- - --------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
May 23, 1995
------------------------
U S WEST, INC.
(Exact Name of Registrant as Specified in its Charter)
COLORADO 1-8611 84-0926774
(State or Other (Commission (I.R.S. Employer
Jurisdiction File Number) Identification
of Incorporation) No.)
7800 EAST ORCHARD ROAD, ENGLEWOOD, COLORADO 80111
(Address of principal executive offices) (zip code)
(303) 793-6500
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name or former address, if changed since last report)
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ITEM 5. OTHER EVENTS.
A. TIME WARNER ENTERTAINMENT COMPANY, L.P.
A subsidiary of U S WEST, Inc. ("U S WEST") holds a 25.51 percent pro rata
priority capital and residual equity interest in Time Warner Entertainment
Company, L.P. ("TWE"). Set forth below are the consolidated financial statements
of TWE for the years ended December 31, 1994, 1993 and 1992 and for the three
month periods ended March 31, 1995 and 1994.
Report of Independent Auditors......................................................... 2
Consolidated Financial Statements for the Years Ended December 31, 1994, 1993 and 1992
Consolidated Balance Sheet........................................................... 3
Consolidated Statement of Operations................................................. 4
Consolidated Statement of Cash Flows................................................. 5
Consolidated Statement of Partnership Capital........................................ 6
Notes to Consolidated Financial Statements........................................... 7
Consolidated Financial Statements for the Three Month Periods Ended March 31, 1995 and
1994..................................................................................
Consolidated Balance Sheet........................................................... 22
Consolidated Statement of Operations................................................. 23
Consolidated Statement of Cash Flows................................................. 24
Notes to Consolidated Financial Statements........................................... 25
1
REPORT OF INDEPENDENT AUDITORS
THE PARTNERS OF
TIME WARNER ENTERTAINMENT COMPANY, L.P.
We have audited the accompanying consolidated balance sheet of Time Warner
Entertainment Company, L.P. ("TWE") as of December 31, 1994 and 1993, and the
related consolidated statements of operations, cash flows and partnership
capital for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of TWE's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of TWE at December
31, 1994 and 1993, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
New York, New York
February 7, 1995
2
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
(MILLIONS)
ASSETS
1994 1993
--------- ---------
CURRENT ASSETS
Cash and equivalents....................................................................... $ 1,071 $ 1,338
Receivables, including $266 and $257 due from Time Warner, less allowances of $306 and
$257...................................................................................... 1,426 1,313
Inventories................................................................................ 956 980
Prepaid expenses........................................................................... 120 114
--------- ---------
Total current assets....................................................................... 3,573 3,745
Noncurrent inventories..................................................................... 1,807 1,760
Loan receivable from Time Warner........................................................... 400 --
Investments................................................................................ 666 540
Land and buildings......................................................................... 841 680
Cable television equipment................................................................. 3,619 3,044
Furniture, fixtures and other equipment.................................................... 1,588 1,319
--------- ---------
6,048 5,043
Less accumulated depreciation.............................................................. (2,264) (1,943)
--------- ---------
Property, plant and equipment.............................................................. 3,784 3,100
Goodwill................................................................................... 4,433 4,560
Cable television franchises................................................................ 3,236 3,510
Other assets............................................................................... 763 748
--------- ---------
Total assets............................................................................... $ 18,662 $ 17,963
--------- ---------
--------- ---------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable........................................................................... $ 514 $ 366
Participations and programming costs....................................................... 857 770
Other current liabilities, including $334 and $108 of distributions due to Time Warner..... 1,486 1,129
--------- ---------
Total current liabilities.................................................................. 2,857 2,265
Long-term debt............................................................................. 7,160 7,125
Other long-term liabilities, including $89 and $439 of distributions due to Time Warner.... 749 1,037
Time Warner General Partners' senior capital............................................... 1,663 1,536
PARTNERS' CAPITAL
Contributed capital........................................................................ 7,398 7,398
Undistributed partnership earnings (deficit)............................................... (394) (393)
Note receivable from U S WEST.............................................................. (771) (1,005)
--------- ---------
Total partners' capital.................................................................... 6,233 6,000
--------- ---------
Total liabilities and partners' capital.................................................... $ 18,662 $ 17,963
--------- ---------
--------- ---------
See accompanying notes.
3
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
(MILLIONS)
Restated
1994 1993 1992(a) 1992
--------- --------- --------- ---------
Revenues (b)............................................................ $ 8,460 $ 7,946 $ 7,251 $ 6,761
--------- --------- --------- ---------
Cost of revenues (b)(c)................................................. 5,976 5,679 5,274 4,837
Selling, general and administrative (b)(c).............................. 1,636 1,384 1,141 1,129
--------- --------- --------- ---------
Operating expenses...................................................... 7,612 7,063 6,415 5,966
--------- --------- --------- ---------
Business segment operating income....................................... 848 883 836 795
Interest and other, net (b)............................................. (587) (551) (563) (525)
Corporate services (b).................................................. (60) (60) (60) (60)
--------- --------- --------- ---------
Income before income taxes.............................................. 201 272 213 210
Income taxes............................................................ (40) (64) (53) (50)
--------- --------- --------- ---------
Income before extraordinary item........................................ 161 208 160 160
Extraordinary loss on retirement of debt, net of $7 million income tax
benefit................................................................ -- (10) -- --
--------- --------- --------- ---------
Net income.............................................................. $ 161 $ 198 $ 160 $ 160
--------- --------- --------- ---------
--------- --------- --------- ---------
<FN>
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(a) The 1994 and 1993 financial statements reflect the consolidation of Six
Flags effective January 1, 1993 as a result of the 1993 Six Flags
acquisition. The 1992 historical financial statements have not been
changed; however, financial statements for 1992 retroactively reflecting
the consolidation are presented as supplementary information under the
column heading "restated" to facilitate comparative analysis (Notes 1 and
3).
(b) Includes the following income (expenses) resulting from transactions with
the partners of TWE (Note 12):
Selling, general and administrative............... $ (97) $ (65) $ (122) $ (122)
Interest and other, net........................... 20 2 (204) (204)
Corporate services................................ (60) (60) (60) (60)
In addition, includes the following income (expenses) resulting from
transactions with equity investees of TWE or Time Warner (Note 12):
Revenues.......................................... $ 112 $ 67 $ 41 $ 41
Cost of revenues.................................. (70) (88) (34) (34)
Selling, general and administrative............... 25 27 30 30
Interest and other, net........................... 1 1 5 5
(c) Includes depreciation and amortization expense of:
$ 943 $ 902 $ 851 $ 782
--------- --------- --------- ---------
--------- --------- --------- ---------
See accompanying notes.
4
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(MILLIONS)
Restated
1994 1993 1992(a) 1992
--------- --------- --------- ---------
OPERATIONS
Net income.............................................................. $ 161 $ 198 $ 160 $ 160
Adjustments for noncash and nonoperating items:
Depreciation and amortization........................................... 943 902 851 782
Equity in (income) losses of investee companies, net of distributions... 58 (21) 48 53
Changes in operating assets and liabilities:
Receivables........................................................... (192) 1 (272) (272)
Inventories........................................................... (76) (158) (105) (104)
Accounts payable and other liabilities................................ 400 260 146 137
Other balance sheet changes........................................... 2 89 36 25
--------- --------- --------- ---------
Cash provided by operations............................................. 1,296 1,271 864 781
--------- --------- --------- ---------
INVESTING ACTIVITIES
Investments and acquisitions............................................ (156) (347) (382) (279)
Capital expenditures.................................................... (1,153) (613) (423) (402)
Loan to Time Warner..................................................... (400) -- -- --
Investment proceeds..................................................... 50 180 50 50
--------- --------- --------- ---------
Cash used by investing activities....................................... (1,659) (780) (755) (631)
--------- --------- --------- ---------
FINANCING ACTIVITIES
Increase (decrease) in debt............................................. 32 (659) (791) (837)
Capital contributions, including collections on note receivable from U S
WEST................................................................... 234 1,548 1,012 1,012
Capital distributions................................................... (170) (33) (183) (183)
Other, principally financing costs prior to 1994........................ -- (45) (123) (129)
--------- --------- --------- ---------
Cash provided (used) by financing activities............................ 96 811 (85) (137)
--------- --------- --------- ---------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS............................. $ (267) $ 1,302 $ 24 $ 13
--------- --------- --------- ---------
--------- --------- --------- ---------
<FN>
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(a) The 1994 and 1993 financial statements reflect the consolidation of Six
Flags effective January 1, 1993 as a result of the 1993 Six Flags
acquisition. The 1992 historical financial statements have not been
changed; however, financial statements for 1992 retroactively reflecting
the consolidation are presented as supplementary information under the
column heading "restated" to facilitate comparative analysis (Notes 1 and
3).
See accompanying notes.
5
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
(MILLIONS)
PARTNERS' CAPITAL
---------------------------------------------------
GENERAL UNDISTRIBUTED
PARTNERS' PARTNERSHIP TOTAL
SENIOR CONTRIBUTED EARNINGS U S WEST PARTNERS'
CAPITAL CAPITAL (DEFICIT) NOTE CAPITAL
--------- ------------ ------------- ----------- ---------
BALANCE AT DECEMBER 31, 1991....................... $ -- $ 6,717 $ -- $ -- $ 6,717
Net income before TWE Capitalization............... 97 97
Distributions...................................... (259) (259)
Pushdown of cost to acquire ATC minority
interest.......................................... 1,431 1,431
Other.............................................. 1 1
TWE Capitalization:
Contributions.................................... 1,000 1,000
Assumption of additional debt.................... (2,545) (2,545)
--------- ------------ ------------- ----------- ---------
BALANCE AT JUNE 30, 1992........................... -- 6,442 -- -- 6,442
Net income after TWE Capitalization................ 63 63
Contributions (a).................................. 12 12
Distributions (a).................................. (41) (41)
Other.............................................. (3) (36) (39)
--------- ------------ ------------- ----------- ---------
BALANCE AT DECEMBER 31, 1992....................... -- 6,451 (14) -- 6,437
Net income......................................... 198 198
Admission of USW:
Contributions.................................... 2,553 (1,021) 1,532
Time Warner General Partners' senior capital..... 1,501 (1,501) (1,501)
Distributions (a).................................. (95) (539) (634)
Allocation of income............................... 35 (35) (35)
Collections........................................ 16 16
Other.............................................. (10) (3) (13)
--------- ------------ ------------- ----------- ---------
BALANCE AT DECEMBER 31, 1993....................... 1,536 7,398 (393) (1,005) 6,000
Net income......................................... 161 161
Distributions (a).................................. (46) (46)
Allocation of income............................... 127 (127) (127)
Collections........................................ 234 234
Other.............................................. 11 11
--------- ------------ ------------- ----------- ---------
BALANCE AT DECEMBER 31, 1994....................... $ 1,663 $ 7,398 $ (394) $ (771) $ 6,233
--------- ------------ ------------- ----------- ---------
--------- ------------ ------------- ----------- ---------
<FN>
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(a) Distributions in 1994, 1993 and 1992 included $173 million, $252 million
and $24 million, respectively, of tax-related distributions, and $50
million and $13 million of cash distributions to the Time Warner Service
Partnerships in 1994 and 1993, respectively. Stock option distributions of
$274 million and $17 million were accrued in 1993 and 1992, respectively,
because of an increase in the market price of Time Warner common stock and
$177 million of such previously-accrued stock option distributions were
reversed in 1994 because the market price of Time Warner common stock
declined during the period. In addition, Time Warner General Partners'
junior priority capital was reduced in 1993 for the $95 million historical
cost of the Time Warner Service Partnership Assets distributed to the Time
Warner General Partners. A $12 million contribution was made by the Time
Warner General Partners in 1992 after the TWE Capitalization pursuant to
the net worth adjustment provision of the partnership agreement. (Note 7.)
See accompanying notes.
6
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Time Warner Entertainment Company, L.P., a Delaware limited partnership
("TWE"), was capitalized on June 30, 1992 (the "TWE Capitalization") to own and
operate substantially all of the Filmed Entertainment, Programming-HBO and Cable
businesses previously owned by subsidiaries of Time Warner Inc. ("Time Warner").
At December 31, 1994, the general partners of TWE, subsidiaries of Time Warner
("Time Warner General Partners"), together directly and indirectly held 63.27%
pro rata priority capital and residual equity partnership interests in TWE, and
certain priority capital interests senior and junior to the pro rata priority
capital interests, which they received for the net assets, or the rights to cash
flows, they contributed to the partnership at the TWE Capitalization; and
subsidiaries of U S WEST, Inc. ("U S WEST"), ITOCHU Corporation ("ITOCHU") and
Toshiba Corporation ("Toshiba" and collectively, the "Limited Partners"), held
25.51%, 5.61% and 5.61% pro rata priority capital and residual equity
partnership interests, respectively. ITOCHU and Toshiba each contributed $500
million of cash at the TWE Capitalization for their limited partnership
interests. U S WEST contributed $1.532 billion of cash and a $1.021 billion 4.4%
note ("U S WEST Note") on September 15, 1993 for its limited partnership
interests.
In lieu of contributing certain assets (the "Beneficial Assets"), the Time
Warner General Partners assigned to TWE the net cash flow generated by such
assets or agreed to pay an amount equal to the net cash flow generated by such
assets. TWE has the right to receive from the Time Warner General Partners, at
the limited partners' option, an amount equal to the fair value of the
Beneficial Assets, net of associated liabilities, that have not been contributed
to TWE by June 30, 1996, rather than continuing to receive the net cash flow, or
an amount equal to the net cash flow, generated by such Beneficial Assets. The
consolidated financial statements include the assets and liabilities of the
businesses contributed by the Time Warner General Partners, including the
Beneficial Assets and associated liabilities, all at Time Warner's historical
cost basis of accounting.
Time Warner's $14 billion acquisition of Warner Communications Inc. ("WCI")
as of December 31, 1989, and $1.3 billion acquisition of the minority interest
in American Television and Communications Corporation ("ATC") on June 26, 1992
were accounted for by the purchase method of accounting. WCI subsequently
contributed filmed entertainment and cable assets to TWE, and ATC subsequently
contributed its cable assets. The financial statements of TWE reflect an
allocable portion of Time Warner's cost to acquire WCI and the ATC minority
interest in accordance with the pushdown method of accounting.
BASIS OF CONSOLIDATION AND ACCOUNTING FOR INVESTMENTS
The consolidated financial statements include 100% of the assets,
liabilities, revenues, expenses, income, loss and cash flows of TWE and all
companies in which TWE has a controlling voting interest ("subsidiaries"), as if
TWE and its subsidiaries were a single company. Significant intercompany
accounts and transactions between the consolidated companies have been
eliminated. Significant accounts and transactions between TWE and its partners
and affiliates are disclosed as related party transactions (Note 12).
Investments in companies in which TWE has significant influence but less
than a controlling voting interest are accounted for using the equity method.
Under the equity method, only TWE's investment in and amounts due to and from
the equity investee are included in the consolidated balance sheet, only TWE's
share of the investee's earnings is included in the consolidated operating
results, and only the dividends, cash distributions, loans or other cash
received from the investee, less any additional cash investment, loan repayments
or other cash paid to the investee, are included in the consolidated cash flows.
7
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In accordance with Financial Accounting Standards Board ("FASB") Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
investments in companies in which TWE does not have the controlling interest or
an ownership and voting interest so large as to exert significant influence are
accounted for at market value if the investments are publicly traded and there
are no resale restrictions, or at cost, if the sale of a publicly-traded
investment is restricted or if the investment is not publicly traded. Unrealized
gains and losses on investments accounted for at market value are reported in
partners' capital until the investment is sold, at which time, the realized gain
or loss is included in income. Dividends and other distributions of earnings
from both market value and cost method investments are included in income when
declared.
Six Flags Entertainment Corporation ("Six Flags") was consolidated effective
January 1, 1993 as a result of the increase of TWE's ownership and voting
control in Six Flags from 50% to 100% in September 1993 (Note 3). The 1992
historical financial statements of TWE were not changed; accordingly, they
include Six Flags on the equity method. However, financial statements for 1992
retroactively reflecting the consolidation also are presented under the caption
"restated" to facilitate comparative analysis. Certain other reclassifications
have been made to the prior years' financial statements to conform to the 1994
presentation.
REVENUES AND COSTS
Feature films are produced or acquired for initial exhibition in theaters
followed by distribution in the home video, pay cable, basic cable, broadcast
network and syndicated television markets. Generally, distribution to the
theatrical, home video and pay cable markets (the primary markets) is completed
within eighteen months of initial release. Theatrical revenues are recognized as
the films are exhibited. Home video revenues, less a provision for returns, are
recognized when the home videos are sold. Revenues from cable and broadcast
television distribution are recognized when the films are available to telecast.
Television films and series are initially produced for the networks or first-run
television syndication (the primary markets) and may be subsequently licensed to
foreign or other domestic television markets. Revenues from television license
agreements are recognized when the films or series are available to telecast,
except for barter agreements where the recognition of revenue is deferred until
the related advertisements are telecast.
Inventories of theatrical and television product are stated at the lower of
amortized cost or net realizable value. Cost includes direct production and
acquisition costs, production overhead and capitalized interest. A portion of
the cost to acquire WCI was allocated to its theatrical and television product
as of December 31, 1989, including an allocation to product that had been
exhibited at least once in all markets ("Library"). Individual films and series
are amortized, and the related participations and residuals are accrued, based
on the proportion that current revenues from the film or series bear to an
estimate of total revenues anticipated from all markets. These estimates are
revised periodically and losses, if any, are provided in full. WCI acquisition
cost allocated to the Library is amortized on a straight-line basis over twenty
years. Current film inventories include the unamortized cost of completed
feature films allocated to the primary markets, television films and series in
production pursuant to a contract of sale, film rights acquired for the home
video market and advances pursuant to agreements to distribute third-party films
in the primary markets. Noncurrent film inventories include the unamortized cost
of completed theatrical and television films allocated to the secondary markets,
theatrical films in production and WCI acquisition cost allocated to the
Library.
A significant portion of cable system and cable programming revenues are
derived from subscriber fees, which are recorded as revenue in the period the
service is provided. The right to exhibit feature films and other programming on
pay cable services during one or more availability periods
8
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
("programming costs") generally is recorded when the programming is initially
available for exhibition, and is allocated to the appropriate availability
periods and amortized as the programming is exhibited.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions to cable
property, plant and equipment generally include material, labor, overhead,
interest and certain start-up costs incurred in developing new franchises.
Depreciation is provided generally on the straight-line method over useful lives
ranging up to twenty-five years for buildings and improvements and up to fifteen
years for furniture, fixtures and cable television and other equipment.
INTANGIBLE ASSETS
Intangible assets are recorded when the cost of acquired companies exceeds
the fair value of their tangible assets. Generally accepted accounting
principles require that all intangible assets be amortized over no more than a
forty-year period. Amortization of goodwill amounted to $129 million in 1994,
$132 million in 1993 and $115 million ($124 million on a restated basis) in
1992; amortization of cable television franchises amounted to $208 million, $222
million and $194 million, respectively; and amortization of other intangible
assets amounted to $141 million, $122 million and $108 million ($129 million on
a restated basis), respectively. Accumulated amortization of intangible assets
at December 31, 1994 and 1993 amounted to $1.867 billion and $1.438 billion,
respectively.
FOREIGN CURRENCY
The financial position and operating results of substantially all of the
foreign operations of TWE are consolidated using the local currency as the
functional currency. Local currency assets and liabilities are translated at the
rates of exchange on the balance sheet date, and local currency revenues and
expenses are translated at average rates of exchange during the period.
Resulting translation gains or losses, which have not been material, are
included in partners' capital. Foreign currency transaction gains and losses,
which have not been material, are included in operating results.
Foreign exchange contracts are used primarily to hedge the risk that
unremitted or future license fees owed to TWE domestic companies for the sale or
anticipated sale of U.S. copyrighted products abroad may be adversely affected
by changes in exchange rates. TWE is reimbursed by or reimburses Time Warner for
Time Warner contract gains and losses related to TWE's exposure. At December 31,
1994, Time Warner had contracts for the sale of $551 million and the purchase of
$109 million of foreign currencies at fixed rates and maturities of three months
or less. Of Time Warner's $442 million net sale contract position, $188 million
related to TWE's exposure, primarily Japanese yen (41% of net contract position
related to TWE), French francs (18%), German marks (12%) and Canadian dollars
(11%), compared to a net sale contract position of $226 million of foreign
currencies at December 31, 1993. Unrealized gains or losses are recorded in
income; accordingly, the carrying value of foreign exchange contracts
approximates market value. TWE had $20 million of net losses on foreign exchange
contracts during 1994, which were or are expected to be offset by corresponding
increases in the dollar value of foreign currency license fee payments that have
been or are anticipated to be received from the sale of U.S. copyrighted
products abroad. Time Warner places foreign currency contracts with a number of
major financial institutions in order to minimize credit risk.
INCOME TAXES
As a Delaware limited partnership, TWE is not subject to U.S. federal and
state income taxation. However, certain of TWE's operations are conducted by
subsidiary corporations that are subject to domestic or foreign taxation. Income
taxes are provided on the income of such corporations using the
9
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
liability method of accounting for income taxes prescribed by FASB Statement No.
109, "Accounting for Income Taxes." The consolidated financial statements for
periods prior to the TWE Capitalization include, for comparative purposes, the
income and withholding tax consequences of those TWE operations subject to
domestic or foreign taxation, as determined on a stand-alone basis consistent
with the liability method of accounting for income taxes.
INTEREST RATE SWAP CONTRACTS
TWE used interest rate swap contracts in 1992 and prior years to adjust the
proportion of total debt that was subject to changes in short-term interest
rates and the proportion that was subject to fixed rates. There were no material
amounts of contracts outstanding during the years ended December 31, 1994 and
1993. Under the previous interest rate swap contracts, TWE had agreed to pay an
amount equal to a specified fixed-rate of interest times a notional principal
amount, and to receive in return an amount equal to a specified floating-rate of
interest times the same notional principal amount. The notional amounts of the
contracts were not exchanged. No other cash payments were made unless the
contracts were terminated prior to maturity, in which case the amount paid or
received in settlement was equal to the present value, at current rates of
interest, of the remaining obligations to exchange payments under the terms of
the contract. The interest rate swap contracts were entered into with a number
of major financial institutions in order to minimize credit risk.
The net amounts paid or payable, or received or receivable, through the end
of the accounting period was included in interest expense. Gains or losses on
the termination of contracts were deferred and amortized to income over the
remaining average life of the terminated contracts.
2. TWE -- ADVANCE/NEWHOUSE PARTNERSHIP
In September 1994, TWE agreed to form a cable television joint venture with
subsidiaries of Advance Publications, Inc. and Newhouse Broadcasting Corporation
("Advance/Newhouse") to which Advance/ Newhouse will contribute cable television
systems serving 1.4 million subscribers and related assets, and TWE will
contribute cable television systems (or interests therein) serving 2.8 million
subscribers and related assets. TWE will own a two-thirds equity interest in the
TWE-Advance/ Newhouse Partnership and be the managing partner. Advance/Newhouse
will own a one-third equity interest in the partnership. Advance/Newhouse can
require TWE to purchase its equity interest for fair market value at specified
intervals following the death of both of its principal shareholders. Beginning
in the third year, either partner can initiate a dissolution in which TWE would
receive two-thirds and Advance/Newhouse would receive one-third of the
partnership's net assets. The transaction is expected to close in the first half
of 1995 and is subject to customary closing conditions, including the receipt of
certain franchise and regulatory approvals.
3. INVESTMENTS
TWE's investments consist of:
DECEMBER 31,
--------------------
1994 1993
--------- ---------
(MILLIONS)
Equity method investments............................................................... $ 629 $ 517
Cost method investments................................................................. 37 23
--------- ---------
Total................................................................................... $ 666 $ 540
--------- ---------
--------- ---------
Companies accounted for using the equity method include Paragon
Communications (50% owned), certain other cable system joint ventures (generally
50% owned), Comedy Partners, L.P. (50%
10
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
owned), Six Flags (50% owned in 1992), E! Entertainment Corporation (50% owned
in 1992), and in 1994 only, certain international cable and programming joint
ventures (generally 25% owned). A summary of financial information as reported
by the equity investees of TWE on a 100% basis is set forth below:
YEARS ENDED DECEMBER 31,
------------------------------------------
RESTATED
1994 1993 1992 1992
--------- --------- --------- ---------
(MILLIONS)
Revenues...................................................... $ 722 $ 596 $ 549 $ 1,039
Operating income.............................................. 11 115 65 116
Net income (loss)............................................. (53) 80 13 6
Current assets................................................ 192 72 125 182
Total assets.................................................. 1,281 1,054 1,033 1,896
Current liabilities........................................... 305 163 181 328
Long-term debt................................................ 554 613 632 1,147
Total liabilities............................................. 926 794 869 1,670
In September 1993, TWE provided Six Flags with $136 million to repurchase
the 50% common stock interest held by other stockholders and preferred stock of
certain subsidiaries. TWE also provided $414 million to finance the repurchase
or retirement of all indebtedness of Six Flags and its subsidiaries, except for
the zero coupon notes due 1999. As a result, TWE has consolidated Six Flags
effective January 1, 1993.
4. INVENTORIES
TWE's inventories consist of:
DECEMBER 31,
--------------------------------------------------
1994 1993
------------------------ ------------------------
CURRENT NONCURRENT CURRENT NONCURRENT
----------- ----------- ----------- -----------
(MILLIONS)
Film costs:
Released, less amortization.............................. $ 585 $ 347 $ 604 $ 318
Completed and not released............................... 123 24 140 23
In process and other..................................... 18 361 7 340
Library, less amortization............................... -- 769 -- 821
Programming costs, less amortization....................... 149 306 147 258
Merchandise................................................ 81 -- 82 --
----- ----------- ----- -----------
Total...................................................... $ 956 $ 1,807 $ 980 $ 1,760
----- ----------- ----- -----------
----- ----------- ----- -----------
Excluding the Library, the unamortized cost of completed films at December
31, 1994 amounted to $1.079 billion, more than 90% of which is expected to be
amortized within three years after release. Excluding the effects of accounting
for the acquisition of WCI, the total cost incurred in the production of
theatrical and television films amounted to $1.667 billion in 1994, $1.784
billion in 1993 and $1.652 billion in 1992; and the total cost amortized
amounted to $1.640 billion, $1.619 billion and $1.535 billion, respectively.
11
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of:
DECEMBER 31,
--------------------
1994 1993
--------- ---------
(MILLIONS)
Credit agreement, weighted average interest rates of 6.5% and 4.2%................. $ 2,550 $ 2,425
Commercial paper, weighted average interest rates of 6.2% and 3.8%................. 649 772
Six Flags 9.25% zero coupon notes due December 15, 1999............................ 123 112
9 5/8% notes due May 1, 2002....................................................... 600 600
7 1/4% debentures due September 1, 2008............................................ 599 599
10.15% notes due May 1, 2012....................................................... 250 250
8 7/8% notes due October 1, 2012................................................... 347 347
8 3/8% debentures due March 15, 2023............................................... 990 990
8 3/8% debentures due July 15, 2033................................................ 994 994
Other.............................................................................. 58 36
--------- ---------
Total.............................................................................. $ 7,160 $ 7,125
--------- ---------
--------- ---------
Each Time Warner General Partner has guaranteed a pro rata portion of
substantially all of TWE's debt and accrued interest thereon based on the
relative fair value of the net assets each Time Warner General Partner
contributed to TWE (the "Time Warner General Partner Guarantees"). Such
indebtedness is recourse to each Time Warner General Partner only to the extent
of its guarantee. The indenture pursuant to which TWE's notes and debentures
have been issued (the "Indenture") requires the unanimous consent of the holders
of the notes and debentures to terminate the Time Warner General Partner
Guarantees prior to June 30, 1997, and the consent of a majority of such holders
to effect a termination thereafter. There are generally no restrictions on the
ability of the Time Warner General Partner guarantors to transfer material
assets, other than TWE assets, to parties that are not guarantors.
As of December 31, 1994, the TWE bank credit agreement provided for up to
$5.2 billion of borrowings and consisted of a $4.2 billion revolving credit
facility with available credit reducing at June 30, 1995 and thereafter by $200
million per quarter through June 30, 1996, by $125 million per quarter from
September 30, 1996 through September 30, 1999, and by $1.575 billion at final
maturity on December 31, 1999; and a $986 million term loan with repayments of
$66 million on June 30, 1995, $98 million per quarter beginning September 30,
1995 through March 31, 1996, $27 million per quarter beginning June 30, 1996
through June 30, 1999, $20 million on September 30, 1999 and a final repayment
of $255 million on December 31, 1999. Unused credit is available for general
business purposes and to support commercial paper borrowings. Outstanding
borrowings under the credit agreement generally bear interest at LIBOR plus 5/8%
per annum. The credit agreement contains covenants relating to, among other
things, additional indebtedness; liens on assets; acquisitions and investments;
cash flow coverage and leverage ratios; and loans, advances, distributions or
other cash payments or transfers of assets to its partners or their affiliates.
An after-tax cost of $10 million was incurred by Six Flags in 1993 in
connection with the retirement of its debt (Note 3). The Six Flags zero coupon
senior notes due 1999 are guaranteed by TWE.
12
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. LONG-TERM DEBT (CONTINUED)
Based on the level of interest rates prevailing at December 31, 1994, the
fair value of TWE's long-term debt was $460 million less than its carrying
value. Based on the level of interest rates prevailing at December 31, 1993, the
fair value of TWE's long-term debt exceeded its carrying value by $290 million.
Accounting recognition is not given to unrealized gains or losses on debt unless
the debt is retired prior to its maturity.
Interest expense was $563 million in 1994, $573 million in 1993 and $436
million in 1992 ($486 million on a restated basis). The weighted average
interest rate on TWE's total debt was 7.6% and 6.7% at December 31, 1994 and
1993, respectively. Interest expense in 1992 prior to the TWE Capitalization
includes interest expense related to Time Warner's credit and interest rate swap
contracts on a pushdown basis and interest expense on $875 million of loans due
to WCI, which were repaid at the TWE Capitalization.
Annual repayments of long-term debt for the five years subsequent to
December 31, 1994 are: 1995--$262 million; 1996--$179 million; 1997--$108
million; 1998--$372 million and 1999--$2.4 billion.
6. INCOME TAXES
Domestic and foreign pretax income (loss) are as follows:
YEARS ENDED DECEMBER 31,
--------------------------
RESTATED
1994 1993 1992 1992
----- ----- ----- -----
(MILLIONS)
Domestic................................ $242 $271 $168 $165
Foreign................................. (41) 1 45 45
----- ----- ----- -----
Total................................... $201 $272 $213 $210
----- ----- ----- -----
----- ----- ----- -----
As a partnership, TWE is not subject to U.S. federal, state or local income
taxation (Note 1). Income taxes (benefits) of TWE and subsidiary corporations
are as set forth below:
YEARS ENDED DECEMBER 31,
--------------------------
RESTATED
1994 1993 1992 1992
----- ----- ----- -----
(MILLIONS)
Federal:
Current (1)........................... $ 6 $ 10 $-- $--
Deferred.............................. (2) (12) 3 --
Foreign:
Current (2)........................... 53 68 42 42
Deferred.............................. (16) (4) 8 8
State and local:
Current............................... 14 20 -- --
Deferred.............................. (15) (18) -- --
----- ----- ----- -----
Total income taxes...................... $ 40 $ 64 $ 53 $ 50
----- ----- ----- -----
----- ----- ----- -----
<FN>
- - ------------------------
(1) Includes utilization of Six Flags' tax carryforwards in the amount of $35
million in 1994 and $75 million in 1993.
(2) Includes foreign withholding taxes of $44 million in 1994, $59 million in
1993 and $34 million in 1992.
13
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES (CONTINUED)
The financial statement basis of TWE's assets exceeds the corresponding tax
basis by $9.5 billion at December 31, 1994, principally as a result of
differences in accounting for depreciable and amortizable assets for financial
statement and income tax purposes.
7. TWE PARTNERS' CAPITAL
The TWE partnership agreement provides for special allocations of income,
loss and distributions of partnership capital, including priority distributions
in the event of liquidation or dissolution. The initial capital amounts assigned
to each partner were based on the fair value of the assets each contributed to
the partnership. Partnership income, to the extent earned, is first allocated to
the partners so that the economic burden of the income tax consequences of
partnership operations is borne as though the partnership were taxed as a
corporation ("special tax allocations"), then to the senior, pro rata and junior
priority capital interests, in order of priority, at rates of return ranging
from 8% to 13.25% per annum, and finally to the residual equity interests. For
the purpose of the foregoing allocations, partnership income is based on the
fair value of assets contributed to the partnership, and differs from net income
of TWE, which is based on the historical cost of contributed assets. Partnership
losses generally are allocated first to eliminate prior allocations of
partnership income to, and then to reduce the initial capital amounts of, the
residual equity, junior priority capital and pro rata priority capital
interests, in that order, then to reduce Time Warner General Partners' senior
capital, including partnership income allocated thereto, and finally to reduce
any special tax allocations. To the extent partnership income is insufficient to
satisfy all special allocations in a particular accounting period, the unearned
portion is carried over until satisfied out of future partnership income.
A summary of the priority of contributed capital and limitations on the
allocation of partnership income is as set forth below:
TIME
INITIAL INCOME WARNER
CAPITAL ALLOCATIONS GENERAL
AMOUNTS (A) LIMITED TO PARTNERS U S WEST ITOCHU TOSHIBA
------------- ------------- ---------- --------- ------- ---------
(BILLIONS) (% PER ANNUM (OWNERSHIP %)
COMPOUNDED
QUARTERLY)
PRIORITY OF CONTRIBUTED CAPITAL
Special tax allocations................. $ 0 No limit . . . . . . . . as necessary . . . . . . . .
Senior capital.......................... 1.4 8.00% 100.00% -- -- --
Pro rata priority capital............... 5.6 13.00%(b) 63.27% 25.51% 5.61% 5.61%
Junior priority capital................. 2.6 13.25%(c) 100.00% -- -- --
Residual equity capital................. 3.3 No limit 63.27% 25.51% 5.61% 5.61%
<FN>
- - ------------------------
(a) Excludes partnership income or loss (to the extent earned) allocated
thereto.
(b) 11.00% to the extent concurrently distributed.
(c) 11.25% to the extent concurrently distributed.
Senior capital and partnership income allocated thereto is required to be
distributed in three annual installments beginning July 1, 1997; earlier
distributions may be made under certain circumstances ("Senior Capital
Distributions"). Senior capital and partnership income allocated thereto
amounted to $1.663 billion at December 31, 1994, consisting of $1.364 billion
initial capital amount plus accrued income. Junior priority capital is subject
to a retroactive adjustment based on TWE's operating performance over five- and
ten-year periods.
U S WEST has an option to increase its pro rata priority capital and
residual equity interests to as much as 31.84%, depending on cable operating
performance. The option is exercisable between
14
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. TWE PARTNERS' CAPITAL (CONTINUED)
January 1, 1999 and on or about May 31, 2005 at a maximum exercise price ranging
from $1.25 billion to $1.8 billion, depending on the year of exercise. U S WEST
or TWE may elect that the exercise price be paid with partnership interests
rather than cash. Prior to the exercise of the U S WEST option, each of ITOCHU
and Toshiba has the right to maintain its original 6.25% pro rata priority
capital and residual equity interests by acquiring additional partnership
interests at fair market value; thereafter, each would have the right to
maintain the percentage of the pro rata priority capital and residual equity
interests it held immediately prior to U S WEST's exercise.
Distributions and loans to the partners are subject to partnership and
credit agreement limitations. Generally, TWE must be in compliance with the cash
flow coverage and leverage ratios, restricted payment limitations and other
credit agreement covenants in order to make such distributions or loans.
Certain assets of TWE (the "Time Warner Service Partnership Assets") were
distributed to the Time Warner General Partners prior to the admission of U S
WEST in 1993 in order to ensure compliance with the Modification of Final
Judgment entered on August 24, 1982 by the United States District Court for the
District of Columbia (the "MFJ") applicable to U S WEST and its affiliated
companies, which may have included TWE. The Time Warner General Partners
contributed the Time Warner Service Partnership Assets to newly-formed
partnerships (the "Time Warner Service Partnerships") in which the Time Warner
General Partners are the general partners and subsidiaries of ITOCHU and Toshiba
are the limited partners. The Time Warner Service Partnerships make certain of
their assets and related services available to TWE (Note 12). If TWE is clearly
not prohibited from owning or operating the Time Warner Service Partnership
Assets, they will be recontributed to TWE on September 15, 1995 (or September
15, 1997 in the case of certain assets), or earlier under certain circumstances,
at their then fair market value in exchange for partnership interests in TWE. As
a result of a judicial order issued to U S WEST on October 24, 1994, TWE is no
longer prohibited from owning or operating substantially all of the Time Warner
Service Partnership Assets.
For financial statement purposes, the distribution of Time Warner Service
Partnership Assets was accounted for at historical cost. For partnership
agreement purposes, the initial capital amount of General Partners' junior
priority capital of $3 billion was reduced by approximately $300 million to give
effect to such distribution. TWE is required to make quarterly cash
distributions of Time Warner General Partners' junior priority capital in the
amount of $12.5 million to the Time Warner General Partners ("TWSP
Distributions"), which the General Partners are then required to contribute to
the Time Warner Service Partnerships. TWE paid $50 million and $12.5 million of
TWSP Distributions to the Time Warner General Partners in 1994 and 1993,
respectively, which were recorded as additional reductions of Time Warner
General Partners' junior priority capital.
TWE reimburses Time Warner for the amount by which the market price on the
exercise date of Time Warner common stock options granted to employees of TWE
exceeds the exercise price or, with respect to options granted prior to the TWE
Capitalization, the greater of the exercise price and $27.75, the market price
of the common stock at the TWE Capitalization ("Stock Option Distributions").
TWE accrues Stock Option Distributions 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. At December 31, 1994 and 1993, TWE had
recorded a liability for Stock Option Distributions of $89 million and $271
million, respectively, based on the unexercised options and the market prices at
such dates of $35.125 and $44.25, respectively, per Time Warner common share.
TWE paid $5 million of Stock Option Distributions to Time Warner in 1994,
compared to $20 million in 1993.
15
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. TWE PARTNERS' CAPITAL (CONTINUED)
Cash distributions are required to be made to the partners to permit them to
pay income taxes at statutory rates based on their allocable taxable income from
TWE ("Tax Distributions"), including any taxable income generated by the
Beneficial Assets, subject to limitations referred to herein. The aggregate
amount of such Tax Distributions is computed generally by reference to the taxes
that TWE would have been required to pay if it were a corporation. TWE paid $115
million of Tax Distributions to the Time Warner General Partners in 1994 and had
recorded an additional liability to the Time Warner General Partners for Tax
Distributions of $334 million at December 31, 1994, compared to a liability of
$276 million at December 31, 1993. All Tax Distributions are permitted to be
paid beginning July 1, 1995 and, accordingly, such amounts are classified as a
current liability at December 31, 1994.
In addition to Stock Option Distributions, Tax Distributions, Senior Capital
Distributions and TWSP Distributions, quarterly cash distributions may be made
to the partners to the extent of excess cash, as defined ("Excess Cash
Distribution"). Assuming that no additional partnership interests are issued to
new partners and that certain cash distribution thresholds are met, cash
distributions other than Stock Option Distributions, Tax Distributions, Senior
Capital Distributions and TWSP Distributions will in the aggregate be made
63.27% to the Time Warner General Partners and 36.73% to the Limited Partners
prior to June 30, 1998; thereafter, the Time Warner General Partners also will
be entitled to additional distributions with respect to junior priority capital.
If aggregate distributions made to the Limited Partners, generally from all
sources, have not reached approximately $800 million by June 30, 1997, cash
distributions to the Time Warner General Partners with respect to the Time
Warner General Partners' pro rata priority and residual equity capital, other
than Stock Option Distributions and Tax Distributions, will be deferred until
such threshold is met. Similarly, if such aggregate distributions to the Limited
Partners have not reached approximately $1.6 billion by June 30, 1998, cash
distributions with respect to junior priority capital, other than TWSP
Distributions, will be deferred until such threshold is met. If any such
deferral occurs, a portion of the corresponding partnership income allocations
with respect to such deferred amounts will be made at a rate higher than
otherwise would have been the case. If a division of TWE or a substantial
portion thereof is sold, the net proceeds of such sale, less expenses and
proceeds used to repay outstanding debt, will be required to be distributed with
respect to the partners' partnership interests. Similar distributions are
required to be made in the event of a financing or refinancing of debt. Subject
to any limitations on the incurrence of additional debt contained in the TWE
partnership and credit agreements, and the Indenture, TWE may borrow funds to
make distributions.
8. STOCK OPTION PLANS
Options to purchase Time Warner common stock under various stock option
plans have been granted to employees of TWE, generally at fair market value at
the date of grant. Generally, the options become exercisable over a three-year
vesting period and expire ten years from the date of grant. A summary of stock
option activity with respect to employees of TWE is as follows:
THOUSANDS OF SHARES EXERCISE
OF TIME WARNER PRICE PER
COMMON STOCK SHARE
------------------- -----------
Balance at December 31, 1993........................................... 26,880 $ 8-45
Granted................................................................ 3,856 33-41
Exercised.............................................................. (437) 8-36
Cancelled.............................................................. (101) 22-45
-------
Balance at December 31, 1994........................................... 30,198 $ 8-45
-------
-------
Exercisable at December 31, 1994....................................... 21,318
-------
-------
16
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTION PLANS (CONTINUED)
TWE reimburses Time Warner for the use of Time Warner stock options on the
basis described in Note 7. There were 1.9 million options exercised by employees
of TWE in 1993 and 129,000 options exercised in 1992 at prices ranging from
$8-$36 per share, and there were 18.5 million options exercisable at December
31, 1993.
9. BENEFIT PLANS
TWE and its divisions have defined benefit pension plans covering
substantially all domestic employees. Pension benefits are based on formulas
that reflect the employees' years of service and compensation levels during
their employment period. Qualifying plans are funded in accordance with
government pension and income tax regulations. Plan assets are invested in
equity and fixed income securities.
Pension expense included the following:
YEARS ENDED DECEMBER 31
------------------------------------------
RESTATED
1994 1993 1992 1992
--------- --------- --------- ---------
(MILLIONS)
Service cost............................................................. $ 26 $ 21 $ 15 $ 13
Interest cost............................................................ 24 19 14 12
Actual return on plan assets............................................. 4 (21) (12) (10)
Net amortization and deferral............................................ (21) 5 (4) (4)
--- --- --- ---
Total.................................................................... $ 33 $ 24 $ 13 $ 11
--- --- --- ---
--- --- --- ---
The status of funded pension plans is as follows:
DECEMBER 31,
--------------------
1994 1993
--------- ---------
(MILLIONS)
Accumulated benefit obligation (88% vested)............................................. $ 172 $ 189
Effect of future salary increases....................................................... 91 94
--------- ---------
Projected benefit obligation............................................................ 263 283
Plan assets at fair value............................................................... 225 221
--------- ---------
Projected benefit obligation in excess of plan assets................................... (38) (62)
Unamortized actuarial losses............................................................ 24 53
Unamortized plan changes................................................................ 4 9
Other................................................................................... (4) (7)
--------- ---------
Accrued pension liability............................................................... $ (14) $ (7)
--------- ---------
--------- ---------
The following assumptions were used in accounting for pension plans:
1994 1993 1992
--------- --------- ---------
Weighted average discount rate................................................. 8.5% 7.5% 8.5%
Return on plan assets.......................................................... 9% 9% 10%
Rate of increase in compensation levels........................................ 6% 6% 6%
Certain domestic employees of TWE participate in multiemployer pension plans
as to which the expense amounted to $18 million in 1994, $19 million in 1993 and
$20 million in 1992. Employees in foreign countries participate to varying
degrees in local pension plans, which in the aggregate are not significant.
17
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. BENEFIT PLANS (CONTINUED)
Certain domestic employees also participate in Time Warner's 401(k) savings
plans and profit sharing plans, as to which the expense was $23 million in 1994,
$20 million in 1993 and $16 million in 1992. Contributions to the 401(k) plans
are based upon a percentage of the employees' elected contributions.
Contributions to the profit sharing plans are determined by management.
10. SEGMENT INFORMATION
Information as to the operations of TWE in different business segments is as
set forth below:
YEARS ENDED DECEMBER 31,
------------------------------------------
RESTATED
1994 1993 1992 1992
--------- --------- --------- ---------
(MILLIONS)
REVENUES (1)
Filmed Entertainment.......................................... $ 5,033 $ 4,557 $ 3,945 $ 3,455
Programming-HBO............................................... 1,494 1,435 1,444 1,444
Cable......................................................... 2,220 2,205 2,091 2,091
Intersegment elimination...................................... (287) (251) (229) (229)
--------- --------- --------- ---------
Total......................................................... $ 8,460 $ 7,946 $ 7,251 $ 6,761
--------- --------- --------- ---------
--------- --------- --------- ---------
<FN>
- - ------------------------
(1) Substantially all operations outside of the United States support the
export of domestic products. Revenues include export sales of $1.693
billion in 1994, $1.650 billion in 1993 and $1.379 billion in 1992.
Approximately 60% of export revenues are from sales to European customers.
YEARS ENDED DECEMBER 31,
------------------------------------------
RESTATED
1994 1993 1992 1992
--------- --------- --------- ---------
(MILLIONS)
OPERATING INCOME
Filmed Entertainment.......................................... $ 257 $ 263 $ 235 $ 194
Programming-HBO............................................... 236 213 201 201
Cable......................................................... 355 407 400 400
--------- --------- --------- ---------
Total......................................................... $ 848 $ 883 $ 836 $ 795
--------- --------- --------- ---------
--------- --------- --------- ---------
YEARS ENDED DECEMBER 31,
------------------------------------------
RESTATED
1994 1993 1992 1992
--------- --------- --------- ---------
(MILLIONS)
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Filmed Entertainment.......................................... $ 122 $ 87 $ 75 $ 36
Programming-HBO............................................... 13 14 13 13
Cable......................................................... 330 325 316 316
--------- --------- --------- ---------
Total......................................................... $ 465 $ 426 $ 404 $ 365
--------- --------- --------- ---------
--------- --------- --------- ---------
18
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SEGMENT INFORMATION (CONTINUED)
YEARS ENDED DECEMBER 31,
------------------------------------------
RESTATED
1994 1993 1992 1992
--------- --------- --------- ---------
(MILLIONS)
AMORTIZATION OF INTANGIBLE ASSETS (1)
Filmed Entertainment.......................................... $ 163 $ 171 $ 185 $ 155
Programming-HBO............................................... 6 3 1 1
Cable......................................................... 309 302 261 261
--------- --------- --------- ---------
Total......................................................... $ 478 $ 476 $ 447 $ 417
--------- --------- --------- ---------
--------- --------- --------- ---------
<FN>
- - ------------------------
(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.
Information as to the assets and capital expenditures of TWE is as follows:
DECEMBER 31,
------------------------------------------
RESTATED
1994 1993 1992 1992
--------- --------- --------- ---------
(MILLIONS)
ASSETS
Filmed Entertainment..................................... $ 7,947 $ 7,525 $ 7,346 $ 6,468
Programming-HBO.......................................... 895 855 936 936
Cable.................................................... 8,191 8,041 8,142 8,142
Corporate (1)............................................ 1,629 1,542 270 302
--------- --------- --------- ---------
Total.................................................... $ 18,662 $ 17,963 $ 16,694 $ 15,848
--------- --------- --------- ---------
--------- --------- --------- ---------
<FN>
- - ------------------------
(1) Consists principally of cash, cash equivalents and other investments.
YEARS ENDED DECEMBER 31,
------------------------------------------
RESTATED
1994 1993 1992 1992
--------- --------- --------- ---------
(MILLIONS)
CAPITAL EXPENDITURES
Filmed Entertainment.......................................... $ 441 $ 244 $ 122 $ 101
Programming-HBO............................................... 13 17 28 28
Cable (1)..................................................... 699 352 273 273
--------- --------- --------- ---------
Total......................................................... $ 1,153 $ 613 $ 423 $ 402
--------- --------- --------- ---------
--------- --------- --------- ---------
<FN>
- - ------------------------
(1) The 1994 increase was funded in part through $234 million of collections on
the U S WEST Note (Note 1).
11. COMMITMENTS AND CONTINGENCIES
Total rent expense amounted to $143 million in 1994, $119 million in 1993
and $99 million ($107 million on a restated basis) in 1992. The minimum rental
commitments under noncancellable long-term operating leases are: 1995-$132
million; 1996-$130 million; 1997-$117 million; 1998-$110 million; 1999-$100
million and after 1999-$784 million.
19
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Minimum commitments and guarantees under certain programming, licensing,
franchise and other agreements at December 31, 1994 aggregated approximately
$3.7 billion, which are payable principally over a five-year period.
Pending legal proceedings are substantially limited to litigation incidental
to the businesses of TWE. In the opinion of counsel and management, the ultimate
resolution of these matters will not have a material effect on the consolidated
financial statements.
12. RELATED PARTY TRANSACTIONS
In the normal course of conducting their businesses, TWE units have had
various transactions with Time Warner units, generally on terms resulting from a
negotiation among the affected parties that in management's view results in
reasonable allocations. Employees of TWE participate in various Time Warner
medical, stock option (Note 8) and other benefit plans (Note 9) for which TWE is
charged its allocable share of plan expenses, including administrative costs.
Time Warner's corporate group provides various other services to TWE. The Music
division of WCI provides home videocassette distribution services to certain TWE
operations, and certain TWE units have placed advertising in magazines published
by Time Warner's Publishing division.
TWE is required to pay a $130 million advisory fee to U S WEST over a
five-year period ending September 15, 1998 for U S WEST's expertise in
telecommunications, telephony and information technology, and its participation
in the management and upgrade of the cable systems to Full Service Network(TM)
capacity.
Time Warner provides TWE with certain corporate support services for which
Time Warner is paid $60 million per year through June 30, 1995, and increasing
annual amounts as adjusted for inflation thereafter. The corporate services
agreement runs through June 30, 1997, and may be extended by agreement of both
parties. Management believes that the corporate services fee is representative
of the cost of corporate services that would be necessary for the stand-alone
operations of TWE.
Time Warner and TWE entered into a credit agreement in 1994 that allows Time
Warner to borrow up to $400 million from TWE through September 15, 2000.
Outstanding borrowings from TWE bear interest at LIBOR plus 1% per annum. Time
Warner borrowed $400 million in 1994 under the credit agreement. Under TWE's
bank credit agreement, TWE's loans to Time Warner cannot exceed $1.1 billion at
December 31, 1994, increasing to no more than $1.5 billion on July 1, 1995.
TWE has service agreements with the Time Warner Service Partnerships for
program signal delivery and transmission services, and TWE provides billing,
collection and marketing services to the Time Warner Service Partnerships. TWE
also has distribution and merchandising agreements with Time Warner
Entertainment Japan Inc., a company owned by partners of TWE to conduct TWE's
businesses in Japan.
In addition to transactions with its partners, TWE has had transactions with
Paragon Communications, Comedy Partners, L.P. and its other equity investees and
with Turner Broadcasting System, Inc., The Columbia House Company partnerships,
Cinamerica Theatres, L.P. and other equity investees of Time Warner, generally
with respect to sales of product in the ordinary course of business.
Long-term debt and interest expense prior to the TWE Capitalization include
the effects of the pushdown of a portion of the Time Warner credit agreement
debt that was related to the WCI acquisition, based on the proportion that the
fair value of the WCI contributed businesses acquired bore to the fair value of
all of the WCI net assets acquired. Interest expense prior to the TWE
20
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. RELATED PARTY TRANSACTIONS (CONTINUED)
Capitalization also reflects interest on $875 million of loans due to WCI, which
were repaid at the TWE Capitalization, at a rate approximating the rate
applicable to borrowings under the Time Warner credit agreement.
13. SUPPLEMENTAL INFORMATION
Supplemental information with respect to cash flows is as follows:
YEARS ENDED DECEMBER 31,
------------------------------------------
RESTATED
1994 1993 1992 1992
--------- --------- --------- ---------
(MILLIONS)
Cash payments made for interest............................................. $ 521 $ 450 $ 418 $ 391
Cash payments made for income taxes (net)................................... 69 70 39 39
Borrowings.................................................................. 977 3,075 6,856 6,677
Repayments.................................................................. 945 3,734 7,647 7,514
Noncash assumption of debt.................................................. -- -- 2,545 2,545
Noncash pushdown of cost to acquire ATC minority interest................... -- -- 1,431 1,431
Noncash capital contributions (distributions), net.......................... 4 384 (117) (117)
The principal balance sheet effects of the consolidation of Six Flags in
1993 were to increase cash and equivalents by $11 million, property, plant and
equipment by $398 million, goodwill by $310 million, other assets by $159
million, debt by $608 million and other liabilities by $238 million, and to
decrease investments by $32 million. The principal balance sheet effects of the
acquisition of the ATC minority interest in 1992 were to increase investments by
$156 million, cable television franchises by $865 million, goodwill by $410
million and partners' capital by $1.431 billion. A noncash effect of the TWE
Capitalization in 1992 was the assumption by TWE of $2.545 billion of Time
Warner debt in excess of the amount reflected as a liability prior to the TWE
Capitalization. Cash equivalents consist of commercial paper and other
investments that are readily convertible into cash, and have original maturities
of three months or less.
Other current liabilities consist of:
DECEMBER 31,
--------------------
1994 1993
--------- ---------
(MILLIONS)
Accrued expenses............................................................................. $ 827 $ 767
Accrued compensation......................................................................... 143 101
Deferred revenues............................................................................ 150 129
Tax Distributions due to Time Warner General Partners........................................ 334 108
Debt due within one year..................................................................... 32 24
--------- ---------
Total........................................................................................ $ 1,486 $ 1,129
--------- ---------
--------- ---------
21
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
(MILLIONS)
CURRENT ASSETS
Cash and equivalents.......................................................... $ 1,267 $ 1,071
Receivables, including $147 and $266 due from Time Warner, less allowances of
$310 and $306................................................................ 1,287 1,426
Inventories................................................................... 924 956
Prepaid expenses.............................................................. 230 120
-------------- --------
Total current assets.......................................................... 3,708 3,573
Noncurrent inventories........................................................ 1,752 1,807
Loan receivable from Time Warner.............................................. 400 400
Property, plant and equipment, net............................................ 3,931 3,784
Goodwill...................................................................... 4,400 4,433
Cable television franchises................................................... 3,189 3,236
Other assets.................................................................. 1,378 1,429
-------------- --------
Total assets.................................................................. $ 18,758 $ 18,662
-------------- --------
-------------- --------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable.............................................................. $ 418 $ 514
Participations and programming costs.......................................... 973 857
Other current liabilities, including $342 and $334 of distributions due to
Time Warner.................................................................. 1,429 1,486
-------------- --------
Total current liabilities..................................................... 2,820 2,857
Long-term debt................................................................ 7,162 7,160
Other long-term liabilities, including $138 and $89 of distributions due to
Time Warner.................................................................. 801 749
Time Warner General Partners' senior capital.................................. 1,696 1,663
PARTNERS' CAPITAL
Contributed capital........................................................... 7,398 7,398
Undistributed partnership earnings (deficit).................................. (498) (394)
Note receivable from U S WEST................................................. (621) (771)
-------------- --------
Total partners' capital....................................................... 6,279 6,233
-------------- --------
Total liabilities and partners' capital....................................... $ 18,758 $ 18,662
-------------- --------
-------------- --------
See accompanying notes.
22
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1994
--------- ---------
(MILLIONS)
Revenues (a)................................................................................. $ 2,046 $ 1,919
--------- ---------
Cost of revenues (a)(b)...................................................................... 1,440 1,343
Selling, general and administrative (a)(b)................................................... 415 373
--------- ---------
Operating expenses........................................................................... 1,855 1,716
--------- ---------
Business segment operating income............................................................ 191 203
Interest and other, net (a).................................................................. (161) (136)
Corporate services (a)....................................................................... (15) (15)
--------- ---------
Income before income taxes................................................................... 15 52
Income taxes................................................................................. (11) (4)
--------- ---------
Net income................................................................................... $ 4 $ 48
--------- ---------
--------- ---------
<FN>
- - ------------------------
(a) Includes the following income (expenses) resulting from transactions with
the partners of TWE:
Selling, general and administrative.................................. $ (22) $ (17)
Corporate services................................................... (15) (15)
In addition, includes the following income (expenses) resulting from transactions with equity
investees of TWE or Time Warner:
Revenues............................................................. $ 26 $ 9
Cost of revenues..................................................... (17) (12)
Selling, general and administrative.................................. 5 5
(b) Includes depreciation and amortization expense of:.......................... $ 226 $ 213
--------- ---------
--------- ---------
See accompanying notes.
23
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
--------------------
1995 1994
--------- ---------
(MILLIONS)
OPERATIONS
Net income.................................................................................... $ 4 $ 48
Adjustments for noncash and nonoperating items:
Depreciation and amortization................................................................. 226 213
Changes in operating assets and liabilities................................................... 116 81
--------- ---------
Cash provided by operations................................................................... 346 342
--------- ---------
INVESTING ACTIVITIES
Investments and acquisitions.................................................................. (21) (29)
Capital expenditures.......................................................................... (270) (239)
Investment proceeds........................................................................... 1 31
--------- ---------
Cash used by investing activities........................................................... (290) (237)
--------- ---------
FINANCING ACTIVITIES
Increase in debt.............................................................................. 4 17
Capital distributions......................................................................... (14) (14)
Collections on note receivable from U S WEST.................................................. 150 --
--------- ---------
Cash provided by financing activities....................................................... 140 3
--------- ---------
INCREASE IN CASH AND EQUIVALENTS................................................................ $ 196 $ 108
--------- ---------
--------- ---------
See accompanying notes.
24
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Time Warner Entertainment Company, L.P., a Delaware limited partnership
("TWE"), is engaged principally in the Filmed Entertainment, Broadcasting -- The
WB Network, Programming -- HBO and Cable businesses. Subsidiaries of Time Warner
Inc. ("Time Warner") are the general partners of TWE ("Time Warner General
Partners") and collectively hold 63.27% pro rata priority capital and residual
equity partnership interests in TWE, and certain priority capital interests
senior ("Time Warner General Partners' senior capital") and junior to the pro
rata priority capital interests, which they received for the net assets, or the
rights to cash flows, they contributed to the partnership at the capitalization
of TWE. The limited partners, subsidiaries of U S WEST, Inc. ("U S WEST"),
ITOCHU Corporation and Toshiba Corporation, hold 25.51%, 5.61% and 5.61% pro
rata priority capital and residual equity partnership interests, respectively.
The TWE partnership agreement provides for special allocations of income, loss
and distributions of partnership capital, including priority distributions in
the event of liquidation.
The consolidated financial statements include 100% of the assets,
liabilities, revenues, expenses, income, loss and cash flows of TWE and all
companies in which TWE has a direct and indirect controlling voting interest
("subsidiaries"), as if TWE and its subsidiaries were a single company.
Investments in certain other companies in which TWE has significant influence
but less than a controlling voting interest, are accounted for using the equity
method.
The accompanying financial statements are unaudited but in the opinion of
management contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the financial position
and the results of operations and cash flows for the periods presented, in
conformity with generally accepted accounting principles applicable to interim
periods. The accompanying financial statements should be read in conjunction
with the audited consolidated financial statements of TWE for the year ended
December 31, 1994.
2. TWE-ADVANCE/NEWHOUSE PARTNERSHIP
On April 1, 1995, TWE formed a cable television joint venture with
subsidiaries of Advance Publications, Inc. and Newhouse Broadcasting Corporation
("Advance/Newhouse") to which Advance/Newhouse and TWE contributed cable
television systems (or interests therein) serving approximately 4.5 million
subscribers, as well as certain foreign cable investments and programming
investments. TWE owns a two-thirds equity interest in the TWE-Advance/Newhouse
Partnership and is the managing partner. Advance/Newhouse owns a one-third
equity interest in the partnership. In accordance with the partnership
agreement, Advance/Newhouse can require TWE to purchase its equity interest for
fair market value at specified intervals following the death of both of its
principal shareholders. Beginning in the third year, either partner can initiate
a dissolution in which TWE would receive two-thirds and Advance/Newhouse would
receive one-third of the partnership's net assets. The assets contributed by TWE
and Advance/Newhouse to the partnership were recorded at their predecessor's
historical cost. No gain was recognized by TWE upon the capitalization of the
partnership.
3. SIX FLAGS
In April 1995, TWE agreed to sell 51% of its interest in Six Flags
Entertainment Corporation ("Six Flags") to an investment group led by Boston
Ventures for $204 million and the receipt of approximately $670 million in
additional proceeds from Six Flags, principally representing payment of certain
intercompany indebtedness and licensing fees. TWE will recognize a gain upon the
closing of the transaction. TWE will deconsolidate the assets, liabilities and
operating results of Six Flags, including approximately $126 million of
third-party indebtedness, and account for its remaining 49%
25
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. SIX FLAGS (CONTINUED)
interest under the equity method of accounting. As a result of this transaction,
TWE will reduce debt by approximately $850 million, after related taxes and
fees. The transaction is expected to close during the second quarter of 1995 and
is subject to customary closing conditions.
4. INVENTORIES
Inventories consist of:
MARCH 31, 1995 DECEMBER 31, 1994
------------------------ ------------------------
CURRENT NONCURRENT CURRENT NONCURRENT
----------- ----------- ----------- -----------
(MILLIONS)
Film costs:
Released, less amortization.............................. $ 525 $ 364 $ 585 $ 347
Completed and not released............................... 94 17 123 24
In process and other..................................... 33 322 18 361
Library, less amortization............................... -- 756 -- 769
Programming costs, less amortization....................... 184 293 149 306
Merchandise................................................ 88 -- 81 --
----- ----------- ----- -----------
Total...................................................... $ 924 $ 1,752 $ 956 $ 1,807
----- ----------- ----- -----------
----- ----------- ----- -----------
5. LONG-TERM DEBT
Long-term debt consists of:
MARCH 31, 1995 DECEMBER 31, 1994
--------------- -----------------
(MILLIONS)
Bank credit agreement, weighted average interest rates of 6.8% and
6.5%............................................................... $ 2,450 $ 2,550
Commercial paper, weighted average interest rates of 6.5% and
6.2%............................................................... 748 649
Publicly held notes and debentures.................................. 3,906 3,903
Other............................................................... 58 58
------- -------
Total............................................................... $ 7,162 $ 7,160
------- -------
------- -------
Each Time Warner General Partner has guaranteed a pro rata portion of
substantially all of TWE's debt and accrued interest thereon based on the
relative fair value of the net assets each General Partner contributed to TWE.
Such indebtedness is recourse to each Time Warner General Partner only to the
extent of its guarantee.
In connection with the formation of the TWE-Advance/Newhouse Partnership and
Time Warner's other cable acquisitions, a new bank credit facility is expected
to be obtained. For a discussion of the status of the negotiations to secure
such bank financing, see "Financial Condition and Liquidity" elsewhere herein.
26
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. PARTNERS' CAPITAL
Changes in partners' capital were as follows:
THREE MONTHS
ENDED MARCH 31,
--------------------
1995 1994
--------- ---------
(MILLIONS)
Balance at beginning of year............................................. $ 6,233 $ 6,000
Net income............................................................... 4 48
Distributions............................................................ (71) (61)
Reduction of stock option distribution liability......................... -- 113
Allocation of income to General Partners' senior capital................. (33) (31)
Collections on note receivable from U S WEST............................. 150 --
Other.................................................................... (4) 6
--------- ---------
Balance at March 31...................................................... $ 6,279 $ 6,075
--------- ---------
--------- ---------
Since September 1993, certain assets formerly owned and operated by TWE have
been owned and operated by other partnerships ("Time Warner Service
Partnerships") in order to ensure compliance with the Modification of Final
Judgment entered on August 24, 1982 by the United States District Court for the
District of Columbia applicable to U S WEST and its affiliated companies, which
may have included TWE. The Time Warner Service Partnerships make certain of
their assets and related services available to TWE and TWE is required to make
quarterly cash distributions of $12.5 million to the Time Warner General
Partners, which the partners in turn are required to contribute to the Time
Warner Service Partnerships. If TWE is clearly not prohibited from owning or
operating the assets of the Time Warner Service Partnerships, they will be
recontributed to TWE on September 15, 1995 (or September 15, 1997 in the case of
certain assets), or earlier under certain circumstances, at their then fair
market value in exchange for partnership interests in TWE. As a result of a
judicial order issued to U S WEST in 1994, TWE is no longer prohibited from
owning or operating substantially all of the assets of the Time Warner Service
Partnerships.
In addition to Time Warner Service Partnership distributions, TWE also is
required to make distributions to reimburse the partners for income taxes at
statutory rates based on their allocable share of taxable income, and to
reimburse Time Warner for its stock options granted to employees of TWE based on
the amount by which the market price of Time Warner common stock exceeds the
option exercise price on the exercise date. TWE accrues a stock option
distribution and a corresponding liability with respect to unexercised options
when the market price of Time Warner common stock increases during the
accounting period, and reverses previously-accrued stock option distributions
and the corresponding liability when the market price of Time Warner common
stock declines.
During the three months ended March 31, 1995, TWE accrued $13 million of
Time Warner Service Partnership distributions, $8 million of tax-related
distributions and $50 million of stock option distributions, based on closing
prices of Time Warner common stock of $37.625 at March 31, 1995 and $35.125 at
December 31, 1994. During the three months ended March 31, 1994, TWE accrued $13
million of Time Warner Service Partnership distributions and $48 million of tax
distributions, and reversed $113 million of previously-accrued stock option
distributions as a result of a decline in the market price of Time Warner common
stock.
27
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. SEGMENT INFORMATION
Information as to the operations of TWE in different business segments is as
set forth below:
THREE MONTHS
ENDED MARCH 31,
--------------------
1995 1994
--------- ---------
(MILLIONS)
REVENUES
Filmed Entertainment..................................................... $ 1,206 $ 1,081
Broadcasting -- The WB Network........................................... 3 --
Programming -- HBO....................................................... 385 358
Cable.................................................................... 557 549
Intersegment elimination................................................. (105) (69)
--------- ---------
Total.................................................................... $ 2,046 $ 1,919
--------- ---------
--------- ---------
THREE MONTHS
ENDED MARCH 31,
--------------------
1995 1994
--------- ---------
(MILLIONS)
OPERATING INCOME
Filmed Entertainment..................................................... $ 65 $ 61
Broadcasting -- The WB Network........................................... (21) --
Programming -- HBO....................................................... 67 57
Cable.................................................................... 80 85
--------- ---------
Total.................................................................... $ 191 $ 203
--------- ---------
--------- ---------
THREE MONTHS
ENDED MARCH 31,
--------------------
1995 1994
--------- ---------
(MILLIONS)
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Filmed Entertainment..................................................... $ 21 $ 16
Broadcasting -- The WB Network........................................... -- --
Programming -- HBO....................................................... 4 3
Cable.................................................................... 88 83
--------- ---------
Total.................................................................... $ 113 $ 102
--------- ---------
--------- ---------
28
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. SEGMENT INFORMATION (CONTINUED)
THREE MONTHS
ENDED MARCH 31,
--------------------
1995 1994
--------- ---------
(MILLIONS)
AMORTIZATION OF INTANGIBLE ASSETS (1)
Filmed Entertainment..................................................... $ 37 $ 34
Broadcasting -- The WB Network........................................... -- --
Programming -- HBO....................................................... -- 1
Cable.................................................................... 76 76
--------- ---------
Total.................................................................... $ 113 $ 111
--------- ---------
--------- ---------
<FN>
- - ------------------------
(1) Amortization includes amortization relating to the acquisitions of Warner
Communications Inc. ("WCI") in 1989 and the American Television and
Communications Corporation ("ATC") minority interest in 1992 and to other
business combinations accounted for by the purchase method.
8. COMMITMENTS AND CONTINGENCIES
Minimum commitments and guarantees under certain programming, licensing,
franchise and other agreements at March 31, 1995 aggregated approximately $4.4
billion, which are payable principally over a five-year period.
Pending legal proceedings are substantially limited to litigation incidental
to the businesses of TWE. In the opinion of counsel and management, the ultimate
resolution of these matters will not have a material effect on the consolidated
financial statements.
9. ADDITIONAL FINANCIAL INFORMATION
Additional financial information is as follows:
THREE MONTHS
ENDED MARCH 31,
--------------------
1995 1994
--------- ---------
(MILLIONS)
Interest expense.............................................................. $ 150 $ 135
Cash payments made for interest............................................... 168 143
Cash payments made for income taxes (net)..................................... 15 13
Borrowings.................................................................... 106 244
Repayments.................................................................... 102 227
29
B. MERCURY PERSONAL COMMUNICATIONS
U S WEST, through subsidiaries, holds a 50 percent interest in Mercury
Personal Communications, trading as Mercury One-2-One ("Mercury One-2-One"). Set
forth below are the financial statements of Mercury One-2-One for the year ended
March 31, 1995.
Management Report............................................................................................................ 31
Auditors' Report............................................................................................................. 34
Financial Statements for the Year Ended March 31, 1995
Profit and Loss Account.................................................................................................... 35
Balance Sheet.............................................................................................................. 36
Cash Flow Statement........................................................................................................ 37
Notes to Financial Statements.............................................................................................. 38
30
MANAGEMENT REPORT
For the year ended 31 March 1995
The management team presents its annual report and the audited financial
statements for the year ended 31 March 1995.
PRINCIPAL ACTIVITY
The principal activity of the business is the design, development,
installation, marketing, operation and maintenance of a personal communications
network ("PCN") for the provision of personal radio telecommunication services.
The partnership also acts as a distributor for mobile phones designed for use on
its network.
REVIEW OF BUSINESS
The profit and loss account is set out on page 5. Following the successful
launch of its mobile telephone business in September 1993, the partnership has
continued to operate and extend its network.
Further information is given in note 1 to these financial statements.
RESEARCH AND DEVELOPMENT
The partnership undertakes research and development to ensure the future
success of the high technology equipment which is currently being used in the
infrastructure development.
CHANGES IN FIXED ASSETS
The movements in fixed assets during the year are set out in note 9 to the
financial statements.
RESULTS
The partnership loss for the year amounted to L123 million, (1994: L67m)
SUBSEQUENT EVENTS
Subsequent to 31 March 1995, the partners have advanced a further L9.5
million of capital contributions, together with L25 million in the form of
subordinated shareholder loans.
EMPLOYEES
The partnership's policy is to consult employees about any matters likely to
affect their interests, including advising them of the financial, economic, and
technical factors which affect the partnership's performance and progress. This
is achieved by way of regular meetings and information bulletins. The
partnership is an equal opportunity employer and recruits disabled workers where
there are vacancies that they are able to fill. All necessary assistance with
initial training is given, and a career plan is developed so as to ensure
suitable opportunities for each disabled employee. Arrangements will be made,
wherever possible, for retraining employees who become disabled, to enable them
to perform work identified as appropriate to their aptitudes and abilities.
SUPERVISORY BOARD
The partnership is governed by a board of management known as the
Supervisory Board, which consists of members appointed by the partners.
31
The members of the Supervisory Board of the partnership who served during
the year are as follows (non-executive unless stated):
R.J. Callahan Chairman
M. Harris Deputy chairman (resigned 18 November 1994)
S.E. Andrews (resigned 16 December 1994)
R.J. Olsen
R. Gras (appointed 16 December 1994)
S. Pettit (appointed 8 November 1994)
R. Goswell Partnership managing director
(Executive)
A. Sukawaty Partnership chief operating (resigned 31 October 1994, appointed non-
officer (Executive) executive representative 18 May 1995)
M. Bell Partnership assistant managing (appointed 1 November 1994)
director (Executive)
MANAGEMENT TEAM
The management team of the partnership at 31 March 1995 (and throughout the
year except where indicated) is as follows:
R. Goswell Managing director
A. Sukawaty Chief operating officer (resigned 31 October 1994)
M. Bell Assistant managing director (appointed 1 November 1994)
S. Roberts Operations (end of secondment from US WEST 30 June
1994)
W. Best Operations (appointed 1 June 1994)
R.A. Foy Finance
A. Harper Business strategy and regulation
J. Morrison Human resources
R. Potter Engineering
D. Colley Implementation (resigned 11 May 1994)
J. Harris Implementation (appointed 1 August 1994)
S. Dunn Sales and marketing (appointed 9 May 1994, resigned 28 March
1995)
D. Harding Customer services (appointed 15 April 1994)
S. Gilling Partnership secretary
There were no contracts of significance subsisting during or at the end of
the financial year in which a member of the management team was beneficially
interested.
RELATED PARTY TRANSACTIONS
The partnership has entered into several arm's length transactions with its
partners and their related companies.
TAXATION STATUS
Corporation tax is not payable by the partnership, but is rather payable by
the partners on their share of the taxable income of the partnership.
CHARITABLE AND POLITICAL CONTRIBUTIONS
The partnership makes occasional small contributions to charitable projects
and organisations where this benefits the local community.
INSURANCE OF MANAGEMENT TEAM
The partnership has purchased insurance cover for a number of its management
team and officers, against liabilities in relation to the partnership.
32
MANAGEMENT TEAM'S RESPONSIBILITIES
The management team is responsible for preparing financial statements for
each financial year designed to give a true and fair view of the state of
affairs of the partnership and of the profit or loss of the partnership for that
year. In preparing those financial statements, it is the management's
responsibility to:
- select suitable accounting policies and apply them
consistently;
- make judgements and estimates that are reasonable and prudent;
- state whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the financial statements; and
- prepare the financial statements on a going concern basis
unless it is inappropriate to presume that the partnership will
continue in business for the foreseeable future.
The management team is responsible for keeping proper accounting records
which disclose with reasonable accuracy at any time the financial position of
the partnership and for safeguarding the assets of the partnership and hence for
taking reasonable steps for the prevention and detection of fraud and other
irregularities.
AUDITORS
A resolution to re-appoint the auditors, Arthur Andersen, will be presented
to the Supervisory Board.
On behalf of the management team,
S. Gilling
PARTNERSHIP SECRETARY
Elstree Tower
Elstree Way
Borehamwood
Herts WD6 1DT
3 July 1995
33
AUDITORS' REPORT
LONDON
To the Partners of Mercury Personal Communications (trading as Mercury
One-2-One):
We have audited the financial statements for the years ended 31 March 1995,
1994 and 1993 on pages 5 to 19 which have been prepared under the historical
cost convention and the accounting policies set out on pages 8 to 10 which are
in accordance with generally accepted accounting principles in the United
Kingdom.
RESPECTIVE RESPONSIBILITIES OF THE MANAGEMENT TEAM AND AUDITORS
As described on page 3, the partnership's management team is responsible for
the preparation of the financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board, (generally accepted auditing standards in the United
Kingdom which are substantially equivalent to generally accepted auditing
standards in the United States). An audit includes examination, on a test basis,
of evidence relevant to the amounts and disclosures in the financial statements.
It also includes an assessment of the significant estimates and judgements made
by the management team in the preparation of the financial statements, and of
whether the accounting policies are appropriate to the partnership's
circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion, we also evaluated the overall
adequacy of the presentation of information in the financial statements.
In forming our opinion, we have considered the adequacy of the disclosures
made in note 1 to the financial statements which refers to the development stage
of the partnership and the assumptions made by the management team in preparing
the financial statements on a going concern basis. Our opinion is not qualified
in this respect.
OPINION
In our opinion the financial statements give a true and fair view of the
partnership's state of affairs at 31 March 1995, 1994 and 1993 and of its losses
and cash flows for the years then ended.
Arthur Andersen
Chartered Accountants and Registered
Auditors
1 Surrey Street
London
WC2R 2PS
3 July 1995
34
MERCURY PERSONAL COMMUNICATIONS
PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31 MARCH 1995
1995 1994 1993
NOTES L'000 L'000 L'000
------ ---------- --------- ---------
Turnover..................................... 2i 95,084 27,572 --
Cost of sales................................ (87,373) (31,999) --
---------- --------- ---------
Gross profit (loss)........................ 7,711 (4,427) --
Selling and distribution costs............... (38,764) (19,497) (1,460)
Administrative expenses...................... (93,612) (56,611) (25,200)
Transfers to deferred revenue expenditure.... 2c&11 -- 3,447 5,759
Own work capitalised......................... 9,618 14,150 5,867
Exceptional Item-provision for equipment
impairment.................................. 3 -- -- (3,000)
---------- --------- ---------
Operating loss............................. (115,047) (62,938) (18,034)
Exceptional Item-rationalisation costs....... 3 -- -- (18,746)
Interest receivable and similar income....... 5 997 827 943
Interest payable and similar charges......... 6 (8,987) (4,434) (297)
---------- --------- ---------
Loss on ordinary activities before taxation
(being retained loss for the financial
year)..................................... 4&16 (123,037) (66,545) (36,134)
Accumulated deficit at beginning of year..... (102,679) (36,134) --
---------- --------- ---------
Accumulated deficit at end of year........... (225,716) (102,679) (36,134)
---------- --------- ---------
---------- --------- ---------
There are no recognised gains or losses in any year other than the loss for
each year as stated.
A statement of movements in partners' funds is given in note 16.
The accompanying notes are an integral part of this profit and loss account.
35
MERCURY PERSONAL COMMUNICATIONS
BALANCE SHEET
31 MARCH 1995
1995 1994 1993
NOTES L'000 L'000 L'000
----- ---------- ---------- ---------
TANGIBLE FIXED ASSETS
Network assets....................................................... 9 270,649 165,179 95,756
Other fixed assets................................................... 9 49,365 38,062 25,483
---------- ---------- ---------
320,014 203,241 121,239
---------- ---------- ---------
CURRENT ASSETS
Customer acquisition costs:
Recoverable after more than one year............................... 10 43,513 14,112 --
Recoverable within one year........................................ 10 13,352 3,829 --
Deferred revenue expenditure:
Recoverable after more than one year............................... 11 12,678 17,924 20,505
Recoverable within one year........................................ 11 5,246 5,246 2,278
Stocks............................................................... 12 10,097 18,646 1,211
Debtors.............................................................. 13 23,721 11,413 4,652
Cash at bank and in hand............................................. 2,679 4,909 8,809
---------- ---------- ---------
111,286 76,079 37,455
CREDITORS: Amounts falling due within one year....................... 14 (131,962) (66,279) (47,924)
---------- ---------- ---------
NET CURRENT (LIABILITIES) ASSETS..................................... (20,676) 9,800 (10,469)
---------- ---------- ---------
TOTAL ASSETS LESS CURRENT LIABILITIES................................ 299,338 213,041 110,770
CREDITORS: Amounts falling due after more than one year.............. 15 (126,575) (75,241) (19,425)
---------- ---------- ---------
NET ASSETS......................................................... 172,763 137,800 91,345
---------- ---------- ---------
CAPITAL AND RESERVES
Partners' capital.................................................... 16 398,479 240,479 127,479
Profit and loss account............................................ 16 (225,716) (102,679) (36,134)
---------- ---------- ---------
TOTAL PARTNERS' FUNDS................................................ 172,763 137,800 91,345
---------- ---------- ---------
---------- ---------- ---------
Signed on behalf of the management team
R.A. Foy Finance director
M. Bell Deputy managing director
3 July 1995
The accompanying notes are an integral part of this balance sheet.
36
MERCURY PERSONAL COMMUNICATIONS
CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MARCH 1995
1995 1994 1993
---------------------- ---------------------- --------------------
NOTES L'000 L'000 L'000 L'000 L'000 L'000
--------- ---------- ---------- ---------- ---------- --------- ---------
OPERATING ACTIVITIES
NET CASH OUTFLOW FROM OPERATING
ACTIVITIES...................... 17 (72,718) (91,010) (30,920)
RETURNS ON INVESTMENT AND
SERVICING OF FINANCE
Interest received................ 997 827 943
Interest paid.................... (5,991) (4,027) (380)
Interest element of finance lease
rental payments................. (1,948) (1,189) (243)
---------- ---------- ---------
NET CASH (OUTFLOW) INFLOW FROM
RETURNS ON INVESTMENT AND
SERVICING OF FINANCE............ (6,942) (4,389) 320
INVESTING ACTIVITIES
Purchase of tangible fixed
assets.......................... (131,386) (66,057) (51,945)
Sale of tangible fixed assets.... 91 8 49
---------- ---------- ---------
NET CASH OUTFLOW FROM INVESTING
ACTIVITIES...................... (131,295) (66,049) (51,896)
---------- ---------- ---------
NET CASH OUTFLOW BEFORE
FINANCING....................... (210,955) (161,448) (82,496)
---------- ---------- ---------
---------- ---------- ---------
FINANCING
Partners' capital
contributions................... 18 (158,000) (113,000) (66,369)
New loans........................ 18 (57,034) (46,422) (15,350)
Capital element of finance lease
payments........................ 18 6,309 1,874 (2,936)
---------- ---------- ---------
NET CASH INFLOW FROM FINANCING... (208,725) (157,548) (84,655)
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS................ 20 (2,230) (3,900) 2,159
---------- ---------- ---------
(210,955) (161,448) (82,496)
---------- ---------- ---------
---------- ---------- ---------
The accompanying notes are an integral part of this statement.
37
MERCURY PERSONAL COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS
1 HISTORY AND DEVELOPMENT OF THE BUSINESS
Mercury Personal Communications is a partnership between Mercury Personal
Communications Limited, USW PCN, Inc., and MPC 92 Limited. The partnership is a
development stage business operating a licence to build and operate a national
Personal Communications Network throughout the UK.
With capital of L398.5 million at 31 March 1995, it has invested L274.9
million in the rollout of the network. The service commenced in 1993, offering
service to 24% of the population and operating within the M25 and the Home
Counties by 31 March 1994. During the current year, it launched its service in
the West Midlands and now covers 30% of the population with approximately
260,000 customers at 31 March 1995. The business has an accumulated deficit of
L225.7 million at 31 March 1995.
The partnership plans to extend the network to cover the whole of the UK and
substantial additional capital expenditure will be required to achieve the 90%
national geographic coverage by 1999 committed under licence. The operating plan
envisages additional funding in the year ended 31 March 1996 amounting to L266.6
million through a combination of equity, leases, third party loans and
uncommitted partner loan facilities, the terms of each of which have been
agreed. Drawdowns under these arrangements are largely at the discretion of the
partners. Additional funding will be required beyond that date, or earlier if
subscriber volumes are substantially higher or lower than planned. In these
circumstances, it is possible that additional capital may be required with a
corresponding acceleration of funding needs. The terms on which such additional
capital may be available, if at all, will be dependent upon future operating
performance.
The financial statements have been prepared on the going concern basis.
Specifically, the management team has assumed that:
a) adequate funding will continue to be available to roll out the network
in accordance with the operating plan, in particular, that the partners will
continue to approve drawdown of amounts under third party facilities and to
provide themselves the finance envisaged in the operating plan, and
b) the partnership will successfully expand the customer base and operate
the network in accordance with its operating and marketing plans.
2 PRINCIPAL ACCOUNTING POLICIES
A summary of the principal accounting policies, all of which have been
applied consistently throughout the year and the preceding two years is set out
below.
A) BASIS OF ACCOUNTING
The financial statements have been prepared in accordance with applicable
accounting standards on the historical cost basis.
B) TANGIBLE FIXED ASSETS
Tangible fixed assets are stated at cost net of accumulated depreciation.
The cost of fixed assets includes all costs incurred in bringing the assets
to their present condition and location including, where appropriate, external
consultancy fees together with an appropriate proportion of internal labour and
overhead.
The cost attributed to network assets includes capital equipment and
external professional fees and expenses incurred in the acquisition of sites,
engineering labour and overhead, together with the payroll and directly
attributable overheads relating to employees whose time, prior to commissioning,
is spent wholly on network development.
38
MERCURY PERSONAL COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2 PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
The interest costs incurred during the construction of the network prior to
commercial launch and relating to borrowings or other financing directly
attributable to the equipment invested in the network have been included in the
determination of the cost of network assets.
The cost of computer systems includes external consultancy and external
software development costs.
Depreciation is calculated so as to write off the cost of tangible fixed
assets, less their estimated residual values, over the expected useful economic
lives of the assets concerned. Depreciation commences on the date the assets are
brought into use and is charged on a straight-line basis.
The useful economic lives used for this purpose are:
Network assets.................................................. 10 years
Business assets
- short leasehold property.................................... terms of lease
- plant and equipment......................................... 3-5 years
- computer systems 3-5 years
- furniture, fixtures and fittings 3-10 years
C) DEFERRED REVENUE EXPENDITURE
Certain pre-launch costs have been carried forward as "deferred revenue
expenditure".
These costs include, inter alia, the payroll and directly attributable
overheads relating to employees whose time, prior to launch of the service, was
spent wholly on the development of computer systems and technical operating
standards. Deferred revenue expenditure also includes an allocation of space and
other indirect overheads attributable to all employees whose payroll and direct
overheads were capitalised in these financial statements. Deferral of costs
ceased on full commercial launch of the service, from which date amortisation
commenced. Deferred revenue expenditure is being amortised over a maximum of
five years on a straight-line basis. The recoverability of deferred costs is
reviewed annually in the light of actual revenues and taking account of
variances from projected revenue streams.
D) CUSTOMER ACQUISITION COSTS
The direct costs of acquiring new customers, relating primarily to equipment
subsidies and connection commissions, will be deferred against the revenues
expected to be earned over the expected life of the related customer, not
exceeding five years. Amortisation commences as individual customers are
connected to the network. The amortisation rate is reviewed annually and
adjustments made based on actual experience. The amortised costs are charged to
cost of sales and selling and distribution costs, respectively.
E) FINANCE AND OPERATING LEASES
The company enters into operating and finance leases. Assets held under
finance leases are initially reported at the present value of the minimum lease
payments at the inception of the lease, normally equivalent to the amount
financed, with an equivalent liability categorised as appropriate under
creditors due within or after one year. The asset is depreciated over the
shorter of the lease term and its useful economic life. Finance charges are
allocated to accounting periods in proportion to the outstanding capital
balance.
Rentals under operating leases are charged on a straight-line basis over the
lease term, even if the payments are not made on such a basis.
39
MERCURY PERSONAL COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2 PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
F) FOREIGN CURRENCIES
Transactions denominated in foreign currencies are recorded at the rate
ruling at the date of the transaction (or, where appropriate, at the rate of
exchange in a related forward exchange contract). Monetary assets and
liabilities denominated in foreign currencies at the balance sheet date are
translated at the rate of exchange ruling at the balance sheet date (or, where
appropriate, at the rate of exchange in a related forward exchange contract).
Any gain or loss arising from a movement in exchange rates subsequent to the
date of the transaction is included as an exchange gain or loss in the profit
and loss account.
G) STOCKS
Stocks of customer equipment are stated at the lower of cost and net
realisable value. The net realisable value is based on normal selling price
before customer acquisition costs, which are recognised when the related
customer is connected to the network or when the equipment is sold to a
distributor.
Network maintenance stock is stated at the lower of cost and net realisable
value.
Cost includes all costs incurred in bringing the stock to its present
condition and location, including appropriate overheads. Net realisable value
takes account of excess stock, deterioration and redundancy.
H) PENSIONS
The regular cost of providing benefits is charged to the profit and loss
account over the service lives of members of the scheme on the basis of a
constant percentage of pensionable pay. Variations from regular cost arising
from periodic actuarial valuations are allocated to the profit and loss account
over the expected remaining service lives of the members.
I) TURNOVER
Turnover comprises the value of sales (excluding VAT and similar taxes,
trade discounts and intra-group transactions) of airtime, connection fees and
equipment revenues made in the normal course of business.
J) RESEARCH AND DEVELOPMENT
Expenditure on research and development, incurred after full commercial
launch of the service, is written off in the year it is incurred.
3 EXCEPTIONAL ITEMS
1995 1994 1993
L'000 L'000 L'000
--------- --------- ---------
Provision for equipment impairment................................. -- -- 3,000
--------- --------- ---------
Provision of L3 million was made in 1993 against commitments to purchase
potentially substandard equipment during the early post-launch months.
1995 1994 1993
L'000 L'000 L'000
--------- --------- ---------
Rationalisation costs............................................. -- -- 18,746
--------- --------- ---------
The acquisition by the partnership of the trade, assets and liabilities of
Mercury PCN Limited in 1993 resulted in the duplication of staff, assets and
major development contracts. Rationalisation
40
MERCURY PERSONAL COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3 EXCEPTIONAL ITEMS (CONTINUED)
costs therefore include fixed asset write-offs of L3.5 million, deferred
expenditure write-offs of L9.5 million and cash related items (primarily
redundancies and contract cancellation costs) of L5.7 million.
4 LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION
Loss before taxation is stated after charging:
1995 1994 1993
L'000 L'000 L'000
--------- --------- ---------
a) Depreciation of owned tangible fixed assets........................... 24,976 10,271 1,599
b) Depreciation of assets held under finance leases...................... 5,333 2,087 411
c) Amortisation of customer acquisition costs............................ 9,896 1,203 --
d) Amortisation of deferred revenue expenditure.......................... 5,246 3,060 --
e) Research and development.............................................. 477 190 10
f) Hire of plant and machinery under operating leases.................... 1,096 1,629 771
g) Other operating lease rentals......................................... 11,750 4,950 95
h) Loss on disposal of fixed assets...................................... 44 5 115
i) Staff costs (see note 7).............................................. 36,822 21,575 13,493
j) Auditors' remuneration
i. audit.............................................................. 127 120 19
ii. non-audit services................................................. 156 367 144
--------- --------- ---------
5 INTEREST RECEIVABLE AND SIMILAR INCOME
1995 1994 1993
L'000 L'000 L'000
--------- --------- ---------
Interest on money market deposits........................................ 997 827 943
--------- --------- ---------
--------- --------- ---------
6 INTEREST PAYABLE AND SIMILAR CHARGES
1995 1994 1993
L'000 L'000 L'000
--------- --------- ---------
On bank loans, overdrafts and other loans
- repayable within 5 years, not by instalments......................... 1,488 582 54
- repayable wholly or partly in more than 5 years...................... 5,551 3,445 326
--------- --------- ---------
7,039 4,027 380
Loan interest capitalised................................................ -- (782) (326)
On finance leases and hire purchase contracts............................ 1,948 1,189 243
--------- --------- ---------
8,987 4,434 297
--------- --------- ---------
--------- --------- ---------
41
MERCURY PERSONAL COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7 EMPLOYEE INFORMATION
The average weekly number of persons (including the management team)
employed by the partnership during the year was:
1995 1994 1993
NUMBER NUMBER NUMBER
--------- --------- ---------
By function:
Sales and marketing.................................................... 143 107 51
Customer services...................................................... 517 107 50
Operations............................................................. 195 97 45
Engineering and implementation......................................... 136 143 133
Finance and administration............................................. 189 173 76
--------- --------- ---------
1,180 627 355
--------- --------- ---------
--------- --------- ---------
Staff costs for the above persons (including amounts capitalised):
1995 1994 1993
L'000 L'000 L'000
--------- --------- ---------
Wages and salaries....................................................... 32,069 18,603 11,633
Social security costs.................................................... 2,442 1,579 1,096
Other pension costs...................................................... 2,311 1,393 764
--------- --------- ---------
36,822 21,575 13,493
--------- --------- ---------
--------- --------- ---------
8 MANAGEMENT TEAM EMOLUMENTS
1995 1994 1993
L'000 L'000 L'000
--------- --------- ---------
Salaries................................................................. 2,281 1,165 1,204
Other emoluments (including pension contributions and benefits in
kind)................................................................... 295 116 135
--------- --------- ---------
2,576 1,281 1,339
--------- --------- ---------
--------- --------- ---------
The amounts shown above include L417,561 (1994 - L195,705; 1993 - L231,112)
recharged by one of the partners as the cost of the highest paid management team
member.
No chairman of the management team was appointed during the year.
The amounts shown above include L100,833 in respect of compensation for loss
of office.
Of the above amounts, L1,274,637 (1994 - L686,970; 1993 - L571,546)
represents recharges of emoluments paid or payable by the partners in respect of
management team members.
Included within the above amounts and the table that follows is L666,230
earned in respect of a longterm incentive scheme operating over the last three
financial years.
42
MERCURY PERSONAL COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8 MANAGEMENT TEAM EMOLUMENTS (CONTINUED)
The number of management team members (including the highest paid member)
who received fees and other emoluments (excluding pension contributions) in the
following ranges was as set out below. Where the partnership is recharged by the
partners for services of the management team, the recharged amount is included
below.
1995 1994 1993
NUMBER NUMBER NUMBER
------- ------- -------
L 65,001 - L 70,000..................................... 1 -- --
L 70,001 - L 75,000..................................... 1 -- --
L 80,001 - L 85,000..................................... -- -- 1
L 85,001 - L 90,000..................................... 1 -- 1
L 90,001 - L 95,000..................................... -- 2 --
L 95,001 - L100,000..................................... -- 1 1
L100,001 - L105,000..................................... -- 1 1
L105,001 - L110,000..................................... -- -- 1
L110,001 - L115,000..................................... 2 -- --
L115,001 - L120,000..................................... -- 1 --
L125,001 - L130,000..................................... -- 1 1
L130,001 - L135,000..................................... 1 1 1
L135,001 - L140,000..................................... -- 1 1
L140,001 - L145,000..................................... 1 -- --
L145,001 - L150,000..................................... -- 1 --
L165,001 - L170,000..................................... 1 -- 1
L185,001 - L190,000..................................... 1 -- --
L195,001 - L200,000..................................... -- 1 --
L210,001 - L215,000..................................... 1 -- --
L215,001 - L220,000..................................... 1 -- --
L225,001 - L230,000..................................... 1 -- --
L230,001 - L235,000..................................... -- -- 1
L325,001 - L330,000..................................... 1 -- --
L415,001 - L420,000..................................... 1 -- --
------- ------- -------
43
MERCURY PERSONAL COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9 TANGIBLE FIXED ASSETS
FURNITURE,
SHORT FIXTURES, TOTAL OF TOTAL
LEASEHOLD PLANT AND COMPUTER AND BUSINESS NETWORK FIXED
PROPERTY EQUIPMENT SYSTEMS FITTINGS ASSETS ASSETS ASSETS
L'000 L'000 L'000 L'000 L'000 L'000 L'000
----------- ----------- ----------- ----------- --------- --------- ---------
Cost
At 1 April 1993............... 439 3,444 22,500 2,848 29,231 95,756 124,987
Additions..................... 51 3,417 11,895 2,400 17,763 76,600 94,363
Disposals..................... -- (221) (5) -- (226) -- (226)
----- ----------- ----------- ----- --------- --------- ---------
At 1 April 1994............... 490 6,640 34,390 5,248 46,768 172,356 219,124
Additions..................... 1,536 4,041 15,241 1,481 22,299 125,009 147,308
Disposals..................... -- (571) (159) (51) (781) -- (781)
----- ----------- ----------- ----- --------- --------- ---------
At 31 March 1995.............. 2,026 10,110 49,472 6,678 68,286 297,365 365,651
----- ----------- ----------- ----- --------- --------- ---------
----- ----------- ----------- ----- --------- --------- ---------
Depreciation
At 1 April 1993............... 39 793 2,400 516 3,748 -- 3,748
Charge for the year........... 17 1,195 3,640 329 5,181 7,177 12,358
Disposals..................... -- (221) (2) -- (223) -- (223)
----- ----------- ----------- ----- --------- --------- ---------
At 1 April 1994............... 56 1,767 6,038 845 8,706 7,177 15,883
Charge for the year........... 138 1,620 8,383 629 10,770 19,539 30,309
Disposals..................... -- (475) (63) (17) (555) -- (555)
----- ----------- ----------- ----- --------- --------- ---------
At 31 March 1995.............. 194 2,912 14,358 1,457 18,921 26,716 45,637
----- ----------- ----------- ----- --------- --------- ---------
----- ----------- ----------- ----- --------- --------- ---------
Net book value
At 1 April 1993............... 400 2,651 20,100 2,332 25,483 95,756 121,239
----- ----------- ----------- ----- --------- --------- ---------
At 1 April 1994............... 434 4,873 28,352 4,403 38,062 165,179 203,241
----- ----------- ----------- ----- --------- --------- ---------
At 31 March 1995.............. 1,832 7,198 35,114 5,221 49,365 270,649 320,014
----- ----------- ----------- ----- --------- --------- ---------
----- ----------- ----------- ----- --------- --------- ---------
The net book value of tangible fixed assets includes an amount of L25.7
million (1994 - L21.1m; 1993 - L3.999m) in respect of assets held under finance
leases and hire purchase contracts.
The net book value of tangible fixed assets includes an amount of L39
million (1994 - L37.2 million; 1993 - L95.8 million) in respect of network
assets in the course of construction and an amount of L5.3 million (1994 - L2.6
million; 1993 - L16.6 million) in respect of business assets in the course of
construction. Tangible fixed assets under the course of construction are not
depreciated.
The net book value of interest capitalised included in network assets at 31
March 1995 is L3.1m (1994 - L3.5m; 1993 - L326,000).
The net book value of own labour and overheads capitalised within the cost
of network assets at 31 March 1995 is L44.8m (1994 - L39.7 million; 1993 - L30.8
million).
44
MERCURY PERSONAL COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10 CUSTOMER ACQUISITION COSTS
1995 1994 1993
L'000 L'000 L'000
--------- --------- ---------
At beginning of year..................................................... 17,941 -- --
Additions during year.................................................... 47,617 19,144 --
Amounts written off...................................................... (8,693) (1,203) --
--------- --------- ---------
At end of year........................................................... 56,865 17,941 --
--------- --------- ---------
Recoverable after more than one year..................................... 43,513 14,112 --
Recoverable within one year.............................................. 13,352 3,829 --
--------- --------- ---------
56,865 17,941 --
--------- --------- ---------
11 DEFERRED REVENUE EXPENDITURE
1995 1994 1993
L'000 L'000 L'000
--------- --------- ---------
At beginning of year..................................................... 23,170 22,783 26,541
Amounts written off...................................................... (5,246) (3,060) (9,517)
Expenditure during the year.............................................. -- 3,447 5,759
--------- --------- ---------
At end of year........................................................... 17,924 23,170 22,783
--------- --------- ---------
Recoverable after more than one year..................................... 12,678 17,924 20,505
Recoverable within one year.............................................. 5,246 5,246 2,278
--------- --------- ---------
17,924 23,170 22,783
--------- --------- ---------
12 STOCKS
The following are included in the net book value of stocks:
1995 1994 1993
L'000 L'000 L'000
--------- --------- ---------
Stocks of customer equipment............................................. 5,869 16,119 --
Network maintenance stock................................................ 4,228 2,527 1,211
--------- --------- ---------
10,097 18,646 1,211
--------- --------- ---------
--------- --------- ---------
13 DEBTORS
The following are included in the net book value of debtors:
1995 1994 1993
L'000 L'000 L'000
--------- --------- ---------
Amounts falling due within one year:
Trade debtors.......................................................... 12,781 5,716 --
Amounts due from related undertakings.................................. 1,129 243 369
Other debtors.......................................................... 330 503 3,143
Prepayments and accrued income......................................... 5,030 1,815 1,140
VAT recoverable........................................................ 4,451 3,136 --
--------- --------- ---------
23,721 11,413 4,652
--------- --------- ---------
--------- --------- ---------
45
MERCURY PERSONAL COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
The following are included in creditors falling due within one year:
1995 1994 1993
L'000 L'000 L'000
--------- --------- ---------
Loans................................................................... 8,707 3,892 199
Obligations under finance leases........................................ 7,069 4,597 1,322
Trade creditors......................................................... 67,777 35,247 32,423
Amounts owed to related undertakings.................................... -- 2,652 1,396
Taxation and social security............................................ 841 720 429
Other creditors......................................................... 5,449 47 133
Accruals and deferred income............................................ 42,119 19,124 12,022
--------- --------- ---------
131,962 66,279 47,924
--------- --------- ---------
--------- --------- ---------
15 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
The following are included in creditors falling due after more than one
year:
1995 1994 1993
L'000 L'000 L'000
--------- --------- ---------
Loans................................................................... 110,099 57,880 15,151
Obligations under finance leases........................................ 14,956 15,761 2,594
Accruals and deferred income............................................ 1,520 1,600 1,680
--------- --------- ---------
126,575 75,241 19,425
--------- --------- ---------
--------- --------- ---------
Obligations under finance leases falling due after more than one year are
all payable within 2-5 years.
LOANS AND FINANCE LEASES
Loans and obligations under finance leases are repayable as follows:
1995 1994 1993
L'000 L'000 L'000
--------- --------- ---------
Due within one year..................................................... 15,776 8,489 1,521
Due within 2-5 years.................................................... 80,725 42,654 6,724
Due after 5 years....................................................... 44,330 30,987 11,021
--------- --------- ---------
140,831 82,130 19,266
--------- --------- ---------
--------- --------- ---------
Included within creditors is a loan totalling L100.3 million (1994 - L42.5
million; 1993 - L14.3 million) repayable by instalments, some of which fall due
after five years. It has an interest rate of 2% above LIBOR and the final
instalment is due on 1 December 2001. The loan is secured on the assets of the
undertaking. The loan agreement includes financial and other covenants which
provide that fixed and floating charges over the assets of the undertaking come
into effect in the event that these covenants are not satisfied.
46
MERCURY PERSONAL COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16 MOVEMENTS IN PARTNERS' FUNDS
PROFIT AND
LOSS PARTNERS'
ACCOUNT CAPITAL TOTAL
L'000 L'000 L'000
---------- --------- ----------
At 1 April 1993.................................................... (36,134) 127,479 91,345
Additional funding during the year................................. -- 113,000 113,000
Retained loss for the year......................................... (66,545) -- (66,545)
---------- --------- ----------
At 1 April 1994.................................................... (102,679) 240,479 137,800
Additional funding during the year................................. -- 158,000 158,000
Retained loss for the year......................................... (123,037) -- (123,037)
---------- --------- ----------
At 31 March 1995................................................... (225,716) 398,479 172,763
---------- --------- ----------
---------- --------- ----------
17 RECONCILIATION OF OPERATING LOSS TO NET CASH OUTFLOW FROM OPERATING
ACTIVITIES
1995 1994 1993
L'000 L'000 L'000
--------- --------- ---------
Operating loss........................................................ 115,047 62,938 18,034
Depreciation charges.................................................. (30,309) (12,358) (2,010)
Exceptional item - rationalisation costs.............................. -- -- 18,746
(Loss) profit on fixed asset disposals................................ (44) 5 (115)
Fixed asset write-offs................................................ -- -- (3,484)
Deferred expenditure written off...................................... (5,246) (3,060) (9,517)
Customer acquisition costs written off................................ (9,896) (1,203) --
Own work capitalised.................................................. 9,618 14,150 5,867
Customer acquisition costs capitalised................................ 48,820 19,144 --
Deferred revenue expenditure.......................................... -- 3,447 5,759
(Decrease) increase in stock.......................................... (8,549) 17,435 1,211
Increase in debtors and prepayments................................... 12,308 6,761 3,361
Increase in creditors and accruals.................................... (59,031) (16,249) (6,932)
--------- --------- ---------
Net cash outflow from operating activities............................ 72,718 91,010 30,920
--------- --------- ---------
--------- --------- ---------
18 ANALYSIS OF CHANGES IN FINANCING DURING THE YEAR
LOANS AND
FINANCE
PARTNERS' LEASE
CAPITAL OBLIGATIONS
L'000 L'000
--------- ------------
At 1 April 1993............................................................... 127,479 19,266
Cash inflows from financing................................................... 113,000 44,548
Inception of finance lease contracts.......................................... -- 18,316
--------- ------------
At 31 March 1994.............................................................. 240,479 82,130
--------- ------------
--------- ------------
At 1 April 1994............................................................... 240,479 82,130
Cash inflows from financing................................................... 158,000 50,725
Inception of finance lease contracts.......................................... -- 7,976
--------- ------------
At 31 March 1995.............................................................. 398,479 140,831
--------- ------------
--------- ------------
47
MERCURY PERSONAL COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
18 ANALYSIS OF CHANGES IN FINANCING DURING THE YEAR (CONTINUED)
The partners contributed L158 million during the year, and have advanced
L9.5 million of capital contributions, together with L25 million in the form of
subordinated shareholder loans after the year-end.
19 MAJOR NON-CASH TRANSACTION
During the year the partnership entered into finance lease arrangements in
respect of assets with a total capital value at the inception of the leases of
L8.0 million (1994 - 18.3 million).
20 ANALYSIS OF CHANGES IN CASH AND CASH EQUIVALENTS DURING THE YEAR
1995 1994
L'000 L'000
--------- ---------
Balance at beginning of year........................................................ 4,909 8,809
Net cash outflow.................................................................... (2,230) (3,900)
--------- ---------
Balance at end of year.............................................................. 2,679 4,909
--------- ---------
--------- ---------
21 PENSIONS
The partnership participates in the Cable and Wireless Superannuation Fund,
which is a defined benefit scheme whereby retirement benefits are based on the
employees' final remuneration and length of service. The scheme is administered
through independent trustees. Contributions to the scheme are made in accordance
with the recommendations of independent actuaries who value the scheme at
regular intervals, usually triennially. An actuarial valuation of the scheme was
prepared at 31 March 1993, which showed a surplus. The main assumption used in
determining the surplus was that the average long-term rate of return earned by
the scheme's assets would be 2.5% higher than the rate of salary inflation. The
aggregate assessed value of the assets was L548.8 million and was sufficient to
cover 107.2% of the aggregate benefits that had accrued to the members after
allowing for expected future increases in earnings. The partnership's liability
under the scheme may be subject to adjustment based on future actuarial
valuations.
The pension cost charge for the year was L2,311,000 (1994 - L873,000; 1993 -
L764,000).
22 CAPITAL COMMITMENTS
1995 1994 1993
L'000 L'000 L'000
--------- --------- ---------
Capital expenditure that has been contracted for but has not been
provided for in the financial statements............................... 109,521 32,513 75,714
--------- --------- ---------
--------- --------- ---------
Capital expenditure that has been authorised but has not yet been
contracted for......................................................... 64,800 21,000 9,195
--------- --------- ---------
--------- --------- ---------
23 CONTINGENT LIABILITIES
The partnership has no material contingent liabilities.
48
MERCURY PERSONAL COMMUNICATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
24 FINANCIAL COMMITMENTS
The partnership had annual commitments under non-cancellable operating
leases as follows:
LAND AND
BUILDINGS OTHER
1995 L'000 L'000
- - ------------------------------------------------------------------------------------ ----------- ---------
Expiring within 1 year.............................................................. 24 4,754
Expiring between 2 and 5 years...................................................... 488 731
Expiring in over 5 years............................................................ 7,300 --
----- ---------
7,812 5,485
----- ---------
----- ---------
1994 L'000 L'000
- - ------------------------------------------------------------------------------------ ----------- ---------
Expiring within 1 year.............................................................. 76 311
Expiring between 2 and 5 years...................................................... 406 311
Expiring in over 5 years............................................................ 5,811 --
----- ---------
6,293 622
----- ---------
----- ---------
1993 L'000 L'000
- - ------------------------------------------------------------------------------------ ----------- ---------
Expiring within 1 year.............................................................. 35 118
Expiring between 2 and 5 years...................................................... 146 417
Expiring in over 5 years............................................................ 3,930 --
----- ---------
4,111 535
----- ---------
----- ---------
25 ULTIMATE PARENT COMPANY
The partnership is an equal joint venture between Cable and Wireless plc
(registered in England and Wales) and U S WEST Inc. (incorporated in the United
States).
49
C. GEORGIA CABLE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARY PARTNERSHIPS
On December 6, 1994, subsidiaries of U S WEST acquired the assets of Atlanta
Cable Partners, L.P. and Georgia Cable Partners, subsidiary partnerships of
Georgia Cable Holdings Limited Partnership ("Georgia Cable Holdings"). Set forth
below are the combined financial statements of Georgia Cable Holdings and
subsidiary partnerships for the years ended December 31, 1993 and 1992.
Independent Auditors' Report........................................................... 51
Combined Financial Statements for the Years Ended December 31, 1993 and 1992
Combined Balance Sheets.............................................................. 52
Combined Statements of Operations.................................................... 53
Combined Statements of Changes in Partners' Capital Deficiency....................... 54
Combined Statements of Cash Flows.................................................... 55
Notes to Combined Financial Statements............................................... 56
Combined Financial Statements for the Nine Months Ended September 30, 1994 and 1993
(unaudited)
Combined Statements of Operations.................................................... 66
50
INDEPENDENT AUDITORS' REPORT
The Partners
Georgia Cable Holdings
Limited Partnership:
We have audited the accompanying combined balance sheets of Georgia Cable
Holdings Limited Partnership and Subsidiary Partnerships (the "Partnership") as
of December 31, 1993 and 1992, and the related combined statements of
operations, changes in partners' capital deficiency and cash flows for each of
the years in the two year period ended December 31, 1993. These combined
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Georgia Cable
Holdings Limited Partnership and Subsidiary Partnerships as of December 31, 1993
and 1992, and the results of their operations and their cash flows for each of
the years in the two year period ended December 31, 1993 in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Miami, Florida
February 25, 1994
51
GEORGIA CABLE HOLDINGS
LIMITED PARTNERSHIP AND
SUBSIDIARY PARTNERSHIPS
COMBINED BALANCE SHEETS
DECEMBER 31, 1993 AND 1992
(IN THOUSANDS)
ASSETS
1993 1992
------------ ----------
Cash and cash equivalents............................................................... $ 850 22,898
Accounts receivable, net................................................................ 4,160 3,441
Prepaid expenses........................................................................ 409 247
Construction inventories and construction in progress................................... 1,384 1,533
Property, plant and equipment, at cost:
Cable television distribution systems................................................. 137,319 128,968
Transportation equipment.............................................................. 1,934 1,680
Furniture and fixtures................................................................ 2,687 2,504
Land and buildings.................................................................... 6,080 5,998
------------ ----------
148,020 139,150
Less accumulated depreciation......................................................... (77,661) (64,970)
------------ ----------
Property, plant and equipment, net.............................................. 70,359 74,180
Intangible assets, net.................................................................. 66,808 82,841
Deferred debt expense, net.............................................................. 7,605 2,389
------------ ----------
Total assets.................................................................... $ 151,575 187,529
------------ ----------
------------ ----------
LIABILITIES AND PARTNERS' CAPITAL DEFICIENCY
Accounts payable........................................................................ 1,676 1,461
Accounts payable, affiliates............................................................ 340 81
Accrued interest........................................................................ 1,332 1,015
Other accrued expenses.................................................................. 4,787 3,548
Subscriber deposits and unearned income................................................. 4,533 4,691
Bank debt............................................................................... 298,000 --
Credit agreement........................................................................ -- 157,000
Subordinated debt....................................................................... -- 169,017
------------ ----------
Total liabilities............................................................... 310,668 336,813
------------ ----------
Commitments and contingencies
Partners' capital deficiency:
General partners...................................................................... (134,635) (126,332)
Limited partners...................................................................... (24,458) (22,952)
------------ ----------
Total partners' capital deficiency.............................................. (159,093) (149,284)
------------ ----------
Total liabilities and partners' capital deficiency.............................. $ 151,575 187,529
------------ ----------
------------ ----------
See accompanying notes to combined financial statements.
52
GEORGIA CABLE HOLDINGS
LIMITED PARTNERSHIP AND
SUBSIDIARY PARTNERSHIPS
COMBINED STATEMENTS OF OPERATIONS
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED DECEMBER 31, 1993
(IN THOUSANDS)
1993 1992
---------- ---------
Revenues.................................................................................. $ 95,228 88,065
---------- ---------
Operating expenses:
Programming costs....................................................................... 18,329 15,567
Service and general and administrative costs............................................ 25,167 23,708
Management fees and consulting expenses................................................. 2,379 2,127
Depreciation and amortization........................................................... 29,843 31,744
---------- ---------
Income from operations................................................................ 19,510 14,919
Interest expense.......................................................................... (26,117) (37,847)
Interest income........................................................................... 200 356
Gain on disposal of assets................................................................ 85 5
---------- ---------
Loss before extraordinary item........................................................ (6,322) (22,567)
Extraordinary item -- loss on extinguishment of debt...................................... (3,487) --
---------- ---------
Net loss.............................................................................. $ (9,809) (22,567)
---------- ---------
---------- ---------
See accompanying notes to combined financial statements.
53
GEORGIA CABLE HOLDINGS
LIMITED PARTNERSHIP AND
SUBSIDIARY PARTNERSHIPS
COMBINED STATEMENTS OF CHANGES IN
PARTNERS' CAPITAL DEFICIENCY
FOR EACH OF THE YEARS IN THE TWO-YEAR PERIOD ENDED DECEMBER 31, 1993
(IN THOUSANDS)
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
------------ --------- ----------
Balances, December 31, 1991................................................. $ (107,240) (19,477) (126,717)
Net loss.................................................................. (19,092) (3,475) (22,567)
Redemption of put option.................................................. (10,427) (1,891) (12,318)
Partners contributions to fund redemption of put option................... 10,427 1,891 12,318
------------ --------- ----------
Balances, December 31, 1992................................................. (126,332) (22,952) (149,284)
Net loss.................................................................. (8,303) (1,506) (9,809)
------------ --------- ----------
Balances, December 31, 1993................................................. $ (134,635) (24,458) (159,093)
------------ --------- ----------
------------ --------- ----------
See accompanying notes to combined financial statements.
54
GEORGIA CABLE HOLDINGS
LIMITED PARTNERSHIP AND
SUBSIDIARY PARTNERSHIPS
COMBINED STATEMENTS OF CASH FLOWS
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED DECEMBER 31, 1993
(IN THOUSANDS)
1993 1992
----------- ---------
Cash flows provided by operating activities:
Net loss before extraordinary item...................................................... $ (6,322) (22,567)
Extraordinary item -- loss on extinguishment of debt.................................... (3,487) --
----------- ---------
Net loss.......................................................................... (9,809) (22,567)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization......................................................... 29,843 31,744
Amortization of deferred debt expense................................................. 3,766 25,020
Gain on disposal of property, plant and equipment..................................... (85) (5)
Deferred debt expense on extinguishment of debt....................................... 2,068 --
(Increase) decrease in:
Accounts receivable................................................................. (719) (533)
Prepaid expenses.................................................................... (162) 10
Deferred debt expense, net.......................................................... (8,067) (178)
Increase (decrease) in:
Accounts payable.................................................................... 215 304
Accounts payable, affiliates........................................................ 259 76
Accrued interest.................................................................... 317 (265)
Other accrued expenses.............................................................. 1,239 121
Subscriber deposits and unearned revenue............................................ (158) (100)
----------- ---------
Net cash provided by operating activities......................................... 18,707 33,627
----------- ---------
Cash flows provided by (used in) investing activities:
Purchase of property, plant and equipment............................................... (10,102) (8,454)
Decrease (increase) in construction inventories and construction in progress............ 149 (16)
Purchase of intangible assets........................................................... (162) --
Proceeds from disposal of assets........................................................ 360 45
----------- ---------
Net cash used in investing activities............................................. (9,755) (8,425)
----------- ---------
Cash flows provided by (used in) financing activities:
Bank borrowings......................................................................... 311,000 --
Payments on bank debt................................................................... (13,000) --
Repayment of term notes................................................................. (157,000) (8,004)
Repayment of subordinated debt.......................................................... (172,000) --
Partners contributions to fund redemption of put option................................. -- 12,318
Redemption of put option................................................................ -- (12,318)
----------- ---------
Net cash used in financing activities............................................. (31,000) (8,004)
----------- ---------
Net increase in cash and cash equivalents......................................... (22,048) 17,198
Cash and cash equivalents, beginning of year.............................................. 22,898 5,700
----------- ---------
Cash and cash equivalents, end of year.................................................... $ 850 22,898
----------- ---------
----------- ---------
Supplemental disclosure of cash flow information:
Cash interest paid...................................................................... $ 22,056 13,059
----------- ---------
----------- ---------
See accompanying notes to combined financial statements.
55
GEORGIA CABLE HOLDINGS
LIMITED PARTNERSHIP AND
SUBSIDIARY PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1992
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined financial statements include the accounts of Georgia Cable
Holdings Limited Partnership (the "Partnership"), Atlanta Cable Partners L.P.
("Atlanta Partners") and Georgia Cable Partners ("Georgia Partners")
(collectively, the "Subsidiary Partnerships"). The Partnership, a Texas limited
partnership, was formed on September 23, 1987 to enter into and form the
Subsidiary partnerships as a general partner. The Partnership controls the
Subsidiary Partnerships and owns a 95.9596 percent interest in and serves as the
managing partner of each partnership.
Atlanta Partners, a Georgia limited partnership, was formed on February 10,
1988 to acquire the assets of the cable television system serving the
metropolitan Atlanta, Georgia, area. Georgia Partners, a Georgia general
partnership, was formed on September 18, 1987 to acquire the assets of the cable
television system serving the DeKalb County, Georgia area.
All income, deductions, credits, gains and losses of the Partnership and the
Subsidiary Partnerships are allocated to the partners in accordance with their
respective percentage interests.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of the Partnership
and its majority ownership interest in the Subsidiary Partnerships. All
interpartnership items and transactions have been eliminated. The general
partner capital accounts representing the minority ownership of the Subsidiary
Partnerships are presented on a combined basis with that of the Partnership.
(B) CASH AND CASH EQUIVALENTS
For the purpose of the statements of cash flows, the Partnership and
Subsidiary Partnerships consider all highly liquid investments with original
maturities of three months or less to be cash equivalents.
(C) PROPERTY, PLANT AND EQUIPMENT
Depreciation is computed by the straight-line method over the estimated
useful lives of the assets. The composite method is used for cable television
distribution systems. Under the composite method, proceeds from the retirement
of cable television distribution system assets are credited to accumulated
depreciation.
The estimated useful lives are generally as follows:
ESTIMATED
USEFUL LIVES
--------------
Buildings........................................................... 15-20 years
Cable television distribution systems............................... 3-10 years
Transportation equipment............................................ 5 years
Other............................................................... 5 years
Construction inventories are carried at the lower of cost (weighted average
unit cost) or market. Construction in progress is reclassified to cable
television distribution systems as each segment of the plant is activated.
Construction in progress includes internal and external costs incurred in the
construction of the cable television distribution systems. Internal costs
include direct labor, transfers from construction inventories and construction
overhead.
56
GEORGIA CABLE HOLDINGS
LIMITED PARTNERSHIP AND
SUBSIDIARY PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993 AND 1992
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Maintenance and repairs are charged to expense as incurred. Expenditures for
major renewals and betterments are capitalized. Gains or losses on disposition
of property, plant and equipment (other than cable television distribution
systems) are credited or charged to income.
(D) AMORTIZATION
Deferred debt expense and discounts on debt are being amortized by the
interest method using the effective rate implicit in the borrowing transaction.
Excess cost over net assets acquired is being amortized by the straight-line
method over ten years. Other intangible assets, including franchises and
subscriber lists, are being amortized by the straight-line method over their
useful lives ranging from three to ten years. Intangible assets consists of the
following at December 31, 1993 and 1992 (in thousands):
1993 1992
----------- -----------
Acquired franchises............................................... $ 132,268 $ 132,106
Goodwill.......................................................... 78,985 78,985
Total......................................................... 211,253 211,091
Less accumulated amortization..................................... 144,445 128,250
----------- -----------
Intangible assets, net............................................ $ 66,808 $ 82,841
----------- -----------
----------- -----------
(E) SUBSCRIBER DEPOSITS
Under Financial Accounting Standards Board Statement No. 107, the fair value
of deposits with no stated maturity is equal to the amount payable on demand at
December 31, 1993 and 1992.
(F) FEDERAL INCOME TAXES
The Partnership and Subsidiary Partnerships, as entities, pay no income
taxes, although they are required to file federal and state income tax returns
for informational purposes only. All income or loss "flows through" to the
individual partners in the manner specified in the partnership agreement.
The significant differences between results of operations presented in these
combined financial statements and taxable loss for the federal income tax
reporting purposes, result from the following tax presentations:
i. Amortization of excess cost over net assets acquired is not deductible.
ii. Deductions relating to acquired assets which are subject to preexisting
safe harbor leases.
(G) EMPLOYEE BENEFIT PLAN
The Partnership participated, through August 1991, with companies affiliated
with Prime II Management, Inc. ("PMI") in a defined contribution pension plan
covering substantially all full-time employees who have completed one year of
service. The plan is subject to the provisions of Internal Revenue Code Section
401(k). Beginning in September 1991, the Partnership adopted a separate 401(k)
plan; balances from the predecessor plan were transferred into the new plan.
Employee vesting and eligibility requirements were not affected. Contributions
by the Partnership are determined as a percentage of each participating
employee's contributions and are at the discretion of the plan's sponsor. During
1993 and 1992, the maximum employer contribution was $350 per employee.
Partnership contributions totaled $44,000 and $45,000 for the years ended
December 31, 1993 and 1992, respectively.
57
GEORGIA CABLE HOLDINGS
LIMITED PARTNERSHIP AND
SUBSIDIARY PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993 AND 1992
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(H) RECLASSIFICATIONS
Certain items in the 1992 combined financial statements have been
reclassified to conform to the 1993 presentation.
3. CASH EQUIVALENTS
The Partnership has entered into an agreement to purchase securities under
agreements to resell ("repos"). At December 31, 1993 and 1992, the outstanding
repos approximated $933,000 and $24,154,000, respectively, which approximates
market. The repos are collateralized by U.S. government and agency securities.
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following at December 31, 1993 and
1992:
1993 1992
--------- ---------
(IN THOUSANDS)
Accounts receivable:
Trade.................................................................... $ 2,879 2,526
Other.................................................................... 503 1,003
Affiliate................................................................ 1,166 508
Less allowance for doubtful accounts....................................... (388) (596)
--------- ---------
Accounts receivable, net............................................... $ 4,160 3,441
--------- ---------
--------- ---------
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31,
1993 and 1992:
1993 1992
----------- -----------
(IN THOUSANDS)
Land................................................................ $ 3,751 3,760
Buildings........................................................... 2,329 2,238
Cable television distribution systems............................... 137,319 128,968
Transportation equipment............................................ 1,934 1,680
Other............................................................... 2,687 2,504
----------- -----------
Total........................................................... 148,020 139,150
Less accumulated depreciation....................................... (77,661) (64,970)
----------- -----------
Property, plant and equipment, net.............................. $ 70,359 74,180
----------- -----------
----------- -----------
Depreciation expense was $13,648,000 and $15,513,000 for the years ended
December 31, 1993 and 1992, respectively.
6. BANK DEBT
Bank debt, consisting of a term loan and a revolving line of credit
consisted of the following at December 31, 1993 and 1992:
1993 1992
----------- -----------
(IN THOUSANDS)
Revolving line of credit............................................ $ 12,500 --
Term loan........................................................... 285,500 --
----------- -----------
$ 298,000 --
----------- -----------
----------- -----------
58
GEORGIA CABLE HOLDINGS
LIMITED PARTNERSHIP AND
SUBSIDIARY PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. BANK DEBT (CONTINUED)
On April 30 1993, the Partnership refinanced its existing indebtedness (see
notes 7 and 8) by entering into a new borrowing arrangement with a group of
banks.
The Partnership received commitments totaling $300 million for a term loan
and $35 million for a revolving line of credit. On April 30, 1993, the
Partnership repaid its existing debt through a combination of excess cash and
the borrowing from the new facility of $311 million, including $11 million from
its revolving facilities.
Under the bank facilities, the Partnership has two interest rate options:
prime rate ("Prime") and London Interbank Offering Rate ("LIBOR"). The rates,
determined in accordance with the Bank Agreement, are subject to an add-on
margin varying from 0.5 percent to 1.5 percent for the Prime options and 1.5
percent to 2.5 percent for the LIBOR option. Current add-on margins are at the
highest percentage. The rates depend on the maintenance of certain ratios.
The Partnership may prepay the term loan and revolving credit loans in whole
or in part upon prior notice without penalty. In connection with the
refinancing, the Partnership is required to make a mandatory repayment of the
term notes within ninety-five days after the end of each fiscal year if, for the
prior year ended December 31, it had positive Excess Cash Flow (defined as
consolidated net income plus depreciation, amortization and noncash charges,
less capital expenditures and scheduled principal payments in respect of
indebtedness). The amount of the required prepayment is equal to 50 percent of
the positive Excess Cash Flow. The mandatory prepayment, when required, is
applied first to the term loans in inverse order, then to the revolving line of
credit. As a result of the 1993 operating activities, the Company will not be
required to make a payment for that year.
As a result of the 1993 refinancing, the Partnership charged $2,068,000 of
prior debt unamortized loan fees to expenses. In addition, it incurred
$1,419,000 as an early prepayment cost to the prior lender (see notes 7 and 8).
These charges are reflected in the combined financial statements as an
extraordinary item for the year ended December 31, 1993.
Quarterly payments under the Partnership's term loan agreement commenced in
June 30, 1993, with the last payment due on June 30, 2001. The Partnership's
revolving line of credit commitment begins amortizing in December 31, 1996, with
a final reduction on June 30, 2001. Aggregate maturities of the Company's
revolving credit and term loan agreements are as follows (in thousands):
PERIOD ENDING AMOUNT
- - --------------------------------------------------------------------------------- -----------
1994............................................................................. $ 12,000
1995............................................................................. 12,000
1996............................................................................. 18,000
1997............................................................................. 35,000
1998............................................................................. 53,500
Thereafter....................................................................... 167,500
-----------
$ 298,000
-----------
-----------
The term loan and revolving line of credit contain several restrictive
covenants; some of the more significant requirements are the maintenance of
interest-coverage ratios, and debt-to-cash-flow ratios (see note 10 for
information regarding amendments to covenants).
59
GEORGIA CABLE HOLDINGS
LIMITED PARTNERSHIP AND
SUBSIDIARY PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. BANK DEBT (CONTINUED)
As of December 31, 1993, the unused portion of the revolving facility
commitment totaled $22.5 million. However, under its most stringent covenant,
only $10.2 million was currently available. The balance becomes available with
improvements in operating cash flow (as defined) or ratio coverages.
The Partnership's effective interest rate was approximately 6.6 percent at
December 31, 1993 (including applicable add-on margins and the effect of the
interest rate protection agreements of 0.7 percent).
In May 1993, the Partnership entered into several interest rate protection
agreements totaling $170 million (based on three-month LIBOR rates) for the
three-year period from May 1993 through May 1996. As a result of these
agreements, the Partnership would pay approximately 4.7 percent on that notional
amount, and would receive interest at a floating rate which is based on
three-month LIBOR rates on each of their outstanding rate agreements. The
Partnership incurred net interest expense under rate protection agreements of
approximately $1.47 million for the period ended December 31, 1993. Annualized
interest expense based on year-end LIBOR rates is $2,099,000. There were no such
agreements in place during 1992.
The loans are collateralized by essentially all of the assets of the
Partnership and Subsidiary Partnerships and by the general and limited partners'
interests in the Partnership and Subsidiary Partnerships.
7. CREDIT AGREEMENT
1993 1992
----------- -----------
(IN THOUSANDS)
Credit agreement
Series A Term Note............................................ $ -- 68,000
Series B Term Note............................................ -- 89,000
----------- -----------
$ -- 157,000
----------- -----------
----------- -----------
The Partnership entered into a credit agreement dated February 11, 1988, as
amended October 7, 1992, which provided for aggregate borrowings of $175 million
under term notes and a maximum of $15 million under a Revolving Credit Loan. The
loans bore interest at a base rate on short-term borrowings (6 percent at
December 31, 1992) plus 1.5 percent.
The Credit Agreement and the Subordinated Debt (see note 8) were repaid on
April 30, 1993, in connection with the bank refinancing discussed above.
8. SUBORDINATED DEBT
Subordinated debt consisted of the following at December 31, 1993 and 1992:
1993 1992
----------- -----------
(IN THOUSANDS)
Fixed Rate Loan due February 1, 1998:
Face amount outstanding....................................... $ -- 172,000
Unamortized discount.......................................... -- (2,983)
----------- -----------
$ -- 169,017
----------- -----------
----------- -----------
Under the February 11, 1988 credit agreement, the Partnership issued a
promissory note in an aggregate principal amount of $172 million for a purchase
price of $78.5 million. The discount was
60
GEORGIA CABLE HOLDINGS
LIMITED PARTNERSHIP AND
SUBSIDIARY PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. SUBORDINATED DEBT (CONTINUED)
amortized over the five-year period ending February 11, 1993, for an effective
interest rate of
16.32 percent. The Fixed Rate Loan was prepaid on April 30, 1993, in connection
with the Bank refinancing (see note 6).
9. RELATED PARTY TRANSACTIONS
(A) CURRENT MANAGEMENT AND CONSULTING AGREEMENT
On July 31, 1991, the Subsidiary Partnerships entered into a management and
consulting agreement (the "Wometco Agreement") with Wometco Cable Corp.
("Wometco"), a cable operator which manages other cable systems in the Atlanta,
Georgia area. Under the terms of the management agreement, Wometco will manage
all aspects of daily operation of the Subsidiary Partnerships' cable television
systems.
In consideration of the management services to be provided to the Subsidiary
Partnerships, Wometco will receive a fee equal to 50 percent of all its
aggregate operating expenses relating to all cable television systems currently
associated with Wometco and the Partnership, excluding depreciation,
amortization, interest, taxes and extraordinary items, not to exceed the amounts
for the periods described below (in thousands):
50% OF TOTAL
OPERATING
PERIOD EXPENSES
- - ----------------------------------------------------------------------- -----------------
1/1/92 to 12/31/92..................................................... $ 1,969
1/1/93 to 12/31/93..................................................... 2,097
After December 31, 1993, for each year in which management agreement is in
effect, the fee continues to be 50 percent of total operating expenses, but
cannot exceed the amount charged during the previous year by more than 6.5
percent.
In connection with the Wometco Agreement, the Subsidiary Partnerships
incurred fees of $2,097,000 and $1,925,000 in 1993 and 1992, respectively.
On February 12, 1988, the Partnership entered into five-year consulting
agreements with two individuals who are affiliated with Prime/Local Georgia,
L.P., a general partner of Atlanta Partners. Under the terms of the agreements,
each individual is to receive $40,000 in consulting fees annually (payable
quarterly) and is to be reimbursed for expenses incurred in performance of such
consulting services. Payments totaling $80,000 were made in connection with
these agreements for each of the years ended December 31, 1993 and 1992. These
agreements automatically renew for successive additional one-year periods
commencing on the expiration or any renewal periods under the same terms and
conditions.
At December 31, 1993 and 1992, accounts receivable, net includes advances
made in the ordinary course of business to affiliated partnerships in the
amounts of $456,000 and $78,000.
(B) ADVERTISING SALES AGREEMENT
Beginning June 1990, the Partnership began an advertising sales
representation arrangement with Cable Advertising of Metro Atlanta ("CAMA"), an
affiliate of Wometco, under which CAMA sells commercial advertising time on
Atlanta area cable operators' cable channels. CAMA handles all revenue billings
and collections and distributes approximately 45 percent of the collected
revenues, net of commissions, to each operator based on sales generated on each
head-end. Management
61
GEORGIA CABLE HOLDINGS
LIMITED PARTNERSHIP AND
SUBSIDIARY PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
believes that the terms of the agreement approximate a market rate for such
services. Included in accounts receivable, net is approximately $710,000 and
$430,000 at December 31, 1993 and 1992 of amounts due from CAMA.
10. COMMITMENTS AND CONTINGENCIES
(A) LEASE ARRANGEMENTS
Rent expense was $885,000 and $929,000 for the years ended December 31, 1993
and 1992, respectively.
The Subsidiary Partnerships, as an integral part of their cable operations,
have entered into short-term lease contracts for pole use and office space.
Approximate annual minimum aggregate rentals under such leases are as follows:
YEAR ENDING
DECEMBER 31,
- - ------------------------------------------------------------ AMOUNT
--------------
(IN THOUSANDS)
1994...................................................... $ 778
1995...................................................... 186
1996...................................................... 48
-------
$1,012
-------
-------
(B) LETTERS OF CREDIT OUTSTANDING
At December 31, 1993, the Partnership had open letters of credit of $500,000
relating to a performance bond for DeKalb County. The performance bond expires
December 16, 1995.
(C) OPTION AGREEMENT
In connection with the formation of the Partnership in 1987, the Subsidiary
Partnerships entered into an option agreement whereby the optionholder could
elect to purchase up to 15 percent interest in the Subsidiary Partnerships,
subject to regulatory approvals, for a purchase price equal to the percentage
interest purchased, multiplied by the aggregate amount of all unreturned capital
contributions. This option is exercisable at any time prior to February 12,
2000.
During 1992, the Subsidiary Partnerships redeemed 7.5 percent of such option
for a cash outlay approximating $12.3 million, net of $4.5 million option price,
such that the optionholder currently has an option to purchase up to a 7.5
percent interest in the Subsidiary Partnerships. The redemption was funded by
the Partnership through additional funds from the owners of the Partnership. The
optionholder has the right at any time to "put" to the Partnership all or any
portion of its option or its interest in the Subsidiary Partnerships purchased
upon the exercise of the option. The Partnership is obligated to purchase the
portion of the option or interest in the Subsidiary Partnerships subject to the
"put" at its fair market value. In the event the optionholder exercises the
"put" prior to October 7, 1995, the optionholder has committed to make an
interest-free unsecured loan for the face amount of the "put" to the Subsidiary
Partnerships, which is nonrecourse to the partners. If the then existing lender
covenants prohibit such borrowing or, at any time, prohibit the Partnership's
honoring the "put" then the optionholder may "put" its interests to the owners
of the Partnership.
The fair value of the option agreement shall be the fair market value as
determined by independent appraisers. The option exercised during 1992
approximates the fair value of the remaining option at December 31, 1992. No
independent valuation has been made as of the end of 1993; furthermore, no
applicable transactions have taken place to enable a fair valuation of the
options.
62
GEORGIA CABLE HOLDINGS
LIMITED PARTNERSHIP AND
SUBSIDIARY PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Due to the FCC reregulation of the cable industry [note 11(c)] valuation of
the option agreement without a third-party appraisal is not practicable.
(D) AGREEMENTS AMONG PARTNERS
Within the 30-day period following October 8, 1997 and each successive
anniversary, PVI; Prime Cable Growth Partners, L.P.; Prime/Local Georgia, L.P.
and any partners of the Partnership and Subsidiary Partnerships affiliated with
them (collectively referred to as the "Prime Group"), may elect to "put" to RMB
Georgia Cable Limited Partnership ("RMB"), a general partner of the Partnership,
their entire collective interests in the Partnership and Subsidiary
Partnerships. Within the 30-day period following October 8, 1998 and each year
thereafter, RMB may elect to "call" the Prime Group's entire collective interest
in the Partnership and Subsidiary Partnerships. The price for the partnership
interests subject to the "put" or "call" shall be fair market value as
determined by independent appraisers.
(E) EQUITY APPRECIATION RIGHTS
In 1990, as amended June 17, 1992, the Partnership initiated an Equity
Appreciation Rights incentive plan ("EARS") for its key employees and Wometco,
its operations management group. The EARS plan was designed to have nominal
value, except in the case of a change of control of the Partnership.
The EARS plan contemplates payments to the recipients under some
circumstances in case of the termination of the recipient's employment; the
payments are based on book value, as defined. In case of change of control of
the Partnership, the payments are based on fair market value, as defined. In
each case, the amount due is reduced by a predefined base value as previously
determined by the Partnership.
The EARS vest at the rate of 20 percent per year and became fully vested at
the earliest of (i) a change of control, (ii) an agreed termination of an
employee, (iii) a termination of an employee or (iv) five years after the date
of grant.
There are no amounts due as of December 31, 1993. Amounts potentially due on
a change of control are not readily determinable.
(F) LEGAL PROCEEDINGS
One of the Subsidiary Partnerships is the lessee under a lease agreement
involving a parcel of property containing an underground fuel storage tank
installed by a previous tenant. An initial test revealed that soil surrounding
the tank has been contaminated, and such contamination has been reported to
state environmental authorities. The Subsidiary Partnership has negotiated with
the landlord regarding allocation of liability for removal of the tank and site
correction. In 1992, the Partnership accrued $100,000 to cover the expected
costs likely to be required with respect to this site. During 1993, the
Partnership spent $25,000, reserved for future expenses of $16,500 and reversed
the balance of the accrual. The Partnership believes its reserve will cover all
contingencies regarding this legal proceeding.
The Partnership is also involved in other claims and lawsuits incidental to
its business. The Partnership either on its own or through its insurance
carriers is contesting these matters. In the opinion of management, the ultimate
resolution of its legal proceedings, including those discussed above, will not
have a material adverse effect on the combined financial condition or the future
combined operating results of the Partnership.
63
GEORGIA CABLE HOLDINGS
LIMITED PARTNERSHIP AND
SUBSIDIARY PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. OTHER EVENTS
(A) BANK DEBT AMENDMENTS
As a result of the effect of the FCC rate regulation in effect as of
December 31, 1993, discussed below, the Partnership negotiated with its current
lenders changes in selected covenant coverage to December 1995.
(B) 1994 FRANCHISE RENEWALS
As part of its normal ongoing business operations, the Partnership
renegotiates renewals of expiring franchises with communities which it serves.
Typically, franchises are renewed by franchising authorities; renegotiations
generally evolve around the term of the renewal, additional services requested
by the franchisor, franchise fees and subscriber relations guidelines. The
Partnership has one franchise expiring in 1994. The franchise represents
approximately 36 percent of its total subscriber base. Negotiations with the
municipality are currently in process and the municipality has provided an
initial proposal for the franchise renewal. Management believes that the
franchise will be renewed.
(C) FCC RATE REGULATION IN EFFECT ON DECEMBER 31, 1993
Under the Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Act") and the Federal Communication Commission's ("FCC") implementing
regulations, the cable systems operated by the Subsidiary Partnerships are
subject to rate regulation for service and equipment associated with their basic
and cable programming service tiers. A number of local franchising authorities
have invoked their jurisdiction to regulate the rates which the Subsidiary
Partnerships charge to subscribers for basic cable service. In addition, a
number of cable subscribers, by virtue of filing rate complaints with the FCC,
have invoked the FCC's authority to regulate the rates which the Partnership
charges to subscribers for the cable program service tier. The Partnership has,
and will, file responses in support of its existing rates with the local
franchising authorities (in the case of basic service rates) and the FCC (in the
case of programming service tier rates). If the rates charged by the Partnership
are found to be in excess of that permitted under the FCC's standards, the local
franchising authorities and FCC have the power under the FCC rules to order a
prospective rate reduction, to prescribe a new rate and to order refunds to
subscribers of that portion of previously paid rates that are determined to be
in excess of that permitted under the FCC's standards. These rate proceedings
(based on the 1992 Act) before the local franchising authorities and FCC are
currently pending and, at this stage, management is unable to predict the
outcome of these proceedings.
Management believes that the partnership's rates to subscribers have been
calculated in accordance with provisions of the benchmark standards prescribed
by the FCC, as those standards existed in December 1993 and that rate
adjustments, if any, will be made primarily on a prospective basis for the basic
and the programming service tiers.
On February 22, 1994, the FCC took further actions dealing with rate
regulation, including the adoption of new and revised rate regulation rules and
policies. Among other things, the FCC further reduced the benchmark rates which
are used to calculate the permissible rates which cable operators can charge to
subscribers for basic and the programming service tiers and adopted new
standards governing a-la-carte services. While it is possible that these FCC
actions could have an impact on the Partnership, it is not possible to predict
the nature and extent of such impact at this time because the FCC has not yet
released the texts of its decisions on these matters.
Preliminary information relating to the FCC's proposed actions indicates
that further prospective rate reductions of approximately 7 percent may be
required after the effective date of the new
64
GEORGIA CABLE HOLDINGS
LIMITED PARTNERSHIP AND
SUBSIDIARY PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. OTHER EVENTS (CONTINUED)
FCC rules. (FCC officers have estimated that the effective date will be May
1994). It is possible that the Partnership will be required to adjust its
a-la-carte service offering, including rates, to conform to new FCC standards
when issued. If both of these occur, management believes, based on preliminary
projections, that the Partnership may not meet certain financial covenants
during 1994. Accordingly, waivers with respect to such covenants may need to be
obtained. Although there can be no assurance, management believes that it will
be able to obtain such covenant waivers, if required.
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount approximates fair value
because of the short-term maturity of these instruments.
SUBSCRIBER DEPOSITS: The fair value of deposits with no stated maturity
approximates the carrying amount at December 31, 1993.
BANK DEBT: The carrying amount approximates fair value because interest
rates are variable and, accordingly, approximates current market rates.
INTEREST RATE PROTECTION AGREEMENTS: The fair value of interest rate
protection agreements are obtained from dealer quotes. These values represent
the estimated amount the Company would receive or pay to terminate the
agreements, taking into account current interest rates and the current
creditworthiness of the counterparts. At December 31, 1993, the notional amount,
carrying amount and estimated fair value for interest rate protection agreements
are as follows:
NOTIONAL CARRYING ESTIMATED
AMOUNT AMOUNT FAIR VALUE
---------------- --------- -------------
In a net receivable position............................... $ -- -- --
In a net payable position.................................. 170,000,000 235,000 927,000
13. SUBSEQUENT EVENTS
In March 1994, the Partnership terminated its outstanding interest rate
protection agreements (see note 6). At the same time, the Partnership entered
into new interest rate cap protection agreements for the same $170 million
notional amount, offering rate protections through the same time periods as the
original interest rate protection agreements. The rate caps provide for the
Partnership to receive payment in those instances where, at preset three month
intervals, the LIBOR rate exceeds 6 percent.
Under the operation of the rate cap agreement, the Partnership is not liable
for any future payments on these arrangements. Due to changes in the interest
rates subsequent to December 31, 1993, the Partnership was able to conclude both
transactions by receiving a nominal net amount.
65
GEORGIA CABLE HOLDINGS
LIMITED PARTNERSHIP AND
SUBSIDIARY PARTNERSHIPS
COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1994 AND 1993
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1994 1993
--------- ---------
Revenues................................................................................... $ 72,976 71,678
--------- ---------
Operating expenses:
Cost of sales and other revenues......................................................... 34,396 32,537
Depreciation and amortization............................................................ 23,108 22,008
--------- ---------
Income from operations................................................................. 15,472 17,133
Interest expense........................................................................... 14,601 29,625
Gain on disposal of assets................................................................. 13 56
--------- ---------
Net income (loss)...................................................................... $ 884 (12,436)
--------- ---------
--------- ---------
66
D. WOMETCO CABLE CORP. AND SUBSIDIARIES
On December 6, 1994, a subsidiary of U S WEST acquired Wometco Cable Corp.
("Wometco"). Set forth below are the consolidated financial statements of
Wometco and subsidiaries for the years ended December 31, 1993 and 1992.
Report of Independent Auditors......................................................... 68
Consolidated Financial Statements for the Years Ended December 31, 1993 and 1992
Consolidated Balance Sheets.......................................................... 69
Consolidated Statements of Operations................................................ 70
Consolidated Statements of Stockholders' Equity...................................... 71
Consolidated Statements of Cash Flows................................................ 72
Notes to Consolidated Financial Statements........................................... 73
Consolidated Financial Statements for the Nine Months Ended September 30, 1994 and 1993
(unaudited)
Consolidated Statements of Operations................................................ 85
67
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Wometco Cable Corp.:
We have audited the accompanying consolidated balance sheets of Wometco
Cable Corp. and subsidiaries as of December 31, 1993 and 1992, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the two-year period ended December 31, 1993. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Wometco
Cable Corp. and subsidiaries as of December 31, 1993 and 1992, and the results
of their operations and their cash flows for each of the years in the two-year
period ended December 31, 1993, in conformity with generally accepted accounting
principles.
As discussed in note 2(h) to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1993 to adopt the
provisions of the Financial Accounting Standards Board's FASB No. 109,
"Accounting for Income Taxes."
/s/ KPMG Peat Marwick LLP
Miami, Florida
March 25, 1994
68
WOMETCO CABLE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND 1992
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
1993 1992
----------- -----------
Cash and cash equivalents............................................................... $ 1,899 2,727
Subscriber receivables, net............................................................. 1,798 1,485
Accounts receivable -- advertising operations, net...................................... 2,084 1,468
Investments in cable television systems:
Intangible assets, net................................................................ 156,790 161,658
Property, plant and equipment......................................................... 151,564 114,814
Construction in progress.............................................................. 1,598 1,711
----------- -----------
153,162 116,525
Less accumulated depreciation......................................................... (57,359) (31,245)
----------- -----------
Property, plant and equipment, net.................................................. 95,803 85,280
----------- -----------
Total investments in cable television systems....................................... 252,593 246,938
Other assets............................................................................ 4,435 4,531
----------- -----------
Total assets........................................................................ $ 262,809 257,149
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank debt............................................................................... 138,700 150,200
Other indebtedness...................................................................... 443 765
Accounts payable and accrued liabilities................................................ 17,259 12,898
Subscriber prepayments and deposits..................................................... 1,805 1,430
Deferred taxes.......................................................................... 78,324 4,207
----------- -----------
Total liabilities................................................................... 236,531 169,500
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock:
Class A -- $.10 par value. Authorized 5,000,000 shares in 1993 and 1992; issued and
outstanding 5,000,000 shares in 1993 and 1992...................................... 500 500
Class B -- $.10 par value. Authorized 1,000,000 shares in 1993 and 1992; issued and
outstanding 882,353 shares in 1993 and 1992........................................ 88 88
Capital surplus....................................................................... 39,538 53,773
Retained earnings (deficit)........................................................... (9,806) 39,446
----------- -----------
30,320 93,807
Less note receivable from stockholders.................................................. (4,042) (6,158)
----------- -----------
Total stockholders' equity.......................................................... 26,278 87,649
----------- -----------
Total liabilities and stockholders' equity.......................................... $ 262,809 257,149
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
69
WOMETCO CABLE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED DECEMBER 31, 1993
(IN THOUSANDS)
1993 1992
----------- -----------
Revenues................................................................................ $ 105,237 94,263
----------- -----------
Expenses:
Service costs......................................................................... 18,766 17,649
Programming costs..................................................................... 17,984 15,954
Selling, general and administrative................................................... 15,297 12,535
Depreciation and amortization......................................................... 18,954 15,416
----------- -----------
Total expenses...................................................................... 71,001 61,554
----------- -----------
Operating income.................................................................... 34,236 32,709
Other income (expense):
Interest and other income............................................................. 369 135
Interest expense...................................................................... (13,692) (13,860)
----------- -----------
Income before income taxes, extraordinary item, and cumulative effect of change in
accounting principle................................................................... 20,913 18,984
Income taxes............................................................................ 8,221 8,062
----------- -----------
Income before extraordinary item and cumulative effect of change in accounting
principle.............................................................................. 12,692 10,922
Extraordinary item -- loss on extinguishment of debt (net of income tax benefit of
$392).................................................................................. -- (639)
Cumulative effect at January 1, 1993 of change in accounting for income taxes........... (61,944) --
----------- -----------
Net income (loss)................................................................... $ (49,252) 10,283
----------- -----------
----------- -----------
Per share data:
Income before extraordinary item and cumulative effect of change in accounting
principle per share.................................................................. $ 2.16 1.86
Extraordinary item per share.......................................................... -- (.11)
Cumulative effect of change in accounting principle -- expense per share................ (10.53) --
Net income (loss) per share............................................................. (8.37) 1.75
See accompanying notes to consolidated financial statements.
70
WOMETCO CABLE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE YEARS IN THE TWO-YEAR PERIOD ENDED DECEMBER 31, 1993
(IN THOUSANDS, INCLUDING SHARES)
NOTE
NUMBER OF RETAINED RECEIVABLE TOTAL
SHARES PAR CAPITAL EARNINGS FROM STOCKHOLDERS
AUTHORIZED ISSUED VALUE SURPLUS (DEFICIT) STOCKHOLDERS EQUITY
---------- --------- ----- -------- -------- ------------ -------------
Balance, December 31, 1991................... 6,000 5,882 588 65,949 29,163 (4,406) 91,294
Advances................................... -- -- -- -- -- (13,928) (13,928)
Dividends paid............................. -- -- -- (12,176) -- 12,176 --
Net income................................. -- -- -- -- 10,283 -- 10,283
----- --------- ----- -------- -------- ------------ -------------
Balance, December 31, 1992................... 6,000 5,882 588 53,773 39,446 (6,158) 87,649
Advances................................... -- -- -- -- -- (12,119) (12,119)
Dividends paid............................. -- -- -- (14,235) -- 14,235 --
Net loss................................... -- -- -- -- (49,252) (49,252)
----- --------- ----- -------- -------- ------------ -------------
Balance, December 31, 1993................... 6,000 5,882 $ 588 39,538 (9,806) (4,042) 26,278
----- --------- ----- -------- -------- ------------ -------------
----- --------- ----- -------- -------- ------------ -------------
See accompanying notes to consolidated financial statements.
71
WOMETCO CABLE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE YEARS IN THE TWO-YEAR
PERIOD ENDED DECEMBER 31, 1993
(IN THOUSANDS)
1993 1992
--------- ---------
Cash flows from operating activities:
Net income before extraordinary item and cumulative effect of change in accounting for
income taxes............................................................................ $ 12,692 10,922
Extraordinary item -- loss on extinguishment of debt..................................... -- (639)
Cumulative effect of change in accounting for income taxes............................... (61,944) --
--------- ---------
Net income (loss)...................................................................... (49,252) 10,283
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization.......................................................... 18,954 15,416
Deferred taxes........................................................................... (1,209) 1,538
Cumulative effect of change in accounting for income taxes............................... 61,944 --
Loss (gain) on disposal of property, plant and equipment................................. 55 (8)
Amortization of deferred loan fees....................................................... 438 492
Deferred loan fees on extinguishment of debt............................................. -- 1,031
Increase in intangible assets due to utilization of net operating losses and investment
tax credits of acquired subsidiaries.................................................... -- --
Provision for losses on subscriber receivables........................................... 1,323 1,202
Provision for losses on accounts receivable -- advertising operations.................... 454 253
Changes in operating assets and liabilities:
Increase in subscriber receivables..................................................... (1,636) (1,184)
Increase in accounts receivable -- advertising operations.............................. (1,070) (291)
Increase in other assets............................................................... (342) (1,056)
Increase (decrease) in accounts payable and accrued liabilities........................ 4,361 1,905
Increase (decrease) in subscriber prepayments and deposits............................. 375 (237)
--------- ---------
Total adjustments.................................................................. 83,647 19,061
--------- ---------
Net cash provided by operating activities.......................................... 34,395 29,344
--------- ---------
Cash flows from investing activities:
Capital expenditures..................................................................... (11,478) (9,611)
Proceeds from disposals of property, plant and equipment................................. 226 8
Acquisition of property, plant and equipment............................................. -- (251)
Acquisition on of intangible assets...................................................... (30) (130)
--------- ---------
Net cash used in investing activities.............................................. (11,282) (9,984)
--------- ---------
Cash flows from financing activities:
Borrowings on bank debt.................................................................. -- --
Additions to other indebtedness.......................................................... 88 226
Payments on bank debt and other indebtedness............................................. (11,910) (6,614)
Dividends paid........................................................................... (14,235) (12,176)
Decrease (additions) to note receivable from stockholders................................ 2,116 (1,752)
--------- ---------
Net cash used in financing activities.............................................. (23,941) (20,316)
--------- ---------
Net (decrease) increase in cash and cash equivalents............................... (828) (956)
Cash and cash equivalents, beginning of year............................................... 2,727 3,683
--------- ---------
Cash and cash equivalents, end of year..................................................... $ 1,899 2,727
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest............................................................................... $ 11,536 12,207
--------- ---------
--------- ---------
Income taxes........................................................................... $ 8,955 7,373
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
72
WOMETCO CABLE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1992
1. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Wometco Cable
Corp. ("Wometco"), its wholly owned cable operating subsidiaries (the "Atlanta
Subsidiaries") which operate cable television systems in the Atlanta, Georgia,
area and its approximately 99 percent owned advertising subsidiaries,
collectively the "Company." As of December 31, 1993, the Atlanta Systems passed
approximately 349,700 homes and served approximately 219,900 basic cable
subscribers in seven franchise areas.
All of the Class A common stock and in excess of 99 percent of the Class B
common stock of Wometco are owned by Peachtree Cable Holdings, Ltd.
("Peachtree"), a Texas limited partnership, which has pledged such stock to
secure their total indebtedness in the amount of $252.4 million (which includes
the Company's indebtedness under its bank debt (see note 7) at December 31,
1993).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Wometco Cable
Corp., its wholly owned subsidiaries, and its advertising subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(B) CASH AND CASH EQUIVALENTS
For the purpose of the consolidated statements of cash flows, the Company
considers all highly liquid investments with original maturities of three months
or less to be cash equivalents. Cash equivalents totaled $1,353,000 and
$1,776,000 at December 31, 1993 and 1992, respectively.
The Company has entered into an agreement to purchase securities under
agreements to resell ("repos"). At December 31, 1993 and 1992, the outstanding
repos approximated $1,286,000 and $1,711,000, respectively, which approximates
market and are included in cash equivalents. The repos are collateralized by
U.S. government securities.
(C) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment purchased prior to December 1986 are recorded
on the basis of appraised values assigned in connection with a December 1986
acquisition (the "Acquisition"). Property, plant and equipment purchased after
Acquisition have been recorded at cost.
The Company's policy is to retire assets from its accounts as they become
fully depreciated. Depreciation is provided by the straight-line method over the
estimated useful lives, which are generally as follows:
ESTIMATED USEFUL LIVES
-----------------------------
Buildings...................................................... 20-40 years
Leasehold improvements......................................... over the anticipated life,
not to exceed the lease term
Reception and distribution systems............................. 3-14 years
Transportation equipment....................................... 3-5 years
Other.......................................................... 3-14 years
Construction inventories are carried at the lower of cost (weighted average
unit cost) or market. Construction in progress is reclassified to reception and
distribution systems as each segment of the plant is activated. Construction in
progress includes internal and external costs incurred in the construction of
the cable television distribution systems. Internal costs include direct labor,
transfers from construction inventories and construction overhead.
73
WOMETCO CABLE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993 AND 1992
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Maintenance and repairs are charged to expense as incurred. Expenditures for
major renewals and betterments are capitalized. Gains or losses on disposition
of property, plant and equipment are credited or charged to income.
(D) INTANGIBLE ASSETS
Intangible assets consist of acquired franchises and goodwill (the excess of
the purchase price over the fair value of tangible and other assets acquired) as
previously determined based on a 1986 acquisition appraisal. Intangible assets
are being amortized by the straight-line method over their useful lives ranging
from five to forty years. Accumulated amortization of intangible assets was
$34,976,000 and $30,078,000 as of December 31, 1993 and 1992, respectively.
(E) AMORTIZATION
Deferred loan fees are amortized by the interest method using the effective
interest rate implicit in the borrowing transaction.
(F) SUBSCRIBER RECEIVABLES
Amounts receivable from subscribers are recorded at their estimated
realizable value. All accounts in arrears in excess of 60 days are fully
reserved. The reserve for uncollectible accounts was $92,000 and $49,000 at
December 31, 1993 and 1992, respectively.
(G) ACCOUNTS RECEIVABLE -- ADVERTISING OPERATIONS
In June 1990, the Company purchased a 99 percent interest in Cable
Advertising of Metro Atlanta ("CAMA"), its advertising subsidiary, under which
CAMA sells commercial advertising time on Atlanta area cable operators' cable
channels. Accounts receivable -- advertising operations are recorded at their
estimated realizable value. The reserve for uncollectible amounts was $414,000
and $99,000 at December 31, 1993 and 1992, respectively.
(H) INCOME TAXES
Wometco and its wholly owned subsidiaries file a consolidated Federal income
tax return. Certain income and expense items are accounted for differently for
financial reporting purposes than for income tax purposes. The provision for
deferred taxes is made in recognition of these timing differences.
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FASB
No. 109"). FASB No. 109 requires the change from the deferred method of
accounting for income taxes of APB Opinion 11 to the asset and liability method
of accounting for income taxes. Under the asset and liability method of FASB No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under FASB No. 109, the
effect on the deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Effective January 1, 1993, the Company adopted FASB No. 109 and has reported
the cumulative effect of that change in the method of accounting for income
taxes in the 1993 consolidated statement of income.
74
WOMETCO CABLE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1993 and 1992
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Pursuant to the deferred method under APB Opinion 11, which was applied in
1992 and prior years, deferred income taxes are recognized for income and
expense items that are reported in different years for financial reporting
purposes and income tax purposes using the tax rate applicable for the year of
the calculation. Under the deferred method, deferred taxes are not adjusted for
subsequent changes in tax rates.
(I) PENSION PLAN
Effective January 1, 1988, the Atlanta subsidiaries participated in a newly
adopted defined contribution plan (the "Plan") containing a qualified cash or
deferred arrangement pursuant to IRC Section 401(k). The Plan allows vesting at
25 percent per year for four years. The Plan allows employees to contribute up
to 15 percent of their annual salary and the employer is required to match 100
percent of the first 3 percent of employee contributions and 50 percent of the
next 2 percent of employee contributions. The Plan is subject to restriction on
matching contributions for highly compensated employees.
Employer matching accounts forfeited by non-fully vested terminating
employees revert back to the employer. The allocated employer matching amounts,
net of forfeitures, were approximately $350,000 and $312,000 for the years ended
December 31, 1993 and 1992, respectively.
(J) RECLASSIFICATIONS
Certain items in the 1992 consolidated financial statements have been
reclassified to conform with the 1993 presentation.
(K) EARNING PER SHARE
Earnings per share is computed by dividing net income by the weighted
average number of shares of Class A and Class B common stock. The weighted
average number of shares used in the computations was 5,882,000 for the years
ended December 31, 1993 and 1992.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31, 1993
and 1992 (in thousands):
1993 1992
----------- ---------
Land................................................................. $ 392 392
Building and leasehold improvements.................................. 1,180 1,097
Reception and distribution systems................................... 145,000 109,157
Transportation equipment............................................. 2,923 2,525
Other................................................................ 2,069 1,643
Construction in progress............................................. 1,598 1,711
----------- ---------
Total............................................................ 153,162 116,525
Less accumulated depreciation........................................ (57,359) (31,245)
----------- ---------
Property, plant and equipment, net................................... $ 95,803 85,280
----------- ---------
----------- ---------
Depreciation expense was $14,056,000 and $10,498,000 for the years ended
December 31, 1993 and 1992, respectively.
75
WOMETCO CABLE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993 AND 1992
4. INTANGIBLE ASSETS, NET
Intangible assets consist of the following at December 31, 1993 and 1992 (in
thousands):
1993 1992
----------- ---------
Acquired franchises.................................................. $ 171,573 171,543
Goodwill............................................................. 20,193 20,193
----------- ---------
Total............................................................ 191,766 191,736
Less accumulated amortization........................................ 34,976 30,078
----------- ---------
Intangible assets, net............................................... $ 156,790 161,658
----------- ---------
----------- ---------
Amortization expense was $4,898,000 and $4,918,000 for the years ended
December 31, 1993 and 1992, respectively.
5. OTHER ASSETS
Other assets consist of the following at December 31, 1993 and 1992 (in
thousands):
1993 1992
--------- ---------
Deferred loan fees....................................................... $ 3,075 3,546
Miscellaneous other receivables.......................................... 340 392
Prepaid and other assets................................................. 221 437
Advances, affiliate...................................................... 799 156
--------- ---------
$ 4,435 4,531
--------- ---------
--------- ---------
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities includes the following at December
31, 1993 and 1992 (in thousands):
1993 1992
--------- ---------
Accounts payable....................................................... $ 6,120 5,197
Interest payable....................................................... 2,838 1,171
Accrued cable and pay television cost.................................. 2,082 1,515
Accrued franchise fee.................................................. 1,482 1,948
Accrued payroll........................................................ 1,073 929
Other.................................................................. 3,664 2,138
--------- ---------
$ 17,259 12,898
--------- ---------
--------- ---------
7. DEBT
Debt consists of the following at December 31, 1993 and 1992 (in thousands):
1993 1992
----------- ---------
Bank debt -- average interest rate of 5.2% in 1993 and 6.6% in 1992
(a)................................................................. $ 138,700 150,200
Other indebtedness -- average interest rate of 9.5% in 1993 and 9.3%
in 1992 (b)......................................................... 443 765
----------- ---------
Total debt........................................................... $ 139,143 150,965
----------- ---------
----------- ---------
(A) BANK DEBT
On April 1, 1991, the Company and some of its subsidiaries closed on a
long-term borrowing arrangement (the "Bank Agreement") with a group of banks
(including some of its then current
76
WOMETCO CABLE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993 AND 1992
7. DEBT (CONTINUED)
lenders) to refinance its then outstanding revolving loan. The maximum amount
available under the Bank Agreement fluctuates monthly using a formula based on
the Company's operating cash flow (as defined in the Bank Agreement) for the
immediately preceding quarter, not to exceed its maximum available commitment.
The Bank Agreement for the period April 1, 1991 to July 7, 1992 consisted of
a revolving credit portion of $30.6 million and a term loan portion of $132.2
million. The Bank Agreement also provided for quarterly principal reductions
beginning in 1995 through March 1999. Under the Bank Agreement, the Company had
three interest rate options: prime rate (Prime), London Interbank Offering Rate
(LIBOR), or certificate of deposit (CD). The rates, determined by the lenders in
accordance with the Bank Agreement, are subject to an add-on margin varying from
.625 percent to 1.25 percent for Prime, 1.625 percent to 2.25 percent for LIBOR,
or 1.755 percent to 2.375 percent for CD rates. The rates depended on certain
ratio maintenance. During this time period, the term loan was fixed at LIBOR
rates; the revolving credit portion at various options. The Company was also
required to obtain interest rate protection for at least 50 percent of its
outstanding commitment by May 30, 1991.
In May 1991, the Company and Peachtree entered into several interest rate
protection agreements (based on three-month LIBOR rates) for the two-year period
from April 6, 1992 through April 6, 1994. As a result of these agreements, the
Company and Peachtree would pay approximately 8 percent on that notional amount
and would receive interest at a floating rate which is based on three-month
LIBOR rates on each of their outstanding rate agreements of $115 million and $5
million, respectively. In 1993 and 1992, the Company incurred net interest
expense of $5.2 million and $3 million, respectively, under rate protection
agreements.
In July 1992, the Company and Peachtree finalized amendments to their
individual existing loan agreements for the purpose of increasing their loan
facilities and amending certain of their existing covenants. The amended loan
agreement for the Company consists of an increase in the revolving credit
portion by $4.4 million to $35 million and the replacement of existing
subsidiary term notes with new notes. The Company's subsidiaries did not change
their total term loan portion of $132.2 million. Peachtree increased the amounts
available under its term loan by $53 million to $126.4 million.
The covenants of all bank facilities were changed to reflect the new
borrowings. Because Peachtree's source of funds for its debt service depends on
dividends from the Company, future dividends by the Company to Peachtree will
increase to meet the debt service and principal repayments under the amended
loan agreement.
In connection with the July 1992 amendment to the loan agreement, the
Company and Peachtree are required to make a mandatory prepayment of the term
notes by April 5 of each year if the combined entities, for the prior year ended
December 31, had positive Excess Cash Flow (defined as consolidated net income
plus depreciation, amortization and non-cash charges, less capital expenditures
and scheduled principle payments in respect of indebtedness). The amount of the
required prepayment is equal to 50 percent of the positive Excess Cash Flow. For
the year ended December 31, 1993, a mandatory prepayment of $2.8 million is
required. The mandatory prepayment, when required, is applied first to the term
loans of the Company in inverse order, then to the revolving credit portion of
the Company, and finally to the term loans of Peachtree, also in inverse order.
77
WOMETCO CABLE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993 AND 1992
7. DEBT (CONTINUED)
As a result of the July 1992 amendment, the Company charged $1,031,000 of
unamortized deferred loan fees that had been included in the April 1991
refinancing to expenses. This charge is reflected in the consolidated financial
statements as an extraordinary item for the year ended December 31, 1992, net of
$392,000 income tax benefit.
At December 31, 1993, the Company had in place LIBOR contracts expiring
prior to January 31, 1994 on $135.2 million of its bank debt with the remaining
revolving credit portion at prime. The Company's effective interest rate was
approximately 5.2 percent at December 31, 1993.
Payments under the Company's term loan agreement are made quarterly with the
last payment due on December 31, 2000. The Company's revolving credit agreement
commitment begins amortizing in June 1996 with a final reduction on December 30,
2000. Aggregate maturities of the Company's revolving credit and term loan
agreements are as follows (in thousands):
YEAR ENDING DECEMBER 31,
- - ------------------------------------------------------------
1994........................................................ $ --
1995........................................................ --
1996........................................................ --
1997........................................................ --
1998........................................................ 30,000
Thereafter.................................................. 108,700
--------
$138,700
--------
--------
Peachtree is a holding company and, as such, has capital requirements for
repayment of principal and interest on its debt and for some minor operating
fees. Peachtree has no source of cash other than its ability to receive
dividends from the Company or additional capital contributions by its partners.
Under the terms of the Bank Agreement, the debt of Peachtree is to be repaid
before the Company's debt. This repayment, including an estimate of the funds
required for interest coverage assuming an average interest rate of
approximately 7.5 percent, is currently expected to be accomplished through
dividends from the Company to Peachtree and is payable as follows (in
thousands):
YEAR ENDING DECEMBER 31,
- - ------------------------------------------------------------
1994........................................................ $ 22,300
1995........................................................ 28,100
1996........................................................ 31,700
1997........................................................ 41,300
1998........................................................ 15,100
--------
$138,500
--------
--------
Because the repayment of both Peachtree's and the Company's debt is subject
to available excess cash from operations of the Company, it is anticipated that
the Company will be required to declare and fund dividends to Peachtree in
amounts sufficient to meet Peachtree's interest and debt repayment as set forth
above (see note 11).
The bank debt portion contains several restrictive covenants; some of the
more significant requirements are the maintenance of interest coverage ratios,
debt to cash flow ratios, limitation on capital expenditures, and permitted
indebtedness. All of the Class A stock and in excess of 99 percent
78
WOMETCO CABLE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993 AND 1992
7. DEBT (CONTINUED)
of the Class B stock of the Company have been pledged by Peachtree to secure
indebtedness of the revolving and term loan of the Company of $138.7 million and
of Peachtree's term loan of $113.7 million at December 31, 1993.
As of December 31, 1993, $28.5 million was available to the Company under
its revolving credit portion.
(b) Other indebtedness consists principally of capitalized leases and
amounts due to sellers of businesses purchased by Wometco. Average
interest rates at December 31, 1993 and 1992 were 9.2 percent and 9.3
percent, respectively. Aggregate maturities on the capitalized leases and
amounts due to sellers of business purchases are as follows (in
thousands):
YEAR ENDING DECEMBER 31,
- - --------------------------------------------------------------------------------------
1994.................................................................................. $ 268
1995.................................................................................. 148
1996.................................................................................. 27
---------
Total............................................................................. $ 443
---------
---------
8. RENT EXPENSE AND LEASE INFORMATION
Rent expense for the years ended December 31, 1993 and 1992, is as follows
(in thousands):
1993 1992
--------- ---------
Pole rentals............................................................. $ 704 673
Minimum rentals on long-term noncancelable leases........................ 493 456
Other rentals............................................................ 256 206
--------- ---------
Total rent expense................................................... $ 1,453 1,335
--------- ---------
--------- ---------
Minimum rental commitments on long-term noncancelable leases (accounted for
as operating leases) that have an initial term of more than one year are as
follows (in thousands):
YEAR ENDING DECEMBER 31,
- - ------------------------------------------------------------------------------------
1994................................................................................ $ 493
1995................................................................................ 422
1996................................................................................ 322
1997................................................................................ 227
1998................................................................................ 155
---------
Total........................................................................... $ 1,619
---------
---------
Generally, leases provide for renewals with substantially the same terms and
conditions as those in effect during the initial term. No material guarantees or
obligations are made or assumed in connection with leases.
9. INCOME TAXES
As discussed in note 2, the Company adopted FASB No. 109 as of January 1,
1993. The cumulative effect of this change in accounting for income taxes of
approximately $62 million is determined as of January 1, 1993 and is reported
separately in the consolidated statement of income for the year ended December
31, 1993. Substantially all of the cumulative effect adjustment is a result of
recording a deferred tax liability relating to assets, principally intangible
assets, acquired in a prior business
79
WOMETCO CABLE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993 AND 1992
9. INCOME TAXES (CONTINUED)
combination. As a result of applying FASB No. 109 in 1993, pretax income from
continuing operations for the year ended December 31, 1993 was decreased
$2,066,000 due to the effects of adjustments for prior purchases business
combinations. Prior years' consolidated financial statements have not been
restated to apply the provisions of FASB No. 109. Income tax expense on income
before extraordinary items and cumulative effect of change in accounting
principle for the years ended December 31, 1993, 1992 and 1991, consists of the
following (in thousands):
CURRENT DEFERRED TOTAL
--------- --------- ---------
Year ended December 31, 1993:
U.S. federal................................................ $ 8,291 (1,123) 7,168
State and local............................................. 1,139 (86) 1,053
--------- --------- ---------
Total..................................................... 9,430 (1,209) 8,221
--------- --------- ---------
Year ended December 31, 1992:
U.S. federal................................................ 5,537 1 ,322 6,859
State and local............................................. 987 216 1,203
--------- --------- ---------
Total..................................................... 6,524 1,538 8,062
--------- --------- ---------
--------- --------- ---------
Income tax expense attributable to income from continuing operations was
$8,221,000 and $8,062,000 for the years ended December 31, 1993 and 1992,
respectively, and differed from the amounts computed by applying the U.S.
federal income tax rates of 35 percent and 34 percent, respectively, to pretax
income from continuing operations as a result of the following (in thousands):
1993 1992
--------- ---------
Computed "expected" tax expense.......................................... $ 7,320 6,455
Effect of state income taxes -- net...................................... 684 794
Effect of investment tax credit carryforwards utilized................... -- --
Effect of basis reduction of qualified transitional capital
expenditures............................................................ -- --
Amortization of goodwill................................................. 177 --
Effect of purchase accounting adjustments................................ -- 667
Others -- net............................................................ 40 146
--------- ---------
Total income tax expense............................................. $ 8,221 8,062
--------- ---------
--------- ---------
For the year ended December 31, 1992, deferred income tax expense (benefit)
of $1,538,000 results from timing differences in the recognition of income and
expense for income tax and financial reporting purposes. The sources and tax
effects of those timing differences are presented below (in thousands):
1992
---------
Excess of tax over financial statement depreciation................................. $ 1,335
Effect of basis reduction on qualified transitional capital expenditures............ --
Other, net.......................................................................... 203
---------
$ 1,538
---------
---------
80
WOMETCO CABLE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993 AND 1992
9. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1993 are presented below (in thousands):
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful
accounts....................................................... $ 207
Compensated absences, principally due to accrual for financial
reporting purposes............................................. 281
Group insurance, principally due to accrual for financial
statement reporting purposes................................... 165
Net operating loss carryforwards................................ 1,650
Investment tax credit carryforwards............................. 400
Other........................................................... 283
---------
Total gross deferred tax assets............................... 2,986
Less valuation allowance...................................... (1,950)
---------
Net deferred tax assets....................................... 1,036
---------
Deferred tax liabilities:
Property, plant land and equipment, principally due to
differences in depreciation.................................... $ 21,848
Intangibles, principally due to differences in amortization..... 57,512
---------
Total gross deferred tax liabilities.......................... 79,360
---------
Net deferred tax liability.................................... $ 78,324
---------
---------
The valuation allowance for deferred tax assets as of January 1, 1993 was
$1,913,000. The net change in the total valuation allowance for the year ended
December 31, 1993 was an increase of $37,000.
At December 31, 1993, the Company has net operating loss carryforwards based
upon each subsidiary's separate income for federal income tax purposes of
$1,432,000 which are available to offset future federal taxable income, if any,
through 2003. The Company also has investment tax credit carryforwards for
federal income tax purposes of approximately $400,000 which are available to
reduce future federal income taxes, if any, through 2006.
The Company files separate state tax returns for its subsidiaries primarily
in Georgia. As of December 31, 1993 state net operating losses are approximately
$19 million of which $17 million have been reserved through the valuation
allowance.
The Company has been notified by the Internal Revenue Service ("IRS") that
its federal tax returns for years 1990, 1991 and 1992 will be audited. As of the
date of these consolidated financial statements, no assessments have been made
by the IRS.
10. CONTINGENCIES
(a) LITIGATION
The Company is involved in various routine legal actions incident to its
business. Management believes that the outcome of these actions will not
have a material effect on its financial position or results of
operations.
81
WOMETCO CABLE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993 AND 1992
10. CONTINGENCIES (CONTINUED)
(b) EQUITY APPRECIATION RIGHTS
In 1986, the Company initiated an Equity Appreciation Rights ("EARS")
incentive plan ("1986 EARS") for its key employees. The 1986 EARS plan
contemplates payments to the recipients in the case of (i) termination of
the recipient's employment by the employer without cause, (ii) death,
(iii) permanent disability or qualified retirement (iv) termination for
good reason by the recipient, or (v) change in control. The payments are
based on book value, as defined. In case of a change of control of the
Company, the payments are based on fair market value, as defined. In each
case, the amount due is reduced by a predefined base value as previously
determined by the board of directors of the Company. All recipients of
the 1986 EARS are fully vested in their eligibility to receive
compensation, where any is due.
In December 1990, the Company and one of its subsidiaries issued
additional EARS ("1990 EARS") to its key employees. Except for a
different base value, the terms and conditions are similar to the 1986
EARS. However, the 1990 EARS vested as follows: 25 percent, 9 months
after grant; 50 percent, 18 months after grant; 75 percent, 30 months
after grant, and 100 percent, 42 months after grant. In cases of
termination due to change of control, the recipients become fully vested
in the 1990 EARS plans.
There are no amounts due either on the 1986 EARS or the 1990 EARS as of
December 31, 1993 and 1992.
(c) FCC RATE REGULATION
Under the Cable Television Consumer Protection and Competition Act of
1992 (the "1992 Act") and the Federal Communication Commission's ("FCC")
implementing regulations, the cable systems operated by the Atlanta
subsidiaries are subject to rate regulation for service and equipment
associated with their basic and cable programming service tiers. A number
of local franchising authorities have invoked their jurisdiction to
regulate the rates which the Atlanta subsidiaries charge to subscribers
for basic cable service. In addition, a number of cable subscribers, by
virtue of filing rate complaints with the FCC, have invoked the FCC's
authority to regulate the rates which the Company charges to subscribers
for the cable program service tier. The Company has, and will, file
responses in support of its existing rates with the local franchising
authorities (in the case of basic service rates) and the FCC (in the case
of programming service tier rates). If the rates charged by the Company
are found to be in excess of that permitted under the FCC's standards,
the local franchising authorities and FCC have the power under the FCC
rules to order a prospective rate reduction, to prescribe a new rate and
to order refunds to subscribers of that portion of previously paid rates
that are determined to be in excess of that permitted under the FCC's
standards. These rate proceedings (based on the 1992 Act) before the
local franchising authorities and FCC are currently pending and, at this
stage, management is unable to predict the outcome of these proceedings.
Management believes that the Company's rates to subscribers have been
calculated in accordance with provisions of the benchmark standards
prescribed by the FCC, as those standards existed in December 1993 and
that rate adjustments, if any, will be made primarily on a prospective
basis for the basic and the programming service tiers.
On February 22, 1994, the FCC took further actions dealing with rate
regulation, including the adoption of new and revised rate regulation
rules and policies. Among other things, the
82
WOMETCO CABLE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993 AND 1992
10. CONTINGENCIES (CONTINUED)
FCC further reduced the benchmark rates which are used to calculate the
permissible rates which cable operators can charge to subscribers for
basic and the programming service tiers and adopted new standards
governing a-la-carte services. While it is possible that these FCC
actions could have an impact on the Company, it is not possible to
predict the nature and extent of such impact at this time because the FCC
has not yet released the texts of its decisions on these matters.
Preliminary information relating to the FCC's proposed actions indicates
that further prospective rate reductions of approximately 7 percent may
be required after the effective date of the new FCC rules. (FCC officers
have estimated that the effective date will be May 1994). It is possible
that the Company will be required to adjust its a-la-carte service
offering, including rates, to conform to new FCC standards when issued.
If these occur, management believes, based on preliminary projections,
that the Company will not meet certain financial covenants during 1994.
Accordingly, waivers with respect to such covenants need to be obtained.
Although there can be no assurance, management believes that it will be
able to obtain such covenant waivers, if required.
11. STOCKHOLDERS' EQUITY
(A) COMMON STOCK
The common stock of Wometco consists of the following at December 31, 1993
and 1992:
NUMBER OF SHARES
------------------------ STATED PAR
PAR VALUE AUTHORIZED ISSUED VALUE
--------- ----------- ----------- -----------
Class A voting stock.......................... $ .10 5,000,000 5,000,000 $ 500,000
Class B non-voting stock...................... .10 1,000,000 882,353 88,235
(B) CAPITAL SURPLUS AND NOTE RECEIVABLE FROM STOCKHOLDERS
During 1993, the Company advanced $12,119,000 to Peachtree for repayment of
principal and interest on its debt and for minor operating fees. On a quarterly
basis, the advances to Peachtree are converted into notes receivable from
stockholders. During 1993, these notes receivable from stockholders were offset
by dividends declared and funded by the Company in the amount of $14,235,000. At
December 31, 1993 and 1992, the notes receivable from stockholders of $4,042,000
and $6,158,000, respectively, were offset by dividends declared and funded in
the following quarter.
12. TRANSACTIONS WITH AFFILIATES
The consolidated balance sheets and statements of income include the
following transactions with Peachtree for the years ended December 31, 1993 and
1992 (in thousands):
1993 1992
--------- ---------
Total advances during year............................................. $ 12,119 13,928
Dividends paid to Peachtree............................................ 14,235 12,176
Net interest expense................................................... 55 41
Interest expense resulted primarily from notes and interest-bearing advances
payable between Peachtree and Wometco as a result of advances in 1993 and 1992.
The average interest rate on these advances was 8 percent in 1993 and 8 percent
in 1992.
83
WOMETCO CABLE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993 AND 1992
12. TRANSACTIONS WITH AFFILIATES (CONTINUED)
On July 31, 1991, Wometco entered into a management agreement with Georgia
Cable Holdings Limited Partnership ("Georgia Cable"), a cable operator in the
Atlanta, Georgia, area. Under the terms of the management agreement, Wometco
will manage all aspects of daily operations of Georgia Cable's cable television
systems.
In consideration of the management services to be provided to Georgia Cable,
Wometco will receive a fee equal to 50 percent of all its aggregate operating
expenses relating to all cable television systems currently associated with
Wometco and Georgia Cable, excluding depreciation, amortization, interest, taxes
and extraordinary items, not to exceed the amounts for the periods described
below (in thousands):
50% OF
TOTAL
OPERATING
PERIOD EXPENSES
- - ----------------------------------------------------------------------- -----------
8/1/91 - 12/31/91...................................................... $ 779
1/1/92 - 12/31/92...................................................... 1,969
1/1/93 - 12/31/93...................................................... 2,097
After December 31, 1993 and for each year in which the management agreement
is in effect, the fee continues to be 50 percent of total operating expenses,
but cannot exceed the amount charged during the previous year by more than 6.5
percent.
In connection with this management agreement, Wometco earned fees of
$2,097,000 and $1,925,000 in 1993 and 1992, respectively.
As of December 31, 1993 and 1992, other assets includes advances made in the
ordinary course of business to affiliated partnerships in the amount of $799,000
and $156,000, respectively.
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount approximates fair value
because of the short-term maturity of these instruments.
SUBSCRIBER DEPOSITS: The fair value of deposits with no stated maturity
approximates the carrying amount at December 31, 1993.
BANK DEBT AND OTHER INDEBTEDNESS -- AMOUNTS DUE TO SELLERS OF BUSINESSES
PURCHASED BY WOMETCO: The carrying amount approximates fair value because
interest rates are variable and, accordingly, approximates current market rates.
INTEREST RATE SWAP AGREEMENTS: The fair value of interest rate swap
agreements are obtained from dealer quotes. These values represent the estimated
amount the Company would receive or pay to terminate the agreements, taking into
account current interest rates and the current creditworthiness of the
counterparts. At December 31, 1993, the notional amount, carrying amount and
estimated fair value for interest rate swap agreements are as follows (in
thousands):
NOTIONAL CARRYING ESTIMATED
AMOUNT AMOUNT FAIR VALUE
----------- ----------- -----------
In a net payable position........................ $ 115,000 1,289 2,682
84
WOMETCO CABLE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1994 1993
---------- ---------
Revenues.................................................................................. $ 82,727 79,018
---------- ---------
Expenses:
Cost of sales and other revenues........................................................ 29,273 29,539
Selling and other operating expenses.................................................... 11,830 10,980
Depreciation and amortization........................................................... 9,885 12,248
---------- ---------
Total expenses........................................................................ 50,988 52,767
---------- ---------
Operating income...................................................................... 31,739 26,251
Other expense -- net...................................................................... -- 190
Interest expense.......................................................................... 7,909 15,095
---------- ---------
Income before income taxes................................................................ 23,830 10,966
Provision for income taxes................................................................ 29 7,861
---------- ---------
Net Income............................................................................ $ 23,801 3,105
---------- ---------
---------- ---------
85
ITEM 7. EXHIBITS
23-A Consent of Ernst & Young LLP
23-B Consent of Arthur Andersen LLP
23-C Consents of KPMG Peat Marwick LLP
86
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Denver, State of
Colorado, on July 12, 1995.
U S WEST, INC.
BY: _______/s/ STEPHEN E. BRILZ______
Name: Stephen E. Brilz
Title: Assistant Secretary
87