SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT of 1934 for the quarterly period
ended March 31, 1997, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT of 1934 for the transition period
from to .
Commission file number 1-12259
TIME WARNER INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3527249
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
75 Rockefeller Plaza
New York, New York 10019
(212) 484-8000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past
90 days. Yes x No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock - $.01 par value 509,176,558
Series LMCN-V Common Stock, $.01 par value 50,642,172
Description of Class Shares Outstanding
as of April 30, 1997
TIME WARNER INC. AND
TIME WARNER ENTERTAINMENT COMPANY, L.P.
INDEX TO FORM 10-Q
Page
Time
Warner TWE
PART I. FINANCIAL INFORMATION
Management's discussion and analysis of results of
operations and financial condition 1 28
Consolidated balance sheets at March 31, 1997 and
December 31, 1996 12 33
Consolidated statements of operations for the
three months ended March 31, 1997 and 1996 13 34
Consolidated statements of cash flows for the
three months ended March 31, 1997 and 1996 14 35
Notes to consolidated financial statements 15 36
Supplementary information 26
PART II. OTHER INFORMATION 41
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On October 10, 1996, Time Warner Inc. ("Time Warner" or
the "Company"), acquired the remaining 80% interest in Turner
Broadcasting System, Inc. ("TBS") that it did not already own
(the "TBS Transaction"). As a result of this transaction, a
new parent company with the name "Time Warner Inc." replaced
the old parent company of the same name ("Old Time Warner",
now known as Time Warner Companies, Inc.), and Old Time
Warner and TBS became separate, wholly owned subsidiaries of
the new parent company ("New Time Warner"). References herein
to "Time Warner" or the "Company" refer to Old Time Warner
prior to October 10, 1996 and New Time Warner thereafter.
Time Warner classifies its business interests into four
fundamental areas: Entertainment, consisting principally of
interests in recorded music and music publishing, filmed
entertainment, television production, television broadcasting
and theme parks; Cable Networks, consisting principally of
interests in cable television programming and sports
franchises; Publishing, consisting principally of interests
in magazine publishing, book publishing and direct marketing;
and Cable, consisting principally of interests in cable
television systems. A majority of Time Warner's interests in
filmed entertainment, television production, television
broadcasting and theme parks, a portion of its interests in
cable television programming and a majority of its cable
television systems are held through Time Warner Entertainment
Company, L.P. ("TWE"). Time Warner owns general and limited
partnership interests in TWE consisting of 74.49% of the pro
rata priority capital ("Series A Capital") and residual
equity capital ("Residual Capital"), and 100% of the senior
priority capital ("Senior Capital") and junior priority
capital ("Series B Capital"). The remaining 25.51% limited
partnership interests in the Series A Capital and Residual
Capital of TWE are held by a subsidiary of U S WEST, Inc. ("U
S WEST"). 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. Capitalized terms are as defined and
described in the accompanying consolidated financial
statements, or elsewhere herein.
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, cable network 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 $2.3 billion of cable
acquisitions in 1995 and 1996, the $6.2 billion acquisition
of TBS in 1996 and other business combinations accounted for
by the purchase method. Financial analysts generally consider
EBITDA to be an important measure of comparative operating
performance for the businesses of Time Warner and the
Entertainment Group, and, when used in comparison to debt
levels or the coverage of interest expense, as a measure of
liquidity. However, EBITDA should be considered in addition
to, not as a substitute for, operating income, net income,
cash flow and other measures of financial performance and
liquidity reported in accordance with generally accepted
accounting principles.
RESULTS OF OPERATIONS
As a result of the TBS Transaction, Time Warner now has
two new business segments which parallel its previously
existing interests in filmed entertainment and cable
television programming held through TWE. Time Warner's Cable
Networks segment principally consists of TBS's cable
television networks and sports operations. These operations
include entertainment networks such as TNT, TBS Superstation,
Cartoon Network and Turner Classic Movies; news networks such
as CNN, CNN International and CNN Headline News; and sports
franchises consisting of the Atlanta Braves and the Atlanta
Hawks. Time Warner's Filmed Entertainment segment principally
consists of TBS's film and television production and
distribution operations, including New Line Cinema, Castle
Rock Entertainment, Hanna-Barbera Productions, Inc. and the
former film and television libraries of Metro-Goldwyn-Mayer,
Inc. and RKO Pictures, Inc.
In order to enhance comparability, the following
discussion of results of operations for Time Warner is
supplemented, where appropriate, by pro forma financial
information that gives effect to the TBS Transaction and
certain 1996 debt refinancings by Time Warner, including the
use of approximately $1.55 billion of net proceeds from the
issuance of Series M exchangeable preferred stock to reduce
debt ("Series M Preferred Stock" and collectively, the "Time
Warner Transactions"), as if such transactions had occurred
at the beginning of 1996. The pro forma results are presented
for informational purposes only and are not necessarily
indicative of the operating results that would have occurred
had the transactions actually occurred at the beginning of
1996, nor are they necessarily indicative of future operating results.
EBITDA and operating income for Time Warner and the
Entertainment Group for the three months ended March 31, 1997
and 1996 are as follows:
Three Months Ended March 31,
EBITDA Operating Income
Pro Pro
Historical Forma Historical Historical Forma Historical
1997 1996 1996 1997 1996 1996
(millions)
Time Warner:
Publishing $ 92 $ 80 $ 80 $ 67 $ 56 $ 56
Music 140 146 146 50 55 55
Cable Networks-TBS 135 120 - 69 60 -
Filmed Entertainment-TBS 7 (22) - (16) (45) -
Cable 136 112 112 35 (1) (1)
Intersegment elimination (11) (23) - (11) (23) -
Total $499 $413 $338 $194 $102 $110
Entertainment Group:
Filmed Entertainment-
Warner Bros. $150 $136 $136 $ 74 $ 73 $ 73
Broadcasting-
The WB Network (20) (24) (24) (20) (24) (24)
Cable Networks-HBO 96 81 81 91 76 76
Cable 431 368 368 183 146 146
Total $657 $561 $561 $328 $271 $271
Time Warner had revenues of $3.034 billion, income of
$52 million before an extraordinary loss on the retirement of
debt ($.05 loss per common share after preferred dividend
requirements) and net income of $35 million ($.08 loss per
common share) for the three months ended March 31, 1997,
compared to revenues of $2.068 billion, a loss of $93 million
before an extraordinary loss on the retirement of debt ($.32
loss per common share) and a net loss of $119 million ($.39
loss per common share) for the three months ended March 31,
1996. Time Warner's equity in the pretax income of the
Entertainment Group was $318 million for the three months
ended March 31, 1997, compared to $116 million for the three
months ended March 31, 1996.
Time Warner's historical results of operations include
the operating results of TBS from October 10, 1996. On a pro
forma basis, giving effect to the Time Warner Transactions as
if each of such transactions had occurred at the beginning of
1996, Time Warner would have reported for the three months
ended March 31, 1996, revenues of $2.835 billion, EBITDA of
$413 million, operating income of $102 million, equity in the
pretax income of the Entertainment Group of $116 million, a
loss before extraordinary item of $121 million ($0.35 loss
per common share) and a net loss of $147 million ($0.39 loss
per common share). No pro forma financial information has
been presented for Time Warner for the three months ended
March 31, 1997 because all of such transactions are already
reflected in the historical financial statements of Time Warner.
Time Warner's operating results improved from a pro
forma net loss of $147 million for the three months ended
March 31, 1996 to net income of $35 million for the three
months ended March 31, 1997. As discussed more fully below,
this improvement principally resulted from an overall
increase in the operating income of Time Warner's business
segments and a significant increase in income from its equity
in the pretax income of the Entertainment Group. On a
historical basis, such underlying operating trends were
mitigated by an overall increase in interest expense
principally relating to the assumption of approximately $2.8
billion of debt in the TBS Transaction, and an increase in
noncash amortization of intangible assets, also relating to
the TBS Transaction. On a historical basis, after preferred
dividend requirements that increased by $44 million due to
the April 1996 issuance of Series M Preferred Stock, Time
Warner's net loss applicable to common shares improved to
$43 million for the three months ended March 31, 1997, compared
to $153 million for the three months ended March 31, 1996.
This improvement, as well as the dilutive effect from issuing
173.4 million shares of common stock in connection with the
TBS transaction, resulted in a net loss per common share of
$.08 for the three months ended March 31, 1997, compared to a
$.39 net loss per common share for the three months ended
March 31, 1996.
On a historical basis, the Entertainment Group had
revenues of $2.602 billion and net income of $318 million for
the three months ended March 31, 1997, compared to revenues
of $2.487 billion and net income of $98 million for the three
months ended March 31, 1996. As discussed more fully below,
the Entertainment Group's net income increased significantly
in 1997 as compared to 1996 due to an overall increase in
operating income generated by its business segments and the
inclusion of an approximately $250 million pretax gain on the
sale of TWE's 58% interest in E! Entertainment Television,
Inc., offset in part by an increase in minority interest
expense related to the TWE-Advance/Newhouse Partnership.
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.
Time Warner
Publishing. Revenues increased to $924 million, compared
to $879 million in the first quarter of 1996. EBITDA
increased to $92 million from $80 million. Depreciation and
amortization amounted to $25 million in 1997 and $24 million
in 1996. Operating income increased to $67 million from $56
million. Revenues benefited from increases in magazine
circulation, advertising and direct marketing revenues. All
major magazine brands achieved revenue gains, including
People, Sports Illustrated and Time. EBITDA and operating
income increased principally as a result of the revenue gains.
Music. Revenues decreased to $933 million, compared to
$983 million in the first quarter of 1996. EBITDA decreased
to $140 million from $146 million. Depreciation and
amortization, including noncash amortization of intangible
assets related to the purchase of WCI, amounted to $90
million in 1997 and $91 million in 1996. Operating income
decreased to $50 million from $55 million. Despite the Music
division maintaining its leading domestic market share (over
21%), the decline in revenues principally related to
continuing industry-wide softness in the overexpanded U.S.
retail marketplace and a decline in international recorded
music sales. EBITDA and operating income decreased
principally as a result of the decline in revenues, offset in
part by certain one-time gains. Management expects that these
domestic and international trends will continue to affect
1997 operating results.
Cable Networks-TBS. Cable Networks results reflect the
acquisition of TBS effective in October 1996. Such operating
results are not comparable to the prior year and,
accordingly, are discussed on a pro forma basis.
Revenues increased to $594 million, compared to $512
million on a pro forma basis in the first quarter of 1996.
EBITDA increased to $135 million from $120 million on a pro
forma basis. Depreciation and amortization, including noncash
amortization of intangible assets related to the purchase of
TBS, amounted to $66 million in 1997 and $60 million on a pro
forma basis in 1996. Operating income increased to $69
million from $60 million on a pro forma basis. Revenues
benefited from increases in advertising and subscription
revenues. Advertising revenues increased due to a strong
overall advertising market for the division's major branded
networks, including TNT, TBS Superstation, CNN and Cartoon
Network. Subscription revenues increased as a result of
higher rates and an increase in subscriptions, primarily at
TNT, CNN, Cartoon Network and Turner Classic Movies. EBITDA
and operating income increased principally as a result of the
revenue gains, offset in part by start-up costs for new
networks, including the sports news network CNN/SI.
Filmed Entertainment-TBS. Filmed Entertainment results
reflect the acquisition of TBS effective in October 1996.
Such operating results are not comparable to the prior year
and, accordingly, are discussed on a pro forma basis.
Revenues increased to $397 million, compared to $294
million on a pro forma basis in the first quarter of 1996.
EBITDA increased to $7 million from a loss of $22 million on
a pro forma basis. Depreciation and amortization, including
noncash amortization of intangible assets related to the
purchase of TBS, amounted to $23 million in 1997 and 1996.
Operating losses decreased to $16 million in 1997 from $45
million on a pro forma basis in 1996. Revenues benefited from
increases in worldwide theatrical, home video and syndication
revenues. EBITDA and operating income increased principally
as a result of the revenue gains and the absence of
write-offs recorded in 1996 that related to disappointing
results for theatrical releases.
Cable. Revenues increased to $242 million, compared to
$217 million in the first quarter of 1996. EBITDA increased
to $136 million from $112 million. Depreciation and
amortization, including noncash amortization of intangible
assets related to the 1995 and 1996 cable acquisitions,
amounted to $101 million in 1997 and $113 million in 1996.
Operating income increased to $35 million from a loss of $1
million. Revenues benefited from an increase in basic cable
subscribers, increases in regulated cable rates as permitted
under Time Warner Cable's "social contract" with the Federal
Communications Commission (the "FCC") and an increase in
advertising revenues. EBITDA and operating income increased
as a result of the revenue gains, as well as a gain of
approximately $11 million on the sale of an investment.
Operating income was further affected by lower depreciation
and amortization principally relating to changes in useful
lives of certain assets acquired in 1996.
Interest and Other, Net. Interest and other, net,
decreased to $292 million in the first quarter of 1997,
compared to $296 million in the first quarter of 1996.
Interest expense increased to $278 million, compared to $247
million. The increase in interest expense was principally due
to the assumption of approximately $2.8 billion of debt in
the TBS Transaction. Other expense, net, decreased to $14
million in the first quarter of 1997 from $49 million in the
first quarter of 1996, principally because of an increase in
gains on foreign exchange contracts and lower losses from
reductions in the carrying value of certain investments.
Entertainment Group
Filmed Entertainment-Warner Bros. Revenues decreased to
$1.174 billion, compared to $1.218 billion in the first
quarter of 1996. EBITDA increased to $150 million from $136
million. Depreciation and amortization, including noncash
amortization of intangible assets related to the purchase of
WCI, amounted to $76 million in 1997 and $63 million in 1996.
Operating income increased to $74 million from $73 million.
Revenues decreased principally as a result of lower worldwide
theatrical and home video revenues, offset in part by
increases in international syndication revenues. EBITDA and
operating income increased principally as a result of the
strong performance of international syndication and a gain on
the sale of an investment. Operating income was further
affected by higher depreciation and amortization principally
related to the expansion of consumer products operations.
Broadcasting - The WB Network. The WB Network recorded
an operating loss of $20 million on $24 million of revenues
in the first quarter of 1997, compared to an operating loss
of $24 million on $15 million of revenues in the first
quarter of 1996. The increase in revenues primarily resulted
from the expansion of programming in September 1996 to three
nights of primetime scheduling and the expansion of Kids'
WB!, the network's animated programming lineup on Saturday
mornings and weekdays. The 1997 operating loss principally
resulted from the expanded programming schedule and was
mitigated by the exercise of an option by a limited partner
to increase its ownership in this network. Due to the
start-up nature of this national broadcast operation, losses
are expected to continue.
Cable Networks-HBO. Revenues increased to $483 million,
compared to $419 million in the first quarter of 1996. EBITDA
increased to $96 million from $81 million. Depreciation and
amortization amounted to $5 million in 1997 and 1996.
Operating income increased to $91 million from $76 million.
Revenues benefited primarily from a significant increase in
subscriptions. EBITDA and operating income improved
principally as a result of the revenue gains.
Cable. Revenues increased to $1.020 billion, compared to
$947 million in the first quarter of 1996. EBITDA increased
to $431 million from $368 million. Depreciation and
amortization, including noncash amortization of intangible
assets related to the purchase of WCI and the acquisition of
the ATC minority interest, amounted to $248 million in 1997
and $222 million in 1996. Operating income increased to $183
million from $146 million. Revenues benefited from an
increase in basic cable subscribers, increases in regulated
cable rates as permitted under Time Warner Cable's "social
contract" with the FCC and an increase in advertising
revenues. EBITDA and operating income increased as a result
of the revenue gains, as well as net gains of approximately
$24 million on the sale or exchange of certain cable systems.
Operating income was further affected by higher depreciation
and amortization related to capital spending.
Interest and Other, Net. Interest and other, net, was
$128 million of income in the first quarter of 1997, compared
to $88 million of expense in the first quarter of 1996.
Interest expense decreased to $116 million, compared to $121
million in 1996. There was other income, net, of $244 million
in the first quarter of 1997, compared to $33 million in the
first quarter of 1996, principally due to the inclusion of an
approximately $250 million pretax gain on the sale of an
interest in E! Entertainment Television, Inc. in March 1997.
FINANCIAL CONDITION AND LIQUIDITY
March 31, 1997
Time Warner
Financial Condition
At March 31, 1997, Time Warner had $13.0 billion of
debt, $511 million of cash and equivalents (net debt of $12.5
billion), $427 million of borrowings against future stock
option proceeds, $949 million of mandatorily redeemable
preferred securities of subsidiaries, $1.7 billion of Series
M Preferred Stock and $9.4 billion of shareholders' equity,
compared to $12.7 billion of debt, $452 million of available
cash and equivalents (net debt of $12.2 billion), $488
million of borrowings against future stock option proceeds,
$949 million of mandatorily redeemable preferred securities
of subsidiaries, $1.7 billion of Series M Preferred Stock and
$9.5 billion of shareholders' equity at December 31, 1996.
Investment in TWE
Time Warner's investment in TWE at March 31, 1997
consisted of interests in 74.49% of the Series A Capital and
Residual Capital of TWE, and 100% of the Senior Capital and
Series B Capital of TWE. Such priority capital interests
provide Time Warner (and with respect to the Series A Capital
only, U S WEST) with certain priority claims to the net
partnership income of TWE and distributions of TWE
partnership capital, 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 Series B Capital interest, which, when taken
together with Time Warner's contributed capital, represented
a cumulative priority Series B Capital interest of $5.4
billion at March 31, 1997. 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 $1.6
billion Senior 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. Time Warner expects that the
initial distribution of Senior Capital will be approximately
$535 million.
Debt Refinancings
During the first quarter of 1997, Time Warner entered
into a number of financing transactions, which resulted in
the refinancing of approximately $600 million of debt and the
elimination of the potential dilution from the conversion of
TBS's zero coupon subordinated convertible notes due 2007
(the "TBS Convertible Notes") into 5.6 million shares of Time
Warner common stock. Time Warner redeemed $300 million
principal amount of 10.75% Senior Notes due January 30, 2002
of TWI Cable and approximately $283 million accreted amount
of TBS Convertible Notes at an aggregate redemption price of
approximately $600 million, including redemption premiums and
accrued interest thereon (collectively, the "1997 Debt
Redemptions"). In addition, Old Time Warner issued $600
million principal amount of Floating Rate Reset Notes due
December 30, 2031 (the "Floating Rate Reset Notes"). The
Floating Rate Reset Notes bear interest at a floating rate
equal to LIBOR less 25 basis points until December 30, 2001,
at which time the interest rate will be reset at a fixed rate
equal to 6.59% plus a margin based upon Old Time Warner's
credit risk at such time. The Floating Rate Reset Notes are
redeemable at the election of the holders, in whole but not
in part, on December 30, 2001. In connection with the 1997
Debt Redemptions, Time Warner recognized an extraordinary
loss of $17 million.
Cash Flows
During the first three months of 1997, Time Warner's
cash provided by operations amounted to $42 million and
reflected $499 million of EBITDA from its Publishing, Music,
Cable Networks-TBS, Filmed Entertainment-TBS and Cable
businesses and $54 million of distributions from TWE, less
$362 million of interest payments, $66 million of income
taxes, $21 million of corporate expenses and $62 million
related to an increase in working capital requirements, other
balance sheet accounts and noncash items. Cash used by
operations of $59 million for the first quarter of 1996
reflected $338 million of business segment EBITDA and $63
million of distributions from TWE, less $291 million of
interest payments, $16 million of income taxes, $18 million
of corporate expenses and $135 million related to an increase
in working capital requirements, balance sheet accounts and
noncash items.
Cash used by investing activities decreased to $108
million in the first quarter of 1997, compared to $195
million in 1996, principally as a result of lower investment
spending, offset in part by higher capital expenditures and a
decrease in investment proceeds. Capital expenditures
increased to $135 million in the first quarter of 1997,
compared to $67 million in 1996, principally as a result of
capital spending by the TBS businesses acquired in October 1996.
Cash provided by financing activities was $63 million in
the first quarter of 1997, compared to cash used by financing
activities of $287 million in the first quarter of 1996,
principally as a result of the use in the first quarter of
1996 of $557 million of noncurrent cash and equivalents
raised in December 1995 to redeem debt, offset in part by the
repurchase in 1997 of approximately 941 thousand shares of
Time Warner common stock at an aggregate cost of $35 million.
Cash dividends paid increased to $84 million in the first
quarter of 1997, compared to $67 million in the first quarter
of 1996, principally as a result of dividends paid on the
common stock issued in connection with the TBS Transaction.
The assets and cash flows of certain consolidated and
unconsolidated subsidiaries of Time Warner are restricted by
certain borrowing and partnership agreements. The assets and
cash flows of TBS, TWE and TWI Cable are restricted by their
respective bank credit agreements, although each entity is
permitted to incur additional indebtedness to make loans,
advances, distributions and other cash payments to Time
Warner, subject to its individual compliance with the cash
flow coverage and leverage ratio covenants contained therein.
Further, under the TWE partnership agreement, the assets and
cash flows of TWE are unavailable to Time Warner except
through the payment of certain fees, reimbursements, cash
distributions and loans, which are subject to limitations.
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 its restricted subsidiaries, including TWE, above
those permitted by existing agreements.
Entertainment Group
Financial Condition
The Entertainment Group had $5.6 billion of debt, $243
million of preferred stock of a subsidiary, $1.6 billion of
Time Warner General Partners' Senior Capital and $6.8 billion
of partners' capital at March 31, 1997, compared to $5.7
billion of debt, $1.5 billion of Time Warner General Partners'
Senior Capital and $6.7 billion of partners' capital at
December 31, 1996. Cash and equivalents were $312 million at
March 31, 1997, compared to $216 million at December 31,
1996, reducing the debt-net-of-cash amounts for the Entertainment
Group to $5.3 billion and $5.5 billion, respectively.
Cash Flows
During the first three months of 1997, the Entertainment
Group's cash used by operations amounted to $48 million and
reflected $657 million of EBITDA from the Filmed
Entertainment-Warner Bros., Broadcasting-The WB Network,
Cable Networks-HBO and Cable businesses, less $146 million of
interest payments, $12 million of income taxes, $18 million
of corporate expenses and $529 million related to an increase
in working capital requirements, other balance sheet accounts
and noncash items. Cash provided by operations of $557
million in the first quarter of 1996 reflected $561 million
of business segment EBITDA and $174 million related to a
reduction in working capital requirements, other balance
sheet accounts and noncash items, less $149 million of
interest payments, $12 million of income taxes and $17
million of corporate expenses.
Cash provided by investing activities was $5 million in
the first quarter of 1997, compared to cash used by investing
activities of $243 million in the first quarter of 1996,
principally as a result of a $248 million increase in
proceeds from the sale of investments. Capital expenditures
were $331 million in each period.
Cash provided by financing activities was $139 million
in the first quarter of 1997, compared to cash used by
financing activities of $382 million in the first quarter of
1996, principally as a result of a lower level of debt
reduction in the first three months of 1997 and the issuance
of 250,000 shares of preferred stock of a subsidiary for
aggregate net proceeds of $243 million, offset in part by the
absence of $71 million of collections on the note receivable
from U S WEST that was fully paid in 1996. The preferred
stock was issued by a newly formed, substantially owned
subsidiary intended to qualify as a real estate investment
trust under the Internal Revenue Code of 1986, as amended.
Management believes that TWE's operating cash flow, cash
and equivalents and additional borrowing capacity are
sufficient to fund its capital and liquidity needs for the
foreseeable future.
Cable Capital Spending
Since the beginning of 1994, Time Warner Cable has been
engaged in a plan to upgrade the technological capability and
reliability of its cable television systems and develop new
services, which it believes will position the business for
sustained, long-term growth. Capital spending by Time Warner
Cable, including the cable operations of both Time Warner and
TWE, amounted to $343 million in the three months ended March
31, 1997, compared to $293 million in the three months ended
March 31, 1996. For the full year of 1997, cable capital
spending is expected to be comparable to 1996 levels, with
approximately $1.3 billion budgeted for the remainder of
1997. Capital spending by Time Warner Cable is expected to be
funded principally by cable operating cash flow. In exchange
for certain flexibility in establishing cable rate pricing
structures for regulated services that went into effect on
January 1, 1996 and consistent with Time Warner Cable's
long-term strategic plan, Time Warner Cable has agreed with
the FCC to invest a total of $4 billion in capital costs in
connection with the upgrade of its cable infrastructure,
which is expected to be substantially completed over a
five-year period ending December 31, 2000. The agreement with
the FCC covers all of the cable operations of Time Warner
Cable, including the owned or managed cable television
systems of 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, bank credit agreement borrowings and the
development of new revenue streams from expanded programming
options, high speed data transmission and other services.
Filmed Entertainment Backlog
Backlog represents the amount of future revenue not yet
recorded from cash contracts for the licensing of theatrical
and television product for pay cable, basic cable, network
and syndicated television exhibition. Backlog of Warner Bros.
amounted to $1.636 billion at March 31, 1997 compared to
$1.502 billion at December 31, 1996 (including amounts
relating to the licensing of film product to Time Warner's
and TWE's cable television networks, collectively, of $618
million and $463 million, respectively). Backlog of the
recently-acquired film production companies of TBS amounted
to approximately $243 million at March 31, 1997 compared to
$290 million at December 31, 1996 (including amounts relating
to the licensing of film product to Time Warner's cable
television networks of approximately $96 million and $90
million, respectively).
Because backlog generally relates to contracts for the
licensing of theatrical and television product which have
already been produced, the recognition of revenue for such
completed product is principally only dependent upon the
commencement of the availability period for telecast under
the terms of the related licensing agreement. Cash licensing
fees are collected periodically over the term of the related
licensing agreements. Accordingly, the portion of backlog for
which cash advances have not already been received has
significant off-balance sheet asset value as a source of
future funding. The backlog excludes advertising barter
contracts, which are also expected to result in the future
realization of revenues and cash through the sale of
advertising spots received under such contracts.
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 March 31, 1997, Time Warner had
interest rate swap contracts to pay floating-rates of
interest (average six-month LIBOR rate of 5.7%) and receive
fixed-rates of interest (average rate of 5.5%) on $2.3
billion notional amount of indebtedness, which resulted in
approximately 52% of Time Warner's underlying debt, and 46%
of the debt of Time Warner and the Entertainment Group
combined, being subject to variable interest rates. The
notional amount of outstanding contracts at March 31, 1997 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: 1998-$700 million
(receive-5.5%; pay-5.6%); 1999-$1.2 billion (receive-5.5%;
pay-5.7%); and 2000-$400 million (receive-5.5%; pay-5.7%). At
December 31, 1996, Time Warner had interest rate swap
contracts on a like-amount of $2.3 billion notional amount of
indebtedness.
Based on the level of interest rates prevailing at March
31, 1997, the fair value of Time Warner's fixed-rate debt
exceeded its carrying value by $127 million and it would have
cost $40 million to terminate the related interest rate swap
contracts, which combined is the equivalent of an unrealized
loss of $167 million. Based on the level of interest rates
prevailing at December 31, 1996, the fair value of Time
Warner's fixed-rate debt exceeded its carrying value by $231
million and it would have cost $43 million to terminate its
interest rate swap contracts, which combined was the equivalent
of an unrealized loss of $274 million. Unrealized gains or losses
on debt or interest rate swap contracts are not recognized for
financial reporting purposes unless the debt is retired or
the contracts are terminated prior to their maturity.
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. However, based on Time Warner's
variable-rate debt and related interest rate swap contracts
outstanding at March 31, 1997, each 25 basis point increase
or decrease in the level of interest rates would respectively
increase or decrease Time Warner's annual interest expense
and related cash payments by approximately $18 million,
including $6 million related to interest rate swap contracts.
Such potential increases or decreases are based on certain
simplifying assumptions, including a constant level of
variable-rate debt and related interest rate swap contracts
during the period and, for all maturities, an immediate,
across-the-board increase or decrease in the level of
interest rates with no other subsequent changes for the
remainder of the period.
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 March 31, 1997, Time
Warner had 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 March 31, 1997, Time Warner
had contracts for the sale of $523 million and the purchase
of $183 million of foreign currencies at fixed rates,
primarily English pounds (19% of net contract value), German
marks (18%), Canadian dollars (18%), French francs (7%) and
Japanese yen (25%), compared to contracts for the sale of
$447 million and the purchase of $104 million of foreign
currencies at December 31, 1996.
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 March
31, 1997 and December 31, 1996. No cash is required to be
received or paid with respect to such gains and losses until
the related foreign exchange contracts are settled, generally
at their respective maturity dates. For the three months
ended March 31, 1997 and 1996, Time Warner recognized $14
million and $6 million in gains, respectively, and TWE
recognized $7 million and $2 million in gains, respectively,
on foreign exchange contracts, which were or are expected to
be offset by corresponding decreases 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
March 31, 1997, each 5% devaluation of the U.S. dollar as
compared to the level of foreign exchange rates for
currencies under contract at March 31, 1997 would result in
approximately $26 million of unrealized losses and $9 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 $26 million of unrealized gains and $9 million of
unrealized losses, respectively. At March 31, 1997, none of
Time Warner's foreign exchange purchase contracts relates to
TWE's foreign currency exposure. However, with regard to the
$26 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 $5
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.
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31,
1997 1996
(millions, except
per share amounts)
ASSETS
Current assets
Cash and equivalents $ 511 $ 452
Receivables, less allowances of $916
and $976 million 2,205 2,421
Inventories 859 941
Prepaid expenses 1,053 1,007
Total current assets 4,628 4,821
Noncurrent cash and equivalents - 62
Noncurrent inventories 1,918 1,698
Investments in and amounts due to and
from Entertainment Group 6,063 5,814
Other investments 1,916 1,919
Property, plant and equipment, net 1,995 1,986
Music catalogues, contracts and copyrights 1,002 1,035
Cable television and sports franchises 4,152 4,203
Goodwill 12,326 12,421
Other assets 1,069 1,105
Total assets $35,069 $35,064
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 749 $ 715
Participations, royalties and programming
costs payable 1,167 1,196
Debt due within one year 11 11
Other current liabilities 2,054 2,090
Total current liabilities 3,981 4,012
Long-term debt 12,972 12,713
Borrowings against future stock option proceeds 427 488
Deferred income taxes 3,962 4,082
Unearned portion of paid subscriptions 693 679
Other liabilities 1,006 967
Company-obligated mandatorily redeemable
preferred securities of subsidiaries holding
solely subordinated notes and debentures of
subsidiaries of the Company(a) 949 949
Series M exchangeable preferred stock, $.10 par
value, 1.76 million and 1.72 million shares
outstanding and $1.764 billion and $1.720
billion liquidation preference 1,717 1,672
Shareholders' equity
Preferred stock, $.10 par value, 35.6
million shares outstanding, $3.559 billion
liquidation preference 4 4
Series LMCN-V Common Stock, $.01 par value,
50.6 million shares outstanding 1 1
Common stock, $.01 par value, 508.6 million
and 508.4 million shares outstanding (excluding
49.7 million and 50.0 million treasury shares) 5 5
Paid-in capital 12,262 12,250
Accumulated deficit (2,910) (2,758)
Total shareholders' equity 9,362 9,502
Total liabilities and shareholders' equity $35,069 $35,064
_______________
(a) Includes $374 million of preferred securities that are
redeemable for cash or, at Time Warner's option,
approximately 18.1 million shares of Hasbro, Inc. common
stock owned by Time Warner (Note 6).
See accompanying notes.
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months
Ended March 31,
1997 1996
(millions,except
per share amounts)
Revenues (a) $ 3,034 $ 2,068
Cost of revenues (a)(b) 1,850 1,277
Selling, general and administrative (a)(b) 990 681
Operating expenses 2,840 1,958
Business segment operating income 194 110
Equity in pretax income of Entertainment Group (a) 318 116
Interest and other, net (a) (292) (296)
Corporate expenses (a) (21) (18)
Income (loss) before income taxes 199 (88)
Income tax provision (147) (5)
Income (loss) before extraordinary item 52 (93)
Extraordinary loss on retirement of debt, net of
$11 million and $17 million income tax benefit (17) (26)
Net income (loss) 35 (119)
Preferred dividend requirements (78) (34)
Net loss applicable to common shares $ (43) $ (153)
Loss per common share:
Loss before extraordinary item $ (.05) $ (.32)
Net loss $ (.08) $ (.39)
Average common shares 558.9 391.7
_______________
(a) Includes the following income (expenses) resulting from
transactions with the Entertainment Group and other related
companies for the three months ended March 31, 1997 and 1996,
respectively: revenues-$74 million and $41 million; cost of
revenues-$(60) million and $(26) million; selling, general
and administrative-$5 million in 1997; equity in pre-tax
income of Entertainment Group-$11 million and $(8) million;
interest and other, net-$(14) million and $(9) million; and
corporate expenses-$18 million and $17 million.
(b) Includes depreciation and amortization expense of: $ 305 $ 228
See accompanying notes.
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
1997 1996
(millions)
OPERATIONS
Net income (loss) $ 35 $ (119)
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt 17 26
Depreciation and amortization 305 228
Noncash interest expense 27 22
Excess of equity in pretax income of Entertainment
Group over distributions (264) (53)
Changes in operating assets and liabilities (78) (163)
Cash provided (used) by operations 42 (59)
INVESTING ACTIVITIES
Investments and acquisitions (39) (278)
Capital expenditures (135) (67)
Investment proceeds 66 150
Cash used by investing activities (108) (195)
FINANCING ACTIVITIES
Borrowings 1,028 2,293
Debt repayments (796) (2,513)
Repayments of borrowings against future stock
option proceeds (61) -
Repurchases of Time Warner common stock (35) -
Dividends paid (84) (67)
Other 11 -
Cash provided (used) by financing activities 63 (287)
DECREASE IN CASH AND EQUIVALENTS (3) (541)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD (a) 514 1,185
CASH AND EQUIVALENTS AT END OF PERIOD $ 511 $ 644
_______________
(a)Includes current and noncurrent cash and equivalents at
December 31, 1996 and 1995.
See accompanying notes.
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
On October 10, 1996, Time Warner Inc. ("Time Warner" or
the "Company") acquired the remaining 80% interest in Turner
Broadcasting System, Inc. ("TBS") that it did not already
own, as more fully described herein (Note 2). As a result of
this transaction, a new parent company with the name "Time
Warner Inc." replaced the old parent company of the same name
("Old Time Warner", now known as Time Warner Companies,
Inc.), and Old Time Warner and TBS became separate, wholly
owned subsidiaries of the new parent company ("New Time
Warner"). References herein to "Time Warner" or the "Company"
refer to Old Time Warner prior to October 10, 1996 and New
Time Warner thereafter.
Time Warner is the world's leading media and entertainment
company, whose principal business objective is to create and
distribute branded information and entertainment copyrights
throughout the world. Time Warner classifies its business
interests into four fundamental areas: Entertainment, consisting
principally of interests in recorded music and music publishing,
filmed entertainment, television production, television broadcasting
and theme parks; Cable Networks, consisting principally of interests
in cable television programming and sports franchises; Publishing,
consisting principally of interests in magazine publishing, book
publishing and direct marketing; and Cable, consisting principally
of interests in cable television systems. A majority of Time Warner's
interests in filmed entertainment, television production,
television broadcasting and theme parks, a portion of its interests
in cable television programming and a majority of its cable television
systems are held through Time Warner Entertainment Company, L.P.
("TWE"). Time Warner owns general and limited partnership interests
in TWE consisting of 74.49% of the pro rata priority capital
("Series A Capital") and residual equity capital ("Residual Capital"),
and 100% of the senior priority capital ("Senior Capital") and
junior priority capital ("Series B Capital"). The remaining
25.51% limited partnership interests in the Series A Capital and
Residual Capital of TWE are held by a subsidiary of U S WEST, Inc.
("U S WEST"). 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,
Cable Networks, Publishing and Cable 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, Atlantic Records, Elektra Entertainment
and Warner Music International, (2) the unique and extensive
film, television and animation libraries of Warner Bros. and
TBS, and trademarks such as the Looney Tunes characters,
Batman and The Flintstones, (3) The WB Network, a national
broadcasting network launched in 1995 as an extension of the
Warner Bros. brand and as an additional distribution outlet
for the Company's collection of children's 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) leading cable television networks, such as
HBO, Cinemax, CNN, TNT and TBS Superstation, (6) sports
franchises consisting of the Atlanta Braves and Atlanta
Hawks, (7) 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 (8) 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 8). Except for start-up losses incurred in
connection with The WB 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 considerably 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 $321 million and $267 million in the three months
ended March 31, 1997 and 1996, respectively.
Basis of Presentation
The accompanying financial statements are unaudited but,
in the opinion of management, contain all the adjustments
(consisting of those of a normal recurring nature) considered
necessary to present fairly the financial position and the
results of operations and cash flows for the periods
presented in conformity with generally accepted accounting
principles applicable to interim periods. The accompanying
financial statements should be read in conjunction with the
audited consolidated financial statements of Time Warner for
the year ended December 31, 1996.
The consolidated financial statements of Time Warner
reflect the acquisition of Cablevision Industries Corporation
and related companies ("CVI") effective as of January 4, 1996
and TBS effective as of October 10, 1996. Certain
reclassifications have been made to the prior years'
financial statements to conform to the 1997 presentation.
In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings per Share" ("FAS
128"), effective for fiscal years beginning after December
15, 1997. The new rules establish simplified standards for
computing and presenting earnings per share. Time Warner does
not expect that the adoption of FAS 128 will have a material
effect on its financial statements.
2. MERGERS AND ACQUISITIONS
TBS Transaction
On October 10, 1996, New Time Warner acquired the
remaining 80% interest in TBS that it did not already own
(the "TBS Transaction"). As part of the transaction, each of
Old Time Warner and TBS became a separate, wholly owned
subsidiary of New Time Warner which combines, for financial
reporting purposes, the consolidated net assets and operating
results of Old Time Warner and TBS. Each issued and
outstanding share of each class of capital stock of Old Time
Warner was converted into one share of a substantially
identical class of capital stock of New Time Warner.
In connection with the TBS Transaction, New Time Warner
issued (i) approximately 173.4 million shares of common stock
(including 50.6 million shares of a special class of
non-redeemable common stock having 1/100th of a vote per
share on certain limited matters ("Series LMCN-V Common
Stock") to affiliates of Liberty Media Corporation ("LMC"), a
subsidiary of Tele-Communications, Inc.), in exchange for
shares of TBS capital stock and (ii) approximately 14 million
stock options to replace all outstanding TBS stock options.
In addition, New Time Warner agreed to issue to LMC and its
affiliates at a later date an additional five million shares
of Series LMCN-V Common Stock and $67 million of
consideration payable, at the election of New Time Warner, in
cash or additional shares of Series LMCN-V Common Stock. This
additional consideration is to be issued pursuant to a
separate option and non-competition agreement that currently
provides, if New Time Warner exercises its option, for a
subsidiary of LMC to provide certain satellite uplink and
distribution services for WTBS, a broadcast television
station owned by TBS, if it is converted to a copyright-paid,
cable television programming service. New Time Warner has
also fully and unconditionally guaranteed all of TBS's and
Old Time Warner's outstanding publicly traded indebtedness,
which amounted to $747 million and $7.782 billion,
respectively, at March 31, 1997.
The TBS Transaction was accounted for by the purchase
method of accounting for business combinations; accordingly,
the cost to acquire TBS of approximately $6.2 billion was
preliminarily allocated to the net assets acquired in
proportion to estimates of their respective fair values, as
follows: goodwill-$6.746 billion; other current and
noncurrent assets-$3.806 billion; long-term debt-$2.765
billion; deferred income taxes-$189 million; and other
current and noncurrent liabilities-$1.416 billion.
CVI Acquisition
On January 4, 1996, Time Warner acquired CVI which 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 6.3
million shares of convertible preferred stock and the
assumption or incurrence of approximately $2 billion of
indebtedness. The acquisition was accounted for by the
purchase method of accounting for business combinations;
accordingly, the cost to acquire CVI of $904 million was
allocated to the net assets acquired in proportion to 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.
Pro Forma Financial Information
The accompanying consolidated statement of operations
includes the operating results of each acquired business from
the respective closing date of each transaction. On a pro
forma basis, giving effect to the TBS Transaction and certain
1996 debt refinancings by Time Warner, including the use of
approximately $1.55 billion of net proceeds from the issuance
of Series M exchangeable preferred stock to reduce debt, as
if each of such transactions had occurred at the beginning of
1996, Time Warner would have reported for the three months
ended March 31, 1996, revenues of $2.835 billion,
depreciation and amortization of $311 million, operating
income of $102 million, equity in the pretax income of the
Entertainment Group of $116 million, a loss before
extraordinary item of $121 million ($0.35 per common share)
and a net loss of $147 million ($0.39 per common share).
3. ENTERTAINMENT GROUP
Time Warner's investment in and amounts due to and from
the Entertainment Group at March 31, 1997 and December 31,
1996 consists of the following:
March 31, December 31,
1997 1996
(millions)
Investment in TWE $ 6,430 $ 6,254
Stock option related distributions due from TWE 178 93
Credit agreement debt due to TWE (400) (400)
Other net liabilities due to TWE, principally
related to home video distribution (267) (256)
Investment in and amounts due to and from TWE 5,941 5,691
Investment in other Entertainment Group companies 122 123
Total $6,063 $5,814
TWE is a Delaware limited partnership that was
capitalized on June 30, 1992 to own and operate substantially
all of the Filmed Entertainment-Warner Bros., Cable
Networks-HBO and Cable businesses previously owned by
subsidiaries of Time Warner. Time Warner, through its wholly
owned subsidiaries, collectively owns general and limited
partnership interests in TWE consisting of 74.49% of the
Series A Capital and Residual Capital and 100% of the Senior
Capital and Series B Capital. The remaining 25.51% limited
partnership interests in the Series A Capital and Residual
Capital of TWE are owned by U S WEST. Certain Time Warner
subsidiaries are the general partners of TWE ("Time Warner
General Partners").
The TWE partnership agreement provides for special
allocations of income, loss and distributions of partnership
capital, including priority distributions in the event of
liquidation. TWE reported net income of $320 million and $94
million in the three months ended March 31, 1997 and 1996,
respectively, no portion of which was allocated to the
limited partnership interests.
Each Time Warner General Partner has guaranteed a pro
rata portion of approximately $5.4 billion of TWE's debt and
accrued interest at March 31, 1997, 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.
Set forth below is summarized financial information of
the Entertainment Group:
TIME WARNER ENTERTAINMENT GROUP
Three Months
Ended March 31,
1997 1996
(millions)
Operating Statement Information
Revenues $2,602 $2,487
Depreciation and amortization (329) (290)
Business segment operating income 328 271
Interest and other, net(1) 128 (88)
Minority interest (108) (50)
Income before income taxes 330 116
Net income 318 98
__________________
(1) Includes a pretax gain of approximately $250 million
recognized in the first quarter of 1997 related to the sale
of an interest in E!Entertainment Television, Inc.
Three Months
Ended March 31,
1997 1996
(millions)
Cash Flow Information
Cash provided (used) by operations $ (48) $ 557
Capital expenditures (331) (331)
Investments and acquisitions (31) (31)
Investment proceeds 367 119
Borrowings 282 63
Debt repayments (318) (498)
Issuance of preferred stock of subsidiary 243 -
Capital distributions (54) (63)
Collections on note receivable from U S WEST - 71
Other financing activities, net (14) 45
Increase (decrease) in cash and equivalents 96 (68)
March 31, December 31,
1997 1996
(millions)
Balance Sheet Information
Cash and equivalents $ 312 $ 216
Total current assets 3,311 3,147
Total assets 20,144 20,027
Total current liabilities 3,587 4,092
Long-term debt 5,640 5,676
Minority interests 1,103 1,020
Preferred stock of subsidiary 243 -
Time Warner General Partners' Senior Capital 1,574 1,543
Partners' capital 6,817 6,681
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 March 31, 1997 and December 31,
1996, the Time Warner General Partners had recorded $178
million and $93 million, respectively, of stock option
related distributions due from TWE, based on closing prices
of Time Warner common stock of $43.25 and $37.50,
respectively. Time Warner is paid when the options are
exercised. The Time Warner General Partners also receive
tax-related distributions from TWE on a current basis. During
the three months ended March 31, 1997, the Time Warner
General Partners received distributions from TWE in the
amount of $54 million, consisting of $50 million of
tax-related distributions and $4 million of stock option
related distributions. During the three months ended March
31, 1996, the Time Warner General Partners received
distributions from TWE in the amount of $63 million,
consisting of $56 million of tax-related distributions and $7
million of stock option related distributions.
4. INVENTORIES
Inventories consist of:
March 31, 1997 December 31, 1996
Current Noncurrent Current Noncurrent
(millions)
Film costs:
Released, less amortization $122 $ 130 $209 $ 142
Completed and not released 57 97 54 -
In process and other 8 306 24 251
Library, less amortization - 1,102 - 1,116
Programming costs, less amortization 258 283 213 189
Magazines, books and recorded music 414 - 441 -
Total $859 $1,918 $941 $1,698
5. LONG-TERM DEBT
During the first quarter of 1997, Time Warner entered
into a number of financing transactions, which resulted in
the refinancing of approximately $600 million of debt and the
elimination of the potential dilution from the conversion of
TBS's zero coupon subordinated convertible notes due 2007
(the "TBS Convertible Notes") into 5.6 million shares of Time
Warner common stock. Time Warner redeemed $300 million
principal amount of 10.75% Senior Notes due January 30, 2002
of TWI Cable Inc. ("TWI Cable"), its wholly owned subsidiary,
and approximately $283 million accreted amount of the TBS
Convertible Notes at an aggregate redemption price of
approximately $600 million, including redemption premiums and
accrued interest thereon (collectively, the "1997 Debt
Redemptions"). In addition, Old Time Warner issued $600
million principal amount of Floating Rate Reset Notes due
December 30, 2031 (the "Floating Rate Reset Notes"). The
Floating Rate Reset Notes bear interest at a floating rate
equal to LIBOR less 25 basis points until December 30, 2001,
at which time the interest rate will be reset at a fixed rate
equal to 6.59% plus a margin based upon Old Time Warner's
credit risk at such time. The Floating Rate Reset Notes are
redeemable at the election of the holders, in whole but not
in part, on December 30, 2001.
An extraordinary loss of $17 million was recognized by
Time Warner in the first quarter of 1997 in connection with
the 1997 Debt Redemptions. An extraordinary loss of $26
million was recognized in 1996 in connection with Time
Warner's redemption of its 8.75% Convertible Subordinated
Debentures due 2015.
6. 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 Old 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 1.5 shares of common stock of Hasbro, Inc.
("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 1.5 shares 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. Time Warner owns approximately
18.1 million shares of Hasbro common stock, which can be used
by Time Warner, at its election, to satisfy its obligations
under the PERCS or its obligations under its zero coupon
exchangeable notes due 2012. Such zero coupon notes are
exchangeable and redeemable into an aggregate 18.1 million
shares of 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 Old Time Warner due
December 31, 2025. Cumulative cash distributions are payable
on the Preferred Trust Securities at an annual rate of 8-
7/8%. 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 (on a subordinated basis) of
each subsidiary's obligations with respect thereto.
7. SHAREHOLDERS' EQUITY
Changes in shareholders' equity are as follows:
Three Months
Ended March 31,
1997 1996
(millions)
Balance at beginning of year $ 9,502 $ 3,667
Net income (loss) 35 (119)
Common dividends declared (51) (35)
Preferred dividends declared (78) (34)
Repurchases of Time Warner common stock (35) -
Issuance of common stock and preferred stock in the
CVI acquisition - 693
Unrealized gains (losses) on certain marketable
equity investments (2) 59
Other, principally foreign currency translation and
shares issued pursuant to stock option and dividend
reinvestment plans (9) 96
Balance at March 31 $ 9,362 $ 4,327
In April 1996, Time Warner's Board of Directors
authorized a program to repurchase, from time to time, up to
15 million shares of Time Warner common stock. The common
stock repurchased under the program is expected to be used to
satisfy future share issuances related to the exercise of
existing employee stock options. Actual repurchases in any
period will be subject to market conditions. As of March 31,
1997, Time Warner had acquired approximately 12.3 million
shares of its common stock for an aggregate cost of $491 million.
8. SEGMENT INFORMATION
Time Warner classifies its businesses into four
fundamental areas: Entertainment, consisting principally of
interests in recorded music and music publishing, filmed
entertainment, television production, television broadcasting
and theme parks; Cable Networks, consisting principally of
interests in cable television programming and sports
franchises; Publishing, consisting principally of interests
in magazine publishing, book publishing and direct marketing;
and Cable, consisting principally of interests in cable
television systems. A majority of Time Warner's interests in
filmed entertainment, television production, television
broadcasting and theme parks, a portion of its interests in
cable television programming and a majority of its cable
television systems are held by the Entertainment Group. The
Entertainment Group 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. The operating results of Time Warner reflect the
acquisitions of CVI effective as of January 4, 1996 and TBS
effective as of October 10, 1996.
Three Months
Ended March 31,
1997 1996
(millions)
Revenues
Time Warner:
Publishing $ 924 $ 879
Music 933 983
Cable Networks-TBS 594 -
Filmed Entertainment-TBS 397 -
Cable 242 217
Intersegment elimination (56) (11)
Total $3,034 $2,068
Entertainment Group:
Filmed Entertainment-Warner Bros. $1,174 $1,218
Broadcasting-The WB Network 24 15
Cable Networks-HBO 483 419
Cable 1,020 947
Intersegment elimination (99) (112)
Total $2,602 $2,487
Three Months
Ended March 31,
1997 1996
(millions)
Operating Income
Time Warner:
Publishing $ 67 $ 56
Music 50 55
Cable Networks-TBS 69 -
Filmed Entertainment-TBS (16) -
Cable 35 (1)
Intersegment elimination (11) -
Total $194 $110
Entertainment Group:
Filmed Entertainment-Warner Bros. $ 74 $ 73
Broadcasting-The WB Network (20) (24)
Cable Networks-HBO 91 76
Cable 183 146
Total $328 $271
Three Months
Ended March 31,
1997 1996
(millions)
Depreciation of Property, Plant and Equipment
Time Warner:
Publishing $ 16 $ 15
Music 22 23
Cable Networks-TBS 21 -
Filmed Entertainment-TBS 1 -
Cable 31 33
Total $ 91 $ 71
Entertainment Group:
Filmed Entertainment-Warner Bros. $ 45 $ 32
Broadcasting-The WB Network - -
Cable Networks-HBO 5 5
Cable 172 143
Total $222 $180
Three Months
Ended March 31,
1997 1996
(millions)
Amortization of Intangible Assets(1)
Time Warner:
Publishing $ 9 $ 9
Music 68 68
Cable Networks-TBS 45 -
Filmed Entertainment-TBS 22 -
Cable 70 80
Total $214 $157
Entertainment Group:
Filmed Entertainment-Warner Bros. $ 31 $ 31
Broadcasting-The WB Network - -
Cable Networks-HBO - -
Cable 76 79
Total $107 $110
______________________
(1) Amortization includes all amortization relating to the
acquisition of Warner Communications Inc. ("WCI") in 1989,
the acquisition of the minority interest in American
Television and Communications Corporation ("ATC") in 1992,
the acquisitions of KBLCOM Incorporated and Summit
Communications Group, Inc. in 1995, the acquisitions of TBS
and CVI in 1996 and other business combinations accounted for
by the purchase method.
9. COMMITMENTS AND CONTINGENCIES
Pending legal proceedings are substantially limited to
litigation incidental to the businesses of Time Warner,
alleged damages in connection with class action lawsuits and
the pending litigation with the City of New York and Fox News
Channel ("FNC") relating to the TBS Transaction and the
carriage of FNC on Time Warner Cable's New York City cable
television system. In the opinion of management, the ultimate
resolution of these matters will not have a material effect
on the consolidated financial statements of Time Warner.
10. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash
flows is as follows:
Three Months
Ended March 31,
1997 1996
(millions)
Interest expense $278 $247
Cash payments made for interest 362 291
Cash payments made for income taxes 89 47
Tax-related distributions received from TWE 50 56
Income tax refunds received 23 31
Noncash dividends 45 -
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
SUMMARIZED FINANCIAL INFORMATION OF
TIME WARNER COMPANIES, INC. AND TURNER BROADCASTING SYSTEM, INC.
On October 10, 1996, Time Warner Inc. acquired the
remaining 80% interest in Turner Broadcasting System, Inc.
("TBS") that it did not already own, as more fully described
in Note 2 to the Time Warner Inc. consolidated financial
statements. As a result of this transaction, a new parent
company with the name "Time Warner Inc." replaced the old
parent company of the same name ("Old Time Warner", now known
as Time Warner Companies, Inc.) and Old Time Warner and TBS
became separate, wholly owned subsidiaries of the new parent
company ("New Time Warner"). New Time Warner has fully and
unconditionally guaranteed all of the outstanding publicly
traded indebtedness of each of Old Time Warner and TBS.
Set forth below is summarized financial information of
each of Old Time Warner and TBS presented for the information
of their respective debtholders. Summarized financial
information of Old Time Warner presented below includes Old
Time Warner's 20% interest in TBS under the equity method of
accounting. Summarized financial information of TBS for all
post-merger periods presented below has been adjusted to
reflect New Time Warner's basis of accounting. Summarized
financial information of TBS presented below for all
pre-merger periods is reflected at TBS's historical cost
basis of accounting. Certain reclassifications have been made
to TBS's summarized financial information for all pre-merger
periods to conform to the post-merger presentation.
Old Time Warner
Three Months
Ended March 31,
1997 1996
(millions)
Operating Statement Information
Revenues $2,086 $2,068
Depreciation and amortization 216 228
Business segment operating income 152 110
Equity in pretax income of Entertainment Group 330 116
Interest and other, net 240 296
Income (loss) before extraordinary item 91 (93)
Net income (loss) (a) 78 (119)
March 31, December 31,
1997 1996
Balance Sheet Information (millions)
Total current assets $ 3,362 $ 3,529
Investments in and amounts due to and from
Entertainment Group 6,075 5,814
Total assets 26,265 25,595
Total current liabilities 2,666 2,831
Long-term debt 11,748 11,002
Total liabilities 19,008 18,532
Old Time Warner-obligated mandatorily redeemable
preferred securities of subsidiaries holding solely
subordinated notes and debentures of subsidiaries (b) 949 949
Series M exchangeable preferred stock 1,717 1,672
Shareholders' equity 4,591 4,442
_______________________
(a) The net income for the three months ended March 31, 1997
includes an extraordinary loss on the retirement of debt of
$13 million.
(b) Includes $374 million of preferred securities that are
redeemable for cash or, at Old Time Warner's option,
approximately 18.1 million shares of Hasbro, Inc. common
stock owned by Old Time Warner.
TBS
Three Months
Ended March 31,
1997 1996
(millions)
Operating Statement Information
Revenues $954 $767
Depreciation and amortization 89 45
Business segment operating income 42 36
Interest and other, net 62 47
Loss before extraordinary item (36) (10)
Net loss (a) (40) (10)
March 31, December 31,
1997 1996
(millions)
Balance Sheet Information
Total current assets $ 1,260 $ 1,286
Total assets 11,235 11,092
Total current liabilities 1,008 934
Long-term debt 1,224 1,711
Debt due to New Time Warner 1,537 958
Total liabilities 4,198 3,989
Shareholders' equity 7,037 7,103
_______________
(a) The net loss for the three months ended March 31, 1997 includes
an extraordinary loss on the retirement of debt of $4 million.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
TWE classifies its business interests into three
fundamental areas: Entertainment, consisting principally of
interests in filmed entertainment, television production,
television broadcasting and theme parks; Cable Networks,
consisting principally of interests in cable television
programming; and Cable, consisting principally of interests
in cable television systems. TWE also manages the cable
properties owned by Time Warner and the combined cable television
operations are conducted under the name of Time Warner Cable.
Capitalized terms are as defined and described in the
accompanying consolidated financial statements, or elsewhere herein.
Use of EBITDA
The following comparative discussion of the results of
operations and financial condition of TWE includes, among
other factors, an analysis of changes in the operating income
of the business segments before depreciation and amortization
("EBITDA") in order to eliminate the effect on the operating
performance of the filmed entertainment and cable businesses
of significant amounts of amortization of intangible assets
recognized in Time Warner's $14 billion acquisition of WCI in
1989, the $1.3 billion acquisition of the ATC minority
interest in 1992 and other business combinations accounted
for by the purchase method. Financial analysts generally
consider EBITDA to be an important measure of comparative
operating performance for the businesses of TWE, and, when
used in comparison to debt levels or the coverage of interest
expense, as a measure of liquidity. However, EBITDA should be
considered in addition to, not as a substitute for, operating
income, net income, cash flow and other measures of financial
performance and liquidity reported in accordance with
generally accepted accounting principles.
RESULTS OF OPERATIONS
EBITDA and operating income for TWE for the three months
ended March 31, 1997 and 1996 are as follows:
Three Months Ended March 31,
EBITDA Operating Income
1997 1996 1997 1996
(millions)
Filmed Entertainment-Warner Bros. $146 $131 $ 75 $ 70
Broadcasting-The WB Network (20) (24) (20) (24)
Cable Networks-HBO 96 81 91 76
Cable 431 368 183 146
Total $653 $556 $329 $268
TWE had revenues of $2.6 billion and net income of $320
million for the three months ended March 31, 1997, compared
to revenues of $2.485 billion and net income of $94 million
for the three months ended March 31, 1996. As discussed more
fully below, TWE's net income increased significantly in 1997
as compared to results in 1996 due to an overall increase in
operating income generated by its business segments and the
inclusion of an approximately $250 million pretax gain on the
sale of TWE's 58% interest in E! Entertainment Television,
Inc., offset in part by an increase in minority interest
expense related to the TWE-Advance/Newhouse Partnership.
As a U.S. partnership, TWE is not subject to U.S.
federal and state income taxation. Income and withholding
taxes of $12 million and $18 million for the three months
ended March 31, 1997 and 1996, respectively, have been
provided for the operations of TWE's domestic and foreign
subsidiary corporations.
Filmed Entertainment-Warner Bros. Revenues decreased to
$1.172 billion, compared to $1.216 billion in the first
quarter of 1996. EBITDA increased to $146 million from $131
million. Depreciation and amortization, including noncash
amortization of intangible assets related to the purchase of
WCI, amounted to $71 million in 1997 and $61 million in 1996.
Operating income increased to $75 million from $70 million.
Revenues decreased principally as a result of lower worldwide
theatrical and home video revenues, offset in part by
increases in international syndication revenues. EBITDA and
operating income increased principally as a result of the
strong performance of international syndication and a gain on
the sale of an investment. Operating income was further
affected by higher depreciation and amortization principally
related to the expansion of consumer products operations.
Broadcasting - The WB Network. The WB Network recorded
an operating loss of $20 million on $24 million of revenues
in the first quarter of 1997, compared to an operating loss
of $24 million on $15 million of revenues in the first
quarter of 1996. The increase in revenues primarily resulted
from the expansion of programming in September 1996 to three
nights of primetime scheduling and the expansion of Kids'
WB!, the network's animated programming lineup on Saturday
mornings and weekdays. The 1997 operating loss principally
resulted from the expanded programming schedule and was
mitigated by the exercise of an option by a limited partner
to increase its ownership in this network. Due to the
start-up nature of this national broadcast operation, losses
are expected to continue.
Cable Networks-HBO. Revenues increased to $483 million,
compared to $419 million in the first quarter of 1996. EBITDA
increased to $96 million from $81 million. Depreciation and
amortization amounted to $5 million in 1997 and 1996.
Operating income increased to $91 million from $76 million.
Revenues benefited primarily from a significant increase in
subscriptions. EBITDA and operating income improved
principally as a result of the revenue gains.
Cable. Revenues increased to $1.020 billion, compared
to $947 million in the first quarter of 1996. EBITDA
increased to $431 million from $368 million. Depreciation and
amortization, including noncash amortization of intangible
assets related to the purchase of WCI and the acquisition of
the ATC minority interest, amounted to $248 million in 1997
and $222 million in 1996. Operating income increased to $183
million from $146 million. Revenues benefited from an
increase in basic cable subscribers, increases in regulated
cable rates as permitted under Time Warner Cable's "social
contract" with the Federal Communications Commission (the
"FCC") and an increase in advertising revenues. EBITDA and
operating income increased as a result of the revenue gains,
as well as net gains of approximately $24 million on the sale
or exchange of certain cable systems. Operating income was
further affected by higher depreciation and amortization
related to capital spending.
Interest and Other, Net. Interest and other, net, was
$129 million income in the first quarter of 1997, compared to
$89 million expense in the first quarter of 1996. Interest
expense decreased to $115 million, compared to $122 million
in 1996. There was other income, net, of $244 million in the
first quarter of 1997, compared to $33 million in the first
quarter of 1996, principally due to the inclusion of an
approximately $250 million pretax gain on the sale of an
interest in E! Entertainment Television, Inc. in March 1997.
FINANCIAL CONDITION AND LIQUIDITY
March 31, 1997
Financial Condition
TWE had $5.6 billion of debt, $243 million of preferred
stock of a subsidiary, $1.6 billion of Time Warner General
Partners' Senior Capital and $6.7 billion of partners'
capital at March 31, 1997, compared to $5.7 billion of debt,
$1.5 billion of Time Warner General Partners' Senior Capital
and $6.6 billion of partners' capital at December 31, 1996.
Cash and equivalents were $312 million at March 31, 1997,
compared to $216 million at December 31, 1996, reducing the
debt-net-of-cash amounts for TWE to $5.3 billion and $5.5
billion, respectively.
Cash Flows
During the first three months of 1997, TWE's cash used
by operations amounted to $48 million and reflected $653
million of EBITDA from the Filmed Entertainment-Warner Bros.,
Broadcasting-The WB Network, Cable Networks-HBO and Cable
businesses, less $146 million of interest payments, $12
million of income taxes, $18 million of corporate expenses,
and $525 million related to an increase in working capital
requirements, other balance sheet accounts and noncash items.
Cash provided by operations of $557 million in the first
quarter of 1996 reflected $556 million of business segment
EBITDA and $181 million related to a reduction in working
capital requirements, other balance sheet accounts and non-
cash items, less $151 million of interest payments, $12
million of income taxes and $17 million of corporate expenses.
Cash provided by investing activities was $5 million in
the first three months of 1997, compared to cash used by
investing activities of $243 million in the first quarter of
1996, principally as a result of a $248 million increase in
proceeds from the sale of investments. Capital expenditures
were $331 million in each period.
Cash provided by financing activities was $139 million
in the first three months of 1997, compared to cash used by
financing activities of $382 million in the first quarter of
1996, principally as a result of a lower level of debt
reduction in the first three months of 1997 and the issuance
of 250,000 shares of preferred stock of a subsidiary for
aggregate net proceeds of $243 million, offset in part by the
absence of $71 million of collections on the note receivable
from U S WEST that was fully repaid in 1996. The preferred
stock was issued by a newly formed, substantially owned
subsidiary intended to qualify as a real estate investment
trust under the Internal Revenue Code of 1986, as amended.
Management believes that TWE's operating cash flow, cash
and equivalents and additional borrowing capacity are
sufficient to fund its capital and liquidity needs for the
foreseeable future.
Cable Capital Spending
Since the beginning of 1994, Time Warner Cable has been
engaged in a plan to upgrade the technological capability and
reliability of its cable television systems and develop new
services, which it believes will position the business for
sustained, long-term growth. Capital spending by TWE's Cable
division amounted to $292 million in the three months ended
March 31, 1997, compared to $268 million in the three months
ended March 31, 1996. For the full year of 1997, cable
capital spending is expected to be comparable to 1996 levels,
with approximately $1.1 billion budgeted for the remainder of
1997. Capital spending by TWE's Cable division is expected to
be funded principally by cable operating cash flow. In
exchange for certain flexibility in establishing cable rate
pricing structures for regulated services that went into
effect on January 1, 1996 and consistent with Time Warner
Cable's long-term strategic plan, Time Warner Cable has
agreed with the FCC to invest a total of $4 billion in capital
costs in connection with the upgrade of its cable infrastructure,
which is expected to be substantially completed over a five-year
period ending December 31, 2000. The agreement with the FCC covers
all of the cable operations of Time Warner Cable, including the
owned or managed cable television systems of TWE, the
TWE-Advance/Newhouse Partnership and Time Warner. Management
expects to continue to finance such level of investment principally
through the growth in cable operating cash flow derived from
increases in subscribers and cable rates, bank credit agreement
borrowings and the development of new revenue streams from expanded
programming options, high speed data transmission and other services.
Warner Bros. Backlog
Warner Bros.' backlog, representing the amount of future
revenue not yet recorded from cash contracts for the
licensing of theatrical and television product for pay cable,
basic cable, network and syndicated television exhibition,
amounted to $1.636 billion at March 31, 1997, compared to
$1.502 billion at December 31, 1996 (including amounts
relating to TWE's cable television networks of $222 million
and $189 million, respectively, and to Time Warner's cable
television networks of $396 million and $274 million,
respectively). Because backlog generally relates to contracts
for the licensing of theatrical and television product which
have already been produced, the recognition of revenue for
such completed product is principally only dependent upon the
commencement of the availability period for telecast under
the terms of the related licensing agreement. Cash licensing
fees are collected periodically over the term of the related
licensing agreements. Accordingly, the portion of backlog for
which cash advances have not already been received has
significant off-balance sheet asset value as a source of
future funding. The backlog excludes advertising barter
contracts, which are also expected to result in the future
realization of revenues and cash through the sale of
advertising spots received under such contracts.
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 March 31, 1997, Time Warner had
effectively hedged approximately half of TWE's 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. 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 March 31, 1997, Time Warner had
contracts for the sale of $523 million and the purchase of
$183 million of foreign currencies at fixed rates. Of Time
Warner's $340 million net sale contract position, none of the
foreign exchange purchase contracts and $100 million of the
foreign exchange sale contracts related to TWE's foreign
currency exposure, primarily Japanese yen (24% of net
contract position related to TWE), French francs (20%),
German marks (12%) and Canadian dollars (19%). This compares
to a net sale contract position of $102 million of foreign
currencies at December 31, 1996.
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 March
31, 1997 and December 31, 1996. No cash is required to be
received or paid with respect to such gains and losses until
the related foreign exchange contracts are settled, generally
at their respective maturity dates. For the three months
ended March 31, 1997 and 1996, TWE recognized $7 million and
$2 million in gains, respectively, on foreign exchange
contracts, which were or are expected to be offset by
corresponding decreases 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 outstanding at March 31,
1997, each 5% devaluation of the U.S. dollar as compared to
the level of foreign exchange rates for currencies under
contract at March 31, 1997 would result in approximately $5
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 March 31, 1997 would result in $5 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.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31,
1997 1996
(millions)
ASSETS
Current assets
Cash and equivalents $ 312 $ 216
Receivables, including $391 and $383 million
due from Time Warner, less allowances of $358
and $373 million 1,638 1,637
Inventories 1,192 1,134
Prepaid expenses 168 159
Total current assets 3,310 3,146
Noncurrent inventories 2,302 2,263
Loan receivable from Time Warner 400 400
Investments 337 351
Property, plant and equipment, net 6,076 5,999
Cable television franchises 3,032 3,054
Goodwill 3,966 3,996
Other assets 671 764
Total assets $20,094 $19,973
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable $ 769 $ 935
Participations and programming costs payable 1,269 1,393
Debt due within one year 7 7
Other current liabilities, including $83
million and $82 million due to Time Warner 1,524 1,740
Total current liabilities 3,569 4,075
Long-term debt 5,640 5,676
Other long-term liabilities, including $219 and
$138 million due to Time Warner 1,254 1,085
Minority interests 1,103 1,020
Preferred stock of subsidiary holding solely a
mortgage note of its parent 243 -
Time Warner General Partners' Senior Capital 1,574 1,543
Partners' capital
Contributed capital 7,537 7,537
Undistributed partnership earnings (deficit) (826) (963)
Total partners' capital 6,711 6,574
Total liabilities and partners' capital $20,094 $19,973
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months
Ended March 31,
1997 1996
(millions)
Revenues (a) $ 2,600 $ 2,485
Cost of revenues (a)(b) 1,665 1,665
Selling, general and administrative (a)(b) 606 552
Operating expenses 2,271 2,217
Business segment operating income 329 268
Interest and other, net (a) 129 (89)
Minority interest (108) (50)
Corporate services (a) (18) (17)
Income before income taxes 332 112
Income taxes (12) (18)
Net income $ 320 $ 94
_______________
(a) Includes the following income (expenses) resulting from
transactions with the partners of TWE and other related
companies for the three months ended March 31, 1997, and
1996, respectively: revenues-$66 million and $23 million;
cost of revenues-$(10) million and $(24) million; selling,
general and administrative-$19 million and $(2) million;
interest and other, net-$12 million and $9 million; and
corporate services-$(18) million and $(17) million.
(b) Includes depreciation and amortization expense of: $ 324 $ 288
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
1997 1996
(millions)
OPERATIONS
Net income $320 $ 94
Adjustments for noncash and nonoperating items:
Depreciation and amortization 324 288
Changes in operating assets and liabilities (692) 175
Cash provided (used) by operations (48) 557
INVESTING ACTIVITIES
Investments and acquisitions (31) (31)
Capital expenditures (331) (331)
Investment proceeds 367 119
Cash provided (used) by investing activities 5 (243)
FINANCING ACTIVITIES
Borrowings 282 63
Debt repayments (318) (498)
Issuance of preferred stock of subsidiary 243 -
Capital distributions (54) (63)
Collections on note receivable from U S WEST - 71
Other (14) 45
Cash provided (used) by financing activities 139 (382)
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 96 (68)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 216 209
CASH AND EQUIVALENTS AT END OF PERIOD $312 $141
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Time Warner Entertainment Company, L.P., a Delaware
limited partnership ("TWE"), classifies its businesses into
three fundamental areas: Entertainment, consisting
principally of interests in filmed entertainment, television
production, television broadcasting and theme parks; Cable
Networks, consisting principally of interests in cable
television programming; and Cable, consisting principally of
interests in cable television systems.
Each of the business interests within Entertainment,
Cable Networks and Cable is important to TWE's objective of
increasing partner value through the creation, extension and
distribution of recognizable brands and copyrights throughout
the world. Such brands and copyrights include (1) the unique
and extensive film, television and animation libraries of
Warner Bros. and trademarks such as the Looney Tunes
characters and Batman, (2) The WB Network, a national
broadcasting network launched in 1995 as an extension of the
Warner Bros. brand and as an additional distribution outlet
for Warner Bros.' collection of children's cartoons and
television programming, (3) 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 7). Except for start-up losses incurred in
connection with The WB Network, TWE's principal business
interests generate significant operating income and cash flow
from operations. The cash flow from operations generated by
such business interests is considerably greater than their
operating income due to significant amounts of noncash
amortization of intangible assets recognized principally in
Time Warner Companies, Inc.'s ("Time Warner")* $14 billion
acquisition of Warner Communications Inc. ("WCI") in 1989 and
$1.3 billion acquisition of the minority interest in American
Television and Communications Corporation ("ATC") in 1992, a
portion of which cost was allocated to TWE upon the
capitalization of the partnership. Noncash amortization of
intangible assets recorded by TWE's businesses amounted to
$107 million and $110 million in the three months ended March
31, 1997 and 1996, respectively.
_________________________
* On October 10, 1996, Time Warner Inc. acquired the remaining
80% interest in Turner Broadcasting System, Inc. ("TBS") that
it did not already own. As a result of this transaction, a
new parent company with the name "Time Warner Inc." replaced
the old parent company of the same name ("Old Time Warner",
now known as Time Warner Companies, Inc.), and Old Time Warner
and TBS became separate, wholly owned subsidiaires of the new
parent company. Unless the context indicates otherwise,
references herein to "Time Warner" refer to Old Time Warner.
Time Warner and certain of its wholly owned subsidiaries
collectively own general and limited partnership interests in
TWE consisting of 74.49% of the pro rata priority capital
("Series A Capital") and residual equity capital ("Residual
Capital"), and 100% of the senior priority capital ("Senior
Capital") and junior priority capital ("Series B Capital").
The remaining 25.51% limited partnership interests in the
Series A Capital and Residual Capital of TWE are held by a
subsidiary of U S WEST, Inc. ("U S WEST"). Certain of Time
Warner's subsidiaries are the general partners of TWE ("Time
Warner General Partners").
Basis of Presentation
The accompanying financial statements are unaudited but,
in the opinion of management, contain all the adjustments
(consisting of those of a normal recurring nature) considered
necessary to present fairly the financial position and the
results of operations and cash flows for the periods
presented in conformity with generally accepted accounting
principles applicable to interim periods. The accompanying
financial statements should be read in conjunction with the
audited consolidated financial statements of TWE for the year
ended December 31, 1996. Certain reclassifications have been
made to the prior year's financial statements to conform to
the 1997 presentation.
2. INVENTORIES
TWE's inventories consist of:
March 31, 1997 December 31, 1996
Current Noncurrent Current Noncurrent
(millions)
Film costs:
Released, less amortization $ 418 $ 562 $ 544 $ 535
Completed and not released 379 86 168 42
In process and other 24 696 21 704
Library, less amortization - 651 - 664
Programming costs, less amortization 288 307 319 318
Merchandise 83 - 82 -
Total $1,192 $2,302 $1,134 $2,263
3. INVESTMENTS
In March 1997, TWE sold its 58% interest in E!
Entertainment Television, Inc. A pretax gain of approximately
$250 million relating to this sale has been included in the
accompanying consolidated statement of operations.
4. LONG-TERM DEBT
Long-term debt consists of:
March 31, December 31,
1997 1996
(millions)
Credit agreement, weighted average interest
rates of 6.0% and 6.1% $1,230 $1,555
Commercial paper, weighted average interest
rates of 6.0% and 5.8% 599 310
Publicly held notes and debentures 3,782 3,781
Other 29 30
Total $5,640 $5,676
Each Time Warner General Partner has guaranteed a pro
rata portion of approximately $5.4 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. Such indebtedness is recourse to each Time Warner
General Partner only to the extent of its guarantee.
5. PREFERRED STOCK OF SUBSIDIARY
In February 1997, a newly formed, substantially owned
subsidiary of TWE (the "REIT") issued 250,000 shares of
step-down preferred stock ("Step-Down Preferred Stock"). The
REIT is intended to qualify as a real estate investment trust
under the Internal Revenue Code of 1986, as amended. TWE used
the aggregate net proceeds from the transaction of $243
million to reduce its bank debt. The sole asset of the REIT
is a $432 million mortgage note payable of TWE, which will be
secured by certain real estate owned by TWE or its affiliates.
Each share of Step-Down Preferred Stock is entitled to a
liquidation preference of $1,000 and entitles the holder
thereof to receive cumulative cash dividends, payable
quarterly, at the rate of 14.253% per annum through December
30, 2006 and 1% per annum thereafter, which results in an
effective dividend yield of 8.48%. Shares of Step-Down
Preferred Stock are redeemable only in the event of certain
changes or proposed changes to the tax laws or regulations,
such that dividends paid by the REIT or interest paid under
the mortgage note would not be fully deductible for federal
income tax purposes. Time Warner has the right to liquidate
or dissolve the REIT at any time after December 30, 2006 or,
at any time prior thereto, upon the approval of the holders
of at least two-thirds of the outstanding shares of Step-Down
Preferred Stock.
6. PARTNERS' CAPITAL
Changes in partners' capital were as follows:
Three Months
Ended March 31,
1997 1996
(millions)
Balance at beginning of year $6,574 $6,478
Net income 320 94
Distributions (139) (121)
Allocation of income to Time Warner General
Partners' Senior Capital (31) (28)
Collections on note receivable from U S WEST - 71
Other (13) 8
Balance at March 31 $6,711 $6,502
TWE is required to make distributions to reimburse the
partners for income taxes at statutory rates based on their
allocable share of taxable income, and to reimburse Time
Warner for its stock options granted to employees of TWE
based on the amount by which the market price of Time Warner
common stock exceeds the option exercise price on the
exercise date or, with respect to options granted prior to
the TWE capitalization on September 30, 1992, the greater of
the exercise price and the $27.75 market price of Time Warner
common stock at the time of the TWE capitalization. TWE
accrues a stock option distribution and a corresponding
liability with respect to unexercised options when the market
price of Time Warner common stock increases during the
accounting period, and reverses previously-accrued stock
option distributions and the corresponding liability when the
market price of Time Warner common stock declines.
During the three months ended March 31, 1997, TWE
accrued $50 million of tax-related distributions and $89
million of stock option distributions, based on closing
prices of Time Warner common stock of $43.25 at March 31,
1997 and $37.50 at December 31, 1996. During the three months
ended March 31, 1996, TWE accrued $56 million of tax-related
distributions and $65 million of stock option distributions
as a result of an increase at that time in the market price
of Time Warner common stock. In the three months ended March
31, 1997, TWE paid distributions to the Time Warner General
Partners in the amount of $54 million, consisting of $50
million of tax-related distributions and $4 million of stock
option related distributions. In the three months ended March
31, 1996, TWE paid the Time Warner General Partners
distributions in the amount of $63 million, consisting of $56
million of tax-related distributions and $7 million of stock
option related distributions.
7. SEGMENT INFORMATION
TWE classifies its businesses into three fundamental
areas: Entertainment, consisting principally of interests in
filmed entertainment, television production, television
broadcasting and theme parks; Cable Networks, consisting
principally of interests in cable television programming; and
Cable, consisting principally of interests in cable
television systems.
Information as to the operations of TWE in different
business segments is set forth below.
Three Months
Ended March 31,
1997 1996
(millions)
Revenues
Filmed Entertainment-Warner Bros. $1,172 $1,216
Broadcasting-The WB Network 24 15
Cable Networks-HBO 483 419
Cable 1,020 947
Intersegment elimination (99) (112)
Total $2,600 $2,485
Three Months
Ended March 31,
1997 1996
(millions)
Operating Income
Filmed Entertainment-Warner Bros. $ 75 $ 70
Broadcasting-The WB Network (20) (24)
Cable Networks-HBO 91 76
Cable 183 146
Total $329 $268
Three Months
Ended March 31,
1997 1996
(millions)
Depreciation of Property, Plant and Equipment
Filmed Entertainment-Warner Bros. $ 40 $ 30
Broadcasting-The WB Network - -
Cable Networks-HBO 5 5
Cable 172 143
Total $217 $178
Three Months
Ended March 31,
1997 1996
(millions)
Amortization of Intangible Assets (1)
Filmed Entertainment-Warner Bros. $ 31 $ 31
Broadcasting-The WB Network - -
Cable Networks-HBO - -
Cable 76 79
Total $107 $ 110
(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.
8. COMMITMENTS AND CONTINGENCIES
Pending legal proceedings are substantially limited to
litigation incidental to the businesses of TWE and the
pending litigation with the City of New York and Fox News
Channel ("FNC") relating to Time Warner's acquisition of
Turner Broadcasting System, Inc. and the carriage of FNC on
Time Warner Cable's New York City cable television system. In
the opinion of management, the ultimate resolution of these
matters will not have a material effect on the consolidated
financial statements of TWE.
9. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash
flows is as follows:
Three Months
Ended March 31,
1997 1996
(millions)
Interest expense $115 $122
Cash payments made for interest 146 151
Cash payments made for income taxes, net 12 12
Noncash capital distributions 89 65
Part II. Other Information
Item 1. Legal Proceedings.
On April 11, 1997, the Washington and Dallas offices of
the Federal Trade Commission notified Warner Elektra Atlantic
Corporation ("WEA") that it had commenced a preliminary
investigation into whether WEA or others may be violating or
have violated laws against unfair competition by the
adoption, implementation and maintenance of minimum
advertised pricing programs.
Reference is made to the Federal lawsuits filed by TBS
and TWE in November 1992 seeking to overturn the must carry
provisions of the 1992 Cable Act on First Amendment grounds,
described on page I-36 of Time Warner's Annual Report on Form
10-K for the year ended December 31, 1996 (the "1996 Form
10-K"). On March 31, 1997, the U.S. Supreme Court upheld the
constitutionality of the must carry requirements.
Reference is made to the investigation commenced in 1994
by the U.S. Department of Justice into certain worldwide
activities of Warner Music Group ("WMG") and other companies
in the recorded music industry, described on page I-37 of the
1996 Form 10-K. On April 25, 1997, WMG provided information
and produced documents in accordance with the order of the
United States District Court for the District of Columbia.
Reference is made to the consolidated actions filed in
Superior Court, Fulton County, Georgia, against TBS, Time
Warner, certain officers and directors of TBS and other
defendants, in connection with the TBS Transaction,
described on pages I-38 and I-39 of the 1996 Form 10-K. On
March 21, 1997, defendants moved for summary judgment on
plaintiffs' fourth amended complaint and for entry of final
judgment on all claims in the third and fourth amended complaints.
Reference is made to the litigation entitled Fox News
Network, L.L.C. v. Time Warner Inc., Time Warner
Entertainment Company, L.P., Turner Broadcasting System, Inc.
and R.E. "Ted" Turner III, described on pages I-39 and I-40
of the 1996 Form 10-K. On March 21, 1997, defendants filed a
motion for summary judgment addressed to Fox's remaining
state law claims, which motion is scheduled to be argued on
May 15, 1997. On April 10, 1997, the court denied
plaintiff's motion to dismiss the counterclaims.
On March 19, 1997, Six Flags Theme Parks Inc. and its
wholly-owned subsidiary Six Flags Over Georgia, Inc. commenced a
declaratory judgment action in the Superior Court of Gwinnett
County, Georgia, entitled Six Flags Over Georgia, Inc. and Six
Flags Theme Parks, Inc. v. Six Flags Fund, Ltd. and Avram Salkin,
as Trustee of the Claims Trust. The plaintiffs are affiliates
of Time Warner and seek, among other things, a declaration and
determination of the rights and obligations of the partners of
Six Flags Over Georgia, L.P. with respect to certain disputed
partnership affairs and an accounting of all partnership affairs.
On April 21, 1997, defendants filed a motion to dismiss the
declaratory judgment action as well as an answer and
counterclaim naming Six Flags Entertainment Corporation and
TWE as additional counterclaim-defendants. The counterclaim
seeks imposition of a constructive trust, compensatory
damages of in excess of $250 million and unspecified punitive
damages for alleged breach of fiduciary duty, conversion, fraud
and conspiracy allegedly committed by the counterclaim-defendants
in connection with the management of the Six Flags Over
Georgia theme park. The counterclaim-defendants intend to
vigorously contest these allegations.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The exhibits listed on the accompanying Exhibit Index are
filed or incorporated by reference as a part of this report
and such Exhibit Index is incorporated herein by reference.
(b) Reports on Form 8-K.
(i) Time Warner filed a Current Report on Form
8-K dated March 21, 1997 setting forth in Item 7 a pro forma
consolidated condensed statement of operations of Time Warner
for the year ended December 31, 1996 reflecting the TBS
Transaction and certain other transactions entered into by
Time Warner during 1996.
TIME WARNER INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Time Warner Inc.
(Registrant)
By: /s/ Richard J. Bressler
Name: Richard J. Bressler
Title: Senior Vice President and
Chief Financial Officer
Dated: May 9, 1997
EXHIBIT INDEX
Pursuant to Item 601 of Regulations S-K
Exhibit No. Description of Exhibit
27 Financial Data Schedule.