SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1998
Commission file number 1-9553
VIACOM INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2949533
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
1515 Broadway, New York, New York 10036
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (212) 258-6000
-----------------------------
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 .
----- -----
Number of shares of Common Stock Outstanding at April 30, 1998:
Class A Common Stock, par value $.01 per share - 69,829,677
Class B Common Stock, par value $.01 per share - 286,782,318
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
VIACOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in millions, except per share amounts)
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
----------- -----------
Revenues ........................................................ $ 3,087.5 $ 2,917.7
Expenses:
Operating ................................................. 2,055.3 1,967.7
Selling, general and administrative ....................... 626.5 558.0
Depreciation and amortization ............................. 229.3 218.2
----------- -----------
Total expenses ................................... 2,911.1 2,743.9
----------- -----------
Operating income ................................................ 176.4 173.8
Other income (expense):
Interest expense, net ..................................... (156.5) (196.8)
Other items, net .......................................... 2.0 .3
----------- -----------
Earnings (loss) from continuing operations before income taxes .. 21.9 (22.7)
Benefit (provision) for income taxes ...................... (13.0) 14.0
Equity in loss of affiliated companies, net of tax ........ (7.7) (15.2)
Minority interest ......................................... .2 .1
----------- -----------
Earnings (loss) from continuing operations ...................... 1.4 (23.8)
Earnings from discontinued operations, net of tax (Note 4) -- 5.1
----------- -----------
Net earnings (loss) ............................................. 1.4 (18.7)
Cumulative convertible preferred stock dividend requirement (15.0) (15.0)
----------- -----------
Net loss attributable to common stock ........................... $ (13.6) $ (33.7)
----------- -----------
----------- -----------
Basic and diluted weighted average number of common shares ...... 355.3 352.5
Basic and diluted loss per common share:
Net loss from continuing operations ....................... $ (.04) $ (.11)
Net loss .................................................. $ (.04) $ (.10)
See notes to consolidated financial statements.
2
VIACOM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions, except per share amounts)
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents ................................................... $ 321.1 $ 292.3
Receivables, less allowances of $101.0 (1998) and
$99.8 (1997) (Note 3) ................................................... 1,961.3 2,397.7
Inventory (Note 6) .......................................................... 2,285.4 2,252.7
Other current assets ........................................................ 812.9 770.8
----------- -----------
Total current assets ............................................... 5,380.7 5,713.5
----------- -----------
Property and equipment, at cost ................................................... 4,392.1 4,320.2
Less accumulated depreciation ............................................... 1,212.1 1,122.5
----------- -----------
Net property and equipment ......................................... 3,180.0 3,197.7
----------- -----------
Inventory (Note 6) ................................................................ 2,669.8 2,650.6
Intangibles, at amortized cost .................................................... 14,663.5 14,699.6
Other assets ...................................................................... 1,951.2 2,027.3
----------- -----------
$ 27,845.2 $ 28,288.7
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................................ $ 560.2 $ 699.7
Accrued compensation ........................................................ 284.0 441.7
Participants' share, residuals and royalties payable ........................ 1,013.7 951.3
Income tax payable .......................................................... 129.9 556.3
Current portion of long-term debt ........................................... 287.6 376.5
Accrued expenses and other .................................................. 1,884.5 2,027.0
----------- -----------
Total current liabilities ......................................... 4,159.9 5,052.5
----------- -----------
Long-term debt .................................................................. 7,973.2 7,423.0
Other liabilities ............................................................... 2,254.7 2,429.6
Commitments and contingencies (Note 8)
Shareholders' Equity:
Convertible Preferred Stock, par value $.01 per share; 200.0
shares authorized; 24.0 shares issued and outstanding ................. 1,200.0 1,200.0
Class A Common Stock, par value $.01 per share;
200.0 shares authorized; 70.5 (1998) and 69.6 (1997)
shares issued and outstanding ......................................... .7 .7
Class B Common Stock, par value $.01 per share;
1,000.0 shares authorized; 292.3 (1998) and 284.8 (1997)
shares issued and outstanding ......................................... 2.9 2.9
Additional paid-in capital .................................................. 10,401.8 10,333.1
Retained earnings ........................................................... 2,075.4 2,089.0
Accumulated other comprehensive income (loss) (Note 1) ...................... 6.1 (12.6)
----------- -----------
13,686.9 13,613.1
Less treasury stock, at cost; 6.5 shares (1998 and 1997) .................... 229.5 229.5
----------- -----------
Total shareholders' equity ......................................... 13,457.4 13,383.6
----------- -----------
$ 27,845.2 $ 28,288.7
----------- -----------
----------- -----------
See notes to consolidated financial statements.
3
VIACOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------------- ------------
NET CASH FROM OPERATING ACTIVITIES:
Net earnings (loss) .................................................................... $ 1.4 $ (18.7)
Adjustments to reconcile net earnings (loss) to net cash flow from operating activities:
Depreciation and amortization ....................................................... 229.3 218.2
Change in operating assets and liabilities:
Decrease in receivables ......................................................... 436.4 166.1
Increase in inventory and related programming liabilities, net .................. (19.6) (193.1)
Increase in pre-publication costs, net .......................................... (7.6) (16.8)
Increase in prepaid expenses and other current assets ........................... (42.1) (180.8)
Decrease in unbilled receivables ................................................ 25.8 8.6
Decrease in accounts payable and accrued expenses ............................... (444.9) (369.6)
Decrease in income taxes payable and deferred income taxes, net ................. (514.1) --
Decrease in deferred income ..................................................... (3.0) (87.7)
Other, net ...................................................................... 72.4 (19.0)
-------- --------
NET CASH FLOW FROM OPERATING ACTIVITIES ................................................... (266.0) (492.8)
-------- --------
INVESTING ACTIVITIES:
Capital expenditures ................................................................ (116.6) (129.9)
Acquisitions, net of cash acquired .................................................. (61.5) (19.6)
Investments in and advances to affiliated companies ................................. (28.1) (200.6)
Proceeds from sales of short-term investments ....................................... 18.8 10.5
Purchases of short-term investments ................................................. (17.7) (11.0)
Other, net .......................................................................... 15.9 12.6
-------- --------
NET CASH FLOW FROM INVESTING ACTIVITIES ................................................... (189.2) (338.0)
-------- --------
FINANCING ACTIVITIES:
Net borrowings from banks ........................................................... 779.1 911.9
Proceeds from exercise of stock options and warrants ................................ 40.2 19.3
Repayment of Senior (6.625%) & Senior Subordinated (9.125%) Notes ................... (300.0) --
Payment of capital lease obligations ................................................ (18.8) (17.7)
Payment of Preferred Stock dividends ................................................ (15.0) (15.0)
Other, net .......................................................................... (1.5) (15.7)
-------- --------
NET CASH FLOW FROM FINANCING ACTIVITIES ................................................... 484.0 882.8
-------- --------
Net increase in cash and cash equivalents ........................................... 28.8 52.0
Cash and cash equivalents at beginning of the period ................................ 292.3 209.0
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................................ $ 321.1 $ 261.0
-------- --------
-------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest, net of amounts capitalized ................................. $ 188.6 $ 283.3
Cash payments for income taxes ......................................................... $ 537.2 $ 17.5
NON CASH INVESTING AND FINANCING:
Property and equipment acquired under capitalized leases ............................... $ 3.1 $ 7.2
See notes to consolidated financial statements.
4
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1) BASIS OF PRESENTATION
Viacom Inc. (the "Company") is a diversified entertainment and publishing
company with operations in four segments: (i) Networks and Broadcasting, (ii)
Entertainment, (iii) Video and Music/Parks and (iv) Publishing. See Note 4
regarding the presentation of discontinued operations.
The accompanying unaudited consolidated financial statements of the Company have
been prepared pursuant to the rules of the Securities and Exchange Commission.
These financial statements should be read in conjunction with the more detailed
financial statements and notes thereto included in the Company's most recent
annual report on Form 10-K.
In the opinion of management, the accompanying financial statements reflect all
adjustments, consisting of only normal and recurring adjustments, necessary for
a fair presentation of the financial position and results of operations and cash
flows of the Company for the periods presented. Certain previously reported
amounts have been reclassified to conform with the current presentation.
USE OF ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NET EARNINGS(LOSS) PER COMMON SHARE -- The Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share," ("SFAS
128") in the fourth quarter of 1997. For each of the periods presented, the
effect of the assumed conversion of Preferred Stock is antidilutive and
therefore, not reflected in diluted net loss per common share. Prior period
amounts have been restated to conform to the requirements of SFAS 128. The
numerator used in the calculation of both basic and diluted EPS for each
respective period reflects earnings (loss) from continuing operations less
preferred stock dividends of $15 million. The weighted average shares used in
the calculation of basic and diluted EPS were 355.3 million and 352.5 million
for the three months ended March 31, 1998 and 1997, respectively.
COMPREHENSIVE INCOME (LOSS) -- The Company adopted SFAS 130, "Reporting
Comprehensive Income", effective January 1, 1998. Total comprehensive income
(loss) for the three months ended March 31, 1998 and 1997 was income of $20.0
million and a loss of $48.8 million, respectively. Total comprehensive income
(loss) for the Company includes net income (loss) and other comprehensive
income items including currency translation adjustments, unrealized gain on
securities and minimum pension liability adjustments.
5
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2) PENDING TRANSACTIONS
On April 13, 1998, the Company announced its intention to redeem all $100
million of Viacom International Inc.'s outstanding 8.75% Senior Subordinated
Reset Notes due 2001 on May 15, 1998 at a redemption price equal to 101% of the
principal amount.
On January 14, 1998, the Company announced its intention to sell Simon &
Schuster's educational, professional and reference publishing operations, while
retaining its consumer book business. Upon completion of this transaction, the
net proceeds will be used to repay debt.
3) ACCOUNTS RECEIVABLE
On March 27, 1998, the Company sold $250.0 million of certain receivables under
a $250.0 million revolving securitization program. Proceeds from the sale were
used to reduce outstanding borrowings. The resulting loss on the sale of
receivables was not material to the Company's financial position and results
of operations.
4) DISCONTINUED OPERATIONS
In accordance with Accounting Principles Board Opinion 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", the Company has presented its interactive game businesses
including Virgin Interactive Entertainment Limited ("Virgin") and its radio
business as discontinued operations.
On February 19, 1997, the Company adopted a plan to dispose of its interactive
game businesses, including Viacom New Media, the operations of which were
terminated in 1997. On that same date, the Board of Directors of Spelling
approved a formal plan to dispose of Virgin. Spelling expects to complete a
transaction in 1998. For the year ended December 31, 1997, the revenues and
operating losses net of minority interest of the interactive game businesses
were $241.3 million and $43.5 million, respectively. These losses were provided
for in the estimated loss on disposal of $159.3 million, net of minority
interest, which included a provision for future operating losses of $44.0
million, net of minority interest, as of December 31, 1996. In the fourth
quarter of 1997, an estimated loss of $32.0 million, net of minority interest,
was recorded, reflecting anticipated future operating losses and cash funding
requirements through completion of the disposition. For the three months ended
March 31, 1998, the revenues and operating losses net of minority interest of
the interactive game businesses were $33.3 million and $15.4 million,
respectively.
6
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
On July 2, 1997, the Company completed the sale of Viacom Radio Stations to
Chancellor Media Corp. for approximately $1.1 billion in cash. As a result of
the sale, the Company realized a pre-tax gain on disposition of approximately
$782.3 million, or $416.4 million net of tax, in the third quarter of 1997.
For the three months ended March 31, 1997, discontinued operations reflect the
results of operations, net of tax, of the Viacom Radio Stations.
Summarized financial data of discontinued operations are as follows:
THREE MONTHS ENDED
RESULTS OF DISCONTINUED OPERATIONS (1): MARCH 31, 1997
--------------
Revenues ............................. $ 25.1
Earnings from operations before income
taxes ............................. 9.0
Provision for income taxes ........... (3.9)
Net earnings ......................... 5.1
FINANCIAL POSITION (2): AT MARCH 31, 1998 AT DECEMBER 31, 1997
----------------- --------------------
Current assets ........................... $ 70.0 $ 114.9
Net property and equipment ............... 12.7 14.5
Other assets ............................. 130.5 153.1
Total liabilities ........................ (238.3) (293.0)
-------- --------
Net liabilities of discontinued operations $ (25.1) $ (10.5)
-------- --------
-------- --------
(1) Results of operations represent the Viacom Radio Stations.
(2) Financial position data reflects the Interactive game
businesses at March 31, 1998 and at December 31, 1997.
5) BLOCKBUSTER CHARGE
The 1996 Blockbuster restructuring charge of approximately $88.9 million
principally reflects costs associated with the closing of approximately 10%, or
50, of its Music retail stores and costs associated with Blockbuster's
relocation to Dallas. Blockbuster recognized lease termination costs of $28.3
million for the Music retail store closings and accrued shut-down and other
costs of $14.6 million. Through March 31, 1998, the Company paid and charged
approximately $23.3 million against these liabilities. The Company expects to
substantially complete the activities related to the Music retail store closings
by the end of 1998.
7
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
In the fourth quarter of 1996, Blockbuster recognized $25 million of estimated
severance benefits associated with the Dallas relocation. Blockbuster, through
the restructuring charge, also recognized $21.0 million of other costs of
exiting Fort Lauderdale and eliminating third party distributors. The
Blockbuster relocation to Dallas was completed during the second quarter of
1997. The construction of the Blockbuster distribution center has been completed
and this facility was opened in the first quarter of 1998. Through March 31,
1998, the Company paid and charged approximately $29.3 million against the
severance liability and other exit costs.
6) INVENTORIES
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
Prerecorded music and videocassettes .... $ 563.4 $ 559.2
Videocassette rental inventory .......... 737.9 722.8
Publishing:
Finished goods ....................... 333.7 301.2
Work in process ...................... 29.1 30.3
Material and supplies ................ 21.2 23.3
Other ................................... 26.5 20.6
---------- ----------
1,711.8 1,657.4
Less current portion ................. 973.9 934.8
---------- ----------
$ 737.9 $ 722.6
---------- ----------
Theatrical and television inventory:
Theatrical and television productions:
Released ................... $ 1,669.1 $ 1,736.0
Completed, not released .... 68.3 17.8
In process and other ....... 322.4 341.4
Program rights ....................... 1,183.6 1,150.7
---------- ----------
3,243.4 3,245.9
Less current portion ................. 1,311.5 1,317.9
---------- ----------
$ 1,931.9 $ 1,928.0
---------- ----------
Total current inventory ................. $ 2,285.4 $ 2,252.7
---------- ----------
---------- ----------
Total non-current inventory ............. $ 2,669.8 $ 2,650.6
---------- ----------
---------- ----------
8
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
7) LONG-TERM DEBT
On February 15, 1998, the Company redeemed all $150 million of Viacom
International Inc.'s outstanding 9.125% Senior Subordinated Notes due 1999.
On February 17, 1998, the Company retired all $150 million of its outstanding
6.625% Senior Notes due 1998.
On May 8, 1998, a subsidiary of the Company amended the 364-day film financing
credit agreement, guaranteed by Viacom International Inc. and the Company, which
extended the expiration date for one year and reduced the facility amount by
$109 million to $361 million.
As of March 31, 1998, the Company's scheduled maturities of indebtedness through
December 31, 2002, assuming full utilization of the March 1997 Credit
Agreements, as amended, are $161.9 million (1998), $870.5 million (1999), $1.7
billion (2000), $2.1 billion (2001) and $2.0 billion (2002). The Company has
classified certain short-term indebtedness as long-term debt based upon its
intent and ability to refinance such indebtedness on a long-term basis.
8) COMMITMENTS AND CONTINGENCIES
The commitments of the Company for program license fees, which are not reflected
in the balance sheet as of March 31, 1998 and are estimated to aggregate
approximately $1.5 billion, principally reflect Showtime Networks Inc.'s
("SNI's") commitments of approximately $1.4 billion for the acquisition of
programming rights and the production of original programming. This estimate is
based upon a number of factors. A majority of such fees are payable over several
years, as part of normal programming expenditures of SNI. These commitments to
acquire programming rights 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.
9) PROVISION FOR INCOME TAXES
The provision for income taxes represents federal, state and foreign income
taxes on earnings before income taxes. The estimated annual effective tax rates
of 59.3% for 1998 and 61.5% for 1997 were both adversely affected by
amortization of intangibles in excess of the amounts deductible for tax
purposes. Excluding the non-deductible amortization of intangibles, the
estimated annual effective tax rate would have been 32.0% for 1998 and 38.6% for
1997.
9
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
10) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Viacom International is a wholly owned subsidiary of the Company. The Company
has fully and unconditionally guaranteed Viacom International debt securities.
The Company has determined that separate financial statements and other
disclosures concerning Viacom International are not material to investors. The
following condensed consolidating financial statements present the results of
operations, financial position and cash flows of the Company, Viacom
International (in each case, carrying investments in Non-Guarantor Affiliates
under the equity method), the direct and indirect Non-Guarantor Affiliates of
the Company, and the eliminations necessary to arrive at the information for the
Company on a consolidated basis.
THREE MONTHS ENDED MARCH 31, 1998
------------------------------------------------------------------
NON- VIACOM
VIACOM VIACOM GUARANTOR INC.
INC. INTERNATIONAL AFFILIATES ELIMINATIONS CONSOLIDATED
--------- ------------- ---------- ------------ ------------
Revenues ................................... $ 10.1 $ 345.9 $ 2,737.5 $ (6.0) $ 3,087.5
Expenses:
Operating ............................. 10.2 125.0 1,926.1 (6.0) 2,055.3
Selling, general and administrative ... 1.0 118.7 506.8 -- 626.5
Depreciation and amortization ......... .6 18.4 210.3 -- 229.3
--------- ------------- ---------- ------------ ------------
Total expenses ................... 11.8 262.1 2,643.2 (6.0) 2,911.1
--------- ------------- ---------- ------------ ------------
Operating income (loss) .................... (1.7) 83.8 94.3 -- 176.4
Other income (expense):
Interest expense, net ................. (127.5) (11.9) (17.1) -- (156.5)
Other items, net ...................... (2.6) 8.8 (4.2) -- 2.0
--------- ------------- ---------- ------------ ------------
Earnings (loss) from continuing operations
before income taxes ................... (131.8) 80.7 73.0 -- 21.9
Benefit (provision) for income taxes .. 55.3 (33.9) (34.4) -- (13.0)
Equity in earnings (loss) of affiliated
companies, net of tax .............. 77.9 29.9 (11.0) (104.5) (7.7)
Minority interest ..................... -- 1.2 (1.0) -- .2
--------- ------------- ---------- ------------ ------------
Net earnings ............................... 1.4 77.9 26.6 (104.5) 1.4
Cumulative convertible preferred
stock dividend requirement ......... (15.0) -- -- -- (15.0)
--------- ------------- ---------- ------------ ------------
Net earnings (loss) attributable to
common stock .......................... $ (13.6) $ 77.9 $ 26.6 $ (104.5) $ (13.6)
--------- ------------- ---------- ------------ ------------
--------- ------------- ---------- ------------ ------------
10
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31, 1997
-----------------------------------------------------------------
NON- VIACOM
VIACOM VIACOM GUARANTOR INC.
INC. INTERNATIONAL AFFILIATES ELIMINATIONS CONSOLIDATED
---- ------------- ---------- ------------ ------------
Revenues ................................... $ -- $ 291.2 $ 2,631.5 $ (5.0) $ 2,917.7
Expenses:
Operating ............................. -- 99.7 1,873.0 (5.0) 1,967.7
Selling, general and administrative ... .2 107.9 449.9 -- 558.0
Depreciation and amortization ......... -- 15.5 202.7 -- 218.2
-------- -------- ---------- -------- ----------
Total expenses .................. .2 223.1 2,525.6 (5.0) 2,743.9
-------- -------- ---------- -------- ----------
Operating income (loss) .................... (.2) 68.1 105.9 -- 173.8
Other income (expense):
Interest expense, net ................. (160.3) (17.3) (19.2) -- (196.8)
Other items, net ...................... -- (.6) .9 -- .3
-------- -------- ---------- -------- ----------
Earnings (loss) from continuing operations
before income taxes ................... (160.5) 50.2 87.6 -- (22.7)
Benefit (provision) for income taxes .. 61.0 (21.0) (26.0) -- 14.0
Equity in earnings (loss) of affiliated
companies, net of tax .............. 80.5 50.6 (5.2) (141.1) (15.2)
Minority interest ..................... -- (.3) .4 -- .1
-------- -------- ---------- -------- ----------
Earnings (loss) from continuing operations (19.0) 79.5 56.8 (141.1) (23.8)
Earnings from discontinued
operations, net of tax ............. .3 1.1 3.7 -- 5.1
-------- -------- ---------- -------- ----------
Net earnings (loss) ........................ (18.7) 80.6 60.5 (141.1) (18.7)
Cumulative convertible preferred
stock dividend requirement ......... (15.0) -- -- -- (15.0)
-------- -------- ---------- -------- ----------
Net earnings (loss) attributable to
common stock .......................... $ (33.7) $ 80.6 $ 60.5 $ (141.1) $ (33.7)
-------- -------- ---------- -------- ----------
-------- -------- ---------- -------- ----------
11
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, 1998
--------------------------------------------------------------------------
NON-
VIACOM VIACOM GUARANTOR VIACOM INC.
INC. INTERNATIONAL AFFILIATES ELIMINATION CONSOLIDATED
----------- ----------- ----------- ------------- ----------
ASSETS
Current Assets:
Cash and cash equivalents............. $ 299.0 $ 99.1 $ (77.0) $ -- $ 321.1
Receivables, net...................... 2.8 309.2 1,696.5 (47.2) 1,961.3
Inventory............................. 11.9 108.0 2,165.5 -- 2,285.4
Other current assets.................. 1.0 91.9 720.0 -- 812.9
----------- ----------- ----------- ------------- ----------
Total current assets.............. 314.7 608.2 4,505.0 (47.2) 5,380.7
Property and equipment, at cost............... 12.4 493.0 3,886.7 -- 4,392.1
Less accumulated depreciation......... 2.4 145.0 1,064.7 -- 1,212.1
----------- ----------- ----------- ------------- ----------
Net property and equipment......... 10.0 348.0 2,822.0 -- 3,180.0
Inventory..................................... -- 348.9 2,320.9 -- 2,669.8
Intangibles, at amortized cost................ 111.6 544.3 14,007.6 -- 14,663.5
Investments in consolidated subsidiaries...... 8,501.4 9,340.4 -- (17,841.8) --
Other assets.................................. 90.8 219.0 1,586.7 54.7 1,951.2
----------- ----------- ----------- ------------- ----------
$ 9,028.5 $ 11,408.8 $ 25,242.2 $ (17,834.3) $ 27,845.2
----------- ----------- ----------- ------------- ----------
----------- ----------- ----------- ------------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................ $ -- $ 38.0 $ 591.6 $ (69.4) $ 560.2
Accrued compensation.................... -- 60.2 223.8 -- 284.0
Participants' share, residuals and
royalties payable................. -- -- 1,013.7 -- 1,013.7
Income tax payable...................... -- 853.3 (187.2) (536.2) 129.9
Current portion of long-term debt....... -- 216.0 71.6 -- 287.6
Accrued expenses and other ............. 155.5 515.6 1,206.8 6.6 1,884.5
----------- ----------- ----------- ------------- ----------
Total current liabilities............ 155.5 1,683.1 2,920.3 (599.0) 4,159.9
----------- ----------- ----------- ------------- ----------
Long-term debt................................ 5,569.6 1,744.4 659.2 -- 7,973.2
Other liabilities............................. (18,815.1) (3,906.0) 19,411.0 5,564.8 2,254.7
Shareholders' equity:
Convertible Preferred Stock............. 1,200.0 103.0 242.0 (345.0) 1,200.0
Common Stock............................ 3.6 153.7 598.6 (752.3) 3.6
Additional paid-in capital.............. 10,237.9 6,739.7 1,295.1 (7,870.9) 10,401.8
Retained earnings....................... 10,906.5 4,824.1 176.7 (13,831.9) 2,075.4
Accumulated other comprehensive
income (loss)..................... -- 66.8 (60.7) -- 6.1
----------- ----------- ----------- ------------- ----------
22,348.0 11,887.3 2,251.7 (22,800.1) 13,686.9
Less treasury stock, at cost............ 229.5 -- -- -- 229.5
----------- ----------- ----------- ------------- ----------
Total shareholders' equity... 22,118.5 11,887.3 2,251.7 (22,800.1) 13,457.4
----------- ----------- ----------- ------------- ----------
$ 9,028.5 $ 11,408.8 $ 25,242.2 $ (17,834.3) $ 27,845.2
----------- ----------- ----------- ------------- ----------
----------- ----------- ----------- ------------- ----------
12
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1997
--------------------------------------------------------------------------
NON-
VIACOM VIACOM GUARANTOR VIACOM INC.
INC. INTERNATIONAL AFFILIATES ELIMINATION CONSOLIDATED
----------- ----------- ----------- ------------- ----------
ASSETS
Current Assets:
Cash and cash equivalents............ $ .1 $ 91.5 $ 200.7 $ -- $ 292.3
Receivables, net..................... 10.2 384.0 2,047.0 (43.5) 2,397.7
Inventory............................ 13.3 100.5 2,138.9 -- 2,252.7
Other current assets................. (6.1) 55.6 719.4 1.9 770.8
--------- --------- --------- ---------- ---------
Total current assets............. 17.5 631.6 5,106.0 (41.6) 5,713.5
Property and equipment, at cost.............. 12.4 478.9 3,828.9 -- 4,320.2
Less accumulated depreciation........ 2.2 131.9 988.4 -- 1,122.5
--------- --------- --------- ---------- ---------
Net property and equipment........ 10.2 347.0 2,840.5 -- 3,197.7
Inventory -- 318.2 2,332.4 -- 2,650.6
Intangibles, at amortized cost............... 112.4 534.4 14,052.8 -- 14,699.6
Investments in consolidated subsidiaries..... 8,256.9 9,303.0 -- (17,559.9) --
Other assets................................. (11.3) 238.0 1,719.7 80.9 2,027.3
--------- --------- --------- ---------- ---------
$ 8,385.7 $11,372.2 $26,051.4 $ (17,520.6) $28,288.7
--------- --------- --------- ---------- ---------
--------- --------- --------- ---------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................... $ -- $ 36.0 $ 803.3 $ (139.6) $ 699.7
Accrued compensation................... -- 122.4 319.3 -- 441.7
Participants share, residuals and
royalties payable.................. -- -- 951.3 -- 951.3
Income tax payable..................... (6.2) 1,405.9 (307.2) (536.2) 556.3
Current portion of long-term debt...... 150.0 156.5 70.0 -- 376.5
Accrued expenses and other ............ 113.3 542.1 1,274.1 97.5 2,027.0
--------- --------- --------- ---------- ---------
Total current liabilities........... 257.1 2,262.9 3,110.8 (578.3) 5,052.5
--------- --------- --------- ---------- ---------
Long-term debt............................... 4,760.5 1,953.9 708.6 -- 7,423.0
Other liabilities............................ (14,112.9) (4,498.2) 20,248.7 792.0 2,429.6
Shareholders' equity:
Convertible Preferred Stock............ 1,200.0 -- -- -- 1,200.0
Common Stock........................... 3.6 256.6 835.3 (1,091.9) 3.6
Additional paid-in capital............. 10,333.2 6,745.9 1,071.0 (7,817.0) 10,333.1
Retained earnings...................... 6,173.7 4,590.6 150.1 (8,825.4) 2,089.0
Accumulated other comprehensive
income (loss)...................... -- 60.5 (73.1) -- (12.6)
--------- --------- --------- ---------- ---------
17,710.5 11,653.6 1,983.3 (17,734.3) 13,613.1
Less treasury stock, at cost........... 229.5 -- -- -- 229.5
--------- --------- --------- ---------- ---------
Total shareholders' equity.. 17,481.0 11,653.6 1,983.3 (17,734.3) 13,383.6
--------- --------- --------- ---------- ---------
$ 8,385.7 $11,372.2 $26,051.4 $(17,520.6) $28,288.7
--------- --------- --------- ---------- ---------
--------- --------- --------- ---------- ---------
13
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------------------------------------------
NON-
VIACOM VIACOM GUARANTOR VIACOM INC.
INC. INTERNATIONAL AFFILIATES ELIMINATION CONSOLIDATED
----------- ----------- ----------- ------------- ----------
NET CASH FLOW FROM OPERATING ACTIVITIES ........ $ 52.8 $ (563.1) $ 244.3 $ -- $ (266.0)
-------- -------- -------- ----------- --------
INVESTING ACTIVITIES:
Capital expenditures ........................ -- (18.8) (97.8) -- (116.6)
Acquisitions, net of cash acquired .......... (11.1) -- (50.4) -- (61.5)
Investments in and advances to
affiliated companies ..................... -- -- (28.1) -- (28.1)
Proceeds from sales of short-term investments -- 18.8 -- -- 18.8
Purchases of short-term investments ......... -- (17.7) -- -- (17.7)
Other, net .................................. -- 15.9 -- -- 15.9
-------- -------- -------- ----------- --------
NET CASH FLOW FROM INVESTING ACTIVITIES ........ (11.1) (1.8) (176.3) -- (189.2)
-------- -------- -------- ----------- --------
FINANCING ACTIVITIES:
Net borrowings from banks ................... 778.3 -- .8 -- 779.1
Increase (decrease) in intercompany
payables ................................. (396.4) 727.3 (330.9) -- --
Proceeds from exercise of stock options
and warrants ............................. 40.2 -- -- -- 40.2
Repayment of Senior (6.625%) and Senior
Subordinated (9.125%) Notes .............. (150.0) (150.0) -- -- (300.0)
Payment of capital lease obligations ........ -- (4.8) (14.0) -- (18.8)
Payment of Preferred Stock dividends ........ (15.0) -- -- -- (15.0)
Other, net .................................. .1 -- (1.6) -- (1.5)
-------- -------- -------- ----------- --------
NET CASH FLOW FROM FINANCING ACTIVITIES ........ 257.2 572.5 (345.7) -- 484.0
-------- -------- -------- ----------- --------
Net increase (decrease) in cash and
cash equivalents ......................... 298.9 7.6 (277.7) -- 28.8
Cash and cash equivalents at beginning
of period ................................ .1 91.5 200.7 -- 292.3
-------- -------- -------- ----------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..... $ 299.0 $ 99.1 $ (77.0) $ -- $ 321.1
-------- -------- -------- ----------- --------
-------- -------- -------- ----------- --------
14
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31, 1997
--------------------------------------------------------------------------
NON-
VIACOM VIACOM GUARANTOR VIACOM INC.
INC. INTERNATIONAL AFFILIATES ELIMINATION CONSOLIDATED
----------- ----------- ----------- ------------- ----------
NET CASH FLOW FROM OPERATING ACTIVITIES .......... $ (67.2) $ 127.3 $ (560.7) $ 7.8 $ (492.8)
-------- -------- -------- ------ --------
INVESTING ACTIVITIES:
Capital expenditures ........................ -- (6.7) (123.2) -- (129.9)
Acquisitions, net of cash acquired .......... -- -- (19.6) -- (19.6)
Investments in and advances to
affiliated companies ..................... -- (8.2) (192.4) -- (200.6)
Proceeds from sales of short-term investments -- 10.5 -- -- 10.5
Purchases of short-term investments ......... -- (11.0) -- -- (11.0)
Other, net .................................. -- -- 12.6 -- 12.6
-------- -------- -------- ------ --------
NET CASH FLOW FROM INVESTING ACTIVITIES .......... -- (15.4) (322.6) -- (338.0)
-------- -------- -------- ------ --------
FINANCING ACTIVITIES:
Net borrowings from banks ................... 999.7 (118.2) 30.4 -- 911.9
Increase (decrease) in intercompany
payables ................................. (912.2) 21.4 890.8 -- --
Proceeds from exercise of stock options
and warrants ............................. 19.3 -- -- -- 19.3
Payment of capital lease obligations ........ -- -- (17.7) -- (17.7)
Payment of Preferred Stock dividends ........ (15.0) -- -- -- (15.0)
Other, net .................................. (9.5) -- (6.2) -- (15.7)
-------- -------- -------- ------ --------
NET CASH FLOW FROM FINANCING ACTIVITIES .......... 82.3 (96.8) 897.3 -- 882.8
-------- -------- -------- ------ --------
Net increase in cash and cash equivalents ... 15.1 15.1 14.0 7.8 52.0
Cash and cash equivalents at beginning
of period ................................ 19.0 61.2 128.8 -- 209.0
-------- -------- -------- ------ --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ....... $ 34.1 $ 76.3 $ 142.8 $ 7.8 $ 261.0
-------- -------- -------- ------ --------
-------- -------- -------- ------ --------
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
Management's discussion and analysis of the combined results of operations and
financial condition should be read in conjunction with the Consolidated
Financial Statements and related Notes.
The following tables set forth revenues and operating income by business
segment, for the three months ended March 31, 1998 and 1997. Results for each
period presented exclude contributions from its interactive game businesses
including Virgin and its radio business which was sold to Chancellor Media Corp.
on July 2, 1997. (See Note 4 of Notes to Consolidated Financial Statements).
THREE MONTHS ENDED PERCENT
MARCH 31, B/(W)
----------------------- ------
1998 1997
---------- ----------
(In millions)
REVENUES:
Networks and Broadcasting .. $ 646.4 $ 576.8 12%
Entertainment .............. 1,019.4 1,000.9 2
Video and Music/Parks ...... 1,077.3 973.2 11
Publishing ................. 377.0 398.7 (5)
Eliminations ............... (32.6) (31.9) (2)
---------- ----------
Total .......... $ 3,087.5 $ 2,917.7 6
---------- ----------
---------- ----------
OPERATING INCOME (LOSS): (A)
Networks and Broadcasting .. $ 136.3 $ 122.3 11%
Entertainment .............. 119.0 94.9 25
Video and Music/Parks ...... 48.9 55.0 (11)
Publishing ................. (88.5) (57.8) (53)
Corporate .................. (39.3) (40.6) 3
---------- ----------
Total .......... $ 176.4 $ 173.8 1
---------- ----------
---------- ----------
(a) Operating income (loss) is defined as net earnings (loss) before
discontinued operations, minority interest, equity in loss of
affiliated companies (net of tax), benefit (provision) for income
taxes, other items (net), and interest expense, net.
EBITDA
The following table sets forth EBITDA (defined as operating income (loss) before
depreciation and amortization) for the three months ended March 31, 1998 and
1997. EBITDA does not reflect the effect of significant amounts of amortization
of goodwill related to business combinations accounted for under the purchase
method.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
While many in the financial community consider EBITDA to be an important measure
of comparative operating performance, it should be considered in addition to,
but not as a substitute for or superior to operating income, net earnings, cash
flow and other measures of financial performance prepared in accordance with
generally accepted accounting principles.
THREE MONTHS ENDED PERCENT
MARCH 31, B/(W)
----------------------- ------
1998 1997
---------- ----------
(In millions)
EBITDA:
Networks and Broadcasting $ 171.2 $ 160.0 7%
Entertainment ........... 153.4 127.2 21
Video and Music/Parks ... 161.9 160.3 1
Publishing .............. (46.9) (19.0) (147)
Corporate ............... (33.9) (36.5) 7
-------- --------
Total ....... $ 405.7 $ 392.0 3
-------- --------
-------- --------
RESULTS OF OPERATIONS
Revenues increased 6% to $3.1 billion for the first quarter of 1998 from $2.9
billion for the first quarter of 1997. Revenue increases were driven primarily
by gains at Paramount's features and television operations in the Entertainment
segment, and by double digit advertising sales gains at MTV Networks in the
Networks and Broadcasting segment. Blockbuster Video led the revenue increases
in the Video and Music/Parks segment, driven primarily by increased worldwide
same store revenues and the increased number of Company-owned video stores in
operation in 1998.
EBITDA increased 3% to $405.7 million for the first quarter of 1998 from $392.0
million for the first quarter of 1997. Operating income increased 1% to $176.4
million for the first quarter of 1998 from $173.8 million for the first quarter
of 1997.
Segment Results of Operations
Networks and Broadcasting (Basic Cable and Premium Subscription Television
Program Services, and Television Stations)
THREE MONTHS ENDED PERCENT
MARCH 31, B/(W)
----------------------- ------
1998 1997
---------- ----------
(In millions)
Revenues $ 646.4 $ 576.8 12%
Operating Income $ 136.3 $ 122.3 11
EBITDA $ 171.2 $ 160.0 7
The Networks and Broadcasting segment is principally comprised of MTV Networks
("MTVN"), basic cable television program services; Showtime Networks Inc.
("SNI"), premium subscription television program services; and the Paramount
Stations Group ("PSG"), television station operations.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
For the first quarter of 1998, MTVN revenues of $361.3 million, EBITDA of
$133.8 million and operating income of $116.5 million increased 19%, 17% and
18%, respectively. The increase in MTVN's revenues principally reflects
higher advertising sales and affiliate fees at each of the domestic networks.
Advertising revenues were driven by rate increases at Nickelodeon and higher
unit volume at MTV. MTVN's EBITDA and operating income gains were driven by
the increased revenues partially offset by increased programming and
production expenses as well as the consolidation of losses of approximately
$9.0 million for MTV Asia in the first quarter of 1998 which were previously
accounted for under the equity method. Viacom will continue to fund all of
MTV Asia's operations resulting in a greater equity ownership as it dilutes
its partner's ownership in the business.
SNI's revenues, EBITDA and operating income increased 7%, 11% and 123%,
respectively. The revenue increase was principally due to an increase of
approximately 2.2 million subscriptions over the prior year to 18.6 million
subscriptions at March 31, 1998. Operating results reflect revenue increases
attributable to the continued growth of direct broadcast satellite subscriptions
and cost reductions associated with the exit from the backyard dish retail
business in the first quarter of 1997 offset primarily by increased
advertising expenses to support a campaign to increase consumer awareness of
Showtime and its programming.
PSG's revenues of $94.9 million remained constant while EBITDA and operating
income decreased 26% and 49%, respectively, primarily reflecting the change
in station mix due to the swapping of network affiliated television stations
for current and future United Paramount Network ("UPN") affiliates.
The Networks and Broadcasting segment derives revenues principally from two
sources: the sale of time on its networks and television stations to advertisers
and the license of the networks to cable television operators, direct-to-home
and other distributors. The sale of advertising time is affected by viewer
demographics, viewer ratings and market conditions. Adverse changes in general
market conditions for advertising may affect revenues.
ENTERTAINMENT (MOTION PICTURES AND TELEVISION PROGRAMMING, MOVIE THEATERS AND
MUSIC PUBLISHING)
THREE MONTHS ENDED PERCENT
MARCH 31, B/(W)
----------------------- ------
1998 1997
---------- ----------
(In millions)
Revenues $ 1,019.4 $ 1,000.9 2%
Operating $ 119.0 $ 94.9 25
Income
EBITDA $ 153.4 $ 127.2 21
The Entertainment segment is principally comprised of Paramount Pictures,
Paramount Television and Spelling Entertainment Group Inc. ("Spelling"). For
the first quarter of 1998, revenue increases are principally due to higher
features and theater revenues driven by the extraordinary box office success
of TITANIC, a co-production with News Corp.'s Twentieth Century Fox studio,
partially offset by lower home video revenues. Paramount's operating results
increased principally due to higher features profits primarily related to the
performance of TITANIC and improved profitability of television programs in
the current quarter. Spelling's revenues of $167.4 million increased 1% and
EBITDA of $11.1 million was on par with the prior year, principally
reflecting the improved performance of its television programming operations
offset by costs associated with exiting the feature film business.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Each motion picture is a separate and distinct product with its financial
success dependent upon many factors, including public response which is of
fundamental importance. Entertainment's operating results fluctuate due to
the timing of theatrical and home video releases. Release dates are
determined by several factors, including timing of vacation and holiday
periods and competition in the marketplace.
Video and Music/Parks (HOME VIDEO AND MUSIC RETAILING/PARKS)
THREE MONTHS ENDED PERCENT
MARCH 31, B/(W)
----------------------- ------
1998 1997
---------- ----------
(In millions)
Revenues $ 1,077.3 $ 973.2 11%
Operating Income $ 48.9 $ 55.0 (11)
EBITDA $ 161.9 $ 160.3 1
The Video and Music/Parks segment is comprised principally of Blockbuster Video
and Music, and Paramount Parks. The revenue increase reflects the increase in
worldwide same store revenues and the increased number of Company-owned video
stores in operation in 1998 as compared to 1997. EBITDA for the segment
increased slightly as revenue growth was substantially offset by increased
expenses principally associated with video tape purchases, increased advertising
related to repositioning the video business and higher operating and
administrative expenses associated with a greater number of stores. Total video
revenues of $930.4 million increased 13%, and EBITDA of $198.2 million and
operating income of $108.3 million increased 6% and 5%, respectively.
Blockbuster Video ended the first quarter with 6,018 stores, a net increase of
330 stores over the first quarter of 1997. Music stores recorded revenues of
$133.3 million, operating losses before depreciation and amortization of $2.5
million and operating losses of $7.8 million for the three months ended March
31, 1998 as compared with revenues of $143.1 million, EBITDA of $0.4 million and
operating losses of $5.6 million for the three months ended March 31, 1997. The
Parks begin full time operations during the second and third quarters and
therefore, record the majority of revenues, EBITDA and operating income during
those periods. The Parks recorded slight losses for the first quarter of 1998
and 1997.
The Company's home video and music businesses may be affected by a variety of
factors, including but not limited to, general economic trends in the movie,
home video and music industries, the quality of new products available for
rental and sale, competition, marketing programs, special or unusual events,
changes in technology, and similar factors that may affect retailers in general.
As with other retail outlets, there is a distinct seasonal pattern to the home
video and music businesses. For home video the peak rental times tend to mirror
school vacations patterns (i.e., summer, spring break, Christmas and Easter).
The music business typically generates higher revenues during the holiday
retail selling seasons.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
PUBLISHING (EDUCATION; CONSUMER; BUSINESS AND PROFESSIONAL; REFERENCE; AND
INTERNATIONAL GROUPS)
THREE MONTHS ENDED PERCENT
MARCH 31, B/(W)
----------------------- ------
1998 1997
---------- ----------
(In millions)
Revenues $ 377.0 $ 398.7 (5)%
Operating Loss $ (88.5) $ (57.8) (53)
EBITDA $ (46.9) $ (19.0) (147)
On January 14, 1998, the Company announced its intention to sell Simon &
Schuster's educational, professional and reference publishing operations, while
retaining its consumer book business. Upon completion of this transaction, the
net proceeds will be used to repay debt.
For the quarter ended March 31, 1998, the decline in revenues is attributable to
fewer major releases for the Consumer Group, lower sales at Macmillan Computer
Publishing in part due to delays in the release of Microsoft's Windows 98
software product and decreased International sales due mainly to the Asian
economic downturn. Results also reflect the impact of publishing management's
involvement in the sale process. Publishing includes imprints such as Simon &
Schuster, Pocket Books, Prentice Hall and Macmillan Computer Publishing.
Publishing typically has seasonally stronger operating results in the second
half of the year.
OTHER INCOME AND EXPENSE INFORMATION
CORPORATE EXPENSES
Corporate expenses including depreciation and amortization expense decreased 3%
to $39.3 million for the first quarter of 1998 from $40.6 million for 1997
reflecting a slight decrease in general and administrative expenses for the
period.
INTEREST EXPENSE, NET
Net interest expense decreased 20% to $156.5 million for the first quarter of
1998 from $196.8 million for the first quarter of 1997. The Company had
approximately $8.3 billion and $10.8 billion principal amount of debt
outstanding (including current maturities) as of March 31, 1998, and March 31,
1997, respectively, at weighted average interest rates of 7.5% and 7.3%,
respectively.
PROVISION FOR INCOME TAXES
The provision for income taxes represents federal, state and foreign income
taxes on earnings before income taxes. The estimated annual effective tax rate
of 59.3% for 1998 and 61.5% for 1997 were both adversely affected by
amortization of intangibles in excess of amounts which are deductible for tax
purposes. Excluding the non-deductible amortization of intangibles, the
estimated annual effective tax rate would have been 32.0% for 1998 and 38.6% for
1997.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
EQUITY IN LOSS OF AFFILIATES
"Equity in loss of affiliated companies, net of tax" was $7.7 million for the
first quarter of 1998 as compared to $15.2 million for the first quarter of
1997, principally reflecting the improved performance of Comedy Central, the
consolidation of certain international network ventures that were previously
accounted for under the equity method, offset by increased losses at other
equity operations and the absence of earnings for USA Networks following its
sale in the fourth quarter of 1997.
MINORITY INTEREST
Minority interest primarily represents the minority ownership of Spelling common
stock.
DISCONTINUED OPERATIONS
For the three months ended March 31, 1997, discontinued operations reflect the
results of operations, net of tax, of the Viacom Radio Stations. Operating
losses for the interactive game businesses, including Virgin, were previously
provided for in the estimated loss on disposal of discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to fund its anticipated cash requirements (including the
anticipated cash requirements of its capital expenditures, joint ventures,
commitments and payments of principal, interest and dividends on its outstanding
indebtedness and preferred stock) with internally generated funds and from
various external sources, which may include the Company's existing credit
agreements and amendments thereto, co-financing arrangements by the Company's
various divisions, additional financings and the sale of non-strategic assets as
opportunities may arise.
On April 13, 1998, the Company announced its intention to redeem all $100
million of Viacom International Inc.'s outstanding 8.75% Senior Subordinated
Reset Notes due 2001 on May 15, 1998 at a redemption price equal to 101% of the
principal amount.
On February 15, 1998, the Company redeemed all $150 million of Viacom
International Inc.'s outstanding 9.125% Senior Subordinated Notes due 1999.
On February 17, 1998, the Company retired all $150 million of its outstanding
6.625% Senior Notes due 1998.
On January 14, 1998, the Company announced its intention to sell Simon &
Schuster's educational, professional and reference publishing operations, while
retaining its consumer book business. Upon completion of this transaction, the
net proceeds will be used to repay debt.
At March 31, 1998, the Company was in compliance with all debt covenants and had
satisfied all financial ratios and tests under the credit agreements. The
Company expects to be in compliance and satisfy all such covenants and ratios as
may be applicable from time to time during 1998.
The Company's scheduled maturities of indebtedness through December 31, 2002,
assuming full utilization of the March 1997 Credit Agreements, as amended are
$161.9 million (1998), $870.5 million (1999), $1.7 billion (2000), $2.1 billion
(2001) and $2.0 billion (2002). As of March 31, 1998, the Company has classified
certain short-term indebtedness as long-term debt based upon its intent and
ability to refinance such indebtedness on a long-term basis.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The commitments of the Company for program license fees which are not reflected
in the balance sheet as of March 31, 1998 and are estimated to aggregate
approximately $1.5 billion, principally reflect SNI's commitments of
approximately $1.4 billion for the acquisition of programming rights and the
production of original programming. This estimate is based upon a number of
factors. A majority of such fees are payable over several years, as part of
normal programming expenditures of SNI. These commitments to acquire programming
rights 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.
Current assets decreased to $5.4 billion as of March 31, 1998 from $5.7
billion as of December 31, 1997, primarily reflecting the reduction in
receivables due to the asset securitization program. The Company sold $250.0
million of certain receivables under a $250.0 million revolving
securitization program. Proceeds from the sale were used to reduce
outstanding borrowings. The allowance for doubtful accounts as a percentage
of receivables increased to 5% as of March 31, 1998 from 4% as of December
31, 1997. The change in property and equipment principally reflects capital
expenditures of $116.6 million related to capital additions for new and
existing video stores, additional construction and equipment upgrades for
the Parks, and equipment purchases at Paramount and MTV offset by
depreciation expense of $121.3 million. Current liabilities decreased
approximately 18% to $4.2 billion as of March 31, 1998 from $5.1 billion as
of December 31, 1997, reflecting the payment of taxes associated with the
sale of USA Networks as well as payment of accrued expenses and other normal
reductions in accounts payable. Long-term debt, including current maturities,
increased 6% to $8.3 billion as of March 31, 1998 from $7.8 billion as of
December 31, 1997 primarily reflecting tax payments and the continued
investment in and seasonality of the Company's businesses.
The Company expects to record the majority of its operating cash flows during
the second half of the year due to the positive effect of the holiday season
on advertising revenues and video store revenues, the summer operation of its
parks and the seasonality of the educational publishing business. Net cash
flow from operating activities improved to negative $266.0 million for the
three months ended March 31, 1998 versus negative $492.8 million for the
three months ended March 31, 1997 principally reflecting the reduction in
accounts receivable due principally to the asset securitization program and
improved operating performance including the impact of Titanic offset by the
first quarter 1998 tax payment related to the sale of USA Networks and
payment of accrued expenses. Net cash expenditures for investing activities
of $189.2 million for the three months ended March 31, 1998 principally
reflect capital expenditures. Net cash flows from investing activities of
$338.0 million for the three months ended March 31, 1997 principally reflect
capital expenditures and the Company's purchase of a 50% interest in UPN.
Financing activities principally reflect borrowings and repayments of debt
during each period presented.
On April 18, 1997, the Company announced its intention to acquire additional
shares of Spelling's outstanding common stock. Through March 31, 1998, the
Company has acquired 6,845,220 additional shares for $57.9 million and currently
owns approximately 80% of Spelling's outstanding common stock. The purchase of
additional shares permits the Company to consolidate Spelling's results for tax
purposes.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CAPITAL STRUCTURE
The following table sets forth the Company's long-term debt, net of current
portion as of March 31, 1998 and December 31, 1997:
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
(in millions)
Notes payable to banks. . . . . . $ 3,931.9 $ 3,152.7
Senior debt . . . . . . . . . . . 2,336.6 2,486.3
Senior subordinated debt. . . . . 496.7 645.5
Subordinated debt . . . . . . . . 975.0 971.4
Obligations under capital leases. 505.5 527.0
Other notes . . . . . . . . . . . 15.1 16.6
---------- ----------
8,260.8 7,799.5
Less current portion. . . . . . . 287.6 376.5
---------- ----------
$ 7,973.2 $ 7,423.0
---------- ----------
---------- ----------
The notes and debentures are presented net of an aggregate unamortized discount
of $143.4 million as of March 31, 1998 and $148.6 million as of December 31,
1997.
On May 8, 1998, a subsidiary of the Company amended the 364-day film financing
credit agreement, guaranteed by Viacom International Inc. and the Company, which
extended the expiration date for one year and reduced the facility amount by
$109 million to $361 million.
Debt, including the current portion, as a percentage of total capitalization of
the Company was 38% at March 31, 1998 and 37% at December 31, 1997.
The Company uses derivative financial instruments to reduce its exposure to
market risks from changes in foreign exchange rates and interest rates. The
Company does not hold or issue financial instruments for speculative trading
purposes. The derivative instruments used are foreign exchange forward contracts
and options, and interest rate swap agreements. The foreign exchange contracts
have principally been used to hedge the British Pound, the Australian Dollar,
the Japanese Yen, the Canadian Dollar, the Singapore Dollar, the German
Deutschemark and the European Currency Unit/British Pound relationship. These
derivatives, which are over-the-counter instruments, are non-leveraged.
The Company filed a shelf registration statement with the Securities and
Exchange Commission registering debt securities, preferred stock and contingent
value rights of the Company and guarantees of such debt securities by Viacom
International which may be issued for aggregate gross proceeds of $3.0 billion.
The registration statement was declared effective on May 10, 1995. The net
proceeds from the sale of the offered securities may be used by the Company to
repay, redeem, repurchase or satisfy its obligations in respect of its
outstanding indebtedness or other securities; to make loans to its subsidiaries;
for general corporate purposes; or for such other purposes as may be specified
in the applicable Prospectus Supplement. The Company filed a post-effective
amendment to this registration statement on November 19, 1996. To date, the
Company issued $1.55 billion of notes and debentures and has $1.45 billion
remaining availability under the shelf registration statement.
23
PART II - - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Amendment No. 3, dated as of May 8, 1998 to the Film Finance
Credit Agreement, dated as of May 10, 1996, as amended as of June
30, 1997 by Amendment No. 2 and as of March 26, 1997 by Amendment
No. 1, among Viacom Film Funding Company Inc., as Borrower; Viacom
Inc. and Viacom International Inc., as Guarantors; the Bank parties
thereto; The Bank of New York, as a Managing Agent and as the
Documentation Agent; Citibank, N.A., as a Managing Agent and as the
Administrative Agent; Morgan Guaranty Trusty Company of New York, as
a Managing Agent; JP Morgan Securities Inc., as the Syndication Agent;
Bank of America NT&SA, as a Managing Agent, and the Agents named
therein.
11 Statement re Computation of Net Earnings Per Share
27 Financial Data Schedule.
(b) Reports on Form 8-K for Viacom Inc.
None.
24
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 INC.
--------------------------------------
(Registrant)
Date May 12, 1998 /s/ Sumner M. Redstone
----------------- --------------------------------------
Sumner M. Redstone
Chairman of the Board of Directors,
Chief Executive Officer
Date May 12, 1998 /s/ George S. Smith, Jr.
----------------- --------------------------------------
George S. Smith, Jr.
Senior Vice President,
Chief Financial Officer
25
Exhibit Index
10.1 Amendment No. 3, dated as of May 8, 1998 to the Film Finance Credit
Agreement, dated as of May 10, 1996, as amended as of June 30, 1997
by Amendment No. 2 and as of March 26, 1997 by Amendment No. 1, among
Viacom Film Funding Company Inc., as Borrower; Viacom Inc. and Viacom
International Inc., as Guarantors; the Bank parties thereto; The Bank
of New York, as a Managing Agent and as the Documentation Agent;
Citibank, N.A., as a Managing Agent and as the Administrative Agent;
Morgan Guaranty Trusty Company of New York, as a Managing Agent; JP
Morgan Securities Inc., as the Syndication Agent; Bank of America
NT&SA, as a Managing Agent, and the Agents named therein.
11 Statement re Computation of Net Earnings Per Share
27 Financial Data Schedule