SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission file number 1-9553
------
VIACOM INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2949533
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
1515 Broadway, New York, New York 10036
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (212) 258-6000
------------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No .
--- ---
Number of shares of Common Stock Outstanding at April 30, 2001:
Class A Common Stock, par value $.01 per share - 137,458,692
Class B Common Stock, par value $.01 per share - 1,642,719,189
VIACOM INC.
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations (Unaudited) for the Three Months
ended March 31, 2001 and March 31, 2000 3
Consolidated Balance Sheets at March 31, 2001 (Unaudited) and
December 31, 2000 4
Consolidated Statements of Cash Flows (Unaudited) for the Three Months
ended March 31, 2001 and March 31, 2000 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 32
Item 6. Exhibits and Reports on Form 8-K 32
-2-
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
VIACOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited; in millions, except per share amounts)
Three Months Ended March 31, 2001 2000
--------------------------------------------------------------------------------------------------
Revenues $ 5,752.2 $ 3,025.8
--------------------------------------------------------------------------------------------------
Expenses:
Operating 3,478.4 1,995.1
Selling, general and administrative 1,124.9 561.1
Depreciation and amortization 745.2 229.2
--------------------------------------------------------------------------------------------------
Total expenses 5,348.5 2,785.4
--------------------------------------------------------------------------------------------------
Operating income 403.7 240.4
Interest expense (256.9) (122.5)
Interest income 11.4 9.5
Other items, net (9.8) 1.7
--------------------------------------------------------------------------------------------------
Earnings before income taxes 148.4 129.1
Provision for income taxes (123.5) (58.1)
Equity in loss of affiliated companies, net of tax (27.1) (6.1)
Minority interest, net of tax (5.1) 3.1
--------------------------------------------------------------------------------------------------
Net earnings (loss) before cumulative effect of
change in accounting principle (7.3) 68.0
Cumulative effect of change in accounting
principle, net of tax -- (452.3)
--------------------------------------------------------------------------------------------------
Net loss $ (7.3) $ (384.3)
--------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share:
Net earnings (loss) before cumulative effect of
change in accounting principle $ -- $ 0.10
Net loss $ -- $ (0.55)
--------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share:
Net earnings (loss) before cumulative effect of
change in accounting principle $ -- $ 0.10
Net loss $ -- $ (0.54)
--------------------------------------------------------------------------------------------------
Weighted average number of common shares:
Basic 1,628.4 694.8
Diluted 1,628.4 711.5
--------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
-3-
VIACOM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(In millions, except per share amounts)
At March 31, At December 31,
2001 2000
------------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 947.8 $ 934.5
Receivables, less allowances of $244.8 (2001) and $246.2 (2000) 3,986.4 3,964.1
Inventory (Note 6) 1,453.7 1,402.0
Other current assets 1,468.3 1,531.8
------------------------------------------------------------------------------------------------------------------
Total current assets 7,856.2 7,832.4
------------------------------------------------------------------------------------------------------------------
Property and equipment:
Land 747.5 713.8
Buildings 855.1 837.1
Capital leases 801.3 852.5
Advertising structures 2,077.7 2,076.5
Equipment and other 4,439.4 4,505.8
------------------------------------------------------------------------------------------------------------------
8,921.0 8,985.7
Less accumulated depreciation and amortization 2,455.4 2,383.9
------------------------------------------------------------------------------------------------------------------
Net property and equipment 6,465.6 6,601.8
------------------------------------------------------------------------------------------------------------------
Inventory (Note 6) 3,905.0 3,632.9
Intangibles, at amortized cost 71,867.0 62,004.1
Other assets 2,456.4 2,574.9
------------------------------------------------------------------------------------------------------------------
Total Assets $ 92,550.2 $ 82,646.1
------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 923.1 $ 1,261.1
Accrued expenses and other 4,253.8 4,343.1
Accrued participations 1,257.2 1,220.3
Program rights 1,188.4 709.8
Current portion of long-term debt (Note 7) 150.0 223.9
------------------------------------------------------------------------------------------------------------------
Total current liabilities 7,772.5 7,758.2
------------------------------------------------------------------------------------------------------------------
Long-term debt (Note 7) 12,887.1 12,473.8
Other liabilities 7,184.4 7,407.0
Commitments and contingencies (Note 8)
Minority interest 1,247.9 7,040.2
Stockholders' Equity:
Class A Common Stock, par value $.01 per share; 500.0 shares
authorized; 138.8 (2001) and 138.9 (2000) shares issued 1.4 1.4
Class B Common Stock, par value $.01 per share; 3,000.0 shares
authorized; 1,688.8 (2001) and 1,454.7 (2000) shares issued 16.9 14.5
Additional paid-in capital 64,726.2 50,729.9
Retained earnings 1,424.5 1,431.8
Accumulated other comprehensive loss (Note 1) (201.1) (152.5)
------------------------------------------------------------------------------------------------------------------
65,967.9 52,025.1
Less treasury stock, at cost; 1.4 (2001 and 2000) Class A shares and
57.9 (2001) and 96.3 (2000) Class B shares 2,509.6 4,058.2
------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 63,458.3 47,966.9
------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 92,550.2 $ 82,646.1
==================================================================================================================
See notes to consolidated financial statements.
-4-
VIACOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited; in millions)
Three Months ended March 31, 2001 2000
-------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net loss $ (7.3) $ (384.3)
Adjustments to reconcile net loss to net cash flow from operating activities:
Cumulative effect of change in accounting principle -- 753.9
Depreciation and amortization 745.2 229.2
Distribution from affiliated companies 18.8 12.0
Equity in loss of affiliated companies 27.1 6.1
Minority interest 5.1 (3.1)
Change in operating assets and liabilities, net of effects of acquisitions (335.7) (505.2)
-------------------------------------------------------------------------------------------------------------------
Net cash flow provided by operating activities 453.2 108.6
-------------------------------------------------------------------------------------------------------------------
Investing Activities:
Acquisitions, net of cash acquired (635.2) (1.9)
Capital expenditures (105.0) (105.7)
Investments in and advances to affiliated companies (24.7) (64.6)
Proceeds from dispositions 228.8 --
Proceeds from sales of short-term investments 40.0 20.4
Purchases of short-term investments (12.9) (34.8)
Other, net -- (7.1)
-------------------------------------------------------------------------------------------------------------------
Net cash flow used for investing activities (509.0) (193.7)
-------------------------------------------------------------------------------------------------------------------
Financing Activities:
Borrowings (repayments) from banks, including commercial paper, net (1,210.6) 868.4
Proceeds from senior notes and debentures 1,667.0 --
Purchase of treasury stock (275.0) (745.8)
Repayment of notes and debentures (110.8) --
Payment of capital lease obligations (45.1) (35.2)
Proceeds from exercise of stock options 45.1 14.3
Other, net (1.5) 0.1
-------------------------------------------------------------------------------------------------------------------
Net cash flow provided by financing activities 69.1 101.8
-------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 13.3 16.7
Cash and cash equivalents at beginning of the period 934.5 680.8
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 947.8 $ 697.5
-------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Non-cash investing and financing activities:
Fair value of assets acquired $ 10,961.5 $ 1.9
Fair value of liabilities assumed (322.8) --
Acquisition of minority interest 5,749.4 --
Cash paid, net of cash acquired (635.2) (1.9)
-------------------------------------------------------------------------------------------------------------------
Impact on stockholders' equity $ 15,752.9 $ --
-------------------------------------------------------------------------------------------------------------------
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. ("Viacom" or the "Company") is a diversified company with operations
in six segments: (i) Cable Networks, (ii) Television, (iii) Infinity, (iv)
Entertainment, (v) Video and (vi) Publishing (See Note 10). On May 4, 2000, CBS
Corporation ("CBS") merged with and into the Company and effective from this
date, CBS' results of operations are included in the Company's consolidated
results of 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--Basic earnings (loss) per share is based
upon net earnings (loss) divided by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the effect of
the assumed exercise of stock options only in the periods in which such effect
would have been dilutive. For the three months ended March 31, 2001, incremental
shares of 31.9 million for the assumed exercise of stock options were excluded
from the computation of diluted EPS because their inclusion would have been
anti-dilutive.
The table below presents a reconciliation of weighted average shares used in the
calculation of basic and diluted EPS:
Three Months ended March 31, 2001 2000
--------------------------------------------------------------------------------
Weighted average shares for basic EPS 1,628.4 694.8
Incremental shares for stock options -- 16.7
--------------------------------------------------------------------------------
Weighted average shares for diluted EPS 1,628.4 711.5
--------------------------------------------------------------------------------
-6-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Comprehensive Income (Loss)--Total comprehensive income (loss) for the Company
includes net earnings (loss) and other comprehensive income items including
unrealized gain (loss) on securities, cumulative translation adjustments and
change in fair value of cash flow hedges.
Three Months ended March 31, 2001 2000
------------------------------------------------------------------------------------------------
Net earnings (loss) $ (7.3) $ (384.3)
Other comprehensive income (loss):
Unrealized gain (loss) on securities, net of tax (10.6) (4.6)
Cumulative translation adjustments (37.2) (2.2)
Change in fair value of cash flow hedges, net of tax (.8) --
------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (55.9) $ (391.1)
------------------------------------------------------------------------------------------------
Derivative Instruments and Hedging Activities - Effective January 1, 2001, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") as
amended. SFAS 133 requires that all derivative instruments be recorded on the
balance sheet at fair value. SFAS 133 also established new accounting rules for
hedging instruments which, depending on the nature of the hedge, require that
changes in the fair value of the derivatives either be offset against the change
in fair value of assets or liabilities through earnings, or be recognized in
other comprehensive income until the hedged item is recognized in earnings. The
impact of adoption was immaterial on the Company's consolidated results of
operations and financial position.
The Company is exposed to fluctuations in foreign currency exchange rates. To
manage foreign currency exposures, the Company may use derivative instruments,
including swaps and forward contracts. Derivative instruments used by the
Company in its hedging activities are not used for speculative trading purposes
and are not designated as hedges. As of March 31, 2001, the change in fair value
of the foreign currency exchange contracts was not material to the Company's
consolidated results of operations.
As of March 31, 2001, the Company's outstanding interest rate swaps, which
effectively convert variable interest payments on commercial paper to a fixed
rate, were designated as hedges. The effective portion of the change in fair
value of cash flow hedges are reported in other comprehensive income and
reclassified into earnings in the same period in which the hedged transaction
affects earnings. The ineffective portion included in earnings was not material.
2) ACQUISITIONS
On February 21, 2001, the Company completed a merger with Infinity Broadcasting
Corporation ("Infinity"), acquiring approximately 36% of the issued and
outstanding shares of Infinity common stock that it did not already own. Under
the terms of the merger, which is tax free for the stockholders of Infinity and
Viacom, each share of Infinity Class A common stock was converted into the right
to receive 0.592 of a share of Viacom Class B Common Stock. The Infinity merger
was accounted for at historical cost, with the exception of minority interest,
which was accounted for under the purchase method of accounting. The total
purchase price of approximately $13.4 billion represents the issuance of
approximately 232 million shares of Viacom Class B Common Stock and the fair
value of Infinity stock options assumed by the Company. Infinity stockholders
received a cash payment in lieu of any fractional shares. The goodwill
attributable to this transaction of approximately $7.6 billion is being
amortized on a straight-line basis over 40 years.
-7-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
On January 23, 2001, the Company completed its acquisition of BET Holdings II,
Inc. ("BET") for approximately $3 billion, which principally represents the
issuance of approximately 43.4 million shares of Viacom Class B Common Stock
from treasury stock and the assumption by the Company of approximately $590
million in debt. The total cost to acquire BET has been allocated based on the
fair value of the assets acquired and liabilities assumed at the time of the
acquisition. The excess purchase price over the fair value of the tangible net
assets acquired of approximately $2.9 billion was allocated to intangibles and
is being amortized on a straight-line basis not to exceed 40 years. The final
allocation of the purchase price will be based on comprehensive final
evaluations of the fair value of BET's tangible and identifiable assets acquired
and liabilities assumed. As of the acquisition date, BET's results are included
as part of the Cable Networks segment.
The unaudited condensed pro forma results of operations data presented below
assumes the Viacom/CBS merger, pre-merger CBS acquisitions, and other
acquisitions, including UPN, BET and the acquisition of the minority interest of
Infinity, had occurred as of January 1, 2000. The unaudited condensed pro forma
results of operations were prepared based upon the historical consolidated
results of operations of the Company and CBS prior to the merger. Financial
results of CBS subsequent to the date of the Viacom/CBS merger are included in
the Company's financial statements.
Pro Forma Results of Operations Data (unaudited)
---------------------------------------------------------------------------------------------
Three Months Ended March 31, 2001 2000
---------------------------------------------------------------------------------------------
Revenues $ 5,768.0 $ 5,435.4
Net loss before cumulative effect of change in
accounting principle $ (29.9) $ (195.1)
Net loss $ (29.9) $ (647.4)
Basic and diluted loss per common share:
Net loss before cumulative effect of change in
accounting principle $ (.02) $ (.11)
Net loss $ (.02) $ (.36)
---------------------------------------------------------------------------------------------
The pro forma financial information is presented for comparative purposes only
and is not necessarily indicative of the operating results that actually would
have occurred had the CBS, UPN, Infinity, BET and other acquisitions been
consummated on January 1, 2000. In addition, these results are not intended to
be a projection of future results and do not reflect any synergies that might be
achieved from the combined operations.
3) STOCK REPURCHASE
The Company initiated a new share repurchase program to acquire up to $2.0
billion in the Company's Class B Common Stock in February 2001. During the first
three months of 2001, the Company repurchased 4.5 million shares of its Class B
Common Stock under its share repurchase programs for approximately $225.0
million.
-8-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
4) MERGER-RELATED CHARGES
In connection with the integration of Viacom and CBS and the acquisition of UPN,
the Company recorded merger-related charges of $698 million in the second
quarter of 2000. These amounts included non-cash charges of $415 million
principally attributable to compensation for stock options and $283 million of
cash payments and accrued liabilities for severance, transaction fees and
integration costs. As of March 31, 2001, the Company had paid and charged
approximately $97 million for severance liabilities, $27 million for transaction
fees and $40 million related to integration costs.
5) RECEIVABLES
As of March 31, 2001, the Company had an aggregate of $550.0 million outstanding
under revolving receivable securitization programs. Proceeds from the sale of
these receivables were used to reduce outstanding borrowings.
6) INVENTORY
At March 31, 2001 At December 31, 2000
----------------- --------------------
Theatrical and television inventory:
Theatrical:
Released (including acquired film libraries) $ 389.9 $ 365.6
Completed, not released 28.4 49.5
In process and other 433.2 276.6
Television:
Released (including acquired film libraries) 974.3 881.9
In process and other 138.3 151.5
Program rights 2,314.6 2,163.4
---------------------------------------------------------------------------------------------------
4,278.7 3,888.5
Less current portion 1,064.2 985.9
---------------------------------------------------------------------------------------------------
3,214.5 2,902.6
---------------------------------------------------------------------------------------------------
Merchandise inventory, including sell-through
videocassettes 272.5 309.9
Videocassette rental inventory 603.3 631.6
Publishing, primarily finished goods 74.1 67.9
Other 130.1 137.0
---------------------------------------------------------------------------------------------------
1,080.0 1,146.4
Less current portion 389.5 416.1
---------------------------------------------------------------------------------------------------
690.5 730.3
---------------------------------------------------------------------------------------------------
Total Current Inventory $ 1,453.7 $ 1,402.0
---------------------------------------------------------------------------------------------------
Total Non-Current Inventory $ 3,905.0 $ 3,632.9
---------------------------------------------------------------------------------------------------
-9-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
7) LONG-TERM DEBT
The following table sets forth the Company's long-term debt, net of current
portion:
At March 31, At December 31,
2001 2000
------------------------------------------------------------------------------------------------------------
Notes payable to banks (including commercial paper) $ 4,531.7 $ 5,735.5
Senior debt (6.40% - 10.50% due 2002-2030) 7,352.5 5,662.7
Senior subordinated debt (8.875% - 10.25% due 2001-2007) 564.1 664.4
Subordinated debt (11.375% due 2009) 39.1 39.4
Other Notes 41.7 43.5
Obligations under capital leases 508.0 552.2
------------------------------------------------------------------------------------------------------------
Total Debt 13,037.1 12,697.7
Less: current portion 150.0 223.9
------------------------------------------------------------------------------------------------------------
Total Long-Term Debt $ 12,887.1 $ 12,473.8
------------------------------------------------------------------------------------------------------------
On January 9, 2001, the Company issued under Rule 144A, $400 million of 6.40%
unsecured senior notes due January 30, 2006, $500 million of 7.70% unsecured
senior notes due July 30, 2010, and $750 million of 7.875% unsecured senior
debentures due July 30, 2030; interest on the senior notes and debentures will
be payable semi-annually. Proceeds from the debt issuance were used to repay
bank debt, including commercial paper. During March 2001, these notes and
debentures were exchanged for registered notes and debentures. The unsecured
senior debentures and the unsecured senior notes due July 30, 2010, are
redeemable at any time at their principal amount plus the applicable premium and
accrued interest.
On February 1, 2001, the Company redeemed all $60.3 million outstanding of
Infinity's 9% senior subordinated notes due 2006 at a redemption price equal to
104.5% of the principal amount.
In March 2001, the Company cancelled its credit agreements other than its
Infinity $1.45 billion facility, and entered into two new credit facilities.
These two new facilities total $3.5 billion and are comprised of a $1.5 billion
5-year revolving credit facility and a $2.0 billion 364-day revolving credit
facility. The Company also amended and restated the Infinity $1.45 billion
facility; the terms and conditions were substantially conformed to the new $1.5
billion 5-year revolving credit facility and the Company was designated as the
borrower. The primary purpose of the facilities is to support commercial paper
borrowings. The Company, at its option, may borrow in certain foreign currencies
up to specified limits under the new $1.5 billion 5-year revolving credit
facility. Borrowing rates under the facilities are determined at the time of
each borrowing and are based generally on LIBOR plus a margin based on the
Company's senior unsecured debt rating. At March 31, 2001, LIBOR for borrowing
periods of one month and two months were 5.08% and 4.98%, respectively.
The new and amended facilities contain certain covenants which, among other
things, require that the Company maintain a minimum interest coverage ratio. At
March 31, 2001, the Company was in compliance with the financial covenants.
-10-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
In March 2001, the Company increased its commercial paper program from $4.0
billion to $4.95 billion and Infinity cancelled its $3.25 billion commercial
paper program. Borrowings under the program have maturities of less than a year
and are supported by unused committed bank facilities. At March 31, 2001, the
Company had borrowings under the program of approximately $3.3 billion.
8) COMMITMENTS AND CONTINGENCIES
The commitments of the Company for program license fees, estimated to aggregate
approximately $14.3 billion, are not reflected in the balance sheet as of March
31, 2001. These commitments include approximately $10.3 billion for the
acquisition of sports programming rights. A majority of such fees are payable
over several years, as part of normal programming expenditures.
The Company, Blockbuster and Paramount Home Entertainment are among the
defendants in a lawsuit filed on July 21, 1999 in the United States District
Court for the Western District of Texas by one former and three present
independent video retailers against the major motion picture studios and the
Company. The plaintiffs, purporting to act as class representatives on behalf of
themselves and all others similarly situated, allege that the Company and the
studios conspired among themselves and with Blockbuster to restrain competition
in the nationwide market for distribution of videocassettes for rental to the
public in violation of federal and California law. Plaintiffs seek injunctive
relief under federal law as well as triple the amount of the alleged actual
damages to themselves and those similarly situated under California statutes. In
January 2001, plaintiffs moved to withdraw their California state law claims
from the federal lawsuit in Texas and filed a substantially similar complaint
with approximately 200 additional named plaintiffs in Superior Court for the
County of Los Angeles. This complaint also sought certification of a nationwide
class of similarly situated plaintiffs. In March 2001, the Texas court denied
the plaintiffs' motion for class certification of both the federal and the
California state law claims in the federal action and denied the plaintiffs'
motion to withdraw their California state law claims from that action. The
Company believes that the plaintiffs' position in these litigations is without
merit and intends to defend itself vigorously in the litigations.
The Company is a defendant in numerous lawsuits claiming various
asbestos-related personal injuries, which allegedly occurred from use or
inclusion of asbestos in certain products supplied by previously divested
industrial business, generally in the pre-1970 time period. Typically, these
lawsuits are brought against multiple defendants in state and federal courts.
The Company was neither a manufacturer nor a producer of asbestos. As of March
31, 2001, the Company had pending approximately 105,800 asbestos cases,
excluding cases in various stages of settlement. The Company has brought suit
against certain of its insurance carriers with respect to asbestos claims. Under
the terms of a settlement agreement resulting from this suit, carriers that have
agreed to the settlement are now reimbursing the Company for a substantial
portion of its current costs and settlement associated with asbestos claims. The
Company believes that it has meritorious defenses to asbestos matters, that
where appropriate it has adequately provided for resolution of matters and that
any ultimate liability resulting from asbestos matters is not likely to have a
material adverse effect on its results of operations, financial position or cash
flows.
-11-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
The Company from time to time receives claims from federal and state
environmental regulatory agencies and other entities asserting that it is or may
be liable for environmental cleanup costs and related damages, principally
relating to discontinued operations conducted by companies acquired by the
Company. The Company's liabilities reflect management's best estimate of its
environmental exposure. Such liability was not discounted or reduced by
potential insurance recoveries and reflects management's estimate of cost
sharing at multiparty sites. The estimated liability was calculated based upon
currently available facts, existing technology and presently enacted laws and
regulations. On the basis of its experience and the information currently
available to it, the Company believes that the claims it has received will not
have a material adverse effect on its results of operations, financial position
or liquidity.
In addition to the above matters, the Company and various of its subsidiaries
are parties to certain other legal proceedings. Litigation is inherently
uncertain and always difficult to predict. However, based on its understanding
and evaluation of the relevant facts and circumstances, the Company believes
that these matters are not likely to have a material adverse effect on its
results of operations, financial position or cash flows.
9) PROVISION FOR INCOME TAXES
The provision for income taxes represents federal, state and foreign income
taxes on earnings before income taxes. The estimated effective tax rates of
83.2% for 2001 and 45.0% for 2000 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 effective tax
rates would have been 42.5% for 2001 and 31.0% for 2000.
10) REPORTABLE SEGMENTS
The following tables set forth the Company's financial performance by reportable
operating segment. Effective January 1, 2001, the Company operates its online
business under the Cable Networks and Television segments and accordingly, now
presents its online business as part of these respective segments. Prior period
information has been reclassified to conform to the new structure. Intersegment
revenues are recorded at fair market value as if the sales were to third parties
and are eliminated in consolidation. Entertainment's revenues include
intercompany revenues of $105.6 million and $79.0 million for the three months
ended March 31, 2001 and March 31, 2000, respectively. Residual costs of
discontinued businesses primarily include pension and postretirement benefit
costs for benefit plans retained by CBS for previously divested industrial
businesses.
The Company evaluates performance based on many factors; one of the primary
measures is EBITDA, defined as operating income before depreciation and
amortization. The Company believes that EBITDA is an appropriate measure of
evaluating the operating performance of its segments. However, EBITDA should be
considered in addition to, not as a substitute for or superior to, operating
income, net earnings, cash flows, and other measures of financial performance
prepared in accordance with generally accepted accounting principles ("GAAP").
As EBITDA is not a measure of performance calculated in accordance with GAAP,
this measure may not be comparable to similarly titled measures employed by
other companies.
-12-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Three months ended March 31, 2001 2000
---------------------------------------------------------------------------------------------------
Revenues:
Cable Networks $ 982.4 $ 771.1
Television 2,030.8 528.1
Infinity 835.6 --
Entertainment 595.2 522.6
Video 1,307.9 1,211.1
Publishing 121.9 112.8
Intercompany eliminations (121.6) (119.9)
---------------------------------------------------------------------------------------------------
Total Revenues $5,752.2 $3,025.8
---------------------------------------------------------------------------------------------------
EBITDA:
Cable Networks $ 359.4 $235.5
Television 314.7 117.3
Infinity 323.1 --
Entertainment 63.8 54.7
Video 160.5 150.3
Publishing 2.2 (1.7)
---------------------------------------------------------------------------------------------------
Segment total 1,223.7 556.1
Reconciliation to Operating Income:
Corporate expense/eliminations (51.3) (86.5)
Residual costs of discontinued operations (23.5) --
Depreciation and amortization (745.2) (229.2)
---------------------------------------------------------------------------------------------------
Total Operating Income $ 403.7 $240.4
---------------------------------------------------------------------------------------------------
At March 31, At December 31,
2001 2000
---------------------------------------------------------------------------------------------------
Total Assets:
Cable Networks $11,194.0 $ 8,077.7
Television 25,588.4 25,417.9
Infinity 40,838.4 33,689.7
Entertainment 4,986.3 4,853.9
Video 8,108.2 8,385.1
Publishing 909.6 954.1
---------------------------------------------------------------------------------------------------
Segment total 91,624.9 81,378.4
Corporate/Eliminations 925.3 1,267.7
---------------------------------------------------------------------------------------------------
Total Assets $92,550.2 $82,646.1
---------------------------------------------------------------------------------------------------
-13-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
11) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Viacom International Inc. ("Viacom International") is a wholly owned subsidiary
of the Company. The Company has fully and unconditionally guaranteed Viacom
International debt securities. The Company has determined that separate
financial statements and other disclosures concerning Viacom International are
not material to investors. The following condensed consolidating financial
statements present the results of operations, financial position and cash flows
of the Company, Viacom International, the direct and indirect Non-Guarantor
Affiliates of the Company, and the eliminations necessary to arrive at the
information for the Company on a consolidated basis.
Three Months Ended March 31, 2001
---------------------------------------------------------------------------------
Non- Viacom
Viacom Viacom Guarantor Inc.
Inc. International Affiliates Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 76.0 $ 567.4 $5,125.0 $ (16.2) $5,752.2
Expenses:
Operating 33.3 197.4 3,256.9 (9.2) 3,478.4
Selling, general and administrative 34.8 153.8 936.3 -- 1,124.9
Depreciation and amortization 3.9 40.3 701.0 -- 745.2
-----------------------------------------------------------------------------------------------------------------------------------
Total expenses 72.0 391.5 4,894.2 (9.2) 5,348.5
-----------------------------------------------------------------------------------------------------------------------------------
Operating income 4.0 175.9 230.8 (7.0) 403.7
Other income (expense):
Interest income (expense), net (335.3) (1.7) 91.5 -- (245.5)
Other items, net (6.2) .9 (4.5) -- (9.8)
-----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (337.5) 175.1 317.8 (7.0) 148.4
Benefit (provision) for income taxes 135.7 (76.9) (182.3) -- (123.5)
Equity in earnings (loss) of affiliated
companies, net of tax 194.5 57.5 (24.1) (255.0) (27.1)
Minority interest, net of tax -- 2.5 (7.6) -- (5.1)
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (7.3) $ 158.2 $ 103.8 $ (262.0) $ (7.3)
-----------------------------------------------------------------------------------------------------------------------------------
-14-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Three Months Ended March 31, 2000
---------------------------------------------------------------------------------
Non- Viacom
Viacom Viacom Guarantor Inc.
Inc. International Affiliates Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 9.6 $ 533.1 $2,536.1 $(53.0) $3,025.8
Expenses:
Operating 10.0 181.9 1,823.4 (20.2) 1,995.1
Selling, general and administrative .3 189.8 371.0 -- 561.1
Depreciation and amortization .7 35.4 193.1 -- 229.2
-----------------------------------------------------------------------------------------------------------------------------------
Total expenses 11.0 407.1 2,387.5 (20.2) 2,785.4
-----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (1.4) 126.0 148.6 (32.8) 240.4
Other income (expense):
Interest income (expense), net (94.6) 13.1 (31.5) -- (113.0)
Other items, net (8.1) 5.9 3.9 -- 1.7
-----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (104.1) 145.0 121.0 (32.8) 129.1
Benefit (provision) for income taxes 42.7 (59.5) (41.3) -- (58.1)
Equity in earnings (loss) of affiliated
companies, net of tax (322.9) (410.4) (14.2) 741.4 (6.1)
Minority interest, net of tax -- 2.0 1.1 -- 3.1
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings before cumulative effect of change
in accounting principle, net of tax (384.3) (322.9) 66.6 708.6 68.0
Cumulative effect of charge in accounting
principle, net of tax -- -- (452.3) -- (452.3)
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $(384.3) $(322.9) $ (385.7) $708.6 $ (384.3)
-----------------------------------------------------------------------------------------------------------------------------------
-15-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
At March 31, 2001
-------------------------------------------------------------------------------
Non-
Viacom Viacom Guarantor Viacom Inc.
Inc. International Affiliates Eliminations Consolidated
--------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 155.2 $ 356.9 $ 435.7 $ -- $ 947.8
Receivables, net 66.0 386.2 3,575.1 (40.9) 3,986.4
Inventory 8.2 268.5 1,177.0 -- 1,453.7
Other current assets 357.7 425.0 739.8 (54.2) 1,468.3
--------------------------------------------------------------------------------------------------------------------------------
Total current assets 587.1 1,436.6 5,927.6 (95.1) 7,856.2
--------------------------------------------------------------------------------------------------------------------------------
Property and equipment 194.8 713.6 8,012.6 -- 8,921.0
Less accumulated depreciation and
amortization 39.6 271.2 2,144.6 -- 2,455.4
--------------------------------------------------------------------------------------------------------------------------------
Net property and equipment 155.2 442.4 5,868.0 -- 6,465.6
--------------------------------------------------------------------------------------------------------------------------------
Inventory 9.9 582.8 3,331.5 (19.2) 3,905.0
Intangibles, at amortized cost 263.2 621.4 70,982.4 -- 71,867.0
Investments in consolidated subsidiaries 65,299.1 14,950.0 -- (80,249.1) --
Other assets 142.0 818.3 1,837.3 (341.2) 2,456.4
--------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 66,456.5 $ 18,851.5 $ 87,946.8 $ (80,704.6) $ 92,550.2
--------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Accounts payable $ -- $ 20.3 $ 984.5 $ (81.7) $ 923.1
Accrued expenses and other 194.9 1,449.0 3,955.6 (157.3) 5,442.2
Accrued participations -- -- 1,284.9 (27.7) 1,257.2
Current portion of long-term debt -- 14.6 135.4 -- 150.0
--------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 194.9 1,483.9 6,360.4 (266.7) 7,772.5
--------------------------------------------------------------------------------------------------------------------------------
Long-term debt 10,187.4 751.4 2,152.5 (204.2) 12,887.1
Other liabilities (11,676.4) 3,767.5 11,096.8 3,996.5 7,184.4
Minority interest -- 160.5 1,087.4 -- 1,247.9
Stockholders' equity:
Preferred Stock -- 106.1 19.9 (126.0) --
Common Stock 18.3 185.7 721.1 (906.8) 18.3
Additional paid-in capital 64,726.2 7,246.8 67,163.8 (74,410.6) 64,726.2
Retained earnings 5,515.8 5,089.3 (392.8) (8,787.8) 1,424.5
Accumulated other comprehensive
income (loss) (0.1) 60.3 (262.3) 1.0 (201.1)
--------------------------------------------------------------------------------------------------------------------------------
70,260.2 12,688.2 67,249.7 (84,230.2) 65,967.9
Less treasury stock, at cost 2,509.6 -- -- -- 2,509.6
--------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 67,750.6 12,688.2 67,249.7 (84,230.2) 63,458.3
--------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 66,456.5 $ 18,851.5 $ 87,946.8 $ (80,704.6) $ 92,550.2
--------------------------------------------------------------------------------------------------------------------------------
-16
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
At December 31, 2000
-----------------------------------------------------------------------------------
Non-
Viacom Viacom Guarantor Viacom Inc.
Inc. International Affiliates Eliminations Consolidated
----------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 192.8 $ 326.5 $ 415.2 $ -- $ 934.5
Receivables, net 89.3 456.0 3,661.3 (242.5) 3,964.1
Inventory 11.3 259.9 1,130.8 -- 1,402.0
Other current assets 355.1 425.5 789.3 (38.1) 1,531.8
----------------------------------------------------------------------------------------------------------------------------------
Total current assets 648.5 1,467.9 5,996.6 (280.6) 7,832.4
----------------------------------------------------------------------------------------------------------------------------------
Property and equipment 170.0 744.8 8,070.9 -- 8,985.7
Less accumulated depreciation and
amortization 14.2 319.9 2,049.8 -- 2,383.9
----------------------------------------------------------------------------------------------------------------------------------
Net property and equipment 155.8 424.9 6,021.1 -- 6,601.8
----------------------------------------------------------------------------------------------------------------------------------
Inventory -- 518.6 3,132.1 (17.8) 3,632.9
Intangibles, at amortized cost 264.9 636.4 61,102.8 -- 62,004.1
Investments in consolidated subsidiaries 49,331.0 14,898.9 -- (64,229.9) --
Other assets 198.2 695.1 1,813.0 (131.4) 2,574.9
----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 50,598.4 $ 18,641.8 $ 78,065.6 $ (64,659.7) $ 82,646.1
----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Accounts payable $ -- $ 35.2 $ 1,332.3 $ (106.4) $ 1,261.1
Accrued expenses and other 312.3 1,515.5 3,379.3 (154.2) 5,052.9
Accrued participations -- -- 1,234.5 (14.2) 1,220.3
Current portion of long-term debt -- 10.8 213.1 -- 223.9
----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 312.3 1,561.5 6,159.2 (274.8) 7,758.2
----------------------------------------------------------------------------------------------------------------------------------
Long-term debt 7,194.1 858.2 4,613.2 (191.7) 12,473.8
Other liabilities (9,118.5) 3,588.9 5,908.2 7,028.4 7,407.0
Minority interest -- 158.9 6,881.3 -- 7,040.2
Stockholders' equity:
Preferred Stock -- 106.1 20.4 (126.5) --
Common Stock 15.9 185.7 508.8 (694.5) 15.9
Additional paid-in capital 50,729.9 7,253.4 54,621.6 (61,875.0) 50,729.9
Retained earnings 5,523.0 4,931.1 (496.5) (8,525.8) 1,431.8
Accumulated other comprehensive
income (loss) (.1) (2.0) (150.6) .2 (152.5)
----------------------------------------------------------------------------------------------------------------------------------
56,268.7 12,474.3 54,503.7 (71,221.6) 52,025.1
Less treasury stock, at cost 4,058.2 -- -- -- 4,058.2
----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 52,210.5 12,474.3 54,503.7 (71,221.6) 47,966.9
----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 50,598.4 $ 18,641.8 $ 78,065.6 $ (64,659.7) $ 82,646.1
----------------------------------------------------------------------------------------------------------------------------------
-17-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Three Months Ended March 31, 2001
-----------------------------------------------------------------------------------
Non-
Viacom Viacom Guarantor Viacom Inc.
Inc. International Affiliates Eliminations Consolidated
------------------------------------------------------------------------------------------------------------------------------------
Net cash flow (used for) provided by operating
activities $(363.5) $ 30.2 $ 786.5 $ -- $ 453.2
------------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Acquisitions, net of cash acquired -- -- (635.2) -- (635.2)
Capital expenditures -- (29.4) (75.6) -- (105.0)
Investments in and advances to affiliated companies -- (21.2) (3.5) -- (24.7)
Proceeds from dispositions -- -- 228.8 -- 228.8
Proceeds from sales of short-term investments -- 40.0 -- -- 40.0
Purchases of short-term investments -- (12.9) -- -- (12.9)
Other, net -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Net cash flow used for investing activities -- (23.5) (485.5) -- (509.0)
------------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Borrowings (repayments) from banks, including
commercial paper, net 1,288.4 (100.0) (2,399.0) -- (1,210.6)
Proceeds from senior notes and debentures 1,661.2 -- 5.8 -- 1,667.0
Repayment of notes and debentures (9.5) -- (101.3) -- (110.8)
Purchase of treasury stock (275.0) -- -- -- (275.0)
Payment of capital lease obligations -- (3.1) (42.0) -- (45.1)
Increase (decrease) in intercompany payables (2,382.8) 126.8 2,256.0 -- --
Proceeds from exercise of stock options 45.1 -- -- -- 45.1
Other, net (1.5) -- -- -- (1.5)
------------------------------------------------------------------------------------------------------------------------------------
Net cash flow provided by (used for) financing
activities 325.9 23.7 (280.5) -- 69.1
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (37.6) 30.4 20.5 -- 13.3
Cash and cash equivalents at beginning of period 192.8 326.5 415.2 -- 934.5
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 155.2 $ 356.9 $ 435.7 $ -- $ 947.8
------------------------------------------------------------------------------------------------------------------------------------
-18-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Three Months Ended March 31, 2000
-----------------------------------------------------------------------------------
Non-
Viacom Viacom Guarantor Viacom Inc.
Inc. International Affiliates Eliminations Consolidated
------------------------------------------------------------------------------------------------------------------------------------
Net cash flow (used for) provided by operating
activities $ 145.3 $ 48.8 $ (85.5) $ -- $ 108.6
------------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Acquisitions, net of cash acquired -- -- (1.9) -- (1.9)
Capital expenditures -- (25.8) (79.9) -- (105.7)
Investments in and advances to affiliated companies -- (1.6) (63.0) -- (64.6)
Proceeds from sales of short-term investments -- 20.4 -- -- 20.4
Purchases of short-term investments -- (34.8) -- -- (34.8)
Other, net -- (7.1) -- -- (7.1)
------------------------------------------------------------------------------------------------------------------------------------
Net cash flow used for investing
activities -- (48.9) (144.8) -- (193.7)
------------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Borrowings from banks, including commercial
paper, net 835.6 -- 32.8 -- 868.4
Purchase of treasury stock (745.8) -- -- -- (745.8)
Payment of capital lease obligations -- (12.7) (22.5) -- (35.2)
Increase (decrease) in intercompany payables (315.8) 24.0 291.8 -- --
Proceeds from exercise of stock options and warrants 14.3 -- -- -- 14.3
Other, net -- -- 0.1 -- 0.1
------------------------------------------------------------------------------------------------------------------------------------
Net cash flow provided by (used for) financing
activities (211.7) 11.3 302.2 -- 101.8
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (66.4) 11.2 71.9 -- 16.7
Cash and cash equivalents at beginning of period 81.6 486.0 113.2 -- 680.8
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 15.2 $ 497.2 $ 185.1 $ -- $ 697.5
------------------------------------------------------------------------------------------------------------------------------------
-19-
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
(Tabular dollars in millions)
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.
In order to enhance comparability, the following discussion of the Company's
results of operations is supplemented by pro forma financial information that
gives effect to the Viacom/CBS merger and other acquisitions including UPN, BET
and the acquistion of the minority interest of Infinity, as if they had occurred
as of January 1, 2000 and excludes non-recurring items. The pro forma results
are presented for informational purposes only and are not indicative of the
operating results that would have occurred had the transactions actually
occurred at the beginning of 2000, nor are they necessarily indicative of future
operating results.
Effective January 1, 2001, the Company operates its online business under the
Cable Networks and Television segments and accordingly, now presents its online
business as part of these respective segments. Prior period information has been
reclassified to conform to the new structure.
The table below presents the Company's total revenues and total operating
income, as reported and on a pro forma basis for the three months ended March
31, 2001 and 2000, respectively.
-------------------------------------------------------------------------------
Three Months Ended
March 31, Percent
2001 2000 B/(W)
-------------------------------------------------------------------------------
Total Revenues:
As Reported $ 5,752.2 $ 3,025.8 90%
Pro Forma $ 5,768.0 $ 5,435.4 6%
-------------------------------------------------------------------------------
Total Operating Income:
As Reported $ 403.7 $ 240.4 68%
Pro Forma $ 377.8 $ 231.3 63%
-------------------------------------------------------------------------------
EBITDA
------
The following tables set forth EBITDA (defined as operating income
(loss) before depreciation and amortization principally of goodwill related to
business combinations) for the three months ended March 31, 2001 and 2000. The
Company believes that EBITDA is an appropriate measure of evaluating the
operating performance of its segments. However, EBITDA should be considered in
addition to, not as a substitute for or superior to, operating income, net
earnings, cash flows, and other measures of financial performance prepared in
accordance with generally accepted accounting principles ("GAAP"). As EBITDA is
not a measure of performance calculated in accordance with GAAP, this measure
may not be comparable to similarly titled measures employed by other companies.
-20-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
--------------------------------------------------------------------------------
Three Months Ended
March 31, Percent
2001 2000 B/(W)
--------------------------------------------------------------------------------
Total EBITDA:
As Reported $1,148.9 $ 469.6 145%
Pro Forma $1,153.5 $ 999.5 15%
--------------------------------------------------------------------------------
Results of Operations
---------------------
On a reported basis, revenues increased 90% to $5.75 billion for the first
quarter of 2001 from $3.03 billion for the same quarter last year. Reported
operating results are not comparable with prior-year periods due to the
Viacom/CBS merger and non-recurring items.
On a pro forma basis, revenues increased 6% to $5.77 billion from $5.44 billion
for the same prior-year period. Revenue increases were led by gains in nearly
every business unit including increases in its Cable Networks, Television and
Entertainment segments. The Video segment also contributed to the revenue
increases driven by the increase in the number of company-operated stores and
strong worldwide same-store sales growth of 5.3%.
EBITDA, on a pro forma basis, increased 15% to $1.15 billion for the first
quarter of 2001 from $1.0 billion for the same prior-year period. EBITDA growth
outpaced revenue growth for the periods presented primarily due to increased
margins on the additional revenues.
Segment Results of Operations
-----------------------------
Cable Networks (MTV Networks ("MTVN") including MTV, VH1, Nickelodeon, Nick at
Nite, TV Land, TNN and CMT; BET; and Showtime Networks Inc. ("SNI"))
-------------------------------------------------------------------------
Three Months Ended
March 31, Percent
2001 2000 B/(W)
-------------------------------------------------------------------------
As Reported:
Revenues $ 982.4 $ 771.1 27%
Operating income $ 252.9 $ 191.0 32
EBITDA $ 359.4 $ 235.5 53
-------------------------------------------------------------------------
Pro Forma:
Revenues $ 998.9 $ 970.6 3%
Operating income $ 254.6 $ 208.9 22
EBITDA $ 365.4 $ 312.4 17
------------------------------------------------------------------------
For the first quarter of 2001, Cable Networks recorded double-digit EBITDA and
operating income growth on both an as reported and pro forma basis. Higher pro
forma revenues were primarily driven by double-digit revenue growth at MTV, VH1,
BET, SNI and TV Land. Revenue gains were principally driven by advertising rate
increases at MTV, VH1, BET and TV Land and higher cable affiliate fees. Pro
forma EBITDA increases principally reflect higher cable affiliate and DBS
revenues and modest growth in operating costs. Subscriber growth continued in
the quarter; Nickelodeon and TNN passed the 80 million-subscriber mark and VH1
now reaches over 76 million
-21-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
subscribers. Showtime subscriptions increased 26% over the prior year by
approximately 6.2 million subscriptions to 29.6 million subscriptions at March
31, 2001.
The Company completed its acquisition of BET on January 23, 2001 for
approximately $3 billion consisting principally of Viacom Class B Common Stock
and the assumption of debt. Pro forma results assume the acquisition of the CBS
Cable Networks, TNN and CMT, and the acquisition of BET, had occurred on January
1, 2000.
Television (CBS and UPN Television Networks and Stations; Television Production
and Syndication)
-------------------------------------------------------------------------
Three Months Ended
March 31, Percent
2001 2000 B/(W)
-------------------------------------------------------------------------
As Reported:
Revenues $ 2,030.8 $ 528.1 285%
Operating income $ 118.7 $ 88.1 35
EBITDA $ 314.7 $ 117.3 168
-------------------------------------------------------------------------
Pro Forma:
Revenues $ 2,030.8 $1,888.0 8%
Operating income $ 118.7 $ 81.7 45
EBITDA $ 314.7 $ 276.4 14
-------------------------------------------------------------------------
Television segment's pro forma revenues, EBITDA and operating income growth were
principally led by the CBS Network, which achieved double-digit revenue growth
in primetime with increased ratings and pricing in the first quarter of 2001.
Television's revenue growth was driven by strong first quarter programming on
the CBS Network, including Super Bowl XXXV, Survivor: The Australian Outback,
CSI: Crime Scene Investigation, the continued success of its Monday night
line-up and the timing of the National Semifinals of the NCAA Men's Basketball
Championship Tournament. CBS Network's strong revenue growth was partially
offset by higher programming costs, including increases in contractual sports
rights.
Paramount Television revenues were higher for the quarter primarily from
continuing network and first run syndication shows including Frasier, Charmed,
7th Heaven, Judge Judy and Judge Joe Brown. These higher revenues were partially
offset by lower syndication library revenues and lower revenues from the
cancelled series Beverly Hills 90210. Paramount Television's operating income
and EBITDA decreased principally due to a change in product mix. United
Paramount Network ("UPN") also continues to deliver improved results.
Pro forma results assume that the Viacom/CBS merger and the acquisition of the
remaining 50% interest of UPN had occurred on January 1, 2000. Included in the
pro forma results for first quarter 2000 are losses of approximately $31 million
for iWon.com, which was previously a minority-owned, consolidated subsidiary. In
2001, iWon.com is accounted for under the equity method.
-22-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Infinity (Radio Stations, Outdoor Advertising Properties)
-------------------------------------------------------------- ---------
Three Months Ended
March 31, Percent
2001 2000 B/(W)
------------------------------------------------------------------------
As Reported:
Revenues $ 835.6 $ -- NM
Operating income $ 35.9 $ -- NM
EBITDA $ 323.1 $ -- NM
------------------------------------------------------------------------
Pro Forma:
Revenues $ 834.9 $ 871.4 (4)%
Operating income $ 8.3 $ 25.2 (67)
EBITDA $ 321.7 $ 338.5 (5)
------------------------------------------------------------------------
NM - not meaningful
Infinity's pro forma revenues and EBITDA decreased for the first quarter of 2001
reflecting difficult comparisons with the comparable prior year period, which
benefited from an exceptionally strong advertising environment including very
strong demand from Internet companies. Operating expenses, as a percentage of
revenues, were essentially flat compared with the prior year. Infinity continues
to maintain its strong margins and has gained market share by outpacing the
out-of-home market.
On February 21, 2001, the Company completed its merger with Infinity, acquiring
all of the issued and outstanding shares of Infinity common stock that it did
not already own, or approximately 36%, for a total purchase price of
approximately $13.4 billion. Pro forma results assume the acquisition of
Infinity had occurred on January 1, 2000 and also assume the completion of all
acquisitions and related divestitures of radio and outdoor properties by
Infinity had occurred at the beginning of each period presented.
Entertainment (Paramount Pictures, Famous Players, Famous Music Publishing and
Paramount Parks)
-------------------------------------------------------------------------
Three Months Ended
March 31, Percent
2001 2000 B/(W)
-------------------------------------------------------------------------
Revenues $ 595.2 $ 522.6 14%
Operating income $ 25.3 $ 14.9 70
EBITDA $ 63.8 $ 54.7 17
-------------------------------------------------------------------------
For the first quarter of 2001, Entertainment revenues of $595.2 million
increased 14% principally as a result of higher Features revenues. The higher
Features revenues primarily consisted of higher domestic theatrical, foreign
home video, pay television and features network revenues partially offset by
lower foreign theatrical and domestic home video revenues. Domestic theatrical
revenues include the box office success of Save The Last Dance, Down to Earth
and Enemy at the Gates as well as continuing contributions from What Women Want.
Higher foreign home video revenues were led by continuing contributions from the
successful foreign video release of Mission: Impossible 2 while the higher
features network revenues include contributions from Deep Impact and The Truman
Show. Theaters' revenues were slightly lower primarily as a result of lower
attendance partially offset by higher per capita spending. The parks begin full
time operations during the
-23-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
second quarter and close full-time operations at the end of the third quarter
and therefore, record the majority of revenues, operating income and EBITDA
during the second and third quarters.
For the first quarter of 2001, Entertainment's operating income and EBITDA
increased 70% to $25.3 million and 17% to $63.8 million, respectively,
principally due to higher features profits from the revenue items noted above.
Theaters' EBITDA was higher for the quarter primarily due to lower overhead
while the increase in operating income resulted from lower depreciation expense
in addition to lower overhead.
Video (Blockbuster)
-------------------------------------------------------------------------
Three Months Ended
March 31, Percent
2001 2000 B/(W)
-------------------------------------------------------------------------
Revenues $ 1,307.9 $1,211.1 8%
Operating income $ 53.8 $ 44.7 20
EBITDA $ 160.5 $ 150.3 7
-------------------------------------------------------------------------
Video revenues increased 8% to $1.31 billion primarily driven by higher
worldwide same store sales and an increase in the number of company-operated
stores. Worldwide same store sales, including rental and retail product,
increased 5.3%, with an increase in worldwide same store rental revenues of
6.6%. Rental revenues increased 9% over the comparable prior year's quarter
driven by significant growth in DVD rental activity. Blockbuster ended the first
quarter of 2001 with 7,723 company-owned and franchise stores, a net increase of
475 stores over the first quarter of 2000 of which 29 company-owned stores were
added in the first quarter 2001.
Video's gross margin increased to 59.6% for the first quarter of 2001 from 59.0%
for the first quarter of 2000 principally due to the decrease in cost of sales
as a percentage of total revenues. Blockbuster is continually evaluating its
product mix and product offerings, as well as related strategic offerings, to
try to optimize its stores' revenues and gross profit. Blockbuster intends to
continue to increase its stores' depth of DVDs and other home entertainment
products in response to accelerated consumer acceptance of DVD and other home
entertainment products. These initiatives to optimize stores' revenues and gross
profit may cause Blockbuster to alter the product mix in its stores which may
cause Blockbuster to rationalize its stores existing product mix which could
result in a non-cash charge.
-24-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Publishing (Consumer Publishing)
------------------------------------------------------------ -----------
Three Months Ended
March 31, Percent
2001 2000 B/(W)
------------------------------------------------------------------------
Revenues $ 121.9 $ 112.8 8%
Operating income $ (3.5) $ (7.0) 50
EBITDA $ 2.2 $ (1.7) NM
------------------------------------------------------------------------
NM - not meaningful
The Publishing segment is comprised of Simon & Schuster Inc., which also
includes other flagship imprints such as Pocket Books, Scribner and The Free
Press.
For the quarter, Publishing reported higher revenues and EBITDA principally due
to increased sales in the Pocket Books division. Publishing's best-selling
titles in the first quarter included Dreamcatcher by Stephen King, Before I Say
Goodbye by Mary Higgins Clark, End of the Rainbow by V.C. Andrews and An Hour
Before Daylight by Jimmy Carter. Publishing typically has seasonally stronger
operating results in the second half of the year.
Other Income and Expense Information
------------------------------------
Corporate Expenses/Eliminations
Corporate expenses/eliminations, excluding depreciation expense, decreased 41%
to $51.3 million for the first quarter of 2001 from $86.5 million for the first
quarter of 2000 principally due to a $27.5 million decrease in intersegment
profit eliminations. Corporate expenses of $24.4 million for the first quarter
of 2001 decreased 24% from $32.2 million for the same prior-year period.
Interest Expense
Interest expense increased 110% to $256.9 million for the first quarter of 2001
from $122.5 million for the first quarter of 2000. The Company had approximately
$13.0 billion and $6.8 billion principal amount of debt outstanding (including
current maturities) as of March 31, 2001 and 2000, respectively, at weighted
average interest rates of 7.0% and 7.3%, respectively.
Interest Income
Interest income increased 20% to $11.4 million for the first quarter of 2001
from $9.5 million for the first quarter of 2000.
Other Items, Net
"Other items, net" reflects a $9.8 million loss for the first quarter of 2001
compared to income of $1.7 million for the first quarter of 2000. The decrease
of $11.5 million principally reflects a decrease of $10.6 million related to
foreign exchange gains in the first quarter of 2001 as compared to the first
quarter of 2000.
-25-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Provision for Income Taxes
The provision for income taxes represents federal, state and foreign income
taxes on earnings before income taxes. The estimated effective tax rates of
83.2% for 2001 and 45.0% for 2000 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 effective tax
rates would have been 42.5% for 2001 and 31.0% for 2000.
Equity in Loss of Affiliated Companies, Net of Tax
"Equity in loss of affiliated companies, net of tax" was $27.1 million for the
first quarter of 2001 as compared to $6.1 million for the first quarter of 2000,
principally reflecting losses of internet equity ventures partially offset by
the continuing improved performance of Comedy Central. The prior year's first
quarter amounts include the equity losses of UPN. The remaining 50% interest of
UPN was acquired by the Company in March 2000.
Minority Interest
Minority interest for the first quarter of 2001 primarily represents the
minority ownership of Infinity, prior to its merger with the Company on February
21, 2001, and the minority ownership of Blockbuster common stock. Minority
interest for the prior year's comparable quarter reflects the minority ownership
of Blockbuster common stock.
Cumulative Effect of Change in Accounting Principle, Net of Tax
In 2000, the Company elected early adoption of Statement of Position 00-2,
"Accounting by Producers or Distributors of Films." As a result of this early
adoption, the Company recorded an after-tax non-cash charge of $452 million as
a cumulative effect of a change in accounting principle in the consolidated
statement of operations.
Net Earnings (Loss)
For the reasons described above, the Company reported a net loss of $7.3 million
for the first quarter of 2001 as compared to a net loss of $384.3 million for
the first quarter of 2000.
Acquisitions
------------
On February 21, 2001, the Company completed a merger with Infinity acquiring
approximately 36% of the issued and outstanding shares of Infinity common stock
that it did not already own. Under the terms of the merger, which is tax free
for the stockholders of Infinity and Viacom, each share of Infinity Class A
common stock was converted into the right to receive 0.592 of a share of Viacom
Class B Common Stock. The Infinity merger was accounted for at historical cost,
with the exception of minority interest, which was accounted for under the
purchase method of accounting. The total purchase price of approximately $13.4
billion represents the issuance of approximately 232 million shares of Viacom
Class B Common Stock and the fair value of Infinity stock options assumed by the
Company. Infinity stockholders received a cash payment in lieu of any fractional
shares. The goodwill attributable to this transaction of approximately $7.6
billion is being amortized on a straight-line basis over 40 years.
On January 23, 2001, the Company completed its acquisition of BET for
approximately $3 billion, which principally represents the issuance of
approximately 43.4 million shares of Viacom Class B Common Stock from treasury
stock and the assumption by the Company of approximately $590 million in debt.
The total cost to acquire BET has been allocated based on the fair value of the
assets acquired and liabilities assumed at the time of the acquisition. The
excess purchase price over the fair value of the tangible net assets acquired of
approximately $2.9 billion was allocated to intangibles and is being amortized
on a straight-line basis not to exceed 40 years. The final allocation of the
purchase price will be based on comprehensive final evaluations of the fair
value of BET's tangible and identifiable assets acquired and liabilities
assumed.
Liquidity and Capital Resources
-------------------------------
The Company expects to fund its anticipated cash requirements (including the
anticipated cash requirements of its capital expenditures, share repurchase
programs, joint ventures, commitments and payments of principal and interest on
its outstanding indebtedness) with internally generated funds, in addition to
various external sources of funds. The external sources of funds may include the
Company's access to commercial paper and the
-26-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Company's credit agreements, co-financing arrangements by the Company's various
divisions relating to the production of entertainment products, and/or
additional financings.
Subsequent to its August 1999 initial public offering, Blockbuster no longer
participates in the Company's centralized cash management system. Cash generated
by Blockbuster's operations is expected to be retained by Blockbuster to fund
its anticipated cash requirements.
The Company filed a shelf registration statement with the Securities and
Exchange Commission registering debt securities, preferred stock and warrants of
Viacom that may be issued for aggregate gross proceeds of $5.0 billion. The
registration statement was declared effective on January 8, 2001. The net
proceeds from the sale of the offered securities may be used by Viacom for
general corporate purposes, including repayment of borrowings, working capital
and capital expenditures; or for such other purposes as may be specified in the
applicable Prospectus Supplement. To date, the Company has not issued any
securities under the shelf registration statement.
On May 10, 2001, the Company announced its intention to sell $1.4 billion of
global debt securities to be comprised of $400 million of 6.40% unsecured senior
notes due January 30, 2006 and $1 billion of 6.625% senior notes due May 15,
2011; interest on the senior notes will be payable semi-annually. Proceeds from
the sale of securities will be used to repay existing short-term debt.
Share Repurchase Program
In January 2001, the Company repurchased 1.1 million shares of its Class B
Common Stock for approximately $56.3 million. On February 1, 2001, the Company
initiated a new repurchase program to acquire up to $2.0 billion of Viacom Class
B Common Stock, and through April 30, 2001, the Company had repurchased under
this program 5.4 million shares of its Class B Common Stock for $264.6 million.
Commitments and Contingencies
-----------------------------
The commitments of the Company for program license fees, estimated to aggregate
approximately $14.3 billion, are not reflected in the balance sheet as of March
31, 2001. These commitments include approximately $10.3 billion for the
acquisition of sports programming rights. A majority of such fees are payable
over several years, as part of normal programming expenditures.
The Company, Blockbuster and Paramount Home Entertainment are among the
defendants in a lawsuit filed on July 21, 1999 in the United States District
Court for the Western District of Texas by one former and three present
independent video retailers against the major motion picture studios and the
Company. The plaintiffs, purporting to act as class representatives on behalf of
themselves and all others similarly situated, allege that the Company and the
studios conspired among themselves and with Blockbuster to restrain competition
in the nationwide market for distribution of videocassettes for rental to the
public in violation of federal and California law. Plaintiffs seek injunctive
relief under federal law as well as triple the amount of the alleged actual
damages to themselves and those similarly situated under California statutes. In
January 2001, plaintiffs moved to withdraw their California state law claims
from the federal lawsuit in Texas and filed a substantially similar complaint
with approximately 200 additional named plaintiffs in Superior Court for the
County of Los Angeles. This complaint also sought certification of a nationwide
class of similarly situated plaintiffs. In March 2001, the Texas court denied
the plaintiffs' motion for class certification of both the federal and the
California state law claims in the federal action and denied the plaintiffs'
motion to withdraw their California state law claims from that action. The
Company believes that the plaintiffs' position in these litigations is without
merit and intends to defend itself vigorously in the litigations.
The Company is a defendant in numerous lawsuits claiming various
asbestos-related personal injuries, which allegedly occurred from use or
inclusion of asbestos in certain products supplied by previously divested
industrial business, generally in the pre-1970 time period. Typically, these
lawsuits are brought against multiple defendants in state and federal courts.
The Company was neither a manufacturer nor a producer of asbestos. As of March
31, 2001, the Company had pending approximately 105,800 asbestos cases,
excluding cases in various stages of settlement. The Company has brought suit
against certain of its insurance carriers with respect to asbestos claims. Under
the terms of a settlement agreement resulting from this suit, carriers that
-27-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
have agreed to the settlement are now reimbursing the Company for a substantial
portion of its current costs and settlement associated with asbestos claims. The
Company believes that it has meritorious defenses to asbestos matters, that
where appropriate it has adequately provided for resolution of matters and that
any ultimate liability resulting from asbestos matters is not likely to have a
material adverse effect on its results of operations, financial position or cash
flows.
The Company from time to time receives claims from federal and state
environmental regulatory agencies and other entities asserting that it is or may
be liable for environmental cleanup costs and related damages, principally
relating to discontinued operations conducted by companies acquired by the
Company. The Company's liabilities reflect management's best estimate of its
environmental exposure. Such liability was not discounted or reduced by
potential insurance recoveries and reflects management's estimate of cost
sharing at multiparty sites. The estimated liability was calculated based upon
currently available facts, existing technology and presently enacted laws and
regulations. On the basis of its experience and the information currently
available to it, the Company believes that the claims it has received will not
have a material adverse effect on its results of operations, financial position
or liquidity.
In addition to the above matters, the Company and various of its subsidiaries
are parties to certain other legal proceedings. Litigation is inherently
uncertain and always difficult to predict. However, based on its understanding
and evaluation of the relevant facts and circumstances, the Company believes
that these matters are not likely to have a material adverse effect on its
results of operations, financial position or cash flows.
Financial Position
------------------
Current assets increased to $7.9 billion at March 31, 2001 from $7.8 billion at
December 31, 2000, due to increases in receivables and inventory, partially
offset by a decrease in other current assets. The allowance for doubtful
accounts as a percentage of receivables was 5.8% at March 31, 2001 and December
31, 2000. The change in property and equipment principally reflects capital
expenditures of $105.0 million related to capital additions principally for
cable networks and radio equipment and video stores offset by depreciation
expense of $214.1 million. Intangibles of $71.9 billion at March 31, 2001
increased by $9.9 billion compared to $62.0 billion at December 31, 2000,
principally reflecting the first quarter 2001 acquisition of BET and the merger
with Infinity. Current liabilities of $7.8 billion at March 31, 2001 remained
unchanged from December 31, 2000. Long-term debt, including current maturities,
increased $.3 billion to $13.0 billion as of March 31, 2001 from $12.7 billion
as of December 31, 2000 principally due to the BET acquisition partially offset
by repayments to banks. The minority interest balance of $1.2 billion as of
March 31, 2001 decreased from $7.0 billion as of December 31, 2000 reflecting
the merger with Infinity.
Cash Flows
----------
Net cash flow from operating activities of $453.2 million for the three months
ended March 31, 2001 principally reflects a net loss of $7.3 million adjusted
for $745.2 million of depreciation and amortization partially offset by
investments in inventory and decreases in accounts payable and accrued expenses.
Net cash flow from operating activities of $108.6 million for the three months
ended March 31, 2000 principally reflects a net loss of $384.3 million adjusted
for non-cash expenses of $983.1 million for depreciation and amortization and
cumulative effect of change in accounting principle. Prior year's net cash flow
from operations also reflects a decrease in receivables of $192.2 million
partially offset by a decrease in accounts payable and accrued expenses. Net
cash expenditures for investing activities of $509.0 million for the three
months ended March 31, 2001 reflects the acquisition of BET and capital
expenditures of $105.0 million partially offset by proceeds from dispositions of
radio stations and other assets for approximately $228.8 million. Net cash
expenditures for investing activities of $193.7 million for the three months
ended March 31, 2000 principally reflect capital expenditures of $105.7 million
and investments in and advances to affiliated companies of $64.6 million.
Financing activities for the three months ended March 31, 2001 reflect proceeds
from the issuance of senior notes and debentures principally offset by the
payment of bank debt and purchase of treasury stock. Financing activities for
the three months ended March 31, 2000 principally reflect net borrowings from
banks, offset by the purchase of treasury stock.
-28-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Capital Structure
-----------------
The following table sets forth the Company's long-term debt, net of current
portion:
At March 31, 2001 At December 31, 2000
----------------- --------------------
Notes payable to banks (including
commercial paper) $ 4,531.7 $ 5,735.5
Senior debt 7,352.5 5,662.7
Senior subordinated debt 564.1 664.4
Subordinated debt 39.1 39.4
Other notes 41.7 43.5
Obligations under capital leases 508.0 552.2
------------- -------------
13,037.1 12,697.7
Less current portion 150.0 223.9
------------- -------------
$ 12,887.1 $ 12,473.8
============= =============
The notes and debentures are presented net of an aggregate unamortized discount
of $14.8 million as of March 31, 2001 and $21.4 million as of December 31, 2000.
Debt, including the current portion, as a percentage of total capitalization of
the Company was 17% at March 31, 2001 and 21% at December 31, 2000.
On January 9, 2001, the Company issued under Rule 144A, $400 million of 6.40%
unsecured senior notes due January 30, 2006, $500 million of 7.70% unsecured
senior notes due July 30, 2010, and $750 million of 7.875% unsecured senior
debentures due July 30, 2030; interest on the senior notes and debentures will
be payable semi-annually. Proceeds from the debt issuance were used to repay
bank debt, including commercial paper. During March 2001, these notes and
debentures were exchanged for registered notes and debentures. The unsecured
senior debentures and the unsecured senior notes due July 30, 2010, are
redeemable at any time at their principal amount plus the applicable premium and
accrued interest.
On February 1, 2001, the Company redeemed all $60.3 million outstanding of
Infinity's 9% senior subordinated notes due 2006 at a redemption price equal to
104.5% of the principal amount.
In March 2001, the Company cancelled its credit agreements other than its
Infinity $1.45 billion facility, and entered into two new credit facilities.
These two new facilities total $3.5 billion and are comprised of a $1.5 billion
5-year revolving credit facility and a $2.0 billion 364-day revolving credit
facility. The Company also amended and restated the Infinity $1.45 billion
facility; the terms and conditions were substantially conformed to the new $1.5
billion 5-year revolving credit facility and the Company was designated as the
borrower. The primary purpose of the facilities is to support commercial paper
borrowings. The Company, at its option, may borrow in certain foreign currencies
up to specified limits under the new $1.5 billion 5-year revolving credit
facility. Borrowing rates under the facilities are determined at the time of
each borrowing and are based generally on LIBOR plus a margin based on the
Company's senior unsecured debt rating. At March 31, 2001, LIBOR for borrowing
periods of one month and two months were 5.08% and 4.98%, respectively.
The new and amended facilities contain certain covenants which, among other
things, require that the Company maintain a minimum interest coverage ratio. At
March 31, 2001, the Company was in compliance with the financial covenants.
-29-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
In March 2001, the Company increased its commercial paper program from $4.0
billion to $4.95 billion and Infinity cancelled its $3.25 billion commercial
paper program. Borrowings under the program have maturities of less than a year
and are supported by unused committed bank facilities. At March 31, 2001, the
Company had borrowings under the program of approximately $3.3 billion.
Merger-Related Charges
----------------------
In connection with the integration of Viacom and CBS and the acquisition of UPN,
the Company recorded merger-related charges of $698 million in the second
quarter of 2000. These amounts included non-cash charges of $415 million
principally attributable to compensation for stock options and $283 million of
cash payments and accrued liabilities for severance, transaction fees and
integration costs. As of March 31, 2001, the Company had paid and charged
approximately $97 million for severance liabilities, $27 million for transaction
fees and $40 million related to integration costs.
Market Risk
-----------
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 swaps. The foreign exchange contracts have principally been used to hedge
the British Pound, the Australian Dollar, the Japanese Yen, the Canadian Dollar,
the Singapore Dollar and the European Union's common currency (the "Euro").
These derivatives, which are over-the-counter instruments, are non-leveraged.
Realized gains and losses on contracts that hedge anticipated future cash flows
are recognized in "Other items, net" and were not material in the periods
presented. The Company is primarily vulnerable to changes in LIBOR which is the
rate currently used in existing agreements; however, the Company does not
believe this exposure to be material.
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133") as amended. SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at fair value. SFAS 133 also
established new accounting rules for hedging instruments which, depending on the
nature of the hedge, require that changes in the fair value of the derivatives
either be offset against the change in fair value of assets or liabilities
through earnings, or be recognized in other comprehensive income until the
hedged item is recognized in earnings. The impact of adoption was immaterial on
the Company's consolidated results of operations and financial position.
The Company is exposed to fluctuations in foreign currency exchange rates. To
manage foreign currency exposures, the Company may use derivative instruments,
including swaps and forward contracts. Derivative instruments used by the
Company in its hedging activities are not used for speculative trading purposes
and are not designated as hedges. As of March 31, 2001, the change in fair value
of the foreign currency exchange contracts was not material to the Company's
consolidated results of operations.
As of March 31, 2001, the Company's outstanding interest rate swaps, which
effectively convert variable interest payments on commercial paper to a fixed
rate, were designated as hedges. The effective portion of the change in fair
value of cash flow hedges are reported in other comprehensive income and
reclassified into earnings in the same period in which the hedged transaction
affects earnings. The ineffective portion included in earnings was not material.
Other Matters
-------------
In early April 2001, the United States Court of Appeals, DC Circuit, granted the
Company's motion for interim relief from the Federal Communications Commission
(the "FCC") national broadcast station ownership cap, which prohibits a company
from owning stations that reach more than 35% of the nation's television
households. As a result of the favorable ruling, the Company will not be
required to divest broadcast stations in excess of that cap, pending the outcome
of further proceedings in that court.
-30-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
On April 19, 2001, the FCC voted to eliminate the dual network rule as it
applied to the "Big Four" networks' ownership of UPN and/or The WB, thereby
permitting the Company to own both the CBS and UPN broadcast television
networks.
Cautionary Statement Concerning Forward looking Statements
This quarterly report on Form 10-Q, including "Management's Discussion and
Analysis of Results of Operations and Financial Condition," contains both
historical and forward-looking statements. All statements other than statements
of historical fact are, or may be deemed to be, forward-looking statements
within the meaning of section 27A of the Securities Act of 1933 and section 21E
of the Securities Exchange Act of 1934, as amended. These forward-looking
statements are not based on historical facts, but rather reflect the Company's
current expectations concerning future results and events. These forward-looking
statements generally can be identified by the use of statements that include
phrases such as "believe," "expect," "anticipate," "intend," "plan," "foresee,"
"likely," "will" or other similar words or phrases. Similarly, statements that
describe the Company's objectives, plans or goals are or may be forward-looking
statements. These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be different from any future results,
performance and achievements expressed or implied by these statements.
A variety of factors, including those set forth under the heading "Cautionary
Statement Concerning Forward-Looking Statements" in our Annual Report on Form
10-K for the fiscal year ended December 31, 2000, could cause actual results to
differ materially from the anticipated results or other expectations expressed
in the forward-looking statements. There may be additional risks that the
Company does not currently view as material or that are not presently known.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Response to this is included in "Item 2 - Management's Discussion
and Analysis of Results of Operations and Financial Condition - Market Risk."
-31-
PART II -- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
On January 23, 2001, the Company issued approximately 43.4 million shares of
Viacom Class B Common Stock in connection with its acquisition of BET Holdings
II, Inc., in a transaction exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit Description of Document
------- -----------------------
No.
---
(2) Plan of Acquisition
(a) Amended and Restated Agreement and Plan of Merger, dated as
of September 6, 1999, as amended and restated as of October
8, 1999 and as of November 23, 1999, among Viacom Inc., CBS
Corporation and Viacom/CBS LLC (incorporated by reference to
Exhibit 2.1 to the Registration Statement on Form S-4 filed
by Viacom Inc.) (File No. 333-88613).
(b) Agreement and Plan of Merger, dated as of October 30, 2000,
among Viacom Inc., IBC Merger Corp. and Infinity
Broadcasting Corporation (incorporated by reference to
Exhibit 99.1 to the Current Report on Form 8-K of Viacom
Inc. with a Report Date of October 30, 2000) (File No.
1-9553).
(3) Articles of Incorporation and By-laws
(a) Restated Certificate of Incorporation of Viacom Inc.
effective May 4, 2000 (incorporated by reference to Exhibit
3.1 to the Registration Statement on Form S-4 filed by
Viacom Inc.) (File No. 333-88613).
(b) Amended and Restated By-laws of Viacom Inc. effective May 4,
2000 (incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-4 filed by Viacom Inc.)
(File No. 333-88613).
(4) Instruments defining the rights of security holders,
including indentures
(a) Specimen certificate representing Viacom Inc. Class A Common
Stock (incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-4 filed by Viacom Inc.)
(File No. 33-13812).
(b) Specimen certificate representing Viacom Inc. Class B Common
Stock (incorporated by reference to Exhibit 4(a) to the
Quarterly Report on Form 10-Q of Viacom Inc. for the quarter
ended June 30, 1990) (File No. 1-9553).
-32-
Exhibit Description of Document
------- -----------------------
No.
---
(c) The instruments defining the rights of holders of the
long-term debt securities of Viacom Inc. and its
subsidiaries are omitted pursuant to section (b)(4)(iii)(A)
of Item 601 of Regulation S-K. Viacom Inc. hereby agrees to
furnish copies of these instruments to the Securities and
Exchange Commission upon request.
(10) Material Contracts
(a) Viacom Inc. 2000 Long-Term Management Incentive Plan (As
Amended and Restated through January 31, 2001) (filed
herewith).*
(b) Viacom Inc. 2000 Stock Option Plan for Outside Directors (As
Amended and Restated through January 31, 2001) (filed
herewith).*
(b) Reports on Form 8-K.
Current Report on Form 8-K of Viacom Inc. with a Report Date of January 5,
2001, announcing the meeting of stockholders of Infinity Broadcasting
Corporation to seek approval of the merger of Viacom Inc. and Infinity
Broadcasting Corporation.
Current Report on Form 8-K of Viacom Inc. with a Report Date of January 5,
2001, announcing the intention of Viacom Inc. to sell $1.5 billion of
global debt securities.
Current Report on Form 8-K of Viacom Inc. with a Report Date of February
14, 2001, relating to the issuance of earnings information for the fourth
quarter and full year ending December 31, 2000.
Current Report on Form 8-K of Viacom Inc. with a Report Date of February
21, 2001, announcing the completion of the merger of Viacom Inc. and
Infinity Broadcasting Corporation pursuant to the Agreement and Plan of
Merger, dated as of October 30, 2000, with Financial Statements of
Businesses Acquired included therein.
--------------------
*Management contract or compensatory plan required to be filed as an exhibit to
this form.
-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 May 14, 2001 /s/ Sumner M. Redstone
------------------------------- --------------------------------------
Sumner M. Redstone
Chairman of the Board of Directors,
Chief Executive Officer
Date May 14, 2001 /s/ Susan C. Gordon
------------------------------- --------------------------------------
Susan C. Gordon
Vice President, Controller,
Chief Accounting Officer
-34-
Exhibit Index
-------------
Exhibit Description of Document
------- -----------------------
No.
---
(2) Plan of Acquisition
(a) Amended and Restated Agreement and Plan of Merger, dated as
of September 6, 1999, as amended and restated as of October
8, 1999 and as of November 23, 1999, among Viacom Inc., CBS
Corporation and Viacom/CBS LLC (incorporated by reference to
Exhibit 2.1 to the Registration Statement on Form S-4 filed
by Viacom Inc.) (File No. 333-88613).
(b) Agreement and Plan of Merger, dated as of October 30, 2000,
among Viacom Inc., IBC Merger Corp. and Infinity
Broadcasting Corporation (incorporated by reference to
Exhibit 99.1 to the Current Report on Form 8-K of Viacom
Inc. with a Report Date of October 30, 2000) (File No.
1-9553).
(3) Articles of Incorporation and By-laws
(a) Restated Certificate of Incorporation of Viacom Inc.
effective May 4, 2000 (incorporated by reference to Exhibit
3.1 to the Registration Statement on Form S-4 filed by
Viacom Inc.) (File No. 333-88613).
(b) Amended and Restated By-laws of Viacom Inc. effective May 4,
2000 (incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-4 filed by Viacom Inc.)
(File No. 333-88613).
(4) Instruments defining the rights of security holders,
including indentures
(a) Specimen certificate representing Viacom Inc. Class A Common
Stock (incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-4 filed by Viacom Inc.)
(File No. 33-13812).
(b) Specimen certificate representing Viacom Inc. Class B Common
Stock (incorporated by reference to Exhibit 4(a) to the
Quarterly Report on Form 10-Q of Viacom Inc. for the quarter
ended June 30, 1990) (File No. 1-9553).
(c) The instruments defining the rights of holders of the
long-term debt securities of Viacom Inc. and its
subsidiaries are omitted pursuant to section (b)(4)(iii)(A)
of Item 601 of Regulation S-K. Viacom Inc. hereby agrees to
furnish copies of these instruments to the Securities and
Exchange Commission upon request.
(10) Material Contracts
(a) Viacom Inc. 2000 Long-Term Management Incentive Plan (As
Amended and Restated through January 31, 2001) (filed
herewith).*
(b) Viacom Inc. 2000 Stock Option Plan for Outside Directors (As
Amended and Restated through January 31, 2001) (filed
herewith).*
--------------------
*Management contract or compensatory plan required to be filed as an exhibit to
this form.
-35-