<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
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 No. 0-9334
TURNER BROADCASTING SYSTEM, INC.
- - ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-0950695
- - ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One CNN Center
Atlanta, Georgia 30303
- - ------------------------------- ----------------------------------
(Address of principal (Zip Code)
executive offices)
(404) 827-1700
- - -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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.
Outstanding at
Class March 31, 1994
- - --------------------------------- --------------------------------
Class A Common Stock, par
value $0.0625 68,330,388
Class B Common Stock, par
value $0.0625 137,286,719
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TURNER BROADCASTING SYSTEM, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 138,270 $ 162,858
Accounts receivable, less allowance of
$24,440 and $23,083
Unaffiliated . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434,402 378,228
Affiliated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,846 94,011
Film costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 563,377 314,637
Installment contracts receivable, less
allowance of $14,507 and $11,915 . . . . . . . . . . . . . . . . . . . 50,962 56,563
Prepaid expense and other current assets . . . . . . . . . . . . . . . . . 87,186 68,196
------------ -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 1,341,043 1,074,493
Film costs, less current portion . . . . . . . . . . . . . . . . . . . . . 1,667,295 1,633,731
Property and equipment, less accumulated
depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,040 225,228
Installment contracts receivable, less
discount of $791 and $1,123 . . . . . . . . . . . . . . . . . . . . . 13,543 15,077
Goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . 336,706 111,202
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294,420 185,131
------------ -----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,913,047 $ 3,244,862
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . $ 175,806 $ 168,975
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,673 106,496
Participants' share and royalties payable . . . . . . . . . . . . . . . . . 61,988 33,922
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,126 32,128
Film contracts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 23,573 28,096
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . 2,141 2,051
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 65,729 42,240
------------ -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 517,036 413,908
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . 2,428,071 2,294,557
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 488,917 395,668
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . 157,929 141,832
------------ -----------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . 3,591,953 3,245,965
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) . . . . . . . . . . . . . . . 321,094 (1,103)
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,913,047 $ 3,244,862
============ ===========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
2
<PAGE> 3
TURNER BROADCASTING SYSTEM, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1994 1993
---------- ----------
<S> <C> <C>
Revenue
Unaffiliated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 469,104 $ 308,909
Affiliated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,200 89,515
---------- ----------
567,304 398,424
---------- ----------
Cost of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368,823 197,462
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . 153,070 113,616
Depreciation of property and equipment and
amortization of goodwill and other
intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,294 8,683
Interest expense, net of interest income . . . . . . . . . . . . . . . . . 51,743 45,104
Equity in (income) loss of unconsolidated entities . . . . . . . . . . . . 3,168 (1,587)
---------- ----------
589,098 363,278
---------- ----------
Income (loss) before provision for income
taxes and the cumulative effect of a change
in accounting for income taxes . . . . . . . . . . . . . . . . . . (21,794) 35,146
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . (8,170) 15,011
---------- ----------
Income (loss) before the cumulative effect of
a change in accounting for income taxes . . . . . . . . . . . . . . (13,624) 20,135
Cumulative effect of a change in accounting for
income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _ (306,000)
---------- ----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (13,624) $ (285,865)
========== ==========
Earnings (loss) per common share and common stock
equivalent
Income (loss) before the cumulative effect of a
change in accounting for income taxes . . . . . . . . . . . . . . . $ (0.07) $ 0.08
Cumulative effect of a change in accounting for
income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . _ (1.16)
---------- ----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.07) $ (1.08)
========== ==========
Weighted average number of common shares outstanding,
including conversion of common stock equivalents in 1993 . . . . . . . . 200,028 264,351
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
3
<PAGE> 4
TURNER BROADCASTING SYSTEM, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1994 1993
--------- ---------
<S> <C> <C>
Cash provided by operations before changes
in film costs and liabilities, net, interest
payments and debt issue costs . . . . . . . . . . . . . . . . . . . . . . . . $ 103,874 $ 125,199
Change in film costs and liabilities, net
Purchased program rights . . . . . . . . . . . . . . . . . . . . . . . . . 18,757 24,934
Produced programming . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,168) (9,085)
Licensed program rights . . . . . . . . . . . . . . . . . . . . . . . . . (5,059) (6,829)
Interest payments, net of interest received . . . . . . . . . . . . . . . . (33,205) (16,709)
Debt issue costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,494) --
--------- ---------
Net cash provided by operations . . . . . . . . . . . . . . . . . . . . . . . . . 50,705 117,510
Cash used for investing activities
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (142,260) (19,205)
Additions to property and equipment . . . . . . . . . . . . . . . . . . . . (32,849) (9,459)
--------- ---------
Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . (175,109) (28,664)
Cash provided by (used for) financing activities
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 574,610 --
Payments of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (475,271) (56,371)
Payments of cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . -- (4,596)
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . 477 478
--------- ---------
Net cash provided by (used for) financing activities . . . . . . . . . . . . . . 99,816 (60,489)
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . (24,588) 28,357
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . 162,858 126,256
--------- ---------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . $ 138,270 $ 154,613
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,317 $ 2,895
Dividends declared but unpaid . . . . . . . . . . . . . . . . . . . . . . . . . . 4,901 --
The Company acquired New Line Cinema Corporation and assumed and incurred
liabilities as of January 28, 1994 (in thousands) as follows:
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . $ 692,600 --
Less: common stock issued or issuable . . . . . . . . . . . . . . . . . . . . . . 416,707 --
Less: cash paid for debt and other acquisition costs . . . . . . . . . . . . . . 139,600 --
---------
Liabilities assumed and incurred . . . . . . . . . . . . . . . . . . . . . . . . $ 136,293 --
=========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
4
<PAGE> 5
TURNER BROADCASTING SYSTEM, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1. PREPARATION OF INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The consolidated condensed financial statements included herein have
been prepared by Turner Broadcasting System, Inc. (the "Company" or "Turner")
pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the accompanying consolidated
condensed financial statements contain all adjustments, which are of a normal
recurring nature, necessary for a fair presentation of such financial
statements. Although certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, management believes that the disclosures are adequate to make the
information presented not misleading. For further information, reference is
made to the consolidated financial statements and the notes thereto in the
Company's Form 10-K for the year ended December 31, 1993.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
NOTE 2. FILM COSTS
The following table sets forth the components of unamortized film
costs (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
------------ -----------
<S> <C> <C>
Purchased program rights . . . . . . . . . . . . . . . . . . . . . . . $ 1,190,772 $ 1,172,921
Produced programming
Released . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254,706 166,768
Completed and not released . . . . . . . . . . . . . . . . . . . . . 8,324 17,654
In process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313,954 153,630
Episodic television . . . . . . . . . . . . . . . . . . . . . . . . 94,618 89,077
Licensed program and distribution rights . . . . . . . . . . . . . . . 256,681 231,385
Prepaid licensed program rights . . . . . . . . . . . . . . . . . . . 111,617 116,933
----------- -----------
2,230,672 1,948,368
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . 563,377 314,637
----------- -----------
$ 1,667,295 $ 1,633,731
=========== ===========
</TABLE>
Episodic television includes serial television episode program costs.
Prepaid licensed program rights represent licensed program rights for which
payments have been made but the films are not currently available for use. As
these programs become available for use they are reclassified to licensed
program rights.
On the basis of the Company's anticipated total gross revenue
estimates, over 87% of released and episodic television produced programming
costs at March 31, 1994 will be amortized within the three-year period ending
March 31, 1997.
Amortization of film costs included in Cost of Operations is composed
of the following (in thousands):
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------
1994 1993
----------- ----------
<S> <C> <C>
Purchased program rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,377 $ 18,917
Produced programming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167,294 55,838
Licensed program and distribution rights . . . . . . . . . . . . . . . . . . . . . . . 19,711 17,383
Participants' share and royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,339 7,962
----------- ----------
$ 224,721 $ 100,100
=========== ==========
</TABLE>
5
<PAGE> 6
NOTE 3. EARNINGS (LOSS) PER COMMON SHARE AND COMMON STOCK EQUIVALENT
Net income (loss) per common share and common stock equivalent is
computed by dividing net income (loss) applicable to common stock by the
weighted average number of outstanding shares of common stock and common stock
equivalents, when dilutive, during the applicable periods in 1994 and 1993. In
1993 common stock equivalents are principally the incremental shares associated
with the Class C Convertible Preferred Stock (the "Class C Preferred Stock")
and the outstanding stock options. Fully-diluted income (loss) per share
amounts are similarly computed, but include the effect, when dilutive, of the
Company's other potentially dilutive securities. In 1994, no common stock
equivalents are included in the calculation of primary earnings per share, due
to their anti-dilutive effect on net loss for the period. The Company's zero
coupon subordinated convertible notes due 2007 and 2004 and the convertible
subordinated debentures of a wholly-owned subsidiary are excluded from the
fully-diluted calculations of net income (loss) per common share for the three
month periods ended March 31, 1994 and 1993 (when applicable) due to their
anti-dilutive effect. The difference between the primary and fully-diluted
earnings per share is not significant.
NOTE 4. LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
----------- -----------
<S> <C> <C>
Bank credit facilities . . . . . . . . . . . . . . . . . . . $ 875,000 $ 1,225,000
12% senior subordinated debentures . . . . . . . . . . . . . 536,807 536,732
8 3/8% Senior Notes . . . . . . . . . . . . . . . . . . . . . 297,339 297,325
Zero coupon subordinated convertible notes . . . . . . . . . 232,798 228,688
7.4% Senior Notes . . . . . . . . . . . . . . . . . . . . . . 249,617 --
8.4% Senior Debentures . . . . . . . . . . . . . . . . . . . 199,844 --
Convertible subordinated debentures of
a wholly-owned subsidiary . . . . . . . . . . . . . . . . . 29,125 --
Obligations under capital leases . . . . . . . . . . . . . . 7,364 6,353
Other long-term debt . . . . . . . . . . . . . . . . . . . . 2,318 2,510
----------- -----------
2,430,212 2,296,608
Less current portion . . . . . . . . . . . . . . . . . . . . 2,141 2,051
----------- -----------
$ 2,428,071 $ 2,294,557
=========== ===========
</TABLE>
On May 6, 1993, the Company filed a registration statement with the
Securities and Exchange Commission (the "Shelf Registration") to allow the
Company to offer, from time to time, the sale of up to $1,100,000,000 of
unsecured senior debt or unsecured senior subordinated debt securities,
consisting of notes, debentures, or other evidence of indebtedness.
On February 3, 1994, the Company sold $250,000,000 of 7.4% Senior Notes
due 2004 (the "Senior Notes") and $200,000,000 of 8.4% Senior Debentures due
2024 (the "Senior Debentures" and, together with the Senior Notes, the
"Securities") under the Shelf Registration. The net proceeds to the Company
were approximately $246,282,000 and $196,680,000, respectively, after market
and underwriting discounts. The Senior Notes and Senior Debentures bear
interest at the rate of 7.4% and 8.4% per annum, respectively, payable
semi-annually on February 1 and August 1 of each year, commencing on August 1,
1994. The Senior Notes are not redeemable at the option of the Company. The
Senior Debentures are redeemable, at the Company's option, at any time after
February 1, 2004, at a redemption price of 104.161% of the principal amount,
plus accrued and unpaid interest to the date of redemption, which redemption
price reduces over 10 years to a redemption price of 100% of the principal
amount in 2014 and thereafter. Each holder has the right to require the
Company to repurchase such holder's Securities in whole, but not in part, at a
redemption price, payable in cash, equal to 101% of the principal amount, plus
accrued and unpaid interest to the date fixed for redemption, upon the
occurrence of certain triggering events, including, without limitation, a
change in control, certain restricted payments or certain consolidations,
mergers, conveyances or transfers of assets, each as defined in the indenture
relating to the securities. The Company is not
6
<PAGE> 7
required to make mandatory redemption or sinking fund payments with respect to
the Securities prior to maturity.
NOTE 5. STOCKHOLDERS' EQUITY (DEFICIT)
Stockholders' equity (deficit) consists of the following components (in
thousands, except share data):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
----------- ------------
<S> <C> <C>
Class C Convertible Preferred Stock, par
value $0.125; authorized 12,600,000 shares;
issued and outstanding 12,396,976 shares . . . . . . . . . . $ 260,438 $ 260,438
Class A Common Stock, par value $0.0625;
authorized 75,000,000 shares; issued and
outstanding 68,330,388 shares . . . . . . . . . . . . . . . . 4,271 4,271
Class B Common Stock, par value $0.0625;
authorized 300,000,000 shares; issued and
outstanding 137,286,719 and 120,887,672
shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,580 7,555
Capital in excess of par value . . . . . . . . . . . . . . . . 1,070,745 731,042
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . (1,022,940) (1,004,409)
----------- -----------
Total stockholders' equity (deficit) . . . . . . . . . . . $ 321,094 $ (1,103)
=========== ===========
</TABLE>
See Note 6 of Notes to Consolidated Condensed Financial Statements for
a discussion of the increase of approximately 16,000,000 shares of outstanding
Class B Common Stock in connection with the merger of New Line Cinema
Corporation into the Company in the first quarter of 1994, which increased
Class B Common Stock and Capital in excess of par value by approximately
$1,000,000 and $340,000,000, respectively.
On March 15, 1994 the Board of Directors declared a cash dividend on
the Company's outstanding shares of Class A Common Stock and Class B Common
Stock, payable at the rate of $0.0175 for each share held on the record date.
In addition, holders of the Company's outstanding Class C Convertible Preferred
Stock were entitled to an equivalent cash dividend of $0.105 for each share
held on the record date based on the number of shares of Class B Common Stock
which would be receivable upon conversion of each share of Class C Convertible
Preferred Stock. Cash dividends of $4,901,000 were paid on April 15, 1994 to
shareholders of record at the close of business on March 30, 1994.
The Company's ability to pay cash dividends to holders of shares of the
Class A and Class B common stock and the Class C Convertible Preferred Stock is
subject to certain covenants in the Company's outstanding debt instruments,
currently the most restrictive of which limits the maximum aggregate amount of
dividends permitted to be paid annually to such holders to $30,000,000.
NOTE 6. ACQUISITION
The Company and New Line Cinema Corporation ("New Line"), a motion
picture production company, completed a merger of New Line with a wholly-owned
subsidiary of the Company on January 28, 1994 (the "Merger"). As a result of
the Merger, each share of New Line Common Stock has been converted into the
right to receive 0.96386 of a share of the Company's Class B Common Stock. The
valuations used by New Line and the Company for purposes of arriving at the
exchange ratio were $20 per share of New Line Common Stock and $20.75 per share
of the Company's Class B Common Stock. The maximum number of Class B common
shares issuable pursuant to the Merger is approximately 21,300,000 valued at
approximately $442,000,000. Cash will be distributed in lieu of any fractional
shares. At March 31, 1994 approximately 16,200,000 shares of the Company's
Class B Common Stock had been issued in connection with the Merger. The
remaining shares issuable result from New Line stock otions and warrants and
shares associated with the New Line convertible subordinated debentures
discussed below. Additionally, the Company assumed and incurred liabilities and
other acquisition costs of approximately $136,000,000 and paid debt and certain
other acquisition costs of approximately $140,000,000 in connection with the
Merger. Liabilities assumed in the Merger included $29,125,000 of convertible
subordinated debentures (the "Convertible Debentures") which bear interest at
the rate of 6 1/2% per annum. The Convertible Debentures are convertible at the
option of the holder into a total of approximately 1,700,000 shares of Class B
Common Stock.
7
<PAGE> 8
At the time of the Merger, New Line owned a 37.4% equity interest in
RHI Entertainment, Inc. ("RHI"). In April 1994, New Line entered into an
agreement to tender for cash its equity interest in RHI which totals
approximately 3,000,000 shares, to an unaffiliated entity for $36 per share.
If such sale is consummated, no income or loss will be recognized by the
Company.
The Merger was accounted for by the purchase method of accounting.
Goodwill and other intangible assets in the amount of approximately
$230,000,000 was recognized in the transaction, and is amortized using a
straight-line basis over 40 years. The Company has not yet received appraisals
or valuations from independent third parties of the assets or properties of New
Line. Therefore, goodwill and other intangible asset amounts may be adjusted
once complete information on the fair value of all of New Line's assets and
liabilities is developed and once a more thorough review of New Line's
operating and accounting policies and procedures has been completed.
The following pro forma condensed combined results of operations for
the three months ended March 31, 1993 is not intended to reflect results of
operations which would have actually resulted had the Merger been effective on
the date indicated. Moreover, this information is not intended to be
indicative of results of operations which may be obtained in the future. The
pro forma condensed combined results of operations for the three months ended
March 31, 1993 includes the Merger and the December 1993 acquisitions of Castle
Rock Holding Co. ("Castle Rock") and the remaining 50% interest in
Hanna-Barbera Holding Co., ("Hanna-Barbera") assuming the Company acquired all
of the outstanding stock of New Line pursuant to the Merger and completed the
acquisitions at January 1, 1993. The pro forma effect of the Merger for the
three months ended March 31, 1994 is not considered significant.
The condensed combined results of operations for the three months
ended March 31, 1993 are as follows:
<TABLE>
<CAPTION>
Three months
ended
March 31,
1993
------------
<S> <C>
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 542,283
============
Income before the cumulative effect of a change
in accounting for income taxes . . . . . . . . . . . . . . . . . . . . . . $ 10,233
Cumulative effect of a change in accounting
for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (306,000)
------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (295,767)
============
Earnings (loss) per common share and common stock
equivalent
Income before the cumulative effect of a change
in accounting for income taxes . . . . . . . . . . . . . . . . . . . $ 0.04
Cumulative effect of a change in accounting for
income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.09)
------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1.05)
============
</TABLE>
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH
Cash provided by operations for the three months ended March 31, 1994
aggregated $51 million, net of interest payments of $33 million and a net
change in film costs and liabilities of $13 million. Primary sources of cash
included borrowings under the 1993 Credit Agreement of $125 million, and
approximately $250 million and $200 million of gross proceeds from the Senior
Notes and Senior Debentures, respectively. Other primary uses of cash during
the period were payments of indebtedness of $475 million, payments of debt and
certain other acquisition costs in connection with the Merger of $140 million
and additions to property and equipment of $33 million.
See the Consolidated Condensed Statements of Cash Flows for additional
details regarding sources and uses of cash and Note 4 of Notes to Consolidated
Condensed Financial Statements for additional information about the Company's
indebtedness.
CREDIT FACILITIES AND FINANCING ACTIVITIES
The Company had approximately $2.4 billion of outstanding indebtedness
at March 31, 1994, of which $875 million was outstanding under an unsecured
revolving credit facility with banks.
Approximately $875 million of the Company's indebtedness bears interest
on a floating basis tied to short-term market indices. The Company has
interest rate swap agreements having a total notional principal amount of $530
million with commercial banks to mitigate possible rising interest rates. A
contract with a total notional principal amount of $250 million expired in
March 1994, and the remaining contracts have expiration dates ranging from
November 1994 to March 1995. These agreements are designated as hedges of
interest rates, and the differential to be paid or received on interest rate
swaps is accrued as an adjustment to interest expense as interest rates change.
On May 6, 1993, the Company filed a registration statement with the
Securities and Exchange Commission (the "Shelf Registration") to allow the
Company to offer, from time to time, the sale of up to $1.1 billion of
unsecured senior debt or unsecured senior subordinated debt securities,
consisting of notes, debentures, or other evidence of indebtedness.
On February 3, 1994, the Company sold $250 million of Senior Notes and
$200 million of Senior Debentures under the Shelf Registration. The net
proceeds to the Company were approximately $246 million and $197 million,
respectively, after market and underwriting discounts. The Senior Notes and
Senior Debentures bear interest at the rate of 7.4% and 8.4% per annum,
respectively, payable semi-annually on February 1 and August 1 of each year,
commencing on August 1, 1994. The Senior Notes are not redeemable at the
option of the Company. The Senior Debentures are redeemable, at the Company's
option, at any time after February 1, 2004, at a redemption price of 104.161%
of the principal amount, plus accrued and unpaid interest to the date of
redemption, which redemption price reduces over 10 years to a redemption price
of 100% of the principal amount in 2014 and thereafter. Each holder has the
right to require the Company to repurchase such holder's Securities in whole,
but not in part, at a redemption price, payable in cash, equal to 101% of the
principal amount, plus accrued and unpaid interest to the date fixed for
redemption, upon the occurrence of certain triggering events, including,
without limitation, a change in control, certain restricted payments or certain
consolidations, mergers, conveyances or transfers of assets, each as defined in
the indenture relating to the Securities. The Company is not required
9
<PAGE> 10
to make mandatory redemption or sinking fund payments with respect to the
Securities prior to maturity.
CAPITAL RESOURCES AND COMMITMENTS
During the next 12 months, the Company anticipates making cash
expenditures of approximately $325 million for sports programming, primarily
rights fees, approximately $645 million for original entertainment programming
(excluding promotional and advertising costs) and approximately $100 million
for licensed programming. Also, during the next 12 months, the Company expects
to make total expenditures of approximately $105 million for additional or
replacement property and equipment. Of the anticipated programming and capital
expenditures described above, firm commitments exist for approximately $590
million. Other capital resource commitments consist primarily of lease
obligations, some of which are contingent on revenues derived from usage.
Management expects to continue to lease satellite facilities, sports facilities
and office facilities not already owned by the Company.
Management expects to finance these commitments from working capital
provided by operations and financing arrangements with lessors, vendors, film
suppliers and additional borrowings.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1994 VS. THREE MONTHS
ENDED MARCH 31, 1993
ENTERTAINMENT SEGMENT
Entertainment Segment revenue increased $160 million to $393 million
for the period, of which $133 million was contributed by New Line, Castle Rock
and the fully consolidated operations of Hanna-Barbera. The remaining increase
was principally related to a $13 million, or 11%, increase in advertising
revenue, due to an increase in the amount charged per thousand homes and a
favorable mix of commercial inventory sold on Turner Network Television ("TNT"),
TBS SuperStation, and the Cartoon Network, and increased viewership for the
latter. Subscription revenue rose $7 million, or 12%, due to increases in the
monthly fees charged per household and increases in the subscription base of
TNT, the Cartoon Network and TNT Latin America.
Operating profit for the Entertainment Segment decreased $38 million,
of which $32 million related to TNT's telecast of the Winter Olympics in
February, and $5 million related to an increase in operating losses associated
with new networks. New networks consist of the Cartoon Network, Cartoon
Network Latin America, TNT & Cartoon Network Europe and Turner Classic Movies.
Other revenue advances were principally offset by programming cost increases
and increased selling, general and administrative costs in core businesses. New
Line, Castle Rock and Hanna-Barbera contributed $127 million to certain
operating expenses and selling, general and administrative costs, and $8
million to depreciation and amortization of intangibles, purchased programming
and certain other acquisition purchase adjustments.
NEWS SEGMENT
News Segment revenue rose $7 million, or 5%, due to increased
subscription revenue from the home satellite market, from an increase in the
number of homes receiving Cable News Network ("CNN") and Headline News, and
increased advertising and broadcast licensing fees associated with CNN
International. Domestic advertising revenue was essentially flat, due to the
effects of slightly lower audience levels during the quarter at CNN and
Headline News.
Operating profit for the segment decreased $4 million, or 7%, as a
result of increased newsgathering costs and new programming, as well as an
increase in selling, general and administrative costs.
10
<PAGE> 11
OTHER SEGMENT
Revenue increased $2 million, or 9%, and operating losses increased by
$4 million, due primarily to increases in Braves' players salaries, general
corporate expenses and planned investments in the Company's information
technology systems.
EQUITY IN INCOME (LOSS) OF UNCONSOLIDATED ENTITIES/OTHER CONSOLIDATED
INFORMATION
Operating losses increased $4 million primarily as a result of the
Company's investment in a German news network which was acquired on March 31,
1993, and the effect of moving Hanna-Barbera to the Entertainment segment
following Turner's purchase of the remaining unowned portion of the company at
the end of 1993.
Consolidated depreciation and amortization increased approximately $4
million due to the inclusion of New Line and Castle Rock in 1994.
Consolidated interest expense increased approximately $7 million
primarily due to the increase in debt associated with the purchase of Castle
Rock and Hanna-Barbera as well as assumed debt associated with New Line. The
increase was somewhat offset by a lower effective interest rate resulting from
new debt incurred in 1993 and 1994.
As a result of the information discussed above, the Company reported a
net loss of $14 million in the first quarter of 1994 ($0.07 net loss per common
share). This compares to net loss of $286 million in the first quarter of 1993
($1.08 net loss per common share and common share equivalent), which included a
non-recurring charge for the cumulative effect of adopting Statement of
Financial Accounting Standards No. 109 in the amount of $306 million ($1.16 per
share).
11
<PAGE> 12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Turner Broadcasting System, Inc. v. Federal Communications Commission and The
United States of America
As last updated in the Company's Form 10-K for 1993, on October 5,
1992, the Company filed a lawsuit in the United States District Court for the
District of Columbia challenging the provisions of the Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Act") that would
require cable television operators to devote up to one-third of their channel
capacity to the carriage of local broadcast stations and provide certain
channel positioning rights to local broadcast stations. The Company's
complaint alleges that these provisions violate the First Amendment of the
United States Constitution. Under a provision of the 1992 Act, the case was
heard by a three-judge court. On April 8, 1993, the Court upheld the
constitutionality of these provisions by a 2-1 vote. On May 3, 1993, the
Company filed its Notice of Appeal of that decision to the United States
Supreme Court. The Company filed its Jurisdictional Statement with the
Supreme Court on July 2, 1993. On September 28, 1993, the Supreme Court of
the United States noted probable jurisdiction and heard oral argument on this
case on January 12, 1994. The parties are awaiting a decision by the Supreme
Court.
Farrell Brokerage, Inc. Pension Plan and Farrell Brokerage, Inc. Profit
Sharing v. Turner Broadcasting System, Inc., et al.
As last updated in the Company's Form 10-K for 1993, on April 14,
1993, shareholders Farrell Brokerage, Inc. Pension Plan and Farrell
Brokerage, Inc. Profit Sharing filed suit in the Supreme Court of the State
of New York, County of New York. These shareholders (the "Plaintiffs"),
together with another shareholder whose suit was dismissed in December 1993,
purported to bring a class action on behalf of all minority common
shareholders of the Company who are similarly situated to the Plaintiffs.
The Defendants include the Company, all directors of the Company, Time Warner
Inc. and Tele-Communications, Inc. (the "Defendants"). Each class action
made identical allegations that the Defendants dominate and control the
Company through their stock ownership, directorships and management positions
and have wrongfully utilized these positions to deprive the Company's
minority common shareholders of their investment. The Plaintiffs'
allegations were allegedly based on public reports, including newspaper
articles. The Plaintiffs sought class action status, injunctive relief,
unspecified damages and a constructive trust for the benefit of class
members. The Plaintiffs initiated proceedings in March 1994 to dismiss the
suit.
United States of America vs. Cable News Network, Inc. and Turner Broadcasting
System, Inc.
As last updated in the Company's Form 10-K for 1993, in October and
November of 1990, CNN was involved in investigating and reporting a story
concerning the potential government audio taping of telephone calls made by
General Manuel Noriega from his cell in the Miami Correctional Center,
including the taping of conversations with his attorneys and defense team.
CNN obtained copies of some of the alleged tapings and telecast segments
thereof. Judge William M. Hoeveler, United States District Court for the
Southern District of Florida, entered orders on November 8, 1990 and November
9, 1990 which temporarily prohibited the telecast of Noriega's privileged
attorney-client conversations. Judge Hoeveler appointed a special
prosecutor, Robert F. Dunlap, to investigate whether CNN violated his Orders
in a telecast on November 9, 1990, and to prepare an application for an Order
to Show Cause "why those entities and individuals responsible for" the
telecast should not be held in contempt of the Court's Orders. On January
15, 1993 CNN was advised by Special Prosecutor Dunlap that it was a target of
a grand jury investigation into these alleged contempts. CNN responded to
grand jury subpoenas issued at that time. On March 30, 1994 CNN was charged
with criminal contempt by Special Prosecutor
12
<PAGE> 13
Dunlap and pleaded innocent at an arraignment before Judge Hoeveler. A
non-jury trial has been scheduled on the charge for July 11, 1994. Fines
and/or penalties of an undetermined amount could be imposed against CNN as a
result of these contempt proceedings. CNN denies it telecast any privileged
conversations and therefore denies that it violated or intended to violate
the Court Orders. CNN intends to vigorously defend the contempt proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 4, 1994, the Company filed a preliminary proxy statement with
the Securities and Exchange Commission with respect to a proposed special
shareholders' meeting at which the holders of each class of the Company's
outstanding stock, voting separately, will be asked to approve an increase in
the voting power of the Class A Common Stock from one vote per share to two
votes per share.
ITEM 5. OTHER INFORMATION
REGULATION
On October 5, 1992, the 1992 Act became law. The Federal
Communications Commission (the "FCC" or the "Commission") is charged with
implementation of the 1992 Act.
RATE REGULATION
Section 623 of the Communications Act of 1934, as amended by the 1992
Act, establishes a two-tier rate structure applicable to systems not found to
be subject to "effective competition" as defined by the statute. Rates for a
required "basic service tier" are subject to regulation by practically every
community. Rates for cable programming services other than those carried on
the basic tier are subject to regulation if, upon complaint, the FCC finds
that such rates are "unreasonable." Programming offered by a cable operator
on a per-channel or per-program basis, however, is exempt from rate
regulation.
On April 1, 1993, the FCC adopted implementing regulations for Section
623. The text of its Report and Order was released on May 3, 1993. The FCC
has adopted a benchmark approach to rate regulation. Rates above the
benchmark would be presumed to be unreasonable. Once established, cable
operators could adjust their rates based on appropriate factors and could
pass through certain costs to customers, including increased programming
costs.
On February 22, 1994, the Commission adopted further regulations.
Among other things, the additional regulations will govern the offering of
bona fide "a la carte" channels that are exempted from rate regulation. The
Commission also adopted a methodology for determining rates when channels are
added to or deleted from regulated tiers. These regulations may adversely
affect the Company's ability to sell its existing or new networks to cable
customers and/or may adversely affect the prices the Company may charge for
its services, although at this time the Company cannot predict their full
effect on its operations.
On April 5, 1993, the FCC also froze rates for cable services subject
to regulation under the 1992 Act for 120 days. On June 11, 1993, the FCC
deferred the implementation of rate regulation from June 21, 1993 until
October 1, 1993, and extended the freeze on rates for cable services subject
to regulation from August 4, 1993 to November 15, 1993. On November 10,
1993, the Commission further extended the freeze until February 15, 1994, and
on February 8, 1994, extended the expiration date of the freeze until May 15,
1994. On July 27, 1993, the FCC moved the effective date of rate regulation
back to September 1, 1993. Additionally, among other things, the FCC
permitted cable operators to structure rates and service offerings up until
September 1, 1993, without prior notice to subscribers.
13
<PAGE> 14
On July 16, 1993, the FCC issued a Notice of Proposed Rulemaking to
add the regulatory requirements to govern cost-of-service showings that
cable operators may submit under this provision to justify rates above the
benchmarks. On February 22, 1994, the Commission adopted interim rules to
govern the cost of service proceedings.
The constitutionality of these provisions has been challenged in
litigation filed in the United States District Court for the District of
Columbia. On September 27, 1993, the district court upheld the
constitutionality of these provisions. An appeal of that decision is pending
in the U.S. Court of Appeals for the District of Columbia. Appeals of the
Commission's implementing regulations have also been taken to the United
States Court of Appeals for the District of Columbia Circuit. The Company
cannot predict the ultimate outcome of the litigation.
MUST CARRY AND RETRANSMISSION CONSENT
The 1992 Act contains provisions that would require cable television
operators to devote up to one-third of their channel capacity to the carriage
of local broadcast stations and provide certain channel position rights to
local broadcast stations. The 1992 Act also includes provisions governing
retransmission of broadcast signals by cable systems, whereby retransmission
of broadcast signals would require the broadcaster's consent and provides
each local broadcaster the right to make an election between must carry or
retransmission consent. The retransmission consent provisions of the 1992
Act became effective on October 5, 1993.
On March 11, 1993, the FCC adopted a Report and Order implementing
these provisions. The provisions could affect the ability and willingness of
cable systems to carry cable programming services. The Company has filed
litigation which is pending in the Supreme Court challenging the provision as
unconstitutional (see "Legal Proceedings - Turner Broadcasting System, Inc.
v. Federal Communications Commission and The United States of America").
PROGRAM ACCESS
On April 1, 1993, the Commission issued regulations implementing a
provision that, among other things, makes it unlawful for a cable network, in
which a cable operator has an attributable interest, to engage in certain
unfair methods of competition or unfair or deceptive acts or practices, the
purpose and effect of which is to hinder significantly or prevent any
multichannel video programming distributor from providing satellite cable
programming or satellite broadcast programming to cable subscribers or
consumers. The provisions contain an exemption for any contract that grants
exclusive distribution rights to a person with respect to satellite cable
programming or that was entered into on or before June 1, 1990. While the
Company cannot predict the regulations' full effect on its operations, they
may affect the rates charged by the Company's cable programming services to
its customers and could affect the terms and conditions of contracts between
the Company and its customers.
The constitutionality of this provision has been challenged in
litigation filed in the United States District Court for the District of
Columbia. On September 27, 1993, the district court upheld this provision.
An appeal of that decision is pending in the United States Court of Appeals
for the District of Columbia Circuit. Appeals of the Commission's
implementing regulations have also been taken to the United States Court of
Appeals for the District of Columbia Circuit. The Company cannot predict the
ultimate outcome of the litigation.
REGULATION OF CARRIAGE AGREEMENTS
The 1992 Act contains a provision that requires the FCC to establish
regulations governing program carriage agreements and related practices
between cable operators and video programming vendors, including provisions
to prevent the cable operator from requiring a financial interest in a
program service as a condition of carriage and provisions designed to
prohibit a cable operator from
14
<PAGE> 15
coercing a video programming vendor to provide exclusive rights as a
condition of carriage. On October 22, 1993, the Commission issued
regulations implementing this provision. The Company cannot at this time
predict the effect of this provision on its operations.
The constitutionality of this provision has been challenged in
litigation filed in the United States District Court for the District of
Columbia. On September 27, 1993, the district court upheld the
constitutionality of this provision. An appeal of that decision is pending
in the United States Court of Appeals for the District of Columbia Circuit.
The Company cannot predict the outcome of the litigation.
OWNERSHIP LIMITATIONS
Section 11 of the 1992 Act directed the Commission to prescribe rules
and regulations establishing limits on the number of cable subscribers a
person is authorized to reach through cable systems owned by such person and
the number of channels that can be occupied by video programmers in which a
cable operator has an attributable interest. The Commission must also
consider the necessity of imposing limitations on the degree to which
multichannel video programming distributors may engage in the creation or
production of video programming.
On December 28, 1992, the FCC issued a Notice of Proposed Rulemaking
and Notice of Inquiry with respect to these provisions. On October 22, 1993,
the FCC adopted a Second Report and Order that established a 40% limit on the
number of channels that may be occupied by programming services in which the
particular cable operator has an attributable interest. The Company is
subject to this provision. The FCC also established a national limit of 30%
on the number of homes passed that any one person can reach through cable
systems owned by such person, but stayed implementation of that provision
pending judicial review of its constitutionality. Petitions for
reconsideration are pending. The Company cannot at this time predict the
effect of this provision or of these proposals on its operations.
The constitutionality of these provisions has been challenged in
litigation filed in the United States District Court for the District of
Columbia. On September 27, 1993, the district court found the national limit
on homes passed unconstitutional, but upheld the constitutionality of the
channel capacity limits. An appeal of that decision is currently pending in
the United States Court of Appeals for the District of Columbia Circuit.
Appeals of the Commission's implementing regulations have also been taken to
the United States Court of Appeals for the District of Columbia Circuit. The
Company cannot predict the ultimate outcome of the litigation.
SPORTS MIGRATION
The 1992 Act directs the FCC to submit an interim report by July 1,
1993, and a final report by July 1, 1994, to Congress on the migration of
sports programming from broadcast networks to cable networks and cable
pay-per-view. The interim report was submitted on June 24, 1993.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Earnings per Common Share and Common Stock
Equivalents.
(b) Reports on Form 8-K
On January 24, 1994, the Company filed a Form 8-K (which was
subsequently amended by a filing made on February 3, 1994) submitting the
following documents in connection with the issuance of the Senior Notes and
the Senior Debentures: Statement re: computation of earnings to fixed charges
for interim period; Statement re: computation of pro forma ratio of earnings
to fixed charges; Consent of Price Waterhouse; Consent of Ernst & Young;
Audited New Line Cinema Corporation consolidated balance sheets as of
December 31, 1992 and 1991, and
15
<PAGE> 16
the related consolidated statements of operations, shareholders' equity and
cash flows for the three years ended December 31, 1992; unaudited New Line
Cinema Corporation condensed consolidated balance sheet as of September 30,
1993 and the condensed consolidated statements of operations and cash flows
for the nine months ended September 30, 1993 and 1992.
On February 2, 1994, the Company filed a Form 8-K submitting the
following documents in connection with the issuance of the Senior Notes and
Senior Debentures: Terms Agreement dated January 27, 1994 among the Company
and Goldman, Sachs & Co., CS First Boston Corporation and Merrill Lynch &
Co., and the Underwriting Agreement Basic Provisions dated June 30, 1993
incorporated by reference therein; Form of Officers' Certificate establishing
the terms of the Notes; and Form of Officers' Certificate establishing the
terms of the Debentures.
On February 7, 1994, the Company filed a Form 8-K (which was
subsequently amended by a filing made on April 6, 1994) announcing that on
January 28, 1994 the Company acquired all of the issued and outstanding
shares of common stock of New Line through a merger of New Line with a
wholly-owned subsidiary of the Company in which each share of common stock of
New Line was converted into the right to receive 0.96386 of a share of the
Company's Class B Common Stock.
16
<PAGE> 17
SIGNATURES
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.
TURNER BROADCASTING SYSTEM, INC.
By: /s/ William S. Ghegan
----------------------------------
William S. Ghegan
Vice President, Controller and
Chief Accounting Officer
Date: May 13, 1994
17
<PAGE> 1
Exhibit 11
TURNER BROADCASTING SYSTEM,INC.
Computation of Primary Earnings Per Share
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
March 31, 1994
--------------
<S> <C>
Net loss applicable to common stock ($13,624)
==============
Weighted average number of shares outstanding during the period 200,028
Add: Common equivalent shares issuable assuming conversion of
Class C Convertible Preferred Stock 0
Shares issuable upon exercise of stock options 0
Subtract: Shares which would have been purchased with proceeds
from exercise of such stock options 0
--------------
Weighted average number of common stock, common stock
equivalents and converted shares outstanding 200,028
==============
Weighted average number of Class A common shares and common
stock equivalents 68,330
==============
Weighted average number of Class B common shares and common
stock equivalents 131,698
==============
Loss per share and common stock equivalent of Class A
and Class B common stock ($0.07)
==============
</TABLE>
In 1994, no common stock equivalents are included in the calculation of
primary earnings per share, due to their anti-dilutive effect on net loss
for the period.
<PAGE> 2
TURNER BROADCASTING SYSTEM,INC.
Computation of Fully-Diluted Earnings Per Share
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
March 31, 1994
--------------
<S> <C>
Net loss applicable to common stock ($13,624)
==============
Add: Interest expense on zero coupon subordinated convertible
notes due 2007 4,118
Interest expense on 6.5% convertible notes 488
Subtract: Additional income taxes (1,808)
--------------
Adjusted net loss applicable to Common Stock ($10,826)
==============
Weighted average number of common stock, common stock
equivalents and converted shares outstanding 200,028
Add: Shares issuable assuming conversion of zero coupon
convertible notes due 2007 7,440
Shares issuable assuming conversion of 6.5%
convertible notes 1,091
Shares issuable assuming conversion of Class C
Preferred stock 74,382
Shares issuable assuming exercise of outstanding
options 2,795
--------------
Weighted average number of common stock, common stock
equivalents and convertible shares, assuming full dilution 285,736
==============
Weighted average number of Class A common shares and common
equivalents and convertible shares, assuming full dilution 68,330
==============
Weighted average number of Class B common shares and common
equivalents and convertible shares, assuming full dilution 217,406
==============
Loss per share and common stock equivalent of Class A
and Class B common stock ($0.04)
==============
</TABLE>
This calculation is submitted in accordance with the rules and regulations
of the Securities and Exchange Commission. Under generally accepted
accounting principles this presentation would not be made because it is
anti-dilutive.
