SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the quarterly period ended March 31, 1998, 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 533,744,788
Series LMCN-V Common Stock - $.01 par value 57,061,942
- ------------------------------------------- ---------------------
Description of Class Shares
Outstanding
as of April 30, 1998
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 26
Consolidated balance sheets at March 31, 1998 and
December 31, 1997 10 31
Consolidated statements of operations for the three months
ended March 31, 1998 and 1997 11 32
Consolidated statements of cash flows for the three months
ended March 31, 1998 and 1997 12 33
Consolidated statement of shareholders' equity and
partnership capital 13 34
Notes to consolidated financial statements 14 35
Supplementary information 24
PART II. OTHER INFORMATION 41
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Time Warner Inc. ("Time Warner" or the "Company")
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.
Use of EBITA
Time Warner evaluates operating performance based on
several factors, of which the primary financial measure is
operating income before noncash amortization of intangible
assets ("EBITA"). Consistent with management's financial
focus on controlling capital spending, EBITA measures
operating performance after charges for depreciation. In
addition, EBITA eliminates the uneven effect across all
business segments of considerable amounts of noncash
amortization of intangible assets recognized in business
combinations accounted for by the purchase method, including
the $14 billion acquisition of Warner Communications Inc. in
1989, the $6.2 billion acquisition of Turner Broadcasting
System, Inc. in 1996 and the $2.3 billion of cable
acquisitions in 1996 and 1995. The exclusion of noncash
amortization charges is also consistent with management's
belief that Time Warner's intangible assets, such as cable
television and sports franchises, music catalogues and
copyrights, film and television libraries and the goodwill
associated with its brands, are generally increasing in
value and importance to Time Warner's business objective of
creating, extending and distributing recognizable brands and
copyrights throughout the world. As such, the following
comparative discussion of the results of operations of Time
Warner and the Entertainment Group includes, among other
factors, an analysis of changes in business segment EBITA.
However, EBITA should be considered in addition to, not as a
substitute for, operating income, net income and other
measures of financial performance reported in accordance
with generally accepted accounting principles.
RESULTS OF OPERATIONS
As more fully described herein, Time Warner's and the
Entertainment Group's 1998 operating results have been
affected by the transfer of cable television systems (or
interests therein) serving approximately 650,000 subscribers
that were formerly owned by subsidiaries of Time Warner to
the TWE-Advance/Newhouse Partnership ("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").
For a more comprehensive description of the TWE-A/N Transfers,
see Note 2 to the accompanying consolidated financial statements.
EBITA and operating income for Time Warner and the Entertainment
Group for the three months ended March 31, 1998 and 1997 are as follows:
Three Months Ended March 31,
EBITA Operating Income
1998 1997 1998 1997
(millions)
Time Warner:
Publishing $ 85 $ 76 $ 76 $ 67
Music 93 118 25 50
Cable Networks-TBS 153 114 103 69
Filmed Entertainment-TBS (15) 6 (35) (16)
Cable 74 105 20 35
Intersegment elimination (19) (11) (19) (11)
Total $371 $408 $170 $194
Entertainment Group:
Filmed Entertainment-Warner Bros. $119 $105 $ 86 $ 74
Broadcasting-The WB Network (38) (20) (39) (20)
Cable Networks-HBO 109 91 109 91
Cable 307 259 213 183
Total $497 $435 $369 $328
Time Warner had revenues of $3.137 billion and a net
loss of $62 million ($.25 loss per common share after
preferred dividend requirements) for the three months ended
March 31, 1998, compared to revenues of $3.034 billion,
income of $52 million before an extraordinary loss on the
retirement of debt ($.05 loss per common share) and net
income of $35 million ($.08 loss per common share) for the
three months ended March 31, 1997. Time Warner's equity in
the pretax income of the Entertainment Group was $107
million for the three months ended March 31, 1998, compared
to $318 million for the three months ended March 31, 1997.
Time Warner's operating results decreased to a net loss
of $62 million for the three months ended March 31, 1998
from net income of $35 million for the three months ended
March 31, 1997. As discussed more fully below, this decrease
principally resulted from the absence of an approximate $250
million pretax gain ($.26 per common share) recognized by
TWE in 1997 in connection with the sale of TWE's interest in
E! Entertainment Television, Inc. ("E! Entertainment").
Excluding the effect of the E! Entertainment gain in 1997,
operating results would have increased principally as a
result of higher income from Time Warner's equity in the
pretax income of the Entertainment Group and the absence of
a $17 million extraordinary loss on the retirement of debt
recognized in 1997, offset in part by an overall decrease in
Time Warner's operating income. Similarly excluding the
effect of the E! Entertainment gain in 1997, Time Warner's
loss per common share before the extraordinary item would
have improved from a $.31 loss per common share in 1997 to a
$.25 loss per common share in 1998.
The Entertainment Group had revenues of $2.912 billion
and net income of $108 million for the three months ended
March 31, 1998, compared to revenues of $2.602 billion and
net income of $318 million for the three months ended March
31, 1997. As discussed more fully below, the Entertainment
Group's net income decreased in 1998 as compared to 1997
principally due to the absence of the E! Entertainment gain
recognized in 1997, offset in part by an overall increase in
operating income generated by its business segments and a
decrease 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 $948 million,
compared to $924 million in the first three months of 1997.
EBITA increased to $85 million from $76 million. Operating
income increased to $76 million from $67 million. 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, Sports Illustrated, Time and
In Style. EBITA and operating income increased principally
as a result of the revenue gains and, to a lesser extent,
cost savings.
Music. Revenues decreased to $888 million, compared to
$933 million in the first three months of 1997. EBITA
decreased to $93 million from $118 million. Operating income
decreased to $25 million from $50 million. Despite the Music
division having a domestic market share of 19.5%, the
decrease in revenues principally related to a decline in
domestic and international recorded music sales. EBITA and
operating income decreased principally as a result of the
decline in revenues, offset in part by increased licensing
income from direct marketing activities.
Cable Networks-TBS. Revenues increased to $728 million,
compared to $594 million in the first three months of 1997.
EBITA increased to $153 million from $114 million. Operating
income increased to $103 million from $69 million. Revenues
benefited from a significant increase in subscription
revenues, as well as an increase in advertising revenues.
The increase in subscription revenues principally related to
the conversion of TBS Superstation from an advertiser-supported
broadcast superstation to a copyright-paid, cable television
service, which allows TBS Superstation to charge cable operators
for the right to carry its cable television programming. Subscription
revenues also increased as a result of an increase in subscriptions,
primarily at TNT, CNN, Cartoon Network and Turner Classic Movies, and
higher rates. The increase in advertising revenues was due to a
strong overall advertising market for most of the division's major
branded networks, including TNT, Cartoon Network and CNN. EBITA and
operating income increased principally as a result of the revenue
gains and cost savings.
Filmed Entertainment-TBS. Revenues decreased to $372
million, compared to $397 million in the first three months
of 1997. EBITA decreased to a loss of $15 million from
income of $6 million. Operating losses increased to $35
million from $16 million. Revenues decreased due to declines
in worldwide theatrical and home video operations,
principally relating to unsuccessful films from Castle Rock
Entertainment. EBITA and operating income decreased
principally as a result of the decline in revenues.
Cable. Revenues increased to $248 million, compared to
$242 million in the first three months of 1997. EBITA
decreased to $74 million from $105 million. Operating income
decreased to $20 million from $35 million. The Cable
division's 1998 operating results were negatively affected
by the TWE-A/N Transfers. Excluding the effect of the
TWE-A/N Transfers, revenues benefited from an increase in
basic cable subscribers, increases in regulated cable rates
as permitted under Time Warner Cable's "social contract"
with the Federal Communications Commission ("FCC") and an
increase in advertising and pay-per-view revenues. Similarly
excluding the effect of the TWE-A/N Transfers, EBITA and
operating income decreased principally as a result of higher
depreciation related to capital spending and the absence of
a gain on the sale of an investment recognized in 1997,
which more than offset the effect of the revenue gains.
Interest and Other, Net. Interest and other, net,
decreased to $283 million in the first three months of 1998,
compared to $292 million in the first three months of 1997.
Interest expense decreased to $233 million, compared to $278
million in the first three months of 1997, principally due
to lower average debt levels associated with the Company's
debt reduction efforts and the TWE-A/N Transfers. Other
expense, net, increased to $50 million in the first three
months of 1998 from $14 million in the first three months of
1997, principally because of lower gains on foreign exchange
contracts and higher losses associated with the Company's
receivables securitization program.
Entertainment Group
Filmed Entertainment-Warner Bros. Revenues increased
to $1.312 billion, compared to $1.174 billion in the first
three months of 1997. EBITA increased to $119 million from
$105 million. Operating income increased to $86 million from
$74 million. Revenues benefited from increases in worldwide
television production and distribution operations, offset in
part by lower worldwide theatrical and home video revenues.
EBITA and operating income benefited principally from the
revenue gains and increased income from licensing
operations, offset in part by the absence of a gain on the
sale of an investment recognized in 1997.
Broadcasting - The WB Network. Revenues increased to
$45 million, compared to $24 million in the first three
months of 1997. EBITA decreased to a loss of $38 million
from a loss of $20 million. Operating losses increased to
$39 million from $20 million. Revenues increased as a result
of improved television ratings and the addition of a fourth
night of primetime programming in January 1998, but were
offset by higher programming costs associated with the
expanded programming schedule. Operating losses increased
principally as a result of a lower allocation of losses to a
limited partner in the network. Due to the start-up nature
of this national broadcast operation, losses are expected to
continue.
Cable Networks-HBO. Revenues increased to $512
million, compared to $483 million in the first three months
of 1997. EBITA and operating income increased to $109
million from $91 million. Revenues benefited primarily from
an increase in subscriptions. EBITA and operating income
increased principally as a result of the revenue gains and,
to a lesser extent, cost savings.
Cable. Revenues increased to $1.153 billion, compared
to $1.020 billion in the first three months of 1997. EBITA
increased to $307 million from $259 million. Operating
income increased to $213 million from $183 million. The
Cable division's 1998 operating results were positively
affected by the TWE-A/N Transfers. Excluding the effect of
the TWE-/AN Transfers, 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. Similarly excluding the effect of the TWE-A/N
Transfers, EBITA and operating income increased as a result
of the revenue gains, offset in part by higher depreciation
related to capital spending and lower gains relating to the
sale or exchange of certain cable systems.
Interest and Other, Net. Interest and other, net, was
$164 million of expense in the first three months of 1998,
compared to $128 million of income in the first three months
of 1997. Interest expense increased to $141 million,
compared to $116 million in the first three months of 1997,
principally due to higher average debt levels associated
with the TWE-A/N Transfers. There was other expense, net, of
$23 million in the first three months of 1998, compared to
other income, net, of $244 million in the first three months
of 1997, principally due to the absence of an approximate
$250 million pretax gain on the sale of an interest in E!
Entertainment recognized in 1997.
FINANCIAL CONDITION AND LIQUIDITY
March 31, 1998
Time Warner
Financial Condition
At March 31, 1998, Time Warner had $10.7 billion of
debt, $544 million of cash and equivalents (net debt of
$10.1 billion), $465 million of borrowings against future
stock option proceeds, $575 million of mandatorily
redeemable preferred securities of a subsidiary, $1.9
billion of Series M preferred stock and $9.3 billion of
shareholders' equity, compared to $11.8 billion of debt,
$645 million of cash and equivalents (net debt of $11.2
billion), $533 million of borrowings against future stock
option proceeds, $575 million of mandatorily redeemable
preferred securities of a subsidiary, $1.9 billion of Series
M preferred stock and $9.4 billion of shareholders' equity
at December 31, 1997. Net debt decreased principally as a
result of the TWE-A/N Transfers.
Investment in TWE
Time Warner's investment in TWE at March 31, 1998
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 $6.2 billion at March 31, 1998.
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 expects to receive a $580 million
distribution relating to its Senior Capital interest in July
1998. After such distribution, Time Warner's remaining $560
million Senior Capital interest and any undistributed
partnership income allocated thereto (based on an 8% annual
rate of return) is required to be distributed to Time Warner
on July 1, 1999.
Debt Reduction, Refinancings and Transfers
In April 1998, Time Warner and TWE consummated three
previously announced transactions, consisting of the sale of
TWE's 49% interest in Six Flags Entertainment Corporation,
the transfer of TWE's and TWE-A/N's direct broadcast
satellite operations and related assets to Primestar, Inc.,
a separate holding company that is ultimately expected to be
the publicly traded parent of TCI Satellite Entertainment,
Inc., and the sale of certain cable television systems. As a
result of these transactions, Time Warner and TWE reduced
debt by approximately $700 million in the aggregate, of
which $160 million relates to Time Warner and $540 million
relates to TWE.
In February 1998, Time Warner Companies, Inc. ("TW
Companies"), a wholly owned subsidiary of Time Warner,
repaid all of its $500 million principal amount of 7.45%
notes due February 1, 1998 at their maturity using proceeds
raised from the issuance of $500 million principal amount of
6.95% debentures due January 15, 2028.
In early 1998, Time Warner transferred approximately $1
billion of debt to TWE-A/N in connection with the TWE-A/N
Transfers. The debt assumed by TWE-A/N has been guaranteed
by TWI Cable Inc., a wholly owned subsidiary of Time Warner,
and certain of its subsidiaries.
Common Stock Repurchase Program
In March 1998, Time Warner entered into a forward
purchase contract with certain banks that provides it with
an option to acquire up to 9.1 million shares of its common
stock. In a related transaction, Toshiba Corporation
("Toshiba") and ITOCHU Corporation ("ITOCHU") sold an equal
number of shares of Time Warner common stock to affiliates
of such banks, after electing to convert a portion of their
Time Warner convertible preferred stock into common stock.
These transactions will result in $26 million of preferred
dividend savings for Time Warner and, if Time Warner elects
to acquire such shares, will also offset the dilutive effect
from the conversion of Toshiba's and ITOCHU's preferred
stock interests into Time Warner common stock. See Note 8 to
the accompanying consolidated financial statements for a
summary of the principal terms of the forward purchase contract.
In connection with these transactions, Time Warner's
Board of Directors authorized a 9.1 million share increase
in the Company's existing common stock repurchase program
that, along with previous authorizations, allows the Company
to repurchase, from time to time, up to 44.1 million shares
of common stock. The common stock repurchased under the
program is expected to continue to be used to satisfy future
share issuances related to the exercise of existing employee
stock options and the potential conversion of certain
convertible securities. Actual repurchases in any period
will be subject to market conditions. As of March 31, 1998,
Time Warner had acquired 4.4 million shares of its common
stock in 1998 at an aggregate cost of $277 million, thereby
increasing the cumulative shares purchased under this
program to approximately 22 million shares at an aggregate
cost of $1.077 billion. These repurchases have been funded
principally with borrowings under Time Warner's Stock Option
Proceeds Credit Facility, as described more fully below.
In early 1998, Time Warner entered into a new
five-year, $1.3 billion revolving credit facility (the
"Stock Option Proceeds Credit Facility"), which replaced its
previously existing facility. Borrowings under the Stock
Option Proceeds Credit Facility are principally used to fund
stock repurchases and future preferred dividend requirements
on Time Warner's Series G, H, I and J Preferred Stock. At
March 31, 1998 and December 31, 1997, Time Warner had
outstanding borrowings against future stock option proceeds
of $465 million and $533 million, respectively.
Cash Flows
During the first three months of 1998, Time Warner's
cash provided by operations amounted to $332 million and
reflected $371 million of EBITA from its Publishing, Music,
Cable Networks-TBS, Filmed Entertainment-TBS and Cable
businesses, $95 million of noncash depreciation expense,
$172 million of distributions from TWE and $47 million
related to a decrease in working capital requirements, other
balance sheet accounts and noncash items, less $316 million
of interest payments, $18 million of income taxes and $19
million of corporate expenses. Cash provided by operations
of $42 million for the first three months of 1997 reflected
$408 million of business segment EBITA, $91 million of
noncash depreciation expense and $54 million of
distributions from TWE, less $362 million of interest
payments, $66 million of income taxes, $21 million of
corporate expenses and $62 million related to an increase in
working capital requirements, balance sheet accounts and
noncash items.
Cash used by investing activities was $42 million in
the first three months of 1998, compared to $108 million in
the first three months of 1997, principally as a result of a
decrease in cash used for investments and acquisitions,
lower capital expenditures and an increase in investment
proceeds. Cash used for investments and acquisitions in 1998
was offset in part by the effect of consolidating
approximately $200 million of cash of Paragon Communications
("Paragon") in connection with the TWE-A/N Transfers.
Capital expenditures decreased to $103 million in the first
three months of 1998, compared to $135 million in the first
three months of 1997.
Cash used by financing activities was $391 million in
the first three months of 1998, compared to cash provided by
financing activities of $63 million in the first three
months of 1997. The use of cash in 1998 principally resulted
from approximately $200 million of debt reduction, the
repayment of $68 million of net borrowings against future
stock option proceeds, the repurchase of approximately 4.4
million shares of Time Warner common stock at an aggregate
cost of $277 million and the payment of $133 million of
dividends, offset in part by $290 million of proceeds
received principally from the exercise of employee stock
options. Cash provided by financing activities in 1997
principally resulted from an increase of approximately $225
million of debt, offset in part by the repurchase of
approximately 941 thousand shares of Time Warner common
stock at an aggregate cost of $35 million, the payment of
$84 million of dividends, the repayment of $61 million of
borrowings against future stock option proceeds and $32
million of proceeds received principally from the exercise
of employee stock options. The increase in dividends paid in
the first three months of 1998 reflects Time Warner's
election to pay $49 million of dividends on its Series M
preferred stock in cash rather than in-kind.
The assets and cash flows of TWE are restricted by
certain borrowing and partnership agreements and are
unavailable to Time Warner except through the payment of
certain fees, reimbursements, cash distributions and loans,
which are subject to limitations. Under its bank credit
agreement, TWE 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.
Management believes that Time Warner's operating cash
flow, cash and equivalents and additional borrowing capacity
are sufficient to fund its capital and liquidity needs for
the foreseeable future without distributions and loans from
TWE above those permitted by existing agreements.
Entertainment Group
Financial Condition
The Entertainment Group had $7.1 billion of debt, $107
million of cash and equivalents (net debt of $7 billion),
$229 million of preferred stock of a subsidiary, $1.1
billion of Time Warner General Partners' Senior Capital and
$6.2 billion of partners' capital at March 31, 1998,
compared to $6.0 billion of debt, $322 million of cash and
equivalents (net debt of $5.7 billion), $233 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 December 31, 1997. Net debt of the Entertainment Group
increased principally as a result of the TWE-A/N Transfers.
Cash Flows
During the first three months of 1998, the
Entertainment Group's cash provided by operations amounted
to $441 million and reflected $497 million of EBITA from its
Filmed Entertainment-Warner Bros., Broadcasting-The WB
Network, Cable Networks-HBO and Cable businesses, $243
million of noncash depreciation expense and $148 million
from the securitization of film and television backlog, less
$156 million of interest payments, $20 million of income
taxes, $18 million of corporate expenses and $253 million
related to an increase in working capital requirements,
other balance sheet accounts and noncash items. Cash used by
operations of $48 million in the first three months of 1997
reflected $435 million of business segment EBITA and $222
million of noncash depreciation expense, less $146 million
of interest payments, $12 million of income taxes, $18
million of corporate expenses and $529 million related to an
increase in working capital requirements, other balance
sheet accounts and noncash items.
Cash used by investing activities was $559 million in
the first three months of 1998, compared to cash provided by
investment activities of $5 million in the first three
months of 1997, principally as a result of the effect of
deconsolidating approximately $200 million of Paragon's cash
in connection with the TWE-A/N Transfers that has been
included in cash flows from investments and acquisitions,
and a $344 million decrease in proceeds from the sale of
investments. Capital expenditures increased to $352 million
in the first three months of 1998, compared to $331 million
in the first three months of 1997.
Cash used by financing activities was $97 million in
the first three months of 1998, compared to cash provided by
financing activities of $139 million in the first three
months of 1997, principally as a result of the absence of
$243 million of aggregate net proceeds from the issuance of
preferred stock of a subsidiary in the first three months of
1997 and a $118 million increase in distributions paid to
Time Warner, offset in part by an increase in debt used to
fund cash distributions to Time Warner.
Management believes that the Entertainment Group'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
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
$369 million in the three months ended March 31, 1998,
compared to $343 million in the three months ended March 31,
1997. For the full year of 1998, cable capital spending is
expected to be comparable to 1997 levels, with approximately
$1.2 billion budgeted for the remainder of 1998. 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 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 cable operating
cash flow and the development of new revenue streams from
expanded programming options, high-speed Internet access,
telephony 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 $2.152 billion at March 31, 1998 compared to $2.126 billion
at December 31, 1997 (including amounts relating to the licensing
of film product to Time Warner's and TWE's cable television networks,
collectively, of $753 million and $719 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 or on an accelerated basis using a $600
million securitization facility. The portion of backlog for
which cash has 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)
March 31, December 31,
1998 1997
(millions, except
per share amounts)
ASSETS
Current assets
Cash and equivalents $ 544 $ 645
Receivables, less allowances of $940 and $991 million 2,153 2,447
Inventories 913 830
Prepaid expenses 1,149 1,089
Total current assets 4,759 5,011
Noncurrent inventories 1,768 1,766
Investments in and amounts due to and from
Entertainment Group 6,057 5,549
Other investments 530 1,495
Property, plant and equipment 2,028 2,089
Music catalogues, contracts and copyrights 902 928
Cable television and sports franchises 3,443 3,982
Goodwill 12,124 12,572
Other assets 717 771
Total assets $32,328 $34,163
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 768 $ 912
Participations, royalties and programming costs payable 1,161 1,072
Debt due within one year 22 8
Other current liabilities 1,992 2,379
Total current liabilities 3,943 4,371
Long-term debt 10,640 11,833
Borrowings against future stock option proceeds 465 533
Deferred income taxes 3,761 3,960
Unearned portion of paid subscriptions 726 672
Other liabilities 1,063 1,006
Company-obligated mandatorily redeemable preferred
securities of a subsidiary holding solely subordinated
debentures of a subsidiary of the Company 575 575
Series M exchangeable preferred stock, $.10 par value,
1.9 million shares outstanding and $1.903 billion
liquidation preference 1,858 1,857
Shareholders' equity
Preferred stock, $.10 par value, 31.0 and 35.4
million shares outstanding, $3.100 and $3.539
billion liquidation preference 3 4
Series LMCN-V Common Stock, $.01 par value, 57.1
million shares outstanding 1 1
Common stock, $.01 par value, 533.5 and 519.0
million shares outstanding (excluding 24.8 and 39.4
million treasury shares) 5 5
Paid-in capital 12,929 12,680
Accumulated deficit (3,641) (3,334)
Total shareholders' equity 9,297 9,356
Total liabilities and shareholders' equity $32,328 $34,163
See accompanying notes.
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
1998 1997
(millions, except
per share amounts)
Revenues (a) $ 3,137 $ 3,034
Cost of revenues (a)(b) 1,887 1,850
Selling, general and administrative (a)(b) 1,080 990
Operating expenses 2,967 2,840
Business segment operating income 170 194
Equity in pretax income of Entertainment Group (a) 107 318
Interest and other, net (a) (283) (292)
Corporate expenses (a) (19) (21)
Income (loss) before income taxes (25) 199
Income tax provision (37) (147)
Income (loss) before extraordinary item (62) 52
Extraordinary loss on retirement of debt, net of $11
million income tax benefit in 1997 - (17)
Net income (loss) (62) 35
Preferred dividend requirements (82) (78)
Net loss applicable to common shares $ (144) $ (43)
Basic and diluted loss per common share:
Loss before extraordinary item $ (.25) $ (.05)
Net loss $ (.25) $ (.08)
Average common shares 578.3 558.9
______________
(a) Includes the following income (expenses) resulting from
transactions with the Entertainment Group and other related
companies for the three months ended March 31, 1998 and 1997,
respectively: revenues-$112 million and $74 million; cost of
revenues-$(67) million and $(60) million; selling, general and
administrative-$(9) million and $5 million; equity in pretax
income of Entertainment Group-$(5) million and $11 million; interest
and other, net-$(3) million and $(14) million; and corporate
expenses-$18 million in both periods.
(b) Includes depreciation and amortization expense of: $ 296 $ 305
See accompanying notes.
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
1998 1997
(millions)
OPERATIONS
Net income (loss) $ (62) $ 35
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt - 17
Depreciation and amortization 296 305
Noncash interest expense 15 27
Excess (deficiency) of distributions over equity
in pretax income of Entertainment Group 65 (264)
Changes in operating assets and liabilities 18 (78)
Cash provided by operations 332 42
INVESTING ACTIVITIES
Investments and acquisitions (24) (39)
Capital expenditures (103) (135)
Investment proceeds 85 66
Cash used by investing activities (42) (108)
FINANCING ACTIVITIES
Borrowings 510 1,028
Debt repayments (700) (796)
Borrowings against future stock option proceeds 465 -
Repayments of borrowings against future stock
option proceeds (533) (61)
Repurchases of Time Warner common stock (277) (35)
Dividends paid (133) (84)
Proceeds received from stock option and dividend
reinvestment plans 290 32
Other, principally financing costs (13) (21)
Cash provided (used) by financing activities (391) 63
DECREASE IN CASH AND EQUIVALENTS (101) (3)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD (a) 645 514
CASH AND EQUIVALENTS AT END OF PERIOD $ 544 $ 511
_______________
(a) Includes current and noncurrent cash and equivalents
at December 31, 1996.
See accompanying notes.
TIME WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Three Months
Ended March 31,
1998 1997
(millions)
BALANCE AT BEGINNING OF YEAR $9,356 $9,502
Net income (loss) (62) 35
Other comprehensive income (loss) (24) (50)
Comprehensive income (loss) (86) (15)
Common stock dividends (52) (51)
Preferred stock dividends (82) (78)
Repurchases of Time Warner common stock (277) (35)
Other, principally shares issued pursuant to stock
option, dividend reinvestment and benefit plans 438 39
BALANCE AT MARCH 31, $9,297 $9,362
See accompanying notes.
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Time Warner Inc. ("Time Warner" or the "Company") 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 $329 million and $321 million for the
three months ended March 31, 1998 and 1997, 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,
1997. Certain reclassifications have been made to the prior
year's financial statements to conform to the 1998 presentation.
2. TWE-A/N TRANSFERS
In early 1998, Time Warner (through a wholly owned
subsidiary) contributed cable television systems (or
interests therein) serving approximately 650,000 subscribers
to the TWE-Advance/Newhouse Partnership ("TWE-A/N"), subject
to approximately $1 billion of debt, in exchange for common
and preferred partnership interests therein, and completed
certain related transactions (collectively, the "TWE-A/N
Transfers"). The cable television systems transferred to
TWE-A/N were formerly owned by TWI Cable Inc. ("TWI Cable"),
a wholly owned subsidiary of Time Warner, and Paragon
Communications ("Paragon"), a partnership formerly owning
cable television systems serving approximately 1 million
subscribers that was wholly owned by subsidiaries of Time
Warner, with 50% beneficially owned in the aggregate by TWE
and TWE-A/N. The debt assumed by TWE-A/N has been guaranteed
by TWI Cable and certain of its subsidiaries, including Paragon.
As part of the TWE-A/N Transfers, TWE and TWE-A/N
exchanged substantially all of their respective beneficial
interests in Paragon for an equivalent share of Paragon's
cable television systems (or interests therein) serving
approximately 500,000 subscribers, resulting in wholly owned
subsidiaries of Time Warner owning 100% of the restructured
Paragon entity, with less than 1% beneficially held for TWE.
Accordingly, effective as of January 1, 1998, Time Warner
has consolidated Paragon. Because this transaction
represented an exchange of TWE's and TWE-A/N's beneficial
interests in Paragon for an equivalent amount of its cable
television systems, it did not have a significant economic
impact on Time Warner, TWE or TWE-A/N.
In connection with the TWE-A/N Transfers, the
Advance/Newhouse Partnership ("Advance/Newhouse"), a limited
partner in TWE-A/N, made a capital contribution to TWE-A/N
in order to maintain its 33.3% common partnership interest
therein. Accordingly, TWE-A/N is now owned 65.3% by TWE,
33.3% by Advance/Newhouse and 1.4% indirectly by Time
Warner. The TWE-A/N Transfers were accounted for effective
as of January 1, 1998. Time Warner did not recognize a gain
or loss on the TWE-A/N Transfers. TWE has continued to
consolidate TWE-A/N and Time Warner has accounted for its
interest in TWE-A/N under the equity method of accounting.
On a pro forma basis, giving effect to the TWE-A/N
Transfers as if they had occurred at the beginning of 1997,
Time Warner would have reported for the three months ended
March 31, 1997, revenues of $3.018 billion, depreciation
expense of $90 million, operating income before noncash
amortization of intangible assets of $379 million, operating
income of $181 million, equity in the pretax income of the
Entertainment Group of $316 million, income before extraordinary
item of $54 million ($.04 loss per common share) and net income
of $37 million ($.07 loss per common share).
3. ENTERTAINMENT GROUP
Time Warner's investment in and amounts due to and from
the Entertainment Group at March 31, 1998 and December 31,
1997 consists of the following:
March 31, December 31,
1998 1997
(millions)
Investment in TWE $5,386 $5,577
Stock option related distributions due from TWE 522 417
Credit agreement debt due to TWE (400) (400)
Other net liabilities due to TWE, principally related to
home video distribution (185) (141)
Investment in and amounts due to and from TWE 5,323 5,453
Investment in TWE-A/N and other Entertainment Group
companies 734 96
Total $6,057 $5,549
Partnership Structure and Allocation of Income
TWE is a Delaware limited partnership that was capitalized
on June 30, 1992 to own and operate substantially all of the Filmed
Entertainment-Warner Bros., Cable Networks-HBO and Cable businesses
previously owned by subsidiaries of Time Warner. Time Warner, through
its wholly owned subsidiaries, collectively owns general and limited
partnership interests in TWE consisting of 74.49% of the Series A Capital
and Residual Capital and 100% of the Senior Capital and Series B
Capital. The remaining 25.51% limited partnership interests in the
Series A Capital and Residual Capital of TWE are owned by U S WEST.
Certain Time Warner subsidiaries are the general partners of TWE
(the "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 $108 million and $320 million in the three months
ended March 31, 1998 and 1997, respectively, no portion of which was
allocated to the limited partnership interests.
Summarized Financial Information of the Entertainment Group
Set forth below is summarized financial information of
the Entertainment Group, which reflects the TWE-A/N
Transfers effective as of January 1, 1998.
Three Months
Ended March 31,
1998 1997
(millions)
Operating Statement Information
Revenues $2,912 $2,602
Depreciation and amortization (371) (329)
Business segment operating income 369 328
Interest and other, net(1) (164) 128
Minority interest (64) (108)
Income before income taxes 123 330
Net income 108 318
__________________
(1) Includes a pretax gain of approximately $250 million
recognized in the first three months of 1997 related
to the sale of an interest in E! Entertainment Television, Inc.
Three Months
Ended March 31,
1998 1997
(millions)
Cash Flow Information
Cash provided (used) by operations $ 441 $ (48)
Capital expenditures (352) (331)
Investments and acquisitions (230) (31)
Investment proceeds 23 367
Borrowings 489 282
Debt repayments (376) (318)
Issuance of preferred stock of subsidiary - 243
Capital distributions (172) (54)
Other financing activities, net (38) (14)
Increase (decrease) in cash and equivalents (215) 96
March 31, December 31,
1998 1997
(millions)
Balance Sheet Information
Cash and equivalents $ 107 $ 322
Total current assets 3,339 3,623
Total assets 22,020 20,739
Total current liabilities 3,765 3,976
Long-term debt 7,108 5,990
Minority interests 1,465 1,210
Preferred stock of subsidiary 229 233
Time Warner General Partners' Senior Capital 1,140 1,118
Partners' capital 6,224 6,430
Capital Distributions
The assets and cash flows of TWE are restricted by the
TWE partnership and credit agreements and are unavailable
for use by the partners except through the payment of
certain fees, reimbursements, cash distributions and loans,
which are subject to limitations. At March 31, 1998 and
December 31, 1997, the Time Warner General Partners had
recorded $522 million and $417 million, respectively, of
stock option related distributions due from TWE, based on
closing prices of Time Warner common stock of $72.00 and
$62.00, respectively. Time Warner is paid when the options
are exercised. The Time Warner General Partners also receive
tax-related distributions from TWE on a current basis.
During the three months ended March 31, 1998, the Time
Warner General Partners received distributions from TWE in
the amount of $172 million, consisting of $52 million of
tax-related distributions and $120 million of stock option
related distributions. During the three months ended March
31, 1997, the Time Warner General Partners received
distributions from TWE in the amount of $54 million,
consisting of $50 million of tax-related distributions and
$4 million of stock option related distributions.
Primestar
In April 1998, TWE and Advance/Newhouse transferred 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
Primestar, Inc. ("New Primestar"), a new holding company
that is ultimately expected to be the publicly traded parent
of TCI Satellite Entertainment, Inc. ("TSAT"). New Primestar
owns the DBS Operations and Primestar partnership interests
formerly owned by TSAT and other previously existing
partners of Primestar. In exchange for contributing its
interests in the Primestar Assets, TWE received an
approximate 24% equity interest in New Primestar and
realized approximately $240 million of debt reduction. In
partial consideration for contributing its indirect interest
in certain of the Primestar Assets, Advance/Newhouse
received an approximate 6% equity interest in New Primestar.
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 New Primestar
would acquire certain assets relating to the high-power,
direct broadcast satellite business of ASkyB (the "Primestar
ASkyB Transaction"). In exchange for such assets, ASkyB
would receive non-voting securities of New Primestar that
would be convertible into non-voting common stock of New
Primestar and, accordingly, would reduce TWE's equity
interest in New Primestar to approximately 16% on a fully
diluted basis. The Primestar ASkyB Transaction is expected
to close in 1998, subject to customary closing conditions,
including all necessary governmental and regulatory
approvals, including the approval of the FCC which is
currently conducting an extensive review of the transaction.
There can be no assurance that such approvals will be obtained.
Six Flags
In April 1998, TWE sold its remaining 49% interest in
Six Flags Entertainment Corporation ("Six Flags") to Premier
Parks Inc. ("Premier"), a regional theme park operator, for
approximately $475 million of cash. TWE used the net,
after-tax proceeds from this transaction to reduce debt by
approximately $300 million. As part of the transaction, TWE
will continue to license its animated cartoon and comic book
characters to Six Flags's theme parks and will similarly
license such rights to Premier's theme parks in the United
States and Canada under a long-term agreement covering an
aggregate of twenty-five existing and all future locations.
A substantial portion of the gain on this transaction has
been deferred by TWE principally as a result of its
continuing guarantees of certain significant long-term
obligations of Six Flags relating to the Six Flags Over
Texas and Six Flags Over Georgia theme parks.
4. INVENTORIES
Inventories consist of:
March 31, 1998 December 31, 1997
Current Noncurrent Current Noncurrent
(millions)
Film costs:
Released, less amortization $122 $ 249 $ 68 $ 228
Completed and not released 49 13 88 48
In process and other 2 147 - 141
Library, less amortization - 1,050 - 1,064
Programming costs, less amortization 333 309 293 285
Magazines, books and recorded music 407 - 381 -
Total $913 $1,768 $830 $1,766
5. LONG-TERM DEBT
In February 1998, Time Warner Companies, Inc. ("TW Companies"),
a wholly owned subsidiary of Time Warner, repaid all of its
$500 million principal amount of 7.45% notes due February 1,
1998 at their maturity using proceeds raised from the issuance of
$500 million principal amount of 6.95% debentures due January 15, 2028.
In early 1998, Time Warner reduced debt by approximately
$1 billion in connection with the TWE-A/N Transfers (see Note 2).
The debt assumed by TWE-A/N has been guaranteed by TWI Cable
and certain of its subsidiaries, including Paragon.
An extraordinary loss of $17 million was recognized in the first
three months of 1997 in connection with certain debt refinancings.
6. BORROWINGS AGAINST FUTURE STOCK OPTION PROCEEDS
In connection with Time Warner's common stock repurchase
program, Time Warner entered into a new five-year, $1.3 billion
revolving credit facility (the "Stock Option Proceeds Credit
Facility") in early 1998, which replaced its previously existing
facility. Borrowings under the Stock Option Proceeds Credit Facility
are principally used to fund stock repurchases and future preferred
dividend requirements on Time Warner's Series G, H, I and J Preferred
Stock. At March 31, 1998 and December 31, 1997, Time Warner had
outstanding borrowings against future stock option proceeds of
$465 million and $533 million, respectively.
7. MANDATORILY REDEEMABLE PREFERRED SECURITIES
In December 1995, TW Companies 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 % 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 %. The
Preferred Trust Securities are mandatorily redeemable for
cash on December 31, 2025, and TW Companies 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
Preferred Trust Securities which amount to a full and
unconditional guaranty (on a subordinated basis) of its
subsidiary's obligations with respect thereto.
8. SHAREHOLDERS' EQUITY
In March 1998, Time Warner entered into a forward
purchase contract with certain banks that provides it with
an option to acquire up to 9.1 million shares of its common
stock. In a related transaction, Toshiba Corporation
("Toshiba") and ITOCHU Corporation ("ITOCHU") sold an equal
number of shares of Time Warner common stock to affiliates
of such banks, after electing to convert a portion of their
Time Warner convertible preferred stock into common stock.
These transactions will result in $26 million of preferred
dividend savings for Time Warner and, if Time Warner elects
to acquire such shares, will also offset the dilutive effect
from the conversion of Toshiba's and ITOCHU's preferred
stock interests into Time Warner common stock.
The forward purchase contract matures in June 2000,
subject to Time Warner's right to extend for an additional
one-year period, and provides for settlement at that time
(or earlier, at Time Warner's option) at $67.89 per share
plus a financing charge (the "Forward Price"). Time Warner
can settle the forward purchase contract either by electing
(i) to purchase the shares for cash at the then Forward
Price, or (ii) to settle on a net basis, whereby Time Warner
would receive (pay) cash or shares of common stock, at its
election, based on the excess (deficiency) of the aggregate
market value of the 9.1 million shares of common stock over
the aggregate Forward Price at the settlement date. If the
forward purchase contract had been settled on a net share
basis as of March 31, 1998 and based on the $72 per share
market price of Time Warner's common stock at such date,
Time Warner would have been entitled to receive
approximately 500,000 shares of its common stock. The
forward purchase contract has been classified in additional
paid-in capital in the accompanying consolidated balance sheet.
In connection with these transactions, Time Warner's Board
of Directors authorized a 9.1 million share increase in the
Company's existing common stock repurchase program that, along
with previous authorizations, allows the Company to repurchase,
from time to time, up to 44.1 million shares of common stock.
The common stock repurchased under the program is expected to
continue to be used to satisfy future share issuances related
to the exercise of existing employee stock options and the
potential conversion of certain convertible securities. Actual
repurchases in any period will be subject to market conditions.
As of March 31, 1998, Time Warner had acquired 4.4 million
shares of its common stock in 1998 at an aggregate cost of $277
million, thereby increasing the cumulative shares purchased under
this program to approximately 22 million shares at an aggregate
cost of $1.077 billion. These repurchases have been funded principally
with borrowings under Time Warner's Stock Option Proceeds Credit Facility.
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 based on the nature of the products and services
offered. Time Warner evaluates performance based on several
factors, of which the primary financial measure is business
segment operating income before noncash amortization of
intangible assets ("EBITA"). The operating results of Time
Warner's and the Entertainment Group's cable segments
reflect the TWE-A/N Transfers effective as of January 1, 1998.
Three Months
Ended March 31,
1998 1997
(millions)
Revenues
Time Warner:
Publishing $ 948 $ 924
Music 888 933
Cable Networks-TBS 728 594
Filmed Entertainment-TBS 372 397
Cable 248 242
Intersegment elimination (47) (56)
Total $3,137 $3,034
Entertainment Group:
Filmed Entertainment-Warner Bros. $1,312 $1,174
Broadcasting-The WB Network 45 24
Cable Networks-HBO 512 483
Cable 1,153 1,020
Intersegment elimination (110) (99)
Total $2,912 $2,602
Three Months
Ended March 31,
1998 1997
(millions)
EBITA(1)
Time Warner:
Publishing $ 85 $ 76
Music 93 118
Cable Networks-TBS 153 114
Filmed Entertainment-TBS (15) 6
Cable 74 105
Intersegment elimination (19) (11)
Total $371 $408
Entertainment Group:
Filmed Entertainment-Warner Bros. $119 $105
Broadcasting-The WB Network (38) (20)
Cable Networks-HBO 109 91
Cable 307 259
Total $497 $435
_______________
(1) EBITA represents business segment operating income
before noncash amortization of intangible assets. After
deducting amortization of intangible assets, Time Warner's
business segment operating income for the three months ended
March 31, 1998 and 1997 was $170 million and $194 million,
respectively. Similarly, business segment operating income
of the Entertainment Group for the three months ended March
31, 1998 and 1997 was $369 million and $328 million, respectively.
Three Months
Ended March 31,
1998 1997
(millions)
Depreciation of Property, Plant and Equipment
Time Warner:
Publishing $ 19 $ 16
Music 19 22
Cable Networks-TBS 22 21
Filmed Entertainment-TBS 2 1
Cable 33 31
Total $ 95 $ 91
Entertainment Group:
Filmed Entertainment-Warner Bros. $ 40 $ 45
Broadcasting-The WB Network - -
Cable Networks-HBO 5 5
Cable 198 172
Total $243 $222
Three Months
Ended March 31,
1998 1997
(millions)
Amortization of Intangible Assets(1)
Time Warner:
Publishing $ 9 $ 9
Music 68 68
Cable Networks-TBS 50 45
Filmed Entertainment-TBS 20 22
Cable 54 70
Total $201 $214
Entertainment Group:
Filmed Entertainment-Warner Bros. $ 33 $31
Broadcasting-The WB Network 1 -
Cable Networks-HBO - -
Cable 94 76
Total $128 $107
(1) Amortization includes amortization relating to all
business combinations accounted for by the purchase method,
including the $14 billion acquisition of Warner
Communications Inc. in 1989, the $6.2 billion acquisition of
Turner Broadcasting System, Inc. in 1996 and the $2.3
billion of cable acquisitions in 1996 and 1995.
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:
Three Months
Ended March 31,
1998 1997
(millions)
Interest expense $233 $278
Cash payments made for interest 316 362
Cash payments made for income taxes 60 89
Tax-related distributions received from TWE 52 50
Income tax refunds received 42 23
Noncash investing activities in the first three months of 1998
included the TWE-A/N Transfers (Note 2). Noncash financing activities in
the first three months of 1997 included noncash dividends of $45 million.
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 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,
TW Companies and TBS have fully and unconditionally guaranteed
all of the outstanding publicly traded indebtedness of each other.
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.
TW Companies
Three Months
Ended March 31,
1998 1997
(millions)
Operating Statement Information
Revenues $2,078 $2,086
Depreciation and amortization (202) (216)
Business segment operating income 115 152
Equity in pretax income of Entertainment Group (a) 123 330
Interest and other, net (207) (240)
Income before extraordinary item 1 91
Net income (b) 1 78
__________________
(a) Includes a pretax gain of approximately $250 million
recognized in the first three months of 1997 related to the
sale of an interest in E! Entertainment Television, Inc.
(b) The net income for the three months ended March 31,
1997 includes an extraordinary loss on the retirement of
debt of $13 million.
March 31, December 31,
1998 1997
Balance Sheet Information
(millions)
Total current assets $ 3,525 $ 3,823
Investments in and amounts due to and from
Entertainment Group 6,114 5,590
Total assets 23,796 25,625
Total current liabilities 2,424 2,911
Long-term debt 9,893 11,085
Total liabilities 17,054 18,860
TW Companies-obligated mandatorily redeemable
preferred securities of a subsidiary holding
solely subordinated debentures of TW Companies 575 575
Shareholders' equity 6,167 6,190
TBS
Three Months
Ended March 31,
1998 1997
(millions)
Operating Statement Information
Revenues $1,067 $ 954
Depreciation and amortization (94) (89)
Business segment operating income 55 42
Interest and other, net (63) (62)
Loss before extraordinary item (25) (36)
Net loss (a) (25) (40)
March 31, December 31,
1998 1997
(millions)
Balance Sheet Information
Total current assets $ 1,236 $ 1,183
Total assets 11,394 11,319
Total current liabilities 1,090 954
Long-term debt 747 748
Debt due to Time Warner 1,647 1,722
Total liabilities 4,078 3,978
Shareholders' equity 7,316 7,341
_______________
(a) The net loss for the three months ended March 31, 1997 includes
an extraordinary loss on the retirement of debt of $4 million.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
TWE classifies its business interests into three
fundamental areas: Entertainment, consisting principally of
interests in filmed entertainment, television production 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.
Use of EBITA
TWE evaluates operating performance based on several
factors, of which the primary financial measure is operating
income before noncash amortization of intangible assets
("EBITA"). Consistent with management's financial focus on
controlling capital spending, EBITA measures operating
performance after charges for depreciation. In addition,
EBITA eliminates the uneven effect across all business
segments of considerable amounts of noncash amortization of
intangible assets recognized in business combinations
accounted for by the purchase method, including Time
Warner's $14 billion acquisition of Warner Communications
Inc. in 1989 and $1.3 billion acquisition of the minority
interest in American Television and Communications
Corporation in 1992. The exclusion of noncash amortization
charges is also consistent with management's belief that
TWE's intangible assets, such as cable television
franchises, film and television libraries and the goodwill
associated with its brands, are generally increasing in
value and importance to TWE's business objective of
creating, extending and distributing recognizable brands and
copyrights throughout the world. As such, the following
comparative discussion of the results of operations of TWE
includes, among other factors, an analysis of changes in
business segment EBITA. However, EBITA should be considered
in addition to, not as a substitute for, operating income,
net income and other measures of financial performance reported
in accordance with generally accepted accounting principles.
RESULTS OF OPERATIONS
As more fully described herein, TWE's 1998 operating
results have been affected by the transfer of cable
television systems (or interests therein) serving
approximately 650,000 subscribers that were formerly owned
by subsidiaries of Time Warner to the TWE-Advance/Newhouse
Partnership ("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"). For a more
comprehensive description of the TWE-A/N Transfers, see Note
2 to the accompanying consolidated financial statements.
EBITA and operating income for TWE for the three months
ended March 31, 1998 and 1997 are as follows:
Three Months Ended March 31,
Operating
EBITA Income
1998 1997 1998 1997
(millions)
Filmed Entertainment-Warner Bros. $119 $106 $ 86 $ 75
Broadcasting-The WB Network (38) (20) (39) (20)
Cable Networks-HBO 109 91 109 91
Cable 307 259 213 183
Total $497 $436 $369 $329
TWE had revenues of $2.910 billion and net income of $108 million
for the three months ended March 31, 1998, compared to revenues of
$2.6 billion and net income of $320 million for the three months ended
March 31, 1997. As discussed more fully below, TWE's net income decreased
in 1998 as compared to 1997 principally due to the absence of
the E! Entertainment gain recognized in 1997, offset in part by an
overall increase in operating income generated by its business segments
and a decrease 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 $15 million
and $12 million for the three months ended March 31, 1998 and
1997, respectively, have been provided for the operations of TWE's
domestic and foreign subsidiary corporations.
Filmed Entertainment-Warner Bros. Revenues increased
to $1.310 billion, compared to $1.172 billion in the first
three months of 1997. EBITA increased to $119 million from
$106 million. Operating income increased to $86 million from
$75 million. Revenues benefited from increases in worldwide
television production and distribution operations, offset in
part by lower worldwide theatrical and home video revenues.
EBITA and operating income benefited principally from the
revenue gains and increased income from licensing
operations, offset in part by the absence of a gain on the
sale of an investment recognized in 1997.
Broadcasting - The WB Network. Revenues increased to
$45 million, compared to $24 million in the first three
months of 1997. EBITA decreased to a loss of $38 million
from a loss of $20 million. Operating losses increased to
$39 million from $20 million. Revenues increased as a result
of improved television ratings and the addition of a fourth
night of primetime programming in January 1998, but were
offset by higher programming costs associated with the expanded
programming schedule. Operating losses increased principally
as a result of a lower allocation of losses to a limited
partner in the network. Due to the start-up nature of this
national broadcast operation, losses are expected to continue.
Cable Networks-HBO. Revenues increased to $512 million,
compared to $483 million in the first three months of 1997.
EBITA and operating income increased to $109 million from
$91 million. Revenues benefited primarily from an increase
in subscriptions. EBITA and operating income increased
principally as a result of the revenue gains, and, to a
lesser extent, cost savings.
Cable. Revenues increased to $1.153 billion, compared
to $1.020 billion in the first three months of 1997. EBITA
increased to $307 million from $259 million. Operating
income increased to $213 million from $183 million. The
Cable division's 1998 operating results were positively
affected by the TWE-A/N Transfers. Excluding the effect of
the TWE-A/N Transfers, 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 Federal Communications Commission ("FCC") and an
increase in advertising and pay-per-view revenues. Similarly
excluding the effect of the TWE-A/N Transfers, EBITA and
operating income increased as a result of the revenue gains,
offset in part by higher depreciation related to capital
spending and lower gains relating to the sale or exchange of
certain cable systems.
Interest and Other, Net. Interest and other, net, was
$164 million of expense in the first three months of 1998,
compared to $129 million of income in the first three months
of 1997. Interest expense increased to $141 million,
compared to $115 million in the first three months of 1997,
principally due to higher average debt levels associated
with the TWE-A/N Transfers. There was other expense, net, of
$23 million in the first three months of 1998, compared to
other income, net, of $244 million in the first three months
of 1997, principally due to the absence of an approximate
$250 million pretax gain on the sale of an interest in E!
Entertainment recognized in 1997.
FINANCIAL CONDITION AND LIQUIDITY
March 31, 1998
Financial Condition
TWE had $7.1 billion of debt, $107 million of cash and
equivalents (net debt of $7.0 billion), $229 million of
preferred stock of a subsidiary, $1.1 billion of Time Warner
General Partners' Senior Capital and $6.1 billion of
partners' capital at March 31, 1998, compared to $6.0
billion of debt, $322 million of cash and equivalents (net
debt of $5.7 billion), $233 million of preferred stock of a
subsidiary, $1.1 billion of Time Warner General Partners'
Senior Capital and $6.3 billion of partners' capital at
December 31, 1997. Net debt increased principally as a
result of the TWE-A/N Transfers.
Debt Transactions
In April 1998, TWE consummated two previously announced
transactions, consisting of the sale of TWE's 49% interest
in Six Flags Entertainment Corporation and the transfer of
TWE's and TWE-A/N's direct broadcast satellite operations
and related assets to Primestar, Inc., a separate holding
company that is ultimately expected to be the publicly traded
parent of TCI Satellite Entertainment, Inc. As a result of these
transactions, TWE reduced debt by approximately $540 million.
In early 1998, TWE-A/N assumed approximately $1 billion
of debt from TWI Cable Inc. ("TWI Cable"), a wholly owned
subsidiary of Time Warner, in connection with the TWE-A/N
Transfers. The debt assumed by TWE-A/N has been guaranteed
by TWI Cable and certain of its subsidiaries.
Cash Flows
During the first three months of 1998, TWE's cash
provided by operations amounted to $441 million and
reflected $497 million of EBITA from its Filmed
Entertainment-Warner Bros., Broadcasting-The WB Network,
Cable Networks-HBO and Cable businesses, $243 million of
noncash depreciation expense and $148 million from the
securitization of film and television backlog, less $156
million of interest payments, $20 million of income taxes,
$18 million of corporate expenses and $253 million related
to an increase in working capital requirements, other
balance sheet accounts and noncash items. Cash used by
operations of $48 million in the first three months of 1997
reflected $436 million of business segment EBITA and $217
million of noncash depreciation expense, less $146 million
of interest payments, $12 million of income taxes, $18
million of corporate expenses and $525 million related to an
increase in working capital requirements, other balance
sheet accounts and noncash items.
Cash used by investing activities was $559 million in
the first three months of 1998, compared to cash provided by
investing activities of $5 million in the first three months
of 1997, principally as a result of the effect of
deconsolidating approximately $200 million of cash of
Paragon Communications in connection with the TWE-A/N
Transfers that has been included in cash flows from
investments and acquisitions, and a $344 million decrease in
proceeds from the sale of investments. Capital expenditures
increased to $352 million in the first three months of 1998,
compared to $331 million in the first three months of 1997.
Cash used by financing activities was $97 million in
the first three months of 1998, compared to cash provided by
financing activities of $139 million in the first three
months of 1997, principally as a result of the absence of
$243 million of aggregate net proceeds from the issuance of
preferred stock of a subsidiary in the first three months of
1997 and a $118 million increase in distributions paid to
Time Warner, offset in part by an increase in debt used to
fund cash distributions to Time Warner.
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
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
$326 million in the three months ended March 31, 1998,
compared to $292 million the three months ended March 31,
1997. For the full year of 1998, cable capital spending is
expected to be comparable to 1997 levels, with approximately
$1.1 billion budgeted for the remainder of 1998. 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 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, TWE-A/N and Time Warner. Management expects
to continue to finance such level of investment through cable
operating cash flow and the development of new revenue streams
from expanded programming options, high-speed Internet access,
telephony 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 $2.152
billion at March 31, 1998, compared to $2.126 billion at December 31,
1997 (including amounts relating to TWE's cable television networks
of $238 million, in both periods, and to Time Warner's cable
television networks of $515 million and $481 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 or on an accelerated basis using a $600
million securitization facility. The portion of backlog for
which cash has 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)
March 31, December 31,
1998 1997
(millions)
ASSETS
Current assets
Cash and equivalents $ 107 $ 322
Receivables, including $465 and $385 million
due from Time Warner, less allowances of
$410 and $424 million 1,840 1,914
Inventories 1,201 1,204
Prepaid expenses 190 182
Total current assets 3,338 3,622
Noncurrent inventories 2,310 2,254
Loan receivable from Time Warner 400 400
Investments 308 315
Property, plant and equipment 6,713 6,557
Cable television franchises 4,041 3,063
Goodwill 4,168 3,859
Other assets 734 661
Total assets $22,012 $20,731
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable $ 834 $ 1,123
Participations and programming costs payable 1,365 1,176
Debt due within one year 7 8
Other current liabilities, including $216 and $184
million due to Time Warner 1,555 1,667
Total current liabilities 3,761 3,974
Long-term debt 7,108 5,990
Other long-term liabilities, including $586
and $477 million due to Time Warner 2,181 1,873
Minority interests 1,465 1,210
Preferred stock of subsidiary holding solely a
mortgage note of its parent 229 233
Time Warner General Partners' Senior Capital 1,140 1,118
Partners' capital
Contributed capital 7,537 7,537
Undistributed partnership earnings (deficit) (1,409) (1,204)
Total partners' capital 6,128 6,333
Total liabilities and partners' capital $22,012 $20,731
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months
Ended March 31,
1998 1997
(millions)
Revenues (a) $2,910 $2,600
Cost of revenues (a)(b) 1,946 1,665
Selling, general and administrative (a)(b) 595 606
Operating expenses 2,541 2,271
Business segment operating income 369 329
Interest and other, net (a) (164) 129
Minority interest (64) (108)
Corporate services (a) (18) (18)
Income before income taxes 123 332
Income taxes (15) (12)
Net income $ 108 $ 320
_______________
(a) Includes the following income (expenses) resulting
from transactions with the partners of TWE and other related
companies for the three months ended March 31, 1998 and
1997, respectively: revenues-$129 million and $66 million;
cost of revenues-$(38) million and $(10) million; selling,
general and administrative-$1 million and $19 million;
interest and other, net-$2 million and $12 million; and
corporate services-$(18) million in both periods.
(b) Includes depreciation and amortization expense of: $371 $324
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
1998 1997
(millions)
OPERATIONS
Net income $108 $320
Adjustments for noncash and nonoperating items:
Depreciation and amortization 371 324
Changes in operating assets and liabilities (38) (692)
Cash provided (used) by operations 441 (48)
INVESTING ACTIVITIES
Investments and acquisitions (230) (31)
Capital expenditures (352) (331)
Investment proceeds 23 367
Cash provided (used) by investing activities (559) 5
FINANCING ACTIVITIES
Borrowings 489 282
Debt repayments (376) (318)
Issuance of preferred stock of subsidiary - 243
Capital distributions (172) (54)
Other (38) (14)
Cash provided (used) by financing activities (97) 139
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (215) 96
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 322 216
CASH AND EQUIVALENTS AT END OF PERIOD $107 $312
See accompanying notes.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
(Unaudited)
Three Months
Ended March 31,
1998 1997
(millions)
BALANCE AT BEGINNING OF YEAR $6,333 $6,574
Net income 108 320
Other comprehensive income (loss) (14) (13)
Comprehensive income 94 307
Distributions (277) (139)
Allocation of income to Time Warner General
Partners' Senior Capital (22) (31)
BALANCE AT MARCH 31, $6,128 $6,711
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 6). 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 $128 million and $107 million in the
three months ended March 31, 1998 and 1997, respectively.
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, 1997.
Certain reclassifications have been made to the prior year's
financial statements to conform to the 1998 presentation.
2. ACQUISITIONS AND DISPOSITIONS
TWE-A/N Transfers
In early 1998, Time Warner (through a wholly owned
subsidiary) contributed cable television systems (or
interests therein) serving approximately 650,000 subscribers
to the TWE-Advance/Newhouse Partnership ("TWE-A/N"), subject
to approximately $1 billion of debt, in exchange for common
and preferred partnership interests therein, and completed
certain related transactions (collectively, the "TWE-A/N
Transfers"). The cable television systems transferred to
TWE-A/N were formerly owned by TWI Cable Inc. ("TWI Cable"),
a wholly owned subsidiary of Time Warner, and Paragon
Communications ("Paragon"), a partnership formerly owning
cable television systems serving approximately 1 million
subscribers that was previously wholly owned by subsidiaries
of Time Warner, with 50% beneficially owned in the aggregate
by TWE and TWE-A/N. The debt assumed by TWE-A/N has been
guaranteed by TWI Cable and certain of its subsidiaries,
including Paragon.
As part of the TWE-A/N Transfers, TWE exchanged
substantially all of its beneficial interest in Paragon for
an equivalent share of Paragon's cable television systems
(or interests therein) serving approximately 500,000
subscribers. TWE, in turn, transferred 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 resulted
in wholly owned subsidiaries of Time Warner owning 100% of
the restructured Paragon entity, with less than 1%
beneficially held for TWE. Accordingly, effective as of
January 1, 1998, TWE has deconsolidated Paragon. Because
this transaction represented an exchange of TWE's and
TWE-A/N's beneficial interests in Paragon for an equivalent
amount of its cable television systems, it did not have a
significant economic impact on Time Warner, TWE or TWE-A/N.
In connection with the TWE-A/N Transfers, the
Advance/Newhouse Partnership ("Advance/Newhouse"), a limited
partner in TWE-A/N, made a capital contribution to TWE-A/N
in order to maintain its 33.3% common partnership interest
therein. Accordingly, TWE-A/N is now owned 65.3% by TWE,
33.3% by Advance/Newhouse and 1.4% indirectly by Time
Warner. The TWE-A/N Transfers were accounted for effective
as of January 1, 1998.
On a pro forma basis, giving effect to the TWE-A/N
Transfers as if they had occurred at the beginning of 1997,
TWE would have reported for the three months ended March 31,
1997, revenues of $2.616 billion, depreciation expense of
$218 million, operating income before noncash amortization
of intangible assets of $465 million, operating income of
$342 million and net income of $318 million.
Primestar
In April 1998, TWE and Advance/Newhouse transferred 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
Primestar, Inc. ("New Primestar"), a new holding company
that is ultimately expected to be the publicly traded parent
of TCI Satellite Entertainment, Inc. ("TSAT"). New Primestar
owns the DBS Operations and Primestar partnership interests
formerly owned by TSAT and other previously existing
partners of Primestar. In exchange for contributing its
interests in the Primestar Assets, TWE received an
approximate 24% equity interest in New Primestar and
realized approximately $240 million of debt reduction. In
partial consideration for contributing its indirect interest
in certain of the Primestar Assets, Advance/Newhouse
received an approximate 6% equity interest in New Primestar.
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 New Primestar
would acquire certain assets relating to the high-power,
direct broadcast satellite business of ASkyB (the "Primestar
ASkyB Transaction"). In exchange for such assets, ASkyB
would receive non-voting securities of New Primestar that
would be convertible into non-voting common stock of New
Primestar and, accordingly, would reduce TWE's equity
interest in New Primestar to approximately 16% on a fully
diluted basis. The Primestar ASkyB Transaction is expected
to close in 1998, subject to customary closing conditions,
including all necessary governmental and regulatory
approvals, including the approval of the FCC which is
currently conducting an extensive review of the transaction.
There can be no assurance that such approvals will be obtained.
Six Flags
In April 1998, TWE sold its remaining 49% interest in
Six Flags Entertainment Corporation ("Six Flags") to Premier
Parks Inc. ("Premier"), a regional theme park operator, for
approximately $475 million of cash. TWE used the net,
after-tax proceeds from this transaction to reduce debt by
approximately $300 million. As part of the transaction, TWE
will continue to license its animated cartoon and comic book
characters to Six Flags's theme parks and will similarly
license such rights to Premier's theme parks in the United
States and Canada under a long-term agreement covering an
aggregate of twenty-five existing and all future locations.
A substantial portion of the gain on this transaction has
been deferred principally as a result of TWE's continuing
guarantees of certain significant long-term obligations of
Six Flags relating to the Six Flags Over Texas and Six Flags
Over Georgia theme parks.
3. INVENTORIES
TWE's inventories consist of:
March 31, 1998 December 31, 1997
Current Noncurrent Current Noncurrent
(millions)
Film costs:
Released, less amortization $ 498 $ 683 $ 545 $ 658
Completed and not released 185 48 170 50
In process and other 43 644 27 595
Library, less amortization - 599 - 612
Programming costs, less amortization 393 336 382 339
Merchandise 82 - 80 -
Total $1,201 $2,310 $1,204 $2,254
4. INVESTMENTS
In March 1997, TWE sold its 58% interest in E! Entertainment
Television, Inc. A pretax gain of approximately $250 million relating
to this sale has been included in the accompanying 1997 consolidated
statement of operations.
5. PARTNERS' CAPITAL
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 stock options granted to employees of TWE based
on the amount by which the market price of Time Warner Inc.
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 Inc. 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 Inc. 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
Inc. common stock declines.
During the three months ended March 31, 1998, TWE
accrued $52 million of tax-related distributions and $225
million of stock option distributions, based on closing
prices of Time Warner Inc. common stock of $72.00 at March
31, 1998 and $62.00 at December 31, 1997. During the three
months ended March 31, 1997, TWE accrued $50 million of
tax-related distributions and $89 million of stock option
distributions as a result of an increase at that time in the
market price of Time Warner Inc. common stock. During the
three months ended March 31, 1998, TWE paid distributions to
the Time Warner General Partners in the amount of $172
million, consisting of $52 million of tax-related
distributions and $120 million of stock option related
distributions. During the three months ended March 31, 1997,
TWE paid the Time Warner General Partners distributions in
the amount of $54 million, consisting of $50 million of
tax-related distributions and $4 million of stock option
related distributions.
6. 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 based on the nature of
the products and services offered. TWE evaluates performance
based on several factors, of which the primary financial
measure is business segment operating income before noncash
amortization of intangible assets ("EBITA"). The operating
results of TWE's cable segment reflects the TWE-A/N
Transfers effective as of January 1, 1998.
Information as to the operations of TWE in different
business segments is set forth below.
Three Months
Ended March 31,
1998 1997
(millions)
Revenues
Filmed Entertainment-Warner Bros. $1,310 $1,172
Broadcasting-The WB Network 45 24
Cable Networks-HBO 512 483
Cable 1,153 1,020
Intersegment elimination (110) (99)
Total $2,910 $2,600
Three Months
Ended March 31,
1998 1997
(millions)
EBITA(1)
Filmed Entertainment-Warner Bros. $ 119 $ 106
Broadcasting-The WB Network (38) (20)
Cable Networks-HBO 109 91
Cable 307 259
Total $ 497 $ 436
_______________
(1) EBITA represents business segment operating income
before noncash amortization of intangible assets. After
deducting amortization of intangible assets, TWE's business
segment operating income for the three months ended March
31, 1998 and 1997 was $369 million and $329 million, respectively.
Three Months
Ended March 31,
1998 1997
(millions)
Depreciation of Property, Plant and Equipment
Filmed Entertainment-Warner Bros. $ 40 $ 40
Broadcasting-The WB Network - -
Cable Networks-HBO 5 5
Cable 198 172
Total $ 243 $ 217
Three Months
Ended March 31,
1998 1997
(millions)
Amortization of Intangible Assets (1)
Filmed Entertainment-Warner Bros. $ 33 $ 31
Broadcasting-The WB Network 1 -
Cable Networks-HBO - -
Cable 94 76
Total $ 128 $ 107
(1) Amortization includes amortization relating to all business
combinations accounted for by the purchase method, including Time
Warner's $14 billion acquisition of WCI in 1989 and $1.3 billion
acquisition of the minority interest in ATC in 1992.
7. 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.
8. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash
flows is as follows:
Three Months
Ended March 31,
1998 1997
(millions)
Interest expense $141 $115
Cash payments made for interest 156 146
Cash payments made for income taxes, net 20 12
Noncash capital distributions 225 89
Noncash investing activities in the first quarter of 1998 included
the TWE-A/N Transfers (Note 2). During the three months ended
March 31, 1998, TWE received $148 million of proceeds under its film
and television backlog securitization program.
Part II. Other Information
Item 1. Legal Proceedings.
Reference is made to the three stockholder actions filed in
Delaware challenging the TBS Transaction described on page I-37 of
Time Warner's Annual Report on Form 10-K for the year ended
December 31, 1997 (the "1997 Form 10-K"). On March 30, 1998,
the Delaware Chancery Court approved a voluntary stipulation and
order of dismissal of all three actions pursuant to which the
actions were dismissed without prejudice and without compensation
in any form passing directly or indirectly from any of the defendants
to plaintiffs or their attorneys.
On April 22, 1998, the purported class actions entitled
(i) Chandu Dani d/b/a Compact Disc Warehouse and Record
Revolution v. EMI Music Distribution, Sony Music
Entertainment, Inc., Warner Elektra Atlantic Corporation,
Universal Music and Video Distribution, Bertelsmann Music
Group, Inc. and Polygram Group Distribution, Inc., No.
97-7226, (ii) Third Street Jazz and Rock Holding Corporation
v. EMI Music Distribution, Sony Music Entertainment, Inc.,
Warner Elektra Atlantic Corporation, Universal Music and
Video Distribution, Bertelsmann Music Group, Inc. and
PolyGram Group Distribution, Inc., No. 97-8864, and (iii)
Nathan Muchnick, Inc. v. Sony Music Entertainment, Inc.,
PolyGram Group Distribution, Inc., Bertelsmann Music Group,
Inc., Universal Music and Video Distribution, Warner Elektra
Atlantic Corporation and EMI Music Distribution, No. 98 Civ.
0612, as described on page I-39 of the 1997 Form 10-K, were
consolidated by the Judicial Panel on Multidistrict Litigation
for coordinated and consolidated pretrial proceedings.
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.
No Current Report on Form 8-K was filed by Time
Warner during the quarter ended March 31, 1998.
TIME WARNER INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Time Warner Inc.
(Registrant)
By: /s/ Richard J. Bressler
Name: Richard J. Bressler
Title: Senior Vice President
and Chief Financial Officer
Dated: May 8, 1998
EXHIBIT INDEX
Pursuant to Item 601 of Regulations S-K
Exhibit No. Description of Exhibit
27 Financial Data Schedule.