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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994.
COMMISSION FILE NUMBER 1-8637
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TIME WARNER INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 13-1388520
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
75 ROCKEFELLER PLAZA, NEW YORK, N.Y. 10019
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 484-8000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $1.00 par value New York Stock Exchange
Pacific Stock Exchange
Rights to Purchase Series A Participating Cumulative New York Stock Exchange
Preferred Stock Pacific Stock Exchange
7.45% Notes due 1998 New York Stock Exchange
7.95% Notes due 2000 New York Stock Exchange
8 3/4% Debentures due 2017 New York Stock Exchange
8 3/4% Convertible Subordinated Debentures due 2015 New York Stock Exchange
9 1/8% Debentures due 2013 New York Stock Exchange
9.15% Debentures due 2023 New York Stock Exchange
Redeemable Reset Notes due 2002 New York Stock Exchange
Liquid Yield Option(TM) Notes due 2012 American Stock Exchange
Liquid Yield Option(TM) Notes due 2013 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 27, 1995, there were 379,770,491 shares of registrant's Common
Stock outstanding and the aggregate market value of such shares held by non-
affiliates of the registrant (based upon the closing price of such shares on
the New York Stock Exchange Composite Tape on March 27, 1995) was approximately
$14.3 billion.
DOCUMENTS INCORPORATED BY REFERENCE:
DESCRIPTION OF DOCUMENT PART OF THE FORM 10-K
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Portions of the Definitive Proxy Statement Part III (Item 10 through Item 13)
to be used in connection with the
registrant's 1995 Annual Meeting of
Stockholders.
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An organizational chart showing the Registrant's major business groups
and its ownership interests therein.
PART I
ITEM 1. BUSINESS
Time Warner Inc. (the "Company") was incorporated in the State of Delaware in
August 1983 and is the successor to a New York corporation originally organized
in 1922. The Company changed its name from Time Incorporated following its
acquisition of 59.3% of the common stock of Warner Communications Inc. ("WCI")
in July 1989. WCI became a wholly owned subsidiary of the Company in January
1990 upon the completion of the merger of WCI and a subsidiary of the Company
(the "Merger"). As used in this report, the terms "Registrant," the "Company"
and "Time Warner" refer to Time Warner Inc. and its subsidiaries and divisions,
and includes Time Warner Entertainment Company, L.P. ("TWE"), which conducts
substantially all of the Entertainment businesses of the Company, unless the
context otherwise requires.
The Company is the largest media and entertainment company in the world. Its
businesses are carried on in three principal groups: Publishing, Music and
Entertainment. The Publishing group consists principally of the publication and
distribution of magazines and books; the Music group consists principally of
the production and distribution of recorded music and the ownership and
administration of music copyrights; and the Entertainment group consists
principally of the production and distribution of motion pictures and
television programming, the distribution of videocassettes, the ownership and
operation of retail stores and theme parks, the production and distribution of
pay television and cable programming, and the operation of cable television
systems. These businesses are conducted throughout the world through numerous
wholly owned, and in certain cases less than wholly owned, subsidiaries and
affiliates.
TWE was formed as a Delaware limited partnership in February 1992 pursuant to
an Agreement of Limited Partnership, dated as of October 29, 1991, as amended
(the "TWE Partnership Agreement"), and has, since its capitalization on June
30, 1992 (the "TWE Capitalization"), owned and operated substantially all of
the Entertainment group businesses, and certain other businesses, previously
owned and operated by the Company. Upon the TWE Capitalization, certain wholly
owned subsidiaries of the Company (the "Time Warner General Partners"),
contributed such businesses, or assigned the net cash flow derived therefrom
(or an amount equal to the net cash flow derived therefrom), to TWE and became
general partners of TWE. Also upon the TWE Capitalization, wholly owned
subsidiaries of ITOCHU Corporation (formerly C. Itoh & Co., Ltd.), a
corporation organized under the laws of Japan ("ITOCHU"), and Toshiba
Corporation, a corporation organized under the laws of Japan ("Toshiba"),
collectively contributed $1 billion to TWE and became limited partners of TWE.
On September 15, 1993, TWE consummated the transactions contemplated by the
Admission Agreement, dated as of May 16, 1993, as amended (the "Admission
Agreement"), between TWE and U S WEST, Inc., a Colorado corporation ("U S
WEST"). Pursuant to the Admission Agreement, a wholly owned subsidiary of U S
WEST made a capital contribution of $2.553 billion and became a limited partner
of TWE (the "U S WEST Transaction"). As a result of the U S WEST Transaction,
the Time Warner General Partners collectively own 63.27% pro rata priority
capital and residual equity interests in TWE and wholly owned subsidiaries of
ITOCHU, Toshiba and U S WEST (the "Class A Partners" or the "Limited Partners")
own pro rata priority capital and residual equity interests in TWE of 5.61%,
5.61% and 25.51%, respectively. 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. In addition, the Time
Warner General Partners own priority capital interests senior and junior to the
pro rata priority capital interests.
The Admission Agreement provides that TWE will use its best efforts to
upgrade a substantial portion of its cable systems to "Full Service
Network(TM)" capacity by the end of 1998. As systems are designated for such
upgrade and after any required approvals are obtained, U S WEST and TWE will
share joint control of those systems through a 50-50 management committee. The
"Full Service Network" business is expected to include substantially all of
TWE's cable systems, subject to obtaining necessary regulatory consents and
approvals. See "Entertainment--Description of Certain Provisions of the TWE
Partnership Agreement."
In September 1994, the Company agreed to acquire Summit Communications Group,
Inc. ("Summit"), which owns cable television systems serving approximately
162,000 subscribers in Winston-Salem, North
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Carolina and in certain suburbs of Atlanta, Georgia, in exchange for 900,000
shares of the Company's common stock, par value $1.00 per share ("Common
Stock"), and 3.2 million shares of a new Time Warner convertible preferred
stock ("Series C Preferred Stock"). The Series C Preferred Stock will have a
liquidation value of $100 per share, be convertible into 6.7 million shares of
Common Stock at an effective price of $48 per share of Common Stock, receive an
annual dividend of $3.75 per share for five years, and be redeemable at
liquidation value plus unpaid dividends after five years, or exchangeable in
part for Common Stock plus unpaid dividends by the holder beginning after the
third year and by the Company after the fourth year at the stated conversion
price plus a declining premium in years four and five and no premium
thereafter.
Also 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 approximately 1.4 million subscribers and
related assets and TWE will contribute cable television systems (or interests
therein) serving approximately 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 new venture will enlarge existing cable clusters already owned by the
partners in North Carolina, Florida and New York.
In January 1995, the Company agreed to acquire KBLCOM Incorporated
("KBLCOM"), a subsidiary of Houston Industries Incorporated, that owns cable
television systems serving approximately 690,000 subscribers and a 50% interest
in Paragon Communications ("Paragon"), which serves an additional 967,000 cable
subscribers. TWE owns the other 50% interest in Paragon. To acquire KBLCOM, the
Company will issue 1 million shares of Common Stock and 11 million shares of a
new Time Warner convertible preferred stock ("Series D Preferred Stock") and
assume or incur approximately $1.24 billion of indebtedness. The Series D
Preferred Stock will have a liquidation value of $100 per share, be convertible
into approximately 22.9 million shares of Common Stock at an effective price of
$48 per share of Common Stock, and receive an annual dividend of $3.75 per
share for four years. The Company will have the right to exchange the Series D
Preferred Stock for Common Stock at the stated conversion price plus unpaid
dividends after four years, or redeem the Series D Preferred Stock at the
liquidation value per share plus unpaid dividends after five years. KBLCOM's
systems serve subscribers in San Antonio and Laredo, Texas, the Minneapolis
metropolitan area, Portland, Oregon and Orange County, California. Paragon owns
systems in Tampa, Florida and northern Manhattan, as well as other locations.
In February 1995, the Company agreed to acquire Cablevision Industries
Corporation ("CVI") and related companies that own cable television systems
serving approximately 1.3 million subscribers principally in New York, North
Carolina, Florida, California's San Fernando Valley and Columbia, South
Carolina. In acquiring CVI and related companies, the Company will issue 2.5
million shares of Common Stock and 6.5 million shares of new convertible
preferred stocks (3.25 million shares of Series E Preferred Stock and 3.25
million shares of Series F Preferred Stock) and assume approximately $2 billion
of debt of CVI and related companies. Each series of preferred stock will have
a liquidation value of $100 per share, be convertible into approximately 13.5
million shares of Common Stock at an effective price of $48 per share of Common
Stock, and receive an annual dividend of $3.75 per share for a period of five
years with respect to the Series E Preferred Stock and a period of four years
with respect to the Series F Preferred Stock. The Company will have the right
to exchange the Series E Preferred Stock for Common Stock at the stated
conversion price plus unpaid dividends after five years and to exchange the
Series F Preferred Stock for Common Stock at the stated conversion price plus
unpaid dividends after four years. In addition, the Company may redeem either
series of preferred stock at the liquidation value per share plus unpaid
dividends after five years.
The Summit and Advance/Newhouse transactions are expected to close in the
first half of 1995. The KBLCOM and CVI transactions are expected to close later
in the year. All transactions are subject to customary closing conditions,
including the receipt of certain franchise and regulatory approvals.
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The Company also has announced its intention to enhance its financial
position and that of the Entertainment Group through sales of non-core assets,
such as the stock of Turner Broadcasting System, Inc. ("TBS") owned by Time
Warner, and/or certain smaller unclustered cable systems owned by Time Warner
or the Entertainment Group. Proceeds from asset sales will be used to reduce
debt. No assurance can be given as to whether or when any particular assets may
be sold, or the amount of the proceeds that may be received by the Company from
any such sales. Because of the announced transactions, Time Warner will explore
the possibility of bringing its various interests in cable operations together
in a separate, self-financed operating unit. This process is expected to be
undertaken over a 12-18 month period and will be dependent, among other things,
on successful negotiations with TWE's partners and certain creditors, and
receipt of franchise and other regulatory approvals. Accordingly, there can be
no assurance that the effort will succeed.
For financial information about the Company's industry segments and
operations in different geographical areas with respect to each of the years in
the three-year period ended December 31, 1994, see Note 10, "Segment
Information," to the Company's consolidated financial statements at pages F-19
through F-22 herein.
The Company's Entertainment Group, consisting of the Company's interests in
certain entertainment companies, principally TWE, was deconsolidated effective
January 1, 1993 as a result of the U S WEST Transaction. The TWE Partnership
Agreement and the TWE credit agreement impose restrictions on the ability of
TWE to make distributions to the Company and the Time Warner General Partners.
See Note 1, "Summary of Significant Accounting Policies," and Note 2,
"Entertainment Group," to the Company's consolidated financial statements at
pages F-6 through F-11 herein.
PUBLISHING
The Company's wholly owned publishing division, Time Inc., publishes
magazines and books and develops products for the multimedia and television
markets. It conducts these activities through wholly owned subsidiaries, joint
ventures, equity investments and partnerships.
MAGAZINES
General
Time Inc. publishes TIME, PEOPLE, SPORTS ILLUSTRATED, FORTUNE, MONEY, LIFE,
SPORTS ILLUSTRATED FOR KIDS and ENTERTAINMENT WEEKLY. In June 1994, Time Inc.
launched IN STYLE, a monthly celebrity life style publication.
Time Inc. Ventures ("TIV") and its subsidiary Time Publishing Ventures, Inc.
("TPV") are responsible for international, regional and special interest
publishing and development activities, including Southern Progress Corporation
("Southern Progress"), Sunset Publishing Corporation ("Sunset Publishing"),
PARENTING, BABY TALK, HEALTH, HIPPOCRATES, MARTHA STEWART LIVING, and WHO
WEEKLY magazines and various joint ventures.
Southern Progress publishes SOUTHERN LIVING, PROGRESSIVE FARMER, SOUTHERN
ACCENTS and COOKING LIGHT magazines.
Time Inc., either directly or indirectly, has equity interests in ASIAWEEK,
American Family Publishers and Publishers Express. In 1994, Time Inc. sold its
interest in ELLE JAPON and YAZHOU ZHOUKAN and acquired full ownership of
President, Inc., which publishes PRESIDENT and DANCYU magazines.
TIV has management responsibility for most of the American Express Publishing
Corporation's operations, including TRAVEL & LEISURE and FOOD & WINE magazines.
TIV also operates an in-store advertising and demonstration business, Time Inc.
In-Store Marketing.
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Each magazine published by the Company has an editorial staff under the
general supervision of a managing editor and a business staff under the
management of a president or publisher. Magazine manufacturing and distribution
activities are generally managed by centralized staffs at Time Inc. Fulfillment
activities for Time Inc.'s magazines are generally administered from a
centralized facility in Tampa, Florida. PARENTING, SUNSET, BABY TALK, HEALTH,
HIPPOCRATES, MARTHA STEWART LIVING, VIBE, and Time Inc.'s overseas operations
employ independent fulfillment services and undertake their own manufacturing
and distribution.
Magazine publishing follows a seasonal pattern with revenues being generally
higher in the second and fourth quarters and lower in the first and third
quarters.
The individual magazines of the Company are summarized below:
TIME, a weekly magazine, summarizes the news and brings original
interpretation and insight to the week's events. The domestic advertising rate
base of TIME as of January 1995 was 4,000,000, which is unchanged from January
1994.
TIME Asia, TIME Atlantic, TIME Canada, TIME Latin America and TIME South
Pacific are weekly English-language editions of TIME which circulate outside
the United States. These editions had an aggregate worldwide advertising rate
base of 1,460,000 as of January 1995, compared to 1,480,000 in January 1994.
SPORTS ILLUSTRATED is a weekly magazine which covers the activities of, and
is designed to appeal to, spectators and participants in virtually all forms of
recreational and competitive sports. The advertising rate base as of January
1995 was 3,150,000, the same as in January 1994.
SPORTS ILLUSTRATED FOR KIDS is a monthly sports-oriented magazine geared to
children ages eight through fourteen. Its advertising rate base as of January
1995 was 950,000, compared to 900,000 in January 1994, including 243,000 copies
distributed free to over 1,100 schools.
PEOPLE, a weekly magazine, reports on celebrities and other notable
personalities. The advertising rate base as of January 1995 was 3,150,000, the
same as in January 1994.
ENTERTAINMENT WEEKLY is a weekly magazine which includes reviews and reports
on television, movies, video, music and books. The advertising rate base as of
January 1995 was 1,125,000, compared to 1,075,000 in January 1994.
FORTUNE, a biweekly magazine, reports on worldwide economic and business
developments. The worldwide advertising rate base was 860,000 as of January
1995, compared to 870,000 in January 1994.
MONEY is a monthly magazine which reports on personal finance. The
advertising rate base as of January 1995 was 1,900,000, the same as in January
1994.
LIFE is a monthly magazine which features photographic essays. The
advertising rate base as of January 1995 was 1,500,000, the same as in January
1994.
IN STYLE is a monthly magazine which focuses on celebrities' lives and
lifestyles. The advertising rate base as of January 1995 was 550,000.
SOUTHERN LIVING is a monthly regional home, garden, food and travel magazine
focused on the South with an advertising rate base of 2,300,000 as of January
1995, which is the same as in January 1994.
PROGRESSIVE FARMER is a monthly regional farming magazine with an advertising
rate base of 410,000 as of January 1995, compared to 415,000 in January 1994.
SOUTHERN ACCENTS, published six times a year, features architecture, fine
homes and gardens, arts and travel and is targeted to affluent Southerners. Its
advertising rate base as of January 1995 was 275,000, compared to 250,000 in
January 1994.
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COOKING LIGHT is published nine times a year and features health and fitness
through active lifestyles and good nutrition. The advertising rate base as of
January 1995 was 1,200,000, compared to 1,100,000 in January 1994.
PARENTING is published ten times a year and is aimed at parents of children
under the age of ten. The advertising rate base increased as of January 1995 to
1,000,000, compared to 925,000 in January 1994.
SUNSET, The Magazine of Western Living, is a monthly regional magazine
focused on lifestyles in the West. The advertising rate base increased to
1,425,000 in January 1995, compared to 1,400,000 in January 1994.
HEALTH is a consumer health magazine published seven times a year, and
HIPPOCRATES is published ten times a year. Although similar in editorial
content, HEALTH is targeted at the consumer market, while HIPPOCRATES is a
trade magazine targeted at physicians and carries primarily trade advertising.
HEALTH had an advertising rate base of 900,000 in January 1995, the same as in
January 1994. HIPPOCRATES had a controlled circulation of 125,000 primary care
physicians in January 1995, the same as in January 1994.
MARTHA STEWART LIVING is published ten times a year and presents Martha
Stewart's personal perspective on entertaining, cooking, decorating and
gardening. Its advertising rate base as of January 1995 was 800,000, compared
to 725,000 in January 1994.
BABY TALK is published ten times a year and is targeted at expectant and new
mothers. In February 1995 its advertising rate base was 1,000,000, compared to
1,300,000 in January 1994. BABY TALK's ancillary publications are BABY ON THE
WAY (published semi-annually) and BABY ON THE WAY BASICS (published annually).
WHO WEEKLY is an Australian version of PEOPLE which focuses on celebrities
and other notable personalities. The advertising rate base as of January 1995
was 230,000, compared to 200,000 in January 1994.
VIBE is published ten times a year by a joint venture between a subsidiary of
TPV and affiliates of Quincy Jones Entertainment Company. It covers rap, rhythm
and blues, reggae and dance music, as well as politics and fashion. The
advertising rate base as of January 1995 was 250,000, compared to 200,000 in
January 1994.
Circulation
The Company's publications are sold primarily by subscription. Subscription
copies are delivered to subscribers through the mail. Subscriptions are sold by
direct-mail solicitation, subscription sales agencies, television and telephone
solicitation and insert cards in the Company's magazines and other
publications. Single copies of magazines are sold through retail news dealers
who are supplied in turn by regional wholesalers.
Advertising
Advertising carried in the Company's magazines is predominantly consumer
advertising. Many of the Company's magazines have numerous regional and
demographic editions which contain the same basic editorial material but permit
advertisers to concentrate their advertising in specific markets. Through the
use of selective binding and ink-jet technology, the Company creates special
custom editions targeted towards specific groups. This allows the Company to
deliver advertisers a more highly targeted audience by segmenting subscriber
lists to identify those subscribers advertisers desire most, as well as
providing the opportunity to personalize advertising messages.
Paper and Printing
Lightweight coated paper, which for certain magazines is recycled,
constitutes a significant component of physical costs in the production of
magazines. Time Inc. has contractual commitments to ensure an
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adequate supply of paper, but periodic shortages may occur in the event of
strikes or other unexpected disruptions in the paper industry. During 1994,
paper prices were relatively flat with some upward movement in the fourth
quarter. In 1995, the Company expects that paper prices will increase as a
result of increased demand in the paper market. Time Inc. purchases paper
principally from four independent manufacturers, in each case under contracts
that, for the most part, are either fixed-term or open-ended at prices
determined on a market price or formula price basis.
Printing and binding for the Company's magazines are accomplished primarily
by major domestic and international printing concerns in 20 locations. Magazine
printing contracts are either fixed-term or open-ended at fixed prices with, in
some cases, adjustments based on certain criteria.
BOOKS
General
The Company's book operations include Time Life Inc., Book-of-the-Month Club,
Inc., Warner Books, Inc. and Little, Brown and Company, each of which is a
wholly owned subsidiary of Time Inc., and the Oxmoor House and Sunset Books
divisions of Southern Progress and Sunset Publishing, respectively. In 1994,
the book operations distributed, in aggregate, approximately 159 million gross
units.
Time Life
Time Life is composed of several divisions including: Books, Music, Video and
Television, Education, Digital, Medical and International. Time Life is one of
the nation's largest direct marketers of books, music and videos. The products
are sold by direct response, including mail order, television and telephone,
through retail, institutional and license channels, and by door-to-door
independent distributors in some foreign markets. Editions of the books are
currently sold in 23 languages worldwide and approximately 40% of Time Life's
revenues are generated outside the United States. In 1994, Time Life created
Time-Life Digital, a division designed to develop all forms of digital media
from the company's extensive library of titles. Time-Life Medical was formed as
a joint venture in January 1995 to create and sell patient-education materials.
Editorial material is created by in-house staffs as well as through outside
book packagers. A significant product in 1994 was Time-Life Music's platinum
series "The Rolling Stone Collection: 25 Years of Essential Rock." Other 1994
best sellers included "Weight Watchers (R) Smart Choice Recipe Collection" from
Time-Life Books, "Sounds of the 70's" from Time-Life Music, and "Predators of
the Wild" from Time-Life Video. In 1993, Time Life began the development of two
ten-hour television documentary series, "Lost Civilizations" and "The History
of Rock 'n' Roll," each of which draw on Time Life's existing editorial
resources. First-run television rights to "Lost Civilizations" have been pre-
sold to NBC and "The History of Rock 'n' Roll," co-produced with TWE's
Telepictures Productions, aired in March 1995.
Manufacturing for Time-Life Books is done by several independent companies.
Manufacturing contracts are entered into on a series rather than a single title
basis and are fixed-price with provisions for cost of labor, material and
specification adjustments. These contracts, subject to certain limitations, may
be terminated by Time Life or the manufacturer. Time Life's fulfillment
activities, excluding international operations, are conducted from a
centralized facility in Richmond, Virginia.
Book-of-the-Month Club
Book-of-the-Month Club operates seven book clubs and three continuity
businesses with combined membership in excess of 3.1 million. Two of the clubs,
Book-of-the-Month Club and Quality Paperback Book Club, are general interest
clubs and the remaining clubs specialize in history, cooking and crafts,
business, children's books and the books of a particular author. In addition,
multimedia, audio and video products are offered through the clubs. In 1993,
Book-of-the-Month Club launched its businesses internationally, and now
operates in over 40 countries in Europe, Asia, Latin America and the Middle
East.
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Book-of-the-Month Club acquires the rights from publishers to manufacture and
distribute books and then has them printed by independent printing concerns.
Book-of-the-Month Club runs its own fulfillment and warehousing operations in
Mechanicsburg, Pennsylvania.
Warner Books
Warner Books publishes hardcover, mass market and trade paperback books.
Among its best selling hardcover books in 1994 were Robert James Waller's "Old
Songs in a New Cafe," "Slow Waltz in Cedar Bend" and "The Bridges of Madison
County" and James Redfield's "The Celestine Prophecy." Mass market paperback
books on the best seller list in 1994 included "Pleading Guilty" by Scott
Turow, "Along Came a Spider" by James Patterson, and "Where There's Smoke" and
"Hidden Fires" by Sandra Brown.
During 1994, Warner Books acquired a minority equity interest in The
Reference Press, Inc., a Texas-based print and electronic publisher of business
information and company profiles. In addition, through a joint venture with
Little, Brown, Warner Books operates Time Warner Electronic Publishing, which
is engaged in on-line and multimedia publishing.
Little, Brown
Little, Brown publishes general and children's trade books, legal and medical
reference books and textbooks. Through its subsidiary, Little, Brown (U.K.), it
also publishes general hardcover and mass market paperback books in the United
Kingdom. Among the trade hardcover books published by Little, Brown in 1994
were "The Day After Tomorrow" by Allan Folsom and "Long Walk to Freedom" by
Nelson Mandela.
Little, Brown handles book distribution for itself, Warner Books and Sunset
Books, as well as other publishers. The marketing of trade books is primarily
to retail stores and wholesalers throughout the United States, Canada and the
United Kingdom. Law and medical textbooks are sold primarily to university
retail stores. Professional reference books are sold to practitioners through
retail stores and direct marketing. Through their combined U.S. and U.K.
operations, Little, Brown and Warner Books have the ability to acquire English-
language publishing rights for the distribution of hard and softcover books
throughout the world.
Warner Books, Little, Brown, and Warner Music Group's Atlantic Records
operate a joint venture, Time Warner AudioBooks, to develop and market audio
versions of books and other materials published by Warner Books, Little, Brown
and other outside publishers.
Oxmoor House and Leisure Arts
Oxmoor House, the book publishing division of Southern Progress, markets how-
to books on a wide variety of topics including food and crafts, as well as
illustrated volumes on art and other subjects. Acquired in 1992 and integrated
into Oxmoor House, Leisure Arts is a well-established publisher and distributor
of instructional leaflets, continuity books series and magazines for the
needlework and crafts market.
Sunset Books
Sunset Books, the book publishing division of Sunset Publishing, markets
books on topics such as building and decorating, cooking, gardening and
landscaping, and travel. Sunset Books' unique marketing formula includes an
extensive network of home repair and garden centers.
OTHER PUBLISHING OPERATIONS
Multimedia and Television
Time Inc. continues to actively develop products for emerging technologies
such as on-line computer networks, the Full Service Network, and the CD-ROM
market. In 1994, Time Inc. launched PATHFINDER (TM), a site on the Internet
that includes electronic editions of editorial content derived from Time Inc.'s
magazine and book publications, as well as original content created exclusively
for the Internet. Time Inc. has also licensed its editorial content to various
other on-line information services, and has produced CD-ROM products through
licensing arrangements with third party CD-ROM developers.
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Time Inc. has undertaken development efforts in various television ventures,
both in combination with other Company divisions and independently. The most
significant of these activities is an entertainment news show, "EXTRA--The
Entertainment Magazine," produced in conjunction with the Telepictures division
of TWE, a six-day-a-week program utilizing the editorial resources of Time Inc.
to break exclusive stories.
Time Inc. In-Store Marketing
Time Inc. In-Store Marketing, an umbrella organization which is a subsidiary
of TIV, operates all of Time Inc.'s in-store advertising and demonstration
businesses, including Media Holdings, Inc. ("Media One") and SmartDemo Inc.
("SmartDemo"). Media One's primary product is a two-sided backlit advertising
display unit that is installed in supermarket checkout lanes. SmartDemo is an
in-store demonstration, couponing, sampling and merchandising business.
American Express Publishing
Time Inc., through its TIV subsidiary, has management responsibility for most
of American Express Publishing Corporation's operations, including its core
lifestyle magazines, TRAVEL & LEISURE and FOOD & WINE. TIV receives a fee for
managing these properties, as well as incentives for improving profitability.
American Family Publishers
Time Inc. is a 50% partner in American Family Publishers ("AFP"), a direct
mail magazine subscription sales agency. AFP sells magazine subscriptions for
approximately 200 major magazines in the United States, including many of the
Company's publications. AFP sells primarily through two heavily-promoted
nationwide sweepstakes mailings conducted each year.
Time Distribution Services
In January 1995, Time Distribution Services Inc. ("TDS"), a wholly owned
subsidiary of Time Inc., acquired substantially all of the assets of Time
Distribution Services, a joint venture between Time Inc. and Gruner & Jahr (the
successor to the New York Times Company's interest in Time Distribution
Services). TDS markets and distributes magazines published by Time Inc. and
certain other publishers in the United States and Canada, through wholesalers
to retail outlets such as newsstands and directly to supermarkets and drugstore
chains.
Warner Publisher Services
Warner Publisher Services ("WPS") is a major distributor of magazines and
paperback books sold through wholesalers in the United States and Canada, and
internationally. WPS is the sole national distributor for MAD magazine, the
publications of DC Comics and certain publications owned by other publishers,
including TEEN, VOGUE, WOMAN'S DAY, and the Dell Puzzle Books. WPS also
distributes the paperback books published by Warner Books as well as the full
paperback line of the Berkley Group. WPS is wholly owned by Time Inc.
Publishers Express
Time Inc. owns 23.5% of Publishers Express Inc., a corporation whose
shareholders consist of eleven other publishers, printers, paper companies and
direct mailers established to deliver second- and third-class mail and
advertising material in competition with the U.S. Postal Service. As of January
1995, the corporation was delivering in 24 cities throughout the United States.
POSTAL RATES
Postal costs represent a significant operating expense for the Company's
publishing activities. There were no general postal rate increases in 1994. An
increase of approximately 10% for first class and 14% for second, third and
fourth classes was implemented in January 1995 by the Postal Service.
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Publishing operations continue to minimize postal expense through the use of
certain cost-saving measures, including the utilization of contract carriers to
transport books and magazines to central postal centers. It has been the
Company's practice in selling books and other products by mail to include a
charge for postage and handling, which is adjusted from time to time to
partially offset any increased postage or handling costs.
COMPETITION
The Company's magazine operations compete for sales with numerous other
publishers and retailers, as well as other media. The general circulation
magazine industry is highly competitive both within itself and with other
advertising media which compete with the Company's magazines for audience and
advertising revenue.
The Company's book publishing operations compete for sales with numerous
other publishers and retailers as well as other media. In addition, the
acquisition of publication rights to important book titles is highly
competitive, and Warner Books and Little, Brown compete with numerous other
book publishers. WPS and TDS meet with direct competition from other
distributors operating throughout the United States and Canada in the
distribution of magazines and paperback books.
MUSIC
GENERAL
The Company's music business, conducted under the umbrella name Warner Music
Group ("WMG"), consists principally of a vertically integrated worldwide
recorded music business and a worldwide music publishing business.
The Company's domestic recorded music business, which was restructured in
1994 and early 1995, is conducted primarily through a division of WMG called
Warner Music U.S. ("WMUS") and its constituent companies, Elektra Entertainment
Group ("Elektra"), The Atlantic Group ("Atlantic") and Warner Bros. Records
("WBR"), and their affiliated labels; and through Warner Media Manufacturing
and Distribution ("WMMD") and its constituent companies, Warner-Elektra-
Atlantic Corporation ("WEA"), WEA Manufacturing Inc. ("WEA Mfg.") and Ivy Hill
Corporation ("Ivy Hill"). Outside of the United States, the Company's recorded
music business is conducted in more than 65 countries through WEA International
Inc. and a division of WCI, Warner Music International, and their subsidiaries
and affiliates ("WMI"), as well as through non-affiliated licensees. WMG also
conducts a home video business specializing in children's videos and fitness
videos through WarnerVision, a division of WMUS.
The Company's music publishing business is conducted principally through
wholly owned subsidiaries of WCI (collectively, "Warner/Chappell").
In 1994, approximately 57% of WMG's recorded music revenues were derived from
sources outside of the United States.
RECORDED MUSIC AND RELATED ACTIVITIES
WMI, WBR, Atlantic and Elektra produce, sell and license compact discs,
cassette tapes and music videos (in both videocassette and video laserdisc
configurations) of the performances of recording artists under contract to them
or for whose recordings they have acquired rights. WMG's recorded music and
video product is marketed under various labels, including the proprietary
labels "Warner Bros.," "Reprise," "Sire," "Tommy Boy," "Warner Nashville,"
"Elektra," "Asylum," "Nonesuch," "Atlantic," "WarnerVision," "EastWest
America," "Big Beat," "Atlantic Nashville," "WEA," "EastWest," "Teldec," "CGD,"
"Carrere," "Erato," "MMG," "DRO," "Telegram," "D-Day," "Muser" and "Fazer."
In addition, WMG has entered into joint venture agreements pursuant to which
WMG companies manufacture, distribute and market (both domestically and, in
most cases, internationally) recordings owned by such joint ventures. The terms
of such agreements vary widely, but each agreement typically provides the
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WMG record company with an equity interest and a profit participation in the
venture, with financing furnished either solely by WMG or by both parties.
Included among these arrangements are the labels "American Recordings,"
"Giant," "Interscope," "Maverick," "Qwest" and "Rhino." In early 1995, Elektra
entered into a joint venture arrangement with Sub Pop Ltd. ("Sub Pop"), an
independent record company based in Seattle.
WMG's record companies also acquire rights pursuant to agreements to
manufacture and distribute certain recordings that are marketed under the
licensor's proprietary label. Included among the labels distributed by WMUS
under such arrangements are "Beggars Banquet," "Curb," "Mammoth," "Matador" and
"Slash."
Recording artists are engaged under arrangements that generally provide that
the artist is to receive a percentage of the suggested retail selling price of
compact discs, cassette tapes and music videos sold. Most artists receive non-
returnable advance payments against future royalties.
Among the artists whose albums resulted in significant sales for WMG's record
companies during 1994 were: All-4-One, Anita Baker, Candlebox, Collective Soul,
Eric Clapton, Green Day, Madonna, Luis Miguel, John Michael Montgomery, Laura
Pausini, R.E.M., Stone Temple Pilots, Keith Sweat, Mariya Takeuchi and The
Three Tenors. In 1995, WMG's record companies expect to release albums by the
following artists: Tori Amos, AC/DC, Bjork, Tevin Campbell, Enya, En Vogue,
Michael Feinstein, Philip Glass, Van Halen, Quincy Jones, Andy Lau, Bette
Midler, Red Hot Chili Peppers, Linda Ronstadt, David Sanborn, Simply Red, Rod
Stewart and Skid Row.
WMG's domestic manufacturing, packaging and distribution operations are
conducted through WMMD and its constituent companies.
WEA Mfg. is engaged in the domestic manufacturing of audio and CD-ROM compact
discs, cassette tapes and videocassettes. WEA Mfg. conducts its operations from
facilities situated in Olyphant, Pennsylvania and in the greater Los Angeles
area. WEA Mfg. participated in the development of digital video discs ("DVD"),
the new digital configuration developed by Time Warner and Toshiba, and expects
to be manufacturing DVD early in 1996.
Ivy Hill is engaged in the offset lithography and packaging business through
facilities situated in four states. Ivy Hill is a major supplier of packaging
to the recorded music industry (including WMG's record companies) and also
supplies packaging for a wide variety of other consumer products.
WMG's recorded music product is marketed and distributed in the continental
United States by WEA, which supplies, directly or indirectly through sub-
distributors and wholesalers, thousands of record stores, department stores,
discount centers and other retail outlets across the country. Alternative
Distribution Alliance, a distribution company specializing in alternative rock
music, with a focus on new artists, operates as a joint venture among WMG, its
labels, Restless Records and Sub Pop.
Warner Special Products produces, primarily for telemarketers, compilations
of music for which it has obtained rights from WMG's recorded music companies,
as well as from third parties.
In foreign markets, WMI produces, distributes, promotes and sells recordings
of local artists and, in most cases, distributes the recordings of those
artists for whom WMG's domestic recording companies have international rights.
In certain countries, WMI licenses to non-affiliated parties rights to
distribute recordings of WMG's labels. WMI strengthened its operations during
1994 with the creation of Warner Music Benelux, combining affiliates in the
Netherlands and Belgium; the establishment of Warner Music Thailand; the
acquisition of NVC Arts, a classical video company in the U.K.; and the
formation of an international marketing alliance with China Records in the U.K.
WMI also operates two plants in Germany that manufacture compact discs,
cassette tapes and vinyl records for WMI's European affiliates and licensees
and for WMI companies outside Europe, as well as for unrelated parties.
Warner Music Enterprises ("WME"), a direct marketing company, operates
magazine-plus-CD/audio cassette continuity programs specializing in classical
music (BBC Music) and country music (New Country).
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During 1994, WME added a new rock music magazine, huH, to its existing Rock
Video Monthly service and launched Jazziz, a new jazz-oriented service. In
February 1995, WME launched Radio Aahs, a similar service for children.
Through joint ventures, WMG and Sony Music Entertainment ("Sony Music")
operate The Columbia House Company, the leading direct marketer of compact
discs, cassette tapes and videocassettes in the United States and Canada. WCI
owns a minority portion of Time Warner's 50% interest in the U.S. partnership
and all of Time Warner's 50% interest in the Canadian partnership. WMG and Sony
Music are also partners in Music Sound Exchange, a direct marketing catalog
that is primarily directed to selling music and related products to consumers
age 35 and over.
In March 1995, WMG entered into a joint venture with PolyGram International
Ltd. ("PolyGram") and Sony Music to directly market recorded music and filmed
entertainment repertoire in Europe through music clubs and video clubs.
WMG, with other partners, including another subsidiary of the Company, has an
equity interest in Digital Cable Radio Associates, an audio programming service
that delivers multiple channels of CD-quality stereo music via cable
television. In Europe, where the service is known as Music Choice Europe, it is
delivered via cable television and direct-to-home satellite.
WMG is a partner with Sony Pictures Entertainment, Inc. ("Sony Pictures"),
PolyGram, Thorn EMI ("EMI") and Hamburg radio executive Frank Otto in VIVA, a
24-hour German language music video channel carried on cable television in
Germany.
In January 1995, WMG entered into a joint venture with STAR TV, Bertlesmann
Music Group, EMI and Sony Pictures to develop programming for STAR TV's
existing pan-Asian music channel, Channel [V].
During 1994 and early 1995, WMG acquired the U.K. multimedia developer
Renegade and signed software development agreements in the U.S. with several
leading interactive programming creators, including Hyperbole Studios,
Imagination Pilots and Accolade (and acquired a minority interest in that
company). Also in 1994, WMG, along with Home Box Office and software developer
Michael Nash, created a new multimedia joint venture known as Inscape. WMG also
announced the formation of WarnerActive, a division of WEA that will publish
multimedia titles in the U.S., and Warner Interactive Entertainment which will
publish multimedia titles in international markets. Time Warner's other
divisions involved in CD-ROM production, including Time Warner Interactive
Group, will also be utilizing WarnerActive's services.
MUSIC PUBLISHING
Time Warner's music publishing companies own or control the rights to over a
million standard and contemporary compositions, including numerous popular
hits, folk songs and music from the stage and motion pictures. Certain works of
the following artists, authors and composers are included in Warner/Chappell's
catalogues: John Bettis, Michael Bolton, The Black Crowes, Phil Collins, Comden
& Green, Dubin & Warren, Genesis, George and Ira Gershwin, Gin Blossoms, Victor
Herbert, Michael Jackson, Elton John, Leiber & Stoller, Lerner & Lowe, Madonna,
Henry Mancini, Johnny Mercer, George Michael, Midnight Oil, Cole Porter, the
artist formerly known as Prince, R.E.M., Rodgers & Hart, Soul Asylum, Jule
Styne, Bernie Taupin, Van Halen, John Williams and the foreign administration
of the works of Irving Berlin.
Warner/Chappell also administers the film music of several television and
motion picture companies, including Lucasfilm, Ltd., Viacom Enterprises, Samuel
Goldwyn Productions and Famous Music (outside the United States and Japan).
Warner/Chappell's printed music division markets publications throughout the
world containing the works of Alabama, Phil Collins, Bon Jovi, The Eagles, The
Grateful Dead, Michael Jackson, Led Zeppelin, Madonna, John Mellencamp, the
artist formerly known as Prince, Rush, Bob Seger and many others. In July 1994,
Warner/Chappell acquired CPP/Belwin, Inc., one of the world's largest
publishers of printed music.
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Principal sources of revenues to Warner/Chappell are license fees for use of
its music copyrights on radio and television, in motion pictures and in other
public performances; royalties for use of its music copyrights on compact
discs, cassette tapes, vinyl records, music videos and in commercials; and
sales of published sheet music and song books for the home musician as well as
the professional and school markets, including methods for teaching musical
instruments.
LEGISLATION
As digital technology is applied to broadcast, cable and other means of
distribution, and more particularly to the interactive networks comprising the
"information superhighway," the virtually flawless reception and improved
potential for recording that digitization entails is expected to be the subject
of legislation in 1995. A bill has been introduced in the Senate (S.227), and
it is anticipated that one will be introduced shortly in the House, which will
provide royalties to performers and producers of sound recordings that are
publicly performed on digital subscription music services. Sound recordings are
the only copyrighted works for which there is no compensation for their public
performance. Passage of this legislation would favorably impact WMG's
interests. Prospects for passage may be improved by the bill's exclusion of
conventional analog distribution.
In addition, a bill to extend the term of ownership of copyrights for an
additional 20 years has been introduced in the House (H.R. 989). Passage of
this legislation would benefit all of the Company's copyright businesses,
including the businesses of WMG.
No assurance can be given that either of these bills will become law.
COMPETITION
The recorded music business is highly competitive. The revenues and income of
a company in the recording industry depend upon the public acceptance of the
company's recording artists and the recordings released in a particular year.
Although WMG is one of the largest recorded music companies in the world, its
competitive position is dependent upon its continuing ability to attract and
develop talent that can achieve a high degree of public acceptance. The
recorded music business continues to be adversely affected by counterfeiting,
piracy, parallel imports and, in particular, the home taping of recorded music.
In addition, the recorded music business also meets with competition from other
forms of entertainment, such as television, pre-recorded videocassettes and
video games.
Competition in the music publishing business is intense. Although WMG's music
publishing business is the largest on a worldwide basis, it competes with every
other music publishing company in acquiring musical compositions and in having
them recorded and performed.
ENTERTAINMENT
The Company's Entertainment Group consists of TWE's Filmed Entertainment,
Programming--HBO and Cable businesses, and also Time Warner's interests in
certain other businesses. Each of the three principal businesses is operated as
a separate division of TWE and, except as described below, in the same manner
as it was operated by the Company at the time of the TWE Capitalization. See
"--Description of Certain Provisions of the TWE Partnership Agreement--
Management and Operations of TWE."
As a result of the U S WEST Transaction, TWE may be deemed an "affiliated
enterprise" of a Regional Bell Operating Company ("RBOC") and, as such, may be
subject to certain restrictions of the Modification of Final Judgment entered
on August 24, 1982 by the United States District Court for the District of
Columbia and related decisions and decrees (the "Modification of Final
Judgment"). Generally, the Modification of Final Judgment prohibits the RBOCs,
including U S WEST, and any of their "affiliated enterprises," from among other
things, (i) providing long distance telecommunications services, which may
include operating or providing long distance services using TVROs or
satellites, or coaxial cable, fiber or microwave facilities, (ii) manufacturing
or providing telecommunications equipment and (iii) manufacturing
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"customer premises equipment," which may include cable television converter or
multimedia boxes. In addition, the Modification of Final Judgment may prohibit
the RBOCs and their "affiliated enterprises" from holding certain financial
interests in ventures that engage in the foregoing activities. Several bills
that would alleviate many of the restrictions contained in the Modification of
Final Judgment are under active consideration in the U.S. Congress.
In order to ensure compliance with the Modification of Final Judgment, prior
to U S WEST's investment in TWE, TWE distributed to the Time Warner General
Partners certain assets, including the satellite receiving dishes and broadcast
antennae used by TWE's cable division, the transponders and other transmission
equipment used by TWE's cable television programming and filmed entertainment
divisions and equity interests in certain programming entities (collectively,
the "TW Service Partnership Assets"). Such partners then contributed such
assets to newly formed sister partnerships in which the Time Warner General
Partners and subsidiaries of ITOCHU and Toshiba are the partners (the "Time
Warner Service Partnerships"). Upon the distribution of the TW Service
Partnership Assets to the Time Warner General Partners, the Time Warner General
Partners' junior priority capital interests were reduced by approximately $300
million. See "--Other Entertainment Group Assets--Time Warner Service
Partnerships."
On October 24, 1994, U S WEST was granted a waiver (the "Waiver") of certain
provisions of the Modification of Final Judgment that affected some of TWE's
businesses. Although the Waiver permits TWE, to a large extent, to conduct its
businesses as it did before the U S WEST Transaction, it does not remove all of
the "line of business" restrictions and requirements imposed by the
Modification of Final Judgment. As a result of the Waiver, TWE is no longer
prohibited from owning substantially all of the TW Service Partnership Assets.
Accordingly, pursuant to the terms of certain agreements, the TW Service
Partnership Assets no longer subject to such restrictions 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.
FILMED ENTERTAINMENT DIVISION
General
TWE's principal operations in the fields of motion pictures and television
are conducted by its Warner Bros. division ("WB"). The filmed entertainment
business includes the production, financing and distribution of feature motion
pictures, television series, made-for-television movies, mini-series for
television, first-run syndication programming, and animated programming for
theatrical and television exhibition; and the distribution of pre-recorded
videocassettes and videodiscs. TWE also is engaged in product licensing and the
ownership and operation of retail stores, movie theaters and theme parks; and,
since January 1995, the ownership and operation of a new national broadcast
television network, The WB.
Feature motion pictures and television programs are produced at various
locations throughout the world, including The Warner Bros. Studio in Burbank,
California and The Warner Hollywood Studio in West Hollywood, California. For
additional information, see Item 2 "Properties."
Feature Films
WB produces feature films either solely or under arrangements with other
producers, and is generally the principal source of financing for such films.
In addition, WB purchases outright, or licenses for distribution, completed
films produced by others. Acquired distribution rights may be limited to
specified territories, specified media and/or particular periods of time. The
terms of WB's agreements with independent motion picture producers and other
entities result from negotiations and vary depending upon the production, the
amount and type of financing by WB, the media covered, the territories covered,
the period of distribution and other factors. In some cases, producers,
directors, actors, writers and others participate in the proceeds generated by
the motion pictures in which they are involved.
WB operates a worldwide theatrical distribution organization through which it
distributes its own films, as well as films produced by others. During 1994,
52% of film rentals from WB theatrical distribution were generated in the
United States and Canada and 48% in international territories.
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Feature films are licensed to exhibitors under contracts that provide for the
length of the engagement, rental fees, which may be either a percentage of box
office receipts, with or without a guarantee of a fixed minimum, or a flat sum,
and other relevant terms. The number of feature films that a particular theater
exhibits depends upon its policy of program changes, the competitive conditions
in its area and the quality and appeal of the feature films available to it. WB
competes with all other distributors for playing time in theaters.
Geffen Films Inc. produces feature films through Geffen Pictures ("Geffen"),
a joint venture with TWE, which arranges for financing of the venture. Geffen
operates autonomously. The pictures produced by Geffen are released worldwide
by WB. In 1994, Geffen produced and WB released "Interview With the Vampire,"
starring Tom Cruise and Brad Pitt. In 1995, Geffen anticipates commencing the
production of "Executive Decision," starring Kurt Russell. Numerous other film
projects are in development.
WB has entered into distribution servicing agreements with Morgan Creek
Productions Inc. and its affiliates ("Morgan Creek"), pursuant to which, among
other things, WB provides domestic distribution services for all Morgan Creek
pictures through June 1998, and certain foreign distribution services for
selected pictures. In 1994, WB released such Morgan Creek pictures as "Ace
Ventura: Pet Detective," starring Jim Carrey and "Major League 2," starring
Charlie Sheen. Among the releases anticipated for 1995 are "Big Bully,"
starring Tom Arnold, and "Ace Ventura 2: When Nature Calls," starring Jim
Carrey.
An affiliate of WB has entered into a long-term arrangement with Monarchy
Enterprises C.V. ("Monarchy"), Le Studio Canal Plus and Alcor Film for the
financing, production and distribution of no fewer than 10 major motion
pictures involving an expected total production outlay in excess of $200
million. Arnon Milchan produces the pictures for Monarchy, with funding
provided primarily by Monarchy. The WB affiliate advances (and has the right to
recoup, together with a distribution fee) a portion of the production budget of
each film and all necessary marketing and distribution costs for the films. WB
has acquired all distribution rights in the United States and Canada, as well
as all international theatrical and home video rights to these motion pictures.
"Boys on the Side," starring Whoopi Goldberg and directed by Herb Ross, was
released in 1995 pursuant to this arrangement. Other productions scheduled to
commence in 1995 under the agreement include "Bogus," also starring Whoopi
Goldberg, and directed by Norman Jewison, as well as, "Empire," directed by
Allan Moyle, and "Copycat," directed by Jon Amiel. It is anticipated that four
to five pictures per year will be produced during the approximately five-year
production term of the agreement.
During 1994, WB released 36 motion pictures for theatrical exhibition, of
which 20 were produced by others. Among these 36 motion pictures, the following
have produced substantial gross receipts: "Maverick," "Interview With the
Vampire," "The Client," "Ace Ventura: Pet Detective," "Disclosure," "Natural
Born Killers" and "The Specialist." Significant revenues were also generated in
1994 by pictures originally released in 1993, including "Grumpy Old Men" and
"The Pelican Brief."
During 1995, WB currently expects to release domestically 23 pictures, of
which 9 will be produced by others. In addition to those previously mentioned,
such pictures include: "Outbreak," starring Dustin Hoffman, "Batman Forever,"
starring Val Kilmer, Tommy Lee Jones and Jim Carrey, "The Bridges of Madison
County," starring Clint Eastwood and Meryl Streep, "Free Willy 2: The Adventure
Home," "Under Seige 2: Dark Territory," starring Steven Seagal, and
"Assassins," starring Sylvester Stallone.
Warner Bros. Feature Animation was formed in January 1994 to create, develop
and produce feature-length animated motion pictures. Numerous projects are
currently in development and the first picture is expected to be released in
1997.
Television
WB, through its television production and distribution divisions and various
contractual arrangements, is the leading supplier of television programming in
the world. These WB divisions and suppliers produce
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and distribute filmed entertainment for television (including comedy and drama
series, animation shows, made-for-television movies, mini-series and first-run
syndication programming) for initial exhibition on networks, local stations or
cable systems. They include the wholly owned Warner Bros. Television Production
("Warner Bros. Television"), Telepictures Productions ("Telepictures"), Warner
Bros. Animation, Warner Bros. Domestic Television Distribution ("WBDTD") and
Warner Bros. International Television Distribution ("WBITD") divisions, the
joint ventures Time Telepictures Television and Quincy Jones/David Salzman
Entertainment Company, and contractual arrangements with the Prime Time
Entertainment Network ("PTEN") and Witt-Thomas-Harris Productions ("Witt-
Thomas").
WB television series for the 1994-95 broadcast season include: "Full House"
(in its eighth season), "Murphy Brown" (in its seventh season), "Family
Matters" (in its sixth season), "Sisters" (in its fifth season), "Step by Step"
(in its fourth season), "Hangin' with Mr. Cooper" (in its third season), "Kung
Fu: The Legend Continues" (in its third season), "Living Single" (in its second
season), "Lois & Clark: The New Adventures of Superman" (in its second season),
"The George Carlin Show" (in its second season), "ER" (the season's most
highly-rated new program), "Friends" (the season's highest-rated new comedy
series), "The Great Defender," "Hope & Gloria," "Medicine Ball," "On Our Own,"
"Pointman," "Something Wilder," "The Ties That Bind," "Under Suspicion," and
two half-hour comedy series for The WB, the new WB television network--"The
Wayans Bros." and "The Parent 'Hood." Warner Bros. Television is also producing
movies and mini-series for the 1994-95 broadcast season.
The Telepictures division, while continuing to specialize in reality and
reality-based series and specials for the first-run syndication market, is
expanding its activities into all media (network, first-run syndication and
cable) and all segments of the daily television schedule (daytime, prime time,
access and late-night). For the 1994-95 television season, Telepictures
productions include the successful, nationally syndicated "Jenny Jones" talk
show and the ten-hour mini-series "The History of Rock 'n' Roll" (broadcast in
March 1995) for PTEN. In 1992, Telepictures and TIV formed Time Telepictures
Television ("TTT"), a venture that is designed to bring together the
information resources of Time Inc. with the production and programming
expertise of Telepictures. TTT's first series is the six-day-a-week
entertainment magazine "EXTRA--The Entertainment Magazine," which debuted in
September 1994.
Warner Bros. Animation is responsible for the creation, development and
production of contemporary animation as well as for the creative use and
production of WB's classic animated properties. Warner Bros. Animation
currently supplies the Fox Children's Network with animated programming. In
September 1995, Warner Bros. Animation will be providing four series to Kids'
WB, the children's programming service of The WB. In addition, Warner Bros.
Animation is actively involved in the production of animated commercials.
PTEN, a consortium of leading television stations, offers prime time, first-
run programs which are exclusively supplied by WBDTD. The 1995 season of PTEN
includes a second season of "Babylon 5," "Kung Fu" (in its third season) and
the debut of "Pointman."
WB and Witt-Thomas have an exclusive, long-term feature film and television
production and distribution agreement. The agreement provides for Witt-Thomas
to exclusively create, develop and produce all forms of television for all
media. For the 1994-95 season, the team produced: "The John Larroquette Show"
(in its second season), "Daddy's Girls," "The Office" and "Muscle."
WBDTD is one of the industry's leading domestic distributors of television
programming. The division distributes over 5,800 hours in full syndication and
an additional 1,800 hours in limited markets; a substantial portion of this
programming is produced by WB's television divisions and ventures.
WBITD is the world's largest distributor of television programming. It
licenses more than 21,000 hours of television programming and feature films,
dubbed or subtitled in more than 40 languages, to telecasters in more than 160
countries. The division handles the distribution to the international
television marketplace (broadcast, pay and basic cable) for all of the product
produced by the WB television divisions and ventures, among others. WBITD
recently created Warner Bros. International Channels to expand its global
presence
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in television with the creation of a variety of thematic or general
entertainment programming services in both mature and emerging broadcast
markets throughout the world. WBTV-The Warner Channel, WB's first cable
satellite-delivered entertainment channel created exclusively for the
international marketplace, will launch in the summer of 1995 and will serve
Latin America as a family-oriented programming service. WBTV-The Warner
Channel, a venture of WB in association with the HBO Ole Partners, will utilize
the cable distribution expertise and facilities of HBO Ole. In alliance with
Home Box Office and other major motion picture studios, WB is a partner in
three other 24-hour pay television services--HBO Asia, HBO Brazil and HBO Ole.
WB's library of films for television distribution is comprised of films
produced by WB since 1949, as well as films produced by others and licensed to
WB for television exhibition in either selected markets or on a worldwide
basis. WB also owns a library of television series previously shown on network
television.
WB's backlog, representing the amount of future revenue not yet recorded from
cash contracts for the licensing of films for pay and basic cable, network and
syndicated television exhibition, amounted to $852 million at December 31, 1994
compared to $724 million at December 31, 1993 (including amounts relating to
Programming-HBO of $175 million at December 31, 1994 and $178 million at
December 31, 1993). The backlog excludes advertising barter contracts.
During 1993, the Federal Communications Commission ("FCC") revised its rules
to allow the three major television networks to acquire financial interests and
syndication rights in programs produced for a network by outside producers such
as WB and to engage in the syndication of such programs abroad. Under the new
rules, the networks remain barred from actively syndicating any programs
domestically--both "off-network" (produced initially for network distribution)
and "first-run" (produced directly for syndication). With respect to first-run
syndicated programs, the networks remain barred from acquiring financial
interests if the program is not solely produced by the network. The new rules
also require the networks to release "off-network" programs into syndication no
later than four years after the program's network debut. The FCC rules were
upheld by the U.S. Court of Appeals for the Seventh Circuit in July 1994.
Until November 1993 the television networks, as a practical matter, continued
to be barred from acquiring financial interests and syndication rights in
outside-produced programs and from syndicating programs domestically or abroad
by consent decrees that each network entered into with the Department of
Justice over a decade ago. On November 8, 1993, however, the U.S. District
Court in Los Angeles issued a decision that eliminated those portions of the
consent decrees that restricted the networks' ability to obtain financial
interests and syndication rights and to distribute syndicated programs. With
these changes to the consent decrees, the above FCC rules are now the only
remaining restrictions on the networks' ability to acquire financial interests
and syndication rights in programs and to syndicate programs domestically.
These restrictions do not apply to The WB.
The District Court's decision and the 1993 FCC decision could adversely
affect the revenues WB derives from its off-network television syndication
operations. In addition, the FCC has stated that it will review the remaining
rules 18 months after the date of the District Court order and, if proponents
of the rules do not convince the FCC to retain the rules, the rules will
automatically expire in November 1995. If the remaining prohibitions on first-
run syndication are permitted to expire at that time, the revenues WB derives
from its first-run syndication operations also could be adversely affected.
FCC regulations also limit to three the number of hours of network (including
off-network) programs that television stations that are affiliated with the
networks and located in the top 50 markets may broadcast during the four-hour
prime time period. In such markets, the fourth hour of prime time programming
currently consists largely of first-run syndication programming. In October
1994, the FCC adopted a Notice of Proposed Rulemaking to examine whether these
regulations should be eliminated or modified. Comments are due at the FCC in
the spring of 1995. Repeal or modification of the off-network restriction might
have an advantageous impact on WB's sales of off-network syndicated programs,
but could adversely affect WB's sales of first-run syndication programming.
Repeal or modification of the network restriction could adversely affect
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WB's sales of both first-run and off-network programming if the networks
provide a network feed during that time period. The rule does not currently
apply to The WB. Repeal or modification of the rule is unlikely to have an
impact on The WB.
The WB Television Network
The WB, a new national television network, was launched by WB on January 11,
1995 (during the 1994-95 broadcast season). Tribune Broadcasting is the
network's flagship affiliate. Combining The WB's current broadcast affiliate
lineup with the reach of Tribune's WGN Superstation, The WB's national coverage
is approximately 80% of U.S. households. The WB's first night of programming is
Wednesday (featuring four half-hour comedies: "The Wayans Bros.," "The Parent
'Hood," "Unhappily Ever After" and "Muscle"). A second night will be added in
August 1995, and it is currently planned that an additional night will be added
each year thereafter. The WB launch programming is designed to appeal to young
adults, teens and kids, especially the 12-34 year old age group. In September
1995, The WB expects to unveil its new children's programming service, Kids'
WB, with 6 half-hours on Saturday morning and 2 half-hour morning strips
(Monday through Friday). Saturday morning highlights include a new animated
series from Steven Spielberg (the action/adventure "Freakazoid!"), brand new
episodes of the Peabody Award-winning "Steven Spielberg Presents Animaniacs"
and "Steven Spielberg Presents Pinky & The Brain" (favorites from
"Animaniacs"). On weekday mornings, Kids' WB will offer WB classic animation as
well as previously produced episodes of "Animaniacs." Viacom Inc. and Chris
Craft Industries Inc. launched United Paramount Network, a new broadcast
television network, in January 1995.
Home Video
Through its Warner Home Video division ("WHV"), WB distributes for home video
use pre-recorded videocasettes and laser optical videodiscs containing the
filmed entertainment product of WB. In addition, WHV distributes (or services
the distribution of) the entertainment product of other companies from which it
has acquired home video distribution or servicing rights. Such companies
include Metro Goldwyn Mayer/United Artists, Turner, Regency Pictures and Morgan
Creek Productions (in the United States and in selected international markets).
During 1994, WHV released eight titles into the North American rental market
whose sales exceeded 300,000 units each: "Maverick," "The Pelican Brief,"
"Demolition Man," "On Deadly Ground," "A Perfect World," "The Client," "Blown
Away" and "Grumpy Old Men." Internationally, the following titles generated
substantial home video revenue in 1994: "The Fugitive," "A Perfect World,"
"Demolition Man" and "Free Willy." Additionally, the Warner Bros. Family
Entertainment label was enhanced through the affordably-priced North American
video releases of "Black Beauty," "Secret Garden," "Thumbelina," "Batman: Mask
of the Phantasm" and "George Ballanchine's The Nutcracker," which generated
combined videocassette sales in excess of 11 million units. Also, WHV released
"The Fugitive" and "Ace Ventura: Pet Detective" at affordable prices,
generating combined sales of over 8 million units. Based on this experience,
WHV will continue the video release of certain "blockbuster" theatrical
releases and family entertainment programming on a direct to sell-through
basis.
WHV sells its product in the United States and in major international
territories through its own sales force, with warehousing and fulfillment
handled by divisions of the Warner Music Group and third parties. In some
international markets, WHV's product is distributed through licensees. All
product is manufactured under contract with independent laboratories.
In January 1995, Toshiba and WHV announced their proposal for a high density
digital video disc (DVD) format that features a double-sided, five-inch disc
with enough storage capacity for two full-length feature films. The proposal
was supported by a number of major consumer electronics companies and Hollywood
studios. Toshiba and WHV expect that the DVD format will be developed and
marketed for consumer introduction in 1996. Sony Corp. and Philips Electronics
NV have independently announced that they are developing a similar product
based on a separate, competing format.
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Competition
The production and distribution of theatrical motion pictures, television
product and videocassettes/ videodiscs are highly competitive businesses, as
each competes with the other as well as with other forms of entertainment.
Furthermore, there is increased competition in the television industry
evidenced by the increasing number and variety of basic cable and pay
television services now available. There is active competition among all
production companies in these industries for the services of producers,
directors, actors and others and for the acquisition of literary properties.
With respect to the distribution of television product, there is significant
competition from independent producers and distributors as well as major
studios. Revenues for filmed entertainment product depend in part upon general
economic conditions, but the competitive position of a producer or distributor
is still greatly affected by the quality of, and public response to, the
entertainment product it makes available to the marketplace. The television
network industry is extremely competitive as networks seek to attract audience
share and television stations for affiliation, and obtain advertising revenue
and distribution rights to television programming. There is strong competition
throughout the home video industry, both from home video subsidiaries of
several major motion picture studios and from independent companies.
Consumer Products
Warner Bros. Consumer Products, another division of WB, through its licensing
division ("WBCP Licensing"), acts as an agent for owners of copyrights and
trademarks in the consumer products marketplace. WBCP Licensing licenses rights
to names, photographs, likenesses, logos and similar representations or
endorsements with respect to the theatrical motion pictures and television
series produced or distributed by WB, including those featuring the cartoon
characters owned by DC Comics. WBCP Licensing operates in both domestic and
international markets, and meets with active competition in all phases of its
activities. In 1994, WBCP Licensing continued its major licensing programs for
"Looney Tunes," Steven Spielberg's "Tiny Toon Adventures," "Animaniacs" and the
animated television series "Adventures of Batman and Robin." In addition, WBCP
Licensing began a major licensing program for the new theatrical motion picture
"Batman Forever."
Warner Bros. Studio Stores
In 1994, the retail division of Warner Bros. Consumer Products ("WBCP
Retail") continued its expansion with the opening of 46 additional outlets in
the United States and five overseas, including stores in London, Glasgow and
Berlin. By the end of 1994, WBCP Retail had opened a total of 111 Warner Bros.
Studio Stores, 100 of which are located in select shopping locations throughout
the United States, 10 of which are located in the United Kingdom and one of
which is located in Germany. In 1995, WBCP Retail plans to open 20-25
additional stores in the United States and Europe. Also in 1994, WBCP Retail
entered into agreements to open its first franchised Warner Bros. Studio Stores
in Hong Kong and Singapore during 1995. Additional agreements to franchise
Warner Bros. Studio Stores throughout other countries in the Asia Pacific
Region are scheduled to be completed during 1995.
Theaters
Since WB, through its Warner Bros. International Theatres division, began its
program in 1987 to construct and operate new multiplex cinemas, it has opened
36 complexes with 294 screens in six foreign countries. WB operates nine
theaters in the United Kingdom, two in Germany and, through joint ventures, 17
theaters in Australia, two in Denmark, one in Portugal and five in Japan.
Directly and through joint ventures, WB plans to open ten new multiplex cinemas
in 1995; there are currently under construction three multiplex cinemas in the
United Kingdom, one in Australia, two in Portugal, two in Japan, one in Spain
and one in Holland.
Warner Bros. Theme Parks
WB, through joint ventures with certain Australian entities (including one
which is 34.25% owned by WB), owns and operates Sea World of Australia and a
400-acre movie studio and movie-related theme park
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named "Warner Bros. Movie World" as well as a water park complex, all near
Brisbane, Australia. In addition, WB and a German partner have under
construction a new regional theme park and studio complex in the Rhine/Ruhr
area of Germany, which is scheduled to open in 1996. The park and studio
complex will be modeled after Warner Bros. Movie World in Australia.
Six Flags Theme Parks
Six Flags Entertainment Corporation ("Six Flags") and its wholly owned
subsidiary, Six Flags Theme Parks Inc., became wholly owned subsidiaries of TWE
in September 1993 when TWE's ownership interest in Six Flags was increased from
50% to 100%.
Six Flags is the second largest theme park operator in the United States. Six
Flags owns or operates seven major theme parks: Six Flags Great Adventure (New
York-Philadelphia), Six Flags Great America (Chicago-Milwaukee), Six Flags
California (Los Angeles), Six Flags Houston (Houston), Six Flags Over Mid-
America (St. Louis), Six Flags Over Texas (Dallas-Ft. Worth) and Six Flags Over
Georgia (Atlanta).
Six Flags California includes Six Flags Magic Mountain and Six Flags
Hurricane Harbor, a 22-acre themed water park adjacent to Six Flags Magic
Mountain, that is expected to open in the summer of 1995.
Six Flags' co-venture parks, Six Flags Over Texas and Six Flags Over Georgia,
are owned by limited partnerships, the limited partners of which are
unaffiliated limited partnerships and the general partners of which are wholly
owned subsidiaries of Six Flags (the "Managing Subsidiaries"). The Managing
Subsidiaries have sole responsibility for the operation and management of the
co-venture parks. The co-venture partnerships are scheduled to liquidate
(subject to extension by the limited partners) on December 31, 1997.
Six Flags' theme parks are generally similar in design and operating
characteristics. Each park is divided into a number of contiguous entertainment
areas featuring different historical, geographic or other entertainment-related
themes. The design and operation of the theme parks are intended to provide a
full day of family entertainment. Admission is based on the concept of a one-
price ticket, which entitles a guest to virtually unlimited access to all
rides, shows, and attractions during a visit to the parks. Each park generally
has from 40 to 60 rides, including five to ten major attractions. These rides
generally include thrill rides, such as roller coasters, mine-train rides,
river-rapids rides, and log flumes, as well as rides for young children. The
theme parks also have a number of indoor and outdoor theaters that offer
entertainment at various times throughout the day and evening. In addition,
from time to time during the season, each of the theme parks offers special
concerts featuring well-known entertainers for which an additional admission
price may be charged.
Competition within the theme park industry exists on a regional rather than a
national basis. Principal factors relating to competition within the theme park
industry generally include the uniqueness and perceived quality of the rides
and attractions in a particular park, the proximity of a park to densely
populated areas, the atmosphere and cleanliness of a park, and the quality of
food and entertainment available. There are no major parks located within Six
Flags' core market areas (within a 50-mile radius) with the exception of Los
Angeles, where Six Flags California is near Disneyland and other attractions.
Six Flags' theme parks also compete with other recreational facilities and
forms of entertainment within their market areas.
For additional information, see Item 2 "Properties."
PROGRAMMING--HBO DIVISION
General
TWE's programming business is principally conducted by its Home Box Office
division ("Home Box Office"). The principal businesses of Home Box Office are
the programming and marketing of two pay television programming services, HBO
and Cinemax. HBO's programming includes commercial-free, uncut feature motion
pictures, sporting events, special entertainment events (such as concerts,
comedy shows and documentaries) and motion pictures produced by or for HBO.
Cinemax offers a broad range of motion pictures, including classic, family,
action-adventure, foreign and recently released feature films.
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At December 31, 1994, HBO had approximately 19.2 million subscribers,
compared to 18.0 million subscribers at year-end 1993, and Cinemax had
approximately 7.8 million subscribers, compared to 6.7 million subscribers at
year-end 1993. The overall gain of 2.3 million subscribers for the two services
represents the largest annual increase in Home Box Office subscribers since
1983.
Affiliates
Home Box Office's pay television services are principally distributed through
cable television systems and multi-point microwave systems with which Home Box
Office has a contractual relationship ("affiliates"). The HBO and Cinemax
services are transmitted via communications satellites to these affiliates,
which are generally charged a monthly fee on a per subscriber basis for each of
the services carried. Subscribers to HBO and Cinemax are then billed monthly by
their local affiliate for each service purchased and are free to cancel a
service at any time.
Individual dish owners wishing to subscribe to HBO or Cinemax must purchase a
consumer decoder from a local source and arrange for its activation.
Subscriptions for direct-by-satellite to the home ("DTH") viewing are available
through cable television system operators, HBO Direct Inc., a subsidiary of
TWE, satellite equipment dealers or unaffiliated program packagers. In 1994,
Home Box Office, through its affiliation agreements with United States
Satellite Broadcasting, Inc. ("USSB") and Primestar Partners L.P., began DTH
distribution of the HBO and Cinemax services by means of high-powered and mid-
powered Ku-Band frequency satellites.
Home Box Office formally introduced in 1993 a new "multichannel" format for
the delivery of HBO and Cinemax over multiple channels providing differing
schedules of HBO and Cinemax programming. As of year-end 1994, the new multi-
channel format was received by approximately 5.4 million HBO subscribers and
2.1 million Cinemax subscribers, including all DTH subscribers.
As a result of acquisitions and mergers in the cable television industry in
recent years, the percentage of Home Box Office's revenue from affiliates that
are large multiple system cable operators has increased and Home Box Office
anticipates that the consolidation among cable television operators will
continue. As of December 31, 1994, the largest single multiple system cable
operator with which Home Box Office does business is Tele-Communications, Inc.
("TCI"). Home Box Office's affiliation with TCI accounted for approximately 20%
of HBO and Cinemax combined subscribers. As of December 31, 1994, Time Warner
Cable (see "Cable Division--Video") accounted for an additional 12%. Home Box
Office attempts to assure itself of continuity in its relationships with
affiliates and has entered into multi-year contracts with certain of such
operators, including TCI. Home Box Office's agreements with its cable
affiliates are typically for terms of five years. Affiliation agreements with
some larger multiple system operators, including TCI, are for terms in excess
of five years. Although Home Box Office believes the prospects of continued
carriage of its pay programming services by the large cable operators are good,
the loss of one or more of them as distributors of Home Box Office's pay cable
television services could have a material adverse effect on Home Box Office's
business.
Programming
A majority of HBO's programming and a large portion of that on Cinemax
consists of recently released, uncut and uncensored feature motion pictures.
Home Box Office's practice has been to negotiate licensing agreements of
varying duration for such programming with major motion picture studios and
independent producers and distributors. These agreements typically grant pay
television exhibition rights to recently released and certain older films owned
by the particular studio, producer or distributor in exchange for a negotiated
fee which is a function of, among other things, HBO and Cinemax subscriber
levels and the films' box office performances. Home Box Office competes with
other pay cable, basic cable and broadcast networks, among others, for the
acquisition of programming product.
Home Box Office attempts to ensure access to future movies in a number of
ways. In addition to its exhibition of movies distributed by WB and its regular
licensing agreements with numerous distributors, it
I-20
has entered into agreements with Sony Pictures Entertainment, Inc. ("Sony
Pictures"), Paramount Pictures Corporation ("Paramount"), Savoy Pictures
Entertainment, Inc. ("Savoy") and Twentieth Century Fox Film Corporation
("Fox") pursuant to which Home Box Office has acquired exclusive and non-
exclusive rights to exhibit on its pay television services all or a substantial
portion of the films produced, acquired and/or released by these entities
during the term of each agreement. Home Box Office has also entered into non-
exclusive license agreements with Fox, Paramount, Sony Pictures and MGM/UA for
older, library films.
In early 1995, Home Box Office entered into an agreement with DreamWorks LLC
pursuant to which Home Box Office acquired exclusive rights to exhibit on its
pay television services films from this new entertainment company formed by
Steven Spielberg, Jeffrey Katzenberg and David Geffen, as well as an agreement
with Orion Pictures Corporation for exclusive rights to certain of its library
films.
HBO also exhibits made-for-pay television motion pictures that are produced
by or for Home Box Office or one of its divisions or by outside production
companies from which Home Box Office licenses certain exclusive pay television
and other rights (frequently including domestic home video) for a negotiated
fee. Besides motion pictures, a significant portion of HBO's programming
consists of dramatic and comedy specials, television series, family shows,
documentaries and other programs that are produced specifically for HBO. Home
Box Office either negotiates a license to these programs with an outside
production company or produces the programs itself, or through a production
services entity, in which case all rights are generally retained and exploited
by Home Box Office. Home Box Office also acquires exclusive pay television
rights to show certain live and delayed-broadcast sporting events, such as
boxing matches and Wimbledon, and may also acquire additional rights to these
programs. In 1994, the quality of HBO's original programming was recognized by
15 Emmy Awards, two Peabody Awards and an Academy Award for the documentary "I
Am a Promise."
Other Interests
Home Box Office acquires home videocassette distribution rights for the
United States and Canada for a number of theatrical and made-for-pay television
motion pictures, concerts and comedy shows that it has produced or licensed for
pay television, including theatrical motion pictures distributed by Savoy. HBO
Video, a division of Home Box Office, exploits these rights. Certain aspects of
the distribution of videocassettes by HBO Video are carried out pursuant to a
service arrangement with WHV.
Time Warner Sports ("TWS"), a division of Home Box Office, operates TVKO, an
entity that distributes pay-per-view prize fights and other pay-per-view
programming. TWS also undertakes sports merchandising through a licensing
division that currently represents the 1996 European (Soccer) Championship. In
1994, merchandising clients included the United States Soccer Federation and
World Cup Soccer USA 1994.
In 1994, HBO Independent Productions ("HBOIP"), a division of Home Box
Office, produced four series for broadcast by the Fox network, "Roc," "Martin,"
"Get Smart" and "House of Buggin." HBOIP also produced a theatrical motion
picture, "Martin Lawrence--You So Crazy," which was distributed theatrically by
The Samuel Goldwyn Company and by means of home videocassettes by HBO Video. A
division of Home Box Office owns a 50% interest in, and is the managing general
partner of, a limited partnership that indirectly acquired the assets of
Citadel Entertainment, Inc. and its affiliates. The limited partnership
produces motion pictures and other programs for broadcast, basic cable and pay
television networks, including HBO, and motion pictures for theatrical
distribution.
Home Box Office and MAI, plc. ("MAI"), a U.K. television production and
distribution company, are co-owners of both a U.K. production company that
develops and produces television programming principally designed for the U.K.
market, and a joint venture, ITEL, for the foreign distribution of programming
produced by Home Box Office and MAI.
HBO Enterprises, a division of Home Box Office, distributes certain feature
length theatrical films and made-for-pay television programming to other cable
television or pay-per-view services. In addition, HBO
I-21
Enterprises distributes Home Box Office original programming in domestic
syndication and foreign television when it controls such rights. WBITD
distributes in foreign markets certain television programming of HBO.
In September 1991, a subsidiary of Home Box Office and a Venezuelan company
launched HBO Ole, a Spanish-language pay television motion picture service, to
serve Central and South America, Mexico and the Caribbean. The launch of a
second motion picture service, Cinemax, occurred in February 1994. In April
1994, Sony Pictures became a partner in HBO Ole. In July 1994, HBO Ole,
together with a Brazilian company, launched a Portuguese-language pay
television movie service in Brazil. In June 1992, a Singapore subsidiary of the
Company launched a new English-language, movie-based HBO service in Singapore.
Home Box Office, together with its partner in the Asian venture, a subsidiary
of Paramount, has expanded this HBO service into other countries in Southeast
Asia including Thailand, the Philippines, Taiwan, Indonesia, Bangladesh, Brunei
and Papua New Guinea. In November 1994, Home Box Office, together with a
partner, launched a Czech-language pay television movie service in the Czech
Republic. Home Box Office also owns an interest in two general entertainment
programming services launched in the Czech Republic in September 1994. In
addition to its Latin American, Asian and Eastern European ventures, Home Box
Office has investments and/or licensing arrangements with pay television
services in Hungary, Scandinavia and New Zealand. See "Cable Division--Video--
Other Interests."
TWE holds an 11% interest in Crystal Dynamics, Inc., a developer and
distributor of video games.
TWE holds a 50% interest in Comedy Central, an advertiser-supported basic
cable television service. Comedy Central launched in April 1991 and was
available in 31 million homes at year-end 1994.
Competition
Home Box Office's businesses face strong competition. HBO and Cinemax compete
both for programming product and for the attention of television viewers with
commercial television networks and independent commercial television stations,
pay-per-view services and home video, as well as other basic and pay cable
television services, some of which have exclusive contracts with motion picture
studios and independent motion picture distributors.
In 1993, an entity affiliated with TCI, the multiple system cable operator
accounting for 20% of HBO and Cinemax combined subscribers, launched STARZ!, a
pay cable television service having exclusive contracts with several motion
picture studios. In February 1994, Viacom Inc., the parent company of the pay
cable television movie services Showtime and The Movie Channel, acquired a
controlling interest in the parent company of Paramount, with which Home Box
Office currently has an exclusive license agreement covering Paramount
theatrical releases through December 31, 1997.
Home Box Office's production divisions compete with other producers of
programs for broadcast networks, independent commercial television stations,
and basic cable and pay television networks. Home Box Office also competes with
other companies engaged in the distribution or exhibition of motion pictures
and with other communications media and entertainment and information sources.
See "Regulation and Legislation."
Regulation and Legislation
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act"), among other things, imposes certain requirements concerning
the wholesale rates that Home Box Office may charge its affiliates and the
means by which Home Box Office may make its programming services available to
subscribers through distribution technologies other than cable television. In
April 1993, the FCC released regulations designed to implement these provisions
of the 1992 Cable Act, generally prohibiting vertically integrated programmers
in which cable companies hold a 5% or greater attributable interest, which
include the program services owned by Home Box Office, from offering different
price, terms, or conditions to competing multichannel video programming
distributors (which includes cable, multichannel microwave distribution
services ("MMDS"), DTH and home satellite distributors) in the geographic areas
in which they
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compete, unless the differential is justified by certain permissible factors
set forth in the regulations. These permissible justifications include the
different costs of delivering the programming to the distributor,
creditworthiness, financial stability, character, technical factors,
differences related to volume, penetration, channel positioning, promotional
advertising, prepayment discounts, retail pricing, and contract duration. The
rules also place certain restrictions on the ability of vertically integrated
programmers such as Home Box Office to enter into exclusive distribution
arrangements with cable operators. Although the HBO and Cinemax services are
currently provided to subscribers by means of a number of different
technologies including cable, MMDS and DTH, this legislation and the FCC's
implementing regulations could have a material adverse effect on Home Box
Office's business. In December 1994, the FCC substantially affirmed these rules
on reconsideration, and determined that it has authority to award monetary
damages for violations, but that no such remedy is necessary at this time. See
"Cable Division--Regulation and Legislation."
The leaders of both Houses of Congress have announced their intention to
introduce telecommunications legislation during 1995. The Senate Commerce
Committee has reported a comprehensive telecommunications reform bill. Several
issues will be subject to continuing negotiation and debate when the full
Senate considers the bill. The bill contains amendments to the program access
provisions of the 1992 Cable Act that may be adverse to HBO's interests by
weakening a programmer's ability to justify price differentials based on
volume. These provisions may be subject to further amendments as the bill moves
through the legislative process and the Company cannot predict whether any such
provisions will be enacted into law.
In November 1994, the FCC released a decision in its Telephone Company-Cable
Television Cross-Ownership proceeding making it clear that telephone companies
could own programmers such as Home Box Office, but could not offer their own
programming over their cable facilities within their telephone service areas.
Thus, telephone companies are free to produce, package and distribute video
programming to unaffiliated cable operators or other multichannel video
programming distributors. Such telephone company programming services might
compete with Home Box Office. Certain telephone companies have already formed
such ventures with individuals or entities with experience in program
production, and discussions regarding additional such ventures reportedly have
taken place.
In November 1994, the FCC also released a decision in its Sixth
Reconsideration, Fifth Report and Order, and Seventh Notice of Proposed
Rulemaking concluding that it had jurisdiction to regulate the rates of
discounted packages of pay services that were also offered on a per channel
basis. The FCC, however, ruled that the rates for such a collective offering of
pay services carried on cable systems as of April 1, 1993 would be presumed
reasonable and would not be regulated by the FCC. The FCC, at the same time,
reiterated its longstanding position that the 1992 Cable Act prohibited rate
regulation of pay services, such as HBO and other cable programming, when they
were offered on a per channel basis. Home Box Office has asked the FCC to
reconsider that portion of its decision that would subject pay services, such
as HBO, to rate regulation when made part of a discounted package.
CABLE DIVISION--VIDEO
General
TWE's cable television operations are conducted through its Time Warner Cable
division ("Time Warner Cable") with headquarters in Stamford, Connecticut.
As of December 31, 1994, Time Warner Cable's wholly and partially owned cable
systems served a total of 7.5 million cable subscribers located in 32 states,
of which cable systems serving 6 million subscribers were wholly owned or
otherwise consolidated. Time Warner Cable is the second-largest multiple system
cable operator in the United States, owning or operating 22 of the top 100 U.S.
cable systems, including Time Warner Cable of New York City, the largest
cluster of cable systems in the country. As of December 31, 1994, cable
television systems serving 922,000 subscribers (adjusted to reflect the partial
ownership of certain of such cable systems by the Time Warner General Partners
and their subsidiaries) were held by the Time Warner General Partners or their
subsidiaries as beneficial assets for TWE, pending completion of the transfer
of these cable systems to TWE.
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Through a network of coaxial and fiber-optic cables, TWE's cable television
system subscribers generally receive 36 or more channels of video programming,
including local broadcast television signals, locally produced or originated
video programming, distant broadcast television signals (such as WTBS, WWOR or
WGN), advertiser-supported video programming (such as ESPN and CNN) and premium
programming services (such as HBO, Cinemax, Showtime and The Movie Channel). In
some systems, Time Warner Cable also offers movies and other events on a pay-
per-view basis, as well as audio and other entertainment services.
In December 1994, Time Warner Cable introduced the Full Service Network in
its suburban Orlando, Florida cable system. The Full Service Network system is
expected to be connected to 4,000 customers by the end of 1995. The Full
Service Network systems will utilize fiber optics, digital compression, digital
switching and storage devices, and will be capable of providing the consumer
with video-on-demand including movies, interactive games, distance learning,
interactive shopping and access to long distance telephone service. Full
implementation of the Full Service Network system to the extent it incorporates
a form of telephone service will require changes in current government
regulation.
Pursuant to the Admission Agreement, TWE has agreed to use its best efforts
to complete upgrades to a substantial portion of its cable systems by the end
of 1998. Such upgrades include the broad deployment of fiber, electronics and
switching equipment. It is anticipated that substantial capital expenditures
will be required to complete these upgrades.
In recent years, Time Warner Cable has grown primarily as a result of
increases in the number of subscribers to its existing cable television systems
and the development of geographically-clustered systems through the exchange or
purchase of existing cable television systems. Future growth in subscribers is
expected to come from acquisitions, increased penetration of existing homes
passed (through rebuilds and the introduction of new services), population
growth, and extensions of existing systems. During 1994, Time Warner Cable
acquired systems in or near Charlotte, North Carolina, Memphis, Tennessee and
Austin, Texas. These acquisitions were funded with the proceeds from Time
Warner Cable's disposition of systems in Arizona, Colorado, Minnesota, Oklahoma
and Texas. These transactions resulted in a net decrease of 20,000 in Time
Warner Cable's reported basic subscribers. For information about pending
acquisitions of cable television systems announced by Time Warner in late 1994
and early 1995, see pages I-1 and I-2.
Most of TWE's cable television revenue is derived from monthly fees paid by
subscribers for cable video programming services. Additional revenue is
generated by selling time on cable television systems for commercial
advertisements to local, regional and, in some cases, national advertisers.
Advertising time is sold as inserts into certain non-broadcast cable
programming and local origination programming shown on TWE's cable television
systems. In addition, pay-per-view service is offered in certain cable
television systems, which allows subscribers to choose to view specific movies
and events, such as concerts and sporting events, and to pay on a per-event
basis. Certain cable television systems also sell direct-by-satellite to the
home video services such as Primestar, for a monthly fee.
Programming
Time Warner Cable provides certain video programming to its subscribers
pursuant to multi-year contracts with program suppliers who are paid a monthly
fee per subscriber. Many of these contracts contain price escalation
provisions; however, in most cases the cable operator has a right to cancel the
contract if the supplier raises its price beyond agreed limits. The loss of any
one supplier would not have a material adverse effect on Time Warner Cable.
Service Charges
Subscribers to Time Warner Cable systems generally are charged monthly fees
based on the level of service selected. The monthly prices for various levels
of cable television services (excluding services offered on a per-channel or
per-program basis) range generally from $5 to $25 for residential customers.
Other services offered include equipment rentals, usually for an additional
monthly fee. Systems offering pay-per-view movies generally charge between $4
and $6 per movie, and systems offering pay-per-view events generally charge
between $6 and $50, depending on the event. A one-time installation fee is
generally charged for connecting subscribers to the cable television system.
I-24
Subscribers may purchase premium programming services, and in certain systems
other per-channel services, for an additional monthly fee for each such
service, with discounts generally available for the purchase of more than one
service.
Commercial subscribers are charged rates for cable programming services that
vary depending on the nature of the contract.
Franchises
In general, Time Warner Cable operates its cable television systems pursuant
to non-exclusive franchises granted by franchising authorities for specified
periods of time, generally ranging from eight to 25 years and averaging
approximately 15 years. These franchise agreements typically specify the design
of the cable system that must be constructed and cover such matters as total
channel capacity; access by local governments, schools and non-profit and
community groups to public, educational and governmental channels; and
franchise fees to be paid to the franchising authority. The terms of a
franchise may also require improved facilities, increased channel capacity or
enhanced services. As a consequence, Time Warner Cable may make significant
additional investments in its cable television systems as part of the franchise
renewal process. Some franchises are nontransferable without prior approval of
the franchising authorities and may prohibit a material change in ownership or
control of the cable operator without prior approval. Although it has not
previously occurred with respect to a Time Warner Cable franchise, many
franchises provide for termination of the franchise in the event of a breach by
the cable operator of a material term of the franchise agreement.
Of Time Warner Cable's franchises, as of January 1, 1995, 398 franchises
serving approximately 1,600,000 subscribers expire during the period ending
December 31, 1997. Although Time Warner Cable has been successful in the past
in negotiating new franchise agreements, there can be no assurance as to the
renewal of franchises in the future.
Regulation and Legislation
Cable television is regulated by the federal government, some state
governments and most local governments. The following discussion summarizes
certain federal, state and local laws and regulations affecting cable
television.
Under the 1992 Cable Act, the FCC has implemented regulations covering, among
other things, cable rates, signal carriage, composition of certain service
offerings, consumer protection and customer service standards, leased access,
indecent programming on commercial leased and public, educational and
governmental channels, programmer access to cable systems, programming
agreements, technical standards, consumer electronics equipment compatibility,
ownership of home wiring, program exclusivity, equal employment opportunity,
and various aspects of direct broadcast satellite system ownership and
operation. The implementation of the 1992 Cable Act continues to have an
adverse effect on the operations of Time Warner Cable.
The 1992 Cable Act subjects nearly all cable systems in the United States to
rate regulation of cable service other than services offered on a per-channel
or per-program basis, and to regulation of charges for service installation and
for certain equipment. Effective on September 1, 1993, FCC rules required rates
for certain equipment to be established based on actual cost, and rates for
regulated cable services to be established based on either a per-channel
benchmark of 10% below the average level of rates prevailing nationwide in
September 1992 or a cost-of-service standard, at the election of the cable
operator. Time Warner Cable elected to establish rates based on the 10% per-
channel benchmarks.
On October 29, 1993, TWE filed a petition for review of certain of the FCC's
rate regulation rules with the United States Court of Appeals for the D.C.
Circuit. Such petition contends, among other things, that the rate regulation
rules are contrary to the 1992 Cable Act, arbitrary and capricious and
unconstitutional. The case has been fully briefed and a decision is pending.
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On March 30, 1994, the FCC lowered, effective on May 15, 1994, the per-
channel benchmark from 10% to 17% below the average level of rates prevailing
in September 1992. From April 5, 1993 until May 15, 1994, the FCC had "frozen"
at April 5, 1993 levels, rates for regulated cable services and associated
equipment, other than for systems in which local franchising authorities
regulate rates.
If a franchising authority in the case of basic rates or the FCC in the case
of a complaint filed against a rate for a tier of service other than a "New
Product Tier" or similar unregulated service, as described below ("Cable
Programming Service") finds that a particular rate is above the applicable
benchmark, the rates can be ordered to be reduced to a level 17% below the rate
in effect on September 30, 1992 (but not below the applicable benchmark). With
respect to basic rates currently in effect that are found to be unreasonable,
it is the FCC's position that franchising authorities may order refunds
(including interest) dating back to September 1, 1993, or one year, whichever
is shorter. With respect to Cable Programming Service rates that are found to
be unreasonable, the FCC may order refunds (including interest) dating back to
the date of the first valid complaint filed on or after September 1, 1993
challenging that rate. However, in the case of basic as well as non-basic
rates, cable operators will have an opportunity to justify their rates through
cost-of-service showings made to the franchising authority or to the FCC, as
appropriate.
On November 18, 1994, the FCC released "going forward" rules that allow
limited increases in rates for new channels added to existing Cable Programming
Service tiers. The rules also allow cable operators to offer "New Product
Tiers" (or in certain cases, recently created tiers comprised of existing
programming) to be priced as operators elect provided certain conditions are
met.
The Company expects that legislation that would make significant changes to
the Communications Act of 1934 will be considered in Congress during 1995.
Among the proposed revisions currently contained in draft House legislation and
in the bill reported out of the Senate Commerce Committee are provisions that
would reduce rate regulation of cable programming services. While such a
provision would have a favorable impact on Time Warner Cable's revenues, the
Company cannot predict whether any such provision will be enacted into law.
One purported class-action brought in a Florida state court and one action by
the Wisconsin Attorney General have been brought alleging that the retiering
and a la carte pricing implementation by Time Warner Cable in response to the
FCC's new rate regulation rules violate those rules and/or state consumer
protection laws. A purported nationwide class action has also been brought in a
federal court in New York alleging that any charges imposed by Time Warner
Cable for additional outlet connections violate the 1992 Cable Act and the
FCC's rate regulation rules to the extent those charges exceed Time Warner
Cable's costs. Time Warner Cable has opposed each of these claims on the
grounds that any state law claims regarding cable rates are preempted by the
1992 Cable Act and rules, that any federal claims regarding cable rates must be
brought before the FCC in the first instance and that rates for premium
services cannot be regulated at all pursuant to the Cable Communications Policy
Act of 1984 (the "1984 Cable Act") and the 1992 Cable Act. The underlying claim
brought by the Wisconsin Attorney General has been settled but the preemption
issue in that matter is pending before a federal appellate court following an
unfavorable determination by a federal district court. The trial courts in the
purported class actions have also ruled against Time Warner Cable's preemption
arguments and Time Warner Cable has appealed or otherwise sought review of
those decisions.
The 1992 Cable Act contains requirements mandating the carriage of certain
"local" television broadcast stations by cable systems. These provisions allow
commercial television broadcast stations that are "local" to a cable system, to
elect whether to require the cable system to carry the station ("must carry"),
subject to certain exceptions, or whether the cable system will have to
negotiate for "retransmission consent" to carry the station. Local,
noncommercial television stations are given mandatory carriage rights only,
subject to certain exceptions. In addition, cable systems must obtain
retransmission consent for the carriage of all "distant" commercial broadcast
stations, except for certain "superstations." Many stations, including the
majority of affiliates of the major broadcast networks, elected to negotiate
for retransmission consent. As of February 15, 1995, for all such stations that
TWE desires to carry, carriage agreements or temporary arrangements have been
effected.
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After enactment of the 1992 Cable Act, TWE and other cable operators and
programmers filed federal lawsuits seeking to overturn certain major
provisions, primarily on First Amendment grounds. For additional information,
see Item 3 "Legal Proceedings."
FCC regulations require that cable systems that have 1,000 or more
subscribers must, upon the appropriate request of a local television station,
delete the simultaneous or non-simultaneous network programming of a distant
station when such programming is under exclusive contract to the local station
for its area.
FCC regulations also enable television broadcast stations that have obtained
exclusive distribution rights for syndicated programming in their market to
require a cable system to delete or "black out" such programming from other
television stations which are carried by the cable system. The extent of such
deletions will vary from area to area. The FCC has commenced a proceeding to
determine whether to relax or abolish the geographic limitations on program
exclusivity contained in its rules, which would allow parties to set the
geographic scope of exclusive distribution rights entirely by contract. It is
possible that the outcome of these proceedings will increase the amount of
programming that cable operators are requested to black out.
Cable television systems are also subject to local regulation, typically
imposed through the franchising process. Local officials may be involved in the
initial franchise selection, system design and construction, safety, rate
regulation, customer service standards, billing practices, community-related
programming and services and franchise renewal.
Although franchising authorities may impose franchise fees, under the 1984
Cable Act such payments cannot exceed 5% of a cable system's annual gross
revenues. Franchising authorities are also empowered in awarding new franchises
or renewing existing franchises to require cable operators in certain
circumstances to provide cable-related facilities and equipment and to enforce
compliance with service commitments.
The 1984 Cable Act established renewal procedures and criteria designed to
protect incumbent franchisees against arbitrary denials of renewal. While these
formal procedures are not mandatory unless timely invoked by either the cable
operator or the franchising authority, they can provide substantial protection
to incumbent franchisees. Nevertheless, renewal is by no means assured, as the
franchisee must meet certain statutory standards. Even if a franchise is
renewed, a franchising authority may impose new and more onerous requirements
such as upgrading facilities and equipment, although the municipality must take
into account the cost of meeting such requirements.
Questions concerning the ability of municipalities to impose certain
franchise restrictions upon cable television companies have been considered in
several federal appellate and district court decisions. These decisions have
been somewhat inconsistent and, until the U.S. Supreme Court rules definitively
on the scope of cable television's First Amendment protections, the legality of
the franchising process and of various specific franchise requirements is
likely to be in a state of uncertainty. However, the 1992 Cable Act, among
other things, prohibits franchising authorities from unreasonably refusing to
grant a franchise to a competing cable system and permits franchising
authorities to operate their own cable systems without franchises.
While the 1984 Cable Act exempted cable television systems from state utility
or common carrier regulation solely by reason of providing cable service,
certain states have adopted other cable television legislation and regulations.
The 1984 Cable Act codified existing FCC cross-ownership regulations, which,
in part, prohibit local exchange telephone companies ("LECs"), including the
Regional Bell Operating Companies ("RBOCs"), from providing video programming
directly to subscribers within their local exchange telephone service areas,
except in rural areas or by specific waiver of FCC rules. This statutory
provision has recently been held unconstitutional by six U.S. District Courts
and two U.S. Courts of Appeals. In light of these court decisions, the FCC
announced on March 17, 1995 that it will not enforce its cross-ownership
restrictions against those telephone companies that have won district court
injunctions against their enforcement or those companies that operate in the
Fourth and Ninth judicial circuits. In practice, the FCC's relaxed enforcement
policy will
I-27
apply to six of the seven RBOCs. The cable television industry and the United
States Department of Justice intend to seek review of the two U.S. Courts of
Appeals decisions by the Supreme Court, but there is no assurance that the
Supreme Court will accept review, or, if accepted, reverse the lower courts.
The FCC has granted numerous authorizations to LECs to construct and operate
facilities on a common carrier basis for the provision of video programming to
the public. These common carrier facilities are known as "video dialtone"
systems. The FCC has also permitted Bell Atlantic to be a programmer on its own
video dialtone system in Northern Virginia, subject to certain conditions, and
has requested public comment on the conditions that should govern the provision
of programming by all LECs. The FCC thus far has not decided whether the
franchise provisions of the 1984 and 1992 Cable Acts apply to LECs that program
their own video dialtone systems. In August 1994, a U.S. Court of Appeals
affirmed the FCC's decision that a programmer unaffiliated with a LEC does not
need a franchise to program the video dialtone system. The cable industry
continues to challenge the FCC's conclusion that neither a LEC nor its
programmer would be required to obtain a local cable franchise.
In November 1994, the FCC reaffirmed its previous recommendation that
Congress amend the Communications Act of 1934 to allow LECs directly to own and
operate cable television systems. A draft bill that has been reported out of
the Senate Commerce Committee would, among other things, remove telephone
company-cable cross-ownership prohibitions. See "Cable Division--Telephony."
The outcome of these FCC, legislative or court proceedings and proposals, or
the effect of such outcome on the operations of Time Warner Cable, cannot be
predicted.
The 1984 Cable Act and FCC rules also prohibit the common ownership,
operation, control or interest in a cable system and a television broadcast
station in the same area. The FCC has recommended to Congress that this
restriction be repealed. Provisions that would eliminate or modify this and
other broadcast ownership rules are contained in the draft Senate bill that
contemplates significant changes to the Communications Act of 1934, although no
assurance can be given that such legislation will be enacted. The FCC has
relaxed its existing television network/cable cross-ownership prohibition
subject to certain national and local ownership caps. Pursuant to the 1992
Cable Act, the FCC on September 23, 1993 announced rules that set a limit of 40
percent of cable system channel capacity that can carry programming of video
programmers that are vertically integrated with the cable system. The FCC also
set a limit of 30 percent of total nationwide cable homes that can be served by
any multiple cable system operator, although this rule has been stayed pending
resolution of litigation in which the provision of the 1992 Cable Act requiring
the FCC to establish limits on horizontal concentration was declared
unconstitutional on First Amendment grounds by a U.S. District Court.
FCC regulations and federal statutory provisions also include matters
relating to restrictions on the sale of cable systems held for less than three
years, subscriber privacy requirements, carriage of local sports programming,
application of the fairness doctrine and rules governing political broadcasts,
and limitations on advertising contained in non-broadcast children's
programming.
Cable television systems are also subject to federal copyright licensing with
respect to carriage of broadcast signals. In exchange for making semi-annual
payments to a federal copyright royalty pool and meeting certain other
obligations, cable operators obtain a statutory license to retransmit broadcast
signals, subject to the retransmission consent provision of the 1992 Cable Act
described above. The amount of this royalty payment varies, depending on the
amount of system revenues from certain sources, the number of distant signals
carried, and the location of the cable system with respect to over-the-air
television stations.
The U.S. Copyright Office has adopted regulations, which became effective
January 1, 1994, declaring that certain microwave video service providers, such
as MMDS (which is sometimes referred to as "wireless cable") operators, do not
qualify for the compulsory copyright license available to cable systems under
the Copyright Act of 1976. The compulsory license status of satellite master
antenna systems ("SMATV") is not covered by these regulations. The availability
of the compulsory license to other multichannel video service providers would
enhance their competitiveness with traditional cable systems.
I-28
Various bills have been introduced into Congress over the past several years
that would eliminate or modify the cable television compulsory license. The FCC
has recommended to Congress that it repeal the cable industry's compulsory
copyright license. No action has been taken with respect to this matter.
Time Warner Cable generally places its cable on poles or in conduits owned by
utility companies that control access to the poles and conduits and charge fees
for their use. The FCC is required by statute to regulate the rates certain
utilities may charge for cable pole attachments and conduit usage and the terms
and conditions they may impose. States can supplant the FCC regulations by
regulating such matters themselves; however, the majority of states have not
done so.
The foregoing does not purport to describe all present and proposed federal,
state and local regulations and legislation relating to the cable television
industry. Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements, currently are the
subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying
degrees, the manner in which cable television systems operate. Neither the
outcome of these proceedings nor their impact upon the cable television
industry or Time Warner Cable can be predicted at this time.
Competition
Cable television systems face strong competition for viewer attention from a
wide variety of established providers and new entrants, including broadcast
television, direct broadcast satellite ("DBS"); multichannel multipoint
distribution service ("MMDS" or "wireless cable"), satellite master antenna
television ("SMATV") systems and telephone companies. Cable television systems
also compete with these and other media for advertising dollars.
DBS. The FCC has awarded conditional permits to several companies for orbital
slots from which high-power Ku-Band DBS service can be provided. DBS services
offer pre-packaged programming that can be received by relatively small and
inexpensive receiving dishes. In 1994, two high-power DBS services sharing
common satellites became operational, DirecTV and USSB. Together, these
services were reported to have a total of approximately 500,000 subscribers
nationwide as of March 1, 1995. Primestar, a medium-power DBS service partially
owned by affiliates of TWE, was reported to have 340,000 subscribers as of that
date. In addition to DBS, most cable programming is available to owners of
larger, more expensive C-Band satellite dishes ("TVROs"), either directly from
the programmers or through third-party packagers.
MMDS/Wireless Cable. Wireless cable operators use microwave technology to
distribute video programming. In recent years, wireless cable has grown
rapidly, serving 550,000 subscribers via 143 systems as of June 1994 according
to the FCC. Wireless cable is now available in 23 of the nation's top 25
television markets. In recent years, the FCC has adopted rules to facilitate
the use of greater numbers of channels by wireless cable operators.
SMATV. SMATV systems provide cable service in numerous Time Warner Cable
service areas. The FCC reports that SMATV systems served approximately one
million subscribers nationwide as of June 1994.
Telephone Companies. Recent legislative, regulatory and judicial developments
have facilitated and will continue to facilitate the entry of telephone
companies into the provision of video programming. See "Cable Division--Video--
Regulation and Legislation." As of February 14, 1995, the FCC has authorized
construction of facilities to conduct a limited test of video dialtone service
for locations in which Time Warner Cable provides franchised cable television
service to approximately 762,000 subscribers, and the FCC has received
applications for video dialtone authorizations in locations in which Time
Warner Cable provides franchised cable television service to approximately
717,000 subscribers. The entry of telephone companies will provide substantial
additional competition to Time Warner Cable's cable systems.
Other. Cable television systems compete for viewer attention with numerous
other sources of news, information and entertainment, including videocassete
rental stores and other cable operators. Videocassette
I-29
rental stores provide many of the same movies, special events and other
programs that are shown on cable television systems, often with earlier release
dates. The 1992 Cable Act provides that all cable franchises must be non-
exclusive. In practice, most franchises have always allowed the franchise
authority to award additional franchises, although additional cable operators
currently operate cable systems in an insignificant number of Time Warner
Cable's franchise areas. The 1992 Cable Act also permits municipalities to
operate cable systems without obtaining a franchise. It is unknown whether this
provision will encourage the building of additional municipally-owned cable
systems. To date, no such systems have been built in Time Warner Cable
franchise areas, although several municipalities have indicated an interest in
doing so.
Other Interests
TWE has a 50% interest in a joint venture established in 1991 to invest in,
and further develop, cable television systems in Hungary. TWE also has a 37
1/2% interest in TV-1000, a pay television service operating in Scandinavia; a
30% interest in N-TV, a German language news and information channel
distributed in Germany in which TBS also has a 32% interest; and a 28% interest
in IA, a general-interest regional television broadcaster serving the Berlin
and Brandenburg areas of Germany (all of which interests are under the
management responsibility of Home Box Office). TWE also owns indirectly 13% of
a New Zealand over-the-air subscription television service--Sky Network
Television as well as 22% of Kablevision, Sweden's second largest cable
television company.
CABLE DIVISION--TELEPHONY
Time Warner Cable's wireline telephony operations are conducted through Time
Warner Communications, a partnership wholly owned and controlled by TWE, which
has formed separate business entities to provide telephony services in various
geographic areas. Time Warner Communications seeks to take advantage of Time
Warner Cable's geographically clustered cable systems to efficiently develop
its telephone business.
The initial focus of Time Warner Communications following its formation in
1993 was the development of "alternative access" telephone operations in
metropolitan areas where Time Warner Cable operates cable systems. These
operations generally provide connections between large businesses and their
long distance telephone providers, between multiple business locations of a
large business, and between long distance telephone company locations. The
connections are marketed primarily to long distance telephone carriers and
large business customers, and are used primarily for high volume voice and data
communications. The networks on which these connections are made are comprised
of dedicated fiber optic strands within the affiliated cable systems' backbone
fiber networks, together with specially constructed high volume building
entrance facilities and specialized electronic equipment for transmission of
digital signals. Alternative access services do not require Time Warner
Communications to operate switching equipment.
As of December 31, 1994, Time Warner Communications had wholly or partly
owned alternative access businesses in operation in Austin, Texas; Charlotte,
North Carolina; Columbus, Ohio; Honolulu, Hawaii; Indianapolis, Indiana; Kansas
City, Kansas and Missouri; Lima, Ohio; and Raleigh, North Carolina. Similar
businesses are in development in a number of additional Time Warner Cable
cities. Revenues to date from these operations have been insignificant. Time
Warner Communications also opened an advanced network management center in
Denver in mid-1994 to monitor and manage operation of its networks.
One of the major business objectives of TWE is the entry of Time Warner
Communications into the switched "local exchange" telephone business. This
business would provide telephone service that is presently provided by monopoly
local exchange telephone companies ("LECs"). The service would be marketed both
to residential and business customers. Local exchange service will require
significant upgrades to, and usage of, the fiber optic and coaxial cable
networks of Time Warner Cable, together with high capacity switching equipment
similar to that employed by the LECs, and certain other specialized equipment.
Expenditures for such upgrades and equipment are expected to be significant.
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In order for Time Warner Communications to be able to connect its local
exchange service customers to LEC customers in an area, Time Warner
Communications must obtain rights to interconnect its network with that of the
LEC. In May 1994, Time Warner Communications announced an agreement under which
Time Warner Communications and Rochester Telephone Corporation agreed to
interconnect their networks in Rochester, New York, enabling each company to
complete calls originated by their telephone service customers to telephone
service customers of the other company. Time Warner Communications believes the
agreement to be the first of its kind between a major telephone company and a
cable company that requires equal compensation to each company for completing
calls.
Based on this agreement, Time Warner Communications began a limited initial
trial of competitive residential telephone service in Rochester in December
1994. Time Warner Communications expects its local exchange telephone service
to be generally available over the Rochester Time Warner Cable network in the
second half of 1995.
Time Warner Communications generally has been able to conduct its alternative
access businesses despite regulatory and other impediments such as difficulties
in obtaining rights to connect its lines to LEC facilities in order to carry
calls from large businesses to long distance telephone companies, and the
insistence by some cable franchise authorities on onerous conditions to permit
use of their rights of way. Provision of switched local exchange services,
however, is heavily regulated by each state. The ability of Time Warner
Communications to obtain entry to, and compete effectively in, the local
exchange telephone business will be dependent on procompetitive legislation or
regulation that currently exists only in a few states. Time Warner
Communications has been certified to provide local exchange service throughout
New York State, and currently has an application on file with the Ohio Public
Utilities Commission to provide such service. Time Warner Communications will
continue to support procompetitive legislative reform, and to apply for local
exchange service authority, in the states where Time Warner Cable has major
cable systems.
The Company anticipates that telecommunications legislation will be
considered in Congress during 1995. The Senate Commerce Committee has reported
out to the Senate floor for consideration a comprehensive bill that would,
among other things, preempt state and local barriers which prevent cable
operators and others from providing telephone service in competition with the
LECs, and require all providers of telephony, including those that employ
technology such as that contemplated for Time Warner Cable's Full Service
Network, to make their networks available for use by unrelated persons on a
common carrier basis with respect to the telephone service offered. To
facilitate a transition to competition, the proposed Senate legislation would
require telecommunications carriers to allow interconnection to their
facilities, to provide reciprocal compensation for origination and completion
of calls, to provide nondiscriminatory access to unbundled network functions
and services, and to provide telephone number portability and local dialing
parity. Comparable telecommunications reform legislation may be introduced in
the House. The actual provisions of the bills that may be introduced, final
enactment of any such legislation or its impact on Time Warner Communications'
business, cannot be predicted.
Time Warner Telecommunications
The Company's wireless telephone, paging and data service operations are
conducted through Time Warner Telecommunications ("TWT"), a division of TWE,
which has its headquarters in Washington, D.C.
TWT plans to provide cellular service, paging and data services under the
Time Warner brand in various markets by reselling cellular service purchased at
wholesale rates from existing facilities-based cellular carriers. On November
9, 1994, the New York Public Service Commission approved TWT's tariff to
provide resold cellular service in New York State. On November 21, 1994, TWT
formally commenced the provision of residential and business cellular service
in Rochester, New York. TWT will seek to distinguish itself from other wireless
carriers through its customer service, the strength of the Time Warner brand
name, and by selling its wireless services with other Time Warner products and
services.
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The provision of cellular services are regulated by the FCC and the public
service commissions of some states (including New York). As a reseller, TWT
does not need approval from the FCC prior to offering cellular services to
customers in any state. Draft federal telecommunications legislation referenced
elsewhere herein would, if enacted, preempt state or local regulation of the
entry of, or the rates charged by, any commercial mobile service including
cellular telephone services.
DESCRIPTION OF CERTAIN PROVISIONS OF THE TWE PARTNERSHIP AGREEMENT
The following description summarizes certain provisions of the TWE
Partnership Agreement relating to the ongoing operations of TWE. Such
description does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, the provisions of the TWE Partnership
Agreement.
Management and Operations of TWE
Board of Representatives. Subject to certain authority of the Management
Committee (as described below) with respect to the Cable division, the business
and affairs of TWE are managed under the direction of a board of
representatives (the "Board of Representatives" or the "Board") that is
comprised of representatives appointed by the Time Warner General Partners (the
"Class B Representatives") and representatives appointed by the Limited
Partners (the "Class A Representatives").
The Class B Representatives control all Board decisions except for certain
matters including (i) the merger or consolidation of TWE; (ii) the sale or
other disposition of assets of TWE generating in excess of 10% of the
consolidated revenues of TWE during the previous fiscal year or representing in
excess of 10% of the fair market value of the total assets of TWE (in each
case, other than in connection with certain joint ventures and "cable asset
swaps" as to which the thresholds are greater); (iii) any acquisition by TWE,
other than in the ordinary course of business, if the consideration paid by TWE
in connection with such acquisition would exceed the greater of (1) $750
million and (2) 10% of the consolidated revenues of TWE for the most recently
ended fiscal year of TWE; (iv) the engagement by TWE in any business other than
the businesses then being conducted by TWE, as they may evolve from time to
time and any business related to such businesses (provided that TWE may not
engage in the manufacturing, sale or servicing of hardware, other than as may
be incidental to TWE's businesses); (v) the incurrence by TWE of indebtedness
for money borrowed if, after giving effect to such incurrence, the ratio of
total indebtedness for money borrowed to cash flow would exceed the greater of
(x) 5.00 to 1.00 and (y) .5 over the analogous ratio in the TWE credit
agreement as in effect from time to time; (vi) cash distributions other than as
provided in the TWE Partnership Agreement; (vii) the dissolution or voluntary
bankruptcy of TWE; and (viii) any amendment to the TWE Partnership Agreement.
Each of the matters described in clauses (i) through (v) requires the
approval of a majority vote of the Class A Representatives who were appointed
by partners that have a residual equity interest of at least 5% and a majority
vote of the Class B Representatives; and each of the matters described in
clauses (vi) through (viii) requires the unanimous approval of all
representatives. Each partner's representatives collectively have voting power
in proportion to the residual equity interest of the partner that designated
such representative.
The managing general partners, both of which are wholly owned subsidiaries of
the Company, may take any action without the approval or consent of the Board
if such action may be authorized by the Class B Representatives without the
approval of the Class A Representatives. However, see "Full Service Network
Management Committee," below.
Full Service Network Management Committee. In connection with the U S WEST
Transaction, the Board established the Full Service Network business, which,
subject to obtaining necessary franchise and
I-32
other approvals, will be comprised of the businesses and operations of the
cable television systems of TWE that are from time to time designated to become
a part thereof. Subject to obtaining necessary franchise and other approvals
relating to the designated systems, the business and affairs of the Full
Service Network business will be governed by a Full Service Network Management
Committee (the "Management Committee"). The Management Committee is comprised
of six voting members, three designated by U S WEST and three designated by
TWE. Each of the other Limited Partners has the right to designate non-voting
members to the Management Committee. If U S WEST at any time owns less than 50%
of the partnership interest which it owned, directly or indirectly, as of
September 15, 1993 or if a "change in control" of U S WEST occurs, U S WEST's
right to designate any members of the Management Committee will terminate. The
Full Service Network business is managed on a day-to-day basis by the officers
of the cable division. The approval of a majority of the members of the
Management Committee is required for certain significant transactions relating
to the Full Service Network business, including, among other things, the sale,
pledge or encumbrance of assets of the Full Service Network business, the
acquisition of cable assets, the making of commitments or expenditures relating
to the Full Service Network business, in each case subject to agreed upon
thresholds, certain decisions with respect to design, architecture and
designation of cable systems for upgrade and the adoption of the annual
business plan.
Day-to-Day Operations. TWE is managed on a day-to-day basis by the officers
of TWE, and each of TWE's three principal partnership divisions is managed on a
day-to-day basis by the officers of such division. Upon the TWE Capitalization,
the officers of Time Warner also became officers of TWE and the officers of the
Time Warner General Partners became the officers of the corresponding
partnership divisions and the subdivisions thereof.
Certain Covenants
Covenant Not to Compete. For so long as any partner (or affiliate of any
partner) owns in excess of 5% of TWE or 15% of TWE Japan and in the case of any
Time Warner General Partner, for one year thereafter, such partner (including
its affiliates) is generally prohibited from competing or owning an interest in
the three principal lines of business of TWE--cable, cable programming and
filmed entertainment (including the ownership and operation of theme parks)--as
such businesses may evolve, subject to certain agreed upon exceptions, limited
passive investments and inadvertent violations. The covenant not to compete
does not prohibit (i) U S WEST from conducting cable and certain regional
programming businesses in the 14-state region in which it provides telephone
service, (ii) any party from engaging in the cable business in a region in
which TWE is not then engaging in the cable business, subject to TWE's right of
first refusal with respect to such cable business, or (iii) any party from
engaging in the telephone or information services business.
Transactions with Affiliates. Subject to agreed upon exceptions for existing
arrangements, TWE will not enter into any transaction with any partner or any
of its affiliates other than on an arm's-length basis.
Registration Rights
Beginning on June 30, 2002 (or as early as June 30, 1999 if certain threshold
cash distributions are not made to the Limited Partners), the Limited Partners
holding, individually or in the aggregate, at least 10% of the residual equity
of TWE will have the right to request that TWE reconstitute itself as a
corporation and register for sale in a public offering an amount of partnership
interests held by such Limited Partners determined by an investment banking
firm so as to maximize trading liquidity and minimize the initial public
offering discount, if any. Upon any such request, the parties will cause an
investment banker to determine the price at which the interests sought to be
registered could be sold in a public offering (the "Appraised Value"). Upon
determination of the Appraised Value, TWE may elect either to register such
interests or purchase such interests at the Appraised Value, subject to certain
adjustments. If TWE elects to register the interests and the proposed public
offering price (as determined immediately prior to the time the public offering
is to be declared effective) is less than 92.5% of the Appraised Value, TWE
will have a second option to purchase such interests immediately prior to the
time such public offering would otherwise have been
I-33
declared effective by the Securities and Exchange Commission at the proposed
public offering price less underwriting fees and discounts. If TWE exercises
its purchase option, it will be required to pay the fees and expenses of the
underwriters. Upon exercise of either purchase option, TWE may also elect to
purchase the entire partnership interests of the Limited Partners requesting
registration at the relevant price, subject to certain adjustments.
In addition to the foregoing, U S WEST will have the right to exercise an
additional demand registration right (in which the other Limited Partners would
be entitled to participate) beginning 18 months following the date on which TWE
reconstitutes itself as a corporation and registers the sale of securities
pursuant to a previously exercised demand registration right.
Beginning on June 30, 1995, at the request of any Time Warner General
Partner, TWE will effect a public offering of the partnership interests of the
Time Warner General Partners or reconstitute TWE as a corporation and register
the shares held by the Time Warner General Partners. In any such case, the
Limited Partners will have standard "piggy-back" registration rights.
Upon any reconstitution of TWE into a corporation, each partner will acquire
preferred and common equity in the corporation corresponding in both relative
value, rate of return and priority to the partnership interests it held prior
to such reconstitution, subject to certain adjustments to compensate the
partners for the effects of converting their partnership interests into capital
stock.
Certain Put Rights of the Limited Partners
Change in Control Put. Upon the occurrence of a change in control of the
Company, at the request of any Limited Partner, TWE will be required to elect
either to liquidate TWE within a two-year period or to purchase the interest of
such partner at fair market value (without any minority discount) as determined
by investment bankers. A "change in control" of the Company shall be deemed to
have occurred:
(x) whenever, in any three-year period, a majority of the members of the
Board of Directors of the Company elected during such three-year period shall
have been so elected against the recommendation of the management of the
Company or the Board of Directors shall be deemed to have been elected against
the recommendation of such Board of Directors of the Company in office
immediately prior to such election; provided, however, that for purposes of
this clause (x) a member of such Board of Directors shall be deemed to have
been elected against the recommendation of such Board of Directors if his or
her initial election occurs as a result of either an actual or threatened
election contest (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended) or other
actual or threatened solicitation of proxies or consents by or on behalf of a
person other than such Board of Directors; or
(y) whenever any person shall acquire (whether by merger, consolidation,
sale, assignment, lease, transfer or otherwise, in one transaction or any
related series of transactions), or otherwise beneficially own voting
securities of the Company that represent in excess of 50% of the voting power
of all outstanding voting securities of the Company generally entitled to vote
for the election of directors, if such person acquires or publicly announces
its intention to initially acquire ten percent or more of such voting
securities in a transaction that has not been approved by the management of the
Company within 30 days after the date of such acquisition or public
announcement.
Change in Government Regulation Put. Upon a change in any applicable federal
or state law or regulation that would prohibit ITOCHU or Toshiba from
continuing to own all or any part of its partnership interest in TWE, or would
materially adversely affect the value of ITOCHU's or Toshiba's partnership
interest relative to the value of the partnership interests held by all other
partners, TWE will be required to elect either to purchase that portion of such
partner's partnership interest required to enable such partner to continue to
own its partnership interest at fair market value (giving effect to the
minority discount) as determined by investment bankers or to take reasonable
actions to remedy the effect of such change in law or regulation.
I-34
Assignment of Put Rights, etc. TWE, with the consent of such assignee, may
assign to the Company, any general partner or any third party, the obligation
to pay the applicable put price in connection with the exercise of a change in
control or change in government regulation put right by a Limited Partner and
the right to receive the partnership interests in payment therefor.
With respect to any of the put rights of the Limited Partners, TWE may pay
the applicable put price in cash or Marketable Securities (defined as any debt
or equity securities that are listed on a national securities exchange or
quoted on NASDAQ) issued by TWE (or if TWE assigns its obligation to pay the
put price to the Company by the Company). The amount of any Marketable
Securities comprising the applicable put price shall be determined based on the
market price of such securities during the seven months following the closing
of such put transaction. In the case of a change in government regulation put,
up to 33% of the applicable put price may be paid in notes issued by TWE (or if
TWE assigns its obligations to pay the put price to the Company by the
Company).
U S WEST Change in Government Regulation Remedies
U S WEST is not entitled to the benefit of the put right upon a change in law
or government regulation to which ITOCHU and Toshiba are entitled. See "--
Certain Put Rights of the Limited Partners--Change in Government Regulation
Put." However, upon a change in law or government regulation prior to September
15, 1996 that prohibits U S WEST from owning, or materially adversely affects
the value (relative to the value of the interests of all other partners) of, U
S WEST's partnership interest, U S WEST will have the right to request that TWE
either remedy such problem (provided such remedy would not have a significant
impact on the business and operation of TWE or any of its divisions) or assist
U S WEST in selling its interest to a third party. Upon any such sale to a
third party, TWE will share 20% of the loss or gain experienced by U S WEST
upon such sale.
Restrictions on Transfer by Time Warner General Partners
Time Warner General Partners. Any Time Warner General Partner is permitted to
dispose of any partnership interest (and any Time Warner General Partner and
any parent of any Time Warner General Partner may issue or sell equity) at any
time so long as, immediately after giving effect thereto, (i) the Company would
not own, directly or indirectly, less than (a) 43.75% of the residual equity of
TWE, if such disposition occurs prior to the later of December 31, 1997 and the
date on which the Limited Partners have received cash distributions of $500
million per $1 billion of investment, and (b) 35% of the residual equity of TWE
if such disposition occurs after such date, (ii) no person or entity would own,
directly or indirectly, a partnership interest greater than that owned,
directly or indirectly, by the Company, and (iii) a subsidiary of the Company
would be a managing general partner of TWE.
No other dispositions are permitted, except that the Company may sell its
entire partnership interest subject to the Limited Partners' rights of first
refusal and "tag-along" rights pursuant to which the Company must provide for
the concurrent sale of the partnership interests of the Limited Partners so
requesting.
OTHER ENTERTAINMENT GROUP ASSETS
Time Warner Service Partnerships
Concurrently with the closing of the U S WEST Transaction, TWE and the Time
Warner Service Partnerships entered into various agreements pursuant to which,
among other things, the Time Warner Service Partnerships provide program signal
delivery services to TWE's cable systems and transmission services to the
Programming--HBO and Filmed Entertainment divisions and TWE provides billing,
collection and marketing services to the Time Warner Service Partnerships. The
Time Warner Service Partnerships receive commercially reasonable fees for the
provision of such services. The Time Warner Service Partnerships own the TVROs
and broadcast antennae used to transmit programming signals to each of TWE's
cable systems, and the satellite transponders and other transmission equipment
used to transmit the HBO and Cinemax services to Home Box Office affiliates and
DTH subscribers.
I-35
In addition, TWE and the Time Warner Service Partnerships have entered into a
series of agreements pursuant to which the Time Warner Service Partnerships
will recontribute the TW Service Partnership Assets to TWE at their then fair
market value in exchange for partnership interests in TWE on September 15, 1995
(or September 15, 1997 in the case of its interests in Court TV and E!
Entertainment Television), or earlier under certain circumstances, but only to
the extent that at such time such assets are then owned by the Time Warner
Service Partnerships and TWE is clearly not prohibited from owning or operating
such assets. 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 TW Service Partnership Assets.
The TW Service Partnership Assets also include various equity investments,
including, among others, an interest of approximately 49% in E! Entertainment
Television, a Los Angeles-based basic cable channel specializing in promoting
the entertainment industry and serving approximately 28 million subscribers as
of year-end 1994; an interest of approximately 15% in Black Entertainment
Television, a basic cable television service providing entertainment
programming directed primarily to African-American audiences; an interest of
approximately 21% in Primestar Partners L.P., a joint venture with several
other cable operators and a subsidiary of General Electric Company that has
developed the delivery of a package of programming services to TVRO owners; a
majority interest in Court TV, a 24-hour basic cable television service
launched in the summer of 1991 featuring live and taped trial coverage, plus
commentary by prominent lawyers, which is managed through the Company's
American Lawyer Media affiliate; and an interest of approximately 13% in The
3DO Company, a company engaged in the development of multimedia technology.
TWE Japan
The Company owns a 37.25% interest in, U S WEST owns a 12.75% interest in,
and each of Toshiba and ITOCHU owns a 25% interest in, Time Warner
Entertainment Japan Inc. ("TWE Japan"). TWE Japan was organized to conduct
TWE's businesses in Japan, including home video distribution, theatrical film
and television distribution and merchandising businesses, and to expand and
develop new business opportunities. Pursuant to distribution and merchandising
agreements entered into between TWE and TWE Japan, TWE Japan receives
distribution fees generally comparable to those currently received by TWE for
performing distribution services for unaffiliated third parties.
In early 1995, the Company, TWE Japan, U S WEST, Toshiba and ITOCHU agreed
jointly to establish TITUS Communications Corp. ("TITUS"), a multiple system
operator that will start new CATV operations in ten or more selected locations
throughout Japan, each of which covers 150,000-200,000 households. The
agreement also contemplates that TITUS eventually will provide telephone
service as well as video services in its operating areas.
DC Comics
TWE and WCI each owns a 50% interest in DC Comics, a New York general
partnership, formed in June 1992 to continue the business previously conducted
by DC Comics Inc., a New York corporation. DC Comics publishes more than 60
regularly issued comics magazines, among the most popular of which are
"Superman," "Batman," "Wonder Woman," "Teen Titans" and "The Sandman," as well
as story collections sold as books. DC Comics also derives revenues from motion
pictures, television syndication, product licensing, books for juvenile and
adult markets and foreign publishing. Trademarks in DC Comics' principal
characters have been registered in the United States Patent and Trademark
Office and in certain foreign countries.
Cinamerica Theatres, L.P.
WCI owns a 50% interest in Cinamerica Theatres, L.P., an unconsolidated joint
venture with Paramount Communications Inc., which owns and operates two theater
circuits: Mann Theatres and Festival Cinemas. The joint venture operates 349
screens in 65 theaters, principally located in California and Colorado.
I-36
E.C. Publications
E.C. Publications, Inc. is the publisher of MAD, a magazine featuring
articles of humorous and satirical interest, which is regularly published eight
times a year and also in periodic special editions. E.C. Publications is wholly
owned by the Company.
OTHER INTERESTS
TURNER BROADCASTING SYSTEM, INC.
The Company purchased equity securities of TBS as part of a private placement
of securities by TBS in 1987 to a consortium of cable television operators and
individual investors. The Company thereafter acquired additional securities in
TBS from time to time and, at December 31, 1994, it had economic and voting
interests in TBS of 19.6% and 6.4%, respectively. TBS's business includes the
ownership and operation of domestic and international entertainment networks
(including TBS SuperStation, Turner Network Television ("TNT"), the Cartoon
Network and TNT Latin America); the production and distribution of
entertainment and news programming worldwide (including Turner Pictures, TBS
Productions, Hanna-Barbera Cartoons, Castle Rock Entertainment, New Line
Cinema, Cable News Network ("CNN"), Headline News and CNN International); and
the ownership of two professional sports teams (the Atlanta Braves and the
Atlanta Hawks).
AMERICAN LAWYER MEDIA
American Lawyer Media, L.P. ("ALM"), which is majority-owned by the Company,
operates a chain of metropolitan and regional legal and business newspapers and
also publishes THE AMERICAN LAWYER, a national monthly magazine with a
subscription-only readership among lawyers across the United States, and
COUNSEL CONNECT, an on-line service connecting lawyers in law firms and
corporate legal departments worldwide. As of February 25, 1994, Mead Data
Central became a minority partner in COUNSEL CONNECT, and the name was changed
to "LEXIS COUNSEL CONNECT." ALM also publishes four weekly and five daily
newspapers, which in most cases enjoy local official status for the publication
of court opinions, legal notices, and/or official court notices; one monthly
newsletter and a monthly law firm management information service. ALM also
provides certain services to Court TV, a basic cable television service
launched in 1991 in which the Company has an indirect majority interest.
HASBRO, INC.
The Company owns approximately 14% of the outstanding common stock of Hasbro,
Inc., one of the world's largest toy companies. For a description of the
issuance by the Company of zero coupon exchangeable notes due 2012 that are
exchangeable for the shares of Hasbro common stock owned by the Company, see
Note 5 "Long-Term Debt" to the Company's consolidated financial statements at
pages F-14 and F-15 herein.
ATARI CORPORATION
The Company owns approximately 25% of Atari Corporation, which is engaged in
the design, manufacture and sale of interactive multimedia entertainment
systems.
ATARI GAMES CORPORATION
The Company owns 100% of Atari Games Corporation, which is engaged in the
design, manufacture and sale of interactive video games for arcades and home
systems.
TIME WARNER INTERACTIVE INC.
Time Warner Interactive Inc. is an indirect wholly owned subsidiary of the
Company that produces and publishes interactive consumer entertainment products
for delivery across the spectrum of digital channels: broadband, narrow-band,
CD-ROM, cartridge and location-based systems.
I-37
CURRENCY RATES AND REGULATIONS
The Company's foreign operations are subject to the risk of fluctuation in
currency exchange rates and to exchange controls. The Company cannot predict
the extent to which such controls and fluctuations in currency exchange rates
may affect its operations in the future or its ability to remit dollars from
abroad. See Note 1 "Summary of Significant Accounting Policies--Foreign
Currency" to the consolidated financial statements set forth at page F-6
herein. For the revenues, operating income from and identifiable assets of
foreign operations, see Note 10 "Segment Information" to the consolidated
financial statements set forth at pages F-19 through F-22 herein.
EMPLOYEES
At December 31, 1994, the Company employed a total of approximately 53,300
persons. This number includes approximately 24,500 persons employed by TWE.
I-38
ITEM 2. PROPERTIES
PUBLISHING, MUSIC AND CORPORATE
The following table sets forth certain information as of December 31, 1994
with respect to the Company's principal properties (over 250,000 square feet in
area) that are used primarily by its publishing and music divisions or occupied
for corporate offices, all of which the Company considers adequate for its
present needs, and all of which were substantially used by the Company or were
leased to outside tenants:
APPROXIMATE
SQUARE FEET TYPE OF OWNERSHIP;
LOCATION PRINCIPAL USE FLOOR SPACE EXPIRATION DATE OF LEASE
-------- ------------- ----------- ------------------------
New York, New York Executive and 560,000 Leased by the Company.
75 Rockefeller Plaza administrative offices Lease expires in 2014.
Rockefeller Center (Corporate, Music and Approximately 142,000 sq.
Filmed Entertainment) ft. are sublet to outside
tenants.
New York, New York Business and editorial 1,481,000 Leased by the Company.
Time & Life Bldg. offices (Publishing and Most leases expire in
Rockefeller Center Corporate) 2007. Approximately
64,000 sq. ft. are sublet
to outside tenants.
Mechanicsburg, Office and warehouse 358,000 Owned and occupied by the
Pennsylvania space (Publishing) Company.
1225 S. Market St.
Olyphant, Manufacturing, 1,058,000 Owned and occupied by the
Pennsylvania warehouses, distribution Company.
1400 and 1444 East and office space (Music)
Lackawanna Avenue
Indianapolis, Indiana Warehouse space 252,000 Owned by the Company.
4200 N. Industrial (Publishing) Approximately 142,000 sq.
Street ft. are leased to outside
tenants.
Nortorf, Manufacturing, 334,000 Owned and occupied by the
Germany distribution and office Company.
Niedernstrasse 3-7 space (Music)
Alsdorf, Manufacturing, 269,000 Owned and occupied by the
Germany distribution and office Company.
Max-Planck Strasse 1- space (Music)
9
Terre Haute, Manufacturing and office 269,000 Leased by the Company.
Indiana space (Music) Lease expires in 2001.
Bldg. 102, Fort Har-
rison
Industrial Park
Other: Office bldgs., plants and 1,718,000 Owned by the Company.
U.S. and abroad, warehouses (Publishing,
including locations Music and Corporate)
in
Europe, Asia, Latin
America, Australia
and New Zealand.
4,535,000 Leased by the Company.
Approximately 52,000 sq.
ft. are sublet to outside
tenants.
----------
Total 10,834,000
==========
I-39
ENTERTAINMENT
The following table sets forth certain information as of December 31, 1994
with respect to TWE's principal properties (over 125,000 square feet in area),
all of which TWE considers adequate for its present needs, and all of which
were substantially used by TWE or were leased to outside tenants.
APPROXIMATE
SQUARE FEET
FLOOR TYPE OF OWNERSHIP;
LOCATION PRINCIPAL USE SPACE/ACRES EXPIRATION DATE OF LEASE
-------- ------------- ----------- ------------------------
New York, New York Business offices 335,000 sq. ft. Leased by TWE.
HBO Building, 1100 (Programming--HBO) Lease expires in 2004.
Avenue of the
Americas
New York, New York Business offices 139,000 sq. ft. Leased by TWE.
1325 Avenue of the (Filmed Entertainment) Lease expires in 2010.
Americas
Baltimore, Maryland Warehouse (Filmed 387,000 sq. ft. Owned by TWE.
White Marsh Entertainment)
Los Angeles, Califor- Warehouse 182,000 sq. ft. Leased by TWE.
nia (Filmed Entertainment) Lease expires in 1997.
9210 San Fernando
Burbank, California Sound stages, 3,422,000 Owned by TWE.
The Warner Bros. administrative, sq. ft. of
Studio technical and dressing improved
room space on 158
structures, screening acres (a)
theaters,
machinery and equipment
facilities, back lot and
parking lot and other
Burbank properties
(Filmed
Entertainment)
West Hollywood, Sound stages, 350,000 Owned by TWE.
California administrative, sq. ft. of Approx. 20,000 sq. ft. are
The Warner technical and dressing improved leased to outside tenants.
Hollywood Studio room space on 11
structures, screening acres
theaters,
machinery and equipment
facilities (Filmed
Entertainment)
Valencia, California Location filming (Filmed 225 acres Owned by TWE.
Undeveloped Land Entertainment)
Atlanta, Georgia Theme park 270 acres Owned by limited
Six Flags Over Geor- (Filmed Entertainment) partners of Six Flags
gia Over Georgia co-venture
partnership.
Dallas-Fort Worth, Theme park 200 acres Owned by limited
Texas (Filmed Entertainment) partners of Six Flags
Six Flags Over Texas Over Texas co-venture
partnership.
St. Louis, Missouri Theme park 500 acres Owned by Six Flags.
Six Flags Over Mid- (Filmed Entertainment)
America
I-40
APPROXIMATE
SQUARE FEET
FLOOR TYPE OF OWNERSHIP;
LOCATION PRINCIPAL USE SPACE/ACRES EXPIRATION DATE OF LEASE
-------- ------------- ----------- ------------------------
Houston, Texas Theme park 105 acres Owned by Six Flags.
Six Flags Houston (Filmed Entertainment)
Jackson, New Jersey Theme park 2,200 acres (b) Owned by Six Flags.
Six Flags Great (Filmed Entertainment)
Adventure
Los Angeles, Califor- Theme park 260 acres Owned by Six Flags.
nia (Filmed Entertainment)
Six Flags California
Gurnee, Illinois Theme park 300 acres Owned by Six Flags.
Six Flags Great (Filmed Entertainment)
America
Other, in the U.S. and Office buildings, retail 1,625,000 sq. ft. (c) Owned by TWE.
abroad, including stores, theatres, plants Approx. 26,000 sq. ft. are
locations in Europe, and leased to outside tenants.
Asia, Latin America, warehouses (Filmed 5,910,000 sq. ft. (c)(d) Leased by TWE.
Australia and New Entertainment, Approx. 69,000 sq. ft. are
Zealand Programming--HBO, sublet to outside tenants.
Cable)
-------------------------
Totals 12,350,000 sq. ft.
4,229 acres
=========================
--------
(a) Ten acres consist of various parcels adjoining The Warner Bros. Studio,
with mixed commercial, office and residential uses.
(b) 1,640 acres of which are undeveloped land available for expansion.
(c) Excludes 9,085,000 sq. ft. of owned and 2,021,000 sq. ft. of leased
properties used by the Cable division for headend, hub, and tower sites.
(d) Includes 108,000 sq. ft. of office space occupied by Time Warner corporate
staff who provide services to TWE pursuant to arrangements set forth in the
TWE Partnership Agreement.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties, in the ordinary course of
business, to litigations involving property, personal injury and contract
claims. The amounts that the Company believes may be recoverable in these
matters are either covered by insurance or are not material.
In June 1989, a purported stockholder class action was filed in the Supreme
Court of the State of New York, County of New York, entitled Northern
Laminating, Inc. Retirement Fund v. Munro, et al., Index No. 12653-89, against
the Company and its Board of Directors, alleging that defendants breached their
fiduciary duties by the Company's tender offer (the "Tender Offer") for WCI
(pursuant to which the Company purchased 100 million shares of WCI common stock
on July 24, 1989) and by the terms of the Agreement and Plan of Merger (as
amended, the "Merger Agreement") among the Company, TW Sub Inc., then a wholly
owned subsidiary of the Company, and WCI which purports to prevent defendants
from considering other offers, and that defendants, by similar acts, engaged in
a combination and conspiracy in restraint of trade. Plaintiff seeks, among
other things, a declaratory judgment that defendants breached their fiduciary
duties and monetary damages for defendants' purported breach of fiduciary
duties. Defendants have not been required to respond to the amended complaint.
A Stipulation of Voluntary Discontinuance without prejudice was submitted to
the court on September 14, 1994, and is awaiting approval.
Since 1989, there has been pending in the Court of Chancery for the State of
Delaware, in and for New Castle County (the "Delaware Chancery Court") a
consolidated stockholder litigation, In re Warner Communications Inc.
Shareholders Litigation, Consol. Civ. Action No. 10671 (the "Warner Stockholder
I-41
Litigation"), commenced against WCI, its Board of Directors and the Company,
alleging that WCI's Board of Directors breached their fiduciary duties to WCI's
stockholders, and the Company aided and abetted such alleged breach, by not
ensuring that the securities distributed to WCI stockholders in the Merger
contained certain protective covenants and redemption provisions. The amended
complaint seeks, among other things, to enjoin the consummation of the Tender
Offer and the Merger, or to rescind the Tender Offer and the Merger. The
defendants have not yet been required to respond to the amended complaint. The
action has been stayed pending resolution of the Berger action described below.
Another 1989 purported stockholder class action, Berger, et al. v. Warner
Communications Inc., et al., Index No. 91-3735, filed in the New York Supreme
Court against WCI, certain of WCI's directors, the Company, Wasserstein Perella
& Co., Inc. ("Wasserstein Perella"), Shearson Lehman Hutton Inc. ("Shearson
Lehman") and Lazard Freres & Co. ("Lazard") alleges, among other things, that
WCI's directors and the Company breached their fiduciary duties to WCI's
stockholders by structuring the Merger as a freezeout of WCI's minority
stockholders, and by failing to ensure that the securities to be distributed to
stockholders in the Merger would in fact trade at the value imputed to those
securities, and that Wasserstein Perella, Shearson Lehman and Lazard aided and
abetted those breaches of fiduciary duty. The complaint seeks, among other
things, a declaratory judgment that defendants have breached their fiduciary
duties, compensatory damages and a judgment declaring the Merger a nullity. On
April 9, 1991, a court order effected defendants' stipulation to the
certification of a plaintiff class consisting of those persons who held shares
of WCI common stock on August 23, 1989 and before the effective date of the
Merger, except defendants in this litigation and any person or entity related
to or affiliated with any defendants. Argument on both sides' motions for
partial summary judgment on plaintiffs' contract claim for additional interest
of approximately $20 million in connection with the consideration paid in the
merger transaction was heard on February 22, 1994. On August 16, 1994, the
court granted defendants' motion for partial summary judgment and dismissed
plaintiffs' contract claim. Plaintiffs filed a Notice of Appeal on September
14, 1994.
On January 24, 1994, a purported class action entitled Dr. Arun Shingala v.
Gerald M. Levin, et al., Civil Action No. 13356, was filed against the Company
and its directors in the Court of Chancery of the State of Delaware, New Castle
County, on behalf of all stockholders of the Company, other than defendants and
their related or affiliated entities. The complaint alleges that the defendant
directors acting on behalf of the Company have adopted a plan ("rights plan")
to thwart any attempt to take over control of the Company which the defendants
find unfavorable to their personal interests. Plaintiff contends that
defendants' actions are in violation of their fiduciary duties and seeks a
judgment rescinding the adoption of the rights plan and ordering the director
defendants jointly and severally to account for all damages which reasonably
flow from the actions and transactions alleged. The parties have agreed to
dismiss the action without prejudice and without compensation to the plaintiffs
or their attorneys. An order effecting that agreement was approved by the court
on March 16, 1995.
In November 1992, TWE filed a federal lawsuit seeking to overturn major
provisions of the 1992 Cable Act primarily on First Amendment grounds. The
complaint, filed in the U.S. District Court for the District of Columbia
against the FCC and the United States of America, challenges the provisions of
the 1992 Cable Act relating to rate regulation, must carry, retransmission
consent, terms of dealing by vertically integrated programmers, uniform pricing
and operation of cable systems by municipal authorities, the number of
subscribers that a cable operator could serve nationwide, free previews of
certain premium channels and educational channel set-aside requirements for
direct broadcast satellite service. In addition, the complaint seeks to
overturn several parts of the 1984 Cable Act relating to public, educational
and government access requirements and commercial leased channels. The
complaint seeks injunctions against the enforcement or implementation of these
provisions. Several other parties have also filed similar lawsuits and these
actions have been at least partially consolidated with the action filed by TWE.
Hearings on the plaintiffs' motions for summary judgment and the defendants'
motions to dismiss or for summary judgment were held in March 1993. On April 8,
1993, in a 2-1 decision, the District Court upheld the constitutionality of the
must carry provisions of the 1992 Cable Act. On May 3, 1993, TWE filed an
appeal from this decision directly to the U.S. Supreme Court. The U.S. Supreme
Court heard argument on that appeal in January 1994 and on June 27, 1994 the
U.S. Supreme Court vacated the judgment of the District Court regarding the
must-carry
I-42
provisions and remanded the case to that court for further factual findings. On
September 16, 1993, a one-judge District Court upheld the constitutionality on
First Amendment grounds of all the other challenged provisions except
restrictions on the number of subscribers that a cable operator could serve
nationwide, free pay TV previews and direct broadcast channel usage. TWE
appealed this decision to the U.S. Court of Appeals for the D.C. Circuit on
November 12, 1993. Briefing on the appeal is scheduled to be completed by early
July 1995. For a description of the 1984 Cable Act and the 1992 Cable Act, see
Item 1 "Business--Cable Division--Regulation and Legislation."
By letters dated July 15, 1993 and September 21, 1993 (the "Access Letters"),
the Dallas Regional Office of the Federal Trade Commission (the "FTC") informed
WEA that it is conducting a preliminary investigation to determine whether WEA
is "unreasonably restricting the resale of previously owned compact discs" and
"unreasonably restricting the sale of new compact discs." The Access Letters
allege that WEA's conduct may violate Section 5 of the Federal Trade Commission
Act, but also say that neither the Access Letters nor the existence of the
investigation "should be viewed as an accusation by the FTC or its staff of any
wrongdoing by [WEA]." The Access Letters request that WEA voluntarily submit
the documents and information requested therein. The FTC investigation also
includes other major distributors of recorded music. In the course of the
investigation, the FTC issued a subpoena for the deposition of a former WEA
executive. WEA has complied with the Access Letters and subpoena. In early
October 1994, WEA (and other major distributors of recorded music) received a
follow-up subpoena for the production of documents, stating that the FTC is
investigating whether members of the pre-recorded music distributing industry
may be engaging in unfair methods of competition by fixing prices or by
engaging in concerted activities to limit the availability of cooperative
advertising or promotional funds to retailers who distribute used compact discs
or advertise prices of compact discs below specified levels. WEA produced
documents in late December in response to the subpoena.
In October 1993, a purported class action was filed in the United States
District Court for the Northern District of Georgia entitled Samuel D. Moore,
et al. v. American Federation of Television and Radio Artists, et al., No. 93-
Civ-2358. The action was brought by fifteen named music performers or
representatives of deceased performers on behalf of an alleged class of
performers who participated in the creation or production of phonograph
recordings for one or more of the defendant recording companies. The named
defendants include the American Federation of Television and Radio Artists
("AFTRA"), the AFTRA Health and Retirement Fund ("Fund"), each present trustee
of the Fund and fifty named recording companies, including four WCI
subsidiaries. The named defendant recording companies comprise substantially
all of the domestic recording industry and the complaint seeks to establish a
defendant class for purposes of the litigation. The complaint seeks recovery
against the recording companies for, among other things, breach of contract,
breach of fiduciary duty, fraud, embezzlement and RICO violations, all growing
out of alleged failure by the recording companies to make proper contributions
to the Fund pursuant to the Phono Code, which is negotiated by AFTRA and most
of the domestic recording companies, and other alleged failures to meet the
terms of the Phono Code and individual contracts. Plaintiffs seek from the
defendant record companies substantial monetary damages, treble damages,
attorneys' fees and costs and the imposition of a constructive trust over the
master recordings created from recorded performances of the plaintiffs. In
March 1994, plaintiffs filed an amended complaint. In March and April 1994,
AFTRA, the Fund, the Fund's trustees and certain of the defendant recording
companies, including the four WCI subsidiaries, moved to dismiss plaintiffs'
amended complaint. On August 2, 1994, the court, among other things, dismissed
the claims against the Fund and the Fund's trustees, converted AFTRA's motion
to one for summary judgment (and allowed re-briefing) and dismissed all claims
against the defendant recording companies except the RICO claim. The record
company defendants in the one remaining RICO claim have answered the amended
complaint and filed a motion for summary judgment seeking dismissal of the
claim. The court has granted AFTRA's motion, and the record company defendants'
motion for summary judgment remains pending.
On February 21, 1995, counsel for plaintiffs filed a new lawsuit, entitled
Samuel D. Moore, et al. v. Sony Music Entertainment Group, et al., No. 95-Civ-
1221, in the United States District Court for the Southern
I-43
District of New York. The action was brought by all but one of the named
plaintiffs in the Georgia federal suit, with one new plaintiff. The plaintiffs
are suing on behalf of an alleged class of performers and derivatively on
behalf of the AFTRA Fund. The named defendants include the Fund's trustees, the
Fund, and the recording companies that were named as defendants in the Georgia
federal suit. The complaint is based on substantially the same allegations as
the complaint in the Georgia federal suit, and seeks to recover substantial
monetary damages, liquidated damages, and attorney's fees from the recording
companies. The record company defendants have simultaneously moved in the
Southern District of New York for an order transferring the new case to the
Northern District of Georgia, and moved in the Northern District of Georgia for
an order staying plaintiffs from proceeding with the New York federal action.
On July 14, 1994, the Company received a civil investigative demand from the
United States Department of Justice in furtherance of an investigation into
certain worldwide activities of the Warner Music Group and other companies in
the recorded music industry principally related to cable, wire and satellite-
delivered music and music video programmers. The Company has complied with the
civil investigative demand to the extent that it sought information and
documents with respect to domestic activities of the Warner Music Group and has
objected to responding with respect to foreign activities on the ground that
the Department of Justice lacks jurisdiction to inquire into such activities.
On November 3, 1994, the Department of Justice filed a petition in the United
States District Court for the District of Columbia seeking to compel the
Company and the other companies to provide documents from their files in the
United States that deal with overseas activities.
The Company and its subsidiaries are also subject to industry investigations
by certain government agencies and/or proceedings under the antitrust laws that
have been filed by private parties in which, in some cases, other companies in
the same or related industries are also defendants. The Company and its
subsidiaries have denied or will deny liability in all of these actions. In all
but a few similar past actions, the damages, if any, recovered from the Company
or the amounts, if any, for which the actions were settled were small or
nominal in relation to the damages sought; and it is the opinion of the
management of the Company that any settlements or adverse judgments in the
similar actions currently pending will not involve the payment of amounts or
have other results that would have a material adverse effect on the financial
condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
I-44
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G (3), the information regarding the
Company's executive officers required by Item 401(b) of Regulation S-K is
hereby included in Part I of this report.
The following table sets forth the name of each executive officer of the
Company, the office held by such officer and the age, as of March 17, 1995, of
such officer:
NAME AGE OFFICE
---- --- ------
Gerald M. Levin......... 55 Chairman of the Board and Chief Executive Officer
Richard D. Parsons...... 46 President
Peter R. Haje........... 60 Executive Vice President, General Counsel and Secretary
Timothy A. Boggs........ 44 Senior Vice President
Richard J. Bressler..... 37 Senior Vice President and Chief Financial Officer
Tod R. Hullin........... 51 Senior Vice President
Philip R. Lochner, Jr... 52 Senior Vice President
Set forth below are the principal positions held by each of the executive
officers named above since March 1, 1990:
Mr. Levin.................. Chairman of the Board of Directors and Chief
Executive Officer since January 21, 1993. Prior
to that he served as President and Co-Chief
Executive Officer from February 20, 1992; Vice
Chairman and Chief Operating Officer from May
1991; and Vice Chairman of the Board prior to
that.
Mr. Parsons................ President since February 1, 1995. Prior to that
he served as Chairman of The Dime Savings Bank of
New York, FSB ("DSB") from January 1991 and Chief
Executive Officer of DSB from July 1990. Prior to
that he was President of DSB.
Mr. Haje................... Executive Vice President and General Counsel
since October 1, 1990 and Secretary since May 20,
1993. Prior to that, he was a member of the law
firm of Paul, Weiss, Rifkind, Wharton & Garrison.
Mr. Boggs.................. Senior Vice President since November 19, 1992.
Prior to that he served as Vice President of
Public Affairs.
Mr. Bressler............... Senior Vice President and Chief Financial Officer
since March 16, 1995. Prior to that he served as
Senior Vice President, Finance from January 2,
1995; and as a Vice President prior to that.
Mr. Hullin................. Senior Vice President since February 7, 1991.
Prior to that, he served as Senior Vice
President, Corporate Affairs of SmithKline
Beecham (diversified health care company).
Mr. Lochner................ Senior Vice President since July 18, 1991. Prior
to that, he was a Commissioner of the Securities
and Exchange Commission from March 1990 to June
1991. Prior to his tenure with the SEC, Mr.
Lochner served as Deputy General Counsel and
Senior Vice President of Time Warner from January
to March 1990.
I-45
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal market for the Company's Common Stock is the New York Stock
Exchange. The Common Stock is also listed on the Pacific Stock Exchange and the
London Stock Exchange. For quarterly price information with respect to the
Company's Common Stock for the two years ended December 31, 1994, see
"Quarterly Financial Information" at page F-27 herein, which information is
incorporated herein by reference.
The approximate number of holders of record of the Company's Common Stock as
of March 1, 1995 was 19,000.
For information on the frequency and amount of dividends paid with respect to
the Company's Common Stock during the two years ended December 31, 1994, see
"Quarterly Financial Information" at page F-27 herein, which information is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information of the Company for the five years ended
December 31, 1994 is set forth at page F-26 herein and is incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth under the caption "Management's Discussion and
Analysis" at pages F-28 through F-36 herein is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company
and the report of independent auditors thereon set forth at pages F-2 through
F-23 and F-25 herein are incorporated herein by reference.
Quarterly Financial Information set forth at page F-27 herein is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
II-1
PART III
ITEMS 10, 11, 12 AND 13.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT; CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
Information called for by PART III (Items 10, 11, 12 and 13) is incorporated
by reference from the Company's definitive Proxy Statement to be filed in
connection with its 1995 Annual Meeting of Stockholders pursuant to Regulation
14A, except that the information regarding the Company's executive officers
called for by Item 401(b) of Regulation S-K has been included in PART I of this
report and the information called for by Items 402(k) and 402(l) of Regulation
S-K is not incorporated by reference.
III-1
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1)-(2) Financial Statements and Schedules:
(i) The list of consolidated financial statements and schedules set forth
in the accompanying Index to Consolidated Financial Statements and Other
Financial Information at page F-1 herein is incorporated herein by
reference. Such consolidated financial statements and schedules are filed
as part of this report.
(ii) The financial statements of the Time Warner Service Partnerships and
the report of independent auditors thereon, set forth at pages F-64 through
F-73 in the 1994 Annual Report on Form 10-K of Time Warner Entertainment
Company, L.P. (Reg. No. 33-53742) (the "TWE's 1994 Form 10-K") are
incorporated herein by reference and are filed as an exhibit to this
report.
(iii) The financial statements and financial statement schedule of
Paragon Communications and the report of independent accountants thereon,
set forth at pages F-74 through F-83 in TWE's 1994 Form 10-K, are
incorporated herein by reference and are filed as an exhibit to this
report.
(3) Exhibits:
The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as part of this report and such Exhibit Index is
incorporated herein by reference. Exhibits 10.1 through 10.24 listed on the
accompanying Exhibit Index identify management contracts or compensatory
plans or arrangements required to be filed as exhibits to this report, and
such listing is incorporated herein by reference.
(b) No reports on Form 8-K were filed by Time Warner during the quarter
ended December 31, 1994.
IV-1
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Time Warner Inc.
/s/ Peter R. Haje
By ..................................
PETER R. HAJE EXECUTIVE VICE
PRESIDENT, GENERAL COUNSEL AND
SECRETARY
Date: March 30, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Gerald M. Levin
............................. Director, Chairman of the March 30,
(GERALD M. LEVIN) Board and Chief Executive 1995
Officer (principal executive
officer)
/s/ Richard J. Bressler
............................. Senior Vice President and March 30,
(RICHARD J. BRESSLER) Chief Financial Officer 1995
(principal financial officer)
/s/ John A. LaBarca
............................. Vice President and Controller March 30,
(JOHN A. LABARCA) (principal accounting 1995
officer)
*
............................. Director March 30,
(MERV ADELSON) 1995
*
............................. Director March 30,
(LAWRENCE B. BUTTENWIESER) 1995
*
............................. Director March 30,
(EDWARD S. FINKELSTEIN) 1995
*
............................. Director March 30,
(BEVERLY SILLS GREENOUGH) 1995
*
............................. Director March 30,
(CARLA A. HILLS) 1995
*
............................. Director March 30,
(DAVID T. KEARNS) 1995
IV-2
SIGNATURE TITLE DATE
*
............................. Director March 30,
(HENRY LUCE III) 1995
*
............................. Director March 30,
(REUBEN MARK) 1995
*
............................. Director March 30,
(MICHAEL A. MILES) 1995
*
............................. Director March 30,
(J. RICHARD MUNRO) 1995
*
............................. Director March 30,
(RICHARD D. PARSONS) 1995
*
............................. Director March 30,
(DONALD S. PERKINS) 1995
*
............................. Director March 30,
(RAYMOND S. TROUBH) 1995
*
............................. Director March 30,
(FRANCIS T. VINCENT, JR.) 1995
/s/ Peter R. Haje
*By: ........................
ATTORNEY-IN-FACT
IV-3
TIME WARNER INC. AND TIME WARNER ENTERTAINMENT COMPANY, L.P.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER FINANCIAL INFORMATION
PAGE
-----------
TIME
WARNER TWE
------ ----
Consolidated Financial Statements:
Balance Sheet..................................................... F-2 F-38
Statement of Operations........................................... F-3 F-39
Statement of Cash Flows........................................... F-4 F-40
Statement of Shareholders' Equity and Partnership Capital......... F-5 F-41
Notes to Consolidated Financial Statements........................ F-6 F-42
Report of Management............................................... F-24
Report of Independent Auditors..................................... F-25 F-57
Selected Financial Information..................................... F-26 F-58
Quarterly Financial Information.................................... F-27 F-59
Management's Discussion and Analysis:
Results of Operations............................................. F-28 F-60
Financial Condition and Liquidity................................. F-32 F-62
Supplementary Information.......................................... F-65
Financial Statement Schedule VIII--Valuation and Qualifying Ac-
counts............................................................ F-37 F-66
All other financial statements and schedules are omitted because the required
information is not present, or is not present in amounts sufficient to require
submission of the financial statements or schedules, or because the information
required is included in the consolidated financial statements and notes
thereto.
F-1
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
1994 1993
------- -------
ASSETS
CURRENT ASSETS
Cash and equivalents......................................... $ 282 $ 200
Receivables, less allowances of $768 and $676................ 1,439 1,400
Inventories.................................................. 370 321
Prepaid expenses............................................. 726 613
------- -------
Total current assets......................................... 2,817 2,534
Investments in and amounts due to and from Entertainment
Group....................................................... 5,350 5,627
Other investments............................................ 1,555 1,613
Land and buildings........................................... 412 393
Furniture, fixtures and other equipment...................... 998 878
------- -------
1,410 1,271
Less accumulated depreciation................................ (657) (505)
------- -------
Property, plant and equipment................................ 753 766
Music catalogues, contracts and copyrights................... 1,207 1,309
Goodwill..................................................... 4,630 4,691
Other assets................................................. 404 352
------- -------
Total assets................................................. $16,716 $16,892
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................. $ 648 $ 532
Royalties payable............................................ 731 567
Debt due within one year..................................... 355 120
Other current liabilities.................................... 1,238 1,006
------- -------
Total current liabilities.................................... 2,972 2,225
Long-term debt............................................... 8,839 9,291
Deferred income taxes........................................ 2,700 2,998
Unearned portion of paid subscriptions....................... 631 633
Other liabilities............................................ 426 375
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 250 million shares authorized,
962 thousand shares outstanding, $140 million liquidation
preference.................................................. 1 1
Common stock, $1 par value, 750 million shares authorized,
379.3 million and 378.3 million shares outstanding.......... 379 378
Paid-in capital.............................................. 2,588 2,537
Unrealized gains on certain marketable securities............ 130 205
Accumulated deficit.......................................... (1,950) (1,751)
------- -------
Total shareholders' equity................................... 1,148 1,370
------- -------
Total liabilities and shareholders' equity................... $16,716 $16,892
======= =======
See accompanying notes.
F-2
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
RESTATED
1994 1993 1992(A) 1992
------ ------ -------- -------
Revenues (b)................................. $7,396 $6,581 $6,309 $13,070
------ ------ ------ -------
Cost of revenues (b) (c)..................... 4,307 3,780 3,633 8,451
Selling, general and administrative (b) (c).. 2,376 2,210 2,147 3,276
------ ------ ------ -------
Operating expenses........................... 6,683 5,990 5,780 11,727
------ ------ ------ -------
Business segment operating income............ 713 591 529 1,343
Equity in pretax income of Entertainment
Group (b)................................... 176 281 226 --
Interest and other, net (b).................. (724) (718) (351) (882)
Corporate expenses (b)....................... (76) (73) (81) (141)
------ ------ ------ -------
Income before income taxes................... 89 81 323 320
Income taxes................................. (180) (245) (237) (234)
------ ------ ------ -------
Income (loss) before extraordinary item...... (91) (164) 86 86
Extraordinary loss on retirement of debt, net
of $37 million income tax benefit........... -- (57) -- --
------ ------ ------ -------
Net income (loss)............................ (91) (221) 86 86
Preferred dividend requirements.............. (13) (118) (628) (628)
------ ------ ------ -------
Net loss applicable to common shares......... $ (104) $ (339) $ (542) $ (542)
====== ====== ====== =======
Loss per common share:
Loss before extraordinary item............... $ (.27) $ (.75) $(1.46) $ (1.46)
====== ====== ====== =======
Net loss..................................... $ (.27) $ (.90) $(1.46) $ (1.46)
====== ====== ====== =======
Average common shares........................ 378.9 374.7 371.0 371.0
====== ====== ====== =======
--------
(a) The 1994 and 1993 financial statements reflect the deconsolidation of the
Entertainment Group, principally TWE, effective January 1, 1993. The 1992
historical financial statements have not been changed; however, financial
statements for 1992 retroactively reflecting the deconsolidation are
presented as supplementary information under the column heading "restated"
to facilitate comparative analysis (Note 1).
(b) Includes the following income (expenses) resulting from transactions with
the Entertainment Group and other related companies for the years ended
December 31, 1994 and 1993, respectively: revenues-$203 million and $170
million; cost of revenues-$(109) million and $(87) million; selling,
general and administrative-$47 million and $59 million; equity in pretax
income of Entertainment Group-$(120) million and $(115) million; interest
and other, net-$13 million and $(4) million; and corporate expenses-$60
million in each year.
(c)Includes depreciation and amortization ex-
pense of:................................... $ 437 $ 424 $ 384 $ 1,172
====== ====== ====== =======
See accompanying notes.
F-3
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(MILLIONS)
RESTATED
1994 1993 1992(A) 1992
----- ------ -------- ------
OPERATIONS
Net income (loss)............................. $ (91) $ (221) $ 86 $ 86
Adjustments for noncash and nonoperating
items:
Depreciation and amortization................. 437 424 384 1,172
Noncash interest expense...................... 219 185 64 64
Unusual tax charge and extraordinary loss (b). -- 127 -- --
Equity in pretax income of Entertainment
Group, net of distributions.................. (56) (261) (43) --
Equity in (income) losses of other investee
companies, net of distributions.............. (17) -- 7 45
Changes in operating assets and liabilities:
Receivables.................................. (47) (71) 37 (235)
Inventories.................................. (38) 20 (16) (120)
Accounts payable and other liabilities....... 324 206 65 140
Other balance sheet changes.................. (258) (152) (22) 8
----- ------ ------ ------
Cash provided by operations................... 473 257 562 1,160
----- ------ ------ ------
INVESTING ACTIVITIES
Investments and acquisitions.................. (187) (175) (122) (389)
Capital expenditures.......................... (164) (198) (172) (574)
Investment proceeds........................... 118 103 913 88
----- ------ ------ ------
Cash provided (used) by investing activities.. (233) (270) 619 (875)
----- ------ ------ ------
FINANCING ACTIVITIES
Increase (decrease) in debt................... (44) 3,115 (42) 20
Redemption of Series D preferred stock........ -- (3,494) -- --
Dividends paid................................ (142) (299) (386) (386)
TWE capital contribution...................... -- -- -- 1,000
Stock option and dividend reinvestment plans.. 34 92 23 23
Other, principally financing costs prior to
1994......................................... (6) (143) (69) (199)
----- ------ ------ ------
Cash provided (used) by financing activities.. (158) (729) (474) 458
----- ------ ------ ------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS... $ 82 $ (742) $ 707 $ 743
===== ====== ====== ======
--------
(a) The 1994 and 1993 financial statements reflect the deconsolidation of the
Entertainment Group, principally TWE, effective January 1, 1993. The 1992
historical financial statements have not been changed; however, financial
statements for 1992 retroactively reflecting the deconsolidation are
presented as supplementary information under the column heading "restated"
to facilitate comparative analysis (Note 1).
(b) Includes $70 million increase in deferred income tax liability as a result
of a new tax law enacted in 1993 and $57 million extraordinary loss on the
retirement of debt.
See accompanying notes.
F-4
TIME WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
PREFERRED COMMON PAID-IN UNREALIZED ACCUMULATED
STOCK STOCK CAPITAL GAINS DEFICIT TOTAL
--------- ------ ------- ---------- ----------- ------
BALANCE AT DECEMBER 31,
1991................... $ 123 $370 $8,269 $ -- $ (264) $8,498
Net income.............. 86 86
Dividends on common
stock--$.265 per share. (98) (98)
Dividends on Series B, C
and D preferred stock--
$9.28, $4.375 and $5.50
(in kind) per share,
respectively........... 7 333 (628) (288)
Purchase of stock....... (1) (61) (62)
Shares issued pursuant
to stock option and
dividend reinvestment
plans.................. 1 28 29
Other................... 1 37 (36) 2
----- ---- ------ ---- ------- ------
BALANCE AT DECEMBER 31,
1992................... 129 372 8,606 -- (940) 8,167
Net loss................ (221) (221)
Dividends on common
stock--$.31 per share.. (116) (116)
Dividends on Series B
preferred stock--$9.28
per share.............. 4 (13) (9)
Dividends on Series C
and D preferred stock
to dates of redemption
or exchange............ (106) (106)
Exchange of Series C
preferred stock and
redemption of Series D
preferred stock (Notes
5 and 7)............... (128) (6,240) (311) (6,679)
Unrealized gains on cer-
tain marketable equity
investments at adoption
of FAS 115............. 205 205
Shares issued pursuant
to stock option and
dividend reinvestment
plans.................. 4 116 120
Other................... 2 51 (44) 9
----- ---- ------ ---- ------- ------
BALANCE AT DECEMBER 31,
1993................... 1 378 2,537 205 (1,751) 1,370
Net loss................ (91) (91)
Dividends on common
stock--$.35 per share
($.09 per share per
quarter effective for
the second quarter of
1994).................. (133) (133)
Dividends on Series B
preferred stock--$9.28
per share.............. 4 (13) (9)
Unrealized losses on
certain marketable eq-
uity investments....... (75) (75)
Shares issued pursuant
to stock option and
dividend reinvestment
plans.................. 1 53 54
Other................... (6) 38 32
----- ---- ------ ---- ------- ------
BALANCE AT DECEMBER 31,
1994................... $ 1 $379 $2,588 $130 $(1,950) $1,148
===== ==== ====== ==== ======= ======
See accompanying notes.
F-5
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 Time Warner
Inc. ("Time Warner" or the "Company") and all companies in which Time Warner
has a controlling voting interest ("subsidiaries"), as if Time Warner and its
subsidiaries were a single company. Significant intercompany accounts and
transactions between the consolidated companies have been eliminated.
Investments in companies in which Time Warner has significant influence but
less than a controlling voting interest are accounted for using the equity
method. Under the equity method, only Time Warner's investment in and amounts
due to and from the equity investee are included in the consolidated balance
sheet, only Time Warner'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.
Prior to 1993, Time Warner's Entertainment Group companies ("Entertainment
Group"), principally Time Warner Entertainment Company, L.P. ("TWE"), were
consolidated. Due to changes in TWE's governance provisions at the time U S
WEST, Inc. ("U S WEST") was admitted as an additional limited partner (Note 2),
TWE and the other Entertainment Group companies were deconsolidated, effective
as of January 1, 1993, and have since been accounted for using the equity
method. The 1992 historical financial statements of Time Warner were not
changed; accordingly, they include TWE and other Entertainment Group companies
on a consolidated basis. However, financial statements for 1992 retroactively
reflecting the deconsolidation of the Entertainment Group also are presented
under the caption "restated" to facilitate comparative analysis.
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 Time Warner 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 net-of-tax in a separate component of shareholders' equity
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.
Time Warner's $14 billion cost to acquire Warner Communications Inc. ("WCI")
was allocated to the net assets acquired as of December 31, 1989 in accordance
with the purchase method of accounting for business combinations. The
acquisition was financed principally by $8.3 billion of long-term debt and $5.6
billion of Series C and Series D preferred stock ("old Series C and Series D
preferred stock"), which was redeemed with or exchanged for debt in 1993 (Notes
5 and 7).
The effect of changes in Time Warner's ownership interests resulting from the
issuance of equity capital by consolidated subsidiaries or equity investees to
unaffiliated parties is included in income. The effect of the four-for-one
common stock split on September 10, 1992 has been reflected retroactively.
Certain reclassifications have been made to the prior years' financial
statements to conform to the 1994 presentation.
REVENUES AND COSTS
The unearned portion of paid subscriptions is deferred until magazines are
delivered to subscribers. Upon each delivery, a proportionate share of the
gross subscription price is included in revenues.
F-6
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Inventories of magazines, books, cassettes and compact discs are stated at
the lower of cost or estimated realizable value. Cost is determined using
first-in, first-out; last-in, first-out; and average cost methods. In
accordance with industry practice, certain products are sold to customers with
the right to return unsold items. Revenues from such sales represent gross
sales less a provision for future returns. Returned goods included in inventory
are valued at estimated realizable value but not in excess of cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. 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 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 $158 million, $148
million and $257 million ($142 million on a restated basis) in 1994, 1993 and
1992, respectively; amortization of music copyrights, artists' contracts and
record catalogues amounted to $115 million, $113 million and $113 million; and
amortization of other intangible assets amounted to $31 million, $31 million
and $310 million ($8 million on a restated basis). Accumulated amortization of
intangible assets at December 31, 1994 and 1993 amounted to $1.505 billion and
$1.245 billion, respectively.
FOREIGN CURRENCY
The financial position and operating results of substantially all foreign
operations 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
accumulated deficit. 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 royalties and license fees owed to Time Warner or TWE
domestic companies for the sale or anticipated sale of U.S. copyrighted
products abroad may be adversely affected by changes in exchange rates. 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, primarily
Japanese yen (25% of net contract value), French francs (19%), English pounds
(17%), Canadian dollars (9%) and German marks (14%), compared to contracts for
the sale of $653 million and the purchase of $80 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. Time Warner had $33 million and 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
royalties and license fee payments that have been or are anticipated to be
received from the sale of U.S. copyrighted products abroad. Time Warner
reimburses or is reimbursed by TWE for contract gains and losses related to
TWE's foreign currency exposure. Foreign currency contracts are placed with a
number of major financial institutions in order to minimize credit risk.
INCOME TAXES
Income taxes are provided using the liability method prescribed by FASB
Statement No. 109, "Accounting for Income Taxes." Under the liability method,
deferred income taxes reflect tax carryforwards and the net tax effects of
temporary differences between the carrying amount of assets and liabilities for
financial statement and income tax purposes, as determined under enacted tax
laws and rates. The financial effect of changes in tax laws or rates is
accounted for in the period of enactment.
F-7
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Realization of the net operating loss and investment tax credit
carryforwards, which were acquired in acquisitions, are accounted for as a
reduction of goodwill.
The principal operations of the Entertainment Group are conducted by
partnerships. Income tax expense includes all income taxes related to Time
Warner's allocable share of partnership income and its equity in the income tax
expense of corporate subsidiaries of the partnerships.
INTEREST RATE SWAP CONTRACTS
Interest rate swap contracts are used to adjust the proportion of total debt
that is subject to changes in short-term interest rates and the proportion that
is subject to fixed rates. Under interest rate swap contracts, the Company
either agrees to pay an amount equal to a specified floating-rate of interest
times a notional principal amount, and to receive in return an amount equal to
a specified fixed-rate of interest times the same notional principal amount or,
vice versa, to receive a floating-rate amount and to pay a fixed-rate amount.
The notional amounts of the contracts are not exchanged. No other cash payments
are made unless the contract is terminated prior to maturity, in which case the
amount paid or received in settlement is equal to the present value, at current
rates of interest, of the remaining obligations to exchange payments under the
terms of the contract. Interest rate swap contracts are 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 are included in interest expense. Gains or losses on
the termination of contracts are deferred and amortized to income over the
remaining average life of the terminated contracts.
TREASURY STOCK
The purchase of Time Warner common and other capital stock by Time Warner or
its subsidiaries is accounted for as if the stock had been retired and is no
longer outstanding.
LOSS PER COMMON SHARE
Loss per common share is based upon the net loss applicable to common shares
after preferred dividend requirements and upon the weighted average of common
shares outstanding during the period. The conversion of securities convertible
into common stock and the exercise of stock options were not assumed in the
calculations of loss per common share because the effect would have been
antidilutive.
2.ENTERTAINMENT GROUP
Time Warner's investment in and amounts due to and from the Entertainment
Group at December 31, 1994 and 1993 consist of the following:
DECEMBER 31,
--------------
1994 1993
------ ------
(MILLIONS)
Investment in TWE.............................................. $5,284 $5,085
Income tax and stock option related distributions due from TWE. 423 547
Credit agreement debt due to TWE............................... (400) --
Other liabilities due to TWE, principally related to home video
distribution.................................................. (266) (257)
------ ------
Investment in and amounts due to and from TWE.................. 5,041 5,375
Investment in other Entertainment Group companies.............. 309 252
------ ------
Total.......................................................... $5,350 $5,627
====== ======
F-8
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
TWE is a Delaware limited partnership that was capitalized on June 30, 1992
to own and operate substantially all of the Filmed Entertainment, Programming-
HBO and Cable businesses previously owned by subsidiaries of Time Warner. The
Time Warner subsidiaries are the general partners ("Time Warner General
Partners") and subsidiaries of U S WEST, ITOCHU Corporation ("ITOCHU") and
Toshiba Corporation ("Toshiba") are the limited partners. The Time Warner
General Partners contributed the assets and liabilities or the rights to the
cash flow of substantially all of Time Warner's Filmed Entertainment,
Programming-HBO and Cable businesses at the initial capitalization of TWE, and
ITOCHU and Toshiba each contributed $500 million of cash. On September 15,
1993, U S WEST contributed $1.532 billion of cash and a $1.021 billion 4.4%
note ("U S WEST Note") for its interests. The initial capital amounts assigned
to each partner were based on the fair value of the assets each contributed to
the partnership and have the following priority in the event of liquidation or
dissolution:
INITIAL % OWNED BY
CAPITAL TIME WARNER
PRIORITY OF CONTRIBUTED CAPITAL AMOUNTS(A) GENERAL PARTNERS
------------------------------- ---------- ----------------
(BILLIONS)
Senior capital...................................... $1.4 100.00%
Pro rata priority capital........................... 5.6 63.27%
Junior priority capital............................. 2.6 100.00%
Residual equity capital............................. 3.3 63.27%
--------
(a) Excludes partnership income or loss (to the extent earned) allocated
thereto.
Under the TWE partnership agreement, 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 priority 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 the 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.
The senior capital owned by the Time Warner General Partners 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. The junior priority capital owned by the Time Warner
General Partners may be increased if certain performance targets are achieved
between 1992 and 2001.
TWE reported net income of $161 million, $198 million and $160 million in
1994, 1993 and 1992, respectively, no portion of which was allocated to the
limited partners. Time Warner did not recognize a gain when TWE was
capitalized. TWE recorded the assets contributed by the Time Warner General
Partners at Time Warner's historical cost. The excess of the Time Warner
General Partners' interest in the net assets of TWE over the net book value of
their investment in TWE is being amortized to income over a twenty year period
at the rate of $17 million per year prior to the admission of U S WEST, and $72
million per year thereafter.
U S WEST has an option to obtain up to an additional 6.33% of pro rata
priority capital and residual equity interests, depending on cable operating
performance. The option is exercisable between January 1, 1999
F-9
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and on or about May 31, 2005 at a maximum exercise price of $1.25 billion to
$1.8 billion, depending on the year of exercise. Either U S WEST or TWE may
elect that the exercise price be paid with partnership interests rather than
cash. Each of ITOCHU and Toshiba have options to obtain up to an additional
.64% of pro rata priority capital and residual equity interests in certain
circumstances, payable in cash.
Each Time Warner General Partner has guaranteed a pro rata portion of $7
billion of TWE's debt and accrued interest at December 31, 1994, based on the
relative fair value of the net assets each Time Warner General Partner
contributed to TWE. Such indebtedness is recourse to each Time Warner General
Partner only to the extent of its guarantee. In addition to their interests in
TWE and the other Entertainment Group companies, the assets of the Time Warner
General Partners include the equivalent of 29.6 million common shares of Turner
Broadcasting System, Inc., 12.1 million common shares of Hasbro, Inc., 43.7
million common shares of Time Warner, and substantially all the assets of Time
Warner's music business. There are no restrictions on the ability of the Time
Warner General Partner guarantors to transfer assets, other than TWE assets, to
parties that are not guarantors.
The summarized financial information for the Entertainment Group set forth
below reflects the consolidation of Six Flags Entertainment Corporation ("Six
Flags") as of January 1, 1993 as a result of the increase in TWE's ownership
from 50% to 100% in September 1993. The 1992 historical financial information
has not been changed; however, financial information for 1992 retroactively
reflecting the consolidation is presented as supplementary information under
the column heading "restated" to facilitate comparative analysis.
TIME WARNER ENTERTAINMENT GROUP
YEARS ENDED DECEMBER 31,
--------------------------------
RESTATED
1994 1993 1992 1992
------- ------ -------- ------
(MILLIONS)
OPERATING STATEMENT INFORMATION
Revenues...................................... $ 8,509 $7,963 $7,251 $6,761
Depreciation and amortization................. 959 909 857 788
Business segment operating income............. 852 905 855 814
Interest and other, net....................... 616 564 569 531
Income before income taxes.................... 176 281 226 223
Income before extraordinary item.............. 136 217 173 173
Net income.................................... 136 207 173 173
YEARS ENDED DECEMBER 31,
--------------------------------
RESTATED
1994 1993 1992 1992
------- ------ -------- ------
(MILLIONS)
CASH FLOW INFORMATION
Cash provided by operations................... $ 1,341 $1,276 $ 864 $ 781
Capital expenditures.......................... (1,235) (613) (423) (402)
Investments and acquisitions.................. (186) (368) (383) (279)
Loan to Time Warner........................... (400) -- -- --
Increase (decrease) in debt................... 48 (659) (791) (837)
Capital contributions......................... 234 1,548 1,012 1,012
Capital distributions......................... (120) (20) (183) (183)
Increase (decrease) in cash and equivalents... (267) 1,302 24 13
F-10
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31,
---------------
1994 1993
------- -------
(MILLIONS)
BALANCE SHEET INFORMATION
Cash and equivalents........................................... $ 1,071 $ 1,338
Total current assets........................................... 3,571 3,766
Total assets................................................... 18,992 18,202
Total current liabilities...................................... 2,953 2,301
Long-term debt................................................. 7,160 7,125
Time Warner General Partners' senior capital, consisting of
$1.364 billion initial capital amount plus accrued income..... 1,663 1,536
TWE partners' capital, before deduction of the U S WEST Note... 7,004 7,005
U S WEST Note.................................................. 771 1,005
The assets and cash flows of TWE are restricted by the TWE partnership and
credit agreements and are unavailable for use by the partners except through
the payment of certain fees, reimbursements, cash distributions and loans,
which are subject to limitations. The Time Warner General Partners received
$115 million of tax-related distributions from TWE in 1994. There was an
additional $334 million of such distributions due from TWE at December 31,
1994, compared to $276 million at December 31, 1993. The Time Warner General
Partners also had accrued $89 million and $271 million, respectively, of stock
option related distributions due from TWE at December 31, 1994 and December 31,
1993, respectively, based on closing prices of Time Warner common stock of
$35.125 and $44.25, respectively. Time Warner is paid when the options are
exercised and received $5 million and $20 million of stock option distributions
in 1994 and 1993, respectively. In addition to the tax, stock option and Time
Warner General Partners' senior capital distributions, TWE may make other
distributions, generally depending on excess cash and credit agreement
limitations. The Time Warner General Partners' full share of such distributions
may be deferred if the limited partners do not receive certain threshold
amounts by certain dates.
In the normal course of conducting their businesses, Time Warner and its
subsidiaries and affiliates have had various transactions with TWE and other
Entertainment Group companies, generally on terms resulting from a negotiation
between the affected units that in management's view results in reasonable
allocations. Time Warner provides TWE with certain corporate support services
for which it receives a fee of $60 million per year through June 30, 1995, and
increasing annual amounts as adjusted for inflation thereafter.
3. CABLE TRANSACTIONS
In September 1994, Time Warner agreed to acquire Summit Communications Group,
Inc. ("Summit"), which owns cable television systems serving 162,000
subscribers, in exchange for 900,000 shares of Time Warner common stock and 3.2
million shares of a new Time Warner convertible preferred stock ("new Series C
preferred stock") having a liquidation value of $100 per share. The new Series
C preferred stock will be convertible into 6.7 million shares of Time Warner
common stock at an effective price of $48 of liquidation value per common
share, receive an annual dividend of $3.75 per share for five years, and be
redeemable at liquidation value plus unpaid dividends after five years, or
exchangeable in part for common stock by the holder beginning after the third
year and by Time Warner after the fourth year at the stated conversion price
plus a declining premium in years four and five and no premium thereafter. The
Time Warner consideration is subject to adjustment after closing based on the
working capital of Summit at closing.
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
F-11
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
In January 1995, Time Warner agreed to acquire KBLCOM Incorporated
("KBLCOM"), a subsidiary of Houston Industries Incorporated that owns cable
television systems serving approximately 690,000 subscribers and a 50% interest
in Paragon Communications ("Paragon"), which serves an additional 967,000 cable
subscribers. TWE owns the other 50% interest in Paragon. To acquire KBLCOM,
Time Warner will issue 1 million shares of common stock and 11 million shares
of a new convertible preferred stock ("new Series D preferred stock") and
assume or incur $1.24 billion of indebtedness. The new Series D preferred stock
will have a liquidation value of $100 per share, be convertible into 22.9
million shares of Time Warner common stock at an effective price of $48 of
liquidation value per common share, and receive an annual dividend of $3.75 per
share for four years. Time Warner will have the right to exchange the new
Series D preferred stock for common stock at the stated conversion price after
four years.
In February 1995, Time Warner agreed to acquire Cablevision Industries
Corporation ("CVI") and related companies that own cable television systems
serving 1.3 million subscribers. To acquire CVI and related companies, Time
Warner will issue 2.5 million shares of common stock and 6.5 million shares of
new convertible preferred stocks (3.25 million shares of "Series E preferred
stock" and 3.25 million shares of "Series F preferred stock") and assume
approximately $2 billion of debt of CVI and related companies. The Series E and
F preferred stocks will have a liquidation value of $100 per share, be
convertible into 13.5 million shares of Time Warner common stock at an
effective price of $48 of liquidation value per common share, and receive an
annual dividend of $3.75 per share for a period of five years with respect to
the Series E preferred stock and a period of four years with respect to the
Series F preferred stock. Time Warner will have the right to exchange the
Series E preferred stock for common stock at the stated conversion price after
five years and to exchange the Series F preferred stock for common stock at the
stated conversion price after four years. The amount of common stock and Series
F preferred stock to be issued will be adjusted if the level of indebtedness,
negative working capital and related items at the closing differ from
approximately $2 billion.
To the extent that any of the new Series C, D, E or F preferred stocks remain
outstanding following the end of the period in which the $3.75 per share
dividend is to be paid, holders will receive a dividend equal to the common
dividend declared times the number of common shares into which their preferred
shares are convertible. While they are outstanding, each of the Series C, D, E
and F preferred stocks will be entitled to vote with the common stock on all
matters on which the common stock is entitled to vote, and each share of any
such preferred stock will be entitled to two votes per share on any such
matter.
The Summit and Advance/Newhouse transactions are expected to close in the
first half of 1995. The KBLCOM and CVI transactions are expected to close later
in the year. All transactions are subject to customary closing conditions,
including the receipt of certain franchise and regulatory approvals.
F-12
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4.OTHER INVESTMENTS
Time Warner's other investments consist of:
DECEMBER 31,
-------------
1994 1993
------ ------
(MILLIONS)
Equity method investments........................................ $ 985 $ 798
Market value method investments(/1/)............................. 435 553
Cost method investments.......................................... 135 262
------ ------
Total............................................................ $1,555 $1,613
====== ======
--------
(1) Unrestricted marketable equity securities not accounted for using the
equity method are stated at market value. Such amounts include the market
value of 12.058 million shares of common stock of Hasbro, Inc., which can
be used, at Time Warner's option, to satisfy its obligations with respect
to the zero coupon exchangeable notes due 2012 (Note 5).
In addition to TWE and its equity investees, companies accounted for using
the equity method include Turner Broadcasting System, Inc. ("TBS") (19.6%
owned); Cinamerica Theatres, L.P. (50% owned) and The Columbia House Company
partnerships (50% owned) and other music joint ventures (generally 50% owned).
Equity investees of TWE include Paragon Communications (50% owned), certain
other cable system joint ventures (generally 50% owned) and Comedy Partners,
L.P. (50% owned).
A summary of financial information as reported by the equity investees of
Time Warner and TWE on a 100% basis is set forth below:
YEARS ENDED DECEMBER 31,
------------------------------
RESTATED
1994 1993 1992 1992
------ ------ -------- ------
(MILLIONS)
Revenues........................................ $4,444 $3,363 $3,020 $4,102
Operating income................................ 584 450 433 555
Income before extraordinary items and cumulative
effect of a change in accounting principle..... 281 201 162 168
Net income (loss)............................... 256 (135) 207 212
Current assets.................................. 2,113 1,586 1,257 1,473
Total assets.................................... 5,194 4,111 3,277 5,421
Current liabilities............................. 1,136 755 589 951
Long-term debt.................................. 3,730 2,606 1,794 3,022
Total liabilities............................... 5,423 3,992 2,606 4,376
The market value and cost of Time Warner's investment in TBS at December 31,
1994 was $900 million and $527 million, respectively. The sale, transfer or
other disposition of substantially all of the shares of TBS capital stock is
restricted pursuant to shareholder agreements. The TBS securities also may be
considered restricted securities under the Securities Act of 1933 and, if so,
could only be sold pursuant to an effective registration statement or in a
transaction exempt from the registration requirements of the Securities Act of
1933.
F-13
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of:
DECEMBER 31,
--------------
1994 1993
------ ------
(MILLIONS)
9.5% Notes due November 1, 1994(/1/)............................ $ -- $ 125
5.2% Notes due April 15, 1994(/1/).............................. -- 250
6.05% Notes due July 1, 1995.................................... -- 300
7.45% Notes due February 1, 1998................................ 500 500
7.95% Notes due February 1, 2000................................ 500 500
Redeemable reset notes due August 15, 2002 (8.7% yield)......... 1,719 1,572
Zero coupon exchangeable notes due December 17, 2012 (6.25%
yield)......................................................... 547 514
Zero coupon convertible notes due June 22, 2013 (5% yield)...... 970 923
9.125% Debentures due January 15, 2013.......................... 1,000 1,000
8.75% Convertible subordinated debentures due January 10, 2015.. 2,226 2,226
8.75% Debentures due April 1, 2017.............................. 248 248
9.15% Debentures due February 1, 2023........................... 1,000 1,000
Credit agreement debt due to TWE (6.7% interest rate)........... 400 --
Other........................................................... 129 133
------ ------
Subtotal........................................................ 9,239 9,291
Reclassification of debt due to TWE to amounts due to the Enter-
tainment Group................................................. (400) --
------ ------
Total........................................................... $8,839 $9,291
====== ======
--------
(1) Classified as long-term in 1993 because of the intent and ability to
refinance under Time Warner's credit agreement with 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, and used the
proceeds principally to repay its 9.5% notes due November 1, 1994 and its 5.2%
notes due April 15, 1994. 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.
The redeemable reset notes due August 15, 2002 do not pay interest for
periods prior to August 15, 1995, the first redemption date, at which time an
interest rate will be set. The interest rate will be reset on August 15, 1998,
the second redemption date. The notes are redeemable at par on each redemption
date, payable in any combination of cash and debt securities, if Time Warner
elects to redeem the notes, or in any combination of cash or equity or debt
securities of Time Warner or any other entity, as Time Warner will determine,
if the holders elect to have the notes redeemed. Unamortized discount was $82
million and $229 million at December 31, 1994 and 1993, respectively.
The zero coupon notes do not pay interest until maturity. The zero coupon
exchangeable notes due December 17, 2012 are exchangeable at any time by the
holder into 7.301 shares of common stock of Hasbro, Inc. ("Hasbro shares") per
$1,000 principal amount, subject to Time Warner's right to pay in whole or in
part with cash instead of Hasbro shares. Time Warner can elect to redeem the
notes any time after December 17, 1997, and holders can elect to have the notes
redeemed prior thereto in the event of a change of control, at the issue price
plus accrued interest. Holders also can elect to have the notes redeemed at the
issue price plus accrued interest on December 17, 1997, 2002 and 2007, subject
to Time Warner's right to pay in whole or in part with Hasbro shares instead of
cash. Unamortized discount was $1.104 billion and $1.137 billion at December
31, 1994 and 1993, respectively.
F-14
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The zero coupon convertible notes due June 22, 2013 are convertible at any
time by the holders into 18.7 million shares of Time Warner common stock at the
rate of 7.759 shares for each $1,000 principal amount of notes. Time Warner can
elect to redeem the notes any time after June 22, 1998, and holders can elect
to have the notes redeemed prior thereto in the event of a change in control,
at the issue price plus accrued interest. Holders also can elect to have the
notes redeemed at the issue price plus accrued interest on June 22, 1998, 2003
and 2008, subject to Time Warner's right to pay in whole or in part with Time
Warner common stock instead of cash. Unamortized discount was $1.445 billion
and $1.492 billion at December 31, 1994 and 1993, respectively.
$3.125 billion of 8.75% convertible subordinated debentures due January 10,
2015 were issued in exchange for the old Series C preferred stock in April 1993
(Note 7). $900 million of such debentures were redeemed in July 1993. The
$2.226 billion of 8.75% convertible subordinated debentures outstanding at
December 31, 1994 are convertible into 46.6 million shares of Time Warner
common stock at the rate of $47.73 principal amount of indebtedness per common
share and are redeemable at any time, in whole or in part, at Time Warner's
option, at 104.375% of par until January 9, 1996, decreasing ratably each year
thereafter to 100% of par on January 10, 2000.
An after-tax cost of $57 million was incurred in connection with the
redemption of debt in 1993, principally the redemption of $900 million of 8.75%
convertible subordinated debentures and $529 million of WCI senior and
subordinated debentures.
Each Time Warner General Partner has guaranteed a pro rata portion of $7
billion of TWE's debt and accrued interest at December 31, 1994, as more fully
described in Note 2. TWE's credit agreement contains certain restrictive
covenants relating to, among other things, additional indebtedness; cash flow
coverage and leverage ratios; and loans, advances, distributions or other cash
payments or transfers of assets to Time Warner and its subsidiaries.
At December 31, 1994, Time Warner had interest rate swap contracts to pay
floating-rates of interest (average six-month LIBOR rate of 5.9%) and receive
fixed-rates of interest (average rate of 5.5%) on $2.9 billion notional amount
of indebtedness, effectively converting approximately 32% of Time Warner's
underlying debt, substantially all of which is fixed-rate, to a floating-rate
basis. The notional amount of outstanding contracts by year of maturity is as
follows: 1995-$300 million; 1996-$300 million; 1998-$700 million; 1999-$1.2
billion; and 2000-$400 million.
Based on the level of interest rates prevailing at December 31, 1994, the
fair value of Time Warner's fixed-rate debt was $572 million less than its
carrying value and it would have cost $236 million to terminate the related
interest rate swap contracts, which combined is the equivalent of an unrealized
gain of $336 million. Based on the level of interest rates prevailing at
December 31, 1993, the fair value of Time Warner's fixed-rate debt exceeded its
carrying value by $530 million and the Company would have received $4 million
to terminate its interest rate swap contracts, which combined was the
equivalent of an unrealized loss of $526 million. Accounting recognition is not
given to unrealized gains or losses on debt or interest rate swap contracts
unless the debt is retired or the contracts are terminated prior to their
maturity.
Interest expense amounted to $769 million in 1994, $698 million in 1993 and
$729 million in 1992 ($287 million on a restated basis, which was before the
old Series C and D preferred stocks were redeemed with or exchanged for long-
term debt). The weighted average interest rate on Time Warner's total debt,
including the effect of interest rate swap contracts, was 8.1% and 7.6% at
December 31, 1994 and 1993, respectively.
Annual repayments of long-term debt for the five years subsequent to December
31, 1994 consist of $500 million due in 1998. Such repayments exclude the
aggregate repurchase or redemption prices of $1.801 billion in 1995, $656
million in 1997 and $1.151 billion in 1998 relating to the redeemable reset
notes, zero coupon exchangeable notes and zero coupon convertible notes,
respectively, in the years in which the holders of such debt may first exercise
their redemption options.
F-15
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
Domestic and foreign pretax income (loss) are as follows:
YEARS ENDED DECEMBER
31,
-------------------------
RESTATED
1994 1993 1992 1992
---- ---- -------- ----
(MILLIONS)
Domestic............................................. $(78) $(57) $ 83 $ 80
Foreign.............................................. 167 138 240 240
---- ---- ---- ----
Total................................................ $ 89 $ 81 $323 $320
==== ==== ==== ====
Current and deferred income taxes (tax benefits) provided are as follows:
YEARS ENDED DECEMBER
31,
-------------------------
RESTATED
1994 1993 1992 1992
---- ---- -------- ----
(MILLIONS)
Federal:
Current(/1/)....................................... $ 66 $ 45 $ 9 $ 9
Deferred(/2/)...................................... (81) 11 24 21
Foreign:
Current(/3/)....................................... 194 168 159 159
Deferred........................................... (45) (11) 14 14
State and Local:
Current............................................ 79 86 45 45
Deferred........................................... (33) (54) (14) (14)
---- ---- ---- ----
Total................................................ $180 $245 $237 $234
==== ==== ==== ====
--------
(1) Includes utilization of tax carryforwards of $48 million in 1994, $136
million in 1993 and $15 million in 1992. Excludes current tax benefits of
$11 million in 1994 and $14 million in 1993 resulting from the exercise of
stock options and vesting of restricted stock awards, which were credited
directly to paid-in-capital, and $6 million of current tax benefits
resulting from the retirement of debt, which reduced the extraordinary
loss in 1993.
(2) Includes $70 million unusual charge in 1993 to increase deferred tax
liability for increase in tax rate.
(3) Includes foreign withholding taxes of $74 million in 1994, $79 million in
1993 and $57 million in 1992.
The differences between income taxes expected at the U.S. federal statutory
income tax rate and income taxes provided are as set forth below. The
relationship between income before income taxes and income tax expense is most
affected by the amortization of goodwill and certain other financial statement
expenses that are not deductible for income tax purposes and by a $70 million
charge ($.19 per common share) in 1993 to adjust the deferred income tax
liability for the increase in the U.S. federal statutory rate from 34% to 35%
enacted into law that year.
YEARS ENDED DECEMBER
31,
-----------------------
RESTATED
1994 1993 1992 1992
---- ---- -------- ----
(MILLIONS)
Taxes on income at U.S. federal statutory rate.......... $ 31 $ 28 $110 $109
State and local taxes, net.............................. 30 21 20 20
Nondeductible expenses.................................. 107 107 92 90
Charge to increase deferred tax liability
for increase in tax rate............................... -- 70 -- --
Foreign income taxed at different
rates, net of U.S. foreign tax credits................. 1 13 14 14
Other................................................... 11 6 1 1
---- ---- ---- ----
Total................................................... $180 $245 $237 $234
==== ==== ==== ====
F-16
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significant components of Time Warner's net deferred tax liabilities are as
follows:
DECEMBER 31,
-------------
1994 1993
------ ------
(MILLIONS)
Assets acquired in business combinations......................... $2,276 $2,146
Depreciation and amortization.................................... 619 1,026
Unrealized appreciation of certain marketable securities......... 91 142
Other............................................................ 460 460
------ ------
Deferred tax liabilities......................................... 3,446 3,774
------ ------
Tax carryforwards................................................ 264 312
Accrued liabilities.............................................. 206 137
Reserves for doubtful receivables and returns.................... 200 160
Other............................................................ 76 167
------ ------
Deferred tax assets.............................................. 746 776
------ ------
Net deferred tax liabilities..................................... $2,700 $2,998
====== ======
U.S. income and foreign withholding taxes have not been recorded on
permanently reinvested earnings of foreign subsidiaries aggregating
approximately $700 million at December 31, 1994. Determination of the amount of
unrecognized deferred U.S. income tax liability with respect to such earnings
is not practicable. If such earnings are repatriated, additional U.S. income
and foreign withholding taxes are expected to be offset by the accompanying
foreign tax credits.
U.S. federal tax carryforwards at December 31, 1994 consisted of $39 million
of net operating losses that expire from 1997 to 2008, $224 million of
investment tax credits that expire from 1996 to 2008, and $26 million of
alternative minimum tax credits that have no expiration dates. The utilization
of certain carryforwards is subject to limitations under U.S. federal income
tax laws.
7.CAPITAL STOCK
The outstanding capital stock of Time Warner at December 31, 1994 consisted
of 962,068 shares of Series B preferred stock and 379.3 million shares of
common stock (net of 45.7 million shares of common stock in treasury, as to
which 43.7 million were held by the Time Warner General Partners). At January
31, 1995, there were approximately 19,000 holders of record of Time Warner
common stock.
Pursuant to a shareholder rights plan adopted in January 1994, Time Warner
distributed one right per common share which becomes exercisable in certain
events involving the acquisition of 15% or more of Time Warner common stock.
Upon the occurrence of such an event, each right entitles its holder to
purchase for $150 the economic equivalent of common stock of Time Warner, or in
certain circumstances, of the acquiror, worth twice as much. In connection with
the plan, 4 million shares of preferred stock were reserved. The rights expire
on January 20, 2004.
Each share of Series B preferred stock is: (1) entitled to a liquidation
preference of $145, (2) entitled to earn dividends at a rate of 6.4% per annum
of its $145 liquidation value through May 31, 1995 and at a rate of 3% per
annum thereafter, payable quarterly in cash, (3) not entitled to vote, except
in certain circumstances, and (4) redeemable, in whole or in part, (a) by Time
Warner prior to May 31, 1995 in exchange for shares or fractional shares of any
class or series of publicly-traded Time Warner stock ("Public Stock") equal in
value to the liquidation value of the Series B stock and (b) by Time Warner or
the holder on or after May 31, 1995 in exchange for, at Time Warner's option,
cash or shares or fractional shares of Public Stock equal in value to the
liquidation value of the Series B stock plus a premium of 2% of liquidation
value for each year after May 31, 1995 to the redemption date.
F-17
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1993, Time Warner redeemed its old Series D preferred stock for cash and
exchanged its old Series C preferred stock for 8.75% convertible subordinated
debentures due January 10, 2015. The old Series D redemption was financed
principally by the proceeds from the issuance of long-term notes and
debentures.
At December 31, 1994, Time Warner had reserved 143.8 million shares of common
stock for the conversion of the 8.75% convertible subordinated debentures, zero
coupon convertible notes and other convertible securities, and for the exercise
of outstanding options to purchase shares of common stock. Approximately 43
million additional shares will be reserved for the conversion of the new Series
C, D, E and F preferred stocks issuable in the cable acquisitons that are
expected to close in 1995 (Note 3).
8. STOCK OPTION PLANS
Options to purchase Time Warner common stock under various stock option plans
have been granted to employees of Time Warner and 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 under all plans is as follows:
THOUSANDS EXERCISE PRICE
OF SHARES PER SHARE
--------- --------------
Balance at December 31, 1993..................... 72,954 $ 8-48
Granted.......................................... 6,071 32-41
Exercised........................................ (1,262) 8-36
Cancelled........................................ (152) 22-45
------
Balance at December 31, 1994..................... 77,611 $ 8-48
======
At December 31, 1994:
Exercisable.................................... 63,106
Available for future grants.................... 8,849
For options granted to employees of TWE, Time Warner is reimbursed for the
amount by which the market value of Time Warner common stock on the exercise
date exceeds the exercise price, or the greater of the exercise price or $27.75
for options granted prior to the TWE capitalization. There were 30.2 million
options held by employees of TWE at December 31, 1994, 21.3 million of which
were exercisable (Note 2).
There were 4.8 million options exercised in 1993 at prices ranging from $8-
$36 per share, 933,000 options exercised in 1992 at prices ranging from $8-$28
per share, and 57.7 million options exercisable and 4.4 million options
available for grant at December 31, 1993.
9. BENEFIT PLANS
Time Warner and its subsidiaries 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................................ $34 $25 $24 $37
Interest cost............................... 50 45 42 54
Actual return on plan assets................ (2) (52) (34) (44)
Net amortization and deferral............... (45) 10 (9) (13)
--- --- --- ---
Total....................................... $37 $28 $23 $34
=== === === ===
F-18
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The status of funded pension plans is as follows:
DECEMBER
31,
------------
1994 1993
----- -----
(MILLIONS)
Accumulated benefit obligation (89% vested)....................... $ 394 $ 450
Effect of future salary increases................................. 132 134
----- -----
Projected benefit obligation...................................... 526 584
Plan assets at fair value......................................... 495 505
----- -----
Projected benefit obligation in excess of plan assets............. (31) (79)
Unamortized actuarial losses...................................... 49 120
Unamortized plan changes.......................................... (7) (8)
Other............................................................. (8) (9)
----- -----
Prepaid pension asset............................................. $ 3 $ 24
===== =====
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................................. 6% 6% 6%
Employees of Time Warner's operations in foreign countries participate to
varying degrees in local pension plans, which in the aggregate are not
significant.
Time Warner also has an employee stock ownership plan, 401(k) savings plans
and profit sharing plans, as to which the expense was $51 million in 1994, $46
million in 1993 and $57 million ($41 million on a restated basis) in 1992.
Contributions to the 401(k) plans are based upon a percentage of the employees'
elected contributions. Contributions to the employee stock ownership and profit
sharing plans are determined by management and approved by the board of
directors of the participating companies.
10. SEGMENT INFORMATION
Information as to the operations of Time Warner and the Entertainment Group
in different business segments is set forth below:
YEARS ENDED DECEMBER 31,
--------------------------------
RESTATED
1994 1993 1992 1992
------ ------ -------- -------
(MILLIONS)
REVENUES
Time Warner:
Publishing.................................... $3,433 $3,270 $3,123 $ 3,123
Music......................................... 3,986 3,334 3,214 3,214
Entertainment Group........................... -- -- -- 6,761
Intersegment elimination...................... (23) (23) (28) (28)
------ ------ ------ -------
Total......................................... $7,396 $6,581 $6,309 $13,070
====== ====== ====== =======
Entertainment Group:
Filmed Entertainment.......................... $5,041 $4,565 $3,945 $ 3,455
Programming-HBO............................... 1,513 1,441 1,444 1,444
Cable......................................... 2,242 2,208 2,091 2,091
Intersegment elimination...................... (287) (251) (229) (229)
------ ------ ------ -------
Total......................................... $8,509 $7,963 $7,251 $ 6,761
====== ====== ====== =======
F-19
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31,
-------------------------
RESTATED
1994 1993 1992 1992
---- ---- -------- ------
(MILLIONS)
OPERATING INCOME
Time Warner:
Publishing........................................... $347 $295 $254 $ 254
Music................................................ 366 296 275 275
Entertainment Group.................................. -- -- -- 814
---- ---- ---- ------
Total................................................ $713 $591 $529 $1,343
==== ==== ==== ======
Entertainment Group:
Filmed Entertainment................................. $275 $286 $254 $ 213
Programming-HBO...................................... 237 213 201 201
Cable................................................ 340 406 400 400
---- ---- ---- ------
Total................................................ $852 $905 $855 $ 814
==== ==== ==== ======
YEARS ENDED DECEMBER 31,
-------------------------
RESTATED
1994 1993 1992 1992
---- ---- -------- ------
(MILLIONS)
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Time Warner:
Publishing........................................... $ 47 $ 45 $ 42 $ 42
Music................................................ 86 87 79 79
Entertainment Group.................................. -- -- -- 371
---- ---- ---- ------
Total................................................ $133 $132 $121 $ 492
==== ==== ==== ======
Entertainment Group:
Filmed Entertainment................................. $127 $ 92 $ 81 $ 42
Programming-HBO...................................... 14 14 13 13
Cable................................................ 340 327 316 316
---- ---- ---- ------
Total................................................ $481 $433 $410 $ 371
==== ==== ==== ======
YEARS ENDED DECEMBER 31,
-------------------------
RESTATED
1994 1993 1992 1992
---- ---- -------- ------
(MILLIONS)
AMORTIZATION OF INTANGIBLE ASSETS(/1/)
Time Warner:
Publishing........................................... $ 36 $ 32 $ 32 $ 32
Music................................................ 268 260 231 231
Entertainment Group.................................. -- -- -- 417
---- ---- ---- ------
Total................................................ $304 $292 $263 $ 680
==== ==== ==== ======
Entertainment Group:
Filmed Entertainment................................. $163 $171 $185 $ 155
Programming-HBO...................................... 6 3 1 1
Cable................................................ 309 302 261 261
---- ---- ---- ------
Total................................................ $478 $476 $447 $ 417
==== ==== ==== ======
--------
(1) Amortization includes all amortization relating to the acquisition of WCI
in 1989, the acquisition of the minority interest in American Television
and Communications Corporation ("ATC") in 1992 and other business
combinations accounted for by the purchase method.
F-20
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Information as to the assets and capital expenditures of Time Warner and the
Entertainment Group is as follows:
DECEMBER 31,
--------------------------------
RESTATED
1994 1993 1992 1992
------- ------- -------- -------
(MILLIONS)
ASSETS
Time Warner:
Publishing.................................... $ 2,013 $ 1,897 $ 1,886 $ 1,886
Music......................................... 7,672 7,401 7,418 7,418
Entertainment Group(/1/)...................... 5,350 5,627 5,392 15,715
Corporate(/2/)................................ 1,681 1,967 2,347 2,347
------- ------- ------- -------
Total......................................... $16,716 $16,892 $17,043 $27,366
======= ======= ======= =======
Entertainment Group:
Filmed Entertainment.......................... $ 7,998 $ 7,567 $ 7,381 $ 6,502
Programming-HBO............................... 911 875 936 936
Cable......................................... 8,303 8,102 8,146 8,146
Corporate(/2/)................................ 1,780 1,658 270 302
------- ------- ------- -------
Total......................................... $18,992 $18,202 $16,733 $15,886
======= ======= ======= =======
--------
(1) At December 31, 1992 on an historical basis, Entertainment Group assets
represent total assets of the Entertainment Group, less certain assets
related to transactions with other Time Warner companies. Entertainment
Group assets for all other periods presented represent Time Warner's
investment in and amounts due to and from the Entertainment Group.
(2) Consists principally of cash and investments.
YEARS ENDED DECEMBER 31,
--------------------------------
RESTATED
1994 1993 1992 1992
------- ------- -------- -------
(MILLIONS)
CAPITAL EXPENDITURES
Time Warner:
Publishing.................................... $ 50 $ 41 $ 40 $ 40
Music......................................... 108 91 124 124
Entertainment Group........................... -- -- -- 402
Corporate..................................... 6 66 8 8
------- ------- ------- -------
Total......................................... $ 164 $ 198 $ 172 $ 574
======= ======= ======= =======
Entertainment Group:
Filmed Entertainment.......................... $ 441 $ 244 $ 122 $ 101
Programming-HBO............................... 14 16 28 28
Cable(/1/).................................... 778 353 273 273
Corporate..................................... 2 -- -- --
------- ------- ------- -------
Total......................................... $ 1,235 $ 613 $ 423 $ 402
======= ======= ======= =======
--------
(1)The 1994 increase was funded in part through $234 million of collections on
the U S WEST Note (Note 2).
F-21
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Information as to Time Warner's operations in different geographical areas
is as follows:
YEARS ENDED DECEMBER 31,
--------------------------------
RESTATED
1994 1993 1992 1992
------- ------- -------- -------
(MILLIONS)
REVENUES
United States(/1/)............................. $ 4,944 $ 4,414 $ 4,220 $10,981
Europe......................................... 1,445 1,296 1,411 1,411
Pacific Rim.................................... 724 583 430 430
Rest of World.................................. 283 288 248 248
------- ------- ------- -------
Total.......................................... $ 7,396 $ 6,581 $ 6,309 $13,070
======= ======= ======= =======
OPERATING INCOME
United States.................................. $ 494 $ 436 $ 311 $ 1,143
Europe......................................... 108 102 155 140
Pacific Rim.................................... 74 28 32 31
Rest of World.................................. 37 25 31 29
------- ------- ------- -------
Total.......................................... $ 713 $ 591 $ 529 $ 1,343
======= ======= ======= =======
ASSETS
United States.................................. $13,961 $14,328 $14,581 $24,878
Europe......................................... 1,717 1,635 1,608 1,626
Pacific Rim.................................... 636 514 498 502
Rest of World.................................. 402 415 356 360
------- ------- ------- -------
Total.......................................... $16,716 $16,892 $17,043 $27,366
======= ======= ======= =======
--------
(1) Time Warner's revenues in 1994, 1993 and on a restated basis in 1992 do
not include the revenues of the Entertainment Group, which had export
revenues of $1.693 billion in 1994, $1.650 billion in 1993 and $1.379
billion in 1992, principally from the sale of Filmed Entertainment
products abroad.
11.COMMITMENTS AND CONTINGENCIES
Total rent expense amounted to $157 million in 1994, $163 million in 1993
and $258 million ($159 million on a restated basis) in 1992. The minimum
rental commitments under noncancellable long-term operating leases are: 1995-
$137 million; 1996-$126 million; 1997-$115 million; 1998-$123 million; 1999-
$118 million and after 1999-$998 million.
Minimum commitments and guarantees under certain licensing, artists and
other agreements aggregated approximately $2 billion at December 31, 1994,
which are payable principally over a seven-year period. Such amounts do not
include the Time Warner General Partner guarantees of approximately $7 billion
of TWE debt.
Pending legal proceedings are substantially limited to litigation incidental
to the businesses of Time Warner and alleged damages in connection with class
action lawsuits. In the opinion of counsel and management, the ultimate
resolution of these matters will not have a material effect on the financial
statements of Time Warner.
F-22
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12.ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash flows is as follows:
YEARS ENDED DECEMBER 31,
---------------------------
RESTATED
1994 1993 1992 1992
---- ------ -------- ------
(MILLIONS)
Cash payments made for interest..................... $539 $ 330 $ 260 $ 651
Cash payments made for income taxes................. 389 234 207 247
Tax-related distributions received from TWE......... 115 -- -- --
Income tax refunds received......................... 50 52 42 44
Borrowings.......................................... 582 4,714 1,349 8,026
Repayments.......................................... 626 1,599 1,391 8,006
Noncash Series D dividends declared................. -- -- 337 337
During the year ended December 31, 1994, Time Warner realized $179 million
from the securitization of receivables. On April 1, 1993, Time Warner issued
$3.125 billion of debentures in a noncash exchange for the old Series C
preferred stock (Notes 5 and 7).
The principal balance sheet effects of the deconsolidation of the
Entertainment Group in 1993 were to decrease cash and equivalents by $36
million, receivables by $1.060 billion, inventories by $2.632 billion,
investments by $690 million, property, plant and equipment by $2.548 billion,
cable television franchises by $3.660 billion, goodwill by $4.356 billion,
other assets by $733 million, debt by $7.178 billion, minority interests by
$961 million and other liabilities by $2.184 billion, and to increase the
investments in and amounts due to and from the Entertainment Group by $5.392
billion. The principal balance sheet effects of the acquisition of the ATC
minority interest in 1992 were to increase investments by $156 million, cable
television franchise costs by $865 million, goodwill by $410 million, deferred
income taxes by $299 million and long-term debt by $1.312 billion, and to
eliminate the ATC minority interest of $180 million. On a restated basis, the
investments in and amounts due to and from the Entertainment Group were
increased $1.431 billion.
Investment proceeds in 1992 on a restated basis include $875 million from the
collection of a note receivable from TWE. 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.................................................. $ 875 $ 716
Accrued compensation.............................................. 308 228
Deferred revenues................................................. 55 62
------ ------
Total............................................................. $1,238 $1,006
====== ======
F-23
REPORT OF MANAGEMENT
The accompanying consolidated financial statements have been prepared by
management in conformity with generally accepted accounting principles, and
necessarily include some amounts that are based on management's best estimates
and judgments.
Time Warner maintains a system of internal accounting controls designed to
provide management with reasonable assurance that assets are safeguarded
against loss from unauthorized use or disposition, and that transactions are
executed in accordance with management's authorization and recorded properly.
The concept of reasonable assurance is based on the recognition that the cost
of a system of internal control should not exceed the benefits derived and that
the evaluation of those factors requires estimates and judgments by management.
Further, because of inherent limitations in any system of internal accounting
control, errors or irregularities may occur and not be detected. Nevertheless,
management believes that a high level of internal control is maintained by Time
Warner through the selection and training of qualified personnel, the
establishment and communication of accounting and business policies, and its
internal audit program.
The Audit Committee of the Board of Directors, composed solely of directors
who are not employees of Time Warner, meets periodically with management and
with Time Warner's internal auditors and independent auditors to review matters
relating to the quality of financial reporting and internal accounting control,
and the nature, extent and results of their audits. Time Warner's internal
auditors and independent auditors have free access to the Audit Committee.
Gerald M. Levin Richard D. Parsons Richard J. Bressler
Chairman and President Senior Vice President
Chief Executive Officer and Chief Financial Officer
F-24
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
TIME WARNER INC.
We have audited the accompanying consolidated balance sheet of Time Warner Inc.
("Time Warner") as of December 31, 1994 and 1993, and the related consolidated
statements of operations, cash flows and shareholders' equity for each of the
three years in the period ended December 31, 1994. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of Time Warner's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 Time Warner 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. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Ernst & Young LLP
New York, New York
February 7, 1995
F-25
TIME WARNER INC.
SELECTED FINANCIAL INFORMATION
The selected financial information for each of the five years in the period
ended December 31, 1994 set forth below has been derived from and should be
read in conjunction with the financial statements and other financial
information presented elsewhere herein. The selected historical financial
information for 1994 and 1993 reflects the deconsolidation of the
Entertainment Group, principally TWE, effective January 1, 1993. The selected
historical financial information for periods prior to such date have not been
changed; however, selected financial information for 1992 retroactively
reflecting the deconsolidation is presented as supplementary information under
the column heading "restated" to facilitate comparative analysis.
The selected historical financial information for 1993 reflects the issuance
of $6.1 billion of long-term debt and the use of $.5 billion of cash and
equivalents in 1993 for the exchange or redemption of preferred stock having
an aggregate liquidation preference of $6.4 billion. The selected historical
financial information for 1992 reflects the capitalization of TWE on June 30,
1992 and associated refinancings, and the acquisition of the 18.7% minority
interest in ATC as of June 30, 1992, using the purchase method of accounting
for business combinations.
Per common share amounts and average common shares have been restated to
give effect to the four-for-one common stock split that occurred on September
10, 1992.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
RESTATED
SELECTED OPERATING 1994 1993 1992 1992 1991 1990
STATEMENT INFORMATION ------- ------- -------- ------- ------- -------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues................. $ 7,396 $ 6,581 $ 6,309 $13,070 $12,021 $11,517
Depreciation and amorti-
zation.................. 437 424 384 1,172 1,109 1,138
Business segment operat-
ing income.............. 713 591 529 1,343 1,154 1,114
Equity in pretax income
of Entertainment Group.. 176 281 226 -- -- --
Interest and other, net.. 724 718 351 882 966 1,133
Net income (loss) (a)(b). (91) (221) 86 86 (99) (227)
Net loss applicable to
common shares (after
preferred dividends).... (104) (339) (542) (542) (692) (786)
Per share of common
stock:
Net loss (a)(b)......... $ (0.27) $ (0.90) $ (1.46) $ (1.46) $ (2.40) $ (3.42)
Dividends............... $ 0.35 $ 0.31 $ 0.265 $ 0.265 $ 0.25 $ 0.25
Average common shares
(b)..................... 378.9 374.7 371.0 371.0 288.2 229.9
SELECTED BALANCE SHEET
INFORMATION
Investments in and
amounts due to
and from Entertainment
Group................... $ 5,350 $ 5,627 $ 5,392 $ -- $ -- $ --
Total assets............. 16,716 16,892 17,043 27,366 24,889 25,337
Long-term debt........... 8,839 9,291 2,897 10,068 8,716 11,184
Shareholders' equity:
Preferred stock liquida-
tion preference........ 140 140 6,532 6,532 6,256 5,954
Equity applicable to
common stock........... 1,008 1,230 1,635 1,635 2,242 360
Total shareholders' eq-
uity................... 1,148 1,370 8,167 8,167 8,498 6,314
Total capitalization
(long-term debt plus
shareholders' equity)... 9,987 10,661 11,064 18,235 17,214 17,498
--------
(a) The net loss for the year ended December 31, 1993 includes an
extraordinary loss on the retirement of debt of $57 million ($.15 per
common share) and an unusual charge of $70 million ($.19 per common share)
from the effect of the new income tax law on Time Warner's deferred income
tax liability. The net loss for the year ended December 31, 1991 includes
a $36 million after-tax charge ($.12 per common share) relating to the
restructuring of the Publishing division.
(b) In August 1991, Time Warner completed the sale of 137.9 million shares of
common stock pursuant to a rights offering. Net proceeds of $2.558 billion
from the rights offering were used to reduce indebtedness under Time
Warner's bank credit agreement. If the rights offering had been completed
at the beginning of 1991, net loss for the year would have been reduced to
$33 million, or $1.70 per common share, and there would have been 369.3
million shares of common stock outstanding during the year.
F-26
TIME WARNER INC.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
EQUITY IN
PRETAX NET
OPERATING INCOME INCOME (LOSS) NET INCOME DIVIDENDS COMMON
INCOME OF (LOSS) OF APPLICABLE (LOSS) PER PER AVERAGE STOCK
BUSINESS ENTERTAINMENT NET INCOME TO COMMON COMMON COMMON COMMON ------------
QUARTER REVENUES SEGMENTS GROUP (LOSS) SHARES(B) SHARE(B) SHARE SHARES HIGH LOW
-------- -------- --------- ------------- ---------- ------------ ---------- --------- ------- ---- ----
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
1994
1st $1,558 $112 $ 45 $(51) $ (54) $(0.14) $0.08 378.6 $44 1/4 $36 5/8
2nd 1,667 170 66 (20) (23) (0.06) 0.09 378.8 40 5/8 34 1/2
3rd 1,884 141 66 (32) (35) (0.09) 0.09 379.1 38 3/4 34
4th 2,287 290 (1) 12 8 0.02 0.09 379.2 37 3/4 31 1/2
Year 7,396 713 176 (91) (104) (0.27) 0.35 378.9 44 1/4 31 1/2
1993
1st $1,519 $112 $108 $(15) $(124) $(0.33) $0.07 372.5 $37 1/4 $28 3/4
2nd (a) 1,567 135 53 (80) (83) (0.22) 0.08 373.8 39 5/8 30 5/8
3rd (a) 1,535 91 118 (133) (136) (0.36) 0.08 375.2 43 5/8 37 1/4
4th 1,960 253 2 7 4 0.01 0.08 377.2 46 7/8 40 1/4
Year (a) 6,581 591 281 (221) (339) (0.90) 0.31 374.7 46 7/8 28 3/4
--------
(a) The net loss for the second quarter of 1993 includes an extraordinary loss
on the retirement of debt of $35 million ($.09 per common share). The net
loss for the third quarter of 1993 includes an extraordinary loss on the
retirement of debt of $22 million ($.06 per common share) and an unusual
charge of $70 million ($.19 per common share) due to the effect of the new
income tax law on Time Warner's deferred income tax liability.
(b) After preferred dividend requirements.
F-27
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
1994 VS. 1993
Time Warner had revenues of $7.396 billion and a net loss of $91 million
($.27 per common share) in 1994, compared to revenues of $6.581 billion and a
net loss of $221 million ($.90 per common share) in 1993. Included in the 1993
results is an extraordinary loss on the retirement of debt of $57 million ($.15
per common share) and a one-time tax charge of $70 million ($.19 per common
share) that resulted from the effect on the Company's deferred income tax
liability of the increase in the corporate income tax rate enacted in August
1993.
Operating income and EBITDA for Time Warner and the Entertainment Group in
1994 and 1993 were as follows:
YEARS ENDED DECEMBER 31,
-------------------------------
OPERATING INCOME EBITDA
----------------- -------------
1994 1993 1994 1993
-------- -------- ------ ------
(MILLIONS)
Time Warner:
Publishing...................................... $ 347 $ 295 $ 430 $ 372
Music........................................... 366 296 720 643
-------- -------- ------ ------
Total........................................... $ 713 $ 591 $1,150 $1,015
======== ======== ====== ======
Entertainment Group:
Filmed Entertainment............................ $ 275 $ 286 $ 565 $ 549
Programming--HBO................................ 237 213 257 230
Cable........................................... 340 406 989 1,035
-------- -------- ------ ------
Total........................................... $ 852 $ 905 $1,811 $1,814
======== ======== ====== ======
Time Warner's equity in the pretax income of the Entertainment Group was $176
million in 1994, compared to $281 million in 1993. During the first quarter of
1993, the Entertainment Group had a one-time gain from the sale of certain
assets that was substantially offset by investment reserves included in Time
Warner's other expenses.
The relationship between income before income taxes and income tax expense of
Time Warner is principally affected by the amortization of goodwill and certain
other financial statement expenses that are not deductible for income tax
purposes, and by the one-time tax charge in 1993. Income tax expense of Time
Warner includes all income taxes related to its allocable share of partnership
income and its equity in the income tax expense of corporate subsidiaries of
the Entertainment Group.
Certain factors affecting comparative operating results are discussed below
on a business segment basis. That discussion includes, among other factors, an
analysis of changes in the operating income of the business segments before
depreciation and amortization ("EBITDA") in order to eliminate the effect on
the operating performance of the music, filmed entertainment and cable
businesses of significant amounts of amortization of intangible assets
recognized in the $14 billion acquisition of WCI in 1989, the $1.3 billion
acquisition of the ATC minority interest in 1992 and other business
combinations accounted for by the purchase method. Financial analysts generally
consider EBITDA to be an important measure of comparative operating performance
for the businesses of Time Warner and the Entertainment Group, and when used in
comparison to debt levels or the coverage of interest expense, as a measure of
liquidity. However, EBITDA should be considered in addition to, not as a
substitute for, operating income, net income, cash flow and other measures of
financial performance and liquidity reported in accordance with generally
accepted accounting principles.
F-28
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
TIME WARNER
Publishing. Revenues increased to $3.433 billion, compared to $3.270 billion
in 1993. Operating income increased to $347 million from $295 million.
Depreciation and amortization amounted to $83 million in 1994 and $77 million
in 1993. EBITDA increased to $430 million from $372 million. Revenues benefited
principally from increases in magazine advertising and circulation revenues,
which were aided in part by several special issues during 1994. Significant
revenue gains were achieved by People, Sports Illustrated and Southern Living.
Operating income, EBITDA and operating margins improved principally as a result
of the revenue gains and continued cost containment.
Music. Revenues increased to $3.986 billion, compared to $3.334 billion in
1994. Operating income increased to $366 million from $296 million.
Depreciation and amortization, including amortization related to the purchase
of WCI, amounted to $354 million in 1994 and $347 million in 1993. EBITDA
increased to $720 million from $643 million. The revenue growth resulted from
increases in both domestic and international recorded music revenues, which
benefited from a number of popular releases during the year and an increase in
the percentage of compact disc to total unit sales, and increased music
publishing revenues. Operating income and EBITDA benefited from these revenue
gains and increased results from direct marketing activities attributable to
new members and lower amortization of member acquisition costs, offset in part
by costs associated with the reorganization of the domestic music companies and
continuing investment in new business ventures.
Interest and Other, Net. Interest and other, net, increased to $724 million
in 1994, compared to $718 million in 1993. Interest expense increased to $769
million from $698 million as a result of a full twelve months of interest on
the debt issued during the first three months of 1993 to redeem or exchange
preferred stock, offset in part by savings from lower-cost debt used to fund
the redemption of certain notes and debentures in 1993. There was other income,
net, of $45 million in 1994, compared to other expense, net, of $20 million in
1993, principally because of an increase in investment-related income,
including an increase in the amortization of the excess of the Time Warner
General Partners' interest in the net assets of TWE over the net book value of
their investment in TWE to reflect U S WEST as a partner for a full year.
Investment-related income was reduced in part in both years by adjustments to
the carrying value of certain investments, expenses in connection with the
settlement of certain employment contracts and losses on foreign exchange
contracts used to hedge foreign exchange risk.
ENTERTAINMENT GROUP
Filmed Entertainment. Revenues increased to $5.041 billion, compared to
$4.565 billion in 1993. Operating income decreased to $275 million from $286
million. Depreciation and amortization, including amortization related to the
purchase of WCI, amounted to $290 million in 1994 and $263 million in 1993.
EBITDA increased to $565 million from $549 million. Worldwide home video,
syndication and consumer products revenues increased at Warner Bros., offset in
part by lower worldwide theatrical revenues. Revenues at Six Flags increased as
a result of overall attendance growth and higher revenues per visitor.
Operating income and EBITDA margins decreased principally as a result of lower
theatrical results in comparison to the exceptionally strong theatrical results
in 1993.
Programming--HBO. Revenues increased to $1.513 billion, compared to $1.441
billion in 1993. Operating income increased to $237 million from $213 million.
Depreciation and amortization amounted to $20 million in 1994 and $17 million
in 1993. EBITDA increased to $257 million from $230 million. Revenues benefited
from an increase in subscribers and higher pay-TV rates. Operating income,
EBITDA and operating margins improved principally as a result of the revenue
gains.
F-29
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
Cable. Revenues increased to $2.242 billion, compared to $2.208 billion in
1993. Operating income decreased to $340 million from $406 million.
Depreciation and amortization, including amortization related to the purchase
of WCI and the acquisition of the ATC minority interest, amounted to $649
million in 1994 and $629 million in 1993. EBITDA decreased to $989 million from
$1.035 billion. Revenues and operating results in 1994 were adversely affected
by two rounds of cable rate regulation that in general reduced the rates cable
operators are allowed to charge for regulated services, the first of which went
into effect in September 1993 and the second of which went into effect in July
1994. The unfavorable effects of rate regulation were offset in part by an
increase in subscribers and nonregulated revenues. Actions that were undertaken
to mitigate the impact of rate regulation included a number of cost containment
measures and a continued emphasis on near and long-term strategies to increase
revenues from unregulated services.
Interest and Other, Net. Interest and other, net, increased to $616 million
in 1994, compared to $564 million in 1993. Interest expense decreased to $567
million, compared with $580 million in 1993. There was other expense, net, of
$49 million in 1994, compared to other income, net, of $16 million in 1993.
Investment-related and foreign currency contract losses in 1994 exceeded an
increase in interest income on higher cash balances and the interest-bearing
note receivable from U S WEST. A gain on the sale of certain assets and other
investment-related income exceeded investment losses in 1993.
1993 VS. 1992
Time Warner had 1993 revenues of $6.581 billion, a loss of $94 million ($.56
per common share) before a one-time tax charge and an extraordinary loss, and a
net loss of $221 million ($.90 per common share), compared to 1992 revenues of
$13.070 billion ($6.309 billion on a restated basis) and net income of $86
million (a loss of $1.46 per common share after preferred dividends). The one-
time tax charge of $70 million ($.19 per common share) resulted from the effect
on the company's deferred income tax liability of the increase in the corporate
income tax rate enacted in August 1993; the extraordinary loss of $57 million
($.15 per common share) resulted from the retirement of debt in 1993. The
improvement in per share results in 1993 includes the after-tax benefits of
replacing preferred stock with debt in the first quarter. Preferred dividends
were $118 million in 1993, compared to $628 million in 1992.
Operating income and EBITDA for Time Warner and the Entertainment Group in
1993 and 1992 were as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------------
OPERATING INCOME EBITDA
-------------------- ----------------------
RESTATED RESTATED
1993 1992 1992 1993 1992 1992
---- -------- ------ ------ -------- ------
(MILLIONS)
Time Warner:
Publishing.......................... $295 $254 $ 254 $ 372 $ 328 $ 328
Music............................... 296 275 275 643 585 585
Entertainment Group................. -- -- 814 -- -- 1,602
---- ---- ------ ------ ------ ------
Total............................... $591 $529 $1,343 $1,015 $ 913 $2,515
==== ==== ====== ====== ====== ======
Entertainment Group:
Filmed Entertainment................ $286 $254 $ 213 $ 549 $ 520 $ 410
Programming-HBO..................... 213 201 201 230 215 215
Cable............................... 406 400 400 1,035 977 977
---- ---- ------ ------ ------ ------
Total............................... $905 $855 $ 814 $1,814 $1,712 $1,602
==== ==== ====== ====== ====== ======
F-30
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
Time Warner's equity in the pretax income of the Entertainment Group was $281
million in 1993, compared to $226 million on a restated basis in 1992. The
Entertainment Group had a one-time gain from the sale of certain assets in
1993.
TIME WARNER
Publishing. Revenues increased to $3.270 billion compared to $3.123 billion
in 1992. Operating income increased to $295 million from $254 million.
Depreciation and amortization amounted to $77 million in 1993 and $74 million
in 1992. EBITDA increased to $372 million from $328 million. Revenues benefited
from increased magazine circulation revenues, higher book publishing revenues
and the full year impact of the 1992 Leisure Arts acquisition. Magazine
circulation revenues reflected higher overall subscription and newsstand sales,
led by People, Time and Entertainment Weekly, as well as increases at American
Family Publishers, the subscription agency. Despite a difficult market,
advertising revenues were nearly flat. Operating income and EBITDA increased as
a result of the revenue gains and improved operating margins achieved through
continued cost savings.
Music. Revenues increased to $3.334 billion compared to $3.214 billion in
1992. Operating income increased to $296 million from $275 million.
Depreciation and amortization, including amortization related to the purchase
of WCI, amounted to $347 million in 1993 and $310 million in 1992. EBITDA
increased to $643 million from $585 million. The revenue gains primarily
reflected an increase in domestic recorded music sales and Warner/Chappell
Music Publishing revenues. An increase in unit volume was achieved
internationally, principally because of an increase in Pacific Rim sales.
International dollar-denominated revenues did not increase, however, because of
exchange rate fluctuations. Overall, revenues benefited from a broad range of
popular releases from both new and established artists, increased unit sales of
compact discs and higher average unit selling prices. Operating income and
EBITDA increased principally as a result of the revenue gains and improved
margins, offset in part by start-up costs for new business ventures.
Interest and Other, Net. Interest and other, net, decreased to $718 million
in 1993 compared to $882 million ($351 million on a restated basis) in 1992.
Interest expense decreased to $698 million compared to $729 million ($287
million on a restated basis) in 1992. The decrease in interest and other, net,
on an historical basis resulted primarily from the exclusion in 1993 of the
expenses of the Entertainment Group, which was deconsolidated in 1993, offset
in part by an increase in interest expense from higher debt levels associated
with the redemption and exchange of preferred stock. Other expenses, net, in
1993 included reductions in the carrying value of certain investments offset by
investment-related income. Other expenses, net, in 1992 included an expense in
connection with the settlement of senior management employment contracts, ATC
minority interest expense and litigation-related costs.
ENTERTAINMENT GROUP
Filmed Entertainment. Revenues increased to $4.565 billion compared to $3.455
billion ($3.945 billion on a restated basis) in 1992. Operating income
increased to $286 million from $213 million ($254 million on a restated basis).
Depreciation and amortization, including amortization related to the purchase
of WCI, amounted to $263 million in 1993 and $197 million ($266 million on a
restated basis) in 1992. EBITDA increased to $549 million from $410 million
($520 million on a restated basis). The increase in revenues, operating income
and EBITDA on an historical basis resulted primarily from the inclusion in 1993
of the operating results of Six Flags, which previously had been accounted for
using the equity method. Revenues at Warner Bros. increased during the period
primarily due to increases in international theatrical, international
syndication and domestic home video revenues, as well as increased revenues
from retail
F-31
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
operations. Record international revenues of $1.650 billion would have been
greater but for unfavorable exchange rate fluctuations. Warner Bros. ranked
number one at both the domestic and international box office in 1993, led by
the success of The Fugitive and The Bodyguard. Revenues at Six Flags increased,
benefiting from higher revenues per visitor. Operating income and EBITDA
benefited from the revenue gains.
Programming--HBO. Revenues decreased to $1.441 billion compared to $1.444
billion in 1992. Operating income increased to $213 million from $201 million.
Depreciation and amortization amounted to $17 million in 1993 and $14 million
in 1992. EBITDA increased to $230 million from $215 million. The decrease in
revenues reflects lower HBO Video sales, which in 1992 were favorably affected
by a children's sell-thru title, offset in part by higher subscriber revenues,
principally as a result of higher pay-TV rates at HBO and an increase in
subscribers. Operating income and EBITDA benefited primarily from improved
results from new businesses, including Time Warner Sports and the Comedy
Central joint venture.
Cable. Revenues increased to $2.208 billion compared to $2.091 billion in
1992. Operating income increased to $406 million from $400 million.
Depreciation and amortization, including amortization related to the purchase
of WCI and the acquisition of the ATC minority interest, amounted to $629
million in 1993 and $577 million in 1992. EBITDA increased to $1.035 billion
from $977 million. Revenues increased principally as a result of growth in the
number of cable subscribers and increases in advertising sales and pay-per-
view. The increase in subscribers accounted for approximately three quarters of
the revenue increase. Operating income and EBITDA benefited from the revenue
gains and increased income from cable joint ventures, but was negatively
affected in the fourth quarter by the first round of cable rate regulation,
which went into effect on September 1, 1993.
Interest and Other, Net. Interest and other, net, increased to $564 million
in 1993 compared to $531 million ($569 million on a restated basis) in 1992.
Interest expense increased to $580 million compared to $442 million ($491
million on a restated basis) in 1992. The increase in interest expense resulted
primarily from the higher average debt levels attributable to the TWE
capitalization, the higher interest cost of the TWE notes and debentures issued
to refinance TWE bank debt, and the consolidation of Six Flags' interest
expense in 1993. Other income, net, in 1993 included gains on the sale of
certain assets partially offset by losses from and reductions in the carrying
value of certain investments. Other expenses, net, on a restated basis in 1992
is principally attributable to losses on certain investments and litigation-
related costs.
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1994
TIME WARNER
Despite the $14 billion of debt incurred as a result of the 1989 acquisition
of Warner Communications, Time Warner continues to be able to finance growth
and expansion in critical areas. In the last three years alone, the Company on
a combined basis (Time Warner and the Entertainment Group together) spent in
excess of $1.4 billion making new investments and acquisitions and $2.8 billion
on capital expenditures. Significant year-to-year improvements in EBITDA and
the $14 billion refinancing of higher cost debt and preferred stocks during
1992 and 1993, which was aided by favorable conditions in the credit markets
and the investment in TWE by ITOCHU, Toshiba and U S WEST, have enabled the
Company to finance this level of investment while at the same time improving
its leverage and coverage ratios.
A commonly-used leverage ratio is total debt, less cash ("Net debt") to total
business segment EBITDA, less corporate expenses ("Adjusted EBITDA"). A
commonly-used coverage ratio is Adjusted EBITDA to total interest expense and
preferred dividends. Those ratios for 1994 and 1993 were as set forth below for
F-32
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
both Time Warner and Time Warner and the Entertainment Group combined. Certain
rating agencies and other credit analysts place more emphasis on the combined
ratios while others place more emphasis on the Time Warner stand-alone ratios.
It should be understood, however, that the assets of the Entertainment Group
are not freely available to meet the cash needs of Time Warner.
1994 1993
----- -----
Time Warner
Net debt/Adjusted EBITDA.......................................... 8.30x 9.78x
Adjusted EBITDA/Interest and preferred dividends.................. 1.37x 1.15x
Time Warner and Entertainment Group combined
Net debt/Adjusted EBITDA.......................................... 5.32x 5.57x
Adjusted EBITDA/Interest and preferred dividends.................. 2.09x 1.93x
Time Warner had $9.2 billion of debt, $282 million of cash and equivalents
(net debt of $8.9 billion), and $1.1 billion of equity at December 31, 1994,
compared to $9.4 billion of debt, $200 million of cash and equivalents (net
debt of $9.2 billion), and $1.4 billion of equity at December 31, 1993. On a
combined basis, there was $15 billion of net debt at both the beginning and end
of the year.
During the latter half of 1994 and continuing into 1995, the Company
announced that it will significantly expand its reach in cable television by
acquiring Summit, KBLCOM and CVI and related companies, which together own
systems serving approximately 2.2 million basic cable subscribers and a 50%
partnership interest in Paragon (with TWE as the other partner), which owns
systems serving approximately 967,000 basic cable subscribers. Time Warner will
issue 4.4 million shares of common stock and approximately $2.1 billion
liquidation value of new 3.75% convertible preferred stocks, and assume or
incur approximately $3.4 billion of debt to acquire these companies. In
addition, subsidiaries of Advance and Newhouse will contribute cable television
systems that serve approximately 1.4 million basic cable subscribers to a joint
venture in which TWE will have a two-thirds interest. In accordance with the
TWE-Advance/Newhouse joint venture agreement, certain of Time Warner's newly-
acquired cable systems may be transferred on a tax-efficient basis to the TWE-
Advance/Newhouse Partnership. Such transfers, if they are made, are expected to
be structured on a leveraged basis.
The new preferred stocks that are to be issued in the cable transactions will
initially have annual dividends totalling $78 million and generally will be
convertible immediately or exchangeable after four or five years into
approximately 43 million shares of Time Warner common stock at an effective
conversion price of $48 of liquidation value per common share. New or revised
bank credit facilities will be required for Time Warner, TWE and the TWE-
Advance/Newhouse Partnership as a result of these transactions, which
management feels will be obtained at a reasonable cost. Upon consummation of
the transactions, which are subject to customary franchise and regulatory
approvals, the total number of cable subscribers under the management of Time
Warner Cable is expected to increase to approximately 11.5 million, compared to
7.5 million at the end of 1994.
The Company also has announced its intention to enhance its financial
position and that of the Entertainment Group through sales of non-core assets,
such as the TBS stock owned by Time Warner, certain investments owned by the
Entertainment Group or certain, smaller unclustered cable systems owned by Time
Warner or the Entertainment Group. Proceeds from asset sales will be used to
reduce debt. The Entertainment Group's interest in QVC, Inc. was sold in
February 1995 to a group that had tendered for all of that company's capital
stock. Approximately $200 million of proceeds will be used to reduce debt.
F-33
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
The Company does not expect its leverage and coverage ratios to deteriorate
as a result of the cable acquisitions and asset dispositions. In the first full
year after the cable transactions are completed, operating results are expected
to be negatively impacted by approximately $.40 to $.45 per common share,
principally as a result of the non cash amortization of the intangible assets
that will be recognized in the allocation of the purchase price. Asset sales
are expected to result in one-time gains.
Because of the announced transactions, the Company will explore the
possibility of bringing its various interests in cable operations together in a
separate, self-financed operating unit. This process is expected to be
undertaken over a 12-18 month period and will be dependent on, among other
things, successful negotiations with TWE's partners and certain creditors, and
the receipt of franchise and other regulatory approvals. Accordingly, there can
be no assurance that the effort will succeed.
During 1994, cash provided by Time Warner's operations amounted to $473
million and consisted of $1.150 billion of EBITDA from the Publishing and Music
businesses, $120 million of net distributions from TWE and $179 million from
the securitization of receivables, less $539 million of interest payments, $339
million of income taxes, $76 million of corporate expenses and working capital
requirements. Cash provided by operations of $257 million in 1993 consisted of
$1.015 billion of EBITDA from the Publishing and Music businesses and $20
million of net distributions from TWE, less $330 million of interest payments,
$182 million of income taxes, $73 million of corporate expenses, and working
capital requirements.
Cash flows used in investing activities in 1994, excluding investment
proceeds, were $351 million, compared to $373 million in 1993. Cash dividends
paid decreased to $142 million in 1994, compared to $299 million in 1993,
principally as a result of the redemption and exchange of preferred stock in
1993. Time Warner has no claim on the assets and cash flows of TWE except
through the payment of certain fees and reimbursements, cash distributions and
loans. Tax-related distributions of $115 million were received from TWE in 1994
and are expected to exceed $350 million in 1995.
Time Warner and TWE entered into a credit agreement in 1994, which allows
Time Warner to borrow up to $400 million from TWE through September 15, 2000.
Time Warner borrowed $400 million in 1994 under the credit agreement, and used
the proceeds to reduce other debt. TWE is permitted under its bank credit
agreement to make additional loans to Time Warner, which in the aggregate
cannot exceed $1.1 billion at December 31, 1994, increasing to no more than
$1.5 billion on July 1, 1995. Management believes that 1995 operating cash
flow, cash and marketable securities and additional borrowing capacity are
sufficient to meet Time Warner's liquidity needs without distributions and
loans from TWE above those permitted by existing agreements.
Time Warner uses derivative financial instruments to manage its risk against
fluctuations in interest rates and foreign currency exchange rates. Interest
rate swap contracts are used to adjust the proportion of total debt that is
subject to changes in short-term rates. At December 31, 1994, Time Warner had
interest rate swap contracts to pay floating-rates of interest (average six-
month LIBOR rate of 5.9%) and receive fixed-rates of interest (average rate of
5.5%) on $2.9 billion notional amount of indebtedness, effectively converting
32% of Time Warner's underlying debt, substantially all of which is fixed-rate,
and 37% of the debt of Time Warner and the Entertainment Group combined, to a
floating-rate basis. Based on the current levels of outstanding debt and
interest rate swap contracts, a 25 basis point increase in the level of
interest rates prevailing at December 31, 1994 would reduce Time Warner's
annual pretax income by an estimated $12 million. The notional amount of
outstanding contracts at December 31, 1994 by year of maturity, along with the
related average fixed-rates of interest to be received and the average
floating-rates of interest to be paid, are as follows: 1995-$300 million
(receive-6.05%; pay-6.95%); 1996-$300 million (receive-4.55%; pay-6.13%); 1998-
$700 million (receive-5.52%; pay-6.06%); 1999-$1.2 billion (receive-5.51%; pay-
5.66%); and 2000-$400 million (receive-5.48%; pay-5.50%).
F-34
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
Foreign exchange contracts are used primarily to hedge the risk that
unremitted or future royalties and license fees owed to Time Warner and TWE
domestic companies for the sale or anticipated sale of U.S. copyrighted
products abroad may be adversely affected by changes in exchange rates.
Time Warner often closes foreign exchange sale contracts by purchasing an
offsetting purchase contract. A summary of foreign exchange contracts at
December 31, 1994 and 1993 is set forth below:
SALE CONTRACTS PURCHASE CONTRACTS
----------------------- -----------------------
U.S. AVERAGE AVERAGE U.S. AVERAGE AVERAGE NET
DOLLAR DAYS TO FORWARD DOLLAR DAYS TO FORWARD SALE
FOREIGN CURRENCY VALUE MATURITY RATE VALUE MATURITY RATE POSITION
---------------- ------ -------- ------- ------ -------- ------- --------
(DOLLARS IN MILLIONS)
DECEMBER 31, 1994:
Canadian dollar....... $ 70 31 .7283 $ 29 33 .7166 $ 41
English pound......... 93 22 1.5704 19 16 1.5511 74
French franc.......... 82 84 .1745 -- -- -- 82
German mark........... 61 49 .6296 -- -- -- 61
Japanese yen.......... 109 23 .0101 -- -- -- 109
Other currencies...... 136 58 -- 61 61 -- 75
---- ---- ----
Total................. $551 $109 $442
==== ==== ====
DECEMBER 31, 1993:
Canadian dollar....... $ 87 60 .7543 $ -- -- -- $ 87
English pound......... 75 45 1.4810 11 59 1.4708 64
French franc.......... 69 40 .1732 6 17 .1700 63
German mark........... 169 85 .5812 6 37 .5651 163
Japanese yen.......... 184 174 .0094 25 48 .0092 159
Other currencies...... 69 126 -- 32 46 -- 37
---- ---- ----
Total................. $653 $ 80 $573
==== ==== ====
ENTERTAINMENT GROUP
The financial condition of the Entertainment Group companies, principally
TWE, at December 31, 1994 remained essentially unchanged from year end 1993,
but is expected to be significantly affected by the formation of the TWE-
Advance/Newhouse Partnership and the other cable transactions announced for
1995 by Time Warner. TWE had $7.2 billion of long-term debt at December 31,
1994, $1.7 billion of Time Warner General Partners' senior capital and $6.2
billion of partners' capital (net of the $771 million uncollected portion of
the U S WEST Note), compared to $7.1 billion of long-term debt, $1.5 billion of
Time Warner General Partners' senior capital and $6 billion of partners'
capital at December 31, 1993. Cash and equivalents were $1.1 billion at
December 31, 1994 compared to $1.3 billion at December 31, 1993, resulting in
net debt of $6.1 billion and $5.8 billion, respectively.
Entertainment Group leverage and coverage ratios for 1994 and 1993 were as
follows:
1994 1993
----- -----
Net debt/Adjusted EBITDA...................................... 3.50x 3.31x
Adjusted EBITDA/Interest...................................... 3.09x 3.02x
F-35
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
The formation of the TWE-Advance/Newhouse Partnership and sales of non-core
assets are expected to improve the Entertainment Group's leverage and coverage
ratios. In accordance with the TWE-Advance/Newhouse joint venture agreement,
certain of Time Warner's newly-acquired cable systems may be transferred on a
tax-efficient basis to the TWE-Advance/Newhouse Partnership. Such transfers, if
they are made, are expected to be structured on a leveraged basis, which could
result in an overall adverse impact on the Entertainment Group ratios.
During 1994, cash provided by Entertainment Group operations amounted to
$1.341 billion and consisted of $1.811 billion of EBITDA from the Filmed
Entertainment, Programming-HBO and Cable businesses and a reduction in working
capital requirements, less $521 million of interest payments, $69 million of
income taxes and $60 million of corporate expenses. Cash provided by operations
of $1.276 billion in 1993 consisted of $1.814 billion of business segment
EBITDA and a reduction in working capital requirements, less $450 million of
interest payments, $70 million of income taxes and $60 million of corporate
expenses. Capital expenditures increased to $1.235 billion in 1994, compared to
$613 million in 1993. Capital spending by Time Warner Cable amounted to $778
million in 1994, compared to $353 million in 1993, and was financed in part
through $234 million of collections on the U S WEST Note. Cable capital
expenditures are budgeted to exceed $1 billion for 1995, and are expected to be
partially financed by $550 million of collections on the U S WEST Note. Because
management believes that the conversion from coaxial to fiber-optic cable is
essential to achieving long-term growth in revenue from telephony and
unregulated cable services, significant cable capital expenditures also are
expected in subsequent years and will be timed to match the rate at which
demand for the new services develops.
Warner Bros.' backlog, representing the amount of future revenue not yet
recorded from cash contracts for the licensing of films for pay and basic
cable, network and syndicated television exhibition, amounted to $852 million
at December 31, 1994, compared to $724 million at December 31, 1993 (including
amounts relating to HBO of $175 million at December 31, 1994 and $178 million
at December 31, 1993). The backlog excludes advertising barter contracts.
Management believes that TWE's 1995 operating cash flow, cash and
equivalents, collections on the U S WEST Note and additional borrowing capacity
are sufficient to meet its capital and liquidity needs.
F-36
TIME WARNER INC.
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ---------- ---------- ---------- ---------
(MILLIONS)
1994(A):
Reserves deducted from ac-
counts receivable:
Allowance for doubtful ac-
counts..................... $ 131 $ 197 $ (171)(b) $ 157
Reserves for sales returns
and allowances:
Magazines and books........ 349 1,401 (1,370)(c)(d) 380
Recorded music............. 196 421 (386)(c) 231
----- ------ ------- -----
Total..................... $ 676 $2,019 $(1,927) $ 768
===== ====== ======= =====
Reserves deducted from
amounts due to publishers
(accounts payable):
Allowance for magazine and
book returns............... $(154) $ (905) $ 900 (d) $(159)
===== ====== ======= =====
1993(A):
Reserves deducted from ac-
counts receivable:
Allowance for doubtful ac-
counts..................... $ 122 $ 194 $ (185)(b) $ 131
Reserves for sales returns
and allowances:
Magazines and books........ 336 1,265 (1,252)(c)(d) 349
Recorded music............. 186 366 (356)(c) 196
----- ------ ------- -----
Total..................... $ 644 $1,825 $(1,793) $ 676
===== ====== ======= =====
Reserves deducted from
amounts due to publishers
(accounts payable):
Allowance for magazine and
book returns............... $(146) $ (855) $ 847 (d) $(154)
===== ====== ======= =====
RESTATED 1992(A):
Reserves deducted from ac-
counts receivable:
Allowance for doubtful ac-
counts..................... $ 123 $ 132 $ (133)(b) $ 122
Reserves for sales returns
and allowances:
Magazines and books........ 314 1,109 (1,087)(c)(d) 336
Recorded music............. 179 333 (326)(c) 186
----- ------ ------- -----
Total..................... $ 616 $1,574 $(1,546) $ 644
===== ====== ======= =====
Reserves deducted from
amounts due to publishers
(accounts payable):
Allowance for magazine and
book returns............... $(159) $ (797) $ 810 (d) $(146)
===== ====== ======= =====
1992(A):
Reserves deducted from ac-
counts receivable:
Allowance for doubtful ac-
counts..................... $ 275 $ 194 $ (181)(b) $ 288
Reserves for sales returns
and allowances:
Magazines and books........ 314 1,109 (1,087)(c)(d) 336
Recorded music and home
video..................... 257 419 (416)(c) 260
----- ------ ------- -----
Total..................... $ 846 $1,722 $(1,684) $ 884
===== ====== ======= =====
Reserves deducted from
amounts due to publishers
(accounts payable):
Allowance for magazine and
book returns............... $(159) $ (797) $ 810 (d) $(146)
===== ====== ======= =====
--------
(a) The 1994 and 1993 financial statements reflect the deconsolidation of the
Entertainment Group, principally TWE, effective January 1, 1993. The
historical financial statements for periods prior to such date have not been
changed; however, financial information for 1992 retroactively reflecting
the deconsolidation is presented as supplementary information under the
column heading "restated" to facilitate comparative analysis.
(b) Represents uncollectible receivables charged against reserve.
(c) Represents returns or allowances applied against reserve.
(d) The distribution of magazines not owned by Time Warner results in a
receivable recorded at the sales price and a corresponding liability to the
publisher recorded at the sales price less the distribution commission
recognized by Time Warner as revenue. Therefore, it would be misleading to
compare magazine revenues to the provision charged to the reserve for
magazine returns that is deducted from accounts receivable without also
considering the related offsetting activity in the reserve for magazine
returns that is deducted from the liability due to the publishers.
F-37
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
(MILLIONS)
1994 1993
------- -------
ASSETS
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 distri-
butions 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 dis-
tributions 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.
F-38
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
====== ====== ====== ======
--------
(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 trans-
actions 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 ex-
pense of:.................................... $ 943 $ 902 $ 851 $ 782
====== ====== ====== ======
See accompanying notes.
F-39
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 compa-
nies, 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
====== ====== ===== =====
--------
(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.
F-40
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
(MILLIONS)
PARTNERS' CAPITAL
---------------------------------------------
GENERAL UNDISTRIBUTED
PARTNERS' PARTNERSHIP U S TOTAL
SENIOR CONTRIBUTED EARNINGS 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 ac-
quire ATC minority in-
terest................. 1,431 1,431
Other................... 1 1
TWE Capitalization:
Contributions.......... 1,000 1,000
Assumption of addi-
tional 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 capi-
tal................... 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
====== ======= ===== ======= =======
--------
(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.
F-41
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.
F-42
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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 ("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.
F-43
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
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.
F-44
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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% owned), Six Flags (50% owned
in 1992), E! Entertainment Corporation (50% owned in 1992), and in 1994 only,
certain
F-45
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
F-46
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.
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.
F-47
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
=== === === ===
--------
(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.
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.
F-48
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 U S
AMOUNTS(A) LIMITED TO PARTNERS 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 capi-
tal.................... 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%
--------
(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 January 1, 1999
F-49
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
F-50
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
COMMON STOCK PER 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
======
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.
F-51
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-52
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
====== ====== ====== ======
--------
(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
====== ====== ====== ======
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
====== ====== ====== ======
--------
(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.
F-53
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
======= ======= ======= =======
--------
(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
======= ======= ======= =======
--------
(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.
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
F-54
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
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)
F-55
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
====== ======
F-56
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. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
TWE's management. Our responsibility is to express an opinion on these
financial statements and schedule 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. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Ernst & Young LLP
New York, New York
February 7, 1995
F-57
TIME WARNER ENTERTAINMENT COMPANY, L.P.
SELECTED FINANCIAL INFORMATION
The selected financial information for each of the five years in the period
ended December 31, 1994 set forth below has been derived from and should be
read in conjunction with the consolidated financial statements and other
financial information presented elsewhere herein. Capitalized terms are as
defined and described in such consolidated financial statements, or elsewhere
herein. The selected historical financial information for 1994 and 1993 gives
effect to the consolidation of Six Flags effective as of January 1, 1993, as a
result of the 1993 Six Flags acquisition. The selected historical financial
information for periods prior to such date has not been changed; however,
selected financial information for 1992 retroactively reflecting the
consolidation is presented as supplementary information under the column
heading "restated" to facilitate comparative analysis.
The selected historical financial information for 1993 gives effect to the
admission of U S WEST as an additional limited partner of TWE as of September
15, 1993 and the issuance of $2.6 billion of TWE debentures during the year to
reduce indebtedness under the TWE credit agreement, and for 1992 gives effect
to the initial capitalization of TWE and associated refinancings as of the
dates such transactions were consummated and Time Warner's acquisition of the
ATC minority interest as of June 30, 1992, using the purchase method of
accounting and reflected in the consolidated financial statements of TWE under
the pushdown method of accounting.
YEARS ENDED DECEMBER 31,
------------------------------------------------
RESTATED
SELECTED OPERATING STATEMENT 1994 1993 1992 1992 1991 1990
INFORMATION ------- ------- -------- ------- ------- -------
(MILLIONS)
Revenues..................... $ 8,460 $ 7,946 $ 7,251 $ 6,761 $ 6,068 $ 5,671
Depreciation and amortiza-
tion........................ 943 902 851 782 733 775
Business segment operating
income...................... 848 883 836 795 712 549
Interest and other, net...... 587 551 563 525 520 648
Income (loss) before extraor-
dinary item................. 161 208 160 160 97 (180)
Net income (loss)............ 161 198 160 160 97 (180)
DECEMBER 31,
------------------------------------------------
RESTATED
SELECTED BALANCE SHEET 1994 1993 1992 1992 1991 1990
INFORMATION ------- ------- -------- ------- ------- -------
(MILLIONS)
Total assets................. $18,662 $17,963 $16,694 $15,848 $14,230 $14,415
Debt due within one year..... 32 24 102 7 878 7
Long-term debt............... 7,160 7,125 7,684 7,171 4,571 6,516
Time Warner General Partners'
senior capital.............. 1,663 1,536 -- -- -- --
Partners' capital............ 6,233 6,000 6,437 6,437 6,717 5,809
F-58
TIME WARNER ENTERTAINMENT COMPANY, L.P.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
OPERATING
INCOME OF NET
BUSINESS INCOME
QUARTER REVENUES SEGMENTS (LOSS)
------- -------- ---------- ------
(MILLIONS)
1994
1st.................................................. $1,919 $203 $ 48
2nd.................................................. 2,055 227 56
3rd.................................................. 2,203 235 41
4th.................................................. 2,283 183 16
Year................................................. 8,460 848 161
1993
1st.................................................. $1,757 $208 $ 93
2nd (a).............................................. 1,865 235 40
3rd (a).............................................. 2,174 279 76
4th.................................................. 2,150 161 (11)
Year (a)............................................. 7,946 883 198
--------
(a) Net income for each of the second and third quarters of 1993 includes an
extraordinary loss on the retirement of debt of $2 million and $8 million,
respectively.
F-59
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
1994 VS. 1993
TWE had revenues of $8.460 billion and net income of $161 million in 1994,
compared to revenues of $7.946 billion and net income of $198 million in 1993.
An extraordinary loss on the retirement of debt of $10 million and a one-time
gain from the sale of certain assets are included in the 1993 results.
Operating income and EBITDA for TWE in 1994 and 1993 were as follows:
YEARS ENDED
DECEMBER 31,
-----------------------
OPERATING
INCOME EBITDA
--------- -------------
1994 1993 1994 1993
---- ---- ------ ------
(MILLIONS)
Filmed Entertainment.................................... $257 $263 $ 542 $ 521
Programming--HBO........................................ 236 213 255 230
Cable................................................... 355 407 994 1,034
---- ---- ------ ------
Total................................................... $848 $883 $1,791 $1,785
==== ==== ====== ======
As a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation. Income and withholding taxes of $40 million in the year ended
December 31, 1994, and $64 million in the year ended December 31, 1993 have
been provided in respect of the operations of TWE's domestic and foreign
subsidiary corporations.
Certain factors affecting comparative operating results are discussed below
on a business segment basis. That discussion includes, among other factors, an
analysis of changes in the operating income of the business segments before
depreciation and amortization ("EBITDA") in order to eliminate the effect on
the operating performance of the filmed entertainment and cable businesses of
significant amounts of amortization of intangible assets recognized in Time
Warner's $14 billion acquisition of WCI in 1989, the $1.3 billion acquisition
of the ATC minority interest in 1992 and other business combinations accounted
for by the purchase method. Financial analysts generally consider EBITDA to be
an important measure of comparative operating performance for the businesses of
TWE, and when used in comparison to debt levels or the coverage of interest
expense, as a measure of liquidity. However, EBITDA should be considered in
addition to, not as a substitute for, operating income, net income, cash flow
and other measures of financial performance and liquidity reported in
accordance with generally accepted accounting principles.
Filmed Entertainment. Revenues increased to $5.033 billion, compared to
$4.557 billion in 1993. Operating income decreased to $257 million from $263
million. Depreciation and amortization, including amortization related to the
purchase of WCI, amounted to $285 million in 1994 and $258 million in 1993.
EBITDA increased to $542 million from $521 million. Worldwide home video,
syndication and consumer products revenues increased at Warner Bros., offset in
part by lower worldwide theatrical revenues. Revenues at Six Flags increased as
a result of overall attendance growth and higher revenues per visitor.
Operating income and EBITDA margins decreased principally as a result of lower
theatrical results in comparison to the exceptionally strong theatrical results
in 1993.
Programming--HBO. Revenues increased to $1.494 billion, compared to $1.435
billion in 1993. Operating income increased to $236 million from $213 million.
Depreciation and amortization amounted to $19 million in 1994 and $17 million
in 1993. EBITDA increased to $255 million from $230 million. Revenues benefited
from an increase in subscribers and higher pay-TV rates. Operating income,
EBITDA and operating margins improved principally as a result of the revenue
gains.
F-60
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
Cable. Revenues increased to $2.220 billion, compared to $2.205 billion in
1993. Operating income decreased to $355 million from $407 million.
Depreciation and amortization, including amortization related to the purchase
of WCI and the acquisition of the ATC minority interest, amounted to $639
million in 1994 and $627 million in 1993. EBITDA decreased to $994 million from
$1.034 billion. Revenues and operating results in 1994 were adversely affected
by two rounds of cable rate regulation that in general reduced the rates cable
operators are allowed to charge for regulated services, the first of which went
into effect in September 1993 and the second of which went into effect in July
1994. The unfavorable effects of rate regulation were offset in part by an
increase in subscribers and nonregulated revenues. Actions that were undertaken
to mitigate the impact of rate regulation included a number of cost containment
measures and a continued emphasis on near and long-term strategies to increase
revenues from unregulated services.
Interest and Other, Net. Interest and other, net, increased to $587 million
in 1994, compared to $551 million in 1993. Interest expense decreased to $563
million, compared with $573 million in 1993. There was other expense, net, of
$24 million in 1994, compared to other income, net, of $22 million in 1993.
Investment-related and foreign currency contract losses in 1994 exceeded an
increase in interest income on higher cash balances and the interest-bearing
note receivable from U S WEST. A gain on the sale of certain assets and other
investment-related income exceeded investment losses in 1993.
1993 VS. 1992
TWE had 1993 revenues of $7.946 billion, income of $208 million before an
extraordinary loss of $10 million on the retirement of debt and net income of
$198 million, compared to 1992 revenues of $6.761 billion ($7.251 billion on a
restated basis) and net income of $160 million.
Operating income and EBITDA for TWE for 1993 and 1992 were as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
OPERATING INCOME EBITDA
------------------------------ ------------------------------
HISTORICAL RESTATED HISTORICAL HISTORICAL RESTATED HISTORICAL
1993 1992 1992 1993 1992 1992
---------- -------- ---------- ---------- -------- ----------
(MILLIONS)
Filmed Entertainment.... $263 $235 $194 $ 521 $ 495 $ 385
Programming--HBO........ 213 201 201 230 215 215
Cable................... 407 400 400 1,034 977 977
---- ---- ---- ------ ------ ------
Total................... $883 $836 $795 $1,785 $1,687 $1,577
==== ==== ==== ====== ====== ======
Filmed Entertainment. Revenues increased to $4.557 billion compared to $3.455
billion ($3.945 billion on a restated basis) in 1992. Operating income
increased to $263 million from $194 million ($235 million on a restated basis).
Depreciation and amortization, including amortization related to the purchase
of WCI, amounted to $258 million in 1993 and $191 million ($260 million on a
restated basis) in 1992. EBITDA increased to $521 million from $385 million
($495 million on a restated basis). The increase in revenues, operating income
and EBITDA on an historical basis resulted primarily from the inclusion in 1993
of the operating results of Six Flags, which previously had been accounted for
using the equity method. Revenues at Warner Bros. increased during the period
primarily due to increases in international theatrical, international
syndication and domestic home video revenues, as well as increased revenues
from retail operations. Record international revenues of $1.650 billion would
have been greater but for unfavorable exchange rate fluctuations. Warner Bros.
ranked number one at both the domestic and international box office in 1993,
led by the success of The Fugitive and The Bodyguard. Revenues at Six Flags
increased, benefiting from higher revenues per visitor. Operating income and
EBITDA benefited from the revenue gains.
F-61
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
Programming--HBO. Revenues decreased to $1.435 billion compared to $1.444
billion in 1992. Operating income increased to $213 million from $201 million.
Depreciation and amortization amounted to $17 million in 1993 and $14 million
in 1992. EBITDA increased to $230 million from $215 million. The decrease in
revenues reflects lower HBO Video sales, which in 1992 were favorably affected
by a children's sell-thru title, offset in part by higher subscriber revenues,
principally as a result of higher pay-TV rates at HBO and an increase in
subscribers. Operating income and EBITDA benefited primarily from improved
results from new businesses, including Time Warner Sports and the Comedy
Central joint venture.
Cable. Revenues increased to $2.205 billion compared to $2.091 billion in
1992. Operating income increased to $407 million from $400 million.
Depreciation and amortization, including amortization related to the purchase
of WCI and the acquisition of the ATC minority interest amounted to $627
million in 1993 and $577 million in 1992. EBITDA increased to $1.034 billion
from $977 million. Revenues increased principally as a result of growth in the
number of cable subscribers and increases in advertising sales and pay-per-
view. The increase in subscribers accounted for approximately three quarters of
the revenue increase. Operating income and EBITDA benefited from the revenue
gains and increased income from cable joint ventures, but was negatively
affected in the fourth quarter by the first round of cable rate regulation,
which went into effect on September 1, 1993.
Interest and Other, Net. Interest and other, net, increased to $551 million
in 1993 from $525 million ($563 million on a restated basis) in 1992. Interest
expense increased to $573 million compared with $436 million ($486 million on a
restated basis) in 1992. The increase in interest expense resulted primarily
from the higher average debt levels attributable to the TWE capitalization, the
higher interest cost of the TWE notes and debentures issued to refinance TWE
bank debt, and the consolidation of Six Flags' interest expense in 1993. Other
income, net, in 1993 included gains on the sale of certain assets partially
offset by losses from and reductions in the carrying value of certain
investments. Other expenses, net, on a restated basis in 1992 is principally
attributable to losses on certain investments and litigation-related costs.
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1994
Despite the $7 billion of debt incurred by Time Warner in its 1989
acquisition of Warner Communications Inc. that was allocated to TWE under the
pushdown method of accounting and the adverse effects on the cable business
since September 1993 from government-imposed rate regulation, TWE continues to
be able to finance growth and expansion in critical areas. In the last three
years alone, TWE has spent approximately $900 million making new investments
and acquisitions and approximately $2.2 billion on capital expenditures. Annual
improvements in EBITDA and the $2.8 billion of capital contributions (excluding
the $771 million uncollected portion of the U S WEST Note) by ITOCHU, Toshiba
and U S WEST, have enabled TWE to finance this level of investment while at the
same time maintaining its leverage and coverage ratios at relatively constant
levels.
A commonly-used leverage ratio is total debt, less cash ("Net debt") to total
business segment EBITDA, less corporate expenses ("Adjusted EBITDA"). A
commonly-used coverage ratio is Adjusted EBITDA to total interest expense.
Those ratios for 1994 and 1993 were as follows:
1994 1993
----- -----
Net debt/Adjusted EBITDA............................................ 3.54x 3.37x
Adjusted EBITDA/Interest expense.................................... 3.07x 3.01x
F-62
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
The financial condition of TWE at December 31, 1994 remained essentially
unchanged from year end 1993, but is expected to be significantly affected by
the formation of the TWE-Advance/Newhouse Partnership and other cable
transactions announced by Time Warner for 1995. TWE had $7.2 billion of long-
term debt at December 31, 1994, $1.7 billion of Time Warner General Partners'
senior capital and $6.2 billion of partners' capital (net of the $771 million
uncollected portion of the U S WEST Note), compared to $7.1 billion of long-
term debt, $1.5 billion of Time Warner General Partners' senior capital and $6
billion of partners' capital at December 31, 1993. Cash and equivalents were
$1.1 billion at December 31, 1994 compared to $1.3 billion at December 31,
1993, resulting in net debt of $6.1 billion and $5.8 billion, respectively.
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. 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.
During the latter half of 1994 and continuing into 1995, Time Warner and TWE
announced a series of cable transactions, all of which are subject to customary
franchise and regulatory approvals, that are expected to increase the total
number of cable subscribers under the management of Time Warner Cable to
approximately 11.5 million, compared to 7.5 million at the end of 1994. As part
of this cable television expansion, TWE will own a two-thirds interest in a
joint venture it will form with subsidiaries of Advance and Newhouse, which
will contribute cable television systems that serve approximately 1.4 million
basic television subscribers. In accordance with the TWE-Advance/Newhouse joint
venture agreement, certain cable systems to be acquired by Time Warner in its
acquisitions of Summit Communications Group, Inc., KBLCOM Incorporated and
Cablevision Industries Corporation and related companies, may be transferred on
a tax-efficient basis to the TWE-Advance/Newhouse Partnership. Such transfers,
if they are made, are expected to be structured on a leveraged basis. New or
revised bank credit facilities will be required for TWE and the
TWE-Advance/Newhouse Partnership as a result of these transactions, which
management feels will be obtained at a reasonable cost.
Time Warner also has announced its intention to enhance its financial
position and that of TWE through sales of non-core assets, which may include
certain smaller, unclustered cable systems and certain investments owned by
TWE. Proceeds from asset sales will be used to reduce debt.
The formation of the TWE-Advance/Newhouse Partnership and sales of non-core
assets are expected to improve TWE's leverage and coverage ratios. In
accordance with the TWE-Advance/Newhouse joint venture agreement, certain of
Time Warner's newly-acquired cable systems may be transferred on a tax-
efficient basis to the TWE-Advance/Newhouse Partnership. Such transfers, if
they are made, are expected to be structured on a leveraged basis, which could
result in an overall adverse impact on the TWE ratios.
Because of the announced transactions, Time Warner will explore the
possibility of bringing its various interests in cable operations together in a
separate, self-financed operating unit. This process is expected to be
undertaken over a 12-18 month period and will be dependent on, among other
things, successful negotiations with TWE's partners and certain creditors, and
the receipt of franchise and other regulatory approvals. Accordingly, there can
be no assurance that the effort will succeed.
During 1994, cash provided by TWE operations amounted to $1.296 billion and
consisted of $1.791 billion of EBITDA from the Filmed Entertainment,
Programming-HBO and Cable businesses and a reduction in working capital
requirements, less $521 million of interest payments, $69 million of income
taxes and $60 million of corporate expenses. Cash provided by operations of
$1.271 billion in 1993 consisted of
F-63
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
$1.785 billion of business segment EBITDA and a reduction in working capital
requirements, less $450 million of interest payments, $70 million of income
taxes and $60 million of corporate expenses. Capital expenditures increased to
$1.153 billion in 1994, compared to $613 million in 1993. Capital spending by
Time Warner Cable amounted to $699 million in 1994, compared to $352 million in
1993, and was financed in part through $234 million of collections on the U S
WEST Note. Cable capital expenditures are budgeted to exceed $1 billion for
1995, and are expected to be partially financed by $550 million of collections
on the U S WEST Note. Because management believes that the conversion from
coaxial to fiber-optic cable is essential to achieving long-term growth in
revenue from telephony and unregulated cable services, significant cable
capital expenditures also are expected in subsequent years and will be timed to
match the rate at which demand for the new services develops.
Warner Bros.' backlog, representing the amount of future revenue not yet
recorded from cash contracts for the licensing of films for pay and basic
cable, network and syndicated television exhibition, amounted to $852 million
at December 31, 1994, compared to $724 million at December 31, 1993 (including
amounts relating to HBO of $175 million at December 31, 1994 and $178 million
at December 31, 1993). The backlog excludes advertising barter contracts.
Management believes that TWE's 1995 operating cash flow, cash and
equivalents, collections on the U S WEST Note and additional borrowing capacity
are sufficient to meet its capital and liquidity needs.
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.
F-64
TIME WARNER ENTERTAINMENT COMPANY, L.P.
SUPPLEMENTARY INFORMATION
SUMMARIZED FINANCIAL INFORMATION OF SIX FLAGS
Six Flags was formed by a group of companies, including a subsidiary of Time
Warner ("Enterprises") which owned 50% of Six Flags common stock, to effect
the acquisition on December 29, 1991 of Six Flags Theme Parks Inc. ("1991 SF
Acquisition"). Enterprises' interest in Six Flags was contributed to TWE at
the TWE capitalization. In December 1992, Six Flags redeemed certain of its
equity with $102 million of proceeds from the issuance of zero coupon senior
notes due 1999 and $12 million of proceeds from the issuance of additional
shares of Six Flags common stock ("1992 SF Recapitalization"). TWE continued
to own 50% of the common stock of Six Flags following the 1992 SF
Recapitalization, until September 17, 1993, when it provided Six Flags with
$136 million to repurchase all the common stock held by the other stockholders
and preferred stock of certain subsidiaries. TWE also provided $414 million to
finance the repurchase or retirement of all the indebtedness of Six Flags and
its subsidiaries, except for the zero coupon senior notes due 1999 ("1993 SF
Acquisition and Refinancing"). As a result of the 1993 SF Acquisition and
Refinancing, TWE has consolidated Six Flags effective January 1, 1993.
Summarized financial information of Six Flags is set forth below:
SIX FLAGS ENTERTAINMENT CORPORATION
YEARS ENDED
IN DECEMBER
-----------------
1994 1993 1992
---- ----- -----
(MILLIONS)
OPERATING STATEMENT INFORMATION
Revenues.................................................... $557 $533 $ 490
Operating income............................................ 68 55 51
Income (loss) before extraordinary item (a)................. 8 2 (6)
Net income (loss) (a)....................................... 8 (8) (6)
YEARS ENDED
IN DECEMBER
------------
1994 1993
----- -----
(MILLIONS)
BALANCE SHEET INFORMATION
Total assets................................................ $ 894 $ 900
Zero coupon senior notes due 1999 (9.25% yield)............. 123 112
Capital lease obligations to TWE, weighted average interest
rates
of 6.7% and 6.3% (b)....................................... 401 301
Long-term notes due to TWE, weighted average interest rates
of 9.2% and 10%............................................ 75 226
Shareholders' equity........................................ 99 90
--------
(a) The 1993 SF Acquisition and Refinancing, certain transactions with respect
to the 1992 SF Recapitalization, and the 1991 SF Acquisition were
accounted for using the purchase method of accounting for business
combinations. If the 1993 SF Acquisition and Refinancing had occurred at
the beginning of the year, the 1993 income before extraordinary item would
have been $7 million; if the 1992 SF Recapitalization had occurred at the
beginning of the year, the 1992 net loss would have been $18 million.
(b) Six Flags has entered into sale and leaseback transactions with TWE with
respect to all of its wholly-owned theme parks. Sale proceeds of $114
million in 1994 and $301 million in 1993 were used to repay indebtedness
to TWE incurred in connection with the 1993 SF Acquisition and
Refinancing. The leases have been accounted for as capital leases and
expire in 2008.
F-65
TIME WARNER ENTERTAINMENT COMPANY, L.P.
SCHEDULE VIII-VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ---------- ---------- ---------- ---------
(MILLIONS)
1994:
Reserves deducted from accounts re-
ceivable:
Allowance for doubtful accounts... $161 $ 49 $ (22)(a) $188
Reserves for sales returns and al-
lowances......................... 96 164 (142)(b) 118
---- ---- ----- ----
Total............................ $257 $213 $(164) $306
==== ==== ===== ====
1993:
Reserves deducted from accounts re-
ceivable:
Allowance for doubtful accounts... $166 $ 27 $ (32)(a) $161
Reserves for sales returns and al-
lowances......................... 74 131 (109)(b) 96
---- ---- ----- ----
Total............................ $240 $158 $(141) $257
==== ==== ===== ====
1992:
Reserves deducted from accounts re-
ceivable:
Allowance for doubtful accounts... $152 $ 62 $ (48)(a) $166
Reserves for sales returns and al-
lowances......................... 78 86 (90)(b) 74
---- ---- ----- ----
Total............................ $230 $148 $(138) $240
==== ==== ===== ====
--------
(a) Represents uncollectible receivables charged against the reserve.
(b) Represents returns or allowances applied against the reserve.
F-66
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
3.(i)(a) Restated Certificate of Incorporation of the Registrant *
as filed with the Secretary of State of the State of
Delaware on May 26, 1993 (which is incorporated herein
by reference to Exhibit 3 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993
(the "June 1993 Form 10-Q").
3.(i)(b) Certificate of Ownership and Merger merging TWE Holdings *
Inc. into Time Warner Inc. as filed with the Secretary
of State of the State of Delaware on September 24, 1993
(which is incorporated herein by reference to Exhibit
3.(i)(b) to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993 (the "Registrant's
1993 Form 10-K")).
3.(i)(c) Certificate of the Voting Powers, Designations, *
Preferences and Relative Participating, Optional and
Other Rights and Qualifications of Series A
Participating Cumulative Preferred Stock of the
Registrant as filed with the Secretary of State of the
State of Delaware on January 26, 1994 (which is
incorporated herein by reference to Exhibit 3.(i)(c) to
the Registrant's 1993 Form 10-K).
3.(ii) By-laws of the Registrant, as amended through March 18, *
1993 (which is incorporated herein by reference to
Exhibit 3.3 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1992 (the
"Registrant's 1992 Form 10-K")).
4.1 Specimen Certificate of the Registrant's Common Stock *
(which is incorporated herein by reference to Exhibit
4.1 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991 (the "Registrant's 1991
Form 10-K").
4.2 Specimen Certificate of Series B 6.4% Preferred Stock of *
the Registrant (which is incorporated herein by
reference to Exhibit 3.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1990).
4.3 Indenture dated as of March 15, 1993 between the *
Registrant and Chemical Bank, as Trustee, relating to
the 8 3/4% Convertible Subordinated Debentures due 2015
of the Registrant (which is incorporated herein by
reference to Exhibit 4.4 to the Registrant's 1992 Form
10-K).
4.4 Specimen Certificate of the Registrant's 8 3/4% *
Convertible Subordinated Debentures due 2015 (which is
incorporated herein by reference to Exhibit 4.5 to the
Registrant's 1992 Form 10-K).
4.5 Rights Agreement dated as of January 20, 1994 between *
the Registrant and Chemical Bank, as Rights Agent (which
is incorporated herein by reference to Exhibit 4(a) to
the Registrant's Current Report on Form 8-K dated
January 20, 1994).
4.6 Indenture dated as of April 30, 1992, as amended by the *
First Supplemental Indenture, dated as of June 30, 1992,
among Time Warner Entertainment Company, L.P. ("TWE"),
the Registrant, certain of its subsidiaries party
thereto and The Bank of New York, as Trustee (which is
incorporated herein by reference to Exhibits 10(g) and
10(h) to the Registrant's Current Report on Form 8-K
dated July 14, 1992).
4.7 Second Supplemental Indenture, dated as of December 9, *
1992, among TWE, the Registrant, certain of its
subsidiaries party thereto and The Bank of New York, as
Trustee (which is incorporated herein by reference to
Exhibit 4.2 to Amendment No. 1 to the Registration
Statement on Form S-4 Reg. No. 33-67688 of TWE filed
with the Commission on October 25, 1993 (the "1993 TWE
S-4")).
i
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
4.8 Third Supplemental Indenture, dated as of October 12, *
1993, among TWE, the Registrant, certain of its
subsidiaries party thereto and The Bank of New York, as
Trustee (which is incorporated herein by reference to
Exhibit 4.3 to the 1993 TWE S-4).
4.9 Fourth Supplemental Indenture, dated as of March 29, *
1994, among TWE, the Registrant, certain of its
subsidiaries party thereto and The Bank of New York, as
Trustee (which is incorporated herein by reference to
Exhibit 4.4 to TWE's Annual Report on Form 10-K for the
year ended December 31, 1993 ("TWE's 1993 Form
10-K")).
4.10 Fifth Supplemental Indenture, dated as of December 28, *
1994 among TWE, the Registrant, certain of its
subsidiaries party thereto and The Bank of New York, as
Trustee (which is incorporated herein by reference to
Exhibit 4.5 to TWE's Annual Report on Form 10-K for the
year ended December 31, 1994 ("TWE's 1994 Form
10-K")).
4.11 Indenture, dated as of October 15, 1985, between the *
Registrant and Marine Midland Bank, N.A., as successor
Trustee (which is incorporated herein by reference to
Exhibit 4(a) to the Registrant's Registration Statement
on Form S-3 Reg. No. 33-724 filed with the Commission on
October 8, 1985).
4.12 Indenture dated as of October 15, 1992, as amended by the *
First Supplemental Indenture dated as of December 15,
1992, as supplemented by the Second Supplemental
Indenture dated as of January 15, 1993, between the
Registrant and Chemical Bank, as Trustee (which is
incorporated herein by reference to Exhibit 4.10 to the
Registrant's 1992 Form 10-K).
4.13 Indenture dated as of January 15, 1993, between the *
Registrant and Chemical Bank, as Trustee (which is
incorporated herein by reference to Exhibit 4.11 to the
Registrant's 1992 Form 10-K).
4.14 First Supplemental Indenture dated as of June 15, 1993, *
between the Registrant and Chemical Bank, as Trustee, to
the Indenture dated as of January 15, 1993 between the
Registrant and Chemical Bank, as Trustee, including as
Exhibit A the Form of Liquid Yield Option Note due 2013
(which is incorporated herein by reference to Exhibit 4
to the Registrant's June 1993 Form 10-Q).
10.1 Time Warner 1981 Stock Option Plan, as amended through *
May 14, 1991 (which is incorporated herein by reference
to Exhibit 10.1 to the Registrant's 1991 Form 10-K).
10.2 Time Warner 1986 Stock Option Plan, as amended through *
May 14, 1991 (which is incorporated herein by reference
to Exhibit 10.2 to the Registrant's 1991 Form 10-K).
10.3 1988 Stock Incentive Plan of Time Warner Inc., as amended *
through May 14, 1991 (which is incorporated herein by
reference to Exhibit 10.3 to the Registrant's 1991 Form
10-K).
10.4 Time Warner 1989 Stock Incentive Plan, as amended through *
May 14, 1991 (which is incorporated herein by reference
to Exhibit 10.4 to the Registrant's 1991 Form 10-K).
10.5 Time Warner 1989 WCI Replacement Stock Option Plan, as
amended through February 14, 1995.
10.6 Time Warner 1989 Lorimar Non-Employee Replacement Stock *
Option Plan, as amended through May 14, 1991 (which is
incorporated herein by reference to Exhibit 10.6 to the
Registrant's 1991 Form 10-K).
10.7 Time Warner 1994 Stock Option Plan, as amended through
November 17, 1994.
ii
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
10.8 Time Warner Corporate Group Stock Incentive Plan, as
amended through May 14, 1991.
10.9 Time Warner 1988 Restricted Stock Plan for Non-Employee *
Directors, as amended through November 18, 1993 (which is
incorporated herein by reference to Exhibit 10.8 to the
Registrant's 1993 Form 10-K).
10.10 Deferred Compensation Plan for Directors of Time Warner, *
as amended through November 18, 1993 (which is
incorporated herein by reference to Exhibit 10.9 to the
Registrant's 1993 Form 10-K).
10.11 Time Warner Retirement Plan for Outside Directors, as *
amended through September 21, 1989 (which is incorporated
herein by reference to Exhibit 10.10 to the Registrant's
1991 Form 10-K).
10.12 Time Warner Annual Bonus Plan for the Chief Executive *
Officer (which is incorporated herein by reference to
Annex A to the Registrant's definitive Proxy Statement
dated March 30, 1994, used in connection with the
Registrant's 1994 Annual Meeting of Stockholders).
10.13 Amended and Restated Employment and Termination Agreement *
dated as of March 3, 1989, as amended and restated as of
January 10, 1990, between the Registrant and
J. Richard Munro (which is incorporated herein by
reference to Exhibit 10.26 to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1989).
10.14 Amended and Restated Employment Agreement dated as of *
November 15, 1990, between the Registrant and Gerald M.
Levin (which is incorporated herein by reference to
Exhibit 10.26 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1990 (the
"Registrant's 1990 Form 10-K")).
10.15 Amended and Restated Employment Agreement made as of *
August 23, 1989, as amended on July 21, 1993, between WCI
and the Registrant, on the one hand, and Bert W.
Wasserman, on the other hand (which is incorporated
herein by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993).
10.16 Employment Agreement made as of September 19, 1990, *
between the Registrant and Peter R. Haje (which is
incorporated herein by reference to Exhibit 10.29 to the
Registrant's 1990 Form 10-K).
10.17 Employment Agreement made as of November 2, 1994, between
the Registrant and Richard D. Parsons.
10.18 Employment Agreement effective as of January 1, 1995,
between the Registrant and Richard J. Bressler.
10.19 Amended and Restated Employment Agreement effective as of
January 1, 1994, between the Registrant and Tod R.
Hullin.
10.20 Amended and Restated Employment Agreement effective as of
January 1, 1994, between the Registrant and Philip R.
Lochner, Jr.
10.21 Employment Agreement dated as of February 1, 1992, *
between the Registrant and Timothy A. Boggs (which is
incorporated herein by reference to Exhibit 10.2 to the
Registrant's 1992 Form 10-K).
10.22 Employment Agreement dated as of July 1, 1992, between *
the Registrant and Geoffrey W. Holmes (which is
incorporated herein by reference to Exhibit 10 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1992).
10.23 The Time Warner Deferred Compensation Plan, as amended
and restated as of November 1, 1994, as amended by
Amendment No. 1, effective as of December 7, 1994, and
Amendment No. 2, effective as of January 1, 1994.
iii
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
10.24 Travel and Accident Insurance Policy issued by INA Life *
Insurance Company of New York (which is incorporated
herein by reference to Exhibit 10.44 to the Registrant's
Annual Report on Form 10-K for the year ended December
31, 1988).
10.25 Amended and Restated Credit Agreement, dated as of June *
23, 1992, among TWE, Bankers Trust Company and Chemical
Bank, as Managing Agents, the Co-Agents and Agents named
therein and the banks named therein (which is
incorporated herein by reference to Exhibit 10(f) to the
Registrant's Current Report on Form 8-K dated July 14,
1992 (the "July Form 8-K")).
10.26 Amendment No. 1 to the Amended and Restated Credit *
Agreement, dated as of June 23, 1992, among TWE, Bankers
Trust Company and Chemical Bank, as Managing Agents, the
Co-Agents and Agents named therein and the banks named
therein (which is incorporated herein by reference to
Exhibit 10.24 to the Registration Statement on
Form S-4 Reg. No. 33-61338 of Six Flags Entertainment
Corporation filed with the Commission on April 20, 1993).
10.27 Amendment No. 2 to the Amended and Restated Credit *
Agreement, dated as of June 23, 1992, among TWE, Bankers
Trust Company and Chemical Bank, as Managing Agents, the
Co-Agents and Agents named therein and the banks named
therein (which is incorporated herein by reference to
Exhibit 10.3 to the 1993 TWE S-4).
10.28 Amendment No. 3 to the Amended and Restated Credit *
Agreement, dated as of
June 23, 1992, among TWE, Bankers Trust Company and
Chemical Bank, as Managing Agents, the Agents and Co-
Agents named therein and the banks named therein (which
is incorporated herein by reference to Exhibit 10.4 to
the 1993 TWE S-4).
10.29 Amendment No. 4 to the Amended and Restated Credit *
Agreement, dated as of
June 23, 1992, among TWE, Bankers Trust Company and
Chemical Bank, as Managing Agents, the Agents and the Co-
Agents named therein and the banks named therein (which
is incorporated herein by reference to Exhibit 10.5 to
TWE's 1993 Form 10-K).
10.30 Amendment No. 5 to the Amended and Restated Credit *
Agreement, dated as of July 1, 1994, among TWE, Bankers
Trust Company and Chemical Bank, as Managing Agents, the
Agents and the Co-Agents named therein and the banks
named therein (which is incorporated herein by reference
to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the period ended June 30, 1994).
10.31 Amendment No. 6 to the Amended and Restated Credit *
Agreement, dated as of
February 1, 1995 among TWE, Bankers Trust Company and
Chemical Bank, as Managing Agents, the Agents and the Co-
Agents named therein and the banks named therein (which
is incorporated herein by reference to Exhibit 10.7 to
TWE's 1994 Form 10-K).
10.32 Agreement of Limited Partnership, dated as of October 29, *
1992, as amended by the Letter Agreement, dated February
11, 1992, and the Letter Agreement dated June 23, 1992,
among the Registrant and certain of its subsidiaries,
ITOCHU Corporation and Toshiba Corporation (which is
incorporated herein by reference to Exhibit (A) to the
Registrant's Current Report on Form 8-K dated October 29,
1991 and Exhibits 10(b) and 10(c) to the Registrant's
Current Report on Form 8-K dated July 14, 1992).
10.33 Admission Agreement, dated as of May 16, 1993, between *
TWE and U S WEST, Inc. (which is incorporated herein by
reference to Exhibit 10(a) to TWE's Current Report on
Form 8-K dated May 16, 1993).
10.34 Amendment Agreement, dated as of September 14, 1993, *
amending the TWE Partnership Agreement, as amended (which
is incorporated herein by reference to Exhibit 3.2 to
TWE's 1993 Form 10-K).
iv
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
10.35 Letter Agreement, dated May 16, 1993, between the *
Registrant and ITOCHU Corporation (which is incorporated
herein by reference to Exhibit 10(b) to TWE's Current
Report on Form 8-K dated May 16, 1993).
10.36 Letter Agreement, dated May 16, 1993, between the *
Registrant and Toshiba Corporation (which is incorporated
herein by reference to Exhibit 10(c) to TWE's Current
Report on Form 8-K dated May 16, 1993).
10.37 Option Agreement, dated as of September 15, 1993, between *
TWE and U S WEST, Inc. (which is incorporated herein by
reference to Exhibit 10.9 to TWE's 1993 Form 10-K).
10.38 Promissory Note of U S WEST Cable Corporation, dated *
September 15, 1993 (which is incorporated herein by
reference to Exhibit 10.10 to TWE's 1993 Form 10-K).
10.39 Guarantee, dated as of September 15, 1993, by U S WEST, *
Inc. of the Promissory Note of U S WEST Cable
Corporation, dated September 15, 1993 (which is
incorporated herein by reference to Exhibit 10.11 to
TWE's 1993 Form 10-K).
10.40 Contribution Agreement dated as of September 9, 1994 *
among TWE, Advance Publications, Inc., Newhouse
Broadcasting Corporation, Advance/Newhouse Partnership,
and Time Warner Entertainment-Advance/Newhouse
Partnership (which is incorporated herein by reference to
Exhibit 10(a) to TWE's Current Report on Form 8-K dated
September 9, 1994 ("TWE's September Form 8-K")).
10.41 Partnership Agreement, dated as of September 9, 1994, *
between TWE and Advance/Newhouse Partnership (which is
incorporated herein by reference to Exhibit 10(b) to
TWE's September Form 8-K).
10.42 Agreement and Plan of Merger dated as of January 26, *
1995, among KBLCOM Incorporated, Houston Industries
Incorporated, Registrant and TW KBLCOM Acquisition Sub
(which is incorporated herein by reference to Exhibit
2(a) to the Registrant's Current Report on Form 8-K dated
January 26, 1995).
10.43 Agreement and Plan of Merger dated as of February 6, *
1995, among Cablevision Industries Corporation, Alan
Gerry, Registrant and TW CVI Acquisition Sub (which is
incorporated herein by reference to Exhibit 2(a) to the
Registrant's Current Report on Form 8-K dated February 6,
1995 (the "February Form 8-K")).
10.44 Agreement and Plan of Merger dated as of February 6, *
1995, among Cablevision Properties, Inc., Alan Gerry and
Registrant (which is incorporated herein by reference to
Exhibit 2(b) to the February Form 8-K).
10.45 Agreement and Plan of Merger dated as of February 6, *
1995, among Cablevision Management Corporation of
Philadelphia, Alan Gerry and Registrant (which is
incorporated herein by reference to Exhibit 2(c) to the
February Form 8-K).
10.46 Purchase Agreement dated as of February 6, 1995, among *
Alan Gerry, Cablevision Industries of Delaware, Inc., ARA
Cablevision Inc., Cablevision Industries Limited
Partnership, Cablevision Industries of Tennessee L.P.,
Cablevision Industries of Saratoga Associates,
Cablevision of Fairhaven/Acushnet, Cablevision Industries
of Middle Florida, Inc., Cablevision Industries of
Florida, Inc. and Registrant (which is incorporated
herein by reference to Exhibit 2(d) to the February Form
8-K).
10.47 Supplemental Agreement dated as of February 6, 1995, *
including Annex A thereto, among Cablevision Industries
Corporation, Cablevision Industries of Delaware, Inc.,
ARA Cablevision Inc., Cablevision Industries Limited
Partnership, Cablevision Industries of Tennessee L.P.,
Cablevision Industries of Saratoga Associates,
Cablevision of Fairhaven/Acushnet, Cablevision Industries
of Middle Florida, Inc., Cablevision Industries of
Florida, Inc., Alan Gerry, Registrant and TW CVI
Acquisition Sub. (which is incorporated herein by
reference to Exhibit 2(e) to the February Form 8-K).
v
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Price Waterhouse LLP, Independent Accountants.
24 Powers of Attorney, dated as of March 30, 1995.
27 Financial Data Schedule.
99.1 The 1994 financial statements of the Time Warner Service
Partnerships and the report of independent auditors
thereon.
99.2 The 1994 financial statements and financial statement
schedule of Paragon Communications and the report of
independent accountants thereon.
99.3 Annual Report on Form 11-K of the Time Warner Employees'
Savings Plan for the year ended December 30, 1994 (to be
filed by amendment).
99.4 Annual Report on Form 11-K of the Time Warner Thrift Plan
for the year ended December 31, 1994 (to be filed by
amendment).
99.5 Annual Report on Form 11-K of the Time Warner Cable
Employees Savings Plan for the year ended December 31,
1994 (to be filed by amendment).
99.6 Annual Report on Form 11-K of the Paragon Communications
Employees Stock Savings Plan for the year ended December
31, 1994 (to be filed by amendment).
--------
* Incorporated by reference.
The Registrant hereby agrees to furnish to the Securities and Exchange
Commission at its request copies of long-term debt instruments defining the
rights of holders of the Registrant's outstanding long-term debt that are not
required to be filed herewith.
vi