SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 September 30, 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.
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(Exact name of registrant as specified in its charter)
Delaware 04-2949533
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1515 Broadway, New York, New York 10036
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 258-6000
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Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No .
----- -----
Number of shares of Common Stock Outstanding at October 31, 2001:
Class A Common Stock, par value $.01 per share - 137,387,094
Class B Common Stock, par value $.01 per share - 1,635,952,255
VIACOM INC.
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statements of Operations (Unaudited) for the Three and Nine Months
ended September 30, 2001 and September 30, 2000 3
Consolidated Balance Sheets at September 30, 2001 (Unaudited) and
December 31, 2000 4
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months
ended September 30, 2001 and September 30, 2000 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition. 24
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 39
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 40
Item 6. Exhibits and Reports on Form 8-K. 40
-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 Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2001 2000 2001 2000
============================================================================================================================
Revenues $ 5,713.8 $ 5,810.8 $17,182.9 $ 13,687.5
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Expenses:
Operating 3,574.6 3,201.3 10,167.8 8,022.4
Selling, general and administrative 1,162.3 1,169.3 3,527.6 2,784.0
Merger-related charges -- -- -- 698.5
Depreciation and amortization 783.2 680.3 2,304.3 1,460.5
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Total expenses 5,520.1 5,050.9 15,999.7 12,965.4
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Operating income 193.7 759.9 1,183.2 722.1
Interest expense (226.5) (245.0) (746.6) (560.9)
Interest income 6.5 13.3 25.9 36.7
Other items, net (28.3) .5 (36.1) (14.5)
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Earnings (loss) before income taxes (54.6) 528.7 426.4 183.4
Provision for income taxes (169.4) (424.2) (607.6) (470.2)
Equity in loss of affiliated companies, net of tax (7.7) (44.0) (41.9) (71.4)
Minority interest, net of tax 41.3 (27.1) 42.1 (36.0)
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Net earnings (loss) before cumulative effect of change in
accounting principle (190.4) 33.4 (181.0) (394.2)
Cumulative effect of change in accounting principle,
net of tax -- -- -- (452.3)
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Net earnings (loss) $ (190.4) $ 33.4 $ (181.0) $ (846.5)
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Basic and diluted earnings (loss) per common share:
Net earnings (loss) before cumulative effect of change
in accounting principle $ (.11) $ .02 $ (.11) $ (.35)
Net earnings (loss) $ (.11) $ .02 $ (.11) $ (.75)
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Weighted average number of common shares:
Basic 1,768.0 1,503.7 1,722.2 1,133.7
Diluted 1,768.0 1,544.5 1,722.2 1,133.7
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See notes to consolidated financial statements.
-3-
VIACOM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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(In millions, except per share amounts)
At September 30, At December 31,
2001 2000
============================================================================================================================
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 525.3 $ 934.5
Receivables, less allowances of $259.2 (2001) and $246.2 (2000) 3,843.3 3,964.1
Inventory (Note 5) 1,500.2 1,402.0
Other current assets 1,206.9 1,531.8
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Total current assets 7,075.7 7,832.4
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Property and equipment:
Land 755.7 713.8
Buildings 1,081.1 837.1
Capital leases 809.0 852.5
Advertising structures 2,066.8 2,076.5
Equipment and other 4,590.7 4,505.8
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9,303.3 8,985.7
Less accumulated depreciation and amortization 2,857.6 2,383.9
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Net property and equipment 6,445.7 6,601.8
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Inventory (Note 5) 3,641.6 3,632.9
Intangibles, at amortized cost 71,313.8 62,004.1
Other assets 3,105.9 2,574.9
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Total Assets $ 91,582.7 $ 82,646.1
============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 980.6 $ 1,261.1
Accrued expenses and other 4,073.4 4,343.1
Accrued participations 1,344.4 1,220.3
Program rights 978.0 709.8
Current portion of long-term debt (Note 7) 266.4 223.9
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Total current liabilities 7,642.8 7,758.2
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Long-term debt (Note 7) 11,725.0 12,473.8
Other liabilities 8,182.9 7,407.0
Commitments and contingencies (Note 9)
Minority interest 1,208.5 7,040.2
Stockholders' Equity:
Class A Common Stock, par value $.01 per share; 750.0 shares
authorized; 138.8 (2001) and 138.9 (2000) shares issued 1.4 1.4
Class B Common Stock, par value $.01 per share; 10,000.0 shares
authorized; 1,694.6 (2001) and 1,454.7 (2000) shares issued 17.0 14.5
Additional paid-in capital 64,817.2 50,729.9
Retained earnings 1,250.8 1,431.8
Accumulated other comprehensive loss (Note 1) (193.0) (152.5)
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65,893.4 52,025.1
Less treasury stock, at cost; 1.4 (2001 and 2000) Class A shares and
70.8 (2001) and 96.3 (2000) Class B shares 3,069.9 4,058.2
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Total Stockholders' Equity 62,823.5 47,966.9
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Total Liabilities and Stockholders' Equity $ 91,582.7 $ 82,646.1
============================================================================================================================
See notes to consolidated financial statements.
-4-
VIACOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Unaudited; in millions)
Nine Months ended September 30, 2001 2000
=========================================================================================================================
Operating Activities:
Net loss $ (181.0) $ (846.5)
Adjustments to reconcile net loss to net cash flow from operating
activities:
Inventory and merger-related charges 352.7 698.5
Cumulative effect of change in accounting principle -- 753.9
Depreciation and amortization 2,304.3 1,460.5
Distribution from affiliated companies 46.3 32.4
Equity in loss of affiliated companies 41.9 71.4
Minority interest (42.1) 36.0
Change in operating assets and liabilities, net of effects of acquisitions (576.6) (1,061.3)
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Net cash flow provided by operating activities 1,945.5 1,144.9
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Investing Activities:
Acquisitions, net of cash acquired (770.5) (1,851.3)
Capital expenditures (329.5) (422.1)
Investments in and advances to affiliated companies (54.6) (125.2)
Proceeds from dispositions 235.3 --
Proceeds from sales of short-term investments 53.8 280.7
Purchases of short-term investments (13.8) (83.4)
Other, net 0.1 2.7
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Net cash flow used for investing activities (879.2) (2,198.6)
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Financing Activities:
(Repayments to) borrowings from banks, including commercial paper, net (3,620.6) 1,526.1
Proceeds from senior notes and debentures 3,378.1 1,635.6
Purchase of treasury stock (829.2) (1,588.6)
Repayment of notes and debentures (459.9) (184.7)
Proceeds from exercise of stock options 158.5 162.5
Payment of capital lease obligations (100.9) (102.0)
Purchase of treasury stock by subsidiary -- (82.8)
Other, net (1.5) (.5)
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Net cash flow (used for) provided by financing activities (1,475.5) 1,365.6
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Net increase (decrease) in cash and cash equivalents (409.2) 311.9
Cash and cash equivalents at beginning of the period 934.5 680.8
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Cash and cash equivalents at end of period $ 525.3 $ 992.7
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Supplemental disclosure of cash flow information
Non-cash investing and financing activities:
Fair value of assets acquired $ 11,073.4 $61,553.6
Fair value of liabilities assumed (325.8) (20,733.4)
Acquisition of minority interest 5,749.4 --
Cash paid, net of cash acquired (770.5) (1,851.3)
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Impact on Stockholders' Equity $ 15,726.5 $38,968.9
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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 11). 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 statement 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 ("EPS") is
based upon net earnings (loss) divided by the weighted average number of common
shares outstanding during the period. Diluted EPS 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 and nine months ended September 30, 2001 and
the nine months ended September 30, 2000, incremental shares of 26.0 million,
29.8 million and 29.2 million, respectively, 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 Nine months ended
September 30, September 30,
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2001 2000 2001 2000
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Weighted average shares for basic EPS 1,768.0 1,503.7 1,722.2 1,133.7
Incremental shares for stock options -- 40.8 -- --
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Weighted average shares for diluted EPS 1,768.0 1,544.5 1,722.2 1,133.7
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-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 Nine months ended
September 30, September 30,
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2001 2000 2001 2000
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Net earnings (loss) $ (190.4) $ 33.4 $ (181.0) $ (846.5)
Other comprehensive income (loss):
Unrealized losses on securities, net of tax (6.9) (21.3) (23.0) (32.6)
Cumulative translation adjustments 23.5 (27.1) (12.7) (62.9)
Change in fair value of cash flow hedges, net of tax (3.8) -- (4.8) --
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Comprehensive loss $ (177.6) $ (15.0) $ (221.5) $ (942.0)
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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 and
interest rates. To manage foreign currency and interest rate exposures, the
Company may use derivative instruments, including forward contracts and interest
rate swaps. Derivative instruments used by the Company in its hedging activities
are not used for speculative trading purposes. The Company designates forward
contracts used to hedge future production costs as cash flow hedges.
Additionally, the Company designates interest rate swaps, which effectively
convert variable interest payments on commercial paper to a fixed rate, as cash
flow 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.
Recent Pronouncements- In August 2001, the Financial Accounting Standards Board
("FASB") issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), effective for fiscal years beginning after
December 15, 2001 and replaces SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144
establishes an accounting model for long-lived assets to be disposed of by sale,
including discontinued operations, and replaces the provisions of APB Opinion
No. 30 for the disposal of segments of a business. The adoption of SFAS 144 will
not have a material effect on the Company's financial statements.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS 141")
and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and prohibits the use of the
pooling-of-interests method for such transactions. SFAS 142 requires that
goodwill and intangible assets with indefinite lives, including such assets
recorded in past business combinations, no longer be amortized to
-7-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
earnings, but should instead be tested for impairment annually. Intangible
assets with finite lives will continue to be amortized over their useful lives
and reviewed for impairment. The Company is required to implement SFAS 142 on
January 1, 2002 and amortization of goodwill, and intangible assets with
indefinite lives, ceases upon adoption of this statement. The Company has not
yet determined the impact that this statement will have on its consolidated
financial position or results of operations.
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 was 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 represented 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 $7.7 billion is being
amortized on a straight-line basis over 40 years.
On January 23, 2001, the Company completed its acquisition of BET Holdings II,
Inc. ("BET") for approximately $3 billion, which principally represented 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 above acquisitions, as well as the Viacom/CBS merger, the
acquisition of the remaining 50% interest of United Paramount Network ("UPN")
and the completion of acquisitions and divestitures of radio, outdoor and cable
properties had occurred January 1, 2000. Pro forma results are also adjusted to
exclude the third quarter 2001 Blockbuster charge of $356 million, the second
quarter 2000 non-cash merger-related charges of $698 million and transactions
with divested investments. Pro forma results also reflect the deconsolidation of
iWon.com, which was previously a minority-owned, consolidated subsidiary, as if
it had occurred on 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 of each of the acquired companies.
-8-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Pro Forma Results of Operations Data (unaudited)
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Nine months ended September 30, 2001 2000
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Revenues $ 17,167.4 $ 16,797.4
Net loss before cumulative effect of change in
accounting principle $ (12.4) $ (221.2)
Net loss $ (12.4) $ (671.5)
Basic and diluted loss per common share:
Net loss before cumulative effect of change in
accounting principle $ (.01) $ (.12)
Net loss $ (.01) $ (.38)
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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 above events 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) BLOCKBUSTER SPECIAL ITEM CHARGES
During the third quarter of 2001, Blockbuster executed a strategic
re-merchandising plan to allow for an expansion of store space for DVD and other
strategic product offerings. Blockbuster initiated this plan with the goal of
optimizing its stores' revenues and gross profit based on an evaluation of its
product mix and product offerings. This evaluation also included analyses of
industry trends and projections, such as the accelerated consumer acceptance of
the DVD format. In addition, Blockbuster's DVD rental revenues have increased as
a percentage of rental revenues from approximately 7.3% for the three months
ended September 30, 2000 to approximately 19.8% for the three months ended
September 30, 2001. In connection with its plan, Blockbuster eliminated
approximately 25% of its rental VHS library, certain VHS merchandise inventory
primarily located in its distribution center, and certain games from its rental
library, and reorganized its marketing and new media functions. The cost of the
eliminated inventory, net of any estimated proceeds, resulted in non-cash
charges of approximately $209.8 million to operating expenses in the Company's
consolidated statement of operations. Blockbuster also recorded a charge of
approximately $13.2 million in selling, general and administrative expenses,
primarily related to employee, labor and supply and disposal costs to execute
the plan. Additionally, $2.6 million was charged to depreciation expense and
$1.1 million was charged to equity in loss of affiliated companies. Blockbuster
anticipates that this plan will be completed by the end of 2001 through the
destruction or sale of the identified items.
Also, during the third quarter of 2001, Blockbuster recorded approximately $28
million in selling, general and administrative expenses related to two
outstanding lawsuits.
The amounts described above, along with the $102 million recorded as the change
in accounting estimates for videocassette inventory, represent the previously
announced third quarter 2001 Blockbuster charge of approximately $356 million.
-9-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
4) CHANGE IN ACCOUNTING ESTIMATES FOR RENTAL INVENTORY
Effective July 1, 2001, Blockbuster changed its accounting estimates related to
rental inventory, including residual values and useful lives, given its
strategic re-merchandising plan as discussed in Note 3. The residual value of
VHS rental inventories was reduced from $4 per unit to $2 per unit, and the
residual value of game rental inventories was reduced from $10 per unit to $5
per unit. In addition, Blockbuster reduced its estimate of the useful life of
its base stock VHS rental inventories from 36 months to nine months. These
changes in estimate reflect the impact of changes in the rental business, such
as an increase in DVD rental revenues, a decrease in VHS rental revenues and
trends affecting games, which have led to a reduction in the average selling
value of Blockbuster's previously rented VHS and game products and a reduction
in the average life of VHS rental products. As a result of these changes in
estimate, the Company's operating expenses were $102 million higher and net loss
was higher by $55 million, or an increase in loss per share of $.03, than it
would have been under the previous method for both the third quarter and nine
months ended September 30, 2001.
5) INVENTORY
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At September 30, 2001 At December 31, 2000
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Theatrical and television inventory:
Theatrical:
Released (including acquired film libraries) $ 405.7 $ 365.6
Completed, not released 4.5 49.5
In process and other 476.4 276.6
Television:
Released (including acquired film libraries) 911.9 881.9
In process and other 180.3 151.5
Program rights 2,405.9 2,163.4
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4,384.7 3,888.5
Less current portion 1,102.0 985.9
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3,282.7 2,902.6
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Merchandise inventory, including sell-through inventory 293.8 309.9
Rental inventory 281.1 631.6
Publishing, primarily finished goods 72.3 67.9
Other 109.9 137.0
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757.1 1,146.4
Less current portion 398.2 416.1
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358.9 730.3
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Total Current Inventory $ 1,500.2 $ 1,402.0
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Total Non-Current Inventory $ 3,641.6 $ 3,632.9
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-10-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
6) 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
accrued liabilities for severance, transaction fees and integration costs. As of
September 30, 2001, the Company had paid and charged approximately $104 million
for severance liabilities, $27 million for transaction fees and $57 million
related to integration costs.
7) LONG-TERM DEBT
The following table sets forth the Company's long-term debt, net of current
portion:
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At September 30, At December 31,
2001 2000
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Notes payable to banks (including commercial paper) $ 2,135.4 $ 5,735.5
Senior debt (6.40% - 10.50% due 2002-2051) 8,885.1 5,662.7
Senior subordinated debt (8.875% - 9.375% due 2006-2007) 458.0 664.4
Subordinated debt (11.375% due 2009) 20.0 39.4
Other notes 18.8 43.5
Obligations under capital leases 474.1 552.2
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Total Debt 11,991.4 12,697.7
Less current portion 266.4 223.9
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Total Long-Term Debt $ 11,725.0 $ 12,473.8
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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 and September 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 by the Company 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 the Blockbuster Credit Agreement, 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
September 30, 2001, LIBOR for borrowing periods of one month and two months were
2.63% and 2.59%, respectively.
The new and amended facilities contain certain covenants which, among other
things, require that the Company maintain a minimum interest coverage ratio. At
September 30, 2001, the Company was in compliance with the financial covenants.
-11-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
On May 17, 2001, the Company issued under Rule 144A an additional $400 million
of 6.40% unsecured senior notes due January 30, 2006 and $1.0 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 were used to repay existing
short-term debt, including commercial paper. During September 2001, these notes
were exchanged for registered notes. The notes due May 15, 2011 are redeemable
at any time by the Company at their principal amount plus the applicable premium
and accrued interest.
On June 29, 2001, the Company issued $335 million of 7.25% senior notes due June
30, 2051; interest on the senior notes will be payable quarterly. Proceeds from
the debt issuance were used to repay existing short-term debt, including
commercial paper. The senior notes are redeemable at any time by the Company
after June 30, 2006 at their principal amount plus accrued interest.
At September 30, 2001, the Company had borrowings under its commercial paper
program of approximately $1.1 billion. Borrowings under the program have
maturities of less than a year and are supported by unused committed bank
facilities.
8) STOCK REPURCHASE
For the nine months ended September 30, 2001, the Company repurchased
approximately 18.1 million shares of the Company's Class B Common Stock for
approximately $779.2 million under its stock repurchase programs, of which $347
million was spent in the third quarter for 9.6 million shares.
9) COMMITMENTS AND CONTINGENCIES
The commitments of the Company for program license fees, estimated to aggregate
approximately $15.1 billion, are not reflected in the balance sheet as of
September 30, 2001. These commitments include approximately $10.6 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, alleged 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 sought 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
-12-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
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
September 30, 2001, the Company had pending approximately 129,910 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.
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 cash flows.
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.
10) PROVISION FOR INCOME TAXES
The provision for income taxes represents federal, state and foreign income
taxes on earnings before income taxes. The reported estimated annual effective
tax rates of 97.8% for 2001, excluding the 2001 Blockbuster charges of $356
million, and 76.7% for 2000, excluding the 2000 merger-related charges of $698
million, were adversely affected by amortization of intangibles in excess of the
amounts deductible for tax purposes. The third quarter and year to date income
tax expense for 2001 includes a $135 million benefit recognized on the $356
million pretax Blockbuster charge. Income tax expense for the three months
ending September 30, 2001 also includes a tax benefit of $59 million recognized
to record the excess of tax bases over the historical financial statement value
that is expected to be realized in the near-term. Excluding the non-deductible
amortization of intangibles and the charges, the estimated annual effective tax
rates would have been 39.1% for 2001 and 38.8% for 2000.
-13-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
11) 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 $93.7 million and $84.5 million for the three months
ended September 30, 2001 and September 30, 2000, respectively, and $300.8
million and $253.8 million for the nine months ended September 30, 2001 and
September 30, 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.
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------------------------------
Revenues:
Cable Networks $ 1,096.6 $ 1,021.2 $ 3,141.0 $ 2,753.5
Television 1,585.2 1,712.8 5,242.4 3,466.6
Infinity 910.3 1,025.8 2,731.3 1,698.4
Entertainment 796.8 786.3 2,164.8 2,057.6
Video 1,264.7 1,193.8 3,798.6 3,619.3
Publishing 183.6 167.0 454.9 413.0
Intercompany eliminations (123.4) (96.1) (350.1) (320.9)
-------------------------------------------------------------------------------------------------------------------------------
Total Revenues $ 5,713.8 $ 5,810.8 $ 17,182.9 $ 13,687.5
-------------------------------------------------------------------------------------------------------------------------------
EBITDA:
Cable Networks $ 470.2 $ 400.8 $ 1,218.3 $ 922.5
Television 282.6 341.1 958.1 622.9
Infinity 373.1 468.3 1,132.6 792.4
Entertainment 92.8 174.9 288.6 344.0
Video (210.4) 119.1 68.5 382.6
Publishing 22.4 27.6 33.8 34.4
-------------------------------------------------------------------------------------------------------------------------------
Segment total 1,030.7 1,531.8 3,699.9 3,098.8
Reconciliation to Operating Income :
Corporate expenses/eliminations (32.8) (62.6) (149.6) (868.6)
Residual costs of discontinued (21.0) (29.0) (62.8) (47.6)
operations
Depreciation and amortization (783.2) (680.3) (2,304.3) (1,460.5)
-------------------------------------------------------------------------------------------------------------------------------
Total Operating Income $ 193.7 $ 759.9 $ 1,183.2 $ 722.1
---------------------------------------------- --------------------- ------------------ -------------------- ------------------
-14-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
At September 30, At December 31,
2001 2000
-----------------------------------------------------------------------------------------------------------
Total Assets:
Cable Networks $ 11,302.2 $ 8,077.7
Television 25,544.4 25,417.9
Infinity 40,340.8 33,689.7
Entertainment 4,874.0 4,853.9
Video 7,588.4 8,385.1
Publishing 988.2 954.1
-----------------------------------------------------------------------------------------------------------
Segment total 90,638.0 81,378.4
Corporate/eliminations 944.7 1,267.7
-----------------------------------------------------------------------------------------------------------
Total Assets $ 91,582.7 $ 82,646.1
-----------------------------------------------------------------------------------------------------------
-15-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
12) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Viacom International Inc. ("Viacom International") is a wholly owned subsidiary
of the Company. The Company has fully and unconditionally guaranteed Viacom
International debt securities. 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 September 30, 2001
---------------------------------------------------------------------------------
Non- Viacom
Viacom Viacom Guarantor Inc.
Inc. International Affiliates Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 65.9 $ 652.9 $ 5,021.4 $ (26.4) $ 5,713.8
-----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Operating 33.6 195.3 3,375.1 (29.4) 3,574.6
Selling, general and administrative 31.3 172.8 958.2 -- 1,162.3
Depreciation and amortization 4.2 138.8 640.2 -- 783.2
-----------------------------------------------------------------------------------------------------------------------------------
Total expenses 69.1 506.9 4,973.5 (29.4) 5,520.1
-----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (3.2) 146.0 47.9 3.0 193.7
Other income (expense):
Interest income (expense), net (172.5) (1.4) (46.1) -- (220.0)
Other items, net (5.3) (13.6) (9.4) -- (28.3)
-----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (181.0) 131.0 (7.6) 3.0 (54.6)
Benefit (provision) for income taxes (55.5) (59.1) (54.8) -- (169.4)
Equity in earnings (loss) of affiliated
companies, net of tax 46.1 (95.4) (20.0) 61.6 (7.7)
Minority interest, net of tax -- 2.2 39.1 -- 41.3
-----------------------------------------------------------------------------------------------------------------------------------
Net loss $ (190.4) $ (21.3) $ (43.3) $ 64.6 $ (190.4)
-----------------------------------------------------------------------------------------------------------------------------------
-16-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Nine Months Ended September 30, 2001
---------------------------------------------------------------------------------
Non- Viacom
Viacom Viacom Guarantor Inc.
Inc. International Affiliates Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 225.6 $1,832.1 $ 15,167.9 $ (42.7) $17,182.9
-----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Operating 99.9 592.9 9,511.7 (36.7) 10,167.8
Selling, general and administrative 98.3 533.4 2,895.9 -- 3,527.6
Depreciation and amortization 12.2 232.7 2,059.4 -- 2,304.3
-----------------------------------------------------------------------------------------------------------------------------------
Total expenses 210.4 1,359.0 14,467.0 (36.7) 15,999.7
-----------------------------------------------------------------------------------------------------------------------------------
Operating income 15.2 473.1 700.9 (6.0) 1,183.2
Other income (expense):
Interest income (expense), net (533.4) (26.3) (161.0) -- (720.7)
Other items, net (10.6) (2.6) (22.9) -- (36.1)
-----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (528.8) 444.2 517.0 (6.0) 426.4
Benefit (provision) for income taxes 213.6 (198.1) (623.1) -- (607.6)
Equity in earnings (loss) of affiliated
companies, net of tax 134.2 26.5 (56.8) (145.8) (41.9)
Minority interest, net of tax -- 7.4 34.7 -- 42.1
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (181.0) $ 280.0 $ (128.2) $ (151.8) $ (181.0)
-----------------------------------------------------------------------------------------------------------------------------------
-17-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Three Months Ended September 30, 2000
---------------------------------------------------------------------------------
Non- Viacom
Viacom Viacom Guarantor Inc.
Inc. International Affiliates Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 8.1 $ 609.3 $5,198.0 $ (4.6) $ 5,810.8
-----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Operating 7.5 184.0 3,012.4 (2.6) 3,201.3
Selling, general and administrative (.1) 192.8 976.6 -- 1,169.3
Depreciation and amortization .9 31.1 648.3 -- 680.3
-----------------------------------------------------------------------------------------------------------------------------------
Total expenses 8.3 407.9 4,637.3 (2.6) 5,050.9
-----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (.2) 201.4 560.7 (2.0) 759.9
Other income (expense):
Interest income (expense), net (146.4) 16.9 (102.2) -- (231.7)
Other items, net (6.3) 13.9 (7.1) -- .5
-----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (152.9) 232.2 451.4 (2.0) 528.7
Benefit (provision) for income taxes 61.2 10.5 (495.9) -- (424.2)
Equity in earnings (loss) of affiliated
companies, net of tax 125.1 (120.0) (52.3) 3.2 (44.0)
Minority interest, net of tax -- 2.4 (29.5) -- (27.1)
-----------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 33.4 $ 125.1 $ (126.3) $ 1.2 $ 33.4
-----------------------------------------------------------------------------------------------------------------------------------
-18-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Nine Months Ended September 30, 2000
--------------------------------------------------------------------------------
Non- Viacom
Viacom Viacom Guarantor Inc.
Inc. International Affiliates Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 28.0 $1,745.4 $11,984.3 $ (70.2) $13,687.5
-----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Operating 25.7 571.1 7,459.5 (33.9) 8,022.4
Selling, general and administrative 1.9 636.3 2,145.8 -- 2,784.0
Merger-related charges -- 650.0 48.5 -- 698.5
Depreciation and amortization 2.5 101.6 1,356.4 -- 1,460.5
-----------------------------------------------------------------------------------------------------------------------------------
Total expenses 30.1 1,959.0 11,010.2 (33.9) 12,965.4
-----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (2.1) (213.6) 974.1 (36.3) 722.1
Other income (expense):
Interest income (expense), net (354.5) 45.1 (214.8) -- (524.2)
Other items, net (21.9) 23.2 (15.8) -- (14.5)
-----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (378.5) (145.3) 743.5 (36.3) 183.4
Benefit (provision) for income taxes 151.5 63.1 (684.8) -- (470.2)
Equity in loss of affiliated
companies, net of tax (619.5) (545.4) (99.1) 1,192.6 (71.4)
Minority interest, net of tax -- 8.1 (44.1) -- (36.0)
-----------------------------------------------------------------------------------------------------------------------------------
Net loss before cumulative effect of change in
accounting principle (846.5) (619.5) (84.5) 1,156.3 (394.2)
Cumulative effect of change in accounting
principle, net of tax -- -- (452.3) -- (452.3)
-----------------------------------------------------------------------------------------------------------------------------------
Net loss $ (846.5) $ (619.5) $ (536.8) $ 1,156.3 $ (846.5)
-----------------------------------------------------------------------------------------------------------------------------------
-19-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
At September 30, 2001
--------------------------------------------------------------------------------------
Non-
Viacom Viacom Guarantor Viacom Inc.
Inc. International Affiliates Eliminations Consolidated
----------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 123.9 $ 124.2 $ 277.2 $ -- $ 525.3
Receivables, net 61.3 431.4 3,597.8 (247.2) 3,843.3
Inventory 14.1 263.6 1,222.5 -- 1,500.2
Other current assets 56.7 432.2 771.8 (53.8) 1,206.9
----------------------------------------------------------------------------------------------------------------------------------
Total current assets 256.0 1,251.4 5,869.3 (301.0) 7,075.7
----------------------------------------------------------------------------------------------------------------------------------
Property and equipment 114.9 997.4 8,191.0 -- 9,303.3
Less accumulated depreciation and
amortization 32.1 321.1 2,504.4 -- 2,857.6
----------------------------------------------------------------------------------------------------------------------------------
Net property and equipment 82.8 676.3 5,686.6 -- 6,445.7
----------------------------------------------------------------------------------------------------------------------------------
Inventory 11.1 547.0 3,111.7 (28.2) 3,641.6
Intangibles, at amortized cost 259.7 106.2 70,947.9 -- 71,313.8
Investments in consolidated subsidiaries 65,695.1 14,690.9 -- (80,386.0) --
Other assets 207.7 1,068.9 1,953.9 (124.6) 3,105.9
----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 66,512.4 $18,340.7 $ 87,569.4 $ (80,839.8) $ 91,582.7
----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Accounts payable $ -- $ 29.9 $ 1,009.6 $ (58.9) $ 980.6
Accrued expenses and other 238.3 1,272.4 3,787.1 (246.4) 5,051.4
Accrued participations -- -- 1,375.9 (31.5) 1,344.4
Current portion of long-term debt -- 12.7 253.7 -- 266.4
----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 238.3 1,315.0 6,426.3 (336.8) 7,642.8
----------------------------------------------------------------------------------------------------------------------------------
Long-term debt 9,464.4 718.3 1,914.0 (371.7) 11,725.0
Other liabilities (10,301.1) 4,066.1 10,125.0 4,292.9 8,182.9
Minority interest -- 153.6 1,054.9 -- 1,208.5
Stockholders' Equity:
Preferred Stock -- 106.1 20.4 (126.5) --
Common Stock 18.4 188.5 725.3 (913.8) 18.4
Additional paid-in capital 64,817.2 6,538.9 68,168.3 (74,707.2) 64,817.2
Retained earnings 5,342.0 5,211.1 (624.9) (8,677.4) 1,250.8
Accumulated other comprehensive
income (loss) 3.1 43.1 (239.9) .7 (193.0)
----------------------------------------------------------------------------------------------------------------------------------
70,180.7 12,087.7 68,049.2 (84,424.2) 65,893.4
Less treasury stock, at cost 3,069.9 -- -- -- 3,069.9
----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 67,110.8 12,087.7 68,049.2 (84,424.2) 62,823.5
----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 66,512.4 $ 18,340.7 $ 87,569.4 $(80,839.8) $ 91,582.7
----------------------------------------------------------------------------------------------------------------------------------
-20-
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
----------------------------------------------------------------------------------------------------------------------------------
-21-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Nine Months Ended September 30, 2001
--------------------------------------------------------------------------
Non-
Viacom Viacom Guarantor Viacom Inc.
Inc. International Affiliates Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
Net cash flow (used for) provided by operating
activities $ (533.4) $ 107.3 $2,371.6 $ -- $ 1,945.5
-----------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Acquisitions, net of cash acquired -- -- (770.5) -- (770.5)
Capital expenditures -- (90.9) (238.6) -- (329.5)
Investments in and advances to affiliated companies -- (37.5) (17.1) -- (54.6)
Proceeds from dispositions -- -- 235.3 -- 235.3
Proceeds from sales of short-term investments -- 53.8 -- -- 53.8
Purchases of short-term investments -- (13.8) -- -- (13.8)
Other, net -- -- 0.1 -- 0.1
-----------------------------------------------------------------------------------------------------------------------------------
Net cash flow used for investing activities -- (88.4) (790.8) -- (879.2)
-----------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Repayments to banks, including commercial paper, net (951.3) (100.0) (2,569.3) -- (3,620.6)
Proceeds from senior notes and debentures 3,372.3 -- 5.8 -- 3,378.1
Purchase of treasury stock (829.2) -- -- -- (829.2)
Repayment of notes and debentures (23.5) -- (436.4) -- (459.9)
Proceeds from exercise of stock options 158.5 -- -- -- 158.5
Payment of capital lease obligations -- (8.8) (92.1) -- (100.9)
Increase (decrease) in intercompany payables (1,260.8) (112.4) 1,373.2 -- --
Other, net (1.5) -- -- -- (1.5)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash flow provided by (used for) financing
activities 464.5 (221.2) (1,718.8) (1,475.5)
-----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (68.9) (202.3) (138.0) -- (409.2)
Cash and cash equivalents at beginning of period 192.8 326.5 415.2 -- 934.5
-----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 123.9 $ 124.2 $ 277.2 $ -- $ 525.3
-----------------------------------------------------------------------------------------------------------------------------------
-22-
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Nine Months Ended September 30, 2000
------------------------------------------------------------------------
Non-
Viacom Viacom Guarantor Viacom Inc.
Inc. International Affiliates Eliminations Consolidated
------------------------------------------------------------------------------------------------------------------------------------
Net cash flow (used for) provided by operating activities $ (46.4) $ 80.3 $ 1,111.0 $ -- $1,144.9
------------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Acquisitions, net of cash acquired -- -- (1,851.3) -- (1,851.3)
Capital expenditures -- (27.0) (395.1) -- (422.1)
Investments in and advances to affiliated companies -- (7.6) (117.6) -- (125.2)
Proceeds from sales of short-term investments -- 55.7 225.0 -- 280.7
Purchases of short-term investments -- (83.4) -- -- (83.4)
Other, net -- (13.4) 16.1 -- 2.7
------------------------------------------------------------------------------------------------------------------------------------
Net cash flow used for investing activities -- (75.7) (2,122.9) -- (2,198.6)
------------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Borrowings from banks, including commercial
paper, net 1.1 -- 1,525.0 -- 1,526.1
Proceeds from senior notes and debentures 1,635.3 -- .3 -- 1,635.6
Purchase of treasury stock (1,588.6) -- -- -- (1,588.6)
Repayment of notes and debentures -- (160.6) (24.1) -- (184.7)
Proceeds from exercise of stock options 162.5 -- -- -- 162.5
Payment of capital lease obligations -- (25.2) (76.8) -- (102.0)
Purchase of treasury stock by subsidiary -- -- (82.8) -- (82.8)
Increase (decrease) in intercompany payables (144.0) 199.1 (55.1) -- --
Other, net -- -- (.5) -- (.5)
------------------------------------------------------------------------------------------------------------------------------------
Net cash flow provided by financing activities 66.3 13.3 1,286.0 -- 1,365.6
------------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 19.9 17.9 274.1 -- 311.9
Cash and cash equivalents at beginning of period 81.6 486.0 113.2 -- 680.8
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 101.5 $ 503.9 $ 387.3 $ -- $ 992.7
------------------------------------------------------------------------------------------------------------------------------------
-23-
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.
Several significant events occurred in 2000 and 2001 that affected the
comparability of the Company's historical results for the three and nine months
ended September 30, 2001 and 2000. They are as follows:
. The Company completed its merger with CBS on May 4, 2000, for a total
purchase price of approximately $39.8 billion.
. On March 31, 2000, the Company acquired the remaining 50% interest in
United Paramount Network ("UPN") that it did not already own for $5
million.
. The Company recorded one-time merger-related pre-tax charges of $698
million associated with the CBS and UPN acquisitions in the second
quarter of 2000.
. In January 2001, the Company completed its acquisition of BET Holdings
II, Inc. ("BET") for approximately $3 billion.
. In February 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.
. In September 2001, Blockbuster, a majority owned subsidiary of the
Company, recorded a primarily non-cash charge of approximately $356
million, principally related to the elimination of less-productive VHS
tapes as part of its strategic re-merchandising plan to transition
from VHS to the higher margin DVD rental market and a change in
amortization.
Additionally, the events of September 11 and their aftermath have impacted the
Company's third quarter and nine-month results and this impact will continue for
the remainder of 2001, particularly with respect to revenues derived from the
advertising business. The Company experienced significant loss of revenue and
additional news costs during the continuous news coverage without advertising on
the CBS Network, its local television news station operations, especially in New
York City, and its major all-news and talk radio stations. The Company also lost
revenue from the cancellation and rescheduling of programming and the delay of
the fall broadcast season.
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 for the three and nine months ended September 30, 2001 and
2000, respectively.
-24-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------- ----------------------------------------
Percent Percent
As Reported: 2001 2000 B/(W) 2001 2000 B/(W)
------------------------------------------------------------------------------------------------------------------------------
Revenues:
Cable Networks $ 1,096.6 $ 1,021.2 7% $ 3,141.0 $ 2,753.5 14%
Television 1,585.2 1,712.8 (7) 5,242.4 3,466.6 51
Infinity 910.3 1,025.8 (11) 2,731.3 1,698.4 61
Entertainment 796.8 786.3 1 2,164.8 2,057.6 5
Video 1,264.7 1,193.8 6 3,798.6 3,619.3 5
Publishing 183.6 167.0 10 454.9 413.0 10
Intercompany eliminations (123.4) (96.1) (28) (350.1) (320.9) (9)
------------------------------------------------------------------------------------------------------------------------------
Total Revenues $ 5,713.8 $ 5,810.8 (2)% $ 17,182.9 $ 13,687.5 26%
------------------------------------------------------------------------------------------------------------------------------
Operating Income:
Cable Networks $ 363.1 $ 312.8 16% $ 894.9 $ 721.9 24%
Television 78.1 158.5 (51) 359.8 257.9 40
Infinity 60.9 213.1 (71) 218.9 364.7 (40)
Entertainment 52.7 132.5 (60) 169.1 223.6 (24)
Video (317.5) 17.7 NM (247.5) 69.4 NM
Publishing 16.3 22.2 (27) 16.0 18.4 (13)
------------------------------------------------------------------------------------------------------------------------------
Segment Operating Income 253.6 856.8 (70) 1,411.2 1,655.9 (15)
Corporate expenses/eliminations (38.9) (67.9) 43 (165.2) (886.2) 81
Residual costs of discontinued
operations (21.0) (29.0) 28 (62.8) (47.6) (32)
------------------------------------------------------------------------------------------------------------------------------
Total Operating Income $ 193.7 $ 759.9 (75)% $ 1,183.2 $ 722.1 64%
------------------------------------------------------------------------------------------------------------------------------
Video third quarter 2001 charge 355.3 -- NM 355.3 -- NM
------------------------------------------------------------------------------------------------------------------------------
Total Operating Income
(excluding charge) $ 549.0 $ 759.9 (28)% $ 1,538.5 $ 722.1 113%
------------------------------------------------------------------------------------------------------------------------------
NM--not meaningful
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 and nine months ended September 30, 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.
-25-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------- -----------------------------------------
Percent Percent
As Reported: 2001 2000 B/(W) 2001 2000 B/(W)
-----------------------------------------------------------------------------------------------------------------------------
EBITDA:
Cable Networks $ 470.2 $ 400.8 17% $ 1,218.3 $ 922.5 32%
Television 282.6 341.1 (17) 958.1 622.9 54
Infinity 373.1 468.3 (20) 1,132.6 792.4 43
Entertainment 92.8 174.9 (47) 288.6 344.0 (16)
Video (210.4) 119.1 (277) 68.5 382.6 (82)
Publishing 22.4 27.6 (19) 33.8 34.4 (2)
-----------------------------------------------------------------------------------------------------------------------------
Segment EBITDA 1,030.7 1,531.8 (33) 3,699.9 3,098.8 19
Corporate expenses/eliminations (32.8) (62.6) 48 (149.6) (868.6) 83
Residual costs of discontinued
operations (21.0) (29.0) 28 (62.8) (47.6) (32)
-----------------------------------------------------------------------------------------------------------------------------
Total EBITDA $ 976.9 $ 1,440.2 (32) $ 3,487.5 $ 2,182.6 60
Video third quarter 2001 charge 352.7 -- NM 352.7 -- NM
-----------------------------------------------------------------------------------------------------------------------------
Total EBITDA (excluding charge) $ 1,329.6 $ 1,440.2 (8)% $ 3,840.2 $ 2,182.6 76%
-----------------------------------------------------------------------------------------------------------------------------
NM--not meaningful
Pro Forma Results
-----------------
In order to enhance comparability, the following discussion of the Company's
results of operations is supplemented by pro forma financial information that
assumes the Viacom/CBS merger, acquisitions of the remaining interests of
Infinity and UPN, and the acquisition of BET as well as the completion of
acquisitions and divestitures of radio, outdoor and cable properties had
occurred January 1, 2000. Pro forma results are adjusted to exclude the
primarily non-cash Blockbuster and merger-related charges and transactions with
divested investments. Pro forma results also reflect the deconsolidation of
iWon.com, which was previously a minority-owned consolidated subsidiary, as if
it had occurred on January 1, 2000. 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.
-------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
2001 2000 B/(W) 2001 2000 B/(W)
-------------------------------------------------------------------------------------------------------------------------
Total Company Pro Forma:
Revenues $ 5,713.3 $ 5,771.9 (1)% $17,167.4 $16,797.4 2%
Operating income $ 552.9 $ 682.6 (19)% $ 1,527.1 $ 1,374.0 11%
EBITDA $ 1,331.0 $ 1,430.8 (7)% $ 3,851.8 $ 3,652.6 5%
-------------------------------------------------------------------------------------------------------------------------
Results of Operations
---------------------
On a reported basis, revenues decreased 2% to $5.71 billion for the third
quarter and increased 26% to $17.18 billion for the nine-month period ended
September 30, 2001 from $5.81 billion and $13.69 billion, respectively, for the
same prior-year periods. Reported operating results for the nine months are not
comparable with prior-year period principally due to the Viacom/CBS merger,
third quarter 2001 Blockbuster charge and the second quarter 2000 merger-related
charges.
-26-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
On a pro forma basis, revenues decreased 1% to $5.71 billion and increased 2% to
$17.17 billion for the three-and nine-month periods ended September 30, 2001,
respectively, from $5.77 billion and $16.80 billion for the same prior-year
periods. EBITDA, on a pro forma basis, decreased 7% to $1.33 billion and
increased 5% to $3.85 billion for the three-and nine-month periods ended
September 30, 2001, respectively, from $1.43 billion and $3.65 billion for the
same prior-year periods. Pro forma results reflect revenue increases for the
quarter in four of six operating segments, and double-digit EBITDA increases for
the third quarter and nine months in the Cable Networks and Video segments. The
Company's third quarter and nine-month results were impacted by lower revenues
and increased costs from the events of September 11 and related events.
Segment Results of Operations
-----------------------------
Cable Networks (MTV Networks ("MTVN") including MTV, VH1, Nickelodeon, Nick at
Nite, TV Land, TNN: The National Network and CMT; BET; and Showtime Networks
Inc. ("SNI"))
---------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
2001 2000 B/(W) 2001 2000 B/(W)
---------------------------------------------------------------------------------------------------------------------
Pro Forma:
Revenues $ 1,096.4 $ 1,009.4 9% $ 3,127.0 $ 2,906.8 8%
Operating income $ 367.0 $ 289.3 27 $ 911.1 $ 713.8 28
EBITDA $ 471.6 $ 395.3 19 $ 1,231.3 $ 1,016.3 21
---------------------------------------------------------------------------------------------------------------------
For the third quarter and nine months ended September 30, 2001, higher pro forma
revenues and EBITDA principally reflect growth in cable affiliate fees, DBS
revenues and double-digit advertising revenue gains at MTV, VH1, TV Land and
BET. The 2001 MTV Video Music Awards aired in September and averaged more than
10 million viewers, ranking it as the No. 1 cable entertainment program for 2001
among households and the second most watched MTV Video Music Awards in the
channel's history. Showtime subscriptions increased 16% over the prior year by
approximately 4.1 million to 29.6 million subscriptions at September 30, 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 CBS
Cable Networks, TNN and CMT, the acquisition of BET, and dispositions had
occurred on January 1, 2000.
Television (CBS and UPN Television Networks and Stations; Television Production
and Syndication)
---------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
2001 2000 B/(W) 2001 2000 B/(W)
---------------------------------------------------------------------------------------------------------------------
Pro Forma:
Revenues $ 1,585.2 $ 1,687.9 (6)% $5,242.4 $ 5,191.3 1%
Operating income $ 78.1 $ 170.1 (54) $ 359.8 $ 386.9 (7)
EBITDA $ 282.6 $ 348.4 (19) $ 958.1 $ 949.7 1
---------------------------------------------------------------------------------------------------------------------
-27-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
For the third quarter ended September 30, 2001, Television's pro forma revenue
and EBITDA shortfalls were primarily the result of continuing softness in the
advertising market and the impact of the events of September 11. The CBS Network
ran sustained news coverage from Tuesday, September 11 through Friday, September
14, which resulted in lower revenue and higher newsgathering costs. The CBS
Network also incurred several preemptions to regular scheduled programming,
further impacting revenue and newsgathering costs. For the quarter, CBS Network
also incurred higher programming costs associated with the earlier premiere of
the fall season; the season premiered in the last week of September in 2001 as
compared to early October in 2000. Television's results were partially offset by
the strong performance of continuing network and first-run syndication shows,
including Paramount Television Group's Frasier, Judge Judy, Judge Joe Brown, 7th
Heaven, Entertainment Tonight, Ed, That's Life, Soul Food and The Division and
the syndication availability of Everybody Loves Raymond. Paramount Television
Group's higher revenues for the three and nine month periods were partially
offset by lower revenues from the cancelled series Beverly Hills 90210 and
Sunset Beach, and the lower revenues from Sabrina, The Teenage Witch and Moesha
whose prior year revenues included first time syndication availabilities. Prior
year's third quarter benefited from a robust advertising market generated by the
tail end of the technology boom.
Pro forma results assume that the Viacom/CBS merger and the acquisition of the
remaining 50% interest of UPN had occurred January 1, 2000. Pro forma results
are also adjusted to exclude transactions with divested investments and
operating losses before depreciation for iWon.com of approximately $23 million
in the third quarter and $87 million for the nine months ended September 30,
2000. In 2001, iWon.com is accounted for as a deconsolidated investment, whereas
in 2000, iWon.com was a minority-owned, consolidated subsidiary.
Infinity (Radio Stations, Outdoor Advertising Properties)
----------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
2001 2000 B/(W) 2001 2000 B/(W)
----------------------------------------------------------------------------------------------------------------------
Pro Forma:
Revenues $ 910.0 $ 1,013.5 (10)% $ 2,729.8 $ 2,913.0 (6)%
Operating income $ 60.9 $ 147.6 (59) $ 191.3 $ 309.5 (38)
EBITDA $ 373.1 $ 457.1 (18) $ 1,131.2 $ 1,254.0 (10)
----------------------------------------------------------------------------------------------------------------------
For both the third quarter and nine months ended September 30, 2001, Infinity's
pro forma revenues, EBITDA and operating income declines reflect difficult
comparisons with the same periods last year resulting from reduced revenues due
to the events of September 11, continuing softness in the advertising market and
lower demand from the technology sector. Operating expenses, as a percentage of
revenues, for the third quarter and nine months, were essentially flat as
compared with the comparable prior-year periods. In the third quarter of 2001,
Infinity continued to be a leader in market share and was No. 1 in radio revenue
billings in seven of the top 10 markets.
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 as part of the Viacom/CBS merger, and the subsequent acquisition of the
minority interest of Infinity, had occurred on January 1, 2000 and also assume
the completion of acquisitions and divestitures of radio and outdoor properties
by Infinity had occurred at the beginning of each period presented. Pro forma
results are also adjusted to exclude transactions with divested investments.
-28-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Entertainment (Paramount Pictures, Famous Players, Famous Music Publishing and
Paramount Parks)
------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
2001 2000 B/(W) 2001 2000 B/(W)
------------------------------------------------------------------------------------------------------
As Reported and Pro Forma:
Revenues $ 796.8 $ 786.3 1% $2,164.8 $2,057.6 5%
Operating income $ 52.7 $ 132.5 (60) $ 169.1 $ 223.6 (24)
EBITDA $ 92.8 $ 174.9 (47) $ 288.6 $ 344.0 (16)
------------------------------------------------------------------------------------------------------
For the three and nine months ended September 30, 2001, Entertainment revenues
increased 1% to $796.8 million and 5% to $2.2 billion, respectively, compared
with the same prior-year periods. Revenues for the three and nine months
principally reflect higher Features and Theaters revenues while the nine-month
period also reflects higher Parks revenues. Features revenues for the three- and
nine-month periods were higher mainly due to higher home video revenues, which
were partially offset by lower theatrical revenues. Domestic home video revenues
for the three- and nine-month periods were higher compared to last year and
included contributions from Along Came A Spider, Enemy at the Gates and Down to
Earth, while the nine-month period also includes contributions from What Women
Want, Rugrats in Paris: The Movie, Save the Last Dance and The Original Kings of
Comedy. Foreign home video revenues for the three-month period were comparable
with last year, while the nine-month period revenues were higher than last year
and included significant contributions from Mission: Impossible 2 and Shaft.
Domestic theatrical revenues for the three- and nine-month periods were higher
than last year and included contributions from The Score, Rat Race, Hardball and
Zoolander, while the nine-month period also included Lara Croft: Tomb Raider,
Along Came A Spider, Save The Last Dance, Down to Earth and Enemy at the Gates
as well as continuing contributions from What Women Want. Foreign theatrical
revenues for the three-and nine-month periods did not match last year's
revenues, which included Mission: Impossible 2. Theaters' revenues for the
three-month period increased due to higher per capita spending and slightly
higher attendance, whereas revenues for the nine-month period increased due to
higher per capita spending which was partially offset by slightly lower
attendance. Parks revenues for the three-month period were lower due to lower
attendance which was partially offset by higher per capita spending, while
revenues for the nine-month period increased principally due to higher per
capita spending.
For the three-and nine-month periods, Entertainment's operating income and
EBITDA decreases principally reflect the revenue items noted above and lower
operating expenses for Theatres which were more than offset by higher Features
distribution costs due to a higher number of pictures in theatrical release and
the recognition of advertising expenses in connection with these releases.
-29-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Video (Blockbuster)
-------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
2001 2000 B/(W) 2001 2000 B/(W)
-------------------------------------------------------------------------------------------------------
Pro Forma:
Revenues $1,264.7 $1,193.8 6% $3,798.6 $3,619.3 5%
Operating income $ 37.8 $ 17.7 114 $ 107.8 $ 69.4 55
EBITDA $ 142.3 $ 119.1 19 $ 421.2 $ 382.6 10
-------------------------------------------------------------------------------------------------------
For the third quarter, Video's pro forma EBITDA increased 19% to $142.3 million
on revenue increases of 6% to $1.26 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 4.9%,
due to a 3.3% increase in domestic same store revenues and a 12.5% increase in
same store revenues from Blockbuster's international operations. For the nine
months ended September 30, 2001, Video's pro forma revenues and EBITDA increased
primarily driven by the increase in the number of company-operated stores and
increases in worldwide same-store sales of 2.5%. Blockbuster ended the third
quarter of 2001 with 7,851 company-owned and franchise stores, a net increase of
332 stores over the third quarter of 2000, of which 34 company-owned stores were
added in the third quarter 2001.
Video's gross margin excluding the charge was relatively constant at 59.9% for
the third quarter of 2001, versus 60.5% for the third quarter of 2000 and 59.9%
for the nine months ended September 30, 2001, versus 59.4% for the comparable
prior-year period.
In the third quarter, Blockbuster eliminated approximately 25% of its VHS
library, and selected video games, as part of a dramatic re-merchandising of its
stores to accommodate in-store DVD expansion. Additionally, Blockbuster reduced
the residual value of VHS rental inventory and games to approximately $2 and $5
per unit, respectively, to reflect the rapid shift in consumer demand from VHS
to DVD and the evolution in game platforms. Blockbuster also changed the
amortization period of its VHS library from 36 months to nine months. As a
result of these actions, Blockbuster recorded a pre-tax primarily non-cash
charge of $356 million, of which $353 million impacted EBITDA. Pro forma results
exclude this charge.
Publishing (Simon & Schuster, including other flagship imprints such as Pocket
Books, Scribner and The Free Press)
---------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, Percent September 30, Percent
2001 2000 B/(W) 2001 2000 B/(W)
---------------------------------------------------------------------------------------------
As Reported and Pro Forma:
Revenues $183.6 $167.0 10% $454.9 $413.0 10%
Operating income $ 16.3 $ 22.2 (27) $ 16.0 $ 18.4 (13)
EBITDA $ 22.4 $ 27.6 (19) $ 33.8 $ 34.4 (2)
---------------------------------------------------------------------------------------------
For the quarter and nine months ended September 30, 2001, Publishing's revenue
increases are principally due to increased sales in the Trade, Pocket Books and
Children's divisions. Publishing EBITDA and operating income declines for the
third quarter and nine months are principally due to higher
-30-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
information systems costs in the current year. Publishing has benefited from the
continuing success of John Adams by David McCullough, which was No. 1 on the New
York Times nonfiction hardcover best-seller list for 13 weeks through September
30 and 17 weeks overall. Other best-selling titles in the third quarter included
The Wild Blue by Stephen Ambrose and Heartbreaker by Julie Garwood.
Other Income and Expense Information
------------------------------------
Corporate Expenses/Eliminations
Corporate expenses/eliminations, excluding depreciation expense, decreased to
$32.8 million for the third quarter of 2001 from $62.6 million for the third
quarter of 2000. Pro forma corporate expenses, excluding intersegment profit
eliminations and merger-related charges, decreased 20% and 29%, respectively,
for the third quarter and nine months ended September 30, 2001 to $36.8 million
and $105.4 million, principally due to effective cost containment measures.
Interest Expense
For the three-month period ended September 30, 2001, interest expense decreased
8% to $226.5 million and for the nine-month period ended September 30, 2001,
interest expense increased 33% to $746.6 million. The Company had approximately
$12.0 billion and $12.9 billion principal amount of debt outstanding (including
current maturities) as of September 30, 2001 and 2000, respectively, at weighted
average interest rates of 6.8% and 7.7%, respectively.
Interest Income
For the three-and nine-month periods ended September 30, 2001, interest income
decreased to $6.5 million and $25.9 million, respectively, from $13.3 million
and $36.7 million, respectively, for the third quarter and nine months ended
September 30, 2000.
Other Items, Net
"Other items, net" reflects net losses of $28.3 million and $36.1 million for
the third quarter and nine months ended September 30, 2001 as compared to net
earnings of $.5 million for the third quarter and net losses of $14.5 million
for the nine months ended September 30, 2000. Other items, net, for all periods
presented principally reflects gains and losses associated with foreign exchange
and the sale of assets.
Provision for Income Taxes
The provision for income taxes represents federal, state and foreign income
taxes on earnings before income taxes. The reported estimated annual effective
tax rates of 97.8% for 2001, excluding the 2001 Blockbuster charge of $356
million, and 76.7% for 2000, excluding the 2000 merger-related charges of $698
million, were adversely affected by amortization of intangibles in excess of the
amounts deductible for tax purposes. The third quarter and year to date income
tax expense for 2001 includes a $135 million benefit recognized on the $356
million pretax Blockbuster charge. Income tax expense for the three months
ending September 30, 2001 also includes a tax benefit of $59 million recognized
to record the excess of tax bases over the historical financial statement value
that is expected to be realized in the near-term. Excluding the non-deductible
amortization of intangibles and the charges, the estimated annual effective tax
rates would have been 39.1% for 2001 and 38.8% for 2000.
Equity in Loss of Affiliated Companies, Net of Tax
"Equity in loss of affiliated companies, net of tax" was $7.7 million and $41.9
million for the third quarter and nine months ended September 30, 2001,
respectively, as compared to $44.0 million and $71.4 million in the comparable
prior-year periods. The year to date period principally reflects operating
losses from international ventures and internet investments partially offset by
-31-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
positive results from Comedy Central while the prior period nine month
results include losses from CBS online equity ventures that were subsequently
written down as well as equity losses of UPN, partially offset by results from
Comedy Central. The remaining 50% interest of UPN was acquired by the Company in
March 2000 and its results are now consolidated with the Company.
Minority Interest
Minority interest for the nine months ended September 30, 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 period primarily
reflects the minority ownership of Infinity, from the date of the Viacom/CBS
merger, and 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 $190.4
million for the third quarter of 2001 as compared to net earnings of $33.4
million for the third quarter of 2000 and a net loss of $181.0 million for the
nine months ended September 30, 2001 versus a net loss of $846.5 million for the
nine months ended September 30, 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 was 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 represented 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 $7.7
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 represented 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.
-32-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
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 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 issued $335 million
of securities under the shelf registration statement.
Stock Repurchase Programs
For the nine months ended September 30, 2001, the Company repurchased
approximately 18.1 million shares of the Company's Class B Common Stock for
approximately $779.2 million under its stock repurchase programs, of which $347
million was spent in the third quarter for 9.6 million shares. From October 1
through October 31, 2001, the Company spent approximately $25.1 million for
approximately 724,000 shares.
Commitments and Contingencies
The commitments of the Company for program license fees, estimated to aggregate
approximately $15.1 billion, are not reflected in the balance sheet as of
September 30, 2001. These commitments include approximately $10.6 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, alleged 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 sought 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.
-33-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
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
September 30, 2001, the Company had pending approximately 129,910 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.
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 cash flows.
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 decreased to $7.1 billion at September 30, 2001 from $7.8 billion
at December 31, 2000, due to reductions in cash and receivables and a decrease
in deferred tax assets. The decrease in cash of approximately $409 million
principally represents the timing of payments of commercial paper obligations.
The allowance for doubtful accounts as a percentage of receivables was 6.3% at
September 30, 2001 compared to 5.8% at December 31, 2000. The change in property
and equipment reflects depreciation expense of $636.4 million partially offset
by acquired assets and $329.5 million of capital expenditures related to capital
additions principally for cable networks, radio equipment and new and existing
video stores. Non-current inventory remained constant at $3.6 billion at
September 30, 2001 from December 31, 2000, reflecting a reduction in the third
quarter of VHS rental inventory offset by an increase of theatrical inventory
due to accelerated timing of motion picture production schedules. Intangibles of
$71.3 billion at September 30, 2001 increased by $9.3 billion as compared to
$62.0 billion at December 31, 2000, principally reflecting the first quarter
2001 acquisition of BET and the merger with Infinity, partially offset by
amortization expense of $1.7 billion. Current liabilities decreased to $7.6
billion at September 30, 2001 from $7.8 billion at December 31, 2000
-34-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
due to normal reductions in accounts payable and accrued expenses, partially
offset by increases in accrued participations and program rights. Long-term
debt, including current maturities, decreased $0.7 billion to $12.0 billion as
of September 30, 2001 from $12.7 billion as of December 31, 2000. The minority
interest balance of $1.2 billion as of September 30, 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 $1.95 billion for the nine months
ended September 30, 2001 principally reflects a net loss of $181 million
adjusted for $2.3 billion of depreciation and amortization expense and $352.7
million for the third quarter Blockbuster charge, partially offset by decreases
in accounts payable and accrued expenses. Net cash flow from operating
activities of $1.1 billion for the nine months ended September 30, 2000
principally reflects the impact of the merger and, excluding non-cash items, the
improved operating results of the Company's businesses, partially offset by the
payment of accrued liabilities. Net cash expenditures for investing activities
of $879.2 million for the nine months ended September 30, 2001 principally
reflect the acquisition of BET and outdoor businesses and capital expenditures
of $329.5 million partially offset by proceeds from dispositions of radio
stations and other assets. Net cash expenditures for investing activities of
$2.2 billion for the nine months ended September 30, 2000 principally reflect
capital expenditures of $422.1 million and acquisitions of $1.9 billion. For the
nine months ended September 30, 2001, financing activities principally reflect
the payment of bank debt, repayment of notes and debentures and purchase of
treasury stock partially offset by proceeds from the issuance of senior notes
and debentures. Financing activities for the nine months ended September 30,
2000 principally reflect borrowings from banks and proceeds from the issuance of
$1.6 billion of senior notes and debentures partially offset by the purchase of
treasury stock.
Capital Structure
-----------------
The following table sets forth the Company's long-term debt, net of current
portion:
-------------------------------------------- -------------------------------- ----------------------------------
At September 30, 2001 At December 31, 2000
-------------------------------------------- -------------------------------- ----------------------------------
Notes payable to banks (including
commercial paper) $ 2,135.4 $ 5,735.5
Senior debt 8,885.1 5,662.7
Senior subordinated debt 458.0 664.4
Subordinated debt 20.0 39.4
Other notes 18.8 43.5
Obligations under capital leases 474.1 552.2
-------------------------------------------- -------------------------------- ----------------------------------
Total Debt 11,991.4 12,697.7
Less current portion 266.4 223.9
-------------------------------------------- -------------------------------- ----------------------------------
Total Long-Term Debt $ 11,725.0 $ 12,473.8
-------------------------------------------- -------------------------------- ----------------------------------
The notes and debentures are presented net of an aggregate unamortized discount
of $19.8 million as of September 30, 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 16% at September 30, 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,
-35-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
including commercial paper. During March and September 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 by the Company 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 the Blockbuster Credit Agreement, 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
September 30, 2001, LIBOR for borrowing periods of one month and two months were
2.63% and 2.59%, respectively.
The new and amended facilities contain certain covenants which, among other
things, require that the Company maintain a minimum interest coverage ratio. At
September 30, 2001, the Company was in compliance with the financial covenants.
On May 17, 2001, the Company issued under Rule 144A an additional $400 million
of 6.40% unsecured senior notes due January 30, 2006 and $1.0 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 were used to repay existing
short-term debt, including commercial paper. During September 2001, these notes
were exchanged for registered notes. The notes due May 15, 2011 are redeemable
at any time by the Company at their principal amount plus the applicable premium
and accrued interest.
On June 29, 2001, the Company issued $335 million of 7.25% senior notes due June
30, 2051; interest on the senior notes will be payable quarterly. Proceeds from
the debt issuance were used to repay existing short-term debt, including
commercial paper. The senior notes are redeemable at any time by the Company
after June 30, 2006 at their principal amount plus accrued interest.
At September 30, 2001, the Company had borrowings under its commercial paper
program of approximately $1.1 billion. Borrowings under the program have
maturities of less than a year and are supported by unused committed bank
facilities.
On October 15, 2001, a subsidiary of the Company redeemed all of its $151
million outstanding 9.375% senior subordinated notes, due 2006 at a redemption
price equal to 104.7% of the principal amount.
On November 1, 2001, a subsidiary of the Company commenced a tender offer and
consent solicitation to purchase for cash, all of its outstanding 8.875% Senior
Subordinated Notes due 2007 at a purchase price to be determined two business
days prior to the expiration date of the tender offer, which is expected to be
December 3, 2001.
-36-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Blockbuster Special Item Charges
During the third quarter of 2001, Blockbuster executed a strategic
re-merchandising plan to capitalize on the higher margin and rapidly growing DVD
rental market. This plan includes an expansion in DVD copy depth and selection
and a reconfiguration of its stores to highlight the digital format. This
initiative is designed to maintain customer satisfaction and is intended to
solidify Blockbuster's DVD leadership position. In addition, Blockbuster
believes its overall rental margins should be enhanced by this plan. To
accommodate the increase in DVD and other products in its stores, Blockbuster
disposed of approximately 25% of its VHS rental inventory in its stores, certain
VHS rental inventory primarily located in its distribution center, and certain
rental inventory games in its stores. As a result of this reduction, a non-cash
charge of $209.8 million was recorded to operating expenses. Blockbuster also
recorded $13.2 million in incremental selling, general and administrative
expenses, primarily related to labor, supply and disposal costs to execute the
plan and severance associated with the reorganization of its marketing and new
media operations. Additionally, Blockbuster recorded charges of $2.6 million and
$1.1 million in depreciation expense and equity in loss of affiliated companies,
respectively, related to the plan. Blockbuster anticipates that this plan will
be completed by the end of 2001 through the destruction or sale of the
identified items. Additionally, in connection with the re-merchandising plan,
and to address the impact of changes in the rental business, effective July 1,
2001, Blockbuster changed its accounting estimates related to its rental
inventory, including residual values and useful lives. As a result of the
changes in estimates, the Company's operating expenses were $102 million higher
for both the three and nine months ended September 30, 2001 than it would have
been under the previous method.
Also during the third quarter of 2001, Blockbuster recorded approximately $28
million in selling, general and administrative expenses relating to two
outstanding lawsuits.
Change in Accounting Estimates for Rental Inventory
Effective July 1, 2001, Blockbuster changed its accounting estimates related to
rental inventory, including residual values and useful lives, given its
strategic re-merchandising plan as discussed in Note 3. The residual value of
VHS rental inventories was reduced from $4 per unit to $2 per unit, and the
residual value of game rental inventories was reduced from $10 per unit to $5
per unit. In addition, Blockbuster reduced its estimate of the useful life of
its core VHS rental inventories from 36 months to nine months. These changes in
estimate reflect the impact of changes in the rental business, such as an
increase in DVD rental revenues, a decrease in VHS rental revenues and trends
affecting game, which have led to a reduction in the average selling value of
Blockbuster's previously rented VHS and game products and a reduction in the
average life of VHS rental products. As a result of these changes in estimate,
the Company's operating expenses were $102 million higher and net loss was
higher by $55 million, or an increase in loss per share of $.03, than it would
have been under the previous method for both the third quarter and nine months
ended September 30, 2001.
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
accrued liabilities for severance, transaction fees and integration costs. As of
September 30, 2001, the Company had paid and charged approximately $104 million
for severance liabilities, $27 million for transaction fees and $57 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
-37-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
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 and
interest rates. To manage foreign currency and interest rate exposures, the
Company may use derivative instruments, including forward contracts and interest
rate swaps. Derivative instruments used by the Company in its hedging activities
are not used for speculative trading purposes. The Company designates forward
contracts used to hedge future production costs as cash flow hedges.
Additionally, the Company designates interest rate swaps, which effectively
convert variable interest payments on commercial paper to a fixed rate, as cash
flow 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. During the next
twelve months, approximately $6 million will be amortized into earnings.
Recent Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), effective for fiscal years beginning after December 15, 2001 and replaces
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS 144 establishes an accounting model
for long-lived assets to be disposed of by sale, including discontinued
operations, and replaces the provisions of APB Opinion No. 30 for the disposal
of segments of a business. The Company does not believe the adoption of SFAS 144
will have a material effect on its financial statements.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS 141")
and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and prohibits the use of the
pooling-of-interests method for such transactions. SFAS 142 requires that
goodwill and intangible assets with indefinite lives, including such assets
recorded in past business combinations, no longer be amortized to earnings, but
should instead be tested for impairment annually. Intangible assets with finite
lives will continue to be amortized over their useful lives and reviewed for
impairment. The Company is required to implement SFAS 142 on January 1, 2002 and
amortization of goodwill, and intangible assets with indefinite lives, ceases
upon adoption of this statement. The Company has not yet determined the impact
that this statement will have on its consolidated financial position or results
of operations.
-38-
Management's Discussion and Analysis of
Results of Operations and Financial Condition
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 the reaction of consumers, viewers, advertisers,
and the economy generally to the events of September 11, including, among other
things, the impact on viewership of the Company's programming and the potential
for future events of national significance to cause further disruptions in the
Company's businesses, as well as those factors 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. The Company has no obligation to publicly update any
forward-looking statements to reflect subsequent events or circumstances.
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."
-39-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
As previously reported in the Company's Annual Report on Form 10-K for
the year ended December 31, 2000, the Company, through its Paramount Pictures
subsidiary, along with other major distributors, received a Civil Investigative
Demand (CID) from the U.S. Department of Justice which was investigating
possible violations of industry-wide decrees relating to restrictions on certain
motion picture trade practices in the United States. On September 5, 2001, the
Company was advised by the Justice Department that the investigation was closed.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No. Description of Document
---------- -----------------------
(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. filed on October 31,
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), as amended by the Certificate of Amendment of
Certificate of Incorporation of Viacom Inc. dated May 23, 2001,
and the Certificate of Elimination of Series C Preferred Stock of
Viacom Inc. dated May 23, 2001 (incorporated by reference to
Exhibits 99.1 and 99.2, respectively, to the Current Report on
Form 8-K of Viacom Inc. filed on May 30, 2001) (File No. 1-9553).
(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).
-40-
Exhibit Description of Document
No. -----------------------
(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.
(b) Reports on Form 8-K.
Current Report on Form 8-K of Viacom Inc. filed on July 3, 2001, with
respect to the sale by Viacom of $335 million of 7.25% Senior Notes
due 2051.
Current Report on Form 8-K of Viacom Inc. filed on July 27, 2001, with
respect to earnings information for the second quarter and six months
ending June 30, 2001.
Current Report on Form 8-K of Viacom Inc. filed on September 20, 2001, with
respect to the Company's comments on its operations in light of the
extraordinary events surrounding the attacks on the United States on
September 11, 2001.
-41-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIACOM INC.
-----------------------------------
(Registrant)
Date November 14, 2001 /s/ Richard Bressler
--------------------------------- -----------------------------------
Richard Bressler
Senior Executive Vice President and
Chief Financial Officer
Date November 14, 2001 /s/ Susan C. Gordon
--------------------------------- -----------------------------------
Susan C. Gordon
Vice President, Controller,
Chief Accounting Officer
-42-
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. filed on October 31,
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), as amended by the Certificate of Amendment of
Certificate of Incorporation of Viacom Inc. dated May 23, 2001,
and the Certificate of Elimination of Series C Preferred Stock of
Viacom Inc. dated May 23, 2001 (incorporated by reference to
Exhibits 99.1 and 99.2, respectively, to the Current Report on
Form 8-K of Viacom Inc. filed on May 30, 2001) (File No. 1-9553).
(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 the 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.
-43-