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, 1996 , 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 384,725,092
Description of Class Shares Outstanding
as of July 31, 1996
TIME WARNER INC. AND
TIME WARNER ENTERTAINMENT COMPANY, L.P.
INDEX TO FORM 10-Q
Page
Time
Warner TWE
PART I. FINANCIAL INFORMATION
Management's discussion and analysis of results
of operations and financial condition 1 34
Consolidated balance sheets at June 30, 1996
and December 31, 1995 19 42
Consolidated statements of operations for the three
and six months ended June 30, 1996 and 1995 20 43
Consolidated statements of cash flows for the
six months ended June 30, 1996 and 1995 21 44
Notes to consolidated financial statements 22 45
PART II. OTHER INFORMATION 51
PART I. FINANCIAL INFORMATION
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Time Warner has interests in three fundamental areas of
business: Entertainment, consisting principally of interests in
recorded music and music publishing, filmed entertainment,
broadcasting, theme parks and cable television programming; News
and Information, consisting principally of interests in magazine
publishing, book publishing and direct marketing; and
Telecommunications, consisting principally of interests in cable
television systems. Substantially all of Time Warner's interests
in filmed entertainment, broadcasting, theme parks, cable
television programming and a majority of its cable television
systems are held through the Entertainment Group, consisting
principally of TWE, which is not consolidated for financial
reporting purposes. TWE manages the telecommunications properties
owned by Time Warner and the combined cable television operations
are conducted under the name of Time Warner Cable. Capitalized
terms are as defined and described in the accompanying
consolidated financial statements, or elsewhere herein.
Significant Transactions
In 1996, Time Warner and the Entertainment Group have
announced or completed a number of transactions that have had or
are expected to have a significant effect on their results of
operations and financial condition. Such transactions include:
* The announcement by Time Warner in July 1996 that it had
reached an agreement in principle with the staff of the
Federal Trade Commission (the "FTC"), Turner Broadcasting
System, Inc. ("TBS") and Liberty Media Corporation ("LMC"),
a subsidiary of Tele-Communications Inc. ("TCI") and a
shareholder of TBS, to make certain modifications to
the previously-announced merger agreement and related
documents which will allow Time Warner and TBS to proceed
with their merger. Accordingly, the merger is expected to
close early in the fourth quarter of 1996.
* The implementation by Time Warner in April 1996 of a
program to repurchase, from time to time, up to 15 million
shares of its common stock. The common stock repurchase
program is supported by a new five-year, $750 million
revolving credit facility which is expected to be
repaid principally from the cash proceeds to be received
by Time Warner from the future exercise of employee stock
options. As of June 30, 1996, Time Warner had acquired
approximately 8.8 million shares of its common
stock for an aggregate cost of approximately $360 million.
* The issuance in April 1996 of 1.6 million shares of a new
series of exchangeable preferred stock ("Series K
Preferred Stock"), which pays cumulative dividends at the
rate of 10-1/4% per annum. The approximate $1.55 billion
of net proceeds raised from this transaction were used to
reduce debt and, together with other actions since the
initiation of a $2-$3 billion debt reduction program in
February 1995, Time Warner and the Entertainment Group
have raised approximately $3.2 billion for debt
reduction.
* The redemption in February 1996 of approximately $1.2
billion of convertible debt using proceeds from 1995 and
1996 financings, the effect of which was to lower interest
rates, stagger debt maturities and eliminate the potential
dilution from the conversion of such securities into 25.7
million shares of common stock.
* The acquisition by Time Warner of Cablevision Industries
Corporation ("CVI") and related companies on January 4,
1996, which strengthened Time Warner Cable's geographic
clusters of cable television systems and substantially
increased the number of cable subscribers managed by
Time Warner Cable. Time Warner Cable now serves
approximately 11.8 million subscribers in neighborhoods
passing nearly 20% of the television homes in the U.S.
In connection with the acquisition, Time Warner issued
2.9 million shares of common stock and 6.3 million shares
of new convertible preferred stock, as adjusted, and
assumed or incurred approximately $2 billion of
indebtedness.
The nature of these transactions and their impact on the
results of operations and financial condition of Time Warner and
the Entertainment Group are further discussed below.
TBS Transaction
On July 17, 1996, Time Warner announced that it had reached
an agreement in principle with the staff of the FTC, TBS and
LMC to make certain modifications to the previously-announced
merger agreement and related documents which will allow
Time Warner and TBS to proceed with their merger. Such
changes include, but are not limited to, (i) changes in the
consideration to be received by LMC from voting LMC Class Common
Stock (as defined below) to reduced-voting LMC Class Common Stock
(having 1/100th of a vote per share), (ii) limitations on the
level and voting power of TCI's and its affiliates' ownership
in Time Warner, (iii) termination of a related proposed,
long-term agreement between TBS and a subsidiary of TCI concerning
carriage of TBS programming services by TCI-affiliated cable
systems, and the agreement by TBS and TCI to enter into a new
five-year, mandatory carriage agreement covering Headline
News and WTBS, a broadcast television station owned by TBS, in
the event that WTBS is converted to a copyright-paid cable television
programming service (the "WTBS Conversion") and (iv) an increase
in the consideration to be paid to LMC and its affiliates,
payable at Time Warner's election in stock or cash, in connection
with obtaining a related option and non-competition agreement (the
"SSSI Agreement") that will provide, if Time Warner exercises
its option, for Southern Satellite Systems, Inc., a subsidiary of
LMC, to provide certain satellite uplink and distribution services
for WTBS in the event that the WTBS Conversion occurs.
The amended merger agreement continues to provide for the
merger of each of Time Warner and TBS with separate subsidiaries
of a holding company ("New Time Warner"), that will combine, for
financial reporting purposes, the consolidated net assets and
operating results of Time Warner and TBS (the "TBS Transaction").
In connection therewith, the issued and outstanding shares of
each class of the capital stock of Time Warner will be converted
into shares of a substantially identical class of capital stock
of New Time Warner. The amended merger agreement provides for the
issuance by New Time Warner of approximately 173.3 million shares
of common stock, par value $.01 per share (including 52 million
shares of a special class of non-redeemable common stock
to be received by LMC which will have 1/100th of a vote per
share, the "LMC Class Common Stock"), in exchange for the
outstanding TBS capital stock, the issuance of approximately
14 million stock options to replace all outstanding TBS options
and the assumption of TBS's indebtedness (which approximated
$2.6 billion at June 30, 1996). As part of the TBS Transaction,
LMC and its affiliates will receive an additional five million
shares of LMC Class Common Stock and $67 million of consideration
payable, at the election of Time Warner, in cash or additional
shares of LMC Class Common Stock, pursuant to the SSSI Agreement.
The TBS Transaction will be accounted for by the purchase
method of accounting for business combinations. Based on TBS's
financial position and results of operations as of and for the
six months ended June 30, 1996, and giving pro forma effect to
the TBS Transaction as if it had occurred on June 30, 1996 for
balance sheet purposes and at the beginning of the year for
statement of operations purposes, the incremental effect on Time
Warner reflected in the combined pro forma financial statements
of New Time Warner would have been (i) an increase in
shareholder's equity of approximately $6 billion, principally due
to the issuance by New Time Warner of approximately 178.3 million
shares of common stock, (ii) an increase in long-term debt of
approximately $2.8 billion principally due to the assumption of
TBS's debt, (iii) an increase in goodwill of approximately $6.7
billion as a result of a preliminary allocation of the excess
cost over the net book value of assets acquired, (iv) an increase
in revenues of $1.7 billion, (v) an increase in EBITDA (as
defined below) of $174 million, (vi) an increase in depreciation
and amortization of $171 million, including approximately $80
million of noncash amortization of goodwill, (vii) an increase in
operating income of $3 million, (viii) an increase in net loss of
$80 million and (ix) a reduction in net loss per common share of
$.07 per common share resulting from the dilutive effect of
issuing 178.3 million shares of common stock.
The TBS Transaction is expected to close early in the fourth
quarter of 1996, but is still subject to customary closing
conditions, including the approval of the shareholders of TBS and
of Time Warner, and all necessary approvals of the Federal
Communications Commission (the "FCC"). In addition, a formal
agreement reflecting the agreement in principle with the FTC
staff must be submitted to the full Commission for its
consideration and is subject to approval by the FTC Commissioners.
Use of EBITDA
The following comparative discussion of the results of
operations and financial condition of Time Warner and the
Entertainment Group 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, the $2.3 billion acquisitions of
Summit, KBLCOM and CVI and related companies in 1995 and early
1996 and other business combinations accounted for by the
purchase method, including the proposed TBS Transaction with
respect to certain discussions on a pro forma basis. 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.
RESULTS OF OPERATIONS
EBITDA and operating income for Time Warner and the
Entertainment Group for the three and six months ended June 30,
1996 and 1995 are as follows:
Three Months Ended June 30, Six Months Ended June 30,
EBITDA Operating Income EBITDA Operating Income
1996 1995 1996 1995 1996 1995 1996 1995
Time Warner: (millions)
Publishing $156 $138 $125 $114 $ 236 $215 $181 $169
Music 165 165 70 70 311 338 125 153
Cable 118 - 20 - 230 - 19 -
Total $439 $303 $215 $184 $ 777 $553 $325 $322
Entertainment Group:
Filmed Entertainment $141 $117 $ 79 $ 59 $ 277 $240 $152 $126
Six Flags Theme Parks - 58 - 31 - 60 - 29
Broadcasting -
The WB Network (12) (12) (12) (12) (36) (33) (36) (33)
Programming - HBO 87 75 83 70 168 146 159 137
Cable 376 319 147 126 744 575 293 216
Total $592 $557 $297 $274 $1,153 $988 $568 $475
Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995
Time Warner had revenues of $2.139 billion, a loss of $31
million ($.26 per common share) before an extraordinary loss on
the retirement of debt and a net loss of $40 million ($.28 per
common share) for the three months ended June 30, 1996, compared
to revenues of $1.907 billion and a net loss of $8 million ($.03
per common share) for the three months ended June 30, 1995. Time
Warner's equity in the pretax income of the Entertainment Group
was $93 million for the three months ended June 30, 1996,
compared to $84 million for the three months ended June 30, 1995.
On a pro forma basis, giving effect to (i) the 1995 and
early 1996 acquisitions by Time Warner of Summit, KBLCOM and CVI
and related companies, and the 1995 formation by TWE of the
TWE-Advance/Newhouse Partnership, (ii) the 1995 exchange of
ITOCHU Corporation's and Toshiba Corporation's interests in TWE
for equity interests in Time Warner, (iii) the 1995 and early
1996 refinancing of approximately $4 billion of public debt by
Time Warner and the 1995 execution of a new $8.3 billion credit
agreement, under which approximately $2.7 billion of debt assumed
in the cable acquisitions was refinanced by subsidiaries of Time
Warner and $2.6 billion of pre-existing bank debt was refinanced
by TWE, (iv) the issuance in April 1996 of 1.6 million shares of
Series K Preferred Stock and the use of approximately $1.55
billion of net proceeds therefrom to reduce debt, (v) the 1995
sale of 51% of TWE's interest in Six Flags and (vi) the sale or
expected sale or transfer of certain unclustered cable television
systems owned by TWE, as if each of such transactions had
occurred at the beginning of 1995, Time Warner would have
reported for the three months ended June 30, 1996 and 1995,
respectively, revenues of $2.139 billion and $2.113 billion,
depreciation and amortization of $224 million and $237 million,
operating income of $215 million and $171 million, equity in the
pretax income of the Entertainment Group of $93 million and $73
million, a loss before extraordinary item of $29 million and $50
million ($0.27 and $0.33 per common share) and a net loss of $38
million and $50 million ($0.29 and $0.33 per common share).
As discussed more fully below, the improvement in Time
Warner's pro forma operating results in 1996 as compared to 1995
principally relates to an overall increase in the operating
income of Time Warner's business segments and increased income
from its equity in the pretax income of the Entertainment Group,
offset in part by a $9 million extraordinary loss on the
retirement of debt ($.02 per common share) and a reduction in
interest income related to the resolution of a corporate tax
matter in 1995. However, on a historical basis, the positive
effect from such underlying operating trends was more than offset
by an increase in interest expense relating to approximately $3.3
billion of debt assumed or incurred in the cable acquisitions
and, with respect to Time Warner's 1996 net loss per common
share, by an increase in preferred dividend requirements as a
result of the preferred stock issued in connection with the
Series K Refinancing, the cable acquisitions and the
ITOCHU/Toshiba Transaction.
The Entertainment Group had revenues of $2.610 billion and
net income of $72 million for the three months ended June 30,
1996, compared to revenues of $2.435 billion and net income of
$59 million for the three months ended June 30, 1995. On a pro
forma basis, giving effect to (i) the 1995 formation of the
TWE-Advance/Newhouse Partnership, (ii) the 1995 refinancing of
approximately $2.6 billion of pre-existing bank debt, (iii) the
1995 consolidation of Paragon, (iv) the 1995 sale of 51% of TWE's
interest in Six Flags and (v) the sale or expected sale or
transfer of certain unclustered cable television systems owned by
TWE, as if each of such transactions had occurred at the
beginning of 1995, the Entertainment Group would have reported
for the three months ended June 30, 1995, revenues of $2.321
billion, depreciation and amortization of $263 million, operating
income of $249 million and net income of $55 million. No pro
forma financial information has been presented for the
Entertainment Group for the three months ended June 30, 1996
because all of such transactions are already reflected, in all
material respects, in the historical financial statements of the
Entertainment Group.
As discussed more fully below, the Entertainment Group's
historical operating results in 1996 as compared to pro forma
results in 1995 reflect an overall increase in operating income
generated by its business segments, offset in part by a decrease
in investment-related income and an increase in minority interest
expense related to the TWE-Advance/Newhouse Partnership. On a
historical basis, the positive effect from such underlying
operating trends was slightly mitigated by the lack of
contribution of Six Flags's operating results in 1996 which
exceeded interest savings on lower average debt levels related to
management's debt reduction program.
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.
Time Warner
Publishing. Revenues increased to $1.038 billion, compared
to $928 million in the second quarter of 1995. EBITDA increased
to $156 million from $138 million. Depreciation and amortization
amounted to $31 million in 1996 and $24 million in 1995.
Operating income increased to $125 million from $114 million.
Revenues benefited from across-the-board increases in magazine
circulation, advertising and book revenues. Contributing to the
revenue gain were increases achieved by People, Sports
Illustrated, Time, Entertainment Weekly, Southern Living and the
direct marketing book businesses. EBITDA and operating income
increased as a result of the revenue gains.
Music. Revenues decreased to $876 million, compared to $986
million in the second quarter of 1995. EBITDA was $165 million
for both periods. Depreciation and amortization, including
amortization related to the purchase of WCI, amounted to $95
million for both periods, and operating income was $70 million
for both periods. Revenues decreased principally due to a decline
in international recorded music sales, as well as the absence of
revenues from certain start-up businesses which are no longer
being operated by the Music Division. In addition, the
industry-wide softness experienced in the first quarter in the
overexpanded U.S. retail marketplace did not deteriorate further
which, together with a number of popular releases, contributed to
an increase in domestic recorded music revenues. EBITDA and
operating income were unchanged principally because the improved
domestic recorded music results, higher music publishing results
and the absence of losses from certain start-up businesses, were
offset by lower international recorded music and direct marketing results.
Cable. The 1996 Cable operating results reflect the
acquisitions of Summit effective as of May 2, 1995, KBLCOM
effective as of July 6, 1995 and CVI and related companies
effective as of January 4, 1996 and are not comparative to the
corresponding period in the prior year. Cable operating results
for the second quarter of 1996 consisted of revenues of $230
million, EBITDA of $118 million, depreciation and amortization of
$98 million and operating income of $20 million.
Interest and Other, Net. Interest and other, net, increased
to $282 million in the second quarter of 1996, compared to $201
million in the second quarter of 1995. Interest expense increased
to $224 million, compared to $219 million. The increase in
interest expense was principally due to the assumption or
incurrence of approximately $3.3 billion of debt in the cable
acquisitions, offset in part by the favorable effect from Time
Warner's redemption of the 8.75% Convertible Debentures. There
was other expense, net, of $58 million in the second quarter of
1996, compared to other income, net, of $18 million in 1995,
principally because of a reduction in interest income related to
the resolution of a corporate tax matter in 1995, a decrease in
investment-related income and an increase in dividend
requirements on preferred securities of subsidiaries issued in
1995 in connection with the redemption of the 8.75% Convertible
Debentures.
Entertainment Group
Filmed Entertainment. Revenues increased to $1.272 billion,
compared to $1.154 billion in the second quarter of 1995. EBITDA
increased to $141 million from $117 million. Depreciation and
amortization, including amortization related to the purchase of
WCI, amounted to $62 million in 1996 and $58 million in 1995.
Operating income increased to $79 million from $59 million.
Revenues benefited from increases in worldwide theatrical, home
video and television distribution operations. Domestic theatrical
revenues in 1996 were led by the success of Twister and exceeded
the prior year's performance despite difficult comparisons to
successful films such as Batman Forever. EBITDA and operating
income benefited from the revenue gains.
Six Flags Theme Parks. As a result of TWE's sale of 51% of
its interest in Six Flags, the operating results of Six Flags
have been deconsolidated effective as of June 23, 1995 and TWE's
remaining 49% interest in Six Flags is accounted for under the
equity method of accounting.
Broadcasting - The WB Network. The WB Network recorded an
operating loss of $12 million on $18 million of revenues in the
second quarter of 1996, compared to an operating loss of $12
million on $3 million of revenues in the second quarter of 1995.
The increase in revenues, as well as a corresponding increase in
costs, primarily resulted from the expansion of programming in
September 1995 to two nights of primetime scheduling, and the
unveiling of Kids' WB!, the network's animated programming lineup
on Saturday mornings and weekdays. Due to the start-up nature of
this new national broadcast operation, losses are expected to continue.
Programming - HBO. Revenues increased to $456 million,
compared to $396 million in the second quarter of 1995. EBITDA
increased to $87 million from $75 million. Depreciation and
amortization amounted to $4 million in 1996 and $5 million in
1995. Operating income increased to $83 million from $70 million.
Revenues benefited primarily from a significant increase in
subscriptions. EBITDA and operating income improved principally
as a result of the revenue gains.
Cable. Revenues increased to $961 million, compared to $760
million in the second quarter of 1995. EBITDA increased to $376
million from $319 million. Depreciation and amortization,
including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $229
million in 1996 and $193 million in 1995. Operating income
increased to $147 million from $126 million. Revenues and
operating results benefited from the consolidation of Paragon
effective as of July 6, 1995. Excluding such effect, revenues
benefited from an aggregate increase of 5% in basic cable and
Primestar-related, direct broadcast satellite subscribers,
increases in regulated cable rates as permitted under Time Warner
Cable's "social contract" with the FCC and increases in
pay-per-view and advertising revenues. Excluding the effect of
consolidating Paragon, EBITDA and operating income increased as a
result of the revenue gains, offset in part, with respect to
operating income only, by higher depreciation and amortization
relating to increased capital spending.
Interest and Other, Net. Interest and other, net, decreased
to $134 million in the second quarter of 1996, compared to $140
million in the second quarter of 1995. Interest expense decreased
to $119 million, compared to $148 million in the second quarter
of 1995, principally as a result of interest savings on lower
average debt levels related to management's debt reduction
program and lower short-term, floating-rates of interest paid on
borrowings under TWE's former and existing bank credit
agreements. There was other expense, net, of $15 million in the
second quarter of 1996, compared to other income, net, of $8
million in 1995, principally due to a decrease in
investment-related income, including a reduction in interest
income resulting from lower average cash balances and lower
average principal amounts due under the note receivable from U S WEST.
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Time Warner had revenues of $4.207 billion, a loss of $124
million ($.58 per common share) before an extraordinary loss on
the retirement of debt and a net loss of $159 million ($.67 per
common share) for the six months ended June 30, 1996, compared to
revenues of $3.724 billion and a net loss of $55 million ($.17
per common share) for the six months ended June 30, 1995. Time
Warner's equity in the pretax income of the Entertainment Group
was $209 million for the six months ended June 30, 1996 compared
to $106 million for the six months ended June 30, 1995.
On a pro forma basis, giving effect to (i) the 1995 and
early 1996 acquisitions by Time Warner of Summit, KBLCOM and CVI
and related companies, and the 1995 formation by TWE of the
TWE-Advance/Newhouse Partnership, (ii) the 1995 exchange of
ITOCHU Corporation's and Toshiba Corporation's interests in TWE
for equity interests in Time Warner, (iii) the 1995 and early
1996 refinancing of approximately $4 billion of public debt by
Time Warner and the 1995 execution of a new $8.3 billion credit
agreement, under which approximately $2.7 billion of debt assumed
in the cable acquisitions was refinanced by subsidiaries of Time
Warner and $2.6 billion of pre-existing bank debt was refinanced
by TWE, (iv) the issuance in April 1996 of 1.6 million shares of
Series K Preferred Stock and the use of approximately $1.55
billion of net proceeds therefrom to reduce debt, (v) the 1995
sale of 51% of TWE's interest in Six Flags and (vi) the sale or
expected sale or transfer of certain unclustered cable television
systems owned by TWE, as if each of such transactions had
occurred at the beginning of 1995, Time Warner would have
reported for the six months ended June 30, 1996 and 1995,
respectively, revenues of $4.207 billion and $4.138 billion,
depreciation and amortization of $452 million and $467 million,
operating income of $325 million and $290 million, equity in the
pretax income of the Entertainment Group of $209 million and $128
million, a loss before extraordinary item of $102 million and $94
million ($0.66 and $0.65 per common share) and a net loss of $137
million and $94 million ($0.75 and $0.65 per common share).
As discussed more fully below, the increase in Time Warner's
pro forma net loss in 1996 as compared to 1995 principally
relates to a $35 million extraordinary loss on the retirement of
debt ($.09 per common share) and a decrease in investment-related
income primarily resulting from gains on the sale of certain
assets recognized in 1995, which more than offset an overall
increase in the operating income of Time Warner's business
segments and increased income from its equity in the pretax
income of the Entertainment Group. On a historical basis, such
underlying operating trends were further affected by an increase
in interest expense relating to approximately $3.3 billion of
debt assumed or incurred in the cable acquisitions, and with
respect to Time Warner's 1996 net loss per common share, by an
increase in preferred dividend requirements as a result of the
preferred stock issued in connection with the Series K
Refinancing, the cable acquisitions and the ITOCHU/Toshiba
Transaction.
The Entertainment Group had revenues of $5.097 billion and
net income of $170 million for the six months ended June 30,
1996, compared to revenues of $4.508 billion and net income of
$70 million for the six months ended June 30, 1995. On a pro
forma basis, giving effect to (i) the 1995 formation of the
TWE-Advance/Newhouse Partnership, (ii) the 1995 refinancing of
approximately $2.6 billion of pre-existing bank debt, (iii) the
1995 consolidation of Paragon, (iv) the 1995 sale of 51% of TWE's
interest in Six Flags and (v) the sale or expected sale or
transfer of certain unclustered cable television systems owned by
TWE, as if each of such transactions had occurred at the
beginning of 1995, the Entertainment Group would have reported
for the six months ended June 30, 1995, revenues of $4.582
billion, depreciation and amortization of $533 million, operating
income of $478 million and net income of $95 million. No pro
forma financial information has been presented for the
Entertainment Group for the six months ended June 30, 1996
because all of such transactions are already reflected, in all
material respects, in the historical financial statements of the
Entertainment Group.
As discussed more fully below, the Entertainment Group's
historical operating results in 1996 as compared to pro forma
results in 1995 reflect an overall increase in operating income
generated by its business segments and an increase in
investment-related income, offset in part by an increase in
minority interest expense related to the TWE-Advance/Newhouse
Partnership. On a historical basis, such underlying operating
trends were enhanced by interest savings in 1996 on lower average
debt levels related to management's debt reduction program, and
were offset in part by an increase in minority interest expense
related to the operations of the TWE-Advance/Newhouse Partnership
for a full six-month period.
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.
Time Warner
Publishing. Revenues increased to $1.917 billion, compared
to $1.759 billion in the first six months of 1995. EBITDA
increased to $236 million from $215 million. Depreciation and
amortization amounted to $55 million in 1996 and $46 million in
1995. Operating income increased to $181 million from $169
million. Revenues benefited from across-the-board increases in
magazine circulation, advertising and book revenues. Contributing
to the revenue gain were increases achieved by People, Sports
Illustrated, Entertainment Weekly, Southern Living and the direct
marketing book businesses. EBITDA and operating income increased
as a result of the revenue gains, offset in part by higher paper
costs as a result of price increases and development spending in
new direct-marketing businesses.
Music. Revenues decreased to $1.859 billion, compared to
$1.977 billion in the first six months of 1995. EBITDA decreased
to $311 million from $338 million. Depreciation and amortization,
including amortization related to the purchase of WCI, amounted
to $186 million in 1996 and $185 million in 1995. Operating
income decreased to $125 million from $153 million. Despite
maintaining its leading domestic market position (over 23%), the
Music Division's domestic recorded music operating results in
1996 were negatively affected by the industry-wide softness in
the overexpanded U.S. retail marketplace, which has resulted in a
number of music retail store closings and higher returns of music
product. The decline in revenues reflects (i) the effects from
the current U.S. retail environment, including an increase in the
Music Division's reserve for returns to provide for an
anticipated higher level of returns (ii) a decline in
international recorded music sales and (iii) the absence of
revenues from certain start-up businesses which are no longer
being operated by the Music Division. These effects were
partially offset by an increase in music publishing revenues.
EBITDA and operating income decreased principally as a result of
the decline in the worldwide recorded music business and lower
results from direct marketing activities, offset in part by
improved music publishing results and the absence of losses from
certain start-up businesses.
Cable. The 1996 Cable operating results reflect the
acquisitions of Summit effective as of May 2, 1995, KBLCOM
effective as of July 6, 1995 and CVI and related companies
effective as of January 4, 1996 and are not comparative to the
corresponding period in the prior year. Cable operating results
for the first six months of 1996 consisted of revenues of $447
million, EBITDA of $230 million, depreciation and amortization of
$211 million and operating income of $19 million.
Interest and Other, Net. Interest and other, net, increased
to $578 million in the first six months of 1996, compared to $356
million in the first six months of 1995. Interest expense
increased to $471 million, compared to $429 million. The increase
in interest expense was principally due to the assumption or
incurrence of approximately $3.3 billion of debt in the cable
acquisitions, offset in part by the favorable effect from Time
Warner's redemption of the 8.75% Convertible Debentures. There
was other expense, net, of $107 million in the first six months
of 1996, compared to other income, net, of $73 million in 1995,
principally because of a decrease in investment-related income
resulting from gains on certain asset sales recognized in 1995 in
connection with management's debt reduction program and an
increase in dividend requirements on preferred securities of
subsidiaries issued in 1995 in connection with the redemption of
the 8.75% Convertible Debentures.
Entertainment Group
Filmed Entertainment. Revenues increased to $2.490 billion,
compared to $2.338 billion in the first six months of 1995.
EBITDA increased to $277 million from $240 million. Depreciation
and amortization, including amortization related to the purchase
of WCI, amounted to $125 million in 1996 and $114 million in
1995. Operating income increased to $152 million from $126
million. Revenues benefited from increases in worldwide home
video and consumer products operations. Lower domestic theatrical
revenues in the first quarter of 1996 were overcome by the second
quarter domestic box office performance of theatrical releases,
led by the success of Twister. EBITDA and operating income
benefited from the revenue gains.
Six Flags Theme Parks. As a result of TWE's sale of 51% of
its interest in Six Flags, the operating results of Six Flags
have been deconsolidated effective as of June 23, 1995 and TWE's
remaining 49% interest in Six Flags is accounted for under the
equity method of accounting.
Broadcasting - The WB Network. The WB Network recorded an
operating loss of $36 million on $33 million of revenues in the
first six months of 1996, compared to an operating loss of $33
million on $6 million of revenues in the first six months of
1995. The increased revenues and operating losses are primarily
due to the expansion of programming in September 1995 to two
nights of primetime scheduling, and the unveiling of Kids' WB!,
the network's animated programming lineup on Saturday mornings
and weekdays. Due to the start-up nature of this new national
broadcast operation, losses are expected to continue.
Programming - HBO. Revenues increased to $875 million,
compared to $786 million in the first six months of 1995. EBITDA
increased to $168 million from $146 million. Depreciation and
amortization amounted to $9 million in 1996 and 1995. Operating
income increased to $159 million from $137 million. Revenues
benefited primarily from a significant increase in subscriptions.
EBITDA and operating income improved principally as a result of
the revenue gains.
Cable. Revenues increased to $1.908 billion, compared to
$1.338 billion in the first six months of 1995. EBITDA increased
to $744 million from $575 million. Depreciation and amortization,
including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $451
million in 1996 and $359 million in 1995. Operating income
increased to $293 million from $216 million. Revenues and
operating results benefited from the contribution of the
TWE-Advance/Newhouse Partnership for a full six-month period and
the consolidation of Paragon effective as of July 6, 1995.
Excluding such effects, revenues benefited from an aggregate
increase of 5% in basic cable and Primestar-related, direct
broadcast satellite subscribers, increases in regulated cable
rates as permitted under Time Warner Cable's "social contract"
with the FCC and increases in pay-per-view and advertising
revenues. Excluding the TWE-Advance/Newhouse Partnership and
Paragon effects noted above, EBITDA and operating income
increased as a result of the revenue gains, offset in part, with
respect to operating income only, by higher depreciation and
amortization relating to increased capital spending.
Interest and Other, Net. Interest and other, net, decreased
to $222 million in the first six months of 1996, compared to $304
million in the first six months of 1995. Interest expense
decreased to $240 million, compared to $299 million in the first
six months of 1995, principally as a result of interest savings
on lower average debt levels related to management's debt
reduction program and lower short-term, floating-rates of
interest paid on borrowings under TWE's former and existing bank
credit agreements. There was other income, net, of $18 million in
the first six months of 1996, compared to other expense, net, of
$5 million in 1995, principally due to an overall increase in
investment-related income resulting from gains on the sale of
certain unclustered cable systems recognized in 1996 in
connection with management's debt reduction program, which more
than exceeded a reduction in interest income resulting from lower
average cash balances and lower average principal amounts due
under the note receivable from U S WEST.
FINANCIAL CONDITION AND LIQUIDITY
June 30, 1996
Time Warner
Financial Condition
Time Warner had $10 billion of debt, $482 million of cash
and equivalents (net debt of $9.5 billion), $225 million of
borrowings against future stock option proceeds, $949 million of
mandatorily redeemable preferred securities of subsidiaries,
$1.586 billion of Series K Preferred Stock and $3.8 billion of
shareholders' equity at June 30, 1996, compared to $9.9 billion
of debt, $1.2 billion of cash and equivalents (net debt of $8.7
billion), $949 million of mandatorily redeemable preferred
securities of subsidiaries and $3.7 billion of shareholders'
equity at December 31, 1995. The increase in net debt principally
reflects the assumption of approximately $2 billion of debt
related to the CVI acquisition, offset in part by the use of
approximately $1.55 billion of net proceeds from the issuance of
the Series K Preferred Stock to reduce debt. The increase in
shareholders' equity reflects the issuance in 1996 of
approximately 2.9 million shares of common stock and
approximately 6.3 million shares of preferred stock in connection
with the CVI acquisition, offset in part by the repurchase of
approximately 8.8 million shares of Time Warner Common Stock at
an aggregate cost of approximately $360 million. On a combined
basis (Time Warner and the Entertainment Group together), excluding
borrowings against future stock option proceeds, there was
$14.9 billion of net debt at June 30, 1996, compared to $14.7
billion of net debt at the beginning of the year.
Investment in TWE
Time Warner's investment in TWE at June 30, 1996 consisted
of interests in 74.49% of the pro rata priority capital ("Series
A Capital") and residual equity capital ("Residual Capital") of
TWE, and 100% of the senior priority capital ("Senior Capital")
and junior priority capital ("Series B Capital") of TWE. Such
priority capital interests provide Time Warner (and with respect
to the Series A Capital only, U S WEST) with certain priority
claims to the net partnership income of TWE and distributions of
TWE partnership capital, including certain priority distributions
of partnership capital in the event of liquidation or dissolution
of TWE. Each level of priority capital interest provides for an
annual rate of return equal to or exceeding 8%, including an
above-market 13.25% annual rate of return (11.25% to the extent
concurrently distributed) related to Time Warner's Series B
Capital interest, which, when taken together with Time Warner's
contributed capital, represented a cumulative priority Series B
Capital interest of $4.9 billion at June 30, 1996. While the TWE
partnership agreement contemplates the reinvestment of
significant partnership cash flows in the form of capital
expenditures and otherwise provides for certain other restrictions
that are expected to limit cash distributions on partnership
interests for the foreseeable future, Time Warner's $1.5 billion
Senior Capital interest and, to the extent not previously
distributed, partnership income allocated thereto (based on an
8% annual rate of return) is required to be distributed to Time
Warner in three annual installments beginning on July 1, 1997.
Series K Exchangeable Preferred Stock
In April 1996, Time Warner raised approximately $1.55
billion of net proceeds for debt reduction in a private placement
of 1.6 million shares of Series K Preferred Stock, which pay
cumulative dividends at the rate of 10-1/4% per annum. The
issuance of the Series K Preferred Stock allowed the Company to
realize cash proceeds through a security whose payment terms are
principally linked (until a reorganization of TWE occurs, if any)
to a portion of Time Warner's currently noncash-generating
interest in the Series B Capital of TWE, as more fully described
herein. Time Warner used the proceeds raised from the issuance of
the Series K Preferred Stock to redeem $250 million principal
amount of 8.75% Debentures due April 1, 2017 for $265 million in
May 1996 (including redemption premiums and accrued interest
thereon), and to reduce bank debt of TWI Cable Inc. by
approximately $1.3 billion. In connection with the redemption of
the 8.75% Debentures due April 1, 2017, Time Warner recognized an
extraordinary loss of $9 million in May 1996.
Generally, the terms of the Series K Preferred Stock only
require Time Warner to pay cash dividends or to redeem, prior to
its mandatory redemption date, any portion of the security for
cash upon the receipt of certain cash distributions from TWE with
respect to Time Warner's interests in the Series B Capital and
Residual Capital of TWE (excluding stock option related
distributions and certain tax related distributions). However,
because such cash distributions are subject to restrictions under
the TWE partnership agreement, Time Warner does not expect to pay
cash dividends or to redeem any portion of the Series K Preferred
Stock for cash in the foreseeable future. Instead, Time Warner
expects to satisfy its dividend requirements through the issuance
of additional shares of Series K Preferred Stock with an
aggregate liquidation preference equal to the amount of such
dividends. In addition, upon a reorganization of TWE, Time Warner
must elect either to redeem each outstanding share of Series K
Preferred Stock for cash, subject to certain conditions, or to
exchange the Series K Preferred Stock for new Series L Preferred
Stock, which also pays cumulative dividends at the rate of
10-1/4% per annum but is not linked to Time Warner's interest in
the Series B Capital of TWE. The terms of the Series L Preferred
Stock do not require Time Warner to pay cash dividends until July
2006 and provide Time Warner with an option to exchange the
Series L Preferred Stock, subject to certain conditions, into
10-1/4% Senior Subordinated Debentures which do not require the
payment of cash interest until July 2006. See Note 7 to the
accompanying consolidated financial statements for a summary of
the principal terms of the Series K Preferred Stock.
Common Stock Repurchase Program
In April 1996, Time Warner's Board of Directors authorized a
program to repurchase, from time to time, up to 15 million shares
of Time Warner common stock. In connection therewith, Time Warner
entered into a five-year, $750 million revolving credit facility
(the "Stock Option Proceeds Credit Facility") in May 1996
principally to support such stock repurchases. The common stock
repurchased under the program is expected to be used to satisfy
future share issuances related to the exercise of existing
employee stock options. Actual repurchases in any period will be
subject to market conditions. As of June 30, 1996, Time Warner
had acquired approximately 8.8 million shares of its common stock
for an aggregate cost of approximately $360 million. Such
repurchases were principally funded with borrowings under the
Stock Option Proceeds Credit Facility and available cash and
equivalents.
The Stock Option Proceeds Credit Facility provides for
borrowings of up to $750 million, of which up to $100 million is
reserved solely for the payment of interest and fees thereunder.
At June 30, 1996, $225 million had been borrowed under the Stock
Option Proceeds Credit Facility. Borrowings under the Stock
Option Proceeds Credit Facility generally bear interest at LIBOR
plus a margin equal to 75 basis points and are generally required
to be prepaid from the cash proceeds received by Time Warner from
the exercise of designated employee stock options. Such
prepayments will permanently reduce the borrowing availability
under the facility. At August 2, 1996, based on a closing market
price of Time Warner common stock of $36.50, the aggregate
exercise prices of outstanding vested, "in the money" stock
options was approximately $1.5 billion, representing a 2 to 1
coverage ratio over the related borrowing availability. To the
extent that such stock option proceeds are not sufficient to
satisfy Time Warner's obligations under the Stock Option Proceeds
Credit Facility, Time Warner is generally required to repay such
borrowings using proceeds from the sale of shares of its common
stock held in escrow under the Stock Option Proceeds Credit
Facility or, at Time Warner's election, using available cash on
hand. Time Warner initially placed 36 million shares in escrow
under this arrangement and may, from time to time, have up to
52.5 million shares held in escrow. Such shares are not
considered to be issued and outstanding capital stock of the
Company.
Because borrowings under the Stock Option Proceeds Credit
Facility are expected to be principally repaid by Time Warner
from the cash proceeds from the exercise of employee stock
options, Time Warner's principal credit rating agencies have
concluded that such borrowings and related financing costs are
credit neutral and are excludable from debt and interest expense,
respectively, for purposes of determining Time Warner's leverage
and coverage ratios.
Debt Refinancings
In 1996, as more fully described below, Time Warner
continued to capitalize on favorable market conditions through
certain debt refinancings, which lowered interest rates,
staggered debt maturities and, with respect to the redemption of
the 8.75% Convertible Debentures in February 1996, eliminated the
potential dilution from the conversion of such securities into
25.7 million shares of common stock.
In January 1996, in connection with its acquisition of CVI
and related companies, Time Warner assumed $500 million of public
notes and debentures of CVI and a subsidiary of Time Warner
borrowed $1.5 billion under its $8.3 billion credit agreement to
refinance a like-amount of other indebtedness assumed or incurred
in such acquisition.
In February 1996, Time Warner redeemed the remaining $1.2
billion principal amount of 8.75% Convertible Debentures for
$1.28 billion, including redemption premiums and accrued interest
thereon. The redemption was financed with (1) proceeds raised
from a $575 million issuance of Company-obligated mandatorily
redeemable preferred securities of a subsidiary in December 1995
and (2) $750 million of proceeds raised from the issuance in
January 1996, of (i) $400 million principal amount of 6.85%
debentures due 2026, which are redeemable at the option of the
holders thereof in 2003, (ii) $200 million principal amount of
8.3% discount debentures due 2036, which do not pay cash interest
until 2016, (iii) $166 million principal amount of 7.48%
debentures due 2008 and (iv) $150 million principal amount of
8.05% debentures due 2016. In connection with the 1996 redemption
of the 8.75% Convertible Debentures, Time Warner recognized an
extraordinary loss of $26 million.
Cash Flows
During the first six months of 1996, Time Warner's cash
provided by operations amounted to $81 million and reflected $777
million of EBITDA from its Publishing, Music and Cable businesses
and $132 million of distributions from TWE, less $426 million of
interest payments, $133 million of income taxes, $36 million of
corporate expenses and $233 million related to an increase in
other working capital requirements, balance sheet accounts and
noncash items. Cash used by operations of $99 million for the
first six months of 1995 reflected $553 million of business
segment EBITDA and $5 million of net distributions from TWE, less
$289 million of interest payments, $127 million of income taxes,
$39 million of corporate expenses and $202 million related to an
increase in other working capital requirements, balance sheet
accounts and noncash items.
Cash used by investing activities increased to $303 million
in the first six months of 1996, compared to $31 million in the
first six months of 1995, principally as a result of the cash
portion of the consideration paid to acquire CVI and related
companies and a $129 million decrease in investment proceeds
realized in 1995 in connection with management's debt reduction
program. Capital expenditures increased to $161 million in the
first six months of 1996, compared to $97 million in 1995,
principally as a result of higher cable capital spending
associated with Time Warner's cable acquisitions.
Cash used by financing activities was $481 million for the
first six months of 1996, compared to cash provided by financing
activities of $445 million for the first six months of 1995. The
use of cash in 1996 principally resulted from the use of $135
million of available cash and equivalents to finance a portion of
the Company's share repurchase program and the use of $557
million of noncurrent cash and equivalents raised in the December
1995 issuance of the Preferred Trust Securities to redeem the
remaining portion of the 8.75% Convertible Debentures in February
1996, offset in part by borrowings incurred to finance the cash
portion of the consideration paid to acquire CVI and related
companies. In addition, Time Warner raised approximately $1.55
billion of net proceeds in 1996 from the issuance of 1.6 billion
shares of Series K Preferred Stock and used the net proceeds
therefrom to reduce debt. Cash provided by financing activities
in 1995 principally resulted from the issuance of $500 million
principal amount of ten-year notes in June 1995, the proceeds of
which were not used until September 1995 in connection with the
redemption of a portion of the then outstanding 8.75% Convertible
Debentures. Cash dividends paid increased to $135 million for the
first six months of 1996, compared to $73 million for the first
six months of 1995, principally as a result of dividends paid on
the preferred stock issued in connection with the cable
acquisitions and the ITOCHU/Toshiba Transaction.
The assets and cash flows of TWE are restricted by the TWE
partnership agreement and are unavailable to Time Warner except
through the payment of certain fees, reimbursements, cash
distributions and loans, which are subject to limitations. Under
the New Credit Agreement, TWE and TWI Cable are permitted to
incur additional indebtedness to make loans, advances,
distributions and other cash payments to Time Warner, subject to
their respective compliance with the cash flow coverage and
leverage ratio covenants contained therein.
Management believes that Time Warner's operating cash flow,
cash and marketable securities and additional borrowing capacity
are sufficient to fund its capital and liquidity needs for the
foreseeable future without distributions and loans from TWE above
those permitted by existing agreements.
Entertainment Group
Financial Condition
The Entertainment Group had $5.6 billion of debt, $1.5
billion of Time Warner General Partners' Senior Capital and $6.7
billion of partners' capital at June 30, 1996, compared to $6.2
billion of debt, $1.4 billion of Time Warner General Partners'
Senior Capital and $6.6 billion of partners' capital (net of the
$169 million uncollected portion of the note receivable from U S
WEST) at December 31, 1995. Cash and equivalents were $218
million at June 30, 1996, compared to $209 million at December
31, 1995, reducing the debt-net-of-cash amounts for the
Entertainment Group to $5.4 billion and $6 billion, respectively.
Cash Flows
In the first six months of 1996, the Entertainment Group's
cash provided by operations amounted to $1.198 billion and
reflected $1.153 billion of EBITDA from the Filmed Entertainment,
Broadcasting-The WB Network, Programming-HBO and Cable businesses
and $359 million related to a reduction in working capital
requirements, other balance sheet accounts and noncash items,
less $247 million of interest payments, $32 million of income
taxes and $35 million of corporate expenses. Cash provided by
operations of $697 million in the first six months of 1995
reflected $988 million of business segment EBITDA and $76 million
related to a reduction in working capital requirements, less $303
million of interest payments, $34 million of income taxes and $30
million of corporate expenses.
Cash used by investing activities was $651 million in the
first six months of 1996, compared to cash provided by investing
activities of $175 million in the first six months of 1995,
principally as a result of a $766 million decrease in investment
proceeds realized in 1995 in connection with management's debt
reduction program. Capital expenditures increased to $781 million
in the first six months of 1996, compared to $704 million in the
first six months of 1995, principally as a result of higher cable
capital spending as discussed more fully below.
Cash used by financing activities was $538 million in the
first six months of 1996, compared to cash provided by financing
activities of $320 million in the first six months of 1995,
principally as a result of a $607 million net reduction in debt
in 1996 and a $127 million increase in net distributions paid to
Time Warner, offset in part by a $74 million decrease in
collections on the note receivable from U S WEST.
Management believes that TWE's operating cash flow, cash and
equivalents and additional borrowing capacity are sufficient to
fund its capital and liquidity needs for the foreseeable future.
Cable Capital Spending
Since the beginning of 1994, Time Warner Cable has been
engaged in a plan to upgrade the technological capability and
reliability of its cable television systems and develop new
services, which it believes will position the business for
sustained, long-term growth. Capital spending by Time Warner
Cable, including the cable operations of both Time Warner and
TWE, amounted to $681 million in the six months ended June 30,
1996, compared to $514 million in the six months ended June 30,
1995, and was financed in part through collections on the note
receivable from U S WEST of $169 million and $243 million,
respectively. Cable capital spending is budgeted to be
approximately $900 million for the remainder of 1996 and is
expected to be funded principally by cable operating cash flow.
In exchange for certain flexibility in establishing cable rate
pricing structures for regulated services that went into effect
on January 1, 1996 and consistent with Time Warner Cable's
long-term strategic plan, Time Warner Cable has agreed with the
FCC to invest a total of $4 billion in capital costs in
connection with the upgrade of its cable infrastructure, which is
expected to be substantially completed over the next five years.
The agreement with the FCC covers all of the cable operations of
Time Warner Cable, including the owned or managed cable
television systems of Time Warner, TWE and the
TWE-Advance/Newhouse Partnership. Management expects to continue
to finance such level of investment principally through the
growth in cable operating cash flow derived from increases in
subscribers and cable rates, bank credit agreement borrowings and
the development of new revenue streams from expanded programming
options, high speed data transmission, telephony and other services.
Warner Bros. Backlog
Warner Bros.' backlog, representing the amount of future
revenue not yet recorded from cash contracts for the licensing of
theatrical and television product for pay cable, network, basic
cable and syndicated television exhibition, amounted to $1.601
billion at June 30, 1996, compared to $1.056 billion at December
31, 1995 (including amounts relating to HBO of $208 million at
June 30, 1996 and $175 million at December 31, 1995). Warner
Bros.' backlog increased principally as a result of the licensing
of the hit television series Friends and ER for domestic
syndication and cable television exhibition beginning in 1998.
Because backlog generally relates to contracts for the licensing
of theatrical and television product which have already been
produced, the recognition of revenue for such completed product
is principally only dependent upon the commencement of the
availability period for telecast under the terms of the related
licensing agreement. In addition, cash licensing fees are
collected periodically over the term of the related licensing
agreements. Accordingly, the portion of backlog for which cash
advances have not already been received has significant
off-balance sheet asset value as a source of future funding. The
backlog excludes advertising barter contracts, which are also
expected to result in the future realization of cash through the
sale of advertising spots received under such contracts.
Interest Rate and Foreign Currency Risk Management
Interest Rate Swap Contracts
Time Warner uses interest rate swap contracts to adjust the
proportion of total debt that is subject to variable and fixed
interest rates. At June 30, 1996, Time Warner had interest rate
swap contracts to pay floating-rates of interest (average
six-month LIBOR rate of 5.5%) and receive fixed-rates of interest
(average rate of 5.4%) on $2.6 billion notional amount of
indebtedness, which resulted in approximately 46% of Time
Warner's underlying debt, and 41% of the debt of Time Warner and
the Entertainment Group combined, being subject to variable
interest rates. The notional amount of outstanding contracts at
June 30, 1996 by year of maturity, along with the related average
fixed-rates of interest to be received and the average
floating-rates of interest to be paid, are as follows: 1996-$300
million (receive-4.6%; pay-5.6%); 1998-$700 million
(receive-5.5%; pay-5.6%); 1999-$1.2 billion (receive-5.5%;
pay-5.4%); and 2000-$400 million (receive-5.5%; pay-5.4%). At
December 31, 1995, Time Warner had interest rate swap contracts
on a like-amount of $2.6 billion notional amount of indebtedness.
Based on the level of interest rates prevailing at June 30,
1996, the fair value of Time Warner's fixed-rate debt was less
than its carrying value by $12 million and it would have cost $58
million to terminate the related interest rate swap contracts,
which combined is the equivalent of an unrealized loss of $46
million. Based on the level of interest rates prevailing at
December 31, 1995, the fair value of Time Warner's fixed-rate
debt exceeded its carrying value by $407 million and it would
have cost $9 million to terminate its interest rate swap
contracts, which combined was the equivalent of an unrealized
loss of $416 million. Unrealized gains or losses on debt or
interest rate swap contracts are not recognized for financial
reporting purposes unless the debt is retired or the contracts
are terminated prior to their maturity.
Changes in the unrealized gains or losses on interest rate
swap contracts and debt do not result in the realization or
expenditure of cash unless the contracts are terminated or the
debt is retired. However, based on Time Warner's variable-rate
debt and related interest rate swap contracts outstanding at June
30, 1996, each 25 basis point increase or decrease in the level
of interest rates would respectively increase or decrease Time
Warner's annual interest expense and related cash payments by
approximately $12 million, including $7 million related to
interest rate swap contracts. Such potential increases or
decreases are based on certain simplifying assumptions, including
a constant level of variable-rate debt and related interest rate
swap contracts during the period and, for all maturities, an
immediate, across-the-board increase or decrease in the level of
interest rates with no other subsequent changes for the remainder
of the period.
Foreign Exchange Contracts
Time Warner uses foreign exchange contracts 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.
As part of its overall strategy to manage the level of exposure
to the risk of foreign currency exchange rate fluctuations, Time
Warner hedges a portion of its and TWE's combined foreign
currency exposures anticipated over the ensuing twelve month
period. At June 30, 1996, Time Warner has effectively hedged
approximately half of the combined estimated foreign currency
exposures that principally relate to anticipated cash flows to be
remitted to the U.S. over the ensuing twelve month period, using
foreign exchange contracts that generally have maturities of six
months or less, which are generally rolled over to provide
continuing coverage throughout the year. Time Warner often closes
foreign exchange sale contracts by purchasing an offsetting
purchase contract. At June 30, 1996, Time Warner had contracts
for the sale of $483 million and the purchase of $165 million of
foreign currencies at fixed rates, primarily English pounds (28%
of net contract value), German marks (23%), Canadian dollars
(19%), French francs (14%) and Japanese yen (11%), compared to
contracts for the sale of $504 million and the purchase of $140
million of foreign currencies at December 31, 1995.
Unrealized gains or losses related to foreign exchange
contracts are recorded in income as the market value of such
contracts change; accordingly, the carrying value of foreign
exchange contracts approximates market value. The carrying value
of foreign exchange contracts was not material at June 30, 1996
and December 31, 1995. No cash is required to be received or paid
with respect to such gains and losses until the related foreign
exchange contracts are settled, generally at their respective
maturity dates. For the six months ended June 30, 1996 and 1995,
Time Warner recognized $11 million in gains and $26 million in
losses, respectively, and TWE recognized $4 million in gains and
$13 million in losses, respectively, on foreign exchange
contracts, which were or are expected to be offset by
corresponding decreases and increases, respectively, in the
dollar value of foreign currency royalties and license fee
payments that have been or are anticipated to be received in cash
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.
Based on the foreign exchange contracts outstanding at June
30, 1996, each 5% devaluation of the U.S. dollar as compared to
the level of foreign exchange rates for currencies under contract
at June 30, 1996 would result in approximately $24 million of
unrealized losses and $8 million of unrealized gains on foreign
exchange contracts involving foreign currency sales and
purchases, respectively. Conversely, a 5% appreciation of the
U.S. dollar would result in $24 million of unrealized gains and
$8 million of unrealized losses, respectively. At June 30, 1996,
none of Time Warner's foreign exchange purchase contracts relates
to TWE's foreign currency exposure. However, with regard to the
$24 million of unrealized losses or gains on foreign exchange
sale contracts, Time Warner would be reimbursed by TWE, or would
reimburse TWE, respectively, for approximately $5 million related
to TWE's foreign currency exposure. Consistent with the nature of
the economic hedge provided by such foreign exchange contracts,
such unrealized gains or losses would be offset by corresponding
decreases or increases, respectively, in the dollar value of
future foreign currency royalty and license fee payments that
would be received in cash within the ensuing twelve month period
from the sale of U.S. copyrighted products abroad.
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
1996 1995
(millions, except
per share amounts)
ASSETS
Current assets
Cash and equivalents $ 482 $ 628
Receivables, less allowances of
$746 and $786 1,356 1,755
Inventories 450 443
Prepaid expenses 936 894
Total current assets 3,224 3,720
Cash and equivalents segregated for
redemption of long-term debt - 557
Investments in and amounts due to and
from Entertainment Group 5,945 5,734
Other investments 2,507 2,389
Property, plant and equipment, net 1,481 1,119
Music catalogues, contracts and copyrights 1,080 1,140
Cable television franchises 3,970 1,696
Goodwill 5,825 5,213
Other assets 476 564
Total assets $24,508 $22,132
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties payable $ 1,361 $ 1,427
Debt due within one year 43 34
Other current liabilities 1,358 1,566
Total current liabilities 2,762 3,027
Long-term debt 9,928 9,907
Borrowings against future stock
option proceeds 225 -
Deferred income taxes 3,983 3,420
Unearned portion of paid subscriptions 688 654
Other liabilities 544 508
Company-obligated mandatorily redeemable
preferred securities of subsidiaries
holding solely subordinated notes and
debentures of the Company (a) 949 949
Series K exchangeable preferred stock,
$1 par value, 1.6 million shares
outstanding at June 30, 1996 and
$1.636 billion liquidation preference 1,586 -
Shareholders' equity
Preferred stock, $1 par value, 35.6 million
and 29.7 million shares outstanding, $3.559
billion and $2.994 billion liquidation
preference 36 30
Common stock, $1 par value, 386.8 million
and 387.7 million shares outstanding
(excluding 53.2 million and 45.7 million
treasury shares) 387 388
Paid-in capital 5,866 5,422
Unrealized gains on certain marketable
securities 177 116
Accumulated deficit (2,623) (2,289)
Total shareholders' equity 3,843 3,667
Total liabilities and shareholders' equity $24,508 $22,132
____________
(a) Includes $374 million of preferred securities that are
redeemable for cash, or at Time Warner's option,
approximately 12.1 million shares of Hasbro, Inc.
common stock owned by Time Warner (Note 6).
See accompanying notes.
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
(millions, except per share amounts)
Revenues (a) $2,139 $1,907 4,207 $3,724
Cost of revenues (a)(b) 1,248 1,019 2,525 2,122
Selling, general and
administrative (a)(b) 676 704 1,357 1,280
Operating expenses 1,924 1,723 3,882 3,402
Business segment operating income 215 184 325 322
Equity in pretax income of
Entertainment Group (a) 93 84 209 106
Interest and other, net (a) (282) (201) (578) (356)
Corporate expenses (a) (18) (19) (36) (39)
Income (loss) before income taxes 8 48 (80) 33
Income tax provision (39) (56) (44) (88)
Loss before extraordinary item (31) (8) (124) (55)
Extraordinary loss on retirement
of debt, net of $5 million and
$22 million income tax benefit (9) - (35) -
Net loss (40) (8) (159) (55)
Preferred dividend requirements (70) (5) (104) (8)
Net loss applicable to common shares $ (110) $ (13) $ (263) $ (63)
Loss per common share:
Loss before extraordinary item $(0.26) $(0.03) $(0.58) $(0.17)
Net loss $(0.28) $(0.03) $(0.67) $(0.17)
Average common shares 389.5 381.4 390.6 380.5
__________________
(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, 1996,
respectively, and for the corresponding periods in the prior
year: revenues- $62 million and $103 million in 1996, and $49
million and $94 million in 1995; cost of revenues- $(53) million
and $(79) million in 1996, and $(25) million and $(49) million in
1995; selling, general and administrative- $5 million and $5
million in 1996, and $16 million and $29 million in 1995; equity
in pretax income of Entertainment Group- $4 million and $(4)
million in 1996, and $(26) million and $(60) million in 1995;
interest and other, net- $(8) million and $(17) million in 1996,
and $(5) million and $1 million in 1995; and corporate expenses-
$18 million and $35 million in 1996, and $15 million and $30
million in 1995.
(b) Includes depreciation and
amortization expense of: $ 224 $ 119 $ 452 $ 231
See accompanying notes.
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
1996 1995
(millions)
OPERATIONS
Net loss $ (159) $ (55)
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt 35 -
Depreciation and amortization 452 231
Noncash interest expense 46 116
Excess of equity in pretax income of
Entertainment Group over distributions (77) (101)
Changes in operating assets and liabilities (216) (290)
Cash provided (used) by operations 81 (99)
INVESTING ACTIVITIES
Investments and acquisitions (307) (228)
Capital expenditures (161) (97)
Investment proceeds 165 294
Cash used by investing activities (303) (31)
FINANCING ACTIVITIES
Borrowings 2,298 650
Debt repayments (4,074) (166)
Borrowings against future stock
option proceeds 225 -
Repurchases of Time Warner common stock (360) -
Issuance of Series K Preferred Stock 1,552 -
Dividends paid (135) (73)
Other 13 34
Cash provided (used) by financing activities (481) 445
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (703) 315
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD (a) 1,185 282
CASH AND EQUIVALENTS AT END OF PERIOD $ 482 $597
_______________
(a) Includes current and noncurrent cash and equivalents at
December 31, 1995.
See accompanying notes.
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Time Warner Inc. ("Time Warner" or the "Company") is the
world's leading media company, whose principal business objective
is to create and distribute branded information and entertainment
copyrights throughout the world. Time Warner has interests in
three fundamental areas of business: Entertainment, consisting
principally of interests in recorded music and music publishing,
filmed entertainment, broadcasting, theme parks and cable
television programming; News and Information, consisting
principally of interests in magazine publishing, book publishing
and direct marketing; and Telecommunications, consisting
principally of interests in cable television systems.
Substantially all of Time Warner's interests in filmed
entertainment, broadcasting, theme parks, cable television
programming and a majority of its cable television systems are
held through Time Warner Entertainment Company, L.P. ("TWE"), a
partnership in which Time Warner owns general and limited
partnership interests in 74.49% of the pro rata priority capital
("Series A Capital") and residual equity capital ("Residual
Capital") of TWE and 100% of the senior priority capital ("Senior
Capital") and junior priority capital ("Series B Capital") of
TWE. The remaining 25.51% limited partnership interests in the
Series A Capital and Residual Capital of TWE are held by a
subsidiary of U S WEST, Inc. ("U S WEST"). Time Warner does not
consolidate TWE and certain related companies (the "Entertainment
Group") for financial reporting purposes because of certain
limited partnership approval rights related to TWE's interest in
certain cable television systems.
Each of the business interests within Entertainment, News
and Information and Telecommunications is important to
management's objective of increasing shareholder value through
the creation, extension and distribution of recognizable brands
and copyrights throughout the world. Such brands and copyrights
include (1) copyrighted music from many of the world's leading
recording artists that is produced and distributed by a family of
established record labels such as Warner Bros. Records, the
Atlantic and Elektra Entertainment Groups and Warner Music
International, (2) the unique and extensive film and television
libraries of Warner Bros. and trademarks such as the Looney Tunes
characters and Batman, (3) The WB Network, a new national
broadcasting network launched in 1995 as an extension of the
Warner Bros. brand and as an additional distribution outlet for
Warner Bros.' collection of children cartoons and television
programming, (4) Six Flags, the largest regional theme park
operator in the United States, in which TWE owns a 49% interest,
(5) HBO and Cinemax, the leading pay television services, (6)
magazine franchises such as Time, People and Sports Illustrated
and direct marketing brands such as Time Life Inc. and
Book-of-the-Month Club and (7) Time Warner Cable, the second
largest operator of cable television systems in the U.S.
The operating results of Time Warner's various business
interests are presented herein as an indication of financial
performance (Note 9). Except for start-up losses incurred in
connection with The WB Network, Time Warner's principal business
interests generate significant operating income and cash flow
from operations. The cash flow from operations generated by such
business interests is significantly greater than their operating
income due to significant amounts of noncash amortization of
intangible assets recognized in various acquisitions accounted
for by the purchase method of accounting. Noncash amortization of
intangible assets recorded by Time Warner's business interests,
including the unconsolidated business interests of the
Entertainment Group, amounted to $256 million and $199 million
for the three months ended June 30, 1996 and 1995, respectively,
and $523 million and $388 million for the six months ended June
30, 1996 and 1995, respectively.
Basis of Presentation
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 Time Warner for the year ended December 31, 1995.
The consolidated financial statements of Time Warner reflect
the acquisitions of Summit Communications Group, Inc. ("Summit")
effective as of May 2, 1995, KBLCOM Incorporated ("KBLCOM")
effective as of July 6, 1995 and Cablevision Industries
Corporation ("CVI") and related companies effective as of January
4, 1996 (collectively, the "Cable Acquisitions"). Certain
reclassifications have been made to the 1995 financial statements
to conform to the 1996 presentation.
Effective January 1, 1996, Time Warner adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" ("FAS 121"), which established standards for the
recognition and measurement of impairment losses on long-lived
assets and certain intangible assets. The adoption of FAS 121 did
not have a material effect on Time Warner's financial statements.
2. ENTERTAINMENT GROUP
Time Warner's investment in and amounts due to and from the
Entertainment Group at June 30, 1996 and December 31, 1995
consists of the following:
June 30, December 31,
1996 1995
(millions)
Investment in TWE $6,239 $6,179
Stock option related distributions due
from TWE 137 122
Credit agreement debt due to TWE (400) (400)
Other liabilities due to TWE, principally
related to home video distribution (281) (354)
Other receivables due from TWE 135 76
Investment in and amounts due to and
from TWE 5,830 5,623
Investment in other Entertainment Group
companies 115 111
Total $5,945 $5,734
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 of TWE ("Time Warner
General Partners"). Time Warner acquired the aggregate 11.22%
limited partnership interests previously held by subsidiaries of
each of ITOCHU Corporation and Toshiba Corporation in 1995 for an
aggregate cost of $1.36 billion, consisting of 15 million shares
of convertible preferred stock (Series G Preferred Stock, Series
H Preferred Stock and Series I Preferred Stock) and $10 million
in cash (the "ITOCHU/Toshiba Transaction"). Accordingly, Time
Warner and certain of its wholly-owned subsidiaries collectively
own general and limited partnership interests in 74.49% of the
Series A Capital and Residual Capital of TWE, and 100% of the
Senior Capital and Series B Capital of TWE. The remaining 25.51%
limited partnership interests in the Series A Capital and
Residual Capital of TWE are owned by U S WEST. The ITOCHU/Toshiba
Transaction was accounted for by the purchase method of
accounting for business combinations.
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 $168 million and $60
million in the six months ended June 30, 1996 and 1995,
respectively, no portion of which was allocated to the limited
partnership interests.
Each Time Warner General Partner has guaranteed a pro rata
portion of approximately $5.5 billion of TWE's debt and accrued
interest at June 30, 1996, 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, the deconsolidation of Six Flags Entertainment Corporation
("Six Flags") effective as of June 23, 1995 and the consolidation
of Paragon Communications ("Paragon") effective as of July 6, 1995.
TIME WARNER ENTERTAINMENT GROUP
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
(millions)
Operating Statement Information
Revenues $2,610 $2,435 $5,097 $4,508
Depreciation and amortization 295 283 585 513
Business segment operating income 297 274 568 475
Interest and other, net 134 140 222 304
Minority interest 52 35 102 35
Income before income taxes 93 84 209 106
Net income 72 59 170 70
Six Months
Ended June 30,
1996 1995
(millions)
Cash Flow Information
Cash provided by operations $1,198 $ 697
Capital expenditures (781) (704)
Investments and acquisitions (66) (83)
Investment proceeds 196 962
Borrowings 63 235
Debt repayments (670) (237)
Collections on note receivable from U S WEST 169 243
Capital distributions (132) (5)
Increase in cash and equivalents 9 1,192
June 30, December 31,
1996 1995
(millions)
Balance Sheet Information
Cash and equivalents $ 218 $ 209
Total current assets 2,710 2,909
Total assets 18,968 18,960
Total current liabilities 3,295 3,230
Long-term debt 5,575 6,137
Minority interests 848 726
Time Warner General Partners' Senior Capital 1,483 1,426
Partners' capital 6,735 6,576
The assets and cash flows of TWE are restricted by the TWE
partnership and credit agreements and are unavailable for use by
the partners except through the payment of certain fees,
reimbursements, cash distributions and loans, which are subject
to limitations. At June 30, 1996 and December 31, 1995, the Time
Warner General Partners had recorded $137 million and $122
million, respectively, of stock option related distributions due
from TWE, based on closing prices of Time Warner common stock of
$39.25 and $37.875, respectively. Time Warner is paid when the
options are exercised. The Time Warner General Partners also
receive tax-related distributions from TWE. The payment of such
distributions was previously subject to restrictions until July
1995 and is now made to the Time Warner General Partners on a
current basis. During the six months ended June 30, 1996, the
Time Warner General Partners received distributions from TWE in
the amount of $132 million, consisting of $123 million of
tax-related distributions and $9 million of stock option related
distributions. During the six months ended June 30, 1995, the
Time Warner General Partners received $5 million of stock option
related distributions from TWE.
On June 23, 1995, TWE sold 51% of its interest in 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, Six Flags has
been deconsolidated and TWE's remaining 49% interest in Six Flags
is accounted for under the equity method of accounting. TWE
reduced debt by approximately $850 million in 1995 in connection
with the transaction, and a portion of the income on the
transaction has been deferred by TWE principally as a result of
its guarantee of certain third-party, zero-coupon indebtedness of
Six Flags due in 1999.
3. CABLE TRANSACTIONS
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 that
included Advance/Newhouse's 10% interest in Primestar Partners,
L.P. ("Primestar"). 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 consolidated
financial statements 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.
On May 2, 1995, Time Warner acquired Summit, which owned
cable television systems serving approximately 162,000
subscribers, in exchange for the issuance of approximately 1.6
million shares of Common Stock and approximately 3.3 million
shares of a new convertible preferred stock ("Series C Preferred
Stock") and the assumption of $140 million of indebtedness. The
acquisition was accounted for by the purchase method of
accounting for business combinations; accordingly, the cost to
acquire Summit of approximately $351 million was allocated to the
assets acquired in proportion to their respective fair values, as
follows: cable television franchises-$372 million; goodwill-$146
million; other current and noncurrent assets-$144 million;
long-term debt-$140 million; deferred income taxes-$166 million;
and other current liabilities-$5 million.
On July 6, 1995, Time Warner acquired KBLCOM which owned
cable television systems serving approximately 700,000
subscribers and a 50% interest in Paragon, which owned cable
television systems serving an additional 972,000 subscribers. The
other 50% interest in Paragon was 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 acquisition was
accounted for by the purchase method of accounting for business
combinations; accordingly, the cost to acquire KBLCOM of
approximately $1.033 billion was allocated to the net assets
acquired in proportion to their respective fair values, as
follows: investments-$950 million; cable television
franchises-$1.366 billion; goodwill-$586 million; other current
and noncurrent assets-$289 million; long-term debt-$1.213
billion; deferred income taxes-$895 million; and other current
liabilities-$50 million.
On January 4, 1996, Time Warner acquired CVI and related
companies that owned cable television systems serving
approximately 1.3 million subscribers, in exchange for the
issuance of approximately 2.9 million shares of common stock and
approximately 6.3 million shares of new convertible preferred
stock ("Series E Preferred Stock" and "Series F Preferred
Stock"), as adjusted, and the assumption or incurrence of
approximately $2 billion of indebtedness. The acquisition was
accounted for by the purchase method of accounting for business
combinations; accordingly, the cost to acquire CVI and related
companies of $904 million was preliminarily allocated to the net
assets acquired in proportion to estimates of their respective
fair values, as follows: cable television franchises-$2.390
billion; goodwill-$688 million; other current and noncurrent
assets-$481 million; long-term debt-$1.766 billion; deferred
income taxes-$731 million; and other current and noncurrent
liabilities-$158 million.
The accompanying consolidated statement of operations
includes the operating results of each business from the
respective closing date of each transaction. On a pro forma
basis, giving effect to (i) all of the aforementioned cable
transactions, (ii) the ITOCHU/Toshiba Transaction, (iii) the 1995
and early 1996 refinancing of approximately $4 billion of public
debt by Time Warner and the 1995 execution of a new $8.3 billion
credit agreement, under which approximately $2.7 billion of debt
assumed in the cable acquisitions was refinanced by subsidiaries
of Time Warner and $2.6 billion of pre-existing bank debt was
refinanced by TWE, (iv) the issuance in April 1996 of 1.6 million
shares of 10-1/4% Series K exchangeable preferred stock and the
use of approximately $1.55 billion of net proceeds therefrom to
reduce debt, (v) the sale of 51% of TWE's interest in Six Flags
and (vi) the sale or expected sale or transfer of certain
unclustered cable television systems owned by TWE, as if each of
such transactions had occurred at the beginning of 1995, Time
Warner would have reported for the three months ended June 30,
1996 and 1995, respectively, revenues of $2.139 billion and
$2.113 billion, depreciation and amortization of $224 million and
$237 million, operating income of $215 million and $171 million,
equity in the pretax income of the Entertainment Group of $93
million and $73 million, a loss before extraordinary item of $29
million and $50 million ($0.27 and $0.33 per common share) and a
net loss of $38 million and $50 million ($.29 and $0.33 per
common share).
On a pro forma basis, giving effect to the transactions
described above as if each had occurred at the beginning of 1995,
Time Warner would have reported for the six months ended June 30,
1996 and 1995, respectively, revenues of $4.207 billion and
$4.138 billion, depreciation and amortization of $452 million and
$467 million, operating income of $325 million and $290 million,
equity in the pretax income of the Entertainment Group of $209
million and $128 million, a loss before extraordinary item of
$102 million and $94 million ($0.66 and $0.65 per common share)
and a net loss of $137 million and $94 million ($0.75 and $0.65
per common share).
4. LONG-TERM DEBT
In January 1996, in connection with its acquisition of CVI
and related companies, Time Warner assumed $500 million of public
notes and debentures of CVI and a subsidiary of Time Warner
borrowed $1.5 billion under its $8.3 billion credit agreement to
refinance a like-amount of other indebtedness assumed or incurred
in such acquisition.
In February 1996, Time Warner redeemed the remaining $1.2
billion principal amount of 8.75% Convertible Subordinated
Debentures due 2015 (the "8.75% Convertible Debentures") for
$1.28 billion, including redemption premiums and accrued interest
thereon. The redemption was financed with (1) proceeds raised
from a $575 million issuance of Company-obligated mandatorily
redeemable preferred securities of a subsidiary in December 1995
and (2) $750 million of proceeds raised from the issuance in
January 1996, of (i) $400 million principal amount of 6.85%
debentures due 2026, which are redeemable at the option of the
holders thereof in 2003, (ii) $200 million principal amount of
8.3% discount debentures due 2036, which do not pay cash interest
until 2016, (iii) $166 million principal amount of 7.48%
debentures due 2008 and (iv) $150 million principal amount of
8.05% debentures due 2016. In connection with the 1996 redemption
of the 8.75% Convertible Debentures, Time Warner recognized an
extraordinary loss of $26 million.
In April 1996, Time Warner raised approximately $1.55
billion of net proceeds in a private placement of 10-1/4% Series
K exchangeable preferred stock (Note 7). The proceeds were used
by Time Warner to redeem $250 million principal amount of 8.75%
Debentures due April 1, 2017 for approximately $265 million in
May 1996 (including redemption premiums and accrued interest
thereon), and to reduce bank debt of TWI Cable Inc. by
approximately $1.3 billion. In connection with the redemption of
the 8.75% Debentures due April 1, 2017, Time Warner recognized an
extraordinary loss of $9 million in May 1996.
5. BORROWINGS AGAINST FUTURE STOCK OPTION PROCEEDS
In connection with a newly-authorized common stock
repurchase program (Note 8), Time Warner entered into a
five-year, $750 million revolving credit facility (the "Stock
Option Proceeds Credit Facility") in May 1996 principally to
support such stock repurchases, of which up to $100 million is
reserved solely for the payment of interest and fees thereunder.
At June 30, 1996, Time Warner had borrowed $225 million under the
Stock Option Proceeds Credit Facility. Borrowings under the Stock
Option Proceeds Credit Facility generally bear interest at LIBOR
plus a margin equal to 75 basis points and are generally required
to be prepaid from the cash proceeds received by Time Warner from
the exercise of designated employee stock options. Such
prepayments will permanently reduce the borrowing availability
under the facility. At August 2, 1996, based on a closing market
price of Time Warner common stock of $36.50, the aggregate
exercise prices of outstanding vested, "in the money" stock
options was approximately $1.5 billion, representing a 2 to 1
coverage ratio over the related borrowing availability. To the
extent that such stock option proceeds are not sufficient to
satisfy Time Warner's obligations under the Stock Option Proceeds
Credit Facility, Time Warner is generally required to repay such
borrowings using proceeds from the sale of shares of its common
stock held in escrow under the Stock Option Proceeds Credit
Facility or, at Time Warner's election, using available cash on
hand. Time Warner initially placed 36 million shares in escrow
under this arrangement and may, from time to time, have up to
52.5 million shares held in escrow. Such shares are not
considered to be issued and outstanding capital stock of the
Company.
6. MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES
In August 1995, Time Warner issued approximately 12.1
million Company-obligated mandatorily redeemable preferred
securities of a wholly-owned subsidiary ("PERCS") for aggregate
gross proceeds of $374 million. The sole assets of the subsidiary
that is the obligor on the PERCS are $385 million principal
amount of 4% subordinated notes of Time Warner due December 23,
1997. Cumulative cash distributions are payable on the PERCS at
an annual rate of 4%. The PERCS are mandatorily redeemable on
December 23, 1997, for an amount per PERCS equal to the lesser of
$54.41, and the market value of a share of common stock of
Hasbro, Inc. ("Hasbro") on December 17, 1997, payable in cash or,
at Time Warner's option, Hasbro common stock. Time Warner has the
right to redeem the PERCS at any time prior to December 23, 1997,
at an amount per PERCS equal to $54.41 (or in certain limited
circumstances the lesser of such amount and the market value of a
share of Hasbro common stock at the time of redemption) plus
accrued and unpaid distributions thereon and a declining premium,
payable in cash or, at Time Warner's option, Hasbro common stock.
Time Warner owns approximately 12.1 million shares of Hasbro
common stock, which can be used by Time Warner, at its election,
to satisfy its obligations under the PERCS or its obligations
under its zero coupon exchangeable notes due 2012. Such zero
coupon notes are exchangeable and redeemable into an aggregate
12.1 million shares of Hasbro common stock.
In December 1995, Time Warner issued approximately 23
million Company-obligated mandatorily redeemable preferred
securities of a wholly-owned subsidiary ("Preferred Trust
Securities") for aggregate gross proceeds of $575 million. The
sole assets of the subsidiary that is the obligor on the
Preferred Trust Securities are $592 million principal amount of
8-7/8% subordinated debentures of Time Warner due December 31,
2025. Cumulative cash distributions are payable on the Preferred
Trust Securities at an annual rate of 8-7/8%. Cash distributions
may be deferred at the election of Time Warner for any period not
exceeding 20 consecutive quarters. The Preferred Trust Securities
are mandatorily redeemable for cash on December 31, 2025, and
Time Warner has the right to redeem the Preferred Trust
Securities, in whole or in part, on or after December 31, 2000,
or in other certain circumstances, in each case at an amount per
Preferred Trust Security equal to $25 plus accrued and unpaid
distributions thereon.
Time Warner has certain obligations relating to the PERCS
and the Preferred Trust Securities which amount to a full and
unconditional guaranty of each subsidiary's obligations with
respect thereto.
7. SERIES K EXCHANGEABLE PREFERRED STOCK
In April 1996, Time Warner raised approximately $1.55
billion of net proceeds in a private placement of 1.6 million
shares of 10-1/4% Series K exchangeable preferred stock ("Series
K Preferred Stock"). The issuance of the Series K Preferred Stock
allowed the Company to realize cash proceeds through a security
whose payment terms are principally linked (until a
reorganization of TWE occurs, if any) to a portion of Time
Warner's currently noncash-generating interest in the Series B
Capital of TWE. The proceeds raised from this transaction were
used by Time Warner to reduce debt. Pursuant to a registered
exchange offer expected to be made, Time Warner plans to exchange
the privately-placed Series K Preferred Stock for registered
Series M exchangeable preferred stock with substantially
identical terms.
Each share of Series K Preferred Stock is entitled to a
liquidation preference of $1,000 and entitles the holder thereof
to receive cumulative dividends at the rate of 10-1/4% per annum,
payable quarterly (1) in cash, to the extent of an amount equal
to the Pro Rata Percentage (as defined below) multiplied by the
amount of cash distributions received by Time Warner from TWE
with respect to its interests in the Series B Capital and
Residual Capital of TWE, excluding stock option related
distributions and certain tax related distributions
(collectively, "Eligible TWE Cash Distributions"), or (2) to the
extent of any balance, at Time Warner's option, (i) in cash or
(ii) in-kind, through the issuance of additional shares of Series
K Preferred Stock with an aggregate liquidation preference equal
to the amount of such dividends. The "Pro Rata Percentage" is
equal to the ratio of (1) the aggregate liquidation preference of
the outstanding shares of Series K Preferred Stock, including any
accumulated and unpaid dividends thereon, to (2) Time Warner's
total interest in the Series B Capital of TWE, including any
undistributed priority capital return thereon. Because cash
distributions to Time Warner with respect to its interests in the
Series B Capital and Residual Capital of TWE are generally
restricted until June 30, 1998 and are subject to additional
limitations thereafter under the TWE partnership agreement, Time
Warner does not expect to pay cash dividends in the foreseeable
future.
The Series K Preferred Stock may be redeemed at the option
of Time Warner, in whole or in part, on or after July 1, 2006,
subject to certain conditions, at an amount per share equal to
its liquidation preference plus accumulated and accrued and
unpaid dividends thereon, and a declining premium through July 1,
2010 (the "Optional Redemption Price"). Time Warner is required
to redeem shares of Series K Preferred Stock representing up to
20%, 25%, 33-1/3 % and 50% of the then outstanding liquidation
preference of the Series K Preferred Stock on July 1 of 2012,
2013, 2014 and 2015, respectively, at an amount equal to the
aggregate liquidation preference of the number of shares to be
redeemed plus accumulated and accrued and unpaid dividends
thereon (the "Mandatory Redemption Price"). Total payments in
respect of such mandatory redemption obligations on any
redemption date are limited to an amount equal to the Pro Rata
Percentage of any cash distributions received by Time Warner from
TWE in the preceding year in connection with the redemption of
Time Warner's interest in the Series B Capital of TWE and in
connection with certain cash distributions related to Time
Warner's interest in the Residual Capital of TWE. The redemption
of the Series B Capital of TWE is scheduled to occur ratably over
a five-year period commencing on June 30, 2011. Time Warner is
required to redeem any remaining outstanding shares of Series K
Preferred Stock on July 1, 2016 at the Mandatory Redemption
Price; however, in the event that Time Warner's interest in the
Series B Capital of TWE has not been redeemed in full prior to
such final mandatory redemption date, payments in respect of the
final mandatory redemption obligation of the Series K Preferred
Stock in 2016 will be limited to an amount equal to the lesser of
the Mandatory Redemption Price and an amount equal to the Pro
Rata Percentage of the fair market value of TWE (net of taxes)
attributable to Time Warner's interests in the Series B Capital
and Residual Capital of TWE. Accordingly, there is no assurance
that such value will result in the redemption of the Series K
Preferred Stock at its full liquidation preference plus
accumulated and accrued and unpaid dividends thereon.
Upon a reorganization of TWE, as defined in the related
certificate of designation, Time Warner must elect either to (1)
exchange each outstanding share of Series K Preferred Stock for
shares of a new series of 10-1/4% exchangeable preferred stock
("Series L Preferred Stock") or (2) subject to certain
conditions, redeem the outstanding shares of Series K Preferred
Stock at an amount per share equal to 110% of the liquidation
preference thereof, plus accumulated and accrued and unpaid
dividends thereon or, after July 1, 2006, at the Optional
Redemption Price. The Series L Preferred Stock has terms similar
to those of the Series K Preferred Stock, except that (i) Time
Warner may only pay dividends in-kind until June 30, 2006, (ii)
Time Warner is required to redeem the outstanding shares of
Series L Preferred Stock on July 1, 2011 at an amount per share
equal to the liquidation preference thereof, plus accumulated and
accrued and unpaid dividends thereon and (iii) Time Warner has
the option to exchange, in whole but not in part, subject to
certain conditions, the outstanding shares of Series L Preferred
Stock for Time Warner 10-1/4% Senior Subordinated Debentures due
July 1, 2011 (the "Senior Subordinated Debentures") having a
principal amount equal to the liquidation preference of the
Series L Preferred Stock plus accrued and unpaid dividends
thereon. Interest on the Senior Subordinated Debentures is
payable in cash or, at Time Warner's option through June 30,
2006, in-kind through the issuance of additional Senior
Subordinated Debentures with a principal amount equal to such
interest. The Senior Subordinated Debentures may be redeemed at
the option of Time Warner, in whole or in part, on or after July
1, 2006, subject to certain conditions, at an amount per
debenture equal to its principal amount plus accrued and unpaid
interest, and a declining premium through July 1, 2010.
8. CAPITAL STOCK
Changes in shareholders' equity are as follows:
Six Months
Ended June 30,
1996 1995
(millions)
Balance at beginning of year $3,667 $1,148
Net loss (159) (55)
Common dividends declared (70) (69)
Preferred dividends declared (104) (8)
Repurchases of Time Warner common stock (360) -
Issuance of common stock and preferred stock
in the Cable Acquisitions 680 383
Unrealized gains on certain marketable
equity investments 61 4
Other, principally shares issued pursuant
to stock option and dividend
reinvestment plans 128 76
Balance at June 30 $3,843 $1,479
In April 1996, Time Warner's Board of Directors authorized a
program to repurchase, from time to time, up to 15 million shares
of Time Warner common stock. The common stock repurchased under
the program is expected to be used to satisfy future share
issuances related to the exercise of existing employee stock
options. Actual repurchases in any period will be subject to
market conditions. As of June 30, 1996, Time Warner had acquired
approximately 8.8 million shares of its common stock for an
aggregate cost of approximately $360 million. Such repurchases
were principally funded with borrowings under the Stock Option
Proceeds Credit Facility (Note 5) and available cash and
equivalents.
9. SEGMENT INFORMATION
Time Warner's businesses are conducted in three fundamental
areas: Entertainment, consisting principally of interests in
recorded music and music publishing, filmed entertainment,
broadcasting, theme parks and cable television programming; News
and Information, consisting principally of interests in magazine
publishing, book publishing and direct marketing; and
Telecommunications, consisting principally of interests in cable
television systems. Time Warner's interests in filmed
entertainment, broadcasting, theme parks, cable television
programming and a majority of its cable television systems are
held by the Entertainment Group, which is not consolidated for
financial reporting purposes.
Information as to the operations of Time Warner and the
Entertainment Group in different business segments is set forth
below. The operating results of Time Warner reflect the
acquisitions of Summit effective as of May 2, 1995, KBLCOM
effective as of July 6, 1995 and CVI and related companies
effective as of January 4, 1996. The operating results of the
Entertainment Group reflect the formation of the
TWE-Advance/Newhouse Partnership effective as of April 1, 1995,
the deconsolidation of Six Flags effective as of June 23, 1995
and the consolidation of Paragon effective as of July 6, 1995.
The operating results of Six Flags prior to June 23, 1995 are
reported separately to facilitate comparability.
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
Revenues (millions)
Time Warner:
Publishing $1,038 $ 928 $1,917 $1,759
Music 876 986 1,859 1,977
Cable 230 - 447 -
Intersegment elimination (5) (7) (16) (12)
Total $2,139 $1,907 $4,207 $3,724
Entertainment Group:
Filmed Entertainment $1,272 $1,154 $2,490 $2,338
Six Flags Theme Parks - 204 - 227
Broadcasting - The WB Network 18 3 33 6
Programming - HBO 456 396 875 786
Cable 961 760 1,908 1,338
Intersegment elimination (97) (82) (209) (187)
Total $2,610 $2,435 $5,097 $4,508
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
Operating Income (millions)
Time Warner:
Publishing $ 125 $ 114 $ 181 $ 169
Music 70 70 125 153
Cable 20 - 19 -
Total $ 215 $ 184 $ 325 $ 322
Entertainment Group:
Filmed Entertainment $ 79 $ 59 $ 152 $ 126
Six Flags Theme Parks - 31 - 29
Broadcasting - The WB Network (12) (12) (36) (33)
Programming - HBO 83 70 159 137
Cable 147 126 293 216
Total $ 297 $ 274 $ 568 $ 475
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
Depreciation of Property, (millions)
Plant and Equipment
Time Warner:
Publishing $ 17 $ 15 $ 32 $ 28
Music 19 24 42 47
Cable 33 - 66 -
Total $ 69 $ 39 $140 $ 75
Entertainment Group:
Filmed Entertainment $ 33 $ 23 $ 65 $ 45
Six Flags Theme Parks - 19 - 20
Broadcasting - The WB Network - - - -
Programming - HBO 4 5 9 9
Cable 157 117 300 207
Total $194 $164 $374 $281
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
Amortization of Intangible Assets (1) (millions)
Time Warner:
Publishing $ 14 $ 9 $ 23 $ 18
Music 76 71 144 138
Cable 65 - 145 -
Total $155 $ 80 $312 $156
Entertainment Group:
Filmed Entertainment $ 29 $ 35 $ 60 $ 69
Six Flags Theme Parks - 8 - 11
Broadcasting - The WB Network - - - -
Programming - HBO - - - -
Cable 72 76 151 152
Total $101 $119 $211 $232
__________________
(1) Amortization includes all amortization relating to the
acquisitions of Warner Communications Inc. ("WCI") in 1989, the
American Television and Communications Corporation ("ATC")
minority interest in 1992, the acquisitions of KBLCOM and Summit
in 1995 and CVI and related companies in 1996, and to other
business combinations accounted for by the purchase method.
10. 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.
11. ADDITIONAL FINANCIAL INFORMATION
Additional financial information is as follows:
Six Months
Ended June 30,
1996 1995
(millions)
Interest expense $471 $429
Cash payments made for interest 426 289
Cash payments made for income taxes 169 141
Tax-related distributions received from TWE 123 -
Income tax refunds received 36 14
Noncash dividends 36 -
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
TWE is engaged principally in two fundamental areas of
business: Entertainment, consisting principally of interests in
filmed entertainment, broadcasting, theme parks and cable
television programming; and Telecommunications, consisting
principally of interests in cable television systems. TWE also
manages the telecommunications properties owned by Time Warner
and the combined cable television operations are conducted under
the name of Time Warner Cable. Capitalized terms are as defined
and described in the accompanying consolidated financial
statements, or elsewhere herein.
Significant Transactions
In 1996, certain transactions were completed by Time Warner
and TWE that have had an effect on TWE's results of operations
and financial condition. Such transactions include:
* The acquisition by Time Warner of Cablevision Industries
Corporation ("CVI") and related companies on January 4,
1996, which strengthened Time Warner Cable's geographic
clusters of cable television systems and substantially
increased the number of cable subscribers managed by
Time Warner Cable. Time Warner Cable now serves
approximately 11.8 million subscribers in neighborhoods
passing nearly 20% of the television homes in the U.S.
* The closing of certain previously-announced sales by TWE
of unclustered cable television systems which raised
approximately $90 million of net proceeds for debt
reduction. Including the 1995 sale of 51% of its
interest in Six Flags Entertainment Corporation ("Six
Flags"), TWE has now completed transactions that have
raised approximately $1.1 billion for debt reduction.
The nature of these transactions and their impact on the results
of operations and financial condition of TWE are further
discussed below.
Use of EBITDA
The following comparative discussion of the results of
operations and financial condition of TWE 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.
RESULTS OF OPERATIONS
EBITDA and operating income for TWE for the three and six
months ended June 30, 1996 and 1995 are as follows:
Three Months Ended June 30, Six Months Ended June 30,
EBITDA Operating Income EBITDA Operating Income
1996 1995 1996 1995 1996 1995 1996 1995
(millions)
Filmed Entertainment $140 $109 $ 79 $ 52 $ 271 $230 $ 149 $119
Six Flags Theme Parks - 58 - 31 - 60 - 29
Broadcasting - The
WB Network (12) (12) (12) (12) (36) (33) (36) (33)
Programming - HBO 87 74 83 70 168 145 159 137
Cable 376 312 147 125 744 556 293 205
Total $591 $541 $297 $266 $1,147 $958 $565 $457
Three Months Ended June 30, 1996 Compared to the Three Months
Ended June 30, 1995
TWE had revenues of $2.608 billion, and net income of $74
million for the three months ended June 30, 1996, compared to
revenues of $2.392 billion and net income of $56 million for the
three months ended June 30, 1995.
On a pro forma basis, giving effect to (i) the 1995 formation
of the TWE-Advance/Newhouse Partnership, (ii) the 1995
refinancing of approximately $2.6 billion of pre-existing bank
debt, (iii) the 1995 consolidation of Paragon, (iv) the 1995
reacquisition of the Time Warner Service Partnership Assets, (v)
the 1995 sale of 51% of TWE's interest in Six Flags and (vi) the
sale or expected sale or transfer of certain unclustered cable
television systems owned by TWE, as if each of such transactions
had occurred at the beginning of 1995, TWE would have reported
for the three months ended June 30, 1995, revenues of $2.317
billion, depreciation and amortization of $259 million, operating
income of $241 million and net income of $47 million. No pro
forma financial information has been presented for TWE for the
three months ended June 30, 1996 because all of such transactions
are already reflected, in all material respects, in the
historical financial statements of TWE.
As discussed more fully below, TWE's historical operating
results in 1996 as compared to pro forma results in 1995 reflect
an overall increase in operating income generated by its business
segments, offset in part by a decrease in investment-related
income and an increase in minority interest expense related to
the TWE-Advance/Newhouse Partnership. On a historical basis, the
positive effect from such underlying operating trends was
slightly mitigated by the lack of contribution of Six Flags's
operating results in 1996 which exceeded interest savings on
lower average debt levels related to management's debt reduction
program.
As a U.S. partnership, TWE is not subject to U.S. federal and
state income taxation. Income and withholding taxes of $21
million and $25 million in the three months ended June 30, 1996
and 1995, respectively, have been provided in respect of the
operations of TWE's domestic and foreign subsidiary corporations.
Filmed Entertainment. Revenues increased to $1.270 billion,
compared to $1.151 billion in the second quarter of 1995. EBITDA
increased to $140 million from $109 million. Depreciation and
amortization, including amortization related to the purchase of
WCI, amounted to $61 million in 1996 and $57 million in 1995.
Operating income increased to $79 million from $52 million.
Revenues benefited from increases in worldwide theatrical, home
video and television distribution operations. Domestic theatrical
revenues in 1996 were led by the success of Twister and exceeded
the prior year's performance despite difficult comparisons to
successful films such as Batman Forever. EBITDA and operating
income benefited from the revenue gains.
Six Flags Theme Parks. As a result of TWE's sale of 51% of
its interest in Six Flags, the operating results of Six Flags
have been deconsolidated effective as of June 23, 1995 and TWE's
remaining 49% interest in Six Flags is accounted for under the
equity method of accounting.
Broadcasting - The WB Network. The WB Network recorded an
operating loss of $12 million on $18 million of revenues in the
second quarter of 1996, compared to $12 million of an operating
loss on $3 million of revenues in the second quarter of 1995. The
increase in revenues, as well as a corresponding increase in
costs, primarily resulted from the expansion of programming in
September 1995 to two nights of primetime scheduling, and the
unveiling of Kids' WB!, the network's animated programming lineup
on Saturday mornings and weekdays. Due to the start-up nature of
this new broadcast operation, losses are expected to continue.
Programming - HBO. Revenues increased to $456 million,
compared to $392 million in the second quarter of 1995. EBITDA
increased to $87 million from $74 million. Depreciation and
amortization amounted to $4 million in 1996 and 1995. Operating
income increased to $83 million from $70 million. Revenues
benefited primarily from a significant increase in subscriptions.
EBITDA and operating income improved principally as a result of
the revenue gains.
Cable. Revenues increased to $961 million, compared to $724
million in the second quarter of 1995. EBITDA increased to $376
million from $312 million. Depreciation and amortization,
including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $229
million in 1996 and $187 million in 1995. Operating income
increased to $147 million from $125 million. Revenues and
operating results benefited from the consolidation of Paragon
effective as of July 6, 1995. Excluding such effect, revenues
benefited from an aggregate increase of 5% in basic cable and
Primestar-related, direct broadcast satellite subscribers,
increases in regulated cable rates as permitted under Time Warner
Cable's "social contract" with the Federal Communications
Commission (the "FCC") and increases in pay-per-view and
advertising revenues. Excluding the effect of consolidating
Paragon, EBITDA and operating income increased as a result of the
revenue gains, offset in part, with respect to operating income
only, by higher depreciation and amortization relating to
increased capital spending.
Interest and Other, Net. Interest and other, net, decreased
to $132 million in the second quarter of 1996, compared to $135
million in the second quarter of 1995. Interest expense decreased
to $117 million, compared to $146 million in the second quarter
of 1995, principally as a result of interest savings on lower
average debt levels related to management's debt reduction
program and lower short-term, floating-rates of interest paid on
borrowings under TWE's former and existing bank credit
agreements. There was other expense, net, of $15 million in the
second quarter of 1996, compared to other income, net, of $11
million in 1995, principally due to a decrease in
investment-related income, including a reduction in interest
income resulting from lower average cash balances and lower
average principal amounts due under the note receivable from U S
WEST.
Six Months Ended June 30, 1996 Compared to the Six Months Ended
June 30, 1995
TWE had revenues of $5.093 billion and net income of $168
million for the six months ended June 30, 1996, compared to
revenues of $4.438 billion and net income of $60 million for the
six months ended June 30, 1995.
On a pro forma basis, giving effect to (i) the 1995 formation
of the TWE-Advance/Newhouse Partnership, (ii) the 1995
refinancing of approximately $2.6 billion of pre-existing bank
debt, (iii) the 1995 consolidation of Paragon, (iv) the 1995
reacquisition of the Time Warner Service Partnership Assets, (v)
the 1995 sale of 51% of TWE's interest in Six Flags and (vi) the
sale or expected sale or transfer of certain unclustered cable
television systems owned by TWE, as if each of such transactions
had occurred at the beginning of 1995, TWE would have reported
for the six months ended June 30, 1995, revenues of $4.583
billion, depreciation and amortization of $528 million, operating
income of $460 million and net income of $77 million. No pro
forma financial information has been presented for TWE for the
six months ended June 30, 1996 because all of such transactions
are already reflected, in all material respects, in the
historical financial statements of TWE.
As discussed more fully below, TWE's historical operating
results in 1996 as compared to pro forma results in 1995 reflect
an overall increase in operating income generated by its business
segments and an increase in investment-related income, offset in
part by an increase in minority interest expense related to the
TWE-Advance/Newhouse Partnership. On a historical basis, such
underlying operating trends were enhanced by interest savings in
1996 on lower average debt levels related to management's debt
reduction program, and were offset in part by an increase in
minority interest expense related to the operations of the
TWE-Advance/Newhouse Partnership for a full six-month period.
As a U.S. partnership, TWE is not subject to U.S. federal
and state income taxation. Income and withholding taxes of $39
million in the six months ended June 30, 1996, and $36 million in
the six months ended June 30, 1995, have been provided in respect
of the operations of TWE's domestic and foreign subsidiary
corporations.
Filmed Entertainment. Revenues increased to $2.486 billion,
compared to $2.334 billion in the first six months of 1995.
EBITDA increased to $271 million from $230 million. Depreciation
and amortization, including amortization related to the purchase
of WCI, amounted to $122 million in 1996 and $111 million in
1995. Operating income increased to $149 million from $119
million. Revenues benefited from increases in worldwide home
video and consumer products operations. Lower domestic theatrical
revenues in the first quarter of 1996 were overcome by the second
quarter domestic box office performance of theatrical releases,
led by the success of Twister. EBITDA and operating income
benefited from the revenue gains.
Six Flags Theme Parks. As a result of TWE's sale of 51% of
its interest in Six Flags, the operating results of Six Flags
have been deconsolidated effective as of June 23, 1995 and TWE's
remaining 49% interest in Six Flags is accounted for under the
equity method of accounting.
Broadcasting - The WB Network. The WB Network recorded an
operating loss of $36 million on $33 million of revenues in the
first six months of 1996, compared to $33 million of an operating
loss on $6 million of revenues in the first six months of 1995.
The increased revenues and operating losses are primarily due to
the expansion of programming in September 1995 to two nights of
primetime scheduling, and the unveiling of Kids' WB!, the
network's animated programming lineup on Saturday mornings and
weekdays. Due to the start-up nature of this new broadcast
operation, losses are expected to continue.
Programming - HBO. Revenues increased to $875 million,
compared to $777 million in the first six months of 1995. EBITDA
increased to $168 million from $145 million. Depreciation and
amortization amounted to $9 million in 1996 and $8 million in
1995. Operating income increased to $159 million from $137
million. Revenues benefited primarily from a significant increase
in subscriptions. EBITDA and operating income improved
principally as a result of the revenue gains.
Cable. Revenues increased to $1.908 billion, compared to
$1.281 billion in the first six months of 1995. EBITDA increased
to $744 million from $556 million. Depreciation and amortization,
including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $451
million in 1996 and $351 million in 1995. Operating income
increased to $293 million from $205 million. Revenues and
operating results benefited from the contribution of the
TWE-Advance/Newhouse Partnership for a full six-month period and
the consolidation of Paragon effective as of July 6, 1995.
Excluding such effects, revenues benefited from an aggregate
increase of 5% in basic cable and Primestar-related, direct
broadcast satellite subscribers, increases in regulated cable
rates as permitted under Time Warner Cable's "social contract"
with the FCC and increases in pay-per-view and advertising
revenues. Excluding the TWE-Advance/Newhouse Partnership and
Paragon effects noted above, EBITDA and operating income
increased as a result of the revenue gains, offset in part, with
respect to operating income only, by higher depreciation and
amortization relating to increased capital spending.
Interest and Other, Net. Interest and other, net, decreased
to $221 million in the first six months of 1996, compared to $296
million in the first six months of 1995. Interest expense
decreased to $239 million, compared to $296 million in the first
six months of 1995, principally as a result of interest savings
on lower average debt levels related to management's debt
reduction program and lower short-term, floating-rates of
interest paid on borrowings under TWE's former and existing bank
credit agreements. Other income, net, increased to $18 million in
the first six months of 1996, principally due to an overall
increase in investment-related income resulting from gains on the
sale of certain unclustered cable systems recognized in 1996 in
connection with management's debt reduction program, which more
than exceeded a reduction in interest income resulting from lower
average cash balances and lower average principal amounts due
under the note receivable from U S WEST.
FINANCIAL CONDITION AND LIQUIDITY
June 30, 1996
Financial Condition
TWE had $5.6 billion of debt, $1.5 billion of Time Warner
General Partners' Senior Capital and $6.6 billion of partners'
capital at June 30, 1996, compared to $6.2 billion of debt, $1.4
billion of Time Warner General Partners' Senior Capital and $6.5
billion of partners' capital (net of the $169 million uncollected
portion of the note receivable from U S WEST) at December 31,
1995. Cash and equivalents were $218 million at June 30, 1996,
compared to $209 million at December 31, 1995, reducing the
debt-net-of-cash amounts for TWE to $5.4 billion and $6 billion,
respectively.
Debt Reduction Program
In the first six months of 1996, TWE closed certain
previously-announced sales of unclustered cable television
systems which raised approximately $90 million of proceeds for
debt reduction. Including the 1995 sale of 51% of its interest in
Six Flags, TWE has now completed transactions that have raised
approximately $1.1 billion for debt reduction.
Cash Flows
In the first six months of 1996, TWE's cash provided by
operations amounted to $1.197 billion and reflected $1.147
billion of EBITDA from the Filmed Entertainment, Broadcasting-The
WB Network, Programming-HBO and Cable businesses and $364 million
related to a reduction in working capital requirements, other
balance sheet accounts and noncash items, less $247 million of
interest payments, $32 million of income taxes and $35 million of
corporate expenses. Cash provided by operations of $725 million
in the first six months of 1995 reflected $958 million of
business segment EBITDA and $132 million related to a reduction
in working capital requirements, other balance sheet accounts and
noncash items, less $301 million of interest payments, $34
million of income taxes and $30 million of corporate expenses.
Cash used by investing activities was $650 million in the
first six months of 1996, compared to cash provided by investing
activities of $256 million in the first six months of 1995,
principally as a result of a $757 million decrease in investment
proceeds realized in 1995 in connection with management's debt
reduction program. Capital expenditures increased to $781 million
in the first six months of 1996, compared to $622 million in the
first six months of 1995, principally as a result of higher cable
capital spending as discussed more fully below.
Cash used by financing activities was $538 million in the
first six months of 1996, compared to cash provided by financing
activities of $211 million in the first six months of 1995,
principally as a result of a $607 million net reduction in debt
in 1996 and a $102 million increase in distributions paid to Time
Warner, offset in part by a $74 million decrease in collections
on the note receivable from U S WEST.
Management believes that TWE's operating cash flow, cash and
equivalents and additional borrowing capacity are sufficient to
meet its capital and liquidity needs for the foreseeable future.
Cable Capital Spending
Since the beginning of 1994, Time Warner Cable has been
engaged in a plan to upgrade the technological capability and
reliability of its cable television systems and develop new
services, which it believes will position the business for
sustained, long-term growth. Capital spending by TWE's Cable
division amounted to $610 million in the six months ended June
30, 1996, compared to $433 million in the six months ended June
30, 1995, and was financed in part through collections on the
note receivable from U S WEST of $169 million and $243 million,
respectively. Cable capital spending by TWE's Cable division is
budgeted to be approximately $700 million for the remainder of
1996 and is expected to be funded principally by cable operating
cash flow. In exchange for certain flexibility in establishing
cable rate pricing structures for regulated services that went
into effect on January 1, 1996 and consistent with Time Warner
Cable's long-term strategic plan, Time Warner Cable has agreed
with the FCC to invest a total of $4 billion in capital costs in
connection with the upgrade of its cable infrastructure, which is
expected to be substantially completed over the next five years.
The agreement with the FCC covers all of the cable operations of
Time Warner Cable, including the owned or managed cable
television systems of Time Warner, TWE and the
TWE-Advance/Newhouse Partnership. Management expects to continue
to finance such level of investment principally through the
growth in cable operating cash flow derived from increases in
subscribers and cable rates, bank credit agreement borrowings and
the development of new revenue streams from expanded programming
options, high speed data transmission, telephony and other services.
Warner Bros. Backlog
Warner Bros.' backlog, representing the amount of future
revenue not yet recorded from cash contracts for the licensing of
theatrical and television product for pay cable, network, basic
cable and syndicated television exhibition, amounted to $1.601
billion at June 30, 1996, compared to $1.056 billion at December
31, 1995 (including amounts relating to HBO of $208 million at
June 30, 1996 and $175 million at December 31, 1995). Warner
Bros.' backlog increased principally as a result of the licensing
of the hit television series Friends and ER for domestic
syndication and cable television exhibition beginning in 1998.
Because backlog generally relates to contracts for the licensing
of theatrical and television product which have already been
produced, the recognition of revenue for such completed product
is principally only dependent upon the commencement of the
availability period for telecast under the terms of the related
licensing agreement. In addition, cash licensing fees are
collected periodically over the term of the related licensing
agreements. Accordingly, the portion of backlog for which cash
advances have not already been received has significant
off-balance sheet asset value as a source of future funding. The
backlog excludes advertising barter contracts, which are also
expected to result in the future realization of cash through the
sale of advertising spots received under such contracts.
Foreign Currency Risk Management
Time Warner uses foreign exchange contracts 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. As part of its overall
strategy to manage the level of exposure to the risk of foreign
currency exchange rate fluctuations, Time Warner hedges a portion
of its foreign currency exposures anticipated over the ensuing
twelve month period, including those related to TWE. At June 30,
1996, Time Warner has effectively hedged approximately half of
TWE's total estimated foreign currency exposures that principally
relate to anticipated cash flows to be remitted to the U.S. over
the ensuing twelve month period, using foreign exchange contracts
that generally have maturities of three months or less, which
generally are rolled over to provide continuing coverage
throughout the year. TWE is reimbursed by or reimburses Time
Warner for Time Warner contract gains and losses related to TWE's
foreign currency exposure. Time Warner often closes foreign
exchange sale contracts by purchasing an offsetting purchase
contract. At June 30, 1996, Time Warner had contracts for the
sale of $483 million and the purchase of $165 million of foreign
currencies at fixed rates and maturities of three months or less.
Of Time Warner's $318 million net sale contract position, none of
the foreign exchange purchase contracts and $98 million of the
foreign exchange sale contracts related to TWE's foreign currency
exposure, primarily Japanese yen (21% of net contract position
related to TWE), French francs (25%), German marks (12%) and
Canadian dollars (18%), compared to a net sale contract position
of $113 million of foreign currencies at December 31, 1995.
Unrealized gains or losses related to foreign exchange
contracts are recorded in income as the market value of such
contracts change; accordingly, the carrying value of foreign
exchange contracts approximates market value. The carrying value
of foreign exchange contracts was not material at June 30, 1996
and December 31, 1995. No cash is required to be received or paid
with respect to such gains and losses until the related foreign
exchange contracts are settled, generally at their respective
maturity dates. For the six months ended June 30, 1996 and 1995,
TWE recognized $4 million in gains and $13 million in losses,
respectively, on foreign exchange contracts, 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 in cash 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.
Based on Time Warner's outstanding foreign exchange contracts
related to TWE's exposure outstanding at June 30, 1996, each 5%
devaluation of the U.S. dollar as compared to the level of
foreign exchange rates for currencies under contract at June 30,
1996 would result in approximately $5 million of unrealized
losses on foreign exchange contracts. Conversely, a 5%
appreciation of the U.S. dollar as compared to the level of
foreign exchange rates for currencies under contract at June 30,
1996 would result in $5 million of unrealized gains on contracts.
Consistent with the nature of the economic hedge provided by such
foreign exchange contracts, such unrealized gains or losses would
be offset by corresponding decreases or increases, respectively,
in the dollar value of future foreign currency license fee
payments that would be received in cash within the ensuing twelve
month period from the sale of U.S. copyrighted products abroad.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
1996 1995
(millions)
ASSETS
Current assets
Cash and equivalents $ 218 $ 209
Receivables, including $281 and $354 due
from Time Warner, less allowances
of $343 and $365 1,439 1,635
Inventories 891 904
Prepaid expenses 160 161
Total current assets 2,708 2,909
Noncurrent inventories 1,958 1,909
Loan receivable from Time Warner 400 400
Investments 400 383
Property, plant and equipment, net 5,585 5,205
Cable television franchises 3,212 3,360
Goodwill 4,058 4,119
Other assets 592 620
Total assets $18,913 $18,905
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable $ 603 $ 697
Participations and programming costs 1,274 1,090
Other current liabilities 1,401 1,427
Total current liabilities 3,278 3,214
Long-term debt 5,575 6,137
Other long-term liabilities, including
$272 and $198 due to Time Warner 1,093 924
Minority interests 848 726
Time Warner General Partners' Senior Capital 1,483 1,426
Partners' capital
Contributed capital 7,537 7,522
Undistributed partnership earnings (deficit) (901) (875)
Note receivable from U S WEST - (169)
Total partners' capital 6,636 6,478
Total liabilities and partners' capital $18,913 $18,905
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
(millions)
Revenues (a) $2,608 $2,392 $5,093 $4,438
Cost of revenues (a)(b) 1,730 1,611 3,395 3,051
Selling, general and
administrative (a)(b) 581 515 1,133 930
Operating expenses 2,311 2,126 4,528 3,981
Business segment operating income 297 266 565 457
Interest and other, net (a) (132) (135) (221) (296)
Minority interest (52) (35) (102) (35)
Corporate services (a) (18) (15) (35) (30)
Income before income taxes 95 81 207 96
Income taxes (21) (25) (39) (36)
Net income $ 74 $ 56 $ 168 $ 60
__________________
(a) Includes the following income (expenses) resulting from
transactions with the partners of TWE and other related companies
for the three and six months ended June 30, 1996, respectively,
and for the corresponding periods in the prior year: revenues-
$76 million and $99 million in 1996, $32 million and $58 million
in 1995; cost of revenues- $(14) million and $(38) million in
1996, $(36) million and $(53) million in 1995; selling, general
and administrative- $(7) million and $(9) million in 1996, $(23)
million and $(40) million in 1995; interest and other, net- $7
million and $16 million in 1996, $6 million and $6 million in
1995; and corporate services- $(18) million and $(35) million in
1996, $(15) million and $(30) million in 1995.
(b) Includes depreciation and amortization expense of:
$ 294 $ 275 $ 582 $ 501
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
1996 1995
(millions)
OPERATIONS
Net income $ 168 $ 60
Adjustments for noncash and nonoperating items:
Depreciation and amortization 582 501
Changes in operating assets and liabilities 447 164
Cash provided by operations 1,197 725
INVESTING ACTIVITIES
Investments and acquisitions (65) (75)
Capital expenditures (781) (622)
Investment proceeds 196 953
Cash provided (used) by investing activities (650) 256
FINANCING ACTIVITIES
Borrowings 63 235
Debt repayments (670) (237)
Capital distributions (132) (30)
Collections on note receivable from U S WEST 169 243
Other 32 -
Cash provided (used) by financing activities (538) 211
INCREASE IN CASH AND EQUIVALENTS 9 1,192
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 209 1,071
CASH AND EQUIVALENTS AT END OF PERIOD $ 218 $2,263
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Time Warner Entertainment Company, L.P., a Delaware limited
partnership ("TWE"), is engaged principally in two fundamental
areas of business: Entertainment, consisting principally of
interests in filmed entertainment, broadcasting, theme parks and
cable television programming; and Telecommunications, consisting
principally of interests in cable television systems.
Each of the business interests within Entertainment and
Telecommunications is important to TWE's objective of increasing
partner value through the creation, extension and distribution of
recognizable brands and copyrights throughout the world. Such
brands and copyrights include (1) the unique and extensive film
and television libraries of Warner Bros. and trademarks such as
the Looney Tunes characters and Batman, (2) The WB Network, a new
national broadcasting network launched in 1995 as an extension of
the Warner Bros. brand and as an additional distribution outlet
for Warner Bros.' collection of children's cartoons and
television programming, (3) Six Flags, the largest regional theme
park operator in the United States, in which TWE owns a 49%
interest, (4) HBO and Cinemax, the leading pay television
services and (5) Time Warner Cable, the second largest operator
of cable television systems in the U.S.
The operating results of TWE's various business interests are
presented herein as an indication of financial performance (Note
7). Except for start-up losses incurred in connection with The WB
Network, TWE's principal business interests generate significant
operating income and cash flow from operations. The cash flow
from operations generated by such business interests is
significantly greater than their operating income due to
significant amounts of noncash amortization of intangible assets
recognized principally in Time Warner Inc.'s ("Time Warner") $14
billion acquisition of Warner Communications Inc. ("WCI") in 1989
and $1.3 billion acquisition of the minority interest in American
Television and Communications Corporation ("ATC") in 1992, a
portion of which cost was allocated to TWE in accordance with the
pushdown method of accounting. Non-cash amortization of
intangible assets recorded by TWE's businesses amounted to $101
million and $119 million for the three months ended June 30, 1996
and 1995, respectively, and $211 million and $232 million for the
six months ended June 30, 1996 and 1995, respectively.
Subsidiaries of Time Warner are the general partners of TWE
("Time Warner General Partners"). During 1995, Time Warner
acquired the aggregate 11.22% limited partnership interests
previously held by subsidiaries of each of ITOCHU Corporation and
Toshiba Corporation. As a result, Time Warner and certain of its
wholly-owned subsidiaries collectively own general and limited
partnership interests in 74.49% of the pro rata priority capital
("Series A Capital") and residual equity capital ("Residual
Capital") of TWE, and 100% of the senior priority capital
("Senior Capital") and junior priority capital ("Series B
Capital") of TWE. The remaining 25.51% limited partnership
interests in the Series A Capital and Residual Capital of TWE are
held by a subsidiary of U S WEST, Inc. ("U S WEST").
Basis of Presentation
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, 1995.
The consolidated financial statements reflect (i) the
formation by TWE of the TWE-Advance/Newhouse Partnership
effective as of April 1, 1995, (ii) the deconsolidation of Six
Flags Entertainment Corporation ("Six Flags") effective as of
June 23, 1995 and (iii) the consolidation of Paragon
Communications ("Paragon") effective as of July 6, 1995. Certain
reclassifications have been made to the prior year's financial
statements to conform to the 1996 presentation.
Effective January 1, 1996, TWE adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
("FAS 121") which established standards for the recognition and
measurement of impairment losses on long-lived assets and certain
intangible assets. The adoption of FAS 121 did not have a
material effect on TWE's 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 that included Advance/Newhouse's 10%
interest in Primestar Partners, L.P. ("Primestar"). 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.
The accompanying consolidated statement of operations
includes the operating results of the Advance/Newhouse businesses
from the date of contribution to the partnership. On a pro forma
basis, giving effect to (i) the 1995 formation of the
TWE-Advance/Newhouse Partnership, (ii) the 1995 refinancing of
approximately $2.6 billion of pre-existing bank debt, (iii) the
1995 consolidation of Paragon, (iv) the 1995 reacquisition of the
Time Warner Service Partnership Assets (Note 6), (v) the 1995
sale of 51% of TWE's interest in Six Flags and (vi) the sale or
expected sale or transfer of certain unclustered cable television
systems owned by TWE, as if each of such transactions had
occurred at the beginning of 1995, TWE would have reported for
the three and six months ended June 30, 1995, respectively,
revenues of $2.317 billion and $4.583 billion, depreciation and
amortization of $259 million and $528 million, operating income
of $241 million and $460 million and net income of $47 million
and $77 million.
3. SIX FLAGS
On June 23, 1995, TWE sold 51% of its interest in 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, Six Flags has
been deconsolidated and TWE's remaining 49% interest in Six Flags
is accounted for under the equity method of accounting. TWE
reduced debt by approximately $850 million in 1995 in connection
with the transaction, and a portion of the income on the
transaction has been deferred by TWE principally as a result of
its guarantee of certain third-party, zero-coupon indebtedness of
Six Flags due in 1999.
4. INVENTORIES
Inventories consist of:
June 30, 1996 December 31, 1995
Current Noncurrent Current Noncurrent
(millions)
Film costs:
Released, less amortization $ 353 $ 447 $ 529 $ 437
Completed and not released 192 53 74 22
In process and other 63 454 11 396
Library, less amortization - 690 - 717
Programming costs, less
amortization 204 314 219 337
Merchandise 79 - 71 -
Total $ 891 $1,958 $ 904 $1,909
5. LONG-TERM DEBT
Long-term debt consists of:
June 30, December 31,
1996 1995
(millions)
Credit agreement, weighted average
interest rates of 6.0% and 6.4% $1,384 $2,185
Commercial paper, weighted average
interest rates of 5.8% and 6.2% 397 157
Publicly held notes and debentures 3,781 3,781
Other 13 14
Total $5,575 $6,137
Each Time Warner General Partner has guaranteed a pro rata
portion of approximately $5.5 billion 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,
1996 1995
(millions)
Balance at beginning of year $6,478 $6,233
Net income 168 60
Capital contributions 15 -
Distributions (147) (316)
Allocation of income to Time Warner
General Partners' Senior Capital (57) (67)
Collections on note receivable from U S WEST 169 243
Other 10 1
Balance at June 30 $6,636 $6,154
In September 1995, TWE reacquired substantially all of the
assets of the Time Warner Service Partnerships, subject to the
liabilities relating thereto, (the "Time Warner Service
Partnership Assets") in exchange for Series B Capital interests
in TWE equal to approximately $400 million. The reacquisition was
recorded for financial statement purposes based on the $124
million historical cost of the Time Warner Service Partnership
Assets. Prior to such reacquisition, the Time Warner Service
Partnerships owned and operated certain assets of TWE which had
been distributed to the Time Warner General Partners in September
1993 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. Prior to
September 1995, TWE was required to make quarterly cash
distributions related to its Series B Capital in the amount of
$12.5 million to the Time Warner General Partners ("TWSP
Distributions"), which the General Partners were then required to
contribute to the Time Warner Service Partnerships.
TWE 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 or, with
respect to options granted prior to the TWE capitalization on
June 30, 1992, the greater of the exercise price and the $27.75
market price of Time Warner common stock at the time of the TWE
capitalization. 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, 1996, TWE accrued $123
million of tax-related distributions and $24 million of stock
option distributions, based on closing prices of Time Warner
common stock of $39.25 at June 30, 1996 and $37.875 at December
31, 1995. During the six months ended June 30, 1995, TWE accrued
$25 million of TWSP Distributions and $156 million of tax-related
distributions, as well as $135 million of stock option
distributions as a result of an increase at that time in the
market price of Time Warner common stock. In the six months ended
June 30, 1996, TWE paid distributions to the Time Warner General
Partners in the amount of $132 million, consisting of $123
million of tax-related distributions and $9 million of stock
option related distributions. In the six months ended June 30,
1995, TWE paid the Time Warner General Partners distributions in
the amount of $30 million, consisting of $25 million of TWSP
Distributions and $5 million of stock option related
distributions.
7. SEGMENT INFORMATION
TWE's businesses are conducted in two fundamental areas of
business: Entertainment, consisting principally of interests in
filmed entertainment, broadcasting, theme parks and cable
television programming; and Telecommunications, consisting
principally of interests in cable television systems.
Information as to the operations of TWE in different
business segments is set forth below. The operating results of
TWE reflect the formation of the TWE-Advance/Newhouse Partnership
effective as of April 1, 1995, the deconsolidation of Six Flags
effective as of June 23, 1995 and the consolidation of Paragon
effective as of July 6, 1995. The operating results of Six Flags
prior to June 23, 1995 are reported separately to facilitate
comparability.
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
(millions)
Revenues
Filmed Entertainment $1,270 $1,151 $2,486 $2,334
Six Flags Theme Parks - 204 - 227
Broadcasting - The WB Network 18 3 33 6
Programming - HBO 456 392 875 777
Cable 961 724 1,908 1,281
Intersegment elimination (97) (82) (209) (187)
Total $2,608 $2,392 $5,093 $4,438
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
(millions)
Operating Income
Filmed Entertainment $ 79 $ 52 $ 149 $ 119
Six Flags Theme Parks - 31 - 29
Broadcasting - The WB Network (12) (12) (36) (33)
Programming - HBO 83 70 159 137
Cable 147 125 293 205
Total $ 297 $ 266 $ 565 $ 457
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
(millions)
Depreciation of Property, Plant and Equipment
Filmed Entertainment $ 32 $ 22 $ 62 $ 42
Six Flags Theme Parks - 19 - 20
Broadcasting - The WB Network - - - -
Programming - HBO 4 4 9 8
Cable 157 111 300 199
Total $ 193 $ 156 $ 371 $ 269
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
(millions)
Amortization of Intangible Assets (1)
Filmed Entertainment $ 29 $ 35 $ 60 $ 69
Six Flags Theme Parks - 8 - 11
Broadcasting - The WB Network - - - -
Programming - HBO - - - -
Cable 72 76 151 152
Total $ 101 $ 119 $ 211 $ 232
______________
(1) Amortization includes amortization relating to the
acquisition of WCI in 1989 and the ATC minority interest in 1992
and to other business combinations accounted for by the purchase method.
8. COMMITMENTS AND CONTINGENCIES
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,
1996 1995
(millions)
Interest expense $239 $296
Cash payments made for interest 247 301
Cash payments made for income taxes (net) 32 34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the litigation entitled U S WEST, INC.
et al. v. TIME WARNER INC., et al., described on page 46 of Time
Warner's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1996 (the "March 1996 Form 10-Q"). On June 6,
1996, the Court of Chancery of the State of Delaware rendered an
opinion dismissing with prejudice all of the claims asserted by U
S WEST and reserving decision on the counterclaims interposed by
Time Warner. U S WEST has not appealed the decision of the Court
of Chancery, and the period for filing a notice of appeal has
closed.
On July 8, 1996, a purported class action was filed in the
Circuit Court of Blount County, Tennessee at Maryville, entitled
ROBINSON AND SILVEY v. EMI MUSIC DISTRIBUTION, INC., SONY MUSIC
ENTERTAINMENT, INC., WARNER ELEKTRA ATLANTIC CORPORATION, UNI
DISTRIBUTION CORPORATION, BERTELSMANN MUSIC GROUP, INC. and
POLYGRAM GROUP DISTRIBUTION, INC., No. L-10462. The action is
brought on behalf of persons who, from June 26, 1992 to the
present, purchased recorded music compact discs ("CDS")
indirectly from defendants in Tennessee, Alabama, California,
Florida, Kansas, Maine, Michigan, Minnesota, Mississippi, New
Mexico, North Dakota, South Dakota, West Virginia, Wisconsin and
the District of Columbia, and alleges that the defendants are
engaged in a conspiracy to fix the prices of CDS, in violation of
the antitrust, unfair trade practices and consumer protection
statutes of each of those jurisdictions. Also on July 8, the
Circuit Court issued an order conditionally granting class
certification, subject to defendants' right to move to decertify
the class.
On July 25, 1996, Warner Elektra Atlantic Corporation was
served with an antitrust civil investigative demand from the
Office of the Attorney General of the State of Florida that calls
for the production of documents in connection with an
investigation to determine whether there "is, has been or may be"
a "conspiracy to fix the prices" of CDS or conduct consisting of
"unfair methods of competition" or "unfair trade practices" in
the sale and marketing of CDS.
Reference is made to the actions filed in Superior Court,
Fulton County, Georgia, and consolidated as LEWIS, et al. v.
TURNER BROADCASTING SYS., INC., et al., described on page 46 of the
March 1996 Form 10-Q. The Superior Court heard arguments on defendants'
motion for judgment based on the pleadings on June 17, 1996.
Reference is made to the litigation entitled SAMUEL D.
MOORE, et al. v. AMERICAN FEDERATION OF TELEVISION AND RADIO
ARTISTS, et al., described on page I-43 of Time Warner's Annual
Report on Form 10-K for the year ended December 31, 1995 (the
"1995 Form 10-K"). In July 1996, the plaintiffs filed a motion
to amend the complaint, which the recording companies will oppose.
The proposed second amended complaint is based on substantially
the same allegations as the prior complaint and seeks to recover
substantial monetary damages, liquidated damages, equitable relief,
and attorney's fees from the recording companies. The proposed
complaint includes a claim asserted derivatively on behalf of
the American Federation of Television and Radio Artists Health
and Retirement Fund as well as a renewal of some of the claims
that had previously been dismissed from this lawsuit.
Reference is made to the litigation entitled SAMUEL D.
MOORE, et al. v. SONY MUSIC ENTERTAINMENT GROUP, et al.,
described on page I-43 of the 1995 Form 10-K. The plaintiffs
have filed an appeal from the District Court for the Southern
District of New York's order of dismissal and have filed the
motion described in the preceding paragraph to amend the
complaint in the SAMUEL D. MOORE, et al. v. AMERICAN FEDERATION
OF TELEVISION AND RADIO ARTISTS, et al. lawsuit.
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, described on page I-42 of the
1995 Form 10-K. Argument on the appeal to the United States
Supreme Court of the December 1995 decision of the District Court
for the District of Columbia upholding the "must-carry"
requirements of the 1992 Cable Act has been set for October 7, 1996.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Stockholders of Time Warner was
held on May 16, 1996 (the "1996 Annual Meeting").
(b) (i) The following were elected directors of Time
Warner at the 1996 Annual Meeting:
Beverly Sills Greenough
Carla A. Hills
Reuben Mark
Francis T. Vincent, Jr.
(ii) The following continue as directors of Time Warner:
Merv Adelson
Lawrence B. Buttenweiser
David T. Kearns
Gerald M. Levin
Michael A. Miles
J. Richard Munro
Richard D. Parsons
Donald S. Perkins
Raymond S. Troubh
(c) The following matters were voted upon at the 1996
Annual Meeting:
(i) Election of directors for terms expiring in 1999:
Broker
For Withheld Non-Votes
Beverly Sills Greenough 379,744,375 8,584,724 0
Carla A. Hills 380,217,114 8,111,985 0
Reuben Mark 380,302,725 8,026,374 0
Francis T. Vincent, Jr. 380,037,805 8,291,294 0
(ii) Approval of the Time Warner Inc. 1996 Stock
Option Plan for Non-Employee Directors:
Broker
Votes For Votes Against Abstentions Non-Votes
326,072,622 56,169,055 6,087,422 0
(iii) Approval of the appointment of Ernst & Young
LLP as independent auditors of Time Warner for 1996:
Broker
Votes For Votes Against Abstentions Non-Votes
385,858,867 1,549,493 920,739 0
(iv) Stockholder resolution relating to the use of
chlorine-free paper:
Broker
Votes For Votes Against Abstentions Non-Votes
18,231,697 315,833,635 17,647,793 36,615,974
(v) Stockholder resolution urging an amendment to the
bylaws of Time Warner which would require that the chairman of
the board be an independent director not formerly the chief
executive of Time Warner:
Broker
Votes For Votes Against Abstentions Non-Votes
61,066,333 279,632,038 11,014,754 36,615,974
(vi) Stockholder resolution calling for the election
of directors annually and not by classes:
Broker
Votes For Votes Against Abstentions Non-Votes
101,412,025 185,960,115 64,340,985 36,615,974
(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 2, 1996, reporting in Item 5 that it had issued a
press release dated April 2, 1996 announcing that it had raised
$1.5 billion for debt reduction by issuing 1.5 million shares of
Series K Exchangeable Preferred Stock under Rule 144A.
(ii) Time Warner filed a Current Report on Form 8-K
dated April 4, 1996, reporting in Item 5 that it had issued a
press release dated April 4, 1996 announcing that its offering of
Series K Exchangeable Preferred Stock had been increased to 1.6
million shares as a result of the exercise by the underwriters of
an option to purchase an additional 100,000 shares to cover
overallotments.
(iii) Time Warner filed a Current Report on Form 8-K
dated April 11, 1996, filing pursuant to Item 7 thereof the
Certificate of Designation of the 10-1/4% Series K Exchangeable
Preferred Stock and the related Form of Senior Subordinated
Indenture.
(iv) Time Warner filed a Current Report on Form 8-K
dated May 15, 1996, setting forth in Item 7 certain pro forma
financial statements of Time Warner and Time Warner Entertainment
Group at March 31, 1996, reflecting certain transactions entered
into by Time Warner and TWE during 1995 and 1996.
(v) Time Warner filed a Current Report on Form 8-K dated
August 6, 1996, reporting in Item 5 that it had issued a press release
dated August 6, 1996 announcing that as a result of a printer's error,
a preliminary draft of a report on Form 8-K relating to the acquisition
of Turner Broadcasting System, Inc. was inadvertently filed through
the SEC's electronic filing system.
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, 1996
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Exhibit No. Description of Exhibit
10.1 Credit Agreement dated as of May 23, 1996 (the
"Credit Agreement") among Time Warner Inc. (the
"Registrant"), the several lenders from time to
time parties thereto and Chemical Bank, as
administrative agent.
10.2 Escrow Agreement dated as of May 23, 1996 among
the Registrant, The Bank of New York, as escrow
agent and Chemical Bank, as administrative agent
under the Credit Agreement.
10.3 Time Warner Inc. 1996 Stock Option Plan for
Non-Employee Directors (which is incorporated by
reference to Annex A to the Registrant's
definitive Proxy Statement dated March 29,
1996, used in connection with the Registrant's
1996 Annual Meeting of Stockholders).
27 Financial Data Schedule.