SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
November 13, 1997
TIME WARNER INC.
(Exact name of registrant as specified in its charter)
Delaware 1-12259 13-3527249
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
75 Rockefeller Plaza, New York, NY 10019
(Address of principal executive offices) (zip code)
(212) 484-8000
(Registrant's telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Item 5. Other Events.
Time Warner Inc. ("Time Warner") and Time Warner Entertainment
Company, L.P. ("TWE"), a partnership in which Time Warner and certain of
its wholly owned subsidiaries own general and limited partnership
interests representing 74.49% of each of the pro rata priority capital
("Series A Capital") and residual equity capital ("Residual Capital") and
100% of each of the senior priority capital ("Senior Capital") and junior
priority capital ("Series B Capital") have completed, or have entered into,
the transactions described below:
(i) On October 27, 1997, a wholly owned subsidiary of Time
Warner entered into an agreement (the "Transfer Agreement") with the
Time Warner Entertainment-Advance/Newhouse Partnership (the
"TWE-Advance/Newhouse Partnership") and each of its partners,
pursuant to which, (a) (i) a wholly owned subsidiary of Time Warner
will contribute cable television systems serving approximately 640,000
subscribers formerly held by Cablevision Industries Corporation and
related companies ("CVI", now known as TWI Cable Inc. or "TWI Cable",
a wholly owned subsidiary of Time Warner) (the "CVI Transferred
Systems") into Paragon Communications ("Paragon", an entity currently
owned by subsidiaries of Time Warner, with 50% beneficially owned in
the aggregate by TWE and the TWE-Advance/Newhouse Partnership) in
exchange for partnership interests therein, (ii) Paragon will assume
approximately $1.021 billion of indebtedness from CVI, and (iii)
Paragon, in turn, will contribute the CVI Transferred Systems,
subject to $985 million of the assumed indebtedness, to the
TWE-Advance/Newhouse Partnership in exchange for a 1.15% common
partnership interest and a $147 million preferred partnership
interest therein (collectively, the "CVI Transfers"), (b) Paragon
will contribute certain of its own cable television systems serving
approximately 27,000 subscribers, subject to $36 million of the
assumed indebtedness, to the TWE-Advance/Newhouse Partnership, in
exchange for an additional .04% common partnership interest and a $5
million preferred partnership interest therein (the "Time Warner/
Paragon Transferred Systems") and (c) (i) TWE will exchange
substantially all of its beneficial interest in Paragon for an
equivalent share of Paragon's cable television systems serving
approximately 515,000 subscribers and (ii) TWE, in turn, will
similarly transfer such systems (and certain related assets) to the
TWE-Advance/Newhouse Partnership in exchange for the TWE-Advance/
Newhouse Partnership's beneficial interest in Paragon and in
satisfaction of certain pre-existing obligations to the TWE-
Advance/Newhouse Partnership (the "TWE/Paragon Transferred Systems",
and when taken together with the Time Warner/Paragon Transferred
Systems, the "Paragon Transfers"). As a result of the Paragon Transfers,
substantially all of the pre-existing beneficial ownership interests
in Paragon owned by TWE and the TWE-Advance/Newhouse Partnership
will be redeemed by Paragon, which, in effect, will result in wholly
owned subsidiaries of Time Warner owning substantially all of the
remaining cable television systems of Paragon. In addition, in
connection with the TWE-A/N Transfers, Advance/Newhouse will contribute
an approximate $76 million note receivable to the TWE-Advance/
Newhouse Partnership in order to maintain its 33.3% common equity
interest therein. The CVI Transfers and the Paragon Transfers are
referred to herein as the "TWE-A/N Transfers". The TWE-A/N Transfers
are not subject to bondholder approval. However, the TWE-A/N
Transfers are subject to the receipt of franchise and other required
regulatory consents and the aggregate consideration is subject to
adjustment pursuant to the terms of the Transfer Agreement.
(ii) On October 10, 1996, Time Warner acquired the remaining
80% interest in Turner Broadcasting System, Inc. ("TBS") that it did
not already own (the "TBS Transaction"). As a result of this
transaction, a new parent company with the name "Time Warner Inc."
replaced the old parent company of the same name (now known as Time
Warner Companies, Inc., "TW Companies"), and TW Companies and TBS
became separate, wholly owned subsidiaries of the new parent
company. References herein to "Time Warner" refer to TW Companies
prior to October 10, 1996 and Time Warner Inc. thereafter.
As part of the TBS Transaction, each of TW Companies and TBS
became separate, wholly owned subsidiaries of Time Warner, which
combines, for financial reporting purposes, the consolidated net
assets and operating
results of TW Companies and TBS. Each issued and outstanding share
of each class of capital stock of TW Companies was converted into
one share of a substantially identical class of capital stock of
Time Warner.
In connection with the TBS Transaction, Time Warner issued (i)
approximately 179.8 million shares of common stock (including 57
million shares of a special class of non-redeemable common stock
having 1/100th of a vote per share on certain limited matters
("Series LMCN-V Common Stock") to affiliates of Liberty Media
Corporation ("LMC"), a subsidiary of Tele-Communications, Inc.) and
(ii) approximately 14 million stock options. Time Warner also
assumed approximately $2.8 billion of indebtedness.
(iii) on April 11, 1996, Time Warner issued 1.6 million shares
of 10-1/4% exchangeable preferred stock for approximately $1.55
billion of net proceeds. Such proceeds were used by Time Warner to
redeem all $250 million principal amount of its outstanding 8.75%
Debentures due 2017 (the "8.75% Debentures") for approximately $265
million (including redemption premiums and accrued interest thereon)
and to reduce indebtedness of TWI Cable under its five-year
revolving credit facility (the "1995 Credit Agreement") by
approximately $1.3 billion. This issuance and the use of the proceeds
therefrom to reduce outstanding indebtedness of Time Warner are
referred to herein as the "Preferred Stock Refinancing". As part of
the TBS Transaction, these privately-placed preferred shares were
converted into registered shares of Series M exchangeable preferred
stock with substantially identical terms ("Series M Preferred
Stock"); and
(iv) on February 1, 1996, Time Warner redeemed all $1.2
billion principal amount of 8.75% Convertible Subordinated
Debentures due 2015 (the "8.75% Convertible Debentures") for $1.28
billion, including redemption premiums and accrued interest thereon
(the "February 1996 Redemption"). The February 1996 Redemption was
financed with (1) $557 million of net proceeds raised in December
1995 from the issuance of Time Warner-obligated mandatorily
redeemable preferred securities of a subsidiary ("Preferred Trust
Securities") and (2) proceeds raised from the $750 million issuance
in January 1996 of (i) $400 million principal amount of 6.85%
debentures due 2026, which are redeemable at the option of the
holders thereof in 2003, (ii) $200 million principal amount of 8.3%
discount debentures due 2036, which do not pay cash interest until
2016, (iii) $166 million principal amount of 7.48% debentures due
2008 and (iv) $150 million principal amount of 8.05% debentures due
2016 (collectively referred to herein as the "January 1996 Debentures").
The issuance of the Preferred Trust Securities and the
January 1996 Debentures, together with the February 1996 Redemption,
are collectively referred to herein as the "Convertible Debt
Refinancing".
The Preferred Stock Refinancing and the Convertible Debt
Refinancing are referred to herein as the "Debt Refinancings" and the
TWE-A/N Transfers, the TBS Transaction and the Debt Refinancings are
referred to herein as the "Transactions".
Item 7. Financial Statements and Exhibits
(a) Pro Forma Consolidated Condensed Financial Statements
The following pro forma consolidated condensed financial statements
of Time Warner and the Time Warner Entertainment Group (the "Entertainment
Group"), principally consisting of TWE, as of and for the nine months ended
September 30, 1997 give effect to the TWE-A/N Transfers as if such
transaction occurred at such date, with respect to the balance sheet, and
at the beginning of such period, with respect to the statement of
operations. The TBS Transaction and the Debt Refinancings are already
reflected in the historical financial statements of Time Warner as of and
for the nine months ended September 30, 1997. The pro forma consolidated
condensed statements of operations of Time Warner and the Entertainment
Group for the year ended December 31, 1996 give effect to the TWE-A/N
Transfers and, with respect to Time Warner only, the TBS Transaction and
the Debt Refinancings, as if the transactions occurred at the beginning of
such period.
The pro forma consolidated condensed financial statements should be
read in conjunction with the historical financial statements of Time
Warner and TWE, including the notes thereto, which are contained in the
Time Warner Quarterly Report on Form 10-Q for the nine months ended
September 30, 1997 and the Time Warner Annual Report on Form 10-K for the
year ended December 31, 1996, as well as the historical financial
statements of TBS for the nine months ended September 30, 1996, which are
incorporated herein by reference from TBS's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1996.
The pro forma consolidated condensed financial statements are
presented for informational purposes only and are not necessarily
indicative of the financial position or operating results that would have
occurred if the Transactions had been consummated as of the dates
indicated, nor are they necessarily indicative of future financial
conditions or operating results.
TWE-A/N Transfers
In April 1995, TWE and the Advance/Newhouse Partnership
("Advance/Newhouse") formed the TWE-Advance/Newhouse Partnership.
Upon formation of the TWE-Advance/Newhouse Partnership, TWE, which
is the managing partner, owned a 66.7% common partnership interest in the
TWE-Advance/Newhouse Partnership and Advance/Newhouse owned a 33.3% common
partnership interest. TWE consolidates the TWE-Advance/Newhouse Partnership.
As such, the common partnership interest owned by Advance/Newhouse and
the common and preferred partnership interests that will be owned by
Paragon as a result of the TWE-A/N Transfers are reflected in the
Entertainment Group's pro forma financial statements as minority interest.
Subject to receipt of franchise and other required regulatory
consents, Time Warner has agreed to transfer certain cable television
systems serving an aggregate of approximately 667,000 subscribers to the
TWE-Advance/Newhouse Partnership, subject to approximately $1.021 billion
of debt, thereby reducing the financial leverage of Time Warner and
increasing the under-leveraged capitalization of the TWE-Advance/Newhouse
Partnership and consequently, TWE. In addition, as discussed more fully
below, as part of the TWE-A/N Transfers, TWE and the TWE-Advance/Newhouse
Partnership will exchange substantially all of their respective beneficial
interests in Paragon (and certain related assets) for an equivalent share
of Paragon's cable television systems serving approximately 515,000
subscribers.
Pro forma adjustments for the CVI Transfers reflect the contribution
by Time Warner, through Paragon, of cable television systems serving
approximately 640,000 subscribers formerly held by CVI to the
TWE-Advance/Newhouse Partnership, subject to approximately $985
million of debt in exchange for a 1.15% common partnership interest and
a $147 million preferred partnership interest therein to be held by Paragon.
Pro forma adjustments for the Paragon Transfers reflect (i) the
contribution by Paragon of certain of its own cable television systems
serving approximately 27,000 subscribers, subject to approximately $36
million of debt, to the TWE-Advance/Newhouse Partnership in exchange for
an additional .04% common partnership interest and a $5 million preferred
partnership interest therein, (ii) (a) the exchange by TWE of substantially
all of its beneficial interest in Paragon for an equivalent share
of Paragon's cable television systems serving approximately 515,000
subscribers and (b) the transfer by TWE, in turn, of such systems (and
certain related assets) to the TWE-Advance/Newhouse Partnership in
exchange for the TWE-Advance/Newhouse Partnership's beneficial interest in
Paragon and in satisfaction of certain pre-existing obligations to the
TWE-Advance/Newhouse Partnership and (iii) the consolidation of Paragon by
Time Warner (and the related deconsolidation of Paragon by TWE) as a
result of the redemption by Paragon of substantially all of the pre-
existing beneficial ownership interests therein owned by TWE and the
TWE-Advance/Newhouse Partnership which, in effect, will result in wholly
owned subsidiaries of Time Warner owning substantially all of the remaining
cable television systems of Paragon.
Because the fair value of the consideration to be received from the
TWE-Advance/Newhouse Partnership approximates the carrying value of the
net assets of the CVI Transferred Systems and the Time Warner/Paragon
Transferred Systems, Time Warner is not expected to recognize a gain or
loss on the transaction and the net assets to be received by the
TWE-Advance/Newhouse Partnership will be recorded at Time Warner's historical
cost basis of accounting. Similarly, TWE will not recognize a gain or loss
on its transfer of the TWE/Paragon Transferred Systems (and such net
assets will be recorded by the TWE-Advance/Newhouse Partnership at TWE's
historical cost basis of accounting), since such entities belong to a
common consolidated control group.
In order to maintain its 33.3% common partnership interest in the
TWE-Advance/Newhouse Partnership, Advance/Newhouse will make a capital
contribution in the form of a $76 million note, payable to the partnership
no later than the fourth anniversary of the closing date of the transaction.
Such contribution has no material effect on the accompanying pro
forma financial statements and accordingly, has not been given pro forma
effect therein.
Upon consummation of the TWE-A/N Transfers, the TWE-Advance/Newhouse
Partnership will be owned approximately 65.5% by TWE, 33.3% by Advance/
Newhouse and 1.2% by Paragon. In addition, Paragon will own an approximate
$152 million preferred partnership interest in the TWE-Advance/Newhouse
Partnership, which will entitle it to receive priority allocations of
partnership income and distributions therefrom. Under the terms of the
partnership agreement, partnership income is generally allocated first to
the preferred partnership interest at a rate of 10-1/4% per annum, and
then to the partners in proportion to their respective common equity
interests. Distributions on such preferred interests are payable each
quarter in cash, to the extent available, in accordance with the terms of
the partnership agreement. The preferred partnership interests are
required to be redeemed by the TWE-Advance/Newhouse Partnership in three
equal annual installments beginning on the sixth anniversary of the
TWE-A/N Transfer closing.
TWE will continue to consolidate the TWE-Advance/Newhouse Partnership
and Paragon will account for its interest therein under the equity
method of accounting.
TBS Transaction
Pro forma adjustments for the TBS Transaction reflect (1) the
issuance of approximately 179.8 million shares of common stock, including
57 million shares of Series LMCN-V Common Stock which were received by
affiliates of LMC, (2) the issuance of approximately 14 million stock
options, (3) the assumption of approximately $2.8 billion of indebtedness
and (4) the payment of approximately $95 million for transaction costs and
other related liabilities of Time Warner and TBS.
The TBS Transaction has been accounted for by the purchase method of
accounting for business combinations and, accordingly, the cost to acquire
TBS of approximately $6.2 billion has been preliminarily allocated to the
net assets acquired in proportion to estimates of their respective fair
values.
Debt Refinancings
Pro forma adjustments for the Debt Refinancings in the year ended
December 31, 1996 reflect proceeds of (1) $1.55 billion received from the
issuance of preferred stock as part of the Preferred Stock Refinancing and
(2) approximately $750 million received from the issuance of the January
1996 Debentures, which have a weighted average interest rate of 7.3%, and
the use of (1) $721 million of such proceeds, together with $557 million
of net proceeds received from the issuance of the Preferred Trust
Securities (8-7/8% yield) in December 1995, to finance the Convertible
Debt Refinancing ($1.226 billion principal amount, plus redemption
premiums and accrued interest thereon of $52 million), (2) $265 million to
redeem all of Time Warner's outstanding 8.75% Debentures ($250 million
principal amount, plus redemption premiums and accrued interest thereon of
$15 million) and (3) approximately $1.285 billion to reduce outstanding
indebtedness of TWI Cable under the 1995 Credit Agreement.
TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
September 30, 1997
(millions, unaudited)
Time Time
Warner CVI Paragon Warner
Historical Transfers(a) Transfers(b) Pro Forma
A S S E T S
Cash and equivalents $ 761 $ $ 180 $ 941
Other current assets 4,130 (9) 12 4,133
Total current assets 4,891 (9) 192 5,074
Noncurrent inventories 1,771 - - 1,771
Investments in and amounts
due to and from
Entertainment Group 5,594 633 22 6,249
Other investments 1,892 - (971) 921
Property, plant and equipment,
net 2,057 (236) 219 2,040
Cable television and
sports franchises 4,045 (1,061) 557 3,541
Goodwill 12,350 (339) (12) 11,999
Other assets 1,938 (2) 6 1,942
Total assets $34,538 $(1,014) $ 13 $33,537
LIABILITIES AND SHAREHOLDERS' EQUITY
Total current liabilities $ 3,756 $ (25) $ 47 $ 3,778
Long-term debt 12,493 (985) (36) 11,472
Borrowings against future stock option
proceeds 303 - - 303
Deferred income taxes 3,982 - - 3,982
Other liabilities 1,716 (4) 2 1,714
Company-obligated mandatorily
redeemable preferred securities of subsidiaries holding solely
subordinated notes and debentures of subsidiaries of the
Company (1) 949 - - 949
Series M exchangeable
preferred stock 1,809 - - 1,809
Shareholders' equity:
Preferred stock 4 - - 4
Series LMCN-V common stock 1 - - 1
Common stock 5 - - 5
Paid-in capital 12,793 - - 12,793
Accumulated deficit (3,273) - - (3,273)
Total shareholders' equity 9,530 - - 9,530
Total liabilities and
shareholders' equity $34,538 $(1,014) $ 13 $33,537
_______________
(1) Includes $374 million of preferred securities that are redeemable
for cash or, at Time Warner's option, approximately 18.1 million
shares of Hasbro, Inc. common stock owned by Time Warner.
See accompanying notes.
TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Nine Months Ended September 30, 1997
(millions, except per share amounts; unaudited)
Time Time
Warner CVI Paragon Warner
Historical Transfers(c) Transfers(d) Pro Forma
Revenues $9,458 $(196) $ 150 $ 9,412
Cost of revenues* 5,417 (139) 132 5,410
Selling, general and
administrative* 3,239 (27) 29 3,241
Operating expenses 8,656 (166) 161 8,651
Business segment operating
income (loss) 802 (30) (11) 761
Equity in pretax income (loss)
of Entertainment Group 522 (7) 2 517
Interest and other, net (904) 50 9 (845)
Corporate expenses (60) - - (60)
Income before income taxes 360 13 - 373
Income tax provision (306) (5) - (311)
Income before extraordinary item 54 8 - 62
Preferred dividend requirements (238) - - (238)
Income (loss) before
extraordinary item applicable
to common shares $(184) $ 8 $ - $ (176)
Loss before extraordinary
item per common share $ (.33) $ (.31)
Average common shares 564.4 564.4
_______________
* Includes depreciation and
amortization expense of: $ 935 $ (73) $ 28 $ 890
See accompanying notes.
TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1996
(millions, except per share amounts; unaudited)
TBS Transaction
Subtotal
Time Warner TBS Pro Forma Debt
Historical Historical(e) Adjustments(f) Refinancings(g)
Revenues $10,064 $2,735 $ - $ -
Cost of revenues* 5,922 1,887 150 -
Selling, general and
administrative* 3,176 725 - -
Operating expenses 9,098 2,612 150 -
Business segment operating
income (loss) 966 123 (150) -
Equity in pretax income
(loss) of Entertainment
Group 290 - - -
Interest and other, net (1,174) (143) 11 38
Corporate expenses (78) (22) - -
Income (loss) before
income taxes 4 (42) (139) 38
Income tax (provision)
benefit (160) 22 11 (16)
Income (loss) before extraordinary
item (156) (20) (128) 22
Preferred dividend
requirements (257) - - (51)
Income (loss) before
extraordinary item
applicable to common
shares $ (413) $ (20) $(128) $ (29)
Loss before extraordinary item per
common share $(0.95)
Average common shares 431.2
_______________
* Includes depreciation and amortization
expense of: $ 988 $ 141 $ 116 $ -
(Cont'd)
Post-
TWE-A/N
Time Warner CVI Paragon Transfers
Pro Forma Transfers(c) Transfers(d) Pro Forma
Revenues $12,799 $(238) $200 $12,761
Cost of revenues* 7,959 (174) 172 7,957
Selling, general and
administrative* 3,901 (39) 41 3,903
Operating expenses 11,860 (213) 213 11,860
Business segment operating
income (loss) 939 (25) (13) 901
Equity in pretax income (loss) of
Entertainment Group 290 (15) (7) 268
Interest and other, net (1,268) 62 20 (1,186)
Corporate expenses (100) - - (100)
Income (loss) before
income taxes (139) 22 - (117)
Income tax (provision)
benefit (143) (9) - (152)
Income (loss) before extraordinary
item (282) 13 - (269)
Preferred dividend
requirements (308) - - (308)
Income (loss) before
extraordinary item
applicable to common
shares $ (590) $ 13 $ - $(577)
Loss before extraordinary item per
common share $(1.04) $(1.02)
Average common shares 567.3 567.3
_______________
* Includes depreciation and
amortization expense of: $1,245 $ (94) $ 36 $1,187
See accompanying notes.
TIME WARNER INC.
NOTES TO PRO FORMA CONSOLIDATED CONDENSED
STATEMENT OF OPERATIONS
(a) Pro forma adjustments to record the CVI Transfers at September
30, 1997 reflect (1) a $633 million increase in Time Warner's
investment in and amounts due to and from the Entertainment
Group as a result of the receipt by Paragon of a 1.15% common
partnership interest and $147 million preferred partnership
interest in the TWE-Advance/Newhouse Partnership and (2) the
elimination of $633 million of net assets relating to Time
Warner's historical cost basis in the net assets to be
transferred at September 30, 1997, including $985 million of
long-term indebtedness that will be assumed by the
TWE-Advance/Newhouse Partnership.
(b) Pro forma adjustments to record the Paragon Transfers reflect
(1) a $22 million increase in Time Warner's investment in and
amounts due to and from the Entertainment Group as a result of
the receipt by Paragon of a .04% common partnership interest
and $5 million preferred partnership interest in the
TWE-Advance/Newhouse Partnership, (2) the elimination of $22
million of net assets relating to Time Warner's historical
cost basis in the net assets to be transferred at September
30, 1997, including (i) $46 million of cable television
franchises and (ii) $12 million of goodwill, offset by (iii)
$36 million of long-term indebtedness that will be assumed by
the TWE-Advance/Newhouse Partnership and (3) the consolidation
of Paragon by Time Warner as a result of the redemption by
Paragon of substantially all of TWE's and the TWE-Advance/
Newhouse Partnership's pre-existing 50% beneficial ownership
interests therein which, in effect, will result in wholly
owned subsidiaries of Time Warner owning substantially all of
the remaining cable television systems of Paragon. Pro forma
adjustments to consolidate Paragon reflect (1) the consolidation
of $404 million of net assets, including $36 million of
cable television franchises, relating to the historical
financial position at September 30, 1997 of the remaining
cable television systems of Paragon that will not be trans-
ferred to the TWE-Advance/Newhouse Partnership and (2) a $971
million decrease in other investments as a result of the
elimination of Time Warner's historical investment in Paragon,
of which $567 million has been reclassified to cable television
franchises.
(c) Pro forma adjustments to record the CVI Transfers for the nine
months ended September 30, 1997 and the year ended December
31, 1996 reflect (1) the elimination of $18 million and $38
million of pretax losses, respectively, relating to the net
assets to be transferred, (2) a $7 million and $15 million
reduction in Time Warner's equity in the pretax income of the
Entertainment Group, respectively, representing the aggregate
effect on TWE's operating results from the CVI Transfers, as
more fully described in the notes to the Entertainment Group
pro forma consolidated condensed financial statements con-
tained elsewhere herein, (3) a decrease in interest and other,
net, of $2 million in the nine months ended September 30, 1997
and an increase of $1 million in the year ended December 31,
1996, relating to Paragon's equity in the net income of the
TWE-Advance/Newhouse Partnership, including distributions
received on Paragon's $147 million preferred partnership
interest therein and (4) an increase of $5 million and $9
million in income tax expense, respectively, provided at a 41%
tax rate.
(d) Pro forma adjustments to record the Paragon Transfers for the
nine months ended September 30, 1997 and the year ended
December 31, 1996 reflect (1) the consolidation of the
operating results of Paragon, (2) a $2 million increase and a
$7 million reduction in Time Warner's equity in the pretax
income of the Entertainment Group, respectively, representing
the aggregate effect on TWE's operating results from the
Paragon Transfers, as more fully described in the notes to the
Entertainment Group pro forma consolidated condensed financial
statements contained elsewhere herein and (3) a $2 million
reduction in interest expense in both periods as a result of
the assumption by the TWE-Advance/Newhouse Partnership of $36
million of long-term indebtedness. Pro forma adjustments to
consolidate the operating results of Paragon for the nine
months ended September 30, 1997 and the year ended December
31, 1996 include (i) an increase in operating income of $27
million and $37 million, respectively, relating to the
operations of the remaining cable television systems of
Paragon that will not be transferred to the TWE-Advance/
Newhouse Partnership, (ii) a
reduction of $7 million and $18 million, respectively,
in interest and other, net, principally relating to gains on
the sale of certain assets formerly owned by Paragon and (iii)
a reduction of $38 million and $50 million in the historical
operating results of Time Warner, respectively, resulting from
the elimination of Time Warner's equity in the
net income of Paragon.
(e) Reflects the historical operating results of TBS for the
nine-month, pre-acquisition period ended September 30, 1996,
including certain reclassifications to conform to Time
Warner's financial statement presentation.
(f) Pro forma adjustments to record the TBS Transaction for the
nine-month, pre-acquisition period ended September 30, 1996
reflect (1) the exclusion of $9 million of merger costs
directly related to the TBS Transaction expensed by TBS in
such period, (2) an increase of $150 million in cost of
revenues consisting of (i) a $7 million reduction of TBS's
historical amortization of pre-existing goodwill, (ii) a $152
million increase in amortization with respect to the excess
cost to acquire TBS that has been allocated to (a) goodwill in
the amount of $6.746 billion and amortized on a straight-line
basis over a forty-year period and (b) other intangible assets
in the amount of $698 million and amortized on a straight-line
basis over a weighted average period of approximately 20
years, (iii) a $29 million decrease in the amortization of
film libraries resulting from a change in their estimated
useful lives and (iv) a $34 million increase in the amortization
of capitalized film exploitation costs to conform TBS's
accounting policy to Time Warner's accounting policy, (3) an
increase of $5 million in interest expense on the $95 million
of additional indebtedness for the payment of transaction
costs and other related liabilities of Time Warner and TBS,
(4) a decrease of $7 million in interest and other, net due to
the elimination of TW Companies's historical equity accounting
for its investment in TBS and (5) a decrease of $11 million in
income tax expense as a result of income taxes provided at a
41% tax rate.
(g) Pro forma adjustments to record the Debt Refinancings for the
year ended December 31, 1996 reflect an increase in noncash
preferred dividend requirements of $51 million relating to the
payment of Series M Preferred Stock dividends, at a rate of
10-1/4% per annum, payable quarterly. For purposes of Time
Warner's pro forma consolidated condensed statement of
operations, such dividend requirements have been assumed to
have been satisfied in-kind, through the issuance of additional
shares of Series M Preferred Stock with an aggregate
liquidation preference equal to the amount of such dividends.
Pro forma adjustments to record the Debt Refinancings for the year
ended December 31, 1996 also reflect interest savings of $38 million
resulting from (1) the issuance of the January 1996 Debentures for
approximately $750 million of proceeds and the use of $721 million of
such proceeds, together with $557 million of available cash and
equivalents related to the issuance of the Preferred Trust Securities,
to redeem $1.226 billion principal amount of 8.75% Convertible
Debentures for an aggregate redemption price of $1.278 billion, includ-
ing redemption premiums and accrued interest thereon of $52 million and
(2) the issuance of 1.6 million shares of Series M Preferred Stock for
approximately $1.55 billion of net proceeds and the use of (i) $265
million of such proceeds to redeem all $250 million principal amount
of Time Warner's outstanding 8.75% Debentures (plus redemption premiums
and accrued interest thereon of $15 million) and (ii) the remaining
$1.285 billion of such proceeds to reduce outstanding indebtedness of
TWI Cable under the 1995 Credit Agreement.
All pro forma adjustments to record the Debt Refinancings for the
year ended December 31, 1996 reflect the
incremental increase (decrease) in Time Warner's interest expense from
each refinancing that had closed during the period, as set forth
below (in millions).
* Issuance by Time Warner of $750 million of January 1996
Debentures in connection with the Convertible Debt Refinancing,
at a weighted average interest rate of 7.3% . . . . . . . . . . $ 2
* Redemption of $1.226 billion principal amount of
8.75% Convertible Debentures . . . . . . . . . . . . . . . . . (9)
* Redemption of $250 million principal amount of
8.75% Debentures. . . . . . . . . . . . . . . . . . . . . . . . (8)
* Repayment of $1.285 billion of TWI Cable indebtedness under
the 1995 Credit Agreement . . . . . . . . . . . . . . . . . . . . (23)
Net decrease in interest expense . . . . . . . . . . . . . . . . . . $(38)
Income taxes of $16 million have been provided at a 41% tax rate on the
aggregate net reduction in interest expense.
TIME WARNER ENTERTAINMENT GROUP
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
September 30, 1997
(millions, unaudited)
Entertainment Entertainment
Group CVI Paragon Group
Historical Transfers(a) Transfers(b) Pro Forma
A S S E T S
Cash and equivalents $ 296 $ - $(180) $ 116
Other current assets 3,110 9 (12) 3,107
Total current assets 3,406 9 (192) 3,223
Noncurrent inventories 2,234 - - 2,234
Loan receivable from
Time Warner 400 - - 400
Property, plant and
equipment, net 6,394 236 (219) 6,411
Cable television franchises 2,929 1,061 10 4,000
Goodwill 3,903 339 12 4,254
Other assets 1,122 2 (6) 1,118
Total assets $20,388 $1,647 $(395) $21,640
LIABILITIES AND PARTNERS' CAPITAL
Total current liabilities $ 3,740 $ 25 $ (47) $ 3,718
Long-term debt 6,257 985 36 7,278
Other long-term liabilities 1,414 4 (2) 1,416
Minority interests 1,173 633 (382) 1,424
Preferred stock of a subsidiary holding solely a mortgage
note of its parent 237 - - 237
Time Warner General Partners' Senior Capital
1,096 - - 1,096
Partners' capital 6,471 - - 6,471
Total liabilities and
partners' capital $20,388 $1,647 $(395) $21,640
See accompanying notes.
TIME WARNER ENTERTAINMENT GROUP
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Nine months Ended September 30, 1997
(millions, unaudited)
Entertainment Entertainment
Group CVI Paragon Group
Historical Transfers(c) Transfers(d) Pro Forma
Revenues $8,190 $ 196 $(150) $8,236
Cost of revenues* 5,352 139 (132) 5,359
Selling, general and
administrative* 1,848 27 (29) 1,846
Operating expenses 7,200 166 (161) 7,205
Business segment operating
income 990 30 11 1,031
Interest and other, net (157) (45) (9) (211)
Minority interest (228) 8 - (220)
Corporate expenses (54) - - (54)
Income (loss) before income
taxes 551 (7) 2 546
Income tax provision (64) - - (64)
Net income (loss) $ 487 $ (7) $ 2 $ 482
_______________
* Includes depreciation and amortization expense of:
$1,027 $ 73 $ (28) $1,072
See accompanying notes.
TIME WARNER ENTERTAINMENT GROUP
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1996
(millions, unaudited)
Entertainment Entertainment
Group CVI Paragon Group
Historical Transfers(c) Transfers(d) Pro Forma
Revenues $10,861 $238 $(200) $10,899
Cost of revenues* 7,436 174 (172) 7,438
Selling, general and
administrative* 2,335 39 (41) 2,333
Operating expenses 9,771 213 (213) 9,771
Business segment operating
income 1,090 25 13 1,128
Interest and other, net (524) (59) (20) (603)
Minority interest (207) 19 - (188)
Corporate expenses (69) - - (69)
Income (loss) before income
taxes 290 (15) (7) 268
Income tax provision (70) - - (70)
Income (loss) before
extraordinary item $ 220 $ (15) $ (7) $ 198
_______________
* Includes depreciation and
amortization expense of: $1,244 $ 94 $ (36) $1,302
See accompanying notes.
TIME WARNER INC.
NOTES TO THE ENTERTAINMENT GROUP PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(a) Pro forma adjustments to record the CVI Transfers at September
30, 1997 reflect (1) the recording of $633 million of net
assets to be acquired by the TWE-Advance/Newhouse Partnership
from Paragon at Time Warner's historical cost basis of
accounting, including $985 million of indebtedness that will
be assumed in the transaction and (2) a $633 million increase
in minority interest resulting from the issuance by the
TWE-Advance/Newhouse Partnership of a 1.15% common partnership
interest and a $147 million preferred partnership interest to
Paragon.
(b) Pro forma adjustments to record the Paragon Transfers at
September 30, 1997 reflect (1) the recording of $22 million of
net assets to be acquired by the TWE-Advance/Newhouse Partnership
from Paragon at Time Warner's historical cost basis of
accounting, including (i) $46 million of cable television
franchises and (ii) $12 million of goodwill, offset by (iii)
$36 million of indebtedness that will be assumed in the
transaction, (2) a $22 million increase in minority interest
resulting from the issuance by the TWE-Advance/Newhouse
Partnership of a .04% common partnership interest and a $5
million preferred partnership interest to Paragon and (3) the
deconsolidation of Paragon by TWE as a result of the redemption
by Paragon of substantially all of TWE's and the TWE-Advance/
Newhouse Partnership's pre-existing 50% beneficial
ownership interests therein which, in effect, will result in
wholly owned subsidiaries of Time Warner owning substantially
all of the remaining cable television systems of Paragon. Pro
forma adjustments to deconsolidate Paragon reflect (1) the
deconsolidation of $404 million of net assets, including $36
million of cable television franchises, relating to the
historical financial position at September 30, 1997 of the
remaining cable television systems of Paragon that will not be
transferred to the TWE-Advance/Newhouse Partnership and (2) a
$404 million decrease in minority interest relating to the
elimination of Time Warner's historical investment in Paragon.
TWE's contribution of the TWE/Paragon Transferred
Systems to the TWE-Advance/Newhouse Partnership in exchange for
the TWE-Advance/Newhouse Partnership's beneficial interest
in Paragon and in satisfaction of certain pre-existing
obligations to the TWE-Advance/Newhouse Partnership has no
effect on the pro forma consolidated condensed balance
sheet of TWE and accordingly, has not been given pro forma
effect to therein.
(c) Pro forma adjustments to record the CVI Transfers for the nine
months ended September 30, 1997 and the year ended December
31, 1996 reflect (1) the recording of $18 million and $38
million of pretax losses, respectively, relating to the net
assets to be acquired by the TWE-Advance/Newhouse Partnership,
(2) a $3 million and $4 million decrease in interest and
other, net, respectively, resulting from a 37.5 basis point
decrease in the pro forma interest rates applicable to
borrowings by the TWE-Advance/Newhouse Partnership under the
New Credit Agreement in comparison to the pro forma interest
rates applicable to borrowings by TWI Cable under the same
credit agreement and (3) an $8 million and $19 million decrease
in minority interest expense, respectively, representing the
net effect of (i) Advance/Newhouse's minority interest in the
incremental net losses and preferred dividend requirements of
the TWE-Advance/Newhouse Partnership which are partially
offset by (ii) Paragon's minority interest in the aggregate
net income of the TWE-Advance/Newhouse Partnership, including
distributions on its $147 million preferred partnership
interest therein at an annual rate of 10-1/4%.
(d) Pro forma adjustments to record the Paragon Transfers for the
nine months ended September 30, 1997 and the year ended
December 31, 1996 reflect (1) the deconsolidation of the
operating results of Paragon, (2) a $2 million increase in
interest and other, net in both periods as a result of the
assumption by the TWE-Advance/Newhouse Partnership of $36
million of long-term indebtedness of TWI Cable. Pro forma
adjustments to deconsolidate the operating results of Paragon
for the nine months ended September 30, 1997 and the year
ended December 31, 1996 include (i) a reduction of $27 million
and $37 million in the historical operating income of Paragon,
respectively, relating to the operations of the remaining
cable television systems of Paragon that will not be transferred
to the TWE-Advance/Newhouse
Partnership, (ii) an increase of $7 million and $18 million,
respectively, in interest and other, net, principally relating
to the elimination of a gain on the sale of an investment
formerly owned by Paragon and (iii) a $38 million and $50
million increase in operating income relating to the elimination
of Time Warner's historical minority interest in the net income
of Paragon.
TWE's contribution of the TWE/Paragon Transferred Systems
to the TWE-Advance/Newhouse Partnership in exchange for the
TWE-Advance/Newhouse Partnership's beneficial interest in Paragon
and in satisfaction of certain pre-existing obligations to the
TWE-Advance/Newhouse Partnership has no effect on the pro forma
consolidated condensed statements of operations of TWE and
accordingly, has not been given pro forma effect to therein.
(b) Financial statements of businesses acquired:
(i) Turner Broadcasting System, Inc. (the documents listed in this
paragraph (i) being referred to as the "Financial Statements of Turner
Broadcasting System, Inc."):
(A) Unaudited Consolidated Condensed Financial Statements as of
September 30, 1996 and for each of the nine months ended September 30,
1996 and 1995; and
(B) Consolidated Financial Statements as of December 31, 1995 and
1994 and for each of the years ended December 31, 1995, 1994 and 1993,
including the report thereon of Price Waterhouse LLP.
(ii) Cablevision Industries Corporation and subsidiaries (the
documents listed in this paragraph (ii) being referred to as the "Financial
Statements of Cablevision Industries Corporation"):
(A) Consolidated Financial Statements as of and for the year
ended December 31, 1995, including the report thereon of Ernst & Young
LLP; and
(B) Consolidated Financial Statements as of December 31,
1994 and for each of the years ended December 31, 1994 and 1993,
including the report thereon of Arthur Andersen LLP.
(c) Pro forma Consolidated Condensed Financial Statements:
(i) Time Warner Inc.:
(A) Pro Forma Consolidated Condensed Balance Sheet as of
September 30, 1997;
(B) Pro Forma Consolidated Condensed Statements of Operations
for the nine months ended September 30, 1997 and the year ended
December 31, 1996; and
(C) Notes to Pro Forma Consolidated Condensed Financial
Statements.
(ii) Entertainment Group:
(A) Pro Forma Consolidated Condensed Balance Sheet as of
September 30, 1997;
(B) Pro Forma Consolidated Condensed Statement of Operations
for the nine months ended September 30, 1997 and the year ended
December 31, 1996; and
(C) Notes to Pro Forma Consolidated Condensed Financial
Statements.
(d) Exhibits:
(i) Exhibit 23(a): Consent of Price Waterhouse LLP.
(ii) Exhibit 23(b): Consent of Ernst & Young LLP.
(iii) Exhibit 23(c): Consent of Arthur Andersen LLP.
(iv) Exhibit 99(a): Financial Statements of Turner Broadcasting
System, Inc. (incorporated by reference from pages 31 to 53 of the Annual
Report to Shareholders incorporated by reference into the Annual Report on
Form 10-K for the year ended December 31, 1995 of Turner Broadcasting
System, Inc. and from pages 2 to 9 of the Quarterly Report on Form 10-Q
for the nine months ended September 30, 1996 of Turner Broadcasting
System, Inc.).
(v) Exhibit 99(b): Financial Statements of Cablevision Industries
Corporation (incorporated by reference from pages 23 to 39 of the Annual
Report on Form 10-K for the year ended December 31, 1995 of Cablevision
Industries Corporation).
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York, State
of New York, on November 13, 1997.
TIME WARNER INC.
By: /s/ Richard J. Bressler
Name: Richard J. Bressler
Title: Senior Vice President
and Chief Financial Officer
EXHIBIT INDEX
Exhibit Sequential
No. Description of Exhibits Page Number
23.(a) Consent of Price Waterhouse LLP, Independent
Accountants.
23.(b) Consent of Ernst & Young LLP, Independent Accountants.
23.(c) Consent of Arthur Andersen LLP, Independent Public
Accountants.
99.(a) Financial Statements of Turner Broadcasting System, Inc.
(incorporated by reference from pages 31 to 53 of the
Annual Report to Shareholders incorporated by reference
into the Annual Report on Form 10-K for the year ended
December 31, 1995 of Turner Broadcasting System, Inc.
and from pages 2 to 9 of the Quarterly Report on Form
10-Q for the nine months ended September 30, 1996 of
Turner Broadcasting System, Inc.) *
99.(b) Financial Statements of Cablevision Industries
Corporation (incorporated by reference from pages
23 to 39 of the Annual Report on Form 10-K for the
year ended December 31, 1995 of Cablevision
Industries Corporation). *
_______________
* Incorporated by reference.