, released by the FCC, which became effective on September
1, 1993. The FCC released additional rate regulations on March 30,
1994 which became effective May 15, 1994, resulting in an anticipated
decrease in regulated revenues of 4% to 6%. Earnings from operations
decreased 35% to $21.4 million for the quarter ended June 30, 1994 from
$32.9 million for the quarter ended June 30, 1993, reflecting the
decreased revenues and increased operating, general and administrative
expenses, which include non-recurring costs associated with the
implementation of FCC rate regulations.
-15-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Viacom Cable served approximately 1,117,000 basic customers subscribing
to approximately 816,000 premium units as of June 30, 1994. Basic
customers and premium units increased 3% and 15%, respectively, since
June 30, 1993. Viacom Cable added 6,500 incremental basic customers in
second quarter 1994, approximately 266% over the amount added in the
second quarter of 1993.
Television stations revenues increased 7% to $26.0 million for the quarter
ended June 30, 1994 from $24.4 million for the quarter ended June 30, 1993,
reflecting increased local and national advertising revenues for the
Viacom stations. Earnings from operations increased 23% to $8.0
million for the quarter ended June 30, 1994 from $6.5 million for the
quarter ended June 30, 1993, reflecting increased revenues.
Radio revenues increased 4% to $24.4 million for the quarter ended
June 30, 1994 from $23.6 million for the quarter ended June 30, 1993,
reflecting increased local advertising revenues. Earnings from
operations increased 15% to $9.5 million for the quarter ended June
30, 1994 from $8.2 million for the quarter ended June 30, 1993,
primarily reflecting the increased revenues.
Other income and expense information
------------------------------------
On April 4, 1994, Viacom International sold its one-third partnership
interest in Lifetime for approximately $317.6 million, which resulted
in a pre-tax gain of approximately $267.4 million in the second quarter
of 1994. Proceeds from the sale were used to reduce outstanding debt
of Viacom International.
The provision for income taxes represents federal, state and foreign
income taxes on earnings before income taxes.
The annual effective tax rates of 48% for 1993 and negative 4% for 1994
continue to be affected by amortization of acquisition costs which are
not deductible for tax purposes.
Due to the unusual and non-recurring nature of the gain on the sale of
the Company's one-third partnership interest in Lifetime, its full
income tax effect is reflected in the second quarter 1994 tax provision
and is excluded from the estimated annual effective tax rate.
"Equity in losses of affiliated companies, net of tax" was $2.3 million
for the quarter ended June 30, 1994 compared with a loss of $.5 million
for the quarter ended June 30, 1993, primarily reflecting the absence
of Lifetime's earnings due to the sale of the one-third partnership
interest, partially offset by improved operating results of Comedy
Central.
Viacom International recognized an extraordinary loss from the
extinguishment of debt of $18.9 million, less a tax benefit of $7.0
million (see "Capital Structure")
-16-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Six months ended June 30, 1994 vs. 1993
---------------------------------------
Revenues increased 6%, or $58.7 million, to $1.0 billion for the six
months ended June 30, 1994. Earnings from operations decreased $365.7
million, to a loss of $165.8 million for the six months ended June 30,
1994.
The net loss of $99.2 million for the six months ended June 30, 1994,
reflects net interest expense of $71.1 million, a pre-tax gain on the
sale of the one-third partnership interest in Lifetime of $267.4
million and a provision for income taxes of $113.6 million. Net
earnings of $125.1 million for the six months ended June 30, 1993,
reflect net interest expense of $79.1 million, a pre-tax gain of $55
million from the sale of the Wisconsin cable television system, a
provision for income taxes of $72.9 million, and the cumulative benefit
from a change in accounting for income taxes of $10.4 million.
On March 11, 1994, Viacom Inc. acquired, pursuant to a tender offer
(the "Paramount Offer"), 61,657,432 shares of Paramount Common Stock,
constituting a majority of the shares outstanding, at a price of $107
per share in cash. On July 7, 1994, Paramount became a wholly owned
subsidiary of Viacom Inc. (See Note 2 of Notes to Consolidated
Financial Statements.)
Included in earnings (loss) from operations are certain merger-related
charges to Viacom's pre-merger businesses, reflecting the integration
of these businesses with similar Paramount units, and related
management and strategic changes principally related to the merger with
Paramount as follows:
Viacom Merger-
International related As
--
pre-merger charges Reported
---------- ------- --------
(Millions of Dollars)
Networks $143.9 $ (73.4) $ 70.5
Entertainment $ 4.0 $(224.0) $(220.0)
Cable Television and
Broadcasting $ 66.8 $ (17.3) $ 49.5
These merger-related charges principally relate to
adjustments of programming assets based upon new management
strategies and additional programming sources resulting
from the merger with Paramount. In addition, a merger-
related charge of $17.4 million has been taken in Corporate
expenses reflecting the combination of the Viacom
International and Paramount staffs.
Exclusive of these merger-related charges, segment results
of operations for the three months ended June 30, 1994 were
as follows:
-17-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Networks (Basic cable and premium television networks)
MTV Networks ("MTVN") revenues increased 25% to $371.9
million for the six months ended June 30, 1994 from $297.5
million for the six months ended June 30, 1993: 70% of this
increase was attributable to increased advertising sales at
each of the services; 18% to increased affiliate fees at
each of the services; and 12% to other revenue sources. The
increase in advertising sales and affiliate fees are
principally due to rate increases. The increases in other
revenue sources are principally due to revenues from new
business ventures, including licensing and merchandising.
MTVN's earnings from operations increased 20% to $123.6
million for the six months ended June 30, 1994 from $102.8
million for the six months ended June 30, 1993, reflecting
the increased revenues, partially offset by increased costs
of operating the networks, including start-up losses of MTV
Latino, Nickelodeon Magazine and VH-1 U.K. aggregating
$5.6 million.
Revenues of SNI increased 3% to $284.7 million for the six months
ended June 30, 1994 from $277.0 million for the six months ended
June 30, 1993 due to: 1) an increase of $10.0 million in revenues
of Showtime Satellite Networks, Inc. ("SSN"), primarily due to a
33% increase in SSN's subscriber base, which was principally
attributable to the use of upgraded scrambling technology,
partially offset by a 2% decrease in average rates and 2) a
decrease of $5.6 million in revenues from sales of Showtime
and The Movie Channel from other than SSN, reflecting a 5%
increase in the combined subscriber base, while the average
affiliate rates decreased by 7%. SNI's earnings from
operations increased 8% to $20.3 million for the six months
ended June 30, 1994 from $18.8 million for the six months
ended June 30, 1993, reflecting the increased revenues and
a change in estimate of the cost of movie rights for
previously exhibited programming of $14.6 million,
partially offset by increased costs.
-18-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Entertainment (Television production and distribution
and New Media)
Viacom Entertainment revenues decreased 20% to $84.6
million for the six months ended June 30, 1994 from $105.1
million for the six months ended June 30, 1993. The
revenue variance is principally due to decreased
syndication revenues. Lower sales to the broadcast, cable
and other markets reflect lower syndication revenues for
The Cosby Show. Earnings from operations decreased 84% to
$4.0 million for the six months ended June 30, 1994 from
$25.3 million for the six months ended June 30, 1993,
primarily reflecting the decreased revenues and $4.8
million of start-up losses associated with Viacom New
Media.
Cable Television and Broadcasting (Cable television systems
and Television and Radio stations)
Cable Television revenues decreased 4% to $204.2 million
for the six months ended June 30, 1994 from $212.0 million
for the six months ended June 30, 1993 due to: 1) a
decrease of $11.9 million in basic revenue, primarily due
to a 10% decrease in rates for basic services, partially
offset by a 3% increase in basic customers; 2) a decrease
of $3.8 million in premium revenue, primarily due to
decreased rates; 3) an increase of $4.4 million in
equipment charges; and 4) an increase of $3.5 million from
other revenue sources. Total revenue per basic customer
per month decreased 6% to $30.71 in 1994 from $32.77 in
1993. Earnings from operations decreased 33% to $42.6
million for the six months ended June 30, 1994 from $63.6
million for the six months ended June 30, 1993, reflecting
the decreased revenues and increased operating, general and
administrative expenses, which include non-recurring costs
associated with the implementation of FCC rate regulations.
Television stations revenues increased 8% to $47.7 million for the
six months ended June 30, 1994 from $44.1 million for the
six months ended June 30, 1993, reflecting increased local
and national advertising revenues for the Viacom stations.
Earnings from operations increased 34% to $12.2 million for
the six months ended June 30, 1994 from $9.1 million for
the six months ended June 30, 1993, reflecting increased
revenues.
Radio revenues increased 3% to $43.5 million for the six
months ended June 30, 1994 from $42.2 million for the six
months ended June 30, 1993, reflecting increased local
advertising revenues. Earnings from operations increased
24% to $14.6 million for the six months ended June 30, 1994
from $11.7 million for the six months ended June 30, 1993,
-19-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
primarily reflecting the increased revenues.
Other income and expense information
------------------------------------
Net interest expense decreased 10% to $71.1 million for the six
months ended June 30, 1994 from $79.1 million for the six months
ended June 30, 1993, reflecting the effect of the redemption of
11.80% Senior Subordinated Debt, partially offset by increased
bank borrowings and expense related to interest rate swap
agreements.
For the six months ended June 30, 1993, "Other items, net,"
reflects the pre-tax gain of approximately $55 million on the
sale of the stock of the Wisconsin cable system, an adjustment
to previously established non-operating litigation reserves and
the net gain on the sale of a portion of an investment held at
cost.
Due to the unusual and non-recurring nature of the gain on the
sale of the Wisconsin cable system, its full income tax effect
is reflected in the first quarter 1993 tax provision and is
excluded from the estimated annual effective tax rate.
During the first quarter of 1993, Viacom International adopted
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" on a prospective basis and recognized a
cumulative benefit from a change in accounting principle of
$10.4 million.
"Equity in losses of affiliated companies, net of tax" was $1.0
for the six months ended June 30, 1994 compared with of $0.1
million for the six months ended June 30, 1993, primarily
reflecting the absence of Lifetime's earnings, effective April
1, 1994, due to the sale of the one-third partnership interest,
partially offset by improved operating results of Comedy
Central.
Effective January 1, 1994, Viacom International adopted
Financial Account Standards No. 112, "Employers Accounting for
Postemployment Benefits," which did not have a material effect
on the Company's financial position or results of operations.
Liquidity and Capital Resources
-------------------------------
Viacom International finances and expects to continue to finance
its operations including cash requirements of its joint ventures
through internally generated cash flow, funds available through
bank credit facilities, public market note and bond offerings and
capital contributions from its parent company, Viacom Inc.
Viacom Inc. expects to fund its anticipated operating, investing
and financing cash requirements, with internally generated funds
and with various external sources of funds, including additional
financings and the sale of non-strategic assets as such
-20-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
opportunities may arise, such as the exploration of the sale of
the operations of Madison Square Garden and certain non-core
publishing assets.
On July 1, 1994, Viacom Inc., entered into an aggregate $6.489
billion credit agreement (the "Viacom Credit Agreement") and
Viacom International and certain of it subsidiaries (the
"Subsidiary Obligors") entered into a $311 million credit
agreement (the "Viacom International Credit Agreement,"
collectively with the Viacom Credit Agreement the "Credit
Agreement") each with certain banks. The proceed of which were
used to refinance bank debt of Viacom Inc. , Viacom
International and Paramount. The Viacom International Credit
Agreement is guaranteed by Paramount and Viacom Inc. Viacom
Inc. and Paramount guarantee the Viacom Credit Agreement. ("See
Capital Structure.")
Viacom International's current scheduled maturities of long-term
debt through December 31, 1998 are $19 million (1997) and $50
million (1998).
On May 15, 1995 and May 15, 1998, unless a notice of redemption
of the 8.75% Senior Subordinated Reset Notes ("8.75% Reset Notes")
on such date has been given by the Company, the interest rate on
the 8.75% Reset Notes will, if necessary, be adjusted from the rate
then in effect to a rate to be determined on the basis of market
rates in effect on May 5, 1995 and on May 5, 1998, respectively, as
the rate the 8.75% Reset Notes should bear in order to have a market
value of 101% of principal amount immediately after the resetting
of the rate.
Viacom International was in compliance with all covenants and
had satisfied all financial ratios and tests as of June 30, 1994
under its credit facility and Viacom International expects to
remain in compliance with such ratios as may be applicable from
time to time during 1994.
Debt, including the current portion, as a percentage of total
capitalization of Viacom International was 67% at June 30, 1994
and December 31, 1993.
The indebtedness under Viacom International's and Viacom Inc.'s
credit facilities bears interest at floating rates, causing
Viacom International and Viacom Inc. to be sensitive to changes
in prevailing interest rates. As of June 30, 1994, Viacom
International had obtained interest rate protection agreements
with respect to $2.4 billion of indebtedness of Viacom
International and Viacom Inc. The interest rate protection
agreements will mature during 1994 through 1997.
-21-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Net cash flow from operating activities was negative $ 32.7
million for the six months ended June 30, 1994 versus $42.5
million for the six months ended June 30, 1993 due to decreased
earnings from operations prior to merger-related charges. Net
cash expenditures from investing activities of $227.5 million for
the six months ended June 30, 1994, principally reflects
proceeds from the sales of the one-third partnership interest in
Lifetime, partially offset by capital expenditures and additional
investments in affiliated companies. Net cash flows for investing
activities of $47.1 million for the six months ended June 30, 1993
principally reflects capital expenditures, the acquisition of
ICOM Simulations, Inc., the additional investment in StarSight
Telecast, Inc. and advances to Comedy Central, partially offset
by proceeds from the sale of the Wisconsin cable system and an
investment held at cost. Financing activities principally
reflect borrowings and repayments of debt under the credit
facilities during each period presented.
Those commitments of Viacom International for program license
fees which are not reflected in the balance sheet as of June 30,
1994, which are estimated to aggregate approximately $1.9
billion, principally reflect commitments under SNI's exclusive
arrangements with several motion picture companies. This estimate
is based upon a number of factors. A majority of such fees are
payable within the next seven years, as part of normal programming
expenditures of SNI. These commitments are contingent upon delivery
of motion pictures, which are not yet available for premium
television exhibition and, in many cases, have not yet been
produced.
Viacom Inc. filed a shelf registration statement with the
Securities and Exchange Commission ("SEC") registering $3
billion of debt securities and Preferred Stock. Any debt
issued would be guaranteed by Viacom International and
Paramount. Effectiveness of the shelf registration is
still pending with the SEC.
-22-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Capital Structure
The following table sets forth the capitalization of Viacom
International and subsidiaries as of June 30, 1994 and December
31, 1993:
June 30, December 31,
1994 1993
------ -----------
(Millions of dollars)
Current portion of long-term debt $ 6.7 $ 18.6
======= ========
Long-term debt:
Notes payable to banks (a) 1,687.4 $1,900.0
9.125% Senior Subordinated Notes due 1999 150.0 150.0
8.75% Senior Subordinated Reset Notes
due 2001 100.0 100.0
10.25% Senior Subordinated Notes due 2001 200.0 200.0
Obligations under capital leases 85.5 61.8
-------- --------
Total long-term debt $2,222.9 $2,411.8
======== ========
Shareholders' equity of Viacom International:
Common stock and additional paid-in
capital (a) $912.3 $ 912.3
Retained earnings (accumulated deficit) 173.8 273.0
Cumulative translation adjustment 1.7 --
------- --------
Total shareholders' equity $1,087.8 $1,185.3
======== ========
______________
a) On July 1, 1994, Viacom Inc., entered into the
aggregate $6.489 billion Viacom Credit Agreement and Viacom
International and the Subsidiary Obligors entered into the
$311 million Viacom International Credit Agreement each
with certain banks. The proceeds of this Credit Agreement
were used to refinance the previously existing bank debt of
Viacom Inc., Viacom International and Paramount. The following
is a summary description of the Credit Agreement. The description
does not purport to be complete and should be read in conjunction
with the Credit Agreement.
The Viacom Credit Agreement is comprised of (i) a $2.5
billion senior unsecured 2-1/2 year revolving short term
loan (the "Short-Term Loan") maturing December 31, 1996,
(ii) a $1.8 billion senior unsecured 8 year reducing
revolving loan (the "Revolving Loan") maturing July 1,
2002 and (iii) a $2.189 billion 8 year term loan maturing
July 1, 2002 (the "Term Loan"), and is guaranteed by
Viacom International and Paramount. The Viacom
International Credit Agreement is comprised of a $311
million 8-year term loan to Viacom International and
certain of its subsidiaries maturing July 1, 2002, and is
guaranteed by Viacom Inc. and Paramount.
The interest rate on all loans made under the Credit
Agreement is based upon Citibank, N.A.'s base rate, the
-23-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Federal Funds Rate or the London Interbank Offered Rate and
is affected by Viacom Inc.'s credit rating. Viacom Inc. is
permitted to issue commercial paper with a maturity at the
time of issuance not to exceed nine months, provided that
following each issuance of commercial paper the aggregate
amount of the Revolving Loans and Short-Term Loan
outstanding, together with the aggregate face amount of
commercial paper outstanding shall not exceed the aggregate
amount of the Revolving Loan commitment and the Short-Term
Loan commitment at such time.
Viacom Inc. is required to repay the outstanding principal
amount of the Short-Term Loan in full on December 31, 1996.
Viacom Inc. is required to repay the principal outstanding
under the Term Loan and the Viacom International Credit
Agreement in quarterly payments of 3% for the period
commencing July 1, 1997 through October 1, 1997, 4% for the
period January 1, 1998 through October 1, 1999, 5% for the
period January 1, 2000 through October 1, 2000, and 6% for
the period January 1, 2001 through July 1, 2002. The
Revolving Loan commitment will be reduced by $90 million on
July 1, 1998, $360 million on July 1, 1999, $360 million on
July 1, 2000, $450 million on July 1, 2001 and $540 million
on July 1, 2002. After giving effect to such Revolving
Loan commitment reductions, the principal amount
outstanding of such Revolving Loans can not exceed the
aggregate Revolving Loan commitment.
Viacom Inc. may prepay the loans and reduce commitments
under the Viacom Credit Agreement in whole or in part at
any time. Viacom Inc. is required, subject to certain
conditions, to make prepayments under the Short-Term Loan
resulting from receipt of the first $2.5 billion in the
aggregate of net cash proceeds from asset sales other than
in the ordinary course of business or from capital market
transactions. In the event that a Subsidiary Obligor
ceases to be a wholly owned subsidiary of Viacom Inc. or
Viacom International, the loans of such Subsidiary Obligor
shall be due and payable on the date on which such
subsidiary ceases to be a wholly owned subsidiary. If such
event occurs prior to December 31, 1996 or the repayment in
full of all Short-Term Loans, Viacom Inc. may elect to
convert any outstanding portion of the Short-Term Loan into
additional Term Loans in an amount equal to the principal
amount of such Subsidiary Obligor's loan.
The Credit Agreement contains certain covenants which,
among other things, require that Viacom Inc. maintain
certain financial ratios and impose on Viacom Inc. and its
subsidiaries certain limitations on substantial asset sales
and merger into any other company in which Viacom Inc. is
not the surviving entity. The Viacom International Credit
Agreement also contains covenants which impose limitations
on the incurrence of borrowed money.
-24-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
The Credit Agreement contains certain customary events of
default and provides that it is an event of default if
National Amusements, Inc. ("NAI") fails to own at least 51%
of the outstanding voting stock of Viacom Inc.
Viacom Inc. is required to pay a commitment fee based on
the aggregate daily unborrowed portion of the loan
commitments. The Credit Agreement does not require
compensating balances.
b) On June 30, 1994, there were 100 outstanding shares of
Common Stock (100 shares authorized), all of which were owned
by Viacom Inc.
National Amusements, Inc. ("NAI") held approximately 64.2% of
outstanding Viacom Inc. Common Stock as of June 30, 1994, which
consisted of 85.2% of the then outstanding Class A Common Stock
and 51.7% of the outstanding Class B Common Stock.
After giving effect to the closing of the Paramount Merger
and assuming that all shares of Paramount Common Stock were
exchanged in the Paramount Merger, NAI owns approximately
85% of the outstanding shares of Viacom Class A Common
Stock and 32% of the outstanding shares of Viacom Class B
Common Stock (46% on a combined basis).
-25-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
VIACOM INTERNATIONAL INC.
-----------------------------
(Registrant)
Date August 15, 1994 /s/Frank J. Biondi, Jr.
------------------ --------------------------
Frank J. Biondi, Jr.
President,
Chief Executive Officer
Date August 15, 1994 /s/George S. Smith, Jr.
------------------ --------------------------
George S. Smith, Jr.
Senior Vice President,
Chief Financial Officer
-26-
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
12.1 Computation of Ratio of Earnings to Fixed Charges
of Viacom International.
12.2 Computation of Ratio of Earnings to Fixed Charges
and Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends of Viacom Inc.
(b) Reports on Form 8-K for and Viacom International Inc.
None.