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, 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
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.
jurisdiction of Employer
incorporation or Identification
organization) 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/ /
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 20
Consolidated balance sheets at September 30, 1997
and December 31, 1996 9 23
Consolidated statements of operations for
the three and nine months ended September 30, 1997
and 1996 10 25
Consolidated statements of cash flows
for the nine months ended September 30, 1997
and 1996 11 29
Notes to consolidated financial statements 12 31
PART II. OTHER INFORMATION 37
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 and television broadcasting; 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 Financing Strategy
Currently, Time Warner is no longer actively pursuing a
restructuring of TWE with U S WEST. Time Warner's and TWE's cable
financing strategy is to continue to use cable operating cash flow to
finance the level of capital spending necessary to upgrade the
technological capability of its cable television systems and develop new
services, while pursuing opportunities to reduce both existing debt and
its share of future funding requirements related to the cable television
business and related ancillary businesses. Consistent with this strategy,
Time Warner, TWE and the TWE-Advance/Newhouse Partnership ("TWE-A/N") have
recently announced certain transactions, consisting of (i) a series of
transactions with TCI Communications, Inc. ("TCI"), a subsidiary of
Tele-Communications, Inc., to establish two, new strategic joint ventures,
expand an existing joint venture and exchange certain cable television
systems (collectively, the "TCI Cable Transactions"), (ii) the transfer of
TWE's and TWE-A/N's direct broadcast satellite operations and related
assets to a separate, publicly traded entity, as well as certain related
transactions (collectively, the "Primestar Transactions") and (iii) the
transfer by a wholly owned subsidiary of Time Warner of cable television
systems serving approximately 650,000 subscribers to TWE-A/N, subject to
approximately $1 billion of debt, in exchange for common and preferred
partnership interests therein, as well as certain related transactions
(collectively, the "TWE-A/N Transfers"). Each of these transactions is
discussed more fully below.
TCI Cable Transactions
In September 1997, Time Warner, TWE, TWE-A/N and TCI signed a
letter of intent to enter into a series of agreements to (i) form two
cable television joint ventures in the Houston and south Texas areas that
will be managed by TWE and own cable television systems serving an
aggregate 1.1 million subscribers, subject to approximately $1.4 billion
of debt, (ii) expand an existing joint venture in Kansas City, which is
managed by TWE, through the contribution by TCI of a contiguous cable
television system serving approximately 95,000 subscribers, subject to
approximately $200 million of debt, and (iii) exchange various cable
television systems owned by Time Warner and TWE serving over 500,000
subscribers (of which cable television systems serving approximately
400,000 subscribers are owned by TWE) for other cable television systems
of comparable size in an effort to enhance each company's geographic
clusters of cable television properties. The joint ventures will be
accounted for under the equity method of accounting.
As a result of these transactions, TWE expects to reduce debt by
approximately $500 million, benefit from the geographic clustering of
cable television systems and increase the number of subscribers under its
management by approximately 675,000 subscribers, thereby becoming the
largest cable television operator in the U.S. The TCI Cable Transactions
are expected to close periodically throughout 1998 and are subject to the
execution of definitive agreements by the parties and customary closing
conditions, including all necessary governmental and regulatory approvals.
There can be no assurance that such agreements will be completed or that
such approvals will be obtained.
Primestar Transactions
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 TWE-A/N (the "DBS
Operations") and the 31% partnership interest in Primestar Partners, L.P.
held by TWE-A/N ("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.
TWE-A/N Transfers
In October 1997, TWE, TWE-A/N and a wholly owned subsidiary of Time
Warner entered into an agreement, pursuant to which Time Warner will
contribute cable television systems serving approximately 650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in
exchange for common and preferred partnership interests therein. The cable
television systems to be transferred to TWE-A/N are currently owned by TWI
Cable Inc., a wholly owned subsidiary of Time Warner, and Paragon
Communications ("Paragon"), a partnership owning cable television systems
serving approximately 1 million subscribers that is currently owned by
subsidiaries of Time Warner, with 50% beneficially owned in the aggregate
by TWE and TWE-A/N.
In a related transaction, TWE will exchange substantially all of
its beneficial interest in Paragon for an equivalent share of Paragon's
cable television systems serving approximately 500,000 subscribers. TWE,
in turn, will similarly transfer such systems and certain related assets
to TWE-A/N in exchange for TWE-A/N's beneficial interest in Paragon and in
satisfaction of certain pre-existing obligations to TWE-A/N. This will
result in subsidiaries of Time Warner owning 99% of the restructured
Paragon entity. Accordingly, upon consummation of the TWE-A/N Transfers,
TWE will deconsolidate Paragon, which will then be approximately half of
its former size. Because this transaction represents an exchange of TWE's
and TWE-A/N's beneficial interests in Paragon for an equivalent amount of
its cable television systems, it will not have any significant economic
impact on Time Warner, TWE or TWE-A/N.
In connection with the TWE-A/N Transfers, Advance/Newhouse will
make a capital contribution to TWE-A/N in order to maintain its 33.3%
common equity interest therein. Accordingly, upon consummation of the
TWE-A/N Transfers, TWE-A/N will be owned 65.5% by TWE, 33.3% by
Advance/Newhouse and 1.2% indirectly by Time Warner. The TWE-A/N
Transfers are expected to close in the first quarter of 1998, subject to
customary closing conditions, including any necessary franchise or
regulatory approvals.
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, 1997 and 1996 are as follows:
Three Months Ended
September 30,
Operating
EBITDA Income
1997 1996 1997 1996
(millions)
Filmed Entertainment-Warner Bros. $156 $139 $ 75 $ 56
Broadcasting-The WB Network (21) (27) (21) (27)
Cable Networks-HBO 107 91 102 86
Cable 454 390 179 156
Total $696 $593 $335 $271
Nine Months Ended
September 30,
Operating
EBITDA Income
1997 1996 1997 1996
Filmed Entertainment-Warner Bros. $446 $410 $223 $205
Broadcasting-The WB Network (59) (63) (60) (63)
Cable Networks-HBO 306 259 291 245
Cable 1,304 1,134 530 449
Total $1,997 $1,740 $984 $836
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996
TWE had revenues of $2.855 billion and net income of $81 million for
the three months ended September 30, 1997, compared to revenues of $2.718
billion and net income of $45 million for the three months ended September
30, 1996. As discussed more fully below, TWE's net income increased in
1997 as compared to 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 $27 million and $10
million for the three months ended September 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 $1.397
billion, compared to $1.443 billion in the third quarter of 1996. EBITDA
increased to $156 million from $139 million. Depreciation and
amortization, including noncash amortization of intangible assets related
to the purchase of WCI, amounted to $81 million in 1997 and $83 million in
1996. Operating income increased to $75 million from $56 million.
Revenues decreased principally as a result of lower worldwide home video
revenues that related to the successful sell-through release of Twister in
1996, offset in part by increases in worldwide theatrical and television
distribution revenues. EBITDA and operating income increased principally
as a result of the strong performance of worldwide television distribution
operations.
Broadcasting - The WB Network. Revenues increased to $31 million,
compared to $23 million in the third quarter of 1996. Operating results
improved to a loss of $21 million from a loss of $27 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 improved
principally as a result of the revenue gains and the effect of an increase
in a limited partner's interest in the network that occurred in early
1997. Due to the start-up nature of this national broadcast operation,
losses are expected to continue.
Cable Networks-HBO. Revenues increased to $482 million, compared to
$426 million in the third quarter of 1996. EBITDA increased to $107
million from $91 million. Depreciation and amortization amounted to $5
million in 1997 and 1996. Operating income increased to $102 million from
$86 million. Revenues benefited primarily from an increase in
subscriptions. EBITDA and operating income increased principally as a
result of the revenue gains.
Cable. Revenues increased to $1.060 billion, compared to $955
million in the third quarter of 1996. EBITDA increased to $454 million
from $390 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 $275 million in 1997
and $234 million in 1996. Operating income increased to $179 million from
$156 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 $15 million
recognized in 1997 in connection with the sale or exchange of certain
cable systems. Operating income was further affected by higher
depreciation related to capital spending.
Interest and Other, Net. Interest and other, net, was $145 million
in the third quarter of 1997, compared to $147 million in the third
quarter of 1996. Interest expense increased to $123 million, compared to
$117 million in 1996. There was other expense, net, of $22 million in the
third quarter of 1997, compared to $30 million in the third quarter of
1996, principally due to higher gains on asset sales, which more than
offset higher investment-related losses, generally relating to reductions
in the carrying value of certain investments, and the dividend
requirements on preferred stock of a subsidiary issued in February 1997 to
reduce TWE's bank debt. The preferred stock was issued by a newly formed,
substantially owned subsidiary of TWE (the "REIT") intended to qualify as
a real estate investment trust under the Internal Revenue Code of 1986, as
amended.
Nine Months Ended September 30, 1997 Compared to the Nine Months Ended
September 30, 1996
TWE had revenues of $8.183 billion and net income of $483 million for
the nine months ended September 30, 1997, compared to revenues of $7.811
billion and net income of $213 million for the nine months ended September
30, 1996. As discussed more fully below, TWE's net income increased
significantly in 1997 as compared to 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 TWE-A/N.
As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $64 million and $49
million for the nine months ended September 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 $3.823
billion, compared to $3.929 billion in the first nine months of 1996.
EBITDA increased to $446 million from $410 million. Depreciation and
amortization, including noncash amortization of intangible assets related
to the purchase of WCI, amounted to $223 million in 1997 and $205 million
in 1996. Operating income increased to $223 million from $205 million.
Revenues decreased principally as a result of lower worldwide theatrical
and home video revenues, offset in part by 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.
Operating income was further affected by higher depreciation principally
relating to the expansion of theme parks and consumer products operations.
Broadcasting - The WB Network. Revenues increased to $84 million,
compared to $56 million in the first nine months of 1996. EBITDA improved
to a loss of $59 million from a loss of $63 million. Depreciation and
amortization amounted to $1 million in 1997. Operating losses decreased
to $60 million from $63 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 improved principally as a result of the revenue
gains and the effect of an increase in a limited partner's interest in the
network that occurred in early 1997. Due to the start-up nature of this
national broadcast operation, losses are expected to continue.
Cable Networks-HBO. Revenues increased to $1.452 billion, compared
to $1.301 billion in the first nine months of 1996. EBITDA increased to
$306 million from $259 million. Depreciation and amortization amounted to
$15 million in 1997 and $14 million in 1996. Operating income increased
to $291 million from $245 million. Revenues benefited primarily from an
increase in subscriptions. EBITDA and operating income increased
principally as a result of the revenue gains.
Cable. Revenues increased to $3.146 billion, compared to $2.863
billion in the first nine months of 1996. EBITDA increased to $1.304
billion from $1.134 billion. 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 $774 million
in 1997 and $685 million in 1996. Operating income increased to $530
million from $449 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 $39 million recognized in
1997 in connection with the sale or exchange of certain cable systems.
Operating income was further affected by higher depreciation related to
capital spending.
Interest and Other, Net. Interest and other, net, decreased to $155
million in the first nine months of 1997, compared to $368 million in the
first nine months of 1996. Interest expense increased to $358 million,
compared to $356 million in 1996. There was other income, net, of $203
million in the first nine months of 1997, compared to other expense, net,
of $12 million in the first nine 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 higher
losses from reductions in the carrying value of certain investments and
the dividend requirements on preferred stock of the REIT issued in
February 1997 to reduce TWE's bank debt.
FINANCIAL CONDITION AND LIQUIDITY
September 30, 1997
Financial Condition
TWE had $6.3 billion of debt, $237 million of preferred stock of a
subsidiary, $1.1 billion of Time Warner General Partners' Senior Capital
and $6.4 billion of partners' capital at September 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 $296 million at September 30, 1997, compared to $216
million at December 31, 1996, resulting in net debt for TWE of $6 billion
and $5.5 billion, respectively.
Debt Refinancings
In November 1997, TWE and TWE-A/N, together with Time Warner Inc. and
certain of its consolidated subsidiaries, expects to enter into a new,
five-year revolving credit facility (the "1997 Credit Agreement") and
terminate its previously existing bank credit facility (the "Old Credit
Agreement"). This will enable TWE to reduce its aggregate borrowing
availability from $8.3 billion to $7.5 billion, lower interest rates and
refinance approximately $2.2 billion of its outstanding borrowings under
the Old Credit Agreement.
The 1997 Credit Agreement will permit borrowings in an aggregate
amount of up to $7.5 billion, with no scheduled reduction in credit
availability prior to maturity in November 2002. The borrowers under the
1997 Credit Agreement will be TWE, TWE-A/N, certain wholly owned
subsidiaries of Time Warner Inc. and, under certain circumstances, Time
Warner Inc. itself. Borrowings by TWE and TWE-A/N under the 1997 Credit
Agreement will be limited to $7.5 billion in the case of TWE and $2
billion in the case of TWE-A/N, subject in each case to certain
limitations and adjustments, including the aggregate borrowing limit of
$7.5 billion. As a result, the amount that can be borrowed by TWE and
TWE-A/N will be reduced by borrowings made by Time Warner Inc. and its
wholly owned subsidiaries. Such borrowings will bear interest at specific
rates for each of the borrowers (generally equal to LIBOR plus a margin
initially equal to 40 basis points for TWE and 35 basis points for
TWE-A/N) and each borrower will be required to pay a commitment fee on the
unused portion of its commitment (initially equal to .15% per annum for
TWE and .125% per annum for TWE-A/N), which margin and fee will vary based
on the credit rating or financial leverage of TWE and TWE-A/N. Borrowings
may be used for general business purposes and unused credit will be
available to support commercial paper borrowings. The 1997 Credit
Agreement will contain certain covenants generally for each borrower
relating to, among other things, additional indebtedness; liens on assets;
cash flow coverage and leverage ratios; and distributions and other
restricted cash payments or transfers of assets from the borrowers to
their respective partners or affiliates.
An extraordinary loss of approximately $23 million is expected to be
recognized by TWE in the fourth quarter of 1997 in connection with the
write-off of deferred financing costs related to the Old Credit Agreement.
Cash Flows
During the first nine months of 1997, TWE's cash provided by
operations amounted to $918 million and reflected $1.997 billion of EBITDA
from the Filmed Entertainment-Warner Bros., Broadcasting-The WB Network,
Cable Networks-HBO and Cable businesses, less $394 million of interest
payments, $55 million of income taxes, $54 million of corporate expenses,
and $576 million related to an increase in working capital requirements,
other balance sheet accounts and noncash items. Cash provided by
operations of $1.322 billion in the first nine months of 1996 reflected
$1.740 billion of business segment EBITDA 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 used by investing activities was $777 million in the first nine
months of 1997, compared to $864 million in the first nine months of 1996,
principally as a result of lower capital expenditures. Capital
expenditures were $1.117 billion in 1997 and $1.228 billion in 1996.
Cash used by financing activities was $61 million in the first nine
months of 1997, compared to $458 million in the first nine months of 1996,
principally as a result of an increase in debt used to fund cash
distributions to Time Warner and the issuance of 250,000 shares of
preferred stock of a subsidiary for aggregate net proceeds of $243
million, offset in part by a $647 million increase in distributions paid
to Time Warner and 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 $1.013 billion in the nine months
ended September 30, 1997, compared to $936 million in the nine months
ended September 30, 1996. For the full year of 1997, cable capital
spending is expected to be relatively comparable to 1996 levels, with
approximately $400 million budgeted for the remainder of 1997. Capital
spending includes over $100 million in each year relating to Primestar,
which is expected to be eliminated in 1998 upon the consummation of the
Primestar Transactions. Other capital spending by TWE's Cable division is
expected to continue 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 $1.875 billion at September 30, 1997,
compared to $1.502 billion at December 31, 1996 (including amounts
relating to TWE's cable television networks of $239 million and $189
million, respectively, and to Time Warner's cable television networks of
$465 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)
September 30, December 31,
1997 1996
(millions)
ASSETS
Current assets
Cash and equivalents $ 296 $ 216
Receivables, including $333 and $383
million due from Time Warner, less
allowances of $371 and $373 million 1,673 1,637
Inventories 1,266 1,134
Prepaid expenses 170 159
Total current assets 3,405 3,146
Noncurrent inventories 2,234 2,263
Loan receivable from Time Warner 400 400
Investments 381 351
Property, plant and equipment, net 6,390 5,999
Cable television franchises 2,929 3,054
Goodwill 3,903 3,996
Other assets 703 764
Total assets $20,345 $19,973
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable $ 815 $ 935
Participations and programming costs payable 1,217 1,393
Debt due within one year 8 7
Other current liabilities, including $156
and $82 million due to Time Warner 1,683 1,740
Total current liabilities 3,723 4,075
Long-term debt 6,257 5,676
Other long-term liabilities, including
$459 and $138 million due to Time Warner 1,499 1,085
Minority interests 1,173 1,020
Preferred stock of subsidiary holding
solely a mortgage note of its parent 237 -
Time Warner General Partners' Senior Capital 1,096 1,543
Partners' capital
Contributed capital 7,537 7,537
Undistributed partnership earnings (deficit) (1,177) (963)
Total partners' capital 6,360 6,574
Total liabilities and partners' capital $20,345 $19,973
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(millions)
Revenues (a) $2,855 $2,718 $8,183 $7,811
Cost of revenues (a)(b) 1,905 1,855 5,352 5,250
Selling, general and admini- 615 592 1,847 1,725
strative (a)(b)
Operating expenses 2,520 2,447 7,199 6,975
Business segment operating income 335 271 984 836
Interest and other, net (a) (145) (147) (155) (368)
Minority interest (64) (52) (228) (154)
Corporate services (a) (18) (17) (54) (52)
Income before income taxes 108 55 547 262
Income taxes (27) (10) (64) (49)
Net income $ 81 $ 45 $ 483 $ 213
_______________
(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, 1997, respectively,
and for the corresponding periods in the prior year: revenues-$103
million and $224 million in 1997, $48 million and $147 million in
1996; cost of revenues-$(11) million and $(47) million in 1997, $(30)
million and $(68) million in 1996; selling, general and
administrative-$20 million and $60 million in 1997, $(24) million and
$(33) million in 1996; interest and other, net-$8 million and $25
million in 1997, $6 million and $22 million in 1996; and corporate
services-$(18) million and $(54) million in 1997, $(17) million and
$(52) million in 1996.
(b) Includes depreciation and
amortization expense of: $361 $322 $1,013 $ 904
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
1997 1996
(millions)
OPERATIONS
Net income $ 483 $ 213
Adjustments for noncash and nonoperating items:
Depreciation and amortization 1,013 904
Changes in operating assets and liabilities (578) 205
Cash provided by operations 918 1,322
INVESTING ACTIVITIES
Investments and acquisitions (104) (86)
Capital expenditures (1,117) (1,228)
Investment proceeds 444 450
Cash used by investing activities (777) (864)
FINANCING ACTIVITIES
Borrowings 905 190
Debt repayments (323) (697)
Issuance of preferred stock of subsidiary 243 -
Capital distributions (809) (162)
Collections on note receivable from U S WEST - 169
Other (77) 42
Cash used by financing activities (61) (458)
INCREASE IN CASH AND EQUIVALENTS 80 -
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 216 209
CASH AND EQUIVALENTS AT END OF PERIOD $296 $209
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 and television broadcasting; 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) HBO and Cinemax, the leading pay
television services and (4) Time Warner Cable, currently 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 8).
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
______________________
* 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 (now known as Time Warner Companies, Inc., "TW Companies"), and TW
Companies and TBS became separate, wholly owned subsidiaries of the new
parent company. Unless the context indicates otherwise, references herein
to "Time Warner" refer to TW Companies.
which cost was allocated to TWE upon the capitalization of the
partnership. Noncash amortization of intangible assets recorded by TWE's
businesses amounted to $109 million and $115 million in the three months
ended September 30, 1997 and 1996, respectively, and $321 million and $326
million for the nine months ended September 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.
In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income" ("FAS 130"), effective for fiscal years beginning
after December 15, 1997. The new rules establish standards for the
reporting of comprehensive income and its components in financial
statements. Comprehensive income consists of net income and other gains
and losses affecting partnership capital that, under generally accepted
accounting principles, are excluded from net income, such as unrealized
gains and losses on marketable equity investments and foreign currency
translation gains and losses. TWE does not expect that the adoption of
FAS 130 will have a material effect on its financial statements.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("FAS 131"), effective
for fiscal years beginning after December 15, 1997. The new rules
establish revised standards for public companies relating to the reporting
of financial and descriptive information about their operating segments in
financial statements. TWE does not expect that the adoption of FAS 131
will have a material effect on its financial statements.
2. CABLE TRANSACTIONS
TCI Cable Transactions
In September 1997, Time Warner Inc., TWE, the TWE-Advance/Newhouse
Partnership ("TWE-A/N") and TCI Communications, Inc. ("TCI"), a subsidiary
of Tele-Communications, Inc., signed a letter of intent to enter into a
series of agreements to (i) form two cable television joint ventures in
the Houston and south Texas areas that will be managed by TWE and own
cable television systems serving an aggregate 1.1 million subscribers,
subject to approximately $1.4 billion of debt, (ii) expand an existing
joint venture in Kansas City, which is managed by TWE, through the
contribution by TCI of a contiguous cable television system serving
approximately 95,000 subscribers, subject to approximately $200 million of
debt, and (iii) exchange various cable television systems owned by Time
Warner and TWE and serving over 500,000 subscribers (of which cable
television systems serving approximately 400,000 subscribers are owned by
TWE) for other cable television systems of comparable size in an effort to
enhance each company's geographic clusters of cable television properties
(collectively, the "TCI Cable Transactions"). The joint ventures will be
accounted for under the equity method of accounting.
As a result of these transactions, TWE expects to reduce debt by
approximately $500 million, benefit from the geographic clustering of
cable television systems and increase the number of subscribers under its
management by approximately 675,000 subscribers. The TCI Cable
Transactions are expected to close periodically throughout 1998, subject
to the execution of definitive agreements by the parties and customary
closing conditions, including all necessary governmental and regulatory
approvals. There can be no assurance that such agreements will be
completed or that such approvals will be obtained.
Primestar Transactions
In June 1997, TWE and the Advance/Newhouse Partnership
("Advance/Newhouse") entered into agreements to transfer the direct broad-
cast satellite operations conducted by TWE and TWE-A/N (the "DBS
Operations") and the 31% partnership interest in Primestar Partners, L.P.
held by TWE-A/N ("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 ("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.
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. There can be no assurance that such approvals will be
obtained.
TWE-A/N Transfers
In October 1997, TWE, TWE-A/N and a wholly owned subsidiary of Time
Warner entered into an agreement, pursuant to which Time Warner will
contribute cable television systems serving approximately 650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in
exchange for common and preferred partnership interests therein, as well
as certain related transactions (collectively, the "TWE-A/N Transfers").
The cable television systems to be transferred to TWE-A/N are currently
owned by TWI Cable Inc., a wholly owned subsidiary of Time Warner, and
Paragon Communications ("Paragon"), a partnership owning cable television
systems serving approximately 1 million subscribers that is currently
owned by subsidiaries of Time Warner, with 50% beneficially owned in the
aggregate by TWE and TWE-A/N.
In a related transaction, TWE will exchange substantially all of its
beneficial interest in Paragon for an equivalent share of Paragon's cable
television systems serving approximately 500,000 subscribers. TWE, in
turn, will similarly transfer such systems and certain related assets to
TWE-A/N in exchange for TWE-A/N's beneficial interest in Paragon and in
satisfaction of certain pre-existing obligations to TWE-A/N. This will
result in subsidiaries of Time Warner owning 99% of the restructured
Paragon entity. Accordingly, upon consummation of the TWE-A/N Transfers,
TWE will deconsolidate Paragon, which will then be approximately half of
its former size. Because this transaction represents an exchange of TWE's
and TWE-A/N's beneficial interests in Paragon for an equivalent amount of
its cable television systems, it will not have any significant economic
impact on Time Warner, TWE or TWE-A/N.
In connection with the TWE-A/N Transfers, Advance/Newhouse will make
a capital contribution to TWE-A/N in order to maintain its 33.3% common
equity interest therein. Accordingly, upon consummation of the TWE-A/N
Transfers, TWE-A/N will be owned 65.5% by TWE, 33.3% by Advance/Newhouse
and 1.2% indirectly by Time Warner. The TWE-A/N Transfers are expected to
close in the first quarter of 1998, subject to customary closing
conditions, including any necessary franchise or regulatory approvals.
3. INVENTORIES
TWE's inventories consist of:
September 30, 1997 December 31, 1996
Current Noncurrent Current Noncurrent
(millions)
Film costs:
Released, less amortization $ 671 $ 599 $ 544 $ 535
Completed and not released 173 48 168 42
In process and other 45 649 21 704
Library, less amortization - 625 - 664
Programming costs, less
amortization 297 313 319 318
Merchandise 80 - 82 -
Total $1,266 $2,234 $1,134 $2,263
4. 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.
5. LONG-TERM DEBT
In November 1997, TWE and TWE-A/N, together with Time Warner Inc. and
certain of its consolidated subsidiaries, expects to enter into a new,
five-year revolving credit facility (the "1997 Credit Agreement") and
terminate their previously existing bank credit facility (the "Old Credit
Agreement"). This will enable TWE to reduce its aggregate borrowing
availability from $8.3 billion to $7.5 billion, lower interest rates and
refinance approximately $2.2 billion of its outstanding borrowings under
the Old Credit Agreement.
The 1997 Credit Agreement will permit borrowings in an aggregate
amount of up to $7.5 billion, with no scheduled reduction in credit
availability prior to maturity in November 2002. The borrowers under the
1997 Credit Agreement will be TWE, TWE-A/N, certain wholly owned
subsidiaries of Time Warner Inc. and, under certain circumstances, Time
Warner Inc. itself. Borrowings by TWE and TWE-A/N under the 1997 Credit
Agreement will be limited to $7.5 billion in the case of TWE and $2
billion in the case of TWE-A/N, subject in each case to certain
limitations and adjustments, including the aggregate borrowing limit of
$7.5 billion. As a result, the amount that can be borrowed by TWE and
TWE-A/N will be reduced by borrowings made by Time Warner Inc. and its
wholly owned subsidiaries. Such borrowings will bear interest at specific
rates for each of the borrowers (generally equal to LIBOR plus a margin
initially equal to 40 basis points for TWE and 35 basis points for
TWE-A/N) and each borrower will be required to pay a commitment fee on the
unused portion of its commitment (initially equal to .15% per annum for
TWE and .125% per annum for TWE-A/N), which margin and fee will vary based
on the credit rating or financial leverage of TWE and TWE-A/N. Borrowings
may be used for general business purposes and unused credit will be
available to support commercial paper borrowings. The 1997 Credit
Agreement will contain certain covenants generally for each borrower
relating to, among other things, additional indebtedness; liens on assets;
cash flow coverage and leverage ratios; and distributions and other
restricted cash payments or transfers of assets from the borrowers to
their respective partners or affiliates.
An extraordinary loss of approximately $23 million is expected to be
recognized by TWE in the fourth quarter of 1997 in connection with the
write-off of deferred financing costs related to the Old Credit Agreement.
6. 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. TWE 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.
7. PARTNERS' CAPITAL
Changes in partners' capital were as follows:
Nine Months
Ended September 30,
1997 1996
(millions)
Balance at beginning of year $6,574 $6,478
Net income 483 213
Distributions (586) (161)
Allocation of income to Time Warner
General Partners' Senior Capital (88) (87)
Collections on note receivable from U S WEST - 169
Capital contributions - 15
Other (23) 11
Balance at September 30 $6,360 $6,638
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, 1997, TWE accrued $232
million of tax-related distributions and $354 million of stock option
distributions, based on closing prices of Time Warner common stock of
$54.19 at September 30, 1997 and $37.50 at December 31, 1996. During the
nine months ended September 30, 1996, TWE accrued $153 million of
tax-related distributions and $8 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, 1997, TWE paid
distributions to the Time Warner General Partners in the amount of $809
million, consisting of $232 million of tax-related distributions, $42
million of stock option related distributions and a $535 million
distribution to the Time Warner General Partners relating to their Senior
Capital interests. In the nine months ended September 30, 1996, TWE paid
the Time Warner General Partners distributions in the amount of $162
million, consisting of $153 million of tax-related distributions and $9
million of stock option related distributions.
8. SEGMENT INFORMATION
TWE classifies its businesses into three fundamental areas:
Entertainment, consisting principally of interests in filmed
entertainment, television production and television broadcasting; 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 Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(millions)
Revenues
Filmed Entertainment-Warner
Bros. $1,397 $1,443 $3,823 $3,929
Broadcasting-The WB Network 31 23 84 56
Cable Networks-HBO 482 426 1,452 1,301
Cable 1,060 955 3,146 2,863
Intersegment elimination (115) (129) (322) (338)
Total $2,855 $2,718 $8,183 $7,811
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(millions)
Operating Income
Filmed Entertainment-Warner Bros. $ 75 $ 56 $223 $205
Broadcasting-The WB Network (21) (27) (60) (63)
Cable Networks-HBO 102 86 291 245
Cable 179 156 530 449
Total $335 $271 $984 $836
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(millions)
Depreciation of Property, Plant
and Equipment
Filmed Entertainment-Warner Bros. $ 50 $ 51 $131 $113
Broadcasting-The WB Network - - 1 -
Cable Networks-HBO 5 5 15 14
Cable 197 151 545 451
Total $252 $207 $692 $578
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(millions)
Amortization of Intangible
Assets (1)
Filmed Entertainment-Warner Bros. $ 31 $ 32 $ 92 $ 92
Broadcasting-The WB Network - - - -
Cable Networks-HBO - - - -
Cable 78 83 229 234
Total $109 $115 $321 $326
(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.
9. 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.
10. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash flows is as
follows:
Nine Months
Ended September 30,
1997 1996
(millions)
Interest expense $358 $356
Cash payments made for interest 394 391
Cash payments made for income taxes, net 55 52
Noncash capital distributions 354 8
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. 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 financial position and results of operations of ATC 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. ("TW
Companies")*, Turner Broadcasting System, Inc. ("TBS") and their revolving
credit agreements with TW Companies. 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
TW Companies' $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 September 30, 1997 Compared to the Three Months Ended
September 30, 1996
WCI had revenues of $866 million and net income of $11 million for
the three months ended September 30, 1997, compared to revenues of $900
million and net income of $45 million for the three months ended September
30, 1996. EBITDA decreased to $110 million from $133 million.
Depreciation and amortization, including amortization related to the
purchase of WCI, was $90 million in 1997 and $92 million in 1996.
______________________
* On October 10, 1996, Time Warner Inc. ("Time Warner") 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 (now known as Time Warner Companies, Inc., "TW Companies"), and TW
Companies and TBS became separate, wholly owned subsidiaries of the new
parent company. The General Partners' pre-existing ownership interests in
TW Companies and TBS were unaffected by the TBS Transaction.
Operating income decreased to $20 million from $41 million. Despite WCI
having a leading domestic market share for the year (20%), the decline in
revenues principally related to continuing softness in the overexpanded
U.S. retail marketplace, artist delays affecting the timing of releases of
new product 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 $64 million for the
three months ended September 30, 1997, compared to $32 million for the
three months ended September 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 $15 million in the third quarter
of 1997 and 1996. Interest expense decreased to $6 million from $8 million.
There was other expense, net, of $9 million in 1997, compared to $7 million
in 1996, principally because of a decrease in investment related income that
included losses from reductions in the carrying value of certain investments.
Nine Months Ended September 30, 1997 Compared to the Nine Months Ended
September 30, 1996
WCI had revenues of $2.635 billion and net income of $172 million for
the nine months ended September 30, 1997, compared to revenues of $2.759
billion and net income of $98 million for the nine months ended September
30, 1996. EBITDA decreased to $351 million from $427 million.
Depreciation and amortization, including amortization related to the
purchase of WCI, was $267 million in 1997 and $271 million in 1996.
Operating income decreased to $84 million from $156 million. Despite WCI
having a leading domestic market share for the year (20%), the decline in
revenues principally related to continuing softness in the overexpanded
U.S. retail marketplace, artist delays affecting the timing of releases of
new product 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 $324 million for the
nine months ended September 30, 1997, compared to $155 million for the
nine months ended September 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 $15 million of income for the nine months
ended September 30, 1997, compared to $41 million of expense for the nine
months ended September 30, 1996. Interest expense decreased to $17
million from $22 million. There was other income, net, of $32 million in
1997, compared to other expense, net, of $19 million in 1996, principally
because of gains on foreign exchange contracts and lower losses from
reductions in the carrying value of certain investments, offset in part by
costs associated with WCI's receivables securitization program.
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
September 30, 1997
WCI had $9.1 billion of equity at September 30, 1997, compared to
$9.5 billion of equity at December 31, 1996. Cash and equivalents
increased to $164 million at September 30, 1997, compared to $91 million
at December 31, 1996. WCI had no long-term debt due to TW Companies under
its revolving credit agreement at the end of either period.
The total capitalization of ATC and WCCI at September 30, 1997
consisted of equity capital of $2.1 billion and $727 million,
respectively, compared to $2.3 billion 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 distribu-
tions from TWE, as well as availability under each General Partner's
revolving credit agreement with TW Companies, will continue to be
sufficient to satisfy the General Partners' obligations with respect to
their tax sharing agreements with TW Companies for the foreseeable future.
Cash Flows
In the first nine months of 1997, WCI's cash provided by operations
amounted to $176 million and reflected $351 million of EBITDA, $210
million of distributions from TWE, less $10 million of interest payments,
$254 million of income taxes ($151 million of which was paid to TW
Companies under a tax sharing agreement) and $121 million related to a
reduction in working capital requirements, other balance sheet accounts
and noncash items. Cash provided by WCI's operations of $479 million in
the first nine months of 1996 reflected $427 million of EBITDA, $96
million of distributions from TWE and $116 million related to a reduction
in working capital requirements, other balance sheet accounts and noncash
items, less $14 million of interest payments and $146 million of income
taxes ($73 million of which was paid to TW Companies under a tax sharing
agreement).
Cash provided by investing activities was $246 million in the first
nine months of 1997, compared to cash used by investing activities of $127
million in 1996, principally as a result of the receipt of $270 million of
proceeds representing the return of a portion of WCI's Senior Capital
interest in TWE and an increase in investment proceeds.
Cash used by financing activities was $349 million in the first nine
months of 1997, compared to $293 million in the first nine months of 1996.
The use of cash in 1997 principally resulted from the payment of $344 million
of dividends to TW Companies. The use of cash in 1996 principally resulted
from an increase in amounts due from TW Companies.
Management believes that WCI's operating cash flow and borrowing
availability under its revolving credit agreement with TW Companies 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 nine months of 1997, the General
Partners received an aggregate $809 million of distributions from TWE,
consisting of $535 million of Senior Capital distributions (representing
the return of $455 million of contributed capital and the distribution of
$80 million of priority capital return), $232 million of tax-related
distributions and $42 million of stock option related distributions.
During the first nine months of 1996, the General Partners received an
aggregate $162 million of distributions, consisting of $153 million of
tax-related distributions and $9 million of stock option related
distributions. Of such aggregate distributions in the first nine months
of 1997 and 1996, WCI, ATC and WCCI received $480 million and $96 million,
respectively; $329 million and $66 million, respectively; and $116 million
and $23 million, respectively.
TWE GENERAL PARTNERS
CONSOLIDATED BALANCE SHEETS
September 30, 1997
(Unaudited)
WCI ATC WCCI
(millions)
ASSETS
Current assets
Cash and equivalents $ 164 $ - $ -
Receivables, less allowances of
$234 million 801 - -
Inventories 144 - -
Prepaid expenses 671 - -
Total current assets 1,780 - -
Investments in and amounts due to
and from TWE 2,457 1,856 657
Investments in TW Companies 103 63 21
Other investments 1,668 347 107
Music catalogues, contracts and
copyrights 956 - -
Goodwill 3,598 - -
Other assets, primarily property,
plant and equipment 483 - -
Total assets $11,045 $2,266 $ 785
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties payable $ 899 $ - $ -
Other current liabilities 437 1 -
Total current liabilities 1,336 1 -
Long-term liabilities, including $327,
$182 and $58 million due to TW Companies 578 182 58
Shareholders' equity
Common stock 1 1 1
Preferred stock, $.01 par value, 125
thousand shares authorized, 90 thousand
shares outstanding, $90 million
liquidation preference - - -
Paid-in capital 10,465 2,707 967
Retained earnings (accumulated deficit) 259 (32) (23)
10,725 2,676 945
Due from TW Companies, net (1,008) (257) (99)
Reciprocal interest in TW Companies
stock (586) (336) (119)
Total shareholders' equity 9,131 2,083 727
Total liabilities and shareholders'
equity $11,045 $2,266 $ 785
See accompanying notes.
TWE GENERAL PARTNERS
CONSOLIDATED BALANCE SHEETS
December 31, 1996
WCI ATC 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 2,553 1,980 701
Investments in TW Companies 103 64 21
Other investments 1,688 345 105
Music catalogues, contracts and
copyrights 1,035 - -
Goodwill 3,704 - -
Other assets, primarily property,
plant and equipment 537 - -
Total assets $11,399 $2,389 $ 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 $148,
$55 and $13 million due to Time Warner 406 56 13
Shareholders' equity
Common stock 1 1 1
Paid-in capital 10,735 2,893 1,033
Retained earnings (accumulated deficit) 394 27 (3)
11,130 2,921 1,031
Due from TW Companies, net (1,003) (254) (98)
Reciprocal interest in Time Warner
stock (586) (336) (119)
Total shareholders' equity 9,541 2,331 814
Total liabilities and shareholders'
equity $11,399 $2,389 $ 827
See accompanying notes.
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 1997
(Unaudited)
WCI ATC WCCI
(millions)
Revenues (a) $866 $ - $ -
Cost of revenues (a)(b) 573 - -
Selling, general and administra-
tive (a)(b) 273 - -
Operating expenses 846 - -
Business segment operating income 20 - -
Equity in pretax income of TWE (a) 64 44 16
Interest and other, net (a) (15) 9 3
Income before income taxes 69 53 19
Income taxes (a) (58) (28) (11)
Net income $ 11 $ 25 $ 8
__________________
(a) Includes the following income (expenses) resulting from transactions
with Time Warner, TWE or equity investees of the General Partners:
Revenues $ 28 $ - $ -
Cost of revenues (10) - -
Selling, general and administrative 17 - -
Equity in pretax income of TWE (7) - -
Interest and other, net 15 - -
Income taxes (31) (17) (7)
(b) Includes depreciation and
amortization expense of: $ 90 $ - $ -
See accompanying notes.
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 1996
(Unaudited)
WCI ATC WCCI
(millions)
Revenues (a) $900 $ - $ -
Cost of revenues (a)(b) 313 - -
Selling, general and administrative
(a)(b) 546 - -
Operating expenses 859 - -
Business segment operating income 41 - -
Equity in pretax income of TWE (a) 32 23 8
Interest and other, net (a) (15) 7 2
Income before income taxes 58 30 10
Income taxes (a) (13) (14) (6)
Net income $ 45 $ 16 $ 4
__________________________
(a) Includes the following income (expenses) resulting from transactions
with Time Warner, TWE or equity investees of the General Partners:
Revenues $ 45 $ - $ -
Cost of revenues (15) - -
Selling, general and administrative 12 - -
Equity in pretax income of TWE (6) - -
Interest and other, net 8 - -
Income taxes 5 (10) (5)
(b) Includes depreciation and
amortization expense of: $ 92 $ - $ -
See accompanying notes.
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 1997
(Unaudited)
WCI ATC WCCI
(millions)
Revenues (a) $2,635 $ - $ -
Cost of revenues (a)(b) 1,724 - -
Selling, general and administrative
(a)(b) 827 - -
Operating expenses 2,551 - -
Business segment operating income 84 - -
Equity in pretax income of TWE (a) 324 223 79
Interest and other, net (a) 15 20 7
Income before income taxes 423 243 86
Income taxes (a) (251) (116) (41)
Net income $ 172 $127 $ 45
_______________________
(a) Includes the following income (expenses) resulting from transactions
with Time Warner, TWE or equity investees of the General Partners:
Revenues $ 93 $ - $ -
Cost of revenues (30) - -
Selling, general and administrative 42 - -
Equity in pretax income of TWE (12) - -
Interest and other, net 49 - -
Income taxes (151) (90) (32)
(b) Includes depreciation and amortization
expense of: $267 $ - $ -
See accompanying notes.
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 1996
(Unaudited)
WCI ATC WCCI
(millions)
Revenues (a) $2,759 $ - $ -
Cost of revenues (a)(b) 1,523 - -
Selling, general and administrative
(a)(b) 1,080 - -
Operating expenses 2,603 - -
Business segment operating income 156 - -
Equity in pretax income of TWE (a) 155 107 38
Interest and other, net (a) (41) 17 6
Income before income taxes 270 124 44
Income taxes (a) (172) (66) (24)
Net income $ 98 $ 58 $ 20
_______________________
(a) Includes the following income (expense) resulting from transactions
with Time Warner, TWE or equity investees of the General Partners:
Revenues $ 144 $ - $ -
Cost of revenues (42) - -
Selling, general and administrative 36 - -
Equity in pretax income of TWE (13) - -
Interest and other, net 36 - -
Income taxes (73) (46) (17)
(b) Includes depreciation and
amortization expense of: $ 271 $ - $ -
See accompanying notes.
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1997
(Unaudited)
WCI ATC WCCI
(millions)
OPERATIONS
Net income $ 172 $ 127 $ 45
Adjustments for noncash and
nonoperating items:
Depreciation and amortization 267 - -
Excess of equity in pretax income
of TWE over distributions (114) (79) (28)
Equity in loss of other investee
companies, net of distributions 17 - -
Changes in operating assets and
liabilities (166) 5 2
Cash provided by operations 176 53 19
INVESTING ACTIVITIES
Investments and acquisitions (54) - -
Capital expenditures (78) - -
Investment proceeds 108 - -
Proceeds received from return of
Senior Capital contributed to TWE 270 185 65
Cash provided by investing activities 246 185 65
FINANCING ACTIVITIES
Dividends (344) (235) (83)
Increase in amounts due from
TW Companies, net (5) (3) (1)
Cash used by financing activities (349) (238) (84)
INCREASE IN CASH AND EQUIVALENTS 73 - -
CASH AND EQUIVALENTS AT BEGINNING OF
PERIOD 91 - -
CASH AND EQUIVALENTS AT END OF PERIOD $ 164 $ - $ -
See accompanying notes.
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1996
(Unaudited)
WCI ATC WCCI
(millions)
OPERATIONS
Net income $ 98 $ 58 $ 20
Adjustments for noncash and
nonoperating items:
Depreciation and amortization 271 - -
Excess of equity in pretax income of
TWE over distributions (59) (41) (15)
Equity in income of other investee
companies, net of distributions (21) - -
Changes in operating assets and
liabilities 190 2 2
Cash provided by operations 479 19 7
INVESTING ACTIVITIES
Investments and acquisitions (45) - -
Capital expenditures (89) - -
Investment proceeds 7 - -
Cash used by investing activities (127) - -
FINANCING ACTIVITIES
Dividends (5) (4) (1)
Increase in amounts due from
TW Companies, net (288) (15) (6)
Cash used by financing activities (293) (19) (7)
INCREASE IN CASH AND EQUIVALENTS 59 - -
CASH AND EQUIVALENTS AT BEGINNING OF
PERIOD 106 - -
CASH AND EQUIVALENTS AT END OF PERIOD $165 $ - $ -
See accompanying notes.
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
On June 30, 1992, thirteen direct or indirect subsidiaries of Time
Warner Companies, Inc. ("TW Companies")* contributed the assets and
liabilities or the rights to the cash flows of substantially all of TW
Companies' 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).
On September 30, 1997, one of the original general partners, Time Warner
Operations Inc. ("TWOI"), was merged into another original general
partner, Warner Communications Inc. (the "TWOI Merger"). After the TWOI
Merger, ten of the thirteen original general partners have now been merged
or dissolved into the other three. Warner Communications Inc. ("WCI", a
subsidiary of TW Companies), American Television and Communications
Corporation ("ATC," a subsidiary of TW Companies) and Warner Cable
Communications Inc. ("WCCI," a consolidated subsidiary of WCI) are the
three remaining general partners of TWE. They have succeeded to the
general partnership interests and have assumed the General Partner
Guarantees of the ten former general partners. WCI, ATC, WCCI 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.
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
___________________
* On October 10, 1996, Time Warner Inc. ("Time Warner") 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
(now known as Time Warner Companies, Inc. "TW Companies"), and TW Companies
and TBS became separate, wholly owned subsidiaries of the new parent
company. The General Partners' pre-existing ownership interests in TW
Companies and TBS were unaffected by the TBS Transaction.
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 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.
In 1997, WCI consummated certain mergers with other entities that are
also under the common control of Time Warner, consisting of the TWOI
Merger and the acquisition of two wholly owned subsidiaries of TBS that
conduct certain of TBS's cable television programming operations in the
United Kingdom (the "TBS UK Merger", see Note 2). The TWOI Merger and the
TBS UK Merger have each been accounted for as a merger of entities under
common control, similar to the pooling-of-interest method of accounting
for business combinations. Accordingly, the consolidated financial
statements of WCI have been restated to reflect the TWOI Merger for all
periods presented herein and to reflect the TBS UK Merger effective as of
January 1, 1997. The financial position, results of operations and cash
flows of the companies acquired by WCI in the TBS UK Merger for the period
from October 10, 1996 (the date on which such companies were acquired by
Time Warner) to December 31, 1996 are not material to WCI's consolidated
financial statements.
In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income" ("FAS 130"), effective for fiscal years beginning
after December 15, 1997. The new rules establish standards for the
reporting of comprehensive income and its components in financial
statements. Comprehensive income consists of net income and other gains
and losses affecting partnership capital that, under generally accepted
accounting principles, are excluded from net income, such as unrealized
gains and losses on marketable equity investments and foreign currency
translation gains and losses. The General Partners do not expect that
the adoption of FAS 130 will have a material effect on their respective
financial statements.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("FAS 131"), effective
for fiscal years beginning after December 15, 1997. The new rules
establish revised standards for public companies relating to the reporting
of financial and descriptive information about their operating segments in
financial statements. The General Partners do not expect that the
adoption of FAS 131 will have a material effect on their respective
financial statements.
2. TBS UK MERGER
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 an $80 annual dividend per share, payable in
cash on a quarterly basis. The TBS UK Merger 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
September 30, 1997 and December 31, 1996 is as follows (millions):
September 30, 1997 WCI ATC WCCI
Investment in TWE $2,418 $1,691 $599
Stock option related distributions
due from TWE 240 165 58
Other net liabilities due to TWE,
principally related to
home video distribution (201) - -
Total $2,457 $1,856 $657
December 31, 1996 WCI ATC WCCI
Investment in TWE $2,786 $1,942 $688
Stock option related distributions
due from TWE 55 38 13
Other net liabilities due to TWE,
principally related to
home video distribution (288) - -
Total $2,553 $1,980 $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. TW Companies 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 Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(million)
Operating Statement Information
Revenues $2,855 $2,718 $8,183 $7,811
Depreciation and amortization 361 322 1,013 904
Business segment operating income 335 271 984 836
Interest and other, net (1) 145 147 155 368
Minority interest 64 52 228 154
Income before income taxes 108 55 547 262
Net income 81 45 483 213
__________________
(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.
Nine Months
Ended September 30,
1997 1996
(millions)
Cash Flow Information
Cash provided by operations $ 918 $1,322
Capital expenditures (1,117) (1,228)
Investments and acquisitions (104) (86)
Investment proceeds 444 450
Borrowings 905 190
Debt repayments (323) (697)
Issuance of preferred stock of subsidiary 243 -
Capital distributions (809) (162)
Collections on note receivable from U S WEST - 169
Other financing activities, net (77) 42
Increase in cash and equivalents 80 -
September 30, December 31,
1997 1996
(millions)
Balance Sheet Information
Cash and equivalents $ 296 $ 216
Total current assets 3,405 3,146
Total assets 20,345 19,973
Total current liabilities 3,723 4,075
Long-term debt 6,257 5,676
Minority interests 1,173 1,020
Preferred stock of subsidiary 237 -
General Partners' Senior Capital 1,096 1,543
Partners' capital 6,360 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 September
30, 1997 and December 31, 1996, the General Partners had recorded $405
million and $93 million, respectively, of stock option related
distributions due from TWE, based on closing prices of Time Warner common
stock of $54.19 and $37.50, respectively. The General Partners are paid
when the options are exercised. The General Partners also receive
tax-related distributions from TWE on a current basis. During the nine
months ended September 30, 1997, the General Partners received
distributions from TWE in the amount of $809 million, consisting of $535
million of Senior Capital distributions (representing the return of $455
million of contributed capital and the distribution of $80 million of
priority capital return), $232 million of tax-related distributions and
$42 million of stock option related distributions. During the nine months
ended September 30, 1996, the 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. Of such aggregate distributions in 1997 and 1996, WCI
received $480 million and $96 million, respectively; ATC received $329
million and $66 million, respectively; and WCCI received $116 million and
$23 million, respectively.
4. GENERAL PARTNER GUARANTEES
Each General Partner has guaranteed a pro rata portion of
approximately $6 billion of TWE's debt and accrued interest at September
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 September 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 44.88 $2,706 59.27 $3,573
ATC 40.73 2,456 40.73 2,456
WCCI, a subsidiary
of WCI 14.39 867 14.39 867
Total 100.00 $6,029 * *
* Adds to more than 100% and $6.029 billion, respectively, because of the
parent-subsidiary relationship between WCI and WCCI.
5. SHAREHOLDERS' EQUITY
Changes in shareholders' equity for WCI are as follows:
Nine Months
Ended September 30,
1997 1996
(millions)
Balance at beginning of year $9,541 $9,888
Net income 172 98
Increase in stock option distribution
liability to TW Companies (210) (5)
Transfers to TW Companies, net (5) (288)
Dividends (319) -
Unrealized gains (losses) of certain marketable
equity investments (10) 65
Other (38) 11
Balance at September 30 $9,131 $9,769
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 WCCI
Nine Months Ended September 30, 1997
Cash payments made for interest $ 10 $ - $ -
Cash payments made for income taxes,
net 254 90 32
Tax-related distributions
received from TWE 138 94 33
WCI ATC WCCI
Nine Months Ended September 30, 1996
Interest expense $ 22 $ 1 $ -
Cash payments made for interest 14 - -
Cash payments made for income taxes, net 146 46 17
Tax-related distributions received from
TWE 91 62 22
Part II. Other Information
Item 1. Legal Proceedings.
On September 23, 1997, Warner Communications Inc. was served by the
Federal Trade Commission with a subpoena duces tecum calling for the
production of documents in connection with a nonpublic investigation into
whether the prerecorded music distribution companies and others may be
engaging or may have engaged in any unfair methods of competition through
the adoption, implementation and maintenance of cooperative advertising
programs that included minimum advertised price provisions.
On September 30, 1997, a purported class action was commenced in the
United States District Court for the Central District of California
entitled Chandu Dani d/b/a Compact Disc Warehouse and Record Revolution v.
EMI Music Distribution, Sony Music Entertainment, Inc., Warner Elektra
Atlantic Corporation, UNI Distribution Corporation, Bertelsmann Music
Group, Inc. and PolyGram Group Distribution, Inc., No. 97- 7226 (JGD).
The plaintiffs purporting to represent a class of direct purchasers of
recorded music compact discs (CDs), allege that Warner Elektra Atlantic
Corporation, along with five other distributors of CDs, violated the
federal and state antitrust laws by engaging in a conspiracy to fix the
prices of CDs, and seek an injunction and treble damages.
Reference is made to the litigation entitled Samuel D. Moore, et al.
v. American Federation of Television and Radio Artists, et al. on page
I-37 of TWE's Annual Report on Form 10-K for the year ended December 31,
1996. On August 14, 1997, the Court granted the record company
defendants' motion to dismiss all of the newly-added ERISA claims against
them, denied the record company defendants' motion to dismiss newly-added
state law claims for breach of contract and fraud, and denied the record
company defendants motion for summary judgment on the RICO claims against
them. The Court also denied a motion by the AFTRA Health and Retirement
Fund and the Fund Trustees to dismiss the claims asserted against them.
Plaintiffs' motion for class certification is currently pending before the
Court.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as a part of this report and such Exhibit Index
is incorporated herein by reference.
(b) Reports on Form 8-K.
No Current Report on Form 8-K was filed by TWE during the
quarter ended September 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
Title: Senior Vice President and
Chief Financial Officer
American Television and Communications Corporation
Warner Cable Communications Inc.
Warner Communications Inc.
By: /s/ Richard J. Bressler
Name: Richard J. Bressler
Title: Senior Vice President and
Chief Financial Officer
Dated: November 12, 1997
EXHIBIT INDEX
Pursuant to Item 601 of Regulations S-K
Exhibit No. Description of Exhibit
10 Amended and Restated Transaction Agreement, dated as of October
27, 1997 among Advance Publications, Inc., Newhouse Broadcasting
Corporation, Advance/Newhouse Partnership, TWE, TW Holding Co.
and Time Warner Entertainment-Advance/Newhouse Partnership (which
is incorporated herein by reference to Exhibit 99(c) to Time
Warner's Current Report on Form 8-K dated October 27, 1997).
27 Financial Data Schedule.