EXHIBIT 99.2
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
BALANCE SHEET
DECEMBER 31,
(THOUSANDS)
1994 1993
--------- ---------
ASSETS
Cash and equivalents, including restricted cash of $5,010
in 1994 and $4,887 in 1993.............................. $ 9,114 $ 7,187
Receivables, net of allowances for doubtful accounts of
$2,265 in 1994 and $1,824 in 1993....................... 14,980 13,364
Prepaid expenses......................................... 1,333 1,164
Property, plant and equipment............................ 660,842 611,365
Less accumulated depreciation............................ (269,116) (226,496)
--------- ---------
Property, plant and equipment, net....................... 391,726 384,869
Cable television franchises, less accumulated amortiza-
tion of $94,315 in 1994 and $84,110 in 1993............. 205,773 215,809
Other assets, less accumulated amortization of $2,611 in
1994 and $2,401 in 1993................................. 4,901 5,014
--------- ---------
Total assets............................................. $ 627,827 $ 627,407
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses.................... $ 74,105 $ 69,468
Debt..................................................... 249,000 320,317
--------- ---------
Total liabilities........................................ 323,105 389,785
Partners' capital:
Partners' contribution................................... 143,904 143,904
Accumulated income....................................... 160,818 93,718
--------- ---------
Total partners' capital.................................. 304,722 237,622
--------- ---------
Total liabilities and partners' capital.................. $ 627,827 $ 627,407
========= =========
The accompanying notes are an integral part of these financial statements.
1
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
STATEMENT OF OPERATIONS AND ACCUMULATED INCOME
YEARS ENDED DECEMBER 31,
(THOUSANDS)
1994 1993 1992
-------- -------- --------
Revenues......................................... $348,323 $338,200 $315,999
Costs and expenses:
Operating and programming*....................... 140,549 133,183 123,682
Selling, general, and administrative*............ 59,582 60,211 58,457
Depreciation and amortization.................... 62,883 59,669 58,439
-------- -------- --------
Total costs and expenses......................... 263,014 253,063 240,578
-------- -------- --------
Operating income................................. 85,309 85,137 75,421
Other income..................................... 18 999 2,528
Interest expense, net............................ (18,227) (21,654) (28,127)
-------- -------- --------
Net income....................................... 67,100 64,482 49,822
Accumulated income (deficit) at beginning of the
year............................................ 93,718 29,410 (20,412)
Adjustment for pension liability................. -- (174) --
-------- -------- --------
Accumulated income at end of the year............ $160,818 $ 93,718 $ 29,410
======== ======== ========
--------
* Includes the following expenses resulting from
transactions with the partners or their
affiliates (Note 3):............................ $ 24,900 $ 25,200 $ 23,900
======== ======== ========
The accompanying notes are an integral part of these financial statements.
2
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(THOUSANDS)
1994 1993 1992
-------- -------- --------
CASH FLOW FROM OPERATING ACTIVITIES
Net income....................................... $ 67,100 $ 64,482 $ 49,822
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 62,883 59,669 58,439
(Increase) decrease in accounts receivable and
prepaid expenses................................ (1,785) (2,703) 171
Increase (decrease) in accounts payable and ac-
crued expenses.................................. 4,637 (3,293) (1,236)
Other............................................ 210 (720) 2,903
-------- -------- --------
Net cash provided by operating activities........ 133,045 117,435 110,099
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment additions.......... (59,694) (53,771) (65,666)
Other............................................ (107) 664 (5,435)
-------- -------- --------
Net cash used in investing activities............ (59,801) (53,107) (71,101)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Changes in commercial paper and revolving credit
facility, net................................... (21,317) (15,101) 10,711
Payments on senior institutional notes........... (50,000) (50,000) (50,000)
-------- -------- --------
Net cash used in financing activities............ (71,317) (65,101) (39,289)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVA-
LENTS........................................... 1,927 (773) (291)
Cash and equivalents at beginning of the year.... 7,187 7,960 8,251
-------- -------- --------
Cash and equivalents at end of the year.......... $ 9,114 $ 7,187 $ 7,960
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest (net of
amounts capitalized)............................ $ 19,660 $ 22,756 $ 29,802
======== ======== ========
The accompanying notes are an integral part of these financial statements.
3
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
STATEMENT OF PARTNERS' CAPITAL
(THOUSANDS)
TOTAL
PARTNERS'
ATC KBLCOM CAPITAL
-------- -------- ---------
BALANCE AT DECEMBER 31, 1991..................... $ 61,746 $ 61,746 $123,492
Net income for the year ended December 31, 1992.. 24,911 24,911 49,822
-------- -------- --------
BALANCE AT DECEMBER 31, 1992..................... 86,657 86,657 173,314
Net income for the year ended December 31, 1993.. 32,241 32,241 64,482
Adjustment for pension liability................. (87) (87) (174)
-------- -------- --------
BALANCE AT DECEMBER 31, 1993..................... 118,811 118,811 237,622
Net income for the year ended December 31, 1994.. 33,550 33,550 67,100
-------- -------- --------
BALANCE AT DECEMBER 31, 1994..................... $152,361 $152,361 $304,722
======== ======== ========
The accompanying notes are an integral part of these financial statements.
4
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1.ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Paragon Communications ("Paragon") is a Colorado general partnership owned
equally by subsidiaries of American Television and Communications Corporation
("ATC") and by KBLCOM Incorporated ("KBLCOM"). ATC is an indirect, wholly-owned
subsidiary of Time Warner Inc. ("Time Warner"). KBLCOM is a wholly-owned
subsidiary of Houston Industries Incorporated. The operations consist primarily
of selling video programming, which is distributed to subscribers for a monthly
fee through communication networks of coaxial and fiber-optic cables.
In October 1991, Time Warner entered into an agreement to form a limited
partnership, Time Warner Entertainment Company, L.P. ("TWE"), with subsidiaries
of Toshiba Corporation ("Toshiba") and ITOCHU Corporation ("ITOCHU"). On June
30, 1992, Time Warner subsidiaries contributed substantially all assets of the
filmed entertainment, HBO programming, and cable businesses and certain other
assets to TWE, subject to certain liabilities. In lieu of contributing certain
assets to TWE, including ATC's interest in Paragon, certain Time Warner
subsidiaries agreed to pay TWE an amount equal to the net cash flow generated
by such assets. On September 15, 1993, a wholly-owned subsidiary of U S WEST,
Inc. ("USW") was admitted as an additional limited partner. As a result of the
USW transaction, the subsidiaries of USW, Toshiba, and ITOCHU hold pro-rata
priority capital and residual equity partnership interests of 25.51%, 5.61%,
and 5.61%, respectively, in TWE. The subsidiaries of Time Warner in the
aggregate hold pro-rata priority capital and residual equity partnership
interests of 63.27% in TWE.
REVENUE AND PROGRAMMING
Subscriber fees are recorded as revenue in the period the service is
provided. Subscriber fees for regulated services and equipment are based upon
rates that management believes are determined in accordance with the guidelines
of the Cable Television Consumer Protection Act of 1992 (the "Cable Act"). The
cost to acquire the rights to the programming ("programming costs") generally
is recorded when the product is initially available for exhibition.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of investments which are readily convertible into
cash and have original maturities of three months or less. Restricted cash
includes converter deposits held by Paragon which are refundable to customers.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions to cable
property, plant and equipment generally include materials, applicable labor,
overhead, and interest. Depreciation is computed generally by the straight-line
method over estimated useful lives ranging up to twenty years for buildings and
improvements and up to fifteen years for furniture, fixtures, and other
equipment. Expenditures for improvements and repairs are expensed as incurred.
Expenditures for major improvements and upgrades are capitalized and included
in property, plant and equipment.
CABLE TELEVISION FRANCHISES
Cable television franchises are stated at cost. Amortization is computed
using the straight-line method over periods ranging up to forty years.
5
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
Paragon is not an income tax paying entity. Accordingly, no provision is made
for income taxes since Paragon's operations are reportable by its partners on
their income tax returns.
2.DEBT
Debt consisted of the following:
DECEMBER 31,
-----------------
1994 1993
-------- --------
(THOUSANDS)
Short term commercial paper, face amounts of $221,073, less
unamortized discount of $756, and weighted average interest
rate of 3.48% at December 31, 1993(/1/).................... $ -- $220,317
Revolving Credit Agreement, unsecured, which provides for an
aggregate of $225 million in revolving credit facilities,
with an average interest rate of 6.7% at December 31,
1994....................................................... 199,000 --
Senior institutional notes dated July 12, 1988, unsecured,
at a fixed rate of 9.56% per annum, due in annual
installments of $50 million commencing July 1992 through
July 1995.................................................. 50,000 100,000
-------- --------
Total debt.................................................. $249,000 $320,317
======== ========
--------
(1)Short term commercial paper was supported by Paragon's revolving credit
agreement under which Paragon maintained unused availability at least to the
extent of the outstanding commercial paper. The commercial paper program was
discontinued effective September 1, 1994.
The aforementioned Revolving Credit Agreement contains certain covenants
which restrict merger or sale of assets, the amount of debt, distributions to
partners, certain investments and requires the maintenance of certain ratios,
including cash flow (operating income before depreciation and amortization) to
interest, debt to cash flow and debt service ratios. Based on the borrowing
rates currently available to the partnership for loans with similar terms and
maturities, the carrying value is a reasonable estimate of the fair value of
the debt at December 31, 1994.
The Revolving Credit Agreement will be terminated when the expected
acquisition of KBLCOM by Time Warner is consummated. It is anticipated that the
senior institutional notes will mature prior to the completion of the
acquisition (See Note 6).
3.RELATED PARTY TRANSACTIONS
ATC and KBLCOM receive management fees for various services equal to a total
of two and one-half percent of Paragon's gross receipts. Paragon paid
management fees of $6.8 million, $6.6 million, and $6.2 million to ATC and $1.7
million, $1.7 million, and $1.5 million to KBLCOM for the years ended December
31, 1994, 1993 and 1992, respectively.
6
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Additionally, Paragon has various transactions with ATC in the normal course
of conducting its business. ATC charges Paragon for certain expenses incurred
on the behalf of Paragon. Advances to or from ATC fluctuate daily and are
settled on a monthly basis. The statement of operations includes charges for
programming, construction and design services provided by TWE. The total of
these charges was $16.4 million, $16.9 million, and $16.2 million in 1994, 1993
and 1992, respectively. Management believes that these charges were based on
customary rates.
4.COMMITMENTS
Paragon presently has certain cable television franchises containing
provisions for construction of cable plant and services to customers according
to various requirements within the franchise areas. In connection with certain
obligations under existing franchise agreements, Paragon obtains surety bonds
or letters of credit guaranteeing performance to municipalities and public
utilities. Payment is required only in the event of nonperformance and no such
payments have been made.
Paragon is committed under non-cancelable operating leases involving certain
real and personal property. Net rent expense, primarily office facilities and
pole attachment and conduit usage agreements with utilities, was $5.4 million,
$5.1 million, and $4.8 million for the years ended December 31, 1994, 1993, and
1992, respectively.
Future minimum lease payments under non-cancelable operating leases as of
December 31, 1994 are: $2.7 million in 1995; $2.5 million in 1996; $2.1 million
in 1997; $1.6 million in 1998; $1.4 million in 1999; and $7.0 million
thereafter, totaling $17.3 million.
5.PENSION PLAN AND OTHER BENEFIT PLANS
Paragon has a non-contributory defined benefit pension plan (the "Pension
Plan") covering the majority of its employees. The benefits under the Pension
Plan are determined based on formulas which reflect employees' years of service
and compensation levels during their employment period. The projected unit
credit method is used to determine pension costs of the Pension Plan. Paragon's
funding policy is to contribute amounts to the plan sufficient to meet minimum
funding requirements set forth in the Employment Retirement Income Security Act
of 1974, plus such additional amounts as Paragon may determine to be
appropriate. At December 31, 1994, the assets of the Pension Plan were invested
primarily in short term, interest bearing securities. Paragon also sponsors an
unfunded excess benefit plan, a non-qualified plan that provides defined
pension benefits in excess of certain qualified plan limits imposed by federal
tax law.
Paragon also participates in a non-contributory multi-employer plan for union
employees of one of its divisions. Contributions are made based on a specified
percentage of an employee's compensation.
YEARS ENDED DECEMBER 31,
--------------------------
1994 1993 1992
-------- -------- --------
(THOUSANDS)
Total net pension cost:
Defined benefit plans................................ $ 1,785 $ 1,142 $ 988
Multi-employer plan.................................. 907 950 734
-------- -------- --------
Total net pension cost............................... $ 2,692 $ 2,092 $ 1,722
======== ======== ========
7
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
(THOUSANDS)
Components of net pension cost for Paragon's de-
fined benefit plans:
Service cost...................................... $ 1,308 $ 874 $ 769
Interest cost on projected benefit obligation..... 696 488 378
Actual return on plan assets...................... (178) (108) (100)
Net amortization and deferral..................... (41) (112) (59)
-------- -------- ------
Net pension cost.................................. $ 1,785 $ 1,142 $ 988
======== ======== ======
Funding Status of Paragon's Defined Benefit Plans:
DECEMBER 31,
-------------
1994 1993
------ ------
(THOUSANDS)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$5,274 and $4,632 at December 31, 1994 and 1993, respectively... $5,800 $5,343
====== ======
Projected benefit obligation..................................... $7,923 $7,486
Less: Plan assets at fair value.................................. 5,423 4,054
------ ------
Projected benefit obligation in excess of fair value of plan as-
sets............................................................ 2,500 3,432
Less: Unrecognized net loss (gain) from experience different from
that assumed and effect of changes in assumptions............... 983 2,316
Unrecognized prior service cost.................................. 119 152
Unrecognized net obligation...................................... 342 380
Plus: Additional minimum liability............................... -- 706
------ ------
Accrued pension cost included in accounts payable
and accrued expenses............................................ $1,056 $1,290
====== ======
The projected benefit obligation was determined using an assumed discount
rate of eight and one-half percent in 1994 and seven and one-half percent in
1993. An increase in future compensation rates of six percent was assumed in
both years. The expected long-term rate of return on assets was nine percent in
1994 and ten percent in 1993.
Paragon also maintains a defined contribution plan, the Paragon Employees
Stock Savings Plan (the "ESSP"), covering substantially all of its employees,
whereby two dollars are contributed by Paragon to a participant's account for
each three dollars contributed by a participant through payroll deductions. The
Paragon management committee has the right in any year to set the maximum
amount of Paragon's contribution. Paragon's defined contribution plan expense
for the ESSP was $983,000, $938,000, and $790,000 in the years ended December
31, 1994, 1993 and 1992, respectively.
6.SUBSEQUENT EVENT
On January 27, 1995, Time Warner and Houston Industries Incorporated
announced an agreement under which Time Warner expects to acquire KBLCOM.
Closing of the acquisition, which is subject to franchise transfers and other
approvals, is expected to take place in the second half of 1995.
8
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE PARTNERS OF
PARAGON COMMUNICATIONS
In our opinion, the accompanying balance sheet and the related statements of
operations and accumulated income (deficit), of partners' capital and of cash
flows present fairly, in all material respects, the financial position of
Paragon Communications (a Partnership) at December 31, 1994 and 1993, and the
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. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Our audits also included the Financial Statement Schedule VIII. In our opinion,
this Financial Statement Schedule presents fairly, in all material respects,
the information set forth therein when read in conjunction with the related
financial statements.
Price Waterhouse LLP
Denver, Colorado
January 19, 1995, except as to Note 6, which is as of January 27, 1995.
9
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS YEAR
----------- ---------- ---------- ---------- ----------
(THOUSANDS)
1994:
Deducted from asset accounts:
Allowance for doubtful ac-
counts........................ $ 1,824 $ 7,320 $(6,879)(a) $ 2,265
Accumulated amortization re-
lated to:
Cable franchises............... 84,110 10,205 -- 94,315
Other assets................... 2,401 210 -- 2,611
1993:
Deducted from asset accounts:
Allowance for doubtful ac-
counts........................ $ 1,545 $ 6,218 $(5,939)(a) $ 1,824
Accumulated amortization re-
lated to:
Cable television franchises.... 73,539 10,851 (280) 84,110
Other assets................... 1,977 424 -- 2,401
1992:
Deducted from asset accounts:
Allowance for doubtful ac-
counts........................ $ 1,822 $ 5,439 $(5,716)(a) $ 1,545
Accumulated amortization re-
lated to:
Cable television franchises.... 62,405 11,134 -- 73,539
Other assets................... 1,530 447 -- 1,977
--------
(a) Uncollectible accounts written off, net of recoveries.
10