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 September 30, 1998
Commission file number 1-9553
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VIACOM INC.
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(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
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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 October 31, 1998:
Class A Common Stock, par value $.01 per share - 70,079,423
Class B Common Stock, par value $.01 per share - 277,753,085
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
VIACOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; all amounts, except per share amounts, are in millions)
Three months ended
September 30,
------------------------
1998 1997
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Revenues............................................................................ $ 4,019.1 $ 3,511.2
Expenses:
Operating....................................................................... 2,437.4 2,154.9
Selling, general and administrative............................................. 782.2 682.5
Depreciation and amortization................................................... 233.2 219.6
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Total expenses............................................................. 3,452.8 3,057.0
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Operating income.................................................................... 566.3 454.2
Other income (expense):
Interest expense, net........................................................... (153.7) (189.6)
Other items, net................................................................ (12.6) (2.3)
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Earnings from continuing operations before income taxes............................. 400.0 262.3
Provision for income taxes...................................................... (240.5) (221.3)
Equity in loss of affiliated companies, net of tax.............................. (2.9) (18.4)
Minority interest............................................................... .5 4.4
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Earnings from continuing operations................................................. 157.1 27.0
Discontinued operations (Note 5):
Loss, net of tax of $1.7 (1998) and $5.1 (1997)................................. (2.8) (8.6)
Gain (loss) on dispositions..................................................... (15.9) 415.9
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Net earnings........................................................................ 138.4 434.3
Cumulative convertible preferred stock dividend requirement..................... (15.0) (15.0)
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Net earnings attributable to common stock........................................... $ 123.4 $ 419.3
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Weighted average number of common shares:
Basic........................................................................... 357.3 353.0
Diluted......................................................................... 362.7 353.6
Earnings per common share (Note 1):
Basic:
Earnings from continuing operations........................................... $ .40 $ .03
Net earnings.................................................................. $ .35 $ 1.19
Diluted:
Earnings from continuing operations........................................... $ .39 $ .03
Net earnings.................................................................. $ .34 $ 1.19
See notes to consolidated financial statements.
2
VIACOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; all amounts, except per share amounts, are in millions)
Nine months ended
September 30,
------------------------------------
1998 1997
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Revenues............................................................................ $ 10,174.6 $ 9,177.8
Expenses:
Operating...................................................................... 6,849.7 6,035.1
Selling, general and administrative............................................ 2,124.3 1,873.0
Depreciation and amortization.................................................. 688.0 688.4
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Total expenses........................................................... 9,662.0 8,596.5
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Operating income.................................................................... 512.6 581.3
Other income (expense):
Interest expense, net.......................................................... (468.2) (588.1)
Other items, net............................................................... (24.7) 62.7
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Earnings from continuing operations before income taxes............................. 19.7 55.9
Provision for income taxes..................................................... (112.0) (142.5)
Equity in loss of affiliated companies, net of tax............................. (21.2) (73.0)
Minority interest.............................................................. 1.1 4.5
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Loss from continuing operations..................................................... (112.4) (155.1)
Discontinued operations (Note 5):
Loss, net of tax of $8.0 (1998) and $29.5 (1997)............................... (12.9) (53.1)
Gain (loss) on dispositions.................................................... (15.6) 428.8
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Net earnings (loss)................................................................. (140.9) 220.6
Cumulative convertible preferred stock dividend requirement.................... (45.0) (45.0)
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Net earnings (loss) attributable to common stock.................................... $ (185.9) $ 175.6
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Weighted average number of common shares, basic and diluted.......................... 356.4 352.7
Earnings (loss) per common share, basic and diluted (Note 1):
Loss from continuing operations.............................................. $ (.44) $ (.57)
Net earnings (loss).......................................................... $ (.52) $ .50
See notes to consolidated financial statements.
3
VIACOM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; all amounts, except per share amounts, are in millions)
September 30, December 31,
1998 1997
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Assets
Current Assets:
Cash and cash equivalents............................................ $ 312.9 $ 292.3
Receivables, less allowances of $117.9 (1998) and $99.8 (1997)....... 2,459.1 2,397.7
Inventory............................................................ 2,217.9 2,252.7
Other current assets................................................. 819.9 770.8
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Total current assets............................................ 5,809.8 5,713.5
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Property and equipment, at cost............................................ 4,508.1 4,320.2
Less accumulated depreciation........................................ 1,401.1 1,122.5
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Net property and equipment...................................... 3,107.0 3,197.7
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Inventory.................................................................. 2,236.5 2,650.6
Intangibles, at amortized cost............................................. 14,486.2 14,699.6
Other assets............................................................... 2,175.6 2,027.3
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$ 27,815.1 $ 28,288.7
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Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable..................................................... $ 724.7 $ 699.7
Accrued compensation................................................. 506.4 441.7
Participants' share, residuals and royalties payable................. 1,207.7 951.3
Income tax payable................................................... 84.1 556.3
Current portion of long-term debt.................................... 89.2 376.5
Accrued expenses and other........................................... 1,820.1 2,027.0
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Total current liabilities....................................... 4,432.2 5,052.5
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Long-term debt............................................................ 8,270.3 7,423.0
Other liabilities......................................................... 2,107.0 2,429.6
Commitments and contingencies (Note 10)
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; 70.7 (1998) and 69.6 (1997)
shares issued................................................... 0.7 0.7
Class B Common Stock, par value $.01 per share;
1,000.0 shares authorized; 295.5 (1998) and 284.8 (1997)
shares issued................................................... 2.9 2.9
Additional paid-in capital........................................... 10,535.1 10,333.1
Retained earnings.................................................... 1,903.1 2,089.0
Accumulated other comprehensive income (loss)........................ 9.5 (12.6)
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13,651.3 13,613.1
Less treasury stock, at cost; 13.3 (1998) and 6.5 (1997) shares...... 645.7 229.5
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Total shareholders' equity...................................... 13,005.6 13,383.6
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$ 27,815.1 $ 28,288.7
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See notes to consolidated financial statements.
4
VIACOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; all amounts are in millions)
Nine months ended September 30,
-------------------------------
1998 1997
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Operating Activities:
Net earnings (loss)...................................................................... $ (140.9) $ 220.6
Adjustments to reconcile net earnings to net cash flow from operating activities:
Depreciation and amortization.......................................................... 688.0 707.4
Distribution from affiliated companies................................................. 14.5 47.8
Loss (gain) on dispositions, net of tax................................................ 15.6 (428.8)
Gain on sale of cost investment........................................................ (10.7) --
Equity in loss of affiliated companies................................................. 21.2 73.0
Gain on television stations swap....................................................... -- (102.1)
Change in operating assets and liabilities:
Increase in receivables............................................................ (74.6) (349.9)
Decrease (increase) in inventory and related programming liabilities, net.......... 476.0 (26.9)
Decrease (increase) in pre-publication costs, net.................................. 21.9 (9.6)
Increase in prepaid expenses and other current assets.............................. (40.8) (72.0)
Increase in unbilled receivables................................................... (.3) (82.4)
Decrease in accounts payable and accrued expenses.................................. (261.4) (324.5)
Decrease in income taxes payable and deferred income taxes, net.................... (501.4) (165.7)
Increase (decrease) in deferred income............................................. 8.7 (90.8)
Other, net......................................................................... 5.2 129.3
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Net cash flow from operating activities.................................................. 221.0 (474.6)
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Investing Activities:
Capital expenditures.................................................................. (417.2) (401.1)
Acquisitions, net of cash acquired.................................................... (103.9) (70.8)
Proceeds from dispositions............................................................ 122.5 1,111.9
Investments in and advances to affiliated companies................................... (66.5) (257.5)
Proceeds from sale of cost investment................................................. 19.2 --
Proceeds from sales of short-term investments......................................... 74.5 135.0
Purchases of short-term investments................................................... (68.8) (75.5)
Other, net............................................................................ (15.7) 21.2
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Net cash flow from investing activities.................................................. (455.9) 463.2
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Financing Activities:
Borrowings from banks, net............................................................ 917.6 130.2
Repayment of Senior Notes............................................................. (400.0) --
Purchase of treasury stock and warrants............................................... (312.2) (9.8)
Proceeds from exercise of stock options and warrants.................................. 156.5 36.3
Payment of capital lease obligations.................................................. (55.3) (80.9)
Payment of Preferred Stock dividends.................................................. (45.0) (45.0)
Other, net............................................................................ (6.1) (9.9)
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Net cash flow from financing activities.................................................. 255.5 20.9
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Net increase in cash and cash equivalents............................................. 20.6 9.5
Cash and cash equivalents at beginning of the period.................................. 292.3 209.0
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Cash and cash equivalents at end of period............................................... $ 312.9 $ 218.5
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Supplemental cash flow information:
Cash payments for interest, net of amounts capitalized................................ $ 524.8 $ 669.0
Cash payments for income taxes........................................................ 640.0 65.4
Non cash investing and financing activities:
Property and equipment acquired under capitalized leases.............................. $ 33.5 $ 22.7
See notes to consolidated financial statements.
5
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 Theme Parks and (iv) Publishing. See Note 5
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") 128, "Earnings per Share" ("SFAS 128")
in the fourth quarter of 1997. For the three months ended September 30, 1998 and
1997, diluted earnings per share reflects the effect of the assumed exercise of
stock options as such effect is dilutive. For the nine months ended September
30, 1998 and 1997, the effect of the assumed exercise of stock options is
antidilutive and therefore, not reflected in diluted earnings (loss) per common
share. For each of the periods presented, the effect of the assumed conversion
of Preferred Stock is antidilutive and therefore, not reflected in diluted net
earnings (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 from continuing operations for each respective
period reflects earnings (loss) from continuing operations less preferred stock
dividends.
Comprehensive Income (Loss) -- The Company adopted SFAS 130, "Reporting
Comprehensive Income", effective January 1, 1998. Total comprehensive income
(loss) for the nine months ended September 30, 1998 and 1997 was a loss of
$118.8 million and income of $202.6 million, respectively. Total comprehensive
income (loss) for the Company includes net earnings (loss) and other
comprehensive income items including currency translation adjustments,
unrealized gain on securities and minimum pension liability adjustments.
6
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Recent Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board issued SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"), effective for fiscal years beginning after
June 15, 1999. The Company anticipates that due to its limited use of derivative
instruments, the adoption of SFAS 133 will not have a material effect on its
financial statements.
2) PENDING TRANSACTION
On May 17, 1998, the Company announced that it has signed an agreement to sell
its educational, professional, and reference publishing businesses to Pearson
plc for $4.6 billion. The Company will retain its consumer operations, including
the Simon & Schuster name. Net after-tax cash proceeds from the transaction,
which are estimated to be approximately $3.8 billion, will be used to repay
debt. The Company expects to complete this sale in the fourth quarter of 1998.
3) CHANGE IN ACCOUNTING METHOD FOR RENTAL INVENTORY
Effective April 1, 1998, Blockbuster adopted an accelerated method of amortizing
videocassette and game rental inventory. Blockbuster has adopted this new method
of amortization because it has implemented a new business model, including
revenue sharing agreements with Hollywood studios, which has dramatically
increased the number of videocassettes in the stores and is satisfying consumer
demand over a shorter period of time. Revenue sharing allows Blockbuster to
purchase videocassettes at a lower product cost than the traditional buying
arrangements, with a percentage of the net rental revenues shared with the
studios over a contractually determined period of time. As the new business
model results in a greater proportion of rental revenue over a shorter period of
time, Blockbuster has changed its method of amortizing rental inventory in order
to more closely match expenses in proportion with the anticipated revenues to be
generated therefrom.
Pursuant to the new accounting method, the Company records base stock
videocassettes (generally less than five copies per title for each store) at
cost and amortizes a portion of these costs on an accelerated basis over three
months, generally to $8 per unit, with the remaining base stock videocassette
costs amortized on a straight-line basis over 33 months to an estimated $4
salvage value. The cost of non-base stock videocassettes (generally greater than
five copies per title for each store) is amortized on an accelerated basis over
three months to an estimated $4 salvage value. Video games are amortized on an
accelerated basis over a 12 month period to an estimated $10 salvage value.
Revenue sharing payments are expensed when revenues are earned pursuant to the
applicable contractual arrangements.
The new method of accounting has been applied to rental inventory held as of
April 1, 1998. The adoption of the new method of amortization has been
accounted for as a change in accounting estimate effected by a change in
accounting principle and, accordingly, the Company recorded a pre-tax charge
of $436.7 million to operating expenses in the second quarter of 1998.
Approximately $424.3 million of the charge represents an adjustment to the
carrying value of
7
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
the rental tapes due to the new method of accounting and approximately $12.4
million represents a write-down of retail inventory.
The Company believes that the new amortization method developed for
Blockbuster's new business model will result in a better matching of revenue and
expense recognition. Under the new model, operating expense attributable to
videocassettes is comprised of revenue sharing payments which are expensed when
earned and amortization of up-front product costs. The calculation of the change
in operating expense attributable to videocassettes and games for the three and
nine months ended September 30, 1998 would not be meaningful because the method
of accounting applied prior to April 1, 1998 did not contemplate the new
business model.
Prior to April 1, 1998, videocassette rental inventory was recorded at cost and
amortized over its estimated economic life. Base stock videocassettes (1 to 4
copies per title for each store) were amortized over 36 months on a
straight-line basis. Non-base stock videocassettes (the fifth and succeeding
copies per title for each store) were amortized over six months on a
straight-line basis. Video game inventory was amortized on a straight-line basis
over a period of 12 to 24 months.
4) ACCOUNTS RECEIVABLE
As of September 30, 1998, the Company had outstanding an aggregate of $409.2
million under revolving receivable securitization programs. Proceeds from the
sale of these receivables 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.
5) DISCONTINUED OPERATIONS
On October 26, 1998, the Company completed the sale of its music retail stores
to Wherehouse Entertainment, Inc. for $115 million in cash and recorded a net
loss on the transaction of $138.5 million. This loss is reflected as part of the
loss on dispositions for the three and nine months ended September 30, 1998. The
Company had previously closed the remaining music stores that were not part of
the transaction.
During the third quarter of 1998, Spelling Entertainment Group Inc.
("Spelling") completed the sale of the development operations of Virgin
Interactive Entertainment Limited ("Virgin") to Electronic Arts Inc. for
$122.5 million in cash. In addition, on November 10, 1998, Spelling completed
the sale of all non-U.S. operations of Virgin to an investor group. Included
in the loss on dispositions for the three and nine months ended September 30,
1998 are additional reserves of $20.3 million, net of minority interest,
which provided for Virgin's operating losses through its disposition. The
Company also recorded a tax benefit related to the sale of Virgin of $134.0
million which is reflected as part of the loss on dispositions for the three
and nine months ended September 30, 1998.
8
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
For the three- and nine-month periods ended September 30, 1998 and 1997, the
Company has recognized the reversal of cable split-off reserves that were no
longer required.
The gain on dispositions for the three- and nine-month periods ended
September 30, 1997 includes the gain of approximately $416 million, net of
tax, from the sale of the Company's radio business to Chancellor Media Corp.
Summarized financial data of discontinued operations are as follows:
Music Radio Total
----- ----- -----
Results of discontinued operations:
For the three months ended September 30, 1998(1)
Revenues ....................................... $ 37.6 $ -- $ 37.6
Loss from operations before income taxes ....... (4.5) -- (4.5)
Benefit from income taxes ...................... 1.7 -- 1.7
Net loss ....................................... (2.8) -- (2.8)
For the three months ended September 30, 1997
Revenues ....................................... $ 136.3 $ -- $ 136.3
Loss from operations before income taxes ....... (13.7) -- (13.7)
Benefit from income taxes ...................... 5.1 -- 5.1
Net loss ....................................... (8.6) -- (8.6)
For the nine months ended September 30,1998(2)
Revenues ....................................... $ 293.5 $ -- $ 293.5
Loss from operations before income taxes ....... (20.9) -- (20.9)
Benefit from income taxes ...................... 8.0 -- 8.0
Net loss ....................................... (12.9) -- (12.9)
For the nine months ended September 30, 1997
Revenues ....................................... $ 418.2 $ 57.1 $ 475.3
Earnings (loss) from operations before
income taxes ................................ (107.1) 24.5 (82.6)
Benefit (provision) for income taxes ........... 40.1 (10.6) 29.5
Net earnings (loss) ............................ (67.0) 13.9 (53.1)
At September 30, 1998(3) At December 31, 1997(4)
------------------------ -----------------------
Financial position:
Current assets ........................... $ 269.0 $ 114.9
Net property and equipment ............... 88.3 14.5
Other assets ............................. 40.5 153.1
Total liabilities ........................ (467.0) (293.0)
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Net liabilities of discontinued operations $ (69.2) $ (10.5)
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(1) Results of operations reflect the music business for the
period July 1 through August 10.
(2) Results of operations reflect the music business for the
period January 1 through August 10.
(3) Financial position data reflects Blockbuster Music and
Interactive game businesses.
(4) Financial position data reflects Interactive game businesses.
9
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
6) BLOCKBUSTER CHARGES
In the second quarter of 1997, Blockbuster recorded a pre-tax charge of $322.8
million (the "Blockbuster charge"). The Blockbuster charge consisted of
operating expenses of approximately $247.5 million, associated with the
reduction in the carrying value of excess inventory and the reorganizing and
closing of underperforming Blockbuster stores in certain international markets.
Approximately $71.8 million of this charge relates to the music retail stores
and has been presented as part of discontinued operations. The Blockbuster
charge also consists of depreciation expense attributable to the write-off of
fixed assets of $45.9 million, of which approximately $0.8 million has been
presented as part of discontinued operations, and write-offs attributable to
international joint ventures accounted for under the equity method of $29.4
million. With respect to the 1996 Blockbuster restructuring charge, the Company
has paid and charged approximately $34.8 million against the severance liability
and other exit costs associated with the Dallas relocation through September 30,
1998.
7) INVENTORIES
September 30, 1998 December 31, 1997
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Prerecorded videocassettes ................................... $ 385.0 $ 559.2
Videocassette rental inventory................................ 389.2 722.8
Publishing:
Finished goods............................................. 310.1 301.2
Work in process............................................ 34.5 30.3
Material and supplies...................................... 17.9 23.3
Other......................................................... 25.6 20.6
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1,162.3 1,657.4
Less current portion....................................... 910.4 934.8
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251.9 722.6
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Theatrical and television inventory:
Theatrical and television productions:
Released............................................ 1,733.5 1,736.0
Completed, not released............................. 6.7 17.8
In process and other................................ 313.0 341.4
Program rights............................................. 1,238.9 1,150.7
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3,292.1 3,245.9
Less current portion....................................... 1,307.5 1,317.9
---------- ----------
1,984.6 1,928.0
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Total Current Inventory....................................... $2,217.9 $ 2,252.7
---------- ----------
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Total Non-Current Inventory................................... $ 2,236.5 $ 2,650.6
---------- ----------
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10
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
8) LONG-TERM DEBT
On February 15, 1998, the Company redeemed all $150.0 million of Viacom
International Inc.'s outstanding 9.125% Senior Subordinated Notes due 1999.
On February 17, 1998, the Company retired all $150.0 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 $109.0 million to $361.0 million.
On May 15, 1998, the Company redeemed all $100.0 million of Viacom
International Inc.'s outstanding 8.75% Senior Subordinated Reset Notes due
2001 at a redemption price equal to 101% of the principal amount.
At September 30, 1998, the Company's scheduled maturities of indebtedness
through December 31, 2002, assuming full utilization of the credit
agreements are $7.0 million (1998), $863.3 million (1999), $1.7 billion
(2000), $2.0 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.
9) TREASURY STOCK
On August 31, 1998, the Company initiated a repurchase program to acquire up
to $1.75 billion of one or more classes of the Company's equity securities.
As of September 30, 1998, the Company repurchased 6,000 shares of Class A
Common Stock, 6,858,200 shares of Class B Common Stock and 1,416,000 Viacom
Five-Year Warrants, expiring on July 7, 1999 for approximately $423.9
million in the aggregate. The cost of the acquired treasury stock has been
reflected separately as a reduction to shareholders' equity. The acquired
warrants have been canceled and the cost has been reflected as a reduction
to additional paid-in capital.
At September 30, 1998 and December 31, 1997, respectively, there were
10,106,695 and 11,522,695 outstanding Viacom Five-Year Warrants, expiring
July 7, 1999. The decrease in the outstanding Viacom Five-Year Warrants is
attributable to the repurchase program.
As of the close of business on November 13, 1998, the Company repurchased
6,000 shares of Class A Common Stock, 12,358,100 shares of Class B Common
Stock and 3,026,400 Viacom Five-Year Warrants, expiring on July 7, 1999,
for approximately $751.0 million in the aggregate.
11
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
10) COMMITMENTS AND CONTINGENCIES
The commitments of the Company for program license fees, which are not
reflected in the balance sheet as of September 30, 1998 and are estimated to
aggregate approximately $1.3 billion, principally reflect Showtime Networks
Inc.'s ("SNI's") commitments of approximately $1.2 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 and original programming which
are not yet available for premium television exhibition and, in many cases,
have not yet been produced.
11) 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 55.9% 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 rates would have been 33.2% for 1998 and
43.7% for 1997.
Due to the unusual nature of the 1998 second quarter charge associated with
the change in accounting for rental tape amortization and the 1997
Blockbuster charge, the full income tax effects are reflected in the second
quarter 1998 and second quarter 1997 tax provisions, respectively, and are
excluded from the estimated annual effective tax rates.
12
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
12) 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
Viacom Inc., 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 September 30, 1998
----------------------------------------------------------------------------
Non- The
Viacom Viacom Guarantor Company
Inc. International Affiliates Eliminations Consolidated
-------- -------------- ------------ ------------- -------------
Revenues..................................... $ 7.6 $ 458.4 $ 3,556.2 $ (3.1) $ 4,019.1
Expenses:
Operating................................ 5.9 121.9 2,312.7 (3.1) 2,437.4
Selling, general and administrative...... 0.3 172.5 609.4 -- 782.2
Depreciation and amortization............ 0.3 21.7 211.2 -- 233.2
-------- -------- ---------- ---------- ----------
Total expenses...................... 6.5 316.1 3,133.3 (3.1) 3,452.8
-------- -------- ---------- ----------- ----------
Operating income ............................ 1.1 142.3 422.9 -- 566.3
Other income (expense):
Interest expense, net.................... (133.1) (7.7) (12.9) -- (153.7)
Other items, net......................... (6.0) (1.7) (4.9) -- (12.6)
--------- --------- ---------- ---------- ----------
Earnings (loss) from continuing operations
before income taxes...................... (138.0) 132.9 405.1 -- 400.0
Benefit (provision) for income taxes..... 56.6 (54.5) (242.6) (240.5)
Equity in earnings (loss) of affiliated
companies, net of tax.................. 219.8 (1.4) (6.2) (215.1) (2.9)
Minority interest........................ -- (0.1) 0.6 -- 0.5
-------- --------- ---------- ---------- ----------
Earnings from continuing operations.......... 138.4 76.9 156.9 (215.1) 157.1
Discontinued operations:
Loss, net of tax......................... -- -- (2.8) -- (2.8)
Gain (loss) on dispositions.............. -- 142.9 (158.8) -- (15.9)
-------- -------- ----------- ---------- ---------
Net earnings................................. 138.4 219.8 (4.7) (215.1) 138.4
Cumulative convertible preferred
stock dividend requirement............. (15.0) -- -- -- (15.0)
--------- -------- ----------- --------- -----------
Net earnings (loss) attributable to common
stock.................................... $ 123.4 $ 219.8 $ (4.7) $ (215.1) $ 123.4
-------- -------- ---------- ----------- ----------
-------- -------- ---------- ----------- ----------
13
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Nine Months Ended September 30, 1998
------------------------------------------------------------------------------
Non- The
Viacom Viacom Guarantor Company
Inc. International Affiliates Eliminations Consolidated
---------- ------------- ---------- ------------ ------------
Revenues..................................... $ 28.2 $ 1,196.3 $ 8,966.0 $ (15.9) $10,174.6
Expenses:
Operating................................ 23.3 385.2 6,457.1 (15.9) 6,849.7
Selling, general and administrative...... 1.7 443.4 1,679.2 -- 2,124.3
Depreciation and amortization............ 1.5 63.4 623.1 -- 688.0
----------- ----------- ----------- ----------- -----------
Total expenses...................... 26.5 892.0 8,759.4 (15.9) 9,662.0
----------- ----------- ----------- ------------ -----------
Operating income............................. 1.7 304.3 206.6 -- 512.6
Other income (expense):
Interest expense, net.................... (397.9) (28.7) (41.6) -- (468.2)
Other items, net......................... (15.1) 6.4 (16.0) -- (24.7)
------------ ------------ ------------ ----------- ------------
Earnings (loss) from continuing operations
before income taxes...................... (411.3) 282.0 149.0 -- 19.7
Benefit (provision) for income taxes..... 168.6 (115.6) (165.0) -- (112.0)
Equity in earnings (loss) of affiliated
companies, net of tax.................. 101.8 (208.9) (31.4) 117.3 (21.2)
Minority interest........................ -- 1.1 -- -- 1.1
----------- ----------- ------------ ----------- -----------
Loss from continuing operations.............. (140.9) (41.4) (47.4) 117.3 (112.4)
Discontinued operations:
Loss, net of tax......................... -- -- (12.9) -- (12.9)
Gain (loss) on dispositions.............. -- 143.2 (158.8) -- (15.6)
----------- ----------- ------------ ----------- ------------
Net earnings (loss).......................... (140.9) 101.8 (219.1) 117.3 (140.9)
Cumulative convertible preferred
stock dividend requirement............. (45.0) -- -- -- (45.0)
------------ ----------- ------------ ----------- ------------
Net earnings (loss) attributable to
common stock............................. $ (185.9) $ 101.8 $ (219.1) $ 117.3 $ (185.9)
------------ ----------- ------------ ----------- ------------
------------ ----------- ------------ ----------- ------------
14
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Three Months Ended September 30, 1997
-------------------------------------------------------------------------
Non- The
Viacom Viacom Guarantor Company
Inc. International Affiliates Eliminations Consolidated
---------- ------------- ---------- ------------ ------------
Revenues....................................... $ 6.8 $ 380.6 $ 3,132.2 $ (8.4) $ 3,511.2
Expenses:
Operating.................................. 6.0 118.7 2,038.6 (8.4) 2,154.9
Selling, general and administrative........ 0.7 135.5 546.3 -- 682.5
Depreciation and amortization.............. 0.8 17.3 201.5 -- 219.6
----------- ------------ ----------- ---------- ------------
Total expenses........................ 7.5 271.5 2,786.4 (8.4) 3,057.0
----------- ------------ ----------- ---------- -----------
Operating income (loss)........................ (0.7) 109.1 345.8 -- 454.2
Other income (expense):
Interest expense, net...................... (160.2) (12.3) (17.1) -- (189.6)
Other items, net........................... -- (0.2) (2.1) -- (2.3)
----------- ------------- ------------ ---------- -------------
Earnings (loss) from continuing operations
before income taxes......................... (160.9) 96.6 326.6 -- 262.3
Benefit (provision) for income taxes....... 67.6 (40.6) (248.3) -- (221.3)
Equity in earnings (loss) of affiliated
companies, net of tax.................... 527.6 56.1 (1.9) (600.2) (18.4)
Minority interest.......................... -- (0.3) 4.7 -- 4.4
----------- ------------- ----------- --------- ------------
Earnings from continuing operations............ 434.3 111.8 81.1 (600.2) 27.0
Discontinued operations:
Loss, net of tax .......................... -- -- (8.6) -- (8.6)
Gain on dispositions....................... -- 415.9 -- -- 415.9
----------- ------------ ----------- --------- ------------
Net earnings................................... 434.3 527.7 72.5 (600.2) 434.3
Cumulative convertible preferred
stock dividend requirement............... (15.0) -- -- -- (15.0)
------------ ------------ ----------- --------- ------------
Net earnings attributable to common stock...... $ 419.3 $ 527.7 $ 72.5 $ (600.2) $ 419.3
------------ ------------ ----------- --------- ------------
------------ ------------ ----------- --------- ------------
15
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Nine Months Ended September 30, 1997
-------------------------------------------------------------------------
Non- The
Viacom Viacom Guarantor Company
Inc. International Affiliates Eliminations Consolidated
--------- ------------- ---------- ------------ ------------
Revenues .................................. $ 15.1 $ 983.1 $ 8,199.3 $ (19.7) $ 9,177.8
Expenses:
Operating ............................. 12.0 326.5 5,716.3 (19.7) 6,035.1
Selling, general and administrative ... 1.2 362.8 1,509.0 -- 1,873.0
Depreciation and amortization ......... 1.4 49.2 637.8 -- 688.4
--------- -------- ---------- -------- ----------
Total expenses ................... 14.6 738.5 7,863.1 (19.7) 8,596.5
--------- -------- ---------- -------- ----------
Operating income .......................... 0.5 244.6 336.2 -- 581.3
Other income (expense):
Interest expense, net ................. (492.4) (44.8) (50.9) -- (588.1)
Other items, net ...................... -- (1.8) 64.5 -- 62.7
--------- -------- ---------- -------- ----------
Earnings (loss) from continuing operations
before income taxes ................... (491.9) 198.0 349.8 -- 55.9
Benefit (provision) for income taxes .. 206.6 (83.2) (265.9) -- (142.5)
Equity in earnings (loss) of affiliated
companies, net of tax ............... 505.6 (39.4) (28.8) (510.4) (73.0)
Minority interest ..................... -- (1.3) 5.8 -- 4.5
--------- -------- ---------- -------- ----------
Earnings (loss) from continuing operations 220.3 74.1 60.9 (510.4) (155.1)
Discontinued operations:
Earnings (loss), net of tax ........... 0.3 2.7 (56.1) -- (53.1)
Gain on dispositions .................. -- 428.8 -- -- 428.8
--------- -------- ---------- -------- ----------
Net earnings .............................. 220.6 505.6 4.8 (510.4) 220.6
Cumulative convertible preferred
stock dividend requirement .......... (45.0) -- -- -- (45.0)
--------- -------- ---------- -------- ----------
Net earnings attributable to
common stock .......................... $ 175.6 $ 505.6 $ 4.8 $ (510.4) $ 175.6
--------- -------- ---------- -------- ----------
--------- -------- ---------- -------- ----------
16
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
September 30, 1998
-------------------------------------------------------------------------------
Non- The
Viacom Viacom Guarantor Company
Inc. International Affiliates Eliminations Consolidated
------- ------------- ---------- ------------ ------------
Assets
Current Assets:
Cash and cash equivalents ........ $ 8.9 $ 158.6 $ 145.4 $ -- $ 312.9
Receivables, net ................. 6.2 389.2 2,165.0 (101.3) 2,459.1
Inventory ........................ 13.9 135.6 2,068.4 -- 2,217.9
Other current assets ............. 1.2 107.7 716.3 (5.3) 819.9
------------ ----------- ------------- -------------- -------------
Total current assets .......... 30.2 791.1 5,095.1 (106.6) 5,809.8
------------ ----------- ------------- -------------- -------------
Property and equipment, at cost ........ 13.4 545.6 3,949.1 -- 4,508.1
Less accumulated depreciation .... 2.8 171.8 1,226.5 -- 1,401.1
------------ ----------- ------------- ------------- --------------
Net property and equipment ....... 10.6 373.8 2,722.6 -- 3,107.0
------------ ----------- ------------- ------------- --------------
Inventory .............................. -- 378.6 1,857.9 -- 2,236.5
Intangibles, at amortized cost ......... 110.2 535.4 13,840.6 -- 14,486.2
Investments in consolidated subsidiaries 5,813.8 17,741.5 -- (23,555.3) --
Other assets ........................... 85.9 247.7 1,784.3 57.7 2,175.6
------------ ----------- ------------- ------------- --------------
$ 6,050.7 $ 20,068.1 $ 25,300.5 $ (23,604.2) $ 27,815.1
------------ ----------- ------------- ------------- --------------
------------ ----------- ------------- ------------- --------------
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable .................. $ 54.1 $ 58.0 $ 680.7 $ (68.1) $ 724.7
Accrued compensation .............. -- 104.1 402.3 -- 506.4
Participants' share, residuals and
royalties payable ............... -- -- 1,207.7 -- 1,207.7
Income tax payable ................ -- 620.4 (.2) (536.1) 84.1
Current portion of long-term debt . -- 7.4 81.8 -- 89.2
Accrued expenses and other ........ 145.5 431.5 1,297.1 (54.0) 1,820.1
------------ ------------ ------------- -------------- --------------
Total current liabilities ....... 199.6 1,221.4 3,669.4 (658.2) 4,432.2
------------ ------------ ------------- -------------- --------------
Long-term debt ......................... 5,988.2 1,743.5 538.6 -- 8,270.3
Other liabilities ...................... (21,958.5) 4,903.7 10,909.9 8,251.9 2,107.0
Shareholders' Equity:
Preferred stock ................... 1,200.0 102.9 242.0 (344.9) 1,200.0
Common Stock ...................... 3.6 198.6 598.4 (797.0) 3.6
Additional paid-in capital ........ 10,535.1 6,953.3 9,503.9 (16,457.2) 10,535.1
Retained earnings ................. 10,728.4 4,842.5 (69.0) (13,598.8) 1,903.1
Accumulated other comprehensive
income (loss) ................... -- 102.2 (92.7) -- 9.5
------------- ------------ ------------- ------------- --------------
22,467.1 12,199.5 10,182.6 (31,197.9) 13,651.3
Less treasury stock, at cost ...... 645.7 -- -- -- 645.7
------------ ----------- ------------- ------------- --------------
Total shareholders' equity ...... 21,821.4 12,199.5 10,182.6 (31,197.9) 13,005.6
------------- ------------ ------------- -------------- --------------
$ 6,050.7 $ 20,068.1 $ 25,300.5 $ (23,604.2) $ 27,815.1
------------- ------------ ------------- -------------- --------------
------------- ------------ ------------- -------------- --------------
17
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
December 31, 1997
-----------------------------------------------------------------------------
Non- The
Viacom Viacom Guarantor Company
Inc. International Affiliates Eliminations 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:
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
-------- ---------- ----------- ---------- -----------
-------- ---------- ----------- ---------- -----------
18
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Nine Months Ended September 30, 1998
-----------------------------------------------------------------------
Non- The
Viacom Viacom Guarantor Company
Inc. International Affiliates Eliminations Consolidated
--------- ------------- ---------- ------------ ------------
Net cash flow from operating activities ....... $(101.8) $(805.1) $1,127.9 $ -- $221.0
---------- -------- --------- ---------- --------
Investing Activities:
Capital expenditures ....................... -- (84.7) (332.5) -- (417.2)
Acquisitions, net of cash acquired ......... (12.0) -- (91.9) -- (103.9)
Proceeds from dispositions ................. -- -- 122.5 -- 122.5
Investments in and advances to
affiliated companies .................... -- (1.0) (65.5) -- (66.5)
Proceeds from sale of cost investment ...... -- 19.2 -- -- 19.2
Proceeds from sale of short-term investments -- 74.5 -- -- 74.5
Purchases of short-term investments ........ -- (68.8) -- -- (68.8)
Other, net ................................. -- (9.7) (6.0) -- (15.7)
---------- -------- --------- ---------- --------
Net cash flow from investing activities ....... (12.0) (70.5) (373.4) -- (455.9)
---------- -------- --------- ---------- --------
Financing Activities:
Borrowings from banks, net ................. 1,172.1 (109.0) (145.5) -- 917.6
Repayment of Senior Notes .................. (150.0) (250.0) -- -- (400.0)
Purchase of treasury stock & warrants ...... (312.2) -- -- -- (312.2)
Proceeds from exercise of stock options
and warrants ............................. 156.5 -- -- -- 156.5
Payment of capital lease obligations ....... -- (20.6) (34.7) -- (55.3)
Payment of Preferred Stock dividends ....... (45.0) -- -- -- (45.0)
Increase (decrease) in intercompany
payables ................................. (698.8) 1,322.3 (623.5) -- --
Other, net ................................. -- -- (6.1) -- (6.1)
---------- -------- --------- ---------- --------
Net cash flow from financing activities ....... 122.6 942.7 (809.8) -- 255.5
---------- -------- --------- ---------- --------
Net increase (decrease) in cash
and cash equivalents ..................... 8.8 67.1 (55.3) -- 20.6
Cash and cash equivalents at beginning
of period ................................ .1 91.5 200.7 -- 292.3
---------- -------- --------- ---------- --------
Cash and cash equivalents at end of period .... $ 8.9 $ 158.6 $ 145.4 $ -- $312.9
---------- -------- --------- ---------- --------
---------- -------- --------- ---------- --------
19
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Nine Months Ended September 30, 1997
-------------------------------------------------------------------------
Non- The
Viacom Viacom Guarantor Company
Inc. International Affiliates Eliminations Consolidated
--------- ------------- ------------ ------------- -------------
Net cash flow from operating activities.......... $ 30.6 $ (213.1) $ (292.1) $ -- $ (474.6)
-------- -------------- ----------- ---------- ----------
Investing Activities:
Capital expenditures............................ -- (14.1) (387.0) -- (401.1)
Acquisitions, net of cash acquired.............. -- -- (70.8) -- (70.8)
Proceeds from dispositions...................... -- 1,111.9 -- -- 1,111.9
Investments in and advances to
affiliated companies........................ -- (31.6) (225.9) -- (257.5)
Proceeds from sale of short-term investments.... -- 135.0 -- -- 135.0
Purchases of short-term investments............. -- (75.5) -- -- (75.5)
Other, net...................................... (9.0) (15.5) 45.7 -- 21.2
------------ -------------- ---------- ---------- ---------
Net cash flow from investing activities........... (9.0) 1,110.2 (638.0) -- 463.2
------------ -------------- ----------- ----------- ---------
Financing Activities:
Borrowings from banks, net...................... 256.2 (148.0) 22.0 -- 130.2
Repayment of Senior Notes....................... -- -- -- -- --
Purchase of treasury stock & warrants........... (9.8) -- -- -- (9.8)
Proceeds from exercise of stock options
and warrants................................ 36.3 -- -- -- 36.3
Payment of capital lease obligations............ -- (18.8) (62.1) -- (80.9)
Payment of Preferred Stock dividends............ (45.0) -- -- -- (45.0)
Increase (decrease) in intercompany
payables ................................... (265.5) (734.0) 999.5 -- --
Other, net...................................... (9.8) (.1) -- -- (9.9)
------------ -------------- ----------- ---------- ---------
Net cash flow from financing activities........... (37.6) (900.9) 959.4 -- 20.9
------------ -------------- ----------- ----------- ---------
Net increase (decrease) in cash and
cash equivalents............................ (16.0) (3.8) 29.3 -- 9.5
Cash and cash equivalents at beginning
of period................................... 19.0 61.2 128.8 -- 209.0
------------ -------------- ----------- ----------- ---------
Cash and cash equivalents at end of period........ $ 3.0 $ 57.4 $ 158.1 $ -- $ 218.5
------------ -------------- ----------- ----------- ---------
------------ -------------- ----------- ----------- ---------
20
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 and the nine months ended September 30, 1998 and
1997. Results for each period presented exclude contributions from Blockbuster
Music, the Company's interactive game businesses, including Virgin, and its
radio business (See Note 5 of Notes to Consolidated Financial Statements).
Three months ended Percent Nine months ended Percent
September 30, B/(W) September 30, B/(W)
-------------- ------- -------------- ------
1998 1997 1998 1997
---- ---- ---- ----
(In millions) (In millions)
Revenues:
Networks and Broadcasting .. $ 759.5 $ 681.2 11% $ 2,127.1 $1,883.5 13%
Entertainment .............. 1,216.1 979.8 24 3,157.2 2,843.0 11
Video and Theme Parks ...... 1,213.0 1,025.0 18 3,198.2 2,755.6 16
Publishing ................. 887.0 859.8 3 1,808.5 1,794.0 1
Intercompany ............... (56.5) (34.6) (63) (116.4) (98.3) (18)
--------- --------- --------- ---------
Total ............. $4,019.1 $3,511.2 14 $10,174.6 $9,177.8 11
--------- --------- --------- ---------
--------- --------- --------- ---------
Operating income (loss): (a)
Networks and Broadcasting .. $ 225.9 $ 201.3 12% $ 540.5 $ 493.5 10%
Entertainment .............. 148.2 70.2 111 342.6 227.4 51
Video and Theme Parks ...... 69.9 44.8 56 (311.6) (145.0) (115)
Publishing ................. 176.1 191.7 (8) 79.8 150.5 (47)
Corporate .................. (53.8) (53.8) -- (138.7) (145.1) 4
--------- --------- --------- ---------
Total ............. $ 566.3 $ 454.2 25 $ 512.6 $ 581.3 (12)
--------- --------- --------- ---------
--------- --------- --------- ---------
(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.
21
EBITDA
The following table sets forth EBITDA (defined as operating income (loss) before
depreciation and amortization) for the three months and nine months ended
September 30, 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. 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 Nine months ended Percent
September 30, B/(W) September 30, B/(W)
-------------------- ------- ------------------- --------
1998 1997 1998 1997
---- ---- ---- ----
(In millions) (In millions)
EBITDA:
Networks and Broadcasting....... $ 265.7 $ 233.2 14% $ 655.1 $ 593.3 10%
Entertainment................... 183.6 103.1 78 447.2 325.2 38
Video and Theme Parks........... 177.1 151.4 17 10.5 209.6 (95)
Publishing...................... 221.1 231.3 (4) 209.5 268.2 (22)
Corporate....................... (48.0) (45.2) (6) (121.7) (126.6) 4
--------- --------- --------- ---------
Total.................. $ 799.5 $ 673.8 19 $1,200.6 $1,269.7 (5)
--------- --------- --------- ---------
--------- --------- --------- ---------
RESULTS OF OPERATIONS
Revenues increased 14% to $4.02 billion and 11% to $10.17 billion for the
three-and nine-month periods ended September 30, 1998, respectively, from $3.51
billion and $9.18 billion for the same prior-year periods. Revenue increases
were driven by the Entertainment segment which reported higher feature film
revenues driven by increased domestic home video revenues for the quarter and
higher domestic theatrical and home video revenues for the nine months. Revenue
increases were also posted by the Video and Theme Parks segment, led by
Blockbuster's worldwide same-store rental revenue increases of 16% for the third
quarter and 13% for the nine months then ended.
Total expenses increased 13% to $3.45 billion and 12% to $9.66 billion for the
quarter and nine-month period ended September 30, 1998, respectively, from $3.06
billion and $8.60 billion for the same prior-year periods. For the quarter,
expenses principally reflect normal increases associated with revenue growth.
For the nine months, expense increases also included the Blockbuster charge of
$436.7 million associated with an accounting change in the second quarter of
1998. In 1997, expenses reflect the impact of Blockbuster reducing the carrying
value of excess retail inventory and reorganizing and closing underperforming
stores in certain international markets.
For the three months ended September 30, 1998, operating income increased 25% to
$566.3 million from $454.2 million for the same prior-year period reflecting the
revenue growth as described above. For the nine months ended September 30, 1998,
operating income decreased 12% to $512.6 million from $581.3 million for the
same prior-year period. Operating results for the nine-month periods reflect the
Blockbuster charges described above. Excluding the impact of the Blockbuster
charges from the respective 1998 and 1997 nine-month periods, EBITDA and
operating income increased 13% to $1.64 billion and 18% to $949.4 million,
respectively, for the nine months ended September 30, 1998.
22
Segment Results of Operations
Networks and Broadcasting (Basic Cable and Premium Subscription Television
Program Services and Television Stations)
Three months ended Percent Nine months ended Percent
September 30, B/(W) September 30, B/(W)
------------------ ------- ----------------- -------
1998 1997 1998 1997
---- ---- ---- ----
(In millions) (In millions)
Revenues $ 759.5 $ 681.2 11% $2,127.1 $1,883.5 13%
Operating Income $ 225.9 $ 201.3 12 $ 540.5 $ 493.5 10
EBITDA $ 265.7 $ 233.2 14 $ 655.1 $ 593.3 10
The Networks and Broadcasting segment is 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.
For the third quarter of 1998, MTVN revenues of $478.3 million, EBITDA of $206.8
million and operating income of $184.9 million increased 19%, 18% and 16%,
respectively, over the same three-month period last year. For the nine months
ended September 30, 1998, MTVN revenues of $1.26 billion, EBITDA of $487.7
million and operating income of $426.6 million increased 21%, 17% and 15%,
respectively, over the same nine-month period last year. The increase in MTVN
revenues principally reflects higher advertising and affiliate revenues.
Advertising revenue growth was driven by rate increases at Nickelodeon and VH1
and higher unit volume at MTV. MTVN's EBITDA and operating income growth was
driven by the increased revenues partially offset primarily by increased
programming and production expenses as well as operating losses of $6.7 million
and $21.5 million for MTV Asia for the three- and nine-month periods ended
September 30, 1998, respectively, which were previously accounted for under the
equity method.
SNI's revenues, EBITDA and operating income increased 1%, 12% and 16% for the
third quarter of 1998, respectively, and 5%, 12% and 30% for the nine months
ended September 30, 1998, respectively, over the same prior-year periods.
Operating results reflect revenue increases attributable to the continued
growth of direct broadcasting satellite subscriptions partially offset by
increased advertising and marketing costs associated with the No Limits
branding campaign. SNI's subscriptions increased over the prior year by
approximately 1.2 million to 18.8 million subscriptions at September 30, 1998.
For the third quarter of 1998, PSG's revenues, EBITDA and operating income
decreased 1%, 7% and 19%, respectively, from the same prior-year period, and for
the nine months ended September 30, 1998, PSG's revenues increased 1% while
EBITDA and operating income decreased 14% and 27%, respectively, from the same
prior-year period. Operating results primarily reflect decreased advertising
revenues and the impact of swapping for television stations with greater growth
potential.
23
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 could have an adverse effect on revenues.
Entertainment (Motion Pictures, Television Programming, Movie Theaters, and
Music Publishing)
Three months ended Percent Nine months ended Percent
September 30, B/(W) September 30, B/(W)
------------------ ------- ----------------- -------
1998 1997 1998 1997
---- ---- ---- ----
(In millions) (In millions)
Revenues $ 1,216.1 $ 979.8 24% $ 3,157.2 $ 2,843.0 11%
Operating Income $ 148.2 $ 70.2 111 $ 342.6 $ 227.4 51
EBITDA $ 183.6 $ 103.1 78 $ 447.2 $ 325.2 38
The Entertainment segment is principally comprised of Paramount Pictures,
Paramount Television and Spelling Entertainment Group Inc. ("Spelling").
Entertainment revenues for the three months ended September 30, 1998 were
higher than the same period last year principally reflecting higher revenues
at Paramount attributable to the successful domestic home video release of
Titanic. The revenue growth for the quarter was partially offset as
television syndication revenues did not match the prior year's quarter, which
included the successful first time availability of Frasier. For the nine
months ended September 30, 1998, revenues were higher than the same period
last year principally due to higher features and theater revenues, partially
offset by lower syndication revenues and the recognition in 1997 of license
fees from Paramount's long-term foreign licensing agreements.
Paramount's EBITDA and operating income increased 44% and 56%, respectively,
for the third quarter and 26% and 32%, respectively, for the nine months ended
September 30, 1998 over the same prior-year periods. The increased operating
results for the quarter were principally attributable to the revenue
contributions from the domestic home video release of Titanic. Results for the
nine months also reflect domestic theatrical revenue contributions from Titanic
along with the successful theatrical releases of Deep Impact and The Truman Show
and higher profit for television library programs, partially offset by higher
deficits attributable to the increased number and mix of network pilots
produced. For the nine months, Paramount's 1997 EBITDA and operating income
included earnings attributable to the long-term foreign licensing agreements.
For the third quarter and nine months ended September 30, 1998, Spelling's
revenues of $157.1 million and $433.3 million increased 45% and 2%,
respectively. The increased revenues for the quarter reflect the licensing
of Spelling's classic video library to Artisan Entertainment and the sale of
television library product to Pax TV. For the nine-month period, increased
revenues were offset by Spelling's exit from the feature film and video
distribution businesses. Spelling posted EBITDA of $25.9 million and $40.7
million for the quarter and nine months ended September 30, 1998,
respectively, compared to a loss before interest, taxes, depreciation and
amortization of $6.4 million for the quarter and EBITDA of $1.9 million for
the nine months ended September 30, 1997. The improved results at Spelling
reflect the decision to exit the feature film business and the resulting
cessation of production, acquisition and distribution of new feature films.
Additionally, Spelling's future programming expenditures are expected to
increase from 1997 levels in connection with its projected increased
production levels.
24
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 also 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 Theme Parks (Home Video and Theme Parks)
Three months ended Percent Nine months ended Percent
September 30, B/(W) September 30, B/(W)
------------------ ------- ----------------- -------
1998 1997 1998 1997
---- ---- ---- ----
(In millions) (In millions)
Revenues $1,213.0 $1,025.0 18% $3,198.2 $2,755.6 16%
Operating Income(loss) $ 69.9 $ 44.8 56 $ (311.6) $ (145.0) (115)
EBITDA $ 177.1 $ 151.4 17 $ 10.5 $ 209.6 (95)
The Video and Theme Parks segment is comprised principally of Blockbuster Video
and Paramount Parks. The revenue increases for the quarter and nine months ended
September 30, 1998 reflect Blockbuster Video worldwide same-store sales
increases of 18% and 13% for the quarter and nine months ended September 30,
1998 and the increased number of Company-owned video stores in operation in 1998
as compared to 1997. Blockbuster Video, which added 80 stores in the third
quarter of 1998, ended the quarter with 6,233 stores, a net increase of 292
stores from September 30, 1997.
The increase in EBITDA for the third quarter reflects the availability of more
new release tapes made possible by revenue sharing agreements with Hollywood
studios. The decrease in EBITDA for the nine month period reflects the
Blockbuster charge of $436.7 million taken in the second quarter of 1998 to
adjust the carrying value of videocassette and game rental inventory under a new
method of amortization as a result of the implementation of Blockbuster's new
business model.
Theme Parks revenues, EBITDA and operating income increased $20.4 million, $4.8
million and $3.7 million, respectively, for the third quarter, and $42.7
million, $10.8 million and $7.1 million, respectively, for the nine months ended
September 30, 1998, from the same prior-year periods. The revenue increases
reflect increased attendance driven by new branded attractions and
entertainment.
The Company's home video business may be affected by a variety of factors,
including but not limited to, general economic trends in the movie, home video
industry, 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
business. For home video the peak rental times tend to mirror school vacation
patterns (i.e., summer, spring break and Christmas).
25
Publishing (Education; Consumer; Business and Professional; Reference; and
International Groups)
Three months ended Percent Nine months ended Percent
September 30, B/(W) September 30, B/(W)
------------------ ------- ----------------- -------
1998 1997 1998 1997
---- ---- ---- ----
(In millions) (In millions)
Revenues $ 887.0 $ 859.8 3% $ 1,808.5 $ 1,794.0 1%
Operating Income $ 176.1 $ 191.7 (8) $ 79.8 $ 150.5 (47)
EBITDA $ 221.1 $ 231.3 (4) $ 209.5 $ 268.2 (22)
On May 17, 1998, the Company announced that it has signed an agreement to sell
its educational, professional and reference publishing operations to Pearson plc
for $4.6 billion. The Company will retain its consumer operations including the
Simon & Schuster name. Net after tax cash proceeds from the transaction, which
are estimated to be approximately $3.8 billion, will be used to repay debt. The
Company expects to complete this sale in the fourth quarter of 1998.
Revenues for the quarter and nine months ended September 30, 1998 were driven
primarily by strong Higher Education sales partially offset by decreased
International sales due mainly to the Asian economic downturn and shortfalls at
Macmillan Computer Publishing. Operating results decreased for the quarter and
nine months as volume related growth in Higher Education was offset by a
non-recurring prior year licensing agreement, fewer computer publishing releases
and the effects of the continued weakness in the Asian market. The Consumer
Group bestsellers for the third quarter included Bag of Bones by Stephen King,
Flood Tide by Clive Cussler and Come Spring by Julie Garwood.
Other Income and Expense Information
Discontinued operations
For the three and nine months ended September 30, 1998, discontinued operations
reflect the results of operations, net of tax, of music retail stores prior to
the sale on October 26, 1998 and the recognized loss on this sale, additional
losses recognized for Virgin operations prior to disposal, the tax benefit
associated with the disposal of Virgin and the reversal of unutilized cable
split-off reserves.
For the three months ended September 30, 1997, discontinued operations
reflect a gain of approximately $416 million, net of tax, from the sale of
the Company's radio business. For the nine months ended September 30, 1997,
discontinued operations principally reflect the realized gain on the sale of
the Company's radio business and its results of operations, net of tax, prior
to its disposal. The prior periods presented reflect the results of
operations, net of tax, of music retail stores. (See Note 5 of Notes to
Consolidated Financial Statements).
Corporate expenses
Corporate expenses, including depreciation expense, decreased 4% to $138.7
million for the nine months ended September 30, 1998 over the comparable nine-
month period principally reflecting a decrease in general and administrative and
litigation expenses.
26
Interest expense, net
For the three- and nine-month periods ended September 30, 1998, net interest
expense decreased 19% to $153.7 million and 20% to $468.2 million, respectively.
The Company had approximately $8.4 billion and $10.0 billion principal amount of
debt outstanding (including current maturities) as of September 30, 1998, and
September 30, 1997, respectively, at a weighted average interest rate of 7.4%
for both periods.
Other items, net
Other items, net of $24.7 million loss for the nine months ended September 30,
1998, principally reflects foreign exchange losses and losses on the early
redemption of notes. Other items, net of $62.7 million for the nine months ended
September 30, 1997, principally reflects a gain associated with the exchange of
certain television stations offset by the write-off of certain investments held
at cost.
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 55.9% 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 rates would have been 33.2% for 1998
and 43.7% for 1997.
Due to the unusual nature of the 1998 second quarter charge associated with the
change in accounting for rental tape amortization and the 1997 Blockbuster
charge, the full income tax effects are reflected in the second quarter 1998 and
second quarter 1997 tax provisions, respectively, and are excluded from the
estimated annual effective tax rates.
Equity in loss of affiliates
"Equity in loss of affiliated companies, net of tax" of $2.9 million and $21.2
million for the third quarter of 1998 and the nine months then ended improved
from a loss of $18.4 million and $73.0 million, respectively, for the prior-year
periods, primarily reflecting the improved performance of Comedy Central and the
consolidation of certain international network ventures that were previously
accounted for under the equity method, offset by the net operating losses of
United Paramount Network and the absence of earnings of USA Networks, which was
sold in the fourth quarter of 1997.
Minority interest
Minority interest primarily represents the minority ownership of Spelling common
stock.
Change in Accounting Method
Effective April 1, 1998, Blockbuster adopted an accelerated method of
amortizing videocassette and game rental inventory. Blockbuster has adopted
this new method of amortization because it has implemented a new business
model, including revenue sharing agreements with Hollywood studios, which has
dramatically increased the number of videocassettes in the stores and is
satisfying consumer demand over a shorter period of time. Previously,
Blockbuster purchased tapes for a fixed price, which were amortized over a
period of six to 36 months. Pursuant to the new accounting method, the
Company records base stock videocassettes (generally less than five copies
per title for each store) at cost and amortizes a portion of these costs on
an accelerated
27
basis over three months, generally to $8 per unit, with the remaining base
stock videocassette costs amortized on a straight-line basis over 33 months
to an estimated $4 salvage value. The cost of non-base stock videocassettes
(generally greater than five copies per title for each store) is amortized
on an accelerated basis over three months to an estimated $4 salvage value.
Video games are amortized on an accelerated basis over a 12 month period to
an estimated $10 salvage value. Revenue sharing payments are expensed when
revenues are earned pursuant to the applicable contractual arrangements. The
Company recorded a pre-tax charge of $436.7 million in the second quarter of
1998, of which approximately $424.3 million represents an adjustment to the
carrying value of the rental tapes due to the new method of accounting and
approximately $12.4 million represents a write-down of retail inventory. The
total charge was reflected as part of operating expenses for the nine months
ended September 30, 1998.
The Company believes that the new amortization method developed for
Blockbuster's new business model will result in a better matching of revenue and
expense recognition. Under the new model, operating expense attributable to
videocassettes is comprised of revenue sharing payments which are expensed when
earned and amortization of up-front product costs. The calculation of the change
in operating expense attributable to videocassettes and games for the three and
nine months ended September 30, 1998 would not be meaningful because the method
of accounting applied prior to April 1, 1998 did not contemplate the new
business model.
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, and the sale of non-strategic assets including
Simon & Schuster's educational, professional and reference businesses.
On October 26, 1998, the Company completed the sale of its music retail stores
to Wherehouse Entertainment, Inc. for $115 million in cash and recorded a loss
of $138.5 million, net of tax, on the disposition.
During the third quarter of 1998, Spelling completed the sale of the
development operations of Virgin Interactive Entertainment Limited ("Virgin")
to Electronic Arts Inc. for $122.5 million in cash. In addition, on
November 10, 1998, Spelling completed the sale of all non-U.S. operations of
Virgin to an investor group.
On May 17, 1998, the Company announced that it has signed an agreement to
sell its educational, professional and reference publishing operations to
Pearson plc for $4.6 billion, while retaining its consumer operations
including the Simon & Schuster name. Upon completion of this transaction, the
net after-tax cash proceeds, which are estimated to be approximately $3.8
billion, will be used to repay debt. The Company expects to complete this
sale in the fourth quarter of 1998.
28
The commitments of the Company for program license fees which are not reflected
in the balance sheet as of September 30, 1998, and are estimated to aggregate
approximately $1.3 billion, principally reflect SNI's commitments of
approximately $1.2 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 and original programming
which are not yet available for premium television exhibition and, in many
cases, have not yet been produced.
Current assets increased to $5.8 billion as of September 30, 1998 from $5.7
billion as of December 31, 1997, primarily reflecting normal operating activity.
The allowance for doubtful accounts as a percentage of receivables was 5% and 4%
as of September 30, 1998 and December 31, 1997, respectively. The change in
property and equipment principally reflects capital expenditures of $417.2
million related to capital additions for new and existing video stores and
additional construction and equipment upgrades for theatres and theme parks
offset by depreciation expense of $364.6 million. Current liabilities decreased
approximately 12% to $4.4 billion as of September 30, 1998 from $5.1 billion as
of December 31, 1997, reflecting the payment of income taxes associated with the
sale of USA Networks as well as payment of certain Senior Notes classified as
short-term as of December 31, 1997. Long-term debt, including current
maturities, increased approximately 7% to $8.4 billion as of September 30, 1998
from $7.8 billion as of December 31, 1997, primarily reflecting the continued
investment in and seasonality of the Company's businesses.
Net cash flow from operating activities was $221.0 million for the nine
months ended September 30, 1998 versus negative $474.6 million for the nine
months ended September 30, 1997. The positive 1998 cash flow principally
reflects the reduction in accounts receivable due principally to the asset
securitization program and the reduction in inventory due to the change in
amortization for videocassettes, partially offset by the first quarter 1998
tax payment related to the sale of USA Networks. Net cash expenditures for
investing activities of $455.9 million for the nine months ended September
30, 1998, principally reflect capital expenditures and the Company's
acquisition of television stations partially offset by proceeds from the
disposition of Virgin. Net cash flow from investing activities of $463.2
million for the nine months ended September 30, 1997 principally reflect the
proceeds of $1.1 billion from the sale of the Company's radio business
partially offset by capital expenditures, and the Company's purchase of a 50%
interest in UPN. Financing activities principally reflect additional
borrowings under the credit agreements during each period presented and the
repayment of $400.0 million in Senior Notes in 1998.
On April 18, 1997, the Company announced its intention to acquire additional
shares of Spelling's outstanding common stock by purchasing shares from third
parties and in market transactions. Through September 30, 1998, the Company
has acquired 6,957,732 additional shares for $58.9 million and currently owns
approximately 81% of Spelling's outstanding common stock. The purchase of
these shares permits the Company to consolidate Spelling's results for tax
purposes.
On August 31, 1998, the Company initiated a repurchase program to acquire up
to $1.75 billion of one or more classes of the Company's equity securities.
As of September 30, 1998, the Company repurchased 6,000 shares of Class A
Common Stock, 6,858,200 shares of Class B Common Stock and 1,416,000 Viacom
Five-Year Warrants, expiring on July 7, 1999 for approximately $423.9 million
in the aggregate.
As of the close of business on November 13, 1998, the Company repurchased
6,000 shares of Class A Common Stock, 12,358,100 shares of Class B Common
Stock and 3,026,400 Viacom Five-Year Warrants, expiring on July 7, 1999, for
approximately $751.0 million in the aggregate.
29
Capital Structure
The following table sets forth the Company's long-term debt, net of current
portion as of September 30, 1998 and December 31, 1997:
September 30, 1998 December 31, 1997
------------------ -----------------
(In millions)
Notes payable to banks.............................. $ 4,169.7 $ 3,152.7
Senior debt......................................... 2,337.5 2,486.3
Senior subordinated debt............................ 399.3 645.5
Subordinated debt................................... 982.3 971.4
Other notes......................................... 14.3 16.6
Obligations under capital leases.................... 456.4 527.0
-------------- -------------
Total debt outstanding.............................. 8,359.5 7,799.5
Less current portion................................ 89.2 376.5
-------------- -------------
Total non-current debt.............................. $ 8,270.3 $ 7,423.0
-------------- -------------
-------------- -------------
The notes and debentures are presented net of an aggregate unamortized discount
of $136.7 million as of September 30, 1998 and $148.6 million as of December 31,
1997.
Debt, including the current portion, as a percentage of total capitalization of
the Company was 39% at September 30, 1998 and 37% at December 31, 1997.
On May 15, 1998, the Company redeemed all $100 million of Viacom International
Inc.'s outstanding 8.75% Senior Subordinated Reset Notes due 2001 at a
redemption price equal to 101% of the principal amount.
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, reduced pricing and decreased the
available credit by $109 million to $361 million.
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.
At September 30, 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.
At September 30, 1998, the Company's scheduled maturities of indebtedness
through December 31, 2002, assuming full utilization of the credit agreements
are $7.0 million (1998), $863.3 million (1999), $1.7 billion (2000), $2.0
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.
30
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. The foreign exchange contracts have principally been used to hedge
the British Pound, the Australian Dollar, the Japanese Yen, the Canadian Dollar,
the French Franc, the Singapore Dollar, the German Deutschemark, the Spanish
Peseta, the Italian Lire, the Mexican Peso, the Netherlands Guilder 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 Inc. 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 has issued $1.6 billion of notes and debentures and has $1.4 billion
remaining availability under the shelf registration statement.
Year 2000
Overview
The widespread use of computer programs that rely on two-digit dates to perform
computations and decision making functions may cause computer systems to
malfunction prior to or in the year 2000 and lead to significant business delays
and disruptions in the U.S. and internationally. The Company has a year 2000
("Y2K") program to identify and mitigate Y2K risks. Pursuant to this program,
each of the Company's principal business units has developed programs to address
Y2K exposures. In addition, under the direction of its Board of Directors, the
Company has designated a committee of senior officers to oversee these programs,
which committee has engaged an independent consulting firm to assist in the
review and oversight. At present it is anticipated that the Company will
complete its Y2K program by mid-1999 in all material respects.
The Company has established a five phase program consisting of inventory,
assessment, remediation, testing and contingency planning. Costs of the
Company's Y2K program are not expected to have a material effect on its
results of operations, financial position or liquidity.
State of Readiness and Contingency Plans
The Company's principal business units commenced their Y2K readiness efforts at
various dates prior to 1998. The Company expects to complete inventory and
assessment in November 1998. Remediation and testing is scheduled for completion
by mid-1999. The Company is also preparing contingency plans based on an
analysis of system risks, including potential failure dates and expected
remediation dates. The Company will continually review its progress against its
Y2K program plans and conclude on the appropriate and feasible contingency plans
to reduce its exposure to Y2K related issues by late spring 1999. The Company
has received information regarding Y2K compliance from its principal business
partners and third party providers and is
31
engaging in a more detailed review of their compliance. The Company expects to
complete such review by late spring 1999. To date, no principal business
partners or third party providers have informed the Company that a material Y2K
issue exists which will have a material effect on the Company.
Risks
The Company's goal is to achieve timely and substantial Y2K compliance, with
remediation work assigned based upon how critical each system is to the
Company's business. Due to the general uncertainty inherent in the Y2K problem
resulting in part from the uncertainty of compliance by the Company's principal
business partners and third party providers, the Company is unable to determine
at this time what the consequences of Y2K may be. The Company will continue to
devote the necessary resources to complete its Y2K program and contingency plans
and believes that the completion of its Y2K program and contingency plans will
significantly mitigate operational and financial risks.
32
PART II - - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Agreement, dated August 20, 1998, amending the Employment
Agreement, dated as of January 1, 1996, between Viacom Inc.
and Philippe P. Dauman.
10.2 Agreement, dated August 20, 1998, amending the Employment
Agreement, dated as of January 1, 1996, between Viacom Inc.
and Thomas E. Dooley.
11. Statement re: Computation of Net Earnings Per Share.
27. Financial Data Schedule.
(b) Reports on Form 8-K for Viacom Inc.
None
33
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 November 16, 1998 \S\Sumner M. Redstone
------------------------------ --------------------------------------
Sumner M. Redstone
Chairman of the Board of Directors,
Chief Executive Officer
Date November 16, 1998 \S\George S. Smith, Jr.
------------------------------ ---------------------------------
George S. Smith, Jr.
Senior Vice President,
Chief Financial Officer
34
Exhibit Index
-------------
10.1 Agreement, dated August 20, 1998, amending the Employment
Agreement, dated as of January 1, 1996, between Viacom Inc.
and Philippe P. Dauman.
10.2 Agreement, dated August 20, 1998, amending the Employment
Agreement, dated as of January 1, 1996, between Viacom Inc.
and Thomas E. Dooley.
11. Statement re: Computation of Net Earnings Per Share.
27. Financial Data Schedule.
35