-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DAiBEG5bmQ9PC09+GGWdfHEvEe5pIwFM7JNu8rdmeS9RZ8ZeN+oREaN/90ApJaFV ChgqDmvlB5XF+Jr4/90O+A== 0000950123-98-010005.txt : 19981118 0000950123-98-010005.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950123-98-010005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980920 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CBS CORP CENTRAL INDEX KEY: 0000106413 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 250877540 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00977 FILM NUMBER: 98752610 BUSINESS ADDRESS: STREET 1: 51 WEST 52ND STREET CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2129754321 MAIL ADDRESS: STREET 1: 51 WEST 52ND STREET CITY: NEW YORK STATE: NY ZIP: 10019 FORMER COMPANY: FORMER CONFORMED NAME: WESTINGHOUSE ELECTRIC CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WESTINGHOUSE ELECTRIC & MANUFACTURING CO DATE OF NAME CHANGE: 19710510 10-Q 1 FORM 10-Q RE: CBS CORPORATION 1 ============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 ---------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________________ TO __________________ COMMISSION FILE NUMBER 1-977 ---------------- CBS CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-0877540 ------------ ---------- (State of Incorporation) (I.R.S. Employer Identification No.) 51 WEST 52ND STREET, NEW YORK, NY 10019 (Address of principal executive offices, zip code) (212) 975-4321 (Registrant's telephone number, including area code) Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / / COMMON STOCK 706,111,607 SHARES OUTSTANDING AT OCTOBER 31, 1998 ================================================================================ -1- 2 CBS CORPORATION INDEX
PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3 Condensed Consolidated Statement of Income and Comprehensive Income 3 Condensed Consolidated Balance Sheet 4 Condensed Consolidated Statement of Cash Flows 5 Notes to the Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings 24 Item 6. Exhibits and Reports on Form 8-K 25 SIGNATURE 29
-2- 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CBS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (unaudited, in millions except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 ------- ------- ------- ------- Revenues $ 1,581 $ 1,285 $ 5,014 $ 3,894 Operating expenses (980) (772) (3,240) (2,551) Marketing, administration, and general expenses (304) (266) (872) (765) Depreciation and amortization (154) (107) (420) (317) Residual costs of discontinued businesses (41) (35) (117) (106) ------- ------- ------- ------- Operating profit 102 105 365 155 Other income (expense), net (note 3) 12 2 29 59 Interest expense (112) (102) (272) (305) ------- ------- ------- ------- Income (loss) from Continuing Operations before income taxes and minority interest in (income) loss of consolidated subsidiaries 2 5 122 (91) Income tax expense (39) (25) (134) (32) Minority interest in (income) loss of consolidated subsidiaries (1) 1 (3) 2 ------- ------- ------- ------- Loss from Continuing Operations (38) (19) (15) (121) Loss from Discontinued Operations, net of income taxes (note 7) -- (143) -- (191) Extraordinary item: Loss on early extinguishment of debt, net of income taxes (note 5) (5) -- (5) -- ------- ------- ------- ------- Net loss $ (43) $ (162) $ (20) $ (312) ======= ======= ======= ======= Basic and diluted earnings (loss) per common share (note 10): Continuing Operations $ (.05) $ (.03) $ (.02) $ (.24) Discontinued Operations -- (.23) -- (.31) Extraordinary item (.01) -- (.01) -- ------- ------- ------- ------- Basic and diluted loss per common share $ (.06) $ (.26) $ (.03) $ (.55) ======= ======= ======= ======= Cash dividends per common share $ -- $ .05 $ .05 $ .15 ======= ======= ======= ======= Comprehensive income (loss): Net loss $ (43) $ (162) $ (20) $ (312) ------- ------- ------- ------- Other comprehensive income (loss), net of taxes (note 11): Unrealized gains (losses) on marketable securities, net of taxes of $10 million and $2 million, respectively (15) -- 3 -- Minimum pension liability adjustment, net of taxes of $8 million and $20 million, respectively 15 -- (37) -- ------- ------- ------- ------- Other comprehensive loss -- -- (34) -- ------- ------- ------- ------- Comprehensive loss $ (43) $ (162) $ (54) $ (312) ======= ======= ======= =======
See Notes to the Condensed Consolidated Financial Statements. -3- 4 CBS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (in millions)
(UNAUDITED) SEPTEMBER 30, DECEMBER 31, 1998 1997 -------- -------- ASSETS: Cash and cash equivalents $ 122 $ 8 Customer receivables (net of allowance for doubtful accounts of $51 million and $35 million) 1,096 936 Program rights 493 502 Deferred income taxes 408 394 Prepaid and other current assets 167 135 -------- -------- Total current assets 2,286 1,975 Property and equipment, net 1,139 1,066 FCC licenses, net (note 2) 4,323 2,171 Goodwill, net 10,443 9,681 Other intangible and noncurrent assets (note 4) 1,620 1,610 Net assets of Discontinued Operations (note 7) -- 212 -------- -------- Total assets $ 19,811 $ 16,715 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Short-term debt $ 254 $ 89 Current maturities of long-term debt 156 62 Accounts payable 303 221 Liabilities for talent and program rights 319 309 Other current liabilities (note 6) 998 868 -------- -------- Total current liabilities 2,030 1,549 Long-term debt (note 5) 4,784 3,236 Pension liability 1,146 1,149 Postretirement benefits 1,142 1,160 Net liabilities of Discontinued Operations (note 7) 1,089 -- Other noncurrent liabilities (note 6) 1,981 1,536 -------- -------- Total liabilities 12,172 8,630 -------- -------- Contingent liabilities and commitments (note 9) Minority interest in equity of consolidated subsidiaries 10 5 -------- -------- Shareholders' equity: Preferred stock, $1.00 par value (25 million shares authorized, none issued) -- -- Common stock, $1.00 par value (1,100 million shares authorized, 732 million and 718 million shares issued) 732 718 Capital in excess of par value 7,406 7,178 Common stock held in treasury, at cost (1,133) (530) Retained earnings 1,429 1,485 Accumulated other comprehensive loss (note 11) (805) (771) -------- -------- Total shareholders' equity 7,629 8,080 -------- -------- Total liabilities and shareholders' equity $ 19,811 $ 16,715 ======== ========
See Notes to the Condensed Consolidated Financial Statements. -4- 5 CBS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited, in millions) NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 - ------------------------------- ---- ---- Cash flows from operating activities of Continuing Operations: Loss from Continuing Operations $ (15) $ (121) Adjustments to reconcile loss from Continuing Operations to net cash provided (used) by operating activities: Depreciation and amortization 420 317 Gain on asset dispositions (6) (32) Other noncash adjustments (132) (56) Changes in assets and liabilities, net of effects of acquisitions and divestitures of businesses: Receivables, current and noncurrent (101) (25) Accounts payable 59 (261) Program rights 66 (73) Deferred and current income taxes 8 (15) Other assets and liabilities 43 101 ------- ------- Cash provided (used) by operating activities of Continuing Operations 342 (165) ------- ------- Cash used by operating activities of Discontinued Operations (note 7) (326) (677) ------- ------- Cash flows from investing activities: Business acquisitions, net of cash acquired, and investments (note 2) (1,404) (50) Business divestitures and other asset liquidations 1,748 163 Deposits in acquisition trust (35) -- Capital expenditures - Continuing Operations (89) (72) Capital expenditures - Discontinued Operations (28) (59) ------- ------- Cash provided (used) by investing activities 192 (18) ------- ------- Cash flows from financing activities: Net increase (reduction) in short-term debt 159 (314) Bank revolver borrowings 3,674 2,690 Bank revolver repayments (3,635) (1,550) Issuance of senior notes 493 -- Long-term debt repayments (332) (149) Stock issued 324 211 Purchase of treasury stock (777) -- Bank fees paid and other costs (8) (8) Dividends paid (36) (113) ------- ------- Cash provided (used) by financing activities (138) 767 ------- ------- Increase (decrease) in cash and cash equivalents 70 (93) Cash and cash equivalents at beginning of period for Continuing and Discontinued Operations 67 233 ------- ------- Cash and cash equivalents at end of period for Continuing and Discontinued Operations $ 137 $ 140 ======= ======= Supplemental disclosure of cash flow information: Interest paid - Continuing Operations $ 244 $ 290 Interest paid - Discontinued Operations 40 71 ------- ------- Total interest paid $ 284 $ 361 ======= ======= Total income taxes paid from Continuing and Discontinued Operations $ 122 $ 47 ======= =======
See Notes to the Condensed Consolidated Financial Statements. -5- 6 CBS CORPORATION NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL The condensed consolidated financial statements include the accounts of CBS Corporation (CBS) and its subsidiary companies (together, the Corporation) after elimination of intercompany accounts and transactions. When reading the financial information contained in this Quarterly Report, reference should be made to the consolidated financial statements, schedule, and notes contained in the Corporation's Annual Report on Form 10-K for the year ended December 31, 1997. Reference also should be made to the Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998 and June 30, 1998. Certain amounts pertaining to the three months and nine months ended September 30, 1997 have been restated or reclassified for comparative purposes. In August 1998, the Corporation announced that it would form a new company to be named Infinity Broadcasting Corporation (Infinity) comprising the Radio and Outdoor Advertising segment of the Corporation and sell up to 20 percent of the new company's common stock in an initial public offering. In September 1998, Infinity filed a registration statement with the Securities and Exchange Commission. The initial public offering is expected to be completed during the fourth quarter of 1998. On June 4, 1998, the Corporation completed the acquisition of the radio broadcasting operations of American Radio Systems Corporation (American Radio) for $1.4 billion in cash plus the assumption of debt with a fair value of approximately $1.3 billion. See note 2 to the financial statements. Under various disposal plans adopted in recent years, the Corporation has either completed or planned the divestiture of all of its industrial businesses. These businesses have been classified as Discontinued Operations in accordance with Accounting Principles Board (APB) Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions." The Corporation has signed definitive agreements to sell the remaining businesses. See note 7 to the financial statements. In June 1997, Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information," were issued. SFAS 130, which requires that an enterprise report by major component and as a single total the change in its net assets from nonowner sources during the period, was adopted in the first quarter of 1998. SFAS 131, which establishes annual reporting standards for an enterprise's operating segments and related disclosures about its products, geographic areas, and major customers will be incorporated in disclosures for 1998 annual reporting purposes. In February 1998, SFAS No. 132, "Employer's Disclosures About Pensions and Other Postretirement Benefits," was issued. SFAS 132 requires additional disclosures concerning changes in the Corporation's pension obligations and assets and eliminates certain other disclosures no longer considered useful. The Corporation will adopt the provisions of this standard for 1998 annual reporting purposes. Adoption of these statements does not impact the Corporation's consolidated financial position, results of operations, or cash flows, and any effects are limited to the form and content of its disclosures. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. SFAS 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, by requiring that an entity recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. This statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. The Corporation's derivative and hedging transactions are not material and adoption of this standard will not materially impact its financial results or disclosure. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates, including those related to litigation, environmental liabilities, contracts, program rights, pensions, and Discontinued Operations, based on currently available information. Changes in facts and circumstances may result in revised estimates. In the opinion of management, the condensed consolidated financial statements include all material adjustments necessary to present fairly the Corporation's financial position, results of operations, and cash flows. Such adjustments are of a normal recurring nature. The results for this interim period are not necessarily indicative of results for the entire year or any other interim period. -6- 7 2. ACQUISITIONS On June 4, 1998, the Corporation acquired the radio broadcasting operations of American Radio. Of the total purchase price of $2.7 billion, $1.4 billion was paid in cash and approximately $1.3 billion represents the fair value of debt assumed. The acquisition was accounted for under the purchase method. The fair value of assets and liabilities acquired includes approximately $2.3 billion for FCC licenses and $0.7 billion for deferred income taxes. Based on preliminary estimates, which may be revised at a later date, the excess consideration paid over the estimated fair value of net assets acquired totaling approximately $0.8 billion was recorded as goodwill and is being amortized on a straight-line basis over 40 years. On September 30, 1997, the Corporation acquired Gaylord Entertainment Company's two major cable networks, The Nashville Network (TNN) and Country Music Television (CMT). The acquisition included the U.S. and international operations of TNN, the U.S. and Canadian operations of CMT, and approximately $50 million of working capital. The total purchase price of $1.55 billion was paid through the issuance of 59 million shares of the Corporation's common stock. The acquisition was accounted for under the purchase method. The excess of the consideration paid over the estimated fair value of net assets acquired of approximately $1.2 billion was recorded as goodwill and is being amortized on a straight-line basis over 40 years. Prior to the acquisition, the Corporation provided certain services to TNN and CMT for which it received a commission. Additionally, the Corporation owned a 33 percent interest in CMT. The following unaudited pro forma information combines the consolidated results of operations of the Corporation with those of American Radio's broadcasting operations and TNN and CMT as if these acquisitions had occurred at the beginning of 1997. The pro forma results give effect to certain purchase accounting adjustments, additional amortization expense from goodwill and other identifiable intangible assets, additional interest expense, related income tax effects, and the issuance of additional shares in connection with the TNN and CMT acquisition. PRO FORMA RESULTS OF OPERATIONS (unaudited, in millions except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ----------------------- 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- Revenues $ 1,581 $ 1,451 $ 5,182 $ 4,369 Interest expense (112) (145) (347) (434) Loss from Continuing Operations (38) (42) (64) (201) Basic and diluted loss per common share - Continuing Operations (.05) (.06) (.09) (.34) - -------------------------------------------------------------------------------------------------------------------------------
This pro forma information is presented for comparative purposes only and is not necessarily indicative of the operating results that actually would have occurred had the American Radio and the TNN and CMT transactions been consummated on January 1, 1997. In addition, these results are not intended to be a projection of future results and do not reflect any synergies that might be achieved from combined operations. 3. OTHER INCOME (EXPENSE), NET (unaudited, in millions)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------- ----------------- 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------- Interest income $ 7 $ 1 $13 $ 7 Gain on disposition of assets 1 -- 6 32 Operating results - non-consolidated affiliates -- -- -- 6 Other 4 1 10 14 - -------------------------------------------------------------------------------------------- Other income (expense), net $12 $ 2 $29 $59 ===========================================================================================
-7- 8 4. OTHER INTANGIBLE AND NONCURRENT ASSETS (in millions)
(unaudited) SEPTEMBER 30, DECEMBER 31, 1998 1997 - --------------------------------------------------------------------------------------------- Cable license agreements $ 455 $ 491 Other intangible assets 364 384 Recoverable costs of discontinued businesses (note 9) 201 208 Noncurrent receivables 220 145 Program rights 132 135 Joint ventures and other affiliates 111 122 Deferred charges 33 48 Intangible pension asset 22 22 Other 82 55 - --------------------------------------------------------------------------------------------- Total other intangible and noncurrent assets $1,620 $1,610 =============================================================================================
5. LONG TERM DEBT Long-term debt for Continuing Operations totaled $4,784 million at September 30, 1998, compared to $3,236 million at December 31, 1997. Included in long-term debt were revolver borrowings of $1,708 million at September 30, 1998, compared to $1,083 million at December 31, 1997. In conjunction with the acquisition of American Radio on June 4, 1998, the Corporation assumed approximately $1.3 billion of American Radio debt. Revolver borrowings under American Radio's revolving credit agreement of $567 million were repaid in conjunction with the acquisition. The remaining debt assumed consisted of 9% and 9-3/4% Senior Subordinated Notes with a combined face value of $325 million, 11 3/8% Cumulative Exchangeable Preferred Stock (exchanged to 11 3/8% Subordinated Exchange Debentures on July 15, 1998) with a face value of $211 million, and 7% Convertible Exchangeable Preferred Stock (exchanged to 7% Convertible Subordinated Debentures on September 30, 1998) with a redemption value of $142 million. The Senior Subordinated Notes and the 11 3/8% Cumulative Exchangeable Preferred Stock were recorded at their fair market value as of the acquisition date, which resulted in an increase in the carrying value of approximately $42 million. The indentures for each of these obligations include certain covenants applicable to American Radio including, among others, limitations on sales of assets, dividend payments, future indebtedness and issuance of preferred stock, and require an offer to purchase within 15 days after the occurrence of a change of control the outstanding securities, plus any accrued and unpaid interest. As a result of the change in control related to the acquisition of American Radio by the Corporation, an offer to purchase was made in June, and $8 million of the Senior Subordinated Notes were redeemed. Under the most restrictive of the indentures relating to the American Radio long-term debt, approximately $1.95 billion of American Radio's net assets at September 30, 1998 are restricted. This, in turn, restricts the ability of American Radio to pay dividends. During the quarter, the Corporation also redeemed $61 million of the 7% Convertible Exchangeable Debentures. The debentures may be redeemed at any time at the option of the holder for cash and certain securities held by the Corporation for the purpose of redemption. In addition to the redemptions noted above, during the quarter the Corporation purchased, at market value, $99 million face value of debt securities consisting of both debt assumed in the American Radio acquisition and other Corporation debt. This purchase of debt resulted in an extraordinary loss of $5 million, net of a $3 million tax benefit, on the early extinguishment of debt. On May 20, 1998, the Corporation issued, under Securities and Exchange Commission Rule 144A, $500 million of Senior Notes due in 2005. Interest on the Notes will accrue at a rate of 7.15% per annum and is payable semiannually in arrears commencing November 20, 1998. During the quarter the Corporation exchanged these restricted securities for registered notes, which have the same interest rate and have other terms and conditions similar to the restricted notes. -8- 9 6. OTHER CURRENT AND NONCURRENT LIABILITIES (in millions)
(unaudited) SEPTEMBER 30, DECEMBER, 31, 1998 1997 - -------------------------------------------------------------------------------------------------- OTHER CURRENT LIABILITIES Accrued employee compensation $ 98 $ 119 Income taxes payable 48 30 Accrued liabilities 346 309 Retained liabilities of discontinued businesses (note 9) 219 191 Accrued interest and insurance 110 54 Other 177 165 - -------------------------------------------------------------------------------------------------- Total other current liabilities $ 998 $ 868 ================================================================================================== OTHER NONCURRENT LIABILITIES Deferred income taxes $ 802 $ 224 Liabilities for talent and program rights 97 68 Accrued liabilities 162 201 Retained liabilities of discontinued businesses (note 9) 681 767 Postemployment benefits 29 28 Other 210 248 - -------------------------------------------------------------------------------------------------- Total other noncurrent liabilities $1,981 $1,536 ==================================================================================================
7. DISCONTINUED OPERATIONS In recent years, the Corporation has adopted various disposal plans that, in the aggregate, provide for the disposal of all of its industrial businesses. The assets and liabilities and the results of operations for all of the industrial businesses are classified as Discontinued Operations except for certain liabilities expected to be retained by the Corporation. See note 9 to the financial statements. The following table summarizes each of the Corporation's segment disposal plans as well as the assets remaining at September 30, 1998.
Measurement Date Business Segment Remaining Assets - ---------------------------------------------------------------------------------------------------------------------- September 1997 Thermo King None All remaining industrial businesses Energy Systems, Government Operations, and miscellaneous assets November 1996 Communication & Information Systems One miscellaneous operation (CISCO) March 1996 Environmental Services Two waste incineration plants December 1995 The Knoll Group (Knoll) None Defense and Electronic Systems None July 1995 Land Development (WCI) Mortgage notes receivable November 1992 Financial Services Leasing portfolio Distribution & Control (DCBU) None Westinghouse Electric Supply Company None (WESCO) - ----------------------------------------------------------------------------------------------------------------------
In August 1998, the Corporation completed the sale of its Power Generation business for $1.2 billion in cash. During the second quarter of 1998, the Corporation sold one of the CISCO operations as well as certain securities remaining from the disposals of WCI and WESCO. In the third quarter of 1998, the Corporation completed the sale of another CISCO operation. Generally, the remaining assets are expected to be divested by early 1999, except for the leasing portfolio, which is generally expected to liquidate in accordance with its contractual terms. -9- 10 The Energy Systems and Government Operations businesses represent the majority of the remaining industrial businesses included in the September 1997 disposal plan. In the second quarter of 1998, the Corporation announced a definitive agreement to sell the Process Control Division of its Energy Systems business for $265 million in cash, subject to certain adjustments, plus the assumption of pension and other liabilities. The transaction is expected to close in the fourth quarter of 1998. Also in the second quarter of 1998, the Corporation announced a definitive agreement to sell the remainder of its Energy Systems business and its Government Operations business for $238 million in cash, subject to certain adjustments, plus the assumption of liabilities, commitments, and obligations totaling approximately $950 million. This transaction is scheduled to close by year-end 1998 although closing could occur early in 1999. The assets and liabilities of Discontinued Operations have been separately classified on the balance sheet as net assets or liabilities of Discontinued Operations. A summary of these assets and liabilities follows: NET ASSETS (LIABILITIES) OF DISCONTINUED OPERATIONS (in millions)
(unaudited) SEPTEMBER 30, DECEMBER 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------------ ASSETS: Cash and cash equivalents $ 15 $ 59 Customer receivables 243 537 Inventories 154 560 Costs and estimated earnings over billings on uncompleted contracts 127 437 Portfolio investments 652 791 Plant and equipment, net 340 681 Deferred income taxes 492 491 Other assets 170 545 - ------------------------------------------------------------------------------------------------------------------ Total assets $ 2,193 $ 4,101 ================================================================================================================== LIABILITIES: Accounts payable $ 198 $ 384 Billings over costs and estimated earnings on uncompleted contracts 170 377 Short-term debt 1 7 Current maturities of long-term debt 45 96 Long-term debt 376 440 Liability for estimated loss on disposal 1,151 989 Settlements and environmental liabilities (note 9) 643 625 Other liabilities 698 971 - ------------------------------------------------------------------------------------------------------------------ Total liabilities 3,282 3,889 - ------------------------------------------------------------------------------------------------------------------ Net assets (liabilities) of Discontinued Operations $(1,089) $ 212 ==================================================================================================================
Certain environmental and litigation-related liabilities are expected to be assumed by buyers and are included in the net assets (liabilities) of Discontinued Operations. Those that are not expected to be assumed by other parties in divestiture transactions have been separately presented as retained liabilities of discontinued businesses. See note 9 to the financial statements. Long-term debt of Discontinued Operations is not expected to be assumed by buyers in divestiture transactions. It is expected to be repaid using cash proceeds from the liquidation of the portfolio investments of Discontinued Operations. The liability for estimated loss on disposal of $1,151 million at September 30, 1998, includes estimated losses and disposal costs associated with each divestiture transaction, including estimated results of operations through the expected closing date, and other costs expected subsequent to the divestiture. Satisfaction of these liabilities is expected to occur over the next several years. Management believes that the liability for estimated loss on disposal at September 30, 1998, is adequate to cover divestiture or liquidation of the remaining assets and liabilities of Discontinued Operations. The Corporation is in the process of reevaluating the remaining obligations related to all prior and pending divestitures of Discontinued Operations. If any adjustments are appropriate, they will be made upon completion of the evaluation. -10- 11 Cash proceeds from the sale or liquidation of all assets of Discontinued Operations, except for portfolio investments, as well as cash requirements to satisfy non-debt obligations of Discontinued Operations will affect cash flows of Continuing Operations. In accordance with APB 30, the consolidated financial statements reflect the results of Discontinued Operations separately from those of Continuing Operations. Pre-tax operating results after the measurement date are charged to the liability for estimated loss on disposal. Summarized in the following table are the operating results of Discontinued Operations: OPERATING RESULTS (unaudited, in millions)
NET INCOME SALE OF PRODUCTS (LOSS) BEFORE NET LOSS AFTER OR SERVICES MEASUREMENT DATE MEASUREMENT DATE ----------- ---------------- ---------------- THREE MONTHS ENDED SEPTEMBER 30, 1998 1997 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- Industrial businesses included in September 1997 plan $ 458 $ 660 $ -- $ (176) $ (7) $ -- Thermo King -- 262 -- 33 -- -- Pre-1997 disposal plans 12 57 -- -- (5) (10) - --------------------------------------------------------------------------------------------------------------------------------- Total $ 470 $ 979 $ -- $ (143) $ (12) $ (10) =================================================================================================================================
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- Industrial businesses included in September 1997 plan $1,767 $2,181 $ -- $ (292) $ (114) $ -- Thermo King -- 768 -- 101 -- -- Pre-1997 disposal plans 112 242 -- -- (20) (44) - --------------------------------------------------------------------------------------------------------------------------------- Total $1,879 $3,191 $ -- $ (191) $ (134) $ (44) =================================================================================================================================
In connection with the September 1997 plan to dispose of the remaining industrial businesses, interest expense on Continuing Operations debt totaling $5 million and $39 million was reclassified to Discontinued Operations for the nine months ended September 30, 1998 and 1997, respectively. For the three months ended September 30, 1998, no reclassification of interest was made, however, $13 million was reclassified for the 1997 period. This allocation is based on the ratio of the net assets of Discontinued Operations to the sum of total consolidated net assets plus consolidated debt. Operating cash flows of Discontinued Operations are presented separately from those of Continuing Operations in the consolidated statement of cash flows. Operating activities of Discontinued Operations used cash of $326 million and $677 million for the nine months ended September 30, 1998 and 1997, respectively. Included in these totals are the cash flows from the operations of the discontinued businesses prior to disposal as well as payments for disposition-related costs. 8. RESTRUCTURING In recent years, the Corporation has restructured its corporate headquarters and certain aspects of its businesses in an effort to reduce its cost structure and remain competitive in its markets. Restructuring activities primarily involve the separation of employees, the termination of leases, and similar actions. Costs for restructuring activities are limited to incremental costs that directly result from the restructuring activities and provide no future benefit to the Corporation. During the quarter, management approved a restructuring initiative with costs totaling $62 million, primarily for the separation of employees and the termination of leases. As of September 30, 1998, minimal costs had been expended on the program. Cash expenditures for the program are estimated to be approximately $16 million for the remainder of 1998, $23 million for 1999, and $20 million for 2000 and beyond. Annualized savings from this program are estimated to approximate $50 million. -11- 12 In addition to the $62 million restructuring plan adopted during the quarter, at September 30, 1998 the Corporation had an accrued restructuring liability of $11 million primarily related to (a) the 1997 restructuring plan, which involved the separation of 118 employees at the Pittsburgh headquarters related to the transfer of the Corporation's overhead functions to New York, and (b) the restructuring plan adopted by the Corporation in 1996, as the acquiring company, to integrate the activities of CBS Inc. into the Corporation's existing media businesses. The restructuring plan adopted at the time of the CBS Inc. acquisition in 1995 to recognize the impact of integration activities on CBS Inc. and the elimination of duplicate facilities and functions is complete. During the nine months ended September 30, 1997, no new restructuring plans were initiated. Expenditures relating to restructuring programs from the 1997 and 1996 plans totaled $6 million and $18 million for the three and nine months ended September 30, 1998. The remaining restructuring expenditures for these plans are expected to be incurred primarily by the end of 1999, although certain expenditures for lease commitments will extend over the next several years. 9. CONTINGENT LIABILITIES AND COMMITMENTS Certain of the environmental and litigation-related liabilities associated with the industrial businesses are not expected to be assumed by other parties in the pending divestiture transactions and, therefore, would be retained by the Corporation. These liabilities include environmental obligations that are not related to active properties of operating businesses, accrued product liability claims for divested businesses, liabilities associated with asbestos claims, and general litigation claims not involving active businesses. Accrued liabilities associated with these matters, which have been separately presented as retained liabilities of discontinued businesses, totaled $900 million at September 30, 1998, including amounts related to previously discontinued businesses of CBS Inc. Of this amount, $681 million is classified as noncurrent. A separate asset of $236 million was recorded for estimated amounts recoverable from third parties, of which $201 million is classified as noncurrent. LEGAL MATTERS STEAM GENERATORS The Corporation has been defending various lawsuits brought by utilities claiming a substantial amount of damages in connection with alleged tube degradation in steam generators sold by the Energy Systems business unit as components of nuclear steam supply systems. Since 1993, settlement agreements have been entered resolving ten litigation claims. These agreements generally require the Corporation to provide certain products and services at prices discounted at varying rates. Two cases were resolved in favor of the Corporation after trial or arbitration. In the one remaining steam generator lawsuit, the Corporation's motion for summary judgment was recently granted. The Corporation is also a party to four tolling agreements with utilities or utility plant owners' groups that have asserted steam generator claims. The tolling agreements delay initiation of any litigation for various specified periods of time and permit the parties time to engage in discussions. Accrued liabilities for previous and potential settlement agreements that provide for costs in excess of discounted prices are expected to be assumed by the buyer of the Energy Systems and, therefore, are included in Discontinued Operations. SECURITIES CLASS ACTIONS - FINANCIAL SERVICES The Corporation has been defending derivative and class action lawsuits alleging federal securities law and common law violations arising out of purported misstatements or omissions contained in the Corporation's public filings concerning the financial condition of the Corporation and certain of its former subsidiaries in connection with charges to earnings of $975 million in 1990 and $1,680 million in 1991 and a public offering of the Corporation's common stock in 1991. The court dismissed both the derivative claim and the class action claims in their entirety. These dismissals were appealed. In July 1996, the United States Court of Appeals for the Third Circuit (the Circuit Court) affirmed the court's dismissal of the derivative claim. The Circuit Court also affirmed in part and reversed in part the dismissal of the class action claims. Those class action claims that were not dismissed by the Circuit Court have been remanded to the lower court for further proceedings. -12- 13 ASBESTOS The Corporation is a defendant in numerous lawsuits claiming various asbestos-related personal injuries, which allegedly occurred from use or inclusion of asbestos in certain of the Corporation's products supplied by its industrial businesses, generally in the pre-1970 time period. Typically, these lawsuits are brought against multiple defendants. The Corporation was neither a manufacturer nor a producer of asbestos and is oftentimes dismissed from these lawsuits on the basis that the Corporation has no relationship to the products in question or the claimant did not have exposure to the Corporation's product. At September 30, 1998, the Corporation had approximately 105,000 unresolved claims pending. In court actions that have been resolved, the Corporation has prevailed in the majority of the asbestos claims and has resolved others through settlement. Furthermore, the Corporation has brought suit against certain of its insurance carriers with respect to these asbestos claims. Under the terms of a settlement agreement resulting from this suit, carriers that have agreed to the settlement are now reimbursing the Corporation for a substantial portion of its current costs and settlements associated with asbestos claims. The Corporation has recorded a liability for asbestos-related matters that are deemed probable and can be reasonably estimated and has separately recorded an asset equal to the amount of such estimated liability that will be recovered pursuant to agreements with insurance carriers. The Corporation cannot reasonably estimate costs for unasserted asbestos claims. GENERAL Litigation is inherently uncertain and always difficult to predict. Substantial damages are sought in the steam generator claims, the securities class action, and certain groupings of asbestos claims, and, although management believes a significant adverse judgment is unlikely, any such judgment could have a material adverse effect on the Corporation's results of operations for a quarter or a year. However, based on its understanding and evaluation of the relevant facts and circumstances, management believes that the Corporation has meritorious defenses to the litigation described previously and that the Corporation has adequately provided for costs arising from potential settlement of these matters when in the best interest of the Corporation. Management believes that the litigation should not have a material adverse effect on the financial condition of the Corporation. ENVIRONMENTAL MATTERS Compliance with federal, state, and local laws and regulations relating to the discharge of pollutants into the environment, the disposal of hazardous wastes, and other related activities affecting the environment have had and will continue to have an impact on the Corporation. It is difficult to estimate the timing and ultimate costs to be incurred in the future due to uncertainties about the status of laws, regulations, and technology; the adequacy of information available for individual sites; the extended time periods over which site remediation occurs; and the identification of new sites. The Corporation has, however, recognized an estimated liability, measured in current dollars, for those sites where it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Corporation recognizes changes in estimates as new remediation requirements are defined or as more information becomes available. With regard to remedial actions under federal and state Superfund laws, the Corporation has been named a potentially responsible party (PRP) at numerous sites located throughout the country. At many of these sites, the Corporation is either not a responsible party or its site involvement is very limited or de minimis. However, the Corporation may have varying degrees of cleanup responsibilities at approximately 90 sites. The Corporation believes that any liability incurred for cleanup at these sites will be satisfied over a number of years, and in many cases, the costs will be shared with other responsible parties. These sites include certain sites for which the Corporation, as part of an agreement for sale, has retained obligations for remediation of environmental contamination and for other Comprehensive Environmental Response Compensation and Liability Act (CERCLA) issues. Based on the costs associated with the most probable alternative remediation strategy for the above mentioned sites, the Corporation has an accrued liability of $365 million at September 30, 1998. Depending on the remediation alternatives ultimately selected, the costs related to these sites could differ from the amounts currently accrued. The accrued liability includes $247 million for site investigation and remediation, and $118 million for post closure and monitoring activities. Management anticipates that the majority of expenditures for site investigation and remediation will occur during the next five to ten years. Expenditures for post-closure and monitoring activities will be made over periods up to 30 years. In addition, included in Discontinued Operations are environmental liabilities directly related to active sites that are expected to be assumed by buyers in divestiture transactions. -13- 14 Management believes, based on its best estimate, that the Corporation has adequately provided for its present environmental obligations and that complying with existing government regulations will not materially impact the Corporation's financial position, liquidity, or results of operations. COMMITMENTS The Corporation routinely enters into commitments to purchase the rights to broadcast programs, including feature films and sporting events. These contracts permit the broadcast of such programs for various periods. At September 30, 1998, the Corporation was committed to make payments under such broadcasting contracts, along with commitments for talent contracts, totaling $7.8 billion. In addition, the Corporation has commitments under operating and capital leases for certain facilities and equipment as well as commitments to pay for certain franchise rights entitling it to display advertising on buses, taxis, trains, bus shelters, terminals, and phone kiosks. 10. EARNINGS (LOSS) PER COMMON SHARE COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE - CONTINUING OPERATIONS (unaudited, in millions except per-share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ------------------------ 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Loss from Continuing Operations $ (38) $ (19) $ (15) $(121) Less preferred stock dividends -- -- -- (23) - --------------------------------------------------------------------------------------------------------------------- Loss applicable to common stock $ (38) $ (19) $ (15) $(144) ===================================================================================================================== Average shares outstanding, basic and diluted 697 630 698 608 - --------------------------------------------------------------------------------------------------------------------- Basic and diluted loss per common share $(.05) $(.03) $(.02) $(.24) - ---------------------------------------------------------------------------------------------------------------------
Shares of common stock issuable under deferred compensation arrangements and options to purchase shares of common stock were excluded from the computation of diluted earnings per common share for all periods presented in the table above because their inclusion would have been antidilutive. In addition, for the nine months ended September 30, 1997, preferred stock convertible into common stock was excluded from the computation of diluted earnings per common share because its inclusion also would have been antidilutive. 11. SHAREHOLDERS' EQUITY During 1998, the Corporation's Board of Directors authorized a $3 billion multi-year stock repurchase program. For the three months ended September 30, 1998, the Corporation purchased 14,825,000 shares of common stock under the program bringing total shares repurchased during 1998 to 25,273,000 at a cost of $777 million. At September 30, 1998, and December 31, 1997, 40,132,000 shares and 21,673,000 shares, respectively, of the Corporation's common stock were held in treasury. At March 31, 1998, the Corporation adopted the provisions of SFAS 130 which establishes standards for reporting and disclosing comprehensive income in the financial statements. Comprehensive income is used to describe all changes in equity from transactions and other events and circumstances, including net income, from nonowner sources. The following table presents the accumulated components of comprehensive income other than net income reflected within shareholders' equity at September 30, 1998 and December 31, 1997: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (in millions)
(unaudited) SEPTEMBER 30, DECEMBER 31, 1998 1997 - -------------------------------------------------------------------------------- Unrealized gains on securities $ 3 $ -- Minimum pension liability adjustment (808) (771) - -------------------------------------------------------------------------------- Total accumulated other comprehensive loss $(805) $(771) ================================================================================
-14- 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Corporation reported dramatic growth in revenues for the three and nine months ended September 30, 1998, which increased over the prior year by 23 percent and 29 percent, respectively. This increase reflects strong gains achieved at both of the Corporation's segments. On September 30, 1998, the Corporation recognized a special charge of $68 million primarily related to a $62 million restructuring plan, as well as $6 million for the impairment of certain programming assets and the write-down of an investment. The majority of the costs reflected in the restructuring plan relate to the separation of employees and the termination of leases at the Corporation's Television segment. The Corporation reported essentially flat operating profit for the quarter compared to last year, primarily due to the $68 million charge. For the nine month period operating profit increased 135 percent compared to last year. Earnings before interest expense, taxes, depreciation, and amortization (EBITDA) increased by 25 percent for the quarter and 53 percent for the year to date. During the third quarter the Corporation's net loss from Continuing Operations was $38 million, or $0.05 per share, compared to a loss of $19 million, or $0.03 per share, in the prior year's quarter. For the nine months of 1998, the Company reported a loss, of $15 million from Continuing Operations, compared to a loss of $121 million from Continuing Operations in the first nine months of 1997. In August 1998, the Corporation announced that it intended to form a new company to be named Infinity Broadcasting Corporation (Infinity) comprising the Radio and Outdoor Advertising segment of the Corporation and sell up to 20 percent of the new company's stock in an initial public offering. In September 1998, Infinity filed a registration statement with the Securities and Exchange Commission. The initial public offering is expected to be completed during the fourth quarter of 1998, subject to certain approvals. Management believes that the offering will create a company with significant borrowing capacity and an attractive stock for future radio and outdoor acquisition opportunities. During the quarter, the Corporation purchased 14,825,000 shares of common stock under its $3 billion multi-year stock repurchase program bringing total shares repurchased as of September 30, 1998 to 25,273,000 at a total cost of $777 million. SEGMENT RESULTS OF OPERATIONS The following table presents the segment results for the Corporation's Continuing Operations for the three and nine months ended September 30, 1998 and 1997. EBITDA is presented in the table because management believes that EBITDA is an appropriate measure for evaluating the operating performance of the Corporation's businesses. EBITDA eliminates the effect of depreciation and amortization of tangible and intangible assets, most of which were acquired in acquisitions accounted for under the purchase method of accounting. The exclusion of amortization expense eliminates variations in results among stations and other businesses caused by the timing of acquisitions. More recent acquisitions reflect higher amortization expense due to the increasing prices paid for FCC licenses, goodwill and other identifiable intangibles. However, EBITDA should be considered in addition to, not as a substitute for, operating earnings, net earnings, cash flows and other measures of financial performance reported in accordance with generally accepted accounting principles. EBITDA differs from cash flows from operating activities primarily because it does not consider certain changes in assets and liabilities from period to period and it does not include cash flows for interest and taxes. -15- 16 SEGMENT RESULTS OF OPERATIONS (unaudited, in millions)
REVENUES OPERATING PROFIT (LOSS) EBITDA - ---------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 1998 1997 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Radio and Outdoor Advertising $ 534 $ 377 $ 157 $ 99 $ 230 $ 150 Television 1,049 909 7 72 92 130 Corporate and Other (2) (1) (21) (31) (13) (31) Residual costs of discontinued businesses -- -- (41) (35) (41) (35) - ---------------------------------------------------------------------------------------------------------------------------- Total $ 1,581 $ 1,285 $ 102 $ 105 $ 268 $ 214 ============================================================================================================================
REVENUES OPERATING PROFIT (LOSS) EBITDA - ---------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Radio and Outdoor Advertising $ 1,320 $ 1,068 $ 362 $ 248 $ 541 $ 398 Television 3,699 2,829 179 81 437 279 Corporate and Other (5) (3) (59) (68) (47) (40) Residual costs of discontinued businesses -- -- (117) (106) (117) (106) - ---------------------------------------------------------------------------------------------------------------------------- Total $ 5,014 $ 3,894 $ 365 $ 155 $ 814 $ 531 ============================================================================================================================
During the quarter, the Corporation restated certain of its segment information to reflect the allocation of the goodwill acquired in connection with the 1995 acquisition of CBS Inc. between the Radio and Outdoor Advertising segment and the Television segment. Such goodwill and related amortization were previously recorded in Corporate and Other. RADIO AND OUTDOOR ADVERTISING (RADIO) The Corporation owns and operates 161 radio stations located in 34 markets. Radio also includes TDI Worldwide, Inc. (TDI), which provides outdoor advertising throughout the United States and abroad. Radio's revenue increased over the prior year by $157 million, or 42 percent, and $252 million, or 24 percent, for the three and nine months ended September 30, 1998. On a pro forma basis, assuming that the American Radio acquisition had occurred at the beginning of the periods presented, revenues increased by 12 percent for the three and nine months ended September 30, 1998. The pro forma increases reflect the strong results at the Corporation's existing stations, primarily in the top 10 markets, as well as double-digit growth at TDI. Operating profit for Radio increased over the prior year by $58 million, or 59 percent, and $114 million, or 46 percent, for the three and nine months ended September 30, 1998. Consistent with the growth in operating profit, EBITDA increased 53 percent and 36 percent for the three and nine months ended September 30, 1998 over the prior year. On a pro forma basis, assuming the acquisition of American Radio had occurred at the beginning of the periods presented, EBITDA increased 24 percent for the quarter and 21 percent for the year to date. The pro forma EBITDA increases reflect the double-digit pro forma revenue growth combined with management's continued efforts to control costs at the station level. Also, because a substantial portion of the Radio segment's costs are fixed, incremental revenue growth will generally result in a greater increase in operating profit and EBITDA. TELEVISION The Television segment consists of the Corporation's 14 owned and operated television stations, the CBS television network, and the cable television operations. Television's revenue increased over the prior year by $140 million, or 15 percent, and $870 million, or 31 percent, for the three and nine months ended September 30, 1998. The increase in third quarter revenue primarily reflects the inclusion of three months of activity in 1998 from the TNN and CMT cable networks which were acquired on September 30, 1997, as well as a solid performance by the CBS network and television stations resulting primarily from broadcasting the NFL. For the nine months ended September 30, 1998, the 31 percent increase over the prior year also reflects the inclusion of 1998 activity related to the newly acquired TNN and CMT cable networks, as well -16- 17 as the significant first quarter impact of the 1998 Winter Olympics on the CBS network and television stations and the third quarter improvements discussed above. Television's operating profit declined $65 million during the quarter, although it increased $98 million, or 121 percent, for the year to date. The third quarter operating profit reflects the inclusion of 1998 operating profits of TNN and CMT and strong results achieved at the television stations. These improvements were offset by a special charge of $64 million recognized during the quarter for restructuring costs and asset impairment as well as declines in profitability at the CBS network. The year-to-date increase in operating profit is primarily due to the improvements achieved at the CBS television network during the first quarter of 1998 driven by the broadcast of the 1998 Winter Olympics and the strong performance of the television stations. The third quarter charge and declines at the CBS network in the second and third quarters partially offset those favorable effects. In addition, 1998 results include nine months of operating profits related to the September 1997 acquisition of TNN and CMT and the continued improvements being generated at the television stations attributable to improved selling practices and cost control efforts. Television's EBITDA decreased by $38 million during the quarter, although it increased $158 million or 57 percent, for the year to date. These results are attributable to the same factors impacting operating profit discussed above. During the quarter, the Corporation entered into a joint venture agreement with Groupo Medcom pursuant to which 70 percent of the Corporation's TeleNoticias cable channel business will be sold to Groupo Medcom. Under the terms of the agreement, the Corporation will retain a 30 percent equity interest in the business and will continue to provide news gathering resources and programming. On November 5, 1998, the transaction was completed. CORPORATE AND OTHER Corporate and Other consists of corporate overhead costs. Following the decision to divest the industrial businesses and recent restructuring initiatives these costs have declined. RESIDUAL COSTS OF DISCONTINUED BUSINESSES The Corporation's results of operations are unfavorably affected by certain costs remaining from past divestitures of its industrial businesses. Following those divestitures, certain liabilities arising from the businesses remained with the Corporation, such as pension and postretirement benefit obligations for inactive and retired employees, environmental liabilities, and litigation-related liabilities. The pension and postretirement benefit costs associated with these former employees, as well as administration costs associated with managing the retained liabilities, have been presented separately in the income statement. For 1998 and 1997, these costs primarily reflect pension and postretirement benefit costs. The slight increase in costs for the quarter and year to date is a result of the closing of the sale of Power Generation in August 1998. Following the sale of Energy Systems and Government Operations, the quarterly costs are expected to increase by an additional $10 million. Prior to the sale, these costs are included in the respective businesses' results of operations which are reported in Discontinued Operations. Although the Corporation's objective is to reduce this earnings constraint over the next few years by fully funding the pension plan and modifying postretirement benefits, management expects that these costs will continue to negatively affect operating results during future years. OTHER INCOME (EXPENSES), NET Other income and expenses during the three and nine months ended September 30, 1998 generated income of $12 million and $29 million, respectively, compared to income of $2 million and $59 million, respectively, for the same periods in 1997. Generally, other income (expenses) includes interest income, miscellaneous gains and losses on dispositions of non-strategic assets, and operating results of non-consolidated affiliates. Included in other income and expenses during the nine month period ended September 30, 1997, was a gain of $24 million on the sale of an equity investment. -17- 18 INTEREST EXPENSE Interest expense from Continuing Operations for the three and nine months ended September 30, 1998 totaled $112 million and $272 million, respectively, compared to $102 million and $305 million, respectively, for the same periods in 1997. The decrease in interest expense for the nine months ended September 30, 1998, was driven by a reduction in average debt, primarily revolver borrowings, during the first nine months of 1998 compared to the same periods of 1997. Average debt has been affected by the timing of major acquisition and divestiture transactions. Interest rates remained relatively constant over the period. In connection with the September 1997 plan to dispose of the remaining industrial businesses, interest expense on Continuing Operations debt totaling $5 million and $39 million was reclassified to Discontinued Operations for the nine months ended September 30, 1998 and 1997, respectively. For the three months ended September 30, 1998, no reclassification of interest was made; however, $13 million was reclassified during the 1997 period. The Corporation's debt of Continuing Operations at September 30, 1998, was $5.2 billion compared to $3.4 billion at year end 1997. Debt outstanding at September 30, 1998 included borrowings for the $2.7 billion acquisition of American Radio on June 4, 1998. Future interest expense will depend on the Corporation's use of proceeds from the Infinity stock offering, additional activity under the Corporation's stock repurchase program as well as the Corporation's performance. INCOME TAXES Income tax expense reflected on the Corporation's condensed consolidated statement of income is in excess of the Corporation's pre-tax income for all periods presented. As a result, the Corporation's effective income tax rates are in excess of 100% and, in the nine month period ended September 30, 1997, income tax expense is being recognized on a book pre-tax loss. These rates result primarily from the amortization of non-deductible goodwill associated with the CBS Inc., Infinity, TNN and CMT, and American Radio acquisitions. Depending on the level of the Corporation's income or losses and the effect of any special transactions, these permanent differences (i.e. amortization of non-deductible goodwill) between book income and taxable income can dramatically impact the resulting tax provision or benefit in relation to pre-tax results. At September 30, 1998, the Corporation had recognized a net deferred income tax benefit totaling $98 million compared to $661 million at December 31, 1997. At September 30, 1998, the net benefit of $98 million consisted of a net deferred tax liability of $394 million for Continuing Operations offset by a $492 million deferred tax benefit for Discontinued Operations. At year-end 1997, Continuing Operations reflected a deferred tax benefit of $170 million. The fluctuation in Continuing Operations deferred taxes between December 31, 1997 and September 30, 1998 primarily reflects the increase in deferred tax liabilities recorded in connection with the acquisition of American Radio. YEAR 2000 The Year 2000 issue results from the development of computer programs and computer chips using two digits rather than four digits to define the applicable year. Computer programs and/or equipment with time-sensitive software or computer chips may recognize the date using "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations and cause disruptions to business operations. To address the Year 2000 issue, the Corporation has undertaken efforts to identify, modify or replace, and test systems that may not be Year 2000 compliant. The Corporation estimates its cost to achieve Year 2000 compliance to be approximately $36 million, of which $11 million has been incurred through September 30, 1998. Approximately 36% of the total expenditures relate to replacement of existing systems. The Corporation expects to fund these costs through its cash flows from operations and expense modification costs as incurred. Several centrally managed critical systems are currently Year 2000 compliant or will be replaced by Year 2000 compliant applications by early 1999. A significant portion of the Year 2000 work for the Corporation's systems has been performed or is underway. The various businesses are currently in the process of developing Year 2000 procedures and guidelines. The Corporation plans to have all systems tested and compliant by the end of 1999. The Year 2000 effort also includes communication with all significant third party suppliers and customers to determine the extent to which the Corporation's systems are vulnerable to those parties' failures to reach Year 2000 compliance. There can be no guarantee that the Corporation's third party suppliers or customers will be Year 2000 compliant on a timely basis and that failure to achieve compliance would not have a material adverse impact on the Corporation's business operations. -18- 19 Overall, the Corporation believes that it will complete its Year 2000 effort and will be compliant on time. Although there can be no assurances that this will occur, the Corporation will continuously monitor its progress and evaluate the need for a contingency plan. Based on its current plan, the Corporation believes that it will have adequate time to prepare for contingency measures if the need arises. The Corporation believes that it is difficult to fully assess the risks of the Year 2000 problem due to numerous uncertainties surrounding the issue. Management believes the primary risks are external to the Corporation and relate to the Year 2000 readiness of its third party business partners. The inability of the Corporation or its third party business partners to adequately address the Year 2000 issues on a timely basis could result in a material financial risk, including loss of revenue, substantial unanticipated costs and service interruptions. Accordingly, the Corporation plans to devote the resources it concludes are appropriate to address all significant Year 2000 issues in a timely manner. DISCONTINUED OPERATIONS With the Corporation's decision in late 1997 to divest its remaining industrial businesses, all of its industrial businesses are presented in the financial statements as Discontinued Operations. In August 1998, Power Generation, the largest of the remaining industrial businesses, was sold to a subsidiary of Siemens A.G. for $1.2 billion of cash. In the second quarter of 1998, the Corporation announced a definitive agreement to sell the Process Control Division of its Energy Systems business for $265 million in cash, subject to certain adjustments, and the assumption of pension and other liabilities. This sale is expected to close in the fourth quarter of 1998. Also in the second quarter of 1998, the Corporation announced a definitive agreement to sell the remainder of its Energy Systems business and its Government Operations business for $238 million in cash, subject to certain adjustments, and the assumption of liabilities, commitments, and obligations totaling approximately $950 million. This transaction is scheduled to close by year-end 1998 although closing could occur early in 1999. During the second quarter of 1998, the Corporation sold certain securities remaining from previous divestitures and sold its security electronics business. In the third quarter of 1998, the Corporation completed the sale of Westinghouse Communications. Proceeds from these transactions totaled more than $360 million. Following the divestitures of the remaining industrial businesses, the assets of Discontinued Operations will consist primarily of the remaining leasing portfolio, which is generally expected to liquidate through the year 2015. Debt of Discontinued Operations, which totaled $422 million at September 30, 1998, will include only that amount which can be repaid through liquidation of the leasing portfolio. Other liabilities, lagging divestiture costs, or unresolved issues related to the industrial businesses also will remain at year-end 1998. Except for cash flows related to the leasing portfolio and the associated debt, all future cash inflows and outflows of Discontinued Operations will affect Continuing Operations. Management believes that the liability for estimated loss on disposal of Discontinued Operations of $1,151 million at September 30, 1998 is adequate to cover future operating costs, estimated losses on disposal, and the remaining divestiture costs associated with all Discontinued Operations. The Corporation is in the process of reevaluating the remaining obligations related to all prior and pending divestitures of Discontinued Operations. If any adjustments are appropriate, they will be made upon completion of the evaluation. -19- 20 The following represents the segment results for Discontinued Operations for the three and nine months ended September 30, 1998 and 1997: SEGMENT RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS (unaudited, in millions)
SALE OF PRODUCTS OPERATING PROFIT AND SERVICES (LOSS) - -------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Industrial businesses included in September 1997 plan $ 458 $ 660 $ (6) $(254) Thermo King -- 262 -- 53 Pre-1997 disposal plans 12 57 (5) (11) - -------------------------------------------------------------------------------------------------------------------------- Total Discontinued Operations $ 470 $ 979 $ (11) $(212) ==========================================================================================================================
SALE OF PRODUCTS OPERATING PROFIT AND SERVICES (LOSS) - -------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Industrial businesses included in September 1997 plan $1,767 $2,181 $ (169) $ (386) Thermo King -- 768 -- 151 Pre-1997 disposal plans 112 242 (25) (54) - -------------------------------------------------------------------------------------------------------------------------- Total Discontinued Operations $1,879 $3,191 $ (194) $ (289) ==========================================================================================================================
The 1997 segment results shown in the table above include sales and operating profit prior to the measurement date of the plans as well as those after the measurement date. Pre-tax operating results after the measurement date, including all results for 1998, are charged to the liability for estimated loss on disposal. The industrial businesses included in the September 1997 disposal plan include Power Generation, Energy Systems, Government Operations, and other miscellaneous operations. The fluctuation in sales and operating profit is primarily attributable to the sale of Power Generation in August 1998. Revenues for Energy Systems for the three and nine months ended September 30,1998 were flat compared to the same periods in the prior year whereas operating results showed improvement following cost cutting measures and an unfavorable contract adjustment in the first quarter of 1997. Government Operations reported higher revenue for both periods accompanied by nominal changes in operating profit. The higher revenues includes revenues related to a new company established to sell safety management solutions to the government. Thermo King was sold in October 1997. Divestitures of certain Communication & Information Systems and environmental services businesses resulted in lower sales and reduced operating losses associated with operations included in pre-1997 disposal plans. Results for pre-1997 disposal plans also include income related to the leasing portfolio as well as interest on the debt of Discontinued Operations. LIQUIDITY AND CAPITAL RESOURCES OVERVIEW The Corporation generally manages its liquidity as a consolidated enterprise without regard to whether assets or liabilities are classified for balance sheet purposes as part of Continuing Operations or Discontinued Operations. As a result, the discussion below focuses on the Corporation's consolidated cash flows and capital resources. In August 1998, the Corporation announced that it intended to form a new company to be named Infinity comprising the Radio and Outdoor Advertising segment of the Corporation and subsequently sell up to 20 percent of the new company's stock in an initial public offering. It is anticipated that the initial public offering will occur during the fourth quarter of 1998. Proceeds are expected to exceed $2.5 billion. Subsequent to the offering, absent a dividend declaration by Infinity, the Corporation's ability to access cash generated at Infinity will be limited. On May 20, 1998, the Corporation issued $500 million of Senior Notes due in 2005. Interest on the Notes will accrue at a rate of 7.15% per annum and is payable semiannually commencing November 20, 1998. The net proceeds of $493 million were used to repay revolver borrowings. -20- 21 On June 4, 1998, the Corporation completed the acquisition of the radio broadcasting operations of American Radio for $1.4 billion in cash plus the assumption of debt with a fair value of approximately $1.3 billion. The cash portion of the consideration was funded through additional revolver borrowings. During the third quarter of 1998, the Corporation completed the sales of Westinghouse Communications and Power Generation. The divestitures combined with other divestitures and asset liquidations resulted in cash proceeds totaling $1.7 billion in 1998. By the end of the year, the Corporation expects to complete the sale of Process Control for proceeds of $0.3 billion and is scheduled to close the sale of Energy Systems and Government Operations for cash proceeds of $0.2 billion. In addition to the cash proceeds, these transactions include the assumption by the buyers of various liabilities, commitments, and obligations. In early 1998, the Corporation adopted a $3 billion stock repurchase program. During the first nine months of 1998, the Corporation purchased 25,273,000 shares for $777 million. Management expects that the Corporation will have sufficient liquidity to meet ordinary business needs. Sources of liquidity generally available to the Corporation include cash from operations, proceeds from sales of non-strategic assets, cash and cash equivalents, availability under its credit facility, borrowing from other sources, including funds from the capital markets, and the issuance of additional capital stock of the Corporation or its subsidiaries. OPERATING ACTIVITIES The operating activities of Continuing Operations provided $342 million of cash during the first nine months of 1998 compared to cash used of $165 million during the first nine months of 1997. The $507 million improvement in operating cash flow reflects improved operating results as well as favorable payment terms for certain program rights. Also, during the first quarter of 1997, cash flows included substantial payments to reduce accounts payable. The Corporation's pension contribution level for 1998, which is expected to approximate $250 million, is consistent with the Corporation's goal to fully fund its qualified pension plans over the next several years. In January, April, July, and October 1998, the Corporation contributed $73 million, $72 million, $53 million, and $54 million, respectively, to the plan pursuant to certain quarterly minimum funding requirements. The Corporation contributed $55 million and $73 million in July and October of 1997, respectively. The operating activities of Discontinued Operations used $326 million of cash during the first nine months of 1998 compared to $677 million of cash used during the same period of 1997 principally related to the Power Generation and Energy Systems businesses. The primary factors contributing to the larger use of cash in 1997 were reductions in accounts payable and settlement liabilities. Future operating cash flows of Discontinued Operations will consist primarily of operating revenues, operating costs, and disposal costs associated with the remaining industrial businesses. These cash flows, along with proceeds generated through divestiture of these businesses, will affect the cash flows of Continuing Operations. Interest costs on debt of Discontinued Operations, as well as the repayment of that debt, will be paid through the continued liquidation of the leasing portfolio and are not expected to impact future cash flows of Continuing Operations. INVESTING ACTIVITIES Investing activities provided $192 million of cash during the first nine months of 1998 compared $18 million of cash used during the same period of 1997. Investing cash inflows from business divestitures and other asset liquidations in the first nine months of 1998 totaled $1.7 billion compared to $163 million in the prior-year period. Asset liquidations in 1998 primarily relate to Discontinued Operations and include the sale of Power Generation for $1.2 billion and the sale of certain other discontinued businesses, investments, and securities for $0.5 billion. Also included were $51 million of proceeds received from divestitures of several radio stations. Divestitures in 1997 include several radio stations, various operations from the environmental services business, an equity investment in a regional sports network, and other non-strategic assets. Investing cash outflows in the first nine months of 1998 primarily related to the acquisition of American Radio for $1.4 billion in cash plus the assumption of debt with a fair value of $1.3 billion. For the same period of 1997, the Corporation had investing cash outflows related to the acquisition of a transit advertising company in the United Kingdom, and a $20 million payment in connection with a swap of radio stations. Capital expenditures for Continuing Operations were $89 million for the first nine months of 1998 compared to $72 million for the same period of 1997. Capital spending for Continuing Operations during 1998 is expected to approximate $150 million compared to 1997 spending of $121 million. For Discontinued Operations, capital spending will continue to decline as the businesses are divested. -21- 22 FINANCING ACTIVITIES Cash used by financing activities during the first nine months of 1998 totaled $138 million compared to cash provided of $767 million during the same period of 1997. Net short-term and long-term borrowings totaled $359 million during the first nine months of 1998 compared to $677 million during the 1997 period. The net borrowings during the first nine months of 1998 primarily reflect revolver borrowings for the acquisition of the broadcasting operations of American Radio and $332 million in debt redemptions and repurchases. In addition, during the second quarter, the Corporation received net proceeds of $493 million related to the May 20, 1998 issuance of Senior Notes due in 2005 and repaid revolver borrowings. The net borrowings in the first nine months of 1997 included a $149 million cash outflow to extinguish the long-term debt assumed in connection with the December 1996 acquisition of Infinity Broadcasting. During the first nine months of 1998, the Corporation purchased 25,273,000 shares of its common stock for $777 million. The Corporation is authorized to purchase up to $3 billion of stock under its multi-year stock repurchase program. Future purchases will adhere to financial policies that are consistent with attaining and maintaining an investment grade rating. Cash provided by the issuance of stock totaled $324 million during the first nine months of 1998 compared to $211 million for the 1997 period. The stock was issued in connection with certain employee stock plans. Total borrowings under the Corporation's $4.0 billion revolving credit facility were $2.4 billion at September 30, 1998, including $0.4 billion classified as Discontinued Operations (see Revolving Credit Facility). These borrowings were subject to a floating interest rate of 6.2 percent at September 30, 1998, which was based on the London Interbank Offer Rate (LIBOR), plus a margin based on the Corporation's senior unsecured debt rating and leverage. After payment of the March 1, 1998 dividend, the Corporation suspended dividend payments on its common stock so that cash could be used to better enhance shareholder value. Dividends paid in the first nine months of 1997 included $23 million for the Series C preferred stock. On May 30, 1997, the Series C preferred stock was converted into 32 million shares of the Corporation's common stock. REVOLVING CREDIT FACILITY On August 29, 1996, the Corporation executed a five-year revolving credit agreement with total commitments of $5.5 billion. This agreement was amended on March 3, 1998 to modify the financial covenants and to provide that, upon completion of the sale of Power Generation, the maximum borrowing would be reduced to $4.0 billion. The availability was reduced in August 1998 upon completion of the sale of Power Generation. The unused capacity under the $4.0 billion facility equaled $1.6 billion at September 30, 1998. Borrowing availability under the credit agreement is subject to compliance with certain covenants, representations, and warranties, including a no material adverse change provision with respect to the Corporation taken as a whole, restrictions on liens incurred, a maximum leverage ratio, minimum interest coverage ratio, and minimum consolidated net worth. Certain of the financial covenants become more restrictive over the term of the agreement. At September 30, 1998, the Corporation was in compliance with the financial covenants. Management is currently in the process of evaluating the Corporation's future credit needs under the facility in light of the anticipated Infinity stock offering. LEGAL, ENVIRONMENTAL, AND OTHER MATTERS The Corporation is addressing a number of environmental and litigation matters, including those discussed in note 9 to the financial statements. Litigation is inherently uncertain and always difficult to predict. Substantial damages are sought in certain of the Corporation's pending cases and, although management believes that a significant adverse judgment is unlikely, any such judgment could have a material adverse effect on the Corporation's results of operations for a quarter or a year. However, based on its understanding and evaluation of the relevant facts and circumstances, management believes that the Corporation has meritorious defenses to the litigation referenced in note 9 and that the Corporation has adequately provided for costs arising from potential settlement of these matters when in the best interest of the Corporation. Management believes that the litigation should not have a material adverse effect on the financial condition of the Corporation. Liabilities for certain of the Corporation's environmental matters as well as certain litigation matters, although arising from discontinued businesses, are expected to be retained by the Corporation following the divestiture of the remaining industrial businesses. These liabilities include environmental obligations that are not related to active properties of operating businesses, accrued product liability claims for divested businesses, liabilities associated with asbestos claims, and general litigation claims not involving active businesses. Accrued liabilities associated -22- 23 with these matters, which have been separately presented as retained liabilities of discontinued businesses, totaled $900 million at September 30, 1998, including amounts related to previously discontinued businesses of CBS Inc. Of this amount, $681 million is classified as noncurrent. A separate asset of $236 million has been recorded for amounts recoverable from insurance carriers under previous settlement arrangements, of which $201 million is classified as noncurrent. See note 9 to the financial statements. The costs associated with resolving these matters are recognized in the period in which the costs are deemed probable and can be reasonably estimated. Management believes that the Corporation has adequately provided for the estimated costs of resolving these matters. INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are not historical facts but rather reflect the Corporation's current expectations concerning future results and events. The words "believes," "expects," "intends," "plans," "anticipates," "likely," "will," and similar expressions identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties, and other factors, some of which are beyond the Corporation's control, that could cause actual results to differ materially from those forecast or anticipated in such forward-looking statements. Such risks, uncertainties, and factors include, but are not limited to: the Corporation's ability to develop and/or acquire television programming and to attract and retain advertisers; the impact of significant competition from both over-the-air broadcast stations and programming alternatives such as cable television, wireless cable, in-home satellite distribution services, and pay-per-view and home video entertainment services; the Corporation's ability to complete its transition from a multi-faceted industrial conglomerate to a pure media company in a timely and cost-effective manner; the impact of new technologies; the impact of the year 2000 transition; changes in Federal Communications Commission regulations; and such other competitive and business risks as from time to time may be detailed in the Corporation's Securities and Exchange Commission reports. Readers are cautioned not to place undue reliance on these forward-looking statements which reflect management's view only as of the date of this Report on Form 10-Q. The Corporation undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. RECENT DEVELOPMENTS On October 28, 1998, the Corporation announced that its Chief Executive Officer, Michael H. Jordan will be retiring at year end and is to be succeeded as Chief Executive Officer, effective January 1, 1999, by Mel Karmazin the Corporation's President and Chief Operating Officer. -23- 24 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS (a)In January 1997, Innovative Business Systems (Overseas) Ltd. and Innovative Business Software, Inc. (collectively Innovative) brought suit against the Corporation and others in the Judicial District Court, Dallas County, Texas. The suit alleges that in connection with the sale by the Corporation of its residential security business on December 31, 1996 the Corporation wrongfully transferred software to the buyers of that business. Innovative has filed four amended complaints against the Corporation; and the latest amended complaint, filed in the fourth quarter of 1997, seeks money damages, specific performance, and injunctive relief against the Corporation for alleged violations by the Corporation relating to software license agreements between the parties. Innovative seeks monetary damages in an amount of $425 million, punitive damages, and attorney's fees. The Corporation has denied the allegations, believes the allegations to be without merit, and has filed a counterclaim against Innovative and others based upon fraud, breach of contract, and tortious interference with a business relationship. On November 9, 1998, the parties to this action reached a settlement resolving all claims. On November, 10, 1998, the court entered an order dismissing the case. (b)On February 27, 1996, suit was brought against the Corporation in the United States District Court (USDC) for the District of New Jersey by Public Service Electric & Gas Company, PECO Energy Company, Atlantic City Electric Company, and Delaware Power & Light Company, the owners of the Salem Generating Station. The suit alleges counts under the Racketeer Influenced and Corrupt Organization Act (RICO) for fraud, negligent misrepresentation, and breach of contract in connection with the Corporation's supply of steam generators and for service orders in 1993 and 1995 related to these steam generators. On October 1, 1997, the Corporation filed a motion for summary judgment in this case. On November 6, 1998, the USDC granted the Corporation's motion for summary judgment, the effect of which was to dismiss the case against the Corporation. Plaintiffs may attempt to refile their lawsuit or appeal this decision. (c)In August 1988, Pennsylvania Department of Environmental Resources (PDER) filed a complaint against the Corporation alleging violations of the Pennsylvania Clean Streams Law at the Corporation's Gettysburg, Pennsylvania, elevator plant. PDER requested that the Environmental Hearing Board assess a penalty in the amount of $9 million. The Corporation denied these allegations. A hearing on the complaint began in 1991. The hearing resumed in 1992 and concluded in February 1993. In November 1996, the Board assessed a civil penalty of approximately $5.5 million. The Corporation appealed the Board's decision to the Commonwealth Court. On January 2, 1998, the Commonwealth Court upheld the Board's findings with respect to violations of the Pennsylvania Clean Stream Law but not with respect to the amount of the penalty assessed. The Commonwealth Court returned the matter to the Board for a reassessment of the penalty. The Corporation's application for a rehearing before the Commonwealth Court was denied. Also, on October 9, 1998, the Corporation's petition for a hearing before the Pennsylvania Supreme Court was denied. The matter is now before the Board for recalculation of the penalty pursuant to the earlier opinion of the Commonwealth Court. Litigation is inherently uncertain and always difficult to predict. Substantial damages are sought in certain of the matters set forth in Item 3 of the Corporation's 1997 Form 10-K and, although management believes a significant adverse judgment is unlikely, any such judgment could have a material adverse effect on the Corporation's results of operations for a quarter or a year. However, based on its understanding and evaluation of the relevant facts and circumstances, management believes that the Corporation has meritorious defenses to these matters, and that the Corporation has adequately provided for costs arising from potential settlement of these matters when in the best interest of the Corporation. Management believes that the litigation should not have a material adverse effect on the financial condition of the Corporation. -24- 25 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A) EXHIBITS (3) ARTICLES OF INCORPORATION AND BYLAWS (a) The Restated Articles of the Corporation, as amended to December 11, 1997, are incorporated herein by reference to Exhibit 3(b) to Form 10-K for the year ended December 31, 1997. (b) The Bylaws of the Corporation, as amended to May 6, 1998, are incorporated herein by reference to Exhibit 4.2 to Post Effective Amendment No. 1 to Form S-8 (Registration Statement No. 333-30127) filed on July 1, 1998. (4) RIGHTS OF SECURITY HOLDERS (a) There are no instruments with respect to long-term debt of the Corporation that involve securities authorized thereunder exceeding 10 percent of the total assets of the Corporation and its subsidiaries on a consolidated basis. The Corporation agrees to provide to the Securities and Exchange Commission, upon request, a copy of instruments defining the rights of holders of long-term debt of the Corporation and its subsidiaries. (b) Rights Agreement is incorporated herein by reference to Exhibit 1 to Form 8-A filed with the Securities and Exchange Commission on January 9, 1996. (10) MATERIAL CONTRACTS (a*) The Annual Performance Plan, as amended to November 1, 1996, is incorporated herein by reference to Exhibit 10(a) to Form 10-Q for the quarter ended September 30, 1996. (b*) The 1993 Long-Term Incentive Plan, as amended to January 28, 1998, is incorporated herein by reference to Exhibit 10(b) to Form 10-K for the year ended December 31, 1997. (c*) The 1984 Long-Term Incentive Plan, as amended to November 1, 1996, is incorporated herein by reference to Exhibit 10(c) to Form 10-Q for the quarter ended September 30, 1996. (d*) The Westinghouse Executive Pension Plan, as amended to December 1, 1997, is incorporated herein by reference to Exhibit 10(d) to Form 10-K for the year ended December 31, 1997. (e*) The Deferred Compensation and Stock Plan for Directors, as amended to January 1, 1998, is incorporated herein by reference to Exhibit 10(e) to Form 10-K for the year ended December 31, 1997. (f*) The Director's Charitable Giving Program, as amended to April 30, 1996, is incorporated herein by reference to Exhibit 10(g) to Form 10-Q for the quarter ended June 30, 1996. (g*) The 1991 Long-Term Incentive Plan, as amended to January 28, 1998, is incorporated herein by reference to Exhibit 10(g) to Form 10-K for the year ended December 31, 1997. (h*) Advisory Director's Plan Termination Fee Deferral Terms and Conditions, dated April 30, 1996, is incorporated herein by reference to Exhibit 10(i) to Form 10-Q for the quarter ended June 30, 1996. (i*) Employment Agreement between the Corporation and Michael H. Jordan is hereby incorporated by reference to Exhibit 10 to the Corporation's Form 8-K, dated September 1, 1993. (j*) Employment Agreement between the Corporation and Fredric G. Reynolds is incorporated herein by reference to Exhibit 10(j) to Form 10-K for the year ended December 31, 1994. -25- 26 (k) $5.5 billion Credit Agreement among the Corporation, the Lenders parties thereto, Nationsbank, N.A. and The Toronto-Dominion Bank as Syndication Agents, The Chase Manhattan Bank as Documentation Agent, and Morgan Guaranty Trust Company of New York as Administrative Agent, dated August 29, 1996, is incorporated herein by reference to Exhibit 10(l) to Form 10-Q for the quarter ended September 30, 1996. (l*) CBS Supplemental Executive Retirement Plan, as amended to November 15, 1995, is incorporated herein by reference to Exhibit 10(n) to Form 10-K for the year ended December 31, 1996. (m*) CBS Bonus Supplemental Executive Retirement Plan, as amended to November 15, 1995, is incorporated herein by reference to Exhibit 10(o) to Form 10-K for the year ended December 31, 1996. (n) First Amendment, dated as of January 29, 1997 to the Credit Agreement, dated as of August 29, 1996, among CBS Corporation, the Lenders parties thereto, Nationsbank, N.A. and The Toronto-Dominion Bank as Syndication Agents, The Chase Manhattan Bank as Documentation Agent, and Morgan Guaranty Trust Company of New York as Administrative Agent, is hereby incorporated by reference to Exhibit 10(p) to Form 10-Q for the quarter ended March 31, 1997. (o) Second Amendment, dated as of March 21, 1997, to the Credit Agreement, dated as of August 29, 1996, as amended by the First Amendment thereto dated as of January 29, 1997, among the Corporation, the Subsidiary Borrowers parties thereto, the Lenders parties thereto, Nationsbank, N.A. and The Toronto-Dominion Bank as Syndication Agents, The Chase Manhattan Bank as Documentation Agent, and Morgan Guaranty Trust Company of New York as Administrative Agent, is hereby incorporated by reference to Exhibit 10(q) to Form 10-Q for the quarter ended March 31, 1997. (p*) Employment Agreement between the Corporation and Mel Karmazin, made as of June 20, 1996 and effective as of December 31, 1996, is hereby incorporated by reference to Exhibit 10(s) to Form 10-Q for the quarter ended March 31, 1997. (q*) Amended and restated Infinity Broadcasting Corporation Stock Option Plan is incorporated herein by reference to Exhibit 4.4 to the Corporation's Registration Statement No. 333-13219 on Post-Effective Amendment No. 1 on Form S-8 to Form S-4 filed with the Securities and Exchange Commission on January 2, 1997. (r*) Infinity Broadcasting Corporation Warrant Certificate No. 3 to Mel Karmazin is incorporated herein by reference to Exhibit 4.6 to the Corporation's Registration Statement No. 333-13219 on Post-Effective Amendment No. 1 on Form S-8 to Form S-4 filed with the Securities and Exchange Commission on January 2, 1997. (s*) Employment Agreement between a subsidiary of the Corporation, CBS Broadcasting, Inc. (formerly CBS Inc.) and Leslie Moonves entered into as of May 17, 1995, and amended as of January 20, 1998 is incorporated herein by reference to Exhibit 10(u) to Form 10-K for the year ended December 31, 1997. (t) Third Amendment dated as of March 3, 1998, to the Credit Agreement dated as of August 29, 1996, as amended by the First Amendment thereto dated as of January 29, 1997, as amended by the Second Amendment thereto dated as of March 21, 1997 among the Corporation, the Subsidiaries Borrowers parties thereto, the Lenders parties thereto, Nationsbank, N.A. and The Toronto-Dominion Bank as Syndication Agents, The Chase Manhattan Bank as Documentation Agent, and Morgan Guaranty Trust Company of New York as Administrative Agent is incorporated by reference to Exhibit 10(x) to Form 10-Q for the quarter ended March 31, 1998. (u*) The CBS Corporation 1998 Executive Annual Incentive Plan is incorporated herein by reference to Exhibit A to the Corporation's Definitive Proxy Statement for the Annual Meeting of Shareholders held on May 6, 1998, as filed with the Commission on March 25, 1998. -26- 27 (v) Asset Purchase Agreement, dated June 25, 1998, between the Corporation and WGNH Acquisition, LLC, an entity owned 60% by Morrison Knudson Corporation and 40% by BNFL USA Group, Inc., relating to the Corporation's Energy Systems Business Unit is incorporated by reference to Exhibit 10(w) to Form 10-Q for the quarter ended June 30, 1998. (w) Asset Purchase Agreement, dated June 25, 1998, between the Corporation and WGNH Acquisition, LLC, an entity owned 60% by Morrison Knudson Corporation and 40% by BNFL USA Group, Inc., relating to the Corporation's Government and Environmental Services Company is incorporated by reference to Exhibit 10(x) to Form 10-Q for the quarter ended June 30, 1998. * Identifies management contract or compensatory plan or arrangement. (27) FINANCIAL DATA SCHEDULE -27- 28 B) REPORTS ON FORM 8-K A Current Report on Form 8-K (Items 5 and 7), dated August 5, 1998, filing a press release concerning the Corporation's earnings for the second quarter of 1998. A Current Report on Form 8-K (Items 5 and 7), dated August 28, 1998, announcing the Corporation's intention to offer up to 20 percent of its radio and outdoor advertising group for sale in an initial public offering. -28- 29 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 16th day of November 1998. CBS CORPORATION /s/ Carol V. Savage ---------------------------------- Vice President, Finance -29- EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 122 0 1,147 51 0 2,286 1,674 535 19,811 2,030 4,784 0 0 732 6,897 19,811 5,014 5,014 3,240 3,240 1,409 0 272 122 134 (15) 0 (5) 0 (20) (.03) (.03)
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