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 September 30, 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 521,313,114
Series LMCN-V Common Stock - $.01 par value 57,061,942
Description of Class Shares Outstanding
as of October 31, 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 36
Consolidated balance sheets at September 30, 1997
and December 31, 1996 18 44
Consolidated statements of operations for the three
and nine months ended September 30, 1997 and 1996 19 45
Consolidated statements of cash flows for the nine
months ended September 30, 1997 and 1996 20 46
Notes to consolidated financial statements 21 47
Supplementary information 34
PART II. OTHER INFORMATION 55
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 (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" or the "Company" refer to TW Companies prior to
October 10, 1996 and Time Warner Inc. 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 and
television broadcasting; Cable Networks, consisting principally
of interests in cable television programming; 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
cable television systems, and a portion of its interests in cable television
programming 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.
Cable Financing Strategy
Currently, Time Warner is no longer actively pursuing a restructuring
of TWE with U S WEST. Time Warner's cable financing strategy is to
continue to use cable operating cash flow to finance the level of capital
spending necessary to upgrade the technological capability of its cable
television systems and develop new services, while pursuing opportunities to
reduce both existing debt and its share of future funding requirements
related to the cable television business and related ancillary businesses.
Consistent with this strategy, Time Warner, TWE and the TWE-Advance/Newhouse
Partnership ("TWE-A/N") have recently announced certain transactions,
consisting of (i) a series of transactions with TCI Communications, Inc.
("TCI"), a subsidiary of Tele-Communications, Inc., to establish two,
new strategic joint ventures, expand an existing joint venture and
exchange certain cable television systems (collectively, the "TCI Cable
Transactions"), (ii) the transfer of TWE's and TWE-A/N's direct
broadcast satellite operations and related assets to a separate,
publicly traded entity, as well as certain related transactions
(collectively, the "Primestar Transactions") and (iii) the transfer
by a wholly owned subsidiary of Time Warner of cable television systems
serving approximately 650,000 subscribers to TWE-A/N, subject to
approximately $1 billion of debt, in exchange for common and preferred
partnership interests therein, as well as certain related transactions
(collectively, the "TWE-A/N Transfers"). Each of these transactions is
discussed more fully below.
TCI Cable Transactions
In September 1997, Time Warner, TWE, TWE-A/N and TCI signed a letter
of intent to enter into a series of agreements to (i) form two cable
television joint ventures in the Houston and south Texas areas that will be
managed by Time Warner Cable and own cable television systems serving an
aggregate 1.1 million subscribers, subject to approximately $1.4 billion of
debt, (ii) expand an existing joint venture in Kansas City, which is managed
by Time Warner Cable, through the contribution by TCI of a contiguous cable
television system serving approximately 95,000 subscribers, subject to
approximately $200 million of debt, and (iii) exchange various cable
television systems serving over 500,000 subscribers for other cable
television systems of comparable size in an effort to enhance each company's
geographic clusters of cable television properties. The joint ventures will
be accounted for under the equity method of accounting.
As a result of these transactions, Time Warner expects to reduce
combined debt of itself and TWE by approximately $650 million, benefit
from the geographic clustering of cable television systems and increase
the number of subscribers under the management of Time Warner Cable by
approximately 675,000 subscribers, thereby becoming the largest cable
television operator in the U.S. The TCI Cable Transactions are expected
to close periodically throughout 1998 and are subject to the execution
of definitive agreements by the parties and customary closing conditions,
including all necessary governmental and regulatory approvals. There can
be no assurance that such agreements will be completed or that such
approvals will be obtained.
Primestar Transactions
In June 1997, TWE and the Advance/Newhouse Partnership ("Advance/
Newhouse") entered into agreements to transfer the direct broadcast
satellite operations conducted by TWE and TWE-A/N (the "DBS Operations") and
the 31% partnership interest in Primestar Partners, L.P. held by TWE-A/N
("Primestar" and collectively, the "Primestar Assets") to a new, publicly
traded holding company ("Newco") that will be the parent entity of TCI
Satellite Entertainment, Inc. ("TSAT"). Newco will also own the DBS
Operations and Primestar partnership interests currently owned by TSAT and
other existing partners of Primestar. In exchange for contributing its
interests in the Primestar Assets, TWE will receive an approximate 24%
equity interest in Newco and realize approximately $200 million of debt
reduction, as well as eliminating its share of future funding requirements
for these operations that will be separately financed by Newco. In partial
consideration for contributing its indirect interest in certain of the
Primestar Assets, Advance/Newhouse will receive an approximate 6% equity
interest in Newco.
In a related transaction, Primestar also entered into an agreement in
June 1997 with The News Corporation Limited, MCI Telecommunications
Corporation and American Sky Broadcasting LLC ("ASkyB"), pursuant to which
Primestar (or, under certain circumstances, Newco) will acquire certain
assets relating to the high-power, direct broadcast satellite business of
ASkyB. In exchange for such assets, ASkyB will receive non-voting securities
of Newco that will be convertible into non-voting common stock of Newco and,
accordingly, reduce TWE's equity interest in Newco to approximately 16% on
a fully diluted basis.
The Primestar Transactions are not conditioned on each other and may
close independently. They are expected to close in 1998, subject to
customary closing conditions, including all necessary governmental and
regulatory approvals, including the approval of the Federal Communications
Commission (the "FCC"). There can be no assurance that such approvals will
be obtained.
TWE-A/N Transfers
In October 1997, Time Warner, through a wholly owned subsidiary,
entered into an agreement with TWE-A/N and each of its partners, pursuant to
which Time Warner will contribute cable television systems serving approxi-
mately 650,000 subscribers to TWE-A/N, subject to approximately $1 billion
of debt, in exchange for common and preferred partnership interests
therein. The cable television systems to be transferred to TWE-A/N are
currently owned by TWI Cable Inc. ("TWI Cable"), a wholly owned subsidiary
of Time Warner, and Paragon Communications ("Paragon"), a partnership owning
cable television systems serving approximately 1 million subscribers that is
currently owned by subsidiaries of Time Warner, with 50% beneficially owned
in the aggregate by TWE and TWE-A/N. The TWE-A/N Transfers will improve the
financial leverage of Time Warner, while increasing the under-leveraged
capitalization of TWE-A/N and consequently, TWE.
In a related transaction, TWE and TWE-A/N will exchange substantially
all of their respective beneficial interests in Paragon for an equivalent
share of Paragon's cable television systems serving approximately 500,000
subscribers, resulting in subsidiaries of Time Warner owning 99% of the
restructured Paragon entity. Accordingly, upon consummation of the TWE-A/N
Transfers, Time Warner will consolidate Paragon, which will then be
approximately half of its former size. Because this transaction represents
an exchange of TWE's and TWE-A/N's beneficial interests in Paragon for an
equivalent amount of its cable television systems, it will not have any
significant economic impact on Time Warner, TWE or TWE-A/N.
In connection with the TWE-A/N Transfers, Advance/Newhouse will make
a capital contribution to TWE-A/N in order to maintain its 33.3% common
equity interest therein. Accordingly, upon consummation of the TWE-A/N
Transfers, TWE-A/N will be owned 65.5% by TWE, 33.3% by Advance/Newhouse
and 1.2% indirectly by Time Warner. Time Warner does not expect to recognize
a gain or loss on the TWE-A/N Transfers. The TWE-A/N Transfers are expected
to close in the first quarter of 1998, subject to customary closing
conditions, including any necessary franchise or regulatory approvals.
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 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 opera-
tions, 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 and nine months ended September 30, 1997 and 1996 are as
follows:
Three Months Ended September 30,
EBITDA Operating Income
Pro Pro
Historical Forma Historical Historical Forma Historical
1997 1996 1996 1997 1996 1996
(millions)
Time Warner:
Publishing $114 $ 99 $ 99 $ 87 $ 66 $ 66
Music 111 143 143 17 48 48
Cable Networks-TBS 151 133 - 83 69 -
Filmed Entertainment
-TBS 70 (97) - 42 (120) -
Cable 141 122 122 38 25 25
Intersegment
elimination (4) 6 - (4) 6 -
Total $583 $406 $364 $263 $ 94 $139
Three Months Ended September 30,
EBITDA Operating Income
Pro Pro
Historical Forma Historical Historical Forma Historical
1997 1996 1996 1997 1996 1996
(millions)
Entertainment Group:
Filmed Entertainment
-Warner Bros. $161 $146 $146 $ 75 $ 62 $ 62
Broadcasting
-The WB Network (21) (27) (27) (21) (27) (27)
Cable Networks-HBO 107 91 91 102 86 86
Cable 454 390 390 179 156 156
Total $701 $600 $600 $335 $277 $277
Nine Months Ended September 30,
EBITDA Operating Income
Pro Pro
Historical Forma Historical Historical Forma Historical
1997 1996 1996 1997 1996 1996
(millions)
Time Warner:
Publishing $ 380 $ 335 $ 335 $303 $247 $247
Music 376 454 454 99 173 173
Cable Networks
-TBS 472 385 - 267 198 -
Filmed Entertainment
-TBS 108 (140) - 36 (210) -
Cable 412 352 352 108 44 44
Intersegment
elimination (11) (15) - (11) (15) -
Total $1,737 $1,371 $1,141 $802 $437 $464
Entertainment Group:
Filmed Entertainment
-Warner Bros. $ 466 $ 423 $ 423 $229 $214 $214
Broadcasting
-The WB Network (59) (63) (63) (60) (63) (63)
Cable Networks-HBO 306 259 259 291 245 245
Cable 1,304 1,134 1,134 530 449 449
Total $2,017 $1,753 $1,753 $990 $845 $845
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996
Time Warner had revenues of $3.231 billion, a loss of $28 million
before an extraordinary loss on the retirement of debt ($.19 loss per common
share after preferred dividend requirements) and a net loss of $35 million
($.20 loss per common share) for the three months ended September 30, 1997,
compared to revenues of $2.157 billion and a net loss of $91 million ($.43
loss per common share) for the three months ended September 30, 1996. Time
Warner's equity in the pretax income of the Entertainment Group was $96
million for the three months ended September 30, 1997, compared to $61
million for the three months ended September 30, 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 September 30, 1996, revenues of $3.231 billion, EBITDA of $406
million, operating income of $94 million, equity in the pretax income
of the Entertainment Group of $61 million and a net loss of $160 million
($.42 loss per common share). No pro forma financial information has been
presented for Time Warner for the three months ended September 30, 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
$160 million for the three months ended September 30, 1996 to a net loss of
$35 million for the three months ended September 30, 1997. As discussed more
fully below, this improvement principally resulted from an overall increase
in Time Warner's operating income and increased income from its equity in
the pretax income of the Entertainment Group, offset in part by a $7 million
extraordinary loss on the retirement of debt recognized in 1997. 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,
Time Warner's net loss applicable to common shares improved to $116 million
for the three months ended September 30, 1997, compared to $167 million for
the three months ended September 30, 1996. This improvement, as well as the
dilutive effect from issuing 179.8 million shares of common stock in
connection with the TBS Transaction, resulted in a net loss per common share
of $.20 for the three months ended September 30, 1997, compared to a $.43
net loss per common share for the three months ended September 30, 1996.
On a historical basis, the Entertainment Group had revenues of $2.857
billion and net income of $80 million for the three months ended September
30, 1997, compared to revenues of $2.720 billion and net income of $51
million for the three months ended September 30, 1996. As discussed more
fully below, the Entertainment Group's net income increased in 1997 as
compared to 1996 principally due to an overall increase in operating income
generated by its business segments.
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 decreased to $1.027 billion, compared to $1.034
billion in the third quarter of 1996. EBITDA increased to $114 million from
$99 million. Depreciation and amortization amounted to $27 million in 1997
and $33 million in 1996. Operating income increased to $87 million from $66
million. The marginal decline in revenues resulted from a loss of revenues
from operations that were recently sold, which exceeded the revenue
contributions from operations that were recently acquired. However,
excluding the effect of acquisitions and dispositions, revenues increased
due to strong growth in magazine advertising revenues, offset in part by
decreases in magazine circulation and direct marketing revenues. Magazine
advertising revenues in the third quarter of 1997 exceeded the strong
advertising performance in the 1996 third quarter, which benefited from
Olympics-related coverage. Contributing to the overall revenue gains were
increases achieved by People, Entertainment Weekly, Fortune and In Style.
EBITDA and operating income increased principally as a result of the
revenue gains and cost savings.
Music. Revenues decreased to $880 million, compared to $900 million in
the third quarter of 1996. EBITDA decreased to $111 million from $143
million. Depreciation and amortization, including noncash amortization of
intangible assets related to the purchase of WCI, amounted to $94 million in
1997 and $95 million in 1996. Operating income decreased to $17 million from
$48 million. Despite the Music division having a leading domestic market
share for the year (20.5%), the decline in revenues principally related to
continuing softness in the overexpanded U.S. retail marketplace, artist
delays affecting the timing of releases of new product and a decline in
international recorded music sales. EBITDA and operating income decreased
principally as a result of the decline in revenues and lower results from
direct marketing activities. 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 $748 million, compared to $640 million on a pro
forma basis in the third quarter of 1996. EBITDA increased to $151 million
from $133 million on a pro forma basis. Depreciation and amortization,
including noncash amortization of intangible assets related to the purchase
of TBS, amounted to $68 million in 1997 and $64 million on a pro forma basis
in 1996. Operating income increased to $83 million from $69 million on a pro
forma basis. Revenues benefited from increases in advertising and subscrip-
tion revenues. Advertising revenues increased due to a strong overall
advertising market for the division's major branded networks, including TNT,
TBS Superstation 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
and the Spanish-language news network CNN en Espanol.
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 decreased to $363 million, compared to $445 million on a pro
forma basis in the third quarter of 1996. EBITDA increased to $70 million
from a loss of $97 million on a pro forma basis. Depreciation and amortiza-
tion, including noncash amortization of intangible assets related to the
purchase of TBS, amounted to $28 million in 1997 and $23 million on a pro
forma basis in 1996. Operating income increased to $42 million in 1997 from
an operating loss of $120 million on a pro forma basis in 1996. Revenues
declined due to decreases in worldwide theatrical and home video revenues
relating to the timing and number of releases in 1997 as compared to 1996.
Despite the revenue decrease, EBITDA and operating income increased
principally as a result of merger-related cost savings and the absence of
$109 million of write-offs recorded in 1996 that related to disappointing
results for theatrical releases.
Cable. Revenues increased to $248 million, compared to $230 million in
the third quarter of 1996. EBITDA increased to $141 million from $122
million. Depreciation and amortization, including noncash amortization of
intangible assets related to the 1995 and 1996 cable acquisitions, amounted
to $103 million in 1997 and $97 million in 1996. Operating income increased
to $38 million from $25 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 and pay-per-view revenues. EBITDA and
operating income increased principally as a result of the revenue gains.
Interest and Other, Net. Interest and other, net, increased to $309
million in the third quarter of 1997, compared to $276 million in the third
quarter of 1996. Interest expense increased to $258 million, compared to
$217 million, principally due to the assumption of approximately $2.8
billion of debt in the TBS Transaction. Other expense, net, decreased to $51
million in the third quarter of 1997 from $59 million in the third quarter
of 1996, principally because of lower losses from reductions in the carrying
value of certain investments, offset in part by costs associated with the
Company's receivables securitization program.
Entertainment Group
Filmed Entertainment-Warner Bros. Revenues decreased to $1.399
billion, compared to $1.445 billion in the third quarter of 1996. EBITDA
increased to $161 million from $146 million. Depreciation and amortization,
including noncash amortization of intangible assets related to the purchase
of WCI, amounted to $86 million in 1997 and $84 million in 1996. Operating
income increased to $75 million from $62 million. Revenues decreased
principally as a result of lower worldwide home video revenues that related
to the successful sell-through release of Twister in 1996, offset in part by
increases in worldwide theatrical and television distribution revenues.
EBITDA and operating income increased principally as a result of the strong
performance of worldwide television distribution operations.
Broadcasting - The WB Network. Revenues increased to $31 million,
compared to $23 million in the third quarter of 1996. Operating results
improved to a loss of $21 million from a loss of $27 million. 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 improved principally as a result of
the revenue gains and the effect of an increase in a limited partner's
interest in the network that occurred in early 1997. Due to the start-up
nature of this national broadcast operation, losses are expected to
continue.
Cable Networks-HBO. Revenues increased to $482 million, compared to
$426 million in the third quarter of 1996. EBITDA increased to $107 million
from $91 million. Depreciation and amortization amounted to $5 million in
1997 and 1996. Operating income increased to $102 million from $86 million.
Revenues benefited primarily from an increase in subscriptions. EBITDA and
operating income increased principally as a result of the revenue gains.
Cable. Revenues increased to $1.060 billion, compared to $955 million
in the third quarter of 1996. EBITDA increased to $454 million from $390
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 $275 million in 1997 and $234 million in
1996. Operating income increased to $179 million from $156 million. Revenues
benefited from an increase in basic cable and Primestar-related, direct
broadcast satellite subscribers, increases in regulated cable rates as
permitted under Time Warner Cable's "social contract" with the FCC and an
increase in advertising and pay-per-view revenues. EBITDA and operating
income increased as a result of the revenue gains, as well as net gains of
approximately $15 million recognized in 1997 in connection with the sale or
exchange of certain cable systems. Operating income was further affected by
higher depreciation related to capital spending.
Interest and Other, Net. Interest and other, net, was $146 million in
the third quarter of 1997, compared to $147 million in the third quarter of
1996. Interest expense was $124 million in 1997 and $118 million in 1996.
There was other expense, net, of $22 million in the third quarter of 1997,
compared to $29 million in the third quarter of 1996, principally due to
higher gains on assets sales, which more than offset higher investment-
related losses, generally relating to reductions in the carrying value of
certain investments, and the dividend requirements on preferred stock of a
subsidiary issued in February 1997 to reduce TWE's bank debt. The preferred
stock was issued by a newly formed, substantially owned subsidiary of TWE
(the "REIT") intended to qualify as a real estate investment trust under the
Internal Revenue Code of 1986, as amended.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Time Warner had revenues of $9.458 billion, income of $54 million
before an extraordinary loss on the retirement of debt ($.33 loss per common
share after preferred dividend requirements) and net income of $30 million
($.37 loss per common share) for the nine months ended September 30, 1997,
compared to revenues of $6.364 billion, a loss of $215 million before an
extraordinary loss on the retirement of debt ($1.02 loss per common share)
and a net loss of $250 million ($1.11 loss per common share) for the nine
months ended September 30, 1996. Time Warner's equity in the pretax income
of the Entertainment Group was $522 million for the nine months ended
September 30, 1997, compared to $270 million for the nine months ended
September 30, 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 nine months
ended September 30, 1996, revenues of $9.099 billion, EBITDA of $1.371
billion, operating income of $437 million, equity in the pretax income of
the Entertainment Group of $270 million, a loss before extraordinary item of
$341 million ($1.01 loss per common share) and a net loss of $376 million
($1.07 loss per common share). No pro forma financial information has been
presented for Time Warner for the nine months ended September 30, 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
$376 million for the nine months ended September 30, 1996 to net income of
$30 million for the nine months ended September 30, 1997. As discussed more
fully below, this improvement principally resulted from an overall increase
in Time Warner's operating income, a significant increase in income from its
equity in the pretax income of the Entertainment Group and an $11 million
decrease in extraordinary losses on the retirement of debt recorded in each
period. 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 $58 million in 1997 due to the April 1996
issuance of Series M Preferred Stock, Time Warner's net loss applicable to
common shares improved to $208 million for the nine months ended September
30, 1997, compared to $430 million for the nine months ended September 30,
1996. This improvement, as well as the dilutive effect from issuing 179.8
million shares of common stock in connection with the TBS Transaction,
resulted in a net loss per common
share of $.37 for the nine months ended September 30, 1997, compared to a
$1.11 net loss per common share for the nine months ended September 30,
1996.
On a historical basis, the Entertainment Group had revenues of $8.190
billion and net income of $487 million for the nine months ended September
30, 1997, compared to revenues of $7.817 billion and net income of $221
million for the nine months ended September 30, 1996. As discussed more
fully below, the Entertainment Group's net income increased significantly in
1997 as compared to 1996 principally due to an overall increase in operating
income generated by its business segments and the inclusion of an approxi-
mately $250 million pretax gain on the first quarter of 1997 sale of TWE's
58% interest in E! Entertainment Television, Inc., offset in part by an
increase in minority interest expense related to TWE-A/N.
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 $3.004 billion, compared to $2.951
billion in the first nine months of 1996. EBITDA increased to $380 million
from $335 million. Depreciation and amortization amounted to $77 million in
1997 and $88 million in 1996. Operating income increased to $303 million
from $247 million. Excluding the effect from operations that were either
recently sold or acquired, revenues benefited from increases in magazine
advertising and circulation revenues, offset in part by a decrease in direct
marketing revenues. Contributing to the revenue gains were increases
achieved by People, Time, Entertainment Weekly and In Style. EBITDA and
operating income increased principally as a result of the revenue gains
and cost savings.
Music. Revenues decreased to $2.635 billion, compared to $2.759
billion in the first nine months of 1996. EBITDA decreased to $376 million
from $454 million. Depreciation and amortization, including noncash
amortization of intangible assets related to the purchase of WCI, amounted
to $277 million in 1997 and $281 million in 1996. Operating income decreased
to $99 million from $173 million. Despite the Music division having a
leading domestic market share for the year (20%), the decline in revenues
principally related to continuing softness in the overexpanded U.S. retail
marketplace, artist delays affecting the timing of releases of new product
and a decline in international recorded music sales. EBITDA and operating
income decreased principally as a result of the decline in revenues and
lower results from direct marketing activities, 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 $2.092 billion, compared to $1.797 billion on a
pro forma basis in the first nine months of 1996. EBITDA increased to $472
million from $385 million on a pro forma basis. Depreciation and amortiza-
tion, including noncash amortization of intangible assets related to the
purchase of TBS, amounted to $205 million in 1997 and $187 million on a pro
forma basis in 1996. Operating income increased to $267 million from $198
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 and the Spanish-language news network CNN en
Espanol.
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 $1.097 billion, compared to $1.003 billion on a
pro forma basis in the first nine months of 1996. EBITDA increased to $108
million from a loss of $140 million on a pro forma basis. Depreciation and
amortization, including noncash amortization of intangible assets related to
the purchase of TBS, amounted to $72 million in 1997 and $70 million on a
pro forma basis in 1996. Operating income increased to $36 million in 1997
from a loss of $210 million on a pro forma basis in 1996. Revenues benefited
from increases in worldwide theatrical, home video and television distribu-
tion revenues. EBITDA and operating income increased principally as a result
of the revenue gains, merger-related cost savings and the absence of
approximately $200 million of write-offs recorded in 1996 that related to
disappointing results for theatrical releases.
Cable. Revenues increased to $740 million, compared to $677 million in
the first nine months of 1996. EBITDA increased to $412 million from $352
million. Depreciation and amortization, including noncash amortization of
intangible assets related to the 1995 and 1996 cable acquisitions, amounted
to $304 million in 1997 and $308 million in 1996. Operating income increased
to $108 million from $44 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 and pay-per-view revenues. EBITDA and operating income increased
as a result of the revenue gains, as well as gains of approximately $11
million recognized in the first quarter of 1997 in connection with the sale
of certain investments.
Interest and Other, Net. Interest and other, net, increased to $904
million in the first nine months of 1997, compared to $854 million in the
first nine months of 1996. Interest expense increased to $792 million,
compared to $688 million, principally due to the assumption of approximately
$2.8 billion of debt in the TBS Transaction. Other expense, net, decreased
to $112 million in the first nine months of 1997 from $166 million in the
first nine months of 1996, principally because of gains on foreign exchange
contracts and lower losses from reductions in the carrying value of certain
investments, offset in part by costs associated with the Company's
receivables securitization program.
Entertainment Group
Filmed Entertainment-Warner Bros. Revenues decreased to $3.830
billion, compared to $3.935 billion in the first nine months of 1996. EBITDA
increased to $466 million from $423 million. Depreciation and amortization,
including noncash amortization of intangible assets related to the purchase
of WCI, amounted to $237 million in 1997 and $209 million in 1996. Operating
income increased to $229 million from $214 million. Revenues decreased
principally as a result of lower worldwide theatrical and home video
revenues, offset in part by increases in worldwide television distribution
revenues. EBITDA and operating income increased principally as a result of
the strong performance of worldwide television distribution operations and
a gain on the sale of an investment. Operating income was further affected
by higher depreciation principally relating to the expansion of theme parks
and consumer products operations.
Broadcasting - The WB Network. Revenues increased to $84 million,
compared to $56 million in the first nine months of 1996. EBITDA improved to
a loss of $59 million from a loss of $63 million. Depreciation and
amortization amounted to $1 million in 1997. Operating losses decreased to
$60 million from $63 million. 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 improved principally as a result of the revenue gains and the effect of
an increase in a limited partner's interest in the network that occurred in
early 1997. Due to the start-up nature of this national broadcast operation,
losses are expected to continue.
Cable Networks-HBO. Revenues increased to $1.452 billion, compared to
$1.301 billion in the first nine months of 1996. EBITDA increased to $306
million from $259 million. Depreciation and amortization amounted to $15
million in 1997 and $14 million in 1996. Operating income increased to $291
million from $245 million. Revenues benefited primarily from an increase in
subscriptions. EBITDA and operating income increased principally as a result
of the revenue gains.
Cable. Revenues increased to $3.146 billion, compared to $2.863
billion in the first nine months of 1996. EBITDA increased to $1.304 billion
from $1.134 billion. 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 $774 million in 1997
and $685 million in 1996. Operating income increased to $530 million from
$449 million. Revenues benefited from an increase in basic cable and
Primestar-related, direct broadcast satellite subscribers, increases in
regulated cable rates as permitted under Time Warner Cable's "social
contract" with the FCC and an increase in advertising and pay-per-view
revenues. EBITDA and operating income increased as a result of the revenue
gains, as well as net gains of $39 million recognized in 1997 in connection
with the sale or exchange of certain cable systems. Operating income was
further affected by higher depreciation related to capital spending.
Interest and Other, Net. Interest and other, net, decreased to $157
million in the first nine months of 1997, compared to $369 million in the
first nine months of 1996. Interest expense increased to $360 million,
compared to $358 million in 1996. There was other income, net, of $203
million in the first nine months of 1997, compared to other expense, net of
$11 million in the first nine months of 1996, principally due to higher
gains on asset sales, including an approximately $250 million pretax gain on
the sale of an interest in E! Entertainment Television, Inc. recognized in
the first quarter of 1997. This income was offset in part by higher losses
from reductions in the carrying value of certain investments and the
dividend requirements on preferred stock of the REIT issued in February 1997
to reduce TWE's bank debt.
FINANCIAL CONDITION AND LIQUIDITY
September 30, 1997
Time Warner
Financial Condition
At September 30, 1997, Time Warner had $12.5 billion of debt, $761
million of cash and equivalents (net debt of $11.7 billion), $303 million of
borrowings against future stock option proceeds, $949 million of mandatorily
redeemable preferred securities of subsidiaries, $1.8 billion of Series M
Preferred Stock and $9.5 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 September 30, 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 $5.8 billion at September
30, 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 received a $535 million distribution relating to its
Senior Capital interest in July 1997. Time Warner's remaining $1.1 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 two installments on July 1,
1998 and 1999.
Debt Refinancings
In November 1997, Time Warner, together with certain of its consoli-
dated and unconsolidated subsidiaries, expects to enter into a new, five-
year revolving credit facility (the "1997 Credit Agreement") and terminate
its subsidiaries' financing arrangements under certain previously existing
bank credit facilities (the "Old Credit Agreements"). This will enable Time
Warner to reduce its aggregate borrowing availability from $10.3 billion to
$7.5 billion, lower interest rates and refinance approximately $4.5 billion
of outstanding borrowings under the Old Credit Agreements.
The 1997 Credit Agreement will permit borrowings in an aggregate
amount of up to $7.5 billion, with no scheduled reduction in credit
availability prior to maturity in November 2002. The borrowers under the
1997 Credit
Agreement will be TBS, TWI Cable, TWE and TWE-A/N and, under certain
circumstances, Time Warner and TW Companies. Borrowings under the 1997
Credit Agreement will be limited to (i) initially, $4 billion in the case of
each of TBS and TWI Cable and, if Time Warner and TW Companies become
additional borrowers, $6 billion in the aggregate for TBS, TWI Cable, Time
Warner and TW Companies, (ii) $2 billion in the case of TWE-A/N and (iii)
$7.5 billion in the case of TWE, subject in each case to an aggregate
borrowing limit of $7.5 billion and certain other limitations and adjust-
ments. Such borrowings will bear interest at specific rates for each of the
borrowers (generally equal to LIBOR plus a margin initially ranging from 35
to 40 basis points) and each borrower will be required to pay a commitment
fee on the unused portion of its commitment (initially ranging from .125% to
.15% per annum), which margin and fee will vary based on the credit rating
or financial leverage of the applicable borrower. Borrowings may be used for
general business purposes and unused credit will be available to support
commercial paper borrowings. The 1997 Credit Agreement will contain certain
covenants generally for each borrower relating to, among other things,
additional indebtedness; liens on assets; cash flow coverage and leverage
ratios; and dividends, distributions and other restricted cash payments or
transfers of assets from the borrowers to their respective shareholders,
partners or affiliates.
In July 1997, TW Companies issued $600 million principal amount of
Floating Rate Reset Notes due July 29, 2009 that are redeemable at the
election of the holders, in whole but not in part, on July 29, 1999 (the
"Two-Year Floating Rate Notes"). The net proceeds therefrom were used by TW
Companies to redeem other indebtedness, consisting of $140 million principal
amount of 10.5% Debentures due April 15, 2005 of Summit Communications
Group, Inc., its wholly owned subsidiary, and $454 million principal amount
of its Floating Rate Notes due August 15, 2000 at an aggregate redemption
price of $612 million, including redemption premiums and accrued interest
thereon. The Two-Year Floating Rate Notes bear interest at a floating rate
equal to LIBOR less 115 basis points until July 29, 1999, at which time, if
not redeemed, the interest rate will be reset at a fixed rate equal to 6.16%
plus a margin based upon the credit risk of TW Companies at such time.
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. In conjunction with the refinancing, TW Companies issued
$600 million principal amount of Floating Rate Reset Notes due December 30,
2031 that are redeemable at the election of the holders, in whole but not in
part, on December 30, 2001 (the "Five-Year Floating Rate Notes"). The Five-
Year Floating Rate Notes bear interest at a floating rate equal to LIBOR
less 25 basis points until December 30, 2001, at which time, if not
redeemed, the interest rate will be reset at a fixed rate equal to 6.59%
plus a margin based upon the credit risk of TW Companies at such time.
An extraordinary loss of approximately $17 million is expected to be
recognized by Time Warner in the fourth quarter of 1997 in connection with
the write-off of deferred financing costs related to the Old Credit
Agreements. An extraordinary loss of $24 million was recognized in the first
nine months of 1997 in connection with the debt redemptions that occurred
during such period. An extraordinary loss of $35 million was recognized in
1996 in connection with Time Warner's redemption of its 8.75% Debentures due
2017 and 8.75% Convertible Subordinated Debentures due 2015.
Cash Flows
During the first nine months of 1997, Time Warner's cash provided by
operations amounted to $639 million and reflected $1.737 billion of EBITDA
from its Publishing, Music, Cable Networks-TBS, Filmed Entertainment-TBS and
Cable businesses and $354 million of distributions from TWE (including $80
million representing a portion of the priority capital return on the Time
Warner General Partners' Senior Capital interest), less $822 million of
interest payments, $182 million of income taxes, $60 million of corporate
expenses and $388 million related to an increase in working capital require-
ments, other balance sheet accounts and noncash items. Cash provided by
operations of $86 million for the first nine months of 1996 reflected $1.141
billion of business segment EBITDA and $162 million of distributions from
TWE, less $699 million of interest payments, $257 million of income taxes,
$52 million of corporate expenses and $209 million related to an increase in
working capital requirements, balance sheet accounts and noncash items.
Cash provided by investing activities was $89 million in the first
nine months of 1997, compared to cash used by investing activities of $497
million in 1996, principally as a result of lower investment spending and
the receipt of $455 million of proceeds representing the return of a portion
of the Time Warner General Partners' Senior Capital interest in TWE, offset
in part by higher capital expenditures and a decrease in investment
proceeds. Capital expenditures increased to $424 million in the first nine
months of 1997, compared to $270 million in 1996, principally as a result of
capital spending by the TBS businesses acquired in October 1996 and higher
capital spending by the cable division.
Cash used by financing activities was $481 million in the first nine
months of 1997, compared to $372 million in the first nine months of 1996.
The use of cash in 1997 principally resulted from approximately $300 million
of debt reduction, the repayment of $185 million of borrowings against
future stock option proceeds, the repurchase of approximately 974 thousand
shares of Time Warner common stock at an aggregate cost of $37 million and
the payment of $253 million of dividends, offset in part by proceeds
received from the exercise of employee stock options. The use of cash in
1996 principally resulted from approximately $1.7 billion of debt reduction,
the repurchase of approximately 11.3 million shares of Time Warner common
stock at an aggregate cost of $452 million and the payment of $203 million
of dividends, offset in part by $425 million of borrowings against future
stock option proceeds and approximately $1.55 billion of net proceeds raised
from the issuance of 1.6 million shares of Series M Preferred Stock. The
proceeds from the Series M Preferred Stock were used to reduce debt.
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 $6.3 billion of debt, $237 million of
preferred stock of a subsidiary, $1.1 billion of Time Warner General
Partners' Senior Capital and $6.5 billion of partners' capital at September
30, 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 $296 million at September 30,
1997, compared to $216 million at December 31, 1996, resulting in net debt
for the Entertainment Group of $6 billion and $5.5 billion, respectively.
Cash Flows
During the first nine months of 1997, the Entertainment Group's cash
provided by operations amounted to $918 million and reflected $2.017 billion
of EBITDA from its Filmed Entertainment-Warner Bros., Broadcasting-The WB
Network, Cable Networks-HBO and Cable businesses, less $394 million of
interest payments, $55 million of income taxes, $54 million of corporate
expenses and $596 million related to an increase in working capital
requirements, other balance sheet accounts and noncash items. Cash provided
by operations of $1.322 billion in the first nine months of 1996 reflected
$1.753 billion of business segment EBITDA and $64 million related to a
reduction in working capital requirements, other balance sheet accounts and
noncash items, less $391 million of interest payments, $52 million of income
taxes and $52 million of corporate expenses.
Cash used by investing activities was $777 million in the first nine
months of 1997, compared to $864 million in the first nine months of 1996,
principally as a result of lower capital expenditures. Capital expenditures
were $1.117 billion in 1997 and $1.228 billion in 1996.
Cash used by financing activities was $61 million in the first nine
months of 1997, compared to $458 million in the first nine months of 1996,
principally as a result of an increase in debt used to fund cash distribu-
tions to Time Warner and the issuance of 250,000 shares of preferred stock
of a subsidiary for aggregate net proceeds of $243 million, offset in part
by a $647 million increase in distributions paid to Time Warner and the
absence of $169 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 $1.221 billion in the nine months ended September 30, 1997,
compared to $1.059 billion in the nine months ended September 30, 1996. For
the full year of 1997, cable capital spending is expected to be relatively
comparable to 1996 levels, with approximately $475 million budgeted for the
remainder of 1997. Capital spending includes over $100 million in each year
relating to Primestar, which is expected to be eliminated in 1998 upon the
consummation of the Primestar Transactions. Other capital spending by Time
Warner Cable is expected to continue to be funded 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 TWE-A/N. Management expects to
continue to finance such level of investment 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 $1.875 billion at September 30, 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 $704 million and $463 million, respectively).
Backlog of the recently-acquired film production companies of TBS amounted
to approximately $231 million at September 30, 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 $100
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.
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, December 31,
1997 1996
(millions, except
per share amounts)
ASSETS
Current assets
Cash and equivalents $ 761 $ 452
Receivables, less allowances of $893
and $976 million 2,282 2,421
Inventories 803 941
Prepaid expenses 1,045 1,007
Total current assets 4,891 4,821
Noncurrent cash and equivalents - 62
Noncurrent inventories 1,771 1,698
Investments in and amounts due to and
from Entertainment Group 5,594 5,814
Other investments 1,892 1,919
Property, plant and equipment, net 2,057 1,986
Music catalogues, contracts and copyrights 956 1,035
Cable television and sports franchises 4,045 4,203
Goodwill 12,350 12,421
Other assets 982 1,105
Total assets $34,538 $35,064
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 709 $ 715
Participations, royalties and programming
costs payable 1,071 1,196
Debt due within one year 8 11
Other current liabilities 1,968 2,090
Total current liabilities 3,756 4,012
Long-term debt 12,493 12,713
Borrowings against future stock option proceeds 303 488
Deferred income taxes 3,982 4,082
Unearned portion of paid subscriptions 648 679
Other liabilities 1,068 967
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, 1.86 million and 1.72 million shares
outstanding and $1.860 billion and $1.720 billion
liquidation preference 1,809 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, 57.1 million
and 50.6 million shares outstanding 1 1
Common stock, $.01 par value, 519.4 million and 508.4
million shares outstanding (excluding 38.9 million
and 50.0 million treasury shares) 5 5
Paid-in capital 12,793 12,250
Accumulated deficit (3,273) (2,758)
Total shareholders' equity 9,530 9,502
Total liabilities and shareholders' equity $34,538 $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 7).
See accompanying notes.
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(millions, except per share amounts)
Revenues (a) $3,231 $2,157 $9,458 $6,364
Cost of revenues (a)(b) 1,964 1,284 5,417 3,809
Selling, general and administrative
(a)(b) 1,004 734 3,239 2,091
Operating expenses 2,968 2,018 8,656 5,900
Business segment operating income 263 139 802 464
Equity in pretax income of
Entertainment Group (a) 96 61 522 270
Interest and other, net (a) (309) (276) (904) (854)
Corporate expenses (a) (17) (16) (60) (52)
Income (loss) before income taxes 33 (92) 360 (172)
Income tax provision (61) 1 (306) (43)
Income (loss) before extraordinary item (28) (91) 54 (215)
Extraordinary loss on retirement of debt,
net of income tax benefits of $5 million,
$ - million, $16 million and $22 million (7) - (24) (35)
Net income (loss) (35) (91) 30 (250)
Preferred dividend requirements (81) (76) (238) (180)
Net loss applicable to common shares $(116) $ (167) $ (208) $ (430)
Loss per common share:
Loss before extraordinary item $ (.19) $ (.43) $(.33) $(1.02)
Net loss $ (.20) $ (.43) $(.37) $(1.11)
Average common shares 573.3 385.0 564.4 388.7
_______________
(a) Includes the following income (expenses) resulting from transactions
with the Entertainment Group and other related companies for the three
and nine months ended September 30, 1997, respectively, and for the
corresponding periods in the prior year: revenues-$94 million and
$241 million in 1997, $47 million and $150 million in 1996; cost of
revenues-$(67) million and $(188) million in 1997, $(39) million and
$(118) million in 1996; selling, general and administrative-$12
million and $20 million in 1997, $20 million and $25 million in 1996;
equity in pretax income of Entertainment Group-$11 million and $35
million in 1997, $(20) million and $(24) million in 1996; interest and
other, net-$(9) million and $(30) million in 1997, $(7) million and
$(24) million in 1996; and corporate expenses-$18 million and
$54 million in 1997, $17 million and $52 million in 1996.
(b) Includes depreciation and amortization expense of:
$320 $225 $935 $677
See accompanying notes.
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
1997 1996
(millions)
OPERATIONS
Net income (loss) $ 30 $ (250)
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt 24 35
Depreciation and amortization 935 677
Noncash interest expense 75 68
Excess of equity in pretax income of Entertainment
Group over distributions (168) (108)
Changes in operating assets and liabilities (257) (336)
Cash provided by operations 639 86
INVESTING ACTIVITIES
Investments and acquisitions (98) (400)
Capital expenditures (424) (270)
Investment proceeds 156 173
Proceeds received from return of Senior Capital
contributed to TWE 455 -
Cash provided (used) by investing activities 89 (497)
FINANCING ACTIVITIES
Borrowings 1,945 2,394
Debt repayments (2,243) (4,109)
Borrowings (repayments of borrowings) against future
stock option proceeds (185) 425
Repurchases of Time Warner common stock (37) (452)
Dividends paid (253) (203)
Issuance of Series M preferred stock - 1,550
Other, principally proceeds received from the exercise
of stock options in 1997 292 23
Cash used by financing activities (481) (372)
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 247 (783)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD (a) 514 1,185
CASH AND EQUIVALENTS AT END OF PERIOD $761 $ 402
(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 (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" or the "Company" refer to TW Companies
prior to October 10, 1996 and Time Warner Inc. 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 and television
broadcasting; Cable Networks, consisting principally of interests in
cable television programming; 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 cable television systems, and a portion of its
interests in cable television programming 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) leading cable television networks, such as
HBO, Cinemax, CNN, TNT and TBS Superstation, (5) 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 (6) Time Warner
Cable, currently 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 9). 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 $333 million and $261 million for
the three months ended September 30, 1997 and 1996, respectively, and $979
million and $784 million in the nine months ended September 30, 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 ("FASB")
issued Statement No. 128, "Earnings per Share" ("FAS 128"), effective for
periods ending 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.
In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income" ("FAS 130"), effective for fiscal years beginning
after December 15, 1997. The new rules establish standards for the reporting
of comprehensive income and its components in financial statements.
Comprehensive income consists of net income and other gains and losses
affecting shareholders' equity that, under generally accepted accounting
principles, are excluded from net income, such as unrealized gains and
losses on marketable equity investments and foreign currency translation
gains and losses. Time Warner does not expect that the adoption of FAS 130
will have a material effect on its financial statements.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("FAS 131"), effective
for fiscal years beginning after December 15, 1997. The new rules establish
revised standards for public companies relating to the reporting of
financial and descriptive information about their operating segments in
financial statements. Time Warner does not expect that the adoption of FAS
131 will have a material effect on its financial statements.
2. MERGERS AND ACQUISITIONS
TBS Transaction
On October 10, 1996, 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 TW Companies and TBS became a separate, wholly owned
subsidiary 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.), in exchange for shares of TBS capital stock and
pursuant to a separate option agreement, as amended, with LMC and its
affiliates (the "SSSI Option Agreement") and (ii) approximately 14 million
stock options to replace all outstanding TBS stock options. Time Warner has
also fully and unconditionally guaranteed all of the outstanding publicly
traded indebtedness of TBS and TW Companies, which amounted to approximately
$750 million and $7.376 billion, respectively, at September 30, 1997.
Of the aggregate consideration issued in the TBS Transaction, 6.4
million shares of Series LMCN-V Common Stock were issued to LMC and its
affiliates in June 1997 pursuant to the SSSI Option Agreement. The SSSI
Option Agreement provides Time Warner with an option to acquire
substantially all of the assets of Southern Satellite Systems, Inc. and its
affiliates ("SSSI"), a subsidiary of LMC that currently provides uplink and
distribution services for WTBS (the "TBS Superstation"), for approximately
$213 million of consideration payable, at the election of Time Warner, in
cash or additional shares of Series LMCN-V Common Stock. In September 1997,
Time Warner exercised this option and the transaction is expected to close
on December 31, 1997, the date on which the TBS Superstation will be
converted to a copyright-paid, cable television programming service.
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 and nine months ended September 30, 1996, revenues of
$3.231 billion and $9.099 billion, depreciation and amortization of $312
million and $934 million, operating income of $94 million and $437 million,
equity in the pretax income of the Entertainment Group of $61 million and
$270 million, a loss before extraordinary item of $161 million and $341
million ($.42 and $1.01 per common share) and a net loss of $160 million and
$376 million ($.42 and $1.07 per common share).
3. TWE-A/N TRANSFERS
In October 1997, Time Warner, through a wholly owned subsidiary,
entered into an agreement with the TWE-Advance/Newhouse Partnership ("TWE-
A/N") and each of its partners, pursuant to which Time Warner will contri-
bute cable television systems serving approximately 650,000 subscribers to
TWE-A/N, subject to approximately $1 billion of debt, in exchange for common
and preferred partnership interests therein, as well as certain related
transactions (collectively, the "TWE-A/N Transfers"). The cable television
systems to be transferred to TWE-A/N are currently owned by CVI (now known
as TWI Cable Inc., "TWI Cable") and Paragon Communications ("Paragon"), a
partnership owning cable television systems serving approximately 1 million
subscribers that is currently owned by subsidiaries of Time Warner, with 50%
beneficially owned in the aggregate by TWE or TWE-A/N.
In a related transaction, TWE and TWE-A/N will exchange substantially
all of their respective beneficial interests in Paragon for an equivalent
share of Paragon's cable television systems serving approximately 500,000
subscribers, resulting in subsidiaries of Time Warner owning 99% of the
restructured Paragon entity. Accordingly, upon consummation of the TWE-A/N
Transfers, Time Warner will consolidate Paragon, which will then be
approximately half of its former size. Because this transaction represents
an exchange of TWE's and TWE-A/N's beneficial interests in Paragon for an
equivalent amount of its cable television systems, it will not have any
significant economic impact on Time Warner, TWE or TWE-A/N.
In connection with the TWE-A/N Transfers, Advance/Newhouse will make
a capital contribution to TWE-A/N in order to maintain its 33.3% common
equity interest therein. Accordingly, upon consummation of the TWE-A/N
Transfers, TWE-A/N will be owned 65.5% by TWE, 33.3% by Advance/Newhouse
and 1.2% indirectly by Time Warner. Time Warner does not expect to recognize
a gain or loss on the TWE-A/N Transfers. The TWE-A/N Transfers are expected
to close in the first quarter of 1998, subject to customary closing
conditions, including any necessary franchise or regulatory approvals.
4. ENTERTAINMENT GROUP
Time Warner's investment in and amounts due to and from the
Entertainment Group, consisting substantially of TWE, at September 30, 1997
and December 31, 1996 consists of the following:
September 30, December 31,
1997 1996
(millions)
Investment in TWE $5,590 $6,254
Stock option related distributions due from TWE 405 93
Credit agreement debt due to TWE (400) (400)
Other net liabilities due to TWE, principally
related to home video distribution (122) (256)
Investment in and amounts due to and from TWE 5,473 5,691
Investment in other Entertainment Group companies 121 123
Total $5,594 $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 subsidi-
aries 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 $483
million and $213 million in the nine months ended September 30, 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 $6 billion of TWE's debt and accrued interest at September 30,
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 Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(millions)
Operating Statement Information
Revenues $2,857 $2,720 $8,190 $7,817
Depreciation and amortization 366 323 1,027 908
Business segment operating income 335 277 990 845
Interest and other, net(1) 146 147 157 369
Minority interest 64 52 228 154
Income before income taxes 107 61 551 270
Net income 80 51 487 221
__________________
(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.
Nine Months
Ended September 30,
1997 1996
(millions)
Cash Flow Information
Cash provided by operations $ 918 $1,322
Capital expenditures (1,117) (1,228)
Investments and acquisitions (104) (86)
Investment proceeds 444 450
Borrowings 905 190
Debt repayments (323) (697)
Issuance of preferred stock of subsidiary 243 -
Capital distributions (809) (162)
Collections on note receivable from U S WEST - 169
Other financing activities, net (77) 42
Increase in cash and equivalents 80 -
September 30, December 31,
1997 1996
(millions)
Balance Sheet Information
Cash and equivalents $ 296 $ 216
Total current assets 3,406 3,147
Total assets 20,388 20,027
Total current liabilities 3,740 4,092
Long-term debt 6,257 5,676
Minority interests 1,173 1,020
Preferred stock of subsidiary 237 -
Time Warner General Partners' Senior Capital 1,096 1,543
Partners' capital 6,471 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 September 30, 1997 and December
31, 1996, the Time Warner
General Partners had recorded $405 million and $93 million, respectively, of
stock option related distributions due from TWE, based on closing prices of
Time Warner common stock of $54.19 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
nine months ended September 30, 1997, the Time Warner General Partners
received distributions from TWE in the amount of $809 million, consisting of
$535 million of Senior Capital distributions (representing the return of
$455 million of contributed capital and the distribution of $80 million of
priority capital return), $232 million of tax-related distributions and $42
million of stock option related distributions. During the nine months ended
September 30, 1996, the Time Warner General Partners received distributions
from TWE in the amount of $162 million, consisting of $153 million of tax-
related distributions and $9 million of stock option related distributions.
5. INVENTORIES
Inventories consist of:
September 30, 1997 December 31, 1996
Current Noncurrent Current Noncurrent
(millions)
Film costs:
Released, less amortization $ 83 $ 192 $209 $ 142
Completed and not released 64 20 54 -
In process and other - 212 24 251
Library, less amortization - 1,078 - 1,116
Programming costs, less amortization 255 269 213 189
Magazines, books and recorded music 401 - 441 -
Total $803 $1,771 $941 $1,698
6. LONG-TERM DEBT
In November 1997, Time Warner, together with certain of its
consolidated and unconsolidated subsidiaries, expects to enter into a new,
five-year revolving credit facility (the "1997 Credit Agreement") and
terminate its subsidiaries' financing arrangements under certain previously
existing bank credit facilities (the "Old Credit Agreements"). This will
enable Time Warner to reduce its aggregate borrowing availability from $10.3
billion to $7.5 billion, lower interest rates and refinance approximately
$4.5 billion of outstanding borrowings under the Old Credit Agreements.
The 1997 Credit Agreement will permit borrowings in an aggregate
amount of up to $7.5 billion, with no scheduled reduction in credit
availability prior to maturity in November 2002. The borrowers under the
1997 Credit Agreement will be TBS, TWI Cable, TWE and TWE-A/N and, under
certain circumstances, Time Warner and TW Companies. Borrowings under the
1997 Credit Agreement will be limited to (i) initially, $4 billion in the
case of each of TBS and TWI Cable and, if Time Warner and TW Companies
become additional borrowers, $6 billion in the aggregate for TBS, TWI Cable,
Time Warner and TW Companies, (ii) $2 billion in the case of TWE-A/N and
(iii) $7.5 billion in the case of TWE, subject in each case to an aggregate
borrowing limit of $7.5 billion and certain other limitations and
adjustments. Such borrowings will bear interest at specific rates for each
of the borrowers (generally equal to LIBOR plus a margin initially ranging
from 35 to 40 basis points) and each borrower will be required to pay a
commitment fee on the unused portion of its commitment (initially ranging
from .125% to .15% per annum), which margin and fee will vary based on the
credit rating or financial leverage of the applicable
borrower. Borrowings may be used for general business purposes and unused
credit will be available to support commercial paper borrowings. The 1997
Credit Agreement will contain certain covenants generally for each borrower
relating to, among other things, additional indebtedness; liens on assets;
cash flow coverage and leverage ratios; and dividends, distributions and
other restricted cash payments or transfers of assets from the borrowers to
their respective shareholders, partners or affiliates.
In July 1997, TW Companies issued $600 million principal amount of
Floating Rate Reset Notes due July 29, 2009 that are redeemable at the
election of the holders, in whole but not in part, on July 29, 1999 (the
"Two-Year Floating Rate Notes"). The net proceeds therefrom were used by TW
Companies to redeem other indebtedness, consisting of $140 million principal
amount of 10.5% Debentures due April 15, 2005 of Summit Communications
Group, Inc., its wholly owned subsidiary, and $454 million principal amount
of its Floating Rate Notes due August 15, 2000 at an aggregate redemption
price of $612 million, including redemption premiums and accrued interest
thereon (collectively, the "Third Quarter Debt Redemptions"). The Two-Year
Floating Rate Notes bear interest at a floating rate equal to LIBOR less 115
basis points until July 29, 1999, at which time, if not redeemed, the
interest rate will be reset at a fixed rate equal to 6.16% plus a margin
based upon the credit risk of TW Companies at such time.
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 the TBS Convertible Notes at an aggregate redemption
price of approximately $600 million, including redemption premiums and
accrued interest thereon (collectively, the "First Quarter Debt
Redemptions"). In conjunction with the refinancing, TW Companies issued $600
million principal amount of Floating Rate Reset Notes due December 30, 2031
that are redeemable at the election of the holders, in whole but not in
part, on December 30, 2001 (the "Five-Year Floating Rate Notes"). The Five-
Year Floating Rate Notes bear interest at a floating rate equal to LIBOR
less 25 basis points until December 30, 2001, at which time, if not
redeemed, the interest rate will be reset at a fixed rate equal to 6.59%
plus a margin based upon the credit risk of TW Companies at such time.
An extraordinary loss of approximately $17 million is expected to be
recognized by Time Warner in the fourth quarter of 1997 in connection with
the write-off of deferred financing costs related to the Old Credit
Agreements. An extraordinary loss of $7 million was recognized in the third
quarter of 1997 in connection with the Third Quarter Debt Redemptions. An
extraordinary loss of $17 million was recognized by Time Warner in the first
quarter of 1997 in connection with the First Quarter Debt Redemptions. An
extraordinary loss of $35 million was recognized in 1996 in connection with
Time Warner's redemption of its 8.75% Debentures due 2017 and 8.75%
Convertible Subordinated Debentures due 2015.
7. 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 TW Companies 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 TW Companies 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.
8. SHAREHOLDERS' EQUITY
Changes in shareholders' equity are as follows:
Nine Months
Ended September 30,
1997 1996
(millions)
Balance at beginning of year $9,502 $3,667
Net income (loss) 30 (250)
Common dividends declared (152) (105)
Preferred dividends declared (238) (180)
Repurchases of Time Warner common stock (37) (452)
Issuance of common stock in connection with the
TBS Transaction 67 -
Issuance of common stock and preferred stock in
the CVI acquisition - 680
Unrealized gains (losses) on certain marketable
equity investments (9) 66
Other, principally foreign currency translation
and shares issued pursuant to stock option and
dividend reinvestment plans 367 154
Balance at September 30 $9,530 $3,580
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 September 30, 1997, Time Warner had
acquired approximately 12.4 million shares of its common stock under this
program for an aggregate cost of $493 million.
9. 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 and television
broadcasting; Cable Networks, consisting principally of interests in cable
television programming; 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 cable television systems, and a
portion of its interests in cable television programming 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 Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(millions)
Revenues
Time Warner:
Publishing $1,027 $1,034 $3,004 $2,951
Music 880 900 2,635 2,759
Cable Networks-TBS 748 - 2,092 -
Filmed Entertainment-TBS 363 - 1,097 -
Cable 248 230 740 677
Intersegment elimination (35) (7) (110) (23)
Total $3,231 $2,157 $9,458 $6,364
Entertainment Group:
Filmed Entertainment-Warner Bros. $1,399 $1,445 $3,830 $3,935
Broadcasting-The WB Network 31 23 84 56
Cable Networks-HBO 482 426 1,452 1,301
Cable 1,060 955 3,146 2,863
Intersegment elimination (115) (129) (322) (338)
Total $2,857 $2,720 $8,190 $7,817
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(millions)
Operating Income
Time Warner:
Publishing $ 87 $ 66 $303 $247
Music 17 48 99 173
Cable Networks-TBS 83 - 267 -
Filmed Entertainment-TBS 42 - 36 -
Cable 38 25 108 44
Intersegment elimination (4) - (11) -
Total $263 $139 $802 $464
Entertainment Group:
Filmed Entertainment-Warner Bros. $ 75 $ 62 $229 $214
Broadcasting-The WB Network (21) (27) (60) (63)
Cable Networks-HBO 102 86 291 245
Cable 179 156 530 449
Total $335 $277 $990 $845
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(millions)
Depreciation of Property, Plant and Equipment
Time Warner:
Publishing $ 16 $ 21 $ 49 $ 53
Music 21 26 62 68
Cable Networks-TBS 23 - 65 -
Filmed Entertainment-TBS 2 - 5 -
Cable 34 32 96 98
Total $ 96 $ 79 $277 $219
Entertainment Group:
Filmed Entertainment-Warner Bros. $ 55 $ 52 $145 $117
Broadcasting-The WB Network - - 1 -
Cable Networks-HBO 5 5 15 14
Cable 197 151 545 451
Total $257 $208 $706 $582
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(millions)
Amortization of Intangible Assets(1)
Time Warner:
Publishing $ 11 $ 12 $ 28 $ 35
Music 73 69 215 213
Cable Networks-TBS 45 - 140 -
Filmed Entertainment-TBS 26 - 67 -
Cable 69 65 208 210
Total $224 $146 $658 $458
Entertainment Group:
Filmed Entertainment-Warner Bros. $ 31 $ 32 $ 92 $ 92
Broadcasting-The WB Network - - - -
Cable Networks-HBO - - - -
Cable 78 83 229 234
Total $109 $115 $321 $326
(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.
10. COMMITMENTS AND CONTINGENCIES
Pending legal proceedings are substantially limited to litigation
incidental to the businesses of Time Warner and alleged damages in
connection with class action lawsuits. In the opinion of management, the
ultimate resolution of these matters will not have a material effect on the
consolidated financial statements of Time Warner.
11. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash flows is as
follows:
Nine Months
Ended September 30,
1997 1996
(millions)
Interest expense $792 $688
Cash payments made for interest 822 699
Cash payments made for income taxes 225 294
Tax-related distributions received from TWE 232 153
Income tax refunds received 43 37
Noncash dividends 137 79
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
SUMMARIZED FINANCIAL INFORMATION OF
TIME WARNER COMPANIES, INC. AND TURNER BROADCASTING SYSTEM, INC.
(Unaudited)
On October 10, 1996, Time Warner Inc. ("Time Warner") 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
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 (now known as Time Warner Companies, Inc., "TW
Companies") and TW Companies and TBS became separate, wholly owned
subsidiaries of the new parent company. Time Warner has fully and
unconditionally guaranteed all of the outstanding publicly traded
indebtedness of each of TW Companies and TBS.
Set forth below is summarized financial information of each of TW
Companies and TBS presented for the information of their respective
debtholders. Summarized financial information of TW Companies presented
below includes TW Companies'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 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.
TW Companies
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(millions)
Operating Statement Information
Revenues $2,159 $2,157 $6,353 $6,364
Depreciation and amortization 224 225 658 677
Business segment operating income 112 139 480 464
Equity in pretax income of Entertainment
Group 107 61 551 270
Interest and other, net 233 276 724 854
Income (loss) before extraordinary item (48) (91) 58 (215)
Net income (loss) (a) (55) (91) 38 (250)
__________________
(a) The net income for the three and nine months ended September 30, 1997
includes an extraordinary loss on the retirement of debt of $7 million
and $20 million, respectively. The net income for the nine months ended
September 30, 1996 includes extraordinary losses on the retirement of
debt of $35 million.
TW Companies
September 30, December 31,
1997 1996
Balance Sheet Information (millions)
Total current assets $ 3,727 $ 3,529
Investments in and amounts due to and from
Entertainment Group 5,623 5,814
Total assets 26,177 25,595
Total current liabilities 2,818 2,831
Long-term debt 11,745 11,002
Total liabilities 19,128 18,532
TW Companies-obligated mandatorily redeemable
preferred securities of subsidiaries holding
solely subordinated notes and debentures of
TW Companies (a) 949 949
Series M exchangeable preferred stock (b) - 1,672
Shareholders' equity (b) 6,100 4,442
TBS
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(millions)
Operating Statement Information
Revenues $1,090 $1,074 $3,123 $2,735
Depreciation and amortization 96 49 277 141
Business segment operating income 151 9 322 123
Interest and other, net 68 46 170 143
Income (loss) before extraordinary item 40 (21) 38 (20)
Net income (loss) (c) 40 (21) 34 (20)
September 30, December 31,
1997 1996
(millions)
Balance Sheet Information
Total current assets $ 1,158 $ 1,286
Total assets 11,134 11,092
Total current liabilities 1,055 934
Long-term debt 748 1,711
Debt due to Time Warner 1,747 985
Total liabilities 3,997 3,989
Shareholders' equity 7,137 7,103
_______________
(a) Includes $374 million of preferred securities that are redeemable
for cash or, at the option of TW Companies, approximately 18.1
million shares of Hasbro, Inc. common stock owned by TW Companies.
(b) On September 30, 1997, TW Companies was recapitalized. In connection
with such recapitalization, all outstanding shares of preferred stock
held by Time Warner were exchanged or converted into an aggregate
of approximately 128 million shares of common stock of TW Companies.
(c) The net loss for the nine months ended September 30, 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 and television broadcasting; 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.
Cable Financing Strategy
Currently, Time Warner is no longer actively pursuing a restructuring
of TWE with U S WEST. Time Warner's and TWE's cable financing strategy is
to continue to use cable operating cash flow to finance the level of capital
spending necessary to upgrade the technological capability of its cable
television systems and develop new services, while pursuing opportunities
to reduce both existing debt and its share of future funding requirements
related to the cable television business and related ancillary businesses.
Consistent with this strategy, Time Warner, TWE and the TWE-Advance/Newhouse
Partnership ("TWE-A/N") have recently announced certain transactions,
consisting of (i) a series of transactions with TCI Communications, Inc.
("TCI"), a subsidiary of Tele-Communications, Inc., to establish two, new
strategic joint ventures, expand an existing joint venture and exchange
certain cable television systems (collectively, the "TCI Cable
Transactions"), (ii) the transfer of TWE's and TWE-A/N's direct broadcast
satellite operations and related assets to a separate, publicly traded
entity, as well as certain related transactions (collectively, the
"Primestar Transactions") and (iii) the transfer by a wholly owned
subsidiary of Time Warner of cable television systems serving approximately
650,000 subscribers to TWE-A/N, subject to approximately $1 billion of debt,
in exchange for common and preferred partnership interests therein, as well
as certain related transactions (collectively, the "TWE-A/N Transfers").
Each of these transactions is discussed more fully below.
TCI Cable Transactions
In September 1997, Time Warner, TWE, TWE-A/N and TCI signed a letter
of intent to enter into a series of agreements to (i) form two cable
television joint ventures in the Houston and south Texas areas that will be
managed by TWE and own cable television systems serving an aggregate 1.1
million subscribers, subject to approximately $1.4 billion of debt, (ii)
expand an existing joint venture in Kansas City, which is managed by TWE,
through the contribution by TCI of a contiguous cable television system
serving approximately 95,000 subscribers, subject to approximately $200
million of debt, and (iii) exchange various cable television systems owned
by Time Warner and TWE serving over 500,000 subscribers (of which cable
television systems serving approximately 400,000 subscribers are owned by
TWE) for other cable television systems of comparable size in an effort to
enhance each company's geographic clusters of cable television properties.
The joint ventures will be accounted for under the equity method of
accounting.
As a result of these transactions, TWE expects to reduce debt by
approximately $500 million, benefit from the geographic clustering of cable
television systems and increase the number of subscribers under its
management by approximately 675,000 subscribers, thereby becoming the
largest cable television operator in the U.S. The TCI Cable Transactions are
expected to close periodically throughout 1998 and are subject to the
execution of definitive
agreements by the parties and customary closing conditions, including all
necessary governmental and regulatory approvals. There can be no assurance
that such agreements will be completed or that such approvals will be
obtained.
Primestar Transactions
In June 1997, TWE and the Advance/Newhouse Partnership
("Advance/Newhouse") entered into agreements to transfer the direct
broadcast satellite operations conducted by TWE and TWE-A/N (the "DBS
Operations") and the 31% partnership interest in Primestar Partners, L.P.
held by TWE-A/N ("Primestar" and collectively, the "Primestar Assets") to a
new, publicly traded holding company ("Newco") that will be the parent
entity of TCI Satellite Entertainment, Inc. ("TSAT"). Newco will also own
the DBS Operations and Primestar partnership interests currently owned by
TSAT and other existing partners of Primestar. In exchange for contributing
its interests in the Primestar Assets, TWE will receive an approximate 24%
equity interest in Newco and realize approximately $200 million of debt
reduction, as well as eliminating its share of future funding requirements
for these operations that will be separately financed by Newco. In partial
consideration for contributing its indirect interest in certain of the
Primestar Assets, Advance/Newhouse will receive an approximate 6% equity
interest in Newco.
In a related transaction, Primestar also entered into an agreement in
June 1997 with The News Corporation Limited, MCI Telecommunications
Corporation and American Sky Broadcasting LLC ("ASkyB"), pursuant to which
Primestar (or, under certain circumstances, Newco) will acquire certain
assets relating to the high-power, direct broadcast satellite business of
ASkyB. In exchange for such assets, ASkyB will receive non-voting securities
of Newco that will be convertible into non-voting common stock of Newco and,
accordingly, reduce TWE's equity interest in Newco to approximately 16% on
a fully diluted basis.
The Primestar transactions are not conditioned on each other and may
close independently. They are expected to close in 1998, subject to
customary closing conditions, including all necessary governmental and
regulatory approvals, including the approval of the Federal Communications
Commission (the "FCC"). There can be no assurance that such approvals will
be obtained.
TWE-A/N Transfers
In October 1997, TWE, TWE-A/N and a wholly owned subsidiary of Time
Warner entered into an agreement, pursuant to which Time Warner will
contribute cable television systems serving approximately 650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in
exchange for common and preferred partnership interests therein. The cable
television systems to be transferred to TWE-A/N are currently owned by TWI
Cable Inc., a wholly owned subsidiary of Time Warner, and Paragon
Communications ("Paragon"), a partnership owning cable television systems
serving approximately 1 million subscribers that is currently owned by
subsidiaries of Time Warner, with 50% beneficially owned in the aggregate by
TWE and TWE-A/N.
In a related transaction, TWE will exchange substantially all of its
beneficial interest in Paragon for an equivalent share of Paragon's cable
television systems serving approximately 500,000 subscribers. TWE, in turn,
will similarly transfer such systems and certain related assets to TWE-A/N
in exchange for TWE-A/N's beneficial interest in Paragon and in satisfaction
of certain pre-existing obligations to TWE-A/N. This will result in
subsidiaries of Time Warner owning 99% of the restructured Paragon entity.
Accordingly, upon consummation of the TWE-A/N Transfers,
TWE will deconsolidate Paragon, which will then be approximately half of its
former size. Because this transaction represents an exchange of TWE's and
TWE-A/N's beneficial interests in Paragon for an equivalent amount of its
cable television systems, it will not have any significant economic impact
on Time Warner, TWE or TWE-A/N.
In connection with the TWE-A/N Transfers, Advance/Newhouse will make
a capital contribution to TWE-A/N in order to maintain its 33.3% common
equity interest therein. Accordingly, upon consummation of the TWE-A/N
Transfers, TWE-A/N will be owned 65.5% by TWE, 33.3% by Advance/Newhouse
and 1.2% indirectly by Time Warner. The TWE-A/N Transfers are expected to
close in the first quarter of 1998, subject to customary closing conditions,
including any necessary franchise or regulatory approvals.
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 and nine months
ended September 30, 1997 and 1996 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
Operating Operating
EBITDA Income EBITDA Income
1997 1996 1997 1996 1997 1996 1997 1996
(millions)
Filmed Entertainment
-Warner Bros. $156 $139 $ 75 $ 56 $446 $410 $223 $205
Broadcasting
-The WB Network (21) (27) (21) (27) (59) (63) (60) (63)
Cable Networks-HBO 107 91 102 86 306 259 291 245
Cable 454 390 179 156 1,304 1,134 530 449
Total $696 $593 $335 $271 $1,997 $1,740 $984 $836
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996
TWE had revenues of $2.855 billion and net income of $81 million for
the three months ended September 30, 1997, compared to revenues of $2.718
billion and net income of $45 million for the three months ended September
30, 1996. As discussed more fully below, TWE's net income increased in 1997
as compared to 1996 principally due to an overall increase in operating
income generated by its business segments.
As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $27 million and $10 million
for the three months ended September 30, 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 $1.397
billion, compared to $1.443 billion in the third quarter of 1996. EBITDA in-
creased to $156 million from $139 million. Depreciation and amortization,
including noncash amortization of intangible assets related to the purchase
of WCI, amounted to $81 million in 1997 and $83 million in 1996. Operating
income increased to $75 million from $56 million. Revenues decreased
principally as a result of lower worldwide home video revenues that related
to the successful sell-through release of Twister in 1996, offset in part by
increases in worldwide theatrical and television distribution revenues.
EBITDA and operating income increased principally as a result of the strong
performance of worldwide television distribution operations.
Broadcasting - The WB Network. Revenues increased to $31 million,
compared to $23 million in the third quarter of 1996. Operating results
improved to a loss of $21 million from a loss of $27 million. 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 improved principally as a result of
the revenue gains and the effect of an increase in a limited partner's
interest in the network that occurred in early 1997. Due to the start-up
nature of this national broadcast operation, losses are expected to continue.
Cable Networks-HBO. Revenues increased to $482 million, compared to
$426 million in the third quarter of 1996. EBITDA increased to $107 million
from $91 million. Depreciation and amortization amounted to $5 million in
1997 and 1996. Operating income increased to $102 million from $86 million.
Revenues benefited primarily from an increase in subscriptions. EBITDA and
operating income increased principally as a result of the revenue gains.
Cable. Revenues increased to $1.060 billion, compared to $955 million
in the third quarter of 1996. EBITDA increased to $454 million from $390
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 $275 million in 1997 and $234 million in
1996. Operating income increased to $179 million from $156 million. Revenues
benefited from an increase in basic cable and Primestar-related, direct
broadcast satellite subscribers, increases in regulated cable rates as
permitted under Time Warner Cable's "social contract" with the FCC and an
increase in advertising and pay-per-view revenues. EBITDA and operating
income increased as a result of the revenue gains, as well as net gains of
approximately $15 million recognized in 1997 in connection with the sale or
exchange of certain cable systems. Operating income was further affected by
higher depreciation related to capital spending.
Interest and Other, Net. Interest and other, net, was $145 million in
the third quarter of 1997, compared to $147 million in the third quarter of
1996. Interest expense increased to $123 million, compared to $117 million
in 1996. There was other expense, net, of $22 million in the third quarter
of 1997, compared to $30 million in the third quarter of 1996, principally
due to higher gains on asset sales, which more than offset higher
investment-related losses, generally relating to reductions in the carrying
value of certain investments, and the dividend requirements on preferred
stock of a subsidiary issued in February 1997 to reduce TWE's bank debt. The
preferred stock was
issued by a newly formed, substantially owned subsidiary of TWE (the "REIT")
intended to qualify as a real estate investment trust under the Internal
Revenue Code of 1986, as amended.
Nine Months Ended September 30, 1997 Compared to the Nine Months Ended
September 30, 1996
TWE had revenues of $8.183 billion and net income of $483 million for
the nine months ended September 30, 1997, compared to revenues of $7.811
billion and net income of $213 million for the nine months ended September
30, 1996. As discussed more fully below, TWE's net income increased
significantly in 1997 as compared to 1996 principally 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 first quarter
of 1997 sale of TWE's 58% interest in E! Entertainment Television, Inc.,
offset in part by an increase in minority interest expense related to TWE-
A/N.
As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $64 million and $49 million
for the nine months ended September 30, 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 $3.823
billion, compared to $3.929 billion in the first nine months of 1996. EBITDA
increased to $446 million from $410 million. Depreciation and amortization,
including noncash amortization of intangible assets related to the purchase
of WCI, amounted to $223 million in 1997 and $205 million in 1996. Operating
income increased to $223 million from $205 million. Revenues decreased
principally as a result of lower worldwide theatrical and home video
revenues, offset in part by increases in worldwide television distribution
revenues. EBITDA and operating income increased principally as a result of
the strong performance of worldwide television distribution operations and
a gain on the sale of an investment. Operating income was further affected
by higher depreciation principally relating to the expansion of theme parks
and consumer products operations.
Broadcasting - The WB Network. Revenues increased to $84 million,
compared to $56 million in the first nine months of 1996. EBITDA improved to
a loss of $59 million from a loss of $63 million. Depreciation and
amortization amounted to $1 million in 1997. Operating losses decreased to
$60 million from $63 million. 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 improved principally as a result of the revenue gains and the effect of
an increase in a limited partner's interest in the network that occurred in
early 1997. Due to the start-up nature of this national broadcast operation,
losses are expected to continue.
Cable Networks-HBO. Revenues increased to $1.452 billion, compared to
$1.301 billion in the first nine months of 1996. EBITDA increased to $306
million from $259 million. Depreciation and amortization amounted to $15
million in 1997 and $14 million in 1996. Operating income increased to $291
million from $245 million. Revenues benefited primarily from an increase in
subscriptions. EBITDA and operating income increased principally as a result
of the revenue gains.
Cable. Revenues increased to $3.146 billion, compared to $2.863
billion in the first nine months of 1996. EBITDA increased to $1.304 billion
from $1.134 billion. 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 $774 million in 1997
and $685 million in 1996. Operating income increased to $530 million from
$449 million. Revenues benefited from an increase in basic cable and
Primestar-related, direct broadcast satellite subscribers, increases in
regulated cable rates as permitted under Time Warner Cable's "social
contract" with the FCC and an increase in advertising and pay-per-view
revenues. EBITDA and operating income increased as a result of the revenue
gains, as well as net gains of $39 million recognized in 1997 in connection
with the sale or exchange of certain cable systems. Operating income was
further affected by higher depreciation related to capital spending.
Interest and Other, Net. Interest and other, net, decreased to $155
million in the first nine months of 1997, compared to $368 million in the
first nine months of 1996. Interest expense increased to $358 million, com-
pared to $356 million in 1996. There was other income, net, of $203 million
in the first nine months of 1997, compared to other expense, net, of $12
million in the first nine months of 1996, principally due to higher gains on
asset sales, including an approximately $250 million pretax gain on the sale
of an interest in E! Entertainment Television, Inc. recognized in the first
quarter of 1997. This income was offset in part by higher losses from
reductions in the carrying value of certain investments and the dividend
requirements on preferred stock of the REIT issued in February 1997 to
reduce TWE's bank debt.
FINANCIAL CONDITION AND LIQUIDITY
September 30, 1997
Financial Condition
TWE had $6.3 billion of debt, $237 million of preferred stock of a
subsidiary, $1.1 billion of Time Warner General Partners' Senior Capital and
$6.4 billion of partners' capital at September 30, 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 $296 million at September 30, 1997, compared to $216
million at December 31, 1996, resulting in net debt for TWE of $6 billion
and $5.5 billion, respectively.
Debt Refinancings
In November 1997, TWE and TWE-A/N, together with Time Warner Inc. and
certain of its consolidated subsidiaries, expects to enter into a new, five-
year revolving credit facility (the "1997 Credit Agreement") and terminate
their previously existing bank credit facility (the "Old Credit Agreement").
This will enable TWE to reduce its aggregate borrowing availability from
$8.3 billion to $7.5 billion, lower interest rates and refinance
approximately $2.2 billion of its outstanding borrowings under the Old
Credit Agreement.
The 1997 Credit Agreement will permit borrowings in an aggregate
amount of up to $7.5 billion, with no scheduled reduction in credit
availability prior to maturity in November 2002. The borrowers under the
1997 Credit Agreement will be TWE, TWE-A/N, certain wholly owned
subsidiaries of Time Warner Inc. and, under certain circumstances, Time
Warner Inc. itself. Borrowings by TWE and TWE-A/N under the 1997 Credit
Agreement will be limited to $7.5 billion in the case of TWE and $2 billion
in the case of TWE-A/N, subject in each case to certain limitations and
adjustments, including the aggregate borrowing limit of $7.5 billion. As a
result, the amount that can be borrowed by TWE and TWE-A/N will be reduced
by borrowings made by Time Warner Inc. and its wholly
owned subsidiaries. Such borrowings will bear interest at specific rates for
each of the borrowers (generally equal to LIBOR plus a margin initially
equal to 40 basis points for TWE and 35 basis points for TWE-A/N) and each
borrower will be required to pay a commitment fee on the unused portion of
its commitment (initially equal to .15% per annum for TWE and .125% per
annum for TWE-A/N), which margin and fee will vary based on the credit
rating or financial leverage of TWE and TWE-A/N. Borrowings may be used for
general business purposes and unused credit will be available to support
commercial paper borrowings. The 1997 Credit Agreement will contain certain
covenants generally for each borrower relating to, among other things,
additional indebtedness; liens on assets; cash flow coverage and leverage
ratios; and distributions and other restricted cash payments or transfers of
assets from the borrowers to their respective partners or affiliates.
An extraordinary loss of approximately $23 million is expected to be
recognized by TWE in the fourth quarter of 1997 in connection with the
write-off of deferred financing costs related to the Old Credit Agreement.
Cash Flows
During the first nine months of 1997, TWE's cash provided by
operations amounted to $918 million and reflected $1.997 billion of EBITDA
from the Filmed Entertainment-Warner Bros., Broadcasting-The WB Network,
Cable Networks-HBO and Cable businesses, less $394 million of interest
payments, $55 million of income taxes, $54 million of corporate expenses,
and $576 million related to an increase in working capital requirements,
other balance sheet accounts and noncash items. Cash provided by operations
of $1.322 billion in the first nine months of 1996 reflected $1.740 billion
of business segment EBITDA and $77 million related to a reduction in working
capital requirements, other balance sheet accounts and noncash items, less
$391 million of interest payments, $52 million of income taxes and $52
million of corporate expenses.
Cash used by investing activities was $777 million in the first nine
months of 1997, compared to $864 million in the first nine months of 1996,
principally as a result of lower capital expenditures. Capital expenditures
were $1.117 billion in 1997 and $1.228 billion in 1996.
Cash used by financing activities was $61 million in the first nine
months of 1997, compared to $458 million in the first nine months of 1996,
principally as a result of an increase in debt used to fund cash
distributions to Time Warner and the issuance of 250,000 shares of preferred
stock of a subsidiary for aggregate net proceeds of $243 million, offset in
part by a $647 million increase in distributions paid to Time Warner and the
absence of $169 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 TWE's
Cable division amounted to $1.013 billion in the nine months ended September
30, 1997, compared to $936 million in the nine months ended September 30,
1996. For the full year of 1997, cable capital spending is expected to be
relatively comparable to 1996 levels, with approximately $400 million
budgeted for the remainder of 1997. Capital spending includes over $100
million in each year relating to Primestar, which is expected to be
eliminated in 1998 upon the consummation of the Primestar Transactions.
Other capital spending by TWE's Cable division is expected to continue to be
funded 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 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 $1.875 billion at September 30, 1997,
compared to $1.502 billion at December 31, 1996 (including amounts relating
to TWE's cable television networks of $239 million and $189 million,
respectively, and to Time Warner's cable television networks of $465 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.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, December 31,
1997 1996
(millions)
ASSETS
Current assets
Cash and equivalents $ 296 $ 216
Receivables, including $333 and $383 million
due from Time Warner, less allowances of
$371 and $373 million 1,673 1,637
Inventories 1,266 1,134
Prepaid expenses 170 159
Total current assets 3,405 3,146
Noncurrent inventories 2,234 2,263
Loan receivable from Time Warner 400 400
Investments 381 351
Property, plant and equipment, net 6,390 5,999
Cable television franchises 2,929 3,054
Goodwill 3,903 3,996
Other assets 703 764
Total assets $20,345 $19,973
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable $ 815 $ 935
Participations and programming costs payable 1,217 1,393
Debt due within one year 8 7
Other current liabilities, including $156
and $82 million due to Time Warner 1,683 1,740
Total current liabilities 3,723 4,075
Long-term debt 6,257 5,676
Other long-term liabilities, including $459
and $138 million due to Time Warner 1,499 1,085
Minority interests 1,173 1,020
Preferred stock of subsidiary holding solely
a mortgage note of its parent 237 -
Time Warner General Partners' Senior Capital 1,096 1,543
Partners' capital
Contributed capital 7,537 7,537
Undistributed partnership earnings (deficit) (1,177) (963)
Total partners' capital 6,360 6,574
Total liabilities and partners' capital $20,345 $19,973
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(millions)
Revenues (a) $2,855 $2,718 $8,183 $7,811
Cost of revenues (a)(b) 1,905 1,855 5,352 5,250
Selling, general and administrative
(a)(b) 615 592 1,847 1,725
Operating expenses 2,520 2,447 7,199 6,975
Business segment operating income 335 271 984 836
Interest and other, net (a) (145) (147) (155) (368)
Minority interest (64) (52) (228) (154)
Corporate services (a) (18) (17) (54) (52)
Income before income taxes 108 55 547 262
Income taxes (27) (10) (64) (49)
Net income $ 81 $ 45 $ 483 $ 213
_______________
(a) Includes the following income (expenses) resulting from transactions
with the partners of TWE and other related companies for the three
and nine months ended September 30, 1997, respectively, and for the
corresponding periods in the prior year: revenues-$103 million and
$224 million in 1997, $48 million and $147 million in 1996; cost of
revenues-$(11) million and $(47) million in 1997, $(30) million and
$(68) million in 1996; selling, general and administrative-$20
million and $60 million in 1997, $(24) million and $(33) million in
1996; interest and other, net-$8 million and $25 million in 1997, $6
million and $22 million in 1996; and corporate services-$(18) million
and $(54) million in 1997, $(17) million and $(52) million in 1996.
(b) Includes depreciation and amortization
expense of: $361 $322 $1,013 $ 904
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
1997 1996
(millions)
OPERATIONS
Net income $ 483 $ 213
Adjustments for noncash and nonoperating items:
Depreciation and amortization 1,013 904
Changes in operating assets and liabilities (578) 205
Cash provided by operations 918 1,322
INVESTING ACTIVITIES
Investments and acquisitions (104) (86)
Capital expenditures (1,117) (1,228)
Investment proceeds 444 450
Cash used by investing activities (777) (864)
FINANCING ACTIVITIES
Borrowings 905 190
Debt repayments (323) (697)
Issuance of preferred stock of subsidiary 243 -
Capital distributions (809) (162)
Collections on note receivable from U S WEST - 169
Other (77) 42
Cash used by financing activities (61) (458)
INCREASE IN CASH AND EQUIVALENTS 80 -
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 216 209
CASH AND EQUIVALENTS AT END OF PERIOD $296 $209
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 and television broadcasting; 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) HBO and Cinemax, the leading pay television services and (4) Time Warner
Cable, currently 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 8). 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
$109 million and $115 million in the three months ended September 30, 1997
and 1996, respectively, and $321 million and $326 million for the nine
months ended September 30, 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 (now known as Time Warner Companies, Inc.,
"TW Companies"), and TW Companies and TBS became separate, wholly
owned subsidiaries of the new parent company. Unless the context
indicates otherwise, references herein to "Time Warner" refer to
TW Companies.
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.
In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income" ("FAS 130"), effective for fiscal years beginning
after December 15, 1997. The new rules establish standards for the reporting
of comprehensive income and its components in financial statements.
Comprehensive income consists of net income and other gains and losses
affecting partnership capital that, under generally accepted accounting
principles, are excluded from net income, such as unrealized gains and
losses on marketable equity investments and foreign currency translation
gains and losses. TWE does not expect that the adoption of FAS 130 will have
a material effect on its financial statements.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("FAS 131"), effective
for fiscal years beginning after December 15, 1997. The new rules establish
revised standards for public companies relating to the reporting of
financial and descriptive information about their operating segments in
financial statements. TWE does not expect that the adoption of FAS 131 will
have a material effect on its financial statements.
2. CABLE TRANSACTIONS
TCI Cable Transactions
In September 1997, Time Warner Inc., TWE, the TWE-Advance/Newhouse
Partnership ("TWE-A/N") and TCI Communications, Inc. ("TCI"), a subsidiary
of Tele-Communications, Inc., signed a letter of intent to enter into a
series of agreements to (i) form two cable television joint ventures in the
Houston and south Texas areas that will be managed by TWE and own cable
television systems serving an aggregate 1.1 million subscribers, subject to
approximately $1.4 billion of debt, (ii) expand an existing joint venture in
Kansas City, which is managed by TWE, through the contribution by TCI of a
contiguous cable television system serving approximately 95,000 subscribers,
subject to approximately $200 million of debt, and (iii) exchange various
cable television systems owned by Time Warner and TWE and serving over
500,000 subscribers (of which cable television systems serving approximately
400,000 subscribers are owned by TWE) for other cable television systems of
comparable size in an effort to enhance each company's geographic clusters
of cable television properties (collectively, the "TCI Cable Transactions").
The joint ventures will be accounted for under the equity method of
accounting.
As a result of these transactions, TWE expects to reduce debt by
approximately $500 million, benefit from the geographic clustering of cable
television systems and increase the number of subscribers under its
management by approximately 675,000 subscribers. The TCI Cable Transactions
are expected to close periodically throughout 1998, subject to the execution
of definitive agreements by the parties and customary closing conditions,
including all
necessary governmental and regulatory approvals. There can be no assurance
that such agreements will be completed or that such approvals will be
obtained.
Primestar Transactions
In June 1997, TWE and the Advance/Newhouse Partnership
("Advance/Newhouse") entered into agreements to transfer the direct broad-
cast satellite operations conducted by TWE and TWE-A/N (the "DBS
Operations") and the 31% partnership interest in Primestar Partners, L.P.
held by TWE-A/N ("Primestar" and collectively, the "Primestar Assets") to a
new, publicly traded holding company ("Newco") that will be the parent
entity of TCI Satellite Entertainment, Inc. ("TSAT"). Newco will also own
the DBS Operations and Primestar partnership interests currently owned by
TSAT and other existing partners of Primestar. In exchange for contributing
its interests in the Primestar Assets, TWE will receive an approximate 24%
equity interest in Newco and realize approximately $200 million of debt
reduction, as well as eliminating its share of future funding requirements
for these operations that will be separately financed by Newco. In partial
consideration for contributing its indirect interest in certain of the
Primestar Assets, Advance/Newhouse will receive an approximate 6% equity
interest in Newco.
In a related transaction, Primestar also entered into an agreement in
June 1997, with The News Corporation Limited, MCI Telecommunications
Corporation ("MCI") and American Sky Broadcasting LLC ("ASkyB"), pursuant to
which Primestar (or, under certain circumstances, Newco) will acquire
certain assets relating to the high-power, direct broadcast satellite
business of ASkyB. In exchange for such assets, ASkyB will receive non-
voting securities of Newco that will be convertible into non-voting common
stock of Newco and, accordingly, reduce TWE's equity interest in Newco to
approximately 16% on a fully diluted basis.
The Primestar transactions are not conditioned on each other and may
close independently. They are expected to close in 1998, subject to
customary closing conditions, including all necessary governmental and
regulatory approvals, including the approval of the Federal Communications
Commission. There can be no assurance that such approvals will be obtained.
TWE-A/N Transfers
In October 1997, TWE, TWE-A/N and a wholly owned subsidiary of Time
Warner entered into an agreement, pursuant to which Time Warner will
contribute cable television systems serving approximately 650,000
subscribers to TWE-A/N, subject to approximately $1 billion of debt, in
exchange for common and preferred partnership interests therein, as well as
certain related transactions (collectively, the "TWE-A/N Transfers"). The
cable television systems to be transferred to TWE-A/N are currently owned by
TWI Cable Inc., a wholly owned subsidiary of Time Warner, and Paragon
Communications ("Paragon"), a partnership owning cable television systems
serving approximately 1 million subscribers that is currently owned by
subsidiaries of Time Warner, with 50% beneficially owned in the aggregate by
TWE and TWE-A/N.
In a related transaction, TWE will exchange substantially all of its
beneficial interest in Paragon for an equivalent share of Paragon's cable
television systems serving approximately 500,000 subscribers. TWE, in turn,
will similarly transfer such systems and certain related assets to TWE-A/N
in exchange for TWE-A/N's beneficial interest in Paragon and in satisfaction
of certain pre-existing obligations to TWE-A/N. This will result in
subsidiaries of Time
Warner owning 99% of the restructured Paragon entity. Accordingly, upon
consummation of the TWE-A/N Transfers, TWE will deconsolidate Paragon, which
will then be approximately half of its former size. Because this transaction
represents an exchange of TWE's and TWE-A/N's beneficial interests in
Paragon for an equivalent amount of its cable television systems, it will
not have any significant economic impact on Time Warner, TWE or TWE-A/N.
In connection with the TWE-A/N Transfers, Advance/Newhouse will make
a capital contribution to TWE-A/N in order to maintain its 33.3% common
equity interest therein. Accordingly, upon consummation of the TWE-A/N
Transfers, TWE-A/N will be owned 65.5% by TWE, 33.3% by Advance/Newhouse
and 1.2% indirectly by Time Warner. The TWE-A/N Transfers are expected to
close in the first quarter of 1998, subject to customary closing conditions,
including any necessary franchise or regulatory approvals.
3. INVENTORIES
TWE's inventories consist of:
September 30, 1997 December 31, 1996
Current Noncurrent Current Noncurrent
(millions)
Film costs:
Released, less amortization $ 671 $ 599 $ 544 $ 535
Completed and not released 173 48 168 42
In process and other 45 649 21 704
Library, less amortization - 625 - 664
Programming costs, less amortization 297 313 319 318
Merchandise 80 - 82 -
Total $1,266 $2,234 $1,134 $2,263
4. INVESTMENTS
In the first quarter of 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.
5. LONG-TERM DEBT
In November 1997, TWE and TWE-A/N, together with Time Warner Inc. and
certain of its consolidated subsidiaries, expects to enter into a new, five-
year revolving credit facility (the "1997 Credit Agreement") and terminate
its previously existing bank credit facility (the "Old Credit Agreement").
This will enable TWE to reduce its aggregate borrowing availability from
$8.3 billion to $7.5 billion, lower interest rates and refinance
approximately $2.2 billion of its outstanding borrowings under the Old
Credit Agreement.
The 1997 Credit Agreement will permit borrowings in an aggregate
amount of up to $7.5 billion, with no scheduled reduction in credit
availability prior to maturity in November 2002. The borrowers under the
1997 Credit Agreement will be TWE, TWE-A/N, certain wholly owned
subsidiaries of Time Warner Inc. and, under certain circumstances, Time
Warner Inc. itself. Borrowings by TWE and TWE-A/N under the 1997 Credit
Agreement will be limited to $7.5 billion in the case of TWE and $2 billion
in the case of TWE-A/N, subject in each case to certain
limitations and adjustments, including the aggregate borrowing limit of $7.5
billion. As a result, the amount that can be borrowed by TWE and TWE-A/N
will be reduced by borrowings made by Time Warner Inc. and its wholly owned
subsidiaries. Such borrowings will bear interest at specific rates for each
of the borrowers (generally equal to LIBOR plus a margin initially equal to
40 basis points for TWE and 35 basis points for TWE-A/N) and each borrower
will be required to pay a commitment fee on the unused portion of its
commitment (initially equal to .15% per annum for TWE and .125% per annum
for TWE-A/N), which margin and fee will vary based on the credit rating or
financial leverage of TWE and TWE-A/N. Borrowings may be used for general
business purposes and unused credit will be available to support commercial
paper borrowings. The 1997 Credit Agreement will contain certain covenants
generally for each borrower relating to, among other things, additional
indebtedness; liens on assets; cash flow coverage and leverage ratios; and
distributions and other restricted cash payments or transfers of assets from
the borrowers to their respective partners or affiliates.
An extraordinary loss of approximately $23 million is expected to be
recognized by TWE in the fourth quarter of 1997 in connection with the
write-off of deferred financing costs related to the Old Credit Agreement.
6. 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 has been 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.
TWE 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.
7. PARTNERS' CAPITAL
Changes in partners' capital were as follows:
Nine Months
Ended September 30,
1997 1996
(millions)
Balance at beginning of year $6,574 $6,478
Net income 483 213
Distributions (586) (161)
Allocation of income to Time Warner General
Partners' Senior Capital (88) (87)
Collections on note receivable from U S WEST - 169
Capital contributions - 15
Other (23) 11
Balance at September 30 $6,360 $6,638
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 nine months ended September 30, 1997, TWE accrued $232
million of tax-related distributions and $354 million of stock option
distributions, based on closing prices of Time Warner common stock of $54.19
at September 30, 1997 and $37.50 at December 31, 1996. During the nine
months ended September 30, 1996, TWE accrued $153 million of tax-related
distributions and $8 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 nine months ended September 30, 1997, TWE paid distributions to the Time
Warner General Partners in the amount of $809 million, consisting of $232
million of tax-related distributions, $42 million of stock option related
distributions and a $535 million distribution to the Time Warner General
Partners relating to their Senior Capital interests. In the nine months
ended September 30, 1996, TWE paid the Time Warner General Partners
distributions in the amount of $162 million, consisting of $153 million of
tax-related distributions and $9 million of stock option related
distributions.
8. SEGMENT INFORMATION
TWE classifies its businesses into three fundamental areas:
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; 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 Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(millions)
Revenues
Filmed Entertainment-Warner Bros. $1,397 $1,443 $3,823 $3,929
Broadcasting-The WB Network 31 23 84 56
Cable Networks-HBO 482 426 1,452 1,301
Cable 1,060 955 3,146 2,863
Intersegment elimination (115) (129) (322) (338)
Total $2,855 $2,718 $8,183 $7,811
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(millions)
Operating Income
Filmed Entertainment-Warner Bros. $ 75 $ 56 $223 $205
Broadcasting-The WB Network (21) (27) (60) (63)
Cable Networks-HBO 102 86 291 245
Cable 179 156 530 449
Total $335 $271 $984 $836
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(millions)
Depreciation of Property, Plant and Equipment
Filmed Entertainment-Warner Bros $ 50 $ 51 $131 $113
Broadcasting-The WB Network - - 1 -
Cable Networks-HBO 5 5 15 14
Cable 197 151 545 451
Total $252 $207 $692 $578
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
(millions)
Amortization of Intangible Assets (1)
Filmed Entertainment-Warner Bros $ 31 $ 32 $ 92 $ 92
Broadcasting-The WB Network - - - -
Cable Networks-HBO - - - -
Cable 78 83 229 234
Total $109 $115 $321 $326
(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.
9. COMMITMENTS AND CONTINGENCIES
Pending legal proceedings are substantially limited to litigation
incidental to the businesses of TWE. In the opinion of management, the
ultimate resolution of these matters will not have a material effect on the
consolidated financial statements of TWE.
10. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash flows is as
follows:
Nine Months
Ended September 30,
1997 1996
(millions)
Interest expense $358 $356
Cash payments made for interest 394 391
Cash payments made for income taxes, net 55 52
Noncash capital distributions 354 8
Part II. Other Information
Item 1. Legal Proceedings.
On September 23, 1997, Warner Communications Inc. was served by the
Federal Trade Commission with a subpoena duces tecum calling for the
production of documents in connection with a nonpublic investigation into
whether the prerecorded music distribution companies and others may be
engaging or may have engaged in any unfair methods of competition through
the adoption, implementation and maintenance of cooperative advertising
programs that included minimum advertised price provisions.
On September 30, 1997, a purported class action was commenced in the
United States District Court for the Central District of California entitled
Chandu Dani d/b/a Compact Disc Warehouse and Record Revolution v. EMI Music
Distribution, Sony Music Entertainment, Inc., Warner Elektra Atlantic
Corporation, UNI Distribution Corporation, Bertelsmann Music Group, Inc. and
PolyGram Group Distribution, Inc., No. 97- 7226 (JGD). The plaintiffs
purporting to represent a class of direct purchasers of recorded music
compact discs (CDs), allege that Warner Elektra Atlantic Corporation, along
with five other distributors of CDs, violated the federal and state
antitrust laws by engaging in a conspiracy to fix the prices of CDs, and
seek an injunction and treble damages.
Reference is made to the consolidated actions filed in Superior Court,
Fulton County, Georgia, against TBS, Time Warner, certain officers and
directors of TBS or TWE, and other defendants, in connection with the TBS
Transaction, described on pages I-38 and I-39 of Time Warner's Annual Report
on Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K").
On July 23, 1997 plaintiffs filed a notice of appeal from the decision
granting judgment in defendants' favor.
Reference is made to the litigation entitled Samuel D. Moore, et al.
v. American Federation of Television and Radio Artists, et al. on page I-37
of the 1996 Form 10-K. On August 14, 1997, the Court granted the record
company defendants' motion to dismiss all of the newly-added ERISA claims
against them, denied the record company defendants' motion to dismiss newly-
added state law claims for breach of contract and fraud, and denied the
record company defendants' motion for summary judgment on the RICO claims
against them. The Court also denied a motion by the AFTRA Health and
Retirement Fund and the Fund Trustees to dismiss the claims asserted against
them. Plaintiffs' motion for class certification is currently pending
before the Court.
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
October 15, 1997 setting forth in Item 5 Time Warner's results of operations
for the quarter ended September 30, 1997.
(ii) Time Warner filed a Current Report on Form 8-K dated
October 27, 1997 (A) reporting in Item 5 the signing of agreements by
subsidiaries of Time Warner and the Time Warner Entertainment-
Advance/Newhouse Partnership ("TWE-A/N") with respect to the transfer by a
wholly owned subsidiary of Time Warner of cable television systems serving
approximately 650,000 subscribers to TWE-A/N, subject to approximately $1
billion of debt, in exchange for equity interests in TWE-A/N, as well as
certain related transactions (collectively, the "TWE-A/N Transfers"), and
(B) setting forth in Item 7 pro forma consolidated condensed financial
statements of Time Warner and Time Warner Entertainment Group giving effect
to the TWE-A/N Transfers and certain other transactions entered into in 1995
and 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: November 12, 1997
EXHIBIT INDEX
Pursuant to Item 601 of Regulations S-K
Exhibit No. Description of Exhibit
3.(i)(a) Restated Certificate of Incorporation of the Registrant as
filed with the Secretary of State of the State of Delaware
on October 10, 1996 (which is incorporated herein by
reference to Exhibit 4.3 to the Registrant's Post-Effective
Amendment No. 1 on Form S-8 to the Registrant's
Registration Statement on Form S-4 (Registration No. 333-
11471) (the "S-8 Registration Statement")).
3.(i)(b) Certificate of Increase of the Number of Shares of Series
Common Stock of the Registrant Designated as Series LMCN-V
Common Stock as filed with the Secretary of State of the
State of Delaware on August 13, 1997.
3.(i)(c) Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant as filed with the Secretary
of State of the State of Delaware on May 19, 1997 (which is
incorporated herein by reference to Exhibit 3.(i)(c) to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997).
3.(i)(d) Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant as filed with the Secretary
of State of the State of Delaware on October 10, 1996
(which is incorporated herein by reference to Exhibit 4.4
to the Registrant's S-8 Registration Statement).
3.(i)(e) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special
Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series LMC Common Stock of the Registrant as
filed with the Secretary of State of the State of Delaware
on October 10, 1996 (which is incorporated herein by
reference to Exhibit 4.5 to the Registrant's S-8
Registration Statement).
3.(i)(f) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special
Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series LMCN-V Common Stock of the Registrant as
filed with the Secretary of State of the State of Delaware
on October 10, 1996 (which is incorporated herein by
reference to Exhibit 4.6 to the Registrant's S-8
Registration Statement).
3.(i)(g) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special
Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series A Participating Cumulative Preferred
Stock of the Registrant as filed with the Secretary of
State of the State of Delaware on October 10, 1996 (which
is incorporated herein by reference to Exhibit 4.7 to the
Registrant's S-8 Registration Statement).
3.(i)(h) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special
Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series D Convertible Preferred Stock of the
Registrant as filed with the Secretary of State of the
State of Delaware on October 10, 1996 (which is
incorporated herein by reference to Exhibit 4.8 to the
Registrant's S-8 Registration Statement).
3.(i)(i) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special
Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series E Convertible Preferred Stock of the
Registrant as filed with the Secretary of State of the
State of Delaware on October 10, 1996 (which is
incorporated herein by reference to Exhibit 4.9 to the
Registrant's S-8 Registration Statement).
3.(i)(j) Certificate of Correction of the Certificate of the Voting
Powers, Designations, Preferences and Relative,
Participating, Optional or Other Special Rights, and
Qualifications, Limitations or Restrictions Thereof, of
Series E Convertible Preferred Stock of the
Registrant as filed with the Secretary of State
of the State of Delaware on November 13, 1996
(which is incorporated by reference to Exhibit
3.(i)(h) to the Registrant's 1996 Form 10-K).
3.(i)(k) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special
Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series F Convertible Preferred Stock of the
Registrant as filed with the Secretary of State of the
State of Delaware on October 10, 1996 (which is
incorporated herein by reference to Exhibit 4.10 to the
Registrant's S-8 Registration Statement).
3.(i)(l) Certificate of Correction of the Certificate of the Voting
Powers, Designations, Preferences and Relative,
Participating, Optional or Other Special Rights, and
Qualifications, Limitations or Restrictions Thereof, of
Series F Convertible Preferred Stock of the Registrant as
filed with the Secretary of State of the State of Delaware
on November 13, 1996 (which is incorporated herein by
reference to Exhibit 3.(i)(j) to the Registrant's 1996 Form
10-K).
3.(i)(m) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special
Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series G Convertible Preferred Stock of the
Registrant as filed with the Secretary of State of the
State of Delaware on October 10, 1996 (which is
incorporated herein by reference to Exhibit 4.11 to the
Registrant's S-8 Registration Statement).
3.(i)(n) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special
Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series H Convertible Preferred Stock of the
Registrant as filed with the Secretary of State of the
State of Delaware on October 10, 1996 (which is
incorporated herein by reference to Exhibit 4.12 to the
Registrant's S-8 Registration Statement).
3.(i)(o) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special
Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series I Convertible Preferred Stock of the
Registrant as filed with the Secretary of State of the
State of Delaware on October 10, 1996 (which is
incorporated herein by reference to Exhibit 4.13 to the
Registrant's S-8 Registration Statement).
3.(i)(p) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special
Rights, and Qualifications, Limitations or Restrictions
Thereof, of Series J Convertible Preferred Stock of the
Registrant as filed with the Secretary of State of the
State of Delaware on October 10, 1996 (which is
incorporated herein by reference to Exhibit 4.14 to the
Registrant's S-8 Registration Statement).
3.(i)(q) Certificate of the Voting Powers, Designations, Preferences
and Relative, Participating, Optional or Other Special
Rights, and Qualifications, Limitations or Restrictions
Thereof, of 10-1/4% Series M Exchangeable Preferred Stock of
the Registrant as filed with the Secretary of State of the
State of Delaware on October 10, 1996 (which is
incorporated herein by reference to Exhibit 4.15 to the
Registrant's S-8 Registration Statement).
10 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 (which is incorporated
herein by reference to Exhibit 99(c) to the Registrant's
Current Report on Form 8-K dated October 27, 1997).
27 Financial Data Schedule.