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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, 1995 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:
Title of Each Class Name of Each Exchange on 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, 1997 American Stock Exchange
Warrants Expiring on July 7, 1999 American Stock Exchange
6.625% Senior Notes due 1998 New York 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, 1996, 75,099,274 shares of Viacom Inc. Class A Common
Stock, $0.01 par value ("Class A Common Stock"), and 294,853,114 shares of
Viacom Inc. Class B Common Stock, $0.01 par value ("Class B Common Stock"), were
outstanding. The aggregate market value of the shares of Class A Common Stock
(based upon the closing price of $40.875 per share as reported by the American
Stock Exchange on that date) held by non-affiliates was approximately
$1,207,943,150 and the aggregate market value of the shares of the Class B
Common Stock (based upon the closing price of $41.75 per share as reported by
the American Stock Exchange on that date) held by non-affiliates was
approximately $10,366,032,214.
DOCUMENTS INCORPORATED BY REFERENCE
The Definitive Proxy of the Registrant for the 1996 Annual Meeting of
Shareholders (Part III to the extent described herein).
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 and
publishing company with operations in five segments: (i) Networks and
Broadcasting, (ii) Entertainment, (iii) Video and Music/Theme Parks, (iv)
Publishing, and (v) Cable Television. Through the Networks and Broadcasting
segment, the Company operates MTV: MUSIC TELEVISION(R), SHOWTIME(R),
NICKELODEON(R)/NICK AT NITE(R) and VH1 MUSIC FIRST(TM), among other program
services, and 12 broadcast television stations and 12 radio stations. Through
the Entertainment segment, which includes PARAMOUNT PICTURES(R) and the
Company's approximately 75%-owned subsidiary SPELLING ENTERTAINMENT GROUP INC.
("SPELLING"), the Company produces and distributes theatrical motion pictures
and television programming. Through the Video and Music/Theme Parks segment,
which includes the BLOCKBUSTER(R) family of businesses and PARAMOUNT PARKS(R),
the Company is the leading worldwide owner, operator and franchiser of
videocassette rental and sales stores and a leading owner and operator of music
stores in the U.S. In addition, PARAMOUNT PARKS owns and operates five theme
parks and one water park in the U.S. and Canada. Through the Publishing segment,
which includes SIMON & SCHUSTER(R), MACMILLAN PUBLISHING USA(TM) and PRENTICE
HALL(R), the Company publishes and distributes educational, consumer, business,
technical and professional books, and audio-video software products. Through the
Cable Television segment, the Company operates cable television systems serving
approximately 1.2 million customers.
The Company was organized in Delaware in 1986 for the purpose of
acquiring Viacom International Inc. ("Viacom International"). On March 11, 1994,
the Company acquired a majority of outstanding shares of Paramount
Communications Inc. ("Paramount Communications") by tender offer; on July 7,
1994, Paramount Communications became a wholly owned subsidiary of the Company,
and, on January 3, 1995, Paramount Communications was merged into Viacom
International. On September 29, 1994, Blockbuster Entertainment Corporation
merged with and into the Company (the "Blockbuster Merger"). During July 1995,
the Company announced an agreement to split-off its cable systems to its
shareholders through a "dutch auction" exchange offer and the subsequent
investment in and acquisition of all of the common stock of such entity by a
subsidiary of Tele-Communications, Inc. immediately following the split-off. The
exchange offer and related transactions are subject to several conditions,
including regulatory approvals, receipt of a tax ruling and consummation of the
exchange offer. The Company is currently exploring the sale of SPELLING and the
related purchase of SPELLING's subsidiary, VIRGIN INTERACTIVE ENTERTAINMENT
LIMITED ("VIRGIN INTERACTIVE"). On March 10, 1995, the Company sold Madison
Square Garden Corporation for closing proceeds of approximately $1.009 billion,
representing the sale price of approximately $1.075 billion, less an
approximately $66 million working capital adjustment. The net after-tax proceeds
of the sale were used to repay indebtedness.
As of March 1, 1996, National Amusements, Inc. ("NAI"), a closely held
corporation that owns and operates more than 1,000 movie screens in the U.S. and
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the U.K., owned approximately 61% of the Company's voting Class A Common Stock
("Class A Common Stock"), and approximately 25% 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 informational filing
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, 1995, the Company and
its affiliated companies employed approximately 81,700 people, of which
approximately 36,500 were full-time salaried employees.
Business
Networks and Broadcasting
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., MTV(TM) in Europe ("MTV EUROPE") and in Latin America ("MTV LATINO"),
NICKELODEON(R), NICK AT NITE(R), VH1 MUSIC FIRST(TM) (in the U.S., "VH1"), and
VH-1(TM) in the U.K., as well as program services in which MTVN participates as
a joint venturer, including MTV(TM) in ASIA ("MTV ASIA"), NICKELODEON(TM) and
THE PARAMOUNT CHANNEL(TM) in the U.K., NICKELODEON(TM) in Australia
("NICKELODEON AUSTRALIA"), and NICKELODEON(TM) and VH-1(TM) in Germany. Showtime
Networks Inc. ("SNI") owns and operates SHOWTIME(R), THE MOVIE CHANNEL(TM) and
FLIX(TM), and participates as a joint venturer in SUNDANCE CHANNEL(TM), a
premium subscription television program service which launched on February 29,
1996. Additionally, the Company participates as a joint venturer in four
advertiser-supported basic cable program services: USA NETWORK(TM) and the
SCI-FI CHANNEL(TM) (both of which are operated by USA Networks), COMEDY
CENTRAL(TM), and ALL NEWS CHANNEL(TM). The Company also packages
satellite-delivered program services for distribution to TVRO subscribers in the
U.S. through SHOWTIME SATELLITE NETWORKS(TM).
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") (TVRO and
DBS, together, "DTH"). Cable television operators are currently the predominant
distributors of the Company's Networks 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 concerts, augmented by
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music and general lifestyle information, comedy and dramatic series, news
specials, interviews, documentaries and other youth-oriented programming.
Additionally, 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.
MTV has expanded its business opportunities based on its programming to
include, among other enterprises, MTV ONLINE(TM) which provides promotional
opportunities for MTV and its programming; the MTV RADIO NETWORK(TM), which MTV
licenses to Westwood One Entertainment for syndication in the U.S. and which
features exclusive concert simulcasts, music information and MTV shows; an MTV
line of home videos, merchandise, interactive products and books, and electronic
retailing programs. MTV also pursues broadcast network and first-run syndication
television opportunities and motion picture development and production through
its MTV Productions business unit. The first two motion pictures produced
through MTV Productions are to be released in 1996, JOE'S APARTMENT(TM) which is
based on MTV programming and is to be released through Geffen Pictures/Warner
Bros., and a film featuring MTV's Beavis & Butt-Head characters to be released
through PARAMOUNT PICTURES. MTV has joined with POCKET BOOKS(TM), a division of
SIMON & SCHUSTER, in a venture under which books are published under an MTV
BOOKS imprint for the youth market. MTV has reintroduced its "Choose or Lose"
political awareness campaign for the 1996 presidential election, consisting of
news specials, interviews with the candidates and weekly coverage of the primary
season, designed to educate and inform young viewers about the political
process.
MTV was licensed to approximately 59.6 million domestic subscribers at
December 31, 1995 (based on subscriber counts provided by each distributor of
the service). According to the December 1995 sample reports issued by the A.C.
Nielsen Company (the "Nielsen Report"), MTV reached approximately 63.2 million
domestic subscriber households.
MTV EUROPE is designed to particularly attract the European youth market
by providing a high percentage of European-sourced youth programming, featuring
music videos, and including coverage of fashion, movies, news, trends and social
issues. MTV EUROPE is distributed in Europe and certain countries in the former
Soviet Union and the Middle East. Based on subscriber counts provided by
distributors of the service, MTV EUROPE reached approximately 51.5 million
subscribers at December 31, 1995. In 1995, MTV encrypted its service in Europe
in order to maximize subscription revenues.
MTV LATINO is customized for Spanish-speaking viewers in approximately
20 countries in Latin America and in the U.S. MTV LATINO was distributed to
approximately 6.5 million subscribers, including 668,000 U.S. subscribers at
December 31, 1995 (based on subscriber counts provided by each distributor of
the service).
MTV ASIA is operated by a joint venture of the Company and PolyGram Asia
L.L.C., which was launched in the second quarter of 1995, and reached
approximately 29.5 million subscribers throughout Asia at December 31, 1995
(based on subscriber counts provided by each distributor of the service). MTV
ASIA consists of two separate satellite feeds, one primarily in Mandarin, the
other primarily in English.
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MTVN has licensing arrangements covering the distribution of
regionally-specific program services in Brazil and Japan. MTVN also licenses MTV
programs, merchandise and format rights worldwide. The Company has also entered
into a joint venture agreement for the development and launch of DTH programming
packages anticipated to be available in the Middle East in April 1996, including
programming from MTV, VH-1, NICKELODEON, THE PARAMOUNT CHANNEL (described
below), and a new premium subscription movie-based program service managed by
SNI called THE MOVIE CHANNEL, among other services.
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
14 (which includes NICK JR.(TM), a program block designed for 2 to 5 year olds),
features live-action, animation and original children's game shows; and NICK AT
NITE, which primarily attracts audiences ages 18 to 49 and offers "Classic
TV"(TM) shows from various eras, including THE DICK VAN DYKE SHOW, THE MARY
TYLER MOORE SHOW and TAXI. At December 31, 1995, NICKELODEON/NICK AT NITE was
licensed to approximately 61.7 million domestic subscribers (based on subscriber
counts provided by each distributor of the service). According to the Nielsen
Report, NICKELODEON and NICK AT NITE each reached approximately 65 million
subscriber households. In 1996, the Company plans to launch NICK AT NITE'S TV
LAND(TM), a 24-hour, seven-days-a-week program service comprised of a broad
range of well-known television programs from various genres. Upon launch, NICK
AT NITE'S TV LAND will feature a wide range of genres including comedies,
dramas, westerns, variety and other formats from the 1950s through the 1980s
while NICK AT NITE programs will remain primarily comedies. NICKELODEON conducts
its brand and character licensing programs in the U.S. and international markets
by entering into merchandising agreements throughout the world. Additionally,
the Company publishes a monthly NICKELODEON MAGAZINE, which had approximately
481,000 subscribers at December 31, 1995; launched NICKELODEON ONLINE(TM) which
offers original content for children including live events, games and
videoclips; launched NICK AT NITE ONLINE(TM), an online resource regarding
classic television and pop culture; and created NICKELODEON MOVIES(TM), a new
unit, which is developing a mix of story and character-driven projects based on
original ideas and NICKELODEON programming, including the upcoming feature film,
HARRIET THE SPY(TM), which is being co-produced with PARAMOUNT PICTURES and is
expected to be released in 1996.
NICKELODEON in the U.K. is a joint venture of the Company and British
Sky Broadcasting Limited ("BSkyB") and is a 13-hour weekday and 12-hour weekend,
satellite-delivered children's television program service. On November 1, 1995,
PARAMOUNT PICTURES and NICKELODEON, in a joint venture with BSkyB, launched THE
PARAMOUNT CHANNEL in the U.K., which features comedies, dramas, light
documentaries and films during the daypart following the NICKELODEON in the
U.K. program segment. NICKELODEON in Australia is operated by a joint venture of
the Company and XYZ Entertainment Pty Ltd. (which is owned by Foxtel, Century
Communications Corp. and United International Holdings Inc.) and is a
subscription television program service which launched in October 1995.
NICKELODEON in Germany, which launched in July 1995, is a joint venture of the
Company, The Bear Stearns Companies Inc. ("Bear Stearns") and Ravensburger Film
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& TV GmbH. This joint venture has required the receipt of certain regulatory
approvals. The international NICKELODEON services deliver children's programming
which generally includes U.S. NICKELODEON programming, acquired programming
(including locally produced programs) and original programming produced by
NICKELODEON and the applicable joint venture.
VH1 presents music videos, long-form music-based series and specials,
original concerts, music-based news and information, artist interviews and
fashion, and targets an audience from the ages of 25 to 44. At December 31,
1995, VH1 was licensed to approximately 51 million domestic subscribers (based
on subscriber counts provided by each distributor of the service). According to
the Nielsen Report, VH1 reached approximately 53.2 million domestic subscriber
households. In 1995, VH1 launched VH1 ONLINE(TM) giving viewers the opportunity
to go behind the scenes at VH1 special events, chat with VH1 artists and learn
more about VH1 programming. VH-1 in the U.K. was launched in September 1994 and
was distributed to approximately 4.3 million viewers in the U.K. and Ireland as
of December 31, 1995 (based on subscriber counts provided by each distributor of
the service). VH-1 in Germany, launched in March 1995, is a joint venture of the
Company and Bear Stearns. This joint venture has required the receipt of certain
regulatory approvals.
MTVN, in exchange for cash and advertising time or for promotional
consideration only, licenses from record companies music videos for exhibition
on MTV, VH1 and other MTVN program services. The agreements generally provide
for a license period of three to five years, and in the U.S., that videos are
available for debut by MTVN and are subject to exclusive exhibition periods on
MTV. MTVN has entered into multi-year global music video licensing agreements
with certain record companies. MTVN also has shorter term and regional clip
licensing arrangements with other record companies. MTVN is negotiating and
expects to conclude additional license agreements with independent labels and
additional global music video license agreements with major international
labels. However, there can be no assurance that such agreements can be concluded
on favorable terms. MTVN is continuing to take measures to assure access to
music videos worldwide. (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 in general market conditions for
advertising may affect MTVN's revenues. (See "Business--Competition--Networks")
Showtime Networks Inc. SNI operates three commercial-free, premium
subscription television program services: SHOWTIME, offering recently released
theatrical feature films, drama and comedy series, boxing events, and original
movies; THE MOVIE CHANNEL, offering recently released theatrical films and
related programming including film festivals; and FLIX, an added-value program
service featuring theatrical movies primarily from the 1960s, 70s and 80s. At
December 31, 1995, SHOWTIME, THE MOVIE CHANNEL and FLIX, in the aggregate, had
approximately 14.8 million cable and other subscribers 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 Distribution
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Inc., which is managed and operated by SNI, launched on February 29, 1996.
SUNDANCE CHANNEL is a commercial-free 24-hour, seven-days-a-week 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 premium titles. The Company
has also entered into a joint venture agreement for the development and launch
of DTH programming packages anticipated to be available in the Middle East in
April 1996, including a new premium subscription movie-based program service
called THE MOVIE CHANNEL, which is managed by SNI, and programming from MTV
EUROPE, VH-1, NICKELODEON and THE PARAMOUNT CHANNEL, among other services.
SNI also provides special events, such as sports events, to licensees on
a pay-per-view basis. In March 1995, SNI entered into an exclusive multi-year
agreement with former heavyweight champion Mike Tyson and Don King Productions,
Inc. for SHOWTIME EVENT TELEVISION's pay-per-view marketing and distribution of
Mike Tyson's fights over three years. SHOWTIME EVENT TELEVISION(TM) is a
pay-per-view distributor of special events, including boxing events. In
addition, SNI, through its subsidiary, SHOWTIME SATELLITE NETWORKS INC.,
packages for distribution to TVRO viewers the Company's wholly owned program
services, as well as COMEDY CENTRAL, USA NETWORK, the SCI-FI CHANNEL, and
certain third-party program services.
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. In addition to SNI's other theatrical motion picture license
agreements, SNI recently entered into agreements with PolyGram Filmed
Entertainment Distribution Inc. under which SNI will acquire the exclusive U.S.
premium television rights to up to 100 of PolyGram's feature titles initially
theatrically released in the U.S. through the year 2001; with PARAMOUNT PICTURES
to acquire the exclusive U.S. premium television rights to up to 196 of
PARAMOUNT PICTURES' feature films, commencing with feature films initially
theatrically released in the U.S. in 1998 for a minimum seven-year period, as
well as 300 titles from its film library (see "Business--Entertainment"); and
with Phoenix Pictures, a new feature film production and distribution company
headed by Mike Medavoy, to acquire the exclusive U.S. premium television rights
to up to 40 of Phoenix Pictures' films initially theatrically released in the
U.S. through the end of 2002, and to acquire an approximate 11% equity
investment in Phoenix Pictures. Theatrical motion pictures 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.
SNI also arranges for the development, production and, in many cases,
distribution of original programs and motion pictures. These original programs
and motion pictures premiere in the U.S. on SHOWTIME, unless they are previously
theatrically released. Such programming is also exploited in various media
worldwide. As part of its original programming strategy, SNI intends to produce
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or acquire approximately 50 SHOWTIME original movies in 1996. SNI has entered
into and plans to continue to enter into co-financing, co-production and/or
distribution arrangements with other parties to reduce the net cost to SNI for
all of its original movies.
The cost of acquiring premium television rights to programming is the
principal expense of SNI. At December 31, 1995, 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 $2 billion, 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.
Other Joint Ventures. USA Networks, a joint venture of the Company and
MCA, Inc. ("MCA"), operates two advertiser-supported basic cable television
program services in the U.S.: USA NETWORK, a general entertainment and sports
channel, and the SCI-FI CHANNEL, a science fiction channel. Internationally, USA
Networks operates USA NETWORK in Latin America and the SCI-FI CHANNEL in Europe.
COMEDY CENTRAL, a joint venture of the Company and Home Box Office ("HBO"), a
division of Time Warner, is an advertiser-supported basic cable television
comedy program service. ALL NEWS CHANNEL, a joint venture of the Company and
Conus Communications Company Limited Partnership, a limited partnership whose
managing general partner is Hubbard Broadcasting, Inc., consists of national and
international news, weather, sports and business news.
Broadcasting. The Company owns and operates 12 television stations and
12 radio stations. All of these television and radio stations operate pursuant
to the Communications Act of 1934, as amended (the "Communications Act"), and
licenses granted by the Federal Communications Commission ("FCC"). Under the
Telecommunications Act of 1996 (the "1996 Telecommunications Act") which was
signed into law on February 8, 1996 and, upon its implementation by the FCC,
licenses will be renewable every eight years. Until such implementation,
licenses are renewable every five years in the case of television stations and
every seven years in the case of radio stations.
The Company's strategy has been to acquire independent television
stations in major U.S. markets to the extent advantageous in conjunction with
the Company's formation of the United Paramount Network(TM) ("UPN") (see
"Business--Entertainment"). The Company acquired WUPA-TV (formerly WVEU-TV),
serving Atlanta, Georgia, on September 1, 1995; WPSG-TV (formerly WGBS-TV),
serving Philadelphia, Pennsylvania, on August 25, 1995; WBFS-TV, serving
Miami-Fort Lauderdale, Florida, on August 3, 1995; and WSBK-TV, serving Boston,
Massachusetts, on March 7, 1995. The Company sold KSLA-TV, a CBS affiliated
station serving Shreveport, Louisiana, on September 1, 1995; WTXF-TV, a Fox
Network affiliated station serving Philadelphia, Pennsylvania, on August 25,
1995; KRRT-TV, a Fox Network affiliated station serving San Antonio, Texas, on
August 3, 1995; and WLFL-TV, a Fox affiliated station serving Raleigh/Durham,
North Carolina, on January 17, 1995. The table below sets forth a list of the 12
television properties owned and operated by the Company at March 1, 1996.
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Network Affiliation and
Station and Market Expiration Date of
Metropolitan Area Served* Rank Type Affiliation Agreement
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WPSG-TV
Philadelphia, PA 4 UHF UPN/January 16, 1998
WSBK-TV
Boston, MA 6 UHF UPN/January 16, 1998
WDCA-TV
Washington, DC 7 UHF UPN/January 16, 1998
KTXA-TV
Dallas-Ft. Worth, TX 8 UHF UPN/January 16, 1998
WKBD-TV
Detroit, MI 9 UHF UPN/January 16, 1998
WUPA-TV
Atlanta, GA 10 UHF UPN/January 16, 1998
KTXH-TV
Houston, TX 11 UHF UPN/January 16, 1998
WBFS-TV
Miami-Ft. Lauderdale, FL 16 UHF UPN/January 16, 1998
KMOV-TV
St. Louis, MO 20 VHF CBS/December 31, 1996
WVIT-TV
Hartford-New Haven, CT 26 UHF NBC/February 1, 2002
WNYT-TV
Albany-Schenectady-Troy, NY 52 VHF NBC/February 1, 2002
WHEC-TV
Rochester, NY 71 VHF NBC/February 1, 2002
*Metropolitan Areas Served are A.C. Nielsen Company's Designated Market Areas
The Company owns and operates the following 12 radio stations: WLTW-FM,
serving New York, New York (Adult Contemporary); KYSR-FM and KXEZ-FM, each
serving Los Angeles, California (Adult Contemporary); WLIT-FM, serving Chicago,
Illinois (Adult Contemporary); WLTI-FM, serving Detroit, Michigan (Adult
Contemporary), WMZQ-AM/FM (Country), WJZW-FM (Jazz) and WBZS-AM (Business News),
each serving Washington, D.C.; KBSG-AM/FM, serving Seattle/Tacoma, Washington
(Oldies); and KNDD-FM, serving Seattle, Washington (Modern Rock). The Company
has undertaken to divest two stations in the Washington, D.C. market as a result
of multiple ownership issues arising from the acquisition of Paramount
Communications (see "Business--Regulation--Broadcasting"). The Company has
requested a temporary waiver of this obligation from the FCC until such time
as the FCC completes its pending review of local ownership limitations.
Depending on the outcome of that review, the Company may request a permanent
waiver of this undertaking. In March 1996, the Company entered into agreements
which will result in the exchange of KBSG-AM/FM and KNDD-FM for WAXQ-FM, serving
New York, New York. On March 22, 1995, the Company sold KSOL-FM, serving San
Francisco, California, and KYLZ-FM, serving Santa Cruz/San Jose, California.
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Entertainment
The Entertainment segment's principal businesses are the production and
distribution of motion pictures and television programming as well as movie
theater operations and new media and interactive 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 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. During 1995,
PARAMOUNT PICTURES theatrically released 14 feature motion pictures in the U.S.,
including, BRAVEHEART, winner of five Academy Awards including "Best Picture",
CONGO, CLUELESS, THE BRADY BUNCH MOVIE and SABRINA. PARAMOUNT PICTURES plans to
release approximately 20 films in 1996, including MISSION: IMPOSSIBLE, STAR TREK
GENERATIONS II, THE GHOST AND THE DARKNESS, PRIMAL FEAR, BEAVIS AND BUTT-HEAD
and HARRIET THE SPY, which is being co-produced with NICKELODEON.
In seeking to maximize PARAMOUNT PICTURES' output while limiting its
financial exposure, the Company has from time to time entered into agreements to
distribute films produced and/or financed, in whole or in part, with other
parties. For example, entities associated with the Company have agreements with
companies with which Michael Douglas and Steven Reuther are associated for the
production and/or financing of 12 films over a term of no less than four years.
PARAMOUNT PICTURES also has an agreement with Lakeshore Entertainment
Corporation ("Lakeshore") for the distribution by PARAMOUNT PICTURES of 15 films
to be produced by Lakeshore over five years.
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 entities associated with the Company, MGM
and MCA. PARAMOUNT PICTURES distributes its motion pictures on videocassette and
disc in the U.S. and Canada through PARAMOUNT HOME VIDEO and outside the U.S.
and Canada, generally through Cinema International B.V., a joint venture of
entities associated with the Company and MCA. PARAMOUNT PICTURES has an
exclusive premium subscription television agreement with HBO for exhibition of
PARAMOUNT PICTURES' new releases on U.S. premium subscription television, which
includes new PARAMOUNT PICTURES motion pictures released theatrically through
December 1997. PARAMOUNT PICTURES has licensed to SNI for exhibition on SHOWTIME
and THE MOVIE CHANNEL the exclusive U.S. premium subscription television rights
to up to 196 of PARAMOUNT PICTURES' feature films, commencing with feature films
initially theatrically released in the U.S. in 1998 for a minimum seven-year
period, as well as 300 titles from its film library. PARAMOUNT PICTURES also
distributes its motion pictures for premium subscription television release
9
outside the U.S. and Canada, in part through UIP, and licenses its motion
pictures to home and hotel/motel pay-per-view, airlines, schools and
universities. In addition, PARAMOUNT PICTURES is a joint venture partner in HBO
Pacific Partners C.V., Latin American Pay Television Service, VOF, Telecine
Programacao de Filmes Ltda., Pay-TV Movies Australia and Star Channel, which are
premium television services in Asia, Spanish-speaking Latin America, Brazil,
Australia and Japan, respectively. UIP and United Cinemas International ("UCI",
as described below) are the subject of governmental inquiries by the Commission
of the European Community ("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 the films are
available for such exhibition, which, among other reasons, may cause substantial
fluctuation in PARAMOUNT PICTURES' operating results. At December 31, 1995, the
unrecognized revenues attributable to such licensing of completed films from
PARAMOUNT PICTURES' license agreements were approximately $639.3 million.
PARAMOUNT PICTURES has approximately 900 motion pictures in its library.
Television Production and Syndication. The Company also produces,
acquires and distributes series, miniseries, specials and made-for-television
movies primarily for network television, first-run syndication, and basic cable
television. As a result of the Blockbuster Merger, the Company now owns
approximately 75% of SPELLING, which includes SPELLING TELEVISION(TM), REPUBLIC
PICTURES(TM) and WORLDVISION ENTERPRISES(TM) ("WORLDVISION"). The Company is
currently exploring the sale of SPELLING and the related purchase of SPELLING's
subsidiary, VIRGIN INTERACTIVE(TM).
The Company's current network programming includes FRASIER(R),
WINGS(TM), ALMOST PERFECT(TM), THE HOME COURT(TM), LEEZA(TM), SISTER,
SISTER(TM), JAG(TM), DIAGNOSIS MURDER(TM) and GOOD COMPANY(TM), and through
SPELLING, BEVERLY HILLS, 90210(TM), MELROSE PLACE(TM), MALIBU SHORES(TM) and
SAVANNAH(TM). 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 license fee is normally less
than the Company's and SPELLING's respective costs of producing each series
episode; however, in many cases, the Company has been successful in obtaining
international sales through its and SPELLING's respective 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 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(R), ENTERTAINMENT TONIGHT(R), HARD COPY(R), SIGHTINGS(R), THE MAURY POVICH
SHOW(R), THE MONTEL WILLIAMS SHOW(TM) and beginning in 1996, REAL TV(TM) and
10
VIPER. In early 1995, PARAMOUNT PICTURES entered into an agreement with The
Procter & Gamble Company ("P&G") pursuant to which P&G will co-finance certain
network and first-run syndicated programming produced by PARAMOUNT PICTURES
during the three year term of the agreement. Later in 1995, PARAMOUNT PICTURES
and P&G announced a strategic alliance with NBC to develop and produce programs
for network series, first-run syndication and international distribution,
pursuant to which NBC has been granted specific "first-look" rights and has
agreed to multiple series commitments.
The Company produces original programming, including STAR TREK:
VOYAGER(R) and THE SENTINEL(TM), for UPN. UPN launched on January 16, 1995 in
approximately 96 U.S. television markets, providing its affiliates a two-hour
prime-time programming block two nights a week. At December 31, 1995, UPN had
affiliates in approximately 151 U.S. television markets. On March 6, 1996, UPN
added an additional night of two hours of prime-time programming. UPN is
currently 100% owned by subsidiaries of BHC Communications, Inc. ("BHC"), an
affiliate of Chris Craft Industries, Inc. The Company has an option exercisable
through January 15, 1997 to acquire an interest in UPN equal to that of BHC and
its subsidiaries for a price equivalent to approximately one-half of BHC's
aggregated cash contributions to UPN through the exercise date, plus
market-based interest.
The Company distributes its television programming to basic cable
program services such as USA NETWORK. On November 1, 1995, PARAMOUNT PICTURES
and NICKELODEON, in a joint venture with BSkyB, launched THE PARAMOUNT CHANNEL
in the U.K., which features comedies, dramas, light documentaries and films
during the daypart following the NICKELODEON in the U.K. program segment.
PARAMOUNT PICTURES is also a joint venture partner in TV1 Australia, a basic
cable channel in Australia.
The Company 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 are generally long-term and exclusive
in nature; 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 receipt and 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, 1995, the unrecognized
revenues attributable to television program license agreements were
approximately $502.7 million.
Theatrical Exhibition. The Company's movie theater operations consist
primarily of FAMOUS PLAYERS(R) in Canada, UCI and FILMS PARAMOUNT(TM) in Europe,
and CINAMERICA(TM) in the Western U.S. UCI, a 50%-owned joint venture of
11
entities associated with the Company and MCA, operates theaters in the U.K.,
Ireland, Germany, Austria and Spain. CINAMERICA, a 50%-owned joint venture of
entities associated with the Company and Time Warner Inc., includes MANN(TM) and
FESTIVAL(TM) Theaters, and operates 371 screens in 66 theaters in California,
Colorado, Arizona and Alaska.
New Media and Interactive Services. VIACOM INTERACTIVE MEDIA(TM) is
comprised of VIACOM NEW MEDIA(TM) and VIACOM INTERACTIVE SERVICES(TM). VIACOM
NEW MEDIA develops and publishes interactive entertainment software for personal
computers and video game consoles on a wide variety of platforms. VIACOM NEW
MEDIA derives its content from brands and franchises developed by the Company's
business units, including MTV NETWORKS and PARAMOUNT TELEVISION, and also
secures outside licenses and original titles. In 1995, VIACOM NEW MEDIA released
11 titles, some of which were released for multiple platforms; the titles
represent 23 stock keeping units ("sku's"; a title in each platform is a
distinct sku). VIACOM INTERACTIVE SERVICES collaborates with the Company's
various business units to develop their respective on-line and interactive
television environments. In 1995, PARAMOUNT DIGITAL ENTERTAINMENT(TM) was formed
to exploit various PARAMOUNT-owned and other properties on-line, and this unit
entered into an agreement with The Microsoft Network to establish STAR TREK(R)
and ENTERTAINMENT TONIGHT(TM) sites on Microsoft Corporation's on-line service
in 1996. VIRGIN INTERACTIVE, a subsidiary of SPELLING, develops and publishes
interactive entertainment software for personal computers and video game
consoles on a wide variety of platforms, and distributes products in
approximately 30 countries. The Company is currently exploring the purchase of
VIRGIN INTERACTIVE and the related sale of SPELLING. In 1995, VIRGIN INTERACTIVE
released 41 titles, including THE 11th HOUR: THE SEQUEL TO THE 7TH GUEST,
COMMAND & CONQUER, and AGILE WARRIOR: F-111, some of which were released for
multiple platforms. These 1995 titles represent 50 sku's.
Video and Music/Theme Parks
The Company operates in the home video retailing and rental business and
music retailing business through its BLOCKBUSTER ENTERTAINMENT GROUP
("BLOCKBUSTER").
Home Video Retailing. BLOCKBUSTER is the leading worldwide owner,
operator and franchiser of videocassette rental and sales stores. BLOCKBUSTER
VIDEO(R) stores range in size from approximately 3,800 square feet to 11,500
square feet, and generally carry a comprehensive selection of 7,000 to 13,000
prerecorded videocassettes, consisting of more than 5,000 titles. BLOCKBUSTER
offers titles primarily for rental and also offers titles for purchase on a
"sell-thru" basis (See "Business--Competition--Video").
At December 31, 1995, there were 4,513 BLOCKBUSTER VIDEO stores
operating worldwide; 3,180 BLOCKBUSTER VIDEO stores were operating in all 50
U.S. states, 2,537 of which were owned by the Company and 643 of which were
owned by franchisees; and 1,333 BLOCKBUSTER VIDEO stores were operating in 18
foreign markets, 1,117 of which were owned by the Company, 85 were owned by
various joint ventures in which the Company is a partner and 131 of which were
12
owned by franchisees. At December 31, 1995, 576 of the Company's stores located
in the United Kingdom were operated under the "BLOCKBUSTER VIDEO EXPRESS"(TM)
trade name.
During 1995, the Company entered into eight new foreign markets and
acquired equity interests in certain foreign franchisees. Franchises to develop,
own and operate BLOCKBUSTER VIDEO stores were granted in Colombia, Ecuador, El
Salvador, Panama, Peru, Portugal and Thailand. In addition, the Company entered
into a joint venture to develop, own and operate BLOCKBUSTER VIDEO stores in
Germany. The Company also increased its participation in three previously
franchised foreign markets during 1995. The Company acquired a 71% interest in
its franchisee in Mexico, a 51% interest in its franchisee in Argentina and a
51% interest in a newly formed joint venture with its franchisee in Spain. The
Company also entered into agreements pursuant to which it will manage the
development and operation of BLOCKBUSTER VIDEO stores in such markets. As a
result, as of December 31, 1995, 81 of the 107 BLOCKBUSTER VIDEO stores located
in Mexico, all 22 BLOCKBUSTER VIDEO stores located in Argentina and all 17
BLOCKBUSTER VIDEO stores located in Spain were managed by the Company. The 26
BLOCKBUSTER VIDEO stores located in Mexico not managed by the Company were
managed by joint venture partners of the Company's franchisee in Mexico.
The Company's home video business may be affected by a variety of
factors, including but not limited to, general economic trends in the movie and
home video industries including the quality of new release titles available for
rental and sale, acquisitions made by the Company, existing and additional
competition, marketing programs, weather, special or unusual events, changes in
technology, variations in the number of store openings and similar factors that
may affect retailers in general. As compared to other months of the year,
revenue from BLOCKBUSTER VIDEO stores in the U.S. has been, and the Company
believes will continue to be, subject to decline during the months of April and
May, due in part to the change to Daylight Savings Time, and during the months
of September, October and November, due in part to the start of school and the
introduction of new television programs.
Music Retailing. Through music stores operating under the "BLOCKBUSTER
MUSIC"(TM) trade name, BLOCKBUSTER is among the largest specialty retailers of
prerecorded music in the U.S. At December 31, 1995, BLOCKBUSTER owned
and operated 516 BLOCKBUSTER MUSIC stores in 34 states in the U.S. and six
BLOCKBUSTER MUSIC stores in Australia. During 1995, the Company restructured its
music retail joint ventures with Virgin Retail Group, Ltd. which owned and
operated Virgin Megastores in the U.S., Europe and Australia. As a
result of the restructuring of these joint ventures, BLOCKBUSTER acquired the
four stores developed by the Australian joint venture (which were all converted
to BLOCKBUSTER MUSIC stores during 1995) and retained a 19.9% interest in the
European joint venture, which operated 20 Virgin Megastores at December 31,
1995. BLOCKBUSTER no longer owns any interest in the Virgin Megastores located
in the U.S.
The Company's music business may be affected by a variety of factors,
including but not limited to, general economic trends and conditions in the
music industry, including the quality of new titles and artists, existing and
additional competition, marketing programs, changes in technology, and similar
factors that may affect retailers in general. The Company's music business is
13
seasonal, with higher than average monthly revenue experienced during the
Thanksgiving and Christmas seasons, and lower than average monthly revenue
experienced in September and October.
Theme Parks. The Company, through PARAMOUNT PARKS, owns and operates
five regional theme parks and one water park 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; and
PARAMOUNT CANADA'S WONDERLAND(R) located near Toronto, Ontario. In May 1995,
PARAMOUNT PARKS purchased RAGING WATERS(TM), the San Francisco Bay Area's
premier water theme park located in San Jose, California. Each of the theme
parks features attractions based on intellectual properties of the Company.
Substantially all of the theme parks' operating income is generated from May
through September. PARAMOUNT PARKS and Las Vegas Hilton Corporation expect to
launch STAR TREK: THE EXPERIENCE(TM) at the Las Vegas Hilton, a
futuristic-themed, interactive environment in early 1997.
Other Entertainment. At December 31, 1995, the Company held an equity
interest of approximately 49% of the outstanding common stock of Discovery Zone,
Inc. ("Discovery Zone"). Discovery Zone(R) owns, operates and franchises large
indoor recreational spaces known as FunCenters, and operates Leaps and Bounds
indoor entertainment and fitness facilities. On March 25, 1996, Discovery Zone
filed a voluntary petition with the U.S. Bankruptcy Court for the District of
Delaware for protection from its creditors under Chapter 11 of the U.S.
Bankruptcy Code.
Publishing
The Company, through the SIMON & SCHUSTER family of companies, publishes
and distributes hardcover and paperback books, interactive CD-ROM products,
audio books, educational textbooks and supplemental educational materials,
multimedia curricula, and information and reference materials for businesses and
professionals. SIMON & SCHUSTER also publishes and distributes certain of its
content on the Internet and commercial on-line services. In February 1994, SIMON
& SCHUSTER completed the acquisition of the U.S. publishing assets of Macmillan,
Inc. for approximately $553 million. Simon & Schuster's well-known imprints
include SIMON & SCHUSTER, PRENTICE HALL, THE FREE PRESS(TM), POCKET BOOKS,
MACMILLAN PUBLISHING USA, SCRIBNER(R), QUE(R), SILVER BURDETT GINN(R), MODERN
CURRICULUM(TM), ALLYN & BACON(R), COMPUTER CURRICULUM CORPORATION(TM) and
EDUCATIONAL MANAGEMENT GROUP(TM), among others. Additionally, SIMON & SCHUSTER
develops special imprints and publishes titles based on MTV, NICKELODEON and
PARAMOUNT PICTURES products. SIMON & SCHUSTER distributes its books directly and
through third parties on a retail and wholesale basis.
Educational Publishing. The Elementary, Secondary, Higher Education and
Educational Technology groups publish elementary, secondary and college
textbooks and related materials, computer-based educational products,
audiovisual products and vocational and technical materials under such imprints
as PRENTICE HALL, SILVER BURDETT GINN, GLOBE FEARON(TM), MODERN CURRICULUM and
ALLYN & BACON, among others. In February 1995, Simon & Schuster acquired all of
14
the outstanding stock of EDUCATIONAL MANAGEMENT GROUP, INC.(TM), an interactive
educational company that develops and distributes customized instructional
materials and live interactive television program services to schools and
reaches more than one million students in approximately 3,800 schools. COMPUTER
CURRICULUM CORPORATION(TM), a subsidiary of SIMON & SCHUSTER, delivers
multimedia coursework to approximately 1.5 million students in approximately
8,000 schools in five countries. The educational marketplace is subject to
seasonal fluctuations in its business which correlate to the traditional school
year. SIMON & SCHUSTER sales to elementary and secondary schools are dependent,
in part, on the "adoption" or selection of instructional materials by designated
state agencies. Twenty-two states and some localities limit the textbooks that
may be purchased with state funds to those books that have been approved by the
adoption authorities.
Consumer Publishing. The Consumer group publishes and distributes
hardcover, trade paperback, mass-market books, audio books and interactive
products under imprints including SIMON & SCHUSTER, POCKET BOOKS, SCRIBNER, THE
FREE PRESS, SIMON & SCHUSTER TRADE PAPERBACK(TM), which includes FIRESIDE(R),
TOUCHSTONE(R), SCRIBNER PAPERBACK FICTION(TM) and SIMON & SCHUSTER LIBROS EN
ESPANOL(TM), as well as SIMON & SCHUSTER CHILDREN'S PUBLISHING(TM), which
includes ALADDIN PAPERBACKS(TM), ATHENEUM BOOKS FOR YOUNG READERS(TM), LITTLE
SIMON(R), MARGARET K. McELDERRY BOOKS(TM), NICK JR.(TM) and SIMON & SCHUSTER
BOOKS FOR YOUNG READERS(TM). Titles released in 1995 included "Remember Me" and
"The Lottery Winner" (Mary Higgins Clark), "All That Glitters" and "Hidden
Jewel" (V.C. Andrews), "The Children's Book of Virtues" (William J. Bennett) and
"The Christmas Box" (Richard Paul Evans). SIMON & SCHUSTER AUDIO(TM) is the
world's largest publisher of audio books. In 1995, the Consumer Group created
SIMON & SCHUSTER INTERACTIVE, which published 11 titles in 1995 and has 25
CD-ROM titles scheduled for publication in 1996. The consumer marketplace is
subject to increased periods of demand in the summer months and during the
end-of-year holiday season. In March 1995, SIMON & SCHUSTER acquired an
approximately 20% ownership stake in Byron Preiss MultiMedia Corporation, a
leading interactive software developer. SIMON & SCHUSTER ONLINE(TM), formed in
January 1996, will publish original content on the Internet and commercial
on-line services.
Business and Professional Publishing. Through a wide variety of
imprints, SIMON & SCHUSTER publishes a full range of business, professional
training, and medical and healthcare information products, including books,
newsletters, journals, seminars, videos, loose-leaf series and multimedia
programs, and operates seminars. Operating units include THE NEW YORK INSTITUTE
OF FINANCE(TM), APPLETON & LANGE(R), JOSSEY-BASS(TM), THE BUREAU OF BUSINESS
PRACTICE(TM), AND PRENTICE HALL DIRECT(TM).
Reference Publishing. MACMILLAN PUBLISHING USA, the umbrella identity of
SIMON & SCHUSTER's reference publishing operations, is the industry leader in
computer book publishing and a leader in home/library reference publishing. The
unit's imprints include MACMILLAN COMPUTER PUBLISHING USA(TM) (QUE(R), SAMS(R),
HAYDEN BOOKS(TM), NEW RIDERS(TM), SAMS.NET(TM), BRADY GAMES(TM) and QUE
EDUCATION & TRAINING(TM)), MACMILLAN REFERENCE USA(TM) (ARCO(TM), BETTY
CROCKER(R), BURPEE(TM), FROMMER'S(TM) TRAVEL GUIDE, HARRAP'S BILINGUAL
15
DICTIONARIES(TM), HOWELL BOOK HOUSE(TM), MONARCH(R) NOTES, J.K. LASSER(TM), THE
PLACES RATED(R) ALMANAC, THE UNOFFICIAL GUIDES(TM), WEBSTER'S NEW WORLD(R),
WEIGHT WATCHERS(R), ALPHA(TM), MACMILLAN BOOKS(TM), MACMILLAN COOKING AND
GARDENING(TM), MACMILLAN SPECTRUM(TM), THORNDIKE(R), SCHIRMER BOOKS(TM), CHARLES
SCRIBNER SONS(R) REFERENCE, G.K. HALL(TM), MACMILLAN TRAVEL(TM) and MACMILLAN
DIGITAL USA(TM)) and MACMILLAN ONLINE USA(TM), the online presence for MACMILLAN
PUBLISHING both on the Internet and commercial online services such as
CompuServe and America Online. In July 1995, the Company acquired ZIFF-DAVIS
PRESS(TM), the book publishing operation of Ziff-Davis Publishing Company, which
will publish approximately 65 titles in 1996. In January 1996, the Company
acquired the WAITE GROUP, INC.(R), which publishes titles on computer
programming languages and emerging technologies.
International Publishing. The Company distributes its English language
books originally published in the U.S. worldwide. The Company also expects to
publish approximately 1,200 books in 10 languages and 34 countries outside North
America in 1996, primarily in the areas of academic, computer, English language
training, and professional publishing. The publishing includes local language
translation and adaptation of U.S. product and indigenous publishing. SIMON &
SCHUSTER also maintains co-publishing partnerships in approximately 14
countries, such as Japan (Toppan and Impress) and the People's Republic of
China, where the operations include distribution of U.S. products. In January
1994, the Company acquired German computer book publisher MARKT & TECHNIK(TM),
enhancing the Company's position as the world's largest computer book publisher
and providing greater opportunities for expansion into other European markets,
particularly Eastern Europe.
Cable Television
Cable Operations. At December 31, 1995, the Company, through Viacom
Cable Television ("Viacom Cable"), was approximately the 12th largest multiple
cable television system operator in the U.S. with approximately 1.2 million
subscribers. During July 1995, the Company announced an agreement to split-off
its cable systems to its shareholders through a "dutch auction" exchange offer
and the subsequent investment in and acquisition of all of the common stock of
such entity by a subsidiary of Tele-Communications, Inc. immediately following
the split-off. The exchange offer and related transactions are subject to
several conditions, including receipt of a tax ruling and consummation of the
exchange offer. Viacom Cable's systems are operated pursuant to non-exclusive
franchises granted by local governing authorities.
In most of its systems, Viacom Cable offers two tiers of primary (i.e.,
non-premium) service: "Limited Service," which is subject to rate regulation by
local franchise authorities and consists generally of local and distant
broadcast stations, and all public, educational and governmental ("PEG")
channels as may be required by the local franchise authorities; and the
"Satellite Value Package," which, until March 31, 1999, is subject to rate
regulation by the FCC and which provides additional channels of
satellite-delivered cable networks, including the Company's own basic program
services and joint venture services, as well as third-party services. Fees for
these two levels of service constitute the major source of the systems' revenue.
In addition, Viacom Cable offers a third tier of non-premium service which
qualifies as a non-regulated "new product tier" in the following systems:
16
Nashville, TN; Dayton, OH; Pittsburg, CA; Petaluma, CA; Livermore, CA; Puget
Sound South, WA; and most of Puget Sound North/Central, WA. Each such tier
consists of either five or six channels of advertiser-supported cable networks.
The Communications Act precludes rate regulation wherever a cable system
faces "effective competition". None of Viacom Cable's systems is presently
subject to "effective competition" and therefore none of such systems is exempt
from such regulation. Pursuant to the 1996 Telecommunications Act, which amends
the Communications Act, regulation of the Satellite Value Package will cease as
of March 31, 1999 (even in the absence of "effective competition"). Regulation
of rates for Limited Service will end only when any cable system becomes subject
to "effective competition". The 1996 Telecommunications Act adds a new
"effective competition" test to the three already included in the Communications
Act. The new test finds effective competition in areas where a local telephone
company, its affiliate, or a multichannel video programming distributor using
the facilities of the telephone company or its affiliate -- irrespective of the
number of subscribers to the service -- offers programming to subscribers by any
means (other than DTH) in the franchise area of the cable system, provided that
the programming so offered is "comparable" to the programming provided by the
cable operator in that area. The new product tiers mentioned above are not rate
regulated at the present time, but the FCC has reserved the right to reopen the
issue of rate regulation for new product tiers in the future.
Viacom Cable offers premium cable television programming, including the
Company's premium subscription television program services, to its customers for
an additional monthly fee of up to $12.95 per premium service. At December 31,
1995, the Company's cable television systems had approximately 921,000
subscriptions to premium subscription television program services.
Viacom Cable earns revenues from sources in addition to subscriber fees.
In all of its markets, revenues are generated from advertising sales as well as
from commissions on the sales of products on home shopping services offered by
Viacom Cable to its customers. Viacom also derives revenues, in three of its
markets, from the lease of certain fiber optic capacity to partnerships engaged
in competitive access telephone services. Viacom Cable has equity interests in
each of these partnerships.
Cable operators require substantial capital expenditures to construct
systems and significant annual expenditures to maintain, rebuild and expand
systems. System construction and operation and quality of equipment used must
conform with federal, state and local electrical and safety codes and certain
regulations of the FCC. Viacom Cable, like many other cable operators, is
analyzing potential business applications for its broadband network, including
interactive video, video on demand, data services and telephony. These
applications, either individually or in combination, may require technological
changes such as the installation of fiber optic cable and the capacity to engage
in digital compression. Although management believes the equipment used in the
cable operations is in good operating condition, except for ordinary wear and
tear, the Company invests significant amounts each year to upgrade, rebuild and
expand its cable systems. During the last five years, Viacom Cable's capital
expenditures were as follows: 1991: $45 million; 1992: $55 million; 1993: $79
million; 1994: $100 million; and 1995: $119 million. The Company expects that
Viacom Cable's capital expenditures in 1996 will be approximately $150 million.
17
Viacom Cable has constructed a fiber optic cable system in Castro
Valley, California to provide more channels with significantly better picture
quality, and to accommodate testing of new services including an interactive
on-screen programming guide known as StarSight (in which consolidated affiliates
of the Company currently have an approximately 22.6% equity interest on a
combined basis), other interactive programs with VIACOM INTERACTIVE MEDIA,
multiplexed services, experimental interactive video and data services and
access to on-line computer services and the Internet through a PC-cable modem.
In January 1996, the Castro Valley system began testing full telephone service
over the cable system.
18
Viacom Cable
As of December 31, 1995
- --------------------------------------------------------------------------------
Approximate
Approximate Homes Homes Number of
in Franchise Area Passed by Primary Primary Premium Premium Miles of
(1) Cable (2) Customers(3) Penetration(4) Units(5) Penetration(6) Cable Distribution
Bay Area Region
Marin(7) 81,000 77,800 63,000 81% 38,600 61% 648
Sonoma(7) 48,000 45,700 36,100 79% 23,600 65% 542
Napa 33,000 32,700 24,100 74% 16,500 68% 323
East Bay/Castro
Valley(7) 90,000 88,700 74,700 84% 68,300 91% 691
Pittsburg/Pinole(7) 74,000 73,900 55,500 75% 55,800 101% 572
San Francisco 358,000 339,500 178,500 53% 148,700 83% 711
--------- --------- --------- -- ------- --- ------
Total Bay Area Region 684,000 658,300 431,900 66% 351,500 81% 3,487
Ore-Cal Region
Redding(7) 58,000 55,800 36,600 66% 21,500 59% 682
Oroville 44,000 40,100 26,500 66% 13,000 49% 504
Salem 79,000 76,200 47,800 63% 29,600 62% 632
--------- --------- --------- -- ------- --- ------
Total Ore-Cal Region 181,000 172,100 110,900 64% 64,100 58% 1,818
Puget Sound Region(7) 645,000 624,400 438,100 70% 302,100 69% 6,410
Midwest Region
Nashville(7) 271,000 240,700 146,300 61% 143,800 98% 2,357
Dayton(7) 98,000 94,100 52,300 56% 59,600 114% 635
--------- --------- --------- -- ------- --- ------
Total Midwest Region 369,000 334,800 198,600 59% 203,400 102% 2,992
Total Viacom Cable 1,879,000 1,789,600 1,179,500 66% 921,100 78% 14,707
========= ========= ========= === ======= === ======
(1) Homes in franchise area represents Viacom Cable's estimate based upon local
sources such as city directories, chambers of commerce, public utilities, public
officials and house counts.
(2) Homes are deemed "passed by cable" if such homes can be connected without
any further extension of the transmission trunk lines.
(3) Represents the number of homes connected, rather than the number of
television outlets connected within such homes.
(4) Represents primary customers as a percentage of homes passed by cable.
(5) The premium unit count is based on the total number of premium services
subscribed to by primary customers.
(6) Represents premium units as a percentage of primary customers.
(7) Other cable television companies have franchises and serve parts of these
areas in which the Company has franchises.
19
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 are among those strongly identified with the
product lines they represent and are significant assets of the Company:
VIACOM(R), the BLOCKBUSTER(R) family of marks, MACMILLAN(R), the MTV: MUSIC
TELEVISION(R) family of marks, THE MOVIE CHANNEL(TM), NICK AT NITE(R) and the
NICKELODEON(R) family of marks, NICK AT NITE'S TV LAND(TM), the PARAMOUNT(R)
family of marks, POCKET BOOKS(TM), SIMON & SCHUSTER(R), SHOWTIME(R), the STAR
TREK(R) family of marks and the VH1 MUSIC FIRST(TM) family of marks.
Competition
All of the Company's segments compete generally with various forms of
leisure, entertainment and recreational activities.
Networks
MTVN. MTVN services are in competition for available channel space on
existing cable systems and for fees from cable operators and alternative media
distributors, with other cable program services, and nationally distributed and
local independent television stations. MTVN also competes for advertising
revenue with other cable and broadcast television programmers, and radio and
print media. For basic cable television programmers such as MTVN, advertising
revenues derived by each program service depend on the number of households
subscribing to the service through local cable operators and other distributors.
(See "Business --Competition--Entertainment")
Certain major record companies have either launched or have announced
plans to launch music-based program services in the U.S. Certain major record
companies have also announced plans to launch, or have launched, music-based
program services outside the U.S., including but not limited to: V-Channel which
is jointly owned and operated in Asia 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. MuchMusic, a music service
which originated in Canada, commenced U.S. distribution in spring 1995; and a
MuchMusic service customized for the Latin American market is being distributed
in Mexico and Argentina.
SNI. Competition among premium subscription television program services
in the U.S. is primarily dependent on: (1) the acquisition and packaging of an
adequate number of recently released quality motion pictures; and (2) the
offering of prices, marketing and advertising support and other incentives to
cable operators and other distributors 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. In addition, in February 1994, Encore
Media Corp. (an affiliate of Tele-Communications, Inc.) launched Starz!, a
premium subscription television program service featuring recently released
motion pictures, in competition with SNI's premium program services. (See
"Business--Competition--Entertainment")
Broadcasting
The principal methods of competition in the television and radio
broadcasting field are the development of audience interest through programming
and promotions. While three of the Company's television stations are affiliated
with NBC and another of the Company's television stations is affiliated with
CBS, 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 Company's
current 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 the older, more established networks.
20
Television and radio stations compete for advertising revenues with other
stations in their respective coverage areas as well as with all other
advertising media. Generally, technological advances with respect to the methods
of providing home entertainment alternatives and changing regulatory policies
with respect to the broadcast industry may have an impact upon broadcasting's
future competitive environment. In addition, the 1996 Telecommunications Act
liberalizes television and radio station ownership limits and consequently
allows for increased group ownership or control of stations on both a national
and, with respect to radio, a local market basis. The Company is unable to
predict what impact these changes will have on its businesses in each applicable
market. (See "Business--Regulation--Broadcasting")
In recent years, competition has arisen from the DBS distribution of
programming which commenced in 1994. Moreover, the FCC has issued rules which
may significantly increase the number of MMDS systems. The FCC has also
authorized video uses of certain frequencies which have not traditionally been
used or permitted for commercial video services and has issued rules which will
increase the number of FM and AM stations. The FCC is also considering
authorizing digital audio broadcasts, which could ultimately permit increased
radio competition by satellite delivery of audio stations directly to the home
(or to cars) and has authorized and is in the process of licensing low-power
television stations ("LPTV stations") that may serve various communities with
coverage areas smaller than those served by full conventional television
stations. Because of their coverage limitations, LPTV stations may be allocated
to communities which cannot accommodate a full-power television station because
of technical requirements.
Entertainment
The Company competes intensely with other major studios and independent
film producers in the production and distribution of motion pictures and video
cassettes. 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, public response and cost. 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.
In addition to the competitive factors applicable to all areas of the
entertainment industry, the marketplace for interactive entertainment is also
characterized by the rapid evolution of game-playing and distribution
technologies.
Recently announced transactions, resulting in greater consolidation in
the entertainment and media industries, may also present significant competitive
challenges to several of the Company's businesses, including its theatrical
motion picture division and its basic and premium subscription program services.
Video
The home video retail business is highly competitive. The Company
believes that the principal competitive factors in the business are title
21
selection, number of copies of titles available, the quality of customer service
and pricing. The Company believes that the success of its business depends in
part on its large and attractive Company-owned and franchise-owned BLOCKBUSTER
VIDEO stores offering a wide selection of titles and larger and more accessible
inventory than most of its competitors, in addition to more convenient store
locations, faster and more efficient computerized check-in/check-out procedures,
extended operating hours, effective customer service and competitive pricing.
From time to time, home video companies and distributors offer titles at
a price substantially lower than the range in which titles are ordinarily priced
to home video retailers. These titles, known as "sell-thru" titles because their
lower wholesale price is intended to increase the number of copies sold by
retailers, consist primarily of successful children's movies and other movies
that have unique characteristics or other mass ownership appeal. BLOCKBUSTER
offers these titles both for rental and sale in its stores. The competition for
sales of these titles is greater than "rental-priced products" due to the
participation in this market of mass merchants, grocery stores and other
retailers not engaged in the business of renting videocassettes. Although the
number of sell-thru priced products increased in 1996, the Company believes that
the substantially higher profit margins to movie studios on rental product will
continue to limit the number of sell-thru titles.
In the retail rental marketplace, the Company and its franchise owners
compete with other national and regional video rental chains, local video rental
stores, grocery stores and several other retailers engaged in the rental of
videocassettes. As noted above, the market for sell-thru product at retail is
significantly broader. The Company and its franchise owners also compete
generally with other feature film distribution media, such as movie theaters and
broadcast, cable and DBS television.
A significant competitive advantage that the Company and its franchisees
(and all other video retail outlets) currently enjoy over broadcast, cable and
DBS television is a limited exclusive distribution "window". Generally, after
the initial domestic theatrical exhibition of a film, studios make the films
available to video rental outlets on an exclusive basis for a period of time.
The length of this period, however, varies based upon a number of factors
including, but not limited to, the box-office success of the film and license
fee commitments made by pay-per-view distributors, premium subscription program
services and broadcast networks to exhibit the film in such alternative windows.
While certain films had shorter home video windows than historically available
to retailers, the average window for major releases during the year did not
differ materially from prior years and the Company does not expect this window
to differ materially in 1996. However, there can be no assurances that the
studios will not alter the window due to new methods of distribution or other
factors.
In 1994, several consumer product companies announced plans to introduce
different types of products to exhibit prerecorded filmed entertainment products
on television sets. During 1995, these companies collectively established
uniform technological standards on which all such products would be based. The
product, now commonly referred to as the "digital versatile disc" or "DVD"
player, is based on digital technology and permits a film that is recorded in
digital format on a compact disc to be shown on a standard television set. This
new technology is said to offer significant benefits to consumers by enabling
home video companies and their distributors to produce a lower cost, higher
22
quality product than videocassettes. Manufacturers are planning to introduce
their DVD products into the U.S. The Company is unable to determine at this time
whether this new format will gain significant consumer acceptance generally or
among the Company's customers. As a result, the Company is unable to determine
the impact, if any, this new format will have on the Company's business. Once
such technology is introduced, the Company will monitor its acceptance by the
market and endeavor to exploit this new medium, both in the rental and sale of
the product.
Music
Competition among music retailers has intensified greatly over the past
two years with the entry into the business of a number of mass merchants. Many
of these retail chains have significantly reduced their prices on prerecorded
music products (primarily new releases) to attract customers into their stores
and generate sales of other, higher margin products. To protect its market
share, the Company has lowered the prices at which it sells many of its
products, resulting in lower revenue and reduced profit margins. Several other
specialty music retail chains, however, have been unable to compete. Some of
these chains have declared bankruptcy while others have begun closing
unprofitable stores in an attempt to minimize operating losses. The intense
competition in the industry coupled with a generally soft overall retail
environment during 1995, also negatively affected many of the mass merchants.
Theme 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 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. The Company believes that its intellectual
properties will enhance existing attractions and facilitate the development of
new attractions to encourage visitors to the PARAMOUNT PARKS theme parks and
water park.
Publishing
Competition in the elementary, secondary and higher education textbook
and the trade and paperback book fields is intense, with a number of strong
competitors. In addition, the acquisition of publication rights to important
book titles is highly competitive and the Company competes with numerous other
book publishers. In the field of elementary and secondary school textbooks, 22
states and some local jurisdictions limit the textbooks that may be bought by
school systems with state funds to those books that have been approved by
adoption or listing. Competition to be included on state adoption lists is
considerable. In the higher education textbook field, new books compete with
used books. In addition, book piracy affects sales in certain foreign markets. A
large portion of annual sales of educational textbooks is made during the June
to September period. In certain areas of publishing, books are usually sold on a
fully returnable basis resulting in significant product returns to publishers.
In the field of information services to businesses and professionals, there are
numerous organizations that provide competitive materials and services.
23
Cable Television
The Company's cable television systems operate pursuant to non-exclusive
franchises granted by local governing authorities (either municipal or county).
The Communications Act prohibits a franchiser from granting exclusive franchises
and from unreasonably refusing to award additional competitive franchises.
Accordingly, other cable operators have been franchised and may continue to
apply for franchises in certain areas served by the Company's cable systems.
However, no new franchises were granted in such areas during 1995.
The Company's cable systems also may compete for viewers with other
distribution systems which deliver programming by MMDS (multichannel, multipoint
distribution systems via microwave transmission) and SMATV (satellite
transmission to a central receiving facility for distribution to a number of
subscribers) or directly to subscribers via DTH technology (either TVRO or DBS).
The strength of competition depends upon the availability, reliability,
programming and pricing of such alternative distribution systems. Digital
compression may allow cable systems to significantly increase the number of
channels of programming they deliver and thereby help cable systems meet
competition from these other distribution systems.
In addition, the 1996 Telecommunications Act permits telephone companies
("telcos") to enter the business of distributing programming inside their
respective service areas (telcos were previously permitted to do so outside
their local telephone areas) either as traditional cable operators, as common
carriers, as operators of wireless systems such as MMDS or as operators of a
hybrid common carrier/cable system known as an "open video system" ("OVS") (see
"Business--Regulation--Cable Television"). The 1996 Telecommunications Act also
permits registered utility holding companies to provide cable services under
certain conditions (these utilities were previously prohibited from doing so
under the Public Utilities Holding Company Act) (see
"Business--Regulation--Cable Television").
Wireless distribution systems such as MMDS generally do not require
local government franchises in order to provide service, nor will telcos require
local franchises if they provide service on a common carrier or OVS basis.
With respect to the provision of telephony services, the Company is a
general partner in three partnerships that provide commercial competitive access
services. These are services linking business customers to long distance
carriers via private networks. Portions of these networks are owned by the
partnerships and other portions are owned by the Company's local cable system
and leased to the partnerships. These partnership interests will be sold as part
of the proposed split-off of the Company's cable systems.
The Company views the future success of the cable business in a
competitive environment as being dependent on the supply of additional
programming and new services to its customers and an increase in primary and
premium subscriber penetrations.
24
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
The Company conducts many of its businesses through the control and
exploitation of the numerous copyrights and trademarks underlying its products
and licenses; therefore, domestic and international laws affecting intellectual
property have significant importance to the Company. Congress is currently
considering revisions to the Copyright Act of 1976 (the "Copyright Act"),
including extension of the protection term by 20 years. Congress may also
consider legislation to update the Copyright Act to take into account new
technological developments relating to the distribution of copyrighted
materials. On November 1, 1995, the Digital Performance Right in Sound
Recordings Act of 1995 was enacted, which legislation is not expected to have a
material effect on the Company.
Compulsory Copyright. Cable television and SMATV systems are subject to
the Copyright Act which provides a compulsory license for carriage of broadcast
signals at prescribed rates (the proceeds are divided among the various
copyright holders of the programs carried on distant broadcast signals). No
license fee is payable to any program copyright holder for retransmission of
broadcast signals which are "local" to the communities served by the cable
system. "Open video systems" under the 1996 Telecommunications Act will also be
subject to the compulsory license. (See "Business -- Competition --Cable
Television" above)
The Copyright Act also provides a similar compulsory license for DTH
services. Legislation adopted by Congress in 1994 extended the DTH compulsory
license for five years, raised the statutory fees paid to carry broadcast
signals, and, beginning in 1996, requires the fees to be set through
negotiations and binding arbitration rather than by law, taking into account
fair market value. Such legislation also includes a provision eliminating the
requirement that cable operators pay compulsory license fees for stations
located more than 35 miles away but within the same "Area of Dominant
Influence".
First Sale Doctrine. The "First Sale" provision of the Copyright Act
provides that the owner of a legitimate copy of a copyrighted work may rent or
otherwise use or dispose of that copy in such a manner as the owner sees fit.
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
25
Company's home video business; however, no such legislation is pending in
Congress at the present time.
Networks and Broadcasting
Networks
Communications Act; 1996 Telecommunications Act. (See "Business--
Regulation--Cable Television" below)
Broadcasting
Television and radio broadcasting are subject to the jurisdiction of the
FCC pursuant to the Communications Act.
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 and radio stations.
Broadcast Licenses. Under the 1996 Telecommunications Act, broadcast
station licenses (both television and radio) will ordinarily be granted for
maximum periods of eight years, and will be renewable for additional eight-year
periods upon application and approval. Prior to this Act, licenses were
renewable and were ordinarily granted for the maximum periods of five years, in
the case of television stations, and seven years, in the case of radio stations.
There is no indication in the 1996 Telecommunications Act as to whether the
eight-year term will apply retroactively or only to those licensees who apply
for renewals in the future. Licenses may be revoked by the FCC for serious
violations of its regulations. Under prior law, competing applications could be
filed against a broadcaster seeking to renew its license, and the FCC was
required to conduct a hearing to consider the comparative merits of the
incumbent and the competing applicant. Although the FCC typically gave the
incumbent a "renewal expectancy" if it had complied with FCC rules and broadcast
a minimum of public affairs and informational programming during the previous
license term, an incumbent nevertheless might have to endure the expense and
uncertainty of the comparative hearing process.
The 1996 Telecommunications Act eliminates competing applications and
comparative hearings if the renewal applicant has served the public interest and
has not seriously violated the Communications Act or FCC rules, or shown a
pattern of abuse. Only if the FCC finds the licensee failed to satisfy these
requirements, finds there are no mitigating factors to justify imposing a
condition on the license or short-term renewal, and ultimately denies the
renewal, can it accept and consider new applications for the now-vacant channel.
26
As in the past, the FCC must decide what factors are relevant to whether
a broadcaster has "served the public interest," and it may use the same factors
it formerly considered or such other factors that it may adapt relevant to a
renewal expectancy. In addition to the broadcaster's record of providing news,
public affairs, and other informational programming, the FCC has also considered
children's programming relevant to television renewals.
The new renewal schedules pursuant to the 1996 Telecommunications Act
will be set by the FCC. However, under the five and seven-year schedules which
have not yet been revised, the licenses for the Company's television stations
expire as follows: WDCA-TV on October 1, 1996; WBFS-TV on February 1, 1997
WUPA-TV on April 1, 1997; WPSG-TV on August 1, 1997; WKBD-TV on October 1, 1997;
KMOV-TV on February 1, 1998; each of KTXA-TV and KTXH-TV on August 1, 1998; each
of WVIT-TV and WSBK-TV on April 1, 1999; and each of WNYT-TV and WHEC-TV on June
1, 1999. The Company's licenses for its radio stations expire as follows:
WLTI-FM on October 1, 1996; WLIT-FM on December 1, 1996; each of KYSR-FM and
KXEZ-FM on December 1, 1997; each of KBSG-AM/FM and KNDD-FM on February 1, 1998;
WLTW-FM on June 1, 1998; and each of WMZQ-AM/FM, WBZS-AM and WJZW-FM on October
1, 2002. The Company will apply for renewal of such licenses which expire in
1996 and expects that such licenses will be renewed.
The Communications Act prohibits the assignment of a license or the
transfer of control of a license without prior approval of the FCC. The
Communications Act, as amended by the 1996 Telecommunications Act, provides that
no license may be held by a corporation if more than 20% of the voting stock is
owned of record or voted by aliens or is subject to control by aliens. In
addition, no corporation may hold the voting stock of another corporation owning
broadcast licenses if more than 25% of the voting stock of such parent
corporation is owned of record or voted by aliens or is subject to control by
aliens, unless specific FCC authorization is obtained.
Broadcast signals are presently transmitted in analog rather than
digital form. The FCC is currently considering allotting to broadcasters
additional spectrum in new, digital transmission modes. If the FCC adopts its
proposals, the 1996 Telecommunications Act requires the FCC to also permit
broadcasters to utilize the digitally transmitted signals for various purposes
including for additional channels of programming and services "ancillary and
supplemental" to broadcasting. Full conversion from analog to digital mode, if
it is to occur at all, is expected to occur over the course of a transition
period subsequent to the FCC's adoption of digital standards. Until such
transition is complete, broadcasters may be licensed to transmit on two
channels, one for carriage of the analog transmission and the second for
carriage of the digital signal, which can be used to transmit either a single
"high definition" channel of video programming or, alternatively, up to six
different channels carrying either an enhanced (although not "high definition")
broadcast signal or the aforesaid ancillary and supplemental services (e.g.,
data transmissions or subscription video services). The 1996 Telecommunications
Act requires that if separate analog and digital channels are used
transitionally, one of the two channels used during the transition period must
eventually be returned to the government. However, this legislation does not
establish a time frame for return of the channel nor specify which of the two
channels (i.e., the analog or digital channel) must be returned. To the extent
digital
27
spectrum is used for any service which generates subscription or usage fees, a
broadcaster must pay the government, at a rate to be determined by the FCC, for
use of the spectrum.
Despite the 1996 Telecommunications Act's recent passage, Congress is
currently considering the issue of whether the additional spectrum authorized
for broadcasters by the legislation should be auctioned to the highest bidder
(either broadcasters or other users) rather than allotted to incumbent
broadcasters without charge. Congress is also considering whether to require
broadcasters, should they be allotted the spectrum, to convert to full digital
transmission within a specified period of time so that returned channels could
then be auctioned to other users not later than a designated date. A spectrum
auction or a short-term analog-to-digital transition period could have an
adverse effect on the business of broadcasting.
Must Carry/Retransmission Consent. The Communications Act contains
provisions which grant certain "must carry" rights to commercial broadcast
television stations that are "local" to communities served by a cable system,
including the right to elect either to require a cable operator to carry the
station pursuant to the must carry provisions of the Act or to require that the
cable operator secure the station's "retransmission consent" on a negotiated
basis before the station can be carried (i.e., retransmitted) on the cable
system (see Business-Regulation-"Cable Television" below). 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 granted retransmission consent. Failure to be
carried on cable systems could be detrimental to the business of a television
station. The application of must carry requirements to additional services which
a broadcaster might transmit over the digital spectrum is to be decided by the
FCC except that the 1996 Telecommunications Act expressly provides that any
"ancillary and supplementary" services provided by broadcasters will not be
entitled to mandatory cable carriage. The must carry rules were challenged by
cable program services and cable system operators. In April 1993, a District of
Columbia three-judge court upheld the rules against a First Amendment challenge.
In June 1994, the U.S. Supreme Court held that the rules were content-neutral
rather than unconstitutional, but nevertheless vacated the District Court's
decision and remanded the case back to the District Court for determination of
the impact of such rules on the broadcast and cable industries. On December 13,
1995, the District Court again upheld the rules in a two-to-one decision. This
decision has been appealed to the U.S. Supreme Court, which has agreed to review
the decision. Oral argument before the U.S. Supreme Court is expected to occur
in the fourth quarter of 1996.
Restrictions on Broadcast Advertising. In past Congressional sessions,
committees of Congress examined proposals for legislation that would eliminate
or severely restrict advertising of beer and wine either through direct
restrictions on content or through elimination or reduction of the deductibility
of expenses for such advertising under federal tax laws. Such proposals
generated substantial opposition, but, while there is currently no proposal to
do so, it is possible that similar proposals will be reintroduced in Congress.
The elimination of all beer and wine advertising would have an adverse effect on
the revenues of the Company's television and radio stations.
28
Ownership Limitations. The 1996 Telecommunications Act increases the
ownership limits on the number of radio and television stations in which one
entity can own an "attributable interest" as defined by the FCC. The Company
currently owns radio and television stations below these limits. Under the new
law, a single entity can have an "attributable" ownership or management interest
in an unlimited number of AM and FM stations nationwide, including multiple AM
and/or FM stations licensed to serve the same market. The limit on the number of
such multiple stations in a particular market in which a single entity may hold
an "attributable interest" depends upon the total number of AM and/or FM
stations in that market. With respect to television, the 1996 Telecommunications
Act limits the maximum number of stations nationwide in which one entity can
have an "attributable interest", to that number which serves up to 35% of U.S.
television households. (FCC rules count only one-half of the households in a
market when determining the household reach of stations which broadcast on a UHF
frequency). That rule is presently under consideration in a pending proceeding
reviewing the television broadcast ownership rules. Subject to waiver, the FCC
currently prohibits a single entity from owning more than one television station
serving the same market or two or more stations which have overlapping signals
with a certain strength. The FCC also permits radio stations to broker the
programming and sales inventories of their stations to other radio stations
within the same area, subject to various restrictions, so long as ultimate
operational control and ownership is retained and exercised by the licensee.
Such brokerage agreements function, as a practical matter, to effect a
consolidation of competitive radio broadcast stations within a market in much
the same manner as would multiple ownership of radio facilities by one entity.
Similar brokerage agreements among television stations are being implemented in
a number of markets and are not now subject to any explicit FCC regulations but
may be affected by pending FCC rulemakings. The recently enacted legislation
prevents the FCC from totally banning such television agreements. The FCC is
currently considering whether to revise its ownership rules as well as redefine
its current standards of what level of ownership or control constitutes an
"attributable interest" under its rules. Moreover, the 1996 Telecommunications
Act requires the FCC to review all of its ownership rules every two years and
modify or repeal those that no longer serve the public interest.
The FCC's ownership limitations also preclude (except on a grandfathered
basis) common ownership in the same market of (i) television stations and cable
systems; (ii) television or radio stations and newspapers of general
circulation; and (iii) radio and television stations. All such restrictions are
subject to waiver by the FCC on a case-by-case basis and radio-television
cross-ownership prohibitions in particular are routinely granted in the major
television markets so long as at least 30 separately owned and operated radio
television and television stations serve the market. The Company operates two AM
and two FM stations as well as a television station serving Washington, D.C.
Ownership of the television station (WDCA) was obtained when the Company
acquired majority ownership of Paramount Communications on March 11, 1994.
Pursuant to the FCC's order consenting to the transfer of control of the
broadcast licenses of Paramount Communications to the Company, the Company is
obligated to dispose of one AM and one FM radio station serving Washington, D.C.
The Company has requested a waiver of this obligation from the FCC until such
time as the FCC completes its pending review of local ownership limitations.
Depending on the outcome of that review, the Company may request a permanent
waiver of this undertaking. The FCC's previous prohibition on a national
29
television network's ownership or operation of cable systems has been repealed
by the 1996 Telecommunications Act.
Entertainment
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 by legislation. However, existing
and proposed rules and regulations of the FCC applicable to broadcast networks,
individual broadcast stations and cable could affect the Company's Entertainment
businesses.
Financial Interest and Syndication Rules. The financial interest and
syndication rules ("finsyn rules") which were adopted by the FCC in 1970 expired
in September 1995. These rules significantly limited the role of broadcast
television networks in broadcast television program syndication. The financial
interest rule prohibited a network from acquiring a financial or proprietary
right or interest in the exhibition (other than its own broadcast network
exhibition), distribution or other commercial use in connection with the
broadcasting of any television program of which it is not the sole producer. The
syndication rule prohibited a network from syndicating programming domestically
to television stations for non-network exhibition and precluded a network from
reserving any rights to participate in income derived from domestic broadcast
syndication or from foreign broadcast syndication where the network was not the
sole producer. For the purposes of these rules, a broadcast network was defined
as any entity which offers an interconnected program service on a regular basis
for 15 or more hours per week to at least 25 affiliated television stations in
10 or more states. Elimination of the finsyn rules may have an adverse effect on
the Company's distribution and production of network prime time programming.
Prime Time Access Rule. The Prime Time Access Rule ("PTAR") will expire
on August 30, 1996. PTAR prohibits network affiliates in the top 50 markets
(designated by the FCC based on survey data) from exhibiting network or
off-network programming during more than three out of the four prime time hours,
with certain limited exceptions. First-run programming produced by a network is
considered network programming for this purpose. Expiration of PTAR could affect
the Company's first-run and other distribution activities and hamper the
development of UPN.
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.
European Union Directive. In October 1989, the European Union ("EU",
then the EC and sometimes referred to as the EC) directed each of the 12
European Community member countries to adopt broadcast quota regulations based
on its guidelines by October 3, 1991. In March 1995, the Executive Commission of
the EU approved revisions to the directive which would, if adopted, increase the
discrimination against non-European programming. The EU Council of Ministers
modified the proposed revisions in November 1995. In February 1996, the European
Parliament recommended further modifications, which are now being considered by
both the Executive Commission and the Council of Ministers. At this time, it is
impossible to predict what changes will be adopted by the EU, or to predict
30
their impact on the Company's theatrical distribution and television syndication
businesses. The Company believes that its program services in Europe are in
compliance with the EU broadcast quotas.
Video and Music Distribution
Franchising. Certain states, the United States Federal Trade Commission
and certain foreign jurisdictions require a franchiser to transmit specified
disclosure statements to potential owners before issuing a franchise.
Additionally, some states and foreign jurisdictions require the franchiser to
register its franchise before its issuance. The Company believes the offering
circulars used to market its franchises comply with the Federal Trade Commission
guidelines and all applicable laws of states in the United States and foreign
jurisdictions regulating the offering and issuance of franchises. The Company's
home video and music retailing businesses, other than the franchising aspect,
are not generally subject to any government regulation other than customary laws
and local zoning and permit requirements.
Cable Television
Federal Regulation
Communications Act; 1996 Telecommunications Act. The Communications Act
sets forth the framework under which cable television systems are regulated. On
February 8, 1996, the 1996 Telecommunications Act was enacted. When fully
implemented by the FCC, this legislation will change regulation of the
communications industry, and alter federal, state and local laws and regulations
regarding the provision of cable and telephony services. Among other items, the
1996 Telecommunications Act authorizes entry of cable operators and electric
utilities into the telephone/telecommunications business. It authorizes entry of
telephone companies into the multichannel video distribution business in their
own service areas and, beginning in March 1999, eliminates the regulations of
certain cable rates. The following is a summary of certain significant aspects
of the Communications Act's regulation of cable television, as amended by the
1996 Telecommunications Act:
Rate Regulation. Rates for two types of cable programming tiers of
service are currently subject to regulation under the Communications Act: basic
service (corresponding to Viacom Cable's "Limited Service" tier) and cable
programming service (corresponding to Viacom Cable's "Satellite Value Package")
(see "Business--Cable Television"). Rates for premium services (such as
SHOWTIME), per-program services (such as pay-per-view events and movies), and
"new product tiers" (a new type of tier authorized by the FCC in 1994 which
offers broad pricing and packaging flexibility) are not regulated. The FCC may
in the future determine to regulate "new product tiers".
For regulated tiers of service, the FCC established a "benchmark"
formula to set a cable operator's "initial permitted rate." Cable systems whose
rates exceeded the applicable benchmark were required to reduce their rates
either to the benchmark or by 17% from those charged on September 30, 1992,
whichever reduction was less. These regulations also established the prices that
an operator may charge for subscriber equipment and installation services, based
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on the operator's actual cost plus an 11.25% return. The FCC has also adopted
standards governing "cost-of service" proceedings pursuant to which a cable
operator may attempt to prove that its costs of providing regulated service
justify initial permitted rates that are higher than those produced under the
benchmark approach.
Once a cable operator establishes its initial rates under either the
benchmark or cost of service methods, FCC regulations provide for periodic rate
increases on a going-forward basis for certain "external" cost increases
exceeding inflation, providing (among other things) a pass-through of, and 7.5%
mark-up on, increases in an operator's programming expenses. On November 10,
1994, the FCC adopted "going forward" rules (the "Going Forward Regulations")
that increased the mark-up for channels added to regulated tiers (other than the
basic tier). These rules allow operators to pass through to subscribers the
costs, plus a 20-cent per channel mark-up, for channels newly added to regulated
tiers (other than the basic tier). Through 1996, however, operators are subject
to an aggregate cap of $1.50 (no more than $1.20 of which may be mark-up) on the
amount that they may increase their retail rates for cable program service tier
rates due to channel additions. In 1997, operators will be entitled to an
additional 20-cent per channel mark-up and will no longer be subject to a
license fee cap. In addition, the FCC proposed eliminating the current 7.5%
operator mark-up on increases in a program service's license fees. The Company,
along with other cable industry interests, has opposed this proposal.
Implementation of the FCC's rate regulations has had a negative effect
on the Cable Television segment's revenues and earnings from operations. The
reduction in revenues in 1994 was partially offset by customer growth and
subsequent permitted rate increases. Viacom Cable implemented additional rate
increases in 1995 pursuant to the Going Forward Regulations. These increases and
future increases will continue to mitigate the adverse impact of rate regulation
on revenues of the Cable Television segment. Any adverse revenue impact will be
further mitigated when the rates for tiers such as the Company's "Satellite
Value Package" (i.e., tiers of service other than basic service) are deregulated
commencing March 31, 1999.
The 1996 Telecommunications Act eliminates rate regulation for all tiers
of regulated service, other than the basic service tier, after March 31, 1999,
or possibly earlier to the extent that any cable system becomes subject to
"effective competition" prior to such date. The 1996 Telecommunications Act adds
a new "effective competition" test to the three already included in the
Communications Act. The new test finds effective competition in areas where a
local telephone company, its affiliate, or a multichannel video programming
distributor using the facilities of the telephone company or its affiliate --
irrespective of the number of subscribers to the service -- offers programming
to subscribers by any means (other than DTH) in the franchise area of the cable
system, provided that the programming so offered is "comparable" to the
programming provided by the cable operator in that area. Basic service tier
regulation will continue without a specific sunset date, but will also end when
any cable system becomes subject to "effective competition". (See
"Business--Cable Television")
Vertical Integration. Certain pricing and other restrictions (the
"program access rules") are imposed on vertically integrated cable programmers
(such as the Company) with respect to their dealings with multichannel
32
distributors of programming, such as cable systems, SMATV systems, MMDS
operators and TVRO and DBS distributors (as defined in "Business--Competition--
Cable Television"). The FCC's implementing regulations governing access by
multichannel distributors to the programming of vertically integrated cable
programmers limit the extent to which a vertically integrated cable programmer
can differentiate in pricing or other terms and conditions of carriage between
and among multichannel distributors. Multichannel distributors may file a
complaint with the FCC if they believe that a vertically integrated cable
programmer has not complied with these regulations. To date, no complaints have
been filed against the Company. The 1996 Telecommunications Act extends the
program access rules to (i) telcos and their affiliates providing video
programming to their subscribers by any means and (ii) programmers in which a
telco providing video programming has an attributable interest. The FCC's
implementing regulations also limit the number of channels on a cable system
which may be used to carry the programming of such system's affiliated
(vertically integrated) cable programmers. These regulations provide generally
that no more than 40% of such a system's channels can be used to carry the
programming of the system's affiliated cable programmers. These channel
occupancy limits apply only up to 75 channels of a given system.
Must Carry/Retransmission Consent. Commercial television stations which
are "local" to communities served by a cable system can elect to require either
Must Carry or Retransmission Consent. In addition, a cable system (or other
multichannel video distributor) may not carry any commercial
non-satellite-delivered television station which is "distant" to communities
served by such system or any radio station without obtaining the consent of such
station for retransmission; however, these "distant" television stations do not
have Must Carry rights. Television stations may require payment in consideration
for Retransmission Consent.
The initial round of Must Carry/Retransmission Consent elections
occurred in 1993. Pursuant to these elections, the Company has negotiated
retransmission rights for a number of commercial television stations which it
carries. Some of these agreements are on an interim basis and may be canceled by
the stations. The Company carries other television stations pursuant to their
exercise of their Must Carry rights. Local non-commercial television stations
have Must Carry rights, but may not elect Retransmission Consent. Local
commercial television stations must make new Must Carry/Retransmission Consent
elections by October 1, 1996. Cable carriage pursuant to these new elections
commences January 1, 1997.
Buy-Through to Premium Services. Pursuant to the Communications Act, a
cable system may not require subscribers to purchase any tier of service other
than the basic service tier in order to obtain other tiers of service or
services offered by the cable operator on a per channel (e.g., premium services)
or pay-per-view basis. A cable system which is not now fully addressable and
which cannot utilize other means to facilitate access to all of its programming
will have until 2002 to fully comply with this provision through the
implementation of fully addressable technology. The Company's cable systems have
already substantially implemented compliance.
Legal Challenges. Lawsuits have been filed challenging various
provisions of the Communications Act including the provisions relating to Must
Carry and Retransmission Consent (see "Business--Regulation--Broadcasting"
above), the pricing and other restrictions imposed on vertically integrated
33
cable programmers with respect to their dealings with multichannel programming
distributors (see "Business--Regulation--Cable Television--Vertical
Integration"), and the mandated availability of cable channels for leased access
and PEG programming.
Competitive Entry. The 1996 Telecommunications Act permits telcos to
enter the multichannel video distribution business in their service areas either
as cable operators, as operators of wireless distribution systems (such as
MMDS), as operators of "open video systems" or on a common carrier basis. The
1996 Telecommunications Act further permits registered utility holding companies
(which had previously been prohibited from providing cable service under the
Public Utilities Holding Company Act) to provide cable services. The 1996
Telecommunications Act also generally eliminates state and local entry barriers
which currently either prohibit or restrict an entity's (including a cable
operator's) capacity to offer telecommunications services (including telephone
exchange service) in competition with telcos and to interconnect on a
non-discriminatory basis with telcos and utilize certain telco facilities in
order to provide service in competition with a telco. The FCC is required to
adopt regulations implementing the interconnection and non-discriminatory access
requirements of the 1996 Telecommunications Act, in order to assure that new
entrants such as cable operators have access to network elements of telcos and
other carriers, and that the systems built by all telecommunications carriers
are interoperable. The Company cannot predict the outcome or impact of these
legislative and regulatory efforts, although the Company anticipates that its
program services could benefit from the increased distribution opportunities
afforded by broadened telco entry into multichannel video distribution. Telcos
have stated their general intention to enter the video programming business.
State and Local Regulation
State and local regulation of cable is exercised primarily through the
franchising process