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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, 1995.
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, YORK, N.Y. 10019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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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
- ------------------------------------------------------------------------------ ---------------------------------
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
6.85% Debentures due 2026 New York Stock Exchange
7.45% Notes due 1998 New York Stock Exchange
7.48% Debentures due 2008 New York Stock Exchange
7.75% Notes due 2005 New York Stock Exchange
7.95% Notes due 2000 New York Stock Exchange
7.975% Notes due 2004 New York Stock Exchange
8.05% Debentures due 2016 New York Stock Exchange
8.11% Debentures due 2006 New York Stock Exchange
8.18% Debentures due 2007 New York Stock Exchange
8.30% Discount Debentures due 2036 New York Stock Exchange
8 3/4% Debentures due 2017 New York Stock Exchange
9 1/8% Debentures due 2013 New York Stock Exchange
9.15% Debentures due 2023 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. [ ]
As of March 20, 1996, there were 392,488,134 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 20, 1996) was approximately
$16.3 billion.
DOCUMENTS INCORPORATED BY REFERENCE:
DESCRIPTION OF DOCUMENT PART OF THE FORM 10-K
- ------------------------------------------------------------------------ -----------------------------------
Portions of the Definitive Proxy Statement to be used in connection with Part III (Item 10 through Item 13)
the registrant's 1996 Annual Meeting of Stockholders.
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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. 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'), unless the context
otherwise requires. See below for a description of TWE and its relationship to
the Company.
The Company is the world's leading media company, and has interests in
three fundamental areas of business: Entertainment, consisting principally of
interests in recorded music and music publishing, filmed entertainment,
broadcasting, theme parks and cable television programming; News and
Information, consisting principally of interests in magazine publishing, book
publishing and direct marketing; and Telecommunications, consisting principally
of interests in cable television systems. Substantially all of the Company's
interests in filmed entertainment, broadcasting, theme parks and cable
television programming are held through TWE and most of its interests in cable
television systems are held through TWE.
In September 1995, the Company announced that it had agreed to merge with
Turner Broadcasting System, Inc. ('TBS'), a diversified information and
entertainment company, by acquiring the remaining approximately 80% interest in
TBS that the Company does not already own. The Company has entered into an
Amended and Restated Agreement and Plan of Merger dated as of September 22, 1995
(the 'Merger Agreement'), which provides for the merger of each of the Company
and TBS with separate subsidiaries of a holding company ('New Time Warner' and
collectively, the 'TBS Transaction'). In connection therewith, the issued and
outstanding shares of each class of the capital stock of the Company will be
converted into shares of a substantially identical class of capital stock of New
Time Warner. In addition, the Company has agreed to enter into certain
agreements and related transactions with certain shareholders of TBS, including
R.E. Turner and Liberty Media Corporation ('LMC'), an affiliate of
Tele-Communications, Inc. ('TCI'). The Merger Agreement and certain related
agreements provide for the issuance by New Time Warner of approximately 172.8
million shares of common stock, par value $.01 per share including 50.6 million
shares of a special class of non-redeemable common stock to be issued to LMC
(the 'LMC Class Common Stock'), in exchange for the outstanding TBS capital
stock, the issuance of approximately 13 million employee stock options to
replace all outstanding TBS employee stock options and the assumption of TBS'
indebtedness (which approximated $2.5 billion at December 31, 1995). As part of
the TBS Transaction, LMC will receive an additional five million shares of LMC
Class Common Stock pursuant to a separate option agreement which, together with
the 50.6 million shares it will receive pursuant to the TBS Transaction, will be
placed in a voting trust of which Gerald M. Levin, Chairman and Chief Executive
Officer of the Company, will be the trustee (the 'Liberty Voting Trust'), or, in
certain circumstances, exchanged for shares of another special class of
non-voting, non-redeemable common stock of New Time Warner that will be held by
LMC.
The TBS Transaction is subject to customary closing conditions, including
the approval of the shareholders of TBS and of the Company, all necessary
approvals of the Federal Communications Commission ('FCC') and appropriate
antitrust approvals. There can be no assurance that all these approvals can be
obtained or, in the case of governmental approvals, if obtained, will not be
conditioned upon changes to the terms of the Merger Agreement or the related
agreements.
In 1995 and early 1996, the Company completed its acquisition of three
significant cable television companies: Summit Communications Group, Inc.
('Summit'), KBLCOM Incorporated ('KBLCOM') and Cablevision Industries
Corporation ('CVI') and related companies and, through TWE, formed a cable
television joint venture (the 'TWE-A/N Partnership') with Advance/Newhouse
Partnership ('Advance/Newhouse'), in which TWE owns a 66 2/3% interest (these
transactions being collectively referred to hereinafter as the '1995
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Cable Transactions'). (See below for a more detailed discussion of each 1995
Cable Transaction.) Currently, Summit, KBLCOM (which has been renamed TWI Cable
Inc.) and CVI and related companies are wholly owned subsidiaries of the
Company, and the Company's interest in the TWE-A/N Partnership is held by TWE.
Time Warner Cable ('Time Warner Cable'), a division of TWE, operates and manages
substantially all of the cable television systems acquired through the 1995
Cable Transactions, as well as those systems held by TWE prior to the 1995 Cable
Transactions. Time Warner Cable does not manage those cable television systems
of the Company which are located within the 14-state telephone service area of U
S WEST, Inc., a Colorado corporation ('U S WEST'). See 'Entertainment -- Cable
Division -- Television.'
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
Filmed Entertainment, Programming-HBO and Cable businesses previously owned by
subsidiaries of 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. 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'). 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.'
Following the admission of U S WEST into TWE, each of ITOCHU and Toshiba
owned a 5.61% pro rata priority capital and residual equity interest in TWE and
a 6.25% residual equity interest in TW Service Holding I, L.P. and TW Service
Holding II, L.P. (the 'Time Warner Service Partnerships'). The Time Warner
Service Partnerships owned certain assets related to the TWE businesses. (See
'Entertainment -- Other Entertainment Group Assets -- Time Warner Service
Partnerships'). On September 5, 1995, and October 2, 1995, ITOCHU and Toshiba,
respectively, each exchanged its interest in TWE and the Time Warner Service
Partnerships for, in the case of ITOCHU, a total of 8 million shares of two new
series of convertible preferred stock ('Series G Preferred Stock' and 'Series H
Preferred Stock') of the Company and, in the case of Toshiba, 7 million shares
of a new series of convertible preferred stock of the Company ('Series I
Preferred Stock') and $10 million in cash (the 'ITOCHU/Toshiba Transaction').
As a result of the ITOCHU/Toshiba Transaction and the U S WEST Transaction,
the Company and the Time Warner General Partners collectively own 74.49% of the
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. The remaining 25.51% pro rata priority capital and residual
equity limited partnership interests are held by a subsidiary of U S WEST.
On April 1, 1995, TWE formed the TWE-A/N Partnership, a cable television
joint venture with Advance/Newhouse to which Advance/Newhouse and TWE
contributed cable television systems (or interests therein) serving
approximately 4.5 million subscribers, as well as certain foreign cable
investments and programming investments. TWE owns a two-thirds equity interest
in the TWE-A/N Partnership and is the managing partner. In accordance with the
partnership agreement, Advance/Newhouse can require TWE to purchase its equity
interest for fair market value at specified intervals following the death of
both of its principal
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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 TWE-A/N Partnership's net assets.
On May 2, 1995, the Company acquired Summit Communications Group, Inc.
('Summit'), which owned cable television systems serving approximately 162,000
subscribers in Winston-Salem, North Carolina and in certain suburbs of Atlanta,
Georgia. To acquire Summit, the Company issued approximately 1.6 million shares
of its common stock, par value $1.00 per share ('Common Stock'), and
approximately 3.3 million shares of a new series of convertible preferred stock
('Series C Preferred Stock') and assumed $140 million of indebtedness.
On July 6, 1995, the Company acquired KBLCOM Incorporated ('KBLCOM'), a
subsidiary of Houston Industries Incorporated, which owned cable television
systems serving approximately 700,000 subscribers and a 50% interest in Paragon
Communications ('Paragon'), which owns cable television systems serving an
additional 972,000 subscribers. The other 50% interest in Paragon was already
owned by TWE. To acquire KBLCOM, the Company issued one million shares of Common
Stock and 11 million shares of a new series of convertible preferred stock
('Series D Preferred Stock') and assumed or incurred approximately $1.2 billion
of indebtedness. KBLCOM's systems serve subscribers located in San Antonio and
Laredo, Texas, the Minneapolis metropolitan area, Portland, Oregon and Orange
County, California. Paragon's systems serve subscribers in Tampa, Florida and
northern Manhattan, as well as other locations.
On January 4, 1996, the Company acquired Cablevision Industries Corporation
('CVI') and related companies that owned cable television systems serving
approximately 1.3 million subscribers, in exchange for the issuance of
approximately 2.9 million shares of Common Stock and approximately 6.5 million
shares of a new series of convertible preferred stock ('Series E Preferred
Stock' and 'Series F Preferred Stock') and the assumption or incurrence of
approximately $2 billion of indebtedness. CVI's systems serve subscribers
principally located in New York, North Carolina, Florida, California's San
Fernando Valley and Columbia, South Carolina.
Along with internal growth, the 1995 Cable Transactions increased the total
number of subscribers under the management of Time Warner Cable to approximately
11.7 million, as compared to 7.5 million subscribers at the end of 1994.
For additional information regarding the 1995 Cable Transactions, see Note
4 'Cable Transactions' and Note 9 'Capital Stock,' to the Company's consolidated
financial statements at pages F-32 and F-40, respectively herein.
On June 23, 1995, TWE sold 51% of its interest in Six Flags Entertainment
Corporation ('SFEC') to an investment group led by Boston Ventures Management,
Inc., a private investment management firm, for $204 million and received $640
million in additional proceeds from SFEC, representing payment of certain
intercompany indebtedness and licensing fees. As a result of the transaction,
SFEC has been deconsolidated and TWE's remaining 49% interest in SFEC is
accounted for under the equity method of accounting.
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, 1995, see Note 13 'Segment
Information,' to the Company's consolidated financial statements at pages F-46
through F-49 herein.
NEWS AND INFORMATION
The Company's News and Information business currently is conducted by Time
Inc., a wholly owned subsidiary of the Company. Time Inc. has one of the largest
portfolios of brand name franchises in the world. Development and distribution
of its brands are accomplished through the publishing, direct marketing and
sales of magazines, books, music and videos. Time Inc. also develops products
for the multimedia and television markets. It conducts these activities through
wholly owned subsidiaries, joint ventures, equity investments and partnerships.
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MAGAZINES
GENERAL
Time Inc. publishes TIME, PEOPLE, SPORTS ILLUSTRATED, FORTUNE, MONEY, LIFE,
SPORTS ILLUSTRATED FOR KIDS, ENTERTAINMENT WEEKLY and IN STYLE. In January 1995,
Time Inc. launched RETIRE WITH MONEY, a consumer newsletter from the editors of
MONEY magazine that provides guidance to individuals on their retirement
investments. In September 1995, Time Inc. launched TIME For Kids, a weekly news
magazine aimed at elementary school students in grades four through six.
Time Inc., either directly or through subsidiaries, has equity interests in
ASIAWEEK and American Family Publishers. In 1995, Time Inc. acquired an equity
interest in Emphasis, a provider of in-flight media and entertainment; purchased
Targeted Media, an organization dedicated to the creation and execution of
alternative media concepts and programs; and launched Independent Media
Distribution in Australia, a distributor of magazines published by Time Inc. and
certain other publishers.
Time Inc. Ventures ('TIV'), and its subsidiary Time Publishing Ventures,
Inc. ('TPV'), are responsible for 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, WHO WEEKLY, PRESIDENT and
DANCYU magazines, and various joint ventures. In 1995, TPV purchased HIN Inc., a
publisher of health information/patient education booklets and tested THIS OLD
HOUSE magazine, based on the popular home renovation television series. In 1996,
THIS OLD HOUSE magazine was launched under a licensing arrangement with public
television station WGBH.
Southern Progress publishes SOUTHERN LIVING, PROGRESSIVE FARMER, SOUTHERN
ACCENTS and COOKING LIGHT magazines as well as occasional special interest
publications. Sunset Publishing publishes SUNSET magazine.
Time Inc., through its TIV subsidiary, 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.
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, THIS OLD HOUSE, VIBE, and Time Inc.'s
overseas operations generally 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. Advertising rate base is the guaranteed minimum paid circulation
level on which advertising rates are based.
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. In 1995, TIME launched Time
Digital, a wide-ranging, user-friendly, quarterly 'magazine within a magazine'
about the digital age. The domestic advertising rate base of TIME as of January
1996 was 4,000,000, which is unchanged from January 1995.
TIME For Kids, is a weekly news magazine aimed at elementary school
students from fourth through sixth grades. The advertising rate base as of
January 1996 was 720,000.
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 1,490,000 as of January 1996, compared to 1,460,000 in January 1995.
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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
1996 was 3,150,000, the same as in January 1995.
SPORTS ILLUSTRATED FOR KIDS is a monthly sports-oriented magazine geared to
children ages eight through fourteen. Its advertising rate base as of January
1996 was 950,000, the same as in January 1995, including 225,000 copies
distributed free to over 1,700 schools.
PEOPLE is a weekly magazine which reports on celebrities and other notable
personalities. The advertising rate base as of January 1996 was 3,150,000, the
same as in January 1995.
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 1996 was 1,225,000, compared to 1,125,000 in January 1995.
FORTUNE is a biweekly magazine which reports on worldwide economic and
business developments. The worldwide advertising rate base as of January 1996,
was 860,000, the same as in January 1995.
MONEY is a monthly magazine which reports on personal finance. The
advertising rate base as of January 1996 was 1,900,000, the same as in January
1995.
LIFE is a monthly magazine which features photographic essays. The
advertising rate base as of January 1996 was 1,500,000, the same as in January
1995.
IN STYLE is a monthly magazine which focuses on celebrities' lives and
lifestyles. The advertising rate base as of January 1996 was 650,000, compared
to 550,000 in January 1995.
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 1996, the same as in January 1995.
PROGRESSIVE FARMER is a monthly regional farming magazine with an
advertising rate base of 630,000 as of January 1996, compared to 640,000 in
January 1995.
SOUTHERN ACCENTS is published six times a year, and features architecture,
fine homes and gardens, arts and travel and is targeted to affluent Southerners.
Its advertising rate base as of January 1996 was 285,000, compared to 275,000 in
January 1995.
COOKING LIGHT is published nine times a year and promotes health and
fitness through active lifestyles and good nutrition. The advertising rate base
as of January 1996 was 1,300,000, compared to 1,200,000 in January 1995.
PARENTING is published ten times a year and is aimed at parents of children
under the age of ten. The advertising rate base as of January 1996 was
1,100,000, compared to 1,000,000 in January 1995.
SUNSET, The Magazine of Western Living, is a monthly regional magazine
focused on lifestyles in the West. The advertising rate base was 1,425,000 in
January 1996, the same as in January 1995.
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 1996, the same as in January
1995. HIPPOCRATES had a controlled circulation of 125,000 primary care
physicians in January 1996, the same as in January 1995.
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 1996 was 1,200,000, compared
to 800,000 in January 1995. Effective with the February 1996 issue, the rate
base will increase to 1,425,000.
BABY TALK is published ten times a year and is targeted at expectant and
new mothers. In January 1996 its advertising rate base was 1,100,000, compared
to 1,000,000 in January 1995. BABY TALK's ancillary publication BABY ON THE WAY
is published semi-annually.
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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 1996 was 400,000, compared to 250,000 in
January 1995.
THIS OLD HOUSE is published six times a year, pursuant to a licensing
arrangement with public television station WGBH, and is based on the popular
home renovation television series. The advertising rate base as of January 1996
was 300,000.
ASIAWEEK is a weekly English-language magazine which summarizes the news
events in the Asian region. In January 1996 its advertising rate base was
110,000, compared to 100,000 in January 1995.
WHO WEEKLY is an Australian version of PEOPLE which focuses on celebrities
and other notable personalities. The advertising rate base as of January 1996
was 227,000, compared to 220,000 in January 1995.
PRESIDENT is a monthly Japanese-language business/management magazine. The
advertising rate base as of January 1996 was 258,000, the same as in January
1995.
DANCYU is a monthly Japanese cooking magazine. The advertising rate base as
of January 1996 was 105,000, the same as in January 1995.
ANCILLARY BUSINESSES
Time Inc. has continued to expand on its core businesses through numerous
product extensions. Most notably: the publishing of newsstand specials including
LIFE's single-subject issues on Elvis Presley and the Beatles, MARTHA STEWART
LIVING WEDDINGS, PEOPLE's tribute issues to Selena, and Jerry Garcia,
ENTERTAINMENT WEEKLY's Academy Awards special, SPORTS ILLUSTRATED PRESENTS
publications which in 1995 included seven commemorative issues and four sport
preview issues, as well as, special interest publications including, Southern
Progress' HOME FOR THE HOLIDAYS, GARDEN GUIDE and SUMMER TIME. Other activities
include TIME's special issues on the Cyber Revolution and V-E Day, and MONEY's
newsletter for retirees and 401(k) plan participants, RETIRE WITH MONEY;
conferences and seminars sponsored by FORTUNE, PEOPLE and VIBE, and expanded
merchandising activities via the SPORTS ILLUSTRATED Insider Authentics catalog,
and the 1995 launch of ENTERTAINMENT WEEKLY's Studio Store and MARTHA STEWART's
Martha by Mail catalog.
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 constitutes a significant component of physical
costs in the production of magazines. Time Inc. has contractual commitments to
ensure an adequate supply of paper, but periodic shortages may occur in the
event of strikes or other unexpected disruptions in the paper industry. During
1995,
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Time Inc. purchased paper principally from six 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. Paper
costs were significantly higher in 1995 as a result of several consecutive
quarterly price increases from October 1994 through October 1995. These
significant price increases resulted in part from an increased demand for paper
relative to production capacity. Based upon the current marketplace, the Company
expects that paper prices will stabilize in 1996.
Printing and binding for the Company's magazines are accomplished primarily
by major domestic and international independent 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 direct marketing and 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 1995, the book operations distributed an aggregate of
approximately 163 million gross units.
TIME LIFE
Time Life is composed of several divisions including: Books, Music, Video,
Television, Education, Custom Publishing 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 licensing channels, and by door-to-door
independent distributors in some foreign markets. Time Life products are
currently sold in over 25 languages worldwide and approximately 40% of Time
Life's revenues are generated outside the United States. In January 1995, Time
Life licensed the name Time Life Medical to Patient Education Media Inc. to be
used in connection with the creation of patient education videos. Time Life also
holds a minority equity interest in Patient Education Media Inc.
Editorial material is created by in-house staffs as well as through outside
book packagers. A significant product in 1995 was Time Life Music's series 'Dick
Clark's Rock 'n' Roll Era.' Time Life's 1995 best sellers included 'Great
Taste-Low Fat' and 'Home Repair and Improvement' from Time Life Books, 'Century
of Warfare' and 'Zoo Life' from Time Life Video. In 1995, Time Life also aired
the television productions 'Lost Civilizations,' a ten-hour television
documentary series and 'The History of Rock 'n' Roll,' co-produced with TWE's
Telepictures Productions.
Time Life Books products are manufactured 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 currently operates eight book clubs and two
continuity businesses with a combined membership of more than 3.5 million
members. 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. Book-of-the-Month Club's international businesses operate in over 50
countries worldwide. In December 1995, Book-of-the-Month Club acquired Meredith
Book Clubs, adding approximately 500,000 members to its book clubs. This
acquisition will significantly expand its presence in the women's lifestyle
franchise. In June 1995, the ONE SPIRIT book club was launched, targeting the
growing consumer interest in spiritual, self-help and health topics.
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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 primarily publishes hardcover, mass market and trade paperback
books. Among its best selling hardcover books in 1995 were Robert James Waller's
'The Bridges of Madison County,' which benefited from the success of the Warner
Bros. movie, and James Redfield's 'The Celestine Prophecy.' Best selling mass
market paperbacks in 1995 included 'Charade' by Sandra Brown, 'The Day After
Tomorrow' by Allan Folsom, 'Kiss the Girls' by James Patterson, 'Nothing Lasts
Forever' by Sidney Sheldon and 'Spencerville' by Nelson DeMille. Trade paperback
bestsellers included James Redfield's 'The Celestine Prophecy: An Experiential
Guide.'
Time Warner AudioBooks develops and markets audio versions of books and
other materials published by both Warner Books and Little, Brown. 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 and journals. Through its subsidiary,
Little, Brown and Company (U.K.) Ltd., it also publishes general hardcover and
mass market paperback books in the United Kingdom. Among the trade hardcover
books published by Little, Brown in 1995 were: 'I Want to Tell You' by O.J.
Simpson, 'A Good Walk Spoiled' by John Feinstein, 'Garcia' by Rolling Stone
Magazine and 'Hide and Seek' by James Patterson.
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 primarily
through direct marketing efforts. Through their combined United States and
United Kingdom 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.
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 distribution network of home repair and garden centers.
OTHER PUBLISHING OPERATIONS
MULTIMEDIA AND TELEVISION
Time Inc. continues to develop products for emerging technologies such as
on-line computer networks, the Full Service Network'tm', and the CD-ROM market.
In 1995, Time Inc. New Media, a company dedicated to the development and
enhancement of on-line services, launched two new startup products in addition
to its successful launch of Pathfinder in 1994. These launches were LineRunner,
a partnership with Time Warner
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Cable, to distribute internet content, local content and Pathfinder via high
speed cable modems, and TNX, the world's first and only switched broadband
interactive TV news service, which is distributed on Time Warner Cable's Full
Service Network. Time Inc. has also licensed its editorial content to various
other commercial on-line information services, and has produced CD-ROM products
internally, as well as through licensing arrangements with third party CD-ROM
developers.
Time Inc. has undertaken development efforts in various television
ventures, both in combination with other Company divisions and independently.
Sports Illustrated Productions Inc. completed its second year of television
production in 1995, producing two prime-time specials, weekly segments on Wide
World of Sports and two home video titles. The 'Martha Stewart Living'
television program, based on the popular magazine, entered its third season in
September and aired a one hour special 'Martha Stewart's Home For The Holidays'
in December 1995. PEOPLE magazine took a retrospective look at the people and
events of 1995 in a prime time broadcast aired in December 1995, and HEALTH
magazine presented 'Your Mind and Body,' a weekly television show focusing on
health, fitness and beauty which began airing in September 1995. TPV has
arrangements to syndicate episodes of the 'This Old House' television program
after such programs have run on public television and produce books based on
this popular series.
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
Time Distribution Services ('TDS') is a national distribution company
responsible for the retail sales, distribution, marketing and merchandising of
single copies of periodicals for Time Inc. and other publishers. TDS distributes
periodicals through a magazine wholesaler network which services retail outlets
such as newsstands, supermarkets, convenience and drug stores.
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
paperback lines of other publishers.
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POSTAL RATES
Postal costs represent a significant operating expense for the Company's
publishing activities. An increase of approximately 10% for first class and 14%
for second, third and fourth classes was implemented in January 1995, which
significantly increased Time Inc.'s postal costs. However, a recently issued
decision by The Postal Rate Commission has been accepted by the Postal Service
and will result in a reduction of Time Inc.'s current postage rates in July
1996. The new rates reflect an increased incentive for mailer worksharing
efforts that reduce costs to the Postal Service.
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.
ENTERTAINMENT
The Company's Entertainment business is conducted through wholly or
partially owned subsidiaries and through TWE. The Company's wholly owned
worldwide recorded music and music publishing businesses are conducted under the
umbrella name Warner Music Group ('WMG'). Substantially all of the Company's
interests in filmed entertainment, broadcasting, theme parks, cable television
programming and most of its cable television systems are held through TWE.
MUSIC
GENERAL
The Company's domestic recorded music business is conducted principally
through WMG and its constituent companies, Warner Bros. Records, Inc. ('WBR'),
Atlantic Recording Corporation ('Atlantic'), Elektra Entertainment Group
('Elektra') and their affiliated labels, and through WEA Inc. ('WEA Inc.') 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 70 countries through WEA International Inc. and a division of WCI, Warner
Music International, and their subsidiaries and affiliates (collectively,
'WMI'), as well as through non-affiliated licensees.
The Company's music publishing business is conducted principally through
wholly owned subsidiaries of WCI (collectively, 'Warner/Chappell').
In 1995, more than 57% of WMG's recorded music revenues were derived from
sources outside of the United States.
In 1995, WMG closed Warner Music Enterprises Inc., one of the Company's
direct marketing businesses, and completed the transaction pursuant to which it
sold its 50% interest in the Interscope Records partnership.
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RECORDED MUSIC AND RELATED ACTIVITIES
WBR, Atlantic, Elektra and WMI produce, sell and license compact discs,
cassette tapes and music videos 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,' 'Tommy Boy,' 'Warner Nashville,'
'Elektra,' 'Sire,' 'Asylum,' 'Atlantic,' 'EastWest America,' 'Big Beat,'
'Atlantic Nashville,' 'WEA,' 'Nonesuch,' '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
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,'
'Mammoth,' 'Maverick,' 'Qwest' and 'Rhino.'
WMG's record companies also acquire rights pursuant to agreements to
manufacture and distribute certain recordings that are marketed under the
owner's proprietary label. Included among the labels distributed by WMG under
such arrangements are 'Curb' and 'Scotti Brothers.'
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 1995 were: AC/DC, Bush, Enya, Jeff Foxworthy, Green Day,
Hootie & The Blowfish, Madonna, Alanis Morissette, John Michael Montgomery,
Natalie Merchant, Red Hot Chili Peppers, Simply Red, Van Halen and Tatsuro
Yamashita. In 1996, WMG's record companies have released or expect to release
albums by the following artists: Tori Amos, Brandy, Jackson Browne, Tevin
Campbell, Jose Carreras, Collective Soul, Phil Collins, The Cure, Hootie & The
Blowfish, Aaron Kwok, Madonna, Noriyuri Makihara, Metallica, Luis Miguel,
Pantera, Laura Pausini, R.E.M., Linda Ronstadt, Rush, Keith Sweat, Seal, Stone
Temple Pilots, Travis Tritt, Van Halen and Westernhagen.
WMG's domestic manufacturing, packaging and distribution operations are
conducted through WEA Inc. 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 'DVD,' the new
digital configuration developed by the Company and Toshiba, and expects to be
manufacturing DVDs in 1996. For additional information regarding DVDs, see
'Filmed Entertainment Division -- Home Video.'
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 Inc. 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
1995, establishing new affiliates in the Czech Republic
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and in Poland and forming a new WEA division in Brazil. 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.
Through joint ventures, WMG and Sony Music Entertainment Inc. ('Sony
Music') operate The Columbia House Company, the leading direct marketer of
compact discs, cassette tapes and videocassettes in the United States and
Canada.
In March 1995, WMG entered into a joint venture with PolyGram International
Ltd. ('PolyGram') and Sony Music to market recorded music and videocassettes in
Europe through music clubs and video clubs.
WMG, with other partners, including another subsidiary of the Company, has
an equity interest in Music Choice, 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, with other partners, has an equity interest in VIVA, a 24-hour German
language music video channel carried on cable television in Germany. WMG,
pursuant to separate joint ventures, has equity interests in two other music
video channels: Channel [V] in Asia and YA TV in Latin America.
WMG's computer-entertainment and video-game businesses -- including
investments in Inscape and Accolade in the United States and wholly owned
operations in Europe -- are operating in 1996 as part of a new company, Warner
Interactive.
MUSIC PUBLISHING
Time Warner's music publishing companies own or control the rights to over
one 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., Samuel Goldwyn Productions,
Aaron Spelling Productions and New World.
Warner/Chappell's printed music division markets publications throughout
the world containing the works of Alabama, Phil Collins, The Eagles, The
Grateful Dead, Michael Jackson, Led Zeppelin, Madonna, the artist formerly known
as Prince, Rush, Bob Seger and many others. Warner/Chappell also owns
CPP/Belwin, Inc., one of the world's largest publishers of printed music.
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
With the enactment of P.L. 104-39 in late 1995, sound recording copyright
owners and performers are now, for the first time in the United States, able to
license and receive royalties for the public performance of digitized sound
recordings distributed through subscription music and interactive services. This
law was enacted in response to the advent of digital technology in broadcast,
cable and other means of distribution. Digitization creates the potential for
virtually flawless reception and copying, and the consequent displacement of the
sale of pre-recorded music product. Passage of this legislation favorably
impacts WMG's interests.
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In addition, bills introduced in Congress last year to extend the term of
ownership of copyrights for an additional 20 years (H.R. 989, S. 483) are still
pending. Passage of these bills would benefit all of the Company's copyright
businesses, including the businesses of WMG, but no assurance can be given that
they 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.
Overexpansion of retail outlets for music over the past several years led to the
closing of many such stores during 1995, which is expected to further increase
competition among recorded music companies for sales of music related product.
Competition also intensified during 1995 as a result of the start-up of a number
of new labels. 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.
FILMED ENTERTAINMENT
GENERAL
The Company's principal interest in the filmed entertainment business is
conducted by Warner Bros. ('WB'), a division of TWE. 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; the ownership and operation of a national
broadcast network, The WB; and the distribution of pre-recorded videocassettes
and videodiscs. WB also is engaged in product licensing and the ownership and
operation of retail stores, movie theaters, theme parks (including the
management of TWE's interest in Six Flags theme parks), a new international
cable channel and a new on-line service.
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 1995,
50% of film rentals from WB theatrical distribution were generated in the United
States and Canada and 50% in international territories.
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,
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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.
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 1995, WB released 'Ace Ventura II: When Nature Calls,'
starring Jim Carrey, under this arrangement. Among the releases anticipated for
1996 is 'Diabolique,' starring Sharon Stone.
An affiliate of WB is a party to long-term distribution agreements with
Monarchy Enterprises C.V. and its affiliate, Regency Entertainment U.S.A.
(collectively 'Monarchy/Regency'), as well as with Le Studio Canal Plus and
Alcor Film for the distribution of major motion pictures involving an expected
total production outlay in excess of $200 million. Arnon Milchan produces the
pictures for Monarchy/Regency with funding provided primarily by
Monarchy/Regency. The WB affiliate makes a distribution advance (which it has
the right to recoup, together with its distribution fee) equal to a portion of
the production budget of each film, and it also advances all necessary marketing
and distribution costs for the films. WB has acquired all distribution rights in
the United States and Canada, and substantially all international theatrical and
home video rights to these motion pictures. In 1995, WB released 'Copycat,'
starring Sigourney Weaver and Holly Hunter, under this arrangement. Among the
releases anticipated for 1996 is 'Bogus,' starring Whoopi Goldberg and directed
by Norman Jewison. It is anticipated that four or five pictures per year will be
produced during the approximately five-year production term of the agreements.
During 1995, David Geffen and TWE agreed to wind-up the operations of
Geffen Pictures, a joint venture of TWE and The David Geffen Company. The final
two pictures produced by Geffen Pictures, 'Michael Collins,' starring Liam
Neeson and Julia Roberts, and 'Joe's Apartment,' will be released by WB in 1996.
WB has selected certain of Geffen Pictures' projects for continued development
by WB with David Geffen as producer.
During 1995, WB released 26 motion pictures for theatrical exhibition, of
which 12 were produced by others. Among these 26 motion pictures, the following
have produced substantial gross receipts: 'Batman Forever,' 'Outbreak,' 'The
Bridges of Madison County,' 'Ace Ventura II: When Nature Calls' and 'Under Seige
II: Dark Territory.' Significant revenues were also generated in 1995 by
pictures originally released in 1994, including 'Disclosure' and 'Interview with
the Vampire.'
During 1996, WB currently expects to release domestically 24 motion
pictures, of which nine will be produced by others. In addition to those
previously mentioned, such motion pictures include: 'Eraser,' starring Arnold
Schwarzenegger, 'Mars Attacks,' directed by Tim Burton, 'Space Jam,' starring
Michael Jordan, 'A Time to Kill,' starring Sandra Bullock and Samuel L. Jackson,
'Tin Cup,' starring Kevin Costner, 'The Glimmer Man,' starring Steven Seagal and
Keenan Ivory Wayans, 'Sleepers,' directed by Barry Levinson and starring Brad
Pitt, Robert DeNiro and Dustin Hoffman, 'Rosewood,' directed by John Singleton,
'My Fellow Americans,' starring Jack Lemmon and James Garner and 'Twister,' a
co-production with MCA.
Warner Bros. Feature Animation operates two animation studios, one in
Glendale, California, and the other in London, England, and plans to produce its
first fully animated feature film for release in November 1997. Additionally,
the division is providing animation services on 'Space Jam,' a combination live
action/animated film scheduled for release in November 1996. The division has
numerous projects in development for production and release in subsequent years.
Warner Digital Studios is a recently formed division that oversees the
creation and control of Warner Bros.' digital visual effects, which effects are
an integral part of the production of feature films.
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 and
distribute filmed entertainment for television (including comedy and drama
series, animation shows,
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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 Productions ('Warner Bros.
Television'), Telepictures Productions ('Telepictures'), Warner Bros. Television
Animation, Warner Bros. Domestic Television Distribution ('WBDTD'), Telepictures
Distribution, Warner Bros. International Television Distribution ('WBITD') and
Warner Bros. International Channels 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 1995-96 broadcast season include: the
highly-rated 'ER' and 'Friends' (each in its second season), 'Murphy Brown' (in
its eighth season), 'Family Matters' (in its seventh season), 'Sisters' (in its
sixth season), 'Step by Step' (in its fifth season), 'Hangin' with Mr. Cooper'
(in its fourth season), 'Kung Fu: The Legend Continues' (in its fourth season),
'Living Single' and 'Lois & Clark: The New Adventures of Superman' (each in its
third season), 'Hope & Gloria,' 'The Parent 'Hood' and 'The Wayans Bros.' (each
in its second season) and 'The Drew Carey Show,' 'John Grisham's The Client,'
'Kirk,' 'High Society' and 'Too Something' (each in its first season). During
1996, Warner Bros. Television will also present numerous movies and mini-series
including, 'Stephen King's The Shining' (a 6-hour mini-series) and 'The Thorn
Birds: The Missing Years,' from the Wolper Organization.
Telepictures specializes in reality and reality-based series and specials
for the first-run syndication market. For the 1995-96 television season,
Telepictures returned the nationally syndicated 'Jenny Jones' for a fifth season
and, on June 10, 1996, will launch a talk/variety series hosted by
actress/comedian Rosie O'Donnell. Through a joint venture, Time Telepictures
Television produced the second season of the six-day-a-week pop culture news
magazine 'EXTRA.'
Warner Bros. Television 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 animation properties for all television media
worldwide. Warner Bros. Television Animation currently supplies animated
programming to the Fox Children's Network, ABC Television Network, Nickelodeon,
as well as providing five series to The WB's new children's programming service,
Kids' WB!, which debuted in September 1995. Commencing in September 1996, Warner
Bros. Television Animation will supply eight series to Kids' WB!.
PTEN, a consortium of leading television stations, offers primetime
first-run programs that are exclusively supplied by WBDTD. The 1995-96 season of
PTEN includes the fourth season of 'Kung Fu: The Legend Continues' and the third
season of 'Babylon 5.'
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 1995-96 season, the team produced the third season of 'The John
Larroquette Show' and three new comedies 'Minor Adjustments,' 'Local Heroes' and
'My Guys' (the latter two for mid-season debuts).
WBDTD is one of the industry's leading domestic distributors of television
programming. The division has over 3,800 hours in active domestic syndication; a
substantial portion of this programming is produced by WB's television divisions
and ventures. The primary focus of WBDTD is to launch and support major
off-network series and high profile first-run syndication strips.
Telepictures Distribution was created in June 1995 as a television
syndication operation that distributes original, general interest programs for
the first-run syndication market, as well as the second licensing cycle of
selected off-network product from WBDTD's library.
WBITD is responsible for expanding WB's global presence in television,
handling the full breadth of distribution services to the international
television marketplace, establishing and managing strategic global alliances
that include co-producing and distributing programs that qualify for European
Community (EC) content. WBITD is the world's largest distributor of television
programming. It licenses more than 25,000 hours of television programming and
feature films, dubbed or subtitled in more than 40 languages, to telecasters in
more than 175 countries. The division handles the distribution to the
international television marketplace
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(including, broadcast, pay cable, basic cable, satellite, pay-per-view,
video-on-demand and digital platforms) of all of the product produced by the WB
television divisions and ventures and WB feature films, among others.
Warner Bros. International Channels oversees the programming, development
and operation of branded satellite-delivered cable programming services in both
mature and emerging broadcast markets throughout the world. The first, WBTV-The
Warner Channel, debuted on September 30, 1995 in Latin America and the Caribbean
Basin to more than 800,000 subscribers, with Brazil added in early 1996. The
24-hour-a-day, family-oriented service is a joint venture of WB and HBO Ole
Partners, and utilizes the cable distribution expertise and facilities of HBO
Ole. In alliance with Home Box Office and other major motion picture studios, WB
participates as a partner in five other 24-hour pay television services: HBO
Asia, HBO Brasil, HBO Ole, Sony Entertainment Television and the music channel,
YA TV.
WB's backlog, representing the amount of future revenue not yet recorded
from cash contracts for the licensing of theatrical and television product for
pay cable, network, basic cable and syndicated television exhibition, amounted
to $1.056 billion at December 31, 1995 compared to $852 million at December 31,
1994 (including amounts relating to Programming-HBO of $175 million at each
date). The backlog excludes advertising barter contracts.
THE WB TELEVISION NETWORK
The WB Television Network completed its first full year of broadcast
operations in January 1996. Combining the WB's current broadcast affiliate
line-up of 95 stations with the reach of Tribune Broadcasting Company's ('TBC')
WGN Superstation, The WB's national coverage is more than 80% of all United
States television households. In addition to a Wednesday night primetime line-up
that includes four half-hour comedies: 'Sister, Sister,' 'The Parent 'Hood,'
'The Wayans Bros.' and 'Unhappily Ever After,' The WB launched a three hour
Sunday night slate of prime time programming in September 1995 that currently
includes four half-hour comedies: 'Steven Spielberg Presents Pinky & the Brain,'
'Simon,' 'Sister, Sister,' 'Kirk' and a one hour drama entitled 'Savannah.' A
third night of prime time programming is scheduled to be added in September
1996, and it is currently planned that an additional night of programming will
be added each year thereafter. The WB prime time program philosophy is to
deliver family-oriented programming that appeals to the greatest number of
household viewers.
Kids' WB! children's programming premiered in September 1995 with six half
hours on Saturday morning and two half-hour weekday strips. The Saturday morning
program block includes 'Freakazoid,' a new animated series from Steven
Spielberg, and new episodes of 'Steven Spielberg Presents Animaniacs' and
'Steven Spielberg Presents Pinky & the Brain.' In addition, the morning block
includes new episodes of 'Sylvester & Tweety Mysteries' and 'Earthworm Jim.' On
weekdays, Kids' WB! continues to offer Warner Bros. classic animation as well as
previously produced episodes of 'Animaniacs.' In September 1996, an additional
hour of animated programming will be added to the weekend line-up. Included in
this new hour of programming is a new version of 'Superman,' currently in
production with Warner Bros. Television Animation.
In August 1995, TBC exercised an option to obtain an ownership interest in
The WB. TBC now owns 11.125% of The WB and has options that are exercisable over
the next several years and that could increase TBC's ownership to 22.25% of the
network. Key employees of The WB hold an 11% interest in the network.
HOME VIDEO
Through its Warner Home Video division ('WHV'), WB distributes for home
video use pre-recorded videocassettes 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, TBS, Regency Pictures and
Morgan Creek Productions (in the United States and in selected international
markets). In 1996, WHV began distributing the entertainment product of
WarnerVision, a WMG company that specializes in children's and fitness videos.
During 1995, WHV released seven titles into the North American rental
market whose sales exceeded 300,000 units each: 'Disclosure,' 'Interview with
the Vampire,' 'Outbreak,' 'The Specialist,' 'Species,' 'Just
I-16
Cause' and 'Natural Born Killers.' Internationally, the following titles
generated substantial home video revenue in 1995: 'Interview with the Vampire,'
'Maverick,' 'Disclosure,' 'The Specialist,' 'The Client' and 'Outbreak.'
Additionally, the Warner Bros. Family Entertainment label was enhanced through
the affordably-priced North American video releases of 'Free Willy 2: The
Adventure Home,' 'Richie Rich,' 'Little Giants,' 'A Little Princess,' 'Born to
be Wild' and 'A Troll in Central Park,' which generated combined videocassette
sales in excess of 17 million units. Also, WHV released 'Batman Forever,' and,
under the MGM/UA family entertainment label, 'Pebble and the Penguin' at
affordable prices, generating combined sales of over 10 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 WMG and third parties. In some international markets,
WHV's product is distributed through licensees. All product is manufactured
under contract with independent duplicators and replicators.
In December 1995, a consortium of nine major consumer electronics
manufacturers, including Sony Corp. and Philips Electronics NV, who had
previously announced that they were developing a similar product based on a
separate competing format, announced agreement on a unified standard for a high
density digital optical technology that is capable of storing large volumes of
digitized information -- enough storage capacity for two full-length feature
films on a double-sided 0.6mm bonded disc. The unified standard has been named
the 'digital versatile disc' or 'DVD'. Certain members of the consortium,
including Toshiba, have announced their intention to introduce in late summer of
1996 a new generation of digital video disc players utilizing DVD for home
viewing by consumers of motion pictures. The DVD technology offers picture
quality significantly superior to existing technology, as well as premium
features such as multiple language soundtracks. If the new DVD delivery medium
is adopted by consumers, and there can be no assurance at this time that it will
be, WHV anticipates being able to benefit by releasing first-run feature motion
pictures in the new format, as well as re-releasing the extensive WHV catalogue
of feature motion pictures.
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 1995, 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 conducted a major licensing program for the new theatrical motion
picture 'Batman Forever,' and began a licensing program for the 1996 theatrical
license of the motion picture 'Space Jam.'
WARNER BROS. INTERACTIVE ENTERTAINMENT
Warner Bros. Interactive Entertainment ('WBIE') is a new division that
licenses, develops and produces interactive entertainment and educational
programming based on WB-owned or controlled properties. During 1995, WBIE
entered into a number of licensing agreements for interactive entertainment
products (e.g., video games, pinball games and handheld games), and initiated a
major interactive game licensing program for 'Space Jam.' WBIE has also formed
an alliance with Acclaim Entertainment, Inc. to jointly publish interactive
entertainment software based on three WB feature films, including 'Space Jam.'
WARNER BROS. STUDIO STORES
In 1995, the retail division of Warner Bros. Consumer Products ('WBCP
Retail') continued its expansion with the opening of 22 additional outlets in
the United States. By the end of 1995, WBCP Retail had opened a total of 133
Warner Bros. Studio Stores, 122 of which are located in select shopping
locations throughout the
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United States, 10 of which are located in the United Kingdom and one of which is
located in Germany. In 1996, WBCP Retail plans to open 10-15 additional stores
in the United States. Two franchised Warner Bros. Studio Stores were opened in
each of Hong Kong and Singapore during 1995. During 1996, WBCP Retail currently
plans to open two franchised stores in Hong Kong, three franchised stores in
Japan and two franchised stores in Australia. Additional agreements to franchise
Warner Bros. Studio Stores throughout countries in the Asia Pacific and European
regions are scheduled to be completed during 1996.
WARNER BROS. ONLINE
Warner Bros. Online ('WBOL'), a new division created in 1995, produces
informational, promotional and entertainment programming for online services and
sites accessible through the World Wide Web on the Internet. In January 1996,
WBOL began providing a new multiplex entertainment center on the World Wide Web,
which includes a wide variety of original, made-for-online entertainment
activities for children and adults. The site offers entertainment and
information based on popular Warner Bros. movies and television shows, WMG
recording artists and Warner Bros. cartoon and DC Comics characters. WBOL, in
consultation with WBCP Retail, has created and launched the Warner Bros. Studio
Store site on the World Wide Web. Internet shoppers visiting this site can
select and purchase Warner Bros. and DC Comics products by placing orders while
online. WBOL is continuing its affiliation with America Online to provide a wide
range of programming, including original online content specifically designed
for America Online.
THEATERS
Through its Warner Bros. International Theatres division, WB operates 45
multiplex cinema complexes with 363 screens in seven foreign countries. WB
operates 12 theaters in the United Kingdom, two in Germany and, through joint
ventures, 18 theaters in Australia, two in Denmark, three in Portugal, one in
Spain and seven in Japan. Directly and through joint ventures, WB plans to open
18 new multiplex cinemas in 1996: five in the United Kingdom, five in Australia,
two in Italy, two in Germany, three in Japan and one in Spain.
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 named 'Warner Bros. Movie
World' as well as a water park complex, all near Brisbane, Australia. In
addition, WB and a German partner are completing construction of a new regional
theme park and studio complex in the Rhine/Ruhr area of Germany, which is
scheduled to open in the summer of 1996. The park and studio complex is modeled
after Warner Bros. Movie World in Australia. WB has also recently announced a
joint venture with MAI plc. ('MAI'), a United Kingdom media company, to study
the feasibility of the development and construction of a theme park and studio
complex near London.
SIX FLAGS THEME PARKS
In June 1995, TWE sold 51% of its ownership interest in Six Flags
Entertainment Corporation ('SFEC') to a group of investors led by Boston
Ventures Management, Inc., a private investment management firm. Prior to the
sale, TWE's ownership interest in SFEC was 100%. SFEC indirectly owns all of the
outstanding stock of Six Flags Theme Parks Inc. ('Six Flags').
Six Flags operates 11 theme parks in seven locations, making it the second
largest operator of theme parks in the United States and the leading operator of
national system regional theme parks. Six Flags's theme parks include seven
major ride-based theme parks, as well as three separately-gated water parks and
one wildlife safari park. Each of the theme parks is located in or near a major
metropolitan area. All of the theme parks operated by Six Flags are owned by Six
Flags, except Six Flags Over Texas and Six Flags Over Georgia (the 'Co-Venture
Parks'). The Co-Venture Parks 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 pursuant to partnership
agreements. The partnership agreements provide that Six Flags will operate the
Co-Venture Parks through 1997.
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In March 1996, Six Flags completed arrangements to manage the Fiesta Texas
theme park located in San Antonio, Texas, commencing in the 1996 season. The
park is owned by an affiliate of United Service Automobile Association ('USAA')
and leased to a partnership owned by Six Flags and USAA. In connection with
these arrangements, Six Flags also acquired an option to purchase the park and
USAA's interest in the partnership.
REGULATION AND LEGISLATION
On February 8, 1996, President Clinton signed into law a comprehensive
reform of the nation's communications laws, entitled the Telecommunications
Competition and Deregulation Act of 1996 (the '1996 Telecommunications Act'),
which substantially revises the Communications Act of 1934, as amended by the
Cable Television Consumer Protection and Competition Act of 1992 (the '1992
Cable Act'). The new law contains certain provisions relating to violent and
sexually explicit programming. First, the statute requires manufacturers to
build television sets with the capability of blocking certain coded programming
(the so-called 'V-chip'). The effective date for any FCC rule regarding the
manufacture of such sets may not occur before March 8, 1998 and may occur at a
later date if, after consultation with the manufacturing industry, the FCC
determines that more time is needed. Second, the 1996 Telecommunications Act
gives the cable and broadcasting industries one year to develop voluntary
ratings for video programming containing violence, sex and indecent content and
to agree voluntarily to transmit signals containing such ratings. Principal
representatives from both industries have announced that they will meet this
timetable. However, if the industries fail to reach a consensus, the statute
gives the FCC the authority to establish an advisory committee to recommend a
ratings system and to prescribe rules requiring transmission of a rating if a
distributor has decided to rate a program.
The 1996 Telecommunications Act eliminates the numerical restrictions on
the number of television stations that one entity may own and increases from 25%
to 35% the percentage of the national audience that one entity is allowed to
reach. In addition, the FCC is directed to revise its dual network rule which
prohibits a TV station from affiliating with an entity maintaining two or more
networks of television broadcast stations. The FCC must now permit such
affiliations unless certain limited circumstances pertain. The FCC must also
amend its rules to permit common ownership or control of a broadcast network and
cable systems.
During 1993, the 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. The FCC continued to prohibit the networks
from actively syndicating any programs domestically -- both 'off-network'
(produced initially for network distribution) and 'first-run' (produced directly
for syndication). By the terms of the FCC's 1993 decision, however, those
remaining restrictions expired in 1995.
An FCC regulation also limits 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
July 1995, the FCC issued a decision to eliminate the rule after a one-year
transition period, which ends on August 30, 1996. During this transition period,
network affiliates are permitted to purchase off-network programming for the
fall 1996 television season.
WB cannot at this time predict the effect on its television businesses of
the passage of the 1996 Telecommunications Act and the changes, or proposed
changes, to the FCC rules discussed above.
COMPETITION
The production and distribution of theatrical motion pictures, television
and animation product and videocassettes/videodiscs are highly competitive
businesses, as each competes with the other, as well as with other forms of
entertainment and leisure time activities (including video games and online
services such as the Internet). 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
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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. WB competes in its
character merchandising and other licensing and retail activities with other
licensors and retailers of character, brand and celebrity names. WB's operation
of theaters is subject to varying degrees of competition with respect to
obtaining new theater sites and attracting patrons, including competition from a
number of motion picture distribution methods, such as pay television and home
video systems. 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, ease of access to the park
from major metropolitan areas, the atmosphere and cleanliness of a park, and the
quality of its food and entertainment.
PROGRAMMING -- HBO DIVISION
GENERAL
The Company's interest in the programming business is principally conducted
through TWE's 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, as well as documentaries.
At December 31, 1995, there were approximately 20.8 million subscriptions
to HBO, compared to 19.2 million subscriptions at year-end 1994, approximately
8.9 million subscriptions to Cinemax, compared to 7.8 million subscriptions at
year-end 1994. The overall gain of 2.7 million subscriptions for the two
services represents the largest annual increase in Home Box Office subscriptions
since 1983.
AFFILIATES
Home Box Office's pay television services are principally distributed
through cable television systems with which Home Box Office has a contractual
relationship. The HBO and Cinemax services are transmitted via C-Band
communications satellites to these cable television systems, as well as to
multi-point microwave systems with which HBO also has a contractual relationship
(both, 'affiliates'). These affiliates are generally charged a monthly fee on a
per subscription 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 as delivered by one of the C-Band
satellites must purchase a consumer decoder and arrange for its activation.
Subscriptions for such direct broadcast satellite ('DBS') viewing are available
through cable television system operators, HBO Direct Inc., a subsidiary of TWE,
satellite equipment dealers or unaffiliated program packagers. Home Box Office,
through its affiliation agreements with United States Satellite Broadcasting,
Inc. ('USSB') and Primestar Partners L.P. (in which TWE holds a 31% interest),
also makes the HBO and Cinemax services available by means of high-powered and
mid-powered Ku-Band frequency satellites, respectively, to DBS viewers who
obtain subscriptions from such distributors. In 1995, Home Box Office entered
into an affiliation agreement with Echostar Satellite Corp., another provider of
high-powered Ku-Band DBS distribution for HBO and Cinemax.
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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 1995, the new
multi-channel format was received by approximately 8.7 million HBO subscribers
and 3.4 million Cinemax subscribers, including all DBS 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, 1995, the largest single multiple system cable
operator with which Home Box Office does business is TCI. Home Box Office's
affiliation with TCI accounted for approximately 20% of HBO and Cinemax combined
subscriptions. As of December 31, 1995, Time Warner Cable (see 'Cable Division
Video') accounted for an additional 14%. 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 and marketing of its pay
programming services by the large cable operators are good, the loss of one or
more of them as distributors or effective marketers 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 subscription 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 has entered into agreements
with Sony Pictures Entertainment, Inc. ('Sony Pictures'), Paramount Pictures
Corporation ('Paramount') 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 1995, Home Box Office entered into an agreement with DreamWorks SKG
pursuant to which Home Box Office acquired exclusive rights to exhibit on its
pay television services films from this new entertainment company, 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. Cinemax's programming composition has recently been expanded to
include documentaries as well as motion pictures. In 1995, the excellence of
HBO's original programming was
I-21
recognized by, among other honors, 19 Emmy Awards, 27 CableACE Awards, 4 Golden
Globe Awards and a Peabody Award.
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. 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. In late 1995, Savoy Pictures
Entertainment, Inc., a major supplier of theatrical motion pictures for home
videocassette distribution by HBO Video, announced that it was withdrawing from
the production and distribution of theatrical motion pictures.
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. In October 1995, TWS closed down the operations of its sports
licensing division pursuant to the sale of that division's assets to DelWilber
Associates, Inc.
In 1995, HBO Independent Productions ('HBOIP'), a division of Home Box
Office, produced three series for broadcast by the Fox network, 'Martin,' 'The
Last Frontier' and 'House of Buggin,' and entered into a 'first look' production
agreement for series with CBS. 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 remaining interest is held by MAI. The limited partnership
produces motion pictures and other programs for broadcast, basic cable and pay
television networks, including HBO.
Home Box Office and MAI are also 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 Enterprises distributes
Home Box Office original programming in domestic syndication and foreign
television and home videocassettes when it controls such rights. WBITD
distributes in foreign markets certain television programming of HBO.
HBO Ole, a partnership comprised of TWE, acting through its Home Box Office
and WB divisions, a Sony Pictures subsidiary and a Venezuelan company, operates
two Spanish-language pay television motion picture services, HBO Ole and
Cinemax, which are currently distributed in Central and South America, Mexico
and the Caribbean. HBO Ole, in partnership with a Brazilian company, also
distributes a Portuguese-language pay television movie service in Brazil.
Home Box Office, through a subsidiary of TWE, also operates HBO Asia,
together with its partner, a subsidiary of Paramount. HBO Asia, an
English-language, movie-based pay television service is currently distributed to
countries in Southeast Asia, including Singapore, Thailand, the Philippines,
Taiwan, Indonesia, Malaysia, Hong Kong, Macau, China, Bangladesh, Brunei and
Papua New Guinea.
In addition to its Latin American and Asian ventures, Home Box Office,
together with a partner, operates a Czech-language pay television motion picture
service in the Czech Republic. Home Box Office also either operates or has
licensing arrangements with pay television services in Hungary and New Zealand.
See 'Cable Division -- Television -- Other Interests.'
TWE holds an 8% 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, which features comedy programming. Comedy Central
launched in April 1991 and was available in approximately 37 million homes at
year-end 1995. HBO Downtown Productions, a division of Home Box Office, produces
comedy programming for exhibition on Comedy Central.
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TWE holds a 58% interest in E! Entertainment Television, a Los
Angeles-based advertiser-supported basic cable channel specializing in promoting
the entertainment industry and serving approximately 37 million subscribers as
of year-end 1995.
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 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 for subscription 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, but is not limited
to, cable, multichannel multipoint distribution services ('MMDS' or 'wireless
cable'), and DBS satellite distributors) in the geographic areas in which they
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 exclusive arrangements with non-cable distributors are
permissible). Although subscriptions to HBO and Cinemax services are currently
provided by means of a number of different technologies including cable, MMDS
and DBS, the 1992 Cable Act 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 1996 Telecommunications Act contains provisions concerning manufacturer
insertion of a 'V-chip' into television sets and industry implementation of a
ratings system for violent, sexually explicit and indecent programming. (See
'Filmed Entertainment Division -- Television.') Home Box Office cannot predict
at this time the effect of this legislation on its business.
In November 1994, the FCC, in its Telephone Company-Cable Television
Cross-Ownership proceeding, permitted telephone companies to own programmers
such as Home Box Office. Thus, telephone companies are free to produce, package
and distribute video programming to unaffiliated cable operators or other
multichannel
I-23
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. In addition, the 1996 Telecommunications Act permits telephone
companies to provide video programming services (whether programmed by such
telephone companies or by third parties such as HBO) directly to customers both
within and outside their telephone service areas. Such distribution may be on a
common carrier basis, which would be regulated under Title II of the
Communications Act; as a cable television service, which would be regulated
under Title VI; or under a new hybrid service called an 'Open Video System,' for
which the FCC must develop a regulatory regime by August 8, 1996.
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.
TELECOMMUNICATIONS
The Company's Telecommunications business consists principally of interests
in cable television systems that are substantially managed by Time Warner Cable,
a division of TWE, and wireline telephony operations that are conducted through
Time Warner Communications, a partnership wholly owned and controlled by TWE.
CABLE DIVISION -- TELEVISION
GENERAL
The cable television operations of the Company, including the operations of
the TWE-A/N Partnership as well as the cable television systems acquired by the
Company in 1995 and early 1996, are substantially conducted and managed by Time
Warner Cable, a division of TWE.
In January 1996, following the Company's acquisition of CVI and related
companies, the number of cable subscribers managed by Time Warner Cable
increased to approximately 11.7 million, geographically concentrated in 35
groupings of more than 100,000 subscribers each. More than 55% of Time Warner's
Cable's subscribers are located in five states: Florida, New York, North
Carolina, Ohio and Texas. Time Warner Cable is the second-largest multiple
system cable operator in the United States. Of the approximately 11.7 million
subscribers, approximately 9.5 million are in systems owned by or through TWE,
including approximately 4.5 million in the TWE-A/N Partnership, and
approximately 2.2 million in systems owned by subsidiaries of the Company. Time
Warner Cable manages or provides certain services to substantially all such
systems and receives a fee from the Company for management of, or services
provided to, such systems owned by subsidiaries of the Company.
Through a network of coaxial and fiber-optic cables, the Company'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 most 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 1995, Time Warner Cable's Full Service Network'tm' in its
suburban Orlando, Florida cable system was connected to 4,000 customers. The
Full Service Network, which began servicing customers in late 1994, utilizes
fiber optics, digital compression, digital switching and storage devices, and is
currently providing
I-24
video-on-demand including movies, interactive games and interactive shopping.
Additional services continue to be developed and added.
Pursuant to the Admission Agreement with U S WEST, 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.
Time Warner Cable has grown recently primarily as a result of the 1995
Cable Transactions, increases in the number of subscribers to its pre-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 the exchange of certain of its
unclustered cable television systems for geographically strategic systems,
increased penetration of existing homes passed (through rebuilds and the
introduction of new services), population growth, and extensions of existing
systems. During 1995 and early 1996, the Company acquired systems in Alabama,
California, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana,
Maryland, Michigan, Minnesota, Nebraska, New York, North Carolina, Ohio, Oregon,
Pennsylvania, South Carolina, Texas, Wisconsin and Wyoming. These acquisitions
were funded principally through the issuance of equity securities of the
Company, the proceeds from Time Warner Cable's disposition of systems in
Arkansas, Colorado, Louisiana and Mississippi and by the exchange of cable
television system assets. These transactions resulted in a net increase of
approximately 3.7 million basic subscribers under the management of Time Warner
Cable. For information about the Company's most recent acquisitions of cable
television systems in 1995 and early 1996, see pages I-1 through I-3.
Most of the Company'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 the Company'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 DBS 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's operations.
SERVICE AND PROGRAMMING CHARGES
Subscribers to the Company's 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.
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.
I-25
REGULATION AND LEGISLATION
The cable television industry is regulated by the FCC, some states and
substantially all local governments. In addition, various legislative and
regulatory proposals under consideration from time to time by the Congress and
various federal agencies may in the future materially affect the cable
television industry. The following discussion summarizes certain federal, state
and local laws and regulations affecting cable television.
Federal Laws. The Cable Communications Policy Act of 1984 ('1984 Cable
Act'), the 1992 Cable Act and the 1996 Telecommunications Act are the principal
federal statutes governing the cable industry. These statutes regulate the cable
industry, among other things, with respect to: (i) cable system rates for both
basic and certain nonbasic services; (ii) programming access and exclusivity
arrangements; (iii) access to cable channels by unaffiliated programming
services; (iv) leased access terms and conditions; (v) horizontal and vertical
ownership of cable systems; (vi) consumer protection and customer service
requirements; (vii) franchise renewals; (viii) television broadcast signal
carriage and retransmission consent; (ix) technical standards; (x) privacy of
customer information; (xi) equal employment opportunity; (xii) consumer
electronics equipment compatibility; (xiii) obscene or indecent programming; and
(xiv) requiring subscribers to subscribe to tiers of service other than basic
service as a condition of purchasing premium services. The provisions of the
1992 Cable Act continue to have an adverse effect on the operations of Time
Warner Cable. The recently enacted 1996 Telecommunications Act, however, is
expected to have a favorable impact on Time Warner Cable's business, e.g.,
through establishment of criteria and a timetable for the ultimate elimination
of regulation of certain cable rates. The 1996 Telecommunications Act also opens
up the cable television and telephone markets to additional competition.
Federal Regulations. The FCC, the principal federal regulatory agency with
jurisdiction over cable television, has promulgated regulations covering a
number of areas. The FCC has the authority to enforce these regulations through
the imposition of substantial fines, the issuance of cease and desist orders
and/or the imposition of other administrative sanctions, such as the revocation
of FCC licenses needed to operate certain transmission facilities often used in
connection with cable operations. A brief summary of the most significant of
these federal regulations as adopted to date follows.
Rate Regulation. Under the 1992 Cable Act, nearly all cable television
systems are subject to local rate regulation of basic service, pursuant to a
formula established by the FCC and enforced by local franchising authorities.
Additionally, the legislation requires the FCC to review rates for nonbasic
service tiers (other than per-channel or per-program services) in response to
complaints filed by franchising authorities and/or cable customers; prohibits
cable television systems from requiring subscribers to purchase service tiers
above basic service in order to purchase premium service if the system is
technically capable of doing so; requires the FCC to adopt regulations to
establish, on the basis of actual costs, the price for installation of cable
service and rental of cable equipment; and allows the FCC to impose restrictions
on the retiring and rearrangement of basic services under certain limited
circumstances.
Under the 1996 Telecommunications Act, regulation of nonbasic tier rates is
scheduled to terminate on March 31, 1999. The 1996 Telecommunications Act also
expands the definition of 'effective competition' to cover situations where a
local telephone company or its affiliate, or any multichannel video provider
using telephone company facilities, offers comparable video service by any means
except DBS. Regulation of both basic and nonbasic tier cable rates ceases for
any cable system subject to 'effective competition.'
The FCC's rate regulations employ a benchmark system for measuring the
reasonableness of existing basic and nonbasic service rates, and a price cap
formula for calculating future rate increases. Alternatively, cable operators
have the opportunity to make cost-of-service showings which, in some cases, may
justify rates above the applicable benchmarks. The rules also require that
charges for cable-related equipment (e.g., converter boxes and remote control
devices) and installation be unbundled from the provision of cable service and
based upon actual costs plus a reasonable profit. The 1996 Telecommunications
Act allows cable operators to aggregate most cable equipment costs on a
franchise, system, regional or company level.
Local franchising authorities and/or the FCC are empowered to order a
reduction of existing rates which exceed the maximum permitted level for either
basic and/or nonbasic cable services and associated equipment,
I-26
and refunds can be required. The regulations also provide that future rate
increases may not exceed an inflation-indexed amount, plus increases in certain
costs beyond the cable operator's control, such as taxes, franchise fees and
increased programming costs. Cost-based adjustments to these capped rates can
also be made in the event a cable operator adds or deletes channels or
significantly upgrades its system. The FCC has continued to modify the processes
by which these adjustments can be made in a fashion that has made them more
beneficial for cable operators generally. In addition, new product tiers
consisting of services new to the cable system can be created free of rate
regulation as long as certain conditions are met, e.g., services may not be
moved from existing tiers to the new product tier.
On November 30, 1995, the FCC adopted a Social Contract which resolves
cable television rate complaints pending against Time Warner Cable and requires
Time Warner Cable to upgrade its domestic cable television systems. The Social
Contract was negotiated in accordance with the FCC's authority to consider and
adopt 'social contracts' as alternatives to other regulatory approaches
applicable to cable television rates. The Social Contract is intended to ensure
fair and reasonable rates for Time Warner Cable customers, reduce the
administrative burden and cost of regulation for local governments, the FCC and
Time Warner Cable and resolve 946 cable programming service tier rate complaints
on file with the FCC. Specifically, the Social Contract provides for an
estimated $4.7 million plus interest in subscriber refunds in the form of
subscriber bill credits to certain designated Time Warner Cable systems, a
commitment by Time Warner Cable to establish a lifeline basic service priced at
10% below Time Warner Cable's benchmark regulated rates with an adjustment to
the nonbasic tier to recoup the reduced basic service tier revenue; and a
commitment by Time Warner Cable to upgrade its domestic systems to a minimum of
550 MHz, or existing 550 MHz systems to 750 MHz, over the next five years. On
January 29, 1996, a Petition for Judicial Review was filed by the cities of New
York, New York; Austin, Texas and the Intercommunity Cable Regulatory Commission
(which represents 28 Cincinnati suburbs served by Time Warner Cable) seeking
review of the FCC decision adopting the Social Contract as well as certain FCC
staff decisions implementing the Social Contract. The Petition contends, among
other things, that the terms of the Social Contract and the process by which it
was negotiated and implemented are contrary to the 1992 Cable Act, and are
inconsistent with the FCC's own rules. A petition for reconsideration of the
Social Contract is also pending before the FCC.
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 1984 Cable Act and the 1992 Cable Act. The underlying claim
brought by the Wisconsin Attorney General has been settled and on September 25,
1995 the Court of Appeals reversed the District Court ruling and held that Time
Warner's service and rate restructuring complied with FCC rate regulations and
that such regulations preempted Wisconsin law. The United States Supreme Court
recently rejected a request filed by the Wisconsin Attorney General for
certiorari.
Carriage of Broadcast Television Signals. The 1992 Cable Act allows
commercial television broadcast stations which are 'local' to a cable system to
elect every three years either to require the cable system to carry the station,
subject to certain exceptions, or to negotiate for 'retransmission consent' to
carry the station. Broadcast stations typically seek monetary compensation or
the carriage of additional programming in return for granting retransmission
consent. Local non-commercial television stations are also given mandatory
carriage rights, subject to certain exceptions. Unlike commercial stations,
noncommercial stations are not given the option to require negotiation of
retransmission consent. In addition, cable systems must obtain retransmission
consent for the carriage of all 'distant' commercial broadcast stations, except
for certain 'superstations,' i.e., commercial satellite-delivered independent
stations such as WTBS, WGN and WWOR-TV. As of February 6, 1996, Time Warner
Cable has obtained any necessary retransmission consents from all stations
currently carried.
I-27
The next election between mandatory carriage and retransmission consent for
local commercial television stations will occur on October 1, 1996. The
mandatory carriage rule is presently under review by the United States Supreme
Court.
Time Warner Cable has been sued in Connecticut state court by Bridgeways
Communications Corporation for, among other things, an alleged violation of the
state antitrust law. Central to the plaintiff's case is its allegation that Time
Warner Cable illegally failed to comply with plaintiff's mandatory carriage
request. The FCC has made no such finding and Time Warner Cable has argued to
the court that the FCC is the only body with the authority to make such a
determination.
Deletion of Certain Programming. Cable television systems that serve 1,000
or more customers must delete the simultaneous or nonsimultaneous network
programming of a distant station upon the appropriate request of a local
television station holding local exclusive rights to such programming. 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.
Cable Programming Agreements. The 1992 Cable Act and FCC regulations
adopted in April 1993 require vertically integrated programmers in which cable
companies hold a 5% or greater attributable interest to make their programming
services available to competing video technologies such as MMDS, satellite
master antenna television ('SMATV') and DBS on terms and conditions that do not
discriminate against such competing technologies. The 1992 Cable Act and FCC
regulations preclude most exclusive programming contracts and limit to some
degree the 'volume discounts' currently available to larger cable operators such
as Time Warner Cable. The 1992 Cable Act also regulates certain aspects of
program carriage agreements between cable operators and cable programming
networks. Cable operators are prohibited from requiring a financial interest in
a program service as a condition to carriage of such service, coercing exclusive
rights in a programming service, or favoring affiliated programmers so as to
unreasonably restrain the ability of unaffiliated programmers to compete.
Public and Leased Access Channels. The 1984 Cable Act permits local
franchising authorities to require operators to set aside certain channels for
public, educational and governmental access programming. The 1984 Cable Act
further requires cable television systems with thirty-six or more activated
channels to designate a portion of their channel capacity for commercial leased
access by unaffiliated third parties. The 1992 Cable Act requires leased access
rates to be set according to a formula determined by the FCC. The FCC is
currently reevaluating its leased channel rate formula, which could lead to
leased channel rates which are substantially more favorable to channel lessees.
Ownership. The 1996 Telecommunications Act repealed the restrictions on
local exchange telephone companies ('LECs') from providing video programming
directly to customers within their local exchange telephone service areas,
except in rural areas or by specific waiver of FCC rules. On February 27, 1996,
the Supreme Court vacated a Fourth Judicial Circuit decision which had held the
1984 Cable Act's cable telephone cross-ownership prohibition unconstitutional.
The Supreme Court remanded for the Court of Appeals to consider whether the case
is moot in light of the repeal of the statutory cross-ownership ban. The 1996
Telecommunications Act also authorized LECs to operate 'open video systems'
without obtaining a local cable franchise, although LECs operating such systems
can be required to make payments to local governmental bodies in lieu of cable
franchise fees. Where demand exceeds channel capacity, up to two-thirds of the
channels on an 'open video system' must be available to programmers unaffiliated
with the LEC.
The 1996 Telecommunications Act eliminated the FCC rule prohibiting common
ownership between a cable system and a national broadcast television network.
The 1996 Telecommunications Act also eliminated the statutory ban covering
certain common ownership interests, operation or control between a television
station and cable system within the station's Grade B signal coverage area.
However, the parallel FCC rule against cable/television station cross-ownership
remains in place, subject to review by the FCC within two years. Finally, the
1992 Cable Act prohibits common ownership, control or interest in cable
television systems and MMDS facilities or SMATV systems having overlapping
service areas, except in limited circumstances. The 1996 Telecommunications Act
exempts cable systems facing 'effective competition' from the MMDS and SMATV
cross-ownership restrictions.
I-28
Pursuant to the 1992 Cable Act, the FCC has adopted rules which, with
certain exceptions, preclude a cable television system from devoting more than
40% of its first 75 activated channels to national video programming services in
which the cable system owner has an attributable interest. The FCC also has set
a limit of 30% of total nationwide cable homes that can be served by any
multiple cable system operator. The FCC has stayed the effectiveness of this
rule pending the outcome of its appeal from the U.S. District Court decision
holding the multiple ownership limit provision of the 1992 Cable Act
unconstitutional.
Technical Requirements. The FCC has imposed technical standards applicable
to all channels on which downstream video programming is carried, and has
prohibited franchising authorities from adopting standards which conflict with
or are more restrictive than those established by the FCC. The FCC also has
adopted additional standards applicable to cable television systems using
frequencies in the 108-137 MHz and 225-400 MHz bands in order to prevent harmful
interference with aeronautical navigation and safety radio services and has also
established limits on cable system signal leakage. Periodic testing by cable
operators for compliance with these technical standards and signal leakage
limits is required.
The FCC has continued to adopt and consider regulations to implement the
requirements of the 1992 Cable Act designed to improve the compatibility of
cable systems and consumer electronics equipment. These regulations generally
prohibit cable operators from scrambling their basic service tier and from
changing the infrared codes used in their existing customer premises equipment.
The 1996 Telecommunications Act directs the FCC to set only minimal standards to
assure compatibility between television sets, VCRs and cable systems, and to
rely on the marketplace. The FCC must adopt rules to assure the competitive
availability to consumers of customer premises equipment, such as converters,
used to access the services offered by cable systems and other multichannel
video programming distributors.
Other FCC Regulations. Additional FCC regulations relate to a cable
system's carriage of local sports programming; privacy of customer information;
franchise fees; equal employment opportunity; pole attachments; restrictions on
origination and cablecasting by cable system operators; application of the
fairness doctrine and rules governing political broadcasts; customer service;
home wiring and limitations on advertising contained in nonbroadcast children's
programming. The 1996 Telecommunications Act changes the formula for pole
attachment fees which could result in substantial increases in payments by cable
operators to utilities for pole attachment rights when services other than cable
services are delivered by cable systems.
Copyright. Cable television systems are subject to federal copyright
licensing covering 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. 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 Copyright Act of 1976 was recently amended to extend the availability
of the cable statutory copyright license to microwave video service providers,
such as MMDS. This legislation also extended through 1999 the separate statutory
license provisions applicable to DBS and other satellite video distribution
systems. The compulsory license status of SMATV systems is not covered by this
legislation. The availability of compulsory copyright licensing to other
multichannel video service providers enhances their competitiveness with
traditional cable systems.
State and Local Regulation. Because a cable television system uses local
streets and rights-of-way, cable television systems are subject to local
regulation, typically imposed through the franchising process, and certain
states have also adopted cable television legislation and regulations. Cable
franchises are nonexclusive, granted for fixed terms and usually terminable if
the cable operator fails to comply with material provisions. No Time Warner
Cable franchise has been terminated due to breach. Franchises usually call for
the payment of fees (which are limited under the 1984 Cable Act to 5% of the
system's gross revenues from cable service) to the granting authority.
Franchises generally contain provisions governing charges for basic cable
television services, channel capacity, support for public, educational and
government access channels, length of the franchise term, renewal, sale or
transfer of the franchise, territory of the franchise, design and technical
performance of the system, use and occupancy of public streets and number and
types of cable services provided. The terms and
I-29
conditions of cable franchises vary materially from jurisdiction to
jurisdiction, and even from city to city within the same state, historically
ranging from reasonable to highly restrictive or burdensome.
The 1992 Cable Act prohibits exclusive franchises and allows franchising
authorities to operate their own multichannel video distribution system without
having to obtain a franchise. Moreover, franchising authorities are immunized
from monetary damage awards arising from regulation of cable television systems
or decisions made on franchise grants, renewals, transfers and amendments.
The 1996 Telecommunications Act provides that local franchising authorities
may not condition the grant or renewal of a cable franchise on the provision of
telecommunications service or facilities (other than institutional networks) and
clarifies that the calculation of franchise fees is to be based solely on
revenues derived from the provision of cable services, not revenues derived from
telecommunications services.
Renewal of Franchises. 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. The 1992 Cable Act
makes several changes to the renewal process which could make it easier in some
cases for a franchising authority to deny renewal.
In the renewal process, a franchising authority may seek to impose new and
more onerous requirements, such as upgraded facilities, increased channel
capacity or enhanced services, although the municipality must take into account
the cost of meeting such requirements. Time Warner Cable may be required to make
significant additional investments in its cable television systems as part of
the franchise renewal process. Of Time Warner Cable's franchises, as of January
1, 1996, 790 franchises serving approximately 3,644,000 subscribers expire
during the period ending December 31, 1998. 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.
The United States District Court of the Western District of Kentucky
recently held that the 1984 Cable Act does not authorize it to review a
franchising authority's assessment of local community needs to determine if they
are reasonable or supported by any evidence. This federal district court
decision is under appeal. If upheld and adopted by other federal courts, this
test might allow local franchising authorities to establish unrealistic
franchise renewal demands designed to oust an incumbent cable franchisee.
Franchise Transfers. The 1992 Cable Act requires franchising authorities
to act on any franchise transfer request within 120 days after receipt of all
required information. Approval is deemed to be granted if the franchising
authority fails to act within such period. The 1996 Telecommunications Act
repeals the restriction against a cable operator selling or otherwise
transferring ownership of a cable television system within 36 months after
acquisition or initial construction.
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, DBS, MMDS, 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. Two high-power DBS services sharing common
satellites, DirecTV and USSB, were reported to have a total of approximately 1.3
million subscribers nationwide
I-30
as of December 31, 1995. Primestar, a medium-power DBS service partially owned
by TWE, was reported to have approximately 1.0 million 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 800,000 subscribers via 121 systems as of June 1995 according to the
FCC. Wireless cable is now available in 19 of the nation's top 20 television
markets. In recent years, the FCC has adopted rules to facilitate the use of
greater numbers of channels by wireless cable operators.
SMATV. Additional competition may come from private cable television
systems servicing condominiums, apartment complexes and certain other multiple
unit residential developments. The operators of these private systems, known as
SMATV systems, often enter into exclusive agreements with apartment building
owners or homeowners' associations which preclude franchised cable television
operators from serving residents of such private complexes. Under the 1996
Telecommunications Act, a SMATV system is not a cable system as long as it uses
no public right-of-way. SMATV systems offer both improved reception of local
television stations and many of the same satellite-delivered program services as
offered by franchised cable television systems.
Overbuilds. Under the 1992 Cable Act, franchising authorities are
prohibited from unreasonably refusing to award additional franchises. There are
currently an insignificant number of overlapping cable systems operating in Time
Warner Cable franchise areas. Municipalities themselves are authorized to
operate cable systems without a franchise. No such municipally-owned systems are
presently in operation in Time Warner Cable franchise areas, although several
municipalities have indicated an interest in doing so.
Telephone Companies. The 1996 Telecommunications Act eliminated the
restriction against ownership and operation of cable systems by local telephone
companies within their local exchange service areas. Telephone companies are now
free to enter the retail video distribution business through any means, such as
DBS, MMDS, SMATV or as traditional franchised cable system operators.
Alternatively, the 1996 Telecommunications Act authorizes local telephone
companies to operate 'open video systems' without obtaining a local cable
franchise, although telephone companies operating such systems can be required
to make payments to local governmental bodies in lieu of cable franchise fees.
Where demand exceeds available channel capacity, up to two-thirds of the
channels on an 'open video system' must be available to programmers unaffiliated
with the local telephone company. The open video system concept replaces the
FCC's video dialtone rules. The 1996 Telecommunications Act also includes
numerous provisions designed to make it easier for cable operators and others to
compete directly with local exchange telephone carriers. With certain limited
exceptions, neither a local exchange carrier nor a cable operator can acquire
more than a 10% equity interest in the other entity operating within its own
service area.
Other Competition. Cable television systems compete with other
communications and entertainment media, including off-air television broadcast
signals which a viewer is able to receive directly using the viewer's own
television set and antenna. Cable systems also face competition from alternative
methods of distributing and receiving television signals and from other sources
of entertainment such as live sporting events, movie theaters and home video
products, including videocassette recorders and, in the future, DVDs, as well
as, the Internet. In recent years, the FCC has adopted policies providing for
authorization of new technologies and a more favorable operating environment for
certain existing technologies that provide, or may provide, substantial
additional competition for cable television systems. The extent to which cable
television service is competitive depends in significant part upon the cable
system's ability to provide an even greater variety of programming than is
available off-air or through competitive alternative delivery sources. Premium
programming provided by cable systems is subject to the same competitive factors
which exist for other programming discussed above. The continued profitability
of premium services may depend largely upon the continued availability of
attractive programming at competitive prices. The cable television industry also
competes with radio, television, print and other media for advertising revenues.
As the cable television industry continues to develop programming designed
specifically for distribution by cable, advertising revenues may increase.
I-31
OTHER INTERESTS
TWE has a 54% interest in a joint venture established in 1991 to invest in,
and further develop, cable television systems in Hungary. TWE also has a 20%
interest in TV-1000, a pay television service operating in Scandinavia; a 31%
interest in N-TV, a German language news and information channel distributed in
Germany in which TBS also has a 33% interest; and a 25% 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 20% 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 telecommunications 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 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 March 1, 1996, Time Warner Communications had wholly or partially
owned alternative access businesses in operation in 21 cities. Similar
businesses are in development in several additional Time Warner Cable cities.
Revenues to date from these operations have been insignificant. Time Warner
Communications also has an advanced network management center in Denver to
monitor and manage operation of its geographically dispersed 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 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.
The required qualifications for providers of local exchange services are
generally regulated by each state. As of March 1, 1996, Time Warner
Communications has received certificates to provide local exchange services in
Florida, New York, Ohio and Tennessee, and is proceeding with applications to
obtain such certification in Hawaii, North Carolina, Texas and Wisconsin. All
these states have already adopted legislation that supports competition in
telecommunications services. Further, the 1996 Telecommunications Act will in
the future preempt state and local barriers to entry into competitive
telecommunications service (although competitively neutral state and local
regulations will continue to be permitted). Time Warner Communications will
continue to seek local exchange service authorization in states where Time
Warner Cable has major cable systems.
In order for Time Warner Communications to actually enter into the local
exchange service business, Time Warner Communications must obtain rights to
connect its local exchange service customers to the incumbent LECs customers in
an area. Time Warner Communications has been in active negotiations throughout
1995 with incumbent LECs in Florida, New York, Ohio, Tennessee, Texas and
Wisconsin. Even where procompetitive state
I-32
legislation has existed or state-level regulatory mediation has been available,
the incumbent LECs have, in Time Warner Communications' view, been extremely
reluctant to concede appropriate terms for competitive entrants to facilitate
interconnection.
The 1996 Telecommunications Act mandates that incumbent LECs provide
reasonable and nondiscriminatory rates, terms and conditions for interconnection
(including reciprocal compensation for transport and termination of calls), and
that incumbent LECs enter into good faith negotiations with requesting carriers
to facilitate such interconnection. In addition, incumbent LECs must provide
nondiscriminatory access to unbundled network elements, functions and services
on reasonable terms. Number portability is treated as a network element and
local dialing parity is addressed. While the 1996 Telecommunications Act should
improve the outlook for Time Warner Communications, the exact timetable for and
terms of mandated interconnection arrangements, and other incumbent LEC
compliance, cannot be predicted. The FCC is required to issue implementing
regulations for interconnection requirements by August 8, 1996.
Currently, Time Warner Communications is providing local exchange service
on a limited basis in Rochester, New York.
Time Warner Cable also offers (as a 're-seller') cellular telephone and
paging services to business and residential customers in Rochester, New York.
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 Class A 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.
I-33
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 other approvals, is comprised of
the businesses and operations of the cable television systems of TWE and TWE-A/N
that have been 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. 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 Time Warner Cable. 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.
Non-Voting Representatives and Committee Members. Each of ITOCHU and
Toshiba have the right to designate non-voting members to the Board of
Representatives and the Management Committee. In addition, Advance/Newhouse has
the right to designate a non-voting member to the Management Committee.
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. ITOCHU and
Toshiba continue to be bound by and benefit from the non-compete provisions but
only as they relate to Japan.
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 Class A Partners), the Class A
Partners holding, individually or in the aggregate, at least 10% of the
I-34
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 Class A 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 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 Class A 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 Class A 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 Class
A 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 CLASS A PARTNERS
Change in Control Put. Upon the occurrence of a change in control of the
Company, at the request of any Class A 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.
I-35
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 put right by a Class A Partner and the right to receive the partnership
interests in payment therefor.
With respect to any of the put rights of the Class A 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
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 Class A 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 Class A 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 Class A Partners so
requesting.
OTHER ENTERTAINMENT GROUP ASSETS
TIME WARNER SERVICE PARTNERSHIPS
In September 1993, certain assets of TWE were distributed to the Time
Warner General Partners and were owned and operated by other partnerships (the
'Time Warner Service Partnerships') in order to ensure compliance with the
Modification of Final Judgment entered on August 24, 1982 by the United States
District Court for the District of Columbia applicable to U S WEST and its
affiliated companies, which may have included TWE. In 1994, U S WEST received a
judicial order that TWE was no longer prohibited from owning or operating
substantially all of such assets. Accordingly, in September 1995, TWE reacquired
substantially all of the assets of the Time Warner Service Partnerships, subject
to the liabilities relating thereto, in exchange for junior priority capital
interests in TWE equal to approximately $400 million.
I-36
COURTROOM TELEVISION NETWORK ('COURT TV')
Each of TWE and affiliates of each of NBC and TCI holds a 33 1/3% interest
in Court TV, subject to adjustment in accordance with the terms of the Court TV
partnership agreement. Court TV is a 24-hour basic cable network covering actual
courtroom trials from around the United States and abroad. Since 1991, Court TV
has brought daytime viewers live and taped coverage of more than 400 trials,
including: Weeks v. Baker & McKenzie, O.J. Simpson, Rodney King, Dr. Kevorkian,
Reginald Denny, the Menendez brothers, the Paramount/QVC hearing and Zion v. New
York Hospital. During prime time, Court TV features live analyses of the day's
coverage as well as a variety of programs that explore all aspects of the legal
system. On the weekend, Court TV airs highlights of the week's courtroom
coverage and presents Continuing Legal Education (CLE) for lawyers and Cable in
the Classroom programming for teachers.
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 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 develop new CATV operations in selected locations throughout
Japan. 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' 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
371 screens in 66 theaters, principally located in California and Colorado.
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 nine
times a year and also in periodic special editions. E.C. Publications is wholly
owned by the Company.
OTHER INTERESTS
TURNER BROADCASTING SYSTEM, INC.
In September 1995, the Company agreed to merge with TBS by acquiring the
remaining approximately 80% interest in TBS not already owned by the Company.
For information about the pending merger, see
I-37
page I-1. At December 31, 1995, the Company had economic and voting interests in
TBS of 19.6%and 6.4%, respectively. TBS is a diversified information and
entertainment company. Through its subsidiaries, TBS owns and operates four
domestic entertainment networks WTBS (commonly known as the 'TBS SuperStation'),
Turner Network Television ('TNT'), the Cartoon Network and Turner Classic Movies
('TCM'); four international entertainment networks TNT Latin America, Cartoon
Network Latin America, TNT & Cartoon Network Europe, and TNT & Cartoon Network
Asia; and four news networks Cable News Network ('CNN'), Headline News, Cable
News Network International ('CNNI') and CNN Financial Network ('CNNfn'). TBS
produces and distributes entertainment and news programming worldwide, with
operations in motion picture, animation and television production, home video,
television syndication, licensing and merchandising, and publishing.
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. ALM
also owns and operates COUNSEL CONNECT ('CC'), an on-line service connecting
lawyers in law firms and corporate legal departments worldwide. On February 2,
1996, ALM acquired the minority share of CC that had been held by Lexis-Nexis.
Since February 25, 1994, ALM had run CC as LEXIS Counsel Connect in partnership
with Lexis-Nexis, a division of Reed Elsevier Inc. At the time the partnership
was formed, Lexis-Nexis was the Mead Data Central division of the Mead
Corporation. 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; and one monthly newsletter. ALM
also provides certain services to Court TV.
HASBRO, INC.
The Company owns approximately 14% of the outstanding common stock of
Hasbro, Inc., one of the world's largest toy companies. See Note 5 'Other
Investments' to the Company's consolidated financial statements at page F-34
herein for a description of the issuance by the Company of (i) zero coupon
exchangeable notes due 2012 that are exchangeable for the shares of Hasbro
common stock owned by the Company (the 'Hasbro Stock'), and (ii) mandatorily
redeemable preferred securities of a subsidiary of the Company redeemable in
1997 for cash or Hasbro Stock. Because the issuance of the mandatorily
redeemable preferred securities provides the Company with protection against the
risk of depreciation of the market price of Hasbro Stock and the zero coupon
exchangeable notes limit the Company's ability to share in the appreciation of
the market price of Hasbro Stock, the combination thereof has effectively
monetized the Company's investment in Hasbro.
ATARI CORPORATION
The Company owns approximately 13.5% of Atari Corporation, which is engaged
in the design, manufacture and sale of interactive multimedia entertainment
systems. In February 1996, Atari Corporation entered into an agreement to merge
with JTS Corp., a disk-drive manufacturer based in San Jose, California.
ATARI GAMES CORPORATION
The Company owns 100% of Atari Games Corporation ('Atari Games'), which is
engaged in the design, manufacture and sale of interactive video games for
arcades and home systems. On February 23, 1996, WCI entered into a Stock
Purchase Agreement with Williams Interactive Inc. ('Williams'), a wholly owned
subsidiary of WMS Industries, Inc., pursuant to which WCI will sell to Williams,
all of the issued and outstanding capital stock of Atari Games. The transaction
is expected to close in April 1996.
I-38
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 'Organization and Summary of Significant Accounting Policies Foreign
Currency' and Note 12 'Financial Instruments Foreign Exchange Risk Management'
to the consolidated financial statements set forth at pages F-24 through F-28
and F-44 through F-45, respectively, herein. For the revenues, operating income
from and identifiable assets of foreign operations, see Note 13 'Segment
Information' to the consolidated financial statements set forth at pages F-46
through F-49 herein.
EMPLOYEES
At December 31, 1995, the Company employed a total of approximately 65,500
persons. This number includes approximately 29,700 persons employed by TWE.
I-39
ITEM 2. PROPERTIES
PUBLISHING, MUSIC AND CORPORATE
The following table sets forth certain information as of December 31, 1995
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 administrative offices 560,000 Leased by the Company. Lease
75 Rockefeller Plaza (Corporate, Music and Filmed expires in 2014. Approximately
Rockefeller Center Entertainment) 109,000 sq. ft. are sublet to
outside tenants.
New York, New York Business and editorial offices 1,457,000 Leased by the Company. Most
Time & Life Bldg. (Publishing and Corporate) leases expire in 2007.
Rockefeller Center Approximately 36,000 sq. ft. are
sublet to outside tenants.
Mechanicsburg, Office and warehouse space 358,000 Owned and occupied by the
Pennsylvania (Publishing) Company.
1225 S. Market St.
Olyphant, Manufacturing, warehouses, 1,058,000 Owned and occupied by the
Pennsylvania distribution and office space Company.
1400 and 1444 East (Music)
Lackawanna Avenue
Indianapolis, Indiana Warehouse space (Publishing) 252,000 Owned by the Company.
4200 N. Industrial Approximately 142,000 sq. ft. are
Street leased to outside tenants.
Nortorf, Manufacturing, distribution and 334,000 Owned and occupied by the
Germany office space (Music) Company.
Niedernstrasse 3-7
Alsdorf, Manufacturing, distribution and 269,000 Owned and occupied by the
Germany office space (Music) Company.
Max-Planck Strasse 1-9
Terre Haute, Manufacturing and office space 269,000 Leased by the Company. Lease
Indiana (Music) expires in 2001.
Bldg. 102, Fort Harrison
Industrial Park
Other:
U.S. and abroad, Office bldgs., plants and warehouses 2,097,000 Owned by the Company.
including locations (Publishing, Music and Corporate)
in
Europe, Asia, Latin
America, Australia
and
New Zealand.
5,084,000 Leased by the Company.
Approximately 297,000 sq. ft. are
sublet to outside tenants.
-----------
Total 11,738,000
-----------
-----------
I-40
FILMED ENTERTAINMENT, PROGRAMMING -- HBO AND CABLE
The following table sets forth certain information as of December 31, 1995
with respect to principal properties (over 125,000 square feet in area) owned or
leased by the Company's Filmed Entertainment, Programming -- HBO and cable
television businesses (including the properties of the Company, TWE and the
TWE/AN Partnership), 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
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, California Warehouse 182,000 sq. ft. Leased by TWE.
9210 San Fernando (Filmed Entertainment) Lease expires in 1997.
Burbank, California Sound stages, 3,422,000 (a) Owned by TWE.
The Warner Bros. administrative, technical and sq. ft. of
Studio dressing room structures, improved
screening theaters, machinery space on 158
and equipment facilities, acres
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)
Raleigh, North Carolina Office/Warehouse facility 150,000 sq. ft. Leased by TWE. Lease expires
2505 Atlantic Avenue (Cable) 1999.
Other, in the U.S. and Office buildings, retail 3,799,000 sq. ft. (b) Owned by TWE.
abroad, including stores, theatres, plants and Approx. 62,000 sq. ft. are
locations in Europe, warehouses (Filmed leased to outside tenants.
Asia, Latin America, Entertainment, 7,070,000 sq. ft. (b)(c) Leased by TWE.
Australia and New Programming -- HBO, Cable) Approx. 57,000 sq. ft. are
Zealand sublet to outside tenants.
------------------
Totals 15,834,000 sq. ft.
394 acres
------------------
------------------
- ------------
(a) Ten acres consist of various parcels adjoining The Warner Bros. Studio,
with mixed commercial, office and residential uses.
(footnotes continued on next page)
I-41
(footnotes continued from previous page)
(b) Excludes 436,847 sq. ft. of owned and 229,345 sq. ft. of leased properties
used by Time Warner Cable for headend, hub, and tower sites that are
located on 672 owned and 162 acres of leased land.
(c) 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 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. 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 on June 27, 1994
vacated the judgment of the District Court regarding the must-carry provisions
and remanded the case to that court for further factual findings after ruling
that cable systems were entitled to significant First Amendment protection. In
December 1995, that panel upheld the 'must-carry' requirements by 2-1 vote. The
Supreme Court has now decided to review that decision. 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,
and argument took place, on November 20, 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 1994 and early 1995 in response to the subpoena.
I-42
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 included 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 comprised substantially
all of the domestic recording industry and the complaint sought to establish a
defendant class for purposes of the litigation. The complaint sought 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 sought 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 answered the amended complaint and filed a motion for
summary judgment seeking dismissal of the claim. The court subsequently granted
AFTRA's motion, and denied the recording company defendants' motion as
premature. Plaintiffs have filed a motion to certify various classes of
plaintiffs. The parties are in limited discovery.
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 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 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 April 19, 1995, the U.S.
District Court for the Northern District of Georgia granted the record company
defendants' motion with respect to the New York federal action and enjoined the
plaintiffs from proceeding any further with such action. On April 30, 1995, the
U.S. District Court for the Southern District of New York directed that the New
York federal action be transferred to the Northern District of Georgia in order
that the Georgia court may determine whether the claims asserted in the New York
action should be dismissed or pursued in the Georgia court. On February 26,
1996, the Georgia Court, finding the parties, issues and available relief
substantially the same as in the initial matter, dismissed the action. The
Georgia court further indicated that should plaintiffs wish to pursue the claims
of the second suit, the appropriate vehicle would be to seek leave of Court to
amend the complaint in the original 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 WMG 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
I-43
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. That motion remains pending.
On May 30, 1995, a purported class action was filed in the United States
District Court for the Central District of California, entitled Digital
Distribution Inc. d/b/a Compact Disc Warehouse v. CEMA Distribution, Sony Music
Entertainment, Inc., Warner Elektra Atlantic Corporation, UNI Distribution
Corporation, Bertelsmann Music Group, Inc. and Polygram Group Distribution,
Inc., No. 95-3596 (JSL) (the 'California Federal Action'). On July 19, 1995, a
purported class action was filed in the Superior Court of California for the
County of Los Angeles, entitled Brenden Barry v. CEMA Distribution, Sony Music
Entertainment, Inc., Warner Elektra Atlantic Corporation, UNI Distribution
Corporation, Bertelsmann Music Group, Inc. and Polygram Group Distribution,
Inc., No. BC 131748 (the 'California State Action'). The California Federal
Action is brought on behalf of direct purchasers of compact discs ('CDs') and
the California State Action is brought on behalf of indirect purchasers of CDs.
In both actions, the plaintiffs allege that Warner Elektra Atlantic Corporation
('WEA'), along with five other distributors of recorded music CDs, violated the
federal and/or state antitrust laws and unfair competition laws, by engaging in
a conspiracy to fix prices of CDs, and seek an injunction and treble damages. In
the California Federal Action the defendants' motion to dismiss the amended
complaint was granted and the action was dismissed, with prejudice, on January
9, 1996. Plaintiffs have filed a notice of appeal. In the California State
Action, plaintiffs voluntarily dismissed the amended complaint without prejudice
on March 6, 1995.
Litigation relating to the 1990 merger of Time Inc. and Warner
Communications Inc. has either been dismissed, or has been dormant for years.
The litigation is described in previous reports on Form 10-K filed by the
Company.
On September 22, 1995, U S WEST and U S WEST Multimedia Communications,
Inc. ('USWMC'), a wholly owned subsidiary of U S WEST, filed a complaint in the
Court of Chancery of the State of Delaware (the 'Delaware Chancery Court')
individually and allegedly in a derivative capacity on behalf of TWE against the
Company and four of TWE's general partners, ATC, Time Warner Operations Inc.,
WCI and Warner Cable Communications, Inc. ('WCCI'), as well as TWE (as a nominal
defendant), alleging that the TBS Transaction would breach certain provisions of
the TWE Partnership Agreement and the Admission Agreement. U S WEST, Inc., et
al. v. Time Warner Inc., et al., Case No. 14555. U S WEST seeks equitable
relief, including an injunction against consummation of the TBS Transaction and
declarations that the defendants have breached fiduciary duties and such
agreements.
On October 11, 1995, the Company and the other defendants filed an answer
and counterclaims denying the material allegations contained in U S WEST's
complaint and alleging, among other things, (a) that U S WEST breached its
agreements with TWE, (b) that U S WEST fraudulently misrepresented and failed to
disclose the standards of regulatory compliance that would apply to the
partnership after the admission of U S WEST as a partner and (c) that the
Admission Agreement would not have been entered into as presently structured if
the misrepresentations had not been made. The counterclaim seeks, among other
things, (i) reformation of the Admission Agreement, (ii) an injunction
prohibiting U S WEST from preventing TWE from entering into contracts or
pursuing business opportunities that are in the best interests of TWE and (iii)
damages. On October 31, 1995, U S WEST replied to the Company's counterclaims,
essentially (A) denying the Company's material allegations and asserting as
affirmative defenses that the counterclaims fail to state a claim and are barred
by laches, acquiescence, unclean hands, waiver and/or estoppel and (B) asserting
that the proposed transactions which the Company alleges U S WEST obstructed are
businesses that the TWE Partnership Agreement prohibits TWE from owning or
conducting, and that the TWE Partnership Agreement provides that U S WEST may,
but need not, waive such restrictions on TWE in its sole discretion.
On December 12, 1995, U S WEST filed an amended and supplemental complaint,
reasserting the allegations contained in its original complaint and asserting
new allegations regarding (a) the Company's alleged failure to make U S WEST
aware during the negotiation of the Admission Agreement of the existence of
certain documents and (b) the Company's November 16, 1995 announcement regarding
a new strategic operating structure and management team. On December 27, 1995,
the Company and the other defendants filed an answer to the amended and
supplemental complaint and counterclaims denying the material allegations
contained in
I-44
U S WEST's amended and supplemental complaint and reasserting the counterclaims.
On February 8, 1996, the Company moved to dismiss the action on the pleadings.
On March 11, 1996, the Court announced that it would not rule on the motion, but
instead proceeded with the trial on March 13, 1996.
Two complaints have been filed against the Company, certain officers and
directors of the Company, and other defendants, by certain stockholders of the
Company, purportedly derivatively on behalf of the Company, relating to the
pending TBS Transaction and related transactions. The two complaints were filed
in the Delaware Chancery Court on October 30, 1995 (Bernard v. Time Warner Inc.,
et al., Case No. 14651; Parnes v. Time Warner Inc., et al., Case No. 14660).
These two complaints allege, among other things, that some or all of the
defendants have violated fiduciary duties owed to the Company and its
stockholders by, among other things, (a) seeking to entrench themselves in board
and management positions and to eliminate the threat of a hostile takeover, (b)
securing economic benefits for themselves or conferring special benefits on TCI
and others at the expense of the Company's public stockholders and (c)
structuring the TBS Transaction so as to place the Company's chief executive
officer in a position which allegedly will involve a conflict between the
interests of TCI and the Company. Among other relief demanded, both complaints
seek an injunction against consummation of the TBS Transaction and an order
directing the individual defendants to account to the Company for their alleged
profits and plaintiffs' alleged damages. On November 22, 1995, the Company and
the other defendants named in the Bernard complaint moved to dismiss such
complaint.
On March 12, 1996, a complaint was filed in the Delaware Chancery Court by
a stockholder of the Company, purportedly derivatively on behalf of the Company
(Trust for the Benefit of Paula C. Rand v. Gerald M. Levin, et al., Case No.
14890). The complaint alleges, among other things, that some or all of the
defendants have breached fiduciary duties owed to the Company and its
stockholders by, among other things, (a) seeking to entrench themselves in board
and management positions, (b) conferring special benefits upon TCI at the
expense of the Company's public stockholders and (c) wasting and
misappropriating corporate assets by causing the Company to enter into certain
agreements, including those with TCI, R.E. Turner and Michael Milken in
connection with the TBS Transaction. The complaint seeks, among other things,
(i) to enjoin, preliminarily and permanently, consummation of the TBS
Transaction and certain related arrangements, (ii) to void the Liberty Voting
Trust, (iii) to enjoin, preliminarily and permanently, any settlement of the
litigation between the Company and U S WEST, unless and until approved by the
Court of Chancery, (iv) a declaratory judgment that defendants breached their
fiduciary duties to the Company and its stockholders and (v) unspecified
damages.
Seventeen complaints have been filed against TBS, the Company, certain
officers and directors of TBS, the Company or TWE, and other defendants,
purportedly on behalf of a class of TBS shareholders, two of which have been
voluntarily dismissed. Sixteen of the 17 complaints were filed in Superior
Court, Fulton County, Georgia; the other was filed in the Court of Chancery of
the State of Delaware in and for New Castle County. Of the complaints filed in
Georgia, 14 were filed prior to the approval of the TBS Transaction on September
22, 1995 by the Company's Board of Directors and the Board of Directors of TBS
(Shingala v. Turner Broadcasting Sys., Inc., et al., Case No. E-41502; Schrank
v. R.E. Turner, et al., Case No. E-41501; Lewis, et al. v. Turner Broadcasting
Sys., Inc., et al., Case No. E-41500; Silverstein and Silverstein v. Turner
Broadcasting Sys., Inc., et al., Case No. E-41526; Strauss v. Turner
Broadcasting Sys., Inc., et al., Case No. E-41538; Hoffman v. Ted Turner, et
al., Case No. E-41544; Barry v. Turner Broadcasting Sys., Inc., et. al., Case
No. E-41545; Mersel and Mersel v. R.E. Turner, et. al., Case No. E-41554;
Friedland and Friedland v. Turner Broadcasting Sys., Inc., et al., Case No.
E-41562; Schwarzchild v. Turner Broadcasting Sys., Inc., et al., Case No.
E-41586; Turner and Hanson v. Turner Broadcasting Sys., Inc., et al., Case No.
E-41637; H. Mark Solomon v. Turner Broadcasting Sys., Inc., et al., Case No.
E-41685; Shores v. Turner Broadcasting Sys., Inc., et al., Case No. E-41749; and
Krim and Davidson v. Turner Broadcasting Sys., Inc. et al., Case No. E-41779).
Two of the complaints filed in Georgia were filed after the TBS Transaction was
approved by the Company's Board of Directors and the Board of Directors of TBS
(Altman v. Turner Broadcasting Sys., Inc., et al., Case No. E-43205; Joyce v.
Tele-Communications, Inc., et al., Case No. E-43321). The plaintiff in Altman
filed a voluntary dismissal of the action without prejudice on November 10,
1995. On September 27, 1995, an amended complaint was filed in Shingala. On
October 24, 1995, an amended complaint was filed in Lewis, apparently on behalf
of the named plaintiffs in 12 of the 16 actions filed in Georgia. On November 1,
1995, a second amended complaint was filed
I-45
in Lewis which is virtually identical to the first amended Lewis complaint
except that the plaintiff in the Joyce action was no longer included as a named
plaintiff. The purported class action filed by a TBS shareholder in Delaware was
filed on October 2, 1995 (Joyce v. John C. Malone, et al., Case No. 14592) and
subsequently dismissed voluntarily without prejudice by the plaintiff on
November 15, 1995. As noted above, a substantially similar action on behalf of
the same plaintiff was filed in Georgia on October 23, 1995 (Joyce v. Tele-
Communications, Inc., et al., Case No. E-43321). On November 13, 1995, Judge
Elizabeth Long, to whom all remaining actions had been assigned, consolidated
the actions. On November 20, 1995, subject to court approval, the plaintiff in
Joyce proposed to file an amended and consolidated class action complaint which
also includes a derivative claim. Also on November 20, 1995, plaintiffs in the
actions other than Joyce filed a motion for the recusal of Judge Long, which
motion was denied on January 22, 1996. The defendants filed answers in response
to the second amended complaint in Lewis on December 20, 1995.
The 17 purported class action complaints filed by TBS shareholders allege,
among other things, that the terms of the TBS Transaction are unfair to TBS
shareholders and that some or all of the defendants have breached or aided and
abetted the breach of fiduciary, common law and/or statutory duties owed to TBS
shareholders. Among the breaches alleged in many of the complaints are (a)
payment of unfair consideration for class members' shares, (b) conferral of
benefits on controlling shareholders at the expense of other shareholders, (c)
corporate waste, (d) failure to seek competitive bids and an independent
appraisal of TBS and (e) entrenchment of TBS Board members. Some of the
complaints allege that some or all of the defendants have committed fraud and/or
have used deceptive and coercive practices to being about the Transaction. Among
other relief demanded, all of these complaints seek damages, most seek an
injunction against consummation of the TBS Transaction and many seek an auction
of TBS.
On January 19, 1996, defendants in these actions filed a motion for
judgment on the pleadings on all claims asserted in the second amended complaint
filed in Lewis on the grounds that, under Georgia law, the valid grant of
dissenters' rights to TBS shareholders with respect to the TBS Transaction
prohibits plaintiffs from maintaining the claims asserted in the second amended
complaint. Plaintiffs are not yet required to file a response to this motion.
By letter dated October 20, 1995, plaintiffs in certain of the Georgia
suits made a demand upon TBS to repudiate (a) an agreement entered into by TBS
and a subsidiary of TCI to sell TBS's interest in SportsSouth, a regional sports
cable network, and (b) the fee authorized to be paid by TBS to MC Group in
connection with the TBS Transaction, as corporate waste or, absent repudiation,
to seek indemnification from any officers or directors of TBS who authorized the
challenged matters. These plaintiffs indicated that a shareholders' derivative
suit seeking injunctive relief would be filed in less than 90 days. These
derivative claims were asserted four days later in the amended Lewis complaint
referred to above. The TBS Board of Directors has established a committee to
investigate such claims.
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-46
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, 1996, of
such officer:
NAME AGE OFFICE
- --------------------------------------------- --- ------------------------------------------------------------
Gerald M. Levin.............................. 56 Chairman of the Board and Chief Executive Officer
Richard D. Parsons........................... 47 President
Peter R. Haje................................ 61 Executive Vice President, General Counsel and Secretary
Timothy A. Boggs............................. 45 Senior Vice President
Richard J. Bressler.......................... 38 Senior Vice President and Chief Financial Officer
Tod R. Hullin................................ 52 Senior Vice President
Philip R. Lochner, Jr. ...................... 53 Senior Vice President
Set forth below are the principal positions held by each of the executive
officers named above since March 1, 1991:
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
and Chief Executive Officer of The Dime Savings Bank of New York, FSB
from January 1991.
Mr. Haje............................... Executive Vice President and General Counsel since October 1, 1990 and
Secretary since May 20, 1993.
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.
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.
I-47
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, 1995, see 'Quarterly
Financial Information' at page F-55 herein, which information is incorporated
herein by reference.
The approximate number of holders of record of the Company's Common Stock
as of January 31, 1996 was 25,000.
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, 1995, see
'Quarterly Financial Information' at page F-55 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, 1995 is set forth at page F-53 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-2 through F-19 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-20 through
F-50 and F-52 herein are incorporated herein by reference.
Quarterly Financial Information set forth at page F-55 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 1996 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 unaudited financial statements of the Time Warner Service
Partnerships for the quarterly period ended September 30, 1995 included in
the Current Report on Form 8-K of Time Warner Entertainment Company, L.P.
(Reg. No. 33-53742) dated November 28, 1995 ('TWE's 1995 Form 8-K') are
incorporated herein by reference and are filed as an exhibit to this
report.
(iii) 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. ('TWE's 1994 Form 10-K') are incorporated
herein by reference and are filed as an exhibit to this report.
(iv) The unaudited financial statements of Paragon Communications for
the quarterly period ended June 30, 1995 included in TWE's 1995 Form 8-K
are incorporated herein by reference and are filed as an exhibit to this
report.
(v) 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.
All other financial statement schedules are omitted because the required
information is not applicable, or because the information required is included
in the consolidated financial statements and notes thereto.
(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 10.22 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) Reports on Form 8-K.
(i) The Company filed a Current Report on Form 8-K dated November 14,
1995, in which it reported in Item 5 certain transactions entered into or
proposed to be entered into by the Company and TWE and which set forth in
Item 7 certain pro forma financial statements of the Company at September
30, 1995 which give effect to such transactions.
(ii) The Company filed a Current Report on Form 8-K dated December 1,
1995, in which it reported in Item 5 that it had entered into an Agreement
and Plan of Merger, dated as of September 22, 1995, providing for TBS to
become a wholly owned subsidiary of the Company through a merger with a
subsidiary of the Company.
(iii) The Company filed a Current Report on Form 8-K dated January 4,
1996, in which it reported in Item 2 its acquisition of CVI and certain
related companies, and related transactions.
(iv) The Company filed a Current Report on Form 8-K dated March 22,
1996 which set forth in Item 7 certain pro forma financial statements of
the Company at December 31, 1995.
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.
By /s/ PETER R. HAJE
.................................
PETER R. HAJE
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
Date: March 22, 1996
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 Board and Chief March 22, 1996
......................................... Executive Officer (principal executive
(GERALD M. LEVIN) officer)
/s/ RICHARD J. BRESSLER Senior Vice President and Chief Financial March 22, 1996
......................................... Officer (principal financial officer)
(RICHARD J. BRESSLER)
/s/ JOHN A. LABARCA Vice President and Controller (principal March 22, 1996
......................................... accounting officer)
(JOHN A. LABARCA)
* Director March 22, 1996
.........................................
(MERV ADELSON)
* Director March 22, 1996
.........................................
(LAWRENCE B. BUTTENWIESER)
* Director March 22, 1996
.........................................
(EDWARD S. FINKELSTEIN)
* Director March 22, 1996
.........................................
(BEVERLY SILLS GREENOUGH)
* Director March 22, 1996
.........................................
(CARLA A. HILLS)
* Director March 22, 1996
.........................................
(DAVID T. KEARNS)
IV-2
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------------------- -------------------
* Director March 22, 1996
.........................................
(HENRY LUCE III)
* Director March 22, 1996
.........................................
(REUBEN MARK)
* Director March 22, 1996
.........................................
(MICHAEL A. MILES)
* Director March 22, 1996
.........................................
(J. RICHARD MUNRO)
* Director March 22, 1996
.........................................
(RICHARD D. PARSONS)
* Director March 22, 1996
.........................................
(DONALD S. PERKINS)
* Director March 22, 1996
.........................................
(RAYMOND S. TROUBH)
* Director March 22, 1996
.........................................
(FRANCIS T. VINCENT, JR.)
*By /s/ PETER R. HAJE
.........................................
(ATTORNEY-IN-FACT)
IV-3
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as 'tm'
The section symbol shall be expressed as SS
TIME WARNER INC. AND TIME WARNER ENTERTAINMENT COMPANY, L.P.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER FINANCIAL INFORMATION
PAGE
--------------
TIME
WARNER TWE
------ ----
Management's Discussion and Analysis of Results of Operations and Financial Condition............ F-2 F-61
Consolidated Financial Statements:
Balance Sheet............................................................................... F-20 F-71
Statement of Operations..................................................................... F-21 F-72
Statement of Cash Flows..................................................................... F-22 F-73
Statement of Shareholders' Equity and Partnership Capital................................... F-23 F-74
Notes to Consolidated Financial Statements.................................................. F-24 F-75
Report of Management............................................................................. F-51
Report of Independent Auditors................................................................... F-52 F-94
Selected Financial Information................................................................... F-53 F-95
Quarterly Financial Information.................................................................. F-55 F-96
Financial Statement Schedules:
Schedule I -- Condensed Financial Information of Registrant................................. F-56
Schedule II -- Valuation and Qualifying Accounts............................................ F-60 F-97
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Time Warner has interests in three fundamental areas of business:
Entertainment, consisting principally of interests in recorded music and music
publishing, filmed entertainment, broadcasting, theme parks and cable television
programming; News and Information, consisting principally of interests in
magazine publishing, book publishing and direct marketing; and
Telecommunications, consisting principally of interests in cable television
systems. Substantially all of Time Warner's interests in filmed entertainment,
broadcasting, theme parks, cable television programming and most of its cable
television systems are held through the Entertainment Group, consisting
principally of TWE, which is not consolidated for financial reporting purposes.
TWE manages the telecommunications properties owned by Time Warner and the
combined cable television operations are conducted under the name of Time Warner
Cable. Capitalized terms are as defined and described in the accompanying
consolidated financial statements, or elsewhere herein.
STRATEGIC INITIATIVES
SIGNIFICANT TRANSACTIONS
During 1995, Time Warner and the Entertainment Group embarked on a program
to improve their financial condition and increase their overall financial
flexibility through the initiation of an asset sales program and significant
debt refinancings. Time Warner and the Entertainment Group also pursued
significant, strategic initiatives during 1995 through their cable television
operations and through a proposed merger of Time Warner and TBS. These
initiatives are part of a continuing strategy to further enhance the strength of
Time Warner's interests in entertainment and news and information, and to
attempt to use existing and acquired cable television systems to establish an
enterprise that will be responsible for the overall management and financing of
its cable and telecommunications interests. In pursuit of these strategic
initiatives, Time Warner and the Entertainment Group announced or completed a
number of transactions in 1995 and early 1996 that have had or are expected to
have a significant effect on their results of operations and financial
condition. Such transactions include:
The September 1995 announcement of Time Warner's agreement to merge with
TBS by acquiring the remaining 80% interest in TBS that it does not
already own;
The acquisitions by Time Warner of Summit, KBLCOM and CVI and related
companies, and the formation by TWE of the TWE-Advance/Newhouse
Partnership, which together strengthened the geographic clusters of the
cable television systems and substantially increased the number of cable
subscribers managed by Time Warner Cable (collectively, the 'Cable
Transactions');
The exchange of ITOCHU's and Toshiba's interests in TWE for equity
interests in Time Warner (the 'ITOCHU/Toshiba Transaction');
The refinancing of approximately $4 billion of public debt by Time Warner
and the execution of a new $8.3 billion credit agreement, under which
approximately $2.7 billion of debt assumed in the Cable Transactions was
refinanced by subsidiaries of Time Warner and $2.6 billion of pre-existing
bank debt was refinanced by TWE (the 'Debt Refinancings'); and
The sale by Time Warner and the Entertainment Group of certain assets
under an asset sales program, which raised approximately $1.6 billion on a
combined basis for debt reduction, including the sale of 51% of TWE's
interest in Six Flags (the 'Six Flags Transaction') and the sale or
expected sale or transfer of certain unclustered cable television systems
owned by TWE (the 'Unclustered Cable Transactions').
F-2
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
The nature of these transactions and their impact on the results of operations
and financial condition of Time Warner and the Entertainment Group are further
discussed below.
TELECOMMUNICATIONS STRATEGY
In 1994, Time Warner embarked on a strategy to expand its cable television
business, leading to agreements to combine with or acquire cable television
systems serving approximately 3.7 million subscribers. This strategy was based
on management's expectation that there would be a signficant increase in the
value of cable television systems related, in part, to a future convergence of
the cable and telephone industries which would provide cable companies with an
opportunity to operate large geographic clusters of cable television systems for
purposes of maximizing the development and distribution of new and improved
services on a cost efficient basis, such as increased channel capacity, high
speed data transmission and telephony services.
During 1995 and with the acquisition of CVI and related companies in
January 1996, Time Warner completed its plans for the expansion of its cable
television business, thereby strengthening its geographic clusters of cable
television systems as previously envisioned. Along with internal growth, the
acquisitions of Summit, KBLCOM and CVI and related companies, as well as the
formation of the TWE-Advance/Newhouse Partnership, increased the total number of
subscribers under the management of Time Warner Cable to 11.7 million, as
compared to 7.5 million subscribers at the end of 1994. Time Warner Cable has
also extended its reach of cable television systems to neighborhoods passing 18
million homes or close to 20% of television homes in the U.S. In addition, there
are now 35 geographic clusters of cable television systems serving over 100,000
subscribers each, including key markets such as New York City and State, central
Florida and North Carolina. Time Warner does not currently plan to make any more
significant acquisitions of cable television systems, but instead intends to
continue to refine its geographic clusters by exchanging certain unclustered
cable television systems for geographically-strategic ones or by selling
non-strategic cable television systems as part of the Company's continuing asset
sales program. Management continues to believe that the increased size and
concentration of its subscriber base will provide for sustained revenue growth
from new and improved services, and provide certain economies of scale relating
to the upgrade of the technological capabilities of Time Warner Cable's cable
television systems.
Management believes that the future convergence of the cable and telephone
industries has been substantially confirmed through various events within the
industry, including the February 1996 enactment into law of sweeping
telecommunications industry reform. Among other features, the Telecommunications
Act of 1996 effectively removes regulatory barriers that historically prohibited
cable television companies and local and long-distance telephone companies from
competing in each other's business. In addition, the new law eliminates most
cable rate pricing restrictions in 1999, and earlier under certain
circumstances. Time Warner expects that the relaxation of cable rate regulation
in 1999, along with permitted cable rate price increases for certain regulated
services that went into effect on January 1, 1996 under a separate Time Warner
agreement with the Federal Communications Commission (the 'FCC'), will provide
enhanced pricing flexibility that will help finance its cable and telephony
expansion plans.
The next phase of Time Warner's telecommunications strategy is to simplify
the structure of its cable and telecommunications properties by bringing such
properties together, so far as practicable and on a tax-efficient basis, into an
enterprise that will be responsible for the overall management and financing of
these interests. The first step of this process was completed in 1995 when
ITOCHU and Toshiba exchanged their interests in TWE for equity interests in Time
Warner. The restructuring process depends, among other things, upon successful
negotiations with U S WEST and certain creditors, and the receipt of franchise
and other regulatory approvals. Accordingly, there can be no assurance that the
effort will succeed. In the interim, as contemplated by the TWE-
F-3
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
Advance/Newhouse Partnership agreement, Time Warner may transfer certain of its
newly-acquired cable systems to the TWE-Advance/Newhouse Partnership on a
tax-efficient basis. Such transfers, if they are made, are expected to be
structured so that the systems will be transferred subject to a portion of Time
Warner's debt, thereby reducing the financial leverage of Time Warner and
increasing the under-leveraged capitalization of the TWE-Advance/Newhouse
Partnership and consequently, TWE.
TBS TRANSACTION
With the announcement in September 1995 of Time Warner's plan to merge with
TBS, Time Warner has taken a strategic step that would further enhance Time
Warner's interests in entertainment and news and information assets while
improving the balance between such interests and its interests in the
telecommunications business. The addition of TBS' news and entertainment
programming networks, film and cartoon libraries, film production companies and
sports franchises is expected to complement virtually all of Time Warner's
business interests and expand the emphasis on growth through Time Warner's
interests in its entertainment and news and information businesses.
The TBS Transaction provides for the merger of each of Time Warner and TBS
with separate subsidiaries of a holding company ('New Time Warner') that will
combine, for financial reporting purposes, the consolidated net assets and
operating results of Time Warner and TBS. Based on TBS' financial position and
results of operations as of and for the year ended December 31, 1995, and giving
pro forma effect to the TBS Transaction as if it had occurred on December 31,
1995 for balance sheet purposes and at the beginning of the year for statement
of operations purposes, the incremental effect on Time Warner reflected in the
combined pro forma financial statements of New Time Warner would have been (i)
an increase in shareholder's equity of approximately $7.3 billion, principally
due to the issuance by New Time Warner of approximately 177.8 million shares of
common stock, (ii) an increase in long-term debt of approximately $2.5 billion
due to the assumption of TBS' debt, (iii) an increase in goodwill of
approximately $7.9 billion as a result of a preliminary allocation of the excess
cost over the net book value of assets acquired, (iv) an increase in revenues of
$3.4 billion, (v) an increase in EBITDA (as defined below) of $524 million, (vi)
an increase in depreciation and amortization of $377 million, including
approximately $200 million of noncash amortization of goodwill, (vii) an
increase in operating income of $147 million, (viii) an increase in net loss of
$111 million and (ix) a reduction in net loss per common share of $.12 per
common share resulting from the dilutive effect of issuing 177.8 million shares
of common stock.
The TBS Transaction is subject to customary closing conditions, including
the approval of the shareholders of TBS and of Time Warner, all necessary
approvals of the FCC and appropriate antitrust approvals. There can be no
assurance that all these approvals can be obtained or, in the case of
governmental approvals, if obtained, will not be conditioned upon changes to the
terms of the merger agreement or related agreements.
USE OF EBITDA
The following comparative discussion of the results of operations and
financial condition of Time Warner and the Entertainment Group 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, the $1.4 billion acquisitions
of KBLCOM and Summit in 1995 and other business combinations accounted for by
the purchase method, including the $904 million acquisition
F-4
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
of CVI and related companies in January 1996 and the proposed TBS merger with
respect to certain discussions on a pro forma basis. 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.
RESULTS OF OPERATIONS
1995 VS. 1994
Time Warner had revenues of $8.067 billion, a loss of $124 million ($.46
per common share) before an extraordinary loss on the retirement of debt and a
net loss of $166 million ($.57 per common share) in 1995, compared to revenues
of $7.396 billion and a net loss of $91 million ($.27 per common share) in 1994.
The increase in Time Warner's net loss in 1995 was principally related to a
$42 million extraordinary loss on the retirement of debt ($.11 per common share)
and $85 million in pretax losses ($52 million after taxes and $.13 per common
share) related to certain businesses and joint ventures owned by the Music
Division which were restructured or closed. As discussed more fully below, the
increase in Time Warner's net loss in 1995 from such losses was principally
mitigated by an overall increase in the fundamental operating income of Time
Warner's business segments and increased income from its equity in the pretax
income of the Entertainment Group, offset in part by a decrease in
investment-related income and higher interest expense on approximately $1.3
billion of debt assumed in the cable acquisitions. The increase in Time Warner's
net loss per common share in 1995 also related to an increase in preferred
dividend requirements to $52 million from $13 million in 1994 as a result of the
preferred stock issued in connection with the 1995 cable acquisitions and the
ITOCHU/Toshiba Transaction.
Time Warner's equity in the pretax income of the Entertainment Group was
$256 million in 1995, compared to $176 million in 1994. As discussed more fully
below, the Entertainment Group's operating results in 1995 reflect an overall
increase in operating income generated by its business segments (including the
contribution by the TWE-Advance/Newhouse Partnership) and an increase in
investment-related income resulting from gains on the sale of certain
unclustered cable systems and other investments, offset in part by minority
interest expense related to the consolidation of the operating results of the
TWE-Advance/Newhouse Partnership effective as of April 1, 1995.
On a pro forma basis, giving effect to (i) the Cable Transactions, (ii) the
ITOCHU/Toshiba Transaction, (iii) the Debt Refinancings, (iv) the Six Flags
Transaction and (v) the Unclustered Cable Transactions, as if each of such
transactions had occurred at the beginning of the periods, Time Warner would
have reported for the years ended December 31, 1995 and 1994, revenues of $8.742
billion and $8.217 billion, depreciation and amortization of $935 million and
$906 million, operating income of $656 million and $653 million, equity in the
pretax income of the Entertainment Group of $286 million and $205 million, a
loss before extraordinary item of $255 million and $266 million ($1.02 and $1.07
per common share) and a net loss of $297 million and $266 million ($1.13 and
$1.07 per common share), respectively. The 1995 to 1994 comparison of pro forma
results are similarly affected by any underlying historical trends that are
unrelated to the transactions given pro forma effect to therein, such as the $85
million in pretax Music Division losses discussed above. The increase in pro
forma over historical losses before extraordinary items for each period is
principally the result of approximately $230 million in annualized noncash
amortization of certain intangible assets recognized in the
F-5
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
cable acquisitions which is not fully offset by the pro forma effects of other
improved net operating results, a component of which is the pro forma benefit
from the net addition of over $400 million in annualized EBITDA.
On a pro forma basis, giving effect to (i) the formation of the
TWE-Advance/Newhouse Partnership, (ii) the refinancing of approximately $2.6
billion of pre-existing bank debt, (iii) the consolidation of Paragon, (iv) the
Six Flags Transaction and (v) the Unclustered Cable Transactions, as if each of
such transactions had occurred at the beginning of the periods, the
Entertainment Group would have reported for the years ended December 31, 1995
and 1994, revenues of $9.686 billion and $8.778 billion, depreciation and
amortization of $1.078 billion and $1.038 billion, operating income of $994
million and $923 million, income before extraordinary item of $203 million and
$171 million and net income of $179 million and $171 million, respectively. The
1995 to 1994 comparison of pro forma results are similarly affected by any
underlying historical trends that are unrelated to the transactions given pro
forma effect to therein. The increase in pro forma over historical net income
for each period principally results from the pro forma effects of a full year
contribution by the TWE-Advance/Newhouse Partnership, and interest savings
associated with the refinancing of TWE's bank debt and lower debt levels
resulting from asset sales.
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. 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.
EBITDA and operating income for Time Warner and the Entertainment Group in
1995 and 1994 are as follows:
YEARS ENDED DECEMBER 31,
----------------------------------------
EBITDA OPERATING INCOME
---------------- --------------------
1995 1994 1995 1994
------ ------ -------- --------
(MILLIONS)
Time Warner:
Publishing............................................................... $ 476 $ 430 $381 $347
Music(1)................................................................. 690 720 321 366
Cable.................................................................... 90 -- (5) --
------ ------ -------- --------
Total.................................................................... $1,256 $1,150 $697 $713
------ ------ -------- --------
------ ------ -------- --------
Entertainment Group:
Filmed Entertainment..................................................... $ 490 $ 430 $253 $219
Six Flags Theme Parks.................................................... 60 135 29 56
Broadcasting-The WB Network.............................................. (66) -- (66) --
Programming-HBO.......................................................... 293 257 274 237
Cable.................................................................... 1,275 989 502 340
------ ------ -------- --------
Total.................................................................... $2,052 $1,811 $992 $852
------ ------ -------- --------
------ ------ -------- --------
- ------------
(1) Includes pretax losses of $85 million recorded in 1995 related to certain
businesses and joint ventures owned by the Music Division which were
restructured or closed.
F-6
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
TIME WARNER
Publishing. Revenues increased to $3.722 billion, compared to $3.433
billion in 1994. EBITDA increased to $476 million from $430 million.
Depreciation and amortization amounted to $95 million in 1995 and $83 million in
1994. Operating income increased to $381 million from $347 million. Revenues
benefited from increases in magazine circulation, advertising and book revenues.
Contributing to the revenue gain were increases achieved by People, Sports
Illustrated, Fortune and book publisher Oxmoor House. EBITDA and operating
income increased as a result of the revenue gains, offset in part by
significantly higher postal and paper costs as a result of price increases.
Music. Revenues increased to $4.196 billion, compared to $3.986 billion in
1994. EBITDA decreased to $690 million from $720 million. Depreciation and
amortization, including amortization related to the purchase of WCI, amounted to
$369 million in 1995 and $354 million in 1994. Operating income decreased to
$321 million from $366 million. Operating results were adversely affected by $85
million in losses recorded in 1995 that related to certain businesses and joint
ventures owned by the Music Division which were restructured or closed. Revenues
for 1995 were negatively affected by certain reclassifications relating to third
party, pressing and distribution arrangements and changes in the Music
Division's ownership interests in certain investments and subsidiaries that
resulted in changes from the consolidation to the equity method of accounting.
Excluding the effects from such reclassifications and changes, revenues from the
fundamental business increased by approximately 6%, principally as a result of
increases in both domestic and international recorded music revenues and
increased music publishing revenues. Domestic and international recorded music
revenues benefited from a number of popular releases and an increase in the
percentage of compact disc to total unit sales. Excluding the $85 million in
losses, EBITDA increased, and operating income benefited, principally from the
revenue gains and interest income on the resolution of a recorded music tax
matter, offset in part by expenses incurred in connection with the settlement of
certain employment contracts and lower results from direct marketing activities
attributable to higher amortization of member acquisition costs.
The losses relating to certain businesses and joint ventures that were
restructured or closed are primarily related to Warner Music Enterprises, one of
the Company's direct marketing efforts, and the write off of its related direct
mail order assets that were not recoverable due to the closure of this business.
Such closure was substantially completed in 1995 and will not require any
significant, future cash outlays. The activities that will not be continued have
not been material to historical operating results and are not expected to
significantly affect the results of future operations.
Cable. As a result of Time Warner's acquisitions of KBLCOM and Summit in
1995, cable operating results for 1995 included revenues of $172 million, EBITDA
of $90 million, depreciation and amortization of $95 million and an operating
loss of $5 million. Moderate operating losses are expected to continue in 1996
because of the full year effect of approximately $230 million of noncash
amortization of certain intangible assets recognized in Time Warner's
acquisitions of KBLCOM and Summit in 1995, and CVI and related companies in
1996.
Interest and Other, Net. Interest and other, net, increased to $877
million in 1995, compared to $724 million in 1994. Interest expense increased to
$877 million, compared to $769 million, principally as a result of approximately
$1.3 billion of debt assumed in the cable acquisitions and higher short-term,
floating-rates of interest paid on $2.6 billion notional amount of interest rate
swap contracts. Other income, net, was immaterial in 1995, compared to $45
million in 1994, principally because of a decrease in investment-related income.
Investment-related income in both periods consisted of gains on the sale of
certain assets, including the sale of an interest in QVC, Inc. in 1995, which
were offset by losses from reductions in the carrying value of certain
investments taken in each period.
F-7
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
ENTERTAINMENT GROUP
Filmed Entertainment. Revenues increased to $5.078 billion, compared to
$4.484 billion in 1994. EBITDA increased to $490 million from $430 million.
Depreciation and amortization, including amortization related to the purchase of
WCI, amounted to $237 million in 1995 and $211 million in 1994. Operating income
increased to $253 million from $219 million. Revenues benefited from increases
in worldwide theatrical, home video, consumer products and television
distribution operations. Worldwide theatrical and domestic home video revenues
in 1995 were led by the success of Batman Forever. EBITDA and operating income
benefited from the revenue gains and increased income from licensing operations.
Six Flags Theme Parks. As a result of TWE's sale of 51% of its interest in
Six Flags, the operating results of Six Flags have been deconsolidated effective
as of June 23, 1995 and TWE's remaining 49% interest in Six Flags is accounted
for under the equity method of accounting. Accordingly, revenues decreased to
$227 million, compared to $557 million in 1994. EBITDA decreased to $60 million
from $135 million. Depreciation and amortization amounted to $31 million in 1995
and $79 million in 1994. Operating income decreased to $29 million from $56
million.
Broadcasting-The WB Network. The WB Network was launched in January 1995,
and generated $66 million of operating losses on $33 million of revenues. The
operating loss was mitigated by a favorable legal settlement, as well as by
funding from a limited partner admitted as of August 1995. Due to the start-up
nature of this new national broadcast operation, losses are expected to
continue.
Programming-HBO. Revenues increased to $1.607 billion, compared to $1.513
billion in 1994. EBITDA increased to $293 million from $257 million.
Depreciation and amortization amounted to $19 million in 1995 and $20 million in
1994. Operating income increased to $274 million from $237 million. Revenues
benefited primarily from an increase in subscriptions to 29.7 million from 27
million at the end of 1994, as well as from higher pay-TV rates. EBITDA and
operating income improved principally as a result of the revenue gains.
Cable. Revenues increased to $3.094 billion, compared to $2.242 billion in
1994. EBITDA increased to $1.275 billion from $989 million. Depreciation and
amortization, including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $773 million in 1995 and
$649 million in 1994. Operating income increased to $502 million from $340
million. Revenues and operating results benefited from the formation of the
TWE-Advance/Newhouse Partnership on April 1, 1995 and the consolidation of
Paragon effective as of July 6, 1995. Excluding such effects, revenues benefited
from an aggregate increase in basic cable and Primestar-related, direct
broadcast satellite subscribers that approached 6% and increases in nonregulated
revenues, including pay-TV, pay-per-view and advertising. Excluding the positive
contributions from the TWE-Advance/Newhouse Partnership and the consolidation of
Paragon, EBITDA and operating income increased as a result of the revenue gains,
offset in part by the full year impact of the second round of cable rate
regulations that went into effect in July 1994, higher start-up costs for
telephony operations and, with respect to operating income only, higher
depreciation and amortization relating to increased capital spending.
Interest and Other, Net. Interest and other, net, decreased to $539
million in 1995, compared to $616 million in 1994. Interest expense increased to
$579 million, compared to $567 million in 1994, principally as a result of
higher short-term, floating-rates of interest paid on borrowings under TWE's
former and existing bank credit agreements, offset in part by interest savings
in the last quarter of 1995 on lower debt levels related to management's asset
sales program. There was other income, net, of $40 million in 1995, compared to
other expense, net, of $49 million in 1994, principally because of an increase
in investment-related income related to gains on the sale of certain unclustered
cable systems and other investments.
F-8
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
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.
As discussed more fully below, the improvement in Time Warner's net loss in
1994 reflected an overall increase in operating income generated by its business
segments and an increase in investment related income, offset in part by higher
interest expense and lower income from Time Warner's equity in the pretax income
of the Entertainment Group. The improvement in Time Warner's 1994 net loss also
related to the absence of the extraordinary loss and one-time tax charge that
were recorded in 1993. The improvement in Time Warner's net loss per common
share in 1994 further resulted from a $105 million reduction in preferred
dividend requirements relating to Time Warner's 1993 redemption or exchange of
$5.6 billion of preferred stock for debt.
Time Warner's equity in the pretax income of the Entertainment Group was
$176 million in 1994, compared to $281 million in 1993. As discussed more fully
below, the Entertainment Group's operating results in 1994 reflected an overall
decrease in operating income generated by its business segments, principally
relating to lower Cable results due to cable rate regulation, and an increase in
investment-related and foreign currency contract losses, offset in part by an
increase in interest income.
EBITDA and operating income for Time Warner and the Entertainment Group in
1994 and 1993 are as follows:
YEARS ENDED DECEMBER 31,
--------------------------------
OPERATING
EBITDA INCOME
---------------- ------------
1994 1993 1994 1993
------ ------ ---- ----
(MILLIONS)
Time Warner:
Publishing..................................................................... $ 430 $ 372 $347 $295
Music.......................................................................... 720 643 366 296
------ ------ ---- ----
Total.......................................................................... $1,150 $1,015 $713 $591
------ ------ ---- ----
------ ------ ---- ----
Entertainment Group:
Filmed Entertainment........................................................... $ 430 $ 427 $219 $233
Six Flags Theme Parks.......................................................... 135 122 56 53
Programming-HBO................................................................ 257 230 237 213
Cable.......................................................................... 989 1,035 340 406
------ ------ ---- ----
Total.......................................................................... $1,811 $1,814 $852 $905
------ ------ ---- ----
------ ------ ---- ----
TIME WARNER
Publishing. Revenues increased to $3.433 billion, compared to $3.270
billion in 1993. EBITDA increased to $430 million from $372 million.
Depreciation and amortization amounted to $83 million in 1994 and $77 million in
1993. Operating income increased to $347 million from $295 million. Revenues
benefited principally from increases in magazine advertising and circulation
revenues, which were aided in part by several special
F-9
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
issues during 1994. Significant revenue gains were achieved by People, Sports
Illustrated and Southern Living. EBITDA, operating income 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
1993. EBITDA increased to $720 million from $643 million. Depreciation and
amortization, including amortization related to the purchase of WCI, amounted to
$354 million in 1994 and $347 million in 1993. Operating income increased to
$366 million from $296 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.
EBITDA and operating income 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 $4.484 billion, compared to
$4.032 billion in 1993. EBITDA increased to $430 million from $427 million.
Depreciation and amortization, including amortization related to the purchase of
WCI, amounted to $211 million in 1994 and $194 million in 1993. Operating income
decreased to $219 million from $233 million. Worldwide home video, syndication
and consumer products revenues increased at Warner Bros., offset in part by
lower worldwide theatrical revenues. EBITDA and operating income margins
decreased principally as a result of lower theatrical results in comparison to
the exceptionally strong theatrical results in 1993.
Six Flags Theme Parks. Revenues increased to $557 million, compared to
$533 million in 1993. EBITDA increased to $135 million from $122 million.
Depreciation and amortization amounted to $79 million in 1994 and $69 million in
1993. Operating income increased to $56 million from $53 million. Revenues
increased as a result of overall attendance growth and higher revenues per
visitor. EBITDA and operating income improved principally as a result of the
revenue gains.
Programming-HBO. Revenues increased to $1.513 billion, compared to $1.441
billion in 1993. EBITDA increased to $257 million from $230 million.
Depreciation and amortization amounted to $20 million in 1994 and $17 million in
1993. Operating income increased to $237 million from $213 million. Revenues
benefited from an increase in subscriptions and higher pay-TV rates. EBITDA,
operating income and operating margins improved principally as a result of the
revenue gains.
F-10
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. EBITDA decreased to $989 million from $1.035 billion. 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. Operating income decreased to $340 million from $406
million. 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. In 1993, other income, net, benefited from a gain
on the sale of certain assets and other investment-related income, which more
than offset investment losses.
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1995
TIME WARNER
1995 FINANCIAL CONDITION
Time Warner had $9.9 billion of debt, $949 million of mandatorily
redeemable preferred securities of subsidiaries, $1.2 billion of cash and
equivalents (net debt of $8.7 billion), and $3.7 billion of shareholders' equity
at December 31, 1995, compared to $9.2 billion of debt, $282 million of cash and
equivalents (net debt of $8.9 billion), and $1.1 billion of shareholders' equity
at December 31, 1994. The increase in debt principally reflects the assumption
of approximately $1.3 billion of debt related to the Cable Transactions, offset
in part by debt reductions using proceeds raised from the asset sales program,
including proceeds from the issuance of the PERCS which monetized Time Warner's
14% investment in Hasbro. The increase in mandatorily redeemable preferred
securities of subsidiaries reflects the issuance in 1995 of the PERCS and
Preferred Trust Securities, the proceeds of which were used to reduce certain
indebtedness of Time Warner. The noncurrent cash and equivalents consist of the
net proceeds received from the issuance of the Preferred Trust Securities in
December 1995, which were used in the redemption of the 8.75% Convertible
Debentures in early 1996. The increase in shareholders' equity reflects the
issuance in 1995 of approximately 2.5 million shares of common stock and
approximately 29.3 million shares of preferred stock in connection with the
ITOCHU/Toshiba Transaction and the acquisitions of KBLCOM and Summit. On a
combined basis (Time Warner and the Entertainment Group together), there was
$14.7 billion of net debt at December 31, 1995, compared to $15 billion of net
debt at the beginning of the year.
INVESTMENT IN TWE
Time Warner's investment in TWE at December 31, 1995 consists of 74.49% of
TWE's pro rata priority capital and residual equity capital, and 100% of TWE's
senior priority capital and junior priority capital. Such priority capital
interests provide Time Warner, and with respect to the pro rata priority capital
only, U S WEST, with certain priority claims to the net partnership income of
TWE and distributions of TWE partnership capital,
F-11
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
including certain priority distributions of partnership capital in the event of
liquidation or dissolution of TWE. Each level of priority capital interest
provides for an annual rate of return equal to or exceeding 8%, including an
above-market 13.25% annual rate of return (11.25% to the extent concurrently
distributed) related to Time Warner's junior priority capital interest, which
represents Cumulative Priority Capital of $4.6 billion at December 31, 1995.
While the TWE partnership agreement contemplates the reinvestment of significant
partnership cash flows in the form of capital expenditures and otherwise
provides for certain other restrictions that are expected to limit cash
distributions on partnership interests for the foreseeable future, Time Warner's
$1.4 billion senior priority capital interest and, to the extent not previously
distributed, partnership income allocated thereto (based on an 8% annual rate of
return) is required to be distributed to Time Warner in three annual
installments beginning on July 1, 1997. In 1995, Time Warner received a $366
million cash distribution from TWE representing the priority capital return
allocated to its senior priority capital interest through June 30, 1995.
CREDIT AGREEMENT REFINANCINGS
In connection with the Cable Transactions, TWI Cable, TWE and the
TWE-Advance/Newhouse Partnership executed a five-year revolving credit facility
in June 1995. The New Credit Agreement enabled such entities to refinance
certain indebtedness assumed in the Cable Transactions, to refinance TWE's
indebtedness under a pre-existing bank credit agreement and to finance the
ongoing working capital, capital expenditure and other corporate needs of each
borrower.
The New Credit Agreement permits borrowings in an aggregate amount of up to
$8.3 billion, with no scheduled reductions in credit availability prior to
maturity. Borrowings are limited to $4 billion in the case of TWI Cable, $5
billion in the case of the TWE-Advance/Newhouse Partnership and $8.3 billion in
the case of TWE, subject in each case to certain limitations and adjustments.
Such borrowings bear interest at specific rates for each of the three borrowers,
generally equal to LIBOR plus a margin initially ranging from 50 to 87.5 basis
points, which margin will vary based on the credit rating or financial leverage
of the applicable borrower. Unused credit is available for general business
purposes and to support any commercial paper borrowings. Each borrower is
required to pay a commitment fee initially ranging from .2% to .35% per annum on
the unused portion of its commitment. TWI Cable may also be required to pay an
annual facility fee equal to .1875% of the entire amount of its commitment,
depending on the level of its financial leverage in any given year. The New
Credit Agreement contains certain covenants for each borrower relating to, among
other things, additional indebtedness; liens on assets; cash flow coverage and
leverage ratios; and loans, advances, distributions and other cash payments or
transfers of assets from the borrowers to their respective partners or
affiliates.
In July 1995, TWI Cable borrowed approximately $1.2 billion under the New
Credit Agreement to refinance certain indebtedness assumed or incurred in the
acquisition of KBLCOM, and TWE borrowed approximately $2.6 billion to repay and
terminate its pre-existing bank credit agreement. An additional $1.5 billion was
borrowed by TWI Cable under the New Credit Agreement in January 1996 to
refinance certain indebtedness assumed or incurred in the acquisition of CVI and
related companies.
PUBLIC DEBT REFINANCINGS
In 1995 and early 1996, Time Warner refinanced approximately $4 billion of
its public debt, thereby increasing its financial flexibility through lowering
interest rates, extending debt maturities and eliminating potential dilution
from the conversion of its 8.75% Convertible Debentures into 46.6 million shares
of common stock. The outstanding 8.75% Convertible Debentures were redeemed in
two tranches: $1 billion principal amount in September 1995 for $1.06 billion
(including redemption premiums and accrued interest) and the
F-12
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
remaining $1.2 billion principal amount in February 1996 for $1.28 billion
(including redemption premiums and accrued interest). The September 1995
redemption was financed with proceeds from a $500 million issuance of 7.75%
ten-year notes in June 1995, proceeds from a $374 million issuance of the PERCS
in August 1995 and available cash and equivalents. The February 1996 redemption
was financed with proceeds from a $575 million issuance of the Preferred Trust
Securities in December 1995 and proceeds from a $750 million issuance of certain
debentures in January 1996. In connection therewith, Time Warner recognized an
extraordinary loss of $26 million in February 1996.
In August 1995, Time Warner redeemed all of its $1.8 billion principal
amount of outstanding Reset Notes in exchange for new securities, consisting of
approximately $454 million aggregate principal amount of Floating Rate Notes due
August 15, 2000, approximately $272 million aggregate principal amount of 7.975%
Notes due August 15, 2004, approximately $545 million aggregate principal amount
of 8.11% Debentures due August 15, 2006, and approximately $545 million
aggregate principal amount of 8.18% Debentures due August 15, 2007.
ASSET SALES
As part of a continuing strategy to enhance the financial position and
credit statistics of Time Warner and the Entertainment Group, an asset sales
program was initiated in 1995. Including the sale of 51% of TWE's interest in
Six Flags in June 1995, the sale of an interest in QVC, Inc. in February 1995,
the sale or expected sale of certain unclustered cable systems and the proceeds
raised from the monetization of Time Warner's investment in Hasbro in August
1995, Time Warner and the Entertainment Group on a combined basis have completed
or entered into transactions that raised approximately $1.6 billion for debt
reduction, all of which were completed in 1995 except for certain transactions
aggregating approximately $170 million which are expected to close in 1996.
CREDIT STATISTICS
The combination of asset sales and debt refinancings is intended to
strengthen the financial position of Time Warner and the Entertainment Group
and, when taken together with EBITDA growth, is expected to continue the
improvement of Time Warner's overall credit statistics. These credit statistics
consist of commonly-used liquidity measures such as leverage and coverage
ratios. The leverage ratio represents the ratio of total debt, less cash ('Net
debt') to total business segment EBITDA, less corporate expenses ('Adjusted
EBITDA'). The coverage ratio represents the ratio of Adjusted EBITDA to total
interest expense and/or preferred dividends. Those ratios, on a pro forma basis
for 1995 and on an historical basis for 1994 and 1993, are as set forth below
for each of 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 fund the cash needs of Time Warner.
HISTORICAL
PRO FORMA ------------
1995(A) 1994 1993
--------- ---- ----
Time Warner:
Net debt/Adjusted EBITDA.............................................................. 7.0x 8.3x 9.8x
Adjusted EBITDA/Interest (b).......................................................... 1.6x 1.4x 1.3x
Adjusted EBITDA/Interest and preferred dividends (b)(c)............................... 1.3x 1.4x 1.2x
Time Warner and Entertainment Group combined:
Net debt/Adjusted EBITDA.............................................................. 4.7x 5.3x 5.6x
Adjusted EBITDA/Interest (b).......................................................... 2.4x 2.1x 2.1x
Adjusted EBITDA/Interest and preferred dividends (b)(c)............................... 2.1x 2.1x 1.9x
(footnotes on next page)
F-13
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
(footnotes from previous page)
(a) Pro forma ratios for 1995 give effect to the Cable Transactions, the
ITOCHU/Toshiba Transaction, the Debt Refinancings, the Six Flags Transaction
and the Unclustered Cable Transactions, and with respect to Time Warner and
the Entertainment Group combined only, the consolidation of Paragon, as if
each of such transactions occurred at the beginning of 1995. Although not
reflected therein, the TBS Transaction is not expected to significantly
affect the pro forma ratios presented above. Historical ratios for 1995 are
not meaningful and have not been presented because they reflect the
operating results of acquired or disposed entities for only a portion of the
year in comparison to year-end net debt levels.
(b) Excludes interest of $28 million in 1995 and $12 million in 1994 which was
paid to TWE in connection with borrowings under Time Warner's $400 million
credit agreement with TWE.
(c) Includes preferred dividends of $11 million in 1995 in connection with
Company-obligated mandatorily redeemable preferred securities of
subsidiaries and on a pro forma basis, an incremental $91 million of
preferred dividends related to the preferred stock issued in the Cable
Transactions and the ITOCHU/Toshiba Transaction.
CASH FLOWS
During 1995, Time Warner's cash provided by operations amounted to $1.051
billion and reflected $1.256 billion of EBITDA from its Publishing, Music and
Cable businesses, $1.063 billion of net distributions from TWE and $35 million
from the securitization of receivables, less $659 million of interest payments,
$278 million of income taxes, $74 million of corporate expenses and $292 million
related to an increase in other working capital requirements, balance sheet
accounts and noncash items. Cash provided by operations of $473 million in 1994
reflected $1.150 billion of EBITDA from the Publishing and Music businesses,
$120 million of net distributions from TWE, $179 million from the securitization
of receivables, less $539 million of interest payments, $339 million of income
taxes, $76 million of corporate expenses and $22 million related to an increase
in other working capital requirements, balance sheet accounts and noncash items.
Cash used by investing activities, excluding investment proceeds, increased
to $647 million in 1995, compared to $351 million in 1994, principally as a
result of higher investment spending by Time Warner's business segments. As a
result of management's asset sales program, investment proceeds increased to
$376 million in 1995, compared to $118 million in 1994.
Cash provided by financing activities was $123 million in 1995, compared to
cash used by financing activities of $158 million in 1994, principally as a
result of the receipt of proceeds from the issuance of the Preferred Trust
Securities in December 1995, offset in part by the use of available cash and
equivalents to redeem a portion of the 8.75% Convertible Debentures in September
1995. In addition, cash dividends paid increased to $171 million in 1995,
compared to $142 million in 1994.
The assets and cash flows of TWE are restricted by the TWE partnership
agreement and are unavailable to Time Warner except through the payment of
certain fees, reimbursements, cash distributions and loans, which are subject to
limitations. Under the New Credit Agreement, TWE and TWI Cable are permitted to
incur additional indebtedness to make loans, advances, distributions and other
cash payments to Time Warner, subject to their respective compliance with the
cash flow coverage and leverage ratio covenants contained therein.
Management believes that Time Warner's operating cash flow, cash and
marketable securities and additional borrowing capacity are sufficient to fund
its capital and liquidity needs for the foreseeable future without distributions
and loans from TWE above those permitted by existing agreements.
F-14
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
ENTERTAINMENT GROUP
1995 FINANCIAL CONDITION
The financial condition of the Entertainment Group, principally TWE, at
December 31, 1995 was affected by the formation of the TWE-Advance/Newhouse
Partnership, the Six Flags Transaction and the consolidation of Paragon. The
Entertainment Group had $6.2 billion of debt, $1.4 billion of Time Warner
General Partners' senior priority capital and $6.6 billion of partners' capital
(net of the $169 million uncollected portion of the note receivable from U S
WEST) at December 31, 1995, compared to $7.2 billion of debt, $1.7 billion of
Time Warner General Partners' senior priority capital and $6.5 billion of
partners' capital at December 31, 1994. The $1 billion reduction in debt
resulted principally from the Six Flags Transaction. In addition, principally as
a result of the payment of over $1 billion of distributions to Time Warner in
1995, cash and equivalents decreased to $209 million at December 31, 1995,
compared to $1.1 billion at December 31, 1994, reducing the debt-net-of-cash
amounts for the Entertainment Group to $6 billion and $6.1 billion,
respectively.
CREDIT STATISTICS
Principally as a result of the formation of the TWE-Advance/Newhouse
Partnership and the Six Flags Transaction, the Entertainment Group's leverage
and coverage ratios improved in 1995 on a pro forma basis, as set forth below:
HISTORICAL
PRO FORMA ------------
1995(A) 1994 1993
--------- ---- ----
Net debt/Adjusted EBITDA.............................................................. 3.0x 3.5x 3.3x
Adjusted EBITDA/Interest.............................................................. 3.8x 3.1x 3.0x
- ------------
(a) Pro forma ratios for 1995 give effect to the formation of the
TWE-Advance/Newhouse Partnership, the refinancing of approximately $2.6
billion of pre-existing bank debt, the consolidation of Paragon, the Six
Flags Transaction and the Unclustered Cable Transactions, as if each of such
transactions had occurred at the beginning of 1995. Historical ratios for
1995 are not meaningful and have not been presented because they reflect the
operating results of acquired or disposed entities for only a portion of the
year in comparison to year-end net debt levels.
Such ratios may be adversely affected upon the transfer of certain of Time
Warner's newly-acquired cable systems to the TWE-Advance/Newhouse Partnership,
which, if completed, is expected to be structured so that the systems will be
transferred subject to a portion of Time Warner's debt, thereby reducing the
financial leverage of Time Warner and increasing the under-leveraged
capitalization of the TWE-Advance/Newhouse Partnership and consequently, TWE.
CASH FLOWS
In 1995, the Entertainment Group's cash provided by operations amounted to
$1.495 billion and reflected $2.052 billion of EBITDA from the Filmed
Entertainment, Six Flags Theme Parks, Broadcasting-The WB Network,
Programming-HBO and Cable businesses and $159 million related to a reduction in
working capital requirements, other balance sheet accounts and noncash items,
less $577 million of interest payments, $75 million of income taxes and $64
million of corporate expenses. Cash provided by operations of $1.341 billion in
1994 reflected $1.811 billion of business segment EBITDA and $180 million
related to a reduction in working capital requirements, other balance sheet
accounts and noncash items, less $521 million of interest payments, $69 million
of income taxes and $60 million of corporate expenses.
F-15
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
Cash used by investing activities decreased to $750 million in 1995,
compared to $1.770 billion in 1994, principally as a result of a $1.1 billion
increase in investment proceeds relating to management's asset sales program.
Capital expenditures increased to $1.653 billion in 1995, compared to $1.235
billion in 1994, principally as a result of higher capital spending by the Cable
Division.
Cash used by financing activities was $1.607 billion in 1995, compared to
cash provided by financing activities of $162 million in 1994, principally as a
result of an approximate $1 billion reduction in debt in 1995 and a $943 million
increase in distributions paid to Time Warner, offset in part by a $368 million
increase in collections on the note receivable from U S WEST that were used to
partially finance the capital spending requirements of the Cable Division.
Management believes that TWE's operating cash flow, cash and equivalents,
collections on the U S WEST Note and additional borrowing capacity are
sufficient to fund its capital and liquidity needs for the foreseeable future.
CABLE CAPITAL SPENDING
Since the beginning of 1994, Time Warner Cable has been engaged in a plan
to upgrade the technological capability and reliability of its cable television
systems and develop new services, which it believes will position the business
for sustained, long-term growth. Capital spending by Time Warner Cable,
including the cable operations of both Time Warner and TWE, amounted to $1.349
billion in 1995, compared to $778 million in 1994, and was financed in part
through collections on the note receivable from U S WEST of $602 million in 1995
and $234 million in 1994. Cable capital spending for 1996 is budgeted to be
approximately $1.6 billion and is expected to be funded principally by cable
operating cash flow and $169 million of collections on the remaining portion of
the note receivable from U S WEST. In exchange for certain flexibility in
establishing cable rate pricing structures for regulated services that went into
effect on January 1, 1996 and consistent with Time Warner Cable's long-term
strategic plan, Time Warner Cable has agreed with the FCC to invest a total of
$4 billion in capital costs in connection with the upgrade of its cable
infrastructure, which is expected to be substantially completed over the next
five years. The agreement with the FCC covers all of the cable operations of
Time Warner Cable, including the owned or managed cable television systems of
Time Warner, TWE and the TWE-Advance/Newhouse Partnership. Management expects to
continue to finance such level of investment principally through the growth in
cable operating cash flow derived from increases in subscribers and cable rates,
borrowings under the New Credit Agreement and the development of new revenue
streams from expanded programming options, high speed data transmission,
telephony and other services.
OFF-BALANCE SHEET ASSETS
As discussed below, Time Warner believes that the value of certain
off-balance sheet assets should be considered, along with other factors
discussed elsewhere herein, in evaluating the Company's financial condition and
prospects for future results of operations, including its ability to fund its
capital and liquidity needs.
INTANGIBLE ASSETS
As a creator and distributor of branded information and entertainment
copyrights, Time Warner and the Entertainment Group have a significant amount of
internally-generated intangible assets whose value is not fully reflected in
their respective consolidated balance sheets. Such intangible assets extend
across Time Warner's principal business interests, but are best exemplified by
Time Warner's collection of copyrighted music product,
F-16
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
its interests in Warner Bros.' and HBO's copyrighted film and television product
libraries, and the creation or extension of brands, as in the case of Time
Inc.'s new magazine titles or The WB Network. Generally accepted accounting
principles do not recognize the value of such assets, except at the time they
may be acquired in a business combination accounted for by the purchase method
of accounting.
Because Time Warner owns the copyrights to such creative material, it
continually generates revenue through the sale of such products across different
media and in new and existing markets. The value of film and television-related
copyrighted product and trademarks is continually realized by the licensing of
films and television series to secondary markets and the licensing of
trademarks, such as the Looney Tunes characters and Batman, to the retail
industry and other markets. In addition, technological advances, such as the
introduction of the compact disc and home videocassette in the 1980's and
potentially the digital versatile disc in the future, have historically
generated significant revenue opportunities through the repackaging and sale of
such copyrighted products under the new technological format. Accordingly, such
intangible assets have significant off-balance sheet asset value that is not
fully reflected in the consolidated balance sheets of Time Warner or the
Entertainment Group.
WARNER BROS. BACKLOG
Warner Bros.' backlog, representing the amount of future revenue not yet
recorded from cash contracts for the licensing of theatrical and television
product for pay cable, network, basic cable and syndicated television
exhibition, amounted to $1.056 billion at December 31, 1995, compared to $852
million at December 31, 1994 (including amounts relating to HBO of $175 million
at each date). Because such contracts are for the licensing of theatrical and
television product which have already been produced, the recognition of revenue
is principally only dependent upon the commencement of the availability period
for telecast under the terms of the related licensing agreement. In addition,
cash licensing fees are collected periodically over the term of the related
licensing agreements. Accordingly, the portion of backlog for which cash
advances have not already been received has significant off-balance sheet asset
value as a source of future funding. The backlog excludes advertising barter
contracts, which are also expected to result in the future realization of cash
through the sale of advertising spots received under such contracts.
INTEREST RATE AND FOREIGN CURRENCY RISK MANAGEMENT
INTEREST RATE SWAP CONTRACTS
Time Warner uses interest rate swap contracts to adjust the proportion of
total debt that is subject to variable and fixed interest rates. At December 31,
1995, 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 5.4%) on $2.6 billion notional amount of indebtedness,
which resulted in approximately 43% of Time Warner's underlying debt, and 41% of
the debt of Time Warner and the Entertainment Group combined, being subject to
variable interest rates. The notional amount of outstanding contracts at
December 31, 1995 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: 1996-$300 million (receive-4.6%; pay-5.9%);
1998-$700 million (receive-5.5%; pay-5.8%); 1999-$1.2 billion (receive-5.5%;
pay-5.9%); and 2000-$400 million (receive-5.5%; pay-5.9%). At December 31, 1994,
Time Warner had interest rate swap contracts on $2.9 billion notional amount of
indebtedness.
F-17
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
Based on the level of interest rates prevailing at December 31, 1995, the
fair value of Time Warner's fixed-rate debt exceeded its carrying value by $407
million and it would have cost $9 million to terminate the related interest rate
swap contracts, which combined is the equivalent of an unrealized loss of $416
million. Based on Time Warner's fixed-rate debt and related interest rate swap
contracts outstanding at December 31, 1995, each 25 basis point increase or
decrease in the level of interest rates prevailing at December 31, 1995 would
result in a net reduction or increase in the combined unrealized loss of
approximately $185 million, respectively, including respective costs or savings
of $16 million to terminate the related interest rate swap contracts. 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 its interest rate swap contracts,
which combined was the equivalent of an unrealized gain of $336 million.
Unrealized gains or losses on debt or interest rate swap contracts are not
recognized unless the debt is retired or the contracts are terminated prior to
their maturity.
Although changes in the unrealized gains or losses on interest rate swap
contracts and debt do not result in the realization or expenditure of cash
unless the contracts are terminated or the debt is retired, each 25 basis point
increase or decrease in the level of interest rates related to Time Warner's
variable-rate debt and interest rate swap contracts would respectively increase
or decrease Time Warner's annual interest expense and related cash payments by
approximately $12 million, including $7 million related to interest rate swap
contracts.
FOREIGN EXCHANGE CONTRACTS
Time Warner uses foreign exchange contracts 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 foreign currency exchange rates.
As part of its overall strategy to manage the level of exposure to the risk of
foreign currency exchange rate fluctuations, Time Warner hedges a portion of its
and TWE's combined foreign currency exposures anticipated over the ensuing
twelve month period. At December 31, 1995, Time Warner has effectively hedged
approximately half of the combined estimated foreign currency exposures that
principally relate to anticipated cash flows to be remitted to the U.S. over the
ensuing twelve month period, using foreign exchange contracts that generally
have maturities of three months or less, which are generally rolled over to
provide continuing coverage throughout the year. Time Warner often closes
foreign exchange sale contracts by purchasing an offsetting purchase contract.
At December 31, 1995, Time Warner had contracts for the sale of $504 million and
the purchase of $140 million of foreign currencies at fixed rates, primarily
English pounds (29% of net contract value), German marks (19%), Canadian dollars
(16%), French francs (16%) and Japanese yen (5%), compared to contracts for the
sale of $551 million and the purchase of $109 million of foreign currencies at
December 31, 1994.
Unrealized gains or losses related to foreign exchange contracts are
recorded in income as the market value of such contracts change; accordingly,
the carrying value of foreign exchange contracts approximates market value. The
carrying value of foreign exchange contracts was not material at December 31,
1995 and 1994. No cash is required to be received or paid with respect to the
realization of such gains and losses until the related foreign exchange
contracts are settled, generally at their respective maturity dates. In 1995 and
1994, Time Warner had $20 million and $33 million, respectively, and TWE had $11
million and $20 million, respectively, of net losses on foreign exchange
contracts, 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 in cash 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.
F-18
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
Based on the foreign exchange contracts outstanding at December 31, 1995,
each 5% devaluation of the U.S. dollar as compared to the level of foreign
exchange rates for currencies under contract at December 31, 1995 would result
in approximately $25 million of unrealized losses and $7 million of unrealized
gains on foreign exchange contracts involving foreign currency sales and
purchases, respectively. Conversely, a 5% appreciation of the U.S. dollar would
result in $25 million of unrealized gains and $7 million of unrealized losses,
respectively. At December 31, 1995, none of Time Warner's foreign exchange
purchase contracts relates to TWE's foreign currency exposure. However, with
regard to the $25 million of unrealized losses or gains on foreign exchange sale
contracts, Time Warner would be reimbursed by TWE, or would reimburse TWE,
respectively, for approximately $6 million related to TWE's foreign currency
exposure. Consistent with the nature of the economic hedge provided by such
foreign exchange contracts, such unrealized gains or losses would be offset by
corresponding decreases or increases, respectively, in the dollar value of
future foreign currency royalty and license fee payments that would be received
in cash within the ensuing twelve month period from the sale of U.S. copyrighted
products abroad.
F-19
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
1995 1994
------- -------
ASSETS
CURRENT ASSETS
Cash and equivalents.......................................................................... $ 628 $ 282
Receivables, less allowances of $786 and $768................................................. 1,755 1,439
Inventories................................................................................... 443 370
Prepaid expenses.............................................................................. 894 726
------- -------
Total current assets.......................................................................... 3,720 2,817
Cash and equivalents segregated for redemption of long-term debt.............................. 557 --
Investments in and amounts due to and from Entertainment Group................................ 5,734 5,350
Other investments............................................................................. 2,389 1,555
Land and buildings............................................................................ 431 412
Cable television equipment.................................................................... 361 --
Furniture, fixtures and other equipment....................................................... 1,196 998
------- -------
1,988 1,410
Less accumulated depreciation................................................................. (869) (657)
------- -------
Property, plant and equipment................................................................. 1,119 753
Music catalogues, contracts and copyrights.................................................... 1,140 1,207
Cable television franchises................................................................... 1,696 --
Goodwill...................................................................................... 5,213 4,630
Other assets.................................................................................. 564 404
------- -------
Total assets.................................................................................. $22,132 $16,716
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.............................................................................. $ 672 $ 648
Royalties payable............................................................................. 755 731
Debt due within one year...................................................................... 34 355
Other current liabilities..................................................................... 1,566 1,238
------- -------
Total current liabilities..................................................................... 3,027 2,972
Long-term debt................................................................................ 9,907 8,839
Deferred income taxes......................................................................... 3,420 2,700
Unearned portion of paid subscriptions........................................................ 654 631
Other liabilities............................................................................. 508 426
Company-obligated mandatorily redeemable preferred securities of subsidiaries
holding solely subordinated notes and debentures of the Company (a)......................... 949 --
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 250 million shares authorized, 29.7 million and 962 thousand
shares
outstanding, $2.994 billion and $140 million liquidation preference......................... 30 1
Common stock, $1 par value, 750 million shares authorized, 387.7 million and 379.3 million
shares outstanding.......................................................................... 388 379
Paid-in capital............................................................................... 5,422 2,588
Unrealized gains on certain marketable securities............................................. 116 130
Accumulated deficit........................................................................... (2,289) (1,950)
------- -------
Total shareholders' equity.................................................................... 3,667 1,148
------- -------
Total liabilities and shareholders' equity.................................................... $22,132 $16,716
------- -------
------- -------
- ------------
(a) Includes $374 million of preferred securities that are redeemable for cash
or, at Time Warner's option, approximately 12.1 million shares of Hasbro,
Inc. common stock owned by Time Warner (Note 8).
See accompanying notes.
F-20
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
1995 1994 1993
------ ------ ------
Revenues (a).......................................................................... $8,067 $7,396 $6,581
------ ------ ------
Cost of revenues (a)(b)............................................................... 4,682 4,307 3,780
Selling, general and administrative (a)(b)............................................ 2,688 2,376 2,210
------ ------ ------
Operating expenses.................................................................... 7,370 6,683 5,990
------ ------ ------
Business segment operating income..................................................... 697 713 591
Equity in pretax income of Entertainment Group(a)..................................... 256 176 281
Interest and other, net (a)........................................................... (877) (724) (718)
Corporate expenses (a)................................................................ (74) (76) (73)
------ ------ ------
Income before income taxes............................................................ 2 89 81
Income taxes.......................................................................... (126) (180) (245)
------ ------ ------
Loss before extraordinary item........................................................ (124) (91) (164)
Extraordinary loss on retirement of debt, net of $26 million and $37 million
income tax benefit in 1995 and 1993, respectively................................... (42) -- (57)
------ ------ ------
Net loss.............................................................................. (166) (91) (221)
Preferred dividend requirements....................................................... (52) (13) (118)
------ ------ ------
Net loss applicable to common shares.................................................. $ (218) $ (104) $ (339)
------ ------ ------
------ ------ ------
Loss per common share:
Loss before extraordinary item........................................................ $ (.46) $ (.27) $ (.75)
------ ------ ------
------ ------ ------
Net loss.............................................................................. $ (.57) $ (.27) $ (.90)
------ ------ ------
------ ------ ------
Average common shares................................................................. 383.8 378.9 374.7
------ ------ ------
------ ------ ------
- ------------
(a) Includes the following income (expenses) resulting from transactions with
the Entertainment Group and other related companies for the years ended
December 31, 1995, 1994 and 1993, respectively: revenues-$211 million, $203
million and $170 million; cost of revenues-$(108) million, $(109) million
and $(87) million; selling, general and administrative-$46 million, $47
million and $59 million; equity in pretax income of Entertainment
Group-$(95) million, $(120) million and $(115) million; interest and other,
net-$(27) million, $13 million and $(4) million; and corporate expenses-$64
million, $60 million and $60 million.
(b) Includes depreciation and amortization expense of:................................ $ 559 $ 437 $ 424
------ ------ ------
------ ------ ------
See accompanying notes.
F-21
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(MILLIONS)
1995 1994 1993
------- ----- -------
OPERATIONS
Net loss.............................................................................. $ (166) $ (91) $ (221)
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt.............................................. 42 -- 57
One-time tax charge (a)............................................................... -- -- 70
Depreciation and amortization......................................................... 559 437 424
Noncash interest expense.............................................................. 176 219 185
Excess (deficiency) of distributions over equity in pretax income of Entertainment
Group............................................................................... 807 (56) (261)
Equity in income of other investee companies, net of distributions.................... (16) (17) --
Changes in operating assets and liabilities:
Receivables....................................................................... (68) (47) (71)
Inventories....................................................................... (52) (38) 20
Accounts payable and other liabilities............................................ 160 324 206
Other balance sheet changes....................................................... (391) (258) (152)
------- ----- -------
Cash provided by operations........................................................... 1,051 473 257
------- ----- -------
INVESTING ACTIVITIES
Investments and acquisitions.......................................................... (381) (187) (175)
Capital expenditures.................................................................. (266) (164) (198)
Investment proceeds................................................................... 376 118 103
------- ----- -------
Cash used by investing activities..................................................... (271) (233) (270)
------- ----- -------
FINANCING ACTIVITIES
Borrowings............................................................................ 2,023 582 4,714
Debt repayments....................................................................... (2,693) (626) (1,599)
Issuance of Company-obligated mandatorily redeemable preferred securities of
subsidiaries........................................................................ 949 -- --
Redemption of old Series D preferred stock............................................ -- -- (3,494)
Dividends paid........................................................................ (171) (142) (299)
Stock option and dividend reinvestment plans.......................................... 106 34 92
Other, principally financing costs.................................................... (91) (6) (143)
------- ----- -------
Cash provided (used) by financing activities.......................................... 123 (158) (729)
------- ----- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS........................................... 903 82 (742)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD........................................... 282 200 942
------- ----- -------
CASH AND EQUIVALENTS AT END OF PERIOD (B)............................................. $ 1,185 $ 282 $ 200
------- ----- -------
------- ----- -------
- ------------
(a) Reflects a $70 million increase in Time Warner's deferred income tax
liability as a result of new tax law enacted in 1993.
(b) Includes current and noncurrent cash and equivalents at December 31, 1995.
See accompanying notes.
F-22
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, 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-$9.28 per
share........................................ 4 (13) (9)
Dividends on old Series C and D preferred stock
to dates of redemption or exchange........... (106) (106)
Exchange of old Series C preferred stock and
redemption of old Series D preferred stock... (128) (6,240) (311) (6,679)
Unrealized gains on certain marketable equity
investments at adoption of FAS 115........... 205 205
Shares issued pursuant to stock option and
dividend reinvestment plans.................. 4 116 120
Other.......................................... 2 51 (44) 9
--------- ------ ------- ----- ----------- -------
BALANCE AT DECEMBER 31, 1993................... 1 378 2,537 205 (1,751) 1,370
Net loss....................................... (91) (91)
Dividends on common stock-$.35 per share ($.09
per share per quarter effective for the
second quarter of 1994)...................... (133) (133)
Dividends on Series B preferred stock-$9.28 per
share........................................ 4 (13) (9)
Unrealized losses on certain marketable equity
investments.................................. (75) (75)
Shares issued pursuant to stock option and
dividend reinvestment plans.................. 1 53 54
Other.......................................... (6) 38 32
--------- ------ ------- ----- ----------- -------
BALANCE AT DECEMBER 31, 1994................... 1 379 2,588 130 (1,950) 1,148
Net loss....................................... (166) (166)
Dividends on common stock-$.36 per share....... (138) (138)
Dividends on Series B preferred stock-$6.40 per
share........................................ 3 (8) (5)
Dividends on new Series C, D, G, H and I
preferred stock-$3.75 per share per year
effective from the respective dates of
issuance..................................... (44) (44)
Issuance of common and preferred stock in the
KBLCOM and Summit acquisitions............... 14 3 1,367 1,384
Issuance of preferred stock in the
ITOCHU/Toshiba Transaction................... 15 1,335 1,350
Unrealized losses on certain marketable equity
investments.................................. (14) (14)
Shares issued pursuant to stock option and
dividend reinvestment plans.................. 4 122 126
Other.......................................... 2 7 17 26
--------- ------ ------- ----- ----------- -------
BALANCE AT DECEMBER 31, 1995................... $ 30 $388 $5,422 $116 $(2,289) $ 3,667
--------- ------ ------- ----- ----------- -------
--------- ------ ------- ----- ----------- -------
See accompanying notes.
F-23
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Time Warner Inc. ('Time Warner' or the 'Company') is the world's leading
media company, whose principal business objective is to create and distribute
branded information and entertainment copyrights throughout the world. Time
Warner has interests in three fundamental areas of business: Entertainment,
consisting principally of interests in recorded music and music publishing,
filmed entertainment, broadcasting, theme parks and cable television
programming; News and Information, consisting principally of interests in
magazine publishing, book publishing and direct marketing; and
Telecommunications, consisting principally of interests in cable television
systems. Substantially all of Time Warner's interests in filmed entertainment,
broadcasting, theme parks, cable television programming and most of its cable
television systems are held through Time Warner Entertainment Company, L.P.
('TWE'), a partnership in which Time Warner owns a 74.49% residual equity
interest and certain priority capital interests senior thereto. Time Warner does
not consolidate TWE and certain related companies (the 'Entertainment Group')
for financial reporting purposes because of certain limited partnership approval
rights related to TWE's interest in certain cable television systems.
Each of the business interests within Entertainment, News and Information
and Telecommunications is important to management's objective of increasing
shareholder value through the creation, extension and distribution of
recognizable brands and copyrights throughout the world. Such brands and
copyrights include (1) copyrighted music from many of the world's leading
recording artists that is produced and distributed by a family of established
record labels such as Warner Bros. Records, the Atlantic and Elektra
Entertainment Groups and Warner Music International, (2) the unique and
extensive film and television libraries of Warner Bros. and trademarks such as
the Looney Tunes characters and Batman, (3) The WB Network, a new national
broadcasting network launched in 1995 as an extension of the Warner Bros. brand
and as an additional distribution outlet for Warner Bros.' collection of
children cartoons and television programming, (4) Six Flags, the largest
regional theme park operator in the United States, in which TWE owns a 49%
interest, (5) HBO and Cinemax, the leading pay television services, (6) magazine
franchises such as Time, People and Sports Illustrated and direct marketing
brands such as Time Life Inc. and Book-of-the-Month Club and (7) Time Warner
Cable, the second largest operator of cable television systems in the U.S.
The operating results of Time Warner's various business interests are
presented herein as an indication of financial performance (Note 13). Except for
start-up losses incurred in an effort to create value in a branded national
broadcasting network, Time Warner's principal business interests generate
significant operating income and cash flow from operations. The cash flow from
operations generated by such business interests is significantly greater than
their operating income due to significant amounts of noncash amortization of
intangible assets recognized in various acquisitions accounted for by the
purchase method of accounting. Noncash amortization of intangible assets
recorded by Time Warner's business interests, including the unconsolidated
business interests of the Entertainment Group, amounted to $822 million in 1995,
$782 million in 1994 and $768 million in 1993.
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 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.
The Entertainment Group and investments in certain other 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
F-24
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In accordance with Financial Accounting Standards Board ('FASB') Statement
No. 115, 'Accounting For Certain Investments in Debt and Equity Securities,'
('FAS 115') 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.
The effect of any 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.
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ from those estimates.
Significant estimates inherent in the preparation of the accompanying
consolidated financial statements include management's forecast of anticipated
revenues from the sale of future and existing music and publishing-related
products in order to evaluate the ultimate recoverability of accounts
receivables and artist and author advances recorded as assets in the
consolidated balance sheet. Accounts receivables and sales in the music and
publishing industries are subject to customers' rights to return unsold items.
Management periodically reviews such estimates and it is reasonably possible
that management's assessment of recoverability of accounts receivables and
individual artist and author advances may change based on actual results and
other factors.
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.
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 (such as magazines, books, compact
discs and cassettes) are sold to customers with the right to return unsold
items. Revenues from such sales represent gross sales less a
F-25
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provision for future returns. Returned goods included in inventory are valued at
estimated realizable value but not in excess of cost.
A significant portion of cable system revenues are derived from subscriber
fees, which are recorded as revenue in the period the service is provided.
ADVERTISING
Advertising costs are expensed upon the first exhibition of the
advertisement, except for certain direct-response advertising, for which the
costs are capitalized and amortized over the expected period of future benefits.
Direct-response advertising principally consists of product promotional
mailings, broadcast advertising, catalogs and other promotional costs incurred
in the Company's direct-marketing businesses. Deferred advertising costs are
generally amortized over periods of up to three years subsequent to the
promotional event using straight-line or accelerated methods, with a significant
portion of such costs amortized in twelve months or less. Deferred advertising
costs for Time Warner amounted to $195 million and $175 million at December 31,
1995 and 1994, respectively. Advertising expense for Time Warner amounted to
$1.045 billion in 1995, $931 million in 1994 and $831 million in 1993.
CASH AND EQUIVALENTS
Cash equivalents consist of commercial paper and other investments that are
readily convertible into cash, and have original maturities of three months or
less. Noncurrent cash and equivalents at December 31, 1995 consist of net
proceeds received from the issuance of Preferred Trust Securities in December
1995, which were segregated for the redemption of the 8.75% Convertible
Debentures in February 1996 (Notes 6 and 8).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions to cable
property, plant and equipment generally include material, labor, overhead and
interest. 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, cable television equipment and
other equipment.
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, 'Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of,' ('FAS 121') effective for fiscal years beginning
after December 15, 1995. The new rules establish standards for the recognition
and measurement of impairment losses on long-lived assets and certain intangible
assets. Time Warner expects that the adoption of FAS 121 will not have a
material effect on its financial statements.
INTANGIBLE ASSETS
As a creator and distributor of branded information and entertainment
copyrights, Time Warner has a significant and growing amount of intangible
assets, including goodwill, cable television franchises and music catalogues,
contracts and copyrights. In accordance with generally accepted accounting
principles, Time Warner does not recognize the fair value of
internally-generated intangible assets. Costs incurred to create and produce
copyrighted product, such as compact discs and cassettes, are generally either
expensed as incurred, or capitalized as tangible assets as in the case of cash
advances and inventoriable product costs. However, accounting recognition is not
given to any increasing asset value that may be associated with the collection
of the underlying copyrighted material. Additionally, costs incurred to create
or extend brands, such as magazine titles, generally result in losses over an
extended development period and are recognized as a reduction of income as
incurred, while any corresponding brand value created is not recognized as an
intangible asset in the consolidated balance sheet. On the other hand,
intangible assets acquired in business combinations accounted for
F-26
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
by the purchase method of accounting are capitalized and amortized over their
expected useful life as a noncash charge against future results of operations.
Accordingly, the intangible assets reported in the consolidated balance sheet do
not reflect the fair value of Time Warner's internally-generated intangible
assets, but rather are limited to intangible assets resulting from certain
acquisitions in which the cost of the acquired companies exceeded the fair value
of their tangible assets at the time of acquisition.
Time Warner amortizes goodwill over periods up to forty years using the
straight-line method. Cable television franchises, music catalogues, contracts
and copyrights, and other intangible assets are amortized over periods up to
twenty years using the straight-line method. In 1995, 1994 and 1993,
amortization of goodwill amounted to $175 million, $158 million and $148
million, respectively; amortization of music copyrights, artists' contracts and
record catalogues amounted to $118 million, $115 million and $113 million,
respectively; amortization of other intangible assets amounted to $43 million,
$31 million and $31 million, respectively; and amortization of cable television
franchises amounted to $42 million in 1995. Accumulated amortization of
intangible assets at December 31, 1995 and 1994 amounted to $1.845 billion and
$1.505 billion, respectively.
Time Warner separately reviews the carrying value of acquired intangible
assets for each acquired entity on a quarterly basis to determine whether an
impairment may exist. Time Warner considers relevant cash flow and profitability
information, including estimated future operating results, trends and other
available information, in assessing whether the carrying value of intangible
assets can be recovered. Upon a determination that the carrying value of
intangible assets will not be recovered from the undiscounted future cash flows
of the acquired business, the carrying value of such intangible assets would be
considered impaired and will be reduced by a charge to operations in the amount
of the impairment. Impairment is measured as any deficiency in estimated
undiscounted future cash flows of the acquired business to recover the carrying
value related to the intangible assets.
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.
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.
STOCK OPTIONS
In accordance with Accounting Principles Board Opinion No. 25, 'Accounting
for Stock Issued to Employees,' compensation cost for stock options is
recognized in income based on the excess, if any, of the quoted market price of
the stock at the grant date of the award or other measurement date over the
amount an employee must pay to acquire the stock. The exercise price for stock
options granted to employees equals or exceeds the fair market value of Time
Warner common stock at the date of grant, thereby resulting in no recognition of
compensation expense by Time Warner.
F-27
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the 1995 presentation.
2. ENTERTAINMENT GROUP
Time Warner's investment in and amounts due to and from the Entertainment
Group at December 31, 1995 and 1994 consist of the following:
DECEMBER 31,
----------------
1995 1994
------ ------
(MILLIONS)
Investment in TWE.............................................................................. $6,179 $5,284
Income tax and stock option related distributions due from TWE................................. 122 423
Credit agreement debt due to TWE............................................................... (400) (400)
Other liabilities due to TWE, principally related to home video distribution................... (354) (266)
Other receivables due from TWE................................................................. 76 --
------ ------
Investment in and amounts due to and from TWE.................................................. 5,623 5,041
Investment in other Entertainment Group companies.............................................. 111 309
------ ------
Total.......................................................................................... $5,734 $5,350
------ ------
------ ------
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. Certain Time Warner subsidiaries are the general partners of TWE ('Time
Warner General Partners'). Time Warner acquired the aggregate 11.22% limited
partnership interests previously held by subsidiaries of each of ITOCHU
Corporation ('ITOCHU') and Toshiba Corporation ('Toshiba') in 1995 for an
aggregate cost of $1.36 billion, consisting of 15 million shares of convertible
preferred stock (Series G Preferred Stock, Series H Preferred Stock and Series I
Preferred Stock) and $10 million in cash (the 'ITOCHU/Toshiba Transaction'). The
ITOCHU/Toshiba Transaction was accounted for by the purchase method of
accounting for business combinations.
After the ITOCHU/Toshiba Transaction, Time Warner and certain of its
wholly-owned subsidiaries collectively own 74.49% of the pro rata priority
capital and residual equity interests in TWE, and certain additional senior and
junior priority capital interests. The remaining 25.51% pro rata priority
capital and residual equity limited partnership interests are held by a
subsidiary of U S WEST, Inc. ('U S WEST'), which acquired such interests in 1993
for $1.532 billion of cash and a $1.021 billion 4.4% note (the 'U S WEST Note').
Each partner's interest in TWE consists of the initial priority capital and
residual equity amounts that were assigned to that partner or its predecessor
based on the estimated fair value of the net assets each contributed to the
partnership, as adjusted for the fair value of certain assets distributed by TWE
to the Time Warner General Partners in 1993 which were not subsequently
reacquired by TWE in 1995 ('Contributed Capital'), plus, with respect to the
priority capital interests only, any undistributed priority capital return. The
priority capital return consists of net partnership income allocated to date in
accordance with the provisions of the TWE partnership
F-28
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreement and the right to be allocated additional partnership income which,
together with any previously allocated net partnership income, provides for the
various priority capital rates of return specified in the table below. The sum
of Contributed Capital and the undistributed priority capital return is referred
to as 'Cumulative Priority Capital.' Cumulative Priority Capital is not
necessarily indicative of the fair value of the underlying priority capital
interests principally due to above-market rates of return on certain priority
capital interests as compared to securities of comparable credit risk and
maturity, such as the 13.25% rate of return on the junior priority capital
interest owned by subsidiaries of Time Warner. Furthermore, the ultimate
realization of Cumulative Priority Capital could be affected by the fair value
of TWE, which is subject to fluctuation.
A summary of the priority of Contributed Capital, Time Warner's ownership
of Contributed Capital and Cumulative Priority Capital at December 31, 1995 and
priority capital rates of return thereon is set forth below:
CUMULATIVE
CONTRIBUTED PRIORITY PRIORITY CAPITAL RATES % OWNED BY
PRIORITY OF CONTRIBUTED CAPITAL CAPITAL(A) CAPITAL OF RETURN(B) TIME WARNER
----------- ---------- ----------------------- -----------
(% PER ANNUM
COMPOUNDED
(BILLIONS) QUARTERLY)
Senior priority capital............................... $ 1.4 $1.4(c) 8.00% 100.00%
Pro rata priority capital............................. 5.6 8.7 13.00%(d) 74.49%
Junior priority capital............................... 2.9 4.6 13.25%(e) 100.00%
Residual equity capital............................... 3.3 3.3(f) -- (f) 74.49%
- ------------
(a) Excludes partnership income or loss allocated thereto.
(b) Income allocations related to priority capital rates of return are based on
partnership income after any special tax allocations.
(c) Net of $366 million of partnership income distributed in 1995 representing
the priority capital return thereon through June 30, 1995.
(d) 11.00% to the extent concurrently distributed.
(e) 11.25% to the extent concurrently distributed.
(f) Residual equity capital is not entitled to stated priority rates of return
and, as such, its Cumulative Priority Capital is equal to its Contributed
Capital. However, in the case of certain events such as the liquidation or
dissolution of TWE, residual equity capital is entitled to any excess of the
fair value of the net assets of TWE over the aggregate amount of Cumulative
Priority Capital and special tax allocations. The residual equity
Contributed Capital has priority over the priority returns on junior and pro
rata priority capital.
Because Contributed Capital is based on the fair value of the net assets
that each partner contributed to the partnership, the aggregate of such amounts
is significantly higher than TWE's partners' capital as reflected in the
consolidated financial statements, which is based on the historical cost of the
contributed net assets. For purposes of allocating partnership income or loss to
the partners, partnership income or loss is based on the fair value of the net
assets contributed to the partnership and results in significantly less
partnership income, or results in partnership losses, in contrast to the net
income reported by TWE for financial statement purposes, which is also based on
the historical cost of contributed net assets.
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 priority, 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. Partnership losses generally are
allocated first to eliminate prior allocations of partnership income to, and
then to reduce the Contributed Capital 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 priority 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 right to receive additional partnership
income necessary to provide for the various priority capital rates of return is
carried forward until satisfied out of future partnership income, including any
partnership income that may result from any liquidation or dissolution of TWE.
F-29
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The TWE partnership agreement provides, under certain circumstances, for
the distribution of partnership income allocated to the senior priority capital
owned by the Time Warner General Partners. Pursuant to such provision, $366
million of partnership income was distributed to the Time Warner General
Partners in 1995. The senior priority capital and, to the extent not previously
distributed, partnership income allocated thereto is required to be distributed
in three annual installments beginning on July 1, 1997. The junior priority
capital owned by subsidiaries of Time Warner may be increased if certain
operating performance targets are achieved over a five-year period ending on
December 31, 1996 and a ten-year period ending on December 31, 2001. Although
satisfaction of the ten-year operating performance target is indeterminable at
this time, it is not expected that the five-year target will be attained.
TWE reported net income of $73 million, $161 million and $198 million in
1995, 1994 and 1993, 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.
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 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 Time Warner General Partner has guaranteed a pro rata portion of
approximately $6 billion of TWE's debt and accrued interest at December 31,
1995, 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.
Set forth below is summarized financial information of the Entertainment
Group, which reflects the consolidation by TWE of the TWE-Advance/Newhouse
Partnership effective as of April 1, 1995 (Note 4), the deconsolidation of Six
Flags Entertainment Corporation ('Six Flags') effective as of June 23, 1995 and
the consolidation of Paragon Communications ('Paragon') effective as of July 6,
1995.
TIME WARNER ENTERTAINMENT GROUP
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------- -------
(MILLIONS)
OPERATING STATEMENT INFORMATION
Revenues.......................................................................... $ 9,629 $ 8,509 $ 7,963
Depreciation and amortization..................................................... 1,060 959 909
Business segment operating income................................................. 992 852 905
Interest and other, net........................................................... 539 616 564
Minority interest................................................................. 133 -- --
Income before income taxes........................................................ 256 176 281
Income before extraordinary item.................................................. 170 136 217
Net income........................................................................ 146 136 207
F-30
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------- -------
(MILLIONS)
CASH FLOW INFORMATION
Cash provided by operations....................................................... $ 1,495 $ 1,341 $ 1,276
Capital expenditures.............................................................. (1,653) (1,235) (613)
Investments and acquisitions...................................................... (217) (186) (368)
Investment proceeds............................................................... 1,120 51 184
Loan to Time Warner............................................................... -- (400) --
Borrowings........................................................................ 2,484 1,001 3,075
Debt repayments................................................................... (3,596) (953) (3,734)
Collections on note receivable from U S WEST...................................... 602 234 16
Capital contributions............................................................. -- -- 1,532
Capital distributions............................................................. (1,063) (120) (20)
Increase (decrease) in cash and equivalents....................................... (862) (267) 1,302
DECEMBER 31,
-------------------
1995 1994
------- -------
(MILLIONS)
BALANCE SHEET INFORMATION
Cash and equivalents....................................................................... $ 209 $ 1,071
Total current assets....................................................................... 2,909 3,571
Total assets............................................................................... 18,960 18,992
Total current liabilities.................................................................. 3,230 2,953
Long-term debt............................................................................. 6,137 7,160
Minority interests......................................................................... 726 --
Time Warner General Partners' senior priority capital, consisting of $1.364 billion
Contributed Capital plus an undistributed priority return................................ 1,426 1,663
Partners' capital, before deduction of the U S WEST Note................................... 6,745 7,262
U S WEST Note.............................................................................. 169 771
The assets and cash flows of TWE are restricted by the TWE partnership and
credit agreements and are unavailable for use by the partners except through the
payment of certain fees, reimbursements, cash distributions and loans, which are
subject to limitations. At December 31, 1995 and 1994, the Time Warner General
Partners had recorded $122 million and $89 million, respectively, of stock
option related distributions due from TWE, based on closing prices of Time
Warner common stock of $37.875 and $35.125, respectively. Time Warner is paid
when the options are exercised. The Time Warner General Partners also receive
tax-related distributions from TWE. The payment of such distributions was
previously subject to restrictions until July 1995 and is now made to the Time
Warner General Partners on a current basis. At December 31, 1994, the Time
Warner General Partners had accrued $334 million of tax-related distributions
due from TWE. During 1995, the Time Warner General Partners received net
distributions from TWE in the amount of $1.063 billion, consisting of $366
million of TWE partnership income allocated to the Time Warner General Partners'
senior priority capital interest, $680 million of tax-related distributions and
$17 million of stock option related distributions. During 1994 and 1993, the
Time Warner General Partners received net distributions from TWE in the amount
of $120 million and $20 million, respectively, consisting of $115 million of
tax-related distributions and $5 million of stock option related distributions
in 1994, and $20 million of stock option related distributions in 1993. In
addition to the tax, stock option and Time Warner General Partners' senior
priority 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.
F-31
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On June 23, 1995, TWE sold 51% of its interest in Six Flags to an
investment group led by Boston Ventures for $204 million and received $640
million in additional proceeds from Six Flags, representing payment of certain
intercompany indebtedness and licensing fees. As a result of the transaction,
Six Flags has been deconsolidated and TWE's remaining 49% interest in Six Flags
is accounted for under the equity method of accounting. TWE reduced debt by
approximately $850 million in connection with the transaction, and a portion of
the income on the transaction has been deferred by TWE principally as a result
of its guarantee of certain third-party, zero-coupon indebtedness of Six Flags
due in 1999.
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. In 1995, TWE and certain subsidiaries of Time Warner entered into
management services agreements, pursuant to which TWE receives fees for the
management of all cable television systems owned by Time Warner. Management fees
paid to TWE in 1995 were not material. In addition, Time Warner provides TWE
with certain corporate support services for which it received a fee in the
amount of $64 million, $60 million and $60 million in 1995, 1994 and 1993,
respectively.
3. TBS TRANSACTION
Time Warner has entered into an Amended and Restated Agreement and Plan of
Merger dated as of September 22, 1995 (the 'Merger Agreement'), which provides
for the merger of each of Time Warner and Turner Broadcasting System, Inc.
('TBS') with separate subsidiaries of a holding company ('New Time Warner' and
collectively, the 'TBS Transaction'). In connection therewith, the issued and
outstanding shares of each class of the capital stock of Time Warner will be
converted into shares of a substantially identical class of capital stock of New
Time Warner. In addition, Time Warner has agreed to enter into certain
agreements and related transactions with certain shareholders of TBS, including
R. E. Turner and Liberty Media Corporation ('LMC'). The Merger Agreement and
certain related agreements provide for the issuance by New Time Warner of
approximately 172.8 million shares of common stock, par value $.01 per share
(including 50.6 million shares of a special class of non-redeemable common stock
to be issued to LMC, the 'LMC Class Common Stock'), in exchange for the
outstanding TBS capital stock, the issuance of approximately 13 million stock
options to replace all outstanding TBS options and the assumption of TBS'
indebtedness (which approximated $2.5 billion at December 31, 1995). As part of
the TBS Transaction, LMC will receive an additional five million shares of LMC
Class Common Stock pursuant to a separate option agreement which, together with
the 50.6 million shares received pursuant to the TBS Transaction, will be placed
in a voting trust or, in certain circumstances, exchanged for shares of another
special class of non-voting, non-redeemable common stock of New Time Warner. The
TBS Transaction will be accounted for by the purchase method of accounting for
business combinations.
The TBS Transaction is subject to customary closing conditions, including
the approval of the shareholders of TBS and of Time Warner, all necessary
approvals of the Federal Communications Commission and appropriate antitrust
approvals. There can be no assurance that all these approvals can be obtained
or, in the case of governmental approvals, if obtained, will not be conditioned
upon changes to the terms of the Merger Agreement or the related agreements.
4. CABLE TRANSACTIONS
On April 1, 1995, TWE formed a cable television joint venture with the
Advance/Newhouse Partnership ('Advance/Newhouse') to which Advance/Newhouse and
TWE contributed cable television systems (or interests therein) serving
approximately 4.5 million subscribers, as well as certain foreign cable
investments and programming investments that included Advance/Newhouse's 10%
interest in Primestar Partners, L.P.
F-32
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
('Primestar'). TWE owns a two-thirds equity interest in the TWE-Advance/Newhouse
Partnership and is the managing partner. TWE consolidates the partnership and
the one-third equity interest owned by Advance/Newhouse is reflected in TWE's
consolidated financial statements as minority interest. In accordance with the
partnership agreement, Advance/Newhouse can require TWE to purchase its equity
interest for fair market value at specified intervals following the death of
both of its principal shareholders. Beginning in the third year, either partner
can initiate a dissolution in which TWE would receive two-thirds and
Advance/Newhouse would receive one-third of the partnership's net assets. The
assets contributed by TWE and Advance/Newhouse to the partnership were recorded
at their predecessor's historical cost. No gain was recognized by TWE upon the
capitalization of the partnership.
On May 2, 1995, Time Warner acquired Summit Communications Group, Inc.
('Summit'), which owned cable television systems serving approximately 162,000
subscribers, in exchange for the issuance of approximately 1.6 million shares of
common stock and approximately 3.3 million shares of a new convertible preferred
stock ('Series C Preferred Stock') and the assumption of $140 million of
indebtedness. The acquisition was accounted for by the purchase method of
accounting for business combinations; accordingly, the cost to acquire Summit of
approximately $351 million was allocated to the net assets acquired in
proportion to estimates of their respective fair values, as follows: cable
television franchises-$372 million; goodwill-$146 million; other current and
noncurrent assets-$144 million; long-term debt-$140 million; deferred income
taxes-$166 million; and other current liabilities-$5 million.
On July 6, 1995, Time Warner acquired KBLCOM Incorporated ('KBLCOM'), which
owned cable television systems serving approximately 700,000 subscribers and a
50% interest in Paragon, which owned cable television systems serving an
additional 972,000 subscribers. The other 50% interest in Paragon was already
owned by TWE. To acquire KBLCOM, Time Warner issued 1 million shares of common
stock and 11 million shares of a new convertible preferred stock ('Series D
Preferred Stock') and assumed or incurred approximately $1.2 billion of
indebtedness. The acquisition was accounted for by the purchase method of
accounting for business combinations; accordingly, the cost to acquire KBLCOM of
approximately $1.033 billion was allocated to the net assets acquired in
proportion to their respective fair values, as follows: investments-$950
million; cable television franchises-$1.366 billion; goodwill-$586 million;
other current and noncurrent assets-$289 million; long-term debt-$1.213 billion;
deferred income taxes-$895 million; and other current liabilities-$50 million.
On January 4, 1996, Time Warner acquired Cablevision Industries Corporation
('CVI') and related companies that owned cable television systems serving
approximately 1.3 million subscribers, in exchange for the issuance of
approximately 2.9 million shares of common stock and approximately 6.5 million
shares of new convertible preferred stock ('Series E Preferred Stock' and
'Series F Preferred Stock') and the assumption or incurrence of approximately $2
billion of indebtedness. The acquisition is not reflected in the accompanying
consolidated financial statements. The acquisition will be accounted for by the
purchase method of accounting for business combinations; accordingly, the cost
to acquire CVI and related companies of $904 million is expected to be
preliminarily allocated to the net assets acquired in proportion to estimates of
their respective fair values, as follows: cable television franchises-$2.390
billion; goodwill-$688 million; other current and noncurrent assets-$481
million; long-term debt-$1.766 billion; deferred income taxes-$731 million; and
other current and noncurrent liabilities-$158 million.
The accompanying consolidated statement of operations includes the
operating results of each business from the respective closing date of each
transaction. On a pro forma basis, giving effect to (i) all of the
aforementioned cable transactions, (ii) the ITOCHU/Toshiba Transaction, (iii)
Time Warner's and TWE's debt refinancings and (iv) the sale of 51% of TWE's
interest in Six Flags and the sale or expected sale or transfer of certain
unclustered cable television systems owned by TWE, as if each of such
transactions had occurred at the beginning of the periods, Time Warner would
have reported for the years ended December 31, 1995 and 1994, revenues of $8.742
billion and $8.217 billion, depreciation and amortization of $935 million and
$906 million,
F-33
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operating income of $656 million and $653 million, equity in the pretax income
of the Entertainment Group of $286 million and $205 million, a loss before
extraordinary item of $255 million and $266 million ($1.02 and $1.07 per common
share) and a net loss of $297 million and $266 million ($1.13 and $1.07 per
common share), respectively.
5. OTHER INVESTMENTS
Time Warner's other investments consist of:
DECEMBER 31,
----------------
1995 1994
------ ------
(MILLIONS)
Equity method investments(1)................................................................... $1,898 $ 985
Market value method investments................................................................ 375 435
Cost method investments........................................................................ 116 135
------ ------
Total.......................................................................................... $2,389 $1,555
------ ------
------ ------
- ------------
(1) Equity method investments include Time Warner's investment in TBS which was
carried at $541 million at December 31, 1995. Time Warner has agreed to
acquire the remaining interest in TBS that it does not already own (Note 3).
Market value method investments include the fair value of 12.1 million
shares of common stock of Hasbro, Inc. ('Hasbro'). Notwithstanding the market
value per share, such shares can be used, at Time Warner's option, to fully
satisfy either its obligations with respect to the zero coupon exchangeable
notes due 2012 (Note 6) or the Company-obligated mandatorily redeemable
preferred securities of a subsidiary due 1997 (Note 8). Because the issuance of
the mandatorily redeemable preferred securities provides Time Warner with
protection against the risk of depreciation of the market price of Hasbro common
stock and the zero coupon exchangeable notes limit Time Warner's ability to
share in the appreciation of the market price of Hasbro common stock, the
combination thereof has effectively monetized Time Warner's investment in
Hasbro.
In addition to TWE and its equity investees, companies accounted for using
the equity method include TBS (currently 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). A summary of combined financial
information as reported by the equity investees of Time Warner is set forth
below:
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ------ ------
(MILLIONS)
Revenues.......................................................................... $5,123 $4,444 $3,363
Depreciation and amortization..................................................... 219 182 140
Operating income.................................................................. 547 584 450
Income before extraordinary items and cumulative effect of a change in accounting
principle....................................................................... 188 281 201
Net income (loss)................................................................. 188 256 (135)
Current assets.................................................................... 2,272 2,113 1,586
Total assets...................................................................... 5,851 5,194 4,111
Current liabilities............................................................... 1,318 1,136 755
Long-term debt.................................................................... 3,826 3,730 2,606
Total liabilities................................................................. 5,886 5,423 3,992
Total shareholders' equity or partners' capital................................... (35) (229) 119
F-34
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of:
DECEMBER 31,
------------------
1995 1994
------- ------
(MILLIONS)
Time Warner:
7.45% Notes due February 1, 1998............................................................ $ 500 $ 500
7.95% Notes due February 1, 2000............................................................ 500 500
Floating rate notes due August 15, 2000 (6.8% interest rate)................................ 454 --
Redeemable reset notes due August 15, 2002 (8.7% yield)..................................... -- 1,719
7.975% Notes due August 15, 2004............................................................ 272 --
7.75% Notes due June 15, 2005............................................................... 497 --
8.11% Debentures due August 15, 2006........................................................ 545 --
8.18% Debentures due August 15, 2007........................................................ 545 --
Zero coupon exchangeable notes due December 17, 2012 (6.25% yield).......................... 581 547
Zero coupon convertible notes due June 22, 2013 (5% yield).................................. 1,019 970
9.125% Debentures due January 15, 2013...................................................... 1,000 1,000
8.75% Convertible subordinated debentures due January 10, 2015.............................. 1,226 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 (6.8% and 6.7% interest rates)............................. 400 400
Time Warner Cable Subsidiaries:
New Credit Agreement (6.8% interest rate)................................................... 1,265 --
Summit 10.5% Debentures due April 15, 2005.................................................. 140 --
Other....................................................................................... 115 129
------- ------
Subtotal.................................................................................... 10,307 9,239
Reclassification of debt due to TWE to amounts due to the Entertainment Group............... (400) (400)
------- ------
Total....................................................................................... $ 9,907 $8,839
------- ------
------- ------
DEBT REFINANCINGS
During 1995 and early 1996, in response to favorable market conditions,
Time Warner refinanced approximately $4 billion of its public debt and, in
conjunction with the cable acquisitions entered into a new credit agreement
under which it refinanced approximately $2.7 billion of debt assumed in the
acquisitions, as more fully described below.
In June 1995, a wholly-owned subsidiary of Time Warner ('TWI Cable'), TWE
and the TWE-Advance/Newhouse Partnership executed a five-year revolving credit
facility (the 'New Credit Agreement'). The New Credit Agreement enabled such
entities to refinance certain indebtedness assumed in the cable acquisitions, to
refinance TWE's indebtedness under a pre-existing bank credit agreement and to
finance the ongoing working capital, capital expenditure and other corporate
needs of each borrower.
The New Credit Agreement permits borrowings in an aggregate amount of up to
$8.3 billion, with no scheduled reductions in credit availability prior to
maturity. Borrowings are limited to $4 billion in the case of TWI Cable, $5
billion in the case of the TWE-Advance/Newhouse Partnership and $8.3 billion in
the case of TWE, subject in each case to certain limitations and adjustments.
Such borrowings bear interest at specific rates for each of the three borrowers,
generally equal to LIBOR plus a margin initially ranging from 50 to 87.5 basis
F-35
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
points, which margin will vary based on the credit rating or financial leverage
of the applicable borrower. Unused credit is available for general business
purposes and to support any commercial paper borrowings. Each borrower is
required to pay a commitment fee initially ranging from .2% to .35% per annum on
the unused portion of its commitment. TWI Cable may also be required to pay an
annual facility fee equal to .1875% of the entire amount of its commitment,
depending on the level of its financial leverage in any given year. The New
Credit Agreement contains certain covenants for each borrower relating to, among
other things, additional indebtedness; liens on assets; cash flow coverage and
leverage ratios; and loans, advances, distributions and other cash payments or
transfers of assets from the borrowers to their respective partners or
affiliates. Principally as a result of such restrictions, restricted net assets
of consolidated subsidiaries of Time Warner amounted to approximately $950
million at December 31, 1995.
In July 1995, TWI Cable borrowed approximately $1.2 billion under the New
Credit Agreement to refinance certain indebtedness assumed or incurred in the
acquisition of KBLCOM. An additional $1.5 billion was borrowed by TWI Cable
under the New Credit Agreement in January 1996 to refinance certain indebtedness
assumed or incurred in the acquisition of CVI and related companies.
In August 1995, Time Warner redeemed all of its $1.8 billion principal
amount of outstanding Redeemable Reset Notes due August 15, 2002 (the 'Reset
Notes') in exchange for new securities, consisting of approximately $454 million
aggregate principal amount of Floating Rate Notes due August 15, 2000,
approximately $272 million aggregate principal amount of 7.975% Notes due August
15, 2004, approximately $545 million aggregate principal amount of 8.11%
Debentures due August 15, 2006, and approximately $545 million aggregate
principal amount of 8.18% Debentures due August 15, 2007.
Through periodic redemptions, Time Warner has fully redeemed its $3.1
billion principal amount of 8.75% Convertible Subordinated Debentures due 2015
(the '8.75% Convertible Debentures'), which were issued in April 1993 in
exchange for the old Series C preferred stock that was issued in Time Warner's
1989 acquisition of Warner Communications Inc. ('WCI') (Note 9). Time Warner
first redeemed $900 million principal amount of 8.75% Convertible Debentures in
July 1993. In September 1995, Time Warner redeemed approximately $1 billion
principal amount of such debentures for $1.06 billion (including redemption
premiums and accrued interest) and, in February 1996, Time Warner redeemed the
remaining $1.2 billion principal amount of 8.75% Convertible Debentures for
$1.28 billion (including redemption premiums and accrued interest). The
September 1995 redemption was financed with proceeds from a $500 million
issuance of 7.75% ten-year notes in June 1995, proceeds from a $374 million
issuance of Company-obligated mandatorily redeemable preferred securities of a
subsidiary in August 1995 and available cash and equivalents. The February 1996
redemption was financed with proceeds raised from a $575 million issuance of
Company-obligated mandatorily redeemable preferred securities of a subsidiary in
December 1995 and proceeds from a $750 million issuance in January 1996 of (i)
$400 million principal amount of 6.85% thirty-year debentures, which are putable
by the holders thereof in year seven, (ii) $200 million principal amount of 8.3%
forty-year discount debentures, which do not pay cash interest for the first
twenty years, (iii) $166 million principal amount of 7.48% twelve-year
debentures and (iv) $150 million principal amount of 8.05% twenty-year
debentures. See Note 8 for a description of the mandatorily redeemable preferred
securities issued in connection with such redemptions.
An extraordinary loss of $57 million was incurred in 1993, principally in
connection with the redemption of $900 million of 8.75% Convertible Debentures
and $529 million of WCI senior and subordinated debentures. An extraordinary
loss of $42 million was recognized in 1995 in connection with the September 1995
redemption of the 8.75% Convertible Debentures and the write-off by TWE of
deferred financing costs related to its former bank credit agreement. In
addition, Time Warner recognized an extraordinary loss of $26 million in
February 1996 in connection with the redemption of the remaining outstanding
portion of the 8.75% Convertible Debentures.
F-36
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ZERO COUPON NOTES
Time Warner's 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 holders into an aggregate of 12.1 million shares of common stock of
Hasbro, Inc. ('Hasbro') at the rate of 7.301 shares for each $1,000 principal
amount of notes, subject to Time Warner's right to pay in whole or in part with
cash instead of Hasbro common stock. 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 common stock
instead of cash. The equivalent conversion price of Hasbro common stock at the
first date of redemption is $54.41 per share, and will be adjusted thereafter in
proportion to changes in the accrued original issue discount of each note. The
12.1 million shares of Hasbro common stock owned by Time Warner can be used by
the Company, at its election, to satisfy its obligations under such notes or its
obligations under certain mandatorily redeemable preferred securities of a
subsidiary (Note 8). Unamortized original issue discount on the zero coupon
exchangeable notes due 2012 was $1.070 billion and $1.104 billion at December
31, 1995 and 1994, respectively.
The zero coupon convertible notes due June 22, 2013 are convertible at any
time by the holders into an aggregate of 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. The equivalent conversion
price of Time Warner common stock at the first date of redemption is $61.44 per
share, and will be adjusted thereafter in proportion to changes in the accrued
original issue discount of each note. Unamortized original issue discount on the
zero coupon convertible notes due 2013 was $1.396 billion and $1.445 billion at
December 31, 1995 and 1994, respectively.
TWE-RELATED OBLIGATIONS
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 therefrom principally to repay certain of its notes at their maturity.
In addition, each Time Warner General Partner has guaranteed a pro rata portion
of approximately $6 billion of TWE's debt and accrued interest at December 31,
1995, as more fully described in Note 2.
INTEREST EXPENSE AND MATURITIES
At December 31, 1995, Time Warner had interest rate swap contracts to pay
floating-rates of interest and receive fixed-rates of interest on $2.6 billion
notional amount of indebtedness, which resulted in approximately 43% of Time
Warner's underlying debt being subject to variable interest rates (Note 12).
Interest expense amounted to $877 million in 1995, $769 million in 1994 and
$698 million in 1993, including $28 million in 1995 and $12 million in 1994
which was paid to TWE in connection with borrowings under Time Warner's $400
million credit agreement with TWE. The weighted average interest rate on Time
Warner's total debt, including the effect of interest rate swap contracts, was
7.9% and 8.1% at December 31, 1995 and 1994, respectively.
F-37
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Annual repayments of long-term debt for the five years subsequent to
December 31, 1995 consist of $500 million due in 1998 and $2.219 billion due in
2000. Such repayments exclude the aggregate repurchase or redemption prices of
$656 million in 1997 and $1.151 billion in 1998 relating to the 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.
7. INCOME TAXES
Domestic and foreign pretax income (loss) are as follows:
YEARS ENDED DECEMBER 31,
-----------------------
1995 1994 1993
----- ---- ----
(MILLIONS)
Domestic................................................................................ $(203) $(78) $(57)
Foreign................................................................................. 205 167 138
----- ---- ----
Total................................................................................... $ 2 $ 89 $ 81
----- ---- ----
----- ---- ----
Current and deferred income taxes (tax benefits) provided are as follows:
YEARS ENDED DECEMBER 31,
-----------------------
1995 1994 1993
----- ---- ----
(MILLIONS)
Federal:
Current(1)........................................................................ $ 42 $ 66 $ 45
Deferred(2)....................................................................... (167) (81) 11
Foreign:
Current(3)........................................................................ 215 194 168
Deferred.......................................................................... 8 (45) (11)
State and Local:
Current........................................................................... 78 79 86
Deferred.......................................................................... (50) (33) (54)
----- ---- ----
Total.................................................................................. $ 126 $180 $245
----- ---- ----
----- ---- ----
- ------------
(1) Includes utilization of tax carryforwards of $101 million in 1995, $48
million in 1994 and $136 million in 1993. Excludes current tax benefits of
$9 million in 1995, $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 current tax benefits of
$3 million in 1995 and $6 million in 1993 resulting from the retirement of
debt, which reduced the extraordinary losses in such years.
(2) Includes $70 million unusual charge in 1993 to increase deferred tax
liability for increase in tax rate.
(3) Includes foreign withholding taxes of $102 million in 1995, $74 million in
1994 and $79 million in 1993.
F-38
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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,
--------------------------
1995 1994 1993
---- ------ ------
(MILLIONS)
Taxes on income at U.S. federal statutory rate...................................... $ 1 $ 31 $ 28
State and local taxes, net.......................................................... 18 30 21
Nondeductible goodwill amortization................................................. 100 97 96
Other nondeductible expenses........................................................ 10 10 11
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............ 3 1 13
Other............................................................................... (6) 11 6
---- ------ ------
Total............................................................................... $126 $ 180 $ 245
---- ------ ------
---- ------ ------
Significant components of Time Warner's net deferred tax liabilities are as
follows:
DECEMBER 31,
-----------------
1995 1994
------ ------
(MILLIONS)
Assets acquired in business combinations..................................................... $2,963 $2,276
Depreciation and amortization................................................................ 829 619
Unrealized appreciation of certain marketable securities..................................... 81 91
Other........................................................................................ 390 460
------ ------
Deferred tax liabilities..................................................................... 4,263 3,446
------ ------
Tax carryforwards............................................................................ 296 264
Accrued liabilities.......................................................................... 228 206
Receivable allowances and return reserves.................................................... 211 200
Other........................................................................................ 108 76
------ ------
Deferred tax assets.......................................................................... 843 746
------ ------
Net deferred tax liabilities................................................................. $3,420 $2,700
------ ------
------ ------
U.S. income and foreign withholding taxes have not been recorded on
permanently reinvested earnings of foreign subsidiaries aggregating
approximately $760 million at December 31, 1995. 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 substantially expected to be offset by the
accompanying foreign tax credits.
U.S. federal tax carryforwards at December 31, 1995 consisted of $328
million of net operating losses, $152 million of investment tax credits and $30
million of alternative minimum tax credits. The utilization of certain
carryforwards is subject to limitations under U.S. federal income tax laws.
Except for the alternative
F-39
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
minimum tax credits which do not expire, the other U.S. federal tax
carryforwards expire in varying amounts as follows for income tax reporting
purposes:
CARRYFORWARDS
-----------------------
NET INVESTMENT
OPERATING TAX
LOSSES CREDITS
--------- ----------
(MILLIONS)
1997...................................................................................... $ -- $ 2
1998...................................................................................... -- 7
1999...................................................................................... 14 19
2000...................................................................................... -- 25
Thereafter up to 2008..................................................................... 314 99
--------- ----------
$ 328 $152
--------- ----------
--------- ----------
8. MANDATORILY REDEEMABLE PREFERRED SECURITIES
In August 1995, Time Warner issued approximately 12.1 million
Company-obligated mandatorily redeemable preferred securities of a wholly-owned
subsidiary ('PERCS') for aggregate gross proceeds of $374 million. The sole
assets of the subsidiary that is the obligor on the PERCS are $385 million
principal amount of 4% subordinated notes of Time Warner due December 23, 1997.
Cumulative cash distributions are payable on the PERCS at an annual rate of 4%.
The PERCS are mandatorily redeemable on December 23, 1997, for an amount per
PERCS equal to the lesser of $54.41, and the market value of a share of common
stock of Hasbro on December 17, 1997, payable in cash or, at Time Warner's
option, Hasbro common stock. Time Warner has the right to redeem the PERCS at
any time prior to December 23, 1997, at an amount per PERCS equal to $54.41 (or
in certain limited circumstances the lesser of such amount and the market value
of a share of Hasbro common stock at the time of redemption) plus accrued and
unpaid distributions thereon and a declining premium, payable in cash or, at
Time Warner's option, Hasbro common stock.
In December 1995, Time Warner issued approximately 23 million
Company-obligated mandatorily redeemable preferred securities of a wholly-owned
subsidiary ('Preferred Trust Securities') for aggregate gross proceeds of $575
million. The sole assets of the subsidiary that is the obligor on the Preferred
Trust Securities are $592 million principal amount of 8 7/8% subordinated
debentures of Time Warner due December 31, 2025. Cumulative cash distributions
are payable on the Preferred Trust Securities at an annual rate of 8 7/8%. Cash
distributions may be deferred at the election of Time Warner for any period not
exceeding 20 consecutive quarters. The Preferred Trust Securities are
mandatorily redeemable for cash on December 31, 2025, and Time Warner has the
right to redeem the Preferred Trust Securities, in whole or in part, on or after
December 31, 2000, or in other certain circumstances, in each case at an amount
per Preferred Trust Security equal to $25 plus accrued and unpaid distributions
thereon.
Time Warner has certain obligations relating to the PERCS and the Preferred
Trust Securities which amount to a full and unconditional guaranty of each
subsidiary's obligations with respect thereto.
9. CAPITAL STOCK
The outstanding capital stock of Time Warner at December 31, 1995 consisted
of 29.7 million shares of preferred stock and 387.7 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, 1996,
including each brokerage house that holds shares of Time Warner common stock as
one shareholder but excluding the number of shareholders whose shares are
beneficially held by such brokerage houses, there were approximately 25,000
holders of record of Time Warner common stock.
F-40
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1995, Time Warner issued approximately 29.3 million shares of
convertible preferred stock in connection with the ITOCHU/Toshiba Transaction
and its acquisitions of KBLCOM and Summit, and in January 1996, Time Warner
issued an additional 6.5 million shares of convertible preferred stock in
connection with its acquisiton of CVI and related companies. Set forth below is
a summary of the principal terms of Time Warner's outstanding issues of
preferred stock:
NUMBER OF SHARES
OF COMMON STOCK EARLIEST EARLIEST
ISSUABLE UPON EXCHANGE REDEMPTION
DESCRIPTION CONVERSION DATE DATE
- ------------------------------------------------------- SHARES ---------------- -------- ------------
OUTSTANDING (MILLIONS)
-----------
(MILLIONS)
Series B Preferred Stock............................... .4 -- -- At any time
Series C Preferred Stock............................... 3.3 6.8 5/2/98 5/2/00
Series D Preferred Stock............................... 11.0 22.9 7/6/99 7/6/00
Series G Preferred Stock............................... 6.2 12.9 9/5/99 9/5/99
Series H Preferred Stock............................... 1.8 3.7 9/5/00 9/5/99
Series I Preferred Stock............................... 7.0 14.6 10/2/99 10/2/99
----- -----
Shares outstanding at December 31, 1995................ 29.7 60.9
Series E Preferred Stock issued in January 1996........ 3.3 6.8 1/4/01 1/4/01
Series F Preferred Stock issued in January 1996........ 3.2 6.7 1/4/00 1/4/01
----- -----
Total shares outstanding at January 31, 1996........... 36.2 74.4
----- -----
----- -----
Each share of Series B Preferred Stock: (1) is entitled to a liquidation
preference of $145 per share, (2) is not convertible, (3) entitles the holder
thereof to receive an annual dividend equal to $4.35 per share beginning in June
1995, and $9.28 per share prior thereto, (4) does not generally entitle the
holder thereof to vote, except in certain limited circumstances, and (5) is
redeemable, in whole or in part, by Time Warner and the holders thereof in
exchange for cash or shares of any class or series of publicly-traded Time
Warner stock, at Time Warner's option, equal in value to the liquidation value
of the Series B Preferred Stock plus a premium of 2% of liquidation value for
each year after May 31, 1995 to the redemption date.
The principal terms of each series of convertible preferred stock issued in
1995 and 1996 (the Series C Preferred Stock, the Series D Preferred Stock, the
Series E Preferred Stock, the Series F Preferred Stock, the Series G Preferred
Stock, the Series H Preferred Stock and the Series I Preferred Stock, and
collectively, the 'Convertible Preferred Stock') are similar in nature, unless
otherwise noted below. Each share of Convertible Preferred Stock: (1) is
entitled to a liquidation preference of $100 per share, (2) is immediately
convertible into 2.08264 shares of Time Warner common stock at a conversion
price of $48 per share (based on its liquidation value), except that shares of
the Series H Preferred Stock are generally not convertible until September 5,
2000, (3) entitles the holder thereof (i) to receive for a four year period from
the date of issuance (or a five year period with respect to the Series C and
Series E Preferred Stock) an annual dividend per share equal to the greater of
$3.75 and an amount equal to the dividends paid on the Time Warner common stock
into which each share may be converted and (ii) to the extent that any of such
shares of preferred stock remain outstanding at the end of the period in which
the minimum $3.75 per share dividend is to be paid, the holders thereafter will
receive dividends equal to the dividends paid on shares of Time Warner common
stock multiplied by the number of shares into which their shares of preferred
stock are convertible and (4) except for the Series H Preferred Stock which is
generally not entitled to vote, entitles the holder thereof to vote with the
common stockholders on all matters on which the common stockholders are entitled
to vote, and each share of such Convertible Preferred Stock is entitled to two
votes on any such matter.
Time Warner has the right to exchange each series of Convertible Preferred
Stock for Time Warner common stock at the stated conversion price at any time on
or after the respective exchange date. The Series C Preferred Stock is
exchangeable by the holder beginning after the third year from its date of
issuance and by
F-41
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Time Warner after the fourth year at the stated conversion price plus a
declining premium in years four and five and no premium thereafter. In addition,
Time Warner has the right to redeem each series of Convertible Preferred Stock,
in whole or in part, for cash at the liquidation value plus accrued dividends,
at any time on or after the respective redemption date.
Pursuant to a shareholder rights plan adopted in January 1994, Time Warner
distributed one right per common share which currently becomes exercisable in
certain events involving the acquisition of 15% or more of the then ouststanding
common stock of Time Warner. 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. In connection with the TBS
Transaction, Time Warner expects to amend the shareholder rights plan
principally to change the basis for determining if an acquisition of 15% or more
of Time Warner common stock has occurred to a fully-diluted basis.
In 1993, Time Warner redeemed or exchanged $6.4 billion of Series C and
Series D preferred stock ('old Series C and Series D preferred stock') that were
issued in Time Warner's 1989 acquisition of WCI. The cash redemption of the old
Series D preferred stock was financed principally by the proceeds from the
issuance of long-term notes and debentures. The old Series C preferred stock was
exchanged for the 8.75% Convertible Debentures.
At December 31, 1995, Time Warner had reserved 172.6 million shares of
common stock for the conversion of its Convertible Preferred Stock, zero coupon
convertible notes and other convertible securities, and for the exercise of
outstanding options to purchase shares of common stock, excluding 25.7 million
shares related to the 8.75% Convertible Debentures which were redeemed in
February 1996 (Note 6).
10. 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 at, or in excess of,
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 January 1, 1995............................................................. 77,611 $ 8-48
Granted................................................................................ 5,096 34-45
Exercised.............................................................................. (3,721) 8-40
Cancelled.............................................................................. (367) 17-45
---------
Balance at December 31, 1995........................................................... 78,619 $17-48
---------
---------
DECEMBER 31,
---------------------------
1995 1994
--------- --------------
(THOUSANDS)
Exercisable............................................................................ 66,242 63,106
Available for future grants............................................................ 7,884 8,849
For options exercised by 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 on June 30, 1992. There were
28.5 million options held by employees of TWE at December 31, 1995, 21.8 million
of which were exercisable. There were 1.3 million options exercised in 1994 and
4.8 million options exercised in 1993, at prices ranging from $8-$36 per share
in each year.
F-42
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. 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,
-------------------------
1995 1994 1993
----- ---- ----
(MILLIONS)
Service cost.......................................................................... $ 29 $ 34 $ 25
Interest cost......................................................................... 53 50 45
Actual return on plan assets.......................................................... (137) (2) (52)
Net amortization and deferral......................................................... 89 (45) 10
----- ---- ----
Total................................................................................. $ 34 $ 37 $ 28
----- ---- ----
----- ---- ----
The status of funded pension plans is as follows:
DECEMBER 31,
--------------
1995 1994
---- ----
(MILLIONS)
Accumulated benefit obligation (89% vested)..................................................... $544 $394
Effect of future salary increase................................................................ 192 132
---- ----
Projected benefit obligation.................................................................... 736 526
Plan assets at fair value....................................................................... 643 495
---- ----
Projected benefit obligation in excess of plan assets........................................... (93) (31)
Unamortized actuarial losses.................................................................... 94 49
Unamortized plan changes........................................................................ 2 (7)
Other........................................................................................... (10) (8)
---- ----
Prepaid (accrued) pension expense............................................................... $ (7) $ 3
---- ----
---- ----
The following assumptions were used in accounting for pension plans:
1995 1994 1993
---- ---- ----
Weighted average discount rate............................................................ 7.25% 8.5 % 7.5 %
Return on plan assets..................................................................... 9% 9 % 9 %
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 other savings and profit sharing plans, as to which the expense amounted to
$51 million in 1995, $51 million in 1994 and $46 million in 1993. Contributions
to the 401(k) and other savings plans are based upon a percentage of the
employees' elected contributions. Contributions to the employee stock ownership
and profit sharing plans are generally determined by management and approved by
the board of directors of the participating companies.
F-43
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. FINANCIAL INSTRUMENTS
The carrying value of Time Warner's financial instruments approximates fair
value, except for differences with respect to long-term, fixed-rate debt and
related interest rate swap contracts and certain differences related to cost
method investments and other financial instruments which are not significant.
The fair value of financial instruments, such as long-term debt and investments,
is generally determined by reference to market values resulting from trading on
a national securities exchange or in an over-the-counter market. In cases where
quoted market prices are not available, such as for derivative financial
instruments, fair value is based on estimates using present value or other
valuation techniques.
INTEREST RATE RISK MANAGEMENT
Interest rate swap contracts are used to adjust the proportion of total
debt that is subject to variable and fixed interest 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
established by agreement at the time of termination, and usually represents the
net 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. Because interest rate
swap contracts are used to modify the interest characteristics of Time Warner's
outstanding debt from a fixed to a floating-rate basis or, vice versa,
unrealized gains or losses on interest rate swap contracts are not recognized in
income unless the contracts are terminated prior to their maturity. Gains or
losses on any contracts terminated early are deferred and amortized to income
over the remaining average life of the terminated contracts.
At December 31, 1995, 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 5.4%) on $2.6 billion notional amount
of indebtedness, which resulted in approximately 43% of Time Warner's underlying
debt being subject to variable interest rates. The notional amount of
outstanding contracts by year of maturity at December 31, 1995 is as follows:
1996-$300 million; 1998-$700 million; 1999-$1.2 billion; and 2000-$400 million.
At December 31, 1994, Time Warner had interest rate swap contracts on $2.9
billion notional amount of indebtedness.
Based on the level of interest rates prevailing at December 31, 1995, the
fair value of Time Warner's fixed-rate debt exceeded its carrying value by $407
million and it would have cost $9 million to terminate the related interest rate
swap contracts, which combined is the equivalent of an unrealized loss of $416
million. Based on Time Warner's fixed-rate debt and related interest rate swap
contracts outstanding at December 31, 1995, each 25 basis point increase or
decrease in the level of interest rates prevailing at December 31, 1995 would
result in a net reduction or increase in the combined unrealized loss of
approximately $185 million, respectively, including respective costs or savings
of $16 million to terminate the related interest rate swap contracts. 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 its interest rate swap contracts,
which combined was the equivalent of an unrealized gain of $336 million.
Although changes in the unrealized gains or losses on interest rate swap
contracts and debt do not result in the realization or expenditure of cash
unless the contracts are terminated or the debt is retired, each 25 basis point
increase or decrease in the level of interest rates related to Time Warner's
variable-rate debt and interest
F-44
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rate swap contracts would respectively increase or decrease Time Warner's annual
interest expense and related cash payments by approximately $12 million,
including $7 million related to interest rate swap contracts.
FOREIGN EXCHANGE RISK MANAGEMENT
Foreign exchange contracts are used primarily by Time Warner 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 foreign currency
exchange rates. As part of its overall strategy to manage the level of exposure
to the risk of foreign currency exchange rate fluctuations, Time Warner hedges a
portion of its and TWE's combined foreign currency exposures anticipated over
the ensuing twelve month period. At December 31, 1995, Time Warner has
effectively hedged approximately half of the combined estimated foreign currency
exposures that principally relate to anticipated cash flows to be remitted to
the U.S. over the ensuing twelve month period, using foreign exchange contracts
that generally have maturities of three months or less, which are generally
rolled over to provide continuing coverage throughout the year. Time Warner
often closes foreign exchange sale contracts by purchasing an offsetting
purchase contract. At December 31, 1995, Time Warner had contracts for the sale
of $504 million and the purchase of $140 million of foreign currencies at fixed
rates, primarily English pounds (29% of net contract value), German marks (19%),
Canadian dollars (16%), French francs (16%) and Japanese yen (5%), compared to
contracts for the sale of $551 million and the purchase of $109 million of
foreign currencies at December 31, 1994.
Unrealized gains or losses related to foreign exchange contracts are
recorded in income as the market value of such contracts change; accordingly,
the carrying value of foreign exchange contracts approximates market value. The
carrying value of foreign exchange contracts was not material at December 31,
1995 and 1994 and is included in other current liabilities. No cash is required
to be received or paid with respect to the realization of such gains and losses
until the related foreign exchange contracts are settled, generally at their
respective maturity dates. In 1995 and 1994, Time Warner had $20 million and $33
million, respectively, and TWE had $11 million and $20 million, respectively, of
net losses on foreign exchange contracts, 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 in cash 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.
Based on the foreign exchange contracts outstanding at December 31, 1995,
each 5% devaluation of the U.S. dollar as compared to the level of foreign
exchange rates for currencies under contract at December 31, 1995 would result
in approximately $25 million of unrealized losses and $7 million of unrealized
gains on foreign exchange contracts involving foreign currency sales and
purchases, respectively. Conversely, a 5% appreciation of the U.S. dollar would
result in $25 million of unrealized gains and $7 million of unrealized losses,
respectively. At December 31, 1995, none of Time Warner's foreign exchange
purchase contracts relates to TWE's foreign currency exposure. However, with
regard to the $25 million of unrealized losses or gains on foreign exchange sale
contracts, Time Warner would be reimbursed by TWE, or would reimburse TWE,
respectively, for approximately $6 million related to TWE's foreign currency
exposure. Consistent with the nature of the economic hedge provided by such
foreign exchange contracts, such unrealized gains or losses would be offset by
corresponding decreases or increases, respectively, in the dollar value of
future foreign currency royalty and license fee payments that would be received
in cash within the ensuing twelve month period from the sale of U.S. copyrighted
products abroad.
F-45
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SEGMENT INFORMATION
Time Warner's businesses are conducted in three fundamental areas:
Entertainment, consisting principally of interests in recorded music and music
publishing, filmed entertainment, broadcasting, theme parks and cable television
programming; News and Information, consisting principally of interests in
magazine publishing, book publishing and direct marketing; and
Telecommunications, consisting principally of interests in cable television
systems. Time Warner's interests in filmed entertainment, broadcasting, theme
parks, cable television programming and most of its telecommunications business
are held by the Entertainment Group, which is not consolidated for financial
reporting purposes.
Information as to the operations of Time Warner and the Entertainment Group
in different business segments is set forth below. Cable business segment
information for Time Warner reflects the 1995 acquisitions of KBLCOM and Summit.
Cable business segment information for the Entertainment Group reflects the
consolidation by TWE of the TWE-Advance/Newhouse Partnership effective as of
April 1, 1995 and Paragon effective as of July 6, 1995. The operating results of
Six Flags have been deconsolidated effective as of June 23, 1995 and results
prior to that date are reported separately to facilitate comparability.
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ------ ------
(MILLIONS)
REVENUES
Time Warner:
Publishing........................................................................ $3,722 $3,433 $3,270
Music............................................................................. 4,196 3,986 3,334
Cable............................................................................. 172 -- --
Intersegment elimination.......................................................... (23) (23) (23)
------ ------ ------
Total............................................................................. $8,067 $7,396 $6,581
------ ------ ------
------ ------ ------
Entertainment Group:
Filmed Entertainment.............................................................. $5,078 $4,484 $4,032
Six Flags Theme Parks............................................................. 227 557 533
Broadcasting-The WB Network....................................................... 33 -- --
Programming-HBO................................................................... 1,607 1,513 1,441
Cable............................................................................. 3,094 2,242 2,208
Intersegment elimination.......................................................... (410) (287) (251)
------ ------ ------
Total............................................................................. $9,629 $8,509 $7,963
------ ------ ------
------ ------ ------
F-46
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31,
----------------------
1995 1994 1993
---- ---- ----
(MILLIONS)
OPERATING INCOME
Time Warner:
Publishing............................................................................. $381 $347 $295
Music(1)............................................................................... 321 366 296
Cable.................................................................................. (5) -- --
---- ---- ----
Total.................................................................................. $697 $713 $591
---- ---- ----
---- ---- ----
Entertainment Group:
Filmed Entertainment................................................................... $253 $219 $233
Six Flags Theme Parks.................................................................. 29 56 53
Broadcasting-The WB Network............................................................ (66) -- --
Programming-HBO........................................................................ 274 237 213
Cable.................................................................................. 502 340 406
---- ---- ----
Total.................................................................................. $992 $852 $905
---- ---- ----
---- ---- ----
- ------------
(1) Includes pretax losses of $85 million recorded in 1995 related to certain
businesses and joint ventures owned by the Music Division which were
restructured or closed. The losses are primarily related to Warner Music
Enterprises, one of the Company's direct marketing efforts, and the write
off of its related direct mail order assets that were not recoverable due to
the closure of this business. Such closure was substantially completed in
1995 and will not require any significant, future cash outlays. The
activities that will not be continued are not material to the Company's
results of operations, having resulted in insignificant operating losses in
prior periods.
YEARS ENDED DECEMBER 31,
----------------------
1995 1994 1993
---- ---- ----
(MILLIONS)
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Time Warner:
Publishing............................................................................. $ 59 $ 47 $ 45
Music.................................................................................. 95 86 87
Cable.................................................................................. 27 -- --
---- ---- ----
Total.................................................................................. $181 $133 $132
---- ---- ----
---- ---- ----
Entertainment Group:
Filmed Entertainment................................................................... $113 $ 76 $ 51
Six Flags Theme Parks.................................................................. 20 51 41
Broadcasting-The WB Network............................................................ -- -- --
Programming-HBO........................................................................ 18 14 14
Cable.................................................................................. 465 340 327
---- ---- ----
Total.................................................................................. $616 $481 $433
---- ---- ----
---- ---- ----
F-47
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(MILLIONS)
AMORTIZATION OF INTANGIBLE ASSETS(1)
Time Warner:
Publishing.................................................................... $ 36 $ 36 $ 32
Music......................................................................... 274 268 260
Cable......................................................................... 68 -- --
------- ------- -------
Total......................................................................... $ 378 $ 304 $ 292
------- ------- -------
------- ------- -------
Entertainment Group:
Filmed Entertainment.......................................................... $ 124 $ 135 $ 143
Six Flags Theme Parks......................................................... 11 28 28
Broadcasting-The WB Network................................................... -- -- --
Programming-HBO............................................................... 1 6 3
Cable......................................................................... 308 309 302
------- ------- -------
Total......................................................................... $ 444 $ 478 $ 476
------- ------- -------
------- ------- -------
- ------------
(1) Amortization includes all amortization relating to the acquisition of WCI in
1989, the acquisition of the minority interest in ATC in 1992, the
acquisitions of KBLCOM and Summit in 1995 and other business combinations
accounted for by the purchase method.
Information as to the assets and capital expenditures of Time Warner and
the Entertainment Group is as follows:
DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(MILLIONS)
ASSETS
Time Warner:
Publishing.................................................................... $ 2,175 $ 2,013 $ 1,897
Music......................................................................... 7,828 7,672 7,401
Cable......................................................................... 3,875 -- --
Entertainment Group(1)........................................................ 5,734 5,350 5,627
Corporate(2).................................................................. 2,520 1,681 1,967
------- ------- -------
Total......................................................................... $22,132 $16,716 $16,892
------- ------- -------
------- ------- -------
Entertainment Group:
Filmed Entertainment.......................................................... $ 7,389 $ 7,184 $ 6,719
Six Flags Theme Parks......................................................... -- 814 848
Broadcasting-The WB Network................................................... 63 -- --
Programming-HBO............................................................... 935 911 875
Cable......................................................................... 9,842 8,303 8,102
Corporate(2).................................................................. 731 1,780 1,658
------- ------- -------
Total......................................................................... $18,960 $18,992 $18,202
------- ------- -------
------- ------- -------
- ------------
(1) Entertainment Group assets represent Time Warner's investment in and amounts
due to and from the Entertainment Group.
(2) Consists principally of cash, cash equivalents and other investments.
F-48
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(MILLIONS)
CAPITAL EXPENDITURES
Time Warner:
Publishing.................................................................... $ 70 $ 50 $ 41
Music......................................................................... 121 108 91
Cable......................................................................... 56 -- --
Corporate..................................................................... 19 6 66
------- ------- -------
Total......................................................................... $ 266 $ 164 $ 198
------- ------- -------
------- ------- -------
Entertainment Group:
Filmed Entertainment.......................................................... $ 294 $ 395 $ 210
Six Flags Theme Parks......................................................... 43 46 34
Broadcasting-The WB Network................................................... -- -- --
Programming-HBO............................................................... 20 14 16
Cable(1)...................................................................... 1,293 778 353
Corporate..................................................................... 3 2 --
------- ------- -------
Total......................................................................... $ 1,653 $ 1,235 $ 613
------- ------- -------
------- ------- -------
- ------------
(1) Cable capital expenditures were funded in part through collections on the
U S WEST Note in the amount of $602 million in 1995, $234 million in 1994
and $16 million in 1993 (Note 2).
Information as to Time Warner's operations in different geographical areas
is as follows:
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(MILLIONS)
REVENUES
United States(1).............................................................. $ 5,447 $ 4,944 $ 4,414
Europe........................................................................ 1,552 1,445 1,296
Pacific Rim................................................................... 775 724 583
Rest of World................................................................. 293 283 288
------- ------- -------
Total......................................................................... $ 8,067 $ 7,396 $ 6,581
------- ------- -------
------- ------- -------
OPERATING INCOME
United States................................................................. $ 457 $ 494 $ 436
Europe........................................................................ 158 108 102
Pacific Rim................................................................... 57 74 28
Rest of World................................................................. 25 37 25
------- ------- -------
Total......................................................................... $ 697 $ 713 $ 591
------- ------- -------
------- ------- -------
ASSETS
United States................................................................. $19,301 $13,961 $14,328
Europe........................................................................ 1,797 1,717 1,635
Pacific Rim................................................................... 628 636 514
Rest of World................................................................. 406 402 415
------- ------- -------
Total......................................................................... $22,132 $16,716 $16,892
------- ------- -------
------- ------- -------
- ------------
(1) Time Warner's revenues do not include the revenues of the Entertainment
Group, which had export revenues of $1.982 billion in 1995, $1.693 billion
in 1994 and $1.650 billion in 1993, principally from the sale of Filmed
Entertainment products abroad.
F-49
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES
Total rent expense amounted to $174 million in 1995, $157 million in 1994
and $163 million in 1993. The minimum rental commitments under noncancellable
long-term operating leases are: 1996-$147 million; 1997-$133 million; 1998-$139
million; 1999-$130 million; 2000-$123 million and after 2000-$923 million.
Minimum commitments and guarantees under certain licensing, artists and
other agreements aggregated approximately $2.9 billion at December 31, 1995,
which are payable principally over a five-year period. Such amounts do not
include the Time Warner General Partner guarantees of approximately $6 billion
of TWE debt.
Pending legal proceedings are substantially limited to litigation
incidental to the businesses of Time Warner, alleged damages in connection with
class action lawsuits and pending litigation with U S WEST. 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.
15. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash flows is as follows:
YEARS ENDED DECEMBER 31,
--------------------------
1995 1994 1993
---- ------ ------
(MILLIONS)
Cash payments made for interest..................................................... $659 $ 539 $ 330
Cash payments made for income taxes................................................. 302 389 234
Tax-related distributions received from TWE......................................... 680 115 --
Income tax refunds received......................................................... 24 50 52
During the years ended December 31, 1995 and 1994, Time Warner realized $35
million and $179 million, respectively, from the securitization of receivables.
Noncash investing and financing activities in 1995 included the $1.4 billion
acquisitions of KBLCOM and Summit in exchange for capital stock (Note 4), the
$1.36 billion acquisition of ITOCHU's and Toshiba's interests in TWE in exchange
for capital stock and $10 million in cash (Note 2) and the $1.8 billion
redemption of Time Warner's Reset Notes in exchange for other debt securities
(Note 6). Noncash financing activities in 1993 included the issuance of
approximately $3.1 billion of debentures in exchange for the old Series C
preferred stock (Note 9).
Other current liabilities consist of:
DECEMBER 31,
-----------------
1995 1994
------ ------
(MILLIONS)
Accrued expenses............................................................................. $ 972 $ 794
Accrued compensation......................................................................... 337 308
Accrued income taxes......................................................................... 173 81
Deferred revenues............................................................................ 84 55
------ ------
Total........................................................................................ $1,566 $1,238
------ ------
------ ------
F-50
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-51
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, 1995 and 1994, and the related consolidated
statements of operations, cash flows and shareholders' equity for each of the
three years in the period ended December 31, 1995. Our audits also included the
financial statement schedules listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of Time Warner's management. Our
responsibility is to express an opinion on these financial statements and
schedules 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, 1995 and 1994, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
New York, New York
February 6, 1996
F-52
TIME WARNER INC.
SELECTED FINANCIAL INFORMATION
The selected financial information for each of the five years in the period
ended December 31, 1995 set forth below has been derived from and should be read
in conjunction with the 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 all periods after 1992 reflects the
deconsolidation of the Entertainment Group, principally TWE, effective January
1, 1993.
The selected historical financial information for 1995 reflects the
issuance of 29.3 million shares of convertible preferred stock having an
aggregate liquidation preference of $2.926 billion in connection with (i) the
acquisitions of KBLCOM and Summit and (ii) the exchange by Toshiba and ITOCHU of
their direct and indirect interests in TWE. 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 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,
---------------------------------------------------
SELECTED OPERATING STATEMENT INFORMATION 1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues................................................... $ 8,067 $ 7,396 $ 6,581 $13,070 $12,021
Depreciation and amortization.............................. 559 437 424 1,172 1,109
Business segment operating income (a)...................... 697 713 591 1,343 1,154
Equity in pretax income of Entertainment Group............. 256 176 281 -- --
Interest and other, net.................................... 877 724 718 882 966
Net income (loss) (b)(c)................................... (166) (91) (221) 86 (99)
Net loss applicable to common shares (after preferred
dividends)............................................... (218) (104) (339) (542) (692)
Per share of common stock:
Net loss (b)(c).......................................... $ (0.57) $ (0.27) $ (0.90) $ (1.46) $ (2.40)
Dividends................................................ $ 0.36 $ 0.35 $ 0.31 $ 0.265 $ 0.25
Average common shares (c).................................. 383.8 378.9 374.7 371.0 288.2
- ------------
(a) Business segment operating income for the year ended December 31, 1995
includes $85 million in losses relating to certain businesses and joint
ventures owned by the Music Division which were restructured or closed.
Business segment operating income for the year ended December 31, 1991
includes a $60 million charge relating to the restructuring of the
Publishing Division.
(b) The net loss for the year ended December 31, 1995 includes an
extraordinary loss on the retirement of debt of $42 million ($.11 per
common share). 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.
(c) 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-53
YEARS ENDED DECEMBER 31,
---------------------------------------------------
SELECTED BALANCE SHEET INFORMATION 1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
Investments in and amounts due to and from Entertainment
Group.................................................... $ 5,734 $ 5,350 $ 5,627 $ -- $ --
Total assets............................................... 22,132 16,716 16,892 27,366 24,889
Long-term debt............................................. 9,907 8,839 9,291 10,068 8,716
Company-obligated mandatorily redeemable preferred
securities of subsidiaries holding solely subordinated
notes and debentures of the Company (a).................. 949 -- -- -- --
Shareholders' equity:
Preferred stock liquidation preference................... 2,994 140 140 6,532 6,256
Equity applicable to common stock........................ 673 1,008 1,230 1,635 2,242
Total shareholders' equity............................... 3,667 1,148 1,370 8,167 8,498
Total capitalization....................................... 14,523 9,987 10,661 18,235 17,214
- ------------
(a) Includes $374 million of preferred securities that are redeemable for cash
or, at Time Warner's option, approximately 12.1 million shares of Hasbro,
Inc. common stock owned by Time Warner.
F-54
TIME WARNER INC.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
EQUITY IN
PRETAX NET NET INCOME
OPERATING INCOME INCOME (LOSS) (LOSS) PER DIVIDENDS
INCOME OF (LOSS) OF NET APPLICABLE COMMON PER
BUSINESS ENTERTAINMENT INCOME TO COMMON SHARE COMMON
QUARTER REVENUES SEGMENTS GROUP (LOSS) SHARES(B) (B)(C) SHARE
- -------- -------- --------- ------------- ------ ------------- ---------- ---------
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
1995
1st $1,817 $ 138 $ 22 $ (47) $ (50) $(0.13) $0.09
2nd 1,907 184 84 (8) (13) (0.03) 0.09
3rd (a) 1,981 21 129 (144) (160) (0.41) 0.09
4th 2,362 354 21 33 5 0.01 0.09
Year (a) 8,067 697 256 (166) (218) (0.57) 0.36
1994
1st $1,558 $ 112 $ 45 $ (51) $ (54) $(0.14) $0.08
2nd 1,667 170 66 (20) (23) (0.06) 0.09
3rd 1,884 141 66 (32) (35) (0.09) 0.09
4th 2,287 290 (1) 12 8 0.02 0.09
Year 7,396 713 176 (91) (104) (0.27) 0.35
AVERAGE COMMON STOCK
COMMON ------------
QUARTER SHARES HIGH LOW
- -------- ------ ---- ---
1995
1st 379.5 $39 1/4 $33 5/8
2nd 381.4 43 1/2 34 1/4
3rd (a) 386.5 45 5/8 38 7/8
4th 387.5 41 1/4 35 3/4
Year (a) 383.8 45 5/8 33 5/8
1994
1st 378.6 $44 1/4 $36 5/8
2nd 378.8 40 5/8 34 1/2
3rd 379.1 38 3/4 34
4th 379.2 37 3/4 31 1/2
Year 378.9 44 1/4 31 1/2
- ------------
(a) Business segment operating income for the third quarter of 1995 includes
$85 million in losses relating to certain businesses and joint ventures
owned by the Music Division which were restructured or closed. The net
loss for the third quarter of 1995 includes an extraordinary loss on the
retirement of debt of $42 million ($.11 per common share).
(b) After preferred dividend requirements.
(c) Per common share amounts for the quarters and full years have been
calculated separately. Accordingly, quarterly amounts may not add to the
annual amount because of differences in the average common shares
outstanding during each period.
F-55
TIME WARNER INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNCONSOLIDATED (PARENT-ONLY) CONDENSED BALANCE SHEET
DECEMBER 31,
(MILLIONS)
1995 1994
------- -------
ASSETS
Cash and equivalents (a)................................................................. $ 922 $ 68
Investments in and amounts due to and from unconsolidated subsidiaries and equity method
investees.............................................................................. 16,040 13,122
Other assets............................................................................. 436 358
------- -------
Total assets............................................................................. $17,398 $13,548
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt........................................................................... $ 8,467 $ 8,811
Deferred income taxes.................................................................... 3,420 2,700
Other liabilities........................................................................ 867 889
Subordinated notes and debentures in support of mandatorily redeemable preferred
securities of subsidiaries............................................................. 977 --
Shareholders' equity:
Preferred stock.......................................................................... 30 1
Common stock............................................................................. 388 379
Paid-in capital.......................................................................... 5,422 2,588
Unrealized gains on certain marketable securities........................................ 116 130
Accumulated deficit...................................................................... (2,289) (1,950)
------- -------
Total shareholders' equity............................................................... 3,667 1,148
------- -------
Total liabilities and shareholders' equity............................................... $17,398 $13,548
------- -------
------- -------
- ------------
(a) Includes $557 million of cash and equivalents at December 31, 1995
segregated for the redemption of long-term debt.
See accompanying notes.
F-56
TIME WARNER INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNCONSOLIDATED (PARENT-ONLY) CONDENSED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
(MILLIONS)
1995 1994 1993
----- ----- -----
Equity in the income of unconsolidated subsidiaries and equity method investees
before federal and state income and foreign withholding taxes..................... $ 815 $ 731 $ 794
Interest and other, net............................................................. (860) (641) (718)
Corporate expenses.................................................................. (74) (76) (73)
----- ----- -----
Income (loss) before federal and state income and foreign withholding taxes......... (119) 14 3
Provision for federal and state income and foreign withholding taxes................ (5) (105) (167)
----- ----- -----
Loss before extraordinary item...................................................... (124) (91) (164)
Extraordinary loss on debt, net of $26 million and $37 million income tax benefit in
1995 and 1993, respectively....................................................... (42) -- (57)
----- ----- -----
Net loss............................................................................ $(166) $ (91) $(221)
----- ----- -----
----- ----- -----
See accompanying notes.
F-57
TIME WARNER INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNCONSOLIDATED (PARENT-ONLY) CONDENSED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(MILLIONS)
1995 1994 1993
------- ------ -------
OPERATIONS
Net loss....................................................................... $ (166) $ (91) $ (221)
Extraordinary loss on retirement of debt....................................... 42 -- 57
One-time tax charge (a)........................................................ -- -- 70
Noncash interest expense....................................................... 176 219 185
Deficiency of distributions over equity in pretax income of unconsolidated
subsidiaries and equity method investees (b)................................. (89) (396) (462)
Other, principally changes in operating assets and liabilities................. (72) 149 435
------- ------ -------
Cash provided (used) by operations (c)......................................... (109) (119) 64
------- ------ -------
INVESTING ACTIVITIES
Investments and acquisitions, principally loans and advances to unconsolidated
subsidiaries................................................................. (353) (815) (737)
Investment proceeds, principally repayments of loans and advances by
unconsolidated subsidiaries.................................................. 1,154 1,087 114
------- ------ -------
Cash provided (used) by investing activities (d)............................... 801 272 (623)
------- ------ -------
FINANCING ACTIVITIES
Borrowings..................................................................... 748 550 4,730
Debt repayments................................................................ (1,455) (617) (1,003)
Issuance of subordinated notes and debentures in support of mandatorily
redeemable preferred securities of subsidiaries.............................. 977 -- --
Redemption of old Series D preferred stock..................................... -- -- (3,494)
Dividends paid................................................................. (171) (142) (299)
Stock option and dividend reinvestment plans................................... 106 34 92
Other, principally financing costs............................................. (43) (6) (133)
------- ------ -------
Cash provided (used) by financing activities (d)............................... 162 (181) (107)
------- ------ -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.................................... 854 (28) (666)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.................................... 68 96 762
------- ------ -------
CASH AND EQUIVALENTS AT END OF PERIOD.......................................... $ 922 $ 68 $ 96
------- ------ -------
------- ------ -------
- ------------
(a) Reflects a $70 million increase in Time Warner's deferred income tax
liability as a result of new tax law enacted in 1993.
(b) Distributions from unconsolidated subsidiaries and equity method investees
were $726 million, $335 million and $332 million in 1995, 1994 and 1993,
respectively.
(c) Cash payments made for interest amounted to $628 million, $539 million and
$268 million in 1995, 1994 and 1993, respectively. U.S. federal and state
income and foreign withholding tax payments were $195 million, $299 million
and $137 million in 1995, 1994 and 1993, respectively, and related tax
refunds were $19 million, $44 million and $44 million, respectively.
(d) For information with respect to certain noncash investing and financing
activities of Time Warner, see Note 15 to the Time Warner consolidated
financial statements. In addition, noncash investing activities of Time
Warner with its unconsolidated subsidiaries included noncash capital
distributions (contributions), net, of $2.450 billion, ($176) million and
$3.049 billion in 1995, 1994 and 1993, respectively, and a $3 billion loan
to an unconsolidated subsidiary in 1993.
See accompanying notes.
F-58
TIME WARNER INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO UNCONSOLIDATED (PARENT-ONLY) CONDENSED FINANCIAL INFORMATION
1. BASIS OF PRESENTATION
Time Warner's investments in and amounts due to and from unconsolidated
subsidiaries and equity method investees are stated at cost plus equity in the
undistributed income (loss) of subsidiaries and equity method investees, before
U.S. federal and state income and foreign withholding taxes, since dates of
acquisition. Time Warner's share of the income (loss) of unconsolidated
subsidiaries and equity method investees, before federal and state income and
foreign withholding taxes, is included in the statement of operations using the
equity method. The unconsolidated (parent-only) financial statements should be
read in conjunction with the accompanying consolidated financial statements of
Time Warner. Capitalized terms are as defined in the Time Warner consolidated
financial statements.
2. LONG-TERM DEBT
The principal terms and amounts of the long-term debt of Time Warner
(parent-only) are set forth in Note 6 to the Time Warner consolidated financial
statements. Time Warner (parent-only) long-term debt excludes unconsolidated
subsidiary debt of $1.440 billion and $28 million at December 31, 1995 and 1994,
respectively, of which $1.265 billion is due in 2000.
3. SUBORDINATED NOTES AND DEBENTURES
In August 1995, Time Warner issued $385 million principal amount of 4%
subordinated notes due December 23, 1997 (the '4% Notes') to a wholly-owned
subsidiary in support of such subsidiary's issuance of the PERCS. The amount
payable by Time Warner upon the maturity of each 4% Note is equal to the lesser
of $54.41, and the market value of a share of common stock of Hasbro on December
17, 1997, payable in cash or, at Time Warner's option, Hasbro common stock held
by a subsidiary of Time Warner. Time Warner has the right to redeem the 4% Notes
at any time prior to December 23, 1997, at an amount per 4% Note equal to $54.41
(or in certain limited circumstances the lesser of such amount and the market
value of a share of Hasbro common stock at the time of redemption) plus accrued
and unpaid interest thereon and a declining premium, payable in cash or, at Time
Warner's option, Hasbro common stock.
In December 1995, Time Warner issued $592 million principal amount of
8 7/8% subordinated debentures due December 31, 2025 (the '8 7/8% Debentures')
to a wholly-owned subsidiary in support of such subsidiary's issuance of the
Preferred Trust Securities. Interest payments on the 8 7/8% Debentures may be
deferred at the election of Time Warner for any period not exceeding 20
consecutive quarters. Time Warner has the right to redeem the 8 7/8% Debentures,
in whole or in part, on or after December 31, 2000, or in other certain
circumstances, in each case at an amount equal to the principal amount of 8 7/8%
Debentures to be redeemed plus accrued and unpaid interest thereon.
F-59
TIME WARNER INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(MILLIONS)
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ------------------------------------------------------------ ---------- ---------- ---------- ---------
1995:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts........................ $ 157 $ 230 $ (199)(a) $ 188
Reserves for sales returns and allowances.............. 611 2,217 (2,230)(b)(c) 598
---------- ---------- ---------- ---------
Total............................................. $ 768 $ 2,447 $ (2,429) $ 786
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Reserves deducted from amounts due to publishers
(accounts payable)
Allowance for magazine and book returns................ $ (159) $ (1,015) $ 1,011(c) $(163)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
1994:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts........................ $ 131 $ 197 $ (171)(a) $ 157
Reserves for sales returns and allowances.............. 545 1,822 (1,756)(b)(c) 611
---------- ---------- ---------- ---------
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(c) $(159)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
1993:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts........................ $ 122 $ 194 $ (185)(a) $ 131
Reserves for sales returns and allowances.............. 522 1,631 (1,608)(b)(c) 545
---------- ---------- ---------- ---------
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(c) $(154)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
- ------------
(a) Represents uncollectible receivables charged against reserve.
(b) Represents returns or allowances applied against reserve.
(c) 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, changes in reserves for
magazine returns also result in corresponding changes to the reserve
against the liability due to the publishers.
F-60
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
TWE is engaged principally in two fundamental areas of business:
Entertainment, consisting principally of interests in filmed entertainment,
broadcasting, theme parks and cable television programming; and
Telecommunications, consisting principally of interests in cable television
systems. TWE also manages the telecommunications properties owned by Time Warner
and the combined cable television operations are conducted under the name of
Time Warner Cable. Capitalized terms are as defined and described in the
accompanying consolidated financial statements, or elsewhere herein.
STRATEGIC INITIATIVES
SIGNIFICANT TRANSACTIONS
During 1995, TWE embarked on a program to improve its financial condition
and increase its overall financial flexibility through asset sales and the
refinancing of its bank debt. In conjunction with Time Warner, TWE also pursued
significant, strategic objectives during 1995 through its cable television
operations. These objectives are part of a continuing strategy to further
enhance the strength of TWE's interests in entertainment and to attempt to use
existing and acquired cable television systems to establish an enterprise that
will be responsible for the overall management and financing of its and Time
Warner's cable and telecommunications interests. In pursuit of these strategic
objectives, TWE completed a number of transactions in 1995 that have had a
significant effect on its results of operations and financial condition. Such
transactions include:
The formation by TWE of the TWE-Advance/Newhouse Partnership which,
together with certain cable acquisitions by Time Warner, strengthened the
geographic clusters of the cable television systems and substantially
increased the number of cable subscribers managed by Time Warner Cable.
The execution of a new $8.3 billion credit agreement, under which $2.6
billion of pre-existing bank debt was refinanced by TWE; and
The sale by TWE of certain assets under an asset sales program, which
raised approximately $1.1 billion for debt reduction, including the sale
of 51% of TWE's interest in Six Flags (the 'Six Flags Transaction') and
the sale or expected sale or transfer of certain unclustered cable
television systems owned by TWE (the 'Unclustered Cable Transactions').
The nature of these transactions and their impact on the results of operations
and financial condition of TWE are further discussed below.
TELECOMMUNICATIONS STRATEGY
In 1994, TWE and Time Warner embarked on a strategy to expand their cable
television business, leading to the formation of the TWE-Advance/Newhouse
Partnership and the acquisition by Time Warner of certain cable television
systems, which increased the number of subscribers under TWE's management by
approximately 3.7 million. This strategy was based on management's expectation
that there would be a signficant increase in the value of cable television
systems related, in part, to a future convergence of the cable and telephone
industries, which would provide cable companies with an opportunity to operate
large geographic clusters of cable television systems for purposes of maximizing
the development and distribution of new and improved services on a cost
efficient basis, such as increased channel capacity, high speed data
transmission and telephony services.
In early 1996, TWE and Time Warner completed their plans for the expansion
of their cable television business, thereby strengthening their geographic
clusters of cable television systems as previously envisioned. Along with
internal growth, the formation of the TWE-Advance/Newhouse Partnership, and Time
Warner's acquisitions of Summit Communications Group, Inc. ('Summit'), KBLCOM
Incorporated ('KBLCOM') and Cablevision Industries Corporation ('CVI') and
related companies, increased the total number of subscribers under the
management of Time Warner Cable to over 11.7 million, as compared to 7.5 million
subscribers at the
F-61
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
end of 1994. Time Warner Cable has also extended its reach of cable television
systems to neighborhoods passing 18 million homes or close to 20% of television
homes in the U.S. In addition, there are now 35 geographic clusters of cable
television systems managed by Time Warner Cable serving over 100,000 subscribers
each, including key markets such as New York City and State, central Florida and
North Carolina. Excluding Time Warner's systems, TWE owns or manages cable
television systems serving 9.5 million subscribers, with 31 geographic clusters
serving over 100,000 subscribers each. TWE and Time Warner do not currently plan
to make any more significant acquisitions of cable television systems, but
instead intends to continue to refine their geographic clusters by exchanging
certain unclustered cable television systems for geographically-strategic ones
or by selling non-strategic cable television systems as part of their continuing
asset sales program. Management continues to believe that the increased size and
concentration of its subscriber base will provide for sustained revenue growth
from new and improved services, and provide certain economies of scale relating
to the upgrade of the technological capabilities of Time Warner Cable's cable
television systems.
Management believes that the future convergence of the cable and telephone
industries has been substantially confirmed through various events within the
industry, including the February 1996 enactment into law of sweeping
telecommunications industry reform. Among other features, the Telecommunications
Act of 1996 effectively removes regulatory barriers that historically prohibited
cable television companies and local and long-distance telephone companies from
competing in each other's business. In addition, the new law eliminates most
cable rate pricing restrictions in 1999, and earlier under certain
circumstances. TWE expects that the relaxation of cable rate regulation in 1999,
along with permitted cable rate price increases for certain regulated services
that went into effect on January 1, 1996 under a separate Time Warner Cable
agreement with the Federal Communications Commission (the 'FCC'), will provide
enhanced pricing flexibility that will help finance its cable and telephony
expansion plans.
The next phase of TWE and Time Warner's telecommunications strategy is to
simplify the structure of its cable and telecommunications properties by
bringing such properties together, so far as practicable and on a tax-efficient
basis, into an enterprise that will be responsible for the overall management
and financing of these interests. The first step of this process was completed
in 1995 when ITOCHU and Toshiba exchanged their interests in TWE for equity
interests in Time Warner. The restructuring process depends, among other things,
upon successful negotiations with U S WEST and certain creditors, and the
receipt of franchise and other regulatory approvals. Accordingly, there can be
no assurance that the effort will succeed. In the interim, as contemplated by
the TWE-Advance/Newhouse Partnership agreement, Time Warner may transfer certain
of its newly-acquired cable systems to the TWE-Advance/Newhouse Partnership on a
tax-efficient basis. Such transfers, if they are made, are expected to be
structured so that the systems will be transferred subject to a portion of Time
Warner's debt, thereby increasing the under-leveraged capitalization of the TWE-
Advance/Newhouse Partnership and consequently, TWE.
USE OF EBITDA
The following comparative discussion of the results of operations and
financial condition of TWE includes, among other factors, an analysis of changes
in the operating income of the business segments before depreciation and
amortization ('EBITDA') in order to eliminate the effect on the operating
performance of the filmed entertainment and cable businesses of significant
amounts of amortization of intangible assets recognized in Time Warner's $14
billion acquisition of WCI in 1989, the $1.3 billion acquisition of the ATC
minority interest in 1992 and other business combinations accounted for by the
purchase method. Financial analysts generally consider EBITDA to be an important
measure of comparative operating performance for the businesses of TWE, and when
used in comparison to debt levels or the coverage of interest expense, as a
measure of liquidity. However, EBITDA should be considered in addition to, not
as a substitute for, operating
F-62
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
income, net income, cash flow and other measures of financial performance and
liquidity reported in accordance with generally accepted accounting principles.
RESULTS OF OPERATIONS
1995 VS. 1994
TWE had revenues of $9.517 billion, income of $97 million before an
extraordinary loss on the retirement of debt and net income of $73 million for
the year ended December 31, 1995, compared to revenues of $8.460 billion and net
income of $161 million for the year ended December 31, 1994. The decrease in net
income in 1995 was principally related to a $24 million extraordinary loss on
the retirement of debt and higher depreciation and amortization relating to
increased capital spending.
As discussed more fully below, TWE's operating results in 1995 reflect an
overall increase in operating income generated by its business segments
(including the contribution by the TWE-Advance/Newhouse Partnership) and an
increase in investment-related income resulting from gains on the sale of
certain unclustered cable systems and other investments, offset in part by
minority interest expense related to the consolidation of the operating results
of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995.
On a pro forma basis, giving effect to (i) the formation of the
TWE-Advance/Newhouse Partnership, (ii) the refinancing of approximately $2.6
billion of pre-existing bank debt, (iii) the consolidation of Paragon, (iv) the
Six Flags Transaction, (v) the Unclustered Cable Transactions and (vi) the
reacquisition of the Time Warner Service Partnership Assets, as if each of such
transactions had occurred at the beginning of the periods, TWE would have
reported for the years ended December 31, 1995 and 1994, revenues of $9.682
billion and $8.779 billion, depreciation and amortization of $1.069 billion and
$1.035 billion, operating income of $962 million and $884 million, income before
extraordinary item of $172 million and $143 million and net income of $148
million and $143 million, respectively. The 1995 to 1994 comparison of pro forma
results are similarly affected by any underlying historical trends unrelated to
the transactions given pro forma effect to therein. The increase in pro forma
over historical net income for 1995 principally results from the pro forma
effects of a full year contribution by the TWE-Advance/Newhouse Partnership, the
contribution of net income related to the Time Warner Service Partnership
Assets, and interest savings associated with the refinancing of TWE's bank debt
and lower debt levels resulting from asset sales. The decrease in pro forma over
historical net income for 1994 principally results from the pro forma effects of
the contribution of net losses related to the Time Warner Service Partnership
Assets, which exceeded the positive pro forma effects of a full year
contribution by the TWE-Advance/Newhouse Partnership, and interest savings
associated with the refinancing of TWE's bank debt and lower debt levels
resulting from asset sales.
As a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation. Income and withholding taxes of $86 million in the year ended December
31, 1995, and $40 million in the year ended December 31, 1994, have been
provided in respect of the operations of TWE's domestic and foreign subsidiary
corporations.
F-63
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
EBITDA and operating income for TWE in 1995 and 1994 are as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------
OPERATING
EBITDA INCOME
----------------- -------------
1995 1994 1995 1994
------ ------ ---- ----
(MILLIONS)
Filmed Entertainment...................................................... $ 459 $ 407 $228 $201
Six Flags Theme Parks..................................................... 60 135 29 56
Broadcasting-The WB Network............................................... (66) -- (66) --
Programming-HBO........................................................... 291 255 274 236
Cable..................................................................... 1,255 994 495 355
------ ------ ---- ----
Total..................................................................... $1,999 $1,791 $960 $848
------ ------ ---- ----
------ ------ ---- ----
Filmed Entertainment. Revenues increased to $5.069 billion, compared to
$4.476 billion in 1994. EBITDA increased to $459 million from $407 million.
Depreciation and amortization, including amortization related to the purchase of
WCI, amounted to $231 million in 1995 and $206 million in 1994. Operating income
increased to $228 million from $201 million. Revenues benefited from increases
in worldwide theatrical, home video, consumer products and television
distribution operations. Worldwide theatrical and domestic home video revenues
in 1995 were led by the success of Batman Forever. EBITDA and operating income
benefited from the revenue gains and increased income from licensing operations.
Six Flags Theme Parks. As a result of TWE's sale of 51% of its interest in
Six Flags, the operating results of Six Flags have been deconsolidated effective
as of June 23, 1995 and TWE's remaining 49% interest in Six Flags is accounted
for under the equity method of accounting. Accordingly, revenues decreased to
$227 million, compared to $557 million in 1994. EBITDA decreased to $60 million
from $135 million. Depreciation and amortization amounted to $31 million in 1995
and $79 million in 1994. Operating income decreased to $29 million from $56
million.
Broadcasting-The WB Network. The WB Network was launched in January 1995,
and generated $66 million of operating losses on $33 million of revenues. The
operating loss was mitigated by a favorable legal settlement, as well as by
funding from a limited partner admitted as of August 1995. Due to the start-up
nature of this new national broadcast operation, losses are expected to
continue.
Programming-HBO. Revenues increased to $1.593 billion, compared to $1.494
billion in 1994. EBITDA increased to $291 million from $255 million.
Depreciation and amortization amounted to $17 million in 1995 and $19 million in
1994. Operating income increased to $274 million from $236 million. Revenues
benefited primarily from an increase in subscriptions to 29.7 million from 27
million at the end of 1994, as well as from higher pay-TV rates. EBITDA and
operating income improved principally as a result of the revenue gains.
Cable. Revenues increased to $3.005 billion, compared to $2.220 billion in
1994. EBITDA increased to $1.255 billion from $994 million. Depreciation and
amortization, including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $760 million in 1995 and
$639 million in 1994. Operating income increased to $495 million from $355
million. Revenues and operating results benefited from the formation of the
TWE-Advance/Newhouse Partnership on April 1, 1995 and the consolidation of
Paragon effective as of July 6, 1995. Excluding such effects, revenues benefited
from a 3% increase in basic cable subscribers and increases in nonregulated
revenues, including pay-TV, pay-per-view and advertising. Excluding the positive
contributions from the TWE-Advance/Newhouse Partnership and the consolidation of
Paragon, EBITDA and operating income increased as a result of the revenue gains,
offset in part by the full year impact of the second round of cable rate
regulations that went into effect in July 1994, higher start-up costs for
F-64
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
telephony operations and, with respect to operating income only, higher
depreciation and amortization relating to increased capital spending.
Interest and Other, Net. Interest and other, net, decreased to $580
million in 1995, compared to $587 million in 1994. Interest expense increased to
$571 million, compared to $563 million in 1994, principally as a result of
higher short-term, floating-rates of interest paid on borrowings under TWE's
former and existing bank credit agreements, offset in part by interest savings
in the last quarter of 1995 on lower debt levels related to management's asset
sales program. Other expense, net, decreased to $9 million in 1995 from $24
million in 1994, principally because of an increase in investment-related income
related to gains on the sale of certain unclustered cable systems and other
investments.
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.
The decrease in net income principally relates to the effects of cable rate
regulation, offset in part by the absence of an extraordinary loss on the
retirement of debt of $10 million recorded in 1993. As discussed more fully
below, the Entertainment Group's operating results in 1994 reflected an overall
decrease in operating income generated by its business segments, principally
relating to lower Cable results due to cable rate regulation, and an increase in
investment-related and foreign currency contract losses, offset in part by an
increase in interest income.
EBITDA and operating income for TWE in 1994 and 1993 are as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------
OPERATING
EBITDA INCOME
----------------- -------------
1994 1993 1994 1993
------ ------ ---- ----
(MILLIONS)
Filmed Entertainment...................................................... $ 407 $ 399 $201 $210
Six Flags Theme Parks..................................................... 135 122 56 53
Programming-HBO........................................................... 255 230 236 213
Cable..................................................................... 994 1,034 355 407
------ ------ ---- ----
Total..................................................................... $1,791 $1,785 $848 $883
------ ------ ---- ----
------ ------ ---- ----
Filmed Entertainment. Revenues increased to $4.476 billion, compared to
$4.024 billion in 1993. EBITDA increased to $407 million from $399 million.
Depreciation and amortization, including amortization related to the purchase of
WCI, amounted to $206 million in 1994 and $189 million in 1993. Operating income
decreased to $201 million from $210 million. Worldwide home video, syndication
and consumer products revenues increased at Warner Bros., offset in part by
lower worldwide theatrical revenues. EBITDA and operating income margins
decreased principally as a result of lower theatrical results in comparison to
the exceptionally strong theatrical results in 1993.
Six Flags Theme Parks. Revenues increased to $557 million, compared to
$533 million in 1993. EBITDA increased to $135 million from $122 million.
Depreciation and amortization amounted to $79 million in 1994 and $69 million in
1993. Operating income increased to $56 million from $53 million. Revenues
increased as a result of overall attendance growth and higher revenues per
visitor. EBITDA and operating income improved principally as a result of the
revenues gains.
Programming-HBO. Revenues increased to $1.494 billion, compared to $1.435
billion in 1993. EBITDA increased to $255 million from $230 million.
Depreciation and amortization amounted to $19 million in 1994 and $17 million in
1993. Operating income increased to $236 million from $213 million. Revenues
benefited
F-65
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
from an increase in subscriptions and higher pay-TV rates. EBITDA, operating
income and operating margins improved principally as a result of the revenue
gains.
Cable. Revenues increased to $2.220 billion, compared to $2.205 billion in
1993. EBITDA decreased to $994 million from $1.034 billion. 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. Operating income decreased to $355 million from $407
million. 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. In 1993, other income, net benefited from a gain
on the sale of certain assets and other investment-related income, which more
than offset investment losses.
FINANCIAL CONDITION AND LIQUIDITY
DECEMBER 31, 1995
1995 FINANCIAL CONDITION
The financial condition of TWE at December 31, 1995 was affected by the
formation of the TWE-Advance/Newhouse Partnership, the Six Flags Transaction and
the consolidation of Paragon. TWE had $6.2 billion of debt, $1.4 billion of Time
Warner General Partners' senior priority capital and $6.5 billion of partners'
capital (net of the $169 million uncollected portion of the note receivable from
U S WEST) at December 31, 1995, compared to $7.2 billion of debt, $1.7 billion
of Time Warner General Partners' senior priority capital and $6.2 billion of
partners' capital at December 31, 1994. The $1 billion reduction in debt
resulted principally from the Six Flags Transaction. In addition, principally as
a result of the payment of over $1 billion of distributions to Time Warner in
1995, cash and equivalents decreased to $209 million at December 31, 1995,
compared to $1.1 billion at December 31, 1994, reducing the debt-net-of-cash
amounts for TWE to $6 billion and $6.1 billion, respectively.
CREDIT AGREEMENT REFINANCING
In connection with the cable transactions, TWE, the TWE-Advance/Newhouse
Partnership and TWI Cable executed a five-year revolving credit facility in June
1995. The New Credit Agreement enabled such entities to refinance certain
indebtedness assumed in the cable acquisitions, to refinance TWE's indebtedness
under a pre-existing bank credit agreement and to finance the ongoing working
capital, capital expenditure and other corporate needs of each borrower.
The New Credit Agreement permits borrowings in an aggregate amount of up to
$8.3 billion, with no scheduled reductions in credit availability prior to
maturity. Borrowings are limited to $4 billion in the case of TWI Cable, $5
billion in the case of the TWE-Advance/Newhouse Partnership and $8.3 billion in
the case of TWE, subject in each case to certain limitations and adjustments.
Such borrowings bear interest at specific rates for each of the three borrowers,
generally equal to LIBOR plus a margin initially ranging from 50 to 87.5 basis
points, which margin will vary based on the credit rating or financial leverage
of the applicable borrower.
F-66
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
Unused credit is available for general business purposes and to support any
commercial paper borrowings. Each borrower is required to pay a commitment fee
initially ranging from .2% to .35% per annum on the unused portion of its
commitment. The New Credit Agreement contains certain covenants for each
borrower relating to, among other things, additional indebtedness; liens on
assets; cash flow coverage and leverage ratios; and loans, advances,
distributions and other cash payments or transfers of assets from the borrowers
to their respective partners or affiliates.
In July 1995, TWE borrowed approximately $2.6 billion under the New Credit
Agreement to repay and terminate its pre-existing bank credit agreement.
ASSET SALES
In conjunction with Time Warner and as part of a continuing strategy to
enhance the financial position and credit statistics of TWE, an asset sales
program was initiated by Time Warner and TWE in 1995. Including the sale of 51%
of TWE's interest in Six Flags in June 1995 and the sale or expected sale of
certain unclustered cable systems, TWE has completed or entered into
transactions that raised approximately $1.1 billion for debt reduction, all of
which were completed in 1995 except for certain transactions aggregating
approximately $170 million which are expected to close in 1996.
CREDIT STATISTICS
The combination of asset sales and the debt refinancing is intended to
strengthen the financial position of TWE and, when taken together with EBITDA
growth, is expected to continue the improvement of TWE's overall credit
statistics. These credit statistics consist of commonly-used liquidity measures
such as leverage and coverage ratios. The leverage ratio represents the ratio of
total debt, less cash ('Net debt') to total business segment EBITDA, less
corporate expenses ('Adjusted EBITDA'). The coverage ratio represents the ratio
of Adjusted EBITDA to total interest expense. Those ratios, on a pro forma basis
for 1995 and on an historical basis for 1994 and 1993, are as set forth below.
HISTORICAL
PRO FORMA -------------
1995(A) 1994 1993
--------- ---- ----
Net debt/Adjusted EBITDA.............................................................. 3.0x 3.5x 3.4x
Adjusted EBITDA/Interest.............................................................. 3.7x 3.1x 3.0x
- ------------
(a) Pro forma ratios for 1995 give effect to the formation of the
TWE-Advance/Newhouse Partnership, the refinancing of approximately $2.6
billion of pre-existing bank debt, the consolidation of Paragon, the Six
Flags Transaction and the Unclustered Cable Transactions, as if each of such
transactions had occurred at the beginning of 1995. Historical ratios for
1995 are not meaningful and have not been presented because they reflect the
operating results of acquired or disposed entities for only a portion of the
year in comparison to year-end net debt levels.
Such ratios may be adversely affected upon the transfer of certain of Time
Warner's newly-acquired cable systems to the TWE-Advance/Newhouse Partnership,
which, if completed, is expected to be structured so that the systems will be
transferred subject to a portion of Time Warner's debt, thereby increasing the
under-leveraged capitalization of the TWE-Advance/Newhouse Partnership and
consequently, TWE.
CASH FLOWS
In 1995, TWE's cash provided by operations amounted to $1.519 billion and
reflected $1.999
billion of EBITDA from the Filmed Entertainment, Six Flags Theme Parks,
Broadcasting-The WB Network, Programming-HBO and Cable businesses and $230
million related to a reduction in working capital requirements, other balance
sheet accounts and noncash items, less $571 million of interest payments, $75
F-67
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
million of income taxes and $64 million of corporate expenses. Cash provided by
operations of $1.296 billion in 1994 reflected $1.791 billion of business
segment EBITDA and $155 million related to a reduction in working capital
requirements, other balance sheet accounts and noncash items, less $521 million
of interest payments, $69 million of income taxes and $60 million of corporate
expenses.
Cash used by investing activities decreased to $688 million in 1995,
compared to $1.659 billion in 1994, principally as a result of a $1 billion
increase in investment proceeds relating to management's asset sales program.
Capital expenditures increased to $1.535 billion in 1995, compared to $1.153
billion in 1994, principally as a result of higher capital spending by the Cable
Division.
Cash used by financing activities was $1.693 billion in 1995, compared to
cash provided by financing activities of $96 million in 1994, principally as a
result of an approximate $1 billion reduction in debt in 1995 and a $918 million
increase in distributions paid to Time Warner, offset in part by a $368 million
increase in collections on the note receivable from U S WEST that were used to
partially finance the capital spending requirements of the Cable Division.
Management believes that TWE's operating cash flow, cash and equivalents,
collections on the U S WEST Note and additional borrowing capacity are
sufficient to fund its capital and liquidity needs for the foreseeable future.
CABLE CAPITAL SPENDING
Since the beginning of 1994, Time Warner Cable has been engaged in a plan
to upgrade the technological capability and reliability of its cable television
systems and develop new services, which it believes will position the business
for sustained, long-term growth. Capital spending by TWE's Cable division
amounted to $1.178 billion in 1995, compared to $699 million in 1994, and was
financed in part through collections on the note receivable from U S WEST of
$602 million in 1995 and $234 million in 1994. Capital spending by TWE's Cable
division for 1996 is budgeted to be approximately $1.3 billion and is expected
to be funded principally by cable operating cash flow and $169 million of
collections on the remaining portion of the note receivable from U S WEST. In
exchange for certain flexibility in establishing cable rate pricing structures
for regulated services that went into effect on January 1, 1996 and consistent
with Time Warner Cable's long-term strategic plan, Time Warner Cable has agreed
with the FCC to invest a total of $4 billion in capital costs in connection with
the upgrade of its cable infrastructure, which is expected to be substantially
completed over the next five years. The agreement with the FCC covers all of the
cable operations of Time Warner Cable, including the owned or managed cable
television systems of TWE, the TWE-Advance/Newhouse Partnership and Time Warner.
Management expects to continue to finance such level of investment principally
through the growth in cable operating cash flow derived from increases in
subscribers and cable rates, borrowings under the New Credit Agreement and the
development of new revenue streams from expanded programming options, high speed
data transmission, telephony and other services.
OFF-BALANCE SHEET ASSETS
As discussed below, TWE believes that the value of certain off-balance
sheet assets should be considered, along with other factors discussed elsewhere
herein, in evaluating TWE's financial condition and prospects for future results
of operations, including its ability to meet its capital and liquidity needs.
INTANGIBLE ASSETS
As a creator and distributor of branded information and entertainment
copyrights, TWE has a significant amount of internally-generated intangible
assets whose value is not fully reflected in the consolidated balance
F-68
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
sheet. Such intangible assets extend across TWE's principal business interests,
but are best exemplified by its interest in Warner Bros.' and HBO's copyrighted
film and television product libraries, and the creation or extension of brands,
as in the case of The WB Network. Generally accepted accounting principles do
not recognize the value of such assets, except at the time they may be acquired
in a business combination accounted for by the purchase method of accounting.
Because TWE owns the copyrights to such creative material, it continually
generates revenue through the sale of such products across different media and
in new and existing markets. The value of film and television-related
copyrighted product and trademarks is continually realized by the licensing of
films and television series to secondary markets and the licensing of
trademarks, such as the Looney Tunes characters and Batman, to the retail
industry and other markets. In addition, technological advances, such as the
introduction of the home videocassette in the 1980's and potentially the digital
versatile disc in the future, have historically generated significant revenue
opportunities through the repackaging and sale of such copyrighted products
under the new technological format. Accordingly, such intangible assets have
significant off-balance sheet asset value that is not fully reflected in TWE's
consolidated balance sheet.
WARNER BROS. BACKLOG
Warner Bros.' backlog, representing the amount of future revenue not yet
recorded from cash contracts for the licensing of theatrical and television
product for pay cable, network, basic cable and syndicated television
exhibition, amounted to $1.056 billion at December 31, 1995, compared to $852
million at December 31, 1994 (including amounts relating to HBO of $175 million
at each date). Because such contracts are for the licensing of theatrical and
television product which have already been produced, the recognition of revenue
is principally only dependent upon the commencement of the availability period
for telecast under the terms of the related licensing agreement. In addition,
cash licensing fees are collected periodically over the term of the related
licensing agreements. Accordingly, the portion of backlog for which cash
advances have not already been received has significant off-balance sheet asset
value as a source of future funding. The backlog excludes advertising barter
contracts, which are also expected to result in the future realization of cash
through the sale of advertising spots received under such contracts.
FOREIGN CURRENCY RISK MANAGEMENT
Time Warner uses foreign exchange contracts 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 foreign currency exchange rates. As part of its overall
strategy to manage the level of exposure to the risk of foreign currency
exchange rate fluctuations, Time Warner hedges a portion of its foreign currency
exposures anticipated over the ensuing twelve month period, including those
related to TWE. At December 31, 1995, Time Warner has effectively hedged
approximately half of TWE's total estimated foreign currency exposures that
principally relate to anticipated cash flows to be remitted to the U.S. over the
ensuing twelve month period, using foreign exchange contracts that generally
have maturities of three months or less, which generally are rolled over to
provide continuing coverage throughout the year. TWE is reimbursed by or
reimburses Time Warner for Time Warner contract gains and losses related to
TWE's foreign currency exposure. Time Warner often closes foreign exchange sale
contracts by purchasing an offsetting purchase contract. At December 31, 1995,
Time Warner had contracts for the sale of $504 million and the purchase of $140
million of foreign currencies at fixed rates and maturities of three months or
less. Of Time Warner's $364 million net sale contract position, none of the
foreign exchange purchase contracts and $113 million of the foreign exchange
sale contracts related to TWE's foreign currency exposure, primarily Japanese
yen (21% of net contract position related to TWE), French francs (22%), German
marks (12%) and Canadian dollars (21%), compared to a net sale contract position
of $188 million of foreign currencies at December 31, 1994.
F-69
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
Unrealized gains or losses related to foreign exchange contracts are
recorded in income as the market value of such contracts change; accordingly,
the carrying value of foreign exchange contracts approximates market value. The
carrying value of foreign exchange contracts was not material at December 31,
1995 and 1994. No cash is required to be received or paid with respect to the
realization of such gains and losses until the related foreign exchange
contracts are settled, generally at their respective maturity dates. In 1995 and
1994, TWE had $11 million and $20 million, respectively, of net losses on
foreign exchange contracts, 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 in cash 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.
Based on Time Warner's outstanding foreign exchange contracts related to
TWE's exposure at December 31, 1995, each 5% devaluation of the U.S. dollar as
compared to the level of foreign exchange rates for currencies under contract at
December 31, 1995 would result in approximately $6 million of unrealized losses
on foreign exchange contracts. Conversely, a 5% appreciation of the U.S. dollar
as compared to the level of foreign exchange rates for currencies under contract
at December 31, 1995 would result in $6 million of unrealized gains on
contracts. Consistent with the nature of the economic hedge provided by such
foreign exchange contracts, such unrealized gains or losses would be offset by
corresponding decreases or increases, respectively, in the dollar value of
future foreign currency license fee payments that would be received in cash
within the ensuing twelve month period from the sale of U.S. copyrighted
products abroad.
F-70
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
(MILLIONS)
1995 1994
------- -------
ASSETS
CURRENT ASSETS
Cash and equivalents.......................................................................... $ 209 $ 1,071
Receivables, including $354 and $266 due from Time Warner,
less allowances of $365 and $306............................................................ 1,635 1,426
Inventories................................................................................... 904 956
Prepaid expenses.............................................................................. 161 120
------- -------
Total current assets.......................................................................... 2,909 3,573
Noncurrent inventories........................................................................ 1,909 1,807
Loan receivable from Time Warner.............................................................. 400 400
Investments................................................................................... 383 666
Land and buildings............................................................................ 732 841
Cable television equipment.................................................................... 5,859 3,619
Furniture, fixtures and other equipment....................................................... 1,752 1,588
------- -------
8,343 6,048
Less accumulated depreciation................................................................. (3,138) (2,264)
------- -------
Property, plant and equipment................................................................. 5,205 3,784
Cable television franchises................................................................... 3,360 3,236
Goodwill...................................................................................... 4,119 4,433
Other assets.................................................................................. 620 763
------- -------
Total assets.................................................................................. $18,905 $18,662
------- -------
------- -------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable.............................................................................. $ 697 $ 514
Participations and programming costs.......................................................... 1,090 857
Other current liabilities, including $334 due to Time Warner at December 31, 1994............. 1,427 1,486
------- -------
Total current liabilities..................................................................... 3,214 2,857
Long-term debt................................................................................ 6,137 7,160
Other long-term liabilities, including $198 and $89 due to Time Warner........................ 924 749
Minority interests............................................................................ 726 --
Time Warner General Partners' senior priority capital......................................... 1,426 1,663
PARTNERS' CAPITAL
Contributed capital........................................................................... 7,522 7,398
Undistributed partnership earnings (deficit).................................................. (875) (394)
Note receivable from U S WEST................................................................. (169) (771)
------- -------
Total partners' capital....................................................................... 6,478 6,233
------- -------
Total liabilities and partners' capital....................................................... $18,905 $18,662
------- -------
------- -------
See accompanying notes.
F-71
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
(MILLIONS)
1995 1994 1993
------ ------ ------
Revenues (a).......................................................................... $9,517 $8,460 $7,946
Cost of revenues (a)(b)............................................................... 6,597 5,976 5,679
Selling, general and administrative (a)(b)............................................ 1,960 1,636 1,384
------ ------ ------
Operating expenses.................................................................... 8,557 7,612 7,063
------ ------ ------
Business segment operating income..................................................... 960 848 883
Interest and other, net (a)........................................................... (580) (587) (551)
Minority interest..................................................................... (133) -- --
Corporate services (a)................................................................ (64) (60) (60)
------ ------ ------
Income before income taxes............................................................ 183 201 272
Income taxes.......................................................................... (86) (40) (64)
------ ------ ------
Income before extraordinary item...................................................... 97 161 208
Extraordinary loss on retirement of debt, net of $7 million income tax benefit in 1993
related to a taxable subsidiary..................................................... (24) -- (10)
------ ------ ------
Net income............................................................................ $ 73 $ 161 $ 198
------ ------ ------
------ ------ ------
- ------------
(a) Includes the following income (expenses) resulting from transactions with
the partners of TWE and other related companies for the years ended December
31, 1995, 1994 and 1993, respectively: revenues-$56 million, $112 million
and $67 million; cost of revenues-$(54) million, $(70) million and $(88)
million; selling, general and administrative-$(61) million, $(72) million
and $(38) million; interest and other, net-$24 million, $21 million and $3
million; and corporate expenses-$(64) million, $(60) million and $(60)
million (Note 13).
(b) Includes depreciation and amortization expense of:................................ $1,039 $ 943 $ 902
------ ------ ------
------ ------ ------
See accompanying notes.
F-72
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(MILLIONS)
1995 1994 1993
------- ------- -------
OPERATIONS
Net income.......................................................................... $ 73 $ 161 $ 198
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt............................................ 24 -- 10
Depreciation and amortization....................................................... 1,039 943 902
Equity in (income) losses of investee companies, net of distributions............... 84 58 (21)
Changes in operating assets and liabilities:
Receivables..................................................................... (159) (192) 1
Inventories..................................................................... (118) (76) (158)
Accounts payable and other liabilities.......................................... 679 400 260
Other balance sheet changes..................................................... (103) 2 79
------- ------- -------
Cash provided by operations......................................................... 1,519 1,296 1,271
------- ------- -------
INVESTING ACTIVITIES
Investments and acquisitions........................................................ (203) (156) (347)
Capital expenditures................................................................ (1,535) (1,153) (613)
Investment proceeds................................................................. 1,050 50 180
Loan to Time Warner................................................................. -- (400) --
------- ------- -------
Cash used by investing activities................................................... (688) (1,659) (780)
------- ------- -------
FINANCING ACTIVITIES
Borrowings.......................................................................... 2,484 977 3,075
Debt repayments..................................................................... (3,596) (945) (3,734)
Capital contributions, including collections on note receivable from U S WEST....... 602 234 1,548
Capital distributions............................................................... (1,088) (170) (33)
Other............................................................................... (95) -- (45)
------- ------- -------
Cash provided (used) by financing activities........................................ (1,693) 96 811
------- ------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS......................................... (862) (267) 1,302
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD......................................... 1,071 1,338 36
------- ------- -------
CASH AND EQUIVALENTS AT END OF PERIOD............................................... $ 209 $ 1,071 $ 1,338
------- ------- -------
------- ------- -------
See accompanying notes.
F-73
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
(MILLIONS)
PARTNERS' CAPITAL
TIME WARNER ---------------------------------------------------
GENERAL UNDISTRIBUTED
PARTNERS' PARTNERSHIP U S TOTAL
SENIOR CONTRIBUTED EARNINGS WEST PARTNERS'
CAPITAL CAPITAL (DEFICIT) NOTE CAPITAL
----------- ----------- ------------- ------ ---------
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 priority
capital..................................... 1,501 (1,501) (1,501)
Distributions (a)................................. (539) (539)
Distribution of Time Warner Service
Partnership Assets (b).......................... (95) (95)
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
Net income........................................ 73 73
Distributions (a)................................. (366) (421) (421)
Reacquisition of Time Warner Service
Partnership Assets (b).......................... 124 124
Allocation of income.............................. 129 (129) (129)
Collections....................................... 602 602
Other............................................. (4) (4)
----------- ----------- ----- ------ ---------
BALANCE AT DECEMBER 31, 1995...................... $ 1,426 $ 7,522 $(875) $ (169) $ 6,478
----------- ----------- ----- ------ ---------
----------- ----------- ----- ------ ---------
- ------------
(a) Distributions in 1995, 1994 and 1993 included $346 million, $173 million and
$252 million, respectively, of accrued tax-related distributions, and $25
million, $50 million and $13 million of cash distributions to the Time
Warner Service Partnerships, respectively. Stock option distributions of $50
million and $274 million were accrued in 1995 and 1993, respectively,
because of an increase in the market price of Time Warner common stock and
$177 million of 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' senior priority
capital was reduced in 1995 by a $366 million distribution of partnership
income previously allocated to such interest.
(b) 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 and was increased in
1995 by the $124 million historical cost of the Time Warner Service
Partnership Assets reacquired by TWE.
See accompanying notes.
F-74
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Time Warner Entertainment Company, L.P., a Delaware limited partnership
('TWE'), is engaged principally in two fundamental areas of business:
Entertainment, consisting principally of interests in filmed entertainment,
broadcasting, theme parks and cable television programming; and
Telecommunications, consisting principally of interests in cable television
systems.
Each of the business interests within Entertainment and Telecommunications
is important to TWE's objective of increasing partner value through the
creation, extension and distribution of recognizable brands and copyrights
throughout the world. Such brands and copyrights include (1) the unique and
extensive film and television libraries of Warner Bros. and trademarks such as
the Looney Tunes characters and Batman, (2) The WB Network, a new national
broadcasting network launched in 1995 as an extension of the Warner Bros. brand
and as an additional distribution outlet for Warner Bros.' collection of
children cartoons and television programming, (3) Six Flags, the largest
regional theme park operator in the United States, in which TWE owns a 49%
interest, (4) HBO and Cinemax, the leading pay television services and (5) Time
Warner Cable, the second largest operator of cable television systems in the
U.S.
The operating results of TWE's various business interests are presented
herein as an indication of financial performance (Note 12). Except for start-up
losses incurred in an effort to create value in a branded national broadcasting
network, TWE's principal business interests generate significant operating
income and cash flow from operations. The cash flow from operations generated by
such business interests is significantly greater than their operating income due
to significant amounts of noncash amortization of intangible assets recognized
principally in Time Warner Inc.'s ('Time Warner') $14 billion acquisition of
Warner Communications Inc. ('WCI') in 1989 and $1.3 billion acquisition of the
minority interest in American Television and Communications Corporation ('ATC')
in 1992, a portion of which cost was allocated to TWE in accordance with the
pushdown method of accounting. Non-cash amortization of intangible assets
recorded by TWE's businesses amounted to $444 million in 1995, $478 million in
1994 and $476 million in 1993.
Subsidiaries of Time Warner are the general partners of TWE ('Time Warner
General Partners'). During 1995, Time Warner acquired the aggregate 11.22%
limited partnership interests previously held by subsidiaries of each of ITOCHU
Corporation and Toshiba Corporation. As a result, Time Warner and certain of its
wholly-owned subsidiaries collectively own 74.49% of the 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.
The remaining 25.51% pro rata priority capital and residual equity limited
partnership interests are held by a subsidiary of U S WEST, Inc. ('U S WEST'),
which acquired such interests in 1993 for $1.532 billion of cash and a $1.021
billion 4.4% note (the 'U S WEST Note').
In lieu of contributing certain assets to the partnership at its
capitalization in 1992 (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.
The consolidated financial statements reflect (i) the consolidation by TWE
of the TWE-Advance/Newhouse Partnership resulting from the formation of such
partnership (Note 2), (ii) the deconsolidation of Six Flags Entertainment
Corporation ('Six Flags') as a result of the disposition by TWE of a 51%
interest in Six Flags effective as of June 23, 1995 (Note 3) and (iii) the
consolidation of Paragon Communications ('Paragon') as a
F-75
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
result of an increase in TWE's control over the management of such entity
effective as of July 6, 1995. Certain other reclassifications have been made to
the prior year's financial statements to conform to the 1995 presentation.
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 direct and indirect 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 14).
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.
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.
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
footnotes thereto. Actual results could differ from those estimates.
Significant estimates inherent in the preparation of the accompanying
consolidated financial statements include management's forecast of anticipated
revenues from the distribution of theatrical and television product in order to
evaluate the ultimate recoverability of film inventory recorded as an asset in
the consolidated balance sheet. Management periodically reviews such estimates
and it is reasonably possible that management's assessment of recoverability of
individual films and television product may change based on actual results and
other factors.
F-76
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUES AND COSTS
Feature films are produced or acquired for initial exhibition in theaters
followed by distribution in the home video, pay cable, broadcast network, basic
cable and syndicated television markets. Generally, distribution to the
theatrical, home video and pay cable markets (the primary markets) is
principally completed within eighteen months of initial release and thereafter
with respect to distribution to the basic cable, broadcast network and
syndicated television markets (the secondary markets). 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 the
distribution of theatrical product to cable, broadcast network and syndicated
television markets 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 domestic cable and syndicated television markets (the
secondary markets). Revenues from the distribution of television product 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 exhibited.
License agreements for the telecast of theatrical and television product in
the cable, broadcast network and syndicated television markets are routinely
entered into well in advance of their available date for telecast, which is
generally determined by the telecast privileges granted under previous license
agreements. Accordingly, there are significant contractual rights to receive
cash and barter upon which revenues will not be recognized until such product is
available for telecast under the contractual terms of the related license
agreement. Such contractual rights for which revenue is not yet recognizable is
referred to as 'backlog.' Excluding advertising barter contracts, Warner Bros.'
backlog amounted to $1.056 billion and $852 million at December 31, 1995 and
1994, respectively (including amounts relating to the licensing of film product
to HBO of $175 million at each date).
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 cost of rights 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.
ADVERTISING
In accordance with FASB Statement No. 53, 'Financial Reporting by Producers
and Distributors of Motion Picture Films,' advertising costs for theatrical and
television product are capitalized and amortized over the related revenue
streams in each market for which such costs are intended to benefit, which
generally does not
F-77
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exceed three months. Other advertising costs are expensed upon the first
exhibition of the advertisement. Advertising expense, excluding theatrical and
television product, amounted to $241 million in 1995, $190 million in 1994 and
$169 million in 1993.
CASH EQUIVALENTS
Cash equivalents consist of commercial paper and other investments that are
readily convertible into cash, and have original maturities of three months or
less.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions to cable
property, plant and equipment generally include material, labor, overhead and
interest. 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, cable television equipment and
other equipment.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, 'Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,' ('FAS 121')
effective for fiscal years beginning after December 15, 1995. The new rules
establish standards for the recognition and measurement of impairment losses on
long-lived assets and certain intangible assets. TWE expects that the adoption
of FAS 121 will not have a material effect on its financial statements.
INTANGIBLE ASSETS
As a creator and distributor of branded information and entertainment
copyrights, TWE has a significant and growing amount of intangible assets,
including goodwill, cable television franchises and other copyrighted products
and trademarks. In accordance with generally accepted accounting principles, TWE
does not recognize the fair value of internally-generated intangible assets.
Costs incurred to create and produce copyrighted product, such as feature films
and television series, are generally either expensed as incurred, or capitalized
as tangible assets, as in the case of cash advances and inventoriable product
costs. However, accounting recognition is not given to any increasing asset
value that may be associated with the collection of the underlying copyrighted
material. Additionally, costs incurred to create or extend brands, such as the
start-up of The WB Network, generally result in losses over an extended
development period and are recognized as a reduction of income as incurred,
while any corresponding brand value created is not recognized as an intangible
asset in the consolidated balance sheet. On the other hand, intangible assets
acquired in business combinations accounted for by the purchase method of
accounting are capitalized and amortized over their expected useful life as a
noncash charge against future results of operations. Accordingly, the intangible
assets reported in the consolidated balance sheet do not reflect the fair value
of TWE's internally-generated intangible assets, but rather are limited to
intangible assets resulting from certain acquisitions in which the cost of the
acquired companies exceeded the fair value of their tangible assets at the time
of acquisition.
TWE amortizes goodwill over periods up to forty years using the
straight-line method. Cable television franchises and other intangible assets
are amortized over periods up to twenty years using the straight-line method. In
1995, 1994 and 1993, amortization of goodwill amounted to $127 million, $129
million and $132 million, respectively; amortization of cable television
franchises amounted to $223 million, $208 million and $222 million,
respectively; and amortization of other intangible assets amounted to $94
million, $141 million and $122 million, respectively. Accumulated amortization
of intangible assets at December 31, 1995 and 1994 amounted to $2.337 billion
and $1.867 billion, respectively.
F-78
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TWE separately reviews the carrying value of acquired intangible assets for
each acquired entity on a quarterly basis to determine whether an impairment may
exist. TWE considers relevant cash flow and profitability information, including
estimated future operating results, trends and other available information, in
assessing whether the carrying value of intangible assets can be recovered. Upon
a determination that the carrying value of intangible assets will not be
recovered from the undiscounted future cash flows of the acquired business, the
carrying value of such intangible assets would be considered impaired and will
be reduced by a charge to operations in the amount of the impairment. Impairment
is measured as any deficiency in estimated undiscounted future cash flows of the
acquired business to recover the carrying value related to the intangible
assets.
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.'
2. TWE-ADVANCE/NEWHOUSE PARTNERSHIP
On April 1, 1995, TWE formed a cable television joint venture with the
Advance/Newhouse Partnership ('Advance/Newhouse') to which Advance/Newhouse and
TWE contributed cable television systems (or interests therein) serving
approximately 4.5 million subscribers, as well as certain foreign cable
investments and programming investments that included Advance/Newhouse's 10%
interest in Primestar Partners, L.P. ('Primestar'). TWE owns a two-thirds equity
interest in the TWE-Advance/Newhouse Partnership and is the managing partner.
TWE consolidates the partnership and the one-third equity interest owned by
Advance/Newhouse is reflected in TWE's consolidated financial statements as
minority interest. In accordance with the partnership agreement,
Advance/Newhouse can require TWE to purchase its equity interest for fair market
value at specified intervals following the death of both of its principal
shareholders. Beginning in the third year, either partner can initiate a
dissolution in which TWE would receive two-thirds and Advance/Newhouse would
receive one-third of the partnership's net assets. The assets contributed by TWE
and Advance/Newhouse to the partnership were recorded at their predecessor's
historical cost, which, with respect to Advance/Newhouse, consisted of assets
contributed to the partnership of approximately $338 million and liabilities
assumed by the partnership of approximately $9 million. No gain was recognized
by TWE upon the capitalization of the partnership.
The accompanying consolidated statement of operations includes the
operating results of the Advance/Newhouse businesses from the date of
contribution to the partnership. On a pro forma basis, giving effect to (i) the
formation of the TWE-Advance/Newhouse Partnership, (ii) the consolidation of
Paragon, (iii) the reacquisition of the Time Warner Service Partnership Assets
(Note 8), (iv) TWE's debt refinancing (Note 6) and (v) TWE's asset sales,
including the sale of 51% of its interest in Six Flags and the sale or expected
sale or transfer of certain unclustered cable television systems, as if each of
such transactions had occurred at the beginning of the periods, TWE would have
reported for the years ended December 31, 1995 and 1994, revenues of $9.682
billion and $8.779 billion, depreciation and amortization of $1.069 billion and
$1.035 billion, operating income of $962 million and $884 million, income before
extraordinary item of $172 million and $143 million and net income of $148
million and $143 million, respectively.
3. SIX FLAGS
On June 23, 1995, TWE sold 51% of its interest in Six Flags to an
investment group led by Boston Ventures for $204 million and received $640
million in additional proceeds from Six Flags, representing
F-79
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payment of certain intercompany indebtedness and licensing fees. As a result of
the transaction, Six Flags has been deconsolidated and TWE's remaining 49%
interest in Six Flags is accounted for under the equity method of accounting.
TWE reduced debt by approximately $850 million in connection with the
transaction, and a portion of the income on the transaction has been deferred by
TWE principally as a result of its guarantee of certain third-party, zero-coupon
indebtedness of Six Flags due in 1999.
TWE had owned all of Six Flags since September 1993 when it provided $136
million in funds to Six Flags to repurchase the remaining 50% common stock
interest held by other stockholders and preferred stock of certain subsidiaries.
4. INVESTMENTS
TWE's investments consist of:
DECEMBER 31,
-----------------
1995 1994
------ ------
(MILLIONS)
Equity method investments.................................................................... $ 335 $ 629
Cost method investments...................................................................... 48 37
------ ------
Total........................................................................................ $ 383 $ 666
------ ------
------ ------
Companies accounted for using the equity method include Comedy Partners,
L.P. (50% owned), certain cable system joint ventures (generally 50% owned),
Primestar (31% owned in 1995), Six Flags (49% owned in 1995 when
deconsolidated), certain international cable and programming joint ventures
(generally 25% owned in 1995 and 1994) and Courtroom Television Network (33%
owned in 1995). A summary of combined financial information as reported by the
equity investees of TWE is set forth below:
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ------ ------
(MILLIONS)
Revenues.......................................................................... $1,450 $ 722 $ 596
Depreciation and amortization..................................................... 195 125 97
Operating income (loss)........................................................... (9) 11 115
Net income (loss)................................................................. (168) (53) 80
Current assets.................................................................... 455 192 72
Total assets...................................................................... 2,416 1,281 1,054
Current liabilities............................................................... 405 305 163
Long-term debt.................................................................... 1,778 554 613
Total liabilities................................................................. 2,323 926 794
Total shareholders' equity or partners' capital................................... 93 355 260
F-80
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVENTORIES
TWE's inventories consist of:
DECEMBER 31,
-------------------------------------------------
1995 1994
---------------------- ----------------------
CURRENT NONCURRENT CURRENT NONCURRENT
------- ---------- ------- ----------
(MILLIONS)
Film costs:
Released, less amortization................................ $ 529 $ 437 $ 585 $ 347
Completed and not released................................. 74 22 123 24
In process and other....................................... 11 396 18 361
Library, less amortization................................. -- 717 -- 769
Programming costs, less amortization............................ 219 337 149 306
Merchandise..................................................... 71 -- 81 --
------- ---------- ------- ----------
Total........................................................... $ 904 $1,909 $ 956 $1,807
------- ---------- ------- ----------
------- ---------- ------- ----------
Excluding the Library, the unamortized cost of completed films at December
31, 1995 amounted to $1.062 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 $2.011 billion in 1995, $1.667
billion in 1994 and $1.784 billion in 1993; and the total cost amortized
amounted to $2 billion, $1.640 billion and $1.619 billion, respectively.
6. LONG-TERM DEBT
Long-term debt consists of:
DECEMBER 31,
----------------------
1995 1994
------- ----------
(MILLIONS)
Credit agreement, weighted average interest rates of 6.4% and 6.5%........................ $2,185 $2,550
Commercial paper, weighted average interest rates of 6.2% and 6.2%........................ 157 649
Six Flags 9.25% zero coupon notes due December 15, 1999................................... -- 123
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...................................................... 991 990
8 3/8% debentures due July 15, 2033....................................................... 994 994
Other..................................................................................... 14 58
------- ----------
Total..................................................................................... $6,137 $7,160
------- ----------
------- ----------
In June 1995, TWE, the TWE-Advance/Newhouse Partnership and a wholly-owned
subsidiary of Time Warner ('TWI Cable') executed a five-year revolving credit
facility (the 'New Credit Agreement'). The New Credit Agreement enabled such
entities to refinance certain indebtedness assumed in certain cable
acquisitions, to refinance TWE's indebtedness under a pre-existing bank credit
agreement and to finance the ongoing working capital, capital expenditure and
other corporate needs of each borrower.
The New Credit Agreement permits borrowings in an aggregate amount of up to
$8.3 billion, with no scheduled reductions in credit availability prior to
maturity. Borrowings are limited to $4 billion in the case of TWI Cable, $5
billion in the case of the TWE-Advance/Newhouse Partnership and $8.3 billion in
the case of
F-81
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TWE, subject in each case to certain limitations and adjustments. Such
borrowings bear interest at specific rates for each of the three borrowers,
generally equal to LIBOR plus a margin initially ranging from 50 to 87.5 basis
points, which margin will vary based on the credit rating or financial leverage
of the applicable borrower. Unused credit is available for general business
purposes and to support any commercial paper borrowings. Each borrower is
required to pay a commitment fee initially ranging from .2% to .35% per annum on
the unused portion of its commitment. The New Credit Agreement contains certain
covenants for each borrower relating to, among other things, additional
indebtedness; liens on assets; cash flow coverage and leverage ratios; and
loans, advances, distributions and other cash payments or transfers of assets
from the borrowers to their respective partners or affiliates.
In July 1995, TWE borrowed approximately $2.6 billion under the New Credit
Agreement to repay and terminate its pre-existing bank credit agreement. In
connection therewith, TWE recognized an extraordinary loss of $24 million to
write-off deferred financing costs related to the former credit agreement.
As a result of the Six Flags transaction, long-term debt was reduced by
approximately $850 million in 1995, including the deconsolidation of Six Flags'
9.25% zero coupon notes due in 1999. Such zero coupon notes have been guaranteed
by TWE. In addition, TWE recognized an extraordinary loss of $10 million in 1993
in connection with the retirement by Six Flags of certain of its indebtedness.
Each Time Warner General Partner has guaranteed a pro rata portion of
approximately $6 billion 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.
Interest expense was $571 million in 1995, $563 million in 1994 and $573
million in 1993. The weighted average interest rate on TWE's total debt was 7.7%
and 7.6% at December 31, 1995 and 1994, respectively.
TWE has the intent and the ability under the New Credit Agreement to
continue to refinance its commercial paper borrowings on a long-term basis. TWE
is not obligated to repay any portion of its long-term debt until the year 2000
when the New Credit Agreement expires and all borrowings thereunder, including
commercial paper supported by the New Credit Agreement, are required to be
repaid.
7. INCOME TAXES
Domestic and foreign pretax income (loss) are as follows:
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993
---- ---- ----
(MILLIONS)
Domestic......................................................................... $191 $242 $271
Foreign.......................................................................... (8) (41) 1
---- ---- ----
Total............................................................................ $183 $201 $272
---- ---- ----
---- ---- ----
F-82
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a partnership, TWE is not subject to U.S. federal, state or local income
taxation. However, certain of TWE's operations are conducted by subsidiary
corporations that are subject to domestic or foreign taxation. Income taxes
(benefits) of TWE and subsidiary corporations are as set forth below:
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993
---- ---- ----
(MILLIONS)
Federal:
Current(1).................................................................. $ 7 $ 6 $ 10
Deferred.................................................................... (5) (2) (12)
Foreign:
Current(2).................................................................. 74 53 68
Deferred.................................................................... 6 (16) (4)
State and local:
Current..................................................................... 7 14 20
Deferred.................................................................... (3) (15) (18)
---- ---- ----
Total income taxes............................................................... $ 86 $ 40 $ 64
---- ---- ----
---- ---- ----
- ------------
(1) Includes utilization of Six Flags' tax carryforwards in the amount of $16
million in 1995, $35 million in 1994 and $75 million in 1993.
(2) Includes foreign withholding taxes of $60 million in 1995, $44 million in
1994 and $59 million in 1993.
The financial statement basis of TWE's assets exceeds the corresponding tax
basis by $8.8 billion at December 31, 1995, principally as a result of
differences in accounting for depreciable and amortizable assets for financial
statement and income tax purposes.
8. TWE PARTNERS' CAPITAL
Each partner's interest in TWE consists of the initial priority capital and
residual equity amounts that were assigned to that partner or its predecessor
based on the estimated fair value of the net assets each contributed to the
partnership, as adjusted for the fair value of certain Time Warner Service
Partnership Assets (as defined below) distributed by TWE to the Time Warner
General Partners in 1993 which were not subsequently reacquired by TWE in 1995
('Contributed Capital'), plus, with respect to the priority capital interests
only, any undistributed priority capital return. The priority capital return
consists of net partnership income allocated to date in accordance with the
provisions of the TWE partnership agreement and the right to be allocated
additional partnership income which, together with any previously allocated net
partnership income, provides for the various priority capital rates of return
specified in the table below. The sum of Contributed Capital and the
undistributed priority capital return is referred to as 'Cumulative Priority
Capital.' Cumulative Priority Capital is not necessarily indicative of the fair
value of the underlying priority capital interests principally due to above-
market rates of return on certain priority capital interests as compared to
securities of comparable credit risk and maturity, such as the 13.25% rate of
return on the junior priority capital interest owned by subsidiaries of Time
Warner. Furthermore, the ultimate realization of Cumulative Priority Capital
could be affected by the fair value of TWE, which is subject to fluctuation.
F-83
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the priority of Contributed Capital, ownership of Contributed
Capital and Cumulative Priority Capital at December 31, 1995 and priority
capital rates of return thereon is set forth below:
PRIORITY TIME LIMITED PARTNERS
CUMULATIVE CAPITAL WARNER ---------------------
CONTRIBUTED PRIORITY RATES OF GENERAL U S
PRIORITY OF CONTRIBUTED CAPITAL CAPITAL(A) CAPITAL RETURN(B) PARTNERS TIME WARNER WEST
- ------------------------------------------ ----------- ---------- ------------ -------- ------------- -----
(BILLIONS) (% PER ANNUM (OWNERSHIP %)
COMPOUNDED
QUARTERLY)
Senior priority capital................... $ 1.4 $1.4(c) 8.00% 100.00% -- --
Pro rata priority capital................. 5.6 8.7 13.00%(d) 63.27% 11.22% 25.51%
Junior priority capital................... 2.9 4.6 13.25%(e) 100.00% -- --
Residual equity capital................... 3.3 3.3(f) --(f) 63.27% 11.22% 25.51%
- ------------
(a) Excludes partnership income or loss allocated thereto.
(b) Income allocations related to priority capital rates of return are based on
partnership income after any special tax allocations.
(c) Net of $366 million of partnership income distributed in 1995 representing
the priority capital return thereon through June 30, 1995.
(d) 11.00% to the extent concurrently distributed.
(e) 11.25% to the extent concurrently distributed.
(f) Residual equity capital is not entitled to stated priority rates of return
and, as such, its Cumulative Priority Capital is equal to its Contributed
Capital. However, in the case of certain events such as the liquidation or
dissolution of TWE, residual equity capital is entitled to any excess of the
fair value of the net assets of TWE over the aggregate amount of Cumulative
Priority Capital and special tax allocations. The residual equity
Contributed Capital has priority over the priority returns on junior and pro
rata priority capital.
Because Contributed Capital is based on the fair value of the net assets
that each partner contributed to the partnership, the aggregate of such amounts
is significantly higher than TWE's partners' capital as reflected in the
consolidated financial statements, which is based on the historical cost of the
contributed net assets. For purposes of allocating partnership income or loss to
the partners, partnership income or loss is based on the fair value of the net
assets contributed to the partnership and results in significantly less
partnership income, or results in partnership losses, in contrast to the net
income reported by TWE for financial statement purposes, which is also based on
the historical cost of contributed net assets.
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 priority, 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. Partnership losses generally are
allocated first to eliminate prior allocations of partnership income to, and
then to reduce the Contributed Capital 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 priority 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 right to receive additional partnership
income necessary to provide for the various priority capital rates of return is
carried forward until satisfied out of future partnership income, including any
partnership income that may result from any liquidation or dissolution of TWE.
The TWE partnership agreement provides, under certain circumstances, for
the distribution of partnership income allocated to the senior priority capital
owned by the Time Warner General Partners ('Senior Priority Capital
Distributions'). Pursuant to such provision, $366 million of partnership income
was distributed to the Time Warner General Partners in 1995. The senior priority
capital and, to the extent not previously distributed, partnership income
allocated thereto is required to be distributed in three annual installments
beginning on July 1, 1997. The junior priority capital owned by subsidiaries of
Time Warner may be increased if certain operating performance targets are
achieved over a five-year period ending on December 31, 1996 and a ten-year
F-84
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
period ending on December 31, 2001. Although satisfaction of the ten-year
operating performance target is indeterminable at this time, it is not expected
that the five-year target will be attained.
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 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. Either U S WEST or TWE may elect
that the exercise price be paid with partnership interests rather than cash.
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.
In September 1993, certain assets of TWE were distributed to the Time
Warner General Partners and were owned and operated by other partnerships (the
'Time Warner Service Partnerships') in order to ensure compliance with the
Modification of Final Judgment entered on August 24, 1982 by the United States
District Court for the District of Columbia applicable to U S WEST and its
affiliated companies, which may have included TWE. This distribution was
recorded for financial statement purposes based on the $95 million historical
cost of such assets and, for partnership agreement purposes, Time Warner General
Partners' junior priority capital was reduced by approximately $300 million. In
1994, U S WEST received a judicial order that TWE was no longer prohibited from
owning or operating substantially all of such assets. Accordingly, in September
1995, TWE reacquired substantially all of the assets of the Time Warner Service
Partnerships, subject to the liabilities relating thereto, (the 'Time Warner
Service Partnership Assets') in exchange for junior priority capital interests
in TWE equal to approximately $400 million. The reacquisition was recorded for
financial statement purposes based on the $124 million historical cost of the
Time Warner Service Partnership Assets. Prior to the reacquisition of the Time
Warner Service Partnership Assets in September 1995, TWE was required to make
quarterly cash distributions of junior priority capital in the amount of $12.5
million to the Time Warner General Partners ('TWSP Distributions'), which the
General Partners were then required to contribute to the Time Warner Service
Partnerships. TWE paid TWSP Distributions to the Time Warner General Partners in
the amount of $25 million, $50 million and $12.5 million in 1995, 1994 and 1993,
respectively, which were recorded as 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 exercised by 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 time of the TWE capitalization on June 30, 1992
('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. Stock
Option Distributions are paid when the options are exercised. At December 31,
1995 and 1994, TWE had recorded a liability for Stock Option Distributions of
$122 million and $89 million, respectively, based on the unexercised options and
the market prices at such dates of $37.875 and $35.125, respectively, per Time
Warner common share. TWE paid Stock Option Distributions to Time Warner in the
amount of $17 million, $5 million and $20 million in 1995, 1994 and 1993,
respectively.
Cash distributions are required to be made to the partners to permit them
to pay income taxes at statutory rates based on their allocable taxable income
from TWE ('Tax Distributions'), including any taxable income generated by the
Beneficial Assets, subject to limitations referred to herein. The aggregate
amount of such Tax Distributions is computed generally by reference to the taxes
that TWE would have been required to pay if it were a corporation. Tax
Distributions were previously subject to restrictions until July 1995 and are
now paid to the Time Warner General Partners on a current basis. TWE paid $680
million of such Tax Distributions to the
F-85
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Time Warner General Partners in 1995 (of which $334 million was accrued at
December 31, 1994), compared to $115 million in 1994.
In addition to Stock Option Distributions, Tax Distributions and Senior
Priority Capital Distributions, quarterly cash distributions may be made to the
partners to the extent of excess cash, as defined in the TWE partnership
agreement ('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 and Senior Priority Capital Distributions will in the
aggregate be made 63.27% to the Time Warner General Partners, 11.22% to Time
Warner and 25.51% to U S WEST prior to June 30, 1998; thereafter, the Time
Warner General Partners 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 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. As of December 31, 1995, no cash
distributions have been made to the limited partners. In addition, 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.
9. STOCK OPTION PLANS
Options to purchase Time Warner common stock under various stock option
plans have been granted to employees of TWE at, or in excess of, 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
OF TIME WARNER EXERCISE PRICE
COMMON STOCK PER SHARE
------------------- --------------
Outstanding at January 1, 1995............................................... 30,198 $ 8-45
Granted...................................................................... 2,141 34-45
Exercised.................................................................... (1,316) 8-38
Cancelled (a)................................................................ (2,488) 17-45
-------
Balance at December 31, 1995................................................. 28,535 $17-45
-------
-------
DECEMBER 31,
-------------------------------------
1995 1994
------------------- --------------
(THOUSANDS)
Exercisable.................................................................. 21,846 21,318
------- --------------
------- --------------
- ------------
(a) Includes all options cancelled and forfeited during the year, as well as
options related to employees who have been transferred out of and into TWE
to and from other Time Warner divisions.
F-86
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TWE reimburses Time Warner for the use of Time Warner stock options on the
basis described in Note 8. There were 437 thousand options exercised in 1994 and
1.9 million options exercised in 1993, at prices ranging from $8-$36 per share
in each year.
10. 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,
----------------------
1995 1994 1993
---- ---- ----
(MILLIONS)
Service cost........................................................................... $ 20 $ 26 $ 21
Interest cost.......................................................................... 21 24 19
Actual return on plan assets........................................................... (55) 4 (21)
Net amortization and deferral.......................................................... 37 (21) 5
---- ---- ----
Total.................................................................................. $ 23 $ 33 $ 24
---- ---- ----
---- ---- ----
The status of funded pension plans is as follows:
DECEMBER 31,
-------------
1995 1994
---- ----
(MILLIONS)
Accumulated benefit obligation (89% vested)...................................................... $213 $172
Effect of future salary increases................................................................ 111 91
---- ----
Projected benefit obligation..................................................................... 324 263
Plan assets at fair value........................................................................ 247 225
---- ----
Projected benefit obligation in excess of plan assets............................................ (77) (38)
Unamortized actuarial losses..................................................................... 60 24
Unamortized plan changes......................................................................... 5 4
Other............................................................................................ (3) (4)
---- ----
Accrued pension liability........................................................................ $(15) $(14)
---- ----
---- ----
The following assumptions were used in accounting for pension plans:
1995 1994 1993
---- ---- ----
Weighted average discount rate......................................................... 7.25% 8.5% 7.5%
Return on plan assets.................................................................. 9% 9% 9%
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 $21 million in 1995, $18 million in
1994 and $19 million in 1993. 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 other savings and profit sharing plans as to which the expense
amounted to $25 million in 1995, $23 million in 1994 and $20 million in 1993.
Contributions to the 401(k) and other savings plans are based upon a percentage
of the
F-87
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
employees' elected contributions. Contributions to the profit sharing plans are
generally determined by management.
11. FINANCIAL INSTRUMENTS
The carrying value of TWE's financial instruments approximates fair value,
except for differences with respect to long-term, fixed-rate debt and certain
differences related to cost method investments and other financial instruments
which are not significant. The fair value of financial instruments, such as
long-term debt and investments, is generally determined by reference to market
values resulting from trading on a national securities exchange or in an
over-the-counter market. In cases where quoted market prices are not available,
such as for derivative financial instruments, fair value is based on estimates
using present value or other valuation techniques.
LONG-TERM DEBT
Based on the level of interest rates prevailing at December 31, 1995, the
fair value of TWE's fixed-rate debt exceeded its carrying value by $386 million
which represents an unrealized loss. Based on TWE's fixed-rate debt outstanding
at December 31, 1995, each 25 basis point increase or decrease in the level of
interest rates prevailing at December 31, 1995 would result in a reduction or
increase in the unrealized loss of $95 million, respectively. Based on the level
of interest rates prevailing at December 31, 1994, the fair value of TWE's
fixed-rate debt was $460 million less than its carrying value which represents
an unrealized gain. Unrealized gains or losses related to the differences in the
fair value and carrying value of TWE's long-term debt are not recognized unless
such debt is retired prior to its maturity.
FOREIGN CURRENCY RISK MANAGEMENT
Foreign exchange contracts are used primarily by Time Warner 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 foreign currency exchange rates. As part of its
overall strategy to manage the level of exposure to the risk of foreign currency
exchange rate fluctuations, Time Warner hedges a portion of its and TWE's
combined foreign currency exposures anticipated over the ensuing twelve month
period, including those related to TWE. At December 31, 1995, Time Warner has
effectively hedged approximately half of TWE's total estimated foreign currency
exposures that principally relate to anticipated cash flows to be remitted to
the U.S. over the ensuing twelve month period, using foreign exchange contracts
that generally have maturities of three months or less, which generally are
rolled over to provide continuing coverage throughout the year. TWE is
reimbursed by or reimburses Time Warner for Time Warner contract gains and
losses related to TWE's exposure. Time Warner often closes foreign exchange sale
contracts by purchasing an offsetting purchase contract. At December 31, 1995,
Time Warner had contracts for the sale of $504 million and the purchase of $140
million of foreign currencies at fixed rates and maturities of three months or
less. Of Time Warner's $364 million net sale contract position, none of the
foreign exchange purchase contracts and $113 million of the foreign exchange
sale contracts related to TWE's foreign currency exposure, primarily Japanese
yen (21% of net contract position related to TWE), French francs (22%), German
marks (12%) and Canadian dollars (21%), compared to a net sale contract position
of $188 million of foreign currencies at December 31, 1994.
Unrealized gains or losses related to foreign exchange contracts are
recorded in income as the market value of such contracts change; accordingly,
the carrying value of foreign exchange contracts approximates market value. The
carrying value of foreign exchange contracts was not material at December 31,
1995 and 1994 and is included in other current liabilities. No cash is required
to be received or paid with respect to the realization of such gains and losses
until the related foreign exchange contracts are settled, generally at their
respective
F-88
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maturity dates. In 1995 and 1994, TWE had $11 million and $20 million,
respectively, of net losses on foreign exchange contracts, 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
in cash 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.
Based on Time Warner's outstanding foreign exchange contracts related to
TWE's exposure at December 31, 1995, each 5% devaluation of the U.S. dollar as
compared to the level of foreign exchange rates for currencies under contract at
December 31, 1995 would result in approximately $6 million of unrealized losses
on foreign exchange contracts. Conversely, a 5% appreciation of the U.S. dollar
would result in $6 million of unrealized gains on contracts. Consistent with the
nature of the economic hedge provided by such foreign exchange contracts, such
unrealized gains or losses would be offset by corresponding decreases or
increases, respectively, in the dollar value of future foreign currency license
fee payments that would be received in cash within the ensuing twelve month
period from the sale of U.S. copyrighted products abroad.
12. SEGMENT INFORMATION
TWE's businesses are conducted in two fundamental areas of business:
Entertainment, consisting principally of interests in filmed entertainment,
broadcasting, theme parks and cable television programming; and
Telecommunications, consisting principally of interests in cable television
systems.
Information as to the operations of TWE in different business segments is
as set forth below. Cable business segment information reflects the
consolidation by TWE of the TWE-Advance/Newhouse Partnership effective as of
April 1, 1995 and Paragon effective as of July 6, 1995. The operating results of
Six Flags have been deconsolidated effective as of June 23, 1995 and results
prior to that date are reported separately to facilitate comparability.
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ------ ------
(MILLIONS)
REVENUES(1)
Filmed Entertainment.............................................................. $5,069 $4,476 $4,024
Six Flags Theme Parks............................................................. 227 557 533
Broadcasting-The WB Network....................................................... 33 -- --
Programming-HBO................................................................... 1,593 1,494 1,435
Cable............................................................................. 3,005 2,220 2,205
Intersegment elimination.......................................................... (410) (287) (251)
------ ------ ------
Total............................................................................. $9,517 $8,460 $7,946
------ ------ ------
------ ------ ------
- ------------
(1) Substantially all operations outside of the United States support the export
of domestic products. Revenues include export sales of $1.982 billion in
1995, $1.693 billion in 1994 and $1.650 billion in 1993. Approximately 58%
of export revenues are from sales to European customers.
F-89
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ------ ------
(MILLIONS)
OPERATING INCOME
Filmed Entertainment.............................................................. $ 228 $ 201 $ 210
Six Flags Theme Parks............................................................. 29 56 53
Broadcasting-The WB Network....................................................... (66) -- --
Programming-HBO................................................................... 274 236 213
Cable............................................................................. 495 355 407
------ ------ ------
Total............................................................................. $ 960 $ 848 $ 883
------ ------ ------
------ ------ ------
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ------ ------
(MILLIONS)
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Filmed Entertainment.............................................................. $ 107 $ 71 $ 46
Six Flags Theme Parks............................................................. 20 51 41
Broadcasting-The WB Network....................................................... -- -- --
Programming-HBO................................................................... 16 13 14
Cable............................................................................. 452 330 325
------ ------ ------
Total............................................................................. $ 595 $ 465 $ 426
------ ------ ------
------ ------ ------
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(MILLIONS)
AMORTIZATION OF INTANGIBLE ASSETS(1)
Filmed Entertainment.......................................................... $ 124 $ 135 $ 143
Six Flags Theme Parks......................................................... 11 28 28
Broadcasting-The WB Network................................................... -- -- --
Programming-HBO............................................................... 1 6 3
Cable......................................................................... 308 309 302
------- ------- -------
Total......................................................................... $ 444 $ 478 $ 476
------- ------- -------
------- ------- -------
- ------------
(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-90
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:
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(MILLIONS)
ASSETS
Filmed Entertainment.......................................................... $ 7,334 $ 7,133 $ 6,677
Six Flags Theme Parks......................................................... -- 814 848
Broadcasting-The WB Network................................................... 63 -- --
Programming-HBO............................................................... 935 895 855
Cable......................................................................... 9,842 8,191 8,041
Corporate(1).................................................................. 731 1,629 1,542
------- ------- -------
Total......................................................................... $18,905 $18,662 $17,963
------- ------- -------
------- ------- -------
- ------------
(1) Consists principally of cash, cash equivalents and other investments.
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(MILLIONS)
CAPITAL EXPENDITURES
Filmed Entertainment.......................................................... $ 294 $ 395 $ 210
Six Flags Theme Parks......................................................... 43 46 34
Broadcasting-The WB Network................................................... -- -- --
Programming-HBO............................................................... 20 13 17
Cable(1)...................................................................... 1,178 699 352
------- ------- -------
Total......................................................................... $ 1,535 $ 1,153 $ 613
------- ------- -------
------- ------- -------
- ------------
(1) Cable capital expenditures were funded in part through collections on the
U S WEST Note in the amount of $602 million in 1995, $234 million in 1994
and $16 million in 1993 (Note 1).
13. COMMITMENTS AND CONTINGENCIES
Total rent expense amounted to $176 million in 1995, $143 million in 1994
and $119 million in 1993. The minimum rental commitments under noncancellable
long-term operating leases are: 1996-$158 million; 1997-$156 million; 1998-$149
million; 1999-$143 million; 2000-$132 million and after 2000-$826 million.
Minimum commitments and guarantees under certain programming, licensing,
franchise and other agreements at December 31, 1995 aggregated approximately $8
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.
14. 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 and other benefit plans for which TWE is charged its
allocable share of plan expenses, including
F-91
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
administrative costs. Time Warner's corporate group provides various other
services to TWE. The Music division of WCI provides home videocassette
distribution services to certain TWE operations, and certain TWE units have
placed advertising in magazines published by Time Warner's Publishing division.
TWE is required to pay a $130 million advisory fee to U S WEST over a
five-year period ending September 15, 1998 for U S WEST's expertise in
telecommunications, telephony and information technology, and its participation
in the management and upgrade of the cable systems to Full Service Network'tm'
capacity.
In 1995, TWE and certain subsidiaries of Time Warner entered into
management services agreements, pursuant to which TWE receives fees for the
management of all cable television systems owned by Time Warner. Management fees
received from Time Warner in 1995 were not material.
Time Warner provides TWE with certain corporate support services for which
Time Warner was paid $60 million per year through June 30, 1995, with 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.
Prior to TWE's reacquisition of the Time Warner Service Partnership Assets
in September 1995, TWE had service agreements with the Time Warner Service
Partnerships for program signal delivery and transmission services, and TWE
provided 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 certain former and existing
partners of TWE to conduct TWE's businesses in Japan.
In addition to transactions with its partners, TWE has had transactions
with Comedy Partners, L.P., Six Flags 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.
15. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash flows is as follows:
YEARS ENDED DECEMBER 31,
--------------------------
1995 1994 1993
---- ------ ------
(MILLIONS)
Cash payments made for interest..................................................... $571 $ 521 $ 450
Cash payments made for income taxes, net............................................ 75 69 70
Noncash capital contributions, net.................................................. 50 4 384
Noncash investing activities in 1995 included the formation of the
TWE-Advance/Newhouse Partnership in April 1995 (Note 2) and the reacquisition of
the Time Warner Service Partnership Assets in September 1995 (Note 8).
F-92
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other current liabilities consist of:
DECEMBER 31,
-----------------
1995 1994
------ ------
(MILLIONS)
Accrued expenses............................................................................. $ 937 $ 827
Accrued compensation......................................................................... 216 143
Deferred revenues............................................................................ 227 150
Tax Distributions due to Time Warner General Partners........................................ -- 334
Debt due within one year..................................................................... 47 32
------ ------
Total........................................................................................ $1,427 $1,486
------ ------
------ ------
F-93
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, 1995 and 1994, and the
related consolidated statements of operations, cash flows and partnership
capital for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, 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 6, 1996
F-94
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, 1995 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 1995 reflects the consolidation by
TWE of the TWE-Advance/Newhouse Partnership resulting from the formation of such
partnership, effective as of April 1, 1995, and the consolidation of Paragon
effective as of July 6, 1995. The selected historical financial information
gives effect to the consolidation of Six Flags Entertainment Corporation ('Six
Flags') effective as of January 1, 1993 as a result of an increase in TWE's
ownership of Six Flags from 50% to 100% in September 1993, and the subsequent
deconsolidation of Six Flags resulting from the disposition by TWE of a 51%
interest in Six Flags effective as of June 23, 1995.
The selected historical financial information for 1993 also 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 former 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. Time Warner's cost to acquire the ATC minority interest is reflected
in the consolidated financial statements of TWE under the pushdown method of
accounting.
YEARS ENDED DECEMBER 31,
---------------------------------------------------
SELECTED OPERATING STATEMENT INFORMATION 1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(MILLIONS)
Revenues................................................... $ 9,517 $ 8,460 $ 7,946 $ 6,761 $ 6,068
Depreciation and amortization.............................. 1,039 943 902 782 733
Business segment operating income.......................... 960 848 883 795 712
Interest and other, net.................................... 580 587 551 525 520
Income before extraordinary item........................... 97 161 208 160 97
Net income................................................. 73 161 198 160 97
YEARS ENDED DECEMBER 31,
---------------------------------------------------
SELECTED BALANCE SHEET INFORMATION 1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(MILLIONS)
Total assets............................................... $18,905 $18,662 $17,963 $15,848 $14,230
Debt due within one year................................... 47 32 24 7 878
Long-term debt............................................. 6,137 7,160 7,125 7,171 4,571
Time Warner General Partners' senior priority capital...... 1,426 1,663 1,536 -- --
Partners' capital.......................................... 6,478 6,233 6,000 6,437 6,717
F-95
TIME WARNER ENTERTAINMENT COMPANY, L.P.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
OPERATING
INCOME OF NET
BUSINESS INCOME
QUARTER REVENUES SEGMENTS (LOSS)
- ---------------------------------------------------------------------------------- -------- --------- ------
(MILLIONS)
1995
1st............................................................................... $2,046 $ 191 $ 4
2nd............................................................................... 2,392 266 56
3rd (a)........................................................................... 2,324 268 23
4th............................................................................... 2,755 235 (10)
Year (a).......................................................................... 9,517 960 73
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
- ------------
(a) Net income for the third quarter of 1995 includes an extraordinary loss on
the retirement of debt of $24 million.
F-96
TIME WARNER ENTERTAINMENT COMPANY, L.P.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(MILLIONS)
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ----------------------------------------------------------------- ---------- ---------- ---------- ---------
1995:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts............................. $188 $104 $ (96)(a) $ 196
Reserves for sales returns and allowances................... 118 218 (167)(b) 169
---------- ---------- ---------- ---------
Total.................................................. $306 $322 $ (263) $ 365
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
1994:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts............................. $161 $ 49 $ (22)(a) $ 188
Reserves for sales returns and allowances................... 96 164 (142)(b) 118
---------- ---------- ---------- ---------
Total.................................................. $257 $213 $ (164) $ 306
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
1993:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts............................. $166 $ 27 $ (32)(a) $ 161
Reserves for sales returns and allowances................... 74 131 (109)(b) 96
---------- ---------- ---------- ---------
Total.................................................. $240 $158 $ (141) $ 257
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
- ------------
(a) Represents uncollectible receivables charged against the reserve.
(b) Represents returns or allowances applied against the reserve.
F-97
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ----------- ------------------------------------------------------------------------------------------- ----------
2.1 Amended and Restated Agreement and Plan of Merger dated as of September 22, 1995 among the *
Registrant, TW Inc., Time Warner Acquisition Corp., TW Acquisition Corp. and Turner
Broadcasting System, Inc. (which is incorporated herein by reference to Exhibit 2(a) to the
Registrant's Current Report on Form 8-K dated December 1, 1995 (the 'December 1995 Form
8-K')).
2.2 Shareholders' Agreement dated as of September 22, 1995 among the Registrant, R.E. Turner *
and certain associates and affiliates of R.E. Turner (which is incorporated herein by
reference to Exhibit 10(a) to the Registrant's Current Report on Form 8-K dated September
22, 1995 (the 'September 1995 Form 8-K')).
2.3 Amended and Restated LMC Agreement dated as of September 22, 1995, among the Registrant, TW *
Inc., Liberty Media Corporation ('Liberty'), TCI Turner Preferred, Inc., Communication
Capital Corp. and United Turner Investment, Inc. (which is incorporated herein by reference
to Exhibit 10(a) to the December 1995 Form 8-K).
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 October 13, 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 '1993 Form 10-K')).
3.(i)(c) Certificate of the Voting Powers, Designations, Preferences and Relative, Participating, *
Optional and Other Special Rights and Qualifications, Limitations or Restrictions 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 1993 Form 10-K).
3.(i)(d) Certificate of the Voting Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications, Limitations or Restrictions thereof,
of Series C Convertible Preferred Stock of the Registrant as filed with the Secretary of
State of the State of Delaware on May 1, 1995.
3.(i)(e) Certificate of the Voting Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications, Limitations or Restrictions thereof,
of Series D Convertible Preferred Stock of the Registrant as filed with the Secretary of
State of the State of Delaware on July 6, 1995.
3.(i)(f) Certificate of the Voting Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications, Limitations or Restrictions thereof,
of Series E Convertible Preferred Stock of the Registrant as filed with the Secretary of
State of the State of Delaware on January 4, 1996.
3.(i)(g) Certificate of the Voting Powers, Designations, Preferences and Relative, Participating,
Optional or Other Special Rights, and Qualifications, Limitations or Restrictions thereof,
of Series F Convertible Preferred Stock of the Registrant as filed with the Secretary of
State of the State of Delaware on January 4, 1996.
3.(i)(h) Certificate of Designations of Series G Convertible Preferred Stock of the Registrant as *
filed with the Secretary of State of the State of Delaware on September 5, 1995 (which is
incorporated herein by reference to Exhibit 4(a) to Registrant's Current Report on Form 8-K
dated August 31, 1995 (the 'August 1995 Form 8-K')).
3.(i)(i) Certificate of Designations of Series H Convertible Preferred Stock of the Registrant as *
filed with the Secretary of State of the State of Delaware on September 5, 1995 (which is
incorporated herein by reference to Exhibit 4(b) to the August 1995 Form 8-K).
3.(i)(j) Certificate of Designations of Series I Convertible Preferred Stock of the Registrant as
filed with the Secretary of State of the State of Delaware on October 2, 1995.
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 '1992 Form 10-K')).
i
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
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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 '1991 Form 10-K').
4.2 Amended and Restated Declaration of Trust of Time Warner Financing Trust (the 'Financing
Trust') dated as of August 15, 1995, among the trustees of the Financing Trust, the
Registrant and the holders of undivided beneficial interests in assets of the Financing
Trust, relating to the $1.24 Preferred Exchangeable Redemption Cumulative Securities of the
Financing Trust (the 'PERCS'), including, as exhibits thereto, the Restated Certificate of
Trust of the Financing Trust, the Terms of the Preferred Securities (including the Form of
Certificate) and the Terms of the Common Securities (including the Form of Certificate).
4.3 Indenture dated as of August 15, 1995, between the Registrant and Chemical Bank, as
trustee, relating to the Registrant's 4% Subordinated Notes due December 23, 1997, issued
in connection with the PERCS, including, as Exhibit A thereto, the Form of Note.
4.4 Guarantee Agreement dated as of August 15, 1995, executed and delivered by the Registrant,
as guarantor, and The First National Bank of Chicago, as trustee, for the benefit of the
holders of the PERCS.
4.5 Amended and Restated Declaration of Trust of Time Warner Capital I ('Time Warner Capital')
dated as of December 5, 1995, among the trustees of Time Warner Capital, the Registrant and
the holders of undivided beneficial interests in the assets of Time Warner Capital,
relating to the 8 7/8% Preferred Trust Securities of Time Warner Capital (the 'Preferred
Trust Securities'), including, as exhibits thereto, the Certificate of Trust of Time Warner
Capital, the Terms of the Preferred Securities (including the Form of Certificate) and the
Terms of the Common Securities (including the Form of Certificate).
4.6 Indenture dated as of December 5, 1995, between the Registrant and Chemical Bank, as
trustee, relating to the issuance of the Preferred Trust Securities.
4.7 First Supplemental Indenture dated as of December 5, 1995, between the Registrant and
Chemical Bank, as trustee, relating to the Registrant's 8 7/8% Subordinated Debentures due
December 31, 2025, issued in connection with the Preferred Trust Securities, including, as
Exhibit A thereto, the Form of Debenture.
4.8 Guarantee Agreement dated as of December 5, 1995, executed and delivered by the Registrant,
as guarantor, and The First National Bank of Chicago, as trustee, for the benefit of the
holders of the Preferred Trust Securities.
4.9 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).
4.10 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 (the 'July 1992 Form 8-K').
4.11 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 Securities and Exchange
Commission (the 'Commission') on October 25, 1993 (the '1993 TWE S-4')).
4.12 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).
4.13 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')).
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4.14 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')).
4.15 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).
4.16 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 1992 Form 10-K).
4.17 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 1992 Form 10-K).
4.18 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 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 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 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 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 1991 Form 10-K).
10.5 Time Warner 1989 WCI Replacement Stock Option Plan, as amended through February 14, 1995 *
(which is incorporated herein by reference to Exhibit 10.5 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994 (the '1994 Form 10-K')).
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 (which is *
incorporated herein by reference to Exhibit 10.7 to the 1994 Form 10-K).
10.8 Time Warner Corporate Group Stock Incentive Plan, as amended through May 14, 1991 (which is *
incorporated herein by reference to Exhibit 10.8 to the 1994 Form 10-K).
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 Annual Report on Form 10-K for the year ended December 31, 1993 (the '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 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 1991 Form 10-K).
10.12 Amended and Restated Time Warner Inc. Annual Bonus Plan for Executive Officers (which is *
incorporated by reference to Annex A to the Registrant's definitive Proxy Statement dated
March 30, 1995, used in connection with the Registrant's 1995 Annual Meeting of
Stockholders).
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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.
10.15 Employment Agreement made as of May 17, 1995 between the Registrant and Peter R. Haje *
(which is incorporated herein by reference to Exhibit 10.5 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995).
10.16 Employment Agreement made as of November 2, 1994 between the Registrant and Richard D. *
Parsons (which is incorporated herein by reference to Exhibit 10.17 to the 1994 Form 10-K).
10.17 Employment Agreement effective as of January 1, 1995 between the Registrant and Richard J. *
Bressler (which is incorporated herein by reference to Exhibit 10.18 to the 1994 Form
10-K).
10.18 Amended and Restated Employment Agreement effective as of January 1, 1994 between the *
Registrant and Tod R. Hullin (which is incorporated herein by reference to Exhibit 10.19 to
the 1994 Form 10-K).
10.19 Amended and Restated Employment Agreement effective as of January 1, 1994 between the *
Registrant and Philip R. Lochner, Jr. (which is incorporated herein by reference to Exhibit
10.20 to the 1994 Form 10-K).
10.20 Employment Agreement dated as of February 1, 1992 between the Registrant and Timothy A. *
Boggs (which is incorporated herein by reference to Exhibit 10.21 to the 1992 Form 10-K).
10.21 The Time Warner Deferred Compensation Plan (Amended and Restated as of November 1, 1995).
10.22 Travel and Accident Insurance Policy issued by INA Life Insurance Company of New York *
(which is incorporated by reference to Exhibit 10.44 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1988).
10.23 Credit Agreement dated as of June 30, 1995 among TWE, Time Warner Entertainment- *
Advance/Newhouse Partnership ('TWE-AN Partnership') and TWI Cable Inc., as borrowers,
Chemical, as administrative agent, Bank of America National Trust and Savings Association,
The Bank of New York and Morgan Guaranty Trust Company of New York, as documentation and
syndication agents, and the lending institutions named therein (which is incorporated
herein by reference to Exhibit 10(a) to the Registrant's Current Report on Form 8-K dated
July 6, 1995).
10.24 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 ('ITOCHU') and Toshiba
Corporation ('Toshiba') (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 July 1992 Form 8-K).
10.25 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 (the 'TWE May 1993 Form 8-K')).
10.26 Amendment Agreement, dated as of September 14, 1993, among ITOCHU, Toshiba, the Registrant, *
US WEST, Inc. and certain of their respective subsidiaries, amending the TWE Partnership
Agreement, as amended (which is incorporated herein by reference to Exhibit 3.2 to TWE's
1993 Form 10-K).
10.27 Letter Agreement, dated May 16, 1993, between the Registrant and ITOCHU (which is *
incorporated herein by reference to Exhibit 10(b) to the TWE May 1993 Form 8-K).
10.28 Letter Agreement, dated May 16, 1993, between the Registrant and Toshiba (which is *
incorporated herein by reference to Exhibit 10(c) to the TWE May 1993 Form 8-K).
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10.29 Restructuring Agreement dated as of August 31, 1995 among the Registrant, ITOCHU and ITOCHU *
Entertainment Inc. (which is incorporated herein by reference to Exhibit 2(a) to the August
1995 Form 8-K).
10.30 Restructuring Agreement dated as of August 31, 1995 between the Registrant and Toshiba *
(including Form of Registration Rights Agreement, between the Registrant and Toshiba)
(which is incorporated herein by reference to Exhibit 2(b) to the August 1995 Form 8-K).
10.31 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).
10.32 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).
10.33 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).
10.34 Contribution Agreement dated as of September 9, 1994 among TWE, Advance Publications, Inc., *
Newhouse Broadcasting Corporation, Advance/Newhouse Partnership ('Advance/Newhouse'), and
TWE-A/N 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 1994 Form 8-K')).
10.35 Partnership Agreement, dated as of September 9, 1994 between TWE and Advance/Newhouse *
(which is incorporated herein by reference to Exhibit 10(b) to TWE's September 1994 Form
8-K).
10.36 Letter Agreement dated April 1, 1995 among TWE, Advance/Newhouse, Advance Publications, *
Inc. and Newhouse Broadcasting Corporation (which is incorporated herein by reference to
Exhibit 10(c) to TWE's Current Report on Form 8-K dated April 1, 1995).
10.37 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).
10.38 Agreement and Plan of Merger dated as of February 6, 1995, among Cablevision Industries *
Corporation ('CVI'), Alan Gerry, Registrant and TW CVI Acquisition Corp. ('TWCVI') (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 1995 Form 8-K')).
10.39 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 1995 Form 8-K).
10.40 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 1995 Form 8-K).
10.41 Agreement and Plan of Merger dated as of December 8, 1995 among Cablevision Industries of *
Middle Florida, Inc., Alan Gerry, the Registrant and CVI (which is incorporated herein by
reference to Exhibit 2(c) to the Registrant's Current Report on Form 8-K dated January 4,
1996 (the 'January 1996 Form 8-K')).
10.42 Purchase Agreement dated as of February 6, 1995, as amended and restated as of December 8, *
1995 among Alan Gerry, the corporations and partnerships listed on the signature pages
thereof as the Purchase Gerry Companies and the Direct Holders, and the Registrant (which
is incorporated herein by reference to Exhibit 2(d) to the January 1996 Form 8-K).
10.43 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 1995 Form 8-K).
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10.44 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. ('TWCVI') (which is
incorporated herein by reference to Exhibit 2(e) to the February 1995 Form 8-K).
10.45 Amendment Agreement dated as of December 8, 1995 to the Supplemental Agreement dated as of *
February 6, 1995, including Annex A thereto, among CVI, the corporations and partnerships
listed on the signature pages thereof as the Gerry Companies and the Direct Holders, Alan
Gerry, the Registrant and TWCVI (which is incorporated herein by reference to Exhibit 2(f)
to the January 1996 Form 8-K).
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 21, 1996.
27 Financial Data Schedule.
99.1 The 1994 financial statements of the Time Warner Service Partnerships and the report of *
independent auditors thereon (which is incorporated herein by reference to TWE's 1994 Form
10-K).
99.2 The unaudited financial statements of the Time Warner Service Partnerships for the *
quarterly period ended September 30, 1995 (which is incorporated herein by reference to the
Current Report on Form 8-K of TWE dated November 28, 1995 ('TWE's November 1995 Form
8-K')).
99.3 The 1994 financial statements and financial statement schedule of Paragon Communications *
and the report of independent accountants thereon (which is incorporated herein by
reference to TWE's 1994 10-K).
99.4 The unaudited financial statements of Paragon Communications for the quarterly period ended *
June 30, 1995 (which is incorporated herein by reference to TWE's November 1995 Form 8-K).
99.5 Complaint in U S WEST, Inc. et al. v. Time Warner Inc., et al. (Civil Action No. 14555) *
filed by U S WEST, Inc. in the Court of Chancery of the State of Delaware in and for New
Castle County (which is incorporated herein by reference to Exhibit 99(c) to the September
1995 Form 8-K).
99.6 Amended and Supplemental Complaint in U S WEST, Inc., et al. v. Time Warner Inc., et al.
(Civil Action No. 14555) filed by U S WEST, Inc. in the Court of Chancery of the State of
Delaware in and for New Castle County.
99.7 Annual Report on Form 11-K of the Time Warner Employees' Savings Plan for the year ended
December 30, 1995 (to be filed by amendment).
99.8 Annual Report on Form 11-K of the Time Warner Thrift Plan for the year ended December 31,
1995 (to be filed by amendment).
99.9 Annual Report on Form 11-K of the Cable Employees Savings Plan for the year ended December
31, 1995 (to be filed by amendment).
99.10 Annual Report on Form 11-K of the Paragon Communications Employees Stock Savings Plan for
the year ended December 31, 1995 (to be filed by amendment).
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* 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