SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT of 1934 for the quarterly period
ended June 30, 1997, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT of 1934 for the transition period
from ------------------------------to--------------------
Registration Number 33-53742
TIME WARNER ENTERTAINMENT COMPANY, L.P.
(Exact name of registrant as specified in its charter)
Delaware 13-3666692
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
American Television and Communications
Corporation Delaware 13-2922502
Time Warner Operations Inc. Delaware 13-3544870
Warner Cable Communications Inc. Delaware 13-3134949
Warner Communications Inc. Delaware 13-2696809
(Exact name of registrant as
specified in its charter) (State or other (I.R.S. Employer
jurisdiction of Identification
incorporation Number)
or organization)
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
TIME WARNER ENTERTAINMENT COMPANY L.P.
AND TWE GENERAL PARTNERS
INDEX TO FORM 10-Q
Page
TWE
General
TWE Partners
PART I. FINANCIAL INFORMATION
Management's discussion and analysis of
results of operations and financial condition 1 16
Consolidated balance sheets at June 30, 1997
and December 31, 1996 7 19
Consolidated statements of operations for
the three and six months ended June 30, 1997
and 1996 8 21
Consolidated statements of cash flows
for the six months ended June 30, 1997 and 1996 9 25
Notes to consolidated financial statements 10 27
PART II. OTHER INFORMATION 32
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
TWE classifies its business interests into three fundamental areas:
Entertainment, consisting principally of interests in filmed
entertainment, television production, television 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 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.
Cable Strategy
Currently, Time Warner is no longer actively pursuing a
restructuring of TWE with U S WEST. However, Time Warner is continuing to
explore alternatives to reduce selectively its economic interest in the
cable television business and related ancillary businesses in order to
reduce existing debt and its share of future funding requirements related
to such operations. These alternatives include sales or exchanges of
non-strategic, unclustered cable television systems and tax-efficient
transfers of cable television systems and related ancillary businesses to
joint ventures or other enterprises that would be responsible for
financing the operating and capital needs of such businesses. These
alternatives may be subject to third party, franchise and regulatory
approvals, including, in certain instances, approval by U S WEST and/or
the Advance/Newhouse Partnership ("Advance/Newhouse"). There can be no
assurance that any of these efforts will succeed.
Consistent with this strategy of reducing existing debt and its share
of future funding requirements related to the cable television business,
TWE and Advance/Newhouse entered into agreements in June 1997 to transfer
the direct broadcast satellite operations conducted by TWE and the
TWE-Advance/Newhouse Partnership (the "DBS Operations") and the 31%
partnership interest in Primestar Partners, L.P. held by the
TWE-Advance/Newhouse Partnership ("Primestar" and collectively, the
"Primestar Assets") to a new, publicly traded holding company ("Newco")
that will be the parent entity of TCI Satellite Entertainment, Inc.
("TSAT"). Newco will also own the DBS Operations and Primestar
partnership interests currently owned by TSAT and other existing partners
of Primestar. In exchange for contributing its interests in the Primestar
Assets, TWE will receive an approximate 24% equity interest in Newco and
realize approximately $200 million of debt reduction, as well as
eliminating its share of future funding requirements for these operations
that will be separately financed by Newco. In partial consideration for
contributing its indirect interest in certain of the Primestar
Assets, Advance/Newhouse will receive an approximate 6% equity interest in
Newco.
In a related transaction, Primestar also entered into an agreement in
June 1997 with The News Corporation Limited, MCI Telecommunications
Corporation and American Sky Broadcasting LLC ("ASkyB"), pursuant to which
Primestar (or, under certain circumstances, Newco) will acquire certain
assets relating to the high-power, direct broadcast satellite business of
ASkyB. In exchange for such assets, ASkyB will receive non-voting
securities of Newco that will be convertible into non-voting common stock
of Newco and, accordingly, reduce TWE's equity interest in Newco to
approximately 16% on a fully diluted basis.
The Primestar transactions are not conditioned on each other and may
close independently. They are expected to close in 1998, subject to
customary closing conditions, including all necessary governmental and
regulatory approvals, including the approval of the Federal Communications
Commission (the "FCC"). There can be no assurance that such approvals
will be obtained.
Use of EBITDA
The following comparative discussion of the results of operations and
financial condition of TWE includes, among other factors, an analysis of
changes in the operating income of the business segments before
depreciation and amortization ("EBITDA") in order to eliminate the effect
on the operating performance of the filmed entertainment and cable
businesses of significant amounts of amortization of intangible assets
recognized in Time Warner's $14 billion acquisition of WCI in 1989, the
$1.3 billion acquisition of the ATC minority interest in 1992 and other
business combinations accounted for by the purchase method. Financial
analysts generally consider EBITDA to be an important measure of
comparative operating performance for the businesses of TWE, and, when
used in comparison to debt levels or the coverage of interest expense, as
a measure of liquidity. However, EBITDA should be considered in addition
to, not as a substitute for, operating income, net income, cash flow and
other measures of financial performance and liquidity reported in
accordance with generally accepted accounting principles.
RESULTS OF OPERATIONS
EBITDA and operating income for TWE for the three and six months
ended June 30, 1997 and 1996 are as follows:
Three Months Ended June 30,
Operating
EBITDA Income
1997 1996 1997 1996
(millions)
Filmed Entertainment-
Warner Bros. $144 $140 $ 73 $ 79
Broadcasting-The WB Network (18) (12) (19) (12)
Cable Networks-HBO 103 87 98 83
Cable 419 376 168 147
Total $648 $591 $320 $297
Six Months Ended June 30,
Operating
EBITDA Income
1997 1996 1997 1996
(millions)
Filmed Entertainment-
Warner Bros. $290 $271 $148 $149
Broadcasting-The WB Network (38) (36) (39) (36)
Cable Networks-HBO 199 168 189 159
Cable 850 744 351 293
Total $1,301 $1,147 $649 $565
Three Months Ended June 30, 1997 Compared to the Three Months Ended June
30, 1996
TWE had revenues of $2.728 billion and net income of $82 million for
the three months ended June 30, 1997, compared to revenues of $2.608
billion and net income of $74 million for the three months ended June 30,
1996. As discussed more fully below, TWE's net income increased in 1997
as compared to results in 1996 principally due to an overall increase in
operating income generated by its business segments.
As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $25 million and $21
million for the three months ended June 30, 1997 and 1996, respectively,
have been provided for the operations of TWE's domestic and foreign
subsidiary corporations.
Filmed Entertainment-Warner Bros. Revenues decreased to $1.254
billion, compared to $1.270 billion in the second quarter of 1996. EBITDA
increased to $144 million from $140 million. Depreciation and
amortization, including noncash amortization of intangible assets related
to the purchase of WCI, amounted to $71 million in 1997 and $61 million in
1996. Operating income decreased to $73 million from $79 million.
Revenues decreased principally as a result of lower worldwide theatrical
and home video revenues, offset in part by significant increases in
worldwide television distribution revenues. EBITDA and operating income
increased principally as a result of the strong performance of worldwide
television distribution operations. Operating income was further affected
by higher depreciation and amortization principally related to the
expansion of theme parks and consumer products operations.
Broadcasting - The WB Network. Revenues increased to $29 million,
compared to $18 million in the second quarter of 1996. EBITDA decreased
to a loss of $18 million from a loss of $12 million. Depreciation and
amortization amounted to $1 million in 1997. Operating losses increased
to $19 million from $12 million. The increase in revenues primarily
resulted from the expansion of programming in September 1996 to three
nights of primetime scheduling and the expansion of Kids' WB!, the
network's animated programming lineup on Saturday mornings and weekdays.
The 1997 operating loss principally resulted from the expanded programming
schedule and was mitigated by the exercise of an option by a limited
partner in the first quarter of 1997 to increase its ownership in this
network. Due to the start-up nature of this national broadcast operation,
losses are expected to continue.
Cable Networks-HBO. Revenues increased to $487 million, compared to
$456 million in the second quarter of 1996. EBITDA increased to $103
million from $87 million. Depreciation and amortization amounted to $5
million in 1997 and $4 million in 1996. Operating income increased to $98
million from $83 million. Revenues benefited primarily from a significant
increase in subscriptions. EBITDA and operating income improved
principally as a result of the revenue gains.
Cable. Revenues increased to $1.066 billion, compared to $961
million in the second quarter of 1996. EBITDA increased to $419 million
from $376 million. Depreciation and amortization, including noncash
amortization of intangible assets related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $251 million in 1997
and $229 million in 1996. Operating income increased to $168 million from
$147 million. Revenues benefited from an 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 an increase in advertising and pay-per-view
revenues. EBITDA and operating income increased as a result of the
revenue gains. Operating income was further affected by higher
depreciation and amortization related to capital spending.
Interest and Other, Net. Interest and other, net, was $139 million
in the second quarter of 1997, compared to $132 million in the second
quarter of 1996. Interest expense increased to $120 million, compared to
$117 million in 1996. There was other expense, net, of $19 million in the
second quarter of 1997, compared to $15 million in the second quarter of
1996, principally due to an increase in dividend requirements on preferred
stock of a subsidiary issued in February 1997 to reduce bank debt. The
preferred stock was issued by a newly formed, substantially owned
subsidiary (the "REIT") intended to qualify as a real estate investment
trust under the Internal Revenue Code of 1986, as amended.
Six Months Ended June 30, 1997 Compared to the Six Months Ended June 30,
1996
TWE had revenues of $5.328 billion and net income of $402 million for
the six months ended June 30, 1997, compared to revenues of $5.093 billion
and net income of $168 million for the six months ended June 30, 1996. As
discussed more fully below, TWE's net income increased significantly in
1997 as compared to results in 1996 principally due to an overall increase
in operating income generated by its business segments and the inclusion
of an approximately $250 million pretax gain on the first quarter of 1997
sale of TWE's 58% interest in E! Entertainment Television, Inc., offset
in part by an increase in minority interest expense related to the
TWE-Advance/Newhouse Partnership.
As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $37 million and $39
million for the six months ended June 30, 1997 and 1996, respectively,
have been provided for the operations of TWE's domestic and foreign
subsidiary corporations.
Filmed Entertainment-Warner Bros. Revenues decreased to $2.426
billion, compared to $2.486 billion in the first six months of 1996.
EBITDA increased to $290 million from $271 million. Depreciation and
amortization, including noncash amortization of intangible assets related
to the purchase of WCI, amounted to $142 million in 1997 and $122 million
in 1996. Operating income decreased to $148 million from $149 million.
Revenues decreased principally as a result of lower worldwide theatrical
and home video revenues, offset in part by significant increases in
worldwide television distribution revenues. EBITDA and operating income
increased principally as a result of the strong performance of worldwide
television distribution operations and a gain on the sale of
an investment.
Broadcasting - The WB Network. Revenues increased to $53 million,
compared to $33 million in the first six months of 1996. EBITDA decreased
to a loss of $38 million from a loss of $36 million. Depreciation and
amortization amounted to $1 million in 1997. Operating losses increased
to $39 million from $36 million. The increase in revenues primarily
resulted from the expansion of programming in September 1996 to three
nights of primetime scheduling and the expansion of Kids' WB!, the
network's animated programming lineup on Saturday mornings and weekdays.
The 1997 operating loss principally resulted from the expanded programming
schedule and was mitigated by the exercise of an option by a limited
partner in the first quarter of 1997 to increase its ownership in this
network. Due to the start-up nature of this national broadcast operation,
losses are expected to continue.
Cable Networks-HBO. Revenues increased to $970 million, compared to
$875 million in the first six months of 1996. EBITDA increased to $199
million from $168 million. Depreciation and amortization amounted to $10
million in 1997 and $9 million in 1996. Operating income increased to
$189 million from $159 million. Revenues benefited primarily from a
significant increase in subscriptions. EBITDA and operating income
improved principally as a result of the revenue gains.
Cable. Revenues increased to $2.086 billion, compared to $1.908
billion in the first six months of 1996. EBITDA increased to $850 million
from $744 million. Depreciation and amortization, including noncash
amortization of intangible assets related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $499 million in 1997
and $451 million in 1996. Operating income increased to $351 million from
$293 million. Revenues benefited from an 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 an increase in advertising and pay-per-view
revenues. EBITDA and operating income increased as a result of the
revenue gains, as well as net gains of approximately $24 million
recognized in the first quarter of 1997 in connection with the sale or
exchange of certain cable systems. Operating income was further affected
by higher depreciation and amortization related to capital spending.
Interest and Other, Net. Interest and other, net, was $10 million in
the first six months of 1997, compared to $221 million in the first six
months of 1996. Interest expense decreased to $235 million, compared to
$239 million in 1996. There was other income, net, of $225 million in the
first six months of 1997, compared to $18 million in the first six months
of 1996, principally due to higher gains on asset sales, including an
approximately $250 million pretax gain on the sale of an interest in E!
Entertainment Television, Inc. recognized in the first quarter of 1997.
This income was offset in part by an increase in dividend requirements on
preferred stock of the REIT issued in February 1997 to reduce bank debt.
FINANCIAL CONDITION AND LIQUIDITY
June 30, 1997
Financial Condition
TWE had $5.8 billion of debt, $240 million of preferred stock of a
subsidiary, $1.6 billion of Time Warner General Partners' Senior Capital
and $6.5 billion of partners' capital at June 30, 1997, compared to $5.7
billion of debt, $1.5 billion of Time Warner General Partners' Senior
Capital and $6.6 billion of partners' capital at December 31, 1996. Cash
and equivalents were $293 million at June 30, 1997, compared to $216
million at December 31, 1996, reducing the debt-net-of-cash amounts for
TWE to $5.5 billion in both periods.
Cash Flows
During the first six months of 1997, TWE's cash provided by
operations amounted to $416 million and reflected $1.301 billion of EBITDA
from the Filmed Entertainment-Warner Bros., Broadcasting-The WB Network,
Cable Networks-HBO and Cable businesses, less $243 million of interest
payments, $35 million of income taxes, $36 million of corporate expenses,
and $571 million related to an increase in working capital
requirements, other balance sheet accounts and noncash items. Cash
provided by operations of $1.197 billion in the first six months of 1996
reflected $1.147 billion of business segment EBITDA and $364 million
related to a reduction in working capital requirements, other balance
sheet accounts and noncash items, less $247 million of interest payments,
$32 million of income taxes and $35 million of corporate expenses.
Cash used by investing activities was $425 million in the first six
months of 1997, compared to $650 million in the first six months of 1996,
principally as a result of a $175 million increase in proceeds from the
sale of investments and lower capital expenditures. Capital expenditures
were $734 million in 1997 and $781 million in 1996.
Cash provided by financing activities was $86 million in the first
six months of 1997, compared to cash used by financing activities of $538
million in the first six months of 1996, principally as a result of a
lower level of debt reduction in the first six months of 1997 and the
issuance of 250,000 shares of preferred stock of a subsidiary for
aggregate net proceeds of $243 million, offset in part by the absence of
$169 million of collections on the note receivable from U S WEST that was
fully paid in 1996. The preferred stock was issued by a newly formed,
substantially owned subsidiary intended to qualify as a real estate
investment trust under the Internal Revenue Code of 1986, as amended.
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 TWE's Cable division amounted to $662 million in the six months ended
June 30, 1997, compared to $610 million in the six months ended June 30,
1996. For the full year of 1997, cable capital spending is expected to be
relatively comparable to 1996 levels, with approximately $750 million
budgeted for the remainder of 1997. Capital spending by TWE's Cable
division 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 TWE, the TWE-Advance/Newhouse Partnership and
Time Warner. Management expects to continue to finance such level of
investment 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 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, basic cable, network and syndicated
television exhibition, amounted to $1.839 billion at June 30, 1997,
compared to $1.502 billion at December 31, 1996 (including amounts
relating to TWE's cable television networks of $226 million and $189
million, respectively, and to Time Warner's cable television networks of
$489 million and $274 million, respectively). 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. 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 revenues and cash through the sale
of advertising spots received under such contracts.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
1997 1996
(millions)
ASSETS
Current assets
Cash and equivalents $ 293 $ 216
Receivables, including $341 and $383
million due from Time Warner, less
allowances of $378 and $373 million 1,717 1,637
Inventories 1,367 1,134
Prepaid expenses 182 159
Total current assets 3,559 3,146
Noncurrent inventories 2,126 2,263
Loan receivable from Time Warner 400 400
Investments 367 351
Property, plant and equipment, net 6,266 5,999
Cable television franchises 2,977 3,054
Goodwill . 3,936 3,996
Other assets 579 764
Total assets $20,210 $19,973
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable $ 710 $ 935
Participations and programming costs payable 1,346 1,393
Debt due within one year 7 7
Other current liabilities, including $85
million and $82 million due to Time Warner 1,568 1,740
Total current liabilities 3,631 4,075
Long-term debt 5,781 5,676
Other long-term liabilities, including
$307 and $138 million due to Time Warner 1,285 1,085
Minority interests 1,137 1,020
Preferred stock of subsidiary holding
solely a mortgage note of its parent 240 -
Time Warner General Partners' Senior Capital 1,605 1,543
Partners' capital
Contributed capital 7,537 7,537
Undistributed partnership earnings
(deficit) (1,006) (963)
Total partners' capital 6,531 6,574
Total liabilities and partners' capital $20,210 $19,973
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
(millions)
Revenues (a) $2,728 $2,608 $5,328 $5,093
Cost of revenues (a)(b) 1,782 1,730 3,447 3,395
Selling, general and
administrative (a)(b) 626 581 1,232 1,133
Operating expenses 2,408 2,311 4,679 4,528
Business segment operating income 320 297 649 565
Interest and other, net (a) (139) (132) (10) (221)
Minority interest (56) (52) (164) (102)
Corporate services (a) (18) (18) (36) (35)
Income before income taxes 107 95 439 207
Income taxes (25) (21) (37) (39)
Net income $ 82 $ 74 $ 402 $ 168
_______________
(a) Includes the following income (expenses) resulting from transactions
with the partners of TWE and other related companies for the three
and six months ended June 30, 1997, respectively, and for the
corresponding periods in the prior year: revenues-$55 million and
$121 million in 1997, $76 million and $99 million in 1996; cost of
revenues-$(26) million and $(36) million in 1997, $(14) million and
$(38) million in 1996; selling, general and administrative-$21
million and $40 million in 1997, $(7) million and $(9) million in
1996; interest and other, net-$5 million and $17 million in 1997, $7
million and $16 million in 1996; and corporate services-$(18) million
and $(36) million in 1997, $(18) million and $(35) million in 1996.
(b) Includes depreciation and amortization
expense of: $328 $294 $652 $ 582
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
1997 1996
(millions)
OPERATIONS
Net income $ 402 $ 168
Adjustments for noncash and nonoperating items:
Depreciation and amortization 652 582
Changes in operating assets and liabilities (638) 447
Cash provided by operations 416 1,197
INVESTING ACTIVITIES
Investments and acquisitions (62) (65)
Capital expenditures (734) (781)
Investment proceeds 371 196
Cash used by investing activities (425) (650)
FINANCING ACTIVITIES
Borrowings 428 63
Debt repayments (323) (670)
Issuance of preferred stock of subsidiary 243 -
Capital distributions (203) (132)
Collections on note receivable from U S WEST - 169
Other (59) 32
Cash provided (used) by financing activities 86 (538)
INCREASE IN CASH AND EQUIVALENTS 77 9
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 216 209
CASH AND EQUIVALENTS AT END OF PERIOD $293 $218
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"), classifies its businesses into three fundamental
areas: Entertainment, consisting principally of interests in filmed
entertainment, television production, television 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, television and animation libraries of
Warner Bros. and trademarks such as the Looney Tunes characters and
Batman, (2) The WB Network, a 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 considerably 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 upon the capitalization of the
______________
* On October 10, 1996, Time Warner Inc. acquired the remaining 80%
interest in Turner Broadcasting System, Inc. ("TBS") that it did not
already own. As a result of this transaction, a new parent company with
the name "Time Warner Inc." replaced the old parent company of the same
name ("Old Time Warner", now known as Time Warner Companies, Inc.), and
Old Time Warner and TBS became separate, wholly owned subsidiaries of the
new parent company. Unless the context indicates otherwise, references
herein to "Time Warner" refer to Old Time Warner.
partnership. Noncash amortization of intangible assets recorded by TWE's
businesses amounted to $105 million and $101 million in the three months
ended June 30, 1997 and 1996, respectively, and $212 million and $211
million for the six months ended June 30, 1997 and 1996, respectively.
Time Warner and certain of its wholly owned subsidiaries collectively
own general and limited partnership interests in TWE consisting of 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"). Certain of Time Warner's subsidiaries are the general partners of
TWE ("Time Warner General Partners").
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, 1996. Certain
reclassifications have been made to the prior year's financial statements
to conform to the 1997 presentation.
2. INVENTORIES
TWE's inventories consist of:
June 30, 1997 December 31, 1996
Current Noncurrent Current Noncurrent
(millions)
Film costs:
Released, less
amortization $ 544 $ 592 $ 544 $ 535
Completed and not released 412 98 168 42
In process and other 54 489 21 704
Library, less amortization - 638 - 664
Programming costs, less
amortization 276 309 319 318
Merchandise 81 - 82 -
Total $1,367 $2,126 $1,134 $2,263
3. INVESTMENTS
In the first quarter of 1997, TWE sold its 58% interest in E!
Entertainment Television, Inc. A pretax gain of approximately $250
million relating to this sale has been included in the accompanying
consolidated statement of operations.
4. PRIMESTAR PARTNERS
In June 1997, TWE and the Advance/Newhouse Partnership
("Advance/Newhouse") entered into agreements to transfer the direct
broadcast satellite operations conducted by TWE and the
TWE-Advance/Newhouse Partnership (the "DBS Operations") and the 31%
partnership interest in Primestar Partners, L.P. held by the
TWE-Advance/Newhouse Partnership ("Primestar" and collectively, the
"Primestar Assets") to a new, publicly traded holding company ("Newco")
that will be the parent entity of TCI Satellite Entertainment, Inc.
("TSAT"). Newco will also own the DBS Operations and Primestar
partnership interests currently owned by TSAT and other existing partners
of Primestar. In exchange for contributing its interests in the Primestar
Assets, TWE will receive an approximate 24% equity interest in Newco and
realize approximately $200 million of debt reduction. In partial
consideration for contributing its indirect interest in certain of the
Primestar Assets, Advance/Newhouse will receive an approximate 6% equity
interest in Newco.
In June 1997, Primestar also entered into an agreement with The News
Corporation Limited, MCI Telecommunications Corporation ("MCI") and
American Sky Broadcasting LLC ("ASkyB"), pursuant to which Primestar (or,
under certain circumstances, Newco) will acquire certain assets relating
to the high-power, direct broadcast satellite business of ASkyB. In
exchange for such assets, ASkyB will receive non-voting securities of
Newco that will be convertible into non-voting common stock of Newco and,
accordingly, reduce TWE's equity interest in Newco to approximately 16% on
a fully diluted basis.
These transactions are not conditioned on each other and may close
independently. They are expected to close in 1998, subject to customary
closing conditions, including all necessary governmental and regulatory
approvals, including the approval of the Federal Communications
Commission. There can be no assurance that such approvals will be
obtained.
5. PREFERRED STOCK OF SUBSIDIARY
In February 1997, a newly formed, substantially owned subsidiary of
TWE (the "REIT") issued 250,000 shares of step-down preferred stock
("Step-Down Preferred Stock"). The REIT is intended to qualify as a real
estate investment trust under the Internal Revenue Code of 1986, as
amended. TWE used the aggregate net proceeds from the transaction of $243
million to reduce its bank debt. The sole asset of the REIT is a $432
million mortgage note payable of TWE, which has been secured by certain
real estate owned by TWE or its affiliates.
Each share of Step-Down Preferred Stock is entitled to a liquidation
preference of $1,000 and entitles the holder thereof to receive cumulative
cash dividends, payable quarterly, at the rate of 14.253% per annum
through December 30, 2006 and 1% per annum thereafter, which results in an
effective dividend yield of 8.48%. Shares of Step-Down Preferred Stock are
redeemable only in the event of certain changes or proposed changes to the
tax laws or regulations, such that dividends paid by the REIT or interest
paid under the mortgage note would not be fully deductible for federal
income tax purposes. Time Warner has the right to liquidate or dissolve
the REIT at any time after December 30, 2006 or, at any time prior
thereto, upon the approval of the holders of at least two-thirds of the
outstanding shares of Step-Down Preferred Stock.
6. PARTNERS' CAPITAL
Changes in partners' capital were as follows:
Six Months
Ended June 30,
1997 1996
(millions)
Balance at beginning of year $6,574 $6,478
Net income 402 168
Distributions (369) (147)
Allocation of income to Time Warner
General Partners' Senior Capital (62) (57)
Collections on note receivable from U S WEST - 169
Capital contributions - 15
Other (14) 10
Balance at June 30 $6,531 $6,636
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 six months ended June 30, 1997, TWE accrued $192 million
of tax-related distributions and $177 million of stock option
distributions, based on closing prices of Time Warner common stock of
$48.25 at June 30, 1997 and $37.50 at December 31, 1996. During the six
months ended June 30, 1996, TWE accrued $123 million of tax-related
distributions and $24 million of stock option distributions as a result of
an increase at that time in the market price of Time Warner common stock.
In the six months ended June 30, 1997, TWE paid distributions to the Time
Warner General Partners in the amount of $203 million, consisting of $192
million of tax-related distributions and $11 million of stock option
related distributions. In the six months ended June 30, 1996, TWE paid
the Time Warner General Partners distributions in the amount of $132
million, consisting of $123 million of tax-related distributions and $9
million of stock option related distributions. In July 1997, TWE made a
$535 million distribution to the Time Warner General Partners relating to
their Senior Capital interests.
7. SEGMENT INFORMATION
TWE classifies its businesses into three fundamental areas:
Entertainment, consisting principally of interests in filmed
entertainment, television production, television 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.
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
(millions)
Revenues
Filmed Entertainment-Warner Bros. $1,254 $1,270 $2,426 $2,486
Broadcasting-The WB Network 29 18 53 33
Cable Networks-HBO 487 456 970 875
Cable 1,066 961 2,086 1,908
Intersegment elimination (108) (97) (207) (209)
Total $2,728 $2,608 $5,328 $5,093
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
(millions)
Operating Income
Filmed Entertainment-Warner Bros. $ 73 $ 79 $ 148 $ 149
Broadcasting-The WB Network (19) (12) (39) (36)
Cable Networks-HBO 98 83 189 159
Cable 168 147 351 293
Total $ 320 $ 297 $ 649 $ 565
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
(millions)
Depreciation of Property, Plant
and Equipment
Filmed Entertainment-Warner Bros. $ 41 $ 32 $ 81 $ 62
Broadcasting-The WB Network 1 - 1 -
Cable Networks-HBO 5 4 10 9
Cable 176 157 348 300
Total $ 223 $ 193 $ 440 $ 371
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
(millions)
Amortization of Intangible Assets (1)
Filmed Entertainment-Warner Bros. $ 30 $ 29 $ 61 $ 60
Broadcasting-The WB Network - - - -
Cable Networks-HBO - - - -
Cable 75 72 151 151
Total $ 105 $ 101 $ 212 $ 211
(1) Amortization includes amortization relating to the acquisitions 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 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 with respect to cash flows is as
follows:
Six Months
Ended June 30,
1997 1996
(millions)
Interest expense $235 $239
Cash payments made for interest 243 247
Cash payments made for income taxes, net 35 32
Noncash capital distributions 177 24
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Set forth below is a discussion of the results of operations and
financial condition of WCI, the only General Partner with independent
business operations. The financial position and results of operations of
ATC, TWOI and WCCI (the other General Partners of TWE, as described in
Note 1 to the accompanying consolidated financial statements) are
principally derived from their investments in TWE, Time Warner Companies,
Inc. ("Time Warner")*, Turner Broadcasting System, Inc. ("TBS") and their
revolving credit agreements with Time Warner. Capitalized terms are as
defined and described in the accompanying consolidated financial
statements, or elsewhere herein.
The following comparative discussion of the results of operations and
financial condition of WCI includes, among other factors, an analysis of
changes in operating income before depreciation and amortization
("EBITDA") in order to eliminate the effect on WCI's operating performance
of significant amounts of amortization of intangible assets recognized in
Time Warner's $14 billion acquisition of WCI in 1989 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 WCI, 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
Three Months Ended June 30, 1997 Compared to the Three Months Ended June
30, 1996
WCI had revenues of $830 million and net income of $22 million for
the three months ended June 30, 1997, compared to revenues of $876 million
and net income of $28 million for the three months ended June 30, 1996.
EBITDA decreased to $112 million from $153 million. Depreciation and
amortization, including amortization related to the purchase of
WCI, was $91 million in 1997 and 1996. Operating income decreased to $21
million from $62 million. Despite WCI maintaining its leading domestic
______________
* On October 10, 1996, Time Warner Inc. acquired the remaining 80%
interest in TBS that it did not already own. (the "TBS Transaction").
As a result of this transaction, a new parent company with the name "Time
Warner Inc." replaced the old parent company of the same name ("Old Time
Warner", now known as Time Warner Companies, Inc.), and Old Time Warner
and TBS became separate, wholly owned subsidiaries of the new parent
company. The General Partners' pre-existing ownership interests in Old
Time Warner and TBS were unaffected by the TBS Transaction. Unless the
context indicates otherwise, references herein to "Time Warner" refer to
Old Time Warner.
market share for the year (20%), the decline in revenues principally
related to continuing industry-wide softness in the overexpanded U.S.
retail marketplace and a decline in international recorded music sales.
EBITDA and operating income decreased principally as a result of the
decline in revenues. Management expects that these domestic and
international trends will continue to affect 1997 operating results.
WCI's equity in the pretax income of TWE was $51 million for the
three months ended June 30, 1997, compared to $46 million for the three
months ended June 30, 1996. TWE's pretax income increased in 1997 as
compared to results in 1996 principally due to an overall increase in
operating income generated by its business segments.
Interest and other, net was $14 million of income for the three
months ended June 30, 1997, compared to $16 million of expense for the
three months ended June 30, 1996. Interest expense decreased to $2
million from $7 million. There was other income, net, of $16 million in
1997, compared to other expense, net, of $9 million in 1996, principally
because of an increase in investment-related income, offset in part by
costs associated with WCI's receivables securitization program. The
increase in investment related income principally related to gains on the
sale of investments and lower losses from reductions in carrying value of
certain investments.
Six Months Ended June 30, 1997 Compared to the Six Months Ended June 30,
1996
WCI had revenues of $1.769 billion and net income of $136 million for
the six months ended June 30, 1997, compared to revenues of $1.859 billion
and net income of $42 million for the six months ended June 30, 1996.
EBITDA decreased to $241 million from $294 million. Depreciation and
amortization, including amortization related to the purchase of WCI, was
$177 million in 1997 and $179 million in 1996. Operating income decreased
to $64 million from $115 million. Despite WCI maintaining its leading
domestic market share for the year (20%), the decline in revenues
principally related to continuing industry-wide softness in the
overexpanded U.S. retail marketplace and a decline in international
recorded music sales. EBITDA and operating income decreased principally
as a result of the decline in revenues, offset in part by certain one-time
gains. Management expects that these domestic and international trends
will continue to affect 1997 operating results.
WCI's equity in the pretax income of TWE was $209 million for the six
months ended June 30, 1997, compared to $99 million for the six months
ended June 30, 1996. TWE's pretax income increased significantly in 1997
as compared to results in 1996 due to an overall increase in operating
income generated by its business segments and the inclusion of an
approximately $250 million pretax gain on the first quarter of 1997 sale
of TWE's 58% interest in E! Entertainment Television, Inc., offset in part
by an increase in minority interest expense related to the
TWE-Advance/Newhouse Partnership.
Interest and other, net was $31 million of income for the six months
ended June 30, 1997, compared to $28 million of expense for the six months
ended June 30, 1996. Interest expense decreased to $11 million from $14
million. There was other income, net, of $42 million in 1997, compared to
other expense, net, of $14 million in 1996, principally because of an
increase in investment-related income and gains on foreign exchange
contracts, offset in part by costs associated with WCI's receivables
securitization program. The increase in investment-related income
principally related to gains on the sale of investments and lower losses
from reductions in the carrying value of certain investments.
The relationship between income before income taxes and income tax
expense for the General Partners 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 for each of the General Partners includes all income taxes related
to its allocable share of partnership income and its equity in the income
tax expense of corporate subsidiaries of TWE.
FINANCIAL CONDITION AND LIQUIDITY
June 30, 1997
WCI had $8.9 billion of equity at June 30, 1997, compared to $9
billion of equity at December 31, 1996. Cash and equivalents increased to
$134 million at June 30, 1997, compared to $91 million at December 31,
1996. WCI had no long-term debt due to Time Warner at the end of either
period.
The total capitalization of ATC, TWOI and WCCI at June 30, 1997
consisted of equity capital of $2.3 billion, $660 million and $821
million, respectively, compared to $2.3 billion, $654 million and $814
million at December 31, 1996, respectively. Although these
General Partners have no independent operations, it is expected that
additional tax-related and other distributions from TWE, as well as
availability under each General Partner's revolving credit agreement with
Time Warner, will continue to be sufficient to satisfy the General
Partners' obligations with respect to their tax sharing agreements with
Time Warner for the foreseeable future.
Cash Flows
In the first six months of 1997, WCI's cash provided by operations
amounted to $216 million and reflected $241 million of EBITDA, $97 million
of distributions from TWE and $52 million related to a reduction in
working capital requirements, other balance sheet accounts and noncash
items, less $7 million of interest payments and $167 million of income
taxes ($99 million of which was paid to Time Warner under a tax sharing
agreement). Cash provided by WCI's operations of $361 million in the
first six months of 1996 reflected $294 million of EBITDA, $63 million of
distributions from TWE and $141 million related to a reduction in working
capital requirements, other balance sheet accounts and noncash items, less
$9 million of interest payments and $128 million of income taxes ($68
million of which was paid to Time Warner under a tax sharing agreement).
Management believes that WCI's operating cash flow and borrowing
availability under its revolving credit agreement with Time Warner are
sufficient to meet its capital and liquidity needs for the foreseeable
future without cash distributions from TWE above those permitted by
existing agreements.
WCI and the other General Partners have no claims on the assets and
cash flows of TWE except through the payment of certain reimbursements and
cash distributions. During the first six months of 1997, the General
Partners received an aggregate $203 million of distributions, consisting
of $192 million of tax-related distributions and $11 million of stock
option related distributions. During the first six months of 1996, the
General Partners received an aggregate $132 million of distributions,
consisting of $123 million of tax-related distributions and $9 million of
stock option related distributions. Of such aggregate distributions in
the first six months of 1997 and 1996, WCI, ATC, TWOI and WCCI received
$97 million and $63 million, respectively; $83 million and $54 million,
respectively; $23 million and $15 million, respectively; and $29 million
and $19 million, respectively. In July 1997, the Time Warner General
Partners received a $535 million distribution relating to their Senior
Capital interests. Of such amount, WCI, ATC, TWOI and WCCI received $255
million, $218 million, $62 million and $77 million, respectively.
TWE GENERAL PARTNERS
CONSOLIDATED BALANCE SHEETS
June 30, 1997
(Unaudited)
WCI ATC TWOI WCCI
(millions)
ASSETS
Current assets
Cash and equivalents $ 134 $ - $ - $ -
Receivables, less allowances
of $244 million 676 - - -
Inventories 150 - - -
Prepaid expenses 640 - - -
Total current assets 1,600 - - -
Investments in and amounts due
to and from TWE 2,151 2,068 579 731
Investments in Time Warner 86 63 17 21
Other investments 1,671 344 94 106
Music catalogues, contracts
and copyrights 980 - - -
Goodwill 3,634 - - -
Other assets, primarily
property, plant and equipment 516 - - -
Total assets $10,638 $2,475 $ 690 $ 858
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties
payable $ 869 $ - $ - $ -
Other current liabilities 416 2 - -
Total current liabilities 1,285 2 - -
Long-term liabilities, including
$209, $123, $30 and $37
million due to Time Warner 452 124 30 37
Shareholders' equity
Common stock 1 1 1 1
Preferred stock, 125 thousand
shares authorized, $.01 par value,
90 thousand shares outstanding,
$90 million liquidation
preference - - - -
Paid-in capital 10,047 2,893 830 1,033
Retained earnings 411 51 5 6
10,459 2,945 836 1,040
Due from Time Warner, net (1,068) (260) (80) (100)
Reciprocal interest in
Time Warner stock (490) (336) (96) (119)
Total shareholders' equity 8,901 2,349 660 821
Total liabilities and
shareholders' equity $10,638 $ 2,475 $ 690 $ 858
See accompanying notes.
TWE GENERAL PARTNERS
CONSOLIDATED BALANCE SHEETS
December 31, 1996
WCI ATC TWOI WCCI
(millions)
ASSETS
Current assets
Cash and equivalents $ 91 $ - $ - $ -
Receivables, less allowances
of $362 million 1,013 - - -
Inventories 165 - - -
Prepaid expenses 510 - - -
Total current assets 1,779 - - -
Investments in and amounts
due to and from TWE 1,998 1,980 555 701
Investments in Time Warner 86 64 17 21
Other investments 1,695 345 93 105
Music catalogues, contracts
and copyrights 1,035 - - -
Goodwill 3,704 - - -
Other assets, primarily
property, plant and equipment 537 - - -
Total assets $10,834 $2,389 $ 665 $ 827
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties
payable $ 934 $ - $ - $ -
Other current liabilities 518 2 - -
Total current liabilities 1,452 2 - -
Long-term liabilities, including
$137, $55, $11 and $13 million
due to Time Warner 395 56 11 13
Shareholders' equity
Common stock 1 1 1 1
Paid-in capital 10,009 2,893 830 1,033
Retained earnings (accumulated
deficit) 390 27 (2) (3)
10,400 2,921 829 1,031
Due from Time Warner, net (923) (254) (79) (98)
Reciprocal interest in Time
Warner stock (490) (336) (96) (119)
Total shareholders' equity 8,987 2,331 654 814
Total liabilities and share-
holders' equity $10,834 $2,389 $ 665 $ 827
See accompanying notes.
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 1997
(Unaudited)
WCI ATC TWOI WCCI
(millions)
Revenues (a) $ 830 $ - $ - $ -
Cost of revenues (a)(b) 538 - - -
Selling, general and
administrative (a)(b) 271 - - -
Operating expenses 809 - - -
Business segment operating income 21 - - -
Equity in pretax income of
TWE (a) 51 44 12 15
Interest and other, net (a) 14 8 2 3
Income before income taxes 86 52 14 18
Income taxes (a) (58) (26) (7) (8)
Net income $ 28 $ 26 $ 7 $ 10
__________________
(a) Includes the following income (expenses) resulting from transactions
with Time Warner, TWE or equity investees of the General Partners:
Revenues $ 30 $ - $ - $ -
Cost of revenues (10) - - -
Selling, general and
administrative 5 - - -
Equity in pretax income of TWE - - - -
Interest and other, net 9 - - -
Income taxes (25) (16) (4) (5)
(b) Includes depreciation and
amortization expense of: $ 91 $ - $ - $ -
See accompanying notes.
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 1996
(Unaudited)
WCI ATC TWOI WCCI
(millions)
Revenues (a) $ 876 $ - $ - $ -
Cost of revenues (a)(b) 647 - - -
Selling, general and
administrative (a)(b) 167 - - -
Operating expenses 814 - - -
Business segment operating
income 62 - - -
Equity in pretax income of
TWE (a) 46 38 11 14
Interest and other, net (a) (16) 7 2 2
Income before income taxes 92 45 13 16
Income taxes (a) (77) (25) (7) (8)
Net income $ 15 $ 20 $ 6 $ 8
__________________
(a) Includes the following income (expenses) resulting from transactions
with Time Warner, TWE or equity investees of the General Partners:
Revenues $ 61 $ - $ - $ -
Cost of revenues (16) - - -
Selling, general and
administrative 6 - - -
Equity in pretax income of TWE (2) - - -
Interest and other, net 14 - - -
Income taxes (43) (16) (4) (5)
(b) Includes depreciation and
amortization expense of: $ 91 $ - $ - $ -
See accompanying notes.
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, 1997
(Unaudited)
WCI ATC TWOI WCCI
(millions)
Revenues (a) $1,769 $ - $ - $ -
Cost of revenues (a)(b) 1,151 - - -
Selling, general and
administrative (a)(b) 554 - - -
Operating expenses 1,705 - - -
Business segment operating
income 64 - - -
Equity in pretax income of
TWE (a) 209 179 51 63
Interest and other, net (a) 31 11 3 4
Income before income taxes 304 190 54 67
Income taxes (a) (168) (88) (25) (30)
Net income $ 136 $ 102 $ 29 $ 37
_______________________
(a) Includes the following income (expenses) resulting from transactions
with Time Warner, TWE or equity investees of the General Partners:
Revenues $ 65 $ - $ - $ -
Cost of revenues (20) - - -
Selling, general and
administrative 25 - - -
Equity in pretax income of TWE (5) - - -
Interest and other, net 34 - - -
Income taxes (99) (73) (21) (25)
(b) Includes depreciation and
amortization expense of: $ 177 $ - $ - $ -
See accompanying notes.
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, 1996
(Unaudited)
WCI ATC TWOI WCCI
(millions)
Revenues (a) $1,859 $ - $ - $ -
Cost of revenues (a)(b) 1,351 - - -
Selling, general and
administrative (a)(b) 393 - - -
Operating expenses 1,744 - - -
Business segment operating
income 115 - - -
Equity in pretax income of
TWE (a) 99 84 24 30
Interest and other, net (a) (28) 10 3 4
Income before income taxes 186 94 27 34
Income taxes (a) (144) (52) (15) (18)
Net income $ 42 $ 42 $ 12 $ 16
_______________________
(a) Includes the following income (expenses) resulting from transactions
with Time Warner, TWE or equity investees of the General Partners:
Revenues $ 99 $ - $ - $ -
Cost of revenues (27) - - -
Selling, general and
administrative 24 - - -
Equity in pretax income of TWE (7) - - -
Interest and other, net 28 - - -
Income taxes (68) (36) (10) (12)
(b) Includes depreciation and
amortization expense of: $ 179 $ - $ - $ -
See accompanying notes.
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1997
(Unaudited)
WCI ATC TWOI WCCI
(millions)
OPERATIONS
Net income $ 136 $ 102 $ 29 $ 37
Adjustments for noncash and
nonoperating items:
Depreciation and amortization 177 - - -
Excess of equity in pretax income
of TWE over distributions (112) (96) (28) (34)
Equity in loss of other investee
companies, net of distributions (9) - - -
Changes in operating assets and
liabilities 24 5 1 -
Cash provided by operations 216 11 2 3
INVESTING ACTIVITIES
Investments and acquisitions (30) - - -
Capital expenditures (62) - - -
Investment proceeds 69 - - -
Cash used by investing activities (23) - - -
FINANCING ACTIVITIES
Dividends (5) (5) (1) (1)
Increase in amounts
due from Time Warner, net (145) (6) (1) (2)
Cash used by financing activities (150) (11) (2) (3)
INCREASE IN CASH AND EQUIVALENTS 43 - - -
CASH AND EQUIVALENTS AT BEGINNING
OF PERIOD 91 - - -
CASH AND EQUIVALENTS AT END
OF PERIOD $ 134 $ - $ - $ -
See accompanying notes.
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1996
(Unaudited)
WCI ATC TWOI WCCI
(millions)
OPERATIONS
Net income $ 42 $ 42 $ 12 $ 16
Adjustments for noncash and
nonoperating items:
Depreciation and amortization 179 - - -
Excess of equity in pretax income
of TWE over distributions (36) (30) (9) (11)
Equity in (income) loss of other
investee companies, net of
distributions (18) 1 - -
Changes in operating assets
and liabilities 194 5 3 2
Cash provided by operations 361 18 6 7
INVESTING ACTIVITIES
Investments and acquisitions (38) - - -
Capital expenditures (55) - - -
Investment proceeds 7 - - -
Cash used by investing
activities (86) - - -
FINANCING ACTIVITIES
Dividends (4) (4) (1) (1)
Increase in amounts due from
Time Warner, net (217) (14) (5) (6)
Cash used by financing
activities (221) (18) (6) (7)
DECREASE IN CASH AND EQUIVALENTS 54 - - -
CASH AND EQUIVALENTS AT BEGINNING
OF PERIOD 106 - - -
CASH AND EQUIVALENTS AT
END OF PERIOD $ 160 $ - $ - $ -
See accompanying notes.
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
On June 30, 1992, thirteen direct or indirect subsidiaries of Time
Warner Companies, Inc. ("Time Warner")* contributed the assets and
liabilities or the rights to the cash flows of substantially all of Time
Warner's Filmed Entertainment -Warner Bros., Cable Networks-HBO and Cable
businesses to Time Warner Entertainment Company, L.P., a Delaware limited
partnership ("TWE"), for general partnership interests, and each general
partner guaranteed a pro rata portion of substantially all of TWE's debt
and accrued interest based on the relative fair value of the net assets
each contributed to TWE (the"General Partner Guarantees", see Note 4).
Nine of the thirteen original general partners have been merged or
dissolved into the other four. Warner Communications Inc. ("WCI," a
subsidiary of Time Warner), American Television and Communications
Corporation ("ATC," a subsidiary of Time Warner), Warner Cable
Communications Inc. ("WCCI," a consolidated subsidiary of WCI) and Time
Warner Operations Inc. ("TWOI," formerly Time Warner Cable Inc., a
subsidiary of Time Warner), are the four remaining general partners of
TWE. They have succeeded to the general partnership interests and have
assumed the General Partner Guarantees of the nine former general
partners. WCI, ATC, WCCI, TWOI and, where appropriate, the former general
partners are referred to herein as the "General Partners."
WCI conducts substantially all of Time Warner's Music operations,
which include 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, Atlantic Records, Elektra
Entertainment and Warner Music International. The remaining General
Partners do not conduct operations independent of their ownership
interests in TWE and certain other investments.
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
______________
* On October 10, 1996, Time Warner Inc. acquired the remaining 80%
interest in TBS that it did not already own (the "TBS Transaction"). As
a result of this transaction, a new parent company with the name "Time
Warner Inc." replaced the old parent company of the same name ("Old Time
Warner", now known as Time Warner Companies, Inc.), and Old Time Warner
and TBS became separate, wholly owned subsidiaries of the new parent
company. The General Partners' pre-existing ownership interests in Old
Time Warner and TBS were unaffected by the TBS Transaction. Unless the
context indicates otherwise, references herein to "Time Warner" refer to
Old Time Warner.
principles applicable to interim periods. The accompanying financial
statements should be read in conjunction with the audited consolidated
financial statements of the General Partners for the year ended December
31, 1996. Certain reclassifications have been made to the 1996 financial
statements to conform to the 1997 presentation.
2. MERGERS AND ACQUISITIONS
In June 1997, WCI acquired TBS's interests in Turner Broadcasting
System Europe Limited ("TBSEL") and Turner Entertainment Networks
International Limited ("TENIL"), wholly-owned subsidiaries of TBS, which
conduct certain of TBS's cable television programming operations in the
United Kingdom. To acquire TBSEL and TENIL, WCI issued 90 thousand shares
of a new series of preferred stock. Each share of preferred stock is
entitled to a liquidation preference of $1,000 per share and entitles the
holder thereof to receive a $80 annual dividend per share, payable in cash
on a quarterly basis. The acquisition was accounted for as a merger of
entities under common control effective as of January 1, 1997, similar to
the pooling-of-interest method of accounting for business combinations.
The operating results of the companies acquired are not material to WCI's
results of operations.
3. TWE
The General Partners' investment in and amounts due to or from TWE at
June 30, 1997 and December 31, 1996 is as follows (millions):
June 30, 1997 WCI ATC TWOI WCCI
Investment in TWE $2,264 $1,962 $ 549 $ 694
Stock option related
distributions due from TWE 123 106 30 37
Other net liabilities due to
TWE, principally related to
home video distribution (236) - - -
Total $2,151 $2,068 $ 579 $ 731
December 31, 1996 WCI ATC TWOI WCCI
Investment in TWE $2,242 $1,942 $ 544 $ 688
Stock option related
distributions due from TWE 44 38 11 13
Other net liabilities due to
TWE, principally related to
home video distribution (288) - - -
Total $1,998 $1,980 $ 555 $ 701
TWE was capitalized on June 30, 1992 to own and operate substantially
all of the Filmed Entertainment-Warner Bros., Cable Networks-HBO and Cable
businesses previously owned by the General Partners. The General Partners
in the aggregate hold, directly or indirectly, 63.27% 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. Time Warner acquired the 11.22% of the Series A Capital and Residual
Capital limited partnership interests previously held by subsidiaries of
each of ITOCHU Corporation and Toshiba Corporation in 1995. 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").
The TWE partnership agreement provides for special allocations of
income, loss and distributions of partnership capital, including priority
distributions in the event of liquidation. No portion of TWE's net income
has been allocated to the limited partnership interests.
Set forth below is summarized financial information of TWE:
TIME WARNER ENTERTAINMENT COMPANY, L.P.
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
(millions)
Operating Statement Information
Revenues $2,728 $2,608 $5,328 $5,093
Depreciation and amortization 328 294 652 582
Business segment operating income 320 297 649 565
Interest and other, net (1) 139 132 10 221
Minority interest 56 52 164 102
Income before income taxes 107 95 439 207
Net income 82 74 402 168
__________________
(1) Includes a pretax gain of approximately $250 million recognized in the
first quarter of 1997 related to the sale of an interest in E!
Entertainment Television, Inc.
Six Months
Ended June 30,
1997 1996
(millions)
Cash Flow Information
Cash provided by operations $ 416 $1,197
Capital expenditures (734) (781)
Investments and acquisitions (62) (65)
Investment proceeds 371 196
Borrowings 428 63
Debt repayments (323) (670)
Issuance of preferred stock of subsidiary 243 -
Capital distributions (203) (132)
Collections on note receivable from U S WEST - 169
Other financing activities, net (59) 32
Increase in cash and equivalents 77 9
June 30, December 31,
1997 1996
(millions)
Balance Sheet Information
Cash and equivalents $ 293 $ 216
Total current assets 3,559 3,146
Total assets 20,210 19,973
Total current liabilities 3,631 4,075
Long-term debt 5,781 5,676
Minority interests 1,137 1,020
Preferred stock of subsidiary 240 -
General Partners' Senior Capital 1,605 1,543
Partners' capital 6,531 6,574
The assets and cash flows of TWE are restricted by the TWE
partnership and credit agreements and are unavailable for use by the
partners except through the payment of certain fees, reimbursements, cash
distributions and loans, which are subject to limitations. At June 30,
1997 and December 31, 1996, the General Partners had recorded $259 million
and $93 million, respectively, of stock option related distributions due
from TWE, based on closing prices of Time Warner common stock of $48.25
and $37.50, respectively. Time Warner is paid when the options are
exercised. The General Partners also receive tax-related distributions
from TWE on a current basis. During the six months ended June 30, 1997,
the General Partners received distributions from TWE in the amount of $203
million, consisting of $192 million of tax-related distributions and $11
million of stock option related distributions. During the six months ended
June 30, 1996, the General Partners received distributions from TWE in the
amount of $132 million, consisting of $123 million of tax-related
distributions and $9 million of stock option related distributions. Of
such aggregate distributions in 1997 and 1996, WCI received $97 million
and $63 million, respectively; ATC received $83 million and $54 million,
respectively; TWOI received $23 million and $15 million, respectively; and
WCCI received $29 million and $19 million, respectively. In July 1997,
the Time Warner General Partners received a $535 million distribution
relating to their Senior Capital interests. Of such amount, WCI, ATC,
TWOI and WCCI received $255 million, $218 million, $62 million and $77
million, respectively.
4. GENERAL PARTNER GUARANTEES
Each General Partner has guaranteed a pro rata portion of
approximately $5.6 billion of TWE's debt and accrued interest at June 30,
1997, based on the relative fair value of the net assets each General
Partner contributed to TWE. Such indebtedness is recourse to each General
Partner only to the extent of its guarantee. There are generally no
restrictions on the ability of the General Partner guarantors to transfer
material assets, other than TWE assets, to parties who are not guarantors.
The portion of TWE debt and accrued interest at June 30, 1997 that
was guaranteed by each General Partner, individually and on a consolidated
basis for each General Partner and its subsidiaries, is set forth below:
Total Guaranteed by
Total Guaranteed by Each General Partner
Each General Partner and its Subsidiaries
General Partner % Amount % Amount
(dollars in millions)
WCI 33.19 $1,851 47.58 $2,653
ATC 40.73 2,272 40.73 2,272
TWOI 11.69 652 11.69 652
WCCI, a subsidiary of WCI 14.39 802 14.39 802
Total 100.00 $5,577 * *
* Adds to more than 100% and $5.577 billion, respectively, because of
the parent-subsidiary relationship between WCI and WCCI.
5. SHAREHOLDERS' EQUITY
Changes in shareholders' equity for WCI are as follows:
Six Months
Ended June 30,
1997 1996
(millions)
Balance at beginning of year $8,987 $9,342
Net income 136 42
Increase in stock option distribution liability to
Time Warner (84) (11)
Transfers to Time Warner, net (148) (217)
Issuance of preferred stock 38 -
Unrealized gains (losses) of certain marketable equity
investments (11) 61
Other (17) (4)
Balance at June 30 $8,901 $9,213
6. CONTINGENCIES
Pending legal proceedings are substantially limited to litigation
incidental to the businesses of the General Partners. In the opinion of
management, the ultimate resolution of these matters will not have a
material effect on the consolidated financial statements of the General
Partners.
7. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash flows is as
follows (millions):
WCI ATC TWOI WCCI
(millions)
Six Months Ended June 30, 1997
Cash payments made for interest $ 7 $ - $ - $ -
Cash payments made for income
taxes, net 167 73 21 25
Tax-related distributions
received from TWE 92 78 22 28
WCI ATC TWOI WCCI
(millions)
Six Months Ended June 30, 1996
Cash payments made for interest $ 9 $ - $ - $ -
Cash payments made for income
taxes, net 128 36 10 12
Tax-related distributions
received from TWE 59 50 14 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the litigation entitled Fox News Network, L.L.C.
v. Time Warner Inc. et al. described on page I-28 of TWE's Annual Report
on Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K").
On May 15, 1997, defendants' motion for summary judgment as to plaintiff's
fraud and promissory estoppel claims was granted, and the remaining
antitrust claims were transferred on the court's own motion to the
Southern District of New York. On July 22, 1997, the parties executed a
settlement agreement resolving all claims against defendants not
previously dismissed.
Reference is made to the action commenced by the holders of Time
Warner's New York City cable franchises against the City of New York
described on page I-29 of the 1996 Form 10-K. On July 3, 1997, the United
States Court of Appeals for the Second Circuit affirmed the lower court's
grant of a preliminary injunction to the Time Warner plaintiffs. On July
22, 1997, the parties executed a settlement agreement that resolved Time
Warner's claims for injunctive relief.
Reference is made to the litigation entitled Digital Distribution
Inc. d/b/a Compact Disc Warehouse v. CEMA Distribution, Sony Music
Entertainment, Inc., Warner Elektra Atlantic Corporation, UNI Distribution
Corporation, Bertelsmann Music Group, Inc. and PolyGram Group
Distribution, Inc. described on pages I-27 and I-28 of the 1996 Form 10-K.
On July 3, 1997, the United States Court of Appeals for the Ninth Circuit
reversed the dismissal of the Amended Complaint and remanded the case to
the District Court, holding that the Amended Complaint was sufficient to
meet the pleading requirements of the Federal Rules and that the action
should proceed.
Reference is made to the litigation entitled Robinson & 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 I-28
of the 1996 Form 10-K. On August 1, 1997, the Circuit Court issued an
Order vacating and setting aside the conditional class certification,
granting the plaintiffs' motion to dismiss, and dismissing the entire
action, without prejudice.
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.
No Current Report on Form 8-K was filed by TWE during the
quarter ended June 30, 1997.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
AND TWE GENERAL PARTNERS
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
each of the registrants has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
By: Warner Communications Inc.,
as General Partner
By: /s/RICHARD J. BRESSLER
Name: Richard J. Bressler
Senior Vice President and
Chief Financial Officer
AMERICAN TELEVISION AND
COMMUNICATIONS CORPORATION
TIME WARNER OPERATIONS INC.
WARNER CABLE COMMUNICATIONS INC.
WARNER COMMUNICATIONS INC.
By: /s/RICHARD J. BRESSLER
Name: Richard J. Bressler
Title: Chief Financial Officer
Dated: August 13, 1997
EXHIBIT INDEX
Pursuant to Item 601 of Regulations S-K
Exhibit No. Description of Exhibit
27 Financial Data Schedule.