SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
October 27, 1997
TIME WARNER INC.
(Exact name of registrant as specified in its charter)
Delaware 1-12259 13-3527249
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
75 Rockefeller Plaza, New York, NY 10019
(Address of principal executive offices) (zip code)
(212) 484-8000
(Registrant's telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Item 5. Other Events.
Time Warner Inc. ("Time Warner") and Time Warner Entertainment
Company, L.P. ("TWE"), a partnership in which Time Warner and certain
of its wholly owned subsidiaries own general and limited partnership
interests representing 74.49% of each of the pro rata priority capital
("Series A Capital") and residual equity capital ("Residual Capital")
and 100% of each of the senior priority capital ("Senior Capital") and
junior priority capital ("Series B Capital") have completed, or have
entered into, the transactions described below:
(i) On October 27, 1997, a wholly owned subsidiary of Time
Warner entered into an agreement (the "Transfer Agreement") with
the Time Warner Entertainment-Advance/Newhouse Partnership (the
"TWE-Advance/Newhouse Partnership") and each of its partners, pur-
suant to which, (a) (i) a wholly owned subsidiary of Time Warner
will contribute cable television systems serving approximately
640,000 subscribers formerly held by Cablevision Industries
Corporation and related companies ("CVI", now known as TWI Cable
Inc., or "TWI Cable", a wholly owned subsidiary of Time Warner)
(the "CVI Transferred Systems") into Paragon Communications
("Paragon", an entity currently owned by subsidiaries of Time Warner,
with 50% beneficially owned in the aggregate by TWE and the
TWE-Advance/Newhouse Partnership) in exchange for partnership interests
therein, (ii) Paragon will assume approximately $1.021 billion of
indebtedness from CVI, and (iii) Paragon, in turn, will contribute
the CVI Transferred Systems, subject to $985 million of the assumed
indebtedness, to the TWE-Advance/Newhouse Partnership in exchange
for a 1.15% common partnership interest and a $147 million preferred
partnership interest therein (collectively, the "CVI Transfers"),
(b) Paragon will contribute certain of its own cable television systems
serving approximately 27,000 subscribers, subject to $36 million of
the assumed indebtedness, to the TWE-Advance/Newhouse Partnership, in
exchange for an additional .04% common partnership interest and a $5
million preferred partnership interest therein (the "Time Warner/
Paragon Transferred Systems") and (c) (i) TWE will exchange
substantially all of its beneficial interest in Paragon for
an equivalent share of Paragon's cable television systems serving
approximately 515,000 subscribers and (ii) TWE, in turn, will similarly
transfer such systems (and certain related assets) to the
TWE-Advance/Newhouse Partnership in exchange for the TWE-Advance/
Newhouse Partnership's beneficial interest in Paragon and
in satisfaction of certain pre-existing obligations to the
TWE-Advance/Newhouse Partnership (the "TWE/Paragon Transferred
Systems", and when taken together with the Time Warner/Paragon
Transferred Systems, the "Paragon Transfers"). As a result of the
Paragon Transfers, substantially all of the pre-existing beneficial
ownership interests in Paragon owned by TWE and the TWE-Advance/
Newhouse Partnership will be redeemed by Paragon, which,
in effect, will result in wholly owned subsidiaries of Time Warner
owning substantially all of the remaining cable television systems
of Paragon. In addition, in connection with the TWE-A/N Transfers,
Advance/Newhouse will contribute an approximate $76 million note
receivable to the TWE-Advance/Newhouse Partnership in order to
maintain its 33.3% common equity interest therein. The CVI
Transfers and the Paragon Transfers are referred to herein as the
"TWE-A/N Transfers". The TWE-A/N Transfers are not subject to
bondholder approval. However, the TWE-A/N Transfers are subject
to the receipt of franchise and other required regulatory consents
and the aggregate consideration is subject to adjustment pursuant
to the terms of the Transfer Agreement.
(ii) On October 10, 1996, Time Warner 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 (now known as
Time Warner Companies, Inc., "TW Companies"), and TW Companies and
TBS became separate, wholly owned subsidiaries of the new parent
company. References herein to "Time Warner" refer to TW Companies
prior to October 10, 1996 and Time Warner Inc. thereafter.
As part of the TBS Transaction, each of TW Companies and TBS
became separate, wholly owned subsidiaries of Time Warner, which
combines, for financial reporting purposes, the consolidated net
assets and operating results of TW Companies and TBS. Each issued
and outstanding share of each class of capital stock of TW
Companies was converted into one share of a substantially
identical class of capital stock of Time Warner.
In connection with the TBS Transaction, Time Warner issued
(i) approximately 179.8 million shares of common stock (including
57 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.) and (ii) approximately 14 million stock options. Time Warner
also assumed approximately $2.8 billion of indebtedness.
(iii) on April 11, 1996, Time Warner issued 1.6 million
shares of 10-1/4% exchangeable preferred stock for approximately
$1.55 billion of net proceeds. Such proceeds were used by Time
Warner to redeem all $250 million principal amount of its
outstanding 8.75% Debentures due 2017 (the "8.75% Debentures") for
approximately $265 million (including redemption premiums and
accrued interest thereon) and to reduce indebtedness of TWI Cable
under its five-year revolving credit facility (the "1995 Credit
Agreement") by approximately $1.3 billion. This issuance and the
use of the proceeds therefrom to reduce outstanding indebtedness
of Time Warner are referred to herein as the "Preferred Stock
Refinancing". As part of the TBS Transaction, these privately-
placed preferred shares were converted into registered shares of
Series M exchangeable preferred stock with substantially identical
terms ("Series M Preferred Stock"); and
(iv) on February 1, 1996, Time Warner redeemed all $1.2
billion principal amount of 8.75% Convertible Subordinated
Debentures due 2015 (the "8.75% Convertible Debentures") for $1.28
billion, including redemption premiums and accrued interest
thereon (the "February 1996 Redemption"). The February 1996
Redemption was financed with (1) $557 million of net proceeds
raised in December 1995 from the issuance of Time Warner-obligated
mandatorily redeemable preferred securities of a subsidiary
("Preferred Trust Securities") and (2) proceeds raised from the
$750 million issuance in January 1996 of (i) $400 million
principal amount of 6.85% debentures due 2026, which are
redeemable at the option of the holders thereof in 2003, (ii) $200
million principal amount of 8.3% discount debentures due 2036,
which do not pay cash interest until 2016, (iii) $166 million
principal amount of 7.48% debentures due 2008 and (iv) $150
million principal amount of 8.05% debentures due 2016 (collectively
referred to herein as the "January 1996 Debentures"). The
issuance of the Preferred Trust Securities and the January 1996
Debentures, together with the February 1996 Redemption, are
collectively referred to herein as the "Convertible Debt Refinancing".
The Preferred Stock Refinancing and the Convertible Debt
Refinancing are referred to herein as the "Debt Refinancings" and
the TWE-A/N Transfers, the TBS Transaction and the Debt
Refinancings are referred to herein as the "Transactions".
Item 7. Financial Statements and Exhibits
(a) Pro Forma Consolidated Condensed Financial Statements
The following pro forma consolidated condensed financial
statements of Time Warner and the Time Warner Entertainment Group (the
"Entertainment Group"), principally consisting of TWE, as of and for the
six months ended June 30, 1997 give effect to the TWE-A/N Transfers as
if such transaction occurred at such date, with respect to the balance
sheet, and at the beginning of such period, with respect to the
statement of operations. The TBS Transaction and the Debt Refinancings
are already reflected in the historical financial statements of Time
Warner as of and for the six months ended June 30, 1997. The pro forma
consolidated condensed statements of operations of Time Warner and the
Entertainment Group for the year ended December 31, 1996 give effect to
the TWE-A/N Transfers and, with respect to Time Warner only, the TBS
Transaction and the Debt Refinancings, as if the transactions occurred
at the beginning of such period.
The pro forma consolidated condensed financial statements should
be read in conjunction with the historical financial statements of Time
Warner and TWE, including the notes thereto, which are contained in the
Time Warner Quarterly Report on Form 10-Q for the six months ended June
30, 1997 and the Time Warner Annual Report on Form 10-K for the year
ended December 31, 1996, as well as the historical financial statements
of TBS for the nine months ended September 30, 1996, which are
incorporated herein by reference from TBS's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1996.
The pro forma consolidated condensed financial statements are
presented for informational purposes only and are not necessarily
indicative of the financial position or operating results that would
have occurred if the Transactions had been consummated as of the dates
indicated, nor are they necessarily indicative of future financial
conditions or operating results.
TWE-A/N Transfers
In April 1995, TWE and the Advance/Newhouse Partnership ("Advance/
Newhouse") formed the TWE-Advance/Newhouse Partnership. Upon formation
of the TWE-Advance/Newhouse Partnership, TWE, which is the managing
partner, owned a 66.7% common partnership interest in the TWE-Advance/
Newhouse Partnership and Advance/Newhouse owned a 33.3% common
partnership interest. TWE consolidates the TWE-Advance/Newhouse
Partnership. As such, the common partnership interest owned by
Advance/Newhouse and the common and preferred partnership interests
that will be owned by Paragon as a result of the TWE-A/N Transfers
are reflected in the Entertainment Group's pro forma financial
statements as minority interest.
Subject to receipt of franchise and other required regulatory
consents, Time Warner has agreed to transfer certain cable television
systems serving an aggregate of approximately 667,000 subscribers to the
TWE-Advance/Newhouse Partnership, subject to approximately $1.021
billion of debt, thereby reducing the financial leverage of Time Warner
and increasing the under-leveraged capitalization of the
TWE-Advance/Newhouse Partnership and consequently, TWE. In addition,
as discussed more fully below, as part of the TWE-A/N Transfers, TWE
and the TWE-Advance/Newhouse Partnership will exchange substantially
all of their respective beneficial interests in Paragon (and certain
related assets) for an equivalent share of Paragon's cable
television systems, serving approximately 515,000 subscribers.
Pro forma adjustments for the CVI Transfers reflect the
contribution by Time Warner, through Paragon, of cable television
systems serving approximately 640,000 subscribers formerly held by CVI to
the TWE-Advance/
Newhouse Partnership, subject to approximately $985 million of debt in
exchange for a 1.15% common partnership interest and a $147 million
preferred partnership interest therein to be held by Paragon.
Pro forma adjustments for the Paragon Transfers reflect (i) the
contribution by Paragon of certain of its own cable television systems
serving approximately 27,000 subscribers, subject to approximately
$36 million of debt, to the TWE-Advance/Newhouse Partnership in
exchange for an additional .04% common partnership interest and a
$5 million preferred partnership interest therein, (ii) (a) the
exchange by TWE of substantially all of its beneficial interest in Paragon
for an equivalent share of Paragon's cable television systems serving
approximately 515,000 subscribers and (b) the transfer by
TWE, in turn, of such systems (and certain related assets) to the
TWE-Advance/Newhouse Partnership in exchange for the TWE-Advance/Newhouse
Partnership's beneficial interest in Paragon and in satisfaction of
certain pre-existing obligations to the TWE-Advance/Newhouse Partnership
and (iii) the consolidation of Paragon by Time Warner (and the
related deconsolidation of Paragon by TWE) as a result of the redemption
by Paragon of substantially all of the pre-existing beneficial ownership
interests therein owned by TWE and the TWE-Advance/Newhouse Partnership
which, in effect, will result in wholly owned subsidiaries of Time
Warner owning substantially all of the remaining cable television
systems of Paragon.
Because the fair value of the consideration to be received from
the TWE-Advance/Newhouse Partnership approximates the carrying value of
the net assets of the CVI Transferred Systems and the Time
Warner/Paragon Transferred Systems, Time Warner is not expected to
recognize a gain or loss on the transaction and the net assets to be
received by the TWE-Advance/Newhouse Partnership will be recorded at
Time Warner's historical cost basis of accounting. Similarly, TWE will
not recognize a gain or loss on its transfer of the TWE/Paragon
Transferred Systems (and such net assets will be recorded by the
TWE-Advance/Newhouse Partnership at TWE's historical cost basis of
accounting), since such entities belong to a common consolidated
control group.
In order to maintain its 33.3% common partnership interest in the
TWE-Advance/Newhouse Partnership, Advance/Newhouse will make a capital
contribution in the form of a $76 million note, payable to the
partnership no later than the fourth anniversary of the closing date of
the transaction. Such contribution has no material effect on the
accompanying pro forma financial statements and accordingly, has not
been given pro forma effect therein.
Upon consummation of the TWE-A/N Transfers, the TWE-Advance/Newhouse
Partnership will be owned approximately 65.5% by TWE, 33.3% by
Advance/Newhouse and 1.2% by Paragon. In addition, Paragon will own an
approximate $152 million preferred partnership interest in the TWE-
Advance/Newhouse Partnership, which will entitle it to receive priority
allocations of partnership income and distributions therefrom. Under the
terms of the partnership agreement, partnership income is generally
allocated first to the preferred partnership interest at a rate of
10-1/4% per annum, and then to the partners in proportion to their
respective common equity interests. Distributions on such preferred
interests are payable each quarter in cash, to the extent available, in
accordance with the terms of the partnership agreement. The preferred
partnership interests are required to be redeemed by the TWE-Advance/
Newhouse Partnership in three equal annual installments beginning on the
sixth anniversary of the TWE-A/N Transfer closing.
TWE will continue to consolidate the TWE-Advance/Newhouse
Partnership and Paragon will account for its interest therein under the
equity method of accounting.
TBS Transaction
Pro forma adjustments for the TBS Transaction reflect (1) the
issuance of approximately 179.8 million shares of common stock,
including 57 million shares of Series LMCN-V Common Stock which were
received by
affiliates of LMC, (2) the issuance of approximately 14 million stock
options, (3) the assumption of approximately $2.8 billion of
indebtedness and (4) the payment of approximately $95 million for
transaction costs and other related liabilities of Time Warner and TBS.
The TBS Transaction has been accounted for by the purchase method
of accounting for business combinations and, accordingly, the cost to
acquire TBS of approximately $6.2 billion has been preliminarily
allocated to the net assets acquired in proportion to estimates of their
respective fair values.
Debt Refinancings
Pro forma adjustments for the Debt Refinancings in the year ended
December 31, 1996 reflect proceeds of (1) $1.55 billion received from
the issuance of preferred stock as part of the Preferred Stock
Refinancing and (2) approximately $750 million received from the
issuance of the January 1996 Debentures, which have a weighted average
interest rate of 7.3%, and the use of (1) $721 million of such proceeds,
together with $557 million of net proceeds received from the issuance
of the Preferred Trust Securities (8-7/8% yield) in December 1995, to
finance the Convertible Debt Refinancing ($1.226 billion principal
amount, plus redemption premiums and accrued interest thereon of $52
million), (2) $265 million to redeem all of Time Warner's outstanding
8.75% Debentures ($250 million principal amount, plus redemption
premiums and accrued interest thereon of $15 million) and (3)
approximately $1.285 billion to reduce outstanding indebtedness
of TWI Cable under the 1995 Credit Agreement.
TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
June 30, 1997
(millions, unaudited)
Time Time
Warner CVI Paragon Warner
Historical Transfers(a) Transfers(b) Pro Forma
A S S E T S
Cash and equivalents $ 470 $ $ 166 $ 636
Other current assets 3,974 (8) 9 3,975
Total current assets 4,444 (8) 175 4,611
Noncurrent inventories 1,757 - - 1,757
Investments in and amounts
due to and from
Entertainment Group 6,050 635 22 6,707
Other investments 1,903 - (967) 936
Property, plant and
equipment, net 2,032 (213) 216 2,035
Cable television and
sports franchises 4,089 (1,084) 569 3,574
Goodwill 12,332 (341) (12) 11,979
Other assets 2,048 (2) 5 2,051
Total assets $34,655 $(1,013) $ 8 $33,650
LIABILITIES AND SHAREHOLDERS' EQUITY
Total current liabilities $ 3,709 $ (24) $ 41 $ 3,726
Long-term debt 12,711 (985) (36) 11,690
Borrowings against future
stock option proceeds 402 - - 402
Deferred income taxes 4,057 - - 4,057
Other liabilities 1,641 (4) 3 1,640
Company-obligated mandatorily
redeemable preferred securities of subsidiaries holding solely
subordinated notes and debentures of subsidiaries of the
Company (1) 949 - - 949
Series M exchangeable
preferred stock 1,763 - - 1,763
Shareholders' equity:
Preferred stock 4 - - 4
Series LMCN-V common stock 1 - - 1
Common stock 5 - - 5
Paid-in capital 12,447 - - 12,447
Accumulated deficit (3,034) - - (3,034)
Total shareholders' equity 9,423 - - 9,423
Total liabilities and
shareholders' equity $34,655 $(1,013) $ 8 $33,650
_______________
(1) 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.
See accompanying notes.
TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Six Months Ended June 30, 1997
(millions, except per share amounts; unaudited)
Time Time
Warner CVI Paragon Warner
Historical Transfers(c) Transfers(d) Pro Forma
Revenues $6,227 $(130) $ 100 $ 6,197
Cost of revenues* 3,453 (91) 89 3,451
Selling, general and
administrative* 2,235 (18) 19 2,236
Operating expenses 5,688 (109) 108 5,687
Business segment operating
income (loss) 539 (21) (8) 510
Equity in pretax income (loss)
of Entertainment Group 426 (5) 3 424
Interest and other, net (595) 34 5 (556)
Corporate expenses (43) - - (43)
Income before income taxes 327 8 - 335
Income tax provision (245) (3) - (248)
Income before extraordinary
item 82 5 - 87
Preferred dividend requirements (157) - - (157)
Income (loss) before extraordinary
item applicable to common shares
$ (75) $ 5 $ - $ (70)
Loss before extraordinary
item per common share $ (.13) $ (.13)
Average common shares 559.9 559.9
_______________
* Includes depreciation and
amortization expense of: $ 615 $ (47) $ 19 $ 587
See accompanying notes.
TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1996
(millions, except per share amounts; unaudited)
TBS Transaction
Time Warner TBS Pro Forma Debt
Historical Historical(e) Adjustments(f) Refinancings(g)
Revenues $10,064 $2,735 $ - $ -
Cost of revenues* 5,922 1,887 150 -
Selling, general and
administrative* 3,176 725 - -
Operating expenses 9,098 2,612 150 -
Business segment operating
income (loss) 966 123 (150) -
Equity in pretax income (loss)
of Entertainment Group 290 - - -
Interest and other, net (1,174) (143) 11 38
Corporate expenses (78) (22) - -
Income (loss) before
income taxes 4 (42) (139) 38
Income tax (provision)
benefit (160) 22 11 (16)
Income (loss) before
extraordinary item (156) (20) (128) 22
Preferred dividend
requirements (257) - - (51)
Income (loss) before extraordinary
item applicable to
common shares $ (413) $ (20) $(128) $ (29)
Loss before extraordinary item per
common share $(0.95)
Average common shares 431.2
_______________
* Includes depreciation and
amortization
expense of: $ 988 $ 141 $ 116 $ -
(Cont'd)
Subtotal TWE-A/N
Time Warner CVI Paragon Transfers
Pro Forma Transfers(c) Transfers(d) Pro Forma
Revenues $12,799 $(238) $200 $12,761
Cost of revenues* 7,959 (175) 172 7,956
Selling, general and
administrative* 3,901 (39) 41 3,903
Operating expenses 11,860 (214) 213 11,859
Business segment operating
income (loss) 939 (24) (13) 902
Equity in pretax income
(loss) of Entertainment
Group 290 (16) (7) 267
Interest and other, net (1,268) 62 20 (1,186)
Corporate expenses (100) - - (100)
Income (loss) before
income taxes (139) 22 - (117)
Income tax (provision)
benefit (143) (9) - (152)
Income (loss) before
extraordinary item (282) 13 - (269)
Preferred dividend
requirements (308) - - (308)
Income (loss) before extraordinary
item applicable to
common shares $ (590) $ 13 $ - $(577)
Loss before extraordinary
item per common share $(1.04) $(1.02)
Average common shares 567.3 567.3
_______________
* Includes depreciation and
amortization expense of: $1,245 $ (95) $ 36 $1,186
See accompanying notes.
TIME WARNER INC.
NOTES TO PRO FORMA CONSOLIDATED CONDENSED
STATEMENT OF OPERATIONS
(a) Pro forma adjustments to record the CVI Transfers at June
30, 1997 reflect (1) a $635 million increase in Time
Warner's investment in and amounts due to and from the
Entertainment Group as a result of the receipt by Paragon
of a 1.15% common partnership interest and $147 million
preferred partnership interest in the TWE-Advance/Newhouse
Partnership and (2) the elimination of $635 million of net
assets relating to Time Warner's historical cost basis in
the net assets to be transferred at June 30, 1997, including
$985 million of long-term indebtedness that will be
assumed by the TWE-Advance/Newhouse Partnership.
(b) Pro forma adjustments to record the Paragon Transfers
reflect (1) a $22 million increase in Time Warner's invest-
ment in and amounts due to and from the Entertainment Group
as a result of the receipt by Paragon of a .04% common
partnership interest and $5 million preferred partnership
interest in the TWE-Advance/Newhouse Partnership, (2) the
elimination of $22 million of net assets relating to Time
Warner's historical cost basis in the net assets to be
transferred at June 30, 1997, including (i) $46 million of
cable television franchises and (ii) $12 million of
goodwill, offset by (iii) $36 million of long-term
indebtedness that will be assumed by the TWE-Advance/Newhouse
Partnership and (3) the consolidation of Paragon by Time
Warner as a result of the redemption by Paragon of substantially
all of TWE's and the TWE-Advance/Newhouse Partnership's pre-
existing 50% beneficial ownership interests
therein which, in effect, will result in wholly owned
subsidiaries of Time Warner owning substantially all of the
remaining cable television systems of Paragon. Pro forma
adjustments to consolidate Paragon reflect (1) the consolidation
of $392 million of net assets, including $40 million
of cable television franchises, relating to the historical
financial position at June 30, 1997 of the remaining cable
television systems of Paragon that will not be transferred
to the TWE-Advance/Newhouse Partnership and (2) a $967
million decrease in other investments as a result of the
elimination of Time Warner's historical investment in
Paragon, of which $575 million has been reclassified to
cable television franchises.
(c) Pro forma adjustments to record the CVI Transfers for the
six months ended June 30, 1997 and the year ended December
31, 1996 reflect (1) the elimination of $11 million and $39
million of pretax losses, respectively, relating to the net
assets to be transferred, (2) a $5 million and $16 million
reduction in Time Warner's equity in the pretax income of
the Entertainment Group, respectively, representing the
aggregate effect on TWE's operating results from the CVI
Transfers, as more fully described in the notes to the
Entertainment Group pro forma consolidated condensed
financial statements contained elsewhere herein, (3) a
decrease in interest and other, net, of $2 million in the
six months ended June 30, 1997 and an increase of $1
million in the year ended December 31, 1996, relating to
Paragon's equity in the net income of the TWE-Advance/
Newhouse Partnership, including distributions received on
Paragon's $147 million preferred partnership interest
therein and (4) an increase of $3 million and $9 million in
income tax expense, respectively, provided at a 41% tax
rate.
(d) Pro forma adjustments to record the Paragon Transfers for
the six months ended June 30, 1997 and the year ended
December 31, 1996 reflect (1) the consolidation of the
operating results of Paragon, (2) a $3 million increase and
a $7 million reduction in Time Warner's equity in the
pretax income of the Entertainment Group, respectively,
representing the aggregate effect on TWE's operating
results from the Paragon Transfers, as more fully described
in the notes to the Entertainment Group pro forma consolidated
condensed financial statements contained elsewhere
herein and (3) a $1 million and $2 million reduction in
interest expense, respectively, as a result of the assump-
tion by the TWE-Advance/Newhouse Partnership of $36 million
of long-term indebtedness. Pro forma adjustments to
consolidate the operating results of Paragon for the six
months ended June 30, 1997 and the year ended December 31,
1996 include (i) an increase in operating income of $18
million and $37
million, respectively, relating to the operations of the
remaining cable television systems of Paragon that will not be
transferred to the TWE-Advance/Newhouse Partnership, (ii) a reduction
of $4 million and $18 million, respectively, in interest and
other, net, principally relating to gains on the sale of certain
assets formerly owned by Paragon and (iii) a reduction of $26
million and $50 million in the historical operating results of
Time Warner, respectively, resulting from the elimination of
Time Warner's equity in the net income of Paragon.
(e) Reflects the historical operating results of TBS for the
nine-month, pre-acquisition period ended September 30,
1996, including certain reclassifications to conform to
Time Warner's financial statement presentation.
(f) Pro forma adjustments to record the TBS Transaction for the
nine-month, pre-acquisition period ended September 30, 1996
reflect (1) the exclusion of $9 million of merger costs
directly related to the TBS Transaction expensed by TBS in
such period, (2) an increase of $150 million in cost of
revenues consisting of (i) a $7 million reduction of TBS's
historical amortization of pre-existing goodwill, (ii) a
$152 million increase in amortization with respect to the
excess cost to acquire TBS that has been allocated to (a)
goodwill in the amount of $6.746 billion and amortized on
a straight-line basis over a forty-year period and (b)
other intangible assets in the amount of $698 million and
amortized on a straight-line basis over a weighted average
period of approximately 20 years, (iii) a $29 million
decrease in the amortization of film libraries resulting
from a change in their estimated useful lives and (iv) a
$34 million increase in the amortization of capitalized
film exploitation costs to conform TBS's accounting policy
to Time Warner's accounting policy, (3) an increase of $5
million in interest expense on the $95 million of additional
indebtedness for the payment of transaction costs
and other related liabilities of Time Warner and TBS, (4)
a decrease of $7 million in interest and other, net due to
the elimination of TW Companies's historical equity
accounting for its investment in TBS and (5) a decrease of
$11 million in income tax expense as a result of income
taxes provided at a 41% tax rate.
(g) Pro forma adjustments to record the Debt Refinancings for
the year ended December 31, 1996 reflect an increase in
noncash preferred dividend requirements of $51 million
relating to the payment of Series M Preferred Stock
dividends, at a rate of 10-1/4% per annum, payable quarterly.
For purposes of Time Warner's pro forma consolidated
condensed statement of operations, such dividend requirements
have been assumed to have been satisfied in-kind,
through the issuance of additional shares of Series M
Preferred Stock with an aggregate liquidation preference
equal to the amount of such dividends.
Pro forma adjustments to record the Debt Refinancings for the year
ended December 31, 1996 also reflect interest savings of $38 million
resulting from (1) the issuance of the January 1996 Debentures for
approximately $750 million of proceeds and the use of $721 million
of such proceeds, together with $557 million of available cash and
equivalents related to the issuance of the Preferred Trust
Securities, to redeem $1.226 billion principal amount of 8.75%
Convertible Debentures for an aggregate redemption price of
$1.278 billion, including redemption premiums and accrued interest
thereon of $52 million and (2) the issuance of 1.6 million shares
of Series M Preferred Stock for approximately $1.55 billion of net
proceeds and the use of (i) $265 million of such proceeds to redeem
all $250 million principal amount of Time Warner's outstanding
8.75% Debentures (plus redemption premiums and accrued interest
thereon of $15 million) and (ii) the remaining $1.285 billion of such
proceeds to reduce outstanding indebtedness of TWI Cable under the
1995 Credit Agreement.
All pro forma adjustments to record the Debt Refinancings for the
year ended December 31, 1996 reflect the
incremental increase (decrease) in Time Warner's interest
expense from each refinancing that had closed during the
period, as set forth below (in millions).
* Issuance by Time Warner of $750 million of January
1996 Debentures in connection with the Convertible
Debt Refinancing, at a weighted average
interest rate of 7.3% $ 2
* Redemption of $1.226 billion principal amount of
8.75% Convertible Debentures (9)
* Redemption of $250 million principal amount of 8.75% Debentures (8)
* Repayment of $1.285 billion of TWI Cable indebtedness
under the 1995 Credit Agreement (23)
Net decrease in interest expense $(38)
Income taxes of $16 million have been provided at a 41% tax rate on
the aggregate net reduction in interest expense.
TIME WARNER ENTERTAINMENT GROUP
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
June 30, 1997
(millions, unaudited)
Entertainment Entertainment
Group CVI Paragon Group
Historical Transfers(a) Transfers(b) Pro Forma
A S S E T S
Cash and equivalents $ 293 $ - $(166) $ 127
Other current assets 3,266 8 (9) 3,265
Total current assets 3,559 8 (175) 3,392
Noncurrent inventories 2,126 - - 2,126
Loan receivable from
Time Warner 400 - - 400
Property, plant and
equipment, net 6,269 213 (216) 6,266
Cable television franchises 2,977 1,084 6 4,067
Goodwill 3,936 341 12 4,289
Other assets 990 2 (5) 987
Total assets $20,257 $1,648 $(378) $21,527
LIABILITIES AND PARTNERS' CAPITAL
Total current liabilities $ 3,649 $ 24 $ (41) $ 3,632
Long-term debt 5,781 985 36 6,802
Other long-term liabilities 1,203 4 (3) 1,204
Minority interests 1,137 635 (370) 1,402
Preferred stock of a subsidiary
holding solely a mortgage
note of its parent 240 - - 240
Time Warner General Partners'
Senior Capital 1,605 - - 1,605
Partners' capital 6,642 - - 6,642
Total liabilities and
partners' capital $20,257 $1,648 $(378) $21,527
See accompanying notes.
TIME WARNER ENTERTAINMENT GROUP
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Six Months Ended June 30, 1997
(millions, unaudited)
Entertainment Entertainment
Group CVI Paragon Group
Historical Transfers(c) Transfers(d) Pro Forma
Revenues $5,333 $ 130 $(100) $5,363
Cost of revenues* 3,445 91 (89) 3,447
Selling, general and
administrative* 1,233 18 (19) 1,232
Operating expenses 4,678 109 (108) 4,679
Business segment
operating income 655 21 8 684
Interest and other, net (11) (30) (5) (46)
Minority interest (164) 4 - (160)
Corporate expenses (36) - - (36)
Income (loss) before
income taxes 444 (5) 3 442
Income tax provision (37) - - (37)
Net income (loss) $ 407 $ (5) $ 3 $ 405
_______________
* Includes depreciation and
amortization expense of: $ 661 $ 47 $ (19) $ 689
See accompanying notes.
TIME WARNER ENTERTAINMENT GROUP
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1996
(millions, unaudited)
Entertainment Entertainment
Group CVI Paragon Group
Historical Transfers(c) Transfers(d) Pro Forma
Revenues $10,861 $238 $(200) $10,899
Cost of revenues* 7,436 175 (172) 7,439
Selling, general and
administrative* 2,335 39 (41) 2,333
Operating expenses 9,771 214 (213) 9,772
Business segment
operating income 1,090 24 13 1,127
Interest and other, net (524) (59) (20) (603)
Minority interest (207) 19 - (188)
Corporate expenses (69) - - (69)
Income (loss) before
income taxes 290 (16) (7) 267
Income tax provision (70) - - (70)
Income (loss) before
extraordinary item $ 220 $ (16) $ (7) $ 197
_______________
*Includes depreciation and
amortization expense of: $1,244 $ 95 $ (36) $1,303
See accompanying notes.
TIME WARNER INC.
NOTES TO THE ENTERTAINMENT GROUP PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(a) Pro forma adjustments to record the CVI Transfers at June 30,
1997 reflect (1) the recording of $635 million of net assets to
be acquired by the TWE-Advance/Newhouse Partnership from
Paragon at Time Warner's historical cost basis of accounting,
including $985 million of indebtedness that will be assumed in
the transaction and (2) a $635 million increase in minority
interest resulting from the issuance by the TWE-Advance/
Newhouse Partnership of a 1.15% common partnership interest and
a $147 million preferred partnership interest to Paragon.
(b) Pro forma adjustments to record the Paragon Transfers at June
30, 1997 reflect (1) the recording of $22 million of net assets
to be acquired by the TWE-Advance/Newhouse Partnership from
Paragon at Time Warner's historical cost basis of accounting,
including (i) $46 million of cable television franchises and
(ii) $12 million of goodwill, offset by (iii) $36 million of
indebtedness that will be assumed in the transaction, (2) a $22
million increase in minority interest resulting from the
issuance by the TWE-Advance/Newhouse Partnership of a .04%
common partnership interest and a $5 million preferred
partnership interest to Paragon and (3) the deconsolidation of Paragon
by TWE as a result of the redemption by Paragon of substantially all
of TWE's and the TWE-Advance/Newhouse Partnership's
pre-existing 50% beneficial ownership interests therein which,
in effect, will result in wholly owned subsidiaries of Time
Warner owning substantially all of the remaining cable television
systems of Paragon. Pro forma adjustments to deconsolidate
Paragon reflect (1) the deconsolidation of $392 million of net
assets, including $40 million of cable television franchises,
relating to the historical financial position at June 30, 1997
of the remaining cable television systems of Paragon that will
not be transferred to the TWE-Advance/Newhouse Partnership and
(2) a $392 million decrease in minority interest relating to
the elimination of Time Warner's historical investment in Paragon.
TWE's contribution of the TWE/Paragon Transferred Systems to the
TWE-Advance/Newhouse Partnership in exchange for the
TWE-Advance/Newhouse Partnership's beneficial interest in Paragon
and in satisfaction of certain pre-existing obligations to the
TWE-Advance/Newhouse Partnership has no effect on the pro forma
consolidated condensed balance sheet of TWE and accordingly,
has not been given pro forma effect to therein.
(c) Pro forma adjustments to record the CVI Transfers for the six
months ended June 30, 1997 and the year ended December 31, 1996
reflect (1) the recording of $11 million and $39 million of
pretax losses, respectively, relating to the net assets to be
acquired by the TWE-Advance/Newhouse Partnership, (2) a $2
million and $4 million decrease in interest and other, net,
respectively, resulting from a 37.5 basis point decrease in the
pro forma interest rates applicable to borrowings by the TWE-
Advance/Newhouse Partnership under the New Credit Agreement in
comparison to the pro forma interest rates applicable to
borrowings by TWI Cable under the same credit agreement and (3)
a $4 million and $19 million decrease in minority interest
expense, respectively, representing the net effect of (i)
Advance/Newhouse's minority interest in the incremental net
losses and preferred dividend requirements of the TWE-
Advance/Newhouse Partnership which are partially offset by (ii)
Paragon's minority interest in the aggregate net income of the
TWE-Advance/Newhouse Partnership, including distributions on
its $147 million preferred partnership interest therein at an
annual rate of 10-1/4%.
(d) Pro forma adjustments to record the Paragon Transfers for the
six months ended June 30, 1997 and the year ended December 31,
1996 reflect (1) the deconsolidation of the operating results
of Paragon, (2) a $1 million and $2 million increase in
interest and other, net, respectively, as a result of the
assumption by the TWE-Advance/Newhouse Partnership of $36
million of long-term indebtedness of TWI Cable. Pro forma
adjustments to deconsolidate the operating results of Paragon
for the six months ended June 30, 1997 and the year ended
December 31, 1996 include (i) a reduction of $18 million and $37
million in the historical operating income of Paragon, respect-
ively, relating to the operations of the remaining cable television
systems of Paragon that will not be transferred to the TWE-Advance/
Newhouse Partnership, (ii) an increase of $4 million and
$18 million, respectively, in interest and other, net, principally
relating to the elimination of a gain on the sale of an investment
formerly owned by Paragon and (iii) a $26 million and $50 million
increase in operating income relating to the elimination of Time
Warner's historical minority interest in the net income of Paragon.
TWE's contribution of the TWE/Paragon Transferred Systems to the
TWE-Advance/Newhouse Partnership in exchange for the
TWE-Advance/Newhouse Partnership's beneficial interest in Paragon
and in satisfaction of certain pre-existing obligations to the
TWE-Advance/Newhouse Partnership has no effect on the pro forma
consolidated condensed statements of operations of TWE and
accordingly, has not been given pro forma effect to therein.
(b) Financial statements of businesses acquired:
(i) Turner Broadcasting System, Inc. (the documents listed in this
paragraph (i) being referred to as the "Financial Statements of Turner
Broadcasting System, Inc."):
(A) Unaudited Consolidated Condensed Financial Statements as
of September 30, 1996 and for each of the nine months ended
September 30, 1996 and 1995; and
(B) Consolidated Financial Statements as of December 31, 1995
and 1994 and for each of the years ended December 31, 1995, 1994 and
1993, including the report thereon of Price Waterhouse LLP.
(ii) Cablevision Industries Corporation and subsidiaries (the
documents listed in this paragraph (ii) being referred to as the
"Financial Statements of Cablevision Industries Corporation"):
(A) Consolidated Financial Statements as of and for the
year ended December 31, 1995, including the report thereon of Ernst
& Young LLP; and
(B) Consolidated Financial Statements as of December 31,
1994 and for each of the years ended December 31, 1994 and 1993,
including the report thereon of Arthur Andersen LLP.
(c) Pro forma Consolidated Condensed Financial Statements:
(i) Time Warner Inc.:
(A) Pro Forma Consolidated Condensed Balance Sheet as of
June 30, 1997;
(B) Pro Forma Consolidated Condensed Statements of
Operations for the six months ended June 30, 1997 and the year ended
December 31, 1996; and
(C) Notes to Pro Forma Consolidated Condensed Financial
Statements.
(ii) Entertainment Group:
(A) Pro Forma Consolidated Condensed Balance Sheet as of
June 30, 1997;
(B) Pro Forma Consolidated Condensed Statement of
Operations for the six months ended June 30, 1997 and the year ended
December 31, 1996; and
(C) Notes to Pro Forma Consolidated Condensed Financial
Statements.
(d) Exhibits:
(i) Exhibit 23.(a): Consent of Price Waterhouse LLP.
(ii) Exhibit 23.(b): Consent of Ernst & Young LLP.
(iii) Exhibit 23.(c): Consent of Arthur Andersen LLP.
(iv) Exhibit 99.(a): Financial Statements of Turner Broadcasting
System, Inc. (incorporated by reference from pages 31 to 53 of the
Annual Report to Shareholders incorporated by reference into the Annual
Report on Form 10-K for the year ended December 31, 1995 of Turner
Broadcasting System, Inc. and from pages 2 to 9 of the Quarterly Report
on Form 10-Q for the nine months ended September 30, 1996 of Turner
Broadcasting System, Inc.).
(v) Exhibit 99.(b): Financial Statements of Cablevision Industries
Corporation (incorporated by reference from pages 23 to 39 of the Annual
Report on Form 10-K for the year ended December 31, 1995 of Cablevision
Industries Corporation).
(vi) Exhibit 99.(c): Amended and Restated Transaction Agreement
dated as of October 27, 1997 among Advance Publications, Inc.,
Newhouse Broadcasting Corporation, Advance/Newhouse Partnership,
Time Warner Entertainment Company, L.P., TW Holding Co. and Time
Warner Entertainment-Advance/Newhouse Partnership.
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, in the City of New
York, State of New York, on November 5, 1997.
TIME WARNER INC.
By: /s/ Richard J. Bressler
Name: Richard J. Bressler
Title: Senior Vice President
and Chief Financial Officer
EXHIBIT INDEX
Exhibit Sequential
No. Description of Exhibits Page Number
23.(a) Consent of Price Waterhouse LLP,
Independent Accountants.
23.(b) Consent of Ernst & Young LLP, Independent
Accountants.
23.(c) Consent of Arthur Andersen LLP, Independent
Public Accountants.
99.(a) Financial Statements of Turner Broadcasting
System, Inc. (incorporated by reference from
pages 31 to 53 of the Annual Report to Shareholders
incorporated by reference into the
Annual Report on Form 10-K for the year ended
December 31, 1995 of Turner Broadcasting System,
Inc. and from pages 2 to 9 of the Quarterly Report
on Form 10-Q for the nine months ended September
30, 1996 of Turner Broadcasting System, Inc.) *
99.(b) Financial Statements of Cablevision Industries
Corporation (incorporated by reference from pages
23 to 39 of the Annual Report on Form 10-K for the
year ended December 31, 1995 of
Cablevision Industries Corporation). *
99.(c) Amended and Restated Transaction Agreement, dated
as of October 27, 1997 among Advance Publications, Inc.,
Newhouse Broadcasting Corporation, Advance/Newhouse
Partnership, Time Warner Entertainment Company, L.P.,
TW Holding Co. and Time Warner Entertainment-Advance
Newhouse Partnership.
_______________
* Incorporated by reference.