SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the quarterly period ended March 31, 1995 , 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 1-8637
TIME WARNER INC.
(Exact name of registrant as specified in its charter)
Delaware 13-1388520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
75 Rockefeller Plaza
New York, New York 10019
(212) 484-8000
(Address, including zip code, and telephone number, including
area code, of each registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock - $1 par value 379,863,970
Description of Class Shares Outstanding
as of April 30, 1995
TIME WARNER INC. AND
TIME WARNER ENTERTAINMENT COMPANY, L.P.
INDEX TO FORM 10-Q
Page
Time
Warner TWE
PART I. FINANCIAL INFORMATION
Consolidated balance sheets at March 31, 1995 and
December 31, 1994 1 16
Consolidated statements of operations for the three
months ended March 31, 1995 and 1994 2 17
Consolidated statements of cash flows for the three
months ended March 31, 1995 and 1994 3 18
Notes to consolidated financial statements 4 19
Management's discussion and analysis of results of
operations and financial condition 10 24
Summarized financial information of the Time Warner Service Partnerships
and Paragon Communications set forth at pages 13 and 14, respectively,
in the Quarterly Report on Form 10-Q for the period ended March 31, 1995
of Time Warner Entertainment Company, L.P. (Reg. No. 33-53742) is
incorporated herein by reference and filed as an exhibit to this report.
PART II. OTHER INFORMATION 28
PART I. FINANCIAL INFORMATION
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31,
1995 1994
(millions, except
per share amounts)
ASSETS
Current assets
Cash and equivalents $ 309 $ 282
Receivables, less allowances of $766 and $768 1,155 1,439
Inventories 409 370
Prepaid expenses 767 726
Total current assets 2,640 2,817
Investments in and amounts due to and from
Entertainment Group 5,443 5,350
Investments, other 1,543 1,555
Music catalogues, contracts and copyrights 1,217 1,207
Goodwill 4,589 4,630
Other assets, primarily property, plant and
equipment 1,176 1,157
Total assets $16,608 $16,716
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties payable $ 1,334 $ 1,379
Debt due within one year 344 355
Other current liabilities 1,035 1,238
Total current liabilities 2,713 2,972
Long-term debt 9,001 8,839
Deferred income taxes 2,657 2,700
Unearned portion of paid subscriptions 677 631
Other liabilities 447 426
Shareholders' equity
Preferred stock, $1 par value 1 1
Common stock, $1 par value, 379.8 million and
379.3 million shares outstanding
(excluding 45.7 million treasury shares) 380 379
Paid-in capital 2,600 2,588
Unrealized gains on certain marketable securities 148 130
Accumulated deficit (2,016) (1,950)
Total shareholders' equity 1,113 1,148
Total liabilities and shareholders' equity $16,608 $16,716
See accompanying notes.
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months
Ended March 31,
1995 1994
(millions, except
per share amounts)
Revenues (a) $ 1,817 $1,558
Cost of revenues (a)(b) 1,103 892
Selling, general and administrative (a)(b) 576 554
Operating expenses 1,679 1,446
Business segment operating income 138 112
Equity in pretax income of Entertainment Group (a) 22 45
Interest and other, net (a) (155) (158)
Corporate expenses (a) (20) (18)
Loss before income taxes (15) (19)
Income taxes (32) (32)
Net loss (47) (51)
Preferred dividend requirements (3) (3)
Net loss applicable to common shares $ (50) $ (54)
Net loss per common share $ (.13) $ (.14)
Average common shares 379.5 378.6
__________________
(a) Includes the following income (expenses) resulting from transactions with
the Entertainment Group and other related companies for the three months ended
March 31, 1995 and 1994, respectively: revenues-$45 million and $39 million;
cost of revenues-$(24) million and $(21) million; selling, general and
administrative-$13 million and $12 million; equity in pretax income of
Entertainment Group-$(34) million and $(38) million; interest and other, net
- -$6 million and $11 million; and corporate expenses-$15 million and
$15 million.
(b) Includes depreciation and amortization expense of: $ 112 $ 105
See accompanying notes.
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
1995 1994
(millions)
OPERATIONS
Net loss $ (47) $ (51)
Adjustments for noncash and nonoperating items:
Depreciation and amortization 112 105
Noncash interest expense 57 52
Equity in pretax income of Entertainment Group,
net of distributions (21) (44)
Changes in operating assets and liabilities (175) 185
Cash provided (used) by operations (74) 247
INVESTING ACTIVITIES
Investments and acquisitions (143) (20)
Capital expenditures (38) (47)
Investment proceeds 212 93
Cash provided by investing activities 31 26
FINANCING ACTIVITIES
Increase (decrease) in debt 94 (106)
Dividends paid (36) (33)
Other 12 14
Cash provided (used) by financing activities 70 (125)
INCREASE IN CASH AND EQUIVALENTS $ 27 $ 148
See accompanying notes.
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements include 100% of the assets,
liabilities, revenues, expenses, income, loss and cash flows of Time Warner
Inc. ("Time Warner" or the "Company") and all companies in which Time Warner
has a controlling voting interest ("subsidiaries"), as if Time Warner and its
subsidiaries were a single company. Subsidiaries of Time Warner are engaged
principally in the Publishing and Music businesses. Investments in
Entertainment Group companies, principally Time Warner Entertainment Company,
L.P. ("TWE"), which are engaged principally in the Filmed Entertainment,
Broadcasting-The WB Network, Programming-HBO and Cable businesses, and
investments in certain other companies in which Time Warner has significant
influence but less than a controlling voting interest, are accounted for using
the equity method.
The accompanying financial statements are unaudited but in the opinion of
management contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the financial position
and the results of operations and cash flows for the periods presented in
conformity with generally accepted accounting principles applicable to interim
periods. Certain reclassifications have been made to the 1994 financial
statements to conform to the 1995 presentation. The accompanying financial
statements should be read in conjunction with the audited consolidated
financial statements of Time Warner for the year ended December 31, 1994.
2. ENTERTAINMENT GROUP
Time Warner's investment in and amounts due to and from the Entertainment
Group at March 31, 1995 and December 31, 1994 consists of the following:
March 31, December 31,
1995 1994
(millions)
Investment in TWE $ 5,231 $ 5,284
Income tax and stock option related distributions
due from TWE 480 423
Credit agreement debt due to TWE (400) (400)
Other liabilities due to TWE, principally related
to home video distribution (147) (266)
Investment in and amounts due to and from TWE 5,164 5,041
Investment in other Entertainment Group companies 279 309
Total $ 5,443 $ 5,350
TWE is a Delaware limited partnership that was capitalized on June 30,
1992 to own and operate substantially all of the Filmed Entertainment,
Programming-HBO and Cable businesses previously owned by subsidiaries of Time
Warner. The Time Warner subsidiaries are the general partners ("Time Warner
General Partners") and in the aggregate hold 63.27% pro rata priority capital
and residual equity partnership interests in TWE, and certain priority capital
interests senior and junior to the pro rata priority capital interest. The
limited partners are not affiliated with Time Warner and in the aggregate hold
36.73% pro rata priority capital and residual equity partnership interests.
The TWE partnership agreement provides for special allocations of income, loss
and distributions of partnership capital, including priority distributions in
the event of liquidation. TWE reported net income of $4 million and $48
million in the three months ended March 31, 1995 and 1994, respectively, no
portion of which was allocated to the limited partners.
Each Time Warner General Partner has guaranteed a pro rata portion of $7
billion of TWE's debt and accrued interest at March 31, 1995, based on the
relative fair value of the net assets each Time Warner General Partner
contributed to TWE. Such indebtedness is recourse to each Time Warner General
Partner only to the extent of its guarantee.
Set forth below is summarized financial information of the Entertainment
Group:
TIME WARNER ENTERTAINMENT GROUP
Three Months
Ended March 31,
1995 1994
(millions)
Operating Statement Information
Revenues $2,073 $1,927
Depreciation and amortization 230 216
Business segment operating income 201 206
Interest and other, net 164 146
Income before income taxes 22 45
Net income 11 41
Three Months
Ended March 31,
1995 1994
(millions)
Cash Flow Information
Cash provided by operations $ 317 $ 352
Capital expenditures (300) (241)
Investments and acquisitions (28) (48)
Increase in debt 52 17
Collections on note receivable from U S WEST 150 -
Capital distributions (1) (1)
Increase in cash and equivalents 196 111
March 31, December 31,
1995 1994
(millions)
Balance Sheet Information
Cash and equivalents $ 1,267 $ 1,071
Total current assets 3,720 3,571
Total assets 19,043 18,992
Total current liabilities 2,945 2,953
Long-term debt 7,162 7,160
Time Warner General Partners' senior capital 1,696 1,663
TWE partners' capital 6,279 6,233
The assets and cash flows of TWE are restricted by the TWE partnership
and credit agreements and are unavailable for use by the partners and their
affiliates except through the payment of certain fees, reimbursements, cash
distributions and loans, which are subject to limitations. At March 31, 1995
and December 31, 1994, the Time Warner General Partners had recorded $342
million and $334 million, respectively, of tax related distributions due from
TWE in 1995, and $138 million and $89 million, respectively, of stock option
related distributions due from TWE, based on closing prices of Time Warner
common stock of $37.625 and $35.125, respectively. Time Warner is paid when
the options are exercised.
In April 1995, TWE agreed to sell 51% of its interest in Six Flags
Entertainment Corporation ("Six Flags") to an investment group led by
Boston Ventures for $204 million and the receipt of approximately $670
million in additional proceeds from Six Flags, principally representing
payment of certain intercompany indebtedness and licensing fees. TWE will
recognize a gain upon the closing of the transaction. TWE will
deconsolidate the assets, liabilities and operating results of Six
Flags, including approximately $126 million of third-party indebtedness,
and account for its remaining 49% interest under the equity method of
accounting. As a result of this transaction, TWE will reduce debt by
approximately $850 million, after related taxes and fees. The transaction
is expected to close during the second quarter of 1995 and is subject to
customary closing conditions.
3. CABLE TRANSACTIONS
On May 2, 1995, Time Warner acquired Summit Communications Group, Inc.
("Summit"), which owns cable television systems serving approximately 162,000
subscribers, in exchange for the issuance of approximately 1.5 million shares
of Time Warner common stock and approximately 3.3 million shares of a new
convertible preferred stock ("Series C preferred stock") and the assumption
of $140 million of indebtedness. The Series C preferred stock is
convertible into approximately 6.8 million shares of Time Warner common
stock at an effective price of $48 of liquidation value per common share.
On April 1, 1995, TWE formed a cable television joint venture with
subsidiaries of Advance Publications, Inc. and Newhouse Broadcasting
Corporation ("Advance/Newhouse") to which Advance/Newhouse and TWE
contributed cable television systems (or interests therein) serving
approximately 4.5 million subscribers, as well as certain foreign cable
investments and programming investments. TWE owns a two-thirds equity
interest in the TWE-Advance/Newhouse Partnership and is the managing partner.
Advance/Newhouse owns a one-third equity interest in the partnership.
In accordance with the partnership agreement, Advance/Newhouse can require
TWE to purchase its equity interest for fair market value at specified
intervals following the death of both of its principal shareholders.
Beginning in the third year, either partner can initiate a dissolution in
which TWE would receive two-thirds and Advance/Newhouse would receive
one-third of the partnership's net assets. The assets contributed by
TWE and Advance/Newhouse to the partnership were recorded at their
predecessor's historical cost. No gain was recognized by TWE upon
the capitalization of the partnership.
Time Warner's previously-announced acquisitions of KBLCOM Incorporated
("KBLCOM") and Cablevision Industries Corporation ("CVI") and related
companies are expected to close during the second half of 1995.
4. CAPITAL STOCK
Changes in shareholders' equity are as follows:
Three Months
Ended March 31,
1995 1994
(millions)
Balance at beginning of year $ 1,148 $ 1,370
Net loss (47) (51)
Common dividends declared (34) (30)
Preferred dividends declared (3) (3)
Other 49 41
Balance at March 31 $ 1,113 $1,327
5. SEGMENT INFORMATION
Information as to the operations of Time Warner and the Entertainment
Group in different business segments is set forth below:
Three Months
Ended March 31,
1995 1994
(millions)
Revenues
TIME WARNER:
Publishing $ 831 $ 751
Music 991 812
Intersegment elimination (5) (5)
Total $1,817 $1,558
ENTERTAINMENT GROUP:
Filmed Entertainment $1,207 $1,083
Broadcasting-The WB Network 3 -
Programming - HBO 390 362
Cable 578 551
Intersegment elimination (105) (69)
Total $2,073 $1,927
Three Months
Ended March 31,
1995 1994
(millions)
Operating income
TIME WARNER:
Publishing $ 55 $ 50
Music 83 62
Total $ 138 $ 112
ENTERTAINMENT GROUP:
Filmed Entertainment $ 65 $ 66
Broadcasting-The WB Network (21) -
Programming - HBO 67 56
Cable 90 84
Total $ 201 $ 206
Three Months
Ended March 31,
1995 1994
(millions)
Depreciation of Property, Plant and Equipment
TIME WARNER:
Publishing $ 13 $ 12
Music 23 19
Total $ 36 $ 31
ENTERTAINMENT GROUP:
Filmed Entertainment $ 23 $ 17
Broadcasting-The WB Network - -
Programming-HBO 4 4
Cable 90 84
Total $ 117 $ 105
Three Months
Ended March 31,
1995 1994
Amortization of Intangible Assets (1) (millions)
TIME WARNER:
Publishing $ 9 $ 8
Music 67 66
Total $ 76 $ 74
ENTERTAINMENT GROUP:
Filmed Entertainment $ 37 $ 34
Broadcasting-The WB Network - -
Programming-HBO - 1
Cable 76 76
Total $ 113 $111
(1) Amortization includes all amortization relating to the acquisitions of
Warner Communications Inc. ("WCI") in 1989 and the American Television and
Communications Corporation ("ATC") minority interest in 1992 and to other
business combinations accounted for by the purchase method.
6. CONTINGENCIES
Pending legal proceedings are substantially limited to litigation
incidental to the businesses of Time Warner and alleged damages in connection
with class action lawsuits. In the opinion of counsel and management,
the ultimate resolution of these matters will not have a material effect on
the financial statements of Time Warner.
7. ADDITIONAL FINANCIAL INFORMATION
Additional financial information is as follows:
Three Months
Ended March 31,
1995 1994
(millions)
Interest expense $210 $182
Cash payments made for interest 204 183
Cash payments made for income taxes 80 54
Income tax refunds received 7 34
During the three months ended March 31, 1995 and 1994, Time Warner
realized $33 million and $180 million, respectively, from the securitization
of receivables.
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Time Warner had revenues of $1.817 billion and a net loss of $47 million
($.13 per common share) for the three months ended March 31, 1995, compared
to revenues of $1.558 billion and a net loss of $51 million ($.14 per
common share) for the three months ended March 31, 1994.
Operating income and EBITDA for Time Warner and the Entertainment Group
for the three months ended March 31, 1995 and 1994 is as follows:
Three Months Ended March 31,
Operating Income EBITDA
1995 1994 1995 1994
(millions)
TIME WARNER:
Publishing $ 55 $ 50 $ 77 $ 70
Music 83 62 173 147
Total $138 $112 $250 $ 217
ENTERTAINMENT GROUP:
Filmed Entertainment $ 65 $ 66 $125 $117
Broadcasting-The WB Network (21) - (21) -
Programming - HBO 67 56 71 61
Cable 90 84 256 244
Total $201 $206 $431 $422
Time Warner's equity in the pretax income of the Entertainment Group
was $22 million for the three months ended March 31, 1995, compared to
$45 million for the first three months of 1994.
The relationship between income before income taxes and income tax
expense of Time Warner is principally affected by the amortization of
goodwill and certain other financial statement expenses that are not
deductible for income tax purposes. Income tax expense of Time Warner
includes all income taxes related to its allocable share of partnership
income and its equity in the income tax expense of corporate subsidiaries
of the Entertainment Group.
Certain factors affecting comparative operating results are discussed
below on a business segment basis. That discussion includes, among other
factors, an analysis of changes in the operating income of the business
segments before depreciation and amortization ("EBITDA") in order to
eliminate the effect on the operating performance of the music, filmed
entertainment and cable business of significant amounts of amortization
of intangible assets recognized in the $14 billion acquisition of WCI
in 1989, the $1.3 billion acquisition of the ATC minority interest in
1992 and other business combinations accounted for by the purchase method.
Financial analysts generally consider EBITDA to be an important measure of
comparative operating performance for the businesses of Time Warner and the
Entertainment Group, and when used in comparison to debt levels or the
coverage of interest expense, as a measure of liquidity. However, EBITDA
should be considered in addition to, not as a substitute for, operating
income, net income, cash flow and other measures of financial performance
and liquidity reported in accordance with generally accepted accounting
principles.
TIME WARNER
PUBLISHING. Revenues increased to $831 million, compared to $751
million in the first quarter of 1994. Operating income increased to
$55 million from $50 million. Depreciation and amortization amounted to
$22 million in the first quarter of 1995 and $20 million in the
first quarter of 1994. EBITDA increased to $77 million from $70 million.
Revenues benefited from increases in magazine circulation, advertising and
book revenues. Significant revenue gains were achieved by PEOPLE,
SPORTS ILLUSTRATED, TIME and ENTERTAINMENT WEEKLY. Operating income and
EBITDA increased as a result of the revenue gains, offset in part by
higher postal and paper costs as a result of price increases.
MUSIC. Revenues increased to $991 million, compared to $812 million in
the first quarter of 1994. Operating income increased to $83 million from
$62 million. Depreciation and amortization, including amortization related
to the purchase of WCI, amounted to $90 million in the first quarter of 1995
and $85 million in the first quarter of 1994. EBITDA increased to $173 million
from $147 million. The revenue growth resulted from increases in both domestic
and international recorded music revenues, which benefited from a number of
popular releases and an increase in the percentage of compact disc to total
unit sales, and increased music publishing revenues. Operating income and
EBITDA benefited from the revenue gains, offset in part by lower results from
direct marketing activities attributable to higher amortization of member
acquisition costs.
INTEREST AND OTHER, NET. Interest and other, net, decreased to
$155 million in the first quarter of 1995, compared to $158 million in
the first quarter of 1994. Interest expense increased to $210 million
compared to $182 million, principally as a result of higher floating-rates
of interest paid on $2.9 billion notional amount of interest rate swap
contracts. There was other income, net, of $55 million in the first quarter
of 1995, compared to other income, net, of $24 million in 1994, principally
because of an increase in investment-related income, including a gain
recognized in 1995 on the sale of an interest in QVC, Inc. Investment-
related income was reduced in both periods by adjustments to the carrying
value of certain investments and losses on foreign exchange contracts
used to hedge foreign exchange risk.
ENTERTAINMENT GROUP
FILMED ENTERTAINMENT. Revenues increased to $1.207 billion, compared to
$1.083 billion in the first quarter of 1994. Operating income decreased to
$65 million from $66 million. Depreciation and amortization, including
amortization related to the purchase of WCI, amounted to $60 million in the
first quarter of 1995 and $51 million in the first quarter of 1994. EBITDA
increased to $125 million from $117 million. Revenues benefited from
increases in international theatrical, international home video and worldwide
television distribution operations. Operating income and EBITDA margins
were affected by lower domestic theatrical results compared to the first
quarter of 1994.
BROADCASTING-THE WB NETWORK. The WB Network was launched on January 11,
1995, and generated $21 million of operating losses on $3 million of revenues
in the first quarter of 1995. Due to the start-up nature of this new national
broadcast operation, losses are expected to continue.
PROGRAMMING-HBO. Revenues increased to $390 million, compared to $362
million in the first quarter of 1994. Operating income increased to $67
million from $56 million. Depreciation and amortization amounted to
$4 million in the first quarter of 1995 and $5 million in the first quarter
of 1994. EBITDA increased to $71 million from $61 million. Revenues
benefited primarily from increases in cable and direct broadcast satellite
subscribers, as well as from higher pay-TV rates. Operating income and EBITDA
improved principally as a result of the revenue gains.
CABLE. Revenues increased to $578 million, compared to $551 million
in the first quarter of 1994. Operating income increased to $90 million
from $84 million. Depreciation and amortization, including amortization
related to the purchase of WCI and the acquisition of the ATC minority
interest, amounted to $166 million in the first quarter of 1995 and
$160 million in the first quarter of 1994. EBITDA increased to $256 million
from $244 million. Revenues benefited from an increase in basic cable
and direct broadcast satellite subscribers and nonregulated revenues,
including pay-TV and advertising. Operating income and EBITDA increased
as a result of the revenue gains, offset in part by the impact of the second
round of cable rate regulations that went into effect in July 1994, higher
start-up costs for telephony operations and, with respect to operating income
only, higher depreciation and amortization relating to increased capital
spending.
INTEREST AND OTHER, NET. Interest and other, net, increased to
$164 million, compared to $146 million in the first quarter of 1994.
Interest expense increased to $151 million compared to $137 million,
principally as a result of higher floating-rates of interest paid
on borrowings under TWE's bank credit agreement. There was other
expense, net, of $13 million in the first quarter of 1995, compared
to other expense, net, of $9 million in 1994, principally because of a
decrease in investment-related income.
FINANCIAL CONDITION AND LIQUIDITY
March 31, 1995
TIME WARNER
The financial condition of Time Warner remained essentially unchanged from
December 31, 1994, but is expected to be significantly affected by the cable
transactions and asset sales that have closed or are expected to close during
1995. Time Warner had $9.3 billion of debt, $309 million of cash and
equivalents (net debt of $9 billion) and $1.1 billion of equity at March 31,
1995, compared to $9.2 billion of debt, $282 million of cash and equivalents
(net debt of $8.9 billion) and $1.1 billion of equity at December 31, 1994.
On a combined basis (Time Warner and the Entertainment Group together), there
was $15 billion of net debt at both the beginning and end of the period.
During 1995, Time Warner and TWE took steps towards achieving certain of
their financial and operational objectives, principally relating to the
expansion of their reach in cable television, the negotiation of a new bank
credit facility and their plan to reduce debt with funds raised from the sale
of non-core assets, such as Six Flags. Time Warner completed its previously-
announced acquisition of Summit in May 1995 and, together with the formation
of the TWE-Advance/Newhouse Partnership in April 1995, the total number of
cable subscribers under the management of Time Warner Cable has increased to
approximately 9.3 million, compared to 7.5 million at the end of 1994.
Such amount is expected to increase further, to approximately 11.5 million,
after the consummation of the acquisitions of KBLCOM and CVI and related
companies, which are expected to close during the second half of 1995.
As a result of the cable transactions, a new bank credit facility is
expected to be obtained for TWE, the TWE-Advance/Newhouse Partnership and
for the newly-created cable division of Time Warner ("TWI Cable") in
order to refinance or repay approximately $5 billion of acquired and
existing indebtedness, and to finance the ongoing working capital,
capital expenditures and other corporate needs of each respective entity.
Time Warner and TWE are currently in negotiations with an administrative
agent for a bank syndicate to secure such financing in the form of one
overall, five-year revolving credit facility (the "New Credit Agreement").
A preliminary term sheet for the New Credit Agreement provides for
borrowings in the aggregate amount of $9 billion for TWE, TWI Cable and
the TWE-Advance/Newhouse Partnership. The aggregate availability for
each borrower is expected to be limited in amount to $4 billion of borrowings
for TWI Cable, $5 billion of borrowings for the TWE-Advance/Newhouse
Partnership and $9 billion of borrowings for TWE, subject to certain
adjustments. The preliminary term sheet provides for borrowings under
the facility to bear interest at separate rates for each borrower, generally
equal to LIBOR plus a margin ranging from 50 to 87.5 basis points
based on the respective credit rating or financial leverage of such
borrower.
The New Credit Agreement is expected to contain certain covenants for
each borrower relating to, among other things, additional indebtedness; liens
on assets, cash flow coverage and leverage ratios; and loans, advances,
distributions or other cash payments or transfers of assets from TWE and the
TWE-Advance/Newhouse Partnership to their partners or affiliates.
Time Warner continues to pursue its plan to enhance its financial position
and that of the Entertainment Group through sales of non-core assets. With
the agreement to sell 51% of TWE's interest in Six Flags to an investment
group led by Boston Ventures and the sale of an interest in QVC, Inc. in
February 1995, Time Warner on a combined basis will have raised approximately
$1.1 billion for debt reduction when the Six Flags transaction closes, which
is expected to occur during the second quarter of 1995. The closing of the
Six Flags transaction is subject to customary closing conditions.
During the first quarter of 1995, cash used by Time Warner's operations
amounted to $74 million and reflected $250 million of EBITDA from the
Publishing and Music businesses, $1 million of net distributions from TWE and
$33 million from the securitization of receivables, less $204 million of
interest payments, $73 million of income taxes, $20 million of corporate
expenses and an increase in working capital requirements. Cash provided by
operations of $247 million in the first quarter of 1994 reflected $217 million
of EBITDA from the Publishing and Music businesses, $1 million of net
distributions from TWE, $180 million from the securitization of receivables
and a reduction in working capital requirements, less $183 million of
interest payments, $20 million of income taxes and $18 million of
corporate expenses.
Cash flows used in investing activities in the first quarter of 1995,
excluding investment proceeds, were $181 million, compared to $67 million
in the first quarter of 1994. Cash dividends paid increased to $36 million
in the first quarter of 1995, compared to $33 million in the first quarter
of 1994. Time Warner has no claim on the assets and cash flows of TWE,
except through the payment of certain fees and reimbursements, cash
distributions and loans. Tax-related distributions in excess of $350
million are expected to be received from TWE during 1995.
Management believes that 1995 operating cash flow, cash and marketable
securities and additional borrowing capacity are and will continue to be
sufficient to meet Time Warner's liquidity needs without distributions and
loans from TWE above those permitted by existing agreements.
Time Warner uses derivative financial instruments to manage its risk
against fluctuations in interest rates and foreign currency exchange rates.
Interest rate swap contracts are used to adjust the proportion of total debt
that is subject to changes in short-term rates. At March 31, 1995, Time
Warner had interest rate swap contracts to pay floating-rates of interest
(average six-month LIBOR rate of 6.5%) and receive fixed-rates of interest
(average rate of 5.5%) on $2.9 billion notional amount of indebtedness,
effectively converting 31% of Time Warner's underlying debt, substantially
all of which is fixed-rate, and 37% of the debt of Time Warner and the
Entertainment Group combined, to a floating-rate basis. Time Warner had
interest rate swap contracts on a like-amount of notional indebtedness at
December 31, 1994. Based on the current levels of outstanding debt and
interest rate swap contracts, a 25 basis point increase in the level
of interest rates prevailing at March 31, 1995 would reduce Time Warner's
annual pretax income by an estimated $11 million.
Based on the level of interest rates prevailing at March 31, 1995, the
fair value of Time Warner's fixed-rate debt was $205 million less than
its carrying value and it would have cost $158 million to terminate the
related interest rate swap contracts, which combined is the equivalent of an
unrealized gain of $47 million. Based on the level of interest rates pre-
vailing at December 31, 1994, the fair value of Time Warner's fixed-rate debt
was less than its carrying value by $572 million and it would have cost
$236 million to terminate its interest rate swap contracts, which combined
was the equivalent of an unrealized gain of $336 million. Accounting
recognition is not given to unrealized gains or losses on debt or
interest rate swap contracts unless the debt is retired or the contracts
are terminated prior to their maturity.
Foreign exchange contracts are used primarily to hedge the risk that
unremitted or future royalties and license fees owed to Time Warner or TWE
domestic companies for the sale or anticipated sale of U.S. copyrighted
products abroad may be adversely affected by changes in exchange rates. At
March 31, 1995, Time Warner had contracts for the sale of $564 million and
the purchase of $120 million of foreign currencies at fixed rates, primarily
Japanese yen (18% of net contract value), French francs (15%), English
pounds (27%), Canadian dollars (13%) and German marks (13%), compared to
contracts for the sale of $551 million and the purchase of $109 million of
foreign currencies at December 31, 1994. Unrealized gains or losses are
recorded in income; accordingly, the carrying value of foreign exchange
contracts approximates market value. Time Warner had $18 million and TWE had
$12 million of net losses on foreign exchange contracts during the first
quarter of 1995, which were or are expected to be offset by corresponding
increases in the dollar value of foreign currency royalties and
license fee payments that have been or are anticipated to be
received from the sale of U.S. copyrighted products abroad. Time
Warner reimburses or is reimbursed by TWE for contract gains and losses
related to TWE's foreign currency exposure. Foreign currency contracts are
placed with a number of major financial institutions in order to minimize
credit risk.
ENTERTAINMENT GROUP
The financial condition of the Entertainment Group companies, principally
TWE, also remained essentially unchanged from December 31, 1994, but is
expected to be significantly affected by the formation of the TWE-Advance/
Newhouse Partnership and the other cable transactions and asset sales that
have closed or are expected to close during 1995, as previously discussed.
TWE had $7.2 billion of long-term debt and $1.7 billion of Time Warner
General Partners' senior capital at March 31, 1995 and December 31, 1994.
TWE had $6.3 billion of partners' capital (net of the $621 million uncollected
portion of the note receivable from U S WEST) at March 31, 1995, compared
to $6.2 billion of partners' capital at December 31, 1994. Cash and
equivalents were $1.3 billion at March 31, 1995, compared to $1.1 billion
at December 31, 1994, reducing the debt-net-of-cash amounts for TWE
to $5.9 billion and $6.1 billion, respectively.
In the first quarter of 1995, cash provided by Entertainment Group
operations amounted to $317 million and reflected $431 million of EBITDA from
the Filmed Entertainment, Broadcasting-The WB Network, Programming-HBO
and Cable businesses and a reduction in working capital requirements, less
$169 million of interest payments, $15 million of income taxes and $15 million
of corporate expenses. Cash provided by operations of $352 million in the
first quarter of 1994 reflected $422 million of business segment EBITDA and
a reduction in working capital requirements, less $143 million of interest
payments, $13 million of income taxes and $15 million of corporate expenses.
Capital expenditures increased to $300 million in the first quarter of 1995,
compared to $241 million in the first quarter of 1994. Capital spending by
Time Warner Cable amounted to $222 million in the first quarter of 1995,
compared to $108 million in the first quarter of 1994, and was financed
in part through $150 million of collections on the note receivable from
U S WEST. Cable capital expenditures are budgeted to exceed $800 million
for the remainder of 1995, and are expected to be partially financed
by an incremental $400 million of collections on the note receivable
from U S WEST. Because management believes that the conversion from
coaxial to fiber-optic cable is essential to achieving long-term growth
in revenue from telephony and unregulated cable services, significant
cable capital expenditures also are expected in subsequent years and will
be timed to match the rate at which demand for the new services develops.
Warner Bros.' backlog, representing the amount of future revenue not yet
recorded from cash contracts for the licensing of films for pay and basic
cable, network and syndicated television exhibition amounted to $918 million
at March 31, 1995 compared to $852 million at December 31, 1994 (including
amounts relating to HBO of $154 million at March 31, 1995 and $175 million
at December 31, 1994). The backlog excludes advertising barter contracts.
Management believes that TWE's 1995 operating cash flow, cash and
equivalents, collections on the note receivable from U S WEST and additional
borrowing capacity are and will continue to be sufficient to meet its capital
and liquidity needs.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31,
1995 1994
(millions)
ASSETS
Current assets
Cash and equivalents $ 1,267 $ 1,071
Receivables, including $147 and $266 due from Time
Warner, less allowances of $310 and $306 1,287 1,426
Inventories 924 956
Prepaid expenses 230 120
Total current assets 3,708 3,573
Noncurrent inventories 1,752 1,807
Loan receivable from Time Warner 400 400
Property, plant and equipment, net 3,931 3,784
Goodwill 4,400 4,433
Cable television franchises 3,189 3,236
Other assets 1,378 1,429
Total assets $18,758 $18,662
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable $ 418 $ 514
Participations and programming costs 973 857
Other current liabilities, including $342 and $334 of
distributions due to Time Warner 1,429 1,486
Total current liabilities 2,820 2,857
Long-term debt 7,162 7,160
Other long-term liabilities, including $138 and $89
of distributions due to Time Warner 801 749
Time Warner General Partners' senior capital 1,696 1,663
Partners' capital
Contributed capital 7,398 7,398
Undistributed partnership earnings (deficit) (498) (394)
Note receivable from U S WEST (621) (771)
Total partners' capital 6,279 6,233
Total liabilities and partners' capital $18,758 $18,662
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months
Ended March 31,
1995 1994
(millions)
Revenues (a) $ 2,046 $ 1,919
Cost of revenues (a)(b) 1,440 1,343
Selling, general and administrative (a)(b) 415 373
Operating expenses 1,855 1,716
Business segment operating income 191 203
Interest and other, net (a) (161) (136)
Corporate services (a) (15) (15)
Income before income taxes 15 52
Income taxes (11) (4)
Net income $ 4 $ 48
_______________
(a) Includes the following income (expenses) resulting from transactions
with the partners of TWE:
Selling, general and administrative $ (22) $ (17)
Corporate services (15) (15)
In addition, includes the following income (expenses) resulting from
transactions with equity investees of TWE or Time Warner:
Revenues $ 26 $ 9
Cost of revenues (17) (12)
Selling, general and administrative 5 5
(b) Includes depreciation and amortization expense of: $ 226 $ 213
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
1995 1994
(millions)
OPERATIONS
Net income $ 4 $ 48
Adjustments for noncash and nonoperating items:
Depreciation and amortization 226 213
Changes in operating assets and liabilities 116 81
Cash provided by operations 346 342
INVESTING ACTIVITIES
Investments and acquisitions (21) (29)
Capital expenditures (270) (239)
Investment proceeds 1 31
Cash used by investing activities (290) (237)
FINANCING ACTIVITIES
Increase in debt 4 17
Capital distributions (14) (14)
Collections on note receivable from U S WEST 150 -
Cash provided by financing activities 140 3
INCREASE IN CASH AND EQUIVALENTS $ 196 $ 108
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Time Warner Entertainment Company, L.P., a Delaware limited partnership
("TWE"), is engaged principally in the Filmed Entertainment, Broadcasting-The
WB Network, Programming-HBO and Cable businesses. Subsidiaries of Time Warner
Inc. ("Time Warner") are the general partners of TWE ("Time Warner General
Partners") and collectively hold 63.27% pro rata priority capital and residual
equity partnership interests in TWE, and certain priority capital interests
senior ("Time Warner General Partners' senior capital") and junior to the
pro rata priority capital interests, which they received for the net assets,
or the rights to cash flows, they contributed to the partnership at the
capitalization of TWE. The limited partners, subsidiaries of U S WEST, Inc.
("U S WEST"), ITOCHU Corporation and Toshiba Corporation, hold 25.51%, 5.61%
and 5.61% pro rata priority capital and residual equity partnership interests,
respectively. The TWE partnership agreement provides for special allocations
of income, loss and distributions of partnership capital, including priority
distributions in the event of liquidation.
The consolidated financial statements include 100% of the assets,
liabilities, revenues, expenses, income, loss and cash flows of TWE and all
companies in which TWE has a direct and indirect controlling voting interest
("subsidiaries"), as if TWE and its subsidiaries were a single company.
Investments in certain other companies in which TWE has significant influence
but less than a controlling voting interest, are accounted for using the
equity method.
The accompanying financial statements are unaudited but in the opinion
of management contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the financial
position and the results of operations and cash flows for the periods
presented, in conformity with generally accepted accounting principles
applicable to interim periods. The accompanying financial statements
should be read in conjunction with the audited consolidated financial
statements of TWE for the year ended December 31, 1994.
2. TWE-ADVANCE/NEWHOUSE PARTNERSHIP
On April 1, 1995, TWE formed a cable television joint venture with
subsidiaries of Advance Publications, Inc. and Newhouse Broadcasting
Corporation ("Advance/Newhouse") to which Advance/Newhouse and TWE contri-
buted cable television systems (or interests therein) serving approximately
4.5 million subscribers, as well as certain foreign cable investments and
programming investments. TWE owns a two-thirds equity interest in
the TWE-Advance/Newhouse Partnership and is the managing partner.
Advance/Newhouse owns a one-third equity interest in the
partnership. In accordance with the partnership agreement, Advance/
Newhouse can require TWE to purchase its equity interest for fair
market value at specified intervals following the death of both of its
principal shareholders. Beginning in the third year, either partner can
initiate a dissolution in which TWE would receive two-thirds and
Advance/Newhouse would receive one-third of the partnership's net assets.
The assets contributed by TWE and Advance/Newhouse to the partnership
were recorded at their predecessor's historical cost. No gain was
recognized by TWE upon the capitalization of the partnership.
3. SIX FLAGS
In April 1995, TWE agreed to sell 51% of its interest in Six Flags
Entertainment Corporation ("Six Flags") to an investment group led by
Boston Ventures for $204 million and the receipt of approximately $670
million in additional proceeds from Six Flags, principally representing
payment of certain intercompany indebtedness and licensing fees. TWE will
recognize a gain upon the closing of the transaction. TWE will deconsolidate
the assets, liabilities and operating results of Six Flags, including
approximately $126 million of third-party indebtedness, and account for
its remaining 49% interest under the equity method of accounting.
As a result of this transaction, TWE will reduce debt by approximately
$850 million, after related taxes and fees. The transaction is expected
to close during the second quarter of 1995 and is subject to customary
closing conditions.
4. INVENTORIES
Inventories consist of:
March 31, 1995 December 31, 1994
Current Noncurrent Current Noncurrent
(millions)
Film costs:
Released, less amortization $ 525 $ 364 $ 585 $ 347
Completed and not released 94 17 123 24
In process and other 33 322 18 361
Library, less amortization - 756 - 769
Programming costs, less amortization 184 293 149 306
Merchandise 88 - 81 -
Total $ 924 $1,752 $ 956 $1,807
5. LONG-TERM DEBT
Long-term debt consists of:
March 31, December 31,
1995 1994
(millions)
Bank credit agreement, weighted average interest
rates of 6.8% and 6.5% $2,450 $2,550
Commercial paper, weighted average interest rates of
6.5% and 6.2% 748 649
Publicly held notes and debentures 3,906 3,903
Other 58 58
Total $7,162 $7,160
Each Time Warner General Partner has guaranteed a pro rata portion of
substantially all of TWE's debt and accrued interest thereon based on the
relative fair value of the net assets each General Partner contributed to
TWE. Such indebtedness is recourse to each Time Warner General Partner only
to the extent of its guarantee.
In connection with the formation of the TWE-Advance/Newhouse Partnership
and Time Warner's other cable acquisitions, a new bank credit facility is
expected to be obtained. For a discussion of the status of the negotiations
to secure such bank financing, see "Financial Condition and Liquidity"
elsewhere herein.
6. PARTNERS' CAPITAL
Changes in partners' capital were as follows:
Three Months
Ended March 31,
1995 1994
(millions)
Balance at beginning of year $6,233 $6,000
Net income 4 48
Distributions (71) (61)
Reduction of stock option distribution liability - 113
Allocation of income to General Partners'
senior capital (33) (31)
Collections on note receivable from U S WEST 150 -
Other (4) 6
Balance at March 31 $6,279 $6,075
Since September 1993, certain assets formerly owned and operated by TWE
have been owned and operated by other partnerships ("Time Warner Service
Partnerships") in order to ensure compliance with the Modification of Final
Judgment entered on August 24, 1982 by the United States District Court for
the District of Columbia applicable to U S WEST and its affiliated companies,
which may have included TWE. The Time Warner Service Partnerships make
certain of their assets and related services available to TWE and TWE is
required to make quarterly cash distributions of $12.5 million to the Time
Warner General Partners, which the partners in turn are required to contribute
to the Time Warner Service Partnerships. If TWE is clearly not prohibited
from owning or operating the assets of the Time Warner Service Partnerships,
they will be recontributed to TWE on September 15, 1995 (or September 15,
1997 in the case of certain assets), or earlier under certain circumstances,
at their then fair market value in exchange for partnership interests in TWE.
As a result of a judicial order issued to U S WEST in 1994, TWE is
no longer prohibited from owning or operating substantially all of
the assets of the Time Warner Service Partnerships.
In addition to Time Warner Service Partnership distributions, TWE also is
required to make distributions to reimburse the partners for income taxes at
statutory rates based on their allocable share of taxable income, and to
reimburse Time Warner for its stock options granted to employees of TWE based
on the amount by which the market price of Time Warner common stock exceeds
the option exercise price on the exercise date. TWE accrues a stock
option distribution and a corresponding liability with respect to unexercised
options when the market price of Time Warner common stock increases during
the accounting period, and reverses previously-accrued stock option
distributions and the corresponding liability when the market price of Time
Warner common stock declines.
During the three months ended March 31, 1995, TWE accrued $13 million of
Time Warner Service Partnership distributions, $8 million of tax-related
distributions and $50 million of stock option distributions, based on closing
prices of Time Warner common stock of $37.625 at March 31, 1995 and $35.125
at December 31, 1994. During the three months ended March 31, 1994, TWE
accrued $13 million of Time Warner Service Partnership distributions and $48
million of tax distributions, and reversed $113 million of previously-accrued
stock option distributions as a result of a decline in the market price of
Time Warner common stock.
7. SEGMENT INFORMATION
Information as to the operations of TWE in different business segments
is as set forth below:
Three Months
Ended March 31,
1995 1994
Revenues (millions)
Filmed Entertainment $ 1,206 $1,081
Broadcasting-The WB Network 3 -
Programming - HBO 385 358
Cable 557 549
Intersegment elimination (105) (69)
Total $ 2,046 $1,919
Three Months
Ended March 31,
1995 1994
Operating Income (millions)
Filmed Entertainment $ 65 $ 61
Broadcasting-The WB Network (21) -
Programming - HBO 67 57
Cable 80 85
Total $ 191 $ 203
Three Months
Ended March 31,
1995 1994
Depreciation of Property, Plant and Equipment (millions)
Filmed Entertainment $ 21 $ 16
Broadcasting-The WB Network - -
Programming-HBO 4 3
Cable 88 83
Total $ 113 $ 102
Three Months
Ended March 31,
1995 1994
Amortization of Intangible Assets (1) (millions)
Filmed Entertainment $ 37 $ 34
Broadcasting-The WB Network - -
Programming-HBO - 1
Cable 76 76
Total $ 113 $ 111
_______________
(1) Amortization includes amortization relating to the acquisitions of
Warner Communications Inc. ("WCI") in 1989 and the American Television
and Communications Corporation ("ATC") minority interest in 1992 and to
other business combinations accounted for by the purchase method.
8. COMMITMENTS AND CONTINGENCIES
Minimum commitments and guarantees under certain programming,
licensing, franchise and other agreements at March 31, 1995 aggregated
approximately $4.4 billion, which are payable principally over a five-year
period.
Pending legal proceedings are substantially limited to litigation
incidental to the businesses of TWE. In the opinion of counsel and
management, the ultimate resolution of these matters will not have a
material effect on the consolidated financial statements.
9. ADDITIONAL FINANCIAL INFORMATION
Additional financial information is as follows:
Three Months
Ended March 31,
1995 1994
(millions)
Interest expense $150 $135
Cash payments made for interest 168 143
Cash payments made for income taxes (net) 15 13
Borrowings 106 244
Repayments 102 227
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
TWE had revenues of $2.046 billion and net income of $4 million for the
three months ended March 31, 1995, compared to revenues of $1.919 billion and
net income of $48 million for the three months ended March 31, 1994.
Operating income and EBITDA for TWE for the three months ended March 31,
1995 and 1994 is as follows:
Three Months Ended March 31,
Operating Income EBITDA
1995 1994 1995 1994
(millions)
Filmed Entertainment $ 65 $ 61 $123 $111
Broadcasting-The WB Network (21) - (21) -
Programming - HBO 67 57 71 61
Cable 80 85 244 244
Total $191 $203 $417 $416
As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $11 million and $4 million
in the three months ended March 31, 1995 and 1994, respectively, have been
provided in respect of the operations of TWE's domestic and foreign
subsidiary corporations.
Certain factors affecting comparative operating results are discussed
below on a business segment basis. That discussion includes, among other
factors, an analysis of changes in the operating income of the business
segments before depreciation and amortization ("EBITDA") in order to eliminate
the effect on the operating performance of the filmed entertainment and
cable businesses of significant amounts of amortization of intangible
assets recognized in Time Warner's $14 billion acquisition of WCI in 1989,
the $1.3 billion acquisition of the ATC minority interest in 1992 and
other business combinations accounted for by the purchase method. Financial
analysts generally consider EBITDA to be an important measure of comparative
operating performance for the businesses of TWE, and when used in
comparison to debt levels or the coverage of interest expense, as a measure
of liquidity. However, EBITDA should be considered in addition to, not as a
substitute for, operating income, net income, cash flow and other measures
of financial performance and liquidity reported in accordance with generally
accepted accounting principles.
FILMED ENTERTAINMENT. Revenues increased to $1.206 billion, compared to
$1.081 billion in the first quarter of 1994. Operating income increased to
$65 million from $61 million. Depreciation and amortization, including
amortization related to the purchase of WCI, amounted to $58 million in the
first quarter of 1995 and $50 million in the first quarter of 1994. EBITDA
increased to $123 million from $111 million. Revenues benefited from increases
in international theatrical, international home video and worldwide television
distribution operations. Operating income and EBITDA margins were affected
by lower domestic theatrical results compared to the first quarter of 1994.
BROADCASTING-THE WB NETWORK. The WB Network was launched on January 11,
1995, and generated $21 million of operating losses on $3 million of revenues
in the first quarter of 1995. Due to the start-up nature of this new national
broadcast operation, losses are expected to continue.
PROGRAMMING-HBO. Revenues were $385 million, compared to $358 million in
the first quarter of 1994. Operating income increased to $67 million from
$57 million. Depreciation and amortization amounted to $4 million in each
of the first quarter of 1995 and 1994. EBITDA increased to $71 million from
$61 million. Revenues benefited primarily from increases in cable and direct
broadcast satellite subscribers, as well as from higher pay-TV rates.
Operating income and EBITDA improved principally as a result of the revenue
gains.
CABLE. Revenues increased to $557 million, compared to $549 million
in the first quarter of 1994. Operating income decreased to $80 million
from $85 million. Depreciation and amortization, including amortization
related to the purchase of WCI and the acquisition of the ATC minority
interest, amounted to $164 million in the first quarter of 1995 and $159
million in the first quarter of 1994. EBITDA amounted to $244 million
in each of the first quarters of 1995 and 1994. Revenues benefited from an
increase in basic cable subscribers and nonregulated revenues, including
pay-TV and advertising. Operating income decreased and EBITDA was flat as
a result of the impact of the second round of cable rate regulations
that went into effect in July 1994, higher start-up costs for
telephony operations and, with respect to operating income only,
higher depreciation and amortization relating to increased capital spending.
INTEREST AND OTHER, NET. Interest and other, net, increased to
$161 million, compared to $136 million in the first quarter of 1994.
Interest expense increased to $150 million compared to $135 million,
principally as a result of higher floating-rates of interest paid
on borrowings under TWE's bank credit agreement. There was other expense,
net, of $11 million in the first quarter of 1995, compared to other expense,
net, of $1 million in 1994, principally because of a decrease in
investment-related income.
FINANCIAL CONDITION AND LIQUIDITY
March 31, 1995
The financial condition of TWE remained essentially unchanged from
December 31, 1994, but is expected to be significantly affected by the
formation of the TWE-Advance/Newhouse Partnership, the Six Flags transaction
and the other cable transactions agreed to by Time Warner that have closed
or are expected to close during 1995. TWE had $7.2 billion of long-term debt
and $1.7 billion of Time Warner General Partners' senior capital at March 31,
1995 and December 31, 1994. TWE had $6.3 billion of partners' capital (net
of the $621 million uncollected portion of the note receivable from U S WEST)
at March 31, 1995, compared to $6.2 billion of partners' capital at
December 31, 1994. Cash and equivalents were $1.3 billion at March 31, 1995,
compared to $1.1 billion at December 31, 1994, reducing the debt-net-of-cash
amounts to $5.9 billion and $6.1 billion, respectively.
During 1995, TWE and Time Warner took steps towards achieving certain
of their financial and operational objectives, principally relating to
the expansion of their reach in cable television, the negotiation of a new
bank credit facility and their plan to reduce debt with funds raised from
the sale of non-core assets, such as Six Flags. TWE formed the
TWE-Advance/Newhouse Partnership in April 1995 and, together with Time
Warner's completion of its previously-announced acquisition of Summit
Communications Group, Inc. in May 1995, the total number of cable
subscribers under the management of Time Warner Cable has increased to
approximately 9.3 million, compared to 7.5 million at the end of 1994.
Such amount is expected to increase further, to approximately 11.5 million,
after the consummation of Time Warner's acquisitions of KBLCOM Incorporated
and Cablevision Industries Corporation and related companies, which
are expected to close during the second half of 1995.
As a result of the cable transactions, a new bank credit facility is
expected to be obtained for TWE, the TWE-Advance/Newhouse Partnership and
for the newly-created cable division of Time Warner ("TWI Cable") in order
to refinance or repay approximately $5 billion of acquired and existing
indebtedness, and to finance the ongoing working capital, capital
expenditures and other corporate needs of each respective entity. TWE
and Time Warner are currently in negotiations with an administrative
agent for a bank syndicate to secure such financing in the form of one
overall, five-year revolving credit facility (the "New Credit Agreement").
A preliminary term sheet for the New Credit Agreement provides for
borrowings in the aggregate amount of $9 billion for TWE, TWI Cable and the
TWE-Advance/Newhouse Partnership. The aggregate availability for each
borrower is expected to be limited in amount to $4 billion of borrowings
for TWI Cable, $5 billion of borrowings for the TWE-Advance/Newhouse
Partnership and $9 billion of borrowings for TWE, subject to certain
adjustments. The preliminary term sheet provides for borrowings under the
facility to bear interest at separate rates for each borrower, generally
equal to LIBOR plus a margin ranging from 50 to 87.5 basis points based on
the respective credit rating or financial leverage of such borrower.
The New Credit Agreement is expected to contain certain covenants for
each borrower relating to, among other things, additional indebtedness; liens
on assets, cash flow coverage and leverage ratios; and loans, advances,
distributions or other cash payments or transfers of assets from TWE and the
TWE-Advance/Newhouse Partnership to their partners or affiliates.
TWE continues to pursue its plan to enhance its financial position
through sales of non-core assets. With TWE's agreement to sell 51% of its
interest in Six Flags to an investment group led by Boston Ventures, TWE will
reduce debt by approximately $850 million, after related taxes and fees,
when the Six Flags transaction closes, which is expected to occur during
the second quarter of 1995. The closing of the Six Flags transaction is
subject to customary closing conditions.
In the first quarter of 1995, cash provided by TWE's operations amounted
to $346 million and reflected $417 million of EBITDA from the Filmed
Entertainment, Broadcasting-The WB Network, Programming-HBO and Cable
businesses and a reduction in working capital requirements, less $168 million
of interest payments, $15 million of income taxes and $15 million of corporate
expenses. Cash provided by operations of $342 million in the first quarter of
1994 reflected $416 million of business segment EBITDA and a reduction in
working capital requirements, less $143 million of interest payments, $13
million of income taxes and $15 million of corporate expenses. Capital
expenditures increased to $270 million in the first quarter of 1995, compared
to $239 million in the first quarter of 1994. Capital spending by Time
Warner Cable amounted to $192 million in the first quarter of 1995, compared
to $108 million in the first quarter of 1994, and was financed in part through
$150 million of collections on the note receivable from U S WEST. Cable
capital expenditures are budgeted to exceed $800 million for the remainder
of 1995, and are expected to be partially financed by an incremental $400
million of collections on the note receivable from U S WEST. Because
management believes that the conversion from coaxial to fiber-optic
cable is essential to achieving long-term growth in revenue from
telephony and unregulated cable services, significant cable capital
expenditures also are expected in subsequent years and will be timed to
match the rate at which demand for the new services develops.
Warner Bros.' backlog, representing the amount of future revenue not yet
recorded from cash contracts for the licensing of films for pay and basic
cable, network and syndicated television exhibition amounted to $918 million
at March 31, 1995 compared to $852 million at December 31, 1994 (including
amounts relating to HBO of $154 million at March 31, 1995 and $175 million
at December 31, 1994). The backlog excludes advertising barter contracts.
Management believes that TWE's 1995 operating cash flow, cash and
equivalents, collections on the note receivable from U S WEST and additional
borrowing capacity are and will continue to be sufficient to meet its capital
and liquidity needs.
Based on the level of interest rates prevailing at March 31, 1995, the
fair value of TWE's long-term debt was $236 million less than its carrying
value. Based on the level of interest rates prevailing at December 31, 1994,
the fair value of TWE's long-term debt was $460 million less than its
carrying value. Accounting recognition is not given to unrealized gains or
losses on debt unless the debt is retired prior to its maturity.
Foreign exchange contracts are used primarily to hedge the risk that
unremitted or future license fees owed to TWE domestic companies for the sale
or anticipated sale of U.S. copyrighted products abroad may be adversely
affected by changes in exchange rates. TWE is reimbursed by or reimburses
Time Warner for Time Warner contract gains and losses related to TWE's
exposure. At March 31, 1995, Time Warner had contracts for the sale of $564
million and the purchase of $120 million of foreign currencies at fixed rates
and maturities of three months or less. Of Time Warner's $444 million net sale
contract position, $166 million related to TWE's exposure, primarily Japanese
yen (35% of net contract position related to TWE), French francs (21%),
German marks (10%) and Canadian dollars (15%), compared to a net sale contract
position of $188 million of foreign currencies at December 31, 1994.
Unrealized gains or losses are recorded in income; accordingly, the
carrying value of foreign exchange contracts approximates market value.
TWE had $12 million of net losses on foreign exchange contracts during the
first quarter of 1995, which were or are expected to be offset by corresponding
increases in the dollar value of foreign currency license fee payments
that have been or are anticipated to be received from the sale of U.S.
copyrighted products abroad. Time Warner places foreign currency
contracts with a number of major financial institutions in order to
minimize credit risk.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the litigation entitled SAMUEL D. MOORE, et al. v.
SONY MUSIC ENTERTAINMENT GROUP, et al. described on pages I-43 and I-44 of
Time Warner's Annual Report on Form 10-K for the year ended December 31,
1994. On April 19, 1995, the U.S. District Court for the Northern District
of Georgia granted the record company defendants' motion with respect to
the New York federal action and enjoined the plaintiffs from proceeding
any further with such action. On April 30, 1995, the U.S. District Court
for the Southern District of New York directed that the New York federal
action be transferred to the Northern District of Georgia in order that
the Georgia court may determine whether the claims asserted in the
New York action should be dismissed or pursued in the Georgia court.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as a part of this report and such Exhibit Index
is incorporated herein by reference.
(b) Reports on Form 8-K.
Time Warner filed a report on Form 8-K dated January 26, 1995 reporting
in Item 5 that it had agreed to acquire KBLCOM Incorporated ("KBLCOM"), a
subsidiary of Houston Industries Incorporated, that owns cable television
systems serving approximately 690,000 subscribers and a 50% interest in
Paragon Communications, which serves an additional 967,000 cable subscribers,
for one million shares of Time Warner Common Stock, 11 million shares of new
Time Warner Series D Convertible Preferred Stock and the assumption of
approximately $1.24 billion of indebtedness.
Time Warner also filed a report on Form 8-K dated February 6, 1995
reporting in Item 5 that it had agreed to acquire Cablevision Industries
Corporation ("CVI") and related companies that own cable television systems
serving approximately 1.3 million subscribers for 2.5 million shares of Time
Warner Common Stock, 6.5 million shares of two new series of Time Warner
convertible preferred stocks and the assumption of approximately $2 billion of
debt of CVI and related companies.
The KBLCOM and CVI transactions are expected to close in the second
half of 1995 and are subject to customary conditions, including the receipt
of certain franchise and regulatory approvals.
TIME WARNER INC.
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.
Time Warner Inc.
(Registrant)
By: /s/ Richard J. Bressler
Name: Richard J. Bressler
Title: Senior Vice President and
Chief Financial Officer
Dated: May 15, 1995
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Exhibit No. Description of Exhibit
10.1 Agreement and Plan of Merger dated as of January 26, 1995,
among KBLCOM Incorporated, Houston Industries Incorporated,
Time Warner and TW KBLCOM Acquisition Sub (which is incorporated
herein by reference to Exhibit 2(a) to Time Warner's Current
Report on Form 8-K dated January 26, 1995).
10.2 Agreement and Plan of Merger dated as of February 6, 1995,
among Cablevision Industries Corporation, Alan Gerry, Time Warner
and TW CVI Acquisition Sub (which is incorporated herein by
reference to Exhibit 2(a) to Time Warner's Current Report on
Form 8-K dated February 6, 1995 (the "February Form 8-K")).
10.3 Agreement and Plan of Merger dated as of February 6, 1995,
among Cablevision Properties, Inc., Alan Gerry and Time Warner
(which is incorporated herein by reference to Exhibit 2(b) to
the February Form 8-K).
10.4 Agreement and Plan of Merger dated as of February 6, 1995,
among Cablevision Management Corporation of Philadelphia,
Alan Gerry and Time Warner (which is incorporated herein by
reference to Exhibit 2(c) to the February Form 8-K).
10.5 Purchase Agreement dated as of February 6, 1995, among
Alan Gerry, Cablevision Industries of Delaware, Inc.,
ARA Cablevision Inc., Cablevision Industries Limited Partnership,
Cablevision Industries of Tennessee L.P., Cablevision Industries
of Saratoga Associates, Cablevision of Fairhaven/Acushnet,
Cablevision Industries of Middle Florida, Inc., Cablevision
Industries of Florida, Inc. and Time Warner (which is incorporated
herein by reference to Exhibit 2(d) to the February Form 8-K).
10.6 Supplemental Agreement dated as of February 6, 1995, including
Annex A thereto, among Cablevision Industries Corporation,
Cablevision Industries of Delaware, Inc., ARA Cablevision Inc.,
Cablevision Industries Limited Partnership, Cablevision Industries
of Tennessee L.P., Cable Industries of Saratoga Associates,
Cablevision of Fairhaven/Acushnet, Cablevision Industries of
Middle Florida, Inc., Cablevision Industries of Florida, Inc.,
Alan Gerry, Time Warner and TW CVI Acquisition Sub (which is
incorporated herein by reference to Exhibit 2(e) to the February
Form 8-K).
27 Financial Data Schedule.
99.1 Summarized financial information of the Time Warner Service
Partnerships.
99.2 Summarized financial information of Paragon Communications.