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
September 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 COMPANIES, INC.*
(Formerly Named 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 - $.01 par value 384,924
-------------------------------- ------------------
Description of Class* Shares Outstanding
as of October 31, 1996*
______________________
* Time Warner Companies, Inc. ("Old Time Warner") was formerly
known as Time Warner Inc. On October 10, 1996, Old Time Warner
became a wholly owned subsidiary of TW Inc. ("New Time Warner")
in connection with the acquisition by New Time Warner of the
remaining 80% interest in Turner Broadcasting System, Inc. that
was not already owned by Old Time Warner. Simultaneously
therewith, New Time Warner was renamed Time Warner Inc. and Old
Time Warner was renamed Time Warner Companies, Inc. All
outstanding shares of common stock of Old Time Warner are now
held directly or directly by New Time Warner. Shares of New Time
Warner common stock outstanding as of October 31, 1996 consist of
508 million shares of common stock and 50.6 million shares of LMCN-V
Class Common Stock, each class having a par value of $.01 per share.
TIME WARNER COMPANIES, 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 37
Consolidated balance sheets at September
30, 1996 and December 31, 1995 20 45
Consolidated statements of operations for
the three and nine months ended September
30, 1996 and 1995 21 46
Consolidated statements of cash flows for
the nine months ended September 30, 1996
and 1995 22 47
Notes to consolidated financial statements 23 48
PART II. OTHER INFORMATION 55
PART I. FINANCIAL INFORMATION
TIME WARNER COMPANIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Time Warner Companies, Inc. ("Old Time Warner") was formerly
known as Time Warner Inc. On October 10, 1996, Old Time Warner
became a wholly owned subsidiary of TW Inc. ("New Time Warner")
in connection with the acquisition by New Time Warner of the
remaining 80% interest in Turner Broadcasting System, Inc.
("TBS") that was not already owned by Old Time Warner, as more
fully described herein. Simultaneously therewith, New Time Warner
was renamed Time Warner Inc. and Old Time Warner was renamed Time
Warner Companies, Inc. The following is a discussion of the
results of operations and financial condition of Old Time Warner.
Unless the context indicates otherwise, references herein to
"Time Warner" or the "Company" refer to Old Time Warner.
Time Warner has interests in four fundamental areas of
business: Entertainment, consisting principally of interests in
recorded music and music publishing, filmed entertainment,
broadcasting and theme parks; Cable Networks, consisting
principally of interests in cable television programming;
Publishing, consisting principally of interests in magazine
publishing, book publishing and direct marketing; and Cable,
consisting principally of interests in cable television systems.
Substantially all of Time Warner's interests in filmed enter-
tainment, broadcasting, theme parks and 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") and 100% of the senior priority capital ("Senior
Capital") and junior priority capital ("Series B Capital"). 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. 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 acquisition by New Time Warner in October 1996 of
the remaining 80% interest in TBS that was not already owned by
Old Time Warner (the "TBS Transaction"). The addition of TBS's
news and entertainment programming networks, film and animation
libraries, film production companies and sports franchises is
expected to complement virtually all of Time Warner's business
interests. In connection with the TBS Transaction, New Time
Warner issued or agreed to issue approximately 178.4 million
shares of common stock (including 55.6 million shares of a
special class of non-redeemable, reduced-voting common stock
referred to hereinafter as "LMCN-V Class Common Stock") to the
former shareholders of TBS capital stock, approximately 14
million stock options to replace all outstanding TBS stock
options and $67 million of consideration payable, at the election
of New Time Warner, in either cash or additional shares of LMCN-V
Class Common Stock. TBS had approximately $2.8 billion of
indebtedness as of September 30, 1996.
* The implementation by Old 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 was
supported by a new five-year, $750 million revolving credit
facility which was expected to be repaid principally from the
cash proceeds to be received by Old Time Warner from the future
exercise of employee stock options. As of September 30, 1996, Old
Time Warner had acquired approximately 11.3 million shares of its
common stock for an aggregate cost of approximately $452 million.
In connection with the TBS Transaction, Old Time Warner's common
stock repurchase program was discontinued and a similar program
was authorized by New Time Warner to continue the repurchase,
from time to time, of up to an additional 3.7 million shares of
New Time Warner common stock.
* The issuance by Time Warner 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 (the
"Series K Refinancing") 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 $3.4 billion for debt reduction.
* The redemption by Time Warner 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 (the
"CVI Acquisition"), 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. As of September 30, 1996, Time Warner Cable, which
includes the cable operations of both Time Warner and TWE, served
approximately 12.1 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 October 10, 1996, New Time Warner acquired the remaining
80% interest in TBS that was not already owned by Old Time
Warner. The transaction was structured so that each of Old Time
Warner and TBS became separate, wholly owned subsidiaries of New
Time Warner which will combine, for financial reporting purposes,
the consolidated net assets and operating results of Old Time
Warner and TBS. In connection therewith, each issued and
outstanding share of each class of capital stock of Old Time
Warner was converted into one share of a substantially identical
class of capital stock of New Time Warner.
In connection with the TBS Transaction, New Time Warner
issued (i) approximately 173.4 million shares of common stock,
par value $.01 (including 50.6 million shares of LMCN-V Class
Common Stock which were received by affiliates of Liberty Media
Corporation ("LMC"), a former shareholder of TBS and a subsidiary
of Tele-Communications, Inc.) in exchange for shares of TBS
capital stock and (ii) approximately 14 million stock options to
replace all outstanding TBS stock options. In addition, New Time
Warner agreed to issue to LMC and its affiliates at a later date
an additional five million shares of LMCN-V Class Common Stock
and $67 million of consideration payable, at the election of New
Time Warner, in cash or additional shares of LMCN-V Class Common
Stock, pursuant to a separate option and non-competition
agreement that will provide, if New Time Warner exercises its
option, for a subsidiary of LMC to provide certain satellite
uplink and distribution services for WTBS, a broadcast television
station owned by TBS, in the event that WTBS is converted to a
copyright-paid cable television programming service. The
aggregate merger consideration has been valued at approximately
$6.1 billion. New Time Warner has also (i) fully and
unconditionally guaranteed approximately $1 billion of TBS's
outstanding publicly traded indebtedness and approximately $7.7
billion of Old Time Warner's outstanding publicly traded
indebtedness and (ii) assumed certain existing liabilities of Old
Time Warner, including all of Old Time Warner's rights and
obligations under the Stock Option Proceeds Credit Facility (as
defined hereinafter).
The TBS Transaction is not reflected in the accompanying
consolidated financial statements of Old Time Warner, but will be
accounted for by New Time Warner in the fourth quarter of 1996 by
the purchase method of accounting for business combinations.
Based on TBS's financial position and results of operations as of
and for the nine months ended September 30, 1996, and giving pro
forma effect to the TBS Transaction as if it had occurred on
September 30, 1996 for balance sheet purposes and at the
beginning of the year for statement of operations purposes, the
incremental pro forma effect on New Time Warner would have been
(i) an increase in shareholders' equity of approximately $6
billion, principally due to the issuance by New Time Warner of
approximately 178.4 million additional shares of common stock,
(ii) an increase in long-term debt of approximately $2.9 billion,
principally due to the inclusion 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 $2.8 billion,
(v) an increase in EBITDA (as defined below) of $208 million,
(vi) an increase in depreciation and amortization of $261
million, including approximately $127 million of noncash
amortization of goodwill, (vii) a decrease in operating income of
$53 million, (viii) an increase in net loss of $152 million and
(ix) a reduction in loss per common share before extraordinary
item of $.07 per common share resulting from the dilutive effect
of issuing an additional 178.4 million shares of common stock.
The increase in pro forma net loss attributable to TBS is
primarily due to disappointing results from worldwide theatrical
releases, which resulted in net writeoffs in TBS's historical
results of approximately $200 million during 1996.
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 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 nine months ended September
30, 1996 and 1995 are as follows:
Three Months Ended September 30, Nine Months Ended September 30,
EBITDA Operating Income EBITDA Operating Income
1996 1995 1996 1995 1996 1995 1996 1995
Time Warner: (millions)
Publishing $ 99 $ 86 $ 66 $ 62 $ 335 $301 $247 $231
Music(1) 143 57 48 (39) 454 395 173 114
Cable 122 45 25 (2) 352 45 44 (2)
Total $364 $188 $139 $ 21 $1,141 $741 $464 $343
Entertainment Group:
Filmed Entertainment
$146 $129 $ 62 $ 70 $ 423 $369 $214 $196
Six Flags Theme Parks
- - - - - 60 - 29
Broadcasting - The WB Network
(27) (7) (27) (7) (63) (40) (63) (40)
Programming - HBO
91 74 86 70 259 220 245 207
Cable 390 345 156 141 1,134 920 449 357
Total $600 $541 $277 $274 $1,753 $1,529 $845 $749
_______________
(1) Includes pretax losses of $85 million recorded in the third
quarter of 1995 related to certain businesses and joint ventures
owned by the Music Division which were restructured or closed.
Three Months Ended September 30, 1996 Compared to Three Months
Ended September 30, 1995
Time Warner had revenues of $2.157 billion, and a net loss
of $91 million ($.43 per common share) for the three months ended
September 30, 1996, compared to revenues of $1.981 billion, a
loss of $102 million ($.30 per common share) before an
extraordinary loss on the retirement of debt and a net loss of
$144 million ($.41 per common share) for the three months ended
September 30, 1995. Time Warner's equity in the pretax income of
the Entertainment Group was $61 million for the three months
ended September 30, 1996, compared to $129 million for the three
months ended September 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 September 30, 1995, revenues
of $2.111 billion, depreciation and amortization of $237 million,
operating income of $15 million, equity in the pretax income of
the Entertainment Group of $130 million, a loss before
extraordinary item of $113 million ($.49 per common share) and a
net loss of $155 million ($.60 per common share). No pro forma
financial information has been presented for Time Warner for the
three months ended September 30, 1996 because all of such
transactions are already reflected, in all material respects, in
the historical financial statements of Time Warner.
As discussed more fully below, the improvement in Time
Warner's historical net loss in 1996 as compared to the
historical and pro forma net loss in 1995 reflects an overall
increase in the operating income of Time Warner's business
segments and the absence of a $42 million extraordinary loss on
the retirement of debt ($.11 per common share) recognized in
1995, offset in part by lower income from Time Warner's equity in
the pretax income of the Entertainment Group and a decrease in
investment-related income. In addition, on a historical basis,
the positive effect from such underlying operating trends on Time
Warner's 1996 net loss per common share was more than offset by
an increase in preferred dividend requirements as a result of the
preferred stock issued in connection with the Series K Refinancing,
the CVI Acquisition and the ITOCHU/Toshiba Transaction.
The Entertainment Group had revenues of $2.720 billion and
net income of $51 million for the three months ended September
30, 1996, compared to revenues of $2.363 billion, income of $103
million before an extraordinary loss on the retirement of debt
and net income of $79 million for the three months ended
September 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 September 30, 1995, revenues of $2.354 billion,
depreciation and amortization of $267 million, operating income
of $271 million, income before extraordinary item of $104 million
and net income of $80 million. No pro forma financial information
has been presented for the Entertainment Group for the three
months ended September 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 net income was lower in 1996 as compared to historical
and pro forma results in 1995 due to a decrease in investment-
related income, which more than offset the absence of a $24 million
extraordinary loss on the retirement of debt recognized in 1995,
an overall increase in operating income generated by its business
segments and interest savings in 1996 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 $1.034 billion, compared
to $914 million in the third quarter of 1995. EBITDA increased to
$99 million from $86 million. Depreciation and amortization
amounted to $33 million in 1996 and $24 million in 1995.
Operating income increased to $66 million from $62 million.
Revenues benefited from across-the-board increases in magazine
circulation, advertising and book revenues. All major magazine
brands achieved revenue gains, including People and Sports
Illustrated, the latter of which benefited in part from
Olympics-related coverage. The increase in book revenues benefited
from strong contributions by the direct marketing businesses. EBITDA
and operating income increased as a result of the revenue gains.
Music. Revenues decreased to $900 million, compared to $992
million in the third quarter of 1995. EBITDA increased to $143
million from $57 million. Depreciation and amortization,
including amortization related to the purchase of WCI, amounted
to $95 million in 1996 and $96 million in 1995. Operating income
increased to $48 million in 1996 from an operating loss of $39
million in 1995. Operating results for 1995 included $85 million
in losses relating to certain start-up businesses and joint
ventures owned by the Music Division which were restructured or
closed. With regard to 1996, despite maintaining its leading
domestic market share (over 22%), the Music Division's domestic
recorded music operating results 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 principally related to the continuing 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, and the absence of revenues
from certain start-up businesses which are no longer being
operated by the Music Division. The increase in EBITDA and
operating income principally resulted from the absence of losses
from certain start-up businesses and joint ventures, and was
offset in part by the decline in the recorded music business and
lower results from direct marketing activities.
Cable. Revenues increased to $230 million, compared to $83
million in the third quarter of 1995. EBITDA increased to $122
million from $45 million. Depreciation and amortization amounted
to $97 million in 1996 and $47 million in 1995. Operating income
increased to $25 million in 1996 from an operating loss of $2
million in 1995. On a pro forma basis, giving effect to the CVI
Acquisition as if it had occurred at the beginning of 1995,
revenues benefited from an increase in basic cable subscribers,
increases in regulated cable rates as permitted under Time Warner
Cable's "social contract" with the Federal Communications
Commission (the "FCC") and an increase in advertising revenues.
Similarly, on a pro forma basis, EBITDA and operating income
increased as a result of the revenue gains.
Interest and Other, Net. Interest and other, net, increased
to $276 million in the third quarter of 1996, compared to $259
million in the third quarter of 1995. Interest expense decreased
to $217 million, compared to $234 million. The decrease in
interest expense was principally due to the favorable effects
from Time Warner's redemption of the 8.75% Convertible Debentures
and the Series K Refinancing, offset in part by the assumption or
incurrence of approximately $2 billion of debt in the 1996
acquisition of CVI and related companies. There was other
expense, net, of $59 million in the third quarter of 1996,
compared to $25 million in 1995, principally because of a
decrease in investment-related income that included losses from
reductions in the carrying value of certain investments 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 $1.445 billion,
compared to $1.176 billion in the third quarter of 1995. EBITDA
increased to $146 million from $129 million. Depreciation and
amortization, including amortization related to the purchase of
WCI, amounted to $84 million in 1996 and $59 million in 1995.
Operating income decreased to $62 million from $70 million.
Revenues benefited from increases in domestic theatrical,
worldwide home video and worldwide television distribution
operations, offset in part by lower international theatrical
revenues. EBITDA increased, and operating income benefited,
principally from the revenue gains. Operating income was further
affected in 1996 by higher depreciation and amortization related
to the summer opening of an international theme park in Germany.
Broadcasting - The WB Network. The WB Network recorded an
operating loss of $27 million on $23 million of revenues in the
third quarter of 1996, compared to an operating loss of $7
million on $7 million of revenues in the third quarter of 1995.
The increase in revenues and operating losses primarily resulted
from the expansion of the WB Network's primetime programming
schedule (now at three nights) and the expansion of Kids' WB!,
the network's animated programming lineup on Saturday mornings and
weekdays. In addition, operating losses for 1995 were mitigated by a
favorable legal settlement. Due to the start-up nature of this
new national broadcast operation, losses are expected to continue.
Programming - HBO. Revenues increased to $426 million,
compared to $409 million in the third quarter of 1995. EBITDA
increased to $91 million from $74 million. Depreciation and
amortization amounted to $5 million in 1996 and $4 million in
1995. Operating income increased to $86 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, as well as income related to
the licensing of the television series Martin for domestic
syndicated television exhibition.
Cable. Revenues increased to $955 million, compared to $858
million in the third quarter of 1995. EBITDA increased to $390
million from $345 million. Depreciation and amortization,
including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $234
million in 1996 and $204 million in 1995. Operating income
increased to $156 million from $141 million. Revenues benefited
from an aggregate increase 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 advertising revenues.
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, increased
to $147 million in the third quarter of 1996, compared to $77
million in the third quarter of 1995. Interest expense decreased
to $118 million, compared to $148 million in the third 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 $29 million in the
third quarter of 1996, compared to other income, net, of $71
million in 1995, principally due to a decrease in
investment-related income. The decrease in investment-related
income related to a reduction in interest income associated with
lower average cash balances and lower average principal amounts
due under the note receivable from U S WEST that was fully
collected as of June 1996, as well as the absence of income
recognized in connection with the 1995 restructuring of the
Entertainment Group's interest in Court TV.
Nine Months Ended September 30, 1996 Compared to Nine Months
Ended September 30, 1995
Time Warner had revenues of $6.364 billion, a loss of $215
million ($1.02 per common share) before an extraordinary loss on
the retirement of debt and a net loss of $250 million ($1.11 per
common share) for the nine months ended September 30, 1996,
compared to revenues of $5.705 billion, a loss of $157 million
($.47 per common share) before an extraordinary loss on the
retirement of debt and a net loss of $199 million ($.58 per common
share) for the nine months ended September 30, 1995. Time Warner's
equity in the pretax income of the Entertainment Group was $270
million for the nine months ended September 30, 1996, compared to
$235 million for the nine months ended September 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 nine months ended September 30, 1996 and 1995,
respectively, revenues of $6.364 billion and $6.249 billion,
depreciation and amortization of $677 million and $704 million,
operating income of $464 million and $305 million, equity in the
pretax income of the Entertainment Group of $270 million and $258
million, a loss before extraordinary item of $193 million and
$207 million ($1.09 and $1.15 per common share) and a net loss of
$228 million and $249 million ($1.18 and $1.26 per common share).
As discussed more fully below, the improvement in Time
Warner's pro forma net loss in 1996 as compared to pro forma
results in 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 decrease in investment-related income
primarily resulting from gains on the sale of certain assets
recognized 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 $7.817 billion and
net income of $221 million for the nine months ended September
30, 1996, compared to revenues of $6.871 billion, income of $173
million before an extraordinary loss on the retirement of debt
and net income of $149 million for the nine months ended
September 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 nine months ended
September 30, 1995, revenues of $6.936 billion, depreciation and
amortization of $800 million, operating income of $749 million,
income before extraordinary item of $199 million and net income
of $175 million. No pro forma financial information has been
presented for the Entertainment Group for the nine months ended
September 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 net income was higher in 1996 as compared to pro forma
results in 1995 due to an overall increase in operating income
generated by its business segments and the absence of a $24
million extraordinary loss on the retirement of debt recognized
in 1995, 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, such
underlying operating trends were enhanced by interest savings in
1996 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 $2.951 billion, compared
to $2.673 billion in the first nine months of 1995. EBITDA
increased to $335 million from $301 million. Depreciation and
amortization amounted to $88 million in 1996 and $70 million in
1995. Operating income increased to $247 million from $231
million. Revenues benefited from across-the-board increases in
magazine circulation, advertising and book revenues. All major
magazine brands achieved revenue gains, including People,
Entertainment Weekly and Sports Illustrated, the latter of which
benefited in part from Olympics-related coverage. The increase in
book revenues benefited from strong contributions by the direct
marketing businesses. EBITDA and operating income increased as a
result of the revenue gains.
Music. Revenues decreased to $2.759 billion, compared to
$2.969 billion in the first nine months of 1995. EBITDA increased
to $454 million from $395 million. Depreciation and amortization,
including amortization related to the purchase of WCI, amounted
to $281 million in 1996 and 1995. Operating income increased to
$173 million from $114 million. Operating results for 1995
included $85 million in losses relating to certain start-up
businesses and joint ventures owned by the Music Division which
were restructured or closed. With regard to 1996, despite
maintaining its leading domestic market share (over 22%), the
Music Division's domestic recorded music operating results 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 principally related to (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. The increase in EBITDA and
operating income principally resulted from the absence of losses
from certain start-up businesses and joint ventures, and was
offset in part by the decline in the recorded music business and
lower results from direct marketing activities.
Cable. Revenues increased to $677 million, compared to $83
million in the first nine months of 1995. EBITDA increased to
$352 million from $45 million. Depreciation and amortization
amounted to $308 million in 1996 and $47 million in 1995.
Operating income increased to $44 million in 1996 from an
operating loss of $2 million in 1995. On a pro forma basis,
giving effect to the CVI Acquisition as if it had occurred at the
beginning of 1995, revenues benefited from an increase in basic
cable subscribers, increases in regulated cable rates as permitted
under Time Warner Cable's "social contract" with the FCC and an
increase in advertising revenues. Similarly, on a pro forma basis,
EBITDA and operating income increased as a result of the revenue gains.
Interest and Other, Net. Interest and other, net, increased
to $854 million in the first nine months of 1996, compared to
$615 million in the first nine months of 1995. Interest expense
increased to $688 million, compared to $663 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 effects from Time
Warner's redemption of the 8.75% Convertible Debentures and the
Series K Refinancing. There was other expense, net, of $166
million in the first nine months of 1996, compared to other
income, net, of $48 million in 1995, principally because of a
decrease in investment-related income resulting from the absence
of gains on certain asset sales recognized in 1995 in connection
with management's debt reduction program, increased losses from
reductions in the carrying value of certain investments 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 $3.935 billion,
compared to $3.514 billion in the first nine months of 1995.
EBITDA increased to $423 million from $369 million. Depreciation
and amortization, including amortization related to the purchase
of WCI, amounted to $209 million in 1996 and $173 million in
1995. Operating income increased to $214 million from $196
million. Revenues benefited from increases in domestic theatrical,
worldwide home video and worldwide television distribution operations,
offset in part by lower international theatrical revenues. EBITDA
and operating income benefited principally from the revenue gains,
offset in part, with respect to operating income only, by higher
depreciation and amortization related to the 1996 summer opening
of an international theme park in Germany.
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 $63 million on $56 million of revenues in the
first nine months of 1996, compared to an operating loss of $40
million on $13 million of revenues in the first nine months of
1995. The increase in revenues and operating losses primarily
resulted from the expansion of the WB Network's primetime
programming schedule (now at three nights) and the expansion of
Kids' WB!, the network's animated programming lineup on Saturday
mornings and weekdays. In addition, operating losses for 1995
were mitigated by a favorable legal settlement. Due to the
start-up nature of this new national broadcast operation, losses
are expected to continue.
Programming - HBO. Revenues increased to $1.301 billion,
compared to $1.195 billion in the first nine months of 1995.
EBITDA increased to $259 million from $220 million. Depreciation
and amortization amounted to $14 million in 1996 and $13 million
in 1995. Operating income increased to $245 million from $207
million. Revenues benefited primarily from a significant increase
in subscriptions. EBITDA and operating income improved
principally as a result of the revenue gains, as well as income
related to the licensing of the television series Martin for
domestic syndicated television exhibition.
Cable. Revenues increased to $2.863 billion, compared to
$2.196 billion in the first nine months of 1995. EBITDA increased
to $1.134 billion from $920 million. Depreciation and
amortization, including amortization related to the purchase of
WCI and the acquisition of the ATC minority interest, amounted to
$685 million in 1996 and $563 million in 1995. Operating income
increased to $449 million from $357 million. Revenues and
operating results benefited from the contribution of the
TWE-Advance/Newhouse Partnership and the consolidation of Paragon
for a full nine-month period. Excluding such effects, revenues
benefited from an aggregate increase 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 $369 million in the first nine months of 1996, compared to
$381 million in the first nine months of 1995. Interest expense
decreased to $358 million, compared to $447 million in the first
nine 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 expense, net, of $11 million
in the first nine months of 1996, compared to other income, net,
of $66 million in 1995, principally due to an overall decrease in
investment-related income. The decrease in investment-related
income resulted from a reduction in interest income, offset in
part by higher gains on the sale of certain unclustered cable systems
recognized in connection with management's debt reduction program.
The reduction in interest income related to lower average cash
balances and lower average principal amounts due under the note
receivable from U S WEST that was fully collected as of June 1996.
FINANCIAL CONDITION AND LIQUIDITY
September 30, 1996
Time Warner
Financial Condition
Time Warner had $10 billion of debt, $402 million of cash
and equivalents (net debt of $9.6 billion), $425 million of
borrowings against future stock option proceeds, $949 million of
mandatorily redeemable preferred securities of subsidiaries,
$1.629 billion of Series K Preferred Stock and $3.6 billion of
shareholders' equity at September 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 for debt reduction. The
decrease in shareholders' equity reflects the repurchase of
approximately 11.3 million shares of Time Warner common stock at
an aggregate cost of approximately $452 million and dividend
requirements, which have increased as a result of the preferred
stock issued in connection with the cable acquisitions and the
ITOCHU/Toshiba Transaction, offset in part by 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. On a combined basis (Time Warner and
the Entertainment Group together), excluding borrowings against
future stock option proceeds, there was $15.1 billion of net debt
at September 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 September 30, 1996
consisted of 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. 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
$5.1 billion at September 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. ("TWI Cable")
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 8 to the
accompanying consolidated financial statements for a summary of
the principal terms of the Series K Preferred Stock.
In connection with the TBS Transaction, all shares of the
privately-placed Series K Preferred Stock of Old Time Warner were
converted into registered shares of Series M exchangeable preferred
stock of New Time Warner with substantially identical terms.
Common Stock Repurchase Program
In April 1996, Old Time Warner's Board of Directors
authorized a program to repurchase, from time to time, up to 15
million shares of Old Time Warner common stock. In connection
therewith, Old 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 was
expected to be used to satisfy future share issuances related to
the exercise of existing employee stock options. Actual
repurchases in any period were subject to market conditions. As
of September 30, 1996, Old Time Warner had acquired approximately
11.3 million shares of its common stock for an aggregate cost of
approximately $452 million. Such repurchases were principally
funded with borrowings under the Stock Option Proceeds Credit
Facility and available cash and equivalents. In connection with
the TBS Transaction, New Time Warner has assumed all of Old Time
Warner's rights and obligations under the Stock Option Proceeds
Credit Facility, including its obligations with respect to $425
million of outstanding borrowings. In addition, Old Time Warner's
common stock repurchase program was discontinued and a similar
program was authorized by New Time Warner to continue the
repurchase, from time to time, of up to an additional 3.7 million
shares of New Time Warner common stock.
The Stock Option Proceeds Credit Facility initially provided
for borrowings of up to $750 million, of which up to $100 million
is reserved solely for the payment of interest and fees
thereunder. Borrowings under the Stock Option Proceeds Credit
Facility generally bear interest at LIBOR plus a margin equal to
75 basis points and are principally expected to be repaid from
the cash proceeds received from the exercise of designated
employee stock options. The receipt of such stock option proceeds
permanently reduces the borrowing availability under the
facility, which has been reduced to approximately $730 million as
of September 30, 1996. At September 30, 1996, based on a closing
market price of Time Warner common stock of $38.50, the aggregate
exercise prices of outstanding vested, "in the money" stock
options was approximately $1.9 billion, representing a 2.6 to 1
coverage ratio over the related borrowing availability. To the
extent that such stock option proceeds are not sufficient to
satisfy New Time Warner's obligations under the Stock Option
Proceeds Credit Facility, New 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 New Time Warner's election, using
available cash on hand. Old Time Warner initially placed 36
million shares in escrow under this arrangement, which shares are
not considered to be issued and outstanding capital stock of the
Company. Such shares were converted into shares of New Time
Warner common stock as a result of the TBS Transaction. New Time
Warner may be required, from time to time, to have up to 52.5
million shares held in escrow.
Because borrowings under the Stock Option Proceeds Credit Facility
are expected to be principally repaid by New Time Warner from the
cash proceeds from the exercise of employee stock options, New 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 New 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 nine months of 1996, Time Warner's cash
provided by operations amounted to $86 million and reflected
$1.141 billion of EBITDA from its Publishing, Music and Cable
businesses and $162 million of distributions from TWE, less $699
million of interest payments, $257 million of income taxes, $52
million of corporate expenses and $209 million related to an
increase in other working capital requirements, balance sheet
accounts and noncash items. Cash provided by operations of $654
million for the first nine months of 1995 reflected $741 million
of business segment EBITDA and $957 million of net distributions
from TWE, less $537 million of interest payments, $187 million of
income taxes, $57 million of corporate expenses and $263 million
related to an increase in other working capital requirements,
balance sheet accounts and noncash items.
Cash used by investing activities increased to $497 million
in the first nine months of 1996, compared to $197 million in the
first nine months of 1995, principally as a result of the cash
portion of the consideration paid to acquire CVI and related
companies and a $159 million decrease in investment proceeds
realized in 1995 in connection with management's debt reduction
program. Capital expenditures increased to $270 million in the
first nine months of 1996, compared to $176 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 $372 million for the
first nine months of 1996, compared to $361 million for the first
nine months of 1995. The use of cash in 1996 principally resulted
from higher cash dividend requirements 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 million
shares of Series K Preferred Stock and used the net proceeds
therefrom to reduce debt. Time Warner also borrowed $425 million
under its Stock Options Proceeds Credit Facility and used the
proceeds therefrom, together with available cash and equivalents,
to repurchase approximately 11.3 million shares of its common
stock at an aggregate cost of approximately $452 million. Cash
used by financing activities in 1995 principally resulted from
the use of approximately $200 million of available cash and
equivalents, together with proceeds raised from the issuance of
the PERCS and $500 million principal amount of ten-year notes, to
redeem $1 billion of the then outstanding 8.75% Convertible
Debentures in September 1995. Cash dividends paid increased to
$203 million for the first nine months of 1996, compared to $110
million for the first nine 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 $5.7 billion of debt, $1.5
billion of Time Warner General Partners' Senior Capital and $6.7
billion of partners' capital at September 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 $209 million at September 30, 1996 and December
31, 1995, reducing the debt-net-of-cash amounts for the
Entertainment Group to $5.5 billion and $6 billion, respectively.
Cash Flows
In the first nine months of 1996, the Entertainment Group's
cash provided by operations amounted to $1.322 billion and
reflected $1.753 billion of EBITDA from the Filmed Entertainment,
Broadcasting-The WB Network, Programming-HBO and Cable businesses
and $64 million related to a reduction in working capital
requirements, other balance sheet accounts and noncash items,
less $391 million of interest payments, $52 million of income
taxes and $52 million of corporate expenses. Cash provided by
operations of $1.205 billion in the first nine months of 1995
reflected $1.529 billion of business segment EBITDA and $229
million related to a reduction in working capital requirements,
less $447 million of interest payments, $59 million of income
taxes and $47 million of corporate expenses.
Cash used by investing activities was $864 million in the
first nine months of 1996, compared to $202 million in the first
nine months of 1995, principally as a result of a $590 million
decrease in investment proceeds realized in 1995 in connection
with management's debt reduction program and higher capital
expenditures. Capital expenditures increased to $1.228 billion in
the first nine months of 1996, compared to $1.099 billion in the
first nine months of 1995, principally as a result of higher
cable capital spending as discussed more fully below.
Cash used by financing activities was $458 million in the
first nine months of 1996, compared to $1.635 billion in the first
nine months of 1995, principally as a result of a lower level of
debt reduction realized in 1996 and a $795 million decrease in net
distributions paid to Time Warner, offset in part by a $206
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 $1.059 billion in the nine months ended
September 30, 1996, compared to $853 million in the nine months
ended September 30, 1995, and was financed in part through
collections on the note receivable from U S WEST of $169 million
and $375 million, respectively. Cable capital spending is
budgeted to be approximately $500 million for the remainder of
1996 and is expected to be funded 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 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 a five-year period ending
December 31, 2000. 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 $1.611
billion at September 30, 1996, compared to $1.056 billion at
December 31, 1995 (including amounts relating to HBO of $190
million at September 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 September 30, 1996, Time Warner had interest
rate swap contracts to pay floating-rates of interest (average
six-month LIBOR rate of 5.7%) 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
September 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-5.7%); and 2000-$400 million (receive-5.5%; pay-5.7%). 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 September
30, 1996, the fair value of Time Warner's fixed-rate debt
exceeded its carrying value by $82 million and it would have cost
$52 million to terminate the related interest rate swap
contracts, which combined is the equivalent of an unrealized loss
of $134 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
September 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 $13 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 September 30, 1996, Time Warner had 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
three 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 September 30, 1996, Time Warner had
contracts for the sale of $500 million and the purchase of $200
million of foreign currencies at fixed rates, primarily English
pounds (23% of net contract value), German marks (26%), Canadian
dollars (20%), French francs (12%) and Japanese yen (18%),
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 September 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 nine months ended September
30, 1996 and 1995, Time Warner recognized $12 million in gains
and $20 million in losses, respectively, and TWE recognized $4
million in gains and $8 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
September 30, 1996, each 5% devaluation of the U.S. dollar as
compared to the level of foreign exchange rates for currencies
under contract at September 30, 1996 would result in
approximately $25 million of unrealized losses and $10 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 $25 million of
unrealized gains and $10 million of unrealized losses,
respectively. At September 30, 1996, none of Time Warner's
foreign exchange purchase contracts related to TWE's foreign
currency exposure. However, with regard to the $25 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 COMPANIES, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, December 31,
1996 1995
(millions, except
per share amounts)
ASSETS
Current assets
Cash and equivalents $ 402 $ 628
Receivables, less allowances of $759 and $786 1,416 1,755
Inventories 475 443
Prepaid expenses 950 894
Total current assets 3,243 3,720
Cash and equivalents segregated for
redemption of long-term debt - 557
Investments in and amounts due to and from
Entertainment Group 5,993 5,734
Other investments 2,506 2,389
Property, plant and equipment, net 1,505 1,119
Music catalogues, contracts and copyrights 1,064 1,140
Cable television franchises 3,930 1,696
Goodwill 5,766 5,213
Other assets 460 564
Total assets $24,467 $22,132
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties payable $ 1,462 $ 1,427
Debt due within one year 105 34
Other current liabilities 1,205 1,566
Total current liabilities 2,772 3,027
Long-term debt 9,949 9,907
Borrowings against future stock option proceeds 425 -
Deferred income taxes 3,935 3,420
Unearned portion of paid subscriptions 657 654
Other liabilities 571 508
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, 1.7 million shares outstanding at
September 30, 1996 and $1.678 billion
liquidation preference 1,629 -
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, 384.9 million and
387.7 million shares outstanding (excluding
55.2 million and 45.7 million treasury shares) 385 388
Paid-in capital 5,791 5,422
Unrealized gains on certain marketable securities 182 116
Accumulated deficit (2,814) (2,289)
Total shareholders' equity 3,580 3,667
Total liabilities and shareholders' equity $24,467 $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 7).
See accompanying notes.
TIME WARNER COMPANIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(millions, except per share amounts)
Revenues (a) $2,157 $1,981 $6,364 $5,705
Cost of revenues (a)(b) 1,284 1,274 3,809 3,396
Selling, general and
administrative (a)(b) 734 686 2,091 1,966
Operating expenses 2,018 1,960 5,900 5,362
Business segment operating income 139 21 464 343
Equity in pretax income of
Entertainment Group (a) 61 129 270 235
Interest and other, net (a) (276) (259) (854) (615)
Corporate expenses (a) (16) (18) (52) (57)
Loss before income taxes (92) (127) (172) (94)
Income tax (provision) benefit 1 25 (43) (63)
Loss before extraordinary item (91) (102) (215) (157)
Extraordinary loss on retirement of
debt, net of $22 million income
tax benefit in 1996 and $26 million
income tax benefit in 1995 - (42) (35) (42)
Net loss (91) (144) (250) (199)
Preferred dividend requirements (76) (16) (180) (24)
Net loss applicable to common shares $ (167) $(160) $(430) $(223)
Loss per common share:
Loss before extraordinary item $(0.43) $(0.30) $(1.02) $(0.47)
Net loss $(0.43) $(0.41) $(1.11) $(0.58)
Average common shares 385.0 386.5 388.7 382.5
__________________
(a) Includes the following income (expenses) resulting from
transactions with the Entertainment Group and other related
companies for the three and nine months ended September 30, 1996,
respectively, and for the corresponding periods in the prior
year: revenues- $47 million and $150 million in 1996, and $50
million and $144 million in 1995; cost of revenues- $(39) million
and $(118) million in 1996, and $(25) million and $(74) million
in 1995; selling, general and administrative-$20 million and $25
million in 1996, and $10 million and $39 million in 1995; equity
in pretax income of Entertainment Group- $(20) million and $(24)
million in 1996, and $(19) million and $(79) million in 1995;
interest and other, net-$(7) million and $(24) million in 1996,
and $(14) million and $(13) million in 1995; and corporate
expenses- $17 million and $52 million in 1996, and $17 million
and $47 million in 1995.
(b) Includes depreciation and
amortization expense of: $ 225 $ 167 $ 677 $ 398
See accompanying notes.
TIME WARNER COMPANIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
1996 1995
(millions)
OPERATIONS
Net loss $ (250) $ (199)
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt 35 42
Depreciation and amortization 677 398
Noncash interest expense 68 156
Excess (deficiency) of distributions over
equity in pretax income of Entertainment Group (108) 722
Changes in operating assets and liabilities (336) (465)
Cash provided by operations 86 654
INVESTING ACTIVITIES
Investments and acquisitions (400) (353)
Capital expenditures (270) (176)
Investment proceeds 173 332
Cash used by investing activities (497) (197)
FINANCING ACTIVITIES
Borrowings 2,394 1,997
Debt repayments (4,109) (2,643)
Borrowings against future stock option proceeds 425 -
Repurchases of Time Warner common stock (452) -
Issuance of Series K Preferred Stock 1,552 -
Issuance of PERCS - 374
Dividends paid (203) (110)
Other 21 21
Cash used by financing activities (372) (361)
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (783) 96
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD (a) 1,185 282
CASH AND EQUIVALENTS AT END OF PERIOD $ 402 $378
_______________
(a) Includes current and noncurrent cash and equivalents at
December 31, 1995.
See accompanying notes.
TIME WARNER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Time Warner Companies, Inc. ("Old Time Warner") was formerly
known as Time Warner Inc. On October 10, 1996, Old Time Warner
became a wholly owned subsidiary of TW Inc. ("New Time Warner")
in connection with the acquisition by New Time Warner of the
remaining 80% interest in Turner Broadcasting System, Inc.
("TBS") that was not already owned by Old Time Warner, as more
fully described herein (Note 3). Simultaneously therewith, New
Time Warner was renamed Time Warner Inc. and Old Time Warner was
renamed Time Warner Companies, Inc. The accompanying consolidated
financial statements present the financial position, results of
operations and cash flows of Old Time Warner. Unless the context
indicates otherwise, references herein to "Time Warner" or the
"Company" refer to Old Time Warner.
Time Warner is one of the world's leading media and
entertainment companies, whose principal business objective is to
create and distribute branded information and entertainment
copyrights throughout the world. Time Warner has interests in
four fundamental areas of business: Entertainment, consisting
principally of interests in recorded music and music publishing,
filmed entertainment, broadcasting and theme parks; Cable
Networks, consisting principally of interests in cable television
programming; Publishing, consisting principally of interests in
magazine publishing, book publishing and direct marketing; and
Cable, consisting principally of interests in cable television
systems. Substantially all of Time Warner's interests in filmed
entertainment, broadcasting, theme parks and 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") and 100% of the senior priority capital ("Senior
Capital") and junior priority capital ("Series B Capital"). 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, Cable
Networks, Publishing and Cable 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 10). 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 $261 million and $227 million
for the three months ended September 30, 1996 and 1995,
respectively, and $784 million and $615 million for the nine
months ended September 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 September 30, 1996 and December 31, 1995
consists of the following:
September 30, December 31,
1996 1995
(millions)
Investment in TWE $6,275 $6,179
Stock option related distributions due from TWE 121 122
Credit agreement debt due to TWE (400) (400)
Other liabilities due to TWE, principally
related to home video distribution (295) (354)
Other receivables due from TWE 171 76
Investment in and amounts due to and from TWE 5,872 5,623
Investment in other Entertainment Group companies 121 111
Total $5,993 $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 $213 million and $83 million in the nine months
ended September 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 $5.4 billion of TWE's debt and accrued
interest at September 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 Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(millions)
Operating Statement Information
Revenues $2,720 $2,363 $7,817 $6,871
Depreciation and amortization 323 267 908 780
Business segment operating income 277 274 845 749
Interest and other, net 147 77 369 381
Minority interest 52 51 154 86
Income before income taxes 61 129 270 235
Income before extraordinary item 51 103 221 173
Net income 51 79 221 149
Nine Months
Ended September 30,
1996 1995
(millions)
Cash Flow Information
Cash provided by operations $1,322 $1,205
Capital expenditures (1,228) (1,099)
Investments and acquisitions (86) (143)
Investment proceeds 450 1,040
Borrowings 190 2,041
Debt repayments (697) (3,135)
Collections on note receivable from U S WEST 169 375
Capital distributions (162) (957)
Decrease in cash and equivalents - (632)
September 30, December 31,
1996 1995
(millions)
Balance Sheet Information
Cash and equivalents $ 209 $ 209
Total current assets 3,095 2,909
Total assets 19,498 18,960
Total current liabilities 3,615 3,230
Long-term debt 5,673 6,137
Minority interests 900 726
Time Warner General Partners' Senior Capital 1,513 1,426
Partners' capital 6,742 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 September 30, 1996 and December 31, 1995, the
Time Warner General Partners had recorded $121 million and $122
million, respectively, of stock option related distributions due
from TWE, based on closing prices of Time Warner common stock of
$38.50 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 nine months ended September 30, 1996,
the Time Warner General Partners received distributions from TWE
in the amount of $162 million, consisting of $153 million of
tax-related distributions and $9 million of stock option related
distributions. During the nine months ended September 30, 1995,
the Time Warner General Partners received distributions from TWE
in the amount of $957 million, consisting of $575 million of
tax-related distributions, $16 million of stock option related
distributions and $366 million of TWE partnership income allocated
to the Time Warner General Partners' Senior Capital interest.
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. TBS TRANSACTION
On October 10, 1996, New Time Warner acquired the remaining
80% interest in TBS that was not already owned by Old Time Warner
(the "TBS Transaction"). The transaction was structured so that
each of Old Time Warner and TBS became separate, wholly owned
subsidiaries of New Time Warner which will combine, for financial
reporting purposes, the consolidated net assets and operating
results of Old Time Warner and TBS. In connection therewith, each
issued and outstanding share of each class of capital stock of
Old Time Warner was converted into one share of a substantially
identical class of capital stock of New Time Warner.
In connection with the TBS Transaction, New Time Warner
issued (i) approximately 173.4 million shares of common stock,
par value $.01 (including 50.6 million shares of a special class
of non-redeemable common stock having 1/100th of a vote per share
("LMCN-V Class Common Stock") which were received by affiliates
of Liberty Media Corporation ("LMC"), a former shareholder of TBS
and a subsidiary of Tele-Communications, Inc.) in exchange for
shares of TBS capital stock and (ii) approximately 14 million
stock options to replace all outstanding TBS stock options. In
addition, New Time Warner agreed to issue to LMC and its
affiliates at a later date an additional five million shares of
LMCN-V Class Common Stock and $67 million of consideration
payable, at the election of New Time Warner, in cash or
additional shares of LMCN-V Class Common Stock, pursuant to a
separate option and non-competition agreement that will provide,
if New Time Warner exercises its option, for a subsidiary of LMC
to provide certain satellite uplink and distribution services for
WTBS, a broadcast television station owned by TBS, in the event
that WTBS is converted to a copyright-paid cable television
programming service. The aggregate merger consideration has been
valued at approximately $6.1 billion. New Time Warner has also
(i) fully and unconditionally guaranteed approximately $1 billion
of TBS's outstanding publicly traded indebtedness and approximately
$7.7 billion of Old Time Warner's outstanding publicly traded
indebtedness and (ii) assumed certain existing liabilities of
Old Time Warner, including all of Old Time Warner's rights and
obligations under a $750 million revolving credit facility
used principally to support common stock repurchases (Note 6).
The TBS Transaction is not reflected in the accompanying
consolidated financial statements of Old Time Warner, but will be
accounted for by New Time Warner in the fourth quarter of 1996 by
the purchase method of accounting for business combinations.
4. 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. In August 1996, all
shares of Series C Preferred Stock were exchanged for shares of a
new series of convertible preferred stock with substantially
identical terms ("Series J Preferred Stock").
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) 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 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 September
30, 1995, revenues of $2.111 billion, depreciation and
amortization of $237 million, operating income of $15 million,
equity in the pretax income of the Entertainment Group of $130
million, a loss before extraordinary item of $113 million ($.49
per common share) and a net loss of $155 million ($.60 per common
share). No pro forma financial information has been presented for
Time Warner for the three months ended September 30, 1996 because
all of such transactions are already reflected, in all material
respects, in the historical financial statements of Time Warner.
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 nine months ended
September 30, 1996 and 1995, respectively, revenues of $6.364
billion and $6.249 billion, depreciation and amortization of $677
million and $704 million, operating income of $464 million and
$305 million, equity in the pretax income of the Entertainment
Group of $270 million and $258 million, a loss before
extraordinary item of $193 million and $207 million ($1.09 and
$1.15 per common share) and a net loss of $228 million and $249
million ($1.18 and $1.26 per common share).
5. 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 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 8). The proceeds were used
by Time Warner to redeem $250 million principal amount of 8.75%
Debentures due April 1, 2017 (the "8.75% Non-Convertible
Debentures" and when taken together with the 8.75% Convertible
Debentures, the "8.75% Debentures") 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.
An extraordinary loss of $35 million was incurred in 1996 in
connection with Time Warner's redemption of the 8.75% Debentures.
An extraordinary loss of $42 million was recognized in 1995 in
connection with Time Warner's partial redemption of the 8.75%
Convertible Debentures and the write-off by TWE of deferred financing
costs related to its former bank credit agreement that was terminated.
6. BORROWINGS AGAINST FUTURE STOCK OPTION PROCEEDS
In connection with Time Warner's common stock repurchase
program (Note 9), Old 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. In connection with the TBS Transaction, New Time
Warner has assumed all of Old Time Warner's rights and obligations
under the Stock Option Proceeds Credit Facility, including its
obligations with respect to its $425 million of borrowings.
The Stock Option Proceeds Credit Facility initially provided
for borrowings of up to $750 million, of which up to $100 million
is reserved solely for the payment of interest and fees
thereunder. Borrowings under the Stock Option Proceeds Credit
Facility generally bear interest at LIBOR plus a margin equal to
75 basis points and are principally expected to be repaid from
the cash proceeds received from the exercise of designated
employee stock options. The receipt of such stock option proceeds
permanently reduces the borrowing availability under the
facility, which has been reduced to approximately $730 million as
of September 30, 1996. At September 30, 1996, based on a closing
market price of Time Warner common stock of $38.50, the aggregate
exercise prices of outstanding vested, "in the money" stock
options was approximately $1.9 billion, representing a 2.6 to 1
coverage ratio over the related borrowing availability. To the
extent that such stock option proceeds are not sufficient to
satisfy New Time Warner's obligations under the Stock Option
Proceeds Credit Facility, New 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 New Time Warner's election, using
available cash on hand. Old Time Warner initially placed 36
million shares in escrow under this arrangement, which shares are
not considered to be issued and outstanding capital stock of the
Company. Such shares were converted into shares of New Time
Warner common stock as a result of the TBS Transaction. New Time
Warner may be required, from time to time, to have up to 52.5
million shares held in escrow.
7. 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.
Old 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. In connection with the TBS Transaction, New Time
Warner has guaranteed such obligations of Old Time Warner.
8. 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.
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 % 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.
In connection with the TBS Transaction, all shares of the
privately-placed Series K Preferred Stock of Old Time Warner were
converted into registered shares of Series M exchangeable preferred
stock of New Time Warner with substantially identical terms.
9. CAPITAL STOCK
Changes in shareholders' equity are as follows:
Nine Months
Ended September 30,
1996 1995
(millions)
Balance at beginning of year $3,667 $1,148
Net loss (250) (199)
Common dividends declared (105) (103)
Preferred dividends declared (180) (24)
Repurchases of Time Warner common stock (452) -
Issuance of common stock and preferred stock
in the Cable Acquisitions 680 1,384
Issuance of preferred stock in ITOCHU/Toshiba transaction - 1,350
Unrealized gains on certain marketable equity investments 66 4
Other, principally shares issued pursuant to stock option
and dividend reinvestment plans 154 132
Balance at September 30 $3,580 $3,692
In April 1996, Old Time Warner's Board of Directors
authorized a program to repurchase, from time to time, up to 15
million shares of Old Time Warner common stock. The common stock
repurchased under the program was expected to be used to satisfy
future share issuances related to the exercise of existing
employee stock options. Actual repurchases in any period were
subject to market conditions. As of September 30, 1996, Time
Warner had acquired approximately 11.3 million shares of its
common stock for an aggregate cost of approximately $452 million.
Such repurchases were principally funded with borrowings under
the Stock Option Proceeds Credit Facility (Note 6) and available
cash and equivalents. In connection with the TBS Transaction, Old
Time Warner's common stock repurchase program was discontinued
and a similar program was authorized by New Time Warner to
continue the repurchase, from time to time, of up to an
additional 3.7 million shares of New Time Warner common stock.
In connection with the TBS Transaction, Old Time Warner was
recapitalized resulting in a reduction in the number of outstanding
shares of each class of Old Time Warner capital stock by a factor
of 1/1000, and a reduction in the par value of each class of such
capital stock from $1 per share to $.01 per share. All of such
shares are held directly and indirectly by New Time Warner.
10. SEGMENT INFORMATION
Time Warner's businesses are conducted in four fundamental
areas: Entertainment, consisting principally of interests in
recorded music and music publishing, filmed entertainment,
broadcasting and theme parks; Cable Networks, consisting
principally of interests in cable television programming;
Publishing, consisting principally of interests in magazine
publishing, book publishing and direct marketing; and Cable,
consisting principally of interests in cable television systems.
Substantially all of Time Warner's interests in filmed
entertainment, broadcasting, theme parks and 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 Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
Revenues (millions)
Time Warner:
Publishing $1,034 $ 914 $2,951 $2,673
Music 900 992 2,759 2,969
Cable 230 83 677 83
Intersegment elimination (7) (8) (23) (20)
Total $2,157 $1,981 $6,364 $5,705
Entertainment Group:
Filmed Entertainment $1,445 $1,176 $3,935 $3,514
Six Flags Theme Parks - - - 227
Broadcasting - The WB Network 23 7 56 13
Programming - HBO 426 409 1,301 1,195
Cable 955 858 2,863 2,196
Intersegment elimination (129) (87) (338) (274)
Total $2,720 $2,363 $7,817 $6,871
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
Operating Income (millions)
Time Warner:
Publishing $ 66 $ 62 $ 247 $ 231
Music(1) 48 (39) 173 114
Cable 25 (2) 44 (2)
Total $ 139 $ 21 $ 464 $ 343
Entertainment Group:
Filmed Entertainment $ 62 $ 70 $ 214 $ 196
Six Flags Theme Parks - - - 29
Broadcasting - The WB Network (27) (7) (63) (40)
Programming - HBO 86 70 245 207
Cable 156 141 449 357
Total $ 277 $ 274 $ 845 $ 749
__________________
(1) Includes pretax losses of $85 million recorded in the third
quarter of 1995 related to certain businesses and joint
ventures owned by the Music Division which were restructured
or closed.
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
Depreciation of Property, Plant and Equipment (millions)
Time Warner:
Publishing $ 21 $ 15 $ 53 $ 43
Music 26 24 68 71
Cable 32 13 98 13
Total $ 79 $ 52 $ 219 $ 127
Entertainment Group:
Filmed Entertainment $ 52 $ 28 $ 117 $ 73
Six Flags Theme Parks - - - 20
Broadcasting - The WB Network - - - -
Programming - HBO 5 4 14 13
Cable 151 123 451 330
Total $ 208 $ 155 $ 582 $ 436
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
Amortization of Intangible Assets (1) (millions)
Time Warner:
Publishing $ 12 $ 9 $ 35 $ 27
Music 69 72 213 210
Cable 65 34 210 34
Total $ 146 $ 115 $ 458 $ 271
Entertainment Group:
Filmed Entertainment $ 32 $ 31 $ 92 $ 100
Six Flags Theme Parks - - - 11
Broadcasting - The WB Network - - - -
Programming - HBO - - - -
Cable 83 81 234 233
Total $ 115 $ 112 $ 326 $ 344
__________________
(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.
11. 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.
12. ADDITIONAL FINANCIAL INFORMATION
Additional financial information is as follows:
Nine Months
Ended September 30,
1996 1995
(millions)
Interest expense $ 688 $ 663
Cash payments made for interest 699 537
Cash payments made for income taxes 294 207
Tax-related distributions received from TWE 153 575
Income tax refunds received 37 20
Noncash dividends 79 -
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
TWE is engaged principally in three fundamental areas of
business: Entertainment, consisting principally of interests in
filmed entertainment, broadcasting and theme parks; Cable Networks,
consisting principally of interests in cable television programming;
and Cable, consisting principally of interests in cable television
systems. TWE also manages the cable properties owned by Time
Warner Companies, Inc. ("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. As of
September 30, 1996, Time Warner Cable served approximately 12.1
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 $150 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 $1.3 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.
_________________
* Time Warner Companies, Inc. ("Old Time Warner") was formerly
known as Time Warner Inc. On October 10, 1996, Old Time Warner
became a wholly owned subsidiary of TW Inc. ("New Time Warner")
in connection with the acquisition by New Time Warner of the
remaining 80% interest in Turner Broadcasting System, Inc. that
was not already owned by Old Time Warner. Simultaneously
therewith, New Time Warner was renamed Time Warner Inc. and Old
Time Warner was renamed Time Warner Companies, Inc. Unless the
context indicates otherwise, references herein to "Time Warner"
refer to Old Time Warner.
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 nine
months ended September 30, 1996 and 1995 are as follows:
Three Months Ended September 30, Nine Months Ended September 30,
EBITDA Operating Income EBITDA Operating Income
1996 1995 1996 1995 1996 1995 1996 1995
(millions)
Filmed
Entertainment $139 $118 $ 56 $ 60 $ 410 $ 348 $205 $179
Six Flags
Theme Parks - - - - - 60 - 29
Broadcasting -
The WB Network (27) (7) (27) (7) (63) (40) (63) (40)
Programming -
HBO 91 73 86 70 259 218 245 207
Cable 390 344 156 145 1,134 900 449 350
Total $593 $528 $271 $268 $1,740 $1,486 $836 $725
Three Months Ended September 30, 1996 Compared to the Three
Months Ended September 30, 1995
TWE had revenues of $2.718 billion, and net income of $45
million for the three months ended September 30, 1996, compared
to revenues of $2.324 billion, income of $47 million before an
extraordinary loss on the retirement of debt and net income of
$23 million for the three months ended September 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 September 30, 1995, revenues of $2.352
billion, depreciation and amortization of $265 million, operating
income of $265 million, income before extraordinary item of $98
million and net income of $74 million. No pro forma financial
information has been presented for TWE for the three months ended
September 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 net income
was lower in 1996 as compared to historical and pro forma results
in 1995 due to a decrease in investment-related income, which
more than offset the absence of a $24 million extraordinary loss
on the retirement of debt recognized in 1995, an overall increase
in operating income generated by its business segments and
interest savings in 1996 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 $10
million and $26 million in the three months ended September 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 $1.443 billion,
compared to $1.174 billion in the third quarter of 1995. EBITDA
increased to $139 million from $118 million. Depreciation and
amortization, including amortization related to the purchase of
WCI, amounted to $83 million in 1996 and $58 million in 1995.
Operating income decreased to $56 million from $60 million.
Revenues benefited from increases in domestic theatrical,
worldwide home video and worldwide television distribution
operations, offset in part by lower international theatrical
revenues. EBITDA increased, and operating income benefited,
principally from the revenue gains. Operating income was further
affected in 1996 by higher depreciation and amortization related
to the summer opening of an international theme park in Germany.
Broadcasting - The WB Network. The WB Network recorded an
operating loss of $27 million on $23 million of revenues in the
third quarter of 1996, compared to $7 million of an operating
loss on $7 million of revenues in the third quarter of 1995. The
increase in revenues and operating losses primarily resulted from
the expansion of the WB Network's primetime programming schedule
(now at three nights) and the expansion of Kids' WB!, the
network's animated programming lineup on Saturday mornings and
weekdays. In addition, operating losses for 1995 were mitigated
by a favorable legal settlement. Due to the start-up nature of
this new national broadcast operation, losses are expected to continue.
Programming - HBO. Revenues increased to $426 million,
compared to $404 million in the third quarter of 1995. EBITDA
increased to $91 million from $73 million. Depreciation and
amortization amounted to $5 million in 1996 and $3 million in
1995. Operating income increased to $86 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, as well as income related to
the licensing of the television series Martin for domestic
syndicated television exhibition.
Cable. Revenues increased to $955 million, compared to $826
million in the third quarter of 1995. EBITDA increased to $390
million from $344 million. Depreciation and amortization,
including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $234
million in 1996 and $199 million in 1995. Operating income
increased to $156 million from $145 million. Revenues benefited
from an aggregate increase 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 advertising revenues. 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, increased
to $147 million in the third quarter of 1996, compared to $127
million in the third quarter of 1995. Interest expense decreased
to $117 million, compared to $144 million in the third 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 $30 million in the
third quarter of 1996, compared to other income, net, of $17
million in 1995, principally due to a decrease in
investment-related income. The decrease in investment-related
income related to a reduction in interest income associated with
lower average cash balances and lower average principal amounts
due under the note receivable from U S WEST that was fully
collected as of June 1996.
Nine Months Ended September 30, 1996 Compared to the Nine Months
Ended September 30, 1995
TWE had revenues of $7.811 billion and net income of $213
million for the nine months ended September 30, 1996, compared to
revenues of $6.762 billion, income of $107 million before an
extraordinary loss on the retirement of debt and net income of
$83 million for the nine months ended September 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 nine months ended September 30, 1995, revenues of $6.935
billion, depreciation and amortization of $793 million, operating
income of $725 million, income before extraordinary item of $175
million and net income of $151 million. No pro forma financial
information has been presented for TWE for the nine months ended
September 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 net income
was higher in 1996 as compared to pro forma results in 1995 due
to an overall increase in operating income generated by its
business segments and the absence of a $24 million extraordinary
loss on the retirement of debt recognized in 1995, 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, such underlying operating
trends were enhanced by interest savings in 1996 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 $49
million in the nine months ended September 30, 1996, and $62
million in the nine months ended September 30, 1995, have been
provided in respect of the operations of TWE's domestic and
foreign subsidiary corporations.
Filmed Entertainment. Revenues increased to $3.929 billion,
compared to $3.508 billion in the first nine months of 1995.
EBITDA increased to $410 million from $348 million. Depreciation
and amortization, including amortization related to the purchase
of WCI, amounted to $205 million in 1996 and $169 million in
1995. Operating income increased to $205 million from $179
million. Revenues benefited from increases in domestic theatrical,
worldwide home video and worldwide television distribution
operations, offset in part by lower international theatrical
revenues. EBITDA and operating income benefited principally
from the revenue gains, offset in part, with respect to operating
income only, by higher depreciation and amortization related to
the 1996 summer opening of an international theme park in Germany.
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 $63 million on $56 million of revenues in the
first nine months of 1996, compared to an operating loss of $40
million on $13 million of revenues in the first nine months of
1995. The increase in revenues and operating losses primarily
resulted from the expansion of the WB Network's primetime
programming schedule (now at three nights) and the expansion of
Kids' WB!, the network's animated programming lineup on Saturday
mornings and weekdays. In addition, operating losses for 1995
were mitigated by a favorable legal settlement. Due to the
start-up nature of this new national broadcast operation, losses
are expected to continue.
Programming - HBO. Revenues increased to $1.301 billion,
compared to $1.181 billion in the first nine months of 1995.
EBITDA increased to $259 million from $218 million. Depreciation
and amortization amounted to $14 million in 1996 and $11 million
in 1995. Operating income increased to $245 million from $207
million. Revenues benefited primarily from a significant increase
in subscriptions. EBITDA and operating income improved
principally as a result of the revenue gains, as well as income
related to the licensing of the television series Martin for
domestic syndicated television exhibition.
Cable. Revenues increased to $2.863 billion, compared to
$2.107 billion in the first nine months of 1995. EBITDA increased
to $1.134 billion from $900 million. Depreciation and
amortization, including amortization related to the purchase of
WCI and the acquisition of the ATC minority interest, amounted to
$685 million in 1996 and $550 million in 1995. Operating income
increased to $449 million from $350 million. Revenues and
operating results benefited from the contribution of the
TWE-Advance/Newhouse Partnership and the consolidation of Paragon
for a full nine-month period. Excluding such effects, revenues
benefited from an aggregate increase 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 $368 million in the first nine months of 1996, compared to
$423 million in the first nine months of 1995. Interest expense
decreased to $356 million, compared to $440 million in the first
nine 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 expense, net, of $12 million
in the first nine months of 1996 compared to other income, net,
of $17 million in 1995, principally due to an overall decrease in
investment-related income. The decrease in investment-related
income resulted from a reduction in interest income, offset in
part by higher gains on the sale of certain unclustered cable
systems recognized in connection with management's debt reduction
program. The reduction in interest income related to lower average
cash balances and lower average principal amounts due under the note
receivable from U S WEST that was fully collected as of June 1996.
FINANCIAL CONDITION AND LIQUIDITY
September 30, 1996
Financial Condition
TWE had $5.7 billion of debt, $1.5 billion of Time Warner
General Partners' Senior Capital and $6.6 billion of partners'
capital at September 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 $209 million at
September 30, 1996, and December 31, 1995, reducing the
debt-net-of-cash amounts for TWE to $5.5 billion and $6 billion,
respectively.
Debt Reduction Program
In the first nine months of 1996, TWE closed certain
previously-announced sales of unclustered cable television
systems which raised approximately $150 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 $1.3 billion for debt reduction.
Cash Flows
In the first nine months of 1996, TWE's cash provided by
operations amounted to $1.322 billion and reflected $1.740
billion of EBITDA from the Filmed Entertainment, Broadcasting-The
WB Network, Programming-HBO and Cable businesses and $77 million
related to a reduction in working capital requirements, other
balance sheet accounts and noncash items, less $391 million of
interest payments, $52 million of income taxes and $52 million of
corporate expenses. Cash provided by operations of $1.194 billion
in the first nine months of 1995 reflected $1.486 billion of
business segment EBITDA and $256 million related to a reduction
in working capital requirements, other balance sheet accounts and
noncash items, less $442 million of interest payments, $59
million of income taxes and $47 million of corporate expenses.
Cash used by investing activities was $864 million in the
first nine months of 1996, compared to $82 million in the first
nine months of 1995, principally as a result of a $581 million
decrease in investment proceeds realized in 1995 in connection
with management's debt reduction program and higher capital
expenditures. Capital expenditures increased to $1.228 billion in
the first nine months of 1996, compared to $983 million in the
first nine months of 1995, principally as a result of higher
cable capital spending as discussed more fully below.
Cash used by financing activities was $458 million in the first
nine months of 1996, compared to $1.744 billion in the first nine
months of 1995, principally as a result of a lower level of debt
reduction realized in 1996 and an $820 million decrease in
distributions paid to Time Warner, offset in part by a $206
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 $936 million in the nine months ended
September 30, 1996, compared to $718 million in the nine months
ended September 30, 1995, and was financed in part through
collections on the note receivable from U S WEST of $169 million
and $375 million, respectively. Cable capital spending by TWE's
Cable division is budgeted to be approximately $400 million for
the remainder of 1996 and is expected to be funded 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 a five-year
period ending December 31, 2000. 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 $1.611
billion at September 30, 1996, compared to $1.056 billion at
December 31, 1995 (including amounts relating to HBO of $190
million at September 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 September
30, 1996, Time Warner had effectively hedged approximately half
of TWE's 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 are
generally 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
September 30, 1996, Time Warner had contracts for the sale of
$500 million and the purchase of $200 million of foreign
currencies at fixed rates. Of Time Warner's $300 million net sale
contract position, none of the foreign exchange purchase
contracts and $103 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
(22%), German marks (11%) 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 September 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 nine months ended September
30, 1996 and 1995, TWE recognized $4 million in gains and $8
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 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 September 30, 1996, each
5% devaluation of the U.S. dollar as compared to the level of
foreign exchange rates for currencies under contract at September
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 September
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)
September 30, December 31,
1996 1995
(millions)
ASSETS
Current assets
Cash and equivalents $ 209 $ 209
Receivables, including $295 and $354 due from
Time Warner, less allowances of $366 and $365 1,542 1,635
Inventories 1,200 904
Prepaid expenses 142 161
Total current assets 3,093 2,909
Noncurrent inventories 2,063 1,909
Loan receivable from Time Warner 400 400
Investments 296 383
Property, plant and equipment, net 5,780 5,205
Cable television franchises 3,101 3,360
Goodwill 4,027 4,119
Other assets 681 620
Total assets $19,441 $18,905
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable $ 670 $ 697
Participations and programming costs 1,354 1,090
Debt due within one year 2 47
Other current liabilities 1,571 1,380
Total current liabilities 3,597 3,214
Long-term debt 5,673 6,137
Other long-term liabilities, including
$292 and $198 due to Time Warner 1,120 924
Minority interests 900 726
Time Warner General Partners' Senior Capital 1,513 1,426
Partners' capital
Contributed capital 7,537 7,522
Undistributed partnership earnings (deficit) (899) (875)
Note receivable from U S WEST - (169)
Total partners' capital 6,638 6,478
Total liabilities and partners' capital $19,441 $18,905
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(millions)
Revenues (a) $2,718 $2,324 $7,811 $6,762
Cost of revenues (a)(b) 1,855 1,589 5,250 4,640
Selling, general and
administrative (a)(b) 592 467 1,725 1,397
Operating expenses 2,447 2,056 6,975 6,037
Business segment operating income 271 268 836 725
Interest and other, net (a) (147) (127) (368) (423)
Minority interest (52) (51) (154) (86)
Corporate services (a) (17) (17) (52) (47)
Income before income taxes 55 73 262 169
Income taxes (10) (26) (49) (62)
Income before extraordinary item 45 47 213 107
Extraordinary loss on retirement of debt - (24) - (24)
Net income $ 45 $ 23 $ 213 $ 83
__________________
(a) Includes the following income (expenses) resulting from
transactions with the partners of TWE and other related companies
for the three and nine months ended September 30, 1996,
respectively, and for the corresponding periods in the prior
year: revenues- $48 million and $147 million in 1996, $17 million
and $75 million in 1995; cost of revenues- $(30) million and
$(68) million in 1996, $(19) million and $(72) million in 1995;
selling, general and administrative- $(24) million and $(33)
million in 1996, $(22) million and $(62) million in 1995; interest
and other, net- $6 million and $22 million in 1996, $14 million
and $20 million in 1995; and corporate services- $(17) million
and $(52) million in 1996, $(17) million and $(47) million in 1995.
(b) Includes depreciation and
amortization expense of: $ 322 $ 260 $ 904 $ 761
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
1996 1995
(millions)
OPERATIONS
Net income $ 213 $ 83
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt - 24
Depreciation and amortization 904 761
Changes in operating assets and liabilities 205 326
Cash provided by operations 1,322 1,194
INVESTING ACTIVITIES
Investments and acquisitions (86) (130)
Capital expenditures (1,228) (983)
Investment proceeds 450 1,031
Cash used by investing activities (864) (82)
FINANCING ACTIVITIES
Borrowings 190 2,041
Debt repayments (697) (3,135)
Capital distributions (162) (982)
Collections on note receivable from U S WEST 169 375
Other 42 (43)
Cash used by financing activities (458) (1,744)
DECREASE IN CASH AND EQUIVALENTS - (632)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 209 1,071
CASH AND EQUIVALENTS AT END OF PERIOD $ 209 $ 439
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 three
fundamental areas of business: Entertainment, consisting
principally of interests in filmed entertainment, broadcasting
and theme parks; Cable Networks, consisting principally of
interests in cable television programming; and Cable, consisting
principally of interests in cable television systems.
Each of the business interests within Entertainment,
Cable Networks and Cable 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
Companies, 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. Noncash amortization of intangible assets recorded
by TWE's businesses amounted to $115 million and $112 million for
the three months ended September 30, 1996 and 1995, respectively,
and $326 million and $344 million for the nine months ended
September 30, 1996 and 1995, respectively.
___________________
* Time Warner Companies, Inc. ("Old Time Warner") was formerly known
as Time Warner Inc. On October 10, 1996, Old Time Warner became a
wholly owned subsidiary of TW Inc. ("New Time Warner") in connection
with the acquisition by New Time Warner of the remaining 80% interest
in Turner Broadcasting System, Inc. that was not already owned by Old
Time Warner. Simultaneously therewith, New Time Warner was renamed
Time Warner Inc. and Old Time Warner was renamed Time Warner Companies
Inc. Unless the context indicates otherwise, references herein to
"Time Warner" refer to Old Time Warner.
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 1995 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 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,
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 nine months ended September 30, 1995, respectively,
revenues of $2.352 billion and $6.935 billion, depreciation and
amortization of $265 million and $793 million, operating income
of $265 million and $725 million and net income of $74 million
and $151 million. No pro forma financial information has been
presented for TWE for the three and nine months ended September 30,
1996 because all of such transactions are already reflected, in all
material respects, in the historical financial statements of TWE.
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:
September 30, 1996 December 31, 1995
Current Noncurrent Current Noncurrent
(millions)
Film costs:
Released, less amortization $ 501 $ 448 $ 529 $ 437
Completed and not released 312 72 74 22
In process and other 34 541 11 396
Library, less amortization - 677 - 717
Programming costs, less amortization 251 325 219 337
Merchandise 102 - 71 -
Total $1,200 $2,063 $ 904 $1,909
5. LONG-TERM DEBT
Long-term debt consists of:
September 30, December 31,
1996 1995
(millions)
Credit agreement, weighted average interest
rates of 6.0% and 6.4% $1,335 $2,185
Commercial paper, weighted average interest
rates of 5.8% and 6.2% 545 157
Publicly held notes and debentures 3,781 3,781
Other 12 14
Total $5,673 $6,137
Each Time Warner General Partner has guaranteed a pro rata
portion of approximately $5.4 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.
An extraordinary loss of $24 million was recognized in 1995
in connection with the write-off of deferred financing costs
related to TWE's former bank credit agreement that was terminated.
6. PARTNERS' CAPITAL
Changes in partners' capital were as follows:
Nine Months
Ended September 30,
1996 1995
(millions)
Balance at beginning of year $6,478 $6,233
Net income 213 83
Capital contributions 15 -
Distributions (161) (371)
Allocation of income to Time Warner General
Partners' Senior Capital (87) (101)
Collections on note receivable from U S WEST 169 375
Reacquisition of Time Warner Service Partnership Assets - 124
Other 11 8
Balance at September 30 $6,638 $6,351
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
September 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 nine months ended September 30, 1996, TWE accrued
$153 million of tax-related distributions and $8 million of stock
option distributions, based on closing prices of Time Warner
common stock of $38.50 at September 30, 1996 and $37.875 at
December 31, 1995. During the nine months ended September 30,
1995, TWE accrued $25 million of TWSP Distributions and $241
million of tax-related distributions, as well as $105 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 nine
months ended September 30, 1996, TWE paid distributions to the
Time Warner General Partners in the amount of $162 million,
consisting of $153 million of tax-related distributions and $9
million of stock option related distributions. In the nine months
ended September 30, 1995, TWE paid the Time Warner General Partners
distributions in the amount of $982 million, consisting of $575
million of tax-related distributions, $25 million of TWSP Distributions,
$16 million of stock option related distributions and $366 million
of distributions of TWE partnership income that had been allocated
to the Time Warner General Partners' Senior Capital interest.
7. SEGMENT INFORMATION
TWE's businesses are conducted in three fundamental areas of
business: Entertainment, consisting principally of interests in filmed
entertainment, broadcasting and theme parks; Cable Networks, consisting
principally of interests in cable television programming; and Cable,
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 Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(millions)
Revenues
Filmed Entertainment $1,443 $1,174 $3,929 $3,508
Six Flags Theme Parks - - - 227
Broadcasting - The WB Network 23 7 56 13
Programming - HBO 426 404 1,301 1,181
Cable 955 826 2,863 2,107
Intersegment elimination (129) (87) (338) (274)
Total $2,718 $2,324 $7,811 $6,762
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(millions)
Operating Income
Filmed Entertainment $ 56 $ 60 $ 205 $ 179
Six Flags Theme Parks - - - 29
Broadcasting - The WB Network (27) (7) (63) (40)
Programming - HBO 86 70 245 207
Cable 156 145 449 350
Total $ 271 $ 268 $ 836 $ 725
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(millions)
Depreciation of Property, Plant and Equipment
Filmed Entertainment $ 51 $ 27 $ 113 $ 69
Six Flags Theme Parks - - - 20
Broadcasting - The WB Network - - - -
Programming - HBO 5 3 14 11
Cable 151 118 451 317
Total $ 207 $ 148 $ 578 $ 417
Three Months Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
(millions)
Amortization of Intangible Assets (1)
Filmed Entertainment $ 32 $ 31 $ 92 $ 100
Six Flags Theme Parks - - - 11
Broadcasting - The WB Network - - - -
Programming - HBO - - - -
Cable 83 81 234 233
Total $ 115 $ 112 $ 326 $ 344
______________
(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:
Nine Months
Ended September 30,
1996 1995
(millions)
Interest expense $ 356 $ 440
Cash payments made for interest 391 442
Cash payments made for income taxes (net) 52 59
Part II. Other Information
Item 1. Legal Proceedings.
On October 8, 1996, the New York State Attorney General
began an investigation by serving a subpoena duces tecum on Time
Warner. In re New York State Attorney General's Investigation.
The subpoena seeks information regarding whether Time Warner and
Time Warner Cable may have violated Section 340 of the General
Business Law of New York and/or Sections 1 and/or 2 of the
Sherman Antitrust Act in making certain decisions regarding the
carriage of video programming services on Time Warner's cable
systems, including its decision to carry the MSNBC news service
and not the Fox News Channel ("FNC").
On October 9, 1996, an action was commenced in the United
States District Court for the Eastern District of New York
entitled Fox News Network, L.L.C. v. Time Warner Inc., Time Warner
Entertainment Company, L.P., Turner Broadcasting System, Inc.,
and R.E. "Ted" Turner III. The plaintiff seeks to have Time
Warner divest the TBS assets acquired alleging that the TBS
transaction is violative of Section 7 of the Clayton Act.
The plaintiff also seeks damages flowing from alleged
violations of Section 1 of the Sherman Act, the Donnelly
Act, New York State's antitrust statute, as well as alleged
breach of contract and fraudulent misrepresentations regarding
carriage of the FNC on defendants' cable television systems. In
total, the plaintiff seeks $1.75 billion in damages. While the
schedule of the proceedings remains the subject of dispute
between the parties, trial is tentatively set to begin April 2, 1997.
On October 7, 1996, a hearing was held to consider whether
the consummation of the TBS Transaction constituted a "change in
control" within the meaning of Time Warner Cable's franchise
agreements with the City of New York (collectively, the
"Franchise Agreements"). On October 9, 1996, the New York City
Franchise Concession and Review Committee met to consider this
issue, but took no action on the matter after the City advised
that the matter required further consideration. Effecting a
change in control within such meaning without the City's consent
could give the City various rights, which could include the right
to terminate the Franchise Agreements. Time Warner does not
believe there has been such a change in control.
On October 10, 1996, the holders of Time Warner's New York
City cable franchises filed a complaint against the City of New York
in the United States District Court for the Southern District of
New York alleging that the City's announced plan to carry two
commercial cable programs, Bloomberg Information Television ("BIT")
and the FNC, over the City's municipal access channels is a
violation of the Franchise Agreements, the 1984 Cable Act,
the First Amendment, New York Public Service Law and certain
other legal rights of such holders. In addition to seeking
to enjoin the City's activity, the complaint seeks a declaratory
judgment that the TBS Transaction does not effect a change in control
for the purposes of the Franchise Agreements.
On October 11, 1996, the judge in this action issued a
temporary restraining order preventing the City from carrying
either BIT or the FNC over its municipal access channels. After
a hearing on October 28, 1996, the judge on November 6, 1996
granted the Time Warner plaintiffs a preliminary injunction that
will continue to prevent the City from carrying these services on
its municipal access channels until a trial on the matter is
completed. The City has announced its intention to appeal the
judge's decision. Thus far, all activity in this action has
related to Time Warner's request for an injunction, and
proceedings with respect to the declaratory judgment that the TBS
Transaction does not effect a change in control for the purposes
of the Franchise Agreements have not as yet commenced.
Reference is made to the Federal lawsuit filed by TWE in
November 1992 seeking to overturn major provisions of the 1992
Cable Act, described on page 51 of Time Warner's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996 (the "June 1996
Form 10-Q"). On August 30, 1996, the D.C. Circuit Court of
Appeals rejected TWE's challenges to certain provisions of the
1984 and 1992 Cable Acts, held unripe the challenge to the
program creation provision of Section 11(c) of the 1992 Cable
Act, and consolidated the remaining challenges to Section 11(c)
with Time Warner Entertainment Company, L.P. v. FCC. On October
29, 1996, TWE and the other plaintiffs filed a Petition for Rehearing
and Suggestion for Rehearing En Banc with the Court, asking the Court
to reconsider its application of First Amendment law and
specifically asking it to reconsider its holding that Section 15
of the 1992 Cable Act is constitutional. Amici filed a petition
asking for rehearing on the Court's holding that Section 25 of
the 1992 Cable Act is constitutional.
Reference is made to the investigation commenced in 1993 by
the Federal Trade Commission ("FTC"), described on page I-42 of
Time Warner's Annual Report on Form 10-K for the year ended
December 31, 1995 (the "1995 Form 10-K"). By letter dated
October 21, 1996, the FTC informed Warner Elektra Atlantic
Corporation that its investigation has been closed.
Reference is made to the litigation 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., described on page 51 of the June 1996 Form
10-Q. On August 5, 1996, defendants jointly filed a Notice of
Removal from the Circuit Court of Blount County, Tennessee, to
the United States District Court for the Eastern District of
Tennessee. On August 21, 1996, plaintiffs filed a Motion to
Remand the case to the Circuit Court of Blount County, and on
October 4, 1996, defendants jointly filed their Response in
Opposition to the Motion to Remand.
Reference is made to the litigation entitled Lewis et al.
v. Turner Broadcasting System, Inc., et al., described on page 51
of the June 1996 Form 10-Q. On September 13, 1996, plaintiffs,
who were TBS shareholders, filed a motion for a preliminary
injunction (and related relief) seeking, among other things, an
order enjoining consummation of the TBS Transaction. Their motion was
denied by Order of the Superior Court of Fulton County for the
State of Georgia dated October 3, 1996. In addition, on
September 19, 1996, plaintiffs sought leave to file a Fourth
Amended Complaint. Defendants filed a brief in opposition to
plaintiffs' motion arguing that the "new allegations" plaintiffs
seek to add to their complaint are baseless. Plaintiffs have
indicated that they intend to go forward with this matter despite
the denial of their motion for a preliminary injunction and the
closing of the TBS transaction.
Reference is made to the litigation entitled Shingala v.
R.E. Turner, et al. described at page I-45 of the 1995 Form 10-K.
On September 13, 1996, plaintiffs filed a motion for a
preliminary injunction (and related relief) seeking, among other
things, an order enjoining consummation of the TBS Transaction.
Their motion was denied by order of the Superior Court of Fulton
County for the State of Georgia dated October 3, 1996.
Item 2. Changes in Securities.
(a) On October 10, 1996, each outstanding share of common
stock, par value $1.00 per share, of Time Warner, other than
shares held directly or indirectly by Time Warner, was converted
into one share of common stock, par value $.01 per share, of New
Time Warner.
(b) In connection with the TBS Transaction, Time Warner
was recapitalized resulting in a reduction (i) in the number of
outstanding shares of each class of Time Warner capital stock by
a factor of 1/1000 and (ii) in the par value of each class of
such capital stock from $1.00 per share to $.01 per share. All
of such shares are held directly and indirectly by New Time Warner.
Item 4. Submission of Matters to a Vote of Security-Holders.
(a) A Special Meeting of Stockholders of Time Warner was
held on October 10, 1996 (the "1996 Special Meeting").
(b) The following matter was voted upon at the 1996
Special Meeting:
Approval of the Amended and Restated Agreement and Plan of
Merger dated as of September 22, 1995, as amended, among Time
Warner, TBS, New Time Warner, Time Warner Acquisition Corp. and
TW Acquisition Corp. (the "TBS Merger Agreement"):
Broker
Votes For Votes Against Abstentions Non-Votes
344,719,756 4,747,689 1,478,435 None
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 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 TBS was inadvertently filed
through the SEC's electronic filing system.
(ii) Time Warner filed a Current Report on Form 8-K
dated August 14, 1996 setting forth in Item 7 certain pro forma
financial statements of Time Warner and Time Warner Entertainment
Group at June 30, 1996, reflecting certain transactions entered
into by Time Warner and TWE during 1995 and 1996.
(iii) Time Warner filed a Current Report on Form 8-K
dated September 6, 1996 reporting in Item 5 (A) the signing of
the Agreement Containing Consent Order dated August 14, 1996 by
Time Warner, TBS, TCI and LMC (together with the Interim
Agreement contemplated thereby, the "FTC Consent Decree") and (B)
certain amendments to the TBS Merger Agreement and related
documents as a result of the FTC Consent Decree.
(iv) Time Warner filed a Current Report on Form 8-K
dated September 12, 1996 reporting in Item 5 that it had issued a
press release on September 12, 1996 announcing that the FTC had
given its initial approval to the FTC Consent decree.
(v) New Time Warner filed a Current Report on Form 8-K
dated October 10, 1996 reporting in (A) Item 2 that on October
10, 1996 the mergers (the "Merger") contemplated by the TBS
Merger Agreement were approved by the stockholders of Time Warner
and the shareholders of TBS and that the Merger and certain
related transactions were consummated on that date and (B) Item 5
certain events relating to Time Warner's decision not to carry
the FNC on its cable system in New York City and certain matters
related to the Merger.
TIME WARNER COMPANIES, 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 Companies, Inc.
(Registrant)
By: /s/ Richard J. Bressler
Name: Richard J. Bressler
Title: Senior Vice President
and Chief Financial Officer
Dated: November 14, 1996
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Exhibit No. Description of Exhibit
2.1 Amendment No. 1 dated as of August 8, 1996 to
the Amended and Restated Agreement and Plan of
Merger dated as of September 22, 1995 among Time
Warner Inc. (the "Registrant"), TW Inc. ("TW"),
Time Warner Acquisition Corp., TW Acquisition
Corp. and Turner Broadcasting System, Inc.
("TBS") (which is incorporated herein by
reference to Exhibit 2(a) to the Registrant's
Current Report on Form 8-K dated September 6,
1996 (the "September 1996 Form 8-K")).
2.2 Agreement Containing Consent Order dated August
14, 1996 among the Registrant, TBS,
Tele-Communications, Inc., Liberty Media Corporation
("LMC") and the Federal Trade Commission (which
is incorporated herein by reference to Exhibit
2(b) to the September 1996 Form 8-K).
3.1 Certificate of Merger of Time Warner Acquisition
Corp. into the Registrant as filed with the
Secretary of State of the State of Delaware on
October 10, 1996.
3.2 Certificate of Amendment of Restated Certificate
of Incorporation of the Registrant as filed with
the Secretary of State of the State of Delaware
on October 11, 1996.
3.3 By-laws of the Registrant effective as of
October 10, 1996.
4.1 Second Supplemental Indenture dated as of
October 10, 1996 among the Registrant, New Time
Warner and The Chase Manhattan Bank, as Trustee,
to the Indenture dated as of January 15, 1993
between the Registrant and the Trustee.
4.2 Third Supplemental Indenture dated as of October
10, 1996 among the Registrant, New Time Warner
and The Chase Manhattan Bank, as Trustee, to the
Indenture dated as of October 15, 1992 between
the Registrant and the Trustee.
4.3 Second Supplemental Indenture dated as of
October 10, 1996, among the Registrant, New Time
Warner and The Chase Manhattan Bank, as Trustee,
to the Indenture dated as of December 5, 1995
between the Registrant and the Trustee.
4.4 First Supplemental Indenture dated as of October
10, 1996 among the Registrant, New Time Warner
and The Chase Manhattan Bank, as Trustee, to the
Indenture dated as of August 15, 1995.
4.5 Declaration Guarantee dated as of October 10,
1996 among the Registrant, New Time Warner and
the Trustees under an Amended and Restated
Declaration of Trust dated as of August 15, 1995
pursuant to which the Trust issued $1.24
Preferred Exchangeable Redemption Cumulative
Securities (the "PERCS").
4.6 Guarantee Agreement dated as of October 10, 1996
among the Registrant, New Time Warner and First
National Bank of Chicago, as Trustee, relating
to the PERCS.
4.7 Declaration Guarantee dated as of October 10,
1996 among the Registrant, New Time Warner and
the Trustees under an Amended and Restated
Declaration of Trust dated as of December 5,
1995 pursuant to which the Trust issued 8-7/8%
Preferred Trust Securities (the "Preferred Trust
Securities").
4.8 Guarantee Agreement dated as of October 10, 1996
among the Registrant, New Time Warner and First
National Bank of Chicago, as Trustee, relating
to the Preferred Trust Securities.
10.1 Second Amended and Restated LMC Agreement dated
as of September 22, 1995 among TW, LMC, TCI
Turner Preferred, Inc., Communication Capital
Corp. and United Cable Turner Investment, Inc.
(which is incorporated herein by reference to
Exhibit 10(a) to the September 1996 Form 8-K).
27 Financial Data Schedule.