SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 1-9553
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VIACOM INC.
(Exact Name Of Registrant As Specified In Its Charter)
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Delaware 04-2949533
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation Or Organization) Identification No.)
1515 Broadway, New York, NY 10036
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (212) 258-6000
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Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
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Class A Common Stock, $0.01 par value American Stock Exchange
Class B Common Stock, $0.01 par value American Stock Exchange
Warrants Expiring on July 7, 1999 American Stock Exchange
6.75% Senior Notes due 2003 American Stock Exchange
7.75% Senior Notes due 2005 American Stock Exchange
8% Exchangeable Subordinated Debentures due 2006 American Stock Exchange
7.625% Senior Debentures due 2016 American Stock Exchange
Securities Registered Pursuant To Section 12(g) of the Act:
None
(Title Of Class)
Indicate by check mark whether 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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of March 22, 1999, 140,250,342 shares of Viacom Inc. Class A Common
Stock, $0.01 par value ("Class A Common Stock"), and 555,815,214 shares of
Viacom Inc. Class B Common Stock, $0.01 par value ("Class B Common Stock"), were
outstanding, after giving effect to the previously announced 2-for-1 common
stock split to be effected in the form of a dividend to be issued on March 31,
1999, to shareholders of record on March 15, 1999. The aggregate market value of
the shares of Class A Common Stock (based upon the closing price of $42 1/32 per
share as reported by the American Stock Exchange on that date and adjusted to
give effect to the stock split) held by non-affiliates was approximately
$1,957,570,415.00 and the aggregate market value of the shares of the Class B
Common Stock (based upon the closing price of $42 15/16 per share as reported by
the American Stock Exchange on that date and adjusted to give effect to the
stock split) held by non-affiliates was approximately $19,382,894,168.00.
DOCUMENTS INCORPORATED BY REFERENCE
The Definitive Proxy of the Registrant for the 1999 Annual Meeting of
Shareholders (Part III to the extent described herein).
<PAGE>
Part I
Item 1. Business.
Background
Viacom Inc. (together with its subsidiaries and divisions, unless the
context otherwise requires, the "Company") is a diversified entertainment
company with operations in six segments: (i) Networks, (ii) Entertainment, (iii)
Video, (iv) Parks, (v) Publishing and (vi) Online. Through the Networks segment,
the Company operates MTV: MUSIC TELEVISION(R), SHOWTIME(R), NICKELODEON(R)/NICK
AT NITE(R), VH1 MUSIC FIRST(TM) and TV LAND(R), among other program services.
Through the Entertainment segment, which includes PARAMOUNT PICTURES(R),
PARAMOUNT TELEVISION(R), PARAMOUNT STATIONS GROUP and the Company's
approximately 80%-owned subsidiary SPELLING ENTERTAINMENT GROUP INC.
("SPELLING"), the Company produces and distributes theatrical motion pictures
and television programming and operates or programs 19 broadcast television
stations. Through the Video segment, the Company operates and franchises
BLOCKBUSTER VIDEO(R) stores worldwide. Through the Parks segment, PARAMOUNT
PARKS(R) owns and operates five theme parks and a themed attraction in the U.S.
and Canada. Through the Publishing segment, which includes imprints such as
SIMON & SCHUSTER(R), POCKET BOOKS(TM), SCRIBNER(R), and THE FREE PRESS(TM), the
Company publishes and distributes consumer books and related multimedia
products. Through the Online segment, the Company operates Internet businesses
currently related to MTV: MUSIC TELEVISION, NICKELODEON/NICK AT NITE and VH1
MUSIC FIRST.
As of December 31, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information". Accordingly, the Company has presented the six operating segments
referred to above. These operating segments have been determined in accordance
with the Company's internal management structure, which is organized based on
products and services. Previous years' reporting had followed an industry
segment approach and therefore, all prior years' segment discussion has been
reclassified to conform with the current segment classification.
The Company was organized in Delaware in 1986 for the purpose of acquiring
the stock of a predecessor. On March 11, 1994, the Company acquired a majority
of the outstanding shares of Paramount Communications Inc. by tender offer; on
July 7, 1994, Paramount Communications Inc. became a wholly owned subsidiary of
the Company, and on January 3, 1995, Paramount Communications Inc. was merged
into the principal subsidiary of the Company. On September 29, 1994, Blockbuster
Entertainment Corporation merged with and into the Company.
On November 27, 1998, the Company completed the sale of its educational,
professional and reference publishing businesses to Pearson plc for
approximately $4.6 billion in cash plus approximately $92 million related to
changes in net assets, which is subject to change based upon final determination
of net assets. On October 26, 1998, the Company completed the sale of its music
retail stores to Wherehouse Entertainment, Inc. for approximately $115 million
in cash before adjustments for changes in working capital. On September 4, 1998,
SPELLING completed the sale of substantially all of the development operations
of VIRGIN INTERACTIVE ENTERTAINMENT LIMITED ("VIRGIN") to Electronic Arts Inc.
for $122.5 million in cash. In addition, on November 10, 1998, Spelling
completed the sale of all non-U.S. operations of VIRGIN to an investor group. On
July 2, 1997, the Company completed the sale of its ten radio stations to
Chancellor Media Corp. for approximately $1.1 billion in cash. On July 31, 1996,
the Company completed the split-off of a subsidiary that held its cable
television system to its shareholders pursuant to an exchange offer and related
transactions. As a result, the Company realized a gain of approximately $1.3
billion, reduced its debt and retired 30,713,920 (adjusted for stock split) of
the Company's common shares, representing approximately 4.1% of the Company's
then total outstanding common shares (see "Business -- Discontinued
Operations").
In 1997, the Company increased its ownership of SPELLING to approximately
80%, thereby permitting tax consolidation of SPELLING with the Company. On March
19, 1999, the Company announced that it has offered
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to purchase the remaining shares of SPELLING that it does not already own for
$9.00 in cash per share in a merger transaction. The offer, approved by the
Company's Board of Directors, is contingent upon approval of SPELLING's
independent Directors.
As of March 22, 1999, National Amusements, Inc. ("NAI"), a closely held
corporation that owns and operates approximately 1,300 movie screens in the
U.S., the U.K. and South America, owned approximately 67% of the Company's
voting Class A Common Stock ("Class A Common Stock"), and approximately 28% of
the Company's outstanding Class A Common Stock and non-voting Class B Common
Stock ("Class B Common Stock") on a combined basis. NAI is not subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended.
Sumner M. Redstone, the controlling shareholder of NAI, is the Chairman of the
Board and Chief Executive Officer of the Company.
The Company's principal offices are located at 1515 Broadway, New York,
New York 10036 (telephone 212/258-6000). At December 31, 1998, the Company and
its affiliated companies employed approximately 111,730 people, of which
approximately 49,180 were full-time salaried employees.
Business
Networks
The Company owns and operates advertiser-supported basic cable television
program services and premium subscription television program services in the
U.S. and internationally. The MTV Networks division ("MTVN") includes such owned
and operated program services as MTV: MUSIC TELEVISION(R) ("MTV") in the U.S.,
Europe and Latin America, NICKELODEON(R) in the U.S., Latin America,
Scandinavia, Japan and the Commonwealth of Independent States, NICK AT NITE(R)
in the U.S., VH1 MUSIC FIRST(TM) in the U.S. ("VH1"), VH1(R) in the U.K. and
Germany, MTV's spin-off, M2: MUSIC TELEVISION(TM) in the U.S. and Europe, and TV
LAND(R) in the U.S. MTVN also participates in program services as a joint
venturer, including MTV: MUSIC TELEVISION(TM) in Asia and in Brazil,
NICKELODEON(R) in the U.K., and NICKELODEON(R) in Australia. The Company's
Showtime Networks Inc. subsidiary ("SNI") owns and operates SHOWTIME(R), THE
MOVIE CHANNEL(TM) and FLIX(R), and participates as a joint venturer in, and is
the manager of, SUNDANCE CHANNEL(R). Additionally, the Company participates as a
joint venturer in COMEDY CENTRAL(R), an advertiser-supported basic cable program
service in the U.S., GULF DTH ENTERTAINMENT LDC ("GULF DTH"), a satellite
direct-to-home platform offering programming in the Middle East, and as of
January 1999, NOGGIN(TM), a subscription-supported, non-commercial children's
educational program service, which is distributed by cable and satellite, and
includes a related online service.
Generally, the Company's networks are offered to customers of cable
television operators, distributors of direct-to-home satellite services ("DTH")
and other multichannel distributors. DTH distributors provide service by either
low-powered C-Band satellite technology (received by large satellite dishes at
customers' premises, "TVRO") or mid- to high-powered K-Band satellite technology
(received by smaller satellite dishes at customers' premises, "DBS"). Cable
television is currently the predominant means of distribution of the Company's
program services in the U.S. Internationally, the predominant distribution
technology varies territory by territory.
MTV Networks. MTV targets viewers from the ages of 12 to 34 with
programming that consists primarily of music videos and events, augmented by
music and general lifestyle information, comedy and dramatic series, animated
programs, news specials, interviews, documentaries and other youth-oriented
programming. M2:
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MUSIC TELEVISION, a 24-hour, seven-days-a-week spin-off of MTV, targets a
segment of the 12 to 34 year old audience with a "freeform" music format which
features music videos from a broad range of musical genres and artists and is
principally distributed to consumers by DTH. On August 1, 1998, MTVN launched
"The Suite from MTV Networks" ("The Suite"), a package of digital television
program services, which currently consists of six music program services, each
featuring a music genre that is an extension of the MTV or VH1 service, NOGGIN
and two other children's program services from NICKELODEON. The Suite is offered
for distribution by digital technologies through DBS distributors and cable
operators offering digital technology.
MTV continues to expand its business opportunities based on its
programming. MTV FILMS(TM) produced DEAD MAN ON CAMPUS, VARSITY BLUES and 200
CIGARETTES, released by PARAMOUNT PICTURES in August 1998, January 1999 and
February 1999, respectively, and expects its feature films ELECTION and THE WOOD
to be released by PARAMOUNT PICTURES in 1999. MTV has also launched lines of
home videos, consumer products and books, featuring MTV programming and
personalities. In addition, MTV pursues broadcast network and first-run
syndication television opportunities through MTV PRODUCTIONS(TM).
MTV had approximately 67.3 million domestic subscribers at December 31,
1998 (based on subscriber counts provided by each distributor of the service,
including cable, DTH and other multichannel programming providers). According to
the December 1998 sample reports issued by the A.C. Nielsen Company (the
"Nielsen Report"), MTV reached approximately 71.2 million domestic subscriber
households. At December 31, 1998, M2: MUSIC TELEVISION had approximately 10.1
million domestic subscribers.
MTV also owns and operates, participates in as a joint venturer, and
licenses third parties to operate, MTV program services throughout the world.
The MTV international program services are described in the International MTVN
Program Services chart that follows. Most of these international MTV program
services are regionally customized to suit the local tastes of their young adult
viewers by the inclusion of local music, programming, and on-air personalities,
and use of the local language.
NICKELODEON combines acquired and originally produced programs in a
pro-social, non-violent format comprising two distinct program units tailored to
age-specific demographic audiences: NICKELODEON, targeted to audiences ages 2 to
15 (which includes NICK JR.(R), a program block designed for 2 to 5 year olds),
features a variety of live-action and animated programs, including children's
game shows, educational shows, puppet shows, dramatic specials, comedy,
adventure and magazine shows, and such popular shows as RUGRATS(TM) and BLUE'S
CLUES(R); and NICK AT NITE, which attracts primarily audiences ages 18 to 54 and
offers mostly situation comedies from various eras, including I LOVE LUCY, THE
DICK VAN DYKE SHOW, HAPPY DAYS, THE MARY TYLER MOORE SHOW and TAXI. TV LAND, a
24-hour, seven-days-a-week spin-off of NICK AT NITE, is comprised of a broad
range of well-known television programs from various genres, including comedies,
dramas, westerns, variety and other formats from the 1950s through the 1980s. On
March 1, 1999, the Company launched NICKELODEON GAS(TM) Games and Sports for
Kids, an advertiser-supported basic cable program service featuring children's
game shows and sports programming for viewers ages 6 to 11, which includes a
related online service.
At December 31, 1998, NICKELODEON/NICK AT NITE had approximately 69.8
million domestic subscribers (based on subscriber counts provided by each
distributor of the service, including cable, DTH and other multichannel
programming providers). According to the Nielsen Report, NICKELODEON/NICK AT
NITE reached approximately 74.2 million domestic subscriber households.
According to the Nielsen Report for the period from September 7, 1998 to
December 27, 1998, NICKELODEON held 52% of the gross ratings points for the kids
ages 2 to 11 audience during the relevant daypart. At December 31, 1998, TV LAND
had approximately 37 million domestic subscribers (based on subscriber counts
provided by each distributor of the service, including cable, DTH and other
multichannel programming providers). According to the Nielsen Report, TV LAND
reached approximately 33.6 million domestic subscriber households.
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NICKELODEON licenses its brands and characters for and in connection with
merchandise, home video and publishing worldwide. NICKELODEON MOVIES(TM)
develops a mix of story- and character-driven projects based on original ideas
and NICKELODEON programming, such as the feature films THE RUGRATS MOVIE and
GOOD BURGER, and RUGRATS VACATION which was released in direct-to-video format.
The feature film SNOW DAY will be produced by NICKELODEON MOVIES and is expected
to be released in 1999 by PARAMOUNT PICTURES. Additionally, the Company
publishes a monthly NICKELODEON MAGAZINE, which had approximately 804,000
subscribers at December 31, 1998. NICKELODEON also owns and operates theme park
attractions and touring shows under its NICKELODEON RECREATION(TM) unit and
interactive public attractions and television production studios under its
NICKELODEON STUDIOS(R) unit located at Universal Studios Florida.
NICKELODEON also owns and operates, participates in as a joint venturer,
and licenses third parties to operate, NICKELODEON program services throughout
the world. The NICKELODEON international program services are described in the
International MTVN Program Services chart that follows. Many of these
international program services are customized by region and country to suit the
tastes and needs of their viewers by inclusion of regionally or locally produced
programming and by use of local language. On May 31, 1998, in accordance with
its plan of disposition, the Company ceased operations of its German NICKELODEON
program service business and began liquidating its assets.
VH1 presents music and related programming directed at an audience aged 25
to 44 with emphasis on series which feature viewers' favorite music and artists
such as "BEHIND THE MUSIC(TM)", "VH1 POP UP VIDEO(TM)" and "VH1
STORYTELLERS(TM)", in addition to airing music videos, concerts, special events,
and music movies. In 1998, VH1 began entering into arrangements for the
production of two-hour, movie-length programming made for VH1, including biopics
of musical artists, fictionalized music-themed stories and music documentaries,
which is expected to commence airing in the third quarter of 1999. At December
31, 1998, VH1 had approximately 61.1 million domestic subscribers (based on
subscriber counts provided by each distributor of the service, including cable,
DTH and other multichannel programming providers). According to the Nielsen
Report, VH1 reached approximately 64.9 million domestic subscriber households.
International versions of VH1 program services are described in the
International MTVN Program Services chart that follows.
In 1998, VH1 extended its brand with the release of audio product, most
notably "VH1 DIVAS LIVE(TM)" including music from VH1's concert of the same name
featuring Celine Dion, Gloria Estefan, Aretha Franklin, Shania Twain and Mariah
Carey. A portion of the proceeds from sales of this audio product supports VH1
SAVE THE MUSIC(R), an initiative to support and fund music education in public
schools.
MTVN, in exchange for cash and advertising time or for promotional
consideration only, licenses from record companies music videos for exhibition
on MTV, VH1, M2: MUSIC TELEVISION and other MTVN program services. MTVN has
entered into multi-year global or regional music video licensing agreements with
certain of the major record companies. These agreements generally cover a three
to five year period and contain provisions regarding video debut and exclusivity
in the U.S. MTVN also is negotiating and expects to renew or initiate additional
global or regional license agreements with the other major record companies and
independent labels. However, there can be no assurance that such renewals or
agreements can be concluded on favorable terms. MTVN is continuing to take
measures to assure its music video program services worldwide access to music
videos (see "Business -- Competition -- Networks").
MTVN derives revenues principally from two sources: the sale of time on
its own networks to advertisers; and the license of the networks to cable
television operators, DTH and other distributors. The sale of MTVN advertising
time is affected by viewer demographics, viewer ratings and market conditions
for advertising time. Adverse changes to any of these factors could have an
adverse effect on revenues (see "Business -- Competition -- Networks").
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International MTVN Program Services
The following table sets forth information regarding MTVN program services
operated internationally:
<TABLE>
<CAPTION>
Launch/
Program Regional Feeds/ Commencement
Service Territory Ownership Language(1) Date
- ------- --------- --------- ----------- ----
<S> <C> <C> <C> <C>
MTV Europe(2) 40 territories, 100% by the Company 5 Regional August 1987
including all EU Feeds (U.K.,
states, Eastern Northern,
and Central Scandinavian,
Europe, South Central and
Africa, certain South), all in
countries in the English (except
former Soviet Central
Union, the Middle presented in
East, Egypt, German and
Faroe Islands, South presented
Israel, in Italian)
Liechtenstein,
Malta and Moldova
MTV Latin Latin America, 100% by the Company 2 Regional October 1993
America the Caribbean, Feeds in Spanish
Brazil and the U.S.
MTV Brasil Brazil Joint Venture (with Portuguese October 1990
Abril S.A.)
MTV Taiwan, certain Through MTV Asia, Joint English and April 1995
Mandarin provinces in Venture (with PolyGram Mandarin
China*, Singapore N.V.)
and Philippines
MTV South East Brunei, Thailand, Through MTV Asia, Joint English, May 1995
Asia Singapore, Venture (with PolyGram Bahasa
Philippines, N.V.) Indonesian and
Indonesia, Tagalog
Malaysia,
Vietnam, Hong
Kong*, South
Korea* and Papua
New Guinea
</TABLE>
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(1) All MTV and VH1 program services include English language music videos.
(2) In 1996, MTV Europe divided its one Pan-European service into three regional
services in order to provide viewers with more locally relevant programming,
including some local language programming. In July 1997, MTV Europe launched a
fourth regional feed customized for viewers in the U.K. and further customized
the South feed for viewers in Italy by adding Italian language programming. In
June 1998, MTV Europe launched a fifth regional feed for Scandinavia. At
December 31, 1998, MTV Europe had approximately 62.2 million subscribers (based
on subscriber counts provided by each distributor of the service, including
cable, DTH and other multichannel programming providers, except in Italy where
the service is broadcast via terrestrial television and the Company's estimated
audience is based on ratings and other information).
* Denotes program services that are not 24 hours-a-day/seven-days-a-week.
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<TABLE>
<CAPTION>
Launch/
Program Regional Feeds/ Commencement
Service Territory Ownership Language(1) Date
- ------- --------- --------- ----------- ----
<S> <C> <C> <C> <C>
MTV India India, Sri Lanka, Through MTV Asia, Joint English and October 1996
Bangladesh, Nepal Venture (with PolyGram Hindi
and Pakistan N.V.)
MTV Australia Australia Licensing Arrangement English March 1997
(with Optus Vision Pty
Limited)
MTV Russia Russia Licensing Arrangement Russian September 1998
(with entities
controlled by Russia
Partners Company L.P.
and Biz Enterprises)
Nickelodeon Latin America, 100% by the Company Spanish, December 1996
Latin America Brazil and the Portuguese and
Caribbean English
Nickelodeon Nordic region 100% by the Company Swedish, February 1997
Nordic* (including Norwegian and
Sweden, Norway, Danish
Denmark and
Finland)
Nickelodeon Turkey Licensing Arrangement Turkish September 1997
Turkey* (with The Media Group of
Turkey)
Nickelodeon U.K. Joint Venture (with English September 1993
U.K.* British Sky Broadcasting
Limited)
Nickelodeon Australia Joint Venture (with XYZ English October 1995
Australia Entertainment Pty Ltd.)
Nickelodeon Spain 100% by the Company Spanish March 1999
Spain*
Nickelodeon Japan, CIS/Baltic 100% by the Company Japanese, November 1998
Global Network Republics, Russian, Magyar
Ventures(3) Hungary*, and English
Philippines,
Indonesia,
Romania and Malta
</TABLE>
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(3) Nickelodeon Global Network Ventures currently consists of five different
feeds with customized programming for targeted markets.
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<TABLE>
<CAPTION>
Launch/
Program Regional Feeds/ Commencement
Service Territory Ownership Language(1) Date
- ------- --------- --------- ----------- ----
<S> <C> <C> <C> <C>
VH1 U.K./ All EU states, 100% by the Company English September 1994
VH1 Export the Middle East,
Africa,
Scandinavia,
Israel, Malta,
Moldova, South
Africa and
Eastern Europe
VH1 Germany Germany and 100% by the Company German May 1995
Austria
</TABLE>
Showtime Networks Inc. SNI owns and operates three commercial-free,
premium subscription television program services: SHOWTIME, offering recently
released theatrical feature films, original motion pictures and series, family
entertainment and boxing and other special events; THE MOVIE CHANNEL, offering
recently released theatrical films and related programming and original motion
pictures; and FLIX, an added-value program service featuring theatrical motion
pictures primarily from the 1960s, 70s and 80s, as well as select recent titles.
At December 31, 1998, SHOWTIME, THE MOVIE CHANNEL and FLIX, in the aggregate,
had approximately 19.7 million cable and other subscriptions in 50 states and
certain U.S. territories. SUNDANCE CHANNEL, a joint venture (among SNI, an
affiliate of Robert Redford and an affiliate of PolyGram Filmed Entertainment
Inc.) managed by SNI, is a commercial-free premium subscription service,
dedicated to independent film, featuring top-quality American independent films,
documentaries, foreign and classic art films, shorts and animation, with an
emphasis on recently released titles.
SNI also provides special events, such as sports and musical events, to
licensees on a pay-per-view basis. SHOWTIME EVENT TELEVISION(TM) is a
pay-per-view distributor of these special events, including boxing events, such
as the historic rematch between heavyweight champion Evander Holyfield and
former heavyweight champion Mike Tyson in June 1997, the Spice Girls' U.S.
full-length television concert debut in 1998, and the return to the ring of Mike
Tyson in 1999.
In order to exhibit theatrical motion pictures on premium subscription
television, SNI enters into commitments to acquire rights, with an emphasis on
acquiring exclusive rights for SHOWTIME and THE MOVIE CHANNEL, from major or
independent motion picture producers and other distributors. SNI's exhibition
rights cover the U.S. and may, on a contract-by-contract basis, cover additional
territories. SNI has the exclusive U.S. premium television rights to all
PARAMOUNT PICTURES' feature films theatrically released beginning January 1,
1998, as well as non-exclusive rights to certain titles from PARAMOUNT PICTURES'
film library (see "Business -- Entertainment"). SNI also has significant
theatrical motion picture license agreements with Sony Pictures Entertainment
Inc., Metro-Goldwyn-Mayer Inc. ("MGM"), PolyGram Filmed Entertainment Inc.,
Castle Rock Entertainment, Phoenix Pictures, Artisan Pictures Inc. (formerly
LIVE Film and Mediaworks Inc.), Stratosphere Entertainment LLC, and, for
Dimension and certain Miramax-label theatrical pictures, Buena Vista Television
(a subsidiary of The Walt Disney Company), covering motion pictures initially
theatrically released through dates ranging from December 31, 1998 to December
31, 2003. Theatrical motion pictures that are licensed to SNI on an exclusive
basis are generally exhibited first on SHOWTIME and THE MOVIE CHANNEL after an
initial period for theatrical, home video and pay-per-view exhibition and before
the period has commenced for standard broadcast television and basic cable
television exhibition. Many of the motion pictures which appear on FLIX have
been previously available for standard broadcast and other exhibitions (but are
shown on FLIX unedited and commercial-free).
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SNI also arranges for the development, production, acquisition and, in
many cases, distribution of original programs, series and motion pictures. As
part of its original programming strategy, SNI premiered 33 original motion
pictures on SHOWTIME and 28 original motion pictures on THE MOVIE CHANNEL in
1998, and expects to premiere approximately 50 original motion pictures in 1999.
The producers of some of SNI's original motion pictures are given an opportunity
to seek a theatrical release prior to such pictures' exhibition on SHOWTIME or
THE MOVIE CHANNEL. If the producers are not successful in obtaining such a
theatrical release, these pictures then premiere in the U.S. on SHOWTIME or THE
MOVIE CHANNEL. SNI has entered into and plans to continue to enter into
co-financing, co-production and/or co-distribution arrangements with other
parties to reduce the net cost to SNI for its original motion pictures. In 1998,
Hallmark Entertainment Distribution Company, PARAMOUNT PICTURES and MGM were the
predominant co-producers, co-financiers and co-distributors of SNI's original
motion pictures, programs and series for that calendar year. BLOCKBUSTER and SNI
have an agreement whereby BLOCKBUSTER will license from SNI the exclusive
domestic home video rights to up to 90 SNI original motion pictures and other
programs over the 1999-2001 period.
The costs of acquiring premium television rights to programming and
producing original motion pictures are the principal expenses of SNI. At
December 31, 1998, in addition to program acquisition commitments reflected in
the Company's financial statements, SNI had commitments to acquire programming
rights and original programming commitments in an aggregate amount of
approximately $1.1 billion (excluding intersegment commitments of approximately
$692.4 million), most of which is payable over the next six years as part of
SNI's normal programming expenditures. SNI's commitments to acquire programming
rights are contingent upon delivery of motion pictures which are not yet
available for premium television exhibition and, in many cases, have not yet
been produced.
Joint Ventures. COMEDY CENTRAL, a joint venture of the Company and Home
Box Office ("HBO"), a division of Time Warner Inc. ("Time Warner"), is an
advertiser-supported basic cable television program service which features
comedy programming, including SOUTH PARK. The Company is a joint venturer in
GULF DTH, a satellite direct-to-home platform offering programming in the Middle
East, including programming from MTV, VH1, NICKELODEON, TV LAND and THE
PARAMOUNT COMEDY CHANNEL (see "Business -- Entertainment -- Other Joint
Ventures"). On January 31, 1999, NICKELODEON and the Children's Television
Workshop launched as a joint venture, NOGGIN, a 24-hour, seven-days-a-week
subscription-supported, non-commercial children's educational program service,
which is distributed by cable and satellite, and includes a related online
service (see "Business -- Online"). NOGGIN's purpose is to educate and entertain
2 to 12 year olds. NOGGIN's programming line-up includes a mix of live action,
news, animated and puppet shows, including many acclaimed series such as SESAME
STREET, ELECTRIC COMPANY and BLUE'S CLUES after their initial network runs. As
of March 10, 1998, the Company and Conus Communications Company Limited
Partnership dissolved their jointly-owned ALL NEWS CHANNEL joint venture.
Entertainment
The Entertainment segment's principal businesses are the production and
distribution of motion pictures and television programming as well as movie
theater operations, music publishing and the operation or programming of 19
broadcast television stations. Additionally, the Company is a joint venturer in
the UNITED PARAMOUNT NETWORK(R), also known as UPN(R), a U.S. broadcast
television network, and various international basic cable and pay television
program services.
Theatrical Motion Pictures. Through PARAMOUNT PICTURES, the Company
produces, finances and distributes feature motion pictures. Motion pictures are
produced by PARAMOUNT PICTURES, produced by independent producers and financed
in whole or in part by PARAMOUNT PICTURES, or produced by others
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and distributed by PARAMOUNT PICTURES. Each picture is a separate and distinct
product with its financial success dependent upon many factors, among which cost
and public response are of fundamental importance. The normal distribution cycle
of motion pictures produced or acquired for distribution by PARAMOUNT PICTURES
is exhibition in U.S. and foreign theaters followed by videocassettes and discs,
pay-per-view television, premium subscription television, network television,
and basic cable television and syndicated television exploitation. In addition
to the unprecedented success of the 1997 motion picture TITANIC, winner of 11
Academy Awards in 1998 including "Best Picture", during 1998, PARAMOUNT PICTURES
produced or co-produced and theatrically released 13 feature motion pictures in
the U.S., including THE TRUMAN SHOW, DEEP IMPACT, STAR TREK: INSURRECTION,
NICKELODEON MOVIES' THE RUGRATS MOVIE, and MTV FILMS' DEAD MAN ON CAMPUS, and
through UIP (as defined below) released internationally SAVING PRIVATE RYAN,
winner of five Academy Awards in 1999. PARAMOUNT PICTURES currently plans to
release approximately 17 films in 1999, including PAYBACK, MISSION: IMPOSSIBLE
II, SLEEPY HOLLOW, THE RUNAWAY BRIDE, THE OUT-OF-TOWNERS, THE GENERAL'S
DAUGHTER, SOUTH PARK and DOUBLE JEOPARDY; VARSITY BLUES, 200 CIGARETTES,
ELECTION and THE WOOD produced by MTV FILMS; and SNOW DAY produced by
NICKELODEON MOVIES.
In seeking to limit PARAMOUNT PICTURES' financial exposure, the Company
has pursued a strategy with respect to a number of films of entering into
agreements to distribute such films produced and/or financed, in whole or in
part, with other parties. The parties to these arrangements include studio and
non-studio entities, both domestic and foreign. In various of these
arrangements, the other parties control certain distribution and other ownership
rights.
PARAMOUNT PICTURES generally distributes its motion pictures for
theatrical release outside the U.S. and Canada through United International
Pictures ("UIP"), a company owned by the Company, MGM and Universal Studios,
Inc. ("Universal"). PARAMOUNT PICTURES distributes its motion pictures on
videocassette and disc in the U.S. and Canada through PARAMOUNT HOME VIDEO(R)
and outside the U.S. and Canada, generally through Cinema International B.V.
("CIBV"), a joint venture of entities affiliated with the Company and Universal.
On March 10, 1999, PARAMOUNT HOME VIDEO and Universal Studios Home Video jointly
announced their decision to restructure the operations of CIBV during 1999.
PARAMOUNT PICTURES' feature films initially theatrically released in the U.S. on
or after January 1, 1998 will be exhibited exclusively (within U.S. premium
television) on SHOWTIME and THE MOVIE CHANNEL. PARAMOUNT PICTURES also
distributes its motion pictures for premium subscription television release
outside the U.S. and Canada and licenses its motion pictures to residential and
hotel/motel pay-per-view, airlines, schools and universities.
During 1996, PARAMOUNT PICTURES entered into transactions with KirchGroup
in Germany and with TCM Droits AudioVisuel S.N.C. and Television par Satellite
in France for the licensing of its feature film and television programming
output and libraries for free and pay television exploitation. SPELLING entered
into a similar broad-based agreement with KirchGroup in 1996.
During 1997, affiliates of PARAMOUNT PICTURES entered into a multi-year
license for television programming with GULF DTH and a multi-year license for
feature film output and library product for THE MOVIE CHANNEL MIDDLE EAST, a
premium subscription television service in the Middle East carried on GULF DTH
and owned by a partnership including subsidiaries of PARAMOUNT PICTURES and Sony
Pictures Entertainment Inc. Affiliates of PARAMOUNT PICTURES also entered into
multi-year transactions with Prima TV Spa in Italy and with Sogecable, S.A. in
Spain for the licensing of feature film and television product for pay
television and pay-per-view exploitation.
During 1998, PARAMOUNT PICTURES entered into a license agreement with
Canal+ Polska in Poland and amended the terms of its license agreement with Star
Channel in Japan. Both agreements are for the licensing
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of PARAMOUNT PICTURES' current theatrical output and certain library television
product for pay television exploitation.
UIP and United Cinemas International ("UCI", as described below) are the
subject of governmental inquiries by the Commission of the European Community
("EC"). UIP has resolved all issues with the EC relating to its pay television
operations in the European Union. Consistent with PARAMOUNT PICTURES' and the
other member studios' recent practices, the UIP member studios have agreed to
license their pay television rights in the future without using the facilities
of UIP, although UIP is offering its licensees the opportunity to enter into
separate agreements with each of PARAMOUNT PICTURES and the other UIP partners
on substantially identical business terms, certain of which licensees have
concluded such agreements with PARAMOUNT PICTURES. UIP Pay Television will
continue to administer certain agreements that were previously entered into
through UIP. The agreement regarding UIP's pay television operations is separate
from the EC's evaluation of UIP's request to renew the exemption granted as of
1988 under the EC's rules covering UIP's theatrical distribution operations. On
January 16, 1998, the EC issued a Statement of Objections expressing its
preliminary views that UIP's application to renew such exemption should be
denied. UIP and its partners have disputed the preliminary views expressed by
the EC in the Statement of Objections by providing evidence, both in writing and
by way of oral testimony, to the EC.
In addition to premium subscription television, most motion pictures are
also licensed for exhibition on broadcast and basic cable television, with fees
generally collected in installments. All of the above license fees for
television exhibition (including international and U.S. premium television and
basic cable television) are recorded as revenue in the year that licensed films
are available for such exhibition, which, among other reasons, may cause
substantial fluctuation in PARAMOUNT PICTURES' operating results. At December
31, 1998, the unrecognized revenues attributable to such licensing of completed
films from PARAMOUNT PICTURES' license agreements were approximately $1.1
billion. At December 31, 1998, PARAMOUNT PICTURES had approximately 975 motion
pictures in its library.
Television Production and Syndication. The Company, through PARAMOUNT
TELEVISION, VIACOM PRODUCTIONS and SPELLING, produces, acquires and distributes
series, miniseries, specials and made-for-television movies primarily for
network television, first-run syndication, pay television and basic cable
television.
The Company's current network programming includes FRASIER (NBC), BECKER
(CBS), DIAGNOSIS MURDER (CBS), JAG (CBS), SABRINA, THE TEENAGE WITCH (ABC),
CLUELESS (UPN), THE SENTINEL (UPN), SEVEN DAYS (UPN), STAR TREK: VOYAGER (UPN)
and SISTER, SISTER (WB), and through SPELLING, BEVERLY HILLS, 90210 (FOX),
MELROSE PLACE (FOX), SUNSET BEACH (NBC), MOESHA (UPN), CHARMED (WB) and SEVENTH
HEAVEN (WB). Generally, a network will license a specified number of episodes
for exhibition on the network in the U.S. during the license period. All other
distribution rights, including foreign and off-network syndication rights, are
typically retained by the Company. The episodic network license fee is normally
less than the costs of producing each series episode; however, in many cases,
the Company has been successful in recouping some of its costs by obtaining
international sales through its syndication operations. Foreign sales are
generally concurrent with U.S. network runs. Generally, a series must have a
network run of at least four years to be successfully sold in domestic
syndication.
The Company produces and/or distributes original television programming
for first-run syndication which it sells directly to television stations in the
U.S. on a market-by-market basis. The Company sells its programs to television
stations for cash, advertising time or a combination of both. The Company's
first-run syndicated programming includes such shows as STAR TREK: DEEP SPACE
NINE, ENTERTAINMENT TONIGHT, HARD COPY, THE MONTEL WILLIAMS SHOW, LEEZA, REAL
TV, WILD THINGS and VIPER, and through SPELLING, JUDGE JUDY and JUDGE JOE
BROWN.
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The Company also distributes its television programming to basic cable
program services (such as the television series MAGGIE and through SPELLING, ANY
DAY NOW on Lifetime), including services in which the Company has an interest,
such as NICK AT NITE and VH1 in the U.S. and THE PARAMOUNT COMEDY CHANNEL in the
U.K.
The Company, through PARAMOUNT TELEVISION and through WORLDVISION(R), a
subsidiary of SPELLING, distributes or syndicates television series, feature
films, made-for-television movies, miniseries and specials for television
exhibition in domestic and/or international broadcast, cable and other
marketplaces. Feature film and television properties distributed by the Company
are produced by the Company and/or SPELLING or acquired from third parties.
Third-party agreements for the acquisition of distribution rights generally
provide for a long-term grant of distribution rights which are exclusive in
nature with respect to the territory or territories involved; such agreements
frequently guarantee a minimum recoupable advance payment to such third parties
and generally provide for periodic payment to such third parties based on the
amount of revenues derived from distribution activities after deduction of the
Company's distribution fee, recoupment of distribution expenses and recoupment
of any advance payments.
The recognition of revenues for license fees for completed television
programming in syndication and on basic cable is similar to that of feature
films exhibited on television and, consequently, operating results are subject
to substantial fluctuation. At December 31, 1998, the unrecognized revenues
attributable to television program license agreements were approximately $591.2
million, of which approximately $103.0 million was attributable to SPELLING.
PARAMOUNT DIGITAL ENTERTAINMENT INC. ("PDE"), a subsidiary of the Company,
produces Web sites that promote and extend PARAMOUNT PICTURES' properties
online, including STAR TREK(R) and ENTERTAINMENT TONIGHT. PDE has expanded the
online presence of STAR TREK to include the official STAR TREK online store and
an e-mail service providing STAR TREK related domain names for the e-mail
addresses of fans of the television series and motion pictures. PDE also
oversees "paramount.com", PARAMOUNT PICTURES' entry way to the Internet, and
produces Web sites for third parties.
Broadcasting. The Company's broadcast television division, PARAMOUNT
STATIONS GROUP ("PSG"), owns and operates 17 television stations, all of which
operate pursuant to the Communications Act of 1934, as amended (the
"Communications Act"), under licenses granted by the Federal Communications
Commission ("FCC"). Such licenses are renewable every eight years. In addition,
the Company programs two additional commercial television stations pursuant to
local marketing agreements ("LMAs"). These 19 stations are located in the top 50
television markets and reach approximately 25.6% of all U.S. television
households.
In connection with the expansion and development of the Company's interest
in UPN, PSG has acquired television stations in major U.S. markets. The majority
of these acquisitions were through like-kind exchanges of former PSG stations
which were affiliated with networks other than UPN for stations which then
became UPN affiliates. On February 1, 1999, PSG acquired WNPA-TV, serving
Pittsburgh, Pennsylvania, for approximately $40 million.
The table below sets forth the 17 television stations owned and operated
by PSG and the two television stations operated by PSG under LMAs at March 22,
1999.
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- --------------------------------------------------------------------------------
Station and Metropolitan Market Type/
Area Served* Rank Channel Network Affiliation
------------ ---- ------- -------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WPSG-TV UHF/
Philadelphia, PA 4 57 UPN
- --------------------------------------------------------------------------------
WSBK-TV UHF/
Boston, MA 6 38 UPN
- --------------------------------------------------------------------------------
KTXA-TV UHF/
Dallas-Ft. Worth, TX 7 21 UPN
- --------------------------------------------------------------------------------
WDCA-TV UHF/
Washington, DC 8 20 UPN
- --------------------------------------------------------------------------------
WKBD-TV UHF/
Detroit, MI 9 50 UPN
- --------------------------------------------------------------------------------
WUPA-TV UHF/
Atlanta, GA 10 69 UPN
- --------------------------------------------------------------------------------
KTXH-TV UHF/
Houston, TX 11 20 UPN
- --------------------------------------------------------------------------------
KSTW-TV VHF/
Seattle-Tacoma, WA 12 11 UPN
- --------------------------------------------------------------------------------
WTOG-TV UHF/
Tampa-St. Petersburg- 14 44 UPN
Sarasota, FL
- --------------------------------------------------------------------------------
WBFS-TV UHF/
Miami-Ft. Lauderdale, FL 16 33 UPN
- --------------------------------------------------------------------------------
WNPA-TV UHF/
Pittsburgh, PA 19 19 UPN
- --------------------------------------------------------------------------------
KMAX-TV UHF/
Sacramento-Stockton- 20 31 UPN
Modesto, CA
- --------------------------------------------------------------------------------
WNDY-TV UHF/
Indianapolis, IN 25 23 UPN
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
Station and Metropolitan Market Type/
Area Served* Rank Channel Network Affiliation
------------ ---- ------- -------------------
- --------------------------------------------------------------------------------
WWHO-TV UHF/
Columbus, OH 34 53 WB/primary (expires
April 13, 2000)
UPN/secondary**
- --------------------------------------------------------------------------------
WGNT-TV UHF/
Norfolk-Portsmouth-Newport 40 27 UPN
News, VA
- --------------------------------------------------------------------------------
WUPL-TV UHF/
New Orleans, LA 41 54 UPN
- --------------------------------------------------------------------------------
KAUT-TV UHF/
Oklahoma City, OK 45 43 UPN
- --------------------------------------------------------------------------------
The following two stations are operated by PSG under LMAs:
- --------------------------------------------------------------------------------
WTVX-TV
West Palm Beach-Ft. Pierce, FL 44 UHF/ UPN
34
- --------------------------------------------------------------------------------
WLWC-TV
Providence, RI-New Bedford, MA 50 UHF/ WB/primary (expires
28 April 13, 2000)
UPN/secondary**
- --------------------------------------------------------------------------------
* Metropolitan Areas Served are A.C. Nielsen Company's Designated Market Areas.
** Under secondary affiliation agreements, UPN programming is broadcast
out-of-pattern and is scheduled around WB programming.
Broadcast television signals are presently transmitted in analog form;
however, in 1997, the FCC assigned to each existing television station a six MHz
channel to be used for the broadcast of digital television ("DTV"). Under the
construction schedule adopted by the FCC, each of the Company's television
stations must construct a DTV facility no later than May 1, 2002 (see "Business
- -- Regulation -- Broadcasting"). Despite this timetable, the Company plans to
launch DTV services in at least one of its markets by the end of 1999. The
Company estimates that the cost of construction of each DTV station will range
from $3 million to $7 million. The Company is currently formulating plans for
use of its DTV channels.
Other Joint Ventures. On January 15, 1997, the Company acquired a 50%
interest in UPN from BHC Communications, Inc. ("BHC"), a corporate affiliate of
Chris Craft Industries, Inc. At December 31, 1998, UPN provided 14 hours of
programming a week, including two-hour prime-time programming blocks
five-nights-
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a-week, to affiliates in 185 U.S. television markets, reaching approximately
96.5% of all U.S. television households. The Company also produces original
programming for UPN and owns and operates 17 stations and programs an additional
two stations pursuant to LMAs, all of which are affiliates of UPN.
In addition to THE MOVIE CHANNEL MIDDLE EAST, through PARAMOUNT PICTURES
and various of its affiliates, the Company is a joint venturer in international
program services, including, in the U.K. with BSkyB, THE PARAMOUNT COMEDY
CHANNEL, a program service featuring comedies and films during the daypart
following the NICKELODEON program segment. On March 1, 1999, the Company
launched THE PARAMOUNT CHANNEL in Spain, a wholly owned program service.
Theatrical Exhibition. The Company's movie theater operations consist
primarily of FAMOUS PLAYERS in Canada and UCI in Europe, Latin America and Asia.
At December 31, 1998, FAMOUS PLAYERS, a 100%-owned subsidiary of the Company,
operated approximately 650 screens in 109 theaters across Canada. UCI, a
50%-owned joint venture of entities affiliated with the Company and Universal,
operated as of December 31, 1998, approximately 680 screens in 89 theaters in
the U.K., Ireland, Germany, Austria, Spain, Japan, Portugal, Poland, Argentina,
Brazil and Panama.
Music Publishing. The FAMOUS MUSIC(R) publishing companies own, control
and/or administer all or a portion of the copyright rights to more than 100,000
musical works (songs, scores, cues). These rights include the right to license
and exploit such works, as well as the right to collect income generated by such
licensing and exploitation.
The majority of rights acquired by FAMOUS MUSIC are derived from (i) music
acquisition agreements entered into by PARAMOUNT PICTURES, MTVN and various
other divisions of the Company respecting certain motion pictures, television
programs and other properties produced by such units and (ii) music acquisition
agreements entered into directly by FAMOUS MUSIC with songwriters and music
publishers, including exclusive songwriting agreements, catalog purchases and
music administration agreements.
Video
The Company operates in the home video and video game rental and retailing
business through BLOCKBUSTER INC. ("BLOCKBUSTER"). As of December 31, 1998, the
Company operated or franchised approximately 6,380 stores in the U.S., its
territories and 25 other countries, compared to approximately 6,050 stores at
December 31, 1997. Most of these stores operate under the BLOCKBUSTER VIDEO
name. During 1998, BLOCKBUSTER also began offering products in the U.S through
its Internet site.
BLOCKBUSTER offers titles primarily for rental and also offers titles for
purchase on a "sell-through" and previously-viewed basis. During 1998,
BLOCKBUSTER implemented revenue-sharing arrangements directly with major motion
picture studios, including PARAMOUNT PICTURES, thereby increasing the
availability of newly-released videos in its domestic stores. Under the
revenue-sharing arrangements, BLOCKBUSTER currently pays a significantly lower
up-front fee for rental-priced titles in exchange for sharing a portion of its
rental revenue with the studios for a limited period of time. The
revenue-sharing arrangements also provide for additional marketing support from
the studios as well as BLOCKBUSTER agreeing to take a minimum movie output. As a
result of the lower up-front cost, BLOCKBUSTER has been able to increase the
number of titles and the number of copies of each title that it stocks in its
stores, both new releases and lesser-known releases, with a resulting increase
in rental volume and revenue. BLOCKBUSTER continues to purchase "sell-through"
titles outside of the revenue-sharing arrangements. "Sell-through" titles are
movies that are released by the studios and are available to all retailers at a
relatively low initial price for both rental and sale. The sale of
previously-viewed tapes in BLOCKBUSTER VIDEO stores and on its Internet site is
subject to its revenue-sharing arrangements.
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In all of its domestic stores and many of its stores outside of the U.S.,
BLOCKBUSTER rents video games and sells previously-played video games. In
addition, in several hundred domestic stores and certain international markets,
BLOCKBUSTER rents and sells digital versatile discs ("DVDs") and rents DVD
players. DVDs, which function in a manner similar to audio compact discs, offer
a picture and sound quality superior to that of a VHS videocassette.
In order to provide a more diverse selection of movies, BLOCKBUSTER has
recently begun acquiring the video rental rights to several independent and
lower-cost films, which will generally be available only at BLOCKBUSTER VIDEO
stores for a specified period of time. These films include both theatrical and
direct-to-video titles, as well as certain movies originally shown on premium
subscription television.
BLOCKBUSTER purchases nearly all of its products for its domestic
Company-operated stores directly from the manufacturer and distributes them
directly to its stores from its 800,000 square foot, highly-automated
distribution facility located near Dallas, Texas. BLOCKBUSTER began distribution
operations out of this facility in the first quarter of 1998.
Historically, BLOCKBUSTER VIDEO stores have generally ranged in size from
approximately 5,000 square feet to 15,000 square feet, averaging 6,100 square
feet. During 1998, BLOCKBUSTER began developing stores of various sizes ranging
from approximately 1,000 square feet to 4,500 square feet in the U.S., including
stores within larger (general merchandise) stores. Outside the U.S., stores are
generally smaller, but vary widely in size.
BLOCKBUSTER's business may be affected by a variety of factors, including
but not limited to, general economic trends, competition, relationships with the
major studios, quality of new releases, changes in technology, unusual events
and weather. In addition, as with other retail outlets, there is a distinct
seasonal pattern to the home video and video games business, with peak rental
periods tending to coincide with summer and winter holidays. Internationally,
BLOCKBUSTER's success depends in great part upon its ability to address country
by country variations, including, among others, varying video formats, film
certification processes, studio arrangements, distribution sources and methods,
release dates, political and economic systems, legal standards and regulations,
and cultural preferences for certain types of technology and movie selections.
Parks
The Company, through PARAMOUNT PARKS, owns and operates five regional
theme parks and a themed attraction in the U.S. and Canada: PARAMOUNT'S
CAROWINDS(R), in Charlotte, North Carolina; PARAMOUNT'S GREAT AMERICA(TM), in
Santa Clara, California; PARAMOUNT'S KINGS DOMINION(TM) located near Richmond,
Virginia; PARAMOUNT'S KINGS ISLAND(TM) located near Cincinnati, Ohio; PARAMOUNT
CANADA'S WONDERLAND(R) located near Toronto, Ontario and STAR TREK: THE
EXPERIENCE(TM) at the Las Vegas Hilton, a futuristic-themed, interactive
environment based on the popular television series and movies. Each of the theme
parks features attractions based on intellectual properties of the Company. A
substantial majority of the theme parks' operating income is generated from May
through September; however, the profitability of the leisure-time industry is
influenced by various factors which are not directly controllable, such as
economic conditions, amount of available leisure time, oil and transportation
prices, and weather patterns. On March 24, 1999, PARAMOUNT PARKS sold the RAGING
WATERS(TM) water park in San Jose, California.
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Publishing
The Company, through SIMON & SCHUSTER, publishes and distributes consumer
hardcover books, trade paperbacks, mass-market paperbacks, children's books,
audiobooks, electronic books and CD-ROM products in the U.S. and
internationally. SIMON & SCHUSTER's flagship imprints include SIMON & SCHUSTER,
POCKET BOOKS, SCRIBNER, and THE FREE PRESS. SIMON & SCHUSTER also develops
special imprints and publishes titles based on MTV, NICKELODEON and PARAMOUNT
PICTURES products. SIMON & SCHUSTER distributes its products directly and
through third parties. SIMON & SCHUSTER also delivers content and sells products
on Internet Web sites operated by various imprints or linked to individual
titles.
In 1998, SIMON & SCHUSTER published 64 titles which were New York Times
bestsellers, including nine New York Times number one bestsellers. Bestselling
titles released in 1998 include "Bag of Bones" (Stephen King); "You Belong to
Me" (Mary Higgins Clark); "All Through the Night" (Mary Higgins Clark); "In the
Meantime" (Iyanla Vanzant); "The Locket" (Richard Paul Evans); "Runaways" (V.C.
Andrews); "The Death of Outrage" (William Bennett); and "The Millionaire Next
Door" (Thomas Stanley and William Danko), as well as a number of BLUE'S CLUES
and RUGRATS books, featuring the popular NICKELODEON characters.
The Company publishes audiobooks through SIMON & SCHUSTER AUDIO(TM) and
publishes CD-ROM titles through SIMON & SCHUSTER INTERACTIVE(R). SIMON &
SCHUSTER AUDIO publishes audio editions of prominent works published by SIMON &
SCHUSTER and by other publishers, as well as the PIMSLEUR(R) line of language
instruction. Major titles released as audiobooks in 1998 include "Bag of Bones"
(Stephen King) and "You Belong to Me" (Mary Higgins Clark).
Titles published by SIMON & SCHUSTER INTERACTIVE generally consist of
CD-ROM editions or product extensions of well-known book publishing properties
or titles associated with recognized authors and Company properties, including
such 1998 titles as "Joy of Cooking", "Sabrina, the Teenage Witch", "Typing
Tutor", "Richard Scarry's Best Activity Center Ever", "Star Trek: Starship
Creator" and "Douglas Adams Starship Titanic".
SIMON & SCHUSTER ONLINE(TM), through "SimonSays.com", publishes original
content, builds reader communities, and promotes and sells SIMON & SCHUSTER's
books and products over the Internet.
International publishing includes the international distribution of
English-language titles through SIMON & SCHUSTER UK and SIMON & SCHUSTER
AUSTRALIA and other distributors, as well as the publication of local titles by
SIMON & SCHUSTER UK and SIMON & SCHUSTER AUSTRALIA.
The consumer publishing marketplace is subject to increased periods of
demand in the summer months and during the end-of-year holiday season. Major new
title releases drive a significant portion of SIMON & SCHUSTER's sales
throughout the year.
Consumer books are generally sold on a fully returnable basis, resulting
in significant product returns. In the international markets, the Company is
subject to global trends and local economic conditions.
Online
The Company operates Internet sites which are targeted to the current
audiences of its various MTV, VH1 and NICKELODEON program services, including
NOGGIN, as well as to new audiences such as those unable to receive cable or
DTH. In addition to providing entertainment and information on such Web sites,
the Company also sells Company-licensed and third party merchandise.
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In February 1999, the Company acquired IMAGINE RADIO(TM), an Internet
radio company transmitting original radio stations offering listeners various
customization features from a wide range of formats. In September 1998, the
Company acquired NVOLVE, INC., a Web site developer. The Company also owns RED
ROCKET(TM), an online education toy retailer.
"MTV.com" and "Nickelodeon.com" each attracted over one million unique
visitors in December 1998, according to Media Metrix. In February 1999, the
Company announced the creation of two new online destinations -- "Project
Nozzle" from NICKELODEON, a kids-only online service scheduled to launch in
September 1999, and the "Buggles Project" from MTV and VH1, an online
destination featuring customizable entertainment, information, community tools,
and e-commerce, which is scheduled to launch in June 1999.
Online revenues are primarily generated by advertising revenues derived
from on-air promotion and online advertising and by the sale of merchandise.
The Company also operates Internet sites through other business units,
such as PARAMOUNT PICTURES, BLOCKBUSTER and SIMON & SCHUSTER. Such activity is
not reported as a part of the Online segment.
Discontinued Operations
Non-Consumer Publishing. On November 27, 1998, the Company completed the
sale of its educational, professional and reference publishing businesses to
Pearson plc for approximately $4.6 billion in cash plus approximately $92
million related to changes in net assets, which is subject to change based upon
final determination of net assets. Pursuant to the agreement of sale, final
settlement related to changes in net assets from January 1, 1998 until the
closing date is expected to be made in 1999.
Music Retailing. On October 26, 1998, the Company completed the sale of
its music retail stores to Wherehouse Entertainment, Inc. for approximately $115
million in cash before adjustments for changes in working capital. The Company
had previously closed the remaining music stores that were not part of the
transaction.
Interactive Games. Pursuant to the Company's previously announced plan to
dispose of its interactive game businesses, including VIACOM NEW MEDIA, the
operations of which were terminated in 1997, on September 4, 1998, SPELLING
completed the sale of substantially all of the development operations of VIRGIN
to Electronic Arts Inc. for $122.5 million in cash. In addition, on November 10,
1998, SPELLING completed the sale of all non-U.S. operations of VIRGIN to an
investor group.
Radio. On July 2, 1997, the Company completed the sale of its ten radio
stations to Chancellor Media Corp. for approximately $1.1 billion in cash.
Cable Television. On July 31, 1996, the Company completed the split-off of
a subsidiary that held its cable television system to its shareholders pursuant
to an exchange offer and related transactions. As a result, the Company realized
a gain of approximately $1.3 billion, reduced its debt and retired 15,356,960
(pre-split) of the Company's common shares, representing approximately 4.1% of
the Company's then total outstanding common shares.
Intellectual Property
It is the Company's practice to protect its theatrical and television
product, software, publications and its other original and acquired works. The
following logos and trademarks and related trademark families are among
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those strongly identified with the product lines they represent and are
significant assets of the Company: VIACOM(R), BLOCKBUSTER(R), MTV: MUSIC
TELEVISION(R), NICK AT NITE(R), NICKELODEON(R), PARAMOUNT(R), POCKET BOOKS(TM),
SHOWTIME(R), SIMON & SCHUSTER(R), STAR TREK(R), THE MOVIE CHANNEL(TM), TV
LAND(R) and VH1 MUSIC FIRST(TM).
Competition
Corporate mergers consummated in recent years have resulted in greater
consolidation in the entertainment industries, which may also present
significant competitive challenges to several of the Company's businesses.
Networks
MTV Networks. MTVN services compete with other basic cable program
services for channel space and compensation for carriage from cable television
operators, DTH and other multichannel distributors. MTVN also competes for
advertising revenue with other basic cable and broadcast television networks,
and radio and print media. For basic cable television networks such as the MTVN
services, advertising revenues derived by each program service depend on the
number of households subscribing to the service through local cable operators
and other distributors in addition to household and demographic viewership as
determined by research companies such as A.C. Nielsen.
Certain major record companies have launched music-based program services
outside the U.S., including, but not limited to: Channel V, which is jointly
owned and operated in Asia and Australia by Star TV and four major record
labels; and Viva and Viva 2, German-language music channels distributed in
Germany and owned in large part by four major record labels. In addition,
MuchMusic, a music service which originated in Canada, is distributing a
MuchMusic service customized for the Latin American market in Argentina.
MuchMusic USA is being distributed in the U.S. through Rainbow Media Holdings,
Inc.
Children oriented programming blocks are currently exhibited on a number
of U.S. broadcast television networks, including, among others, "Fox Kids",
"Kids' WB" and a Saturday morning block on ABC, all of which also compete with
NICKELODEON for advertising revenue. There are also a number of other U.S. cable
television program services featuring children oriented programming, including
the Cartoon Network, the Disney Channel, and Fox Family which launched on August
15, 1998. In addition, NICKELODEON competes internationally with other
television program services and blocks targeted at children for distribution by
cable, satellite and other systems, and for distribution license fees and
advertising revenue.
Showtime Networks Inc. Competition among premium subscription television
program services in the U.S. is primarily dependent on: (i) the acquisition and
packaging of an adequate number of recently released quality motion pictures and
the production, acquisition and packaging of original programs and motion
pictures; and (ii) the offering of prices, marketing and advertising support and
other incentives to cable operators and other distributors for carriage so as to
favorably position and package SNI's premium subscription television program
services to subscribers. HBO is the dominant company in the U.S. premium
subscription television category, offering two premium subscription television
program services, the HBO service and Cinemax. SNI is second to HBO with a
significantly smaller share of the premium subscription television category.
Encore Media Group (an affiliate of AT&T Corp. ("AT&T")) owns the third
principal premium subscription television program service in the U.S., Starz!,
which features recently released motion pictures and competes with SNI's and
HBO's premium program services. Starz!, which had initially received
distribution primarily on cable systems owned and/or managed by the predecessor
to AT&T, is now also carried on cable systems owned or managed by others, in
TVRO and on all DBS platforms.
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Entertainment
Motion Picture and Television Production and Distribution. The Company
competes with other major studios and independent film producers in the
production and distribution of motion pictures, videocassettes and discs.
Similarly, as a producer and distributor of television programs, the Company
competes with other studios and independent producers in the licensing of
television programs to both networks and independent television stations.
PARAMOUNT PICTURES' competitive position primarily depends on the quality of the
product produced, its distribution and marketing success, and public response.
The Company also competes to obtain creative talents and story properties which
are essential to the success of all of the Company's entertainment businesses.
Broadcasting. The principal methods of competition in broadcast television
are the acquisition of popular programming and the development of audience
interest through programming and promotions in order to sell advertising at
profitable rates. Television stations compete for programming and for
advertising revenues with other stations in their respective coverage areas and,
in some cases, with larger station groups for programming, and in the case of
advertising revenues, with other local media. Broadcast networks like UPN
compete for audience and advertising revenues with other broadcast networks,
basic cable program services and, with respect to advertising revenues only,
other national media. The Company's expansion strategy has been to seek to
acquire UPN affiliates or independent stations which will become primary
affiliates of UPN. At this time, UPN has limited programming. Therefore, with
respect to the UPN-affiliated stations, and, to the extent that the Company
acquires independent stations, there will be a need for those stations to
acquire additional programming to a greater extent than would otherwise be
required if the stations were affiliated with other, more established networks.
Another factor that could affect the Company's broadcast business is the
deregulation of television ownership restrictions. The Telecommunications Act of
1996, which amended the Communications Act, liberalized television station
ownership limits by eliminating the former numerical cap of 12 television
stations and by increasing the nationwide audience reach limitation from 25% to
35%. This change in the restrictions on national television ownership has
enabled the Company, as well as other broadcast groups, to significantly
increase their television holdings, but may have the effect of increasing the
negotiating power of other, larger groups. As for restrictions on local
television ownership, the FCC is currently considering relaxation of its
ownership rules (see "Business -- Regulation -- Broadcasting").
Video
The home video and video games rental and retailing business is highly
competitive. In the home video and video games rental marketplace, BLOCKBUSTER's
primary competitors are other local, regional and national video specialty
stores, as well as supermarkets, pharmacies and convenience stores. Although
most of these competitors also participate in the video sales marketplace,
BLOCKBUSTER's most significant competitors in the sales marketplace are mass
merchant retailers. The Company believes that the principal competitive factors
in competing with other traditional retailers are (i) convenience and visibility
of store locations, (ii) quantity, quality and variety of titles, (iii) pricing
and (iv) customer service. The Company believes that BLOCKBUSTER currently
competes favorably in each of these areas; however, if any of BLOCKBUSTER's
competitors were to
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grow and/or increase their presence in BLOCKBUSTER's markets, the continued
success of BLOCKBUSTER's business would be further challenged by its ability to
address these competitive factors.
BLOCKBUSTER also competes in the home video and video games sales
marketplace with other online retailers. Many of these competitors have greater
experience in this area and/or have devoted significantly greater financial and
marketing resources to their online businesses.
BLOCKBUSTER also competes with other providers of home viewing
entertainment, including DTH, cable, network and syndicated television. The
Company believes that its most significant competitive risk in this area comes
from DTH and digital cable television, which offer "pay-per-view" television
whereby the subscriber can pay a per-program fee to see particular movies as
well as sporting and other special events. Historically, the home video rental
industry as a whole generally has had the following advantages over DTH and
cable: (i) a greater selection of movies; (ii) interactive capabilities such as
start, stop, pause, forward and rewind; and (iii) exclusive film distribution
rights for a limited period of time following a film's release in movie theaters
and prior to any other form of distribution ("Video Distribution Windows").
Technological advances have, however, enabled DTH and cable providers to (i)
substantially increase the number and variety of movies they can offer their
subscribers and (ii) provide more frequent and convenient start times for the
most popular titles. In addition, certain DTH and cable companies have begun
testing technology designed to provide interactive capabilities such as start,
stop and rewind. Although such technology cannot currently be provided on a
cost-effective basis, further technological advances in this area, as well as
further increases in movie availability and frequency on DTH and cable, could
have a negative impact on BLOCKBUSTER's business. The Company believes that,
particularly in light of the studios' revenue-sharing arrangements with
BLOCKBUSTER and other video stores, studios have economic incentives to continue
their present practices with respect to Video Distribution Windows; however, any
change in these practices could have a material adverse effect on BLOCKBUSTER's
business.
The emergence of new and improved technological formats, such as DVDs, may
have an impact on BLOCKBUSTER's business. Due to such factors as (i) the number
of households that already own a videocassette recorder ("VCR"), (ii) the
greater (and sometimes earlier) availability of movies currently on
videocassette, (iii) the higher cost of a DVD player compared to a VCR, and (iv)
the lack of recording capability, the Company is unable to determine whether
DVDs will gain significant consumer acceptance. The success of DVD as a rentable
product could be negatively affected if (i) the studios decide to set low
"sell-through" prices with respect to new releases on DVD and (ii) DVD proves
insufficiently durable to be rented efficiently. In addition, the development of
Digital Video Express (DIVX), an enhanced form of DVD, provides consumers with
yet another alternative to the VCR in competition to DVDs. The Company is
monitoring the acceptance by the consumer of these new technologies and is
considering how to exploit these new media, both in the rental and sale of home
video titles.
Parks
The Company's theme parks compete directly with other theme parks in their
respective geographic regions as well as generally with other forms of leisure
entertainment. The Company believes that its intellectual properties enhance
existing attractions and facilitate the development of new attractions which
encourages visitors to the PARAMOUNT PARKS theme parks and STAR TREK: THE
EXPERIENCE at the Las Vegas Hilton.
Publishing
The publishing business is highly competitive and consumer publishing in
particular has been affected by well-publicized consolidation trends. Recent
years have brought a number of significant mergers among the
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leading consumer publishers. The book superstore has emerged as a significant
factor in the industry contributing to the general trend toward consolidation in
the retail channel. There have also been a number of mergers completed or
announced in the distribution channel.
The Company must compete with other publishers for the rights to works by
well-known authors and public personalities.
Online
The online industry is highly competitive as it is rapidly evolving
throughout the world and improving technology may enable new entrants to offer
some similar Web site features at a lower startup cost than established
businesses. The Company's online services compete with other operators of
Internet sites for advertising revenue and marketing opportunities.
The Company believes that its established brands, marketing expertise, and
existing relationships with its audiences allow it to compete effectively in the
various online businesses.
Regulation
The Company's businesses are either subject to or affected by regulations
of federal, state and local governmental authorities. The rules, regulations,
policies and procedures affecting these businesses are constantly subject to
change. The descriptions which follow are summaries and should be read in
conjunction with the texts of the statutes, rules and regulations described
herein. The descriptions do not purport to describe all present and proposed
statutes, rules and regulations affecting the Company's businesses.
Intellectual Property
Domestic and international laws affecting intellectual property are of
significant importance to the Company.
WIPO Copyright Treaties. In 1996, delegates to the World Intellectual
Property Organization ("WIPO") adopted a proposed Copyright Treaty which will
take effect if ratified by 30 nations. As of December 1998, eight countries,
including the U.S., had ratified the Copyright Treaty.
The proposed Copyright Treaty updates the Berne Convention, last revised
in 1971, and addresses copyright protection for new technologies that have
emerged since that time. It is not possible to predict whether the Copyright
Treaty will take effect or how countries would implement the Treaty after
ratification. Because the Treaty includes important copyright protections for
the digital transmission of content, if ratified, the Treaty likely would have a
positive impact on the Company.
The U.S. implementing legislation, known as the Digital Millennium
Copyright Act ("DMCA"), which is effective whether or not WIPO is ultimately
ratified, affords important new copyright protections, including civil and
criminal penalties for the manufacture of, or trafficking in, devices that
circumvent copyright protection technologies such as encryption and scrambling,
and for the act of circumventing such technologies to gain unauthorized access
to a copyrighted work. The DMCA also amends the Copyright Act by modifying the
language concerning the statutory licensing mechanism for certain types of
digital transmissions of sound recordings and by creating a new statutory
license concerning certain rights related to such digital transmissions.
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The statute provides that new statutory rates for each license will be set
either through voluntary negotiations between the interested parties or through
Copyright Arbitration Royalty Proceedings.
Copyright Term Extension. In October 1998, Congress passed legislation
extending the copyright term an additional twenty years. The extended term is
life of the author plus 70 years for authored works and 95 years for
works-made-for-hire. This extension puts the U.S. copyright term on par with the
European Community. Term extension should have a beneficial effect for the
Company over time, including with respect to important publishing properties
which otherwise would have passed into the public domain in the next several
years.
Compulsory Copyright License. The Copyright Act provides a compulsory
copyright license for the retransmission of broadcast signals by multichannel
video distributors such as cable television, SMATV (Satellite Master Antenna
Television), MMDS (Multipoint Multichannel Distribution Systems) and DTH.
The compulsory license rate paid to programmers for the retransmission of
broadcast signals by cable, MMDS and SMATV is established by statute, while the
fees for DTH service are set through negotiations and binding arbitration based
on the fair market value of the signals. On August 1, 1997, a Copyright
Arbitration Royalty Panel increased the DTH retransmission rates from $0.06 for
network signals and $0.14 for superstation signals to $0.27 for both network and
superstation signals per subscriber per month, effective January 1, 1998. The
federal courts have rejected challenges to the rate increase and legislation has
been introduced in Congress to reduce the rate to $0.189 for superstations and
$0.1485 for network signals. It is not possible to predict whether or in what
form the legislation might pass.
Unlike the compulsory license applicable to other multichannel video
program providers, the DTH compulsory license is not permanent and will expire
in December 1999. Congress, however, is likely to extend the compulsory license
before year end. Extension of the DTH compulsory license would be expected to
have an overall positive impact on the Company. Pending legislation also would
broaden the scope of the DTH compulsory license to allow the retransmission of
local broadcast signals back into their local markets, which is not permitted
under current law.
Separate satellite "must carry" legislation also has been introduced which
would require satellite companies to carry the local broadcast signals in those
markets where the satellite companies choose to offer any local broadcast
service.
First Sale Doctrine. The copyright "First Sale" doctrine provides that the
owner of a legitimate copy of a copyrighted work may use or dispose of it in
such manner as the owner sees fit, including by renting it. The First Sale
doctrine does not apply to sound recordings or computer software (other than
software made for a limited purpose computer, such as a video game platform) for
which the Copyright Act vests a rental right (i.e., the right to control the
rental of the copy) in the copyright holder. The repeal or limitation of the
First Sale doctrine (or conversely, the creation of a rental right vested in the
copyright holder) for audiovisual works or for computer software made for
limited purpose computers would have an adverse impact on the Company's home
video and game rental business; however, no such legislation is pending in
Congress at the present time.
Cable Networks
Cable Rate Regulation. The Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") directed the FCC to limit by
regulation cable system rates for the "basic service tier" ("BST") (including
retransmission consent and must carry broadcast signals and public, educational
and governmental channels) and the "cable programming service tier" ("CPST") to
a level not to exceed the rates that would be
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charged in the presence of effective competition. Programming offered on a
per-channel or per-program basis is exempt from rate regulation.
Although all rate regulation of the CPST is set to expire on March 31,
1999, legislation has been introduced in the House to extend these rate
regulation provisions. The Company cannot predict whether such legislation will
be enacted into law. The Company believes that cable rate regulation adversely
affects its non-premium cable program services which rely on cable operator
license fee support, along with advertising revenues, to maintain the quantity
and quality of programming. Rate regulation in this area tends to erode cable
operator incentives to invest in programming and particularly in start-up
program services.
Program Access. The "program access" provisions of the 1992 Cable Act
impose certain pricing and other restrictions on vertically integrated satellite
cable programming vendors with respect to the provision of their program
services to multichannel programming distributors, such as cable systems, SMATV
systems, MMDS operators and TVRO and DBS distributors. Specifically, vertically
integrated program services generally are prohibited from entering into
exclusive arrangements with cable operators and from discriminating against
cable competitors on programming price and other terms. The program access
provisions were intended to spur competition to cable providers by facilitating
the access of cable competitors to programming owned by cable operators or their
affiliates. The Telecommunications Act of 1996 extended the program access rules
to program services in which common carriers that provide video programming have
an attributable interest.
The Company divested its cable systems in 1996 and, as a result, the
Company's wholly owned program services are no longer subject to the program
access rules. Legislation which would extend the program access provisions to
non-vertically integrated program services, if enacted, could adversely impact
the Company's program services by reducing the Company's flexibility to
negotiate the most favorable terms available for the distribution of its
content. However, no such legislation is pending in Congress.
Motion Picture and Television Production and Distribution
The Company's first-run, network and other production operations and its
distribution of off-network, first-run and other programs in domestic and
foreign syndication are not directly regulated. However, existing and proposed
rules and regulations of the FCC applicable to broadcast networks, individual
broadcast stations and cable operators could affect the Company's entertainment
businesses.
Antitrust. The Company, through PARAMOUNT PICTURES, is subject to a
consent decree, entered in 1948, which contains restrictions on certain motion
picture trade practices in the U.S. The Company, through PARAMOUNT PICTURES,
along with other major distributors, has received a Civil Investigative Demand
from the Justice Department which is investigating possible violations of the
industry-wide decrees.
European Union Directive. Since 1989, members of the European Union have
been required by the "Television without Frontiers" Directive (89/552/EEC) to
maintain quotas such that programming of local origin constitutes the majority
proportion of all programming, where practicable and by appropriate means, to be
achieved progressively on the basis of stated criteria. The Company believes
that its program services in Europe are in compliance with the EC broadcast
quotas.
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Broadcasting
Television broadcasting is subject to the jurisdiction of the FCC.
The Communications Act. The Communications Act authorizes the FCC to
issue, renew, revoke or modify broadcast licenses; to regulate the radio
frequency, operating power and location of stations; to approve the transmitting
equipment used by stations; to adopt rules and regulations necessary to carry
out the provisions of the Communications Act; and to impose certain penalties
for violations of the Communications Act and the FCC's regulations governing the
day-to-day operations of television stations.
Broadcast Licenses. Unless the FCC finds that doing so would not be in the
public interest, it will grant broadcast station licenses for maximum periods of
eight years. Upon application to and approval by the FCC, the licenses are
renewable for an indefinite number of additional eight-year periods.
A licensee can ordinarily expect renewal of its license if the licensee
has served the public interest and has not seriously violated the Communications
Act or FCC rules. Among the factors the FCC considers relevant to whether a
broadcaster has served the public interest is compliance with the Children's
Television Act of 1990 and implementing regulations. Under those rules,
beginning on September 1, 1997, licensees generally are required to regularly
schedule at least three hours a week of "core" educational and informational
programming targeted to children ages 16 and under. Licensees also are required
to limit commercials during programming targeted to children ages 12 and under.
At renewal, the FCC also reviews the licensee's compliance with FCC Equal
Employment Opportunity ("EEO") policies and rules; however, those policies have
been suspended by the FCC in light of the 1998 decision of the U.S Court of
Appeals for the D.C Circuit which held them unconstitutional. The FCC has
initiated a rule making proceeding to draft new EEO rules.
A license which has expired but is awaiting renewal entitles the licensee
to continue broadcasting pending grant of the renewal. The status of the
Company's television stations' licenses is as follows: WSBK-TV expires on April
1, 1999; WPSG-TV and WNPA-TV each expires on August 1, 1999; WDCA-TV and WGNT-TV
each expires on October 1, 2004; WBFS-TV and WTOG-TV each expires on February 1,
2005; WUPA-TV expires on April 1, 2005; WUPL-TV expires on June 1, 2005; WNDY-TV
expires on August 1, 2005; WKBD-TV and WWHO-TV each expires on October 1, 2005;
KAUT-TV expires on June 1, 2006; KTXA-TV and KTXH-TV each expires on August 1,
2006; KMAX-TV expires on December 1, 2006; and KSTW-TV expires on February 1,
2007.
The Communications Act requires prior approval of the FCC for the
assignment of a license or transfer of control of a licensee. Additionally, the
Communications Act provides that no license may be held by a corporation whose
voting stock is more than 20% owned of record or voted by aliens or is subject
to control by aliens. In addition, no corporation whose voting stock is more
than 25% owned of record or voted by aliens or is subject to control by aliens
may hold the voting stock of a corporation holding a broadcast license without
specific FCC authorization. The Company conducts annual surveys of its
shareholders to confirm its compliance with the foreign ownership limits.
In April 1997, the FCC issued a DTV Table of Allotments, which assigned to
all existing television stations nationwide a second, six-MHz channel for
broadcasting in digital form. Under FCC rules, television stations may use this
second channel to broadcast either one or two streams of "high definition"
digital television ("HDTV") video programming or to "multicast" several streams
of standard digital video programming. Broadcasters may also deliver large
amounts of data over their DTV channels or offer other ancillary or
supplementary services, including computer software distribution, teletext,
interactive materials, aural messages, paging services, audio signals or
subscription video. At a minimum, under the FCC's DTV rules, broadcasters must
ultimately provide a free digital video programming service the resolution of
which is
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comparable to or better than that of today's service on air during the same time
periods that their analog channels are broadcasting.
At the time it adopted the DTV Table of Allotments, the FCC also
established a schedule pursuant to which all television stations must have
constructed their DTV operations. Under that schedule, any commercial television
station that is not an affiliate of ABC, CBS, NBC or FOX must construct its DTV
station no later than May 1, 2002. Accordingly, because its stations are all
affiliates of UPN or the WB, the Company must have constructed its digital
operations by that date, unless an extension of time is granted by the FCC. It
is difficult to assess how DTV will affect the Company's broadcast business with
respect to other broadcasters and other video program providers.
Each television station licensee will be licensed a digital channel for an
eight-year term running coterminous with the licensee's analog channel.
Broadcasters will be required to surrender their analog channels but, under FCC
policy, not until at least 2006. This transition period is subject to periodic
progress reviews to make sure DTV service is widely available. In addition, the
Balanced Budget Act of 1997 includes provisions that would extend the
continuation of analog service beyond the year 2006 deadline if DTV is
implemented more slowly than expected. Specific conditions which would extend
the transition period include the failure of one or more of the largest
television stations in a market to begin broadcasting digital television signals
through no fault of their own, or fewer than 85% of the television households in
a market being able to receive digital televisions signals off the air either
with a digital television set or with an analog set equipped with a converter
box or by subscription to a cable-type service that carries the DTV stations in
the market. Until the transition to digital is complete, FCC rules require that
broadcasters phase in (according to annual benchmarks) the percentage of video
programming of their analog channels that is simulcast on the DTV channel.
During the transition and thereafter, broadcasters are permitted to use
their digital channels to offer ancillary and supplementary services, including,
but not limited to, data transmission and subscription services. The
Telecommunications Act of 1996 imposes fees for use of the spectrum based upon
the extent to which such services generate revenues other than from commercial
advertisements used to support broadcasting for which a subscription fee is not
required. In 1998, the FCC adopted rules which set the spectrum use fee at 5% of
the broadcaster's gross revenues from ancillary and supplemental services.
Must Carry/Retransmission Consent. The Communications Act grants certain
"must carry" rights to enable broadcast television stations that are "local" to
communities served by cable systems to obtain carriage on such systems.
Alternatively, commercial stations may elect to secure cable system carriage
pursuant to "retransmission consent" on negotiated terms. The must
carry/retransmission consent election must be made every three years; the next
election must be made by October 1, 1999 and will take effect on January 1,
2000.
All of the Company's television stations are carried on cable systems
serving the communities in the stations' markets. Certain of the stations
obtained carriage by asserting must carry rights and other stations followed the
retransmission consent process. Failure of broadcast stations to be carried on
cable systems could be detrimental to the business of a television station.
The application of must carry requirements to DTV is to be decided by the
FCC in a proceeding that is expected to be completed during the second or third
quarter of 1999. The Telecommunications Act of 1996 expressly provides that no
ancillary or supplementary DTV services provided by broadcasters will be
entitled to mandatory cable carriage. As explained in the section on the
Compulsory Copyright License, legislation has been introduced in the Congress
requiring satellite companies to ultimately carry local broadcast signals.
Ownership Limitations. The Telecommunications Act of 1996 deregulated
national television ownership by eliminating the prior 12-station ownership
limit and increasing the nationwide audience reach limit from 25% to
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35%. FCC rules provide for the calculation of audience reach based on the
percentage of U.S. households in each television market where a station is
located. Under current FCC rules, only half of the households in a market are
counted for UHF stations. The national ownership cap of 35% and the UHF discount
are currently being reevaluated as part of the FCC's biennial review of the
broadcast ownership rules, as required by the Telecommunications Act of 1996.
Even if the FCC eliminated the UHF discount, the Company's current group of
television stations would remain well below the nationwide audience reach limit
of 35%.
With respect to local television ownership, the FCC rules currently
prohibit a party from owning a television station whose Grade B contour overlaps
with that of another television station. In a pending rule making proceeding,
the FCC has proposed to relax this so-called "duopoly" rule to a Grade A
contour/DMA standard. Under this proposal, a party would be permitted to own two
television stations provided that their smaller Grade A contours do not overlap
and they are not located within the same DMA, or "Designated Market Area", as
that term is defined by Nielsen Media Research. Under an interim policy, the FCC
is currently granting conditional waivers based on this proposed standard.
As part of the same local television ownership proceeding, the FCC also is
considering attributing ownership of a station to the party which operates it
pursuant to an LMA. Under an LMA, the television station licensee delegates the
operations, sales and programming to another party subject to the ultimate
control of the licensee. In a number of markets, stations operate a second
station in the same market under an LMA without conflicting with the FCC's local
ownership rules. In the pending local ownership proceeding the FCC proposes to
narrow the use of LMAs by attributing ownership of a station to a party which
operates the station pursuant to an LMA for 15% or more of the broadcast time.
It is unclear how the Company's LMAs in West Palm Beach-Fort Pierce, Florida,
and in Providence, Rhode Island-New Bedford, Massachusetts, would be affected,
if at all, by the FCC's local ownership proceeding. The FCC is expected to adopt
modified local ownership rules during the second quarter or third quarter of
1999. Congress may consider legislation this year to make deregulatory changes
to the broadcast ownership restrictions, including an increase in the current
national audience cap limit. It is not certain whether such legislation will
pass this year.
Video
BLOCKBUSTER is subject to certain regulations of the U.S. Federal Trade
Commission ("FTC") and certain states and foreign jurisdictions governing (a)
the offer and sale of franchises and (b) franchise relationships. These
regulations require BLOCKBUSTER to furnish disclosure documents to current and
prospective franchisees. In addition, some states and foreign jurisdictions
require franchisors to comply with registration or filing requirements prior to
offering a franchise in that state or jurisdiction and/or limit the franchisor's
rights to terminate a franchisee. The Company believes that BLOCKBUSTER's
disclosure documents comply with FTC guidelines and all applicable guidelines of
the states and foreign jurisdictions regulating the offering and issuance of
franchises. Compliance with franchise laws can, however, be both costly and
time-consuming, and no assurance can be given that BLOCKBUSTER will not
encounter difficulties or delays in this area or that it will not require
significant capital for franchising activities.
BLOCKBUSTER is also subject to various federal, state and local laws that
govern the disclosure and retention of video rental records, as well as various
other regulations affecting its business, including state and local advertising,
consumer protection, credit protection, licensing, zoning, land use,
construction and environmental regulations.
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Online
Web Sites Directed to Children. The Children's Online Privacy Protection
Act of 1998 ("COPPA"), which must be implemented by the FTC, applies to Web
sites, or those portions of Web sites, directed to children under age 13. Under
COPPA, Web site operators generally cannot collect online from a child under age
13 information that is individually identifiable -- such as a first and last
name, an e-mail address or telephone number -- without the prior consent of that
child's parent. The FTC is expected to adopt final rules by fall 1999, after
which COPPA will become effective. NICKELODEON's online services are designed to
comply with COPPA. Congress may also consider legislation this year regarding
online privacy for adults.
Item 2. Properties.
The Company maintains its world headquarters at 1515 Broadway, New York,
New York, where it rents approximately one million square feet for executive
offices and certain of its operating divisions. The lease runs to 2010, with
four renewal options for five years each. The lease also grants the Company
options for additional space and a right of first negotiation for other
available space in the building. The Company also leases approximately 548,000
square feet of office space at 1633 Broadway, New York, New York, which lease
runs to 2010, and approximately 237,000 square feet of office space at 1230
Avenue of the Americas, New York, New York, which lease runs to 2009, which
leases contain options to renew. The Company owns the PARAMOUNT PICTURES studio
at 5555 Melrose Avenue, Los Angeles, California, which consists of approximately
65 acres containing sound stages, administrative, technical and dressing room
structures, screening theaters, machinery and equipment facilities, plus a back
lot and parking lots. PARAMOUNT PARKS' operations in the U.S. include
approximately 1,954 acres owned and 130 acres leased and in Canada include
approximately 380 acres owned. The BLOCKBUSTER headquarters at 1201 Elm Street,
Dallas, Texas consists of approximately 210,000 square feet of leased space. The
BLOCKBUSTER retail and distribution operations in the U.S. and Canada consist of
approximately 54 owned properties, aggregating approximately 343,000 square
feet, and approximately 3,900 leased locations, aggregating approximately 25.5
million square feet. Facilities within the Publishing segment (other than
executive offices at 1230 Avenue of the Americas described above) include
approximately 1,260,000 square feet of space, of which approximately 674,000
square feet are leased. The facilities are used for warehouse, distribution and
administrative functions.
The Company also owns and leases office, studio, retail and warehouse
space and broadcast and satellite transmission facilities in various cities in
the U.S., Canada and several countries around the world for its businesses. The
Company considers its properties adequate for its present needs.
Item 3. Legal Proceedings.
On March 19, 1999, the date upon which the Company announced its proposal
to acquire the remaining stock of SPELLING that it does not currently own, eight
putative class action complaints were filed in the Court of Chancery of the
State of Delaware. Each of such complaints names the Company, SPELLING and all
of SPELLING's Directors, and generally alleges that the defendants have breached
their fiduciary duties to SPELLING and its stockholders by failing to exercise
independent business judgment in connection with the Company's proposal. The
complaints also allege that the Company proposal is unfair to the other
stockholders of SPELLING because the proposed price is allegedly too low and the
transaction allegedly has been timed by the Company to capture SPELLING's true
value without paying a full and fair price. On March 23, 1999, a putative class
complaint was filed in the Superior Court of the State of California, County of
Los Angeles. The complaint names the Company, SPELLING and all of SPELLING's
Directors, and contains allegations that mirror those
I-27
<PAGE>
contained in the Delaware complaints. The Company believes that the plaintiffs'
allegations are speculative and without merit and intends to vigorously defend
these actions.
Certain subsidiaries of the Company from time to time receive claims from
federal and state environmental regulatory agencies and other entities asserting
that they are or may be liable for environmental cleanup costs and related
damages arising out of former operations. While the outcome of these claims
cannot be predicted with certainty, on the basis of its experience and the
information currently available to it, the Company does not believe that the
claims it has received will have a material adverse effect on its results of
operations, financial position or cash flows. (See "Item 6. Selected Financial
Data" and "Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition".)
The Company and various of its subsidiaries are parties to certain other
legal proceedings. However, these proceedings are not likely to result in
judgments that will have a material adverse effect on its results of operations,
financial position or cash flows.
Financial Information About Foreign and Domestic Operations
Financial information relating to foreign and domestic operations for each
of the last three years ending December 31, is set forth in Note 14 to the
Consolidated Financial Statements of the Company included elsewhere herein.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
Executive Officers of the Company
Set forth below is certain information concerning the current executive
officers of the Company, which information is hereby included in Part I of this
report.
Name Age Title
- ---- --- -----
Sumner M. Redstone------ 75 Chairman of the Board of Directors and Chief
Executive Officer
Philippe P. Dauman------ 45 Deputy Chairman, Executive Vice President and
Director
Thomas E. Dooley-------- 42 Deputy Chairman, Executive Vice President and
Director
Robert M. Bakish-------- 35 Senior Vice President, Planning, Development
and Technology
Carl D. Folta----------- 41 Senior Vice President, Corporate Relations
Michael D. Fricklas----- 39 Senior Vice President, General Counsel and
Secretary
Susan C. Gordon--------- 45 Vice President, Controller and Chief Accounting
Officer
Rudolph L. Hertlein----- 58 Senior Vice President, Corporate Development
Carol A. Melton--------- 44 Senior Vice President, Government Affairs
I-28
<PAGE>
William A. Roskin------- 56 Senior Vice President, Human Resources and
Administration
Martin M. Shea---------- 55 Senior Vice President, Investor Relations
George S. Smith, Jr.---- 50 Senior Vice President, Chief Financial Officer
- ----------
None of the executive officers of the Company is related to any other
executive officer or director by blood, marriage or adoption except that Brent
D. Redstone and Shari Redstone, Directors of the Company, are the son and
daughter, respectively, of Sumner M. Redstone.
Mr. Redstone has been a Director of the Company since 1986 and Chairman of
the Board since 1987, acquiring the additional title of Chief Executive Officer
in January 1996. Mr. Redstone has served as President, Chief Executive Officer
of NAI since 1967, and continues to serve in such capacity; he has also served
as the Chairman of the Board of NAI since 1986. Mr. Redstone became a Director
of Spelling in 1994 and became Chairman of the Board of Spelling in January
1996. He is a member of the Advisory Council for the Academy of Television Arts
and Sciences Foundation and on the Board of Trustees for The Museum of
Television and Radio. Mr. Redstone served as the first Chairman of the Board of
the National Association of Theatre Owners, and is currently a member of the
Executive Committee of that organization. Since 1982, Mr. Redstone has been a
member of the faculty of Boston University Law School, where he has lectured on
entertainment law, and since 1994, he has been a Visiting Professor at Brandeis
University. In 1944, Mr. Redstone graduated from Harvard University and, in
1947, received an LL.B. from Harvard University School of Law. Upon graduation,
he served as Law Secretary with the U.S. Court of Appeals, and then as a Special
Assistant to the U.S. Attorney General.
Mr. Dauman has been a Director of the Company since 1987. He was elected
Executive Vice President in March 1994, and was appointed Deputy Chairman in
January 1996. From February 1993 to October 1998, Mr. Dauman also served as
General Counsel and Secretary of the Company. Prior to February 1993, Mr. Dauman
was a partner in the law firm of Shearman & Sterling in New York, which he
joined in 1978. Mr. Dauman became a Director of Lafarge Corporation in 1997, a
Director of Spelling in 1994 and a Director of NAI in 1992.
Mr. Dooley was elected Executive Vice President in March 1994 and
appointed a Director and Deputy Chairman of the Company in January 1996, having
been an executive officer of the Company since January 1987. From July 1992 to
March 1994, Mr. Dooley served as Senior Vice President, Corporate Development of
the Company. From August 1993 to March 1994, he also served as President,
Interactive Television. Prior to that, he held various positions in the
Company's corporate and divisional finance areas. Mr. Dooley became a Director
of Spelling in 1996.
Mr. Bakish was elected Senior Vice President, Planning, Development and
Technology of the Company in January 1998. Prior to that, he served as Vice
President, Planning and Development of the Company since February 1997. Before
joining the Company, Mr. Bakish served most recently as a partner with Booz
Allen and Hamilton in its media and entertainment practice, which he joined in
1990.
Mr. Folta was elected Senior Vice President, Corporate Relations of the
Company in November 1994. Prior to that, he served as Vice President, Corporate
Relations of the Company from April 1994 to November 1994. From 1984 until
joining the Company in April 1994, Mr. Folta held various Corporate
Communications positions at Paramount, serving most recently as Senior Director,
Corporate Communications.
Mr. Fricklas was elected Senior Vice President, General Counsel and
Secretary of the Company in October 1998. From July 1993 to October 1998, he
served as Deputy General Counsel of the Company. He served as
I-29
<PAGE>
Vice President, General Counsel and Secretary of Minorco (U.S.A.) Inc. from 1990
to 1993. Prior to that, Mr. Fricklas was an attorney in private practice at the
law firm of Shearman & Sterling.
Ms. Gordon was elected Vice President, Controller and Chief Accounting
Officer in April 1995. Prior to that, she served as Vice President, Internal
Audit of the Company since October 1986. From June 1985 to October 1986, Ms.
Gordon served as Controller of Viacom Broadcasting. She joined the Company in
1981 and held various positions in the corporate finance area.
Mr. Hertlein was elected Senior Vice President, Corporate Development of
the Company in July 1994. Prior to that, he served as Senior Vice President and
Controller of Paramount from September 1993 to July 1994 and as Senior Vice
President, Internal Audit and Special Projects of Paramount from September 1992
to September 1993 and, before that, as Vice President, Internal Audit and
Special Projects of Paramount.
Ms. Melton was elected Senior Vice President, Government Affairs of the
Company in May 1997. Before joining the Company, Ms. Melton served most recently
as Vice President, Law and Public Policy at Time Warner Inc., having joined
Warner Communications Inc. in 1987. Prior to that, Ms. Melton served as Legal
Advisor to the Chairman of the Federal Communications Commission and as
Assistant General Counsel for the National Cable Television Association.
Mr. Roskin has been an executive officer of the Company since April 1988
when he became Vice President, Human Resources and Administration. In July 1992,
Mr. Roskin was elected Senior Vice President, Human Resources and Administration
of the Company. From May 1986 to April 1988, he was Senior Vice President, Human
Resources at Coleco Industries, Inc. From 1976 to 1986, he held various
executive positions at Warner Communications Inc., serving most recently as Vice
President, Industrial and Labor Relations.
Mr. Shea was elected Senior Vice President, Investor Relations of the
Company in January 1998. From July 1994 to May 1995 and from November 1995 to
December 1997, he was Senior Vice President, Corporate Communications for Triarc
Companies, Inc. From June 1995 through October 1995, he served as Managing
Director of Edelman Worldwide. From 1977 until July 1994, Mr. Shea held various
Investor Relations positions at Paramount, serving most recently as Vice
President, Investor Relations.
Mr. Smith has been an executive officer of the Company since May 1985. In
November 1987, he was elected Senior Vice President, Chief Financial Officer of
the Company and he continues to serve in such capacity. In May 1985, Mr. Smith
was elected Vice President, Controller and, in October 1987, he was elected Vice
President, Chief Financial Officer of the Company. From 1983 until May 1985, he
served as Vice President, Finance and Administration of Viacom Broadcasting and
from 1981 until 1983, he served as Controller of Viacom Radio. Mr. Smith joined
the Company in 1977 in the Corporate Treasurer's office and until 1981 served in
various financial planning capacities.
I-30
<PAGE>
PART II
Item 5. Market for Viacom Inc.'s Common Equity and Related Security Holder
Matters.
Viacom Inc. voting Class A Common Stock and Viacom Inc. non-voting Class B
Common Stock are listed and traded on the American Stock Exchange ("AMEX") under
the symbols "VIA" and "VIA B", respectively. Effective April 8, 1999, the
Company will move its listing to the New York Stock Exchange and will be traded
under the symbols VIA and VIA.B, respectively.
On February 25, 1999, the Board of Directors of the Company declared a 2-for-1
common stock split, to be effected in the form of a dividend. The additional
shares will be issued on March 31, 1999 to shareholders of record on March 15,
1999. All common share and per share amounts have been adjusted to reflect the
stock split for all periods presented.
The following table sets forth, for the calendar period indicated, the per share
range of high and low sales prices for Viacom Inc.'s Class A Common Stock and
Class B Common Stock, as reported on the AMEX Composite Tape adjusted to reflect
the effect of the 2-for-1 common stock split.
Viacom Class A Viacom Class B
Common Stock Common Stock
----------------------- ----------------------
High Low High Low
---- --- ---- ---
1997
1st quarter........... $18 9/16 $16 $18 15/16 $16
2nd quarter........... 17 23/32 12 5/8 18 12 5/8
3rd quarter........... 17 3/8 13 3/4 17 9/16 13 5/8
4th quarter........... 20 7/8 13 21 1/8 13 1/4
1998
1st quarter........... $27 1/8 $19 15/16 $27 17/32 $20 1/4
2nd quarter........... 30 1/2 26 1/8 30 5/8 26 13/32
3rd quarter........... 34 11/16 24 5/8 35 24 3/4
4th quarter........... 36 29/32 25 7/16 37 1/8 25 163/512
Viacom Inc. has not declared cash dividends on its common stock and has no
present intention of so doing.
As of March 22, 1999, there were approximately 9,555 holders of Viacom Inc.
Class A Common Stock, and 18,977 holders of Viacom Inc. Class B Common Stock.
II-1
<PAGE>
Item 6. Selected Financial Data
VIACOM INC. AND SUBSIDIARIES
(Millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues ....................................... $ 12,096.1 $ 10,684.9 $ 9,683.9 $ 8,700.1 $ 4,485.6
Operating income (a) ........................... $ 751.6 $ 685.4 $ 1,197.2 $ 1,247.2 $ 354.4
Earnings (loss) from continuing operations ..... $ (43.5) $ 373.5 $ 152.2 $ 88.0 $ 18.7
Net earnings (loss) ............................ $ (122.4) $ 793.6 $ 1,247.9 $ 222.5 $ 89.6
Net earnings (loss) attributable to
common stock .............................. $ (149.6) $ 733.6 $ 1,187.9 $ 162.5 $ 14.6
Earnings (loss) per common share(b):
Basic:
Earnings (loss) from continuing operations $ (0.10) $ .44 $ .13 $ .04 $ (.14)
Net earnings (loss) ....................... $ (0.21) $ 1.04 $ 1.63 $ .22 $ .04
Diluted:
Earnings (loss) from continuing operations. $ (0.10) $ .44 $ .13 $ .04 $ (.13)
Net earnings (loss) ....................... $ (0.21) $ 1.04 $ 1.62 $ .22 $ .03
At year end:
Total assets .............................. $ 23,613.1 $ 28,288.7 $ 28,834.0 $ 28,991.0 $ 28,273.7
Long-term debt, net of current portion .... $ 3,813.4 $ 7,423.0 $ 9,855.7 $ 10,712.1 $ 10,402.4
Shareholders' equity ...................... $ 12,049.6 $ 13,383.6 $ 12,586.5 $ 12,093.8 $ 11,791.6
</TABLE>
(a) Operating income is defined as earnings (loss) before extraordinary loss,
discontinued operations, minority interest, equity in loss of affiliated
companies (net of tax), provision for income taxes, other items (net) and
interest expense (net).
(b) All common per share data has been adjusted to reflect the 2-for-1 common
stock split effective March 31, 1999.
Paramount Communications Inc.'s and Blockbuster Entertainment Corporation's
results of operations are included from their dates of acquisition, commencing
March 1, 1994 and October 1, 1994, respectively. Revenues, operating income and
earnings (loss) from continuing operations for each year presented exclude
Non-Consumer Publishing, the music retail stores, the interactive game
businesses, Viacom Radio Stations and Viacom Cable, which are reported as
discontinued operations.
See Notes to Consolidated Financial Statements for additional information on
transactions and accounting classifications which have affected the
comparability of the periods presented above.
Viacom Inc. has not declared cash dividends on its common stock for any of the
periods presented above.
II-2
<PAGE>
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
General
Management's discussion and analysis of the results of operations and financial
condition of Viacom Inc. and its subsidiaries (the "Company") should be read in
conjunction with the Consolidated Financial Statements and related Notes.
Descriptions of all documents incorporated by reference herein or included as
exhibits hereto are qualified in their entirety by reference to the full text of
such documents so incorporated or included.
The Company continued to make significant progress towards accomplishing its
strategic objectives to focus on its core businesses, strengthen the balance
sheet and improve the capital structure. The Company's significant transactions
were as follows:
o On November 27, 1998, the Company completed the sale of its educational,
professional and reference publishing businesses ("Non-Consumer
Publishing") to Pearson plc for approximately $4.6 billion in cash plus
approximately $92 million related to changes in net assets, which is
subject to change based upon final determination of net assets. The net
proceeds were principally used to reduce debt and buyback preferred
stock.
o On October 26, 1998, the Company completed the sale of its music retail
stores to Wherehouse Entertainment, Inc. for approximately $115 million in
cash before adjustments for changes in working capital.
o On September 4, 1998, Spelling Entertainment Group Inc. ("Spelling")
completed the sale of substantially all of the development operations of
Virgin Interactive Entertainment Limited ("Virgin") to Electronic Arts
Inc. for $122.5 million in cash. In addition, on November 10, 1998,
Spelling completed the sale of all non-U.S. operations of Virgin to an
investor group.
o Throughout 1998, the Company repurchased certain of its shares of common
stock and warrants and also repurchased half of its convertible preferred
stock, the remainder of which was repurchased in January 1999.
o On October 21, 1997, the Company completed the sale of its half-interest
in USA Networks, including Sci-Fi Channel, to Universal Studios, Inc. for
a total of $1.7 billion in cash.
o On July 2, 1997, the Company completed the sale of Viacom Radio Stations
to Chancellor Media Corp. for approximately $1.1 billion in cash.
o On July 31, 1996, the Company completed the split-off of its Cable segment
pursuant to an exchange offer and related transactions. As a result, the
Company realized a gain of approximately $1.3 billion, reduced its debt
and retired approximately 4.1% of the Company's then total outstanding
common shares.
As a result of the transactions described above, Non-Consumer Publishing, the
music retail stores, the interactive game businesses, including Virgin, Viacom
Radio Stations and Viacom Cable have been accounted for as discontinued
operations. Operating results and the related gain or loss attributable to
discontinued operations have been separately disclosed in the Company's notes to
the consolidated financial statements. (See Note 3 of the Notes to the
Consolidated Financial Statements.)
II-3
<PAGE>
Business Segment Information
As of December 31, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). Accordingly, the Company has presented the following
six operating segments below, as they represent how management evaluates
operating results of the Company. Previous years' reporting had followed an
industry segment approach. All prior years' segment information has been
reclassified to conform with the current segment presentation.
Networks - Basic Cable and Premium Subscription Television Program
Services.
Entertainment - Production and Distribution of Motion Pictures and
Television Programming as well as Television Stations, International
Channels, Movie Theater Operations and Music Publishing.
Video - Home Video and Game rental and retail.
Parks - Theme Parks.
Publishing - Consumer Publishing Group.
Online - Viacom Online Services.
The following tables set forth revenues and operating income (loss) by business
segment, for the years ended December 31, 1998, 1997 and 1996. Results for each
year presented exclude Non-Consumer Publishing, music retail stores, interactive
game businesses, Viacom Radio Stations and Viacom Cable, which are reported as
discontinued operations.
<TABLE>
<CAPTION>
Year ended Percent
December 31, Better/(Worse)
----------------------------------- -----------------
1998 1997
(In millions) 1998 1997 1996 vs 1997 vs 1996
---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Networks ................... $ 2,607.9 $ 2,262.8 $ 1,999.5 15% 13%
Entertainment .............. 4,757.8 4,305.9 3,897.9 10 10
Video ...................... 3,893.4 3,313.6 2,942.3 17 13
Parks ...................... 421.2 367.3 361.9 15 1
Publishing ................. 564.6 556.6 547.6 1 2
Online ..................... 13.7 10.4 -- 32 NM
Intercompany ............... (162.5) (131.7) (65.3) (23) (102)
--------- --------- ---------
Total revenues ......... $12,096.1 $10,684.9 $ 9,683.9 13 10
========= ========= =========
Operating income (loss) (a):
Networks ................... $ 744.3 $ 635.6 $ 532.5 17% 19%
Entertainment .............. 448.0 343.0 428.3 31 (20)
Video ...................... (342.2) (196.8) 309.4 (74) (164)
Parks ...................... 49.9 42.4 43.7 18 (3)
Publishing ................. 53.2 60.4 60.1 (12) 0
Online ..................... (7.5) 2.3 -- NM NM
--------- --------- ---------
Segment total ......... 945.7 886.9 1,374.0 7 (35)
Corporate .................. (194.1) (201.5) (176.8) 4 (14)
--------- --------- ---------
Total operating income . $ 751.6 $ 685.4 $ 1,197.2 10 (43)
========= ========= =========
</TABLE>
(a) Operating income is defined as earnings before extraordinary loss,
discontinued operations, minority interest, equity in loss of affiliated
companies (net of tax), provision for income taxes, other items (net) and
interest expense (net).
NM - Not meaningful
II-4
<PAGE>
EBITDA
The following table sets forth EBITDA (defined as operating income (loss) before
depreciation and amortization principally of goodwill related to business
combinations) for the years ended December 31, 1998, 1997 and 1996. While many
in the financial community consider EBITDA to be an important measure of
comparative operating performance, it should be considered in addition to, but
not as a substitute for or superior to operating income, net earnings, cash flow
and other measures of financial performance prepared in accordance with
generally accepted accounting principles.
<TABLE>
<CAPTION>
Year ended Percent
December 31, Better/(Worse)
---------------------------------- ---------------------
1998 1997
1998 1997 1996 vs 1997 vs 1996
---- ---- ---- ------- ------
<S> <C> <C> <C> <C> <C>
EBITDA (a):
Networks ................... $ 851.3 $ 729.4 $ 619.3 17% 18%
Entertainment .............. 640.5 514.5 593.7 24 (13)
Video ...................... 39.9 221.6 635.7 (82) (65)
Parks ...................... 101.1 88.9 87.9 14 1
Publishing ................. 71.2 77.9 77.8 (9) 0
Online ..................... (3.5) 2.3 -- NM NM
---------- ---------- ----------
Segment total ........ 1,700.5 1,634.6 2,014.4 4 (19)
Corporate .................. (171.6) (176.6) (162.9) 3 (8)
---------- ---------- ----------
Total EBITDA ......... $ 1,528.9 $ 1,458.0 $ 1,851.5 5 (21)
========== ========== ==========
</TABLE>
(a) EBITDA is defined as operating income (loss) before depreciation and
amortization.
NM - Not meaningful
Results of Operations 1998 versus 1997
Revenues increased 13% to $12.1 billion for 1998 from $10.7 billion for 1997
with every operating segment posting increases over the prior year. Primary
contributors to the increase were the Entertainment segment which recorded
higher feature and theater revenues; the Video segment which realized the
positive impact from revenue sharing as well as revenue increases from the
increase in the number of Company owned stores; and the Networks segment, where
revenue increases were driven primarily by increased advertising and affiliate
revenues.
Total expenses increased 13% to $11.3 billion for 1998 from $10.0 billion for
1997 principally reflecting normal increases associated with revenue growth and
the second quarter 1998 Blockbuster charge of approximately $436.7 million
principally associated with an accounting change for tape amortization. In 1997,
expenses reflect the impact of the Blockbuster charge which consisted primarily
of a reduction in the carrying value of excess retail inventory and the cost of
closing underperforming stores principally located in international markets.
II-5
<PAGE>
Effective April 1, 1998, Blockbuster adopted an accelerated method of amortizing
videocassettes and game rental inventory. Blockbuster has adopted this new
method of amortization because it has implemented a new business model,
including revenue sharing agreements with Hollywood studios, which has
dramatically increased the number of videocassettes in the stores and which is
satisfying consumer demand over a shorter period of time. Previously,
Blockbuster purchased tapes for a fixed price, which were amortized over a
period of six to 36 months. Pursuant to the new method, the Company records base
stock videocassettes at cost and amortizes a portion of the costs on an
accelerated basis over three months, generally to $8 per unit, with the
remaining cost of the base stock videocassettes amortized on a straight-line
basis over 33 months to an estimated $4 salvage value. Non-base stock
videocassette costs are amortized on an accelerated basis over three months to
an estimated $4 salvage value. Video games are amortized on an accelerated basis
over a 12 month period to an estimated $10 salvage value. Revenue sharing
payments are expensed when earned pursuant to the applicable contractual
arrangements. The Company recorded a pre-tax charge of $436.7 million, of which
approximately $424.3 million represents an adjustment to the carrying value of
the rental tapes due to the new method of accounting and approximately $12.4
million represents a write-down of retail inventory. The total charge was
reflected as part of operating expenses for 1998.
During the second quarter of 1997, Blockbuster shifted its strategic emphasis
from retailing a broad assortment of merchandise to focusing on its core rental
business. Rationalization of the retail product lines such as sell-through
video, confectionery items, literature, music and fashion merchandise allowed
the Company to devote more management time and attention, as well as retail
floor selling space, to its video and rental game business. In addition, as part
of its effort to improve the performance of its operations, Blockbuster adopted
a plan to close consistently underperforming stores primarily located in the
United Kingdom and Australia and to exit the German market. As a result,
Blockbuster recorded a pre-tax charge of $322.8 million which consisted of
operating and general and administrative expenses of approximately $247.5
million, as well as depreciation expense attributable to the write-off of
long-lived assets of $45.9 million and write-offs attributable to international
joint ventures accounted for under the equity method of $29.4 million. As a
result of exiting the music business, approximately $72.6 million of the charge
has been presented as part of discontinued operations. The remaining balance of
the charge consisted principally of $100.8 million for a reduction in the
carrying value of excess merchandise inventories, $69.6 million for the closing
of underperforming stores principally located in international markets, and
$39.3 million recognized as general and administrative expenses, primarily
related to relocation costs incurred in connection with the move of the
Company's employees, corporate offices and data center from Fort Lauderdale,
Florida to Dallas, Texas.
The $69.6 million charge for the closing of underperforming stores is comprised
of a $41.8 million non-cash impairment charge associated with long-lived assets
and a $27.8 million charge for lease exit obligations. These amounts have been
recognized as depreciation expense and general and administrative expense,
respectively. Through December 31, 1998, the Company has paid and charged
approximately $12.8 million against the lease exit obligations.
The Company's EBITDA increased 5% to $1.53 billion for 1998 from $1.46 billion
for 1997 and operating income increased 10% to $751.6 million for 1998 from
$685.4 million for 1997. Operating results were adversely affected by the
charges taken by Blockbuster during 1998 and 1997. Excluding the impact of such
charges in each period, the Company's EBITDA increased 20% to $1.97 billion and
operating income increased 31% to $1.19 billion.
II-6
<PAGE>
Segment Results of Continuing Operations - 1998 versus 1997
Networks (Basic Cable and Premium Subscription Television Program Services)
The Networks segment is comprised of MTV Networks ("MTVN"), basic cable
television program services and Showtime Networks Inc. ("SNI"), premium
subscription television program services.
For the year, MTVN revenues of $1.9 billion increased 21%, EBITDA of $743.5
million increased 17% and operating income of $660.1 million increased 16% over
the prior year principally reflecting higher advertising revenues, as well as
the benefit of the continued licensing success of RUGRATS and BLUE'S CLUES.
Advertising revenue growth was driven by rate increases at Nickelodeon and VH1
and higher unit volume at MTV. MTVN's EBITDA and operating income growth were
driven by revenue growth partially offset by increased production, selling and
marketing expenses. Results for 1998 also include an operating loss of $22.0
million for MTV Asia, which was previously accounted for under the equity
method. Excluding the loss of MTV Asia, MTVN's EBITDA and operating income
increased 21% and 20%, respectively.
SNI's revenues, EBITDA and operating income increased 3%, 15% and 29%,
respectively, over the prior-year period. Operating results reflect revenue
increases attributable to the continued growth of direct broadcasting satellite
subscriptions partially offset by increased marketing costs associated with
SNI's NO LIMITS branding campaign. SNI's subscriptions increased over the prior
year by approximately 1.5 million to 19.7 million subscriptions at December 31,
1998.
The Networks segment derives revenues principally from two sources: the sale of
time on its basic cable networks to advertisers and the license of the networks
to cable television operators, direct-to-home and other distributors. The sale
of advertising time is affected by viewer demographics, viewer ratings and
market conditions for advertising time. Adverse changes to any of these factors
could have an adverse effect on revenues.
Entertainment (Motion Pictures, Television Programming, Television Stations,
International Channels, Movie Theaters and Music Publishing)
The Entertainment segment is comprised of Paramount Pictures, Paramount
Television, Spelling Entertainment Group Inc. ("Spelling"), the Paramount
Stations Group ("PSG") and Paramount's movie theaters, music publishing and
international channels. Entertainment revenues for the year ended December 31,
1998 were 10% higher than the same period last year principally reflecting
Paramount's higher features and theater revenues. Higher features revenues were
led by the extraordinary domestic box office and home video success of TITANIC,
along with the successful domestic theatrical performance of DEEP IMPACT and THE
RUGRATS MOVIE, the foreign theatrical performance of SAVING PRIVATE RYAN, and
the worldwide theatrical success of THE TRUMAN SHOW. Theaters' revenues were
also higher primarily as a result of opening new multiplex theaters. Paramount's
overall revenue growth for the year was partially offset by lower television
programming revenues compared with the prior year, which included the successful
first time availability of FRASIER in syndication.
II-7
<PAGE>
Paramount's features and television groups recorded EBITDA and operating income
increases of 32% and 44%, respectively, compared with the same prior year
period. The results reflect the revenue increases described above partially
offset by earnings recorded in 1997 attributable to long-term foreign licensing
agreements.
For the year, PSG's revenues increased 1% and EBITDA and operating income
decreased 5% and 15%, respectively, from the same prior-year period. Operating
results primarily reflect decreased advertising revenues and the impact of
swapping for television stations with greater growth potential. PSG owns and
operates 17 television stations, including WNPA-TV serving Pittsburgh,
Pennsylvania, which was acquired on February 1, 1999. In addition, PSG programs
two additional television stations pursuant to local marketing agreements.
For the year ended December 31, 1998, Spelling's revenues of $586.1 million
increased 4% principally reflecting the impact of the licensing of Spelling's
classic video library and the sale of television library product, partially
offset by Spelling's exit from the feature film and video distribution
businesses. Spelling posted EBITDA of $22.3 million for the year, as compared to
EBITDA of $7.1 million for the prior year. The improved results at Spelling
reflect the decision to exit the feature film business and the resulting
cessation of production, acquisition and distribution of new feature films.
Each motion picture is a separate and distinct product with its financial
success dependent upon many factors, among which cost and public response are of
fundamental importance. Entertainment's operating results also fluctuate due to
the timing of theatrical and home video releases. Release dates are determined
by several factors, including timing of vacation and holiday periods and
competition in the marketplace.
License fees for the television exhibition of motion pictures and for
syndication and basic cable exhibition of television programming are recorded as
revenue in the period that the products are available for such exhibition,
which, among other reasons, may cause substantial fluctuation in operating
results. As of December 31, 1998, the unrecognized revenues attributable to such
licensing agreements were approximately $1.6 billion.
Video (Home Video and Game rental and retail)
The Video segment consists of Blockbuster Video. For the year, Video revenues
increased 17% driven by higher video store revenues reflecting the impact of
revenue sharing and an increase in the number of Company owned stores. EBITDA
decreased 82% principally reflecting the impact of the charge of approximately
$436.7 million taken in the second quarter of 1998 to adjust the carrying value
of videocassettes and game rental inventory under a new method of amortization
as a result of the implementation of Blockbuster's new business model. For the
year, Blockbuster recorded same store sales increases of 13% domestically and
worldwide. Blockbuster ended the year with approximately 6,380 stores, a net
increase of approximately 330 stores over the prior year. Video results in 1997
reflect a charge of approximately $250 million related primarily to the
reduction of the carrying value of excess retail inventory and the cost of
closing underperforming stores principally located in international markets.
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Excluding the impact of the 1998 and 1997 charges, Video's EBITDA increased 20%
to $476.6 million in 1998 from $397.3 million in 1997. Excluding the impact of
the second quarter 1998 and 1997 Blockbuster charges, Video's gross margin
percentage decreased to 60.8% in 1998 from 61.4% in 1997 due to the initial
impact of revenue sharing agreements and increased promotional activity.
The Company's home video business may be affected by a variety of factors,
including but not limited to, general economic trends, competition,
relationships with the major studios, quality of new releases, changes in
technology, unusual events and weather. In addition, as with other retail
outlets, there is a distinct seasonal pattern to the home video and video game
business, with peak rental periods tending to coincide with summer and winter
holidays.
Parks (Theme Parks)
The Parks segment consists of five regional theme parks and a themed attraction
in the U.S. and Canada. Parks' revenues of $421.2 million, EBITDA of $101.1
million and operating income of $49.9 million for 1998 increased 15%, 14% and
18%, respectively, as compared with revenues of $367.3 million, EBITDA of $88.9
million and operating income of $42.4 million for 1997. Operating results
principally reflect increased attendance driven by new branded attractions and
entertainment, including STAR TREK: THE EXPERIENCE located at the Las Vegas
Hilton, and increased pricing.
Each of the theme parks features attractions based on intellectual properties of
the Company. A substantial majority of the theme parks' operating income is
generated from May through September; however, the profitability of the
leisure-time industry is influenced by various factors which are not directly
controllable, such as economic conditions, amount of available leisure time, oil
and transportation prices and weather patterns.
Publishing (Consumer Publishing)
On November 27, 1998, the Company completed the sale of Non-Consumer Publishing
for approximately $4.6 billion in cash plus approximately $92 million related to
changes in net assets, which is subject to change based upon final determination
of net assets. The Company is retaining its consumer operations including the
Simon & Schuster name. The Company recognized a gain of approximately $65.5
million, net of tax, from the sale and has presented Non-Consumer Publishing as
a discontinued operation.
Growth in revenues to $564.6 million was primarily attributable to increases in
the trade business driven by the best selling titles including BAG OF BONES by
Stephen King, ALL THROUGH THE NIGHT by Mary Higgins Clark and ANGELA'S ASHES by
Frank McCourt, along with gains in the children's business. The mass-market
business experienced a sales decrease due to weakness in that segment of the
industry.
The consumer publishing marketplace is subject to increased periods of demand in
the summer months and during the end-of-year holiday season. Major new title
releases drive a significant portion of Publishing's sales throughout the year.
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Online (Interactive Online Services)
Revenues increased 32% to $13.7 million for 1998 from $10.4 million for 1997.
Operating loss of $7.5 million in 1998, as compared with operating income of
$2.3 million in 1997, reflects the increased investment in the Company's online
services.
In February 1999, the Company acquired Imagine Radio, an Internet radio company
transmitting original radio stations offering listeners various customization
features from a wide range of formats. In the fourth quarter of 1998, the
Company acquired Nvolve, Inc., a Web site developer. The Company also owns Red
Rocket, an online education toy retailer.
Other Income and Expense Information
Corporate Expenses
Corporate expenses, including depreciation expense, decreased 4% to $194.1
million for 1998 from $201.5 million for 1997, principally reflecting a decrease
in general and administrative and litigation expenses.
Interest Expense, net
Net interest expense decreased 20% to $599.0 million for 1998 from $750.9
million for 1997. The Company had approximately $4.2 billion and $7.8 billion
principal amount of debt outstanding (including current maturities) as of
December 31, 1998 and 1997, respectively, at a weighted average interest rate of
7.8% for each period.
Other Items, net
The Company continued the strategy of focusing on its core businesses and in
December 1998, announced plans to close the Viacom Entertainment Store in
Chicago and to phase out its Nickelodeon stores in January 1999. As a result,
the Company recorded a loss of approximately $91 million, which is reflected in
"other items, net", for the year ended December 31, 1998. The loss principally
reflects $8.5 million for estimated severance benefits payable to approximately
530 employees and $32.7 million for lease exit obligations. The loss also
reflects the write-off of property and equipment, inventory and prepaid assets
of $21.1 million, $10.3 million and $3.1 million, respectively, as well as
future vendor commitments of $3.3 million. Additionally, "other items, net" for
1998 principally reflects foreign exchange losses and the write-off of certain
investments, partially offset by a gain of approximately $118.9 million from the
sale of a cost investment. "Other items, net" of $1.2 billion for 1997,
principally reflects the gain from the sale of USA Networks as well as gains
associated with the exchange of certain television stations offset by the
write-off of certain investments held at cost.
Provision for Income Taxes
The provision for income taxes represents federal, state and foreign income
taxes on earnings before income taxes. The annual effective tax rates of 101.0%
for 1998 and 54.9% for 1997 were both adversely affected by amortization of
intangibles in excess of amounts which are deductible for tax purposes.
Excluding the non-deductible amortization of intangibles, the annual effective
tax rates would have been 31.8% for 1998 and 44.1% for 1997.
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Equity in Loss of Affiliates
"Equity in loss of affiliated companies, net of tax" was $41.4 million for 1998
as compared to $163.3 million for 1997. In 1998, the equity loss primarily
reflects the net operating loss of United Paramount Network ("UPN"), partially
offset by the positive results of Comedy Central. In 1997, the equity loss
primarily reflects the net operating loss of UPN and charges associated with
international network ventures partially offset by earnings from the Company's
half-interest in USA Networks, which was sold in the fourth quarter of 1997.
Minority Interest
Minority interest primarily represents the minority ownership of Spelling common
stock.
Discontinued Operations
For 1998, discontinued operations reflect the results of operations, net of tax,
of Non-Consumer Publishing prior to sale on November 27, 1998, and music retail
stores prior to sale on October 26, 1998. Discontinued operations also reflect
the gain from the sale of Non-Consumer Publishing of approximately $65.5
million, net of tax, the loss from the sale of music retail stores of
approximately $138.5 million, net of tax, additional losses recognized for
Virgin operations prior to disposal of $20.3 million, net of minority interest,
the tax benefit associated with the disposal of Virgin of $134.0 million and the
reversal of unutilized cable split-off reserves.
For 1997, discontinued operations reflect the results of operations, net of tax,
of (1) Non-Consumer Publishing, (2) music retail stores, (3) the Viacom Radio
Stations prior to disposal on July 2, 1997, as well as the realized gain on the
sale of approximately $416.4 million, net of tax, (4) additional losses
recognized for Virgin operations prior to disposal of $32.0 million, net of
minority interest, and (5) the reversal of unutilized cable split-off reserves.
Extraordinary Loss
During 1998, the Company recognized an after-tax extraordinary loss from the
early extinguishment of debt of $74.7 million.
Results of Operations 1997 versus 1996
Revenues increased 10% to $10.7 billion for 1997 from $9.7 billion for 1996.
Revenue increases were driven primarily by the Networks, Video and Entertainment
segments, all of which increased their percentage of total revenue for 1997.
EBITDA decreased 21% to $1.5 billion for 1997 from $1.9 billion for 1996.
Operating income decreased 43% to $685.4 million for 1997 from $1.2 billion for
1996. Operating results were adversely affected by lower operating margins at
Blockbuster in 1997 and charges taken by Blockbuster during 1997 and 1996.
Total expenses increased 18% to $10.0 billion for 1997 from $8.5 billion for
1996 principally reflecting normal increases in every segment associated with
revenue growth. Expense increases for the year also reflect the second quarter
1997 Blockbuster charge primarily associated with the reduction in the carrying
value of excess retail inventory and the cost of closing underperforming stores
principally located in international markets.
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<PAGE>
Segment Results of Continuing Operations - 1997 versus 1996
Networks (Basic Cable and Premium Subscription Television Program Services)
Revenues increased 13% to $2.3 billion for 1997 from $2.0 billion for 1996.
EBITDA increased 18% to $729.4 million for 1997 from $619.3 million for 1996.
Operating income increased 19% to $635.6 million for 1997 from $532.5 million
for 1996. MTVN revenues of $1.5 billion, EBITDA of $634.0 million and operating
income of $569.9 million increased 18%, 20% and 23%, respectively. The increase
in MTVN's revenues principally reflects higher advertising sales and affiliate
fees. Advertising revenue increases were driven by rate increases at Nickelodeon
and higher unit volume at MTV. MTVN's EBITDA and operating income increases were
driven by revenue growth partially offset by increased programming and
production expenses.
SNI's revenues of $724.1 million increased 3% over the prior year principally
reflecting higher DBS revenues due to subscriber growth. SNI's reported 1997
increases of 17% and 10% for EBITDA and operating income, respectively, reflect
continued DBS growth and cost reductions associated with the exit from the
backyard (TVRO) dish retail business. Showtime subscriptions increased
approximately 2.3 million to 18.2 million subscriptions at December 31, 1997.
Entertainment (Motion Pictures, Television Programming, Television Stations,
International Channels, Movie Theaters and Music Publishing)
Revenues increased 10% to $4.3 billion for 1997 from $3.9 billion for 1996.
EBITDA decreased 13% to $514.5 million for 1997 from $593.7 million for 1996.
Operating income decreased 20% to $343.0 million for 1997 from $428.3 million
for 1996. Entertainment revenues were higher than the prior year principally
reflecting higher revenues at Paramount Television attributable to higher
network and syndication revenues for FRASIER. For 1997, higher feature film
revenues were driven by higher home video revenues, led by THE FIRST WIVES CLUB,
MISSION: IMPOSSIBLE and STAR TREK: FIRST CONTACT as well as higher pay
television revenues partially offset by lower foreign theatrical revenues.
EBITDA in 1996 reflects the impact of significant foreign library licensing
agreements entered into by Paramount and Spelling.
PSG's revenues, EBITDA and operating income increased 8%, 5% and 6%,
respectively, primarily due to higher advertising sales partially offset by a
change in station mix reflecting the swapping of network affiliated television
stations for stations which are or will become affiliated with United Paramount
Network. On a same-station basis, revenues, EBITDA and operating income for PSG
increased 13%, 21% and 39%, respectively.
License fees for the television exhibition of motion pictures and for
syndication and basic cable exhibition of television programming are recorded as
revenue in the period that the products are available for such exhibition,
which, among other reasons, may cause substantial fluctuation in operating
results. As of December 31, 1997, the unrecognized revenues attributable to such
licensing agreements were approximately $1.6 billion.
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<PAGE>
Video (Home Video and Game rental and retail)
Revenues increased 13% to $3.3 billion for 1997 from $2.9 billion for 1996.
EBITDA decreased 65% to $221.6 million for 1997 from $635.7 million for 1996.
Video recorded operating losses of $196.8 million for 1997 versus operating
income of $309.4 million for 1996. The revenue increase primarily reflects the
increased number of Company-owned video stores in operation in 1997 as compared
to 1996. Blockbuster's worldwide same-store rental revenues and worldwide same
store sales each decreased 1%. Blockbuster ended the year with approximately
6,050 stores, a net increase of approximately 730 stores from the prior year.
EBITDA of $221.6 million reflects the impact of the charge taken in the second
quarter of 1997 which is described below, as well as increased rental tape
amortization costs and higher expenses attributable to the interim effects of
the change in strategic emphasis back to video rental from broad based retail.
During the second quarter of 1997, Blockbuster shifted its strategic emphasis
from retailing a broad assortment of merchandise to focusing on its core rental
business. Rationalization of the retail product lines such as sell-through
video, confectionery items, literature, music and fashion merchandise allowed
the Company to devote more management time and attention, as well as retail
floor selling space, to its video and rental game business. In addition, as part
of its effort to improve the performance of its operations, Blockbuster adopted
a plan to close consistently underperforming stores primarily located in the
United Kingdom and Australia and to exit the German market. As a result,
Blockbuster recorded a pre-tax charge of $322.8 million which consisted of
operating and general and administrative expenses of approximately $247.5
million, as well as depreciation expense attributable to the write-off of
long-lived assets of $45.9 million and write-offs attributable to international
joint ventures accounted for under the equity method of $29.4 million. As a
result of exiting the music business, approximately $72.6 million of the charge
has been presented as part of discontinued operations. The remaining balance of
the charge consisted principally of $100.8 million for a reduction in the
carrying value of excess merchandise inventories, $69.6 million for the closing
of underperforming stores principally located in international markets, and
$39.3 million recognized as general and administrative expenses, primarily
related to relocation costs incurred in connection with the move of the
Company's employees, corporate offices and data center from Fort Lauderdale,
Florida to Dallas, Texas.
The $69.6 million charge for the closing of underperforming stores is comprised
of a $41.8 million non-cash impairment charge associated with long-lived assets
and a $27.8 million charge for lease exit obligations. These amounts have been
recognized as depreciation expense and general and administrative expense,
respectively. Through December 31, 1997, the Company has paid and charged
approximately $2.5 million against the lease exit obligations.
In the fourth quarter of 1996, Blockbuster recognized $25 million of estimated
severance benefits payable to approximately 650 employees of its Fort Lauderdale
headquarters who had chosen not to relocate. Blockbuster, through the
restructuring charge, also recognized $21.0 million of other costs of exiting
Fort Lauderdale and eliminating third party distributors. The Blockbuster
relocation to Dallas was completed during the second quarter of 1997. The
construction of the Blockbuster distribution center has been completed and this
facility was opened in the first quarter of 1998. Through December 31, 1997, the
Company paid and charged approximately $26.6 million against the severance
liability and other exit costs.
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<PAGE>
Excluding the impact of the second quarter 1997 charge of approximately $175.7
million, Blockbuster posted EBITDA of $397.3 million.
Parks (Theme Parks)
Parks reported revenues of $367.3 million, operating income of $42.4 million and
EBITDA of $88.9 million for 1997 as compared with revenues of $361.9 million,
operating income of $43.7 million and EBITDA of $87.9 million for 1996
principally reflecting higher per capita spending.
Publishing (Consumer Publishing)
Revenues increased 2% to $556.6 million for 1997 from $547.6 million for 1996.
EBITDA and operating income remained unchanged from 1996. Consumer's bestsellers
for 1997 were led by ANGELA'S ASHES by Frank McCourt, THE JOY OF COOKING by Irma
S. Rombauer, Mary Higgins Clark's PRETEND YOU DON'T SEE HER and Andrew Morton's
DIANA: HER TRUE STORY, THE COMMEMORATIVE EDITION.
Online (Interactive Online Services)
Revenues were $10.4 million and EBITDA and operating income were $2.3 million
for 1997.
Other Income and Expense Information
Corporate Expenses
Corporate expenses, including depreciation and amortization expense, increased
14% to $201.5 million for 1997 from $176.8 million for 1996, principally
reflecting increased general and administrative expenses and increased
intercompany profit elimination for the year.
Interest Expense
Net interest expense decreased 4% to $750.9 million for 1997 from $785.5 million
for 1996, principally reflecting the reduction of debt with proceeds from the
sale of Viacom Radio Stations and USA Networks partially offset by increases in
debt to finance capital expenditures and other investments including the
exercise by the Company of its option to purchase a 50% interest in UPN. The
Company had approximately $7.8 billion and $9.9 billion principal amount of debt
outstanding as of December 31, 1997 and December 31, 1996, respectively, at
weighted average interest rates of 7.8% and 7.4%, respectively. (See Note 8 of
Notes to Consolidated Financial Statements.)
Other Items, net
On October 21, 1997, the Company completed the sale of its half-interest in USA
Networks, including Sci-Fi Channel, to Universal Studios, Inc. for a total of
$1.7 billion in cash. The Company realized a pre-tax gain of approximately $1.1
billion in the fourth quarter of 1997. The net proceeds from this transaction
were used to repay debt.
In addition, during 1997, the Company recorded pre-tax gains on the swap of
certain television stations of approximately $190.9 million partially offset by
write-offs of certain cost investments.
II-14
<PAGE>
Provision for Income Taxes
The provision for income taxes represents federal, state and foreign income
taxes on earnings before income taxes. The annual effective tax rates of 54.9%
for 1997 and 59.3% for 1996 were both adversely affected by amortization of
intangibles in excess of amounts which are deductible for tax purposes.
Excluding the non-deductible amortization of intangibles, the annual effective
tax rates would have been 44.1% for 1997 and 35.7% for 1996.
Due to the unusual nature of the 1997 charge recorded by Blockbuster, the full
income tax effect is reflected in the second quarter 1997 tax provision, and is
excluded from the annual effective tax rate.
Equity in Loss of Affiliates
"Equity in loss of affiliated companies, net of tax" was $163.3 million for 1997
as compared to $13.3 million for 1996. The net equity loss for 1997 increased
significantly due to the start-up losses of UPN, the absence of income from USA
Networks subsequent to its sale on October 21, 1997 and charges associated with
international network ventures.
Minority Interest
Minority interest primarily represents the minority ownership of Spelling's
common stock.
Discontinued Operations
For 1997 and 1996, discontinued operations reflect the results of operations,
net of tax, of Non-Consumer Publishing and the music retail stores.
Additionally, for 1997, discontinued operations reflect the Viacom Radio
Stations' net earnings prior to disposal on July 2, 1997 and the realized
after-tax gain of approximately $416.4 million, a net reversal of approximately
$20.8 million principally of cable split-off reserves that were no longer
required, partially offset by a reserve of $32.0 million, net of minority
interest, for anticipated additional losses associated with the operations of
Virgin through disposition.
For the year ended December 31, 1997, the revenues and operating losses of the
interactive game businesses were $241.3 million and $43.5 million, respectively.
These losses were provided for in the estimated loss on disposal of $159.3
million, net of minority interest, which included a provision for future
operating losses of approximately $44.0 million, net of minority interest, as of
December 31, 1996.
For 1996, discontinued operations reflect the results of operations, net of tax,
of the Cable segment, the interactive game businesses, including Virgin, and the
Viacom Radio Stations. The Cable segment was split-off from the Company on July
31, 1996 and the gain realized of approximately $1.3 billion is included in the
net gain on dispositions, net of tax, offset by the anticipated loss on disposal
of the interactive game businesses.
Liquidity and Capital Resources
The Company expects to fund its anticipated cash requirements (including the
anticipated cash requirements of its capital expenditures, joint ventures,
commitments and payments of principal 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
existing Credit Agreements and amendments thereto, co-financing arrangements by
the Company's various divisions relating to the production of entertainment
products, and/or additional financings.
II-15
<PAGE>
Dispositions
On November 27, 1998, the Company completed the sale of Non-Consumer Publishing
to Pearson plc for approximately $4.6 billion in cash plus approximately $92
million related to changes in net assets, which is subject to change based upon
final determination of net assets. Viacom retained its consumer publishing
operations, including the Simon & Schuster name.
On October 26, 1998, the Company completed the sale of its music retail stores
to Wherehouse Entertainment, Inc. for approximately $115 million in cash before
adjustments for changes in working capital and recorded a loss of $138.5
million, net of tax, on the disposition. The Company had previously closed the
remaining music stores that were not part of the transaction.
On September 4, 1998, Spelling completed the sale of substantially of all of the
development operations of Virgin to Electronic Arts Inc. for $122.5 million in
cash. In addition, on November 10, 1998, Spelling completed the sale of all
non-U.S. operations of Virgin to an investor group.
Debt Transactions
During December 1998, the Company commenced the unconditional tender offers to
purchase for cash, all of its outstanding 8.0% Merger Debentures due 2006 at a
purchase price of 104% of the principal amount, and to purchase Viacom
International's outstanding 10.25% Senior Subordinated Notes due 2001 at a
purchase price of 112.925% of the principal amount. The tender offer for the
8.0% Merger Debentures expired on January 4, 1999. The offer for the 10.25%
Senior Subordinated Notes expired December 30, 1998 and $163.7 million of such
notes were tendered. Through December 31, 1998, $533.8 million of the 8% Merger
Debentures were tendered and classified as part of accrued liabilities as the
settlement date occurred subsequent to year end. In 1999, an additional $307.5
million of the 8.0% Merger Debentures were tendered for a total principal amount
of $841.3 million of notes tendered.
On December 30, 1998, the Company redeemed all $231.5 million of Viacom
International's outstanding 7% Senior Subordinated Debentures due 2003 at a
redemption price equal to 100% of the principal amount.
On May 15, 1998, the Company redeemed all $100.0 million of Viacom
International's outstanding 8.75% Senior Subordinated Reset Notes due 2001 at a
redemption price equal to 101% of the principal amount.
On February 17, 1998, the Company retired all $150.0 million of its outstanding
6.625% Senior Notes due 1998.
On February 15, 1998, the Company redeemed all $150 million of Viacom
International's outstanding 9.125% Senior Subordinated Notes due 1999 at a
redemption price equal to 101.3% of the principal amount.
In addition, the Company purchased $21.8 million of the 8.0% Merger Debentures
and $29.0 million of the 7.75% Senior Notes in open market transactions during
1998.
Effective December 23, 1997, the Company permanently reduced its commitments
under the March 1997 Credit Agreement by $1.0 billion.
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<PAGE>
Effective June 30, 1997, certain financial covenants in the March 1997 Credit
Agreements and the film financing credit agreement were amended to provide the
Company with increased financial flexibility. (See Note 8 of Notes to
Consolidated Financial Statements.)
The Company's scheduled maturities of indebtedness through December 31, 2003,
assuming full utilization of the March 1997 Credit Agreements, as amended, are
$1.2 billion (1999), $1.7 billion (2000), $1.8 billion (2001), $2.0 billion
(2002) and $350.0 million (2003). The Company's maturities of long-term debt
outstanding at December 31, 1998, excluding capital leases, are $327.9 million
(1999), $150.0 million (2000), $36.3 million (2001), $1.1 billion (2002) and
$350.0 million (2003). The Company has classified certain short-term
indebtedness as long-term debt based upon its intent and ability to refinance
such indebtedness on a long-term basis.
Debt as a percentage of total capitalization of the Company decreased to 26% at
December 31, 1998 from 37% at December 31, 1997.
The Company was in compliance with all debt covenants and had satisfied all
financial ratios and tests as of December 31, 1998 under its Credit Agreements
and the Company expects to be in compliance and satisfy all such covenant ratios
as may be applicable from time to time during 1999.
Share Repurchase Programs
On March 24, 1999, the Company initiated a repurchase program to acquire up to
$500 million in the Company's common stock.
On December 2, 1998, as part of its repurchase program described below, the
Company repurchased 12 million shares of its convertible preferred stock from
Bell Atlantic Corporation for $564 million in cash. On January 5, 1999, the
Company repurchased the remaining 12 million shares of its convertible preferred
stock from Bell Atlantic Corporation for $612 million in cash. The
preferred stock had a cumulative cash dividend of $60 million per
year and was convertible into approximately 34.3 million common shares of the
Company's Class B common stock.
On August 31, 1998, the Company initiated a repurchase program to acquire one or
more classes of the Company's equity securities. Through December 31, 1998, the
Company had repurchased 12,000 shares of Class A Common Stock, 26,190,200 shares
of Class B Common Stock, 5,502,000 Viacom Five-Year Warrants, expiring on July
7, 1999, and 12 million shares of its convertible preferred stock for
approximately $1.4 billion in the aggregate. On February 10, 1999, the program
was completed and the Company had repurchased a total of 12,000 shares of Class
A Common Stock 26,255,600 shares of Class B Common Stock, 5,546,500 Viacom
Five-Year warrants, expiring on July 7, 1999 and 24 million shares of its
convertible preferred stock. The total repurchase program approximated $2.0
billion.
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<PAGE>
During 1997, the Company completed its joint purchase program initially
established in September 1996 with NAI, for each to acquire up to $250 million,
or $500 million in total, of the Company's Class A Common Stock, Class B Common
Stock, and, as to the Company, Viacom Warrants. The Company repurchased
1,319,400 shares of Viacom Inc. Class A Common Stock, 11,632,600 shares of
Viacom Inc. Class B Common Stock and 6,824,590 Viacom Five-Year Warrants,
expiring on July 7, 1999, for approximately $250 million in the aggregate. As of
December 31, 1997, NAI had separately acquired 2,564,400 shares of Viacom Inc.
Class A Common Stock and 11,204,000 shares of Viacom Inc. Class B Common Stock
pursuant to the joint purchase program for approximately $250 million, raising
its ownership to approximately 67% of Viacom Inc. Class A Common Stock and
approximately 28% of Class A and Class B Common Stock on a combined basis, and
as of December 31, 1998, NAI's ownership percentages were approximately the
same.
----------
Planned capital expenditures, including information systems costs, are
approximately $600 million to $700 million in 1999. Capital expenditures are
primarily related to capital additions for new and existing video stores,
expansion of Paramount's theatres and theme park attractions. The Company's
joint ventures, including UPN, are expected to require estimated net cash
contributions of approximately $90 million to $140 million in 1999.
The Company uses derivative financial instruments to reduce its exposure to
market risks from changes in foreign exchange rates and interest rates. The
Company does not hold or issue financial instruments for speculative trading
purposes. The derivative instruments used are foreign exchange forward contracts
and options. The foreign exchange contracts have principally been used to hedge
the British Pound, the Australian Dollar, the Japanese Yen, the Canadian Dollar,
the Singapore Dollar, the European Union's common currency (the "Euro") and the
European Currency Unit/British Pound relationship. These derivatives, which are
over-the-counter instruments, are non-leveraged. At December 31, 1998, the
Company had outstanding contracts with a notional value of approximately $4.3
million which expire in 1999. Realized gains and losses on contracts that hedge
anticipated future cash flows are recognized in "other items, net" and were not
material in any of the periods presented.
The Company continually monitors its positions with, and credit quality of, the
financial institutions which are counterparties to its financial instruments.
The Company is exposed to credit loss in the event of nonperformance by the
counterparties to the agreements. However, the Company does not anticipate
nonperformance by the counterparties. The Company's receivables do not represent
significant concentrations of credit risk at December 31, 1998, due to the wide
variety of customers, markets and geographic areas to which the Company's
products and services are sold.
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<PAGE>
The Company filed a shelf registration statement with the Securities and
Exchange Commission registering debt securities, preferred stock and contingent
value rights of Viacom and guarantees of such debt securities by Viacom
International which may be issued for aggregate gross proceeds of $3.0 billion.
The registration statement was declared effective on May 10, 1995. The net
proceeds from the sale of the offered securities may be used by Viacom to repay,
redeem, repurchase or satisfy its obligations in respect of its outstanding
indebtedness or other securities; to make loans to its subsidiaries; for general
corporate purposes; or for such other purposes as may be specified in the
applicable Prospectus Supplement. The Company filed a post-effective amendment
to this registration statement on November 19, 1996. To date, the Company has
issued $1.55 billion of notes and debentures and has $1.45 billion remaining
availability under the shelf registration statement.
The commitments of the Company for program license fees, which are not reflected
in the balance sheet as of December 31, 1998 and are estimated to aggregate
approximately $1.2 billion, excluding intersegment commitments of approximately
$738.9 million, principally reflect SNI's commitments of approximately $1.1
billion for the acquisition of programming rights and the production of original
programming. This estimate is based upon a number of factors. A majority of such
fees are payable over several years, as part of normal programming expenditures
of SNI. These commitments to acquire programming rights are contingent upon
delivery of motion pictures which are not yet available for premium television
exhibition and, in many cases, have not yet been produced.
See Note 13 of Notes to Consolidated Financial Statements for a description of
the Company's future minimum lease commitments.
There are various lawsuits and claims pending against the Company. Management
believes that any ultimate liability resulting from those actions or claims will
not have a material adverse effect on the Company's results of operations,
financial position or liquidity.
Certain subsidiaries and affiliates of the Company from time to time receive
claims from federal and state environmental regulatory agencies and other
entities asserting that they are or may be liable for environmental cleanup
costs and related damages, principally relating to discontinued operations
conducted by its former mining and manufacturing businesses (acquired as part of
the mergers with Paramount and Blockbuster). The Company has recorded a
liability reflecting its best estimate of environmental exposure. Such liability
was not discounted or reduced by potential insurance recoveries and reflects
management's estimate of cost sharing at multiparty sites. The estimated
liability was calculated based upon currently available facts, existing
technology and presently enacted laws and regulations. On the basis of its
experience and the information currently available to it, the Company believes
that the claims it has received will not have a material adverse effect on its
results of operations, financial position or liquidity.
II-19
<PAGE>
Current assets decreased to $5.1 billion as of December 31, 1998 from $5.7
billion as of December 31, 1997, principally reflecting the sale of Non-Consumer
Publishing and the reduction of receivables due to the asset securitization
programs. Proceeds from the sale of these receivables under the asset
securitization programs were used to reduce outstanding borrowings. The
allowance for doubtful accounts as a percentage of receivables increased to 5%
for 1998 from 4% for 1997. The change in property and equipment principally
reflects capital expenditures of $603.5 million related to capital additions for
new and existing video stores, construction of new movie theaters and additional
construction and equipment upgrades for the Parks offset by depreciation expense
of $441.8 million. Current liabilities increased to $5.6 billion from $5.1
billion reflecting the timing of the settlement for the 8% Merger Debentures and
increased participation liabilities primarily attributable to successful films
such as TITANIC and other normal operating activity. Long-term debt including
current maturities, decreased to $4.2 billion from $7.8 billion, reflecting debt
reduction from proceeds received with the sale of Non-Consumer Publishing and
the asset securitization programs.
Net cash flow from operating activities increased to $864.1 million in 1998 from
$340.0 million in 1997 due to the reductions in accounts receivable as a result
of the asset securitization programs and increased operating results of the
Company, partially offset by the first quarter 1998 tax payment related to the
sale of USA Networks. Net cash flow from investing activities of $4.2 billion
for 1998 principally reflects the proceeds from the sale of Non-Consumer
Publishing of approximately $4.6 billion in cash plus approximately $92 million
related to changes in net assets and the sale of certain investments offset by
capital expenditures. Net cash flow from investing activities of $1.9 billion
for 1997, principally reflects the proceeds of $1.1 billion from the sale of the
Company's Radio business, as well as $1.7 billion in proceeds from the sale of
USA Networks, both of which were partially offset by capital expenditures and
other investing activities. Financing activities reflect repayment of debt, the
repurchase of convertible preferred stock and purchase of treasury stock and
warrants, offset by the exercise of stock options and warrants.
Other Matters
On March 19, 1999, the Company announced that it has offered to purchase the
remaining shares of Spelling that it does not already own, approximately 20%,
for $9 in cash per share in a merger transaction. The offer, approved by the
Company's Board of Directors, is contingent upon approval of Spelling's
independent Directors.
In April 1998, Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5") was issued. SOP 98-5 provides guidance on the financial
reporting of start-up costs and organization costs. The SOP is effective for
financial statements for fiscal years beginning after December 15, 1998. The
Company does not anticipate that the adoption of this statement will have a
material effect on its financial statements.
II-20
<PAGE>
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), effective for fiscal years beginning after
June 15, 1999. The Company anticipates that due to its limited use of derivative
instruments, the adoption of SFAS 133 will not have a material effect on its
financial statements.
In October 1998, the FASB released an exposure draft of the proposed statement
on "Rescission of FASB Statement No. 53, Financial Reporting by Producers and
Distributors of Motion Picture Films," ("SFAS 53"). An entity that previously
was subject to the requirements of SFAS 53 would follow the guidance in a
proposed Statement of Position, "Accounting by Producers and Distributors of
Films." This proposed Statement of Position would be effective for financial
statements for fiscal years beginning after December 15, 1999 and could have a
significant impact on the Company's results of operations and financial position
depending on its final outcome. The Company has not concluded on its impact
given the preliminary stages of the proposed Statement of Position.
Euro Conversion
In January 1999, eleven member countries of the European Union established
permanent conversion rates between their existing currencies and the Euro. The
transition period for the introduction of the Euro will be between January 1,
1999 and June 30, 2002. The Company conducts business in member countries and is
addressing the issues involved with the introduction of the Euro. The more
important issues facing the Company include: converting information technology
systems, reassessing currency risk, negotiating and amending licensing
agreements and contracts, and processing tax, accounting, payroll and customer
records.
Based on the progress to date, the Company believes that the introduction of the
Euro will not have a significant impact on the manner in which it conducts its
business affairs and processes its business and accounting records. Accordingly,
conversion to the Euro is not expected to have a material effect on the
Company's financial condition or results of operations.
Year 2000
Overview
The widespread use of computer programs that rely on two-digit dates to perform
computations and decision making functions may cause computer systems to
malfunction prior to or in the year 2000 ("Y2K") and lead to significant
business delays and disruptions in the U.S. and internationally. In December
1997, the Company formalized its Y2K initiative to optimize the divisional Y2K
efforts that had already begun, by developing a Company wide program to identify
and mitigate Y2K risks. Pursuant to this program, each of the Company's
principal business units developed programs to address Y2K exposures. In
addition, under the direction of its Board of Directors, the Company has
designated a committee of senior officers to oversee these programs and has
engaged an independent consulting firm to assist in the review and oversight. At
present, the Company anticipates completing its program to have substantially
all critical and non-critical systems compliant prior to the end of the third
quarter of 1999.
The Company is reviewing its Y2K issues based upon three areas: applications,
infrastructure and business partners.
o Applications cover the software systems resident on mainframe, mid-range,
network and personal computers. The Company defines an application as one
or a collection of programs directly related to a common system. For
example, a financial application may include all the general ledger and
accounts receivable software code used to process information throughout
an operating segment. In addition, the Company's applications have been
segregated into critical and non-critical applications. Critical
applications are software systems which, if not operational, could have a
material impact on business operations.
o Infrastructure includes the computers, data and voice communications
networks, and other equipment which use embedded chip processors (e.g.,
inventory movement systems, tape duplication equipment, telephone systems,
etc.).
o Business partners include third party vendors, customers and other
entities whose systems may interface with the Company or whose own
operations are important to the Company's daily operations.
II-21
<PAGE>
These three areas have been addressed using a five phase program: inventory,
assessment, remediation, testing and contingency planning.
o Phase 1 inventories the respective applications, hardware and business
partners.
o Phase 2 assesses the possible impact of a Y2K error on the continuing
operation of each identified application, hardware systems or business
partner relationship; and subsequently determines the risk to operations
and assigns priorities.
o Phase 3 establishes and implements specific plans for the remediation of
applications and hardware systems and for the determination of business
partners' compliance.
o Phase 4 tests each application and hardware system and reviews business
partners' compliance under the plans established in phase 3, to ensure
that Y2K issues no longer exist.
o Phase 5 establishes and implements contingency plans in the event internal
or external systems are not compliant.
Changes may occur to the Company's operations during the implementation of its
Y2K program or subsequent to the completion of each phase, therefore, management
may periodically revise its plans. The Company continues to review and test
systems for Y2K compliance as changes occur.
State of Readiness
The Company's Y2K progress as of March 22, 1999 is as follows:
Applications
The inventory and assessment phases for the Company have been completed.
Applications status of each operating segment is discussed below.
Networks, Corporate, Online - We have identified 15 critical domestic and 29
critical international applications which primarily relate to program
scheduling, finance/payroll and network transmission. A majority of critical
domestic applications has been remediated and tested and the remaining systems
are scheduled for completion during the second quarter of 1999. International's
critical applications are currently being remediated and testing is scheduled
for completion in the second quarter of 1999. A significant number of domestic
and international non-critical applications have been remediated and tested and
the remaining applications are scheduled for completion in the second quarter
of 1999.
Entertainment - We have identified 71 critical domestic and 50 critical
international applications which primarily relate to theatrical and video
distribution, TV syndication, theater point-of-sale and finance/payroll. A
significant number of critical and non-critical worldwide applications have been
remediated and tested and the remaining systems are scheduled for completion
during the second and third quarters of 1999.
Video - We have identified 16 critical domestic and 6 critical international
applications which primarily relate to point-of-sale, warehousing and
distribution, and finance/payroll. A significant number of critical and
non-critical worldwide applications have been remediated and tested and the
remaining applications are scheduled for completion during the second and third
quarters of 1999.
II-22
<PAGE>
Publishing - We have identified 13 critical domestic applications which
primarily relate to order processing, warehousing and billing. A majority of
critical domestic applications has been remediated and tested and the remaining
systems are scheduled for completion in the second quarter of 1999. A
significant number of non-critical applications have been remediated and tested
and the remaining systems are scheduled for completion in the second quarter of
1999.
Parks - We have identified 20 critical domestic and 4 critical international
applications which primarily relate to point-of-sale, ticketing and
finance/payroll. All critical worldwide applications have been remediated and
tested. A significant number of non-critical applications have been remediated
and tested and the remaining systems are scheduled to be completed in the second
quarter of 1999.
Infrastructure
Infrastructure status of each operating segment is discussed below.
Networks, Corporate, Online - The inventory and assessment phases for domestic
and international operations have been completed. A majority of the remediation
and testing of domestic and international hardware systems has been completed.
The remaining infrastructure systems will be completed by the third quarter of
1999.
Entertainment - The inventory and assessment phases for domestic computer
systems have been completed. The inventory and assessment of the remaining
non-computer domestic systems (e.g., studio production facilities and equipment)
will be completed by the second quarter of 1999. International's inventory and
assessment phases are substantially complete; the remainder will be completed by
the second quarter of 1999. Worldwide remediation and testing of infrastructure
systems will be completed in the second and third quarters of 1999.
Video - Domestic and international inventory and assessment phases have been
completed. A majority of the systems with embedded processors have completed
remediation and testing. The remaining hardware systems will be completed during
the second and third quarters of 1999.
Publishing - The inventory and assessment phases have been completed. A
substantial number of hardware systems have been remediated and tested; the
remaining systems are scheduled for completion during the second and third
quarters of 1999.
Parks - The inventory and assessment phases have been completed. Substantially
all systems with embedded processors have been remediated and tested. The
remainder are scheduled for remediation and testing during the second quarter of
1999.
II-23
<PAGE>
Business Partners
During the course of business operations, the Company relies on third party
business partners to provide raw materials and services and to distribute and
sell products. These business partners include financial institutions,
governmental agencies and utilities. The disruption of the ability to receive
raw materials or services or to distribute or sell the Company's products could
adversely affect the financial condition of the Company. Although the Company
has little or no control over the remediation and testing of these third party
systems, the Company is taking appropriate action to determine the level of Y2K
compliance at each third party. These actions include, but are not limited to,
requesting written confirmation of a business or business system's Y2K
compliance; directly meeting with business management; and, performing
additional independent tests. Subsequent to the Company's review of third party
Y2K compliance, management is determining the need for contingency plans.
The Company has substantially completed the inventory phase and is in the
assessment phase of business partners and expects this phase to be completed by
the second quarter of 1999. The determination of third party Y2K compliance will
continue through the end of the year.
Contingency Plans and Risks
As the remediation, testing and review of each application, infrastructure item
and business partners occur, the Company is determining the need for contingency
plans. Where appropriate, plans addressing both operational and technical
alternatives are being developed. This phase has begun and will continue through
the end of 1999.
The Company's goal is to achieve timely and substantial Y2K compliance, with
remediation work assigned based upon how critical each system is to the
Company's business. Due to the general uncertainty inherent in the Y2K problem
resulting in part from the uncertainty of compliance by the Company's principal
business partners and third party providers, the Company is unable to determine
at this time what the consequences of Y2K may be. Also, the Company's
international operations may be adversely affected by failures of businesses in
other parts of the world to take adequate steps to address the Y2K problem. The
Company will continue to devote the necessary resources to complete its Y2K
program and contingency plans and believes that the completion of its Y2K
program and contingency plans will significantly mitigate operational and
financial risks.
Costs
Y2K costs have been expensed as incurred, except those costs directly related to
the replacement of systems requiring upgrades in the ordinary course of business
which have been capitalized. As of February 28, 1999, the Company had incurred
costs of approximately $31.7 million, of which $8.4 million has been
capitalized. The estimated additional costs to complete the Y2K program are
currently expected to approximate $20.7 million, of which approximately $4.0
million are expected to be capitalized. Based on these amounts, the Company does
not expect the costs of the Y2K program to have a material effect on its results
of operations, financial position or liquidity.
II-24
<PAGE>
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Viacom Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of Viacom Inc.
and its subsidiaries (the "Company") at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14(a) present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 8, 1999, except for the first paragraph of Note 2, which is as of
February 25, 1999
II-25
<PAGE>
MANAGEMENT'S STATEMENT OF RESPONSIBILITY FOR FINANCIAL REPORTING
Management has prepared and is responsible for the consolidated financial
statements and related notes of Viacom Inc. They have been prepared in
accordance with generally accepted accounting principles and necessarily include
amounts based on judgments and estimates by management. All financial
information in this annual report is consistent with the consolidated financial
statements.
The Company maintains internal accounting control systems and related policies
and procedures designed to provide reasonable assurance that assets are
safeguarded, that transactions are executed in accordance with management's
authorization and properly recorded, and that accounting records may be relied
upon for the preparation of consolidated financial statements and other
financial information. The design, monitoring, and revision of internal
accounting control systems involve, among other things, management's judgment
with respect to the relative cost and expected benefits of specific control
measures. The Company also maintains an internal auditing function which
evaluates and reports on the adequacy and effectiveness of internal accounting
controls, policies and procedures.
Viacom Inc.'s consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants, who have expressed their
opinion with respect to the presentation of these statements.
The Audit Committee of the Board of Directors, which is comprised solely of
directors who are not employees of the Company, meets periodically with the
independent accountants, with our internal auditors, as well as with management,
to review accounting, auditing, internal accounting controls and financial
reporting matters. The Audit Committee is also responsible for recommending to
the Board of Directors the independent accounting firm to be retained for the
coming year, subject to shareholder approval. The independent accountants and
the internal auditors have full and free access to the Audit Committee with and
without management's presence.
VIACOM INC.
By: /s/ Sumner M. Redstone
-------------------------------------
Sumner M. Redstone
Chairman of the Board of Directors,
Chief Executive Officer
By: /s/ George S. Smith, Jr.
-------------------------------------
George S. Smith, Jr.
Senior Vice President,
Chief Financial Officer
By: /s/ Susan C. Gordon
-------------------------------------
Susan C. Gordon
Vice President, Controller,
Chief Accounting Officer
II-26
<PAGE>
VIACOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues .................................................. $ 12,096.1 $ 10,684.9 $ 9,683.9
Expenses:
Operating ............................................... 8,506.3 7,476.3 6,340.2
Selling, general and administrative ..................... 2,060.9 1,750.6 1,442.0
Restructuring charge (Note 4) ........................... -- -- 50.2
Depreciation and amortization ........................... 777.3 772.6 654.3
---------- ---------- ----------
Total expenses ......................................... 11,344.5 9,999.5 8,486.7
---------- ---------- ----------
Operating income .......................................... 751.6 685.4 1,197.2
Other income (expense):
Interest expense, net .................................. (599.0) (750.9) (785.5)
Other items, net (Note 16) ............................. (15.3) 1,244.0 (1.6)
---------- ---------- ----------
Earnings from continuing operations before income taxes ... 137.3 1,178.5 410.1
Provision for income taxes ................................ (138.7) (646.4) (243.3)
Equity in loss of affiliated companies, net of tax (Note 7) (41.4) (163.3) (13.3)
Minority interest ......................................... (0.7) 4.7 (1.3)
---------- ---------- ----------
Earnings (loss) from continuing operations ................ (43.5) 373.5 152.2
Discontinued operations (Note 3):
Earnings (loss), net of tax ............................ (54.1) 14.9 (62.0)
Net gain on dispositions, net of tax ................... 49.9 405.2 1,157.7
---------- ---------- ----------
Net earnings (loss) before extraordinary loss ............. (47.7) 793.6 1,247.9
Extraordinary loss, net of tax (Note 17) .................. (74.7) -- --
---------- ---------- ----------
Net earnings (loss) ....................................... (122.4) 793.6 1,247.9
Cumulative convertible preferred stock dividend requirement (57.2) (60.0) (60.0)
Discount on repurchase of preferred stock (Note 10) ....... 30.0 -- --
---------- ---------- ----------
Net earnings (loss) attributable to common stock .......... $ (149.6) $ 733.6 $ 1,187.9
========== ========== ==========
Basic earnings per common share:
Earnings (loss) from continuing operations ............. $ (.10) $ .44 $ .13
Net earnings (loss) .................................... $ (.21) $ 1.04 $ 1.63
Diluted earnings per common share:
Earnings (loss) from continuing operations ............. $ (.10) $ .44 $ .13
Net earnings (loss) .................................... $ (.21) $ 1.04 $ 1.62
Weighted average number of common shares:
Basic .................................................. 708.7 705.8 728.0
Diluted ................................................ 708.7 708.5 734.7
</TABLE>
See notes to consolidated financial statements.
II-27
<PAGE>
VIACOM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ................................... $ 767.3 $ 292.3
Receivables, less allowances of $98.7 (1998) and $99.8 (1997) 1,759.1 2,397.7
Inventory (Note 6) .......................................... 468.7 934.8
Theatrical and television inventory (Note 6) ................ 1,336.8 1,317.9
Other current assets ........................................ 732.6 770.8
--------- ---------
Total current assets .......................................... 5,064.5 5,713.5
--------- ---------
Property and Equipment:
Land ........................................................ 458.5 452.2
Buildings ................................................... 1,636.8 1,544.4
Capital leases .............................................. 671.7 655.6
Equipment and other ......................................... 1,770.0 1,668.0
--------- ---------
4,537.0 4,320.2
Less accumulated depreciation and amortization .............. 1,457.5 1,122.5
--------- ---------
Net property and equipment ................................ 3,079.5 3,197.7
--------- ---------
Inventory (Note 6) ............................................ 2,470.8 2,650.6
Intangibles, at amortized cost ................................ 11,557.3 14,699.6
Other assets .................................................. 1,441.0 2,027.3
--------- ---------
$23,613.1 $28,288.7
========= =========
</TABLE>
See notes to consolidated financial statements.
II-28
<PAGE>
VIACOM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable ......................................... $ 499.2 $ 699.7
Accrued expenses ......................................... 2,125.8 1,574.7
Deferred income .......................................... 286.5 254.6
Accrued compensation ..................................... 410.3 441.7
Participants' share, residuals and royalties payable ..... 1,227.5 951.3
Program rights ........................................... 179.6 197.7
Income tax payable ....................................... 526.5 556.3
Current portion of long-term debt ........................ 377.2 376.5
--------- ---------
Total current liabilities ......................... 5,632.6 5,052.5
--------- ---------
Long-term debt (Note 8) ........................................ 3,813.4 7,423.0
Other liabilities .............................................. 2,117.5 2,429.6
Commitments and contingencies (Note 13)
Shareholders' Equity:
Convertible Preferred Stock, par value $.01 per share; 200.0
shares authorized; 12.0 (1998) and 24.0 (1997) shares
issued and outstanding ................................... 600.0 1,200.0
Class A Common Stock, par value $.01 per share; 200.0 shares
authorized; 141.6 (1998) and 140.7 (1997) shares issued .. 1.4 1.4
Class B Common Stock, par value $.01 per share; 1,000.0 shares
authorized; 591.9 (1998) and 581.1 (1997) shares issued .. 5.9 5.8
Additional paid-in capital ................................... 10,574.7 10,329.5
Retained earnings ............................................ 1,932.9 2,089.0
Accumulated other comprehensive loss (Note 1) ................ (67.1) (12.6)
--------- ---------
13,047.8 13,613.1
Less treasury stock, at cost; 38.5 shares (1998) and
13.0 shares (1997) ....................................... 998.2 229.5
--------- ---------
Total shareholders' equity ............................... 12,049.6 13,383.6
--------- ---------
$23,613.1 $28,288.7
========= =========
</TABLE>
See notes to consolidated financial statements.
II-29
<PAGE>
VIACOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating Activities:
Net earnings (loss) .......................................... $ (122.4) $ 793.6 $1,247.9
Adjustments to reconcile net earnings (loss) to net cash
flow from operating activities:
Net gain on dispositions ..................................... (49.9) (1,761.3) (1,157.7)
Depreciation and amortization ................................ 777.3 943.3 817.6
Restructuring charge ......................................... -- -- 88.9
Distribution from affiliated companies ....................... 17.9 62.2 59.8
Gain on the sale of cost investments ......................... (118.9) -- --
Loss on redemption of debt ................................... 126.6 -- --
Equity in loss of affiliated companies ....................... 41.4 163.3 13.0
Amortization of deferred financing costs ..................... 16.1 33.6 31.2
Change in operating assets and liabilities:
Decrease (increase) in receivables ......................... 135.6 (251.3) (413.3)
Decrease (increase) in inventory and related
programming liabilities, net ............................ 367.1 79.7 (443.0)
Decrease (increase) in prepublication costs, net ........... 13.8 (21.4) (57.9)
Increase in prepaid expenses and other current assets ...... (119.7) (83.5) (40.0)
Decrease (increase) in unbilled receivables ................ 105.0 (53.3) (226.5)
Increase (decrease) in accounts payable and accrued expenses 192.6 (7.6) 1.0
Increase (decrease) in income taxes payable and deferred
income taxes, net ....................................... (563.9) 455.6 38.5
Increase (decrease) in deferred income ..................... 7.4 (93.1) 122.6
Other, net ................................................. 38.1 80.2 (11.6)
-------- -------- --------
Net cash flow provided by operating activities .................. 864.1 340.0 70.5
-------- -------- --------
Investing activities:
Proceeds from dispositions ................................... 4,950.1 3,014.9 1,838.1
Acquisitions, net of cash acquired ........................... (126.4) (355.1) (299.8)
Capital expenditures ......................................... (603.5) (530.3) (598.6)
Investments in and advances to affiliated companies .......... (100.3) (300.4) (88.8)
Proceeds from sale of cost investment ........................ 167.3 -- --
Proceeds from sale of short-term investments ................. 101.4 139.8 137.9
Purchases of short-term investments .......................... (151.6) (81.3) (149.2)
Other, net ................................................... (18.6) 18.2 --
-------- -------- --------
Net cash flow provided by investing activities .................. 4,218.4 1,905.8 839.6
-------- -------- --------
Financing activities:
Repayments of credit agreements, net ......................... (2,383.0) (2,092.3) (859.5)
Repayment of notes and debentures ............................ (869.3) -- (50.9)
Purchase of treasury stock and warrants ...................... (809.6) (9.8) (223.6)
Repurchase of Preferred Stock ................................ (564.0) -- --
Payment on capital lease obligations ......................... (110.7) (66.2) (48.9)
Payment of Preferred Stock dividends ......................... (64.8) (60.0) (60.0)
Proceeds from exercise of stock options and warrants ......... 182.8 69.6 95.1
Other, net ................................................... 11.1 (3.8) (17.4)
-------- -------- --------
Net cash flow used in financing activities ...................... (4,607.5) (2,162.5) (1,165.2)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............ 475.0 83.3 (255.1)
Cash and cash equivalents at beginning of year .................. 292.3 209.0 464.1
-------- -------- --------
Cash and cash equivalents at end of year ........................ $ 767.3 $ 292.3 $ 209.0
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
II-30
<PAGE>
VIACOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
Shares Amounts Shares Amounts Shares Amounts
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Convertible Preferred Stock:
Balance, beginning of year ............ 24.0 $ 1,200.0 24.0 $ 1,200.0 24.0 $ 1,200.0
Repurchase of Preferred Stock ......... 12.0 600.0 -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance, end of year .................. 12.0 600.0 24.0 $ 1,200.0 24.0 $ 1,200.0
========= ========= ========= ========= ========= =========
Class A Common Stock:
Balance, beginning of year ............ 140.7 $ 1.4 140.2 $ 1.4 150.2 $ 1.5
Exercise of stock options and warrants .9 -- .5 -- .8 --
Cable split-off ....................... -- -- -- -- (10.8) (.1)
--------- --------- --------- --------- --------- ---------
Balance, end of year .................. 141.6 $ 1.4 140.7 $ 1.4 140.2 $ 1.4
========= ========= ========= ========= ========= =========
Class B Common Stock:
Balance, beginning of year ............ 581.1 $ 5.8 576.4 $ 5.8 589.2 $ 5.9
Exercise of stock options and warrants 10.8 .1 4.7 -- 7.0 .1
Cable split-off ....................... -- -- -- -- (19.8) (.2)
--------- --------- --------- --------- --------- ---------
Balance, end of year .................. 591.9 $ 5.9 581.1 $ 5.8 576.4 $ 5.8
========= ========= ========= ========= ========= =========
Additional Paid-In Capital:
Balance, beginning of year ............ $10,329.5 $10,238.5 $10,723.2
Exercise of stock options and warrants,
net of tax benefit ................. 280.1 94.9 157.4
Cable split-off ....................... -- -- (625.5)
Warrants repurchased .................. (34.9) (3.9) (16.6)
--------- --------- ---------
Balance, end of year .................. $10,574.7 $10,329.5 $10,238.5
========= ========= =========
Retained Earnings:
Balance, beginning of year ............ $ 2,089.0 $ 1,358.6 $ 173.1
Net earnings (loss) ................... (122.4) 793.6 1,247.9
Preferred stock dividend
requirement ......................... (57.2) (60.0) (60.0)
Discount on repurchase of
Preferred Stock ..................... 30.0 -- --
Comprehensive income reclassification.. -- (3.2) (2.4)
Exercise of stock options ............. (6.5) -- --
--------- --------- ---------
Balance, end of year .................. $ 1,932.9 $ 2,089.0 $ 1,358.6
========= ========= =========
Accumulated Other Comprehensive Income (Loss):
Balance, beginning of year ............ $ (12.6) $ 5.9 $ (11.9)
Other comprehensive income (loss) ..... (54.5) (18.5) 17.8
--------- --------- ---------
Balance, end of year .................. $ (67.1) $ (12.6) $ 5.9
========= ========= =========
Treasury Stock, at cost:
Balance, beginning of year ............ 13.0 $ (229.5) 12.5 $ (223.6) -- $ --
Class A Common Stock repurchased ...... -- -- -- -- 1.3 (22.9)
Class B Common Stock repurchased ...... 26.2 (787.0) .5 (5.9) 11.2 (200.7)
Exercise of stock options ............. (.7) 18.3 -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance, end of year .................. 38.5 $ (998.2) 13.0 $ (229.5) 12.5 $ (223.6)
========= ========= ========= ========= ========= =========
Total Shareholders' Equity ............ $12,049.6 $13,383.6 $12,586.6
========= ========= =========
Comprehensive Income (Loss)(Note 1):
Net earnings (loss) ................... $ (122.4) $ 793.6 $ 1,247.9
Other comprehensive income (loss) ..... (54.5) (18.5) 17.8
--------- --------- ---------
Total Comprehensive Income (Loss)...... $ (176.9) $ 775.1 $ 1,265.7
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
II-31
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollars in millions, except per share amounts)
1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - Viacom Inc. and its subsidiaries (the "Company") is a
diversified entertainment company with operations in the six segments described
below. These operating segments have been determined in accordance with the
Company's internal management structure, which is organized based on products
and services. In accordance with Statement of Financial Accounting Standards
("SFAS") 131, "Disclosures about Segments of an Enterprise and Related
Information", certain similar operating segments have been aggregated. See Note
3 regarding the presentation of discontinued operations. See Note 14 regarding
the relative contribution to revenues and operating results of each of the
following operating segments:
Networks
MTV Networks owns and operates advertiser-supported basic cable television
program services, and Showtime Networks Inc. owns and operates premium
subscription cable television program services.
Entertainment
Paramount Pictures: 1) produces, acquires, finances and distributes feature
motion pictures, normally for exhibition in U.S. and foreign theaters followed
by videocassettes and discs, pay-per-view television, premium subscription
television, network television, basic cable television and syndicated television
exploitation; 2) produces, acquires and distributes series, mini-series,
specials and made-for-television movies initially for network television,
first-run syndication and basic cable television, and subsequently for
syndication; 3) operates movie theaters; 4) acquires and exploits a library of
music copyrights to various musical works, including songs, scores and cues; and
5) owns and operates 17 televisions stations and operates 2 stations pursuant to
local marketing agreements.
Spelling Entertainment Group Inc. ("Spelling") is a producer and distributor of
television series, mini-series and made-for-television movies.
Video
Blockbuster Video operates and franchises videocassette rental and retail sales
stores throughout the United States and internationally.
Parks
Paramount Parks owns and operates five regional theme parks and a themed
attraction in the United States and Canada.
Publishing
Simon & Schuster publishes and distributes consumer hardcover books, trade
paperbacks, mass-market paperbacks, children's books, audiobooks, electronic
books and CD-ROM products in the United States and internationally.
Online
Viacom online services provides online music and children destinations featuring
entertainment, information, community tools and e-commerce.
II-32
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
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 and
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 subsequently differ from those estimates.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and investments of more than 50% in subsidiaries and
other entities. Investments in affiliated companies over which the Company has a
significant influence or ownership of more than 20% but less than or equal to
50% are accounted for under the equity method. Investments of 20% or less are
accounted for under the cost method. All significant intercompany transactions
have been eliminated.
Cash Equivalents - Cash equivalents are defined as short-term (three months or
less) highly liquid investments.
Inventories - Inventories related to theatrical and television product (which
include direct production costs, production overhead, acquisition costs, prints
and certain exploitation costs) are stated at the lower of amortized cost or net
realizable value. Inventories are amortized, and liabilities for residuals and
participations are accrued, on an individual product basis based on the
proportion that current revenues bear to the estimated remaining total lifetime
revenues. Estimates for initial domestic syndication and basic cable revenues
are not included in the estimated lifetime revenues of network series until such
sales are probable. Estimates of total lifetime revenues and expenses are
periodically reviewed. The costs of feature and television films are classified
as current assets to the extent such costs are expected to be recovered through
their respective primary markets, with the remainder classified as non-current.
A portion of the cost to acquire Paramount and Spelling was allocated to
theatrical and television inventories based upon estimated revenues from certain
films less related costs of distribution and a reasonable profit allowance for
the selling effort. The cost allocated to films is being amortized over their
estimated economic lives not to exceed 20 years.
The Company estimates that approximately 70% of unamortized film costs
(including amounts allocated under purchase accounting) at December 31, 1998
will be amortized within the next three years.
Inventories related to base stock videocassettes (generally less than five
copies per title for each store) are recorded at cost and a portion of these
costs are amortized on an accelerated basis over three months, generally to $8
per unit, with the remaining base stock videocassette costs amortized on a
straight-line basis over 33 months to an estimated $4 salvage value. The cost of
non-base stock videocassettes (generally greater than four copies per title for
each store) is amortized on an accelerated basis over three months to an
estimated $4 salvage value. Video games are amortized on an accelerated basis
over a 12 month period to an estimated $10 salvage value (See Note 4).
II-33
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Program Rights - The Company acquires rights to exhibit programming on its
broadcast stations or cable networks. The costs incurred in acquiring programs
are capitalized and amortized over the license period. Program rights and the
related liabilities are recorded at the gross amount of the liabilities when the
license period has begun, the cost of the program is determinable, and the
program is accepted and available for airing.
Property and Equipment - Property and equipment is stated at cost. Depreciation
is computed principally by the straight-line method over estimated useful lives
ranging from 3 to 40 years. Depreciation expense, including capitalized lease
amortization, was $441.8 million (1998), $447.2 million (1997) and $331.1
million (1996).
Property and equipment includes capital leases of $399.0 million and $463.1
million as of December 31, 1998 and December 31, 1997, respectively, net of
accumulated amortization of $272.7 million and $192.5 million, respectively.
Amortization expense related to capital leases was $62.6 million (1998), $58.4
million (1997) and $63.0 million (1996).
In 1996, the Company adopted SFAS 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121").
SFAS 121 requires that the Company assess long-lived assets and certain
identifiable intangibles for impairment whenever there is an indication that the
carrying amount of the asset may not be recoverable. Recoverability of these
assets is determined by comparing the forecasted undiscounted cash flows
generated by those assets to the assets' net carrying value. The amount of
impairment loss, if any, will generally be measured by the difference between
the net book value of the assets and the estimated fair value of the related
assets. The adoption of SFAS 121 did not have a significant effect on the
consolidated financial position or results of operations.
Intangible Assets - Intangible assets, which primarily consist of the cost of
acquired businesses in excess of the fair value of tangible assets and
liabilities acquired ("goodwill"), are generally amortized by the straight-line
method over estimated useful lives of up to 40 years. The Company evaluates the
amortization period of intangibles on an ongoing basis in light of changes in
any business conditions, events or circumstances that may indicate the potential
impairment of intangible assets. Accumulated amortization of intangible assets
was $1.6 billion at December 31, 1998 and 1997.
Revenue Recognition - Subscriber fees for Networks are recognized in the period
the service is provided. Advertising revenues for Networks are recognized in the
period during which the spots are aired. Video segment revenues are recognized
at the time of rental or sale. The publishing segment recognizes revenue when
merchandise is shipped.
Theatrical revenues from domestic and foreign markets are recognized as films
are exhibited; revenues from the sale of videocassettes and discs are recognized
upon availability of sale to the public; and revenues from all television
sources are recognized upon availability of the film for telecast. On average,
the length of the initial revenue cycle for feature films approximates four to
seven years.
II-34
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Television series initially produced for the networks and first-run syndication
are generally licensed to domestic and foreign markets concurrently. The more
successful series are later syndicated in domestic markets and in certain
foreign markets. The length of the revenue cycle for television series will vary
depending on the number of seasons a series remains in active production.
Revenues arising from television license agreements are recognized in the period
that the films or television series are available for telecast and therefore may
cause fluctuation in operating results.
Interest - Costs associated with the refinancing or issuance of debt, as well as
with debt discount, are expensed as interest over the term of the related debt.
The Company enters into interest rate exchange agreements; the amount to be paid
or received under such agreements is accrued as interest rates change and is
recognized over the life of the agreements as an adjustment to interest expense.
Amounts paid for purchased interest rate cap agreements are amortized as
interest expense over the term of the agreement.
Foreign Currency Translation and Transactions - The Company's foreign
subsidiaries' assets and liabilities are translated at exchange rates in effect
at the balance sheet date, while results of operations are translated at average
exchange rates for the respective periods. The resulting translation gains or
losses are included as a separate component of shareholders' equity in
Accumulated Other Comprehensive Income. Foreign currency transaction gains and
losses have been included in "other items, net", and have not been material in
any of the years presented.
Provision for Doubtful Accounts - The provision for doubtful accounts charged to
expense was $29.5 million (1998), $83.1 million (1997) and $55.1 million (1996).
Net Earnings (Loss) per Common Share - Basic earnings per share is based upon
the net earnings applicable to common shares after preferred dividend
requirements and upon the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflects the effect of the assumed
conversions of convertible securities and exercise of stock options only in the
periods in which such effect would have been dilutive.
In December 1998, the Company repurchased 12 million shares of its convertible
preferred stock. The preferred stock had a cumulative cash dividend of $30
million per year.
For each of the full years presented, the effect of the assumed conversion of
preferred stock is antidilutive and therefore, not reflected in diluted net
earnings per common share. Prior period amounts have been adjusted to reflect
the effect of the 2-for-1 stock split (See Note 2). The numerator used in the
calculation of both basic and diluted EPS for each respective year reflects
earnings from continuing operations less preferred stock dividends of $57.2
million for 1998 and $60 million for both 1997 and 1996 plus the discount on
repurchase of preferred stock of $30 million for 1998. The table below presents
a reconciliation of weighted average shares used in the calculation of basic and
diluted EPS:
II-35
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
1998 1997 1996
------ ------ ------
Weighted average shares for basic EPS ......... 708.7 705.8 728.0
Plus incremental shares for stock options ..... -- 2.7 6.7
------ ------ ------
Weighted average shares for diluted EPS ....... 708.7 708.5 734.7
====== ====== ======
Comprehensive Income (Loss) -- The Company adopted SFAS 130, "Reporting
Comprehensive Income", effective January 1, 1998. The components of accumulated
other comprehensive income (loss) were as follows:
<TABLE>
<CAPTION>
Minimum Accumulated
Unrealized Cumulative Pension Other
Gain (Loss) Translation Liability Comprehensive
on Securities Adjustments Adjustment Income(Loss)
------------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
At December 31, 1995 ....... $ 2.0 $ (9.9) $ (4.0) $ (11.9)
Current period change ...... 3.0 21.2 (6.4) 17.8
------- ------- ------- -------
At December 31, 1996 ....... 5.0 11.3 (10.4) 5.9
Current period change ...... 29.9 (50.4) 2.0 (18.5)
------- ------- ------- -------
At December 31, 1997 ....... 34.9 (39.1) (8.4) (12.6)
Current period change ...... (33.7) (19.0) (1.8) (54.5)
------- ------- ------- -------
At December 31, 1998 ....... $ 1.2 $ (58.1) $ (10.2) $ (67.1)
======= ======= ======= =======
</TABLE>
Reclassifications - Certain amounts reported for prior years have been
reclassified to conform with the current year's presentation.
Recent Pronouncements - In April 1998, Statement of Position 98-5 "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5") was issued. SOP 98-5 provides
guidance on the financial reporting of start-up costs and organization costs.
The SOP is effective for financial statements for fiscal years beginning after
December 15, 1998. The Company does not anticipate that the adoption of this
statement will have a material effect on its financial statements.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), effective for fiscal years beginning after
June 15, 1999. The Company anticipates that due to its limited use of derivative
instruments, the adoption of SFAS 133 will not have a material effect on its
financial statements.
II-36
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
In October 1998, the FASB released an exposure draft of the proposed statement
on "Rescission of FASB Statement No. 53, Financial Reporting by Producers and
Distributors of Motion Picture Films," ("SFAS 53"). An entity that previously
was subject to the requirements of SFAS 53 would follow the guidance in a
proposed Statement of Position, "Accounting by Producers and Distributors of
Films." This proposed Statement of Position would be effective for financial
statements for fiscal years beginning after December 15, 1999 and could have a
significant impact on the Company's results of operations and financial position
depending on its final outcome. The Company has not concluded on its impact
given the preliminary stages of the proposed Statement of Position.
2) SUBSEQUENT EVENTS
On February 25, 1999, the Board of Directors of the Company declared a 2-for-1
common stock split, to be effected in the form of a dividend. The additional
shares will be issued on March 31, 1999 to shareholders of record on March 15,
1999. All common share and per share amounts have been adjusted to reflect the
stock split for all periods presented (See Note 10).
On January 5, 1999, the Company repurchased the remaining 12 million shares of
its convertible preferred stock from Bell Atlantic Corporation for $612 million
in cash.
II-37
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
3) DISCONTINUED OPERATIONS
In accordance with Accounting Principles Board Opinion ("APB") 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", the Company has presented the following lines of business as
discontinued operations: its educational, professional and reference publishing
businesses ("Non-Consumer Publishing"), its music retail stores, interactive
game businesses, Viacom Radio Stations and Viacom Cable.
On November 27, 1998, the Company completed the sale of Non-Consumer Publishing
to Pearson plc for approximately $4.6 billion in cash plus approximately $92
million related to changes in net assets, which is subject to change based upon
final determination of net assets. Viacom retained its consumer publishing
operations, including the Simon & Schuster name. As a result of the sale, the
Company recorded a net gain on the transaction of $65.5 million.
On October 26, 1998, the Company completed the sale of its music retail stores
to Wherehouse Entertainment, Inc. for approximately $115 million in cash before
adjustments for changes in working capital and recorded a net loss on the
transaction of $138.5 million. The Company had previously closed the remaining
music stores that were not part of the transaction.
On February 19, 1997, the Company adopted a plan to dispose of its interactive
game businesses, including Viacom New Media, the operations of which were
terminated in 1997. On that same date, the Board of Directors of Spelling
approved a formal plan to dispose of Virgin Interactive Entertainment Limited
("Virgin"). Accordingly, the interactive game businesses were presented as
discontinued operations. On September 4, 1998, Spelling completed the sale of
substantially all of the development operations of Virgin to Electronic Arts
Inc. for $122.5 million in cash. In addition, on November 10, 1998, Spelling
completed the sale of all non-U.S. operations of Virgin to an investor group.
For the year ended December 31, 1997, the revenues and operating losses of the
interactive game businesses were $241.3 million and $43.5 million, respectively.
These losses were provided for in the estimated loss on disposal of $159.3
million, net of minority interest, which included a provision for future
operating losses of approximately $44.0 million, net of minority interest, as of
December 31, 1996. In the fourth quarter of 1997, an estimated loss of $32.0
million, net of minority interest, was recorded, reflecting anticipated future
operating losses and cash funding requirements through completion of the
disposition.
On July 2, 1997, the Company completed the sale of Viacom Radio Stations to
Chancellor Media Corp. for approximately $1.1 billion in cash. As a result of
the sale, the Company realized a gain on disposition of approximately $416.4
million, net of tax, in the third quarter of 1997.
On July 31, 1996, the Company completed the split-off of its Cable segment
pursuant to an exchange offer and related transactions. As a result, the Company
realized a gain of approximately $1.3 billion, reduced its debt and retired
approximately 4.1% of the Company's then total outstanding common shares.
II-38
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
For the year ended December 31, 1998, the net gain on dispositions of $49.9
million includes the gain from the sale of Non-Consumer Publishing of $65.5
million, net of tax, a tax benefit related to the sale of Virgin of $134.0
million and the reversal of cable split-off reserves that were no longer
required, partially offset by the loss on the sale of the Company's music retail
stores of $138.5 million, net of tax, and additional reserves of $20.3 million,
net of minority interest, which provided for Virgin's operating losses through
its disposition.
For the year ended December 31, 1997, the net gain on dispositions of $405.2
million includes approximately $416.4 million, net of tax, for the Viacom Radio
Stations sale, a net reversal of approximately $20.8 million principally of
Cable split-off reserves that were no longer required partially offset by a
reserve of $32.0 million, net of minority interest, for anticipated additional
losses associated with the operations of Virgin through disposition.
For the year ended December 31, 1996, the net gain on dispositions of
approximately $1.2 billion includes the Cable gain of approximately $1.3 billion
and the Company's estimated loss on disposal of its interactive game businesses
of $159.3 million.
Basic earnings (loss) per share for discontinued operations was ($0.01), $0.60
and $1.50 for 1998, 1997 and 1996, respectively. Diluted earnings (loss) per
share for discontinued operations was $(0.01), $0.60 and $1.49 for 1998, 1997
and 1996, respectively.
II-39
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Summarized financial data of discontinued operations are as follows:
<TABLE>
<CAPTION>
Results of discontinued operations: Non-Consumer
Publishing Music Radio Cable Interactive Total
---------- ----- ----- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
For the Year ended December 31, 1998(1)(2)
Revenues ................................. $1,718.0 $ 293.5 -- -- -- $2,011.5
Loss from operations before income
taxes ................................. (15.2) (20.9) -- -- -- (36.1)
Benefit (provision) for income taxes ..... (26.0) 8.0 -- -- -- (18.0)
Net loss ................................. (41.2) (12.9) -- -- -- (54.1)
For the Year ended December 31, 1997(3)
Revenues ................................. $1,915.5 $ 605.7 $ 57.1 -- -- $2,578.3
Earnings (loss) from operations before
income taxes .......................... 144.5 (100.3) 24.5 -- -- 68.7
Benefit (provision) for income taxes ..... (80.8) 37.6 (10.6) -- -- (53.8)
Net earnings (loss) ...................... 63.7 (62.7) 13.9 -- -- 14.9
For the Year ended December 31, 1996(4)
Revenues ................................. $1,784.1 $ 616.2 $ 113.5 $ 236.9 $ 268.7 $3,019.4
Earnings (loss) from operations before
income taxes .......................... 157.8 (87.4) 36.3 50.5 (157.6) (0.4)
Benefit (provision) for income taxes ..... (85.0) 32.8 (16.1) (21.5) (1.2) (91.0)
Net earnings (loss) ...................... 73.1 (54.6) 20.2 28.3 (129.0) (62.0)
</TABLE>
At December 31, 1997
--------------------
Financial position(5):
Current assets ............................. $ 114.9
Net property and equipment ................. 14.5
Other assets ............................... 153.1
Total liabilities .......................... (293.0)
--------
Net liabilities of discontinued operations . $ (10.5)
========
(1) Results of operations reflect Non-Consumer Publishing for the period
January 1 through November 26, 1998.
(2) Results of operations reflect the music retail stores for the period
January 1 through August 10, 1998.
(3) Results of operations include Radio for the six months ended June
30, 1997. Results of operations of Interactive for 1997 were
provided for in the prior year's estimated loss on disposal.
(4) Results of operations include Cable for the six months ended June
30, 1996.
(5) Reflects financial position of Interactive at December 31, 1997.
The provisions for income taxes of $18.0 million for 1998 and $53.8 million for
1997 represent effective tax rates of (49.9%) and 78.3%, respectively. The
effective tax rate for 1996 is not meaningful. The differences between the
effective tax rates and the statutory federal tax rate of 35% principally relate
to certain non-deductible expenses, the allocation of nondeductible goodwill
amortization, state and local taxes and, for 1996, the provision of valuation
allowances attributable to net operating losses of Virgin.
II-40
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
4) CHANGE IN ACCOUNTING METHOD AND OTHER CHARGES
Effective April 1, 1998, Blockbuster adopted an accelerated method of amortizing
videocassette and game rental inventory. Blockbuster has adopted this new method
of amortization because it has implemented a new business model, including
revenue sharing agreements with Hollywood studios, which has dramatically
increased the number of videocassettes in the stores and is satisfying consumer
demand over a shorter period of time. Revenue sharing allows Blockbuster to
purchase videocassettes at a lower product cost than the traditional buying
arrangements, with a percentage of the net rental revenues shared with the
studios over a contractually determined period of time. As the new business
model results in a greater proportion of rental revenue over a shorter period of
time, Blockbuster has changed its method of amortizing rental inventory in order
to more closely match expenses in proportion with the anticipated revenues to be
generated therefrom.
Pursuant to the new accounting method, the Company records base stock
videocassettes (generally less than five copies per title for each store) at
cost and amortizes a portion of these costs on an accelerated basis over three
months, generally to $8 per unit, with the remaining base stock videocassette
costs amortized on a straight-line basis over 33 months to an estimated $4
salvage value. The cost of non-base stock videocassettes (generally greater than
four copies per title for each store) is amortized on an accelerated basis over
three months to an estimated $4 salvage value. Video games are amortized on an
accelerated basis over a 12 month period to an estimated $10 salvage value.
Revenue sharing payments are expensed when revenues are earned pursuant to the
applicable contractual arrangements.
The new method of accounting has been applied to rental inventory held as of
April 1, 1998. The adoption of the new method of amortization has been accounted
for as a change in accounting estimate effected by a change in accounting
principle. The Company recorded a pre-tax charge of $436.7 million to operating
expenses in the second quarter of 1998. Approximately $424.3 million of the
charge represents an adjustment to the carrying value of the rental tapes due to
the new method of accounting and approximately $12.4 million represents a
write-down of retail inventory.
The Company believes that the new amortization method developed for
Blockbuster's new business model will result in a better matching of revenue and
expense recognition. Under the new model, operating expense attributable to
videocassettes is comprised of revenue sharing payments, which are expensed when
earned, and amortization of product costs. The calculation of the change in
operating expense attributable to videocassettes and games for the twelve months
ended December 31, 1998 would not be meaningful because the method of accounting
applied prior to April 1, 1998 did not contemplate the new business model.
Prior to April 1, 1998, videocassette rental inventory was recorded at cost and
amortized over its estimated economic life. Base stock videocassettes (1 to 4
copies per title for each store) were amortized over 36 months on a
straight-line basis. Non-base stock videocassettes (the fifth and succeeding
copies per title for each store) were amortized over six months on a
straight-line basis. Video game inventory was amortized on a straight-line basis
over a period of 12 to 24 months.
II-41
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
During the second quarter of 1997, Blockbuster shifted its strategic emphasis
from retailing a broad assortment of merchandise to focusing on its core rental
business. Rationalization of the retail product lines such as sell-through
video, confectionery items, literature, music and fashion merchandise allowed
the Company to devote more management time and attention, as well as retail
floor selling space, to its video and rental game business. In addition, as part
of its effort to improve the performance of its operations, Blockbuster adopted
a plan to close consistently underperforming stores primarily located in the
United Kingdom and Australia and to exit the German market. As a result,
Blockbuster recorded a pre-tax charge of $322.8 million which consisted of
operating and general and administrative expenses of approximately $247.5
million, as well as depreciation expense attributable to the write-off of
long-lived assets of $45.9 million and write-offs attributable to international
joint ventures accounted for under the equity method of $29.4 million. As a
result of exiting the music business, approximately $72.6 million of the charge
has been presented as part of discontinued operations. The remaining balance of
the charge consisted principally of $100.8 million for a reduction in the
carrying value of excess merchandise inventories, $69.6 million for the closing
of underperforming stores principally located in international markets, and
$39.3 million recognized as general and administrative expenses, primarily
related to relocation costs incurred in connection with the move of the
Company's employees, corporate offices and data center from Fort Lauderdale,
Florida to Dallas, Texas.
The $69.6 million charge for the closing of underperforming stores is comprised
of a $41.8 million non-cash impairment charge associated with long-lived assets
and a $27.8 million charge for lease exit obligations. These amounts have been
recognized as depreciation expense and general and administrative expense,
respectively. Through December 31, 1998, the Company has paid and charged
approximately $12.8 million against the lease exit obligations.
During the fourth quarter of 1996, Blockbuster adopted a plan to abandon certain
music retail stores, relocate its headquarters from Fort Lauderdale to Dallas
and eliminate third party distributors domestically. As a result of such plan,
Blockbuster recognized a restructuring charge of approximately $88.9 million of
which approximately $38.7 million related to Music retail stores closings which
is included as part of discontinued operations. Of the remaining charge, $25.0
million reflects estimated severance benefits payable to approximately 650
employees who had chosen not to relocate to Dallas, $11.6 million of other costs
related to the disposition of its corporate headquarters and $13.6 million for
eliminating third party distributors.
The Company relocation to Dallas was completed during the second quarter of
1997. Through December 31, 1998, the Company paid and charged approximately
$25.0 million against the severance liability and approximately $11.4 million
against the Fort Lauderdale exit. In addition, as of December 31, 1998,
substantially all activities related to the music retail store closings have
been completed.
II-42
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
5) ACCOUNTS RECEIVABLE
As of December 31, 1998, the Company had an aggregate of $399.6 million
outstanding under revolving receivable securitization programs. Proceeds from
the sale of these receivables were used to reduce outstanding borrowings. The
resulting loss on the sale of receivables was not material to the Company's
financial position and results of operations.
6) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Prerecorded videocassettes .................... $ 381.9 $ 559.2
Videocassette rental inventory ................ 404.1 722.8
Publishing:
Finished goods .......................... 59.7 301.2
Work in process ......................... 6.9 30.3
Materials and supplies .................. 2.5 23.3
Other ......................................... 17.7 20.6
---------- ----------
872.8 1,657.4
Less current portion ..................... 468.7 934.8
---------- ----------
$ 404.1 $ 722.6
---------- ----------
Theatrical and television inventory:
Theatrical and television productions:
Released ........................... $ 1,800.4 $ 1,736.0
Completed, not released ............ 35.9 17.8
In process and other ............... 321.0 341.4
Program rights .......................... 1,246.2 1,150.7
---------- ----------
3,403.5 3,245.9
Less current portion .................... 1,336.8 1,317.9
---------- ----------
$ 2,066.7 $ 1,928.0
---------- ----------
Total Current Inventory ....................... $ 1,805.5 $ 2,252.7
========== ==========
Total Non-Current Inventory ................... $ 2,470.8 $ 2,650.6
========== ==========
</TABLE>
II-43
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
7) INVESTMENTS IN AFFILIATED COMPANIES
The Company accounts for its investments in affiliated companies over which the
Company has significant influence or ownership of more than 20% but less than or
equal to 50%, under the equity method. Such investments principally include but
are not limited to the Company's interest in Comedy Central (50% owned), United
Paramount Network (50%, owned) and United Cinemas International (50% owned).
Investments in affiliates are included as a component of other assets.
The following is a summary of combined financial information which is
based on information provided by the equity investees.
Year Ended December 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
Results of operations:
Revenues ................... $ 1,898.3 $ 2,324.9 $ 2,074.9
Operating income (loss) .... (73.2) (142.5) 7.3
Net loss ................... (115.4) (150.6) (28.2)
At December 31,
---------------------------
1998 1997
---- ----
Financial position:
Current assets................... $740.5 $866.6
Non-current assets............... 781.2 616.7
Current liabilities.............. 694.9 788.1
Non-current liabilities.......... 451.8 366.0
Equity........................... 375.0 329.2
The Company, through the normal course of business, is involved in
transactions with affiliated companies that have not been material in any
of the periods presented.
In 1998, equity in loss of affiliated companies, net of tax, principally
reflects the net operating loss of United Paramount Network ("UPN"), a 50%
interest which was acquired in January 1997, partially offset by the
positive results of Comedy Central. In 1997, the equity loss primarily
reflects the net operating loss of UPN and charges associated with
international network ventures partially offset by earnings from the
Company's half-interest in USA Networks which was sold on October 21,
1997.
II-44
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
8) BANK FINANCING AND DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Notes payable to banks (a) ............................... $ 848.3 $ 3,152.7
6.625% Senior Notes due 1998 (b) ......................... -- 150.0
5.875% Senior Notes * due 2000, net of unamortized
discount of $.2 (1998) and (1997) .................... 149.8 149.8
7.5% Senior Notes * due 2002, net of unamortized
discount of $1.3 (1998) and $1.7 (1997) .............. 248.7 248.3
6.75% Senior Notes due 2003, net of unamortized
discount of $.2 (1998) and (1997) .................... 349.8 349.8
7.75% Senior Notes due 2005, net of unamortized
discount of $5.9 (1998) and $7.1 (1997) .............. 965.0 992.9
7.625% Senior Debentures due 2016, net of unamortized
discount of $1.2 1998 and $1.3 (1997) ................ 198.7 198.7
8.25% Senior Debentures * due 2022, net of unamortized
discount of $2.6 (1998) and $2.7 (1997) .............. 247.4 247.3
7.5% Senior Debentures * due 2023, net of unamortized
discount of $.5 ...................................... 149.5 149.5
9.125% Senior Subordinated Notes * due 1999 (c) .......... -- 150.0
8.75% Senior Subordinated Reset Notes * due 2001 (d) .... -- 100.0
10.25% Senior Subordinated Notes * due 2001 (e) .......... 36.3 200.0
7.0% Senior Subordinated Debentures * due 2003, net of
unamortized discount of $36.0 (1997) (f) ............. -- 195.5
8.0% Merger Debentures due 2006, net of unamortized
discount of $44.1 (1998) and $98.9 (1997) (e) ........ 475.2 971.4
Other Notes .............................................. 20.5 16.6
Obligations under capital leases ......................... 501.4 527.0
---------- ----------
4,190.6 7,799.5
Less current portion ..................................... 377.2 376.5
---------- ----------
$ 3,813.4 $ 7,423.0
========== ==========
</TABLE>
*Issues of Viacom International guaranteed by the Company.
(a) -- Effective March 26, 1997, the Company and Viacom International Inc.
("Viacom International") amended and restated the $6.489 billion and $311
million Credit Agreements and the $1.8 billion Credit Agreement, originally
established in 1994, to provide for credit agreements of $6.4 billion (the
"March 1997 Viacom Credit Agreement") and $100 million (the "March 1997 Viacom
International Credit Agreement," together with the March 1997 Viacom Credit
Agreement, collectively the "March 1997 Credit Agreements"). The March 1997
Credit Agreements increased commitments by $400 million, extended maturities and
reduced pricing.
II-45
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Effective December 23, 1997, the Company permanently reduced its commitments
under the March 1997 Credit Agreements by $1.0 billion.
Certain proceeds from the disposition of Non-Consumer Publishing in November of
1998 were used to reduce borrowings under the March 1997 Credit Agreements.
Effective June 30, 1997, certain financial covenants in the March 1997 Credit
Agreements and the film financing credit agreement were amended to provide the
Company with increased financial flexibility.
The following is a summary description of the March 1997 Credit Agreements as
amended. The description does not purport to be complete and should be read in
conjunction with each of the credit agreements which have been filed as exhibits
and are incorporated by reference herein.
The March 1997 Viacom Credit Agreement is comprised of (i) a $4.7 billion
senior unsecured reducing revolving loan maturing July 1, 2002 and (ii) a
$700 million term loan maturing April 1, 2002. The March 1997 Viacom
International Credit Agreement is comprised of a $100 million term loan
maturing July 1, 2002.
The Company guarantees the March 1997 Viacom International Credit
Agreement and notes and debentures issued by Viacom International. Viacom
International guarantees the March 1997 Viacom Credit Agreement and notes
and debentures issued by the Company.
The Company may prepay the loans and reduce commitments under the March
1997 Credit Agreements in whole or in part at any time.
The March 1997 Credit Agreements contain certain covenants which, among
other things, require that the Company maintain certain financial ratios
and impose on the Company and its subsidiaries certain limitations on
substantial asset sales and mergers with any other company in which the
Company is not the surviving entity.
The March 1997 Credit Agreements contain certain customary events of
default and provide that it is an event of default if NAI fails to own at
least 51% of the outstanding voting stock of the Company.
The interest rate on all loans made under the three facilities is based upon
Citibank, N.A.'s base rate or the London Interbank Offered Rate ("LIBOR") and is
affected by the Company's credit rating. At December 31, 1998, the LIBOR (upon
which the Company's borrowing rate was based) for borrowing periods of one month
and two months were each 5.09%. At December 31, 1997, LIBOR for borrowing
periods of one and two months were 5.72% and 5.75%, respectively.
The Company is required to pay a commitment fee based on the aggregate daily
unborrowed portion of the loan commitments. As of December 31, 1998, the Company
had $4.7 billion of available unborrowed loan commitments. The March 1997 Credit
Agreements do not require compensating balances.
On May 8, 1998, a subsidiary of the Company amended the 364-day film financing
credit agreement, guaranteed by Viacom International and the Company, which
extended the expiration date for one year, reduced pricing and decreased the
available credit by $109 million to $361 million.
II-46
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
(b) -- On February 17, 1998, the Company retired all $150.0 million of its
outstanding 6.625% Senior Notes due 1998.
(c) -- On February 15, 1998, the Company redeemed all $150.0 million of Viacom
International's outstanding 9.125% Senior Subordinated Notes due 1999, at a
redemption price equal to 101.3% of the principal amount.
(d) -- On May 15, 1998, the Company redeemed all $100.0 million of Viacom
International's outstanding 8.75% Senior Subordinated Reset Notes due 2001 at a
redemption price equal to 101% of the principal amount.
(e) -- During December 1998, the Company commenced the unconditional tender
offers to purchase for cash, all of its outstanding 8.0% Merger Debentures due
2006 at a purchase price of 104% of the principal amount, and to purchase Viacom
International's outstanding 10.25% Senior Subordinated Notes due 2001 at a
purchase price of 112.925% of the principal amount. The tender offer for the
8.0% Merger Debentures expired on January 4, 1999. The offer for the 10.25%
Senior Subordinated Notes expired December 30, 1998 and $163.7 million of such
notes were tendered. Through December 31, 1998, $533.8 million of the 8% Merger
Debentures were tendered and classified as part of accrued liabilities as the
settlement date occurred subsequent to year end. In 1999, an additional $307.5
million of the 8.0% Merger Debentures were tendered for a total principal amount
of $841.3 million of notes tendered.
In addition, the Company purchased $21.8 million of the 8.0% Merger Debentures
and $29.0 million of the 7.75% Senior Notes in open market transactions during
1998.
(f) -- On December 30, 1998, the Company redeemed all $231.5 million of Viacom
International's outstanding 7% Senior Subordinated Debentures due 2003 at a
redemption price equal to 100% of the principal amount.
The Company filed a shelf registration statement with the Securities and
Exchange Commission registering debt securities, preferred stock and contingent
value rights of Viacom and guarantees of such debt securities by Viacom
International which may be issued for aggregate gross proceeds of $3.0 billion.
The registration statement was declared effective on May 10, 1995. The net
proceeds from the sale of the offered securities may be used by Viacom to repay,
redeem, repurchase or satisfy its obligations in respect of its outstanding
indebtedness or other securities; to make loans to its subsidiaries; for general
corporate purposes; or for such other purposes as may be specified in the
applicable Prospectus Supplement. The Company filed a post-effective amendment
to this registration statement on November 19, 1996. To date, the Company has
issued $1.55 billion of notes and debentures and has $1.45 billion remaining
availability under the shelf registration statement.
II-47
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Interest costs incurred, interest income and capitalized interest are summarized
below:
Year Ended December 31,
-----------------------------------
1998 1997 1996
Interest Incurred ........... $ 622.3 $ 772.8 $ 823.9
Interest Income ............. 23.4 21.0 33.9
Capitalized Interest ........ -- 1.0 4.5
The Company's scheduled maturities of indebtedness through December 31, 2003,
assuming full utilization of the March 1997 Credit Agreements, as amended, are
$1.2 billion (1999), $1.7 billion (2000), $1.8 billion (2001), $2.0 billion
(2002) and $350.0 million (2003). The Company's maturities of long-term debt
outstanding at December 31, 1998, excluding capital leases, are $327.9 million
(1999), $150.0 million (2000), $36.3 million (2001), $1.1 billion (2002) and
$350.0 million (2003). The Company has classified certain short-term
indebtedness as long-term debt based upon its intent and ability to refinance
such indebtedness on a long-term basis.
9) FINANCIAL INSTRUMENTS
The Company's carrying value of financial instruments approximates fair value,
except for differences with respect to the notes and debentures and certain
differences related to other financial instruments which are not significant.
The carrying value of the senior debt, senior subordinated debt and subordinated
debt is $2.8 billion and the fair value, which is estimated based on quoted
market prices, is approximately $3.0 billion.
The Company enters into foreign currency exchange contracts in order to reduce
its exposure to changes in foreign currency exchange rates that affect the value
of its firm commitments and certain anticipated foreign currency cash flows.
These contracts generally mature within the calendar year. The Company does not
enter into foreign currency contracts for speculative purposes. To date, the
contracts utilized have been purchased options, spots and forward contracts. A
spot or forward contract is an agreement between two parties to exchange a
specified amount of foreign currency, at a specified exchange rate on a
specified date. An option contract provides the right, but not the obligation,
to buy or sell currency at a fixed exchange rate on a future date. In 1998 the
foreign exchange contracts have principally been used to hedge the British
Pound, the Australian Dollar, the Japanese Yen, the Canadian Dollar, the
Singapore Dollar, the European Union's common currency (the "Euro") and the
European Currency Unit/British Pound relationship. At December 31, 1998, the
Company had outstanding contracts with a notional value of approximately $4.3
million which expire in 1999. Realized gains and losses on contracts that hedge
anticipated future cash flows are recognized in "other items, net" and were not
material in each of the periods. Option premiums are expensed at the inception
of the contract. Deferred gains and losses on foreign currency exchange
contracts as of December 31, 1998 were not material.
II-48
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
The Company continually monitors its positions with, and credit quality of, the
financial institutions which are counterparties to its financial instruments.
The Company is exposed to credit loss in the event of nonperformance by the
counterparties to the agreements. However, the Company does not anticipate
nonperformance by the counterparties. The Company's receivables do not represent
significant concentrations of credit risk at December 31, 1998, due to the wide
variety of customers, markets and geographic areas to which the Company's
products and services are sold.
10) SHAREHOLDERS' EQUITY
On February 25, 1999, the Company announced a 2-for-1 common stock split in the
form of a dividend with a record date of March 15, 1999 and a distribution date
of March 31, 1999. An amount equal to the par value of the shares issued has
been transferred from additional paid-in capital to the common stock account.
All common shares and per-share amounts have been adjusted to reflect the stock
split for all periods presented.
On December 2, 1998, as part of its repurchase program described below, the
Company repurchased 12 million shares of its convertible preferred stock, par
value $.01 per share, from Bell Atlantic Corporation for $564 million in cash.
On January 5, 1999, the Company repurchased the remaining 12 million shares of
its convertible preferred stock from Bell Atlantic Corporation for $612 million
in cash. The preferred stock had a cumulative cash dividend of $60 million per
year and was convertible into approximately 34.3 million shares of the Company's
Class B common stock.
On August 31, 1998, the Company initiated a repurchase program to acquire one or
more classes of the Company's equity securities. Through December 31, 1998, the
Company had repurchased 12,000 shares of Class A Common Stock, 26,190,200 shares
of Class B Common Stock, 5,502,000 Viacom Five-Year Warrants, expiring on July
7, 1999, and 12 million shares of its convertible preferred stock for
approximately $1.4 billion in the aggregate. On February 10, 1999, the program
was completed and the Company had repurchased a total of 12,000 shares of Class
A Common Stock 26,255,600 shares of Class B Common Stock, 5,546,500 Viacom
Five-Year warrants, expiring on July 7, 1999 and 24 million shares of its
convertible preferred stock. The total repurchase program approximated $2.0
billion. The cost of the acquired treasury stock has been reflected separately
as a reduction to shareholders' equity. The acquired warrants have been canceled
and the cost has been reflected as a reduction to additional paid-in capital.
At December 31, 1998 and 1997, respectively, there were 6,090,822 and 11,522,695
outstanding Viacom Five-Year Warrants, expiring July 7, 1999 and at December 31,
1996 there were 30,576,562 outstanding Viacom Three-Year Warrants, which expired
July 7, 1997. The decrease in the outstanding Viacom Five-Year Warrants is
attributable to the 1998 stock repurchase program.
II-49
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
During 1997, the Company completed its joint purchase program initially
established in September 1996 with NAI, for each to acquire up to $250 million,
or $500 million in total, of the Company's Class A Common Stock, Class B Common
Stock, and, as to the Company, Viacom Warrants. The Company repurchased
1,319,400 shares of Viacom Inc. Class A Common Stock, 11,632,600 shares of
Viacom Inc. Class B Common Stock and 6,824,590 Viacom Five-Year Warrants,
expiring on July 7, 1999, for approximately $250 million in the aggregate. The
cost of the acquired treasury stock has been reflected separately as a reduction
to shareholders' equity. The cost of the warrants has been reflected as a
reduction to additional paid-in-capital and such warrants have been cancelled.
As of December 31, 1997, NAI has separately acquired 2,564,400 shares of Viacom
Inc. Class A Common Stock and 11,204,000 shares of Viacom Inc. Class B Common
Stock pursuant to the joint purchase program for approximately $250 million,
raising its ownership to approximately 67% of Viacom Inc. Class A Common Stock
and approximately 28% of Class A and Class B Common Stock on a combined basis.
Long-Term Incentive Plans - The purpose of the Company's 1989, 1994 and 1997
Long-Term Incentive Plans (the "Plans") is to benefit and advance the interests
of the Company by rewarding certain key employees for their contributions to the
financial success of the Company and thereby motivating them to continue to make
such contributions in the future. The Plans provide for fixed grants of
equity-based interests pursuant to awards of phantom shares, stock options,
stock appreciation rights, restricted shares or other equity-based interests
("Awards"), and for subsequent payments of cash with respect to phantom shares
or stock appreciation rights based, subject to certain limits, on their
appreciation in value over stated periods of time. The stock options generally
vest over a four to six year period from the date of grant and expire 10 years
after the date of grant.
The stock options available for future grant are as follows:
December 31, 1996 ................... 40,701,682
December 31, 1997 ................... 26,753,956
December 31, 1998 ................... 14,849,484
The Company has adopted the disclosure-only provisions of SFAS 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). In accordance with the provisions of
SFAS 123, the Company applies APB 25 "Accounting for Stock Issued to Employees"
and related interpretations in accounting for the Plans and accordingly, does
not recognize compensation expense for its stock option plans because the
Company typically does not issue options at exercise prices below the market
value at date of grant. Had compensation expense for its stock option plans been
determined based upon the fair value at the grant date for awards consistent
with the methodology prescribed by SFAS 123, the Company's consolidated pre-tax
income would have decreased by $67.4 million ($40.5 million after tax or $.06
per basic and diluted common share), $36.3 million ($22.2 million after tax or
$.03 per basic and diluted common share) and $18.3 million ($11.0 million after
tax or $.02 per basic and diluted common share) in 1998, 1997 and 1996,
respectively. These pro forma effects may not be representative of future
amounts since the estimated fair value of stock options on the date of grant is
amortized to expense over the vesting period, and additional options may be
granted in future years.
II-50
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
1998 1997 1996
---- ---- ----
Expected dividend yield(a) ........ -- -- --
Expected stock price volatility ... 32.76% 31.74% 32.50%
Risk-free interest rate ........... 5.43% 6.04% 6.19%
Expected life of options (years) .. 6.0 6.0 6.0
(a) The Company has not declared any cash dividends on its common
stock for any of the periods presented and has no present
intention of so doing.
The weighted-average fair value of each option as of the grant date was $12.97,
$6.58 and $8.14 in 1998, 1997 and 1996, respectively.
The following table summarizes the Company's stock option activity under the
various plans (all options and prices reflect the stock split):
Options Weighted-Average
Outstanding Exercise Price
----------- --------------
Balance at December 31, 1995 ......... 37,136,642 $15.35
-----------
Granted ............................ 12,527,600 18.75
Exercised .......................... (7,677,298) 15.18
Canceled ........................... (2,695,930) 18.78
-----------
Balance at December 31, 1996 ......... 39,291,014 16.23
-----------
Granted ............................ 18,406,000 15.34
Exercised .......................... (5,467,748) 14.40
Canceled ........................... (7,012,692) 18.24
-----------
Balance at December 31, 1997 ......... 45,216,574 15.78
-----------
Granted ............................ 13,576,420 30.53
Exercised .......................... (12,077,298) 16.16
Canceled ........................... (1,802,390) 16.97
-----------
Balance at December 31, 1998 ......... 44,913,306 20.09
===========
II-51
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
The following table summarizes information concerning currently outstanding and
exercisable stock options of the Company at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------------------------------- ------------------------------
Remaining
Range of Contractual Weighted-Average Weighted-Average
Exercise Prices Options Life (Years) Exercise Price Options Exercise Price
- --------------- ------- ------------ -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$10 to $15 1,017,994 3.4 $13.43 847,994 $13.20
15 to 20 27,705,974 7.7 16.49 5,906,282 17.66
20 to 25 1,304,000 6.8 22.55 809,998 22.72
25 to 30 759,178 5.0 27.08 700,868 27.23
30 to 35 13,498,420 9.6 30.59 -- --
3 to 25(a) 359,384(a) 4.2 14.29 359,384 14.29
15 to 30(b) 268,356(b) 4.0 23.51 268,356 23.51
---------- ---------
44,913,306 8,892,882
========== =========
</TABLE>
(a) Represents information for options assumed with the merger of
Blockbuster.
(b) Represents information for options assumed with the merger of
Paramount.
Shares issuable under exercisable stock options:
December 31, 1996.................................... 22,486,440
December 31, 1997.................................... 14,795,698
December 31, 1998.................................... 8,892,882
The Company has reserved a total of 85,694 shares of Viacom Inc. Class A Common
Stock and 57,033,736 shares of Viacom Inc. Class B Common Stock principally for
exercise of stock options and warrants.
Spelling Stock Option Plans - Spelling currently has stock option plans under
which both incentive and nonqualified stock options have been granted to certain
key employees, consultants and directors. Options have generally been granted
with an exercise price equal to the fair market value of the underlying Common
Stock on the date of grant, although nonqualified options may be granted with an
exercise price not less than 50% of such fair market value. Each option is
granted subject to various terms and conditions established on the date of
grant, including vesting periods and expiration dates. The options typically
become exercisable at the rate of 20% or 25% annually, beginning one year after
the date of grant. Options expire no later than 10 years from their date of
grant.
II-52
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
The Spelling stock options available for future grant are as follows:
December 31, 1996 ........................ 5,094,251(a)
December 31, 1997 ........................ 3,030,838
December 31, 1998 ........................ 2,867,963
(a) Includes 1,360,866 shares available for grant under a plan which
expired on April 13, 1997.
The weighted average fair value of each option as of the grant date was $2.91,
$2.65 and $2.66 for 1998, 1997 and 1996, respectively. The fair value of each
Spelling option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
1998 1997 1996
---- ---- ----
Expected dividend yield(a) -- -- --
Expected stock price volatility 34.30% 30.91% 28.45%
Risk-free interest rate 4.91% 5.75% 6.60%
Expected life of options (years) 6.2 5.2 4.8
(a) During 1998, 1997 and 1996, Spelling did not declare any cash
dividends on its common stock.
The following table summarizes Spelling's stock option activity:
Options Weighted-Average
Outstanding Exercise Price
----------- --------------
Balance at December 31, 1995 ........ 5,759,218 $ 7.72
----------
Granted ........................... 3,750,010 7.13
Exercised ......................... (841,943) 4.91
Canceled .......................... (688,967) 7.02
----------
Balance at December 31, 1996 ........ 7,978,318 7.80
----------
Granted ........................... 1,171,000 6.90
Exercised ......................... (362,008) 6.29
Canceled .......................... (588,519) 8.90
----------
Balance at December 31, 1997 ........ 8,198,791 7.66
----------
Granted ........................... 1,287,500 6.76
Exercised ......................... (671,279) 6.15
Canceled .......................... (1,187,839) 8.06
----------
Balance at December 31, 1998 ........ 7,627,173 7.58
==========
II-53
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
The following table summarizes Spelling's information concerning currently
outstanding and exercisable stock options at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------------------------------- -----------------------------
Remaining
Range of Contractual Weighted-Average Weighted-Average
Exercise Prices Options Life (Years) Exercise Price Options Exercise Price
- --------------- ------- ------------ -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$5.25 to $ 5.75 25,834 7.27 $ 5.69 8,959 $ 5.56
6.00 to 7.75 5,942,717 7.48 6.83 2,309,842 6.61
7.88 to 9.88 469,622 5.66 9.11 417,122 9.14
10.00 to 11.78 1,189,000 5.86 10.75 1,179,000 10.75
--------- ---- ----- --------- ------
$5.25 to $11.78 7,627,173 7.12 $ 7.58 3,914,923 $ 8.12
========= ==== ====== ========= ======
</TABLE>
Shares issuable under exercisable stock options:
December 31, 1996.................................... 3,079,436
December 31, 1997.................................... 3,813,349
December 31, 1998.................................... 3,914,923
Options related to employees of Virgin and included in the tables above are
875,010 shares granted for the year ended December 31, 1996. Also included are
120,276, 133,582 and 775,220 shares exercised, and 615,060, 184,269 and 149,921
shares terminated for the years ended December 31, 1998, 1997 and 1996,
respectively.
11) INCOME TAXES
Earnings from continuing operations before income taxes are attributable to the
following jurisdictions:
Year Ended December 31,
--------------------------------------
1998 1997 1996
---- ---- ----
United States ........... $ 74.1 $ 910.4 $ 152.6
Foreign ................. 63.2 268.1 257.5
------- -------- -------
Total ................... $ 137.3 $1,178.5 $ 410.1
======= ======== =======
II-54
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Components of the provision for income taxes on earnings from continuing
operations before income taxes are as follows:
Year Ended December 31,
----------------------------------------
1998 1997 1996
---- ---- ----
Current:
Federal ....................... $ 151.0 $ 370.0 $ 155.9
State and local ............... 34.9 115.1 27.7
Foreign ....................... 50.9 24.5 76.6
--------- --------- ---------
236.8 509.6 260.2
Deferred ........................ (98.1) 136.8 (16.9)
--------- --------- ---------
$ 138.7 $ 646.4 $ 243.3
========= ========= =========
The earnings (loss) of affiliated companies accounted for under the equity
method are shown net of tax on the Company's Statements of Operations. The tax
provision (benefit) relating to earnings (loss) from equity investments in
1998, 1997 and 1996 are ($24.0) million, ($29.0) million and $14.9 million,
respectively, which represents an effective tax rate of 36.7%, 15.1% and 762.1%,
respectively.
The difference between the effective tax rates and the statutory U.S. federal
tax rate of 35% is principally due to the effect of non-deductible goodwill
amortization, state and local taxes and foreign losses for which no benefit was
provided. Excluding the non-deductible amortization of intangibles, the annual
effective tax rate on earnings from continuing operations before income taxes
would have been 31.8%, 44.1% and 35.7% for 1998, 1997 and 1996, respectively.
See Note 3 for tax benefits relating to the discontinued operations. In addition
to the amounts reflected in the table above, $55.1 million and $7.8 million of
income tax benefit in 1998 and 1997, respectively, was recorded as a component
of shareholders' equity as a result of exercised stock options.
A reconciliation of the statutory U.S. federal tax rate to the Company's
effective tax rate on earnings from continuing operations before income taxes is
summarized as follows:
Year Ended December 31,
-------------------------------
1998 1997 1996
---- ---- ----
Statutory U.S. federal tax rate ......... 35.0% 35.0% 35.0%
State and local taxes, net
of federal tax benefit ................ 5.7 5.9 2.3
Effect of foreign operations ............ (35.5) (0.6) (13.0)
Amortization of intangibles ............. 86.3 9.7 27.1
Divestiture tax versus book ............. (.5) -- 1.0
Other, net .............................. 10.0 4.9 6.9
----- ---- ----
Effective tax rate on earnings from
continuing operations before
income taxes .......................... 101.0% 54.9% 59.3%
===== ==== ====
II-55
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
The following is a summary of the components of the deferred tax accounts:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997
---- ----
<S> <C> <C>
Current deferred tax assets and (liabilities):
Recognition of revenue ......................................... $ 103.0 $ 76.7
Sales return and allowances .................................... 29.9 91.5
Publishing costs ............................................... 15.2 15.6
Employee compensation and other payroll related expenses ....... 23.7 48.0
Other differences between tax and financial statement values.... 7.1 4.5
------- -------
Gross current deferred net tax assets ..................... 178.9 236.3
------- -------
Noncurrent deferred tax assets and (liabilities):
Depreciation/amortization of fixed assets and intangibles ...... 45.0 (179.5)
Reserves including restructuring and relocation charges ........ 260.3 296.7
Acquired net operating loss and tax credit carryforwards ....... 60.9 82.1
Amortization of discount on 8% Merger Debentures ............... 60.4 61.3
Other differences between tax and financial statement values.... 26.9 95.3
------- -------
Gross non-current deferred net tax assets ................... 453.5 355.9
------- -------
Valuation allowance ............................................ (88.3) (106.8)
------- -------
Total net deferred tax assets (liabilities) .............. $ 544.1 $ 485.4
======= =======
</TABLE>
As of December 31, 1998 and December 31, 1997, the Company had total deferred
tax assets of $632.4 million and $771.7 million, respectively, and total
deferred tax liabilities of $179.5 million as of December 31, 1997. There were
no deferred tax liabilities as of December 31, 1998.
As of December 31, 1998, the Company had net operating loss carryforwards of
approximately $173.7 million which expire in various years from 1999 through
2012.
The 1998 and 1997 net deferred tax assets are reduced by a valuation allowance
of $88.3 million and $106.8 million, respectively, principally relating to tax
benefits of net operating losses which are not expected to be recognized as a
result of certain limitations applied where there is a change of ownership.
II-56
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
The Company's share of the undistributed earnings of foreign subsidiaries not
included in its consolidated federal income tax return that could be subject to
additional income taxes if remitted, was approximately $1.5 billion at December
31, 1998 and December 31, 1997. No provision has been recorded for the U.S. or
foreign taxes that could result from the remittance of such undistributed
earnings since the Company intends to reinvest these earnings outside the United
States indefinitely and it is not practicable to estimate the amount of such
taxes.
As of December 31, 1998, the Company owns approximately 80% of Spelling's
outstanding common stock and consolidates Spelling's results for tax purposes.
12) PENSION PLANS, OTHER POSTRETIREMENT BENEFITS AND POSTEMPLOYMENT BENEFITS
The Company and certain of its subsidiaries have non-contributory pension plans
covering specific groups of employees. Effective January 1, 1996, the pension
plans of Paramount were merged with the Company's pension plans. The Pension
Plan for Employees of PVI Transmission Inc. and Paramount Distribution Inc. was
merged with and into the Viacom Pension Plan effective December 31, 1996. The
benefits for these plans are based primarily on an employee's years of service
and pay near retirement. Participant employees are vested in the plans after
five years of service. The Company's policy for all pension plans is to fund
amounts in accordance with the Employee Retirement Income Security Act of 1974.
Plan assets consist principally of common stocks, marketable bonds and U.S.
government securities. The Company's Class B Common Stock represents
approximately 15.8% and 10% of the plan assets' fair value at December 31, 1998
and 1997, respectively.
The Company adopted SFSA 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits - an amendment of FASB Statements No. 87, 88 and 106"
in 1998.
II-57
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
The following table sets forth the change in benefit obligation for the
Company's benefit plans:
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Benefits
December 31, December 31,
----------------- ---------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation, beginning of year ........ $ 785.3 $ 667.8 $103.6 $ 98.8
Service cost ................................. 36.8 32.1 1.0 1.0
Interest cost ................................ 57.8 54.1 6.5 7.4
Benefits paid ................................ (39.3) (38.8) (8.8) (9.2)
Actuarial (gain) loss ........................ 66.8 70.4 (2.9) 4.5
Curtailments/Divestitures..................... (61.4) -- (46.9) --
Participant contributions .................... -- -- 1.1 1.1
Amendments ................................... -- .8 -- --
Cumulative translation adjustments ........... (1.8) (1.1) -- --
------- ------- ------ -------
Benefit obligation, end of year .............. $ 844.2 $ 785.3 $ 53.6 $ 103.6
======= ======= ====== =======
<CAPTION>
The following table sets forth the change in plan assets for the Company's
benefit plans:
Postretirement
Pension Benefits Benefits
December 31, December 31,
----------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Change in plan assets:
Fair value of plan assets, beginning of year.. $ 697.3 $ 606.2 $ -- $ --
Actual return on plan assets ................. 146.4 123.6 -- --
Employer contributions ....................... 7.3 7.9 7.7 8.1
Benefits paid ................................ (39.3) (38.8) (8.8) (9.2)
Divestitures ................................. (21.7) -- -- --
Participant contributions .................... -- -- 1.1 1.1
Cumulative translation adjustments ........... (3.4) (1.6) -- --
------- ------- ------ -------
Fair value of plan assets, end of year ....... $ 786.6 $ 697.3 $ -- $ --
======= ======= ====== =======
</TABLE>
The projected benefit obligations and accumulated benefit obligations for the
pension plans with accumulated benefit obligations in excess of plan assets were
$99.6 million and $88.4 million for 1998, and $85.7 million and $75.1 million
for 1997.
The accrued pension and postretirement costs recognized in the Company's
consolidated balance sheets are computed as follows:
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Benefits
December 31, December 31,
----------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Funded status ................................ $ (57.6) $ (88.0) $(53.6) $(103.6)
------- ------- ------ -------
Unrecognized actuarial gain .................. (97.5) (71.5) (16.2) (30.1)
Unrecognized prior service cost (benefit) .... 12.5 15.1 (5.4) (25.1)
Unrecognized asset at transition ............. (2.1) (4.3) -- --
------- ------- ------ -------
Accrued pension liability, net................ $(144.7) $(148.7) $(75.2) $(158.8)
======= ======= ====== =======
Amounts recognized in the Consolidated Balance Sheets:
Accrued pension liability, net .......... $(161.1) $(163.3) $(75.2) $(158.8)
Prepaid benefits cost ................... 2.3 3.6 -- --
Intangibles ............................. 3.9 2.6 -- --
Accumulated other comprehensive loss .... 10.2 8.4 -- --
------- ------- ------ -------
Net liability recognized ..................... $(144.7) $(148.7) $ (75.2) $(158.8)
======= ======= ======= =======
</TABLE>
II-58
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Net periodic cost for the Company's pension and postretirement benefit plans
consists of the following:
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Benefits
December 31, December 31,
----------------------------- -----------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic cost:
Service cost .......................... $ 36.8 $ 32.1 $ 31.1 $ 1.0 $ 1.0 $ 1.0
Interest cost ......................... 57.8 54.1 50.6 6.5 7.4 8.1
Expected return on plan assets ........ (64.4) (56.0) (48.8) -- -- --
Amortization of prior service cost .... 2.6 1.6 1.7 (3.0) (3.2) (3.2)
Amortization of transition obligation . (2.2) (.7) (.5) -- -- --
Recognized actuarial (gain) loss ...... 3.7 3.3 (.2) (2.9) (3.1) (1.3)
Curtailment (gain) .................... (31.4) -- -- (77.5) -- --
------- ------- ------- ------- ------- -------
Net periodic cost ..................... $ 2.9 $ 34.4 $ 33.9 $ (75.9) $ 2.1 $ 4.6
======= ======= ======= ======= ======= =======
</TABLE>
The following assumptions were used in accounting for the pension plans:
1998 1997 1996
---- ---- ----
Discount rate .............................. 6.75% 7.25% 7.75%
Expected return on plan assets ............. 9.5% 9.5% 9.5%
Rate of increase in future compensation .... 5.0% 5.0% 5.0%
The following assumptions were used in accounting for postretirement benefits:
1998 1997 1996
---- ---- ----
Projected health care cost trend rate .......... 6.0% 7.0% 9.0%
Ultimate trend rate ............................ 5.5% 5.5% 5.5%
Year ultimate trend rate is achieved ........... 1999 1999 1999
Discount rate .................................. 6.75% 7.25% 7.75%
Assumed health care cost trend rates could have a significant effect on the
amounts reported for the postretirement health care plan. A one percentage point
change in assumed health care cost trend rates would have the following effects:
One Percentage One Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest
cost components............................. $ .6 $ (.5)
Effect on the postretirement benefit
obligation.................................. $ 4.4 $ (3.8)
As a result of the sale of Non-Consumer Publishing, the Company realized
curtailment gains of $31.4 million related to pension benefits and $77.5 million
related to postretirement benefits, which have been included in the net gain on
disposition in 1998.
The Company contributes to multi-employer plans which provide pension and health
and welfare benefits to certain employees under collective bargaining
agreements. The contributions to these plans were $35.4 million (1998) and $52.5
million (1997).
In addition, the Company sponsors a health and welfare plan which provides
certain postretirement health care and life insurance benefits to retired
employees and their covered dependents who are eligible for these benefits if
they meet certain age and service requirements. The plan is contributory and
contains cost-sharing features such as deductibles and coinsurance which are
adjusted annually. The plan is not funded and the Company funds these benefits
as claims are paid.
II-59
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
SFAS 112, "Employers' Accounting For Postemployment Benefits" does not have a
significant effect on the Company's consolidated financial position or results
of operations.
In addition, the Company has defined contribution plans for the benefit of
substantially all employees meeting certain eligibility requirements. Employer
contributions to such plans were $21.1 million, $19.2 million and $24.4 million
for the years ended December 31, 1998, 1997 and 1996.
13) COMMITMENTS AND CONTINGENCIES
The Company has long-term noncancelable lease commitments for retail and office
space and equipment, transponders, studio facilities and vehicles.
At December 31, 1998, minimum rental payments under noncancelable leases are as
follows:
Leases
------------------------
Operating Capital
1999 ....................................... $ 553.2 $ 120.4
2000 ....................................... 516.9 106.8
2001 ....................................... 441.6 101.1
2002 ....................................... 347.7 90.7
2003 ....................................... 314.4 69.4
2004 and thereafter ........................ 1,630.3 164.3
---------- --------
Total minimum lease payments ............... $ 3,804.1 652.7
==========
Less amounts representing interest ......... (151.3)
--------
Present value of net minimum payments ...... $ 501.4
========
II-60
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
The Company has entered into capital leases for satellite transponders with
future minimum commitments commencing in future periods. Future minimum capital
lease payments have not been reduced by future minimum sublease rentals of $40.0
million. Rent expense amounted to $533.8 million (1998), $523.1 million (1997)
and $392.3 million (1996).
The commitments of the Company for program license fees, which are not reflected
in the balance sheet as of December 31, 1998 and are estimated to aggregate
approximately $1.2 billion, excluding intersegment commitments of approximately
$738.9 million, principally reflect Showtime Networks Inc.'s ("SNI's")
commitments of approximately $1.1 billion for the acquisition of programming
rights and the production of original programming. This estimate is based upon a
number of factors. A majority of such fees are payable over several years, as
part of normal programming expenditures of SNI. These commitments to acquire
programming rights are contingent upon delivery of motion pictures which are not
yet available for premium television exhibition and, in many cases, have not yet
been produced.
There are various lawsuits and claims pending against the Company. Management
believes that any ultimate liability resulting from those actions or claims will
not have a material adverse effect on the Company's results of operations,
financial position or liquidity.
Certain subsidiaries and affiliates of the Company from time to time receive
claims from federal and state environmental regulatory agencies and other
entities asserting that they are or may be liable for environmental cleanup
costs and related damages, principally relating to discontinued operations
conducted by its former mining and manufacturing businesses (acquired as part of
the mergers with Paramount and Blockbuster). The Company has recorded a
liability reflecting its best estimate of environmental exposure. Such liability
was not discounted or reduced by potential insurance recoveries and reflects
management's estimate of cost sharing at multiparty sites. The estimated
liability was calculated based upon currently available facts, existing
technology and presently enacted laws and regulations. On the basis of its
experience and the information currently available to it, the Company believes
that the claims it has received will not have a material adverse effect on its
results of operations, financial position or liquidity.
II-61
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
14) OPERATING SEGMENTS
The Company's reportable operating segments have been determined in accordance
with the Company's internal management structure, which is organized based on
products and services. See Note 1 for descriptive information about the
Company's business segments and the summary of significant accounting policies.
The Company evaluates performance based on many factors, one of the primary
measures is earnings before interest, taxes, depreciation and amortization
("EBITDA").
The following tables set forth the Company's financial results by operating
segments. The prior years' results have also been reclassified to conform to the
new presentation. Intersegment revenues, recorded at fair market value, of the
Entertainment segment for 1998, 1997 and 1996 were $156.7 million, $114.0
million and $45.9 million, respectively. All other intersegment revenues were
immaterial for any of the periods presented.
<TABLE>
<CAPTION>
Year Ended or at December 31,
----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Networks ................................. $ 2,607.9 $ 2,262.8 $ 1,999.5
Entertainment ............................ 4,757.8 4,305.9 3,897.9
Video .................................... 3,893.4 3,313.6 2,942.3
Parks .................................... 421.2 367.3 361.9
Publishing ............................... 564.6 556.6 547.6
Online ................................... 13.7 10.4 --
Intercompany ............................. (162.5) (131.7) (65.3)
----------- ----------- ----------
Total revenues .................... $ 12,096.1 $ 10,684.9 $ 9,683.9
=========== =========== ==========
EBITDA:
Networks ................................. $ 851.3 $ 729.4 $ 619.3
Entertainment ............................ 640.5 514.5 593.7
Video .................................... 39.9 221.6 635.7
Parks .................................... 101.1 88.9 87.9
Publishing ............................... 71.2 77.9 77.8
Online ................................... (3.5) 2.3 --
----------- ----------- ----------
Segment total ..................... 1,700.5 1,634.6 2,014.4
Reconciliation to operating income:
Corporate expenses ....................... (171.6) (176.6) (162.9)
Depreciation and amortization ............ (777.3) (772.6) (654.3)
----------- ----------- ----------
Total operating income ............ $ 751.6 $ 685.4 $ 1,197.2
=========== =========== ==========
Depreciation and amortization:
Networks ................................. $ 107.0 $ 93.8 $ 86.8
Entertainment ............................ 192.5 171.5 165.4
Video .................................... 382.1 418.4 326.3
Parks .................................... 51.2 46.5 44.2
Publishing ............................... 18.0 17.5 17.7
Online ................................... 4.0 -- --
----------- ----------- ----------
Segment total ........................ 754.8 747.7 640.4
Corporate ................................ 22.5 24.9 13.9
----------- ----------- ----------
Total depreciation and amortization .. $ 777.3 $ 772.6 $ 654.3
=========== =========== ==========
</TABLE>
II-62
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
Year Ended or at December 31,
---------------------------------
1998 1997 1996
---- ---- ----
Total assets:
Networks .................................. $ 2,770.2 $ 2,692.8 $ 2,925.3
Entertainment ............................. 9,361.6 9,342.9 9,224.4
Video ..................................... 8,142.6 8,965.4 9,273.7
Parks ..................................... 914.8 897.2 883.1
Publishing ................................ 962.4 5,439.4 5,405.1
Online .................................... 5.8 1.4 --
--------- --------- ---------
Segment total ......................... 22,157.4 27,339.1 27,711.6
Corporate ................................. 1,455.7 949.6 833.0
Net assets of discontinued operations ..... -- -- 289.4
--------- --------- ---------
Total assets .......................... $23,613.1 $28,288.7 $28,834.0
========= ========= =========
Capital expenditures:
Networks .................................. $ 89.8 $ 67.9 $ 86.4
Entertainment ............................. 174.3 66.7 67.6
Video ..................................... 196.0 294.2 304.3
Parks ..................................... 61.0 35.0 54.2
Publishing ................................ 37.5 36.1 37.3
Online .................................... -- -- --
--------- --------- ---------
Segment total ......................... 558.6 499.9 549.8
Corporate ................................. 44.9 30.4 48.8
--------- --------- ---------
Total capital expenditures ............ $ 603.5 $ 530.3 $ 598.6
========= ========= =========
Information regarding the Company's operations by geographic area is as follows:
Year Ended or at December 31,
---------------------------------
1998 1997 1996
---- ---- ----
Revenues(a):
United States ......................... $ 9,268.3 $ 8,227.9 $ 7,428.2
International ......................... 2,827.8 2,457.0 2,255.7
--------- --------- ---------
Total revenues ............... $12,096.1 $10,684.9 $ 9,683.9
========= ========= =========
Long-lived assets(b):
United States ......................... $16,857.0 $20,914.3 $21,570.7
International ......................... 1,326.9 1,421.6 1,223.9
--------- --------- ---------
Total long-lived assets ...... $18,183.9 $22,335.9 $22,794.6
========= ========= =========
Intercompany transfers between geographic areas are not significant.
(a) Revenue classification is based on location of customer.
(b) Includes all non-current assets.
II-63
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
15) QUARTERLY FINANCIAL DATA (unaudited):
<TABLE>
<CAPTION>
First Second Third Fourth
1998(1) Quarter Quarter Quarter Quarter Total Year
- ------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Revenues ....................................... $ 2,685.6 $ 2,779.3 $ 3,288.8 $ 3,342.4 $ 12,096.1
Operating income (loss)(2) ..................... $ 273.4 $ (225.4) $ 407.3 $ 296.3 $ 751.6
Earnings (loss) from continuing operations ..... $ 47.6 $ (267.3) $ 86.4 $ 89.8 $ (43.5)
Net earnings (loss)(3)(4)(5) ................... $ 1.4 $ (280.7) $ 138.4 $ 18.5 $ (122.4)
Net earnings (loss) attributable to common stock $ (13.6) $ (295.7) $ 123.4 $ 36.3 $ (149.6)
Basic earnings (loss) per common share(6):
Earnings (loss) from continuing operations .. $ .05 $ (.40) $ .10 $ .15 $ (.10)
Net earnings (loss) ......................... $ (.02) $ (.41) $ .17 $ .05 $ (.21)
Diluted earnings (loss) per common share(6):
Earnings (loss) from continuing operations .. $ .05 $ (.40) $ .10 $ .15 $ (.10)
Net earnings (loss) ......................... $ (.02) $ (.41) $ .17 $ .05 $ (.21)
Weighted average number of common shares(6):
Basic ....................................... 710.5 713.2 714.7 696.7 708.7
Diluted ..................................... 718.0 713.2 725.5 706.4 708.7
<CAPTION>
1997(1)
- -------
<S> <C> <C> <C> <C> <C>
Revenues ....................................... $ 2,495.7 $ 2,476.1 $ 2,806.4 $ 2,906.7 $ 10,684.9
Operating income (loss)(7) ..................... $ 246.6 $ (65.9) $ 287.3 $ 217.4 $ 685.4
Earnings (loss) from continuing operations(8) .. $ 11.2 $ (166.6) $ (46.0) $ 574.9 $ 373.5
Net earnings (loss)(9) ......................... $ (18.7) $ (195.0) $ 434.3 $ 573.0 $ 793.6
Net earnings (loss) attributable to common stock $ (33.7) $ (210.0) $ 419.3 $ 558.0 $ 733.6
Basic earnings (loss) per common share(6):
Earnings (loss) from continuing operations .. $ (.01) $ (.26) $ (.09) $ .79 $ .44
Net earnings (loss) ......................... $ (.05) $ (.30) $ .59 $ .79 $ 1.04
Diluted earnings (loss) per common share(6):
Earnings (loss) from continuing operations(10) $ (.01) $ (.26) $ (.09) $ .77 $ .44
Net earnings (loss)(10) ..................... $ (.05) $ (.30) $ .59 $ .77 $ 1.04
Weighted average number of common shares(6):
Basic ....................................... 705.0 705.3 705.9 706.8 705.8
Diluted(10) ................................. 705.0 705.3 705.9 744.5 708.5
</TABLE>
The timing of the Company's results of operations is affected by the typical
timing of major motion picture releases, the summer operation of the theme
parks, the positive effect of the holiday season on advertising and video store
revenues, and the impact of the broadcasting television season on television
production.
(1) The first three quarters of 1998 and all four quarters of 1997 results
have been restated for the effect of discontinued operations (See Note 3).
(2) The second quarter of 1998 included a $436.7 million charge for
Blockbuster representing the adjustment to the carrying value of the
library tapes due to a change in Blockbuster's business model and a
revaluation of retail inventory (See Note 4).
(3) The third quarter of 1998 included a loss of $138.5 million, net of tax,
resulting from the sale of the Company's music retail stores, partially
offset by a tax benefit of $134.0 million related to the sale of Virgin.
(4) The fourth quarter of 1998 included a gain of $65.5 million, net of tax,
resulting from the sale of Non-Consumer Publishing.
(5) The fourth quarter of 1998 included an extraordinary loss of $74.7
million, net of tax, for the early extinguishment of debt (See Note 17).
(6) All prior quarters' earnings per common share and weighted average number
of common shares have been adjusted to reflect the effect of the 2-for-1
stock split.
(7) The second quarter of 1997 included a $220.8 million charge for
Blockbuster representing the reduction in carrying value of excess retail
inventory and costs associated with closing underperforming stores
principally located in international markets (See Note 4).
(8) The fourth quarter of 1997 included a gain of $640.5 million, net of tax,
resulting from the sale of USA Networks.
(9) The third quarter of 1997 included a gain of $416.4 million, net of tax,
resulting from the sale of Viacom Radio Stations.
(10) For the fourth quarter of 1997, the assumed conversion of preferred stock
had a dilutive effect on earnings per share, therefore, the sum of the
quarterly earnings per share will not equal full year earnings per share.
II-64
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
16) OTHER ITEMS, NET
The Company continued the strategy of focusing on its core businesses and in
December 1998, announced plans to close the Viacom Entertainment Store in
Chicago and to phase out its Nickelodeon stores in January 1999. As a result,
the Company recorded a loss of approximately $91 million, which is reflected in
"other items, net", for the year ended December 31, 1998. The loss principally
reflects $8.5 million for estimated severance benefits payable to approximately
530 employees and $32.7 million for lease exit obligations. The loss also
reflects the write-off of property and equipment, inventory and prepaid assets
of $21.1 million, $10.3 million and $3.1 million, respectively, as well as
future vendor commitments of $3.3 million. Additionally, "other items, net" for
1998 principally reflects foreign exchange losses and the write-off of certain
investments, partially offset by a gain of approximately $118.9 million from the
sale of a cost investment.
On October 21, 1997, the Company completed the sale of its half-interest in USA
Networks, including Sci-Fi Channel, to Universal Studios, Inc. for a total of
$1.7 billion in cash. The Company realized a pre-tax gain of approximately $1.1
billion in the fourth quarter of 1997. The net proceeds from this transaction
were used to repay debt.
In addition, during 1997, the Company recorded pre-tax gains on the swap of
certain television stations of approximately $190.9 million partially offset by
write-offs of certain cost investments.
17) EXTRAORDINARY LOSS
For the year ended December 31, 1998, the Company recognized an extraordinary
loss of $74.7 million, net of tax of $51.9 million, or a loss of $.10 per
basic and diluted common share for the early extinguishment of the 10.25% Senior
Subordinated Notes, 7.0% Senior Subordinated Debentures and the 8.0% Merger
Debentures (See Note 8).
18) SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash payments for interest net of amounts
capitalized ...................................................... $ 668.2 $ 792.1 $ 808.0
Cash payments for income taxes ...................................... 656.6 110.9 193.0
Supplemental schedule of non-cash financing and investing activities:
Equipment acquired under capitalized leases ...................... 116.8 54.0 211.1
Common Stock retired with Cable Split-off ........................ -- -- 625.8
</TABLE>
II-65
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
19) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Viacom International is a wholly owned subsidiary of the Company. The Company
has fully and unconditionally guaranteed Viacom International debt securities
(See Note 8). The Company has determined that separate financial statements and
other disclosures concerning Viacom International are not material to investors.
The following condensed consolidating financial statements present the results
of operations, financial position and cash flows of the Company, Viacom
International (in each case carrying investments in Non-Guarantor Affiliates
under the equity method), the direct and indirect Non-Guarantor Affiliates of
the Company, and the eliminations necessary to arrive at the information for the
Company on a consolidated basis.
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------------
Non-
Viacom Guarantor Viacom Inc.
Viacom Inc. International Affiliates Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues...................................... $ 39.4 $ 1,775.3 $ 10,301.9 $ (20.5) $12,096.1
Expenses:
Operating................................. 33.3 563.7 7,929.8 (20.5) 8,506.3
Selling, general and administrative....... 2.6 650.6 1,407.7 -- 2,060.9
Depreciation and amortization............. 2.1 87.0 688.2 -- 777.3
---------- ----------- ---------- ---------- ---------
Total expenses....................... 38.0 1,301.3 10,025.7 (20.5) 11,344.5
---------- ----------- ---------- ---------- ---------
Operating income.............................. 1.4 474.0 276.2 -- 751.6
Other income (expense):
Interest expense, net..................... (516.0) (34.0) (49.0) -- (599.0)
Other items, net.......................... (21.2) 89.0 (83.1) -- (15.3)
---------- ----------- ---------- ---------- ---------
Earnings (loss) from continuing operations
before income taxes....................... (535.8) 529.0 144.1 -- 137.3
Benefit (provision) for income taxes.......... 219.7 (216.9) (141.5) -- (138.7)
Equity in earnings (loss) of affiliated
companies, net of tax..................... 236.9 (236.3) (54.0) 12.0 (41.4)
Minority interest............................. -- 1.3 (2.0) -- (0.7)
---------- ----------- ---------- ---------- ---------
Earnings (loss) from continuing operations.... (79.2) 77.1 (53.4) 12.0 (43.5)
Discontinued operations:
Loss, net of tax.......................... -- -- (54.1) -- (54.1)
Net gain (loss) on dispositions........... -- 191.2 (141.3) -- 49.9
---------- ----------- ---------- ---------- ---------
Net earnings (loss) before extraordinary loss. (79.2) 268.3 (248.8) 12.0 (47.7)
Extraordinary loss, net of tax ............... (43.2) (31.5) -- -- (74.7)
---------- ----------- ---------- ---------- ---------
Net earnings (loss)........................... (122.4) 236.8 (248.8) 12.0 (122.4)
Cumulative convertible preferred stock
dividend requirement...................... (57.2) -- -- -- (57.2)
Discount on repurchase of preferred stock..... 30.0 -- -- -- 30.0
---------- ----------- ---------- ---------- ---------
Net earnings (loss) attributable to common
stock..................................... $ (149.6) $ 236.8 $ (248.8) $ 12.0 $ (149.6)
========== =========== ========== =========== =========
</TABLE>
II-66
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------------------
Non-
Viacom Guarantor Viacom Inc.
Viacom Inc. International Affiliates Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ...................................... $ 26.7 $ 1,458.3 $ 9,225.8 $ (25.9) $10,684.9
Expenses:
Operating ................................. 25.6 471.3 7,005.3 (25.9) 7,476.3
Selling, general and administrative ....... 1.8 520.3 1,228.5 -- 1,750.6
Depreciation and amortization ............. 1.9 67.4 703.3 -- 772.6
--------- --------- --------- --------- ---------
Total expenses ....................... 29.3 1,059.0 8,937.1 (25.9) 9,999.5
--------- --------- --------- --------- ---------
Operating income (loss) ....................... (2.6) 399.3 288.7 -- 685.4
Other income (expense):
Interest expense, net ..................... (631.1) (56.2) (63.6) -- (750.9)
Other items, net .......................... -- (38.7) 1,282.7 -- 1,244.0
--------- --------- --------- --------- ---------
Earnings (loss) from continuing operations
before income taxes ....................... (633.7) 304.4 1,507.8 -- 1,178.5
Benefit (provision) for income taxes .......... 266.1 (127.8) (784.7) -- (646.4)
Equity in earnings (loss) of affiliated
companies, net of tax ..................... 1,160.9 545.3 (53.8) (1,815.7) (163.3)
Minority interest ............................. -- (0.9) 5.6 -- 4.7
--------- --------- --------- --------- ---------
Earnings from continuing operations ........... 793.3 721.0 674.9 (1,815.7) 373.5
Discontinued operations:
Earnings, net of tax ...................... 0.3 2.7 11.9 -- 14.9
Net gain (loss) on dispositions, net of tax -- 437.2 (32.0) -- 405.2
--------- --------- --------- --------- ---------
Net earnings .................................. 793.6 1,160.9 654.8 (1,815.7) 793.6
Cumulative convertible preferred stock
dividend requirement ...................... (60.0) -- -- -- (60.0)
--------- --------- --------- --------- ---------
Net earnings attributable to common stock ..... $ 733.6 $ 1,160.9 $ 654.8 $(1,815.7) $ 733.6
========= ========= ========= ========= =========
</TABLE>
II-67
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------------------
Non-
Viacom Guarantor Viacom Inc.
Viacom Inc. International Affiliates Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues......................................... $ -- $1,193.7 $8,517.5 $ (27.3) $9,683.9
Expenses:
Operating.................................... -- 373.5 5,994.0 (27.3) 6,340.2
Selling, general and administrative.......... (0.3) 470.1 972.2 -- 1,442.0
Restructuring charge......................... -- -- 50.2 -- 50.2
Depreciation and amortization................ -- 60.9 593.4 -- 654.3
--------- --------- --------- ---------- ----------
Total expenses.......................... (0.3) 904.5 7,609.8 (27.3) 8,486.7
--------- --------- --------- ---------- ----------
Operating income................................. 0.3 289.2 907.7 -- 1,197.2
Other income (expense):
Interest expense, net........................ (627.7) (102.5) (55.3) -- (785.5)
Other items, net............................. -- (0.1) (1.5) -- (1.6)
--------- --------- --------- ---------- ----------
Earnings (loss) from continuing operations
before income taxes.......................... (627.4) 186.6 850.9 -- 410.1
Benefit (provision) for income taxes............. 259.3 (84.0) (418.6) -- (243.3)
Equity in earnings (loss) of affiliated
companies, net of tax........................ 1,613.0 77.2 42.3 (1,745.8) (13.3)
Minority interest................................ -- (1.2) (0.1) -- (1.3)
--------- --------- --------- ---------- ----------
Earnings from continuing operations.............. 1,244.9 178.6 474.5 (1,745.8) 152.2
Discontinued operations:
Earnings (loss) net of tax .................. 3.0 2.5 (67.5) -- (62.0)
Net gain (loss) on dispositions, net of tax.. -- 1,292.0 (134.3) -- 1,157.7
--------- --------- --------- ---------- ----------
Net earnings..................................... 1,247.9 1,473.1 272.7 (1,745.8) 1,247.9
Cumulative convertible preferred stock
dividend requirement......................... (60.0) -- -- -- (60.0)
--------- --------- --------- ---------- ----------
Net earnings attributable to common stock........ $ 1,187.9 $ 1,473.1 $ 272.7 $ (1,745.8) $ 1,187.9
========= ========= ========= ========== ==========
</TABLE>
II-68
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------------------
Non-
Viacom Guarantor Viacom Inc.
Viacom Inc. International Affiliates Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ......... $ 406.4 $ 189.5 $ 171.4 $ -- $ 767.3
Receivables, net .................. 9.5 319.5 1,458.0 (27.9) 1,759.1
Inventory ......................... 11.5 131.9 1,662.1 -- 1,805.5
Other current assets .............. .9 160.9 570.8 -- 732.6
---------- --------- --------- ---------- ---------
Total current assets ........... 428.3 801.8 3,862.3 (27.9) 5,064.5
---------- --------- --------- ---------- ---------
Property and equipment .................. 13.6 602.3 3,921.1 -- 4,537.0
Less accumulated depreciation
and amortization ............... 3.0 188.6 1,265.9 -- 1,457.5
---------- --------- --------- ---------- ---------
Net property and equipment ...... 10.6 413.7 2,655.2 -- 3,079.5
---------- --------- --------- ---------- ---------
Inventory ............................... -- 400.1 2,070.7 -- 2,470.8
Intangibles, at amortized cost .......... 109.4 530.9 10,917.0 -- 11,557.3
Investments in consolidated subs ........ 5,951.7 15,701.9 -- (21,653.6) --
Other assets ............................ 83.4 1,541.4 1,795.3 (1,979.1) 1,441.0
---------- --------- --------- ---------- ---------
$ 6,583.4 $19,389.8 $21,300.5 $(23,660.6) $23,613.1
========== ========= ========= ========== =========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable ................... $ -- $ 68.0 $ 474.4 $ (43.2) $ 499.2
Accrued expenses ................... 612.7 590.0 923.4 (.3) 2,125.8
Deferred income .................... -- 16.5 270.0 -- 286.5
Accrued compensation ............... -- 144.4 265.9 -- 410.3
Participants' share, residuals
and royalties payable ............ -- -- 1,227.5 -- 1,227.5
Program rights ..................... -- 57.1 158.1 (35.6) 179.6
Income tax payable ................. -- 1,257.5 (139.7) (591.3) 526.5
Current portion of long-term debt... 282.4 13.5 81.3 -- 377.2
---------- --------- --------- ---------- ---------
Total current liabilities ........ 895.1 2,147.0 3,260.9 (670.4) 5,632.6
---------- --------- --------- ---------- ---------
Long-term debt .......................... 2,214.6 1,050.4 548.4 -- 3,813.4
Other liabilities ....................... (17,419.8) 3,302.4 9,008.6 7,226.3 2,117.5
Shareholders' equity
Convertible Preferred Stock ........ 600.0 104.1 20.4 (124.5) 600.0
Common Stock ....................... 7.3 228.7 1,985.3 (2,214.0) 7.3
Additional paid-in capital ......... 10,519.6 7,545.4 6,676.9 (14,167.2) 10,574.7
Retained earnings .................. 10,764.8 4,977.7 (98.8) (13,710.8) 1,932.9
Accumulated other comprehensive
income (loss) .................... -- 34.1 (101.2) -- (67.1)
---------- --------- --------- ---------- ---------
21,891.7 12,890.0 8,482.6 (30,216.5) 13,047.8
Less treasury stock, at cost ....... 998.2 -- -- -- 998.2
---------- --------- --------- ---------- ---------
Total shareholders' equity ....... 20,893.5 12,890.0 8,482.6 (30,216.5) 12,049.6
---------- --------- --------- ---------- ---------
$ 6,583.4 $19,389.8 $21,300.5 $(23,660.6) $23.613.1
========== ========= ========= ========== =========
</TABLE>
II-69
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
1997
------------------------------------------------------------------------
Non-
Viacom Guarantor Viacom Inc.
Viacom Inc. International Affiliates Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ....... $ .1 $ 91.5 $ 200.7 $ -- $ 292.3
Receivables, net ................ 10.2 384.0 2,047.0 (43.5) 2,397.7
Inventory ....................... 13.3 100.5 2,138.9 -- 2,252.7
Other current assets ............ (6.1) 55.6 719.4 1.9 770.8
----------- ----------- ----------- ----------- -----------
Total current assets ......... 17.5 631.6 5,106.0 (41.6) 5,713.5
----------- ----------- ----------- ----------- -----------
Property and equipment ................ 12.4 478.9 3,828.9 -- 4,320.2
Less accumulated depreciation
and amortization ............. 2.2 131.9 988.4 -- 1,122.5
----------- ----------- ----------- ----------- -----------
Net property and equipment .... 10.2 347.0 2,840.5 -- 3,197.7
----------- ----------- ----------- ----------- -----------
Inventory ............................. -- 318.2 2,332.4 -- 2,650.6
Intangibles, at amortized cost ........ 112.4 534.4 14,052.8 -- 14,699.6
Investments in consolidated subs ...... 8,256.9 9,303.0 -- (17,559.9) --
Other assets .......................... (11.3) 238.0 1,719.7 80.9 2,027.3
----------- ----------- ----------- ----------- -----------
$ 8,385.7 $ 11,372.2 $ 26,051.4 $ (17,520.6) $ 28,288.7
=========== =========== =========== =========== ===========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable ................. $ -- $ 36.0 $ 803.3 $ (139.6) $ 699.7
Accrued expenses ................. 113.3 486.9 861.5 113.0 1,574.7
Deferred income .................. -- 17.0 237.6 -- 254.6
Accrued compensation ............. -- 122.4 319.3 -- 441.7
Participants' share, residuals
and royalties payable .......... -- -- 951.3 -- 951.3
Program rights ................... -- 38.2 175.0 (15.5) 197.7
Income tax payable ............... (6.2) 1,405.9 (307.2) (536.2) 556.3
Current portion of long-term debt 150.0 156.5 70.0 -- 376.5
----------- ----------- ----------- ----------- -----------
Total current liabilities ...... 257.1 2,262.9 3,110.8 (578.3) 5,052.5
----------- ----------- ----------- ----------- -----------
Long-term debt ........................ 4,760.5 1,953.9 708.6 -- 7,423.0
Other liabilities ..................... (14,112.9) (4,498.2) 20,248.7 792.0 2,429.6
Shareholders' equity:
Convertible Preferred Stock ...... 1,200.0 -- -- -- 1,200.0
Common Stock ..................... 7.2 256.6 835.3 (1,091.9) 7.2
Additional paid-in capital ....... 10,329.6 6,745.9 1,071.0 (7,817.0) 10,329.5
Retained earnings ................ 6,173.7 4,585.0 155.7 (8,825.4) 2,089.0
Accumulated other comprehensive
income (loss) .................. -- 66.1 (78.7) -- (12.6)
----------- ----------- ----------- ----------- -----------
17,710.5 11,653.6 1,983.3 (17,734.3) 13,613.1
Less treasury stock, at cost ..... 229.5 -- -- -- 229.5
----------- ----------- ----------- ----------- -----------
Total shareholders' equity 17,481.0 11,653.6 1,983.3 (17,734.3) 13,383.6
----------- ----------- ----------- ----------- -----------
$ 8,385.7 $ 11,372.2 $ 26,051.4 $ (17,520.6) $ 28,288.7
=========== =========== =========== =========== ===========
</TABLE>
II-70
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
1998
------------------------------------------------------------------------
Non-
Viacom Guarantor Viacom Inc.
Viacom Inc. International Affiliates Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash flow provided by (used in)
operating activities ............... $ 527.3 $ (303.7) $ 640.5 $ -- $ 864.1
-------- -------- -------- -------- --------
Investing Activities:
Proceeds from dispositions ............. -- 4,677.3 272.8 -- 4,950.1
Acquisitions, net of cash acquired ..... (14.9) -- (111.5) -- (126.4)
Capital expenditures ................... -- (88.6) (514.9) -- (603.5)
Investments in and advances to
affiliated companies ............... -- (3.6) (96.7) -- (100.3)
Proceeds from sale of cost investment .. -- 131.7 35.6 -- 167.3
Proceeds from sale of short-term
investments ........................ -- 101.4 -- -- 101.4
Purchases of short-term
investments ........................ -- (151.6) -- -- (151.6)
Other, net ............................. -- (6.9) (11.7) -- (18.6)
-------- -------- -------- -------- --------
Net cash flow provided by (used in)
investing activities ............... (14.9) 4,659.7 (426.4) -- 4,218.4
-------- -------- -------- -------- --------
Financing Activities:
Repayments of credit agreements, net ... (1,788.6) (470.0) (124.4) -- (2,383.0)
Increase (decrease) in intercompany
payables ........................... 3,140.7 (3,100.7) (40.0) -- --
Repayment of notes and debentures ...... (202.6) (666.7) -- -- (869.3)
Purchase of treasury stock and warrants. (809.6) -- -- -- (809.6)
Repurchase of Preferred Stock .......... (564.0) -- -- -- (564.0)
Payment on capital lease obligations ... -- (20.6) (90.1) -- (110.7)
Payment of Preferred Stock dividends ... (64.8) -- -- -- (64.8)
Proceeds from exercise of stock options
and warrants ....................... 182.8 -- -- -- 182.8
Other, net ............................. -- -- 11.1 -- 11.1
-------- -------- -------- -------- --------
Net cash flow used in
financing activities ............... (106.1) (4,258.0) (243.4) -- (4,607.5)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and
cash equivalents ................... 406.3 98.0 (29.3) -- 475.0
Cash and cash equivalents at beginning
of year ............................ .1 91.5 200.7 -- 292.3
-------- -------- -------- -------- --------
Cash and cash equivalents at end
of year ............................ $ 406.4 $ 189.5 $ 171.4 $ -- $ 767.3
======== ======== ======== ======== ========
</TABLE>
II-71
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------------
Non-
Viacom Guarantor Viacom Inc.
Viacom Inc. International Affiliates Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash flow provided by (used in)
operating activities .................. $ 1,275.7 $ 109.6 $(1,045.3) $ -- $ 340.0
--------- --------- --------- -------- ---------
Investing Activities:
Proceeds from dispositions ................ -- 1,096.5 1,918.4 -- 3,014.9
Acquisitions, net of cash acquired ........ (46.9) -- (308.2) -- (355.1)
Capital expenditures ...................... -- (77.9) (452.4) -- (530.3)
Investments in and advances to
affiliated companies .................. -- (47.5) (252.9) -- (300.4)
Proceeds from sale of short-term
investments ........................... -- 139.8 -- -- 139.8
Purchases of short-term investments ....... -- (81.3) -- -- (81.3)
Other, net ................................ -- .1 18.1 -- 18.2
--------- --------- --------- -------- ---------
Net cash flow provided by (used in)
investing activities .................. (46.9) 1,029.7 923.0 -- 1,905.8
--------- --------- --------- -------- ---------
Financing Activities:
Repayments of credit agreements, net ...... (1,972.0) (148.0) 27.7 -- (2,092.3)
Increase (decrease) in intercompany
payables .............................. 734.3 (939.2) 204.9 -- --
Purchase of treasury stock and warrants ... (9.8) -- -- -- (9.8)
Payment on capital lease obligations ...... -- (21.8) (44.4) -- (66.2)
Payment of Preferred Stock dividends ...... (60.0) -- -- -- (60.0)
Proceeds from exercise of stock options and
warrants .............................. 69.6 -- -- -- 69.6
Other, net ................................ (9.8) -- 6.0 -- (3.8)
--------- --------- --------- -------- ---------
Net cash flow provided by (used in)
financing activities .................. (1,247.7) (1,109.0) 194.2 -- (2,162.5)
--------- --------- --------- -------- ---------
Net increase (decrease) in cash and cash
equivalents ........................... (18.9) 30.3 71.9 -- 83.3
Cash and cash equivalents at beginning
of year ............................... 19.0 61.2 128.8 -- 209.0
--------- --------- --------- -------- ---------
Cash and cash equivalents at end
of year ............................... $ .1 $ 91.5 $ 200.7 $ -- $ 292.3
========= ========= ========= ======== =========
</TABLE>
II-72
<PAGE>
VIACOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------------------
Non-
Viacom Guarantor Viacom Inc.
Viacom Inc. International Affiliates Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash flow provided by (used in)
operating activities .................. $ 1,150.6 $ (1,583.2) $ 503.1 $ -- $ 70.5
---------- ---------- ---------- -------- ----------
Investing Activities:
Proceeds from dispositions ................ -- 1,700.0 138.1 -- 1,838.1
Acquisitions, net of cash acquired ........ -- -- (299.8) -- (299.8)
Capital expenditures ...................... -- (125.5) (473.1) -- (598.6)
Investments in and advances to
affiliated companies .................. -- (57.3) (31.5) -- (88.8)
Proceeds from sale of short-term
investments ........................... -- 137.9 -- -- 137.9
Purchases of short-term investments ....... -- (149.2) -- -- (149.2)
Other, net ................................ -- -- -- -- --
---------- ---------- ---------- -------- ----------
Net cash flow provided by (used in)
investing activities .................. -- 1,505.9 (666.3) -- 839.6
---------- ---------- ---------- -------- ----------
Financing Activities:
Repayments of credit agreements, net ...... (1,293.8) 407.0 27.3 -- (859.5)
Increase (decrease) in intercompany
payables .............................. 320.7 (464.3) 143.6 -- --
Repayment of notes and debentures ......... -- (12.0) (38.9) -- (50.9)
Purchase of treasury stock and warrants ... (223.6) -- -- -- (223.6)
Payment on capital lease obligations ...... -- (15.5) (33.4) -- (48.9)
Payment of Preferred Stock
dividends ............................. (60.0) -- -- -- (60.0)
Proceeds from exercise of stock options and
warrants .............................. 95.1 -- -- -- 95.1
Other, net ................................ (17.4) -- -- -- (17.4)
---------- ---------- ---------- -------- ----------
Net cash flow provided (used by)
financing activities .................. (1,179.0) (84.8) 98.6 -- (1,165.2)
---------- ---------- ---------- -------- ----------
Net decrease in cash and cash
equivalents ........................... (28.4) (162.1) (64.6) -- (255.1)
Cash and cash equivalents at beginning
of year ............................... 47.4 223.3 193.4 -- 464.1
---------- ---------- ---------- -------- ----------
Cash and cash equivalents at end
of year ............................... $ 19.0 $ 61.2 $ 128.8 $ -- $ 209.0
========== ========== ========== ======== ==========
</TABLE>
II-73
<PAGE>
PART III
Item 10. Directors and Executive Officers.
The information contained in the Viacom Inc. Definitive Proxy Statement
under the captions "Information Concerning Directors and Nominees" and
"Compliance with Section 16(a) Beneficial Ownership Reporting Compliance" is
incorporated herein by reference.
Item 11. Executive Compensation.
The information contained in the Viacom Inc. Definitive Proxy Statement
under the captions "Directors' Compensation" and "Executive Compensation" is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information contained in the Viacom Inc. Definitive Proxy Statement
under the caption "Security Ownership of Certain Beneficial Owners and
Management" is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information contained in the Viacom Inc. Definitive Proxy Statement
under the captions "Compensation Committee Interlocks and Insider Participation"
and "Related Transaction" is incorporated herein by reference.
III-1
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) and (d) Financial Statements and Schedules (see Index on Page F-1)
(b) Reports on Form 8-K
Current Report on Form 8-K of Viacom Inc. with a Report Date of November
27, 1998 relating to the sale of the Company's educational, professional and
reference publishing businesses to Pearson plc for approximately $4.6 billion.
(c) Exhibits (see index on Page E-1)
IV-1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Viacom Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
VIACOM INC.
By /s/ SUMNER M. REDSTONE
--------------------------------------
Sumner M. Redstone,
Chairman of the Board of Directors,
Chief Executive Officer
By /s/ GEORGE S. SMITH, Jr.
--------------------------------------
George S. Smith, Jr.,
Senior Vice President,
Chief Financial Officer
By /s/ SUSAN C. GORDON
--------------------------------------
Susan C. Gordon,
Vice President, Controller,
Chief Accounting Officer
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of Viacom Inc. and in
the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
* Director March 31, 1999
- -----------------------------------
George S. Abrams
* Director March 31, 1999
- -----------------------------------
Philippe P. Dauman
* Director March 31, 1999
- -----------------------------------
Thomas E. Dooley
* Director March 31, 1999
- -----------------------------------
Ken Miller
* Director March 31, 1999
- -----------------------------------
Brent D. Redstone
<PAGE>
Signature Title Date
--------- ----- ----
* Director March 31, 1999
- -----------------------------------
Shari Redstone
/s/ SUMNER M. REDSTONE Director March 31, 1999
- -----------------------------------
Sumner M. Redstone
* Director March 31, 1999
- -----------------------------------
Frederic V. Salerno
* Director March 31, 1999
- -----------------------------------
William Schwartz
* Director March 31, 1999
- -----------------------------------
Ivan Seidenberg
*By /s/ MICHAEL D. FRICKLAS March 31, 1999
--------------------------------
Michael D. Fricklas
Attorney-in-Fact
for the Directors
<PAGE>
VIACOM INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
ITEM 14(c)
Exhibit
No. Description of Document Page No.
------- ----------------------- --------
(2) Plan of Acquisition
(a) Agreement and Plan of Merger dated as of January 7,
1994, as amended as of June 15, 1994, between Viacom
Inc. and Blockbuster Entertainment Corporation
(incorporated by reference to Exhibit 2.1 to the
Registration Statement on Form S-4 filed by Viacom
Inc.) (File No. 33-55271).
(b) Amended and Restated Agreement and Plan of Merger
dated as of February 4, 1994 between Viacom Inc. and
Paramount Communications Inc., as further amended as
of May 26, 1994, among Viacom, Viacom Sub Inc. and
Paramount Communications Inc. (incorporated by
reference to Exhibit 2.1, included as Annex I, to the
Registration Statement on Form S-4 filed by Viacom
Inc.) (File No. 33-53977).
(3) Articles of Incorporation and By-laws
(a) Restated Certificate of Incorporation of Viacom Inc.
(incorporated by reference to Exhibit 3(a) to the
Annual Report on Form 10-K of Viacom Inc. for the
fiscal year ended December 31, 1992, as amended by
Form 10-K/A Amendment No. 1 dated November 29, 1993
and as further amended by Form 10-K/A Amendment No. 2
dated December 9, 1993) (File No. 1-9553).
(b) Amendment to Restated Certificate of Incorporation of
Viacom Inc. (incorporated by reference to Exhibit 3.2
to the Registration Statement on Form S-4 filed by
Viacom Inc.) (File No. 33-55271).
(c) Certificate of Merger merging Blockbuster
Entertainment Corporation with and into Viacom Inc.
(incorporated by reference to Exhibit 4.3 to the
Registration Statement on Form S-3 filed by Viacom
Inc.) (File No. 33-55785).
(d) Certificate of the Designations, Powers, Preferences
and Relative, Participating or other Rights, and the
Qualifications, Limitations or Restrictions thereof,
of Series B Cumulative Convertible Preferred Stock
($0.01 par value) of Viacom Inc. (incorporated by
reference to Exhibit 4.1 to the Quarterly Report on
Form 10-Q of Viacom Inc. for the quarter ended
September 30, 1993) (File No. 1-9553).
(e) By-laws of Viacom Inc. (incorporated by reference to
Exhibit 3.3 to the Registration Statement on Form S-4
filed by Viacom Inc.) (File No. 33-13812).
(4) Instruments defining the rights of security holders, including
indentures
(a) Specimen certificate representing the Viacom Inc.
Voting Common Stock (currently 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
Non-Voting 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) Specimen certificate representing Viacom Inc. Series
B Cumulative Convertible Preferred Stock of Viacom
Inc. (incorporated by reference to Exhibit 4(d) to
the Annual Report on Form 10-K of Viacom Inc. for the
fiscal year ended December 31,
E-1
<PAGE>
Exhibit
No. Description of Document Page No.
------- ----------------------- --------
1993, as amended by Form 10-K/A Amendment No. 1 dated
May 2, 1994) (File No. 1-9553).
(d) Form of Warrant Agreement between Viacom Inc. and
Harris Trust and Savings Bank, as Warrant Agent with
respect to the Warrants expiring July 7, 1999 of
Viacom Inc. (including the Form of Warrant expiring
July 7, 1999) (incorporated by reference to Exhibit
4.8 to the Registration Statement on Form S-4 filed
by Viacom Inc.) (File No. 33-53977).
(e) Amended and Restated Credit Agreement dated as of
March 26, 1997 among Viacom Inc.; the Bank parties
thereto; The Bank of New York ("BNY"), Citibank N.A.
("Citibank"), Morgan Guaranty Trust Company of New
York ("Morgan Guaranty"), Bank of America NT&SA
("BofA") and The Chase Manhattan Bank ("Chase"), as
Managing Agents; BNY, as Documentation Agent;
Citibank, as Administrative Agent; JP Morgan
Securities Inc. ("JP Morgan") and BofA, as
Syndication Agents; and the Agents and Co-Agents
named therein (incorporated by reference to Exhibit
4(f) to the Annual Report on Form 10-K of Viacom Inc.
for the fiscal year ended December 31, 1996) and
Amended and Restated Credit Agreement dated as of
March 26, 1997 among Viacom International Inc.; the
Bank parties thereto; BNY, Citibank, Morgan Guaranty,
BofA and Chase, as Managing Agents; BNY, as
Documentation Agent; Citibank, as Administrative
Agent; JP Morgan and BofA, as Syndication Agents; and
the Agents and Co-Agents named therein (incorporated
by reference to Exhibit 4(f) to the Annual Report on
Form 10-K of Viacom Inc. for the fiscal year ended
December 31, 1996) (File No. 1-9553) as amended by
Amendment No. 1, dated as of June 30, 1997
(incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of Viacom Inc. for the
quarter ended June 30, 1997) (File No. 1-9553) and as
further amended by Amendment No. 2, dated as of
December 19, 1997 (incorporated by reference to
Exhibit 4(e) to the Annual Report on Form 10-K of
Viacom Inc. for the fiscal year ended December 31,
1997) (File No. 1-9553).
(f) Film Finance Credit Agreement, dated as of May 10,
1996, among Viacom Film Funding Company Inc. as
Borrower; Viacom Inc. and Viacom International Inc.
as Guarantors; the Bank parties thereto; The Bank of
New York ("BNY"), Citibank N.A. ("Citibank"), Morgan
Guaranty Trust Company of New York and Bank of
America NT&SA, as Managing Agents; BNY, as
Documentation Agent; Citibank, as Administrative
Agent; JP Morgan Securities Inc., as Syndication
Agent; and the Agents and Co-Agents named therein
(incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q of Viacom Inc. for the
quarter ended June 30, 1996) (File No. 1-9553), as
amended by Amendment No. 1, dated as of May 9, 1997
(incorporated by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q of Viacom Inc. for the
quarter ended March 31, 1997) (File No. 1-9553), as
further amended by Amendment No. 2, dated as of June
30, 1997 (incorporated by reference to Exhibit 10.2
to the Quarterly Report on Form 10-Q of Viacom Inc.
for the quarter ended June 30, 1997) (File No.
1-9553), and as further amended by Amendment No. 3,
dated as of May 8, 1998 (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q of
Viacom Inc. for the quarter ended March 31, 1998)
(File No. 1-9553).
(g) 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
E-2
<PAGE>
Exhibit
No. Description of Document Page No.
------- ----------------------- --------
601 of Regulation S-K. Viacom Inc. hereby agrees
to furnish copies of these instruments to the
Securities and Exchange Commission upon request.
(10) Material Contracts
(a) Viacom Inc. 1989 Long-Term Management Incentive Plan
(as amended and restated through April 23, 1990, as
further amended and restated through April 27, 1995,
and as further amended and restated through November
1, 1996) (incorporated by reference to Exhibit 10(a)
to the Annual Report on Form 10-K of Viacom Inc. for
the fiscal year ended December 31, 1996) (File No.
1-9553).*
(b) Viacom Inc. 1994 Long-Term Management Incentive Plan
(as amended and restated through April 27, 1995 and
as further amended and restated through November 1,
1996) (incorporated by reference to Exhibit 10(b) to
the Annual Report on Form 10-K of Viacom Inc. for the
fiscal year ended December 31, 1996) (File No.
1-9553).*
(c) Viacom Inc. 1997 Long-Term Management Incentive Plan
(incorporated by reference to Exhibit A to Viacom
Inc.'s Definitive Proxy Statement dated April 17,
1997).*
(d) Viacom Inc. Senior Executive Short-Term Incentive
Plan (as amended and restated through March 27, 1996)
(incorporated by reference to Exhibit 10(c) to the
Annual Report on Form 10-K of Viacom Inc. for the
fiscal year ended December 31, 1995).*
(e) Viacom Inc. Long-Term Incentive Plan (Divisional)
(incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q of Viacom Inc. for the
quarter ended June 30, 1993) (File No. 1-9553).*
(f) Viacom International Inc. Deferred Compensation Plan
for Non-Employee Directors (as amended and restated
through December 17, 1992) (incorporated by reference
to Exhibit 10(e) to the Annual Report on Form 10-K of
Viacom Inc. for the fiscal year ended December 31,
1992, as amended by Form 10-K/A Amendment No. 1 dated
November 29, 1993 and as further amended by Form
10-K/A Amendment No. 2 dated December 9, 1993) (File
No. 1-9553).*
(g) Viacom Inc. and Viacom International Inc. Retirement
Income Plan for Non-Employee Directors (incorporated
by reference to Exhibit 10(f) to the Annual Report on
Form 10-K of Viacom Inc., for the fiscal year ended
December 31, 1989) (File No. 1-9553).*
(h) Viacom Inc. Stock Option Plan for Outside Directors
(incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q of Viacom Inc. for the
quarter ended June 30, 1993) (File No. 1-9553).*
(i) Viacom Inc. 1994 Stock Option Plan for Outside
Directors (incorporated by reference to Exhibit B to
Viacom Inc.'s Definitive Proxy Statement dated April
28, 1995).*
(j) Viacom Inc. Excess Investment Plan (incorporated by
reference to Exhibit 4.1 to the Viacom Inc.
Registration Statement on Form S-8) (File No.
1-9553).*
- --------
* Management contract or compensatory plan required to be filed as an exhibit
to this form pursuant to Item 14(c).
E-3
<PAGE>
Exhibit
No. Description of Document Page No.
------- ----------------------- --------
(k) Excess Pension Plan for Certain Key Employees of
Viacom International Inc. (incorporated by reference
to Exhibit 10(i) to the Annual Report on Form 10-K of
Viacom Inc. for the fiscal year ended December 31,
1990) (File No. 1-9553).*
(l) Agreement, dated as of January 1, 1996, between
Viacom Inc. and Philippe P. Dauman (incorporated by
reference to Exhibit 10(l) to the Annual Report on
Form 10-K of Viacom Inc. for the fiscal year ended
December 31, 1995) (File No. 1-9553), as amended by
an Agreement dated August 20, 1998 (incorporated by
reference to Exhibit 10.1 to the Quarterly Report on
Form 10-Q of Viacom Inc. for the quarter ended
September 30, 1998) (File No. 1-9553).*
(m) Agreement, dated as of January 1, 1996, between
Viacom Inc. and Thomas E. Dooley (incorporated by
reference to Exhibit 10(m) to the Annual Report on
Form 10-K of Viacom Inc. for the fiscal year ended
December 31, 1995) (File No. 1-9553), as amended by
an Agreement dated August 20, 1998 (incorporated by
reference to Exhibit 10.2 to the Quarterly Report on
Form 10-Q of Viacom Inc. for the quarter ended
September 30, 1998) (File No. 1-9553).*
(n) Agreement, dated as of January 1, 1996, between
Viacom Inc. and Michael D. Fricklas, as amended by an
Agreement dated March 31, 1998, and as further
amended by an Agreement dated October 12, 1998
(filed herewith).*
(o) Agreement, dated as of April 1, 1995, between Viacom
Inc. and George S. Smith, Jr., as amended by an
Agreement dated as of March 30, 1998 (incorporated by
reference to Exhibit 10(o) to the Annual Report on
Form 10-K of Viacom Inc. for the fiscal year ended
December 31, 1997) (File No. 1-9553).*
(p) Service Agreement, dated as of March 1, 1994, between
George S. Abrams and Viacom Inc. (incorporated by
reference to Exhibit 10(q) to the Annual Report on
Form 10-K of Viacom Inc. for the fiscal year ended
December 31, 1994) (File No. 1-9553).*
(q) Blockbuster Entertainment Corporation ("BEC") stock
option plans* assumed by Viacom Inc. after the
Blockbuster Merger consisting of the following:
(i) BEC's 1989 Stock Option Plan (incorporated by
reference to BEC's Proxy Statement dated March
31, 1989).
(ii) Amendments to BEC's 1989 Stock Option Plan
(incorporated by reference to BEC's Proxy
Statement dated April 3, 1991).
(iii) BEC's 1990 Stock Option Plan (incorporated by
reference to BEC's Proxy Statement dated March
29, 1990).
(iv) Amendments to BEC's 1990 Stock Option Plan
(incorporated by reference to BEC's Proxy
Statement dated April 15, 1991).
(v) BEC's 1991 Employee Director Stock Option Plan
(incorporated by reference to BEC's Proxy
Statement dated April 15, 1991).
(vi) BEC's 1991 Non-Employee Director Stock Option
Plan (incorporated by reference to BEC's Proxy
Statement dated April 15, 1991).
- --------
* Management contract or compensatory plan required to be filed as an exhibit
to this form pursuant to Item 14(c).
E-4
<PAGE>
Exhibit
No. Description of Document Page No.
------- ----------------------- --------
(vii) BEC's 1994 Stock Option Plan (incorporated by
reference to Exhibit 10.35 to the Annual Report
on Form 10-K of BEC for the fiscal year ended
December 31, 1993) (File No. 0-12700).
(r) Parents Agreement dated as of July 24, 1995 among
Viacom Inc., Tele-Communications, Inc. and TCI
Communications, Inc. (incorporated by reference to
Exhibit 10.1 to the Registration Statement on Form
S-4 filed by Viacom International Inc.) (File No.
33-64467).
(s) Implementation Agreement dated as of July 24, 1995
between Viacom International Inc. and Viacom
International Services Inc. (incorporated by
reference to Exhibit 10.2 to the Registration
Statement on Form S-4 filed by Viacom International
Inc.) (File No. 33-64467).
(t) Subscription Agreement dated as of July 24, 1995
among Viacom International Inc., Tele-Communications,
Inc. and TCI Communications, Inc. (incorporated by
reference to Exhibit 10.3 to the Registration
Statement on Form S-4 filed by Viacom International
Inc.) (File No. 33-64467).
(u) Stock Purchase Agreement, dated as of February 16,
1997, between Viacom International Inc. and Evergreen
Media Corporation of Los Angeles (incorporated by
reference to Exhibit 10(u) to the Annual Report on
Form 10-K of Viacom Inc. for the fiscal year ended
December 31, 1996) (File No. 1-9553).
(v) Stock Purchase Agreement, dated as of May 17, 1998,
among Viacom International Inc., Pearson Inc., and
Pearson plc (incorporated by reference to Exhibit
10.1 to the Quarterly Report on Form 10-Q of Viacom
Inc. for the quarter ended June 30, 1998) (File No.
1-9553), as amended by Amendment No. 1 dated as of
November 25, 1998 (filed herewith).
(11) Statements re Computation of Net Earnings Per Share
(21) Subsidiaries of Viacom Inc.
(23) Consents of Experts and Counsel
(a) Consent of PricewaterhouseCoopers LLP
(24) Powers of Attorney
(27) Financial Data Schedule
E-5
<PAGE>
VIACOM INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Item 14a
The following consolidated financial statements and schedule of the registrant
and its subsidiaries are submitted herewith as part of this report:
Reference
(Page/s)
--------
1. Report of Independent Accountants II-25
2. Management's Statement of Responsibility for Financial
Reporting .................................................... II-26
3. Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 ............................. II-27
4. Consolidated Balance Sheets as of December 31,
1998 and 1997 ................................................ II-28 - II-29
5. Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 ............................ II-30
6. Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996 ................ II-31
7. Notes to Consolidated Financial Statements .................... II-32 - II-73
Financial Statement Schedule:
II. Valuation and Qualifying Accounts ..................... F-2
All other Schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedule.
F-1
<PAGE>
VIACOM INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Millions of Dollars)
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
- ------------------------------------------- ------------ ---------------------------- ----------- ----------
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Description Period Expenses Accounts Deductions Period
- ----------- ------ -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1998 .............. $ 99.8 $ 29.5(D) $ 18.3 $ 48.9(A) $ 98.7
Year ended December 31, 1997 .............. $101.3 $ 83.1(D) $ (6.2) $ 78.4(B) $ 99.8
Year ended December 31, 1996 .............. $126.0 $ 55.1 $ 3.1 $ 82.9(B) $101.3
Valuation allowance on deferred tax assets:
Year ended December 31, 1998 .............. $106.8 $ -- $ -- $ 18.5 $ 88.3
Year ended December 31, 1997 .............. $ 81.8 $ 25.0 $ -- $ -- $106.8
Year ended December 31, 1996 .............. $ 81.8 $ -- $ -- $ -- $ 81.8
Reserves for inventory obsolescence:
Year ended December 31, 1998 .............. $150.6 $ 25.7(D) $ (8.1) $111.5 $ 56.7
Year ended December 31, 1997 .............. $105.8 $ 98.9(D) $ -- $ 54.1 (C) $150.6
Year ended December 31, 1996 .............. $129.6 $ 11.2(D) $(24.7) $ 10.3 (B) $105.8
</TABLE>
Notes:
- ------
(A) Primarily related to the sale of Non-Consumer Publishing and amounts
written off, net of recoveries.
(B) Includes amounts written off, net of recoveries and amounts related to
discontinued operations.
(C) Primarily related to the second quarter 1997 Blockbuster charge associated
with the reduction in the carrying value of excess inventory.
(D) Prior year amounts charged to the Statement of Operations have been
restated to conform with the current discontinued operations presentation.
F-2
As of January 1, 1996
Michael D. Fricklas
60 Riverside Drive, Apt. 16-G
New York, NY 10024
Dear Mr. Fricklas:
Viacom Inc. ("Viacom"), having an address at 1515 Broadway, New York, New
York 10036, agrees to employ you and you agree to accept such employment upon
the following terms and conditions:
l. Term. The term of your employment hereunder shall commence on January
1, 1996 and, unless terminated by Viacom or you pursuant to paragraph 8 hereof,
shall continue through and until December 31, 1998. The period from January 1,
1996 through December 31, 1998 shall hereinafter be referred to as the
"Employment Term" notwithstanding any earlier termination pursuant to paragraph
8.
2. Duties. During the Employment Term, you agree to devote your entire
business time, attention and energies to the business of Viacom and its
subsidiaries. You will be Senior Vice President, Deputy General Counsel of
Viacom and you agree to perform such duties, and such other duties reasonable
and consistent with such office as may be assigned to you from time to time by
the Deputy Chairman and Executive Vice President, General Counsel and Chief
Administrative Officer of Viacom or such other individual as may be designated
by the Chief Executive Officer of Viacom (the "CEO"). Your principal place of
business shall be at Viacom's headquarters in the New York City metropolitan
area.
3. Compensation.
(a) Salary: For all the services rendered by you in any capacity
hereunder, Viacom agrees to pay you the sum of Four Hundred Thousand Dollars
($400,000) per annum ("Salary"), payable in accordance with Viacom's then
effective payroll practices. Your Salary will be increased on January 1, 1997 to
Four Hundred Fifty Thousand Dollars ($450,000) and on January 1, 1998 to Five
Hundred Thousand Dollars ($500,000).
<PAGE>
Michael D. Fricklas
January 1, 1996
Page 2
(b) Bonus Compensation: In addition to your Salary, you shall be
entitled to receive bonus compensation for each of the calendar years during the
Employment Term, determined and payable as follows ("Bonus"):
(i) Your Bonus for each of the calendar years during the
Employment Term will be based upon a measurement of
performance against objectives in accordance with the Viacom
Short-Term Incentive Plan, as the same may be amended from
time to time.
(ii) Your Target Bonus for each of the calendar years during the
Employment Term shall be 50% of Salary.
(iii) Your Bonus for any calendar year shall be payable by February
28 of the following year.
(c) Long-Term Incentive Plans: You will be eligible to participate
in one or more of Viacom's long-term incentive plans at a level appropriate to
your position as determined by the Viacom Board of Directors.
4. Benefits. You shall be entitled to participate in such vacation,
medical, dental and life insurance, 401(k), pension and other plans as Viacom
may have or establish from time to time and in which you would be entitled to
participate pursuant to the terms thereof. The foregoing, however, shall not be
construed to require Viacom to establish any such plans or to prevent the
modification or termination of such plans once established, and no such action
or failure thereof shall affect this Agreement. It is further understood and
agreed that all benefits you may be entitled to as an employee of Viacom shall
be based upon your Salary, as set forth in paragraph 3(a) hereof, and not upon
any bonus compensation due, payable or paid to you hereunder, except where the
benefit plan expressly provides otherwise.
5. Business Expenses. During the Employment Term, you shall be reimbursed
for such reasonable travel and other expenses incurred in the performance of
your duties hereunder as are customarily reimbursed to senior executives of
Viacom. You shall be entitled to a car allowance in accordance with Viacom's
policy.
6. Exclusive Employment, Confidential Information, Etc.
(a) Non-Competition. You agree that your employment hereunder is on
an exclusive basis, and that during the shorter of (x) the Employment Term and
(y) one (1) year after the termination of your employment pursuant to paragraph
8(b) or 8(c) hereof or eighteen (18) months after the termination of your
employment pursuant to paragraph 8(a) hereof (the "Non-Compete Period"), you
will not engage in any other business activity which is in conflict with your
duties and obligations hereunder. You
<PAGE>
Michael D. Fricklas
January 1, 1996
Page 3
agree that during the Non-Compete Period you shall not directly or indirectly
engage in or participate as an officer, employee, director, agent of or
consultant for any business directly competitive with that of Viacom, nor shall
you make any investments in any company or business competing with Viacom;
provided, however, that nothing herein shall prevent you from investing as less
than a one (1%) percent shareholder in the securities of any company listed on a
national securities exchange or quoted on an automated quotation system.
(b) Confidential Information. You agree that you shall not, during
the Employment Term or at any time thereafter, use for your own purposes, or
disclose to or for the benefit of any third party, any trade secret or other
confidential information of Viacom or any of its affiliates (except as may be
required by law or in the performance of your duties hereunder consistent with
Viacom's policies) and that you will comply with any confidentiality obligations
of Viacom to a third party, whether under agreement or otherwise.
Notwithstanding the foregoing, confidential information shall be deemed not to
include information which (i) is or becomes generally available to the public
other than as a result of a disclosure by you or any other person who directly
or indirectly receives such information from you or at your direction or (ii) is
or becomes available to you on a non-confidential basis from a source which is
entitled to disclose it to you.
(c) No Employee Solicitation. You agree that, during the Employment
Term and for one (1) year thereafter, you shall not, directly or indirectly,
engage, employ, or solicit the employment of any person who is then or has been
within six (6) months prior thereto, an employee of Viacom or any of Viacom's
affiliates.
(d) Viacom Ownership. The results and proceeds of your services
hereunder, including, without limitation, any works of authorship resulting from
your services during your employment with Viacom and/or any of its affiliates
and any works in progress, shall be works-made-for-hire and Viacom shall be
deemed the sole owner throughout the universe of any and all rights of
whatsoever nature therein, whether or not now or hereafter known, existing,
contemplated, recognized or developed, with the right to use the same in
perpetuity in any manner Viacom determines in its sole discretion without any
further payment to you whatsoever. If, for any reason, any of such results and
proceeds shall not legally be a work-for-hire and/or there are any rights which
do not accrue to Viacom under the preceding sentence, then you hereby
irrevocably assign and agree to assign any and all of your right, title and
interest thereto, including, without limitation, any and all copyrights,
patents, trade secrets, trademarks and/or other rights of whatsoever nature
therein, whether or not now or hereafter known, existing, contemplated,
recognized or developed to Viacom, and Viacom shall have the right to use the
same in perpetuity throughout the universe in any manner Viacom determines
without any further payment to you whatsoever. You shall, from time to time, as
may be requested by Viacom, do any and all things which Viacom may deem useful
or desirable to establish or document Viacom's exclusive ownership
<PAGE>
Michael D. Fricklas
January 1, 1996
Page 4
of any and all rights in any such results and proceeds, including, without
limitation, the execution of appropriate copyright and/or patent applications or
assignments. To the extent you have any rights in the results and proceeds of
your services that cannot be assigned in the manner described above, you
unconditionally and irrevocably waive the enforcement of such rights. This
paragraph 6(d) is subject to, and shall not be deemed to limit, restrict, or
constitute any waiver by Viacom of any rights of ownership to which Viacom may
be entitled by operation of law by virtue of Viacom or any of its affiliates
being your employer.
(e) Litigation. You agree that, during the Employment Term, for one
(1) year thereafter and, if longer, during the pendancy of any litigation or
other proceeding, (i) you shall not communicate with anyone (other than your own
attorneys and tax advisors and, except to the extent necessary in the
performance of your duties hereunder) with respect to the facts or subject
matter of any pending or potential litigation, or regulatory or administrative
proceeding involving any of Viacom's affiliates, other than any litigation or
other proceeding in which you are a party-in-opposition, without giving prior
notice to Viacom or Viacom's counsel, and (ii) in the event that any other party
attempts to obtain information or documents from you with respect to matters
possibly related to such litigation or other proceeding, you shall promptly so
notify Viacom's counsel.
(f) No Right to Give Interviews or Write Books, Articles, Etc.
During the Employment Term, except as authorized by Viacom, you shall not (i)
give any interviews or speeches, or (ii) prepare or assist any person or entity
in the preparation of any books, articles, television or motion picture
productions or other creations, in either case, concerning Viacom or any of
Viacom's affiliates or any of their officers, directors, agents, employees,
suppliers or customers.
(g) Return of Property. All documents, data, recordings, or other
property, whether tangible or intangible, including all information stored in
electronic form, obtained or prepared by or for you and utilized by you in the
course of your employment with Viacom or any of its affiliates shall remain the
exclusive property of Viacom. In the event of the termination of your employment
for any reason, Viacom reserves the right, to the extent permitted by law and in
addition to any other remedy Viacom may have, to deduct from any monies
otherwise payable to you the following: (i) the full amount of any debt you owe
to Viacom or any of its affiliates at the time of or subsequent to the
termination of your employment with Viacom, and (ii) the value of the Viacom
property which you retain in your possession after the termination of your
employment with Viacom. In the event that the law of any state or other
jurisdiction requires the consent of an employee for such deductions, this
Agreement shall serve as such consent.
<PAGE>
Michael D. Fricklas
January 1, 1996
Page 5
(h) Non-Disparagement. You agree that you shall not, during the
Employment Term and for one (1) year thereafter, in any communications with any
customer or client of Viacom or any of Viacom's affiliates, criticize, ridicule
or make any statement which disparages or is derogatory of Viacom or Viacom's
affiliates or any of their officers, directors, agents or employees.
(i) Injunctive Relief. Viacom has entered into this Agreement in
order to obtain the benefit of your unique skills, talent, and experience. You
acknowledge and agree that any violation of paragraphs 6(a) through (h) hereof
will result in irreparable damage to Viacom, and, accordingly, Viacom may obtain
injunctive and other equitable relief for any breach or threatened breach of
such paragraphs, in addition to any other remedies available to Viacom.
(j) Survival; Modification of Terms. Your obligations under
paragraphs 6(a) through (i) hereof shall remain in full force and effect for the
entire period provided therein notwithstanding the termination of the Employment
Term pursuant to paragraph 8 hereof or otherwise; provided, however, that your
obligations under paragraph 6(a) shall cease if you terminate your employment
for "Good Reason" or Viacom terminates your employment without "cause" (as such
terms are defined in paragraph 8) and you notify Viacom in writing that you have
elected to waive your right to receive, or to continue to receive, payments and
benefits pursuant to clauses (i), (ii), (iii), (iv) and (v) of paragraph 8(d).
You and Viacom agree that the restrictions and remedies contained in paragraphs
6(a) through (i) are reasonable and that it is your intention and the intention
of Viacom that such restrictions and remedies shall be enforceable to the
fullest extent permissible by law. If it shall be found by a court of competent
jurisdiction that any such restriction or remedy is unenforceable but would be
enforceable if some part thereof were deleted or the period or area of
application reduced, then such restriction or remedy shall apply with such
modification as shall be necessary to make it enforceable.
7. Incapacity. In the event you become totally medically disabled and
cannot substantially perform your duties at any time during the Employment Term,
the CEO, at any time after such disability has continued for 30 consecutive
days, may determine that Viacom requires such duties and responsibilities be
performed by another executive. In the event you become disabled, you will first
receive benefits under Viacom's short-term disability program for the first 26
weeks of consecutive absence. Thereafter, you will be eligible to receive
benefits under Viacom's Long-Term Disability ("LTD") program in accordance with
its terms. Upon receipt of benefits under the LTD program, you will also be
entitled to receive a pro-rated Target Bonus for the calendar year in which such
benefits commence.
<PAGE>
Michael D. Fricklas
January 1, 1996
Page 6
8. Termination.
(a) Termination for Cause. Viacom may, at its option, terminate this
Agreement forthwith for "cause", and Viacom shall thereafter have no further
obligations under this Agreement, including, without limitation, any obligation
to pay Salary or Bonus or provide benefits under this Agreement. For purposes of
this Agreement, termination of this Agreement for "cause" shall mean termination
for embezzlement, fraud or other conduct which would constitute a felony,
conviction of a felony, or willful unauthorized disclosure of confidential
information, or if you at any time materially breach this Agreement (including,
without limitation, your failure, neglect of or refusal to substantially perform
your obligations hereunder as set forth in paragraphs 2 and 11 hereof), except
in the event of your disability as set forth in paragraph 7. Anything herein to
the contrary notwithstanding, Viacom will give you written notice prior to
terminating this Agreement for your material breach setting forth the exact
nature of any alleged breach and the conduct required to cure such breach. You
shall have ten (10) business days from the giving of such notice within which to
cure.
(b) Good Reason Termination. You may terminate your employment
hereunder for "Good Reason" at any time during the Employment Term by written
notice to Viacom not more than thirty (30) days after the occurrence of the
event constituting "Good Reason". Such notice shall state an effective date no
later than ten (10) business days after the date it is given. Good Reason shall
mean, without your prior written consent, other than in connection with the
termination of your employment for "cause" (as defined above) or in connection
with your permanent disability, the assignment to you by Viacom of duties
substantially inconsistent with your positions, duties, responsibilities, titles
or offices, the withdrawal of a material part of your responsibilities as set
forth in paragraph 2, or the material breach by Viacom of its material
obligations hereunder.
(c) Termination Without Cause. Viacom may terminate your employment
hereunder without "cause" (as defined above) at any time during the Employment
Term by written notice to you.
(d) Termination Payments, Etc. In the event that your employment
terminates pursuant to paragraph 8(b) or 8(c) hereof, you shall be entitled to
receive, subject to applicable withholding taxes:
(i) your Salary as provided in paragraph 3(a) until the end of the
Employment Term, payable in accordance with Viacom's then
effective payroll practices;
<PAGE>
Michael D. Fricklas
January 1, 1996
Page 7
(ii) bonus compensation for each calendar year during the
Employment Term equal to your Target Bonus as set forth in
paragraph 3(b);
(iii) your car allowance as provided in paragraph 5 until the end of
the Employment Term, payable in accordance with Viacom's then
effective payroll practices;
(iv) medical and dental insurance coverage under COBRA until the
end of the Employment Term or, if earlier, the date on which
you become eligible for medical and dental coverage from a
third party employer; during this period, Viacom will pay an
amount equal to the applicable COBRA premiums (or such other
amounts as may be required by applicable law) (which amount
will be included in your income for tax purposes to the extent
required by applicable law); at the end of such period, you
may elect to continue your medical and dental insurance
coverage at your own expense for the balance, if any, of the
period required by law;
(v) life insurance coverage until the end of the Employment Term
(the amount of Salary covered by such insurance to be reduced
by the amount of any salary payable to you by a third party);
(vi) stock options granted to you under Viacom's 1989 and 1994
Long-Term Management Incentive Plans and any successor plans
(collectively, the "LTMIP") which are exercisable on or prior
to the date of the termination of your employment under
paragraph 8(b) or 8(c) or that would have vested and become
exercisable on or before the last day of the Employment Term
will be exercisable until six (6) months after the date of
such termination or, if earlier, the expiration date of the
stock options; and
(vii) if the termination of your employment occurs before July 7,
1998, a supplemental pension benefit equivalent to the benefit
you would have received under the Viacom pension plan and
excess pension plan based on your years of benefit service on
the date of such termination and calculated as if you were
fully vested in such plans on the date of termination;
provided, however, you shall be required to mitigate the amount of any payment
provided for in (i), (ii) and (iii) of this paragraph 8(d) by seeking other
employment or otherwise, and the amount of any such payment provided for in (i),
(ii) and (iii) shall be reduced by any compensation earned by you from a third
person except that mitigation
<PAGE>
Michael D. Fricklas
January 1, 1996
Page 8
shall not be required for twelve (12) months after the termination of your
employment or for the period commencing with the termination of your employment
and ending on the last day of the Employment Term, whichever is shorter. The
payments provided for in (i) above are in lieu of any severance or income
continuation or protection under any Viacom plan that may now or hereafter
exist. The payments and benefits to be provided pursuant to this paragraph 8(d)
shall constitute liquidated damages, and shall be deemed to satisfy and be in
full and final settlement of all obligations of Viacom to you under this
Agreement.
(e) Termination of Benefits. Notwithstanding anything in this Agreement to
the contrary (except as otherwise provided in paragraph 8(d) with respect to
medical, dental and life insurance), coverage under all Viacom benefit plans and
programs (including, without limitation, vacation, 401(k) and excess 401(k)
plans, pension and excess pension plans, LTD, car insurance and accidental death
and dismemberment and business travel and accident insurance) will terminate
upon the termination of your employment except to the extent otherwise expressly
provided in such plans or programs.
(f) Non-Renewal Notice, Etc. Viacom shall notify you in writing in the
event that Viacom elects not to extend or renew this Agreement. If Viacom gives
you such notice less than twelve (12) months before the end of the Employment
Term, or your employment terminates pursuant to paragraph 8(b) or 8(c) hereof
during the final twelve (12) months of the Employment Term, you shall be
entitled to receive Salary as provided in paragraph 3(a), payable in accordance
with Viacom's then effective payroll practices, subject to applicable
withholding requirements, for the period commencing after the end of the
Employment Term which, when added to the portion of the Employment Term, if any,
remaining when the notice is given or the termination occurs, equals twelve (12)
months; provided, however, you shall be required to mitigate the amount of any
payment pursuant to this paragraph 8(f) by seeking other employment or
otherwise, and the amount of any such payment shall be reduced by any
compensation earned by you from a third person. The payments provided for in
this paragraph 8(f) are in lieu of any severance or income continuation or
protection under any Viacom plan that may now or hereafter exist.
9. Death. If you die prior to the end of the Employment Term, your
beneficiary or estate shall be entitled to receive your Salary up to the date on
which the death occurs and a pro-rated Target Bonus.
10. Section 317 and 507 of the Federal Communications Act. You represent
that you have not accepted or given nor will you accept or give, directly or
indirectly, any money, services or other valuable consideration from or to
anyone other than Viacom for the inclusion of any matter as part of any film,
television program or other production produced, distributed and/or developed by
Viacom and/or any of its affiliates.
<PAGE>
Michael D. Fricklas
January 1, 1996
Page 9
11. Equal Opportunity Employer. You acknowledge that Viacom is an equal
opportunity employer. You agree that you will comply with Viacom policies
regarding employment practices and with applicable federal, state and local laws
prohibiting discrimination on the basis of race, color, creed, national origin,
age, sex or disability.
12. Indemnification.
(a) Viacom shall indemnify and hold you harmless, to the maximum
extent permitted by law and by the Restated Certificate of Incorporation and/or
the Bylaws of Viacom, against judgments, fines, amounts paid in settlement of
and reasonable expenses incurred by you in connection with the defense of any
action or proceeding (or any appeal therefrom) in which you are a party by
reason of your position as Senior Vice President, Deputy General Counsel of
Viacom or by reason of any prior positions held by you with Viacom, or for any
acts or omissions made by you in good faith in the performance of any of your
duties as an officer of Viacom.
(b) To the extent that Viacom maintains officers' and directors'
liability insurance, you will be covered under such policy.
13. Notices. All notices required to be given hereunder shall be given in
writing, by personal delivery or by mail at the respective addresses of the
parties hereto set forth above, or at such other address as may be designated in
writing by either party, and in the case of Viacom, to the attention of the
General Counsel of Viacom. Any notice given by mail shall be deemed to have been
given three days following such mailing.
14. Assignment. This is an Agreement for the performance of personal
services by you and may not be assigned by you or Viacom except that Viacom may
assign this Agreement to any affiliate of or any successor in interest to
Viacom.
15. New York Law, Etc. This Agreement and all matters or issues collateral
thereto shall be governed by the laws of the State of New York applicable to
contracts entered into and performed entirely therein. Any action to enforce
this Agreement shall be brought in the state or federal courts located in the
City of New York.
16. No Implied Contract. Nothing contained in this Agreement shall be
construed to impose any obligation on Viacom to renew this Agreement or any
portion thereof. The parties intend to be bound only upon execution of a written
agreement and no negotiation, exchange of draft or partial performance shall be
deemed to imply an agreement. Neither the continuation of employment nor any
other conduct shall be deemed to imply a continuing agreement upon the
expiration of this Agreement.
<PAGE>
Michael D. Fricklas
January 1, 1996
Page 10
17. Entire Understanding. This Agreement contains the entire understanding
of the parties hereto relating to the subject matter herein contained, and can
be changed only by a writing signed by both parties hereto.
18. Void Provisions. If any provision of this Agreement, as applied to
either party or to any circumstances, shall be adjudged by a court to be void or
unenforceable, the same shall be deemed stricken from this Agreement and shall
in no way affect any other provision of this Agreement or the validity or
enforceability of this Agreement.
19. Supersedes Previous Agreement. This Agreement supersedes and cancels
all prior agreements relating to your employment by Viacom or any of its
affiliates, including, without limitation, your employment agreement with Viacom
dated as of July 1, 1994.
If the foregoing correctly sets forth our understanding, please sign one
copy of this letter and return it to the undersigned, whereupon this letter
shall constitute a binding agreement between us.
Very truly yours,
VIACOM INC.
By: /s/ William A. Roskin
-----------------------------
Name: William A. Roskin
Title: Senior Vice President,
Human Resources and
Administration
ACCEPTED AND AGREED:
/s/ Michael D. Fricklas
- ------------------------------
Michael D. Fricklas
<PAGE>
March 31, 1998
Michael D. Fricklas
60 Riverside Drive, Apt. 16-G
New York, New York 10024
Dear Mr. Fricklas:
Reference is made to that certain employment agreement between you and
Viacom Inc. ("Viacom"), dated as of January 1, 1996 (your "Employment
Agreement"). All defined terms used without definitions shall have the meanings
provided in your Employment Agreement.
This letter, when fully executed below, shall amend your Employment
Agreement as follows:
1. Term. Paragraph 1 shall be amended to change the date representing the
end of the Employment Term in the first and second sentences from "December 31,
1998" to "December 31, 2000".
2. Compensation / Salary. Paragraph 3(a) shall be amended to replace the
second sentence with the following sentence:
"Your Salary will be increased on January 1, 1999 to Five Hundred
Seventy Five Thousand Dollars ($575,000) per annum and on January 1,
2000 to Six Hundred Twenty Five Thousand Dollars ($625,000) per
annum."
3. Termination / Termination for Cause. Paragraph 8(a) shall be amended to
replace the last sentence with the following:
"Except for a breach which cannot by its nature be cured, you shall
have ten (10) business days from the giving of such notice within
which to cure."
<PAGE>
Michael D. Fricklas
March 31, 1998
Page 2
4. Termination / Good Reason Termination. Paragraph 8(b) shall be amended
to replace the second sentence with the following sentences:
"Such notice shall state an effective date no earlier than thirty
(30) business days after the date it is given. Viacom shall have ten
(10) business days from the giving of such notice within which to
cure."
Except as herein amended, all other terms and conditions of your
Employment Agreement shall remain the same and your Employment Agreement as
herein amended shall remain in full force and effect.
If the foregoing correctly sets forth our understanding, please sign one
(1) copy of this letter and return it to the undersigned, whereupon this letter
shall constitute a binding amendment to your Employment Agreement.
Very truly yours,
VIACOM INC.
By: /s/ William A. Roskin
-----------------------------
Name: William A. Roskin
Title: Senior Vice President,
Human Resources and
Administration
ACCEPTED AND AGREED:
/s/ Michael D. Fricklas
- ------------------------------
Michael D. Fricklas
<PAGE>
October 12, 1998
Michael D. Fricklas
60 Riverside Drive, Apt. 16-G
New York, New York 10024
Dear Mr. Fricklas:
Reference is made to that certain employment agreement between you and
Viacom Inc. ("Viacom"), dated as of January 1, 1996, as amended by a letter
agreement dated March 31, 1998 (your "Employment Agreement"). All defined terms
used without definitions shall have the meanings provided in your Employment
Agreement.
This letter, when fully executed below, shall amend your Employment
Agreement as follows:
1. Term. Paragraph 1 shall be amended to change the date representing the
end of the Employment Term in the first and second sentences from
"December 31, 2000" to "December 31, 2001".
2. Duties. Paragraph 2 shall be amended to replace the second sentence
with the following sentence:
"You will be Senior Vice President, General Counsel and Secretary
of Viacom and you agree to perform such duties reasonable and
consistent with such offices as may be assigned to you from time
to time by the Deputy Chairman, Executive Vice President of
Viacom responsible for Viacom's legal affairs or such other
individual as may be designated by the Chief Executive Officer of
Viacom (the "CEO")."
<PAGE>
Michael D. Fricklas
October 12, 1998
Page 2
3. Compensation/Salary. Paragraph 3(a) shall be amended to replace the
second sentence with the following sentence:
"Your Salary will be increased on October 12, 1998 to Five
Hundred Fifty Thousand Dollars ($550,000) per annum, on January
1, 1999 to Six Hundred Thousand Dollars ($600,000) per annum, on
January 1, 2000 to Six Hundred Fifty Thousand Dollars ($650,000)
per annum and on January 1, 2001 to Seven Hundred Thousand
Dollars ($700,000) per annum."
Except as herein amended, all other terms and conditions of your
Employment Agreement shall remain the same and your Employment Agreement as
herein amended shall remain in full force and effect.
If the foregoing correctly sets forth our understanding, please sign one
copy of this letter and return it to the undersigned, whereupon this letter
shall constitute a binding amendment to your Employment Agreement.
Very truly yours,
VIACOM INC.
By: /s/ William A. Roskin
-----------------------------
Name: William A. Roskin
Title: Senior Vice President,
Human Resources and
Administration
ACCEPTED AND AGREED:
/s/ Michael D. Fricklas
- ------------------------------
Michael D. Fricklas
EXECUTION COPY
AMENDMENT NO. 1 TO
STOCK PURCHASE AGREEMENT
dated as of November 25, 1998
among
VIACOM INTERNATIONAL INC.,
PEARSON plc
and
PEARSON INC.
<PAGE>
AMENDMENT NO. 1, dated as of November 25, 1998 (this "Amendment"),
to the Stock Purchase Agreement, dated as of May 17, 1998 (the "Stock Purchase
Agreement"), among VIACOM INTERNATIONAL INC., a Delaware corporation (the
"Seller"), PEARSON INC., a Delaware corporation (the "Purchaser"), and PEARSON
plc, a corporation organized under the laws of the United Kingdom that is the
indirect holder of all of the outstanding capital stock of the Purchaser (the
"Parent").
W I T N E S S E T H :
WHEREAS, the Seller, the Purchaser and the Parent desire to amend
the Stock Purchase Agreement in certain respects to provide for, among other
things, (i) the designation of additional direct or indirect Subsidiaries of the
Seller as Publishing Subsidiaries, Directly Acquired Publishing Subsidiaries,
Directly Acquired B&P and Reference Publishing Subsidiaries (as defined herein),
and Directly Acquired Foreign Subsidiaries and of certain assets as Assets; (ii)
the assignment by Parent of its right to purchase the Shares of certain Directly
Acquired Publishing Subsidiaries, Directly Acquired Foreign Subsidiaries,
Directly Acquired B&P and Reference Publishing Subsidiaries (including certain
of the additional Subsidiaries designated herein) and certain other properties
(all such Shares and other properties, including those which Parent or any of
its Affiliates is to purchase, together with all right, title and interest
therein and thereto, collectively, the "Sold Properties"), (x) to Purchaser or
other Subsidiaries of the Parent (each a "Parent Purchaser") or (y) to certain
Parent Purchasers and, if Parent so elects pursuant to Section 2.01(b) hereof,
the Shares of the Directly Acquired B&P and Reference Publishing Subsidiaries
and the covenant not to compete set forth in Section 5.12(c) of the Stock
Purchase Agreement, as amended by this Amendment, to Hicks, Muse Books LLC, a
Delaware limited liability company ("Hicks Muse"; the Parent Purchasers,
together with Hicks Muse if such election is made, the "Purchasing Entities");
provided, however, that no such assignment shall release the Purchaser or the
Parent from any liability under the Stock Purchase Agreement or delay the
consummation of the purchase and sale of the Sold Property under the Stock
Purchase Agreement; (iii) the manner in which each Sold Property is to be sold
and the consideration to be paid at Closing by each Purchasing Entity for each
Sold Property; and (iv) if Parent makes the election pursuant to Section 2.01(b)
hereof, the execution of the acknowledgment by Seller, Parent and Hicks Muse of
the right of Parent to assign the right to purchase the Shares of the Directly
Acquired B&P and Reference Publishing Subsidiaries and the covenant not to
compete set forth in Section 5.12(c) of the Stock Purchase Agreement, as amended
by this Amendment, to Hicks Muse (capitalized terms not defined herein have the
meanings ascribed to them in the Stock Purchase Agreement);
NOW, THEREFORE, the parties hereto hereby agree as follows:
SECTION 1. Amendments to Stock Purchase Agreement. (a) The
defined term "Ancillary Agreements" set forth in Section 1.01 is hereby
deleted in its entirety and replaced with the following:
<PAGE>
2
""Ancillary Agreements" means the Services Agreements, the
License Agreements, the Sublease Agreement, the S&S Software License
Agreement and the Purchaser Software License Agreement."
(b) The following defined term is hereby inserted in Section 1.01
immediately following the defined term "Assets" set forth therein:
""B&P and Reference Publishing Businesses" means, collectively, on
the date hereof, the United States business and professional and reference
publishing businesses included within the publishing segment of Viacom as
reported in the Annual Report on Form 10-K of Viacom for the year ended
December 31, 1997, and specifically excluding the Consumer Business, and
the children's learning, higher education and non-United States business
and professional and reference publishing businesses (other than the
interest in New York Institute of Finance (Holdings) L.D.C.). For the
purposes of this Agreement, "children's learning", "higher education",
"business and professional" and "reference" shall have the meanings
commonly employed by the management of Simon & Schuster on the date of
this Agreement, "reference" specifically includes "reference", "library
reference", "Macmillan Computer Publishing" and "Macmillan Publishing"
(and any other variation on the term "Macmillan", other than in connection
with Macmillan College Publishing, but specifically excluding any consumer
titles listed in Schedule D attached to the Purchaser to Consumer
Trademark License Agreement) and "business" refers to businesses managed
as a unit, without regard to the specific legal entity that conducts such
business."
(c) The defined term "Base Price" set forth in Section 1.01 is hereby
deleted in its entirety and replaced with the following:
""Base Price" means $4,620,000,000."
(d) The defined term "Consumer Business" set forth in Section 1.01 is
hereby deleted in its entirety and replaced with the following:
""Consumer Business" means the consumer/trade publishing business
that is included within the publishing segment of Viacom as reported in
the Annual Report on Form 10-K of Viacom for the year ended December 31,
1997 and the Learning Products Group. For the purposes of this Agreement,
"consumer" and "trade" shall have the meanings commonly employed by the
management of Simon & Schuster on the date of this Agreement."
(e) The defined term "Closing Net Assets" set forth in Section 1.01 is
hereby modified by inserting the following text immediately after the phrase
"total assets" and immediately before the phrase "minus total liabilities":
<PAGE>
3
"(excluding intangibles, net, consisting of goodwill and publishing
rights)"
(f) The defined term "Closing Net Assets Adjustment Amount" set forth in
Section 1.01 is hereby modified by inserting the following text at the end
thereof:
"(excluding intangibles, net, consisting of goodwill and publishing
rights). For purposes of calculating the Closing Net Assets Adjustment
Amount, the December 31, 1997 Audited Balance Sheet shall be adjusted to
eliminate the total net assets (excluding intangibles, net, consisting of
goodwill and publishing rights) of the Learning Products Group."
(g) The defined term "December 31, 1997 Audited Balance Sheet" set forth
in Section 1.01 is hereby modified by inserting the following sentence
immediately after the first sentence thereof:
"For purposes of computing the Closing Net Assets Adjustment Amount, the
December 31, 1997 Audited Balance Sheet and the Estimated Closing Net
Assets shall be adjusted to exclude intangibles, net, consisting of
goodwill and publishing rights."
(h) The following defined term is hereby inserted in Section 1.01
immediately following the defined term "December 31, 1997 Audited Balance
Sheet":
""Directly Acquired B&P and Reference Publishing Subsidiaries" means
the entities set forth on Schedule 5."
(i) The defined term "Final Net Assets Adjustment Amount" set forth in
Section 1.01 is hereby modified by (i) inserting the phrase "(excluding
intangibles, net, consisting of goodwill and publishing rights)" immediately
after the phrase "total assets" and immediately before the phrase "minus total
liabilities" and (ii) inserting the following sentence to the end thereof:
"For purposes of calculating the Final Net Assets Adjustment Amount, the
December 31, 1997 Audited Balance Sheet shall be adjusted to
eliminate the total net assets (excluding intangibles, net,
consisting of goodwill and publishing rights) of the Learning
Products Group."
(j) The following defined terms are hereby inserted in Section 1.01
immediately following the defined term "Hazardous Materials" set forth therein:
""Hicks Muse" means Hicks, Muse Books LLC, a Delaware limited
liability company.
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4
"Hicks Muse Transfer" means the transfer and delivery of all of the
outstanding capital stock of the Directly Acquired B&P and Reference
Publishing Subsidiaries by the Seller or its Affiliates to Hicks Muse, if
the Parent elects to assign the right to purchase such capital stock to
Hicks Muse pursuant to Section 2.01(b) of this Agreement."
(k) The following defined term is hereby inserted in Section 1.01
immediately following the defined term "Law" set forth therein:
""Learning Products Group" means all right, title and interest in
the assets and liabilities comprising the Simon & Schuster Learning
Products Group (which shall have the meaning commonly employed by the
management of Simon & Schuster on the date of this Agreement), including,
without limitation, all rights to the business known as the "Red Rocket"
website, which includes, without limitation, the domain name (being
"redrocket.com"), the trademark (being "Red Rocket"), and any third-party
contracts and equipment used exclusively in such business."
(l) The following defined term is hereby inserted in Section 1.01
immediately following the defined term "Lien" set forth therein:
""Macmillan Trademark Sharing Agreement" means the agreement,
dated November 8, 1993, between Macmillan, Inc. and Macmillan Limited
relating to names and marks."
(m) The defined term "Permitted Reorganization" set forth in Section 1.01
is hereby deleted in its entirety and replaced with the following:
""Permitted Reorganization" means an internal reorganization of
assets owned and employees employed by the Seller or its Subsidiaries,
including the Restructuring, to be completed prior to the Closing Date (1)
to effect any transfer (a) of Assets and employees to the Publishing
Subsidiaries (or otherwise in connection with an assignment permitted
pursuant to Section 11.08 hereof), (b) of assets and employees from the
Publishing Subsidiaries to the Seller or an Affiliate of the Seller (other
than a Publishing Subsidiary) and (c) of assets and employees from any
Publishing Subsidiary to any other Publishing Subsidiary and (2), at the
election of the Seller, in its sole discretion, to transfer any inactive
Subsidiary to the Seller or one of its Affiliates that is not a Publishing
Subsidiary."
(n) The following defined term is hereby inserted in Section 1.01
immediately following the defined term "Purchase Price":
<PAGE>
5
""Purchaser Software License Agreement" means the Software
License Agreement between Simon & Schuster and Silver Burdett Ginn Inc.
in the form attached hereto as Exhibit 1.01(d)".
(o) The following defined term is hereby inserted in Section 1.01
immediately following the defined term "Purchase Price" set forth therein:
""Restructuring" means the series of transactions effected on
September 30, 1998 whereby the Seller has caused (i) Prentice-Hall, Inc.,
a Delaware corporation ("PHI"), to contribute to Arco Publishing, Inc.
("Arco"), Executive Reports Corporation, Executive Tax Reports, Inc., and
Robert J. Brady Co. certain United States business and professional and
reference publishing business assets owned by PHI and (ii) Macmillan,
Inc., a Delaware corporation ("Macmillan"), to contribute to Jossey-Bass,
Inc., Publishers, a California corporation ("Jossey-Bass"), certain United
States business and professional and reference publishing business assets
owned by Macmillan."
(p) The following defined term is hereby inserted in Section 1.01
immediately following the defined term "Simon & Schuster":
""Simon & Schuster Software License Agreement" means the Software
Licence Agreement between Simon & Schuster and Silver Burdett Ginn Inc.
in the form attached as Exhibit 1.01(e)".
(q) The defined term "Sublease Agreement" is hereby deleted in its
entirety and replaced with the following:
""Sublease Agreement" means, collectively, (i) the Sublease
Agreement between the Purchaser (or an assignee reasonably acceptable to
the Seller and acceptable to the landlord for such property) and the
Seller and (ii) the Sublease Agreement between the Purchaser, or if Parent
makes the election pursuant to Section 2.01(b) of this Agreement, Hicks
Muse (or, in each case, an assignee reasonably acceptable to the Seller
and acceptable to the landlord for such property) on the one hand and the
Seller on the other, in the case of each of clause (i) and (ii) hereof
with respect to 1633 Broadway, each substantially in the form attached
hereto as Exhibit 1.01(c) and containing representations and warranties
with respect to subleased property comparable to those contained in
Section 3.19 of this Agreement."
(r) Section 1.02 is hereby amended as follows:
(i) To insert the terms "Competing Computer Business", "Competing
Education Business" and "Competing International Business" and the
section
<PAGE>
6
references "5.12(c)", "5.12(a)" and "5.12(b)", respectively,
immediately following the term and corresponding section reference
for "COBRA";
(ii) To insert the term "Initial Allocation" and the section
reference "2.02(a)" immediately following the term and corresponding
section reference for "Indemnifying Party";
(iii) To insert the term "Parent Purchaser" and the section
reference "Recitals" immediately following the term and
corresponding section reference for "Parent Board Recommendation";
(iv) To insert the term "Purchasing Entities" and the section
reference "Recitals" immediately following the term and
corresponding section reference for "Purchaser's DC Plan";
(v) To insert the term "Sold Properties" and the section reference
"Recitals" immediately following the term and corresponding
reference for "Shares";
(vi) To delete the term "Competing Business" and the corresponding
section reference;
(vii) To delete the term "Draft Allocation Statement" and the
corresponding section reference; and
(viii) To delete the term "Stock Allocation" and the corresponding
section reference.
(s) Section 2.01 is hereby deleted in its entirety and replaced with the
following text:
"SECTION 2.01 Purchase and Sale (a) On the terms and subject to the
conditions set forth in this Agreement, at the Closing the Seller shall
sell, convey, assign, transfer and deliver to each Purchasing Entity
(and/or cause one or more of its Subsidiaries to sell, convey, assign,
transfer and deliver to such Purchasing Entity) each Sold Property being
acquired by such Purchasing Entity and each Purchasing Entity shall
purchase, acquire and accept from the Seller or such Subsidiaries each
Sold Property, with each Sold Property being sold by the party shown under
the column "Seller" and purchased by the party shown under the column
"Purchaser" on Schedule A. Such transactions shall occur in the following
order, with all such transactions constituting the Closing: all of the
transactions shown under Step I of Schedule A shall be completed first and
prior to any of the transactions shown under Steps II or III of Schedule
A; all of the transactions shown under Step II of Schedule A shall be
completed second and prior to any of the transactions shown under Step III
of Schedule A; all of the transactions shown
<PAGE>
7
under Step III of Schedule A shall be completed last and after any of the
transactions shown under Steps I and II of Schedule A; and all proceeds
received by a Publishing Subsidiary in connection with any such Step shall
be distributed by such Publishing Subsidiary to a non-Publishing
Subsidiary before the sale of such Publishing Subsidiary pursuant to any
subsequent Step.
(b) Parent shall have the right to elect to assign its right to
purchase the Shares of the Directly Acquired B&P and Reference Publishing
Subsidiaries and the covenant not to compete set forth in Section 5.12(c)
hereof to Hicks Muse and/or Hicks Muse's Affiliates. In order for such
election to be effective, (i) Parent must notify Seller in writing of such
election at least five days prior to the Closing and (ii) such notice
shall have attached to it an original of a parallel notice from Hicks Muse
to Parent whereby Hicks Muse notifies Parent of its intent to consummate
the purchase of the Shares of the Directly Acquired B&P and Reference
Publishing Subsidiaries and the covenant not to compete set forth in
Section 5.12(c) hereof, as contemplated by the Stock Purchase Agreement,
dated July 2, 1998, among Purchaser, Parent and Hicks Muse, as such
agreement may be amended, and as further set forth in this Agreement."
(t) The first sentence of Section 2.02(a) is hereby deleted in its
entirety and replaced with the following text:
"Each Purchasing Entity shall pay that portion of the Purchase Price
relating to each Sold Property as is specified in the Purchase Price
Notice (in accordance with the amounts shown under the column "Purchase
Price" in Schedule A next to each such Sold Property (the "Initial
Allocations"); the Initial Allocation with respect to Prentice-Hall, Inc.
shall be increased or decreased from the amount listed on Schedule A, as
the case may be, to reflect the portion of the Closing Net Assets
Adjustment Amount required to be taken into account pursuant to Section
2.05(a)), in cash to the "Seller" shown next to such Sold Property in
Schedule A at the Closing, as provided in Section 2.05(a). Parent and
Purchaser agree that the Initial Allocations shall be the maximum amounts
allocated with respect to each Sold Property other than Prentice-Hall,
Inc., and, notwithstanding anything else contained herein, such Initial
Allocations to each Sold Property other than Prentice-Hall, Inc. shall not
be adjusted upward at any time. In addition, Parent and Purchaser agree
that at the Closing if any Purchasing Entity is for any reason unwilling
or unable to so pay or for any reason fails to pay such portion of the
Purchase Price so specified in the Purchase Price Notice, Parent and
Purchaser shall be liable and shall pay such portion of the Purchase Price
at Closing."
(u) The following text is hereby inserted at the end of Section 2.02(a):
"Notwithstanding the foregoing, no assignment of rights and
obligations to any Purchasing Entity shall release the Purchaser or Parent
from any liability hereunder. In
<PAGE>
8
the event that Parent has previously elected to assign the rights to
purchase certain Sold Property to Hicks Muse and/or one or more of its
Affiliates pursuant to Section 2.01(b) hereof, and Hicks Muse and/or such
Affiliates fail to perform at the Closing, then the Closing shall proceed
as though such election was not made, and such Sold Property shall be sold
directly to Parent and certain of Parent's Affiliates at the Closing."
(v) The first sentence of Section 2.02(b) is hereby deleted in its
entirety. The second sentence of Section 2.02(b) is hereby amended by
substituting the phrase "IBD Holdings" for the phrase "Viacom Holdings [name to
be changed]", deleting the word "and" before the phrase "at least $300 million,"
and adding at the end of such sentence the phrase "and, in the aggregate, $708
million to the Directly Acquired B&P and Reference Publishing Subsidiaries and
the covenant set forth in Sections 5.12(c), with the aggregate amount allocated
to all the Sold Properties with respect to the Base Price in all events not to
exceed the Base Price." The fifth sentence of Section 2.02(b) is hereby deleted
in its entirety and replaced with the following text:
"Within 75 days after the Closing Date, the Seller shall notify the
Purchaser either (i) that it consents to the Initial Allocations as set
forth in Schedule A or (ii) that it disagrees with the Initial
Allocations."
(w) The sixth sentence of Section 2.02(b) is hereby amended by
substituting the phrase "Initial Allocations," for the phrase "Draft Allocation
Statement,".
(x) Following the last sentence of Section 2.02(b), the following sentence
shall be added:
"If the resolution of any dispute regarding the Initial Allocations
results in a different amount of consideration being allocated to the
purchase of any Sold Property, the excess of any Initial Allocation paid
by the party listed in Schedule A as "Purchaser" over the amount of any
final allocation determined under this Section 2.02(b) shall be deemed
paid by such party on behalf of the actual "Purchaser" of Prentice-Hall,
Inc. and received by the "Seller" of Prentice-Hall, Inc."
(y) The first sentence of Section 2.02(c) is hereby deleted in its
entirety and replaced with the following text:
"The Seller, the Parent and the Purchaser shall, and, if applicable,
the Parent and the Purchaser shall cause Hicks Muse to, report the
federal, state, local and foreign Tax consequences of the transactions
contemplated by this Agreement in a manner consistent with the
transactions and order and timing of steps described in Section 2.01(a)
and the Initial Allocations, revised as agreed by the Seller, the Parent
and the Purchaser or as determined by the Independent Accounting Firm, as
the case may be."
<PAGE>
9
(z) The second sentence of Section 2.02(c) is hereby amended by
substituting for the phrase "Stock Allocations" the phrase "transactions, order
and timing of steps and Initial Allocations, as so revised,"
(aa) The final sentence of Section 2.03 shall be amended by inserting the
following text at the start thereof:
"Except as otherwise contemplated by the sequence of steps set forth in
Section 2.01(a),"
(bb) Section 2.04 is hereby deleted in its entirety and replaced with the
following text:
"SECTION 2.04. Closing Deliveries by the Seller. At the
Closing, the Seller shall deliver or cause to be delivered to each
Purchasing Entity (or Parent, on behalf of Parent, Purchaser and, if
applicable, Hicks Muse):
(i) stock certificates evidencing all of the shares of capital
stock acquired by such Purchasing Entity of (A) the Directly
Acquired Publishing Subsidiaries, (B) the Directly Acquired Foreign
Subsidiaries and (C) the Directly Acquired B&P and Reference
Publishing Subsidiaries, duly endorsed in blank or accompanied by
stock powers and transfer forms duly executed in blank;
(ii) receipts for the portion of the Purchase Price as is
specified in the Purchase Price Notice relating to each Sold
Property;
(iii) the Ancillary Agreements required to be delivered
pursuant to Section 8.02; and
(iv) any required stock transfer tax stamps."
(cc) Section 2.05 is hereby amended by substituting for the phrase "Parent
and the Purchaser shall deliver to the Seller" the phrase "each Purchasing
Entity shall deliver to the "Seller" noted opposite its name on Schedule A with
respect to each Sold Property being purchased by such Purchasing Entity" and by
inserting after the words "wire transfer" in Section 2.05(a) the words "or
intra-bank transfer".
(dd) Section 2.06(e) is hereby amended by substituting for the phrase "the
Parent and the Purchaser" the phrase "Pearson AG" and for the word "Seller" the
phrase "Paramount Communications Acquisitions Corp.", and inserting in the first
sentence of such Section 2.06(e) after the word "excess" the phrase ",which
amount shall be deemed to be paid in respect of the Shares of Prentice-Hall,
Inc.,"
<PAGE>
10
(ee) Section 2.07 is hereby amended by inserting after the words "wire
transfer" the words "or intra-bank transfer."
(ff) Section 3.03 is hereby amended by inserting the following text
immediately after the phrase "Directly Acquired Publishing Subsidiaries":
", the Directly Acquired B&P and Reference Publishing Subsidiaries"
(gg) Section 3.12 is hereby amended by inserting the following text
immediately after the Section heading "Intellectual Property" and immediately
before clause (a):
"Except to the extent caused by (i) the direct sale of additional
Publishing Subsidiaries pursuant to this Amendment, (ii) the series of
transactions contemplated by clauses (i) and (ii) of the defined term
"Restructuring" set forth in Section 1.01 hereof or (iii) the Hicks Muse
Transfer (but, in the case of the Hicks Muse Transfer, only to the extent
that any inaccuracy or breach of the representations or warranties set
forth in this Section 3.12 would not have occurred had the transactions
contemplated by the Stock Purchase Agreement as in effect prior to this
Amendment been consummated in the manner set forth therein);"
(hh) Section 3.13(a) of the Stock Purchase Agreement is hereby amended by
adding the following sentence to the end thereof:
"Anything in this Section 3.13(a) to the contrary notwithstanding,
no individual currently or formerly employed in the Learning Products
Group, which individuals are listed on Section 3.13(a)(iv) of the
Disclosure Schedule, shall be a "Business Employee" or a "Former Business
Employee" for any purpose under this Agreement.
(ii) Section 3.13(a)(iv) is hereby added to the Disclosure Schedule in the
form attached to this Amendment.
(jj) Section 5.04(d) is hereby amended by inserting the following text
immediately after the phrase "consents and approvals" and immediately before the
phrase "that may be required":
"(including, without limitation, any consents, approvals, authorizations
or other actions or filings or notifications that are the responsibility
of Parent and Purchaser pursuant to Section 5.04(e); provided, however,
that in no event shall Seller or its Affiliates be liable under this
Agreement or otherwise for the failure to obtain any such consents,
approvals, authorizations or other actions or filings or notifications,
which shall be the sole responsibility of Parent and Purchaser pursuant to
Section 5.04(e))".
<PAGE>
11
(kk) Section 5.04 is hereby amended by inserting the following text
immediately after Section 5.04(d):
"(e) The Parent and the Purchaser shall be solely responsible, to
the extent not previously obtained, for (i) obtaining any consents,
approvals, authorizations or other action of or by, or making any filing
with or notification to, any Governmental Authority, including, but not
limited to, trademark or copyright filings, and (ii) obtaining any
consents, approvals, waivers, authorizations or other actions or giving
(or instructing the Seller to give) any notice under or pursuant to any
bond, note, Contract, Real Property Lease, license, permit, franchise or
other instrument to which the Seller or any B&P and Reference Publishing
Subsidiary is a party or by which any shares or assets of any B&P and
Reference Publishing Businesses may be bound or affected, arising from or
made necessary by, in the case of each of clause (i) and (ii), the direct
sale of additional Publishing Subsidiaries pursuant to this Amendment, the
Restructuring or the Hicks Muse Transfer. The Parent and the Purchaser
hereby acknowledge and agree that neither the Seller nor its Affiliates
shall have any liability to the Parent or the Purchaser in connection with
any Losses arising from the failure to obtain or to give any notice on the
consents, approvals, authorizations or other matters set forth in this
Section 5.04(e) including, without limitation, any change in the rights
granted to Macmillan, Inc. under the Macmillan Trademark Sharing
Agreement."
(ll) The first sentence of Section 5.08 is hereby deleted in its entirety
and replaced with the following text:
"Prior to the Closing Date, the Seller shall, and shall cause its
Subsidiaries to, effect the Permitted Reorganization."
(mm) Section 5.12 is hereby deleted in its entirety and replaced with
the following:
"SECTION 5.12. Non-Competition. (a) The Seller acknowledges that
reasonable limits on its ability to engage in activities competitive with
the Purchaser are warranted to protect the Purchaser's substantial
investment in acquiring the Shares, the Assets and the Businesses.
Accordingly, the Seller hereby covenants and agrees that during the period
commencing with the Closing Date and ending on the third anniversary of
the Closing Date, Viacom and the Seller shall not, and shall cause their
direct and indirect Subsidiaries not to (subject, in the case of its
existing Subsidiaries that are not wholly owned, to its fiduciary duties
to holders of minority interests), for the Seller's own account or jointly
with any other Person, publish or produce textbooks intended for use
primarily in instruction in academic institutions of higher learning in
the United States (a "Competing Education Business"); provided, however,
that the foregoing shall not be breached as a result of (a) the ownership
or other right to acquire by Viacom or the Seller (or any of their
Subsidiaries) of not more than an aggregate of 10% of any class of stock
<PAGE>
12
of a Person engaged, directly or indirectly, in a Competing Education
Business; (b) the acquisition of, holding by, operation of, or disposition
by Viacom or the Seller (or any of their Subsidiaries) of an interest in
any Person whose primary business is not a Competing Education Business;
(c) the licensing or sale of any of the Seller's or its Subsidiaries'
intellectual property for use in connection with any Competing Education
Business; (d) any activity relating to the publication of fiction or
non-fiction (other than in the subject matter of computer applications and
operation systems) sold primarily into the consumer retail channel; or (e)
any activity relating to any book or category of books presently published
by Simon & Schuster's Consumer division or similar in genre to any such
book or category.
"(b) The Seller acknowledges that reasonable limits on its ability
to engage in activities competitive with the Purchaser are warranted to
protect the Purchaser's substantial investment in acquiring the Shares,
the Assets and the Businesses. Accordingly, the Seller hereby covenants
and agrees that during the period commencing with the Closing Date and
ending on the third anniversary of the Closing Date, Viacom and the Seller
shall not, and shall cause their direct and indirect Subsidiaries not to
(subject, in the case of its existing Subsidiaries that are not wholly
owned, to its fiduciary duties to holders of minority interests), for the
Seller's own account or jointly with any other Person, publish or produce
(i) textbooks intended for use primarily in instruction in academic
institutions of higher learning outside of the United States or (ii) any
branded series of tutorial reference books in the computer applications
and operating systems categories outside of the United States (a
"Competing International Business"); provided, however, that the foregoing
shall not be breached as a result of (a) the ownership or other right to
acquire by Viacom or the Seller (or any of their Subsidiaries) of not more
than an aggregate of 10% of any class of stock of a Person engaged,
directly or indirectly, in a Competing International Business; (b) the
acquisition of, holding by, operation of, or disposition by Viacom or the
Seller (or any of their Subsidiaries) of an interest in any Person whose
primary business is not a Competing International Business; (c) the
licensing or sale of any of the Seller's or its Subsidiaries' intellectual
property for use in connection with any Competing International Business;
(d) any activity relating to the publication of fiction or non-fiction
(other than in the subject matter of computer applications and operation
systems) sold primarily into the consumer retail channel; or (e) any
activity relating to any book or category of books presently published by
Simon & Schuster's Consumer division or similar in genre to any such book
or category.
"(c) The Seller acknowledges that reasonable limits on its ability
to engage in activities competitive with the Purchaser are warranted to
protect the Purchaser's substantial investment in acquiring the Shares,
the Assets and the Businesses. Accordingly, the Seller hereby covenants
and agrees that during the period commencing with the Closing Date and
ending on the third anniversary of the Closing Date, the Seller shall not,
and shall cause their direct and indirect Subsidiaries not to (subject, in
the case
<PAGE>
13
of its existing Subsidiaries that are not wholly owned, to its fiduciary
duties to holders of minority interests), for the Seller's own account or
jointly with any other Person, publish or produce any branded series of
tutorial reference books in the computer applications and operating
systems categories in the United States (a "Competing Computer Business");
provided, however, that the foregoing shall not be breached as a result of
(a) the ownership or other right to acquire by the Seller (or any of their
Subsidiaries) of not more than an aggregate of 10% of any class of stock
of a Person engaged, directly or indirectly, in a Competing Computer
Business; (b) the acquisition of, holding by, operation of, or disposition
by the Seller (or any of their Subsidiaries) of an interest in any Person
whose primary business is not a Competing Computer Business; (c) the
licensing or sale of any of the Seller's or its Subsidiaries' intellectual
property for use in connection with any Competing Computer Business; (d)
any activity relating to the publication of fiction or non-fiction (other
than in the subject matter of computer applications and operation systems)
sold primarily into the consumer retail channel; or (e) any activity
relating to any book or category of books presently published by Simon &
Schuster's Consumer division or similar in genre to any such book or
category."
(nn) The following text is hereby inserted immediately following Section
5.13:
"SECTION 5.14. Harvard Medical School Publishing Program. (a)
Each party hereto agrees to cooperate in obtaining the consent of the
President and Fellows of Harvard College ("Harvard") under the agreement,
dated as of September 24, 1996, between Simon & Schuster and Harvard
regarding the Harvard Medical School Publishing Program (the "Harvard
Agreement") in connection with the division of the rights granted to Simon
& Schuster under the Harvard Agreement as between the Business and the
Consumer Business in connection with (i) the sale by Seller of the
Business as contemplated by this Agreement and the Ancillary Agreements
and (ii) the possible sale by Parent and Purchaser, or Affiliates thereof,
of the B&P and Reference Publishing Business following the Closing. Such
consent and division of rights, including, without limitation, any related
amendment to the Harvard Agreement, shall be in a form reasonably
satisfactory to the Seller and the Parent.
(b) Seller represents and warrants to Parent and Purchaser that as
of November 25, 1998, (i) $1,993,332 has been paid to Harvard as advances
under the Harvard Agreement ("Advances"), of which $1,160,000 has been
internally allocated to the Consumer Business, $166,666 to the B&P and
Reference Publishing Business and $666,666 to the "education business" (as
commonly used by the management of Simon & Schuster on the date of this
Agreement) and (ii) $4,006,668 in Advances remains to be paid. Commencing
from the Closing Date and ending on the date which is the earlier of (x)
the termination of the Harvard Agreement or (y) such time as all Advances
have been paid, each milestone comprising all of the remaining Advances
shall be payable as between Seller or its Affiliates on the one hand and
Parent and/or Purchaser or their
<PAGE>
14
Affiliates on the other hand, in a ratio of 58.33% by the Seller or its
Affiliates and 41.67% by Parent and/or Purchaser or their Affiliates. To
the extent that there are any reductions in the Advances payable to
Harvard from those payable under the Harvard Agreement on the date hereof,
the Advances payable by Seller or its Affiliates on the one hand and by
Parent and/or Purchaser on the other hand shall be reduced by a
proportionate amount of such reduction equal to the proportionate amount
of all remaining Advances payable by each party, as set forth in the
preceding sentence.
As used in this Agreement (i) "Consumer Business Advance Amount"
means (x) $3.5 million plus (y) any Budget amounts (as the term "Budget"
is defined in the Harvard Agreement) expended from the date hereof by the
Seller or its Affiliates minus (z) any reduction in remaining Advances
payable by Seller or its Affiliates and (ii) "Business Advance Amount"
means (x) $2.5 million plus (y) any Budget amounts (as the term "Budget"
is defined in the Harvard Agreement) expended from the date hereof by
Parent and/or Purchaser or their Affiliates minus (z) any reduction in
remaining Advances payable by Parent and/or Purchaser or their Affiliates.
(c) Any royalties owed under the Harvard Agreement in connection
with books, imprints, titles and the like published thereunder
("Royalties") relating to (i) the Consumer Business, up to the Consumer
Business Advance Amount, shall be the property of and paid over to Seller
or its Affiliates and (ii) the Business, up to the Business Advance
Amount, shall be the property of and paid over to Purchaser or its
Affiliates, in each case as a recoupment against the Consumer Business
Advance Amount or the Business Advance Amount, as the case may be. If at
any time Seller or its Affiliates has recouped the Consumer Business
Advance Amount and Purchaser or its Affiliates has not recouped the
Business Advance Amount, then from such time all Royalties relating to the
Consumer Business shall be the property of and paid over to Purchaser or
its Affiliates until Purchaser or its Affiliates has recouped the Business
Advance Amount. Similarly, if at any time Purchaser or its Affiliates has
recouped the Business Advance Amount and Seller or its Affiliates has not
recouped the Consumer Business Advance Amount, then from such time all
Royalties relating to the Business shall be the property of and paid over
to Seller or its Affiliates until Seller or its Affiliates has recouped
the Consumer Business Advance Amount. At such time as Seller or its
Affiliates has recouped the Consumer Business Advance Amount and Purchaser
or its Affiliates has recouped the Business Advance Amount, all Royalties
shall be paid to Harvard in accordance with the Harvard Agreement.
(d) Each party hereto agrees to cooperate with each other party in
sharing all information in its possession from time to time relating to
the Harvard Agreement necessary for the calculation of the Royalties and
all amounts advanced in respect of Consumer Business Advance Amounts and
Business Advance Amounts, as the case may be, and any further information
which the parties reasonably believe is necessary or
<PAGE>
15
desirable for the proper administration of their mutual relationship under
the Harvard Agreement and as set forth in this Section 5.14.
(e) In the event that the consents described in Section 5.14(a) are
not obtained or are only partially obtained, each party hereto agrees to
negotiate in good faith to reach an agreement as between them that
accomplishes the same economic result as is set forth in Sections 5.14(b)
and (c) hereof."
(oo) Section 6.02(a) of the Stock Purchase Agreement is hereby deleted in
its entirety and replaced with the following:
"SECTION 6.02. Retirement Plans. (a) It is agreed by both parties
that the Seller or one of its Affiliates will continue to maintain the VPP
and the Viacom Excess Pension Plan, with the benefit accruals of the
Business Employees under such plans ceasing as of the Closing Date and
Seller shall retain all liabilities thereunder. The Seller shall cause the
Business Employees to be fully vested in their accrued benefits in each
such plan as of the Closing Date."
(pp) Section 6.02(b) of the Stock Purchase Agreement is hereby amended by
inserting the following text at the end of the fifth full sentence thereof:
"and Seller shall retain all other liabilities under the VIP.
Notwithstanding anything to the contrary in this Section 6.02(b), in the
event that the Parent makes the election pursuant to Section 2.01(b) of
this Agreement, the Seller shall transfer and deliver the VIP account
balances of Business Employees and Former Business Employees designated in
writing by the Parent and the Purchaser, and the Seller shall also
transfer and deliver to Hicks Muse, or, if so directed by the Parent and
the Purchaser, cause the trustee of the VIP to transfer and deliver to the
trustee of a Hicks Muse defined contribution plan designated in writing by
the Parent and the Purchaser or Hicks Muse, if applicable, an amount equal
to the aggregate account balances of Business Employees and Former
Business Employees of the B&P and Reference Publishing Businesses so
designated by the Parent and the Purchaser."
(qq) Section 6.02(b) of the Stock Purchase Agreement is hereby further
amended by adding the following text to the end thereof:
"Notwithstanding anything to the contrary in this Section 6.02(b), in the
event that the Parent makes the election pursuant to Section 2.01(b) of
this Agreement, then (i) the Seller shall, (A) prior to Closing, establish
a separate non-qualified deferred compensation plan (the "HM EIP") with
terms, benefits and commitments identical to those provided under the VEIP
for the benefit of participating Business Employees and Former Business
Employees of the B&P and Reference Publishing Businesses designated
<PAGE>
16
in writing by the Parent and the Purchaser and (B) at Closing, transfer
the HM EIP to Hicks Muse, (ii) the HM EIP shall assume responsibility for
all account balances and earnings thereon of such designated individuals
under the VEIP (it being understood that the S&S EIP shall not assume any
responsibility for the VEIP account balances and earnings thereon with
respect to such individuals) and (iii) the Parent and the Purchaser shall
cause Hicks Muse to assume the HM EIP at Closing and to honor the terms of
any elections previously made by participants under the VEIP. The
Purchaser and the Parent acknowledge that no assets will be transferred to
Hicks Muse in connection with the establishment of the HM EIP and the
assumption thereof by Hicks Muse."
(rr) Section 6.02(e) of the Stock Purchase Agreement is hereby amended by
(i) inserting the phrase "as soon as practicable, after the Closing,"
immediately after the phrase "and the Seller shall" in the first sentence
thereof and (ii) adding the following text to the end thereof:
"Notwithstanding anything to the contrary in this Section 6.02(e), in the
event that the Parent makes the election pursuant to Section 2.01(b) of
this Agreement, then (i) the Seller shall, (A) prior to Closing, (I)
establish a separate non-qualified deferred compensation plan (the "HM
DCP") providing for the payment of deferred benefits to participating
Business Employees and Former Business Employees of the B&P and Reference
Publishing Businesses designated in writing by the Parent and the
Purchaser who have previously deferred the settlement of performance
awards under the terms of the Paramount DCP and (II) transfer assets, if
any, and liabilities related to each designated individual's account
balance in the Paramount DCP, including all earnings thereon, into the HM
DCP (it being understood that no assets or liabilities related to any such
individual's account balance in the Paramount DCP will be transferred to
the S&S DCP) and (B) at Closing, transfer of the HM DCP to Hicks Muse and
(ii) the Parent and the Purchaser shall cause Hicks Muse to assume the HM
DCP at Closing and to honor the terms of the distribution election
previously made by the designated individuals, subject to the terms of the
HM DCP."
(ss) The following sentence is hereby inserted at the end of Section
6.03:
"For the avoidance of doubt, the Purchaser and the Seller
acknowledge that the term "Former Business Employees" for all purposes under
this Agreement shall mean all individuals who were at any time employed in a
publishing business other than the Consumer Business, including but not limited
to former employees of those businesses previously disposed of and set forth on
Schedule 8 attached hereto."
(tt) Section 6.05(a) of the Stock Purchase Agreement is hereby amended by
inserting the text "(other than severance liability arising from any claim by
any Business Employee for the disputed severance benefits described in Schedule
7)" at the end of clauses (ii), (v) and (vii) thereof.
<PAGE>
17
(uu) Section 6.05(b) of the Stock Purchase Agreement is hereby amended by
inserting the following text at the beginning thereof:
"Except as may be otherwise agreed by a Business Employee and
Purchaser,"
(vv) Section 6.05 of the Stock Purchase Agreement is hereby amended by
inserting the following text immediately following Section 6.05(b):
"(c) Subject to Section 6.09, the Purchaser acknowledges that it
shall make all required stay bonus and cash severance payments to Business
Employees under the plans, programs, arrangements and agreements referred
to in Sections 3.13(a)(i)(A)(I)(13), (A)(I)(14) and (A)(III)(1) of the
Disclosure Schedule (as such plans, programs, arrangements and agreements
may be amended by the Purchaser and, with respect to the agreements
referenced in Section 3.13(a)(i)(A)(III)(1) of the Disclosure Schedule,
with the consent of the Business Employees) and shall not look to the
Seller for the cash payment of any amounts required to be paid
thereunder."
(ww) The following text is hereby inserted immediately following
Section 6.07:
"SECTION 6.08. Transition Period. During the period between the
Closing and December 31, 1998, the Seller shall maintain the benefits of
the Business Employees and Former Business Employees under each of the
Viacom Plans listed on Schedule 6 attached hereto. Purchaser or Parent
shall promptly reimburse Seller for Seller's direct out-of-pocket expenses
for maintaining such Viacom Plans upon transmission to Purchaser or Parent
of a statement of such expenses in relation thereto.
SECTION 6.09. Enhanced Severance and Retention Agreements. The
Seller agrees to reimburse the Parent and the Purchaser for any severance
payment that the Parent or the Purchaser becomes obligated to make to any
Business Employee who received an Enhanced Severance and Retention
Agreement pursuant to the claim of any Business Employee described on
Schedule 7 attached hereto; provided, however, that the Parent and the
Purchaser agree (i) to notify the Seller promptly and in writing of any
such claim brought against the Parent, the Purchaser or any of the
Publishing Subsidiaries on or after the Closing Date and (ii) not to
settle any such claim without approval of the Seller, such approval not to
be unreasonably withheld or delayed; and, provided, further, that the
Parent and the Purchaser have not amended the employment agreement and/or
the Enhanced Severance Retention Agreement with the Business Employee in a
manner that adversely impacts Seller's ability to defend the claim of such
Business Employee. Seller shall notify Parent and Purchaser promptly after
receiving the notice described in clause (i) whether or not it intends to
defend such claim and, if no such notice is received by Parent or
Purchaser within thirty days after such receipt, Seller shall be deemed to
intend
<PAGE>
18
not to defend. The Parent and the Purchaser agree that the Seller shall be
entitled to assume and control the defense of any such claim through
counsel of its choice, reasonably acceptable to Parent and Purchaser, and
that, in the event the Seller undertakes any such defense, the Parent and
the Purchaser shall, and shall cause the Publishing Subsidiaries to,
cooperate with the Seller in such defense (or, if related to the claim in
question, in making a counterclaim or any cross-complaint) and make
available to the Seller all witnesses, records materials and information
in the possession or under the control of the Parent, the Purchaser or any
of the Publishing Subsidiaries as is reasonably requested by the Seller.
SECTION 6.10. Business Employee. Notwithstanding any other
provision of this Agreement to the contrary, including any Schedules or
Exhibits attached hereto, each of the parties hereto agrees that Jonathan
Newcomb shall not be considered a Business Employee or Former Business
Employee for purposes of this Agreement."
(xx) Section 7.07 is hereby amended by adding at the end of such Section
the following sentence:
"The party responsible under local law for filing the Tax Return
with respect to each such Tax shall file such return, pay such Tax and
notify the other party of the amount of such Tax, and the other party
shall promptly pay to such party 50% of the amount of such Tax."
(yy) Section 7.09 is hereby amended by adding at the end of such Section
the following phrase:
"or, at the Parent or the Purchaser's request, a certificate that
one or more of the Publishing Subsidiaries being sold pursuant to this
Agreement and identified in such request is not a "United States real
property holding company" within the meaning of Section 897 of the Code."
(zz) Section 7.10(b) is hereby amended by inserting "(i)" immediately
following the phrase "except for" and by inserting "and (ii) the indemnity
contained in Section 10.01(a)(iv) of this Agreement" immediately following the
phrase "Section 3.14 of this Agreement".
(aaa) Section 7.10(d) is hereby amended by adding at the end of such
Section the following sentence:
"Notwithstanding the preceding sentence, any foreign Publishing
Subsidiary that receives any proceeds pursuant to Section 2.01(a) shall
distribute such proceeds as provided in Section 2.01(a), and Prentice-Hall
Hispanoamericana, S.A. will, at and in accordance with the request of
Parent or Purchaser, if agreed to by Seller, distribute
<PAGE>
19
before the Closing an amount reflecting its "CUFIN" account, as determined
for Mexican tax law purposes."
(bbb) Section 10.01(a) is hereby amended by deleting the word "or" at the
end of paragraph (ii), by inserting the text"; or" at the end of paragraph (iii)
and by inserting the following text immediately thereafter:
"(iv) any claim or cause of action against any Seller Indemnified
Party or as to which any Seller Indemnified Party is otherwise involved
(through discovery, as a witness or otherwise) by or through Hicks Muse or
any of its Affiliates relating to or arising out of (A) the assignment
contemplated by Section 11.08(b)(i) or (B) the direct sale to Hicks Muse
or any of its Affiliates of any Directly Acquired B&P and Reference
Publishing Subsidiaries, the business or operations of the B&P and
Reference Publishing Businesses, this Agreement or the transactions
contemplated hereby or any assignment to Hicks Muse or any of its
Affiliates contemplated by Section 11.08(b)(ii) of this Agreement, other
than any claim or cause of action by or through Hicks Muse or any of its
Affiliates with respect to the Ancillary Agreements to which any of them
may be a party or to the transactions contemplated thereby; provided that
nothing contained in this clause (iv) shall preclude the Parent or
Purchaser from asserting any claim against any Seller Indemnified Party,
to the extent otherwise permitted by and subject to the applicable terms
and conditions of this Agreement, with respect to the Directly Acquired
B&P and Reference Publishing Subsidiaries, the business or operations of
the B&P and Reference Publishing Business, this Agreement or the
transactions contemplated hereby."
(ccc) Section 11.08 is hereby amended by deleting subsection (b) thereof
in its entirety and substituting the following phrase therefor:
"each of the Parent and the Purchaser may assign any or all of its
rights and obligations under this Agreement (but with respect to clauses
(i) and (ii) below, Parent and Purchaser may only assign the right to
purchase the Shares of the Directly Acquired B&P and Reference Publishing
Subsidiaries and the covenant not to compete set forth in Section 5.12(c)
hereof) (i) in connection with the sale by the Parent or the Purchaser or
any wholly-owned Subsidiary of the Parent or the Purchaser, as the case
may be, to Hicks, Muse, Tate and Furst Incorporated (and/or any Affiliate
thereof) of certain Sold Property; provided that Hicks, Muse, Tate and
Furst Incorporated shall execute, and the effectiveness of such assignment
shall be conditional upon such execution, the form of Acknowledgment and
Covenant Not to Sue attached hereto as Exhibit 11.08(b)(i), (ii) if Parent
makes the election pursuant to Section 2.01(b) of this Agreement, to
Hicks, Muse, Tate and Furst Incorporated (and/or any Affiliate thereof);
provided that Hicks, Muse, Tate and Furst Incorporated shall execute, and
the effectiveness of such assignment shall be conditional upon such
execution, the form of Acknowledgment and Covenant Not to Sue attached
hereto as Exhibit 11.08(b)(ii) and (iii) to any Subsidiary of the Parent;
<PAGE>
20
provided that no such assignment pursuant to clauses (i), (ii) and (iii)
of this Section 11.08(b) shall release the Parent or the Purchaser from
any liability hereunder or delay the consummation of the purchase and sale
of the Sold Properties hereunder; provided, further, that no assignment
shall be permitted by this sentence that would result in the sale by the
Seller or the Seller's Subsidiaries at the Closing of any assets or Shares
to any party other than the Parent, any wholly-owned Subsidiary of the
Parent or the Purchaser, or Hicks Muse, Tate and Furst Incorporated
(and/or any Affiliate thereof)"
(ddd) Schedule A is hereby added to the Stock Purchase Agreement in the
form attached to this Amendment.
(eee) Schedule 2 of the Stock Purchase Agreement is hereby deleted in its
entirety and replaced with the Schedule 2 attached to this Amendment.
(fff) Schedule 2A of the Stock Purchase Agreement is hereby deleted in its
entirety and replaced with the Schedule 2A attached to this Amendment.
(ggg) Schedule 3 of the Stock Purchase Agreement is hereby modified by
deleting the following subsidiaries from the list captioned "Inactive
Domestic"and adding them to the list captioned "Domestic":
"Arco Publishing, Inc., Executive Reports Corporation, Executive Tax
Reports, Inc. and Robert J. Brady Co.".
(hhh) Schedule 5 is hereby added to the Stock Purchase Agreement in the
form attached to this Amendment.
(iii) Schedule 6 is hereby added to the Stock Purchase Agreement in the
form attached to this Amendment.
(jjj) Schedule 7 is hereby added to the Stock Purchase Agreement in the
form attached to this Amendment.
(kkk) Schedule 8 is hereby added to the Stock Purchase Agreement in the
form attached to this Amendment.
(lll) Exhibit 1.01(a) of the Stock Purchase Agreement is hereby deleted in
its entirety and replaced with the Exhibit 1.01(a) attached to this Amendment.
(mmm) Exhibit 1.01(b) of the Stock Purchase Agreement is hereby deleted in
its entirety and replaced with the Exhibit 1.01(b) attached to this Amendment.
<PAGE>
21
(nnn) Exhibit 1.01(c) of the Stock Purchase Agreement is hereby deleted in
its entirety and replaced with the Exhibit 1.01(c) attached to this Amendment.
(ooo) Exhibit 1.01(d) is hereby added to the Stock Purchase Agreement in
the form attached to this Amendment.
(ppp) Exhibit 1.01(e) is hereby added to the Stock Purchase Agreement in
the form attached to this Amendment.
(qqq) Exhibit 11.08(b)(i) is hereby added to the Stock Purchase Agreement
in the form attached to this Amendment.
(rrr) Exhibit 11.08(b)(ii) is hereby added to the Stock Purchase Agreement
in the form attached to this Amendment.
(sss) Section 5.07 of the Disclosure Schedule is hereby amended to delete
the Standby Letters of Credit listed in items (i) and (ii) thereto.
SECTION 2. Representations and Warranties; Indemnity. (a) The Parent
and the Purchaser each agree and acknowledge that the Seller shall have no
liability as a result of the inaccuracy of any representations and warranties
made by the Seller in the Stock Purchase Agreement if such representations and
warranties were accurate when made and in light of the form of transaction
contemplated by the Stock Purchase Agreement prior to this Amendment but are
inaccurate as of the Closing Date as a result of the direct sale of any
additional Publishing Subsidiaries pursuant to this Amendment, the Restructuring
or the Hicks Muse Transfer. In addition, the Parent and the Purchaser each agree
and acknowledge that the inaccuracy of any representations and warranties
arising under the circumstances set forth in the preceding sentence shall not
(i) relieve the Parent and the Purchaser from their respective obligations to
consummate the transactions contemplated by the Stock Purchase Agreement, as
amended by this Amendment, pursuant to Section 8.02(a) thereof or (ii) give the
Parent the right to terminate the Stock Purchase Agreement, as amended by this
Amendment, prior to Closing pursuant to Section 9.01(d) thereof.
(b) The Parent and the Purchaser agree, jointly and severally, to
indemnify and hold harmless the Seller Indemnified Parties for any Losses that
any Seller Indemnified Party may at any time suffer or incur, or become subject
to, as a result of any claim or cause of action by any third party against any
Seller Indemnified Party for any matter that is the subject of a representation
or warranty made by the Seller in the Stock Purchase Agreement if such
representation or warranty was accurate when made and in light of the form of
transaction contemplated by the Stock Purchase Agreement prior to this Amendment
but is inaccurate as of the Closing Date as a result of the direct sale of any
additional Publishing Subsidiaries pursuant
<PAGE>
22
to this Amendment, the Restructuring or the Hicks Muse Transfer, including,
without limitation, any losses related to or arising under that certain
Macmillan Trademark Sharing Agreement.
SECTION 3. No Contractual Relationship with Hicks Muse. The Parent
and the Purchaser each acknowledge and agree neither (i) the agreement by the
Seller to transfer and deliver the Shares of the Directly Acquired B&P and
Reference Publishing Subsidiaries to Hicks Muse pursuant to Section 2.01(a) of
the Stock Purchase Agreement, if the Parent so elects pursuant to Section
2.01(b) of the Stock Purchase Agreement, in each case as amended by this
Amendment nor (ii) any assignment by the Parent and the Purchaser permitted by
Section 11.08(b)(i) of any or all of its rights and obligations under this
Agreement in connection with the sale by the Parent or the Purchaser or any
wholly owned Subsidiary of the Parent or the Purchaser, as the case may be, to
Hicks, Muse, Tate and Furst Incorporated, or any Affiliate thereof, of certain
Sold Property, is intended to create, and does not in any way create, a
contractual relationship between the Seller or any of its Affiliates on the one
hand and Hicks Muse, or any Affiliates thereof, on the other, except as
otherwise provided in any of the Ancillary Agreements.
SECTION 4. Effect of Amendments. Except as and to the extent
expressly modified by this Amendment, the Stock Purchase Agreement shall remain
in full force and effect in all respects.
SECTION 5. Acknowledgment and Covenant Not to Sue. (a) If Parent
makes the election pursuant to Section 2.01(b) of the Stock Purchase Agreement,
as amended by this Amendment, each of Seller, Parent, Purchaser and Hicks Muse,
simultaneously with the execution hereof, shall execute and deliver to the other
the Acknowledgment and Covenant Not to Sue attached as Exhibit 11.08(b)(ii).
(b) Seller, Parent and Purchaser acknowledge and agree that in the
event of any sale of Sold Property following the Closing contemplated by Section
11.08(b)(i), Seller, Parent, Purchaser and Hicks Muse shall execute and deliver
to the other the Acknowledgment and Covenant Not to Sue attached
as Exhibit 11.08(b)(i).
SECTION 6. Governing Law. This Amendment shall be governed by, and
construed in accordance with, the Laws of the State of New York, and, for
greater certainty, the provisions set forth in Section 11.12 of the Stock
Purchase Agreement are incorporated herein by reference and made a part hereof.
SECTION 7. Counterparts. This Amendment may be executed in one or
more counterparts, and by the different parties hereto in separate counterparts,
each of which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement. Delivery of an
executed counterpart of a signature page to this
<PAGE>
23
Amendment by telecopier shall be effective as delivery of a manually executed
counterpart of this Amendment.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Amendment to be executed as of the date first written above by its respective
officer thereunto duly authorized.
VIACOM INTERNATIONAL INC.
By
-----------------------------
PEARSON INC.
By
-----------------------------
PEARSON PLC
By
-----------------------------
Viacom Inc. and Subsidiaries
Computation of Net Earnings (Loss) Per Share
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1998 1997 1996
---- ---- ----
(In millions, except per share amounts)
<S> <C> <C> <C>
Earnings (loss):
Earnings (loss) from continuing operations ............. $ (43.5) $ 373.5 $ 152.2
Cumulative convertible preferred stock dividend
requirement .......................................... (57.2) (60.0) (60.0)
Discount on repurchase of preferred stock .............. 30.0 -- --
-------- -------- ---------
Earnings (loss) from continuing operations
attributable to common stock ......................... (70.7) 313.5 92.2
Earnings (loss) from discontinued operations, net of
tax .................................................. (54.1) 14.9 (62.0)
Net gain on dispositions, net of tax ................... 49.9 405.2 1,157.7
Extraordinary loss, net of tax ......................... (74.7) -- --
-------- -------- ---------
Net earnings (loss) .................................... $ (149.6) $ 733.6 $ 1,187.9
======== ========= ==========
Basic computation:
Shares:
Weighted average number of common shares ............... 708.7 705.8 728.0
======== ========= ==========
Net earnings per common share:
Earnings (loss) from continuing operations ............. $ (0.10) $ 0.44 $ 0.13
Earnings (loss) from discontinued operations, net of
tax .................................................. (0.08) 0.02 (0.09)
Net gain on dispositions, net of tax ................... 0.07 0.58 1.59
Extraordinary loss, net of tax ......................... (0.10) -- --
-------- -------- ---------
Net earnings (loss) .................................... $ (0.21) $ 1.04 $ 1.63
======== ========= ==========
Diluted computation:
Shares:
Weighted average number of common shares (basic) ....... 708.7 705.8 728.0
Common shares potentially issuable in connection with:
Stock options and warrants(1): .................... -- 2.7 6.7
-------- -------- ---------
Weighted average number of common shares (diluted) ..... 708.7 708.5 734.7
======== ========= ==========
Net earnings (loss) per common share:
Earnings (loss) from continuing operations ............. $ (0.10) $ 0.44 $ 0.13
Earnings (loss) from discontinued operations, net of
tax .................................................. (0.08) 0.02 (0.09)
Net gain on dispositions, net of tax ................... 0.07 0.58 1.58
Extraordinary loss, net of tax ......................... (0.10) -- --
-------- -------- ---------
Net earnings (loss) .................................... $ (0.21) $ 1.04 $ 1.62
======== ========= ==========
</TABLE>
(1) For the year ended December 31, 1998, the assumed exercise of stock
options had an anti-dilutive effect on earnings per share, and therefore
was excluded from the diluted earnings per share calculation.
Exhibit 21
STATE OF PERCENT
SUBSIDIARY NAME INCORPORATION OWNED
2 Day Video, Inc. Texas 100
2 Day Video, Inc. of Georgia Georgia 100
37th Floor Productions Inc. Delaware 100
5555 Communications Inc. Delaware 100
Addax Music Co., Inc. Delaware 100
Aetrax International Corporation Delaware 100
Ages Electronics, Inc. Delaware 100
Ages Entertainment Software, Inc. Delaware 100
All Media Inc. Delaware 100
Antics G.P. Inc. Delaware 100
Antics Inc. Delaware 100
A-R Acquisition Corp. Delaware 100
Around the Block Productions, Inc. Delaware 100
Atlantic Associates, Inc. Delaware 100
Atlantic Home Video Delaware 80
Bardwire Inc. Delaware 100
Beta Theatres Inc. Delaware 100
Big Planet Video, Inc. New Hampshire 100
Big Shows Inc. Delaware 100
Blockbuster Airships, Inc. Delaware 100
Blockbuster Amphitheater Corporation Delaware 100
Blockbuster Canada Inc. Delaware 100
Blockbuster Computer Systems Corporation Florida 100
Blockbuster Distribution, Inc. Delaware 100
Blockbuster Entertainment Corporation Delaware 100
Blockbuster Global Services Inc. Delaware 100
Blockbuster Inc. Delaware 100
Blockbuster International Spain Inc. Delaware 100
Blockbuster Investments LLC Delaware 100
Blockbuster Mid-America, Inc. Delaware 100
Blockbuster On-Line Services, Inc. Delaware 100
Blockbuster Park Lands, Inc. Florida 100
Blockbuster Park, Inc. Delaware 100
Blockbuster SC Video Operating Corporation Delaware 100
<PAGE>
Exhibit 21
STATE OF PERCENT
SUBSIDIARY NAME INCORPORATION OWNED
Blockbuster Services Inc. Delaware 100
Blockbuster Technology Holding Corporation Delaware 100
Blockbuster Video Acquisition Corp. Delaware 100
Blockbuster Video Italy, Inc. Delaware 100
Blue Cow Inc. Delaware 100
BN Productions Inc. Delaware 100
Bombay Hook Limited Delaware 100
Broadcast Leasing Inc. Delaware 100
Bruin Music Company Delaware 100
BS Hotel, Inc. Delaware 100
California Holdings LLC Delaware 100
Centurion Satellite Broadcast Inc. Delaware 100
Charlotte Amphitheater Corporation Delaware 100
Cinamerica Service Corporation Delaware 100
Classless Inc. Delaware 100
Cloverleaf Productions Inc. Delaware 100
Columbus Circle Films Inc. Delaware 100
D.E.J. Productions Inc. Delaware 100
Desilu Music Corp. New York 50
Desilu Productions, Inc. Delaware 100
Direct Court Productions, Inc. Delaware 100
Eighth Century Corporation Delaware 100
Energy Development Associates, Inc. Delaware 100
Ensign Music Corporation Delaware 100
EWB Corporation Delaware 100
Family Entertainment Centers, Inc. Florida 100
Famous Music Corporation Delaware 100
Famous Orange Productions Inc. Delaware 100
Fifty-Sixth Century Antrim Iron Company, Inc. Delaware 100
Film Intex Corporation Delaware 100
FLC Holding Corp. Florida 100
Forty-Fourth Century Corporation Delaware 100
French Street Management Inc. Delaware 100
Fried Worms Productions Inc. Delaware 100
<PAGE>
Exhibit 21
STATE OF PERCENT
SUBSIDIARY NAME INCORPORATION OWNED
Front Street Management Inc. Delaware 100
FT Productions Inc. Delaware 100
Future General Corporation Delaware 100
G & W Leasing Company Delaware 100
G & W Natural Resources Company, Inc. Delaware 100
Games Animation Inc. Delaware 100
Games Productions Inc. Delaware 100
GC Productions Inc. Delaware 100
Glendale Property Corp. Delaware 100
Gloucester Titanium Company, Inc. Delaware 100
GNS Productions Inc. Delaware 100
Gramps Company, Inc., The Delaware 100
Green Tiger Press, Inc. California 100
Gulf & Western Indonesia, Inc. Delaware 100
Imagine Radio, Inc. California 52.5
IMR Acquisition Corp. Delaware 100
International Overseas Film Services, Inc. Delaware 66.67
International Overseas Productions, Inc. California 66.67
Interstitial Programs Inc. Delaware 100
Joseph Productions Inc. Delaware 100
Katled Systems Inc. Delaware 100
Kilo Mining Corporation Pennsylvania 100
Kings Island Company Delaware 100
Low Key Productions Inc. Delaware 100
LT Holdings Inc. Delaware 100
Magicam, Inc. Delaware 83.5
Major Video National Advertising Council Corporation Nevada 100
Major Video Super Stores, Inc. Nevada 100
Matlock Company, The Delaware 100
Mattalex Corporation Delaware 100
Merritt Inc. Delaware 100
Michaela Productions Inc. Delaware 100
Montgomery Acquisition, Inc. Delaware 100
MTV Animation Inc. Delaware 100
<PAGE>
Exhibit 21
STATE OF PERCENT
SUBSIDIARY NAME INCORPORATION OWNED
MTV Asia Development Company Inc. Delaware 100
MTV Australia Inc. Delaware 100
MTV India Development Company Inc. Delaware 100
MTV Networks Company Delaware 100
MTV Networks Europe Inc. Delaware 100
MTV Networks Global Services Inc. Delaware 100
MTV Networks Latin America Inc. Delaware 100
MTV Networks Shopping Inc. Delaware 100
MTV Networks South Africa Inc. Delaware 100
MTV Songs Inc. Delaware 100
MTVN Online Inc. Delaware 100
MTVN Shopping Inc. Delaware 100
Music By Nickelodeon Inc. Delaware 100
Music By Video Inc. Delaware 100
New Jersey Zinc Exploration Company, The Delaware 100
New Leaf Entertainment Corporation Delaware 100
Nick At Nites TV Land Retromercials Inc. Delaware 100
Nickelodeon Animation Studios Inc. Delaware 100
Nickelodeon Australia Inc. Delaware 100
Nickelodeon Direct Inc. Delaware 100
Nickelodeon Germany Inc. Delaware 100
Nickelodeon Global Network Ventures Inc. Delaware 100
Nickelodeon India Corporation Delaware 100
Nickelodeon Magazines Inc. Delaware 100
Nickelodeon Movies Inc. Delaware 100
Nickelodeon Online Inc. Delaware 100
Noggin LLC Delaware 50
OM/TV Productions Inc. Delaware 100
Our Home Productions Inc. Delaware 100
Outatown Productions Inc. Delaware 100
Paramount (PDI) Distribution Inc. Delaware 100
Paramount Advertiser Services Inc. Delaware 100
Paramount Asia Inc. Delaware 100
Paramount Canadian Productions, Inc. Delaware 100
<PAGE>
Exhibit 21
STATE OF PERCENT
SUBSIDIARY NAME INCORPORATION OWNED
Paramount Communications Technology Group Inc. Delaware 100
Paramount Digital Entertainment Inc. Delaware 100
Paramount Films of Australia Inc. Delaware 100
Paramount Films of China, Inc. Delaware 100
Paramount Films of Egypt, Inc. Delaware 100
Paramount Films of India, Ltd. Delaware 100
Paramount Films of Italy, Inc. New York 100
Paramount Films of Lebanon, Inc. New York 100
Paramount Films of Pakistan Ltd. New York 100
Paramount Films of Southeast Asia Inc. Delaware 100
Paramount General Entertainment Australia Inc. Delaware 100
Paramount Home Video, Inc. Delaware 100
Paramount Images Inc. Delaware 100
Paramount LAPTV Inc. Delaware 100
Paramount Music Corporation Delaware 100
Paramount Overseas Productions, Inc. Delaware 100
Paramount Parks Experience Inc. Nevada 100
Paramount Parks Inc. Delaware 100
Paramount Pictures Corporation Delaware 100
Paramount Production Support Inc. Delaware 100
Paramount Productions Service Corporation Delaware 100
Paramount Stations Group Inc. Virginia 100
Paramount Stations Group of Fort Worth/Dallas Inc. Virginia 100
Paramount Stations Group of Houston Inc. Virginia 100
Paramount Stations Group of Miami Inc. Delaware 100
Paramount Stations Group of Oklahoma City LLC Delaware 100
Paramount Stations Group of Philadelphia Inc. Delaware 100
Paramount Stations Group of Pittsburgh Inc. Delaware 100
Paramount Stations Group of Washington Inc. Virginia 100
Paramount Television Service, Inc. Delaware 100
Paramount-Roy Rogers Music Co., Inc. New York 50
Para-Sac Music Corporation Delaware 100
Park Court Productions, Inc. Delaware 100
Part-Time Productions Inc. Delaware 100
<PAGE>
Exhibit 21
STATE OF PERCENT
SUBSIDIARY NAME INCORPORATION OWNED
PCCGW Company, Inc. Delaware 100
PCI Canada Inc. Delaware 100
PCI Network Partner II Inc. Delaware 100
PCI Network Partner Inc. Delaware 100
Pet II Productions Inc. Delaware 100
PMV Productions Inc. Delaware 100
Possum Point Incorporated Delaware 100
Premiere House, Inc. Delaware 100
PSG of PHA Inc. Virginia 100
Quemahoning Coal Processing Company Pennsylvania 100
Real TV Music Inc. Delaware 100
Reality Check Productions Inc. Delaware 100
Remote Productions Inc. Delaware 100
RTV News Inc. Delaware 100
RTV News Music Inc. Delaware 100
Satellite Holdings Inc. Delaware 100
Saucon Valley Iron and Railroad Company, The Pennsylvania 100
Scarab Publishing Corporation Delaware 100
Scott Mattson Farms, Inc. Florida 100
Showtime Networks Inc. Delaware 100
Showtime Networks Inc. (U.K.) Delaware 100
Showtime Networks Middle East Inc. Delaware 100
Showtime Networks Satellite Programming Company California 100
Showtime Online Inc. Delaware 100
Showtime Satellite Networks Inc. Delaware 100
Showtime/Sundance Holding Company Inc. Delaware 100
SIFO One Inc. Delaware 100
SIFO Two Inc. Delaware 100
Simon & Schuster Global Services Inc. Delaware 100
Simon & Schuster, Inc. New York 100
SNI Development Corp. Delaware 100
Solar Service Company Delaware 100
Southeastern Home Video, Inc. Delaware 100
SP Productions Inc. Delaware 100
<PAGE>
Exhibit 21
STATE OF PERCENT
SUBSIDIARY NAME INCORPORATION OWNED
Special Effects Merchandise, Inc. Delaware 100
Spelling Entertainment Group Inc. Delaware 80
State of Mind Inc. Delaware 100
Sundance Channel L.L.C. Delaware 45
Superstar Productions USA Inc. Delaware 100
T.V. Factory, Inc., The New York 100
Talent Court Productions, Inc. Delaware 100
Taylor Forge Memphis, Inc. Delaware 100
They Productions Inc. Delaware 100
Things of the Wild Songs Inc. Delaware 100
Third Century Company Delaware 100
Thirteenth Century Corporation Delaware 100
Thirtieth Century Corporation Delaware 100
Toe-To-Toe Productions Inc. Delaware 100
Total Warehouse Services Corporation Delaware 100
Trans-American Resources, Inc. Delaware 100
TRF III Entertainment, Inc. Delaware 100
TS Video, Inc. Louisiana 100
TSM Services Inc. Delaware 100
Tunes By Nickelodeon Inc. Delaware 100
TV Scoop Inc. Delaware 100
UI Video Stores, Inc. Colorado 100
Universal American Corporation Delaware 100
Uptown Productions Inc. Delaware 100
VE Development Company Delaware 100
VE Drive Inc. Delaware 100
VE Television Inc. Delaware 100
VHONE Inc. Delaware 100
VIA Aircraft Management Inc. Delaware 100
Viacom Animation of Korea Inc. Delaware 100
Viacom Asia Inc. Delaware 100
Viacom Broadcasting of Seattle Inc. Delaware 100
Viacom Broadcasting West Inc. Delaware 100
Viacom Camden Lock Inc. Delaware 100
<PAGE>
Exhibit 21
STATE OF PERCENT
SUBSIDIARY NAME INCORPORATION OWNED
Viacom Consumer Products Inc. Delaware 100
Viacom DBS Inc. Delaware 100
Viacom Film Funding Company Inc. Delaware 100
Viacom First Run Development Company Inc. Delaware 100
Viacom First Run Limited Delaware 100
Viacom Global Services Inc. Delaware 100
Viacom HA! Holding Company Delaware 100
Viacom IDA Inc. Delaware 100
Viacom International Inc. Delaware 100
Viacom International Inc. Political Action Committee
Corporation New York 100
Viacom IRB Acquisition Inc. Delaware 100
Viacom Japan Inc. New York 100
Viacom K-Band Inc. Delaware 100
Viacom Networks Europe Inc. Delaware 100
Viacom Networks Inc. New York 100
Viacom Phoenix Inc. Delaware 100
Viacom Pictures Development Company Delaware 100
Viacom Pictures Inc. Delaware 100
Viacom Pictures Movie Music Inc. Delaware 100
Viacom Pictures Overseas Inc. Delaware 100
Viacom Pictures Songs Inc. Delaware 100
Viacom PNW Sports Inc. Delaware 100
Viacom Productions Inc. Delaware 100
Viacom Properties Inc. Delaware 100
Viacom Realty Corporation Delaware 100
Viacom Receivables Funding I Corporation Delaware 100
Viacom Receivables Funding II Corporation Delaware 100
Viacom Retail Stores, Inc. Delaware 100
Viacom Satellite News Inc. Delaware 100
Viacom Shopping Inc. Delaware 100
Viacom Telecommunications (D.C.) Inc. Delaware 100
Viacom World Wide Ltd. New York 100
Via-Sac Music Inc. Delaware 100
Virgin Interactive Entertainment USA, Inc. Delaware 100
<PAGE>
Exhibit 21
STATE OF PERCENT
SUBSIDIARY NAME INCORPORATION OWNED
VISI Services Inc. Delaware 100
VJK Inc. Delaware 100
VNM Inc. Delaware 100
VP Direct Inc. Delaware 100
VP Programs Inc. California 100
VSC Communications Inc. Delaware 100
VSC Compositions Inc. New York 100
VSC Music Inc. New York 100
Western Row Properties, Inc. Ohio 100
Westside Amphitheater Corporation, The Arizona 100
WF Cinema Holdings, L.P. Delaware 50
Wilshire Court Productions, Inc. Delaware 100
Worldwide Productions, Inc. Delaware 100
WT Animal Music Inc. Delaware 100
WT Productions Inc. Delaware 100
WVIT Inc. Delaware 100
Young Reader's Press, Inc. Delaware 100
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 (No. 33-53485 and
No. 33-55785) of Viacom Inc. and Viacom International Inc. and in the
Registration Statements on Form S-8 (No. 333-42987, No. 333-34125, No. 33-41934,
No. 33-56088, No. 33-59049, No. 33-59141, No. 33-55173, No. 33-55709, and No.
33-60943) of Viacom Inc. of our report dated February 8, 1999, except for the
first paragraph of Note 2, which is as of February 25, 1999, included in Item 8
of this Form 10-K.
PricewaterhouseCoopers LLP
New York, New York
March 30, 1999
VIACOM INC.
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of VIACOM
INC., a Delaware corporation (the "Company"), hereby constitutes and appoints
Michael D. Fricklas and Mark C. Morril his true lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 (and any
amendments thereto); granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully for all intents and purposes as he might or could
do in person hereby ratifying and confirming all that the said attorney-in-fact
and agent, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto signed my name this 18th day of March,
1999.
/s/ George S. Abrams
------------------------------
George S. Abrams
<PAGE>
VIACOM INC.
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of VIACOM
INC., a Delaware corporation (the "Company"), hereby constitutes and appoints
Michael D. Fricklas and Mark C. Morril his true lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 (and any
amendments thereto); granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully for all intents and purposes as he might or could
do in person hereby ratifying and confirming all that the said attorney-in-fact
and agent, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto signed my name this 18th day of March,
1999.
/s/ Ivan Seidenberg
------------------------------
Ivan Seidenberg
<PAGE>
VIACOM INC.
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of VIACOM
INC., a Delaware corporation (the "Company"), hereby constitutes and appoints
Michael D. Fricklas and Mark C. Morril his true lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 (and any
amendments thereto); granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully for all intents and purposes as he might or could
do in person hereby ratifying and confirming all that the said attorney-in-fact
and agent, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto signed my name this 18th day of March,
1999.
/s/ Thomas E. Dooley
------------------------------
Thomas E. Dooley
<PAGE>
VIACOM INC.
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of VIACOM
INC., a Delaware corporation (the "Company"), hereby constitutes and appoints
Michael D. Fricklas and Mark C. Morril his true lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 (and any
amendments thereto); granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully for all intents and purposes as he might or could
do in person hereby ratifying and confirming all that the said attorney-in-fact
and agent, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto signed my name this 18th day of March,
1999.
/s/ Ken Miller
------------------------------
Ken Miller
<PAGE>
VIACOM INC.
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of VIACOM
INC., a Delaware corporation (the "Company"), hereby constitutes and appoints
Michael D. Fricklas and Mark C. Morril his true lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 (and any
amendments thereto); granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully for all intents and purposes as he might or could
do in person hereby ratifying and confirming all that the said attorney-in-fact
and agent, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto signed my name this 18th day of March,
1999.
/s/ Brent D. Redstone
------------------------------
Brent D. Redstone
<PAGE>
VIACOM INC.
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of VIACOM
INC., a Delaware corporation (the "Company"), hereby constitutes and appoints
Michael D. Fricklas and Mark C. Morril her true lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for her and in her
name, place and stead, in any and all capacities, to sign the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 (and any
amendments thereto); granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully for all intents and purposes as she might or
could do in person hereby ratifying and confirming all that the said
attorney-in-fact and agent, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto signed my name this 18th day of March,
1999.
/s/ Shari Redstone
------------------------------
Shari Redstone
<PAGE>
VIACOM INC.
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of VIACOM
INC., a Delaware corporation (the "Company"), hereby constitutes and appoints
Michael D. Fricklas and Mark C. Morril his true lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 (and any
amendments thereto); granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully for all intents and purposes as he might or could
do in person hereby ratifying and confirming all that the said attorney-in-fact
and agent, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto signed my name this 18th day of March,
1999.
/s/ Frederic V. Salerno
------------------------------
Frederic V. Salerno
<PAGE>
VIACOM INC.
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of VIACOM
INC., a Delaware corporation (the "Company"), hereby constitutes and appoints
Michael D. Fricklas and Mark C. Morril his true lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 (and any
amendments thereto); granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully for all intents and purposes as he might or could
do in person hereby ratifying and confirming all that the said attorney-in-fact
and agent, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto signed my name this 18th day of March,
1999.
/s/ William Schwartz
------------------------------
William Schwartz
<PAGE>
VIACOM INC.
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of VIACOM
INC., a Delaware corporation (the "Company"), hereby constitutes and appoints
Michael D. Fricklas and Mark C. Morril his true lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 (and any
amendments thereto); granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully for all intents and purposes as he might or could
do in person hereby ratifying and confirming all that the said attorney-in-fact
and agent, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto signed my name this 18th day of March,
1999.
/s/ Philippe P. Dauman
------------------------------
Philippe P. Dauman
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF VIACOM INC. FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1996 RESTATED FOR DISCONTINUED OPERATIONS AND ADJUSTED TO REFLECT
THE 2-FOR-1 STOCK SPLIT EFFECTIVE MARCH 31, 1999. EARNINGS PER SHARE ARE
PRESENTED IN ACCORDANCE WITH SFAS 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> <F1> DEC-31-1996
<CASH> 209
<SECURITIES> 0
<RECEIVABLES> 2,254
<ALLOWANCES> 101
<INVENTORY> 2,342
<CURRENT-ASSETS> 5,718
<PP&E> 3,890
<DEPRECIATION> 734
<TOTAL-ASSETS> 28,834
<CURRENT-LIABILITIES> 4,269
<BONDS> 9,856
<COMMON> 7
0
1,200
<OTHER-SE> 11,380
<TOTAL-LIABILITY-AND-EQUITY> 28,834
<SALES> 9,684
<TOTAL-REVENUES> 9,684
<CGS> 6,340
<TOTAL-COSTS> 8,487
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 786
<INCOME-PRETAX> 410
<INCOME-TAX> 243
<INCOME-CONTINUING> 152
<DISCONTINUED> 1,096
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,188
<EPS-PRIMARY> 1.63
<EPS-DILUTED> 1.62
<FN>
<F1> RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RESTATEMENTS AND
RECLASSIFICATIONS TO PRIOR PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE
CURRENT PERIOD PRESENTATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF VIACOM INC. FOR THE THREE MONTHS ENDED MARCH
31, 1997 RESTATED FOR DISCONTINUED OPERATIONS AND ADJUSTED TO REFLECT THE
2-FOR-1 STOCK SPLIT EFFECTIVE MARCH 31, 1999. EARNINGS PER SHARE ARE PRESENTED
IN ACCORDANCE WITH SFAS 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> <F1> MAR-31-1997
<CASH> 261
<SECURITIES> 0
<RECEIVABLES> 2,088
<ALLOWANCES> 104
<INVENTORY> 2,455
<CURRENT-ASSETS> 5,881
<PP&E> 4,039
<DEPRECIATION> 873
<TOTAL-ASSETS> 29,079
<CURRENT-LIABILITIES> 3,728
<BONDS> 10,753
<COMMON> 7
0
1,200
<OTHER-SE> 11,343
<TOTAL-LIABILITY-AND-EQUITY> 29,079
<SALES> 2,496
<TOTAL-REVENUES> 2,496
<CGS> 1,710
<TOTAL-COSTS> 2,249
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 194
<INCOME-PRETAX> 53
<INCOME-TAX> 27
<INCOME-CONTINUING> 11
<DISCONTINUED> (30)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
<FN>
<F1> RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RESTATEMENTS TO PRIOR
PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE CURRENT PERIOD PRESENTATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF VIACOM INC. FOR THE SIX MONTHS ENDED JUNE 30,
1997 RESTATED FOR DISCONTINUED OPERATIONS AND ADJUSTED TO REFLECT THE 2-FOR-1
STOCK SPLIT EFFECTIVE MARCH 31, 1999. EARNINGS PER SHARE ARE PRESENTED IN
ACCORDANCE WITH SFAS 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> <F1> JUN-30-1997
<CASH> 202
<SECURITIES> 0
<RECEIVABLES> 2,177
<ALLOWANCES> 114
<INVENTORY> 2,359
<CURRENT-ASSETS> 5,996
<PP&E> 4,151
<DEPRECIATION> 951
<TOTAL-ASSETS> 29,197
<CURRENT-LIABILITIES> 3,889
<BONDS> 10,820
<COMMON> 7
0
1,200
<OTHER-SE> 11,144
<TOTAL-LIABILITY-AND-EQUITY> 29,197
<SALES> 4,972
<TOTAL-REVENUES> 4,972
<CGS> 3,597
<TOTAL-COSTS> 4,791
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 396
<INCOME-PRETAX> (148)
<INCOME-TAX> (46)
<INCOME-CONTINUING> (155)
<DISCONTINUED> 58
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (244)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
<FN>
<F1> RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RESTATEMENTS TO PRIOR
PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE CURRENT PERIOD PRESENTATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF VIACOM INC. FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1997 RESTATED FOR DISCONTINUED OPERATIONS AND ADJUSTED TO REFLECT THE
2-FOR-1 STOCK SPLIT EFFECTIVE MARCH 31, 1999. EARNINGS PER SHARE ARE PRESENTED
IN ACCORDANCE WITH SFAS 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> <F1> SEP-30-1997
<CASH> 219
<SECURITIES> 0
<RECEIVABLES> 2,610
<ALLOWANCES> 112
<INVENTORY> 2,441
<CURRENT-ASSETS> 5,934
<PP&E> 4,229
<DEPRECIATION> 1,051
<TOTAL-ASSETS> 29,054
<CURRENT-LIABILITIES> 4,056
<BONDS> 9,925
<COMMON> 7
0
1,200
<OTHER-SE> 11,578
<TOTAL-LIABILITY-AND-EQUITY> 29,054
<SALES> 7,778
<TOTAL-REVENUES> 7,778
<CGS> 5,483
<TOTAL-COSTS> 7,310
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 584
<INCOME-PRETAX> (49)
<INCOME-TAX> 84
<INCOME-CONTINUING> (201)
<DISCONTINUED> 422
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 176
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
<FN>
<F1> RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RESTATEMENTS TO PRIOR
PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE CURRENT PERIOD PRESENTATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF VIACOM INC. FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1997 RESTATED FOR DISCONTINUED OPERATIONS AND ADJUSTED TO REFLECT
THE 2-FOR-1 STOCK SPLIT EFFECTIVE MARCH 31, 1999. EARNINGS PER SHARE ARE
PRESENTED IN ACCORDANCE WITH SFAS 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> <F1> DEC-31-1997
<CASH> 292
<SECURITIES> 0
<RECEIVABLES> 2,498
<ALLOWANCES> 100
<INVENTORY> 2,253
<CURRENT-ASSETS> 5,714
<PP&E> 4,320
<DEPRECIATION> 1,123
<TOTAL-ASSETS> 28,289
<CURRENT-LIABILITIES> 5,053
<BONDS> 7,423
<COMMON> 7
0
1,200
<OTHER-SE> 12,176
<TOTAL-LIABILITY-AND-EQUITY> 28,289
<SALES> 10,685
<TOTAL-REVENUES> 10,685
<CGS> 7,476
<TOTAL-COSTS> 10,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 751
<INCOME-PRETAX> 1,179
<INCOME-TAX> 646
<INCOME-CONTINUING> 374
<DISCONTINUED> 420
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 734
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
<FN>
<F1> RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RESTATEMENTS TO PRIOR
PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE CURRENT PERIOD PRESENTATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF VIACOM INC. FOR THE THREE MONTHS ENDED MARCH
31, 1998 RESTATED FOR DISCONTINUED OPERATIONS AND ADJUSTED TO REFLECT THE
2-FOR-1 STOCK SPLIT EFFECTIVE MARCH 31, 1999. EARNINGS PER SHARE ARE PRESENTED
IN ACCORDANCE WITH SFAS 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> <F1> MAR-31-1998
<CASH> 321
<SECURITIES> 0
<RECEIVABLES> 2,062
<ALLOWANCES> 101
<INVENTORY> 2,285
<CURRENT-ASSETS> 5,381
<PP&E> 4,392
<DEPRECIATION> 1,212
<TOTAL-ASSETS> 27,845
<CURRENT-LIABILITIES> 4,160
<BONDS> 7,973
<COMMON> 7
0
1,200
<OTHER-SE> 12,250
<TOTAL-LIABILITY-AND-EQUITY> 27,845
<SALES> 2,686
<TOTAL-REVENUES> 2,686
<CGS> 1,804
<TOTAL-COSTS> 2,412
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 154
<INCOME-PRETAX> 123
<INCOME-TAX> 68
<INCOME-CONTINUING> 48
<DISCONTINUED> (46)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
<FN>
<F1> RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RESTATEMENTS TO PRIOR
PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE CURRENT PERIOD PRESENTATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF VIACOM INC. FOR THE SIX MONTHS ENDED JUNE 30,
1998 RESTATED FOR DISCONTINUED OPERATIONS AND ADJUSTED TO REFLECT THE 2-FOR-1
STOCK SPLIT EFFECTIVE MARCH 31, 1999. EARNINGS PER SHARE ARE PRESENTED IN
ACCORDANCE WITH SFAS 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> <F1> JUN-30-1998
<CASH> 336
<SECURITIES> 0
<RECEIVABLES> 2050
<ALLOWANCES> 108
<INVENTORY> 2,535
<CURRENT-ASSETS> 5,621
<PP&E> 4,497
<DEPRECIATION> 1,333
<TOTAL-ASSETS> 27,503
<CURRENT-LIABILITIES> 3,958
<BONDS> 8,171
<COMMON> 7
0
1,200
<OTHER-SE> 11,962
<TOTAL-LIABILITY-AND-EQUITY> 27,503
<SALES> 5,465
<TOTAL-REVENUES> 5,465
<CGS> 4,114
<TOTAL-COSTS> 5,417
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 311
<INCOME-PRETAX> (267)
<INCOME-TAX> (65)
<INCOME-CONTINUING> (220)
<DISCONTINUED> (60)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (309)
<EPS-PRIMARY> (.43)
<EPS-DILUTED> (.43)
<FN>
<F1> RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RESTATEMENTS TO PRIOR
PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE CURRENT PERIOD PRESENTATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF VIACOM INC. FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1998 RESTATED FOR DISCONTINUED OPERATIONS AND ADJUSTED TO REFLECT THE
2-FOR-1 STOCK SPLIT EFFECTIVE MARCH 31, 1999. EARNINGS PER SHARE ARE PRESENTED
IN ACCORDANCE WITH SFAS 128.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> <F1> SEP-30-1998
<CASH> 313
<SECURITIES> 0
<RECEIVABLES> 2,577
<ALLOWANCES> 118
<INVENTORY> 2,218
<CURRENT-ASSETS> 5,810
<PP&E> 4,508
<DEPRECIATION> 1,401
<TOTAL-ASSETS> 27,815
<CURRENT-LIABILITIES> 4,432
<BONDS> 8,270
<COMMON> 7
0
1,200
<OTHER-SE> 11,798
<TOTAL-LIABILITY-AND-EQUITY> 27,815
<SALES> 8,754
<TOTAL-REVENUES> 8,754
<CGS> 6,259
<TOTAL-COSTS> 8,298
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 469
<INCOME-PRETAX> (28)
<INCOME-TAX> 86
<INCOME-CONTINUING> (133)
<DISCONTINUED> (8)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (186)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
<FN>
<F1> RESTATEMENT REFLECTED HEREIN IS THE RESULT OF RESTATEMENTS TO PRIOR
PERIODS' FINANCIAL STATEMENTS TO CONFORM TO THE CURRENT PERIOD PRESENTATION.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF VIACOM INC. FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1998. EARNINGS PER SHARE ARE PRESENTED IN ACCORDANCE WITH SFAS 128
AND HAVE BEEN ADJUSTED TO REFLECT THE 2-FOR-1 STOCK SPLIT EFFECTIVE MARCH 31,
1999.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> <F1> DEC-31-1998
<CASH> 767
<SECURITIES> 0
<RECEIVABLES> 1,858
<ALLOWANCES> 99
<INVENTORY> 1,806
<CURRENT-ASSETS> 5,065
<PP&E> 4,537
<DEPRECIATION> 1,458
<TOTAL-ASSETS> 23,613
<CURRENT-LIABILITIES> 5,633
<BONDS> 3,813
<COMMON> 7
0
600
<OTHER-SE> 11,442
<TOTAL-LIABILITY-AND-EQUITY> 23,613
<SALES> 12,096
<TOTAL-REVENUES> 12,096
<CGS> 8,506
<TOTAL-COSTS> 11,345
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 599
<INCOME-PRETAX> 137
<INCOME-TAX> 139
<INCOME-CONTINUING> (44)
<DISCONTINUED> (4)
<EXTRAORDINARY> (75)
<CHANGES> 0
<NET-INCOME> (150)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
