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
June 30, 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 386,174,888
Description of Class Shares Outstanding
as of July 31, 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 June 30, 1995
and December 31, 1994 1 23
Consolidated statements of operations for the three
and six months ended June 30, 1995 and 1994 2 24
Consolidated statements of cash flows for the six
months ended June 30, 1995 and 1994 3 25
Notes to consolidated financial statements 4 26
Management's discussion and analysis of results
of operations and financial condition 13 32
Summarized financial information of the Time Warner Service
Partnerships and Paragon Communications set forth at pages 16
and 17, respectively, in the Quarterly Report on Form 10-Q for
the quarter ended June 30, 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 38
PART I. FINANCIAL INFORMATION
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
1995 1994
(millions, except
per share amounts)
ASSETS
Current assets
Cash and equivalents $ 597 $ 282
Receivables, less allowances of $738 and $768 1,295 1,439
Inventories 444 370
Prepaid expenses 831 726
Total current assets 3,167 2,817
Investments in and amounts due to and from
Entertainment Group 5,471 5,350
Investments, other 1,487 1,555
Music catalogues, contracts and copyrights 1,196 1,207
Goodwill 4,837 4,630
Cable television franchises 405 -
Other assets, primarily property, plant
and equipment 1,225 1,157
Total assets $17,788 $16,716
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties payable $ 1,277 $ 1,379
Debt due within one year 341 355
Other current liabilities 1,327 1,238
Total current liabilities 2,945 2,972
Long-term debt 9,593 8,839
Deferred income taxes 2,696 2,700
Unearned portion of paid subscriptions 636 631
Other liabilities 439 426
Shareholders' equity
Preferred stock, $1 par value, 3.7 million
and 962 thousand shares outstanding,
$394 million and $140 million liquidation
preference 4 1
Common stock, $1 par value, 384.2 million
and 379.3 million shares outstanding
(excluding 45.7 million treasury shares) 384 379
Paid-in capital 3,010 2,588
Unrealized gains on certain marketable securities 134 130
Accumulated deficit (2,053) (1,950)
Total shareholders' equity 1,479 1,148
Total liabilities and shareholders' equity $17,788 $16,716
See accompanying notes.
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(millions, except per share amounts)
Revenues (a) $1,907 $1,667 $3,724 $3,225
Cost of revenues (a)(b) 1,019 906 2,122 1,798
Selling, general and administrative (a)(b) 704 591 1,280 1,145
Operating expenses 1,723 1,497 3,402 2,943
Business segment operating income 184 170 322 282
Equity in pretax income of Entertainment
Group (a) 84 66 106 111
Interest and other, net (a) (201) (179) (356) (337)
Corporate expenses (a) (19) (19) (39) (37)
Income before income taxes 48 38 33 19
Income taxes (56) (58) (88) (90)
Net loss (8) (20) (55) (71)
Preferred dividend requirements (5) (3) (8) (6)
Net loss applicable to common shares $(13) $(23) $(63) $(77)
Net loss per common share $(0.03) $(0.06) $(0.17) $(0.20)
Average common shares 381.4 378.8 380.5 378.7
__________________
(a) Includes the following income (expenses) resulting from
transactions with the Entertainment Group and other related
companies for the three and six months ended June 30, 1995,
respectively, and for the corresponding periods in the prior year:
revenues of $49 million and $94 million in 1995, and $53 million
and $92 million in 1994; cost of revenues of $(25) million and
$(49) million in 1995, and $(25) million and $(46) million in 1994;
selling, general and administrative of $16 million and $29 million
in 1995, and $7 million and $19 million in 1994; equity in pretax
income of Entertainment Group of $(26) and $(60) in 1995, and $(26)
million and $(64) million in 1994; interest and other, net of $(5)
and $1 in 1995, and $4 million and $15 million in 1994; and
corporate expenses of $15 million and $30 million in both 1995 and
1994.
(b) Includes depreciation and amortization
expense of: $ 119 $ 105 $ 231 $ 210
See accompanying notes.
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
1995 1994
(millions)
OPERATIONS
Net loss $ (55) $ (71)
Adjustments for noncash and nonoperating items:
Depreciation and amortization 231 210
Noncash interest expense 116 107
Equity in pretax income of Entertainment Group,
net of distributions (101) (109)
Changes in operating assets and liabilitie (290) 106
Cash provided (used) by operations (99) 243
INVESTING ACTIVITIES
Investments and acquisitions (228) (67)
Capital expenditures (97) (95)
Investment proceeds 294 111
Cash used by investing activities (31) (51)
FINANCING ACTIVITIES
Borrowings 650 318
Debt repayments (166) (372)
Dividends paid (73) (69)
Other 34 23
Cash provided (used) by financing activities 445 (100)
INCREASE IN CASH AND EQUIVALENTS 315 92
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 282 200
CASH AND EQUIVALENTS AT END OF PERIOD $ 597 $ 292
See accompanying notes.
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
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.
Intangible Assets
Intangible assets are recorded when the cost of acquired
companies exceeds the fair value of their tangible assets.
Intangible assets are amortized over periods up to forty years
using the straight-line method. Time Warner separately reviews
the carrying value of intangible assets for each acquired
entity on a quarterly basis to determine whether an impairment
may exist. Time Warner considers relevant cash flow and
profitability information, including estimated future operating
results, trends and other available information, in assessing
whether the carrying value of intangible assets can be
recovered. Upon a determination that the carrying value of
intangible assets will not be recovered from the undiscounted
future cash flows of the acquired business, the carrying value
of such intangible assets would be considered impaired and will
be reduced by a charge to operations in the amount of the
impairment. Impairment is measured as any deficiency in
estimated undiscounted future cash flows of the acquired
business to recover the carrying value related to the
intangible assets.
In March 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets to Be
Disposed Of," ("FAS 121") effective for fiscal years beginning
after December 15, 1995. The new rules establish standards for
the recognition and measurement of impairment losses on long-
lived assets and certain identifiable intangible assets,
including goodwill. Time Warner expects that the adoption of
FAS 121 will not have a material effect on its financial
statements.
Interest Rate Swap Contracts
Interest rate swap contracts are used to adjust the
proportion of total debt that is subject to variable and fixed
interest rates. Under interest rate swap contracts, the Company
either agrees to pay an amount equal to a specified floating
rate of interest times a notional principal amount, and to
receive in return an amount equal to a specified fixed rate of
interest times the same notional principal amount or, vice
versa, to receive a floating rate amount and to pay a fixed
rate amount. The notional amounts of the contracts are not
exchanged. No other cash payments are made unless the contract
is terminated prior to maturity, in which case the amount paid
or received in settlement is established by agreement at the
time of termination, and usually represents the net present
value, at current rates of interest, of the remaining
obligations to exchange payments under the terms of the
contract. Interest rate swap contracts are entered into with a
number of major financial institutions in order to minimize
credit risk.
The net amounts paid or payable, or received or receivable,
through the end of the accounting period are included in
interest expense. Because interest rate swap contracts are
used to modify the interest characteristics of Time Warner's
outstanding debt from a fixed to a floating rate basis or, vice
versa, unrealized gains or losses on interest rate swap
contracts are not recognized unless the contracts are
terminated prior to their maturity. Gains or losses on the
termination of contracts are deferred and amortized to income
over the remaining average life of the terminated contracts.
2. ENTERTAINMENT GROUP
Time Warner's investment in and amounts due to and from the
Entertainment Group at June 30, 1995 and December 31, 1994
consists of the following:
June 30, December 31,
1995 1994
(millions)
Investment in TWE $ 5,069 $ 5,284
Income tax and stock option related
distributions due from TWE 709 423
Credit agreement debt due to TWE (400) (400)
Other liabilities due to TWE, principally
related to home video distribution (234) (266)
Investment in and amounts due to and from TWE 5,144 5,041
Investment in other Entertainment Group companies 327 309
Total $5,471 $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. Certain 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 $60 million and $104 million in the six months ended
June 30, 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
June 30, 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, which reflects the consolidation by TWE of
the TWE-Advance/Newhouse Partnership effective as of April 1,
1995.
TIME WARNER ENTERTAINMENT GROUP
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(millions)
Operating Statement Information
Revenues $2,435 $2,063 $4,508 $3,990
Depreciation and amortization 283 242 513 458
Business segment operating income 274 231 475 437
Interest and other, net 175 150 339 296
Income before income taxes 84 66 106 111
Net income 59 54 70 95
Six Months
Ended June 30,
1995 1994
(millions)
Cash Flow Information
Cash provided by operations $ 697 $ 707
Capital expenditures (704) (504)
Investments and acquisitions (83) (78)
Investment proceeds 962 40
Loan to Time Warner - (250)
Increase (decrease) in debt (2) 28
Collections on note receivable from U S WEST 243 68
Capital distributions (5) (2)
Increase in cash and equivalents 1,192 8
June 30, December 31,
1995 1994
(millions)
Balance Sheet Information
Cash and equivalents $2,263 $1,071
Total current assets 4,773 3,571
Total assets 19,620 18,992
Total current liabilities 3,275 2,953
Long-term debt 7,037 7,160
Time Warner General Partners' senior capital 1,730 1,663
TWE partners' capital 6,154 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 June 30, 1995 and
December 31, 1994, the Time Warner General Partners had
recorded $490 million and $334 million, respectively, of tax-
related distributions due from TWE, and $219 million and $89
million, respectively, of stock option related distributions
due from TWE, based on closing prices of Time Warner common
stock of $41.25 and $35.125, respectively. Time Warner is paid
when the options are exercised. In July 1995, the Time Warner
General Partners received $490 million of accrued tax-related
distributions from TWE.
On June 23, 1995, TWE sold 51% of its interest in Six Flags
Entertainment Corporation ("Six Flags") to an investment group
led by Boston Ventures for $204 million and received $640
million in additional proceeds from Six Flags, representing
payment of certain intercompany indebtedness and licensing
fees. As a result of the transaction, TWE expects a cumulative
debt reduction of approximately $850 million, after the payment
of related taxes and fees and the deconsolidation of
approximately $128 million of third-party, zero-coupon indebtedness
of Six Flags due in 1999. The deconsolidation of such indebtedness
is reflected in TWE's balance sheet as of June 30, 1995, and
the remaining debt reduction is expected to occur
in the third quarter of 1995. TWE deferred approximately $140
million of income on the transaction principally as a result of
its guarantee of such debt. TWE will account for its remaining 49%
interest in Six Flags under the equity method of accounting.
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") with
an aggregate liquidation value of approximately $330 million,
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. The acquisition was
accounted for by the purchase method of accounting for business
combinations; accordingly, the cost to acquire Summit of
approximately $383 million, including $330 million aggregate
liquidation value of Series C preferred stock, was
preliminarily allocated to the assets acquired in the amount of
$711 million and to the liabilities assumed in the amount of
$328 million, in proportion to estimates of their respective
fair values.
On April 1, 1995, TWE formed a cable television joint venture
with the Advance/Newhouse Partnership ("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. TWE consolidates the partnership and the one-third
equity interest owned by Advance/Newhouse is reflected in TWE's
balance sheet as minority interest. 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.
Subsequent to June 30, 1995, Time Warner acquired KBLCOM
Incorporated ("KBLCOM"), which owns cable television systems
serving approximately 700,000 subscribers and a 50% interest in
Paragon Communications ("Paragon"), which owns cable television
systems serving an additional 972,000 subscribers. The other
50% interest in Paragon is already owned by TWE. To acquire
KBLCOM, Time Warner issued 1 million shares of common stock and
11 million shares of a new convertible preferred stock ("Series
D preferred stock") and assumed or incurred approximately $1.2
billion of indebtedness. The Series D preferred stock is
convertible into approximately 22.9 million shares of Time
Warner common stock at an effective price of $48 of liquidation
value per common share.
Time Warner's previously-announced acquisition of Cablevision
Industries Corporation ("CVI") and related companies is
expected to close during the fourth quarter of 1995.
4. LONG-TERM DEBT
On June 30, 1995, a wholly owned subsidiary of Time Warner
("TWI Cable"), TWE and the TWE-Advance/Newhouse Partnership
executed a five-year revolving credit facility (the "New Credit
Agreement"). The New Credit Agreement enables such
entities to refinance certain indebtedness assumed from the
companies acquired or to be acquired in the cable acquisitions,
to refinance existing indebtedness of TWE and to finance the
ongoing working capital, capital expenditure and other
corporate needs of each borrower.
The New Credit Agreement permits borrowings in an aggregate
amount of up to $8.3 billion. Borrowings are limited to $4
billion in the case of TWI Cable, $5 billion in the case of the
TWE-Advance/Newhouse Partnership and $8.3 billion in the case
of TWE, subject in each case to certain limitations and
adjustments. Such borrowings will bear interest at specific
rates for each of the three borrowers, generally equal to LIBOR
plus a margin initially ranging from 50 to 87.5 basis points
based on the credit rating or financial leverage of the
applicable borrower. The New Credit Agreement contains 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 and
other cash payments or transfers of assets from the borrowers
to their respective partners or affiliates.
On July 6, 1995, TWI Cable borrowed approximately $1.2
billion under the New Credit Agreement to refinance certain
indebtedness assumed or incurred in the acquisition of KBLCOM.
On July 31, 1995, Time Warner announced the redemption on
August 15, 1995 of all of its $1.8 billion principal amount of
outstanding Redeemable Reset Notes due August 15, 2002 (the
"Reset Notes") in exchange for new securities. The Reset Notes
will be redeemed in exchange for approximately $457 million
aggregate principal amount of Floating Rate Notes due August
15, 2000, approximately $274 million aggregate principal amount
of 7.975% Notes due August 15, 2004, approximately $548 million
aggregate principal amount of 8.11% Debentures due August 15,
2006, and approximately $548 million aggregate principal amount
of 8.18% Debentures due August 15, 2007.
On August 10, 1995, Time Warner announced the partial
redemption on September 18, 1995 of $1 billion principal amount
of its 8.75% Convertible Subordinated Debentures due 2015 for
an aggregate redemption price of $1.06 billion, including
redemption premiums and accrued interest thereon. The
redemption is expected to be financed with approximately $500
million of proceeds raised from the issuance of 7.75% ten-year
notes in June 1995, $363 million of net proceeds to be raised from the
issuance of Company-obligated mandatorily redeemable preferred
securities of a subsidiary in August 1995 and available cash
and equivalents.
5. MANDATORILY REDEEMABLE PREFERRED SECURITIES
In August 1995, Time Warner will raise $363 million of net proceeds
through the issuance of approximately 12.1 million Company-obligated
mandatorily redeemable preferred securities of a subsidiary
("PERCS"), whose only assets will be an equivalent amount of
subordinated notes of Time Warner. Cumulative cash
distributions will be payable on the PERCS at an annual rate of
4%, or $1.24 per PERCS. The PERCS will be subject to mandatory
redemption on December 23, 1997, for an amount per PERCS equal
to the lesser of $54.41, and the then market value of a share
of common stock of Hasbro, Inc. ("Hasbro") payable in cash or,
at Time Warner's option, Hasbro common stock. Time Warner
currently has a 13.75% equity interest in Hasbro.
6. CAPITAL STOCK
Changes in shareholders' equity are as follows:
Six Months
Ended June 30,
1995 1994
(millions)
Balance at beginning of year $1,148 $1,370
Net loss (55) (71)
Common dividends declared (69) (64)
Preferred dividends declared (8) (6)
Issuance of common stock and preferred stock
in Summit acquisition 383 -
Unrealized gains (losses) on certain marketable
equity investments 4 (74)
Other 76 58
Balance at June 30 $1,479 $1,213
7. SEGMENT INFORMATION
Information as to the operations of Time Warner and the
Entertainment Group in different business segments is set forth
below. Cable business segment information reflects the
consolidation by TWE of the TWE-Advance/Newhouse Partnership
effective as of April 1, 1995.
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
Revenues (millions)
Time Warner:
Publishing $ 928 $ 851 $1,759 $1,602
Music 986 822 1,977 1,634
Intersegment elimination (7) (6) (12) (11)
Total $1,907 $1,667 $3,724 $3,225
Entertainment Group:
Filmed Entertainment $1,358 $1,216 $2,565 $2,299
Broadcasting - The WB Network 3 - 6 -
Programming - HBO 396 374 786 736
Cable 760 560 1,338 1,111
Intersegment elimination (82) (87) (187) (156)
Total $2,435 $2,063 $4,508 $3,990
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
Operating income (millions)
Time Warner:
Publishing $ 114 $ 106 $ 169 $ 156
Music 70 64 153 126
Total $ 184 $ 170 $ 322 $ 282
Entertainment Group:
Filmed Entertainment $ 90 $ 75 $ 155 $ 141
Broadcasting - The WB Network (12) - (33) -
Programming - HBO 70 62 137 118
Cable 126 94 216 178
Total $ 274 $ 231 $ 475 $ 437
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(millions)
Depreciation of Property, Plant and Equipment
Time Warner:
Publishing $ 15 $ 11 $ 28 $ 23
Music 24 20 47 39
Total $ 39 $ 31 $ 75 $ 62
Entertainment Group:
Filmed Entertainment $ 42 $ 34 $ 65 $ 51
Broadcasting - The WB Network - - - -
Programming - HBO 5 4 9 8
Cable 117 82 207 166
Total $ 164 $ 120 $ 281 $ 225
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(millions)
Amortization of Intangible Assets (1)
Time Warner:
Publishing $ 9 $ 8 $ 18 $ 16
Music 71 66 138 132
Total $ 80 $ 74 $ 156 $ 148
Entertainment Group:
Filmed Entertainment $ 43 $ 41 $ 80 $ 75
Broadcasting - The WB Network - - - -
Programming - HBO - 1 - 2
Cable 76 80 152 156
Total $ 119 $ 122 $ 232 $ 233
(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.
8. CONTINGENCIES
Pending legal proceedings are substantially limited to litigation
incidental to 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 consolidated financial statements of
Time Warner.
9. ADDITIONAL FINANCIAL INFORMATION
Additional financial information is as follows:
Six Months
Ended June 30,
1995 1994
(millions)
Interest expense $429 $374
Cash payments made for interest 289 246
Cash payments made for income taxes 141 135
Income tax refunds received 14 39
During the six months ended June 30, 1995 and 1994, Time Warner
realized $35 million and $210 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 $1.907 billion and a net loss of $8
million ($.03 per common share) for the three months ended June 30,
1995, compared to revenues of $1.667 billion and a net loss of $20
million ($.06 per common share) for the three months ended June 30,
1994. As discussed more fully below, the improvement in Time
Warner's net loss principally resulted from an overall increase in
operating income generated by Time Warner's business segments and
increased income from Time Warner's equity in the pretax income of
the Entertainment Group, offset in part by a decrease in
investment-related income and higher floating-rates of interest
paid on Time Warner's $2.9 billion notional amount of interest rate
swap contracts.
Revenues of $3.724 billion and a net loss of $55 million ($.17
per common share) were reported for the six months ended June 30,
1995, compared to revenues of $3.225 billion and a net loss of $71
million ($.20 per common share) for the six months ended June 30,
1994. As discussed more fully below, the improvement in Time
Warner's net loss principally resulted from an overall increase in
operating income generated by Time Warner's business segments and
an increase in investment-related income, offset in part by lower
income from Time Warner's equity in the pretax income of the
Entertainment Group and higher floating-rates of interest paid on
Time Warner's interest rate swap contracts.
Time Warner's equity in the pretax income of the Entertainment
Group was $84 million in the three months ended June 30, 1995,
compared to $66 million in the three months ended June 30, 1994,
and was $106 million in the six months ended June 30, 1995,
compared to $111 million in the six months ended June 30, 1994. As
discussed more fully below, the Entertainment Group's operating
results for the three and six month periods ended June 30, 1995
reflect an overall increase in operating income generated by its
business segments and gains on the sale of certain unclustered
cable systems, offset by higher floating-rates of interest paid on
borrowings under TWE's bank credit agreement and minority interest
expense related to the consolidation of the operating results of
the TWE-Advance/Newhouse Partnership effective as of April 1, 1995.
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.
EBITDA and operating income for Time Warner and the Entertainment
Group for the three and six months ended June 30, 1995 and 1994 is
as follows:
Three Months Ended June 30,
EBITDA Operating Income
1995 1994 1995 1994
(millions)
Time Warner:
Publishing $138 $125 $114 $106
Music 165 150 70 64
Total $303 $275 $184 $170
ENTERTAINMENT GROUP:
Filmed Entertainment $175 $150 $ 90 $ 75
Broadcasting - The WB Network (12) - (12) -
Programming - HBO 75 67 70 62
Cable 319 256 126 94
Total $557 $473 $274 $231
Six Months Ended June 30,
EBITDA Operating Income
1995 1994 1995 1994
(millions)
Time Warner:
Publishing $215 $195 $169 $156
Music 338 297 153 126
Total $553 $492 $322 $282
ENTERTAINMENT GROUP:
Filmed Entertainment $300 $267 $155 $141
Broadcasting - The WB Network (33) - (33) -
Programming - HBO 146 128 137 118
Cable 575 500 216 178
Total $988 $895 $475 $437
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
businesses 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.
Three Months Ended June 30, 1995 Compared to the Three Months Ended
June 30, 1994
Time Warner
PUBLISHING. Revenues increased to $928 million, compared to $851
million in the second quarter of 1994. EBITDA increased to $138
million from $125 million. Depreciation and amortization amounted
to $24 million in 1995 and $19 million in 1994. Operating income
increased to $114 million from $106 million. Revenues benefited
from increases in magazine circulation, advertising and book
revenues. Significant revenue gains were achieved by PEOPLE,
FORTUNE and book publisher Oxmoor House. EBITDA and operating
income 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 $986 million, compared to $822
million in the second quarter of 1994. EBITDA increased to $165
million from $150 million. Depreciation and amortization,
including amortization related to the purchase of WCI, amounted to
$95 million in 1995 and $86 million in 1994. Operating income
increased to $70 million from $64 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. As a result of
increases in Time Warner's ownership in certain direct marketing
and merchandising joint ventures, revenues also benefited from the
consolidation of the operating results of such companies which had
previously been accounted for under the equity method of
accounting. EBITDA and operating income benefited principally from
the revenue gains and interest income on the resolution of a
recorded music tax matter, offset in part by lower results from
direct marketing activities attributable to higher amortization of
member acquisition costs and expenses incurred in connection with
the settlement of certain employment contracts.
INTEREST AND OTHER, NET. Interest and other, net, increased to
$201 million in the second quarter of 1995, compared to $179
million in the second quarter of 1994. Interest expense increased
to $219 million, compared to $192 million, principally as a result
of higher floating-rates of interest paid on $2.9 billion notional
amount of interest rate swap contracts. Other income, net, of $18
million in the second quarter of 1995 increased from $13 million in
1994, principally because of the recognition in 1995 of interest
income on the resolution of a corporate tax matter, offset in part
by a decrease in investment-related income. Investment-related
income in 1994 benefited from gains on the sale of certain assets
which exceeded losses from reductions in the carrying value of
certain investments. Losses on foreign exchange contracts used to
hedge foreign exchange risk reduced investment-related income in
both periods.
Entertainment Group
FILMED ENTERTAINMENT. Revenues increased to $1.358 billion,
compared to $1.216 billion in the second quarter of 1994. EBITDA
increased to $175 million from $150 million. Depreciation and
amortization, including amortization related to the purchase of
WCI, amounted to $85 million in 1995 and $75 million in 1994.
Operating income increased to $90 million from $75 million.
Revenues benefited from increases in worldwide theatrical,
international home video and consumer products operations. Domestic
theatrical revenues in 1995 were led by the success of BATMAN
FOREVER. Revenues and operating results at Six Flags increased due
to higher attendance and in-park spending. EBITDA and operating
income benefited from the revenue gains and increased income from
licensing operations, offset in part by approximately one week less
of operating results of Six Flags in 1995 due to the sale of a 51%
interest in the theme park company on June 23, 1995.
BROADCASTING - THE WB NETWORK. The WB Network was launched in
January 1995, and generated $12 million of operating losses on $3
million of revenues in the second 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 $396 million, compared
to $374 million in the second quarter of 1994. EBITDA increased to
$75 million from $67 million. Depreciation and amortization
amounted to $5 million in each period. Operating income increased
to $70 million from $62 million. Revenues benefited primarily from
an increase in subscribers, as well as from higher pay-TV rates.
EBITDA and operating income improved principally as a result of the
revenue gains.
CABLE. Revenues increased to $760 million, compared to $560
million in the second quarter of 1994. EBITDA increased to $319
million from $256 million. Depreciation and amortization,
including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $193 million
in 1995 and $162 million in 1994. Operating income increased to
$126 million from $94 million. Revenues benefited from the
formation of the TWE-Advance/Newhouse Partnership in April 1995 and
increases in basic cable and direct broadcast satellite subscribers
and nonregulated revenues, including pay-TV and advertising.
EBITDA and operating income increased as a result of the revenue
gains and contributions from the TWE-Advance/Newhouse Partnership,
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
$175 million in the second quarter of 1995, compared to $150
million in the second quarter of 1994. Interest expense increased
to $148 million, compared to $139 million in the second quarter of
1994, principally as a result of higher floating-rates of interest
paid on borrowings under TWE's bank credit agreement. Other
expense, net, increased to $27 million in the second quarter of
1995 from $11 million in 1994, principally because of the inclusion
in 1995 of minority interest expense related to the TWE-
Advance/Newhouse Partnership, offset in part by gains on the sale
of certain unclustered cable systems.
Six Months Ended June 30, 1995 Compared to the Six Months Ended
June 30, 1994
Time Warner
PUBLISHING. Revenues increased to $1.759 billion, compared to
$1.602 billion in the first six months of 1994. EBITDA increased
to $215 million from $195 million. Depreciation and amortization
amounted to $46 million in 1995 and $39 million in 1994. Operating
income increased to $169 million from $156 million. Revenues
benefited from increases in magazine circulation, advertising and
book revenues. Significant revenue gains were achieved by PEOPLE,
SPORTS ILLUSTRATED, TIME, FORTUNE and book publisher Oxmoor House.
EBITDA and operating income 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 $1.977 billion, compared to $1.634
billion in the first six months of 1994. EBITDA increased to $338
million from $297 million. Depreciation and amortization, including
amortization related to the purchase of WCI, amounted to $185
million in 1995 and $171 million in 1994. Operating income
increased to $153 million from $126 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. As a result of
increases in Time Warner's ownership in certain direct marketing
and merchandising joint ventures, revenues also benefited from the
consolidation of the operating results of such companies which had
previously been accounted for under the equity method of
accounting. EBITDA and operating income benefited principally from
the revenue gains and interest income on the resolution of a
recorded music tax matter, offset in part by lower results from
direct marketing activities attributable to higher amortization of
member acquisition costs and expenses incurred in connection with
the settlement of certain employment contracts.
INTEREST AND OTHER, NET. Interest and other, net, increased to
$356 million in the first six months of 1995, compared to $337
million in the first six months of 1994. Interest expense
increased to $429 million from $374 million 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 $73
million in the first six months of 1995, compared to other income,
net, of $37 million in 1994, principally because of the recognition
in 1995 of interest income on the resolution of a corporate tax
matter and an increase in investment-related income. Investment-
related income in both periods benefited primarily from gains on
the sale of certain assets, including the sale of an interest in
QVC, Inc. in 1995, which exceeded losses from reductions in the
carrying value of certain investments taken in each period. The
increase in investment-related income in 1995 was offset in part by
higher losses on foreign exchange contracts used to hedge foreign
exchange risk.
Entertainment Group
FILMED ENTERTAINMENT. Revenues increased to $2.565 billion,
compared to $2.299 billion in the first six months of 1994. EBITDA
increased to $300 million from $267 million. Depreciation and
amortization, including amortization related to the purchase of
WCI, amounted to $145 million in 1995 and $126 million in 1994.
Operating income increased to $155 million from $141 million.
Revenues benefited from increases in worldwide theatrical,
international home video, consumer products and worldwide
television distribution operations. Lower domestic theatrical
revenues in the first quarter of 1995 were overcome by the second
quarter domestic box office performance of theatrical releases, led
by the success of BATMAN FOREVER. Revenues and operating results
at Six Flags increased due to higher attendance and in-park
spending. EBITDA and operating income benefited from the revenue
gains and increased income from licensing operations.
BROADCASTING - THE WB NETWORK. The WB Network was launched in
January 1995, and generated $33 million of operating losses on $6
million of revenues for the first six months of 1995. Due to the
start-up nature of this new national broadcast operation, losses
are expected to continue.
PROGRAMMING - HBO. Revenues increased to $786 million, compared
to $736 million in the first six months of 1994. EBITDA increased
to $146 million from $128 million. Depreciation and amortization
amounted to $9 million in 1995 and $10 million in 1994. Operating
income increased to $137 million from $118 million. Revenues
benefited primarily from an increase in subscribers, as well as
from higher pay-TV rates. EBITDA and operating income improved
principally as a result of the revenue gains.
CABLE. Revenues increased to $1.338 billion, compared to $1.111
billion in the first six months of 1994. EBITDA increased to $575
million from $500 million. Depreciation and amortization,
including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $359 million
in 1995 and $322 million in 1994. Operating income increased to
$216 million from $178 million. Revenues benefited from the
formation of the TWE-Advance/Newhouse Partnership in April 1995 and
increases in basic cable and direct broadcast satellite subscribers
and nonregulated revenues, including pay-TV and advertising.
EBITDA and operating income increased as a result of the revenue
gains and contributions from the TWE-Advance/Newhouse Partnership,
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
$339 million in the first six months of 1995, compared to $296
million in the first six months of 1994. Interest expense
increased to $299 million, compared with $276 million in the first
six months of 1994, principally as a result of higher floating-
rates of interest paid on borrowings under TWE's bank credit
agreement. Other expense, net, increased to $40 million in the
first six months of 1995 from $20 million in 1994, principally
because of the inclusion in 1995 of minority interest expense
related to the TWE-Advance/Newhouse Partnership, offset in part by
gains on the sale of certain unclustered cable systems.
FINANCIAL CONDITION AND LIQUIDITY
June 30, 1995
Time Warner
The financial condition of Time Warner changed moderately from
December 31, 1994, and is expected to be further affected by the
cable transactions, debt refinancings and asset sales that have
closed or are expected to close during the second half of 1995.
Time Warner had $9.9 billion of debt, $597 million of cash and
equivalents (net debt of $9.3 billion) and $1.5 billion of
shareholders' equity at June 30, 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 shareholders' equity at December 31,
1994. The increase in shareholders' equity reflects the issuance in
May 1995 of approximately 1.5 million shares of common stock and
approximately 3.3 million shares of Series C preferred stock to
acquire Summit. On a combined basis (Time Warner and the
Entertainment Group together), there was $14.1 billion of net debt
at June 30, 1995, compared to $15 billion of net debt at the
beginning of the year.
During 1995, Time Warner and TWE made progress in achieving
certain of their financial and operational objectives, principally
relating to the expansion of their reach in cable television, the
attainment of a new bank credit facility and their plan to reduce
debt with funds raised from the sale of non-core assets. Time
Warner completed its previously-announced acquisition of Summit in
May 1995 and KBLCOM in July 1995 and, together with the formation
of the TWE-Advance/Newhouse Partnership in April 1995, the total
number of subscribers under the management of Time Warner Cable has
increased to over 10 million, compared to 7.5 million at the end of
1994. The number of subscribers is expected to increase further,
to over 11.5 million, after the consummation of the acquisition of
CVI and related companies, which is expected to close in the fourth
quarter of 1995.
On June 30, 1995, TWI Cable, TWE and the TWE-Advance/Newhouse
Partnership executed a five-year revolving credit facility. The
New Credit Agreement enables such entities to refinance certain
indebtedness assumed from the companies acquired or to be acquired
in the cable acquisitions, to refinance existing indebtedness of
TWE and to finance the ongoing working capital, capital expenditure
and other corporate needs of each borrower.
The New Credit Agreement permits borrowings in an aggregate
amount of up to $8.3 billion. Borrowings are limited to $4 billion
in the case of TWI Cable, $5 billion in the case of the TWE-
Advance/Newhouse Partnership and $8.3 billion in the case of TWE,
subject in each case to certain limitations and adjustments. Such
borrowings will bear interest at specific rates for each of the
three borrowers, generally equal to LIBOR plus a margin initially
ranging from 50 to 87.5 basis points based on the credit rating or
financial leverage of the applicable borrower. The New Credit
Agreement contains 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 and other cash payments or transfers of assets from
the borrowers to their respective partners or affiliates.
On July 6, 1995, TWI Cable borrowed approximately $1.2 billion
under the New Credit Agreement to refinance certain indebtedness
assumed or incurred in the acquisition of KBLCOM, and TWE borrowed
approximately $2.6 billion to repay and terminate its existing bank
credit agreement.
Time Warner continues to pursue its plan to enhance its financial
position and that of the Entertainment Group through sales of non-
core assets and, to the extent that market conditions remain
favorable, through the issuance of debt to redeem or otherwise
repay certain higher-cost debt securities that are currently
outstanding. With the sale of 51% of TWE's interest in Six Flags
in June 1995, the sale of an interest in QVC, Inc. in February
1995, the sale or expected sale of certain unclustered cable
systems and the proceeds to be raised from the issuance of the
PERCS in August 1995, Time Warner and the Entertainment Group on a
combined basis will have raised approximately $1.6 billion for debt
reduction.
The $363 million of net proceeds to be raised from the issuance of
the PERCS, taken together with approximately $500 million of
proceeds raised from the issuance of 7.75% ten-year notes in June
1995 and available cash and equivalents, are expected to be used to
finance the partial redemption in September 1995 of $1 billion
principal amount of Time Warner's 8.75% Convertible Subordinated
Debentures due 2015 for an aggregate redemption price of $1.06
billion, including redemption premiums and accrued interest
thereon. Time Warner also filed a shelf registration statement
with the Securities and Exchange Commission in August 1995 for the
offering of up to $500 million of other mandatorily redeemable
preferred securities of certain subsidiaries, the proceeds of which
will be used to reduce debt. However, there can be no assurance
that such offering will be completed.
On July 31, 1995, Time Warner also announced the redemption on
August 15, 1995 of all of its $1.8 billion principal amount of
outstanding Reset Notes in exchange for new securities. The Reset
Notes will be redeemed in exchange for approximately $457 million
aggregate principal amount of Floating Rate Notes due August 15,
2000, approximately $274 million aggregate principal amount of
7.975% Notes due August 15, 2004, approximately $548 million
aggregate principal amount of 8.11% Debentures due August 15, 2006,
and approximately $548 million aggregate principal amount of 8.18%
Debentures due August 15, 2007.
During the first six months of 1995, cash used by Time Warner's
operations amounted to $99 million and reflected $553 million of
EBITDA from the Publishing and Music businesses, $5 million of net
distributions from TWE and $35 million from the securitization of
receivables, less $289 million of interest payments, $127 million
of income taxes, $39 million of corporate expenses and an increase
in working capital requirements. Cash provided by operations of
$243 million in the the first six months of 1994 reflected $492
million of EBITDA from the Publishing and Music businesses, $2
million of net distributions from TWE and $210 million from the
securitization of receivables, less $246 million of interest
payments, $96 million of income taxes, $37 million of corporate
expenses and an increase in working capital requirements.
Cash flows used in investing activities, excluding investment
proceeds, increased to $325 million in the first six months of
1995, compared to $162 million in the first six months of 1994,
principally as a result of higher investment spending by Time
Warner's business segments. As a result of management's debt
reduction program, investment proceeds increased to $294 million in
the first six months of 1995, compared to $111 million in the first
six months of 1994.
Cash flows from financing activities increased to $445 million of
cash provided in the first six months of 1995, compared to a use of
cash of $100 million in the first six months of 1994, principally
as a result of the issuance of $500 million principal amount of
7.75% ten-year notes in June 1995. In addition, cash dividends
paid increased to $73 million in the first six months of 1995,
compared to $69 million in the first six months 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 of $490 million
were received from TWE in July 1995 and an additional $150 million
of tax-related distributions are expected to be received from TWE
by the end of 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 June 30, 1995, Time Warner had interest rate swap
contracts to pay floating-rates of interest (average six-month
LIBOR rate of 6.6%) and receive fixed-rates of interest (average
rate of 5.5%) on $2.9 billion notional amount of indebtedness,
effectively converting 29% of Time Warner's underlying debt,
substantially all of which is fixed-rate, and 36% of the combined
debt of Time Warner and the Entertainment Group, 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 June 30, 1995 would reduce Time Warner's annual
pretax income by an estimated $8 million. Interest rate swap
contracts are placed with a number of major financial institutions
in order to minimize credit risk.
Based on the level of interest rates prevailing at June 30, 1995,
the fair value of Time Warner's fixed-rate debt exceeded its
carrying value by $121 million and it would have cost $61 million
to terminate the related interest rate swap contracts, which
combined is the equivalent of an unrealized loss of $182 million.
Based on the level of interest rates prevailing 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.
Unrealized gains or losses on debt or interest rate swap contracts
are not recognized 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 foreign currency exchange rates. At June 30, 1995, Time
Warner had contracts for the sale of $546 million and the purchase
of $151 million of foreign currencies at fixed rates, primarily
Japanese yen (11% of net contract value), French francs (13%),
English pounds (27%), Canadian dollars (15%) and German marks
(18%), 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 $26 million and TWE had
$13 million of net losses on foreign exchange contracts during the
first six months 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, at June 30, 1995 was, and will continue to be,
affected by the formation of the TWE-Advance/Newhouse Partnership
and the other cable transactions and asset sales that have either
closed or are expected to close during 1995. TWE had $7.1 billion
of debt, $1.7 billion of Time Warner General Partners' senior
capital and $6.2 billion of partners' capital (net of the $528
million uncollected portion of the note receivable from U S WEST)
at June 30, 1995, compared to $7.2 billion of debt, $1.7 billion of
Time Warner General Partners' senior capital and $6.2 billion of
partners' capital at December 31, 1994. Principally as a result of
the proceeds received in the Six Flags transaction, cash and
equivalents increased to $2.3 billion at June 30, 1995, compared to
$1.1 billion at December 31, 1994, reducing the debt-net-of-cash
amounts for TWE to $4.8 billion and $6.1 billion, respectively.
In the first six months of 1995, cash provided by Entertainment
Group operations amounted to $697 million and reflected $988
million of EBITDA from the Filmed Entertainment, Broadcasting-The
WB Network, Programming-HBO and Cable businesses and a reduction in
working capital requirements, less $303 million of interest
payments, $34 million of income taxes and $30 million of corporate
expenses. Cash provided by operations of $707 million in the first
six months of 1994 reflected $895 million of business segment
EBITDA and a reduction in working capital requirements, less $240
million of interest payments, $29 million of income taxes and $30
million of corporate expenses.
Cash flows from investing activities increased to $175 million of
cash provided in the first six months of 1995, compared to a use of
cash of $792 million in the first six months of 1994, principally
as a result of a $922 million increase in investment proceeds
relating to management's debt reduction program. Capital
expenditures increased to $704 million in the first six months of
1995, compared to $504 million in the first six months of 1994.
Capital spending by Time Warner Cable amounted to $514 million in
the first six months of 1995, compared to $256 million in the first
six months of 1994, and was financed in part through $243 million
of collections on the note receivable from U S WEST. Cable capital
expenditures are budgeted to exceed $500 million for the remainder
of 1995, and are expected to be partially financed by approximately
$300 million of additional 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, cable and other 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.
Cash flows provided by financing activities increased to $320
million in the first six months of 1995, compared to $94 million in
the first six months of 1994, principally as a result of a $175
million increase in collections on the note receivable from U S
WEST.
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 over $1 billion at June 30, 1995 compared to $852
million at December 31, 1994 (including amounts relating to HBO of
$156 million at June 30, 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)
June 30, December 31,
1995 1994
(millions)
ASSETS
Current assets
Cash and equivalents $ 2,263 $ 1,071
Receivables, including $234 and $266 due from
Time Warner, less allowances of $299 and $306 1,421 1,426
Inventories 907 956
Prepaid expenses 165 120
Total current assets 4,756 3,573
Noncurrent inventories 1,656 1,807
Loan receivable from Time Warner 400 400
Property, plant and equipment, net 3,944 3,784
Goodwill 4,095 4,433
Cable television franchises 3,123 3,236
Other assets 1,316 1,429
Total assets $19,290 $18,662
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable $ 435 $ 514
Participations and programming costs 1,007 857
Other current liabilities, including $490
and $334 of distributions due to Time Warner 1,668 1,486
Total current liabilities 3,110 2,857
Long-term debt 7,037 7,160
Other long-term liabilities, including $219
and $89 of distributions due to Time Warner 942 749
Minority interest 317 -
Time Warner General Partners' senior capital 1,730 1,663
Partners' capital
Contributed capital 7,398 7,398
Undistributed partnership earnings (deficit) (716) (394)
Note receivable from U S WEST (528) (771)
Total partners' capital 6,154 6,233
Total liabilities and partners' capital $19,290 $18,662
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(millions)
Revenues (a) $2,392 $2,055 $4,438 $3,974
Cost of revenues (a)(b) 1,611 1,441 3,051 2,784
Selling, general and administrative (a)(b) 515 387 930 760
Operating expenses 2,126 1,828 3,981 3,544
Business segment operating income 266 227 457 430
Interest and other, net (a) (170) (144) (331) (280)
Corporate services (a) (15) (15) (30) (30)
Income before income taxes 81 68 96 120
Income taxes (25) (12) (36) (16)
Net income $ 56 $ 56 $ 60 $ 104
__________________
(a) Includes the following income (expenses) resulting from
transactions with the partners of TWE:
Selling, general and administrative $(30) $(26) $(52) $(43)
Corporate services (15) (15) (30) (30)
Interest and other, net 6 3 6 3
In addition, includes the following income (expenses) resulting
from transactions with equity affiliates of TWE or Time Warner:
Revenues $ 32 $ 58 $ 58 $ 67
Cost of revenues (36) (19) (53) (31)
Selling, general and administrative 7 9 12 14
(b) Includes depreciation and amortization
expense of: $275 $240 $501 $453
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
1995 1994
(millions)
OPERATIONS
Net income $ 60 $ 104
Adjustments for noncash and nonoperating items:
Depreciation and amortization 501 453
Changes in operating assets and liabilities 164 120
Cash provided by operations 725 677
INVESTING ACTIVITIES
Investments and acquisitions (75) (46)
Capital expenditures (622) (496)
Loan to Time Warner - (250)
Investment proceeds 953 39
Cash provided (used) by investing activities 256 (753)
FINANCING ACTIVITIES
Borrowings 235 317
Debt repayments (237) (277)
Capital distributions (30) (27)
Collections on note receivable from U S WEST 243 68
Cash provided by financing activities 211 81
INCREASE IN CASH AND EQUIVALENTS 1,192 5
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,071 1,338
CASH AND EQUIVALENTS AT END OF PERIOD $2,263 $1,343
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
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 upon 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.
Intangible Assets
Intangible assets are recorded when the cost of acquired
companies exceeds the fair value of their tangible assets.
Intangible assets are amortized over periods up to forty years
using the straight-line method. TWE separately reviews the
carrying value of intangible assets for each acquired entity on a
quarterly basis to determine whether an impairment may exist.
TWE considers relevant cash flow and profitability information,
including estimated future operating results, trends and other
available information, in assessing whether the carrying value of
intangible assets can be recovered. Upon a determination that the
carrying value of intangible assets will not be recovered from the
undiscounted future cash flows of the acquired business, the
carrying value of such intangible assets would be considered
impaired and will be reduced by a charge to operations in the
amount of the impairment. Impairment is measured as any deficiency
in estimated undiscounted future cash flows of the acquired
business to recover the carrying value related to the intangible
assets.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets to Be Disposed Of," ("FAS
121") effective for fiscal years beginning after December 15, 1995.
The new rules establish standards for the recognition and
measurement of impairment losses on long-lived assets and certain
identifiable intangible assets, including goodwill. TWE expects
that the adoption of FAS 121 will not have a material effect on its
financial statements.
2. TWE-ADVANCE/NEWHOUSE PARTNERSHIP
On April 1, 1995, TWE formed a cable television joint venture
with the Advance/Newhouse Partnership ("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. TWE
consolidates the partnership and the one-third equity interest
owned by Advance/Newhouse is reflected in TWE's balance sheet as
minority interest. 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, which, with respect to
Advance/Newhouse, consisted of assets contributed to the
partnership of approximately $338 million and liabilities assumed
by the partnership of approximately $9 million. No gain was
recognized by TWE upon the capitalization of the partnership. On a
pro forma basis, giving effect to the formation of the TWE-
Advance/Newhouse Partnership as if it had occurred at the beginning
of the periods, TWE would have reported $4.575 billion and $4.238
billion of revenues for the six months ended June 30, 1995 and
1994, respectively. The pro forma effect on TWE's net income for
each of the six month periods ended June 30, 1995 and 1994 is not
material.
3. SIX FLAGS
On June 23, 1995, TWE sold 51% of its interest in Six Flags
Entertainment Corporation ("Six Flags") to an investment group led
by Boston Ventures for $204 million and received $640 million in
additional proceeds from Six Flags, representing payment of certain
intercompany indebtedness and licensing fees. As a result of the
transaction, TWE expects a cumulative debt reduction of
approximately $850 million, after the payment of related taxes and
fees and the deconsolidation of approximately $128 million of
third-party, zero-coupon indebtedness of Six Flags due in 1999.
The deconsolidation of such indebtedness is reflected in TWE's
balance sheet as of June 30, 1995, and the remaining debt reduction
is expected to occur in the third quarter of 1995. TWE deferred
approximately $140 million of income on the transaction principally
as a result of its guarantee of such debt. TWE will account for its
remaining 49% interest in Six Flags under the equity method of
accounting.
4. INVENTORIES
Inventories consist of:
June 30, 1995 December 31, 1994
Current Noncurrent Current Noncurrent
(millions)
Film costs:
Released, less amortization $ 442 $ 352 $ 585 $ 347
Completed and not released 153 37 123 24
In process and other 59 207 18 361
Library, less amortization - 743 - 769
Programming costs, less amortization 177 317 149 306
Merchandise 76 - 81 -
Total $ 907 $1,656 $ 956 $1,807
5. LONG-TERM DEBT
Long-term debt consists of:
June 30, December 31,
1995 1994
(millions)
Bank credit agreement, weighted average interest
rates of 6.7% and 6.5% $2,575 $2,550
Commercial paper, weighted average interest rates
of 6.5% and 6.2% 622 649
Publicly held notes and debentures 3,781 3,903
Other 59 58
Total $7,037 $7,160
On June 30, 1995, TWE, the TWE-Advance/Newhouse Partnership and a
wholly owned subsidiary of Time Warner ("TWI Cable") executed a
five-year revolving credit facility (the "New Credit Agreement").
The New Credit Agreement enables such entities to refinance
certain indebtedness assumed from the companies acquired or to be
acquired in the cable acquisitions, to refinance existing
indebtedness of TWE and to finance the ongoing working capital,
capital expenditure and other corporate needs of each borrower.
The New Credit Agreement permits borrowings in an aggregate
amount of up to $8.3 billion. Borrowings are limited to $4 billion
in the case of TWI Cable, $5 billion in the case of the TWE-
Advance/Newhouse Partnership and $8.3 billion in the case of TWE,
subject in each case to certain limitations and adjustments. Such
borrowings will bear interest at specific rates for each of the
three borrowers, generally equal to LIBOR plus a margin initially
ranging from 50 to 87.5 basis points based on the credit rating or
financial leverage of the applicable borrower. The New Credit
Agreement contains 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 and other cash payments or transfers of assets from
the borrowers to their respective partners or affiliates.
On July 6, 1995, TWE borrowed approximately $2.6 billion under
the New Credit Agreement to repay and terminate its existing bank
credit agreement.
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
Time Warner General Partner contributed to TWE. Such indebtedness
is recourse to each Time Warner General Partner only to the extent
of its guarantee.
6. PARTNERS' CAPITAL
Changes in partners' capital were as follows:
Six Months
Ended June 30,
1995 1994
(millions)
Balance at beginning of year $6,233 $6,000
Net income 60 104
Distributions (316) (120)
Reduction of stock option distribution liability - 174
Allocation of income to Time Warner General Partners'
senior capital (67) (62)
Collections on note receivable from U S WEST 243 68
Other 1 7
Balance at June 30 $6,154 $6,171
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 six months ended June 30, 1995, TWE accrued $25
million of Time Warner Service Partnership distributions, $156
million of tax-related distributions and $135 million of stock
option distributions, based on closing prices of Time Warner common
stock of $41.25 at June 30, 1995 and $35.125 at December 31, 1994.
During the six months ended June 30, 1994, TWE accrued $25 million
of Time Warner Service Partnership distributions and $95 million of
tax-related distributions, and reversed $174 million of previously-
accrued stock option distributions as a result of a decline in the
market price of Time Warner common stock. TWE paid $490 million of
accrued tax distributions to the Time Warner General Partners in
July 1995.
7. SEGMENT INFORMATION
Information as to the operations of TWE in different business
segments is as set forth below. Cable business segment information
reflects the consolidation of the TWE-Advance/Newhouse Partnership
effective as of April 1, 1995.
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(millions)
Revenues
Filmed Entertainment $1,355 $1,214 $2,561 $2,295
Broadcasting - The WB Network 3 - 6 -
Programming - HBO 392 369 777 727
Cable 724 559 1,281 1,108
Intersegment elimination (82) (87) (187) (156)
Total $2,392 $2,055 $4,438 $3,974
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(millions)
Operating Income
Filmed Entertainment $ 83 $ 72 $148 $133
Broadcasting - The WB Network (12) - (33) -
Programming - HBO 70 61 137 118
Cable 125 94 205 179
Total $266 $227 $457 $430
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(millions)
Depreciation of Property, Plant and Equipment
Filmed Entertainment $ 41 $ 33 $ 62 $ 49
Broadcasting - The WB Network - - - -
Programming - HBO 4 4 8 7
Cable 111 81 199 164
Total $156 $118 $269 $220
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(millions)
Amortization of Intangible Assets (1)
Filmed Entertainment $ 43 $ 41 $ 80 $ 75
Broadcasting - The WB Network - - - -
Programming - HBO - 1 - 2
Cable 76 80 152 156
Total $119 $122 $232 $233
_______________
(1) Amortization includes amortization relating to the acquisition
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 June 30, 1995
aggregated approximately $5.5 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 of TWE.
9. ADDITIONAL FINANCIAL INFORMATION
Additional financial information is as follows:
Six Months
Ended June 30,
1995 1994
(millions)
Interest expense $ 296 $ 273
Cash payments made for interest 301 240
Cash payments made for income taxes (net) 34 29
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 $2.392 billion and net income of $56 million
for the three months ended June 30, 1995, compared to revenues of
$2.055 billion and net income of $56 million for the three months
ended June 30, 1994. Revenues of $4.438 billion and net income
of $60 million were reported for the six months ended June 30,
1995, compared to revenues of $3.974 billion and net income of
$104 million for the six months ended June 30, 1994.
As discussed more fully below, TWE's operating results for the
three and six month periods ended June 30, 1995 reflect an overall
increase in operating income generated by its business segments and
gains on the sale of certain unclustered cable systems, offset by
higher floating-rates of interest paid on borrowings under TWE's
bank credit agreement and minority interest expense related to the
consolidation of the operating results of the TWE-Advance/Newhouse
Partnership effective as of April 1, 1995.
As a U.S. partnership, TWE is not subject to U.S. federal and
state income taxation. Income and withholding taxes of $25 million
and $36 million in the three and six months ended June 30, 1995,
respectively, and $12 million and $16 million in the three and six
months ended June 30, 1994, respectively, have been provided in
respect of the operations of TWE's domestic and foreign subsidiary
corporations.
EBITDA and operating income for TWE for the three and six months
ended June 30, 1995 and 1994 is as follows:
Three Months Ended June 30,
EBITDA Operating Income
1995 1994 1995 1994
(millions)
Filmed Entertainment $167 $146 $ 83 $ 72
Broadcasting - The WB Network (12) - (12) -
Programming - HBO 74 66 70 61
Cable 312 255 125 94
Total $541 $467 $266 $227
Six Months Ended June 30,
EBITDA Operating Income
1995 1994 1995 1994
(millions)
Filmed Entertainment $290 $257 $148 $133
Broadcasting - The WB Network (33) - (33) -
Programming - HBO 145 127 137 118
Cable 556 499 205 179
Total $958 $883 $457 $430
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.
Three Months Ended June 30, 1995 Compared to the Three Months Ended
June 30, 1994
FILMED ENTERTAINMENT. Revenues increased to $1.355 billion,
compared to $1.214 billion in the second quarter of 1994. EBITDA
increased to $167 million from $146 million. Depreciation and
amortization, including amortization related to the purchase of
WCI, amounted to $84 million in 1995 and $74 million in 1994.
Operating income increased to $83 million from $72 million.
Revenues benefited from increases in worldwide theatrical,
international home video and consumer products operations.
Domestic theatrical revenues in 1995 were led by the success of
BATMAN FOREVER. Revenues and operating results at Six Flags
increased due to higher attendance and in-park spending. EBITDA
and operating income benefited from the revenue gains and increased
income from licensing operations, offset in part by approximately
one week less of operating results of Six Flags in 1995 due to the
sale of a 51% interest in the theme park company on June 23, 1995.
BROADCASTING - THE WB NETWORK. The WB Network was launched on
January 11, 1995, and generated $12 million of operating losses on
$3 million of revenues in the second 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 $392 million, compared
to $369 million in the second quarter of 1994. EBITDA increased to
$74 million from $66 million. Depreciation and amortization
amounted to $4 million in 1995 and $5 million in 1994. Operating
income increased to $70 million from $61 million. Revenues
benefited primarily from an increase in subscribers, as well as
from higher pay-TV rates. EBITDA and operating income improved
principally as a result of the revenue gains.
CABLE. Revenues increased to $724 million, compared to $559
million in the second quarter of 1994. EBITDA increased to $312
million from $255 million. Depreciation and amortization,
including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $187 million
in 1995 and $161 million in 1994. Operating income increased to
$125 million from $94 million. Revenues benefited from the
formation of the TWE-Advance/Newhouse Partnership in April 1995 and
increases in basic cable subscribers and nonregulated revenues,
including pay-TV and advertising. EBITDA and operating income
increased as a result of the revenue gains and contributions from
the TWE-Advance/Newhouse Partnership, 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
$170 million in the second quarter of 1995, compared to $144
million in the second quarter of 1994. Interest expense increased
to $146 million, compared to $138 million in the second quarter of
1994, principally as a result of higher floating-rates of interest
paid on borrowings under TWE's bank credit agreement. Other
expense, net, increased to $24 million in the second quarter of
1995 from $6 million in 1994, principally because of the inclusion
in 1995 of minority interest expense related to the TWE-
Advance/Newhouse Partnership, offset in part by gains on the sale
of certain unclustered cable systems.
Six Months Ended June 30, 1995 Compared to the Six Months Ended
June 30, 1994
FILMED ENTERTAINMENT. Revenues increased to $2.561 billion,
compared to $2.295 billion in the first six months of 1994. EBITDA
increased to $290 million from $257 million. Depreciation and
amortization, including amortization related to the purchase of
WCI, amounted to $142 million in 1995 and $124 million in 1994.
Operating income increased to $148 million from $133 million.
Revenues benefited from increases in worldwide theatrical,
international home video, consumer products and worldwide
television distribution operations. Lower domestic theatrical
revenues in the first quarter of 1995 were overcome by the second
quarter domestic box office performance of theatrical releases, led
by the success of BATMAN FOREVER. Revenues and operating results
at Six Flags increased due to higher attendance and in-park
spending. EBITDA and operating income benefited from the revenue
gains and increased income from licensing operations.
BROADCASTING-THE WB NETWORK. The WB Network was launched on
January 11, 1995, and generated $33 million of operating losses on
$6 million of revenues in the first six months of 1995. Due to the
start-up nature of this new national broadcast operation, losses
are expected to continue.
PROGRAMMING - HBO. Revenues increased to $777 million, compared
to $727 million in the first six months of 1994. EBITDA increased
to $145 million from $127 million. Depreciation and amortization
amounted to $8 million in 1995 and $9 million in 1994. Operating
income increased to $137 million from $118 million. Revenues
benefited primarily from an increase in subscribers, as well as
from higher pay-TV rates. EBITDA and operating income improved
principally as a result of the revenue gains.
CABLE. Revenues increased to $1.281 billion, compared to $1.108
billion in the first six months of 1994. EBITDA increased to $556
million from $499 million. Depreciation and amortization,
including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $351 million
in 1995 and $320 million in 1994. Operating income increased to
$205 million from $179 million. Revenues benefited from the
formation of the TWE-Advance/Newhouse Partnership in April 1995 and
increases in basic cable subscribers and nonregulated revenues,
including pay-TV and advertising. EBITDA and operating income
increased as a result of the revenue gains and contributions from
the TWE-Advance/Newhouse Partnership, 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
$331 million in the first six months of 1995, compared to $280
million in the first six months of 1994. Interest expense
increased to $296 million, compared with $273 million in the first
six months of 1994, principally as a result of higher floating-
rates of interest paid on borrowings under TWE's bank credit
agreement. Other expense, net, increased to $35 million in the
first six months of 1995 from $7 million in 1994, principally
because of the inclusion in 1995 of minority interest expense
related to the TWE-Advance/Newhouse Partnership, offset in part by
gains on the sale of certain unclustered cable systems.
FINANCIAL CONDITION AND LIQUIDITY
June 30, 1995
The financial condition of TWE at June 30, 1995 was affected by
the formation of the TWE-Advance/Newhouse Partnership and the Six
Flags transaction, and is expected to be further affected by the
other cable transactions agreed to by Time Warner that have closed
or are expected to close during 1995. TWE had $7.1 billion of
debt, $1.7 billion of Time Warner General Partners' senior capital
and $6.2 billion of partners' capital (net of the $528 million
uncollected portion of the note receivable from U S WEST) at June
30, 1995, compared to $7.2 billion of debt, $1.7 billion of Time
Warner General Partners' senior capital and $6.2 billion of
partners' capital at December 31, 1994. Principally as a result of
the proceeds received in the Six Flags transaction, cash and
equivalents increased to $2.3 billion at June 30, 1995, compared to
$1.1 billion at December 31, 1994, reducing the debt-net-of-cash
amounts to $4.8 billion and $6.1 billion, respectively.
During 1995, TWE and Time Warner made progress in achieving
certain of their financial and operational objectives, principally
relating to the expansion of their reach in cable television, the
attainment of a new bank credit facility and their plan to reduce
debt with funds raised from the sale of non-core assets. TWE
formed the TWE-Advance/Newhouse Partnership in April 1995 and,
together with Time Warner's completion of its previously-announced
acquisitions of Summit Communications Group, Inc. in May 1995 and
KBLCOM Incorporated in July 1995, the total number of subscribers
under the management of Time Warner Cable has increased to over 10
million, compared to 7.5 million at the end of 1994. The number of
subscribers is expected to increase further, to over 11.5 million,
after the consummation of Time Warner's acquisition of Cablevision
Industries Corporation and related companies, which is expected to
close in the fourth quarter of 1995.
On June 30, 1995, TWE, the TWE-Advance/Newhouse Partnership and
TWI Cable executed a five-year revolving credit facility. The New
Credit Agreement enables such entities to refinance certain
indebtedness assumed from the companies acquired or to be acquired
in the cable acquisitions, to refinance existing indebtedness of
TWE and to finance the ongoing working capital, capital expenditure
and other corporate needs of each borrower.
The New Credit Agreement permits borrowings in an aggregate
amount of up to $8.3 billion. Borrowings are limited to $4 billion
in the case of TWI Cable, $5 billion in the case of the TWE-
Advance/Newhouse Partnership and $8.3 billion in the case of TWE,
subject in each case to certain limitations and adjustments. Such
borrowings will bear interest at specific rates for each of the
three borrowers, generally equal to LIBOR plus a margin initially
ranging from 50 to 87.5 basis points based on the credit rating or
financial leverage of the applicable borrower. The New Credit
Agreement contains 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 and other cash payments or transfers of assets from
the borrowers to their respective partners or affiliates.
On July 6, 1995, TWE borrowed approximately $2.6 billion under
the New Credit Agreement to repay and terminate its existing bank
credit agreement.
TWE continues to pursue its plan to enhance its financial
position through sales of non-core assets. With the sale of 51% of
its interest in Six Flags in June 1995 and the sale or expected
sale of certain unclustered cable systems, TWE expects a
cumulative debt reduction of approximately $1 billion, after the
payment of related taxes and fees and the deconsolidation of
approximately $128 million of third-party, zero-coupon indebtedness
of Six Flags due in 1999. The deconsolidation of such
indebtedness is reflected in TWE's balance sheet as of June 30,
1995, and the remaining debt reduction is expected to occur
in the second half of 1995.
In the first six months of 1995, cash provided by TWE's
operations amounted to $725 million and reflected $958 million of
EBITDA from the Filmed Entertainment, Broadcasting-The WB Network,
Programming-HBO and Cable businesses and a reduction in working
capital requirements, less $301 million of interest payments, $34
million of income taxes and $30 million of corporate expenses.
Cash provided by operations of $677 million in the first six months
of 1994 reflected $883 million of business segment EBITDA and a
reduction in working capital requirements, less $240 million of
interest payments, $29 million of income taxes and $30 million of
corporate expenses.
Cash flows from investing activities increased to $256 million of
cash provided in the first six months of 1995, compared to a use of
cash of $753 million in the first six months of 1994, principally
as a result of a $914 million increase in investment proceeds
relating to management's debt reduction program. Capital
expenditures increased to $622 million in the first six months of
1995, compared to $496 million in the first six months of 1994.
Capital spending by Time Warner Cable amounted to $433 million in
the first six months of 1995, compared to $248 million in the first
six months of 1994, and was financed in part through $243 million
of collections on the note receivable from U S WEST. Cable capital
expenditures are budgeted to exceed $500 million for the remainder
of 1995, and are expected to be partially financed by approximately
$300 million of additional 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, cable and other 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.
Cash flows provided by financing activities increased to $211
million in the first six months of 1995, compared to $81 million in
the first six months of 1994, principally as a result of a $175
million increase in collections on the note receivable from U S
WEST.
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 over $1 billion at June 30, 1995 compared to $852
million at December 31, 1994 (including amounts relating to HBO of
$156 million at June 30, 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 June 30, 1995,
the fair value of TWE's long-term debt exceeded its carrying value
by $123 million. 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. Unrealized gains or
losses on debt are not recognized 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 foreign
currency exchange rates. TWE is reimbursed by or reimburses Time
Warner for Time Warner contract gains and losses related to TWE's
exposure. At June 30, 1995, Time Warner had contracts for the sale
of $546 million and the purchase of $151 million of foreign
currencies at fixed rates and maturities of three months or less.
Of Time Warner's $395 million net sale contract position, $133
million related to TWE's exposure, primarily Japanese yen (20% of
net contract position related to TWE), French francs (20%), German
marks (10%) and Canadian dollars (21%), 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 $13 million of net losses on
foreign exchange contracts during the first six months 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 NORTHERN LAMINATING,
INC. RETIREMENT FUND v. MUNRO, et al. described on page I-41 of
Time Warner's Annual Report on Form 10-K for the year ended
December 31, 1994 (the "1994 Form 10-K"). A Stipulation of
Voluntary Discontinuance without prejudice was approved by the
court on July 12, 1995.
Reference is made to the description of the Federal lawsuit filed
by TWE in November 1992 seeking to overturn major provisions of the
1992 Cable Act that appears on pages I-42 and I-43 of Time Warner's
1994 Form 10-K. Argument on cross motions for summary judgment in
connection with the must-carry portion of the case was held on July
17, 1995; post-argument submissions by all parties are due on
August 22, 1995. With respect to the remainder of the case,
briefing on the appeal was completed in early July 1995 and
argument of the appeal is scheduled for November 20, 1995.
On May 30, 1995, a purported class action was filed in the United
States District Court for the Central District of California,
entitled DIGITAL DISTRIBUTION INC. D/B/A COMPACT DISC WAREHOUSE v.
CEMA DISTRIBUTION, SONY MUSIC ENTERTAINMENT, INC., WARNER ELEKTRA
ATLANTIC CORPORATION, UNI DISTRIBUTION CORPORATION, BERTELSMANN
MUSIC GROUP, INC. AND POLYGRAM GROUP DISTRIBUTION, INC., No. 95-
3596 (JSL) (the "California Federal Action"). On July 19, 1995, a
purported class action was filed in the Superior Court of
California for the County of Los Angeles, entitled BRENDEN BARRY v.
CAMA DISTRIBUTION, SONY MUSIC ENTERTAINMENT, INC., WARNER ELEKTRA
ATLANTIC CORPORATION, UNI DISTRIBUTION CORPORATION, BERTELSMANN
MUSIC GROUP, INC. AND POLYGRAM GROUP DISTRIBUTION, INC., No. BC
131748 (the "California State Action"). The California Federal
Action is brought on behalf of direct purchasers of compact discs
("CDs") and the California State Action is brought on behalf of
indirect purchasers of CDs. In both actions, the plaintiffs allege
that Warner Elektra Atlantic Corporation ("WEA"), along with five
other distributors of recorded music CDs, violated the federal
and/or state antitrust laws and unfair competition laws, by
engaging in a conspiracy to fix prices of CDs, and seek an
injunction and treble damages. In the California Federal Action,
the defendants have moved to dismiss the complaint and stay the
proceedings pending the disposition of the motion to dismiss. An
initial conference is scheduled in early September 1995. In the
California State Action, defendants time to answer or move against
the complaint has been extended until October 15, 1995.
[An action similar to the California Federal Action was filed in
the United States District Court for the Southern District of New
York and then dismissed voluntarily by the plaintiff, effective as
of July 19, 1995. The plaintiff indicated that it intended to
intervene in the California Federal Action or file a separate
action in the same court.]
Item 4. Submission of Matters to a Vote of Security-Holders.
(a) The Annual Meeting of Stockholders of Time Warner was held
on May 18, 1995.
(b) Not applicable.
(c) The following matters were voted upon at the Time Warner
Annual Meeting of Stockholders:
(i) Election of directors for terms expiring in 1998.
Broker
For Withheld Non-Votes
Merv Adelson 310,072,682 4,973,582 0
Beverly Sills Greenough 310,020,000 5,026,264 0
Michael A. Miles 310,851,464 4,194,800 0
Donald S. Perkins 310,737,122 4,309,142 0
Raymond S. Troubh 310,941,947 4,104,317 0
(ii) Adoption of amended and restated Time Warner Inc. Annual
Bonus Plan for Executive Officers:
Broker
Votes For Votes Against Abstentions Non-Votes
287,990,584 22,137,691 4,917,989 0
(iii) Appointment of Ernst & Young LLP as independent auditors
of Time Warner for 1995:
Broker
Votes For Votes Against Abstentions Non-Votes
312,574,237 1,395,455 1,076,572 0
(iv) Stockholder resolution relating to cigarette advertising in
Time Warner's magazines:
Broker
Votes For Votes Against Abstentions Non-Votes
15,842,233 245,079,278 13,045,154 41,079,599
(v) Stockholder resolution calling for the election of directors
annually and not by classes:
Broker
Votes For Votes Against Abstentions Non-Votes
89,948,660 122,102,463 61,906,541 41,088,600
(d) Not applicable.
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.
(i) Time Warner filed a Current Report on Form 8-K dated April
1, 1995 reporting in Item 2 that TWE had closed its previously
announced transaction with Advance/Newhouse Partnership regarding
the formation of the Time Warner Entertainment - Advance/Newhouse
Partnership.
(ii) Time Warner filed a Current Report on Form 8-K dated May
30, 1995 which sets forth the pro forma financial statements of
Time Warner Inc., reflecting the Unclustered Cable Disposition, the
Six Flags Transaction, the TWE - A/N Transaction, the Summit
Acquisition, the CVI Acquisition, the KBLCOM Acquisition and the
New Credit Agreement.
(iii) Time Warner filed a Current Report on Form 8-K dated June
15, 1995 which sets forth the financial statements of Newhouse
Broadcasting Cable Division of Newhouse Broadcasting Corporation.
(iv) Time Warner filed a Current Report on Form 8-K dated July
6, 1995 reporting in Item 2 that Time Warner had closed its
previously announced acquisition of KBLCOM Incorporated, formerly a
subsidiary of Houston Industries Incorporated.
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: August 14, 1995
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Exhibit No. Description of Exhibit
10.1 Contribution Agreement, dated as of September 9, 1994,
among Time Warner Entertainment Company, L.P., Advance
Publications, Inc., Newhouse Broadcasting Corporation,
Advance/Newhouse Partnership, and Time Warner Entertainment-
Advance/Newhouse Partnership (incorporated by reference to
Exhibit 10(a) to Time Warner Entertainment Company, L.P.'s
Current Report on Form 8-K dated September 9, 1994).
10.2 Partnership Agreement, dated as of September 9, 1994,
between Time Warner Entertainment Company, L.P. and
Advance/Newhouse Partnership (incorporated by reference to
Exhibit 10(b) to Time Warner Entertainment Company, L.P.'s
Current Report on Form 8-K dated September 9, 1994).
10.3 Letter Agreement, dated April 1, 1995, among Time Warner
Entertainment Company, L.P., Advance/Newhouse Partnership,
Advance Publications, Inc. and Newhouse Broadcasting
Corporation (incorporated by reference to Exhibit 10(c) to
Time Warner Entertainment Company, L.P.'s Current Report on
Form 8-K dated April 1, 1995).
10.4 Credit Agreement among Time Warner Entertainment Company,
L.P., Time Warner Entertainment-Advance/Newhouse Partnership
and TWI Cable Inc., as borrowers, Chemical Bank, as
administrative agent, Bank of America National Trust and
Savings Association, The Bank of New York and Morgan Guaranty
Trust Company of New York, as documentation and syndication
agents, and the lending institutions named therein, dated as
of June 30, 1995 (incorporated by reference to Exhibit 10(a)
to Time Warner's Current Report on Form 8-K dated July 6,
1995).
10.5 Employment Agreement made as of May 17, 1995, between
Time Warner and Peter R. Haje.
27 Financial Data Schedule.
99.1 Summarized financial information of the Time Warner
Service Partnerships.
99.2 Summarized financial information of Paragon
Communications.