<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, 1996
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. 1-8911
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.
<TABLE>
<CAPTION>
Outstanding at
Class March 31, 1996
- -------------------------- -----------------------
<S> <C>
Class A Common Stock, par
value $0.0625 68,330,388
Class B Common Stock, par
value $0.0625 139,844,518
</TABLE>
<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,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,703 $ 85,185
Accounts receivable, less allowance of
$40,358 and $38,503
Unaffiliated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385,303 464,923
Affiliated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,697 92,657
Film costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 617,159 567,031
Installment contracts receivable, less
allowance of $7,720 and $7,633 . . . . . . . . . . . . . . . . . . . . 48,973 47,928
Prepaid expense and other current assets . . . . . . . . . . . . . . . . . 129,306 135,597
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 1,343,141 1,393,321
Film costs, less current portion . . . . . . . . . . . . . . . . . . . . . 1,928,002 1,936,565
Property and equipment, less accumulated
depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354,501 358,528
Goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . 423,739 427,611
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269,453 279,375
----------- -----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,318,836 $ 4,395,400
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,226 $ 64,704
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238,893 292,167
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,054 83,772
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,663 63,693
Participants' share and royalties payable . . . . . . . . . . . . . . . . . 92,561 107,254
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,820 33,011
Film contracts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 80,849 69,802
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . 1,458 1,543
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 105,378 123,693
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 751,902 839,639
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . 2,495,476 2,479,770
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 424,975 421,685
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . 188,395 216,627
----------- -----------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . 3,860,748 3,957,721
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . 458,088 437,679
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . $ 4,318,836 $ 4,395,400
=========== ===========
</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,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenue
Unaffiliated . . . . . . . . . . . . . . . . . . . . . . $ 654,749 $ 583,851
Affiliated . . . . . . . . . . . . . . . . . . . . . . . 120,452 126,464
----------- -----------
775,201 710,315
----------- -----------
Cost of operations . . . . . . . . . . . . . . . . . . . . 496,416 410,680
Selling, general and administrative . . . . . . . . . . . . 225,389 189,238
Equity in loss of unconsolidated entities . . . . . . . . . 3,026 5,069
Costs of accounts receivable
securitization program . . . . . . . . . . . . . . . . . 3,754 -
Time Warner merger costs . . . . . . . . . . . . . . . . . 951 -
Depreciation of property and equipment and
amortization of intangible assets . . . . . . . . . . . . 21,292 16,377
Interest expense, net of interest income . . . . . . . . . 42,232 50,708
----------- -----------
793,060 672,072
----------- -----------
Income (loss) before provision (benefit) for
income taxes. . . . . . . . . . . . . . . . . . . . (17,859) 38,243
Provision (benefit) for income taxes . . . . . . . . . . . (8,051) 16,253
----------- -----------
Net income (loss) . . . . . . . . . . . . . . . . . . $ (9,808) $ 21,990
=========== ===========
Earnings (loss) per common share and
common stock equivalent
Net income (loss). . . . . . . . . . . . . . . . . $ (0.05) $ 0.08
=========== ===========
Weighted average number of common shares
outstanding, including conversion of
common stock equivalents,
when applicable . . . . . . . . . . . . . . . . . . . . . 206,976 282,367
</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,
-----------------------------
1996 1995
--------- --------
<S> <C> <C>
Cash provided by (used for) operations before changes
in film costs and liabilities, net . . . . . . . . . . . . . . . . . . . . . $ 63,872 $ 78,122
Changes in film costs and liabilities, net
Purchased program rights . . . . . . . . . . . . . . . . . . . . . . . . . 21,499 20,267
Produced programming . . . . . . . . . . . . . . . . . . . . . . . . . . . (97,191) (86,649)
Licensed program and distribution rights . . . . . . . . . . . . . . . . . (11,092) 2,030
--------- --------
Net cash provided by (used for) operations . . . . . . . . . . . . . . . . . . . (22,912) 13,770
--------- --------
Cash provided by (used for) investing activities
Distributions from unconsolidated entities . . . . . . . . . . . . . . . . . 175 5,720
Acquisitions and advances to unconsolidated entities . . . . . . . . . . . . - (2,522)
Additions to property and equipment . . . . . . . . . . . . . . . . . . . . (31,318) (26,452)
--------- --------
Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . (31,143) (23,254)
--------- --------
Cash provided by (used for) financing activities
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 -
Payments of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (67) (129)
Payments of cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . (4,944) (4,902)
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . 1,584 476
--------- --------
Net cash provided by (used for) financing activities . . . . . . . . . . . . . . 36,573 (4,555)
--------- --------
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . (17,482) (14,039)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . 85,185 52,895
--------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . $ 67,703 $ 38,856
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH INVESTING AND FINANCING ACTIVITIES:
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,405 $ 13,162
Net interest paid, including interest
capitalized of $4,009 and $4,419 . . . . . . . . . . . . . . . . . . . . . . 56,305 58,596
Conversion of convertible subordinated debentures
originally issued by a wholly-owned subsidiary . . . . . . . . . . . . . . . 29,075 -
</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") 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 incorporated by
reference in the Company's Form 10-K for the year ended December 31, 1995.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
NOTE 2. PROPOSED MERGER WITH TIME WARNER INC.
The Company has entered into an Amended and Restated Agreement and
Plan of Merger dated as of September 22, 1995 (the "Merger Agreement") among
the Company, Time Warner Inc. ("Time Warner"), TW Inc., a Delaware corporation
and currently a wholly-owned subsidiary of Time Warner ("New Time Warner"),
Time Warner Acquisition Corp., a Delaware corporation ("Delaware Sub") and TW
Acquisition Corp., a Georgia corporation ("Georgia Sub"), which provides for a
transaction in which the Company and Time Warner will each become a
wholly-owned subsidiary of a new holding company, New Time Warner. Pursuant to
the Merger Agreement, (a) Georgia Sub will be merged into the Company (the "TBS
Merger"), (b) each outstanding share of Class A Common Stock, par value $0.0625
per share, of the Company and each share of Class B Common Stock, par value
$0.0625 per share, of the Company (other than shares held directly or
indirectly by Time Warner or New Time Warner or in the treasury of the Company
and other than shares with respect to which dissenters' rights are properly
exercised) will be converted into 0.75 of a share of common stock, par value
$.01 per share, of New Time Warner ("New Time Warner Common Stock"), (c) each
share of Class C Convertible Preferred Stock, par value $0.125 per share, of
the Company (other than shares held directly or indirectly by Time Warner or
New Time Warner or in the treasury of the Company and other than shares with
respect to which dissenters' rights are properly exercised) will be converted
into 4.80 shares of New Time Warner Common Stock, (d) Delaware Sub will be
merged into Time Warner (the "TW Merger" and together with the TBS Merger, the
"Mergers"), (e) each outstanding share of common stock, par value $1.00 per
share, of Time Warner (other than shares held directly or indirectly by Time
Warner) will be converted into one share of New Time Warner Common Stock, (f)
each outstanding share of each series of preferred stock of Time Warner (other
than shares held directly or indirectly by Time Warner and shares with respect
to which appraisal rights are properly exercised) will be converted into one
share of a substantially identical series of preferred stock of New Time Warner
having the same designation as the shares of preferred stock of Time Warner so
converted, (g) each of Time Warner and the Company will become a wholly-owned
subsidiary of New Time Warner and (h) New Time Warner will be renamed "Time
Warner Inc."
The Mergers are subject to a number of closing conditions, including
regulatory approvals and the approval of the shareholders of the Company and
the stockholders of Time Warner. Among the required regulatory approvals are
(i) the approval of the Federal Communications Commission (the "FCC") and (ii)
the expiration of all waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"). Both the FCC and the
Federal Trade Commission (the "FTC"), which has the responsibility for
reviewing the parties' filings under the HSR Act, are closely reviewing the
Mergers. There can be no assurance that all of the conditions to the
consummation of the Mergers will be satisfied or that, as a condition to the
grant of any approvals by government agencies, including the FCC and the FTC,
changes will not
5
<PAGE> 6
be required to the terms of the Merger Agreement or the other agreements
entered into by the Company, Time Warner and Liberty Media Corporation ("LMC")
and its affiliates in connection with the Mergers. As a result of the
arrangements among R.E. Turner, the Company, Time Warner and LMC and its
affiliates, holders of a sufficient number of shares of the Company's capital
stock of each class have agreed to vote in favor of the TBS Merger to assure
its approval by the Company's shareholders, regardless of the vote of any other
shareholders of the Company. The LMC Agreement described below, however,
provides that the obligation of LMC and its affiliates to vote in favor of the
TBS Merger is subject to certain conditions, including there not having been
amendments to the related agreements that would have certain effects on LMC.
Concurrently with the execution of the Merger Agreement, the Company
and LMC Southeast Sports Inc. ("LMC Sports"), entered into a Stock Purchase
Agreement (the "SportSouth Agreement") pursuant to which the Company will sell
to LMC Sports all of the outstanding capital stock of Turner Sports
Programming, Inc. ("TSPI") which owns a 44% interest in SportSouth Network,
Ltd. The purchase price for the stock of TSPI (currently estimated to be
$60,000,000) will be determined in accordance with a formula set forth in the
SportSouth Agreement. The transaction contemplated by the SportSouth Agreement
is conditioned upon the consummation of the Mergers. The Company has also
agreed, subject to the consummation of the Mergers, to extend the existing
affiliation agreements pursuant to which Tele-Communications, Inc. and its
affiliates distribute programming produced by the Company.
Pursuant to the Amended and Restated LMC Agreement (the "LMC Agreement"),
dated as of September 22, 1995, among Time Warner, New Time Warner, LMC and
certain of its affiliates, LMC and certain of its affiliates have agreed,
subject to certain conditions, to vote all their shares of Company capital
stock in favor of the approval of the TBS Merger and each of the other
transactions contemplated by the Merger Agreement and in favor of the approval
of the Merger Agreement. Pursuant to the LMC Agreement, Time Warner has agreed
with LMC that, upon the happening of certain events, LMC will have the right to
cause Time Warner to terminate the Merger Agreement and abandon the Mergers.
NOTE 3. FILM COSTS
The following table sets forth the components of unamortized film costs
(in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Purchased program rights . . . . . . . . . . . . . . . . . . . . . . . $ 997,977 $ 1,017,761
Produced programming
Released . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396,751 397,639
Completed and not released . . . . . . . . . . . . . . . . . . . . . 36,119 73,706
In process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 584,462 504,997
Episodic television . . . . . . . . . . . . . . . . . . . . . . . . 107,396 101,430
Licensed program and distribution rights . . . . . . . . . . . . . . . 296,789 302,370
Prepaid licensed program rights . . . . . . . . . . . . . . . . . . . 125,667 105,693
------------ ------------
2,545,161 2,503,596
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . 617,159 567,031
------------ ------------
$ 1,928,002 $ 1,936,565
============ ============
</TABLE>
Episodic television includes serial television program costs. Prepaid
licensed program rights represent licensed program rights for which payments
have been made but the programming is 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 90% of released and episodic television produced programming costs at
March 31, 1996 will be amortized within the three-year period ending March 31,
1999.
6
<PAGE> 7
Amortization of film costs included in Cost of operations is composed of the
following (in thousands):
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Purchased program rights . . . . . . . . . . . . . . . $ 21,977 $ 22,363
Produced programming . . . . . . . . . . . . . . . . . 243,856 161,385
Licensed program and distribution
rights . . . . . . . . . . . . . . . . . . . . . . 31,807 27,080
Participants' share and royalties . . . . . . . . . . . 26,161 18,110
Non-cash amortization of certain
acquisition purchase adjustments . . . . . . . . . 1,895 2,793
--------- ---------
$ 325,696 $ 231,731
========= =========
</TABLE>
NOTE 4. 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 1996 and 1995.
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. In 1996, no common stock equivalents are included in
the calculation of primary earnings per share, due to their anti-dilutive
effect. Fully-diluted income (loss) per share amounts are similarly computed,
but include the effect, when dilutive, of the Company's other potentially
dilutive securities. The Company's zero coupon subordinated convertible notes
and the convertible subordinated debentures originally issued by 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, 1996 and
1995 due to their anti-dilutive effect. The difference between primary and
fully-diluted earnings per share is not significant.
NOTE 5. LONG-TERM DEBT
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- -----------
<S> <C> <C>
Bank credit facilities . . . . . . . . . . . . . . . . . . . $ 1,475,000 $ 1,435,000
8 3/8% Senior Notes . . . . . . . . . . . . . . . . . . . . . 297,458 297,442
7.4% Senior Notes . . . . . . . . . . . . . . . . . . . . . . 249,674 249,666
8.4% Senior Debentures . . . . . . . . . . . . . . . . . . . 199,846 199,846
Zero coupon subordinated convertible notes . . . . . . . . . 268,433 263,694
Convertible subordinated debentures
originally issued by a wholly-owned
subsidiary . . . . . . . . . . . . . . . . . . . . . . . . - 29,075
Obligations under capital leases . . . . . . . . . . . . . . 5,195 5,254
Other long-term debt . . . . . . . . . . . . . . . . . . . . 1,328 1,336
----------- -----------
2,496,934 2,481,313
Less current portion . . . . . . . . . . . . . . . . . . . . 1,458 1,543
----------- -----------
$ 2,495,476 $ 2,479,770
=========== ===========
</TABLE>
On January 4, 1996, the Company called for redemption on February 5,
1996 all of the convertible subordinated debentures originally issued by a
wholly-owned subsidiary. All of the debentures outstanding, which aggregated
approximately $29,000,000, were converted into the Company's Class B Common
Stock at $17.51 per share or 57.11 shares of Class B Common Stock for each
$1,000 face amount of debentures. The conversion resulted in the issuance of
approximately 1.7 million shares of Class B Common Stock.
7
<PAGE> 8
NOTE 6. STOCKHOLDERS' EQUITY
Stockholders' equity consists of the following components (in thousands,
except share data):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
------------ -------------
<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 139,844,518 and 137,982,831
shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,740 8,624
Capital in excess of par value . . . . . . . . . . . . . . . . 1,119,226 1,084,181
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . (934,587) (919,835)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . $ 458,088 $ 437,679
============ =============
</TABLE>
On March 1, 1996, 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 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 issued upon conversion of each share of Class C Preferred Stock. Cash
dividends of $4,944,000 were paid on March 30, 1996 to shareholders of record
at the close of business on March 15, 1996.
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 Preferred Stock is subject to
certain covenants in the Company's outstanding debt instruments. Currently, the
most restrictive of such covenants limits the maximum aggregate amount of
dividends permitted to be paid annually to such holders to $30,000,000.
NOTE 7. ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM
In May 1995, the Company entered into an agreement with a financial
institution whereby the Company can sell on an ongoing basis up to $300,000,000
of an undivided percentage ownership interest in a designated pool of domestic
cable and advertising accounts receivable. The initial proceeds were used to
repay amounts outstanding under the Company's unsecured revolving credit
facilities. As collections reduce the accounts receivable balance in the pool,
the Company has continued to sell participating interests in new receivables up
to the maximum allowable under the program. Under the terms of the agreement,
the difference between the cash proceeds and the undivided percentage ownership
interest sold in the designated pool of domestic cable and advertising accounts
receivable consists of receivables that have been designated as reserves
principally for any potential credit costs that may be incurred under the
program. However, these costs are not expected to exceed the full amount of
the allowance for doubtful accounts which has been retained in the consolidated
condensed balance sheet of the Company, as the Company expects to experience
substantially the same risk of credit loss as if the receivables had not been
8
<PAGE> 9
sold. The ongoing costs of the program are largely based on the purchaser's
level of investment and cost of funds. The costs of the program are
anticipated to be less than those the Company would have otherwise incurred
under the Company's unsecured revolving credit facilities. Under the
agreement, which was scheduled to expire in May 1996 but was renewed in April
1996 for another one-year term, the Company performs collection and
administrative responsibilities related to the receivables sold as agent for
the purchaser.
As of March 31, 1996, the Company had sold an undivided interest in
this designated pool of domestic cable and advertising accounts receivable that
aggregated $300,000,000, generating net proceeds of $246,000,000. The
estimated total cost of the program for the sale of accounts receivable during
the three months ended March 31, 1996, approximated $3,800,000 and is reflected
as a reduction of operating profit in the consolidated condensed statements of
operations.
NOTE 8. INCOME TAXES
The 1991 and 1992 consolidated federal income tax returns of the Company
have been examined by the Internal Revenue Service (the "IRS"). As a result
of the examination, the IRS has issued a deficiency notice for additional
taxes. The IRS is prohibited from assessing and collecting the disputed tax
until the taxpayer has had an opportunity to seek a redetermination of the
asserted deficiency in the U.S. Tax Court. The Company will file a petition
in the U.S. Tax Court contesting the notice as it believes the items in
dispute have been properly reflected in its tax returns. The Company does not
anticipate a quick resolution of this matter and the ultimate result cannot be
predicted at this time. However, in the opinion of management, any additional
tax liability resulting from this matter would not have a material adverse
impact on the consolidated financial position or operating results of the
Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH
Cash used by operations after changes in film costs and associated
liabilities for the three months ended March 31, 1996 aggregated $23 million,
including a net change in film costs and liabilities of $87 million, and cash
interest payments, net of cash interest received, of $56 million. Other
primary uses of cash during the period included additions to property and
equipment of $31 million. The primary source of cash for the period was
borrowings under the unsecured revolving credit facilities of $40 million.
Included in the net change in film costs were $245 million utilized by
the Company for original entertainment and sports programming (including $115
million for theatrical film productions, excluding promotional and advertising
costs).
In May 1995, the Company entered into an agreement with a financial
institution whereby the Company can sell on an ongoing basis up to $300 million
of an undivided percentage ownership interest in a designated pool of domestic
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<PAGE> 10
cable and advertising accounts receivable. The agreement, which was scheduled
to expire in May 1996, was renewed in April 1996 for another one-year term. As
of March 31, 1996, the Company had sold an undivided interest in this
designated pool of its domestic cable and advertising accounts receivable that
aggregated $300 million. The original proceeds were used in 1995 to repay
amounts outstanding under the Company's unsecured revolving credit facilities.
During 1996, the Company has recognized costs of approximately $4 million in
connection with this accounts receivable securitization program. The ongoing
costs of the program are anticipated to be less than those the Company would
have otherwise incurred under the bank credit facilities. See Note 7 of Notes
to Consolidated Condensed Financial Statements.
See the Consolidated Condensed Statements of Cash Flows for additional
details regarding sources and uses of cash and Note 5 and Note 7 of Notes to
Consolidated Condensed Financial Statements for additional information about
the Company's indebtedness and the accounts receivable securitization program.
CREDIT FACILITIES AND FINANCING ACTIVITIES
The Company had approximately $2.5 billion of outstanding indebtedness
at March 31, 1996, of which $1.5 billion was outstanding under unsecured
revolving credit facilities with banks.
On January 4, 1996, the Company called for redemption on February 5,
1996 all of the convertible subordinated debentures originally issued by a
wholly-owned subsidiary. All of the debentures outstanding, which aggregated
approximately $29 million, were converted into the Company's Class B Common
Stock at $17.51 per share or 57.11 shares of Class B Common Stock for each
$1,000 face amount of debentures. The conversion resulted in the issuance of
approximately 1.7 million shares of Class B Common Stock.
CAPITAL RESOURCES AND COMMITMENTS
During the next 12 months, the Company anticipates making cash
expenditures of approximately $280 million for sports programming, primarily
rights fees, approximately $1.2 billion for original entertainment programming
(excluding promotional and advertising costs) and approximately $150 million for
licensed programming. Also, during the next 12 months, the Company expects to
make total expenditures of approximately $145 million for additional or
replacement property and equipment. Of the anticipated programming and capital
expenditures described above, firm commitments exist for approximately $780
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 and film suppliers and additional
borrowings.
PROPOSED MERGER WITH TIME WARNER INC.
The Company has entered into an Amended and Restated Agreement and Plan
of Merger dated as of September 22, 1995 (the "Merger Agreement") among the
Company, Time Warner Inc. ("Time Warner"), TW Inc., a Delaware corporation and
currently a wholly-owned subsidiary of Time Warner ("New Time Warner"), Time
Warner Acquisition Corp., a Delaware corporation ("Delaware Sub") and TW
Acquisition Corp., a Georgia corporation ("Georgia Sub"), which provides for a
transaction in
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<PAGE> 11
which the Company and Time Warner will each become a wholly-owned subsidiary of
a new holding company, New Time Warner. Pursuant to the Merger Agreement, (a)
Georgia Sub will be merged into the Company (the "TBS Merger"), (b) each
outstanding share of Class A Common Stock, par value $0.0625 per share, of the
Company and each share of Class B Common Stock, par value $0.0625 per share, of
the Company (other than shares held directly or indirectly by Time Warner or
New Time Warner or in the treasury of the Company and other than shares with
respect to which dissenters' rights are properly exercised) will be converted
into 0.75 of a share of common stock, par value $.01 per share, of New Time
Warner ("New Time Warner Common Stock"), (c) each share of Class C Convertible
Preferred Stock, par value $0.125 per share, of the Company (other than shares
held directly or indirectly by Time Warner or New Time Warner or in the
treasury of the Company and other than shares with respect to which dissenters'
rights are properly exercised) will be converted into 4.80 shares of New Time
Warner Common Stock, (d) Delaware Sub will be merged into Time Warner (the "TW
Merger" and together with the TBS Merger, the "Mergers"), (e) each outstanding
share of common stock, par value $1.00 per share, of Time Warner (other than
shares held directly or indirectly by Time Warner) will be converted into one
share of New Time Warner Common Stock, (f) each outstanding share of each
series of preferred stock of Time Warner (other than shares held directly or
indirectly by Time Warner and shares with respect to which appraisal rights are
properly exercised) will be converted into one share of a substantially
identical series of preferred stock of New Time Warner having the same
designation as the shares of preferred stock of Time Warner so converted, (g)
each of Time Warner and the Company will become a wholly-owned subsidiary of
New Time Warner and (h) New Time Warner will be renamed "Time Warner Inc."
The Mergers are subject to a number of closing conditions, including
regulatory approvals and the approval of the shareholders of the Company and the
stockholders of Time Warner. Among the required regulatory approvals are (i)
the approval of the Federal Communications Commission (the "FCC") and (ii) the
expiration of all waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"). Both the FCC and the
Federal Trade Commission (the "FTC"), which has the responsibility for reviewing
the parties' filings under the HSR Act, are closely reviewing the Mergers.
There can be no assurance that all of the conditions to the consummation of the
Mergers will be satisfied or that, as a condition to the grant of any approvals
by government agencies, including the FCC and the FTC, changes will not be
required to the terms of the Merger Agreement or the other agreements entered
into by the Company, Time Warner and Liberty Media Corporation ("LMC") and its
affiliates in connection with the Mergers. As a result of the arrangements
among R.E. Turner, the Company, Time Warner and LMC and its affiliates, holders
of a sufficient number of shares of the Company's capital stock of each class
have agreed to vote in favor of the TBS Merger to assure its approval by the
Company's shareholders, regardless of the vote of any other shareholders of the
Company. The LMC Agreement described below, however, provides that the
obligation of LMC and its affiliates to vote in favor of the TBS Merger is
subject to certain conditions, including there not having been amendments to the
related agreements that would have certain effects on LMC.
Concurrently with the execution of the Merger Agreement, the Company and
LMC Southeast Sports Inc. ("LMC Sports"), entered into a Stock Purchase
Agreement (the "SportSouth Agreement") pursuant to which the Company will sell
to LMC Sports all of the outstanding capital stock of Turner Sports Programming,
Inc. ("TSPI") which owns a 44% interest in SportSouth Network, Ltd.
("SportSouth"). The purchase price for the stock of TSPI (currently estimated
to be $60 million)
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will be determined in accordance with a formula set forth in the SportSouth
Agreement. The transaction contemplated by the SportSouth Agreement is
conditioned upon the consummation of the Mergers. The Company has also agreed,
subject to the consummation of the Mergers, to extend the existing affiliation
agreements pursuant to which Tele-Communications, Inc. and its affiliates
distribute programming produced by the Company.
Pursuant to the Amended and Restated LMC Agreement (the "LMC Agreement"),
dated as of September 22, 1995, among Time Warner, New Time Warner, LMC and
certain of its affiliates, LMC and certain of its affiliates have agreed,
subject to certain conditions, to vote all their shares of Company capital
stock in favor of the approval of the TBS Merger and each of the other
transactions contemplated by the Merger Agreement and in favor of the approval
of the Merger Agreement. Pursuant to the LMC Agreement, Time Warner has
agreed with LMC that, upon the happening of certain events, LMC will have the
right to cause Time Warner to terminate the Merger Agreement and abandon the
Mergers.
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<PAGE> 13
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1996 VS. THREE MONTHS
ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1995
----------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Revenue
Entertainment
Networks $ 293,980 $ 243,414
Production & Distribution 306,407 291,141
Intrasegment revenue elimination (49,276) (33,162)
---------- ----------
Total Entertainment 551,111 501,393
News 195,437 182,460
Other 36,191 31,669
Intersegment revenue elimination (7,538) (5,207)
------ ----------
$ 775,201 $ 710,315
========== ==========
Operating profit (loss)
Entertainment
Networks $ 66,907 $ 43,427
Production & Distribution (48,387) 12,954
Intrasegment elimination (23,051) (8,582)
---------- ----------
Total Entertainment (4,531) 47,799
News 60,208 66,878
Other (23,573) (20,657)
Equity in loss of
unconsolidated entities (3,026) (5,069)
Costs of accounts receivable
securitization program (3,754) -
Time Warner merger costs (951) -
---------- -----------
$ 24,373 $ 88,951
========== ==========
</TABLE>
ENTERTAINMENT SEGMENT
Entertainment Segment revenue increased $50 million, or 10%, from $501
million to $551 million. In the entertainment networks, advertising revenue
increased $35 million, or 24%, from $144 million to $179 million, due to higher
viewership, primarily at TNT and TBS Superstation. Subscription revenue for
the entertainment networks increased $20 million, or 23%, from $84 million to
$104 million, from higher rates as well as an increase in both cable and home
satellite viewers. In the production and distribution companies, syndication
revenue increased $12 million, or 18%, from $69 million to $81 million,
primarily due to increased network license fees related to television product
of Castle Rock Entertainment ("Castle Rock"). In addition, licensing and
merchandising revenue increased $7 million, or 48%, from $14 million to $21
million, due primarily to increased sales related to Turner Entertainment Co.
Library product. Home video revenue decreased $23 million, or 20%, from $113
million to $90 million, due to the success of New Line Cinema Corporation's The
Mask, which was released during the first quarter of 1995.
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<PAGE> 14
Operating profit for the Entertainment Segment decreased $53 million,
from operating profit of $48 million to operating losses of $5 million.
Operating profit for the entertainment networks increased $29 million or 58%,
from $51 million to $80 million, due to the revenue increases described above.
Operating losses from the production and distribution companies increased $82
million, from $3 million to $85 million, after the elimination of intra-segment
transactions. The increase was due to disappointing results from domestic
theatrical releases at Castle Rock, which resulted in net write-offs of
approximately $60 million, a lack of comparable theatrical and home video
titles from the Company's other units, as well as increased costs associated
with certain of the Company's syndicated programming.
NEWS SEGMENT
News Segment revenue rose $13 million, or 7%, from $182 million to $195
million, due to an increase of $8 million, or 11%, from $71 million to $79
million, in subscription revenue at CNN and CNN International. The remaining
increase in overall revenue was primarily generated by CNN Interactive and
CNNfn, which launched in December 1995. Advertising revenue for the quarter
remained relatively flat in comparison to the prior year, as increased rates
were offset by lower viewership when compared with exceptionally high viewing
levels associated with the O.J. Simpson trial.
Operating profit for the News Segment decreased $7 million, or 10%, from
$67 million to $60 million as revenue increases were offset by increased news
gathering costs including costs associated with political coverage as well as
CNNfn start-up costs of $2 million.
OTHER SEGMENT
Revenue for the Segment increased $5 million, or 14%, from $31 million
to $36 million, due to increased syndication revenue generated by World
Championship Wrestling ("WCW"). Overall, increased revenue was offset by higher
costs at WCW and increased depreciation expense related to corporate
infrastructure improvements made in 1995, resulting in an increase of $3
million in operating losses, from $21 million to $24 million.
EQUITY IN LOSS OF UNCONSOLIDATED ENTITIES/MISCELLANEOUS
The Company's share of operating losses from unconsolidated entities
decreased by $2 million due to increased earnings from SportSouth and improved
operations at n-tv, a 24-hour German news network.
In May 1995, the Company sold an undivided percentage ownership
interest in a designated domestic cable and advertising accounts receivable
pool of approximately $300 million. The original proceeds were used to repay
amounts outstanding under the Company's unsecured revolving credit facilities.
The Company recognized costs of approximately $4 million in the first quarter
in connection with this securitization program. The ongoing costs of the
securitization program are anticipated to be less than those the Company would
have otherwise incurred under its unsecured revolving credit facilities.
Consolidated interest expense decreased $9 million, from $51 million
to $42 million, due to lower average outstanding balances and lower interest
rates related to the Company's revolving credit facilities.
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<PAGE> 15
As a result of the information discussed above, the Company reported a
net loss of $10 million in the first quarter of 1996 ($0.05 net loss per common
share). This compares to net income of $22 million in the first quarter of 1995
($0.08 net income per common share and common share equivalent).
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Turner Broadcasting System, Inc., et al. v. Federal Communications Commission,
et al.
On October 5, 1992, the Company filed suit in the United States District
Court for the District of Columbia (the "District Court") challenging the
provisions of the Cable Television Consumer Protection and Competition Act of
1992 (the "1992 Act") that require cable television systems to devote up to
one-third or more of their channel capacity to the carriage of local television
stations and provide certain channel positioning rights to such stations. The
provisions also grant television stations the right to require prior consent to
the retransmission by a cable operator of the station's broadcast signal. The
Company's complaint alleges that these provisions infringe upon the free speech
rights of cable program networks and cable operators in violation of the First
Amendment of the United States Constitution. Under a provision in the 1992
Act, the case was heard by a three-judge panel of the District Court. On April
8, 1993, the District Court upheld the constitutionality of the provisions by a
2-1 vote. On June 17, 1994, the United States Supreme Court vacated the
District Court's ruling and remanded the case for further proceedings. On
December 12, 1995, the District Court, on remand, again upheld the
constitutionality of the provisions by a 2-1 vote. On December 21, 1995, the
Company appealed the District Court's ruling to the United States Supreme
Court. On February 20, 1996, the Supreme Court noted probable jurisdiction to
hear the Company's appeal. The Company cannot predict the outcome of the
litigation at this time. The Company is pursuing its claims.
Shareholder Litigation in Connection with Proposed Merger
Seventeen actions have been filed against the Company, Time Warner,
certain officers and directors of the Company, Time Warner or Time Warner
Entertainment Company, L.P., and other defendants, purportedly on behalf of a
class of the Company's shareholders, in connection with the proposed merger
transaction between the Company and Time Warner. Sixteen of the seventeen
complaints were filed in Superior Court, Fulton County, Georgia; the other,
which was filed in the Court of Chancery of the State of Delaware in and for
New Castle County, was subsequently dismissed voluntarily without prejudice by
the plaintiff. Of the complaints filed in Georgia, fourteen were filed prior
to the approval of the Mergers on September 22, 1995 by the Boards of Directors
of Time Warner and the Company (Shigala v. Turner Broadcasting Sys., Inc., et
al., Case No. E-41502; Schrank v. R.E. Turner, et al., Case No. E-41501; Lewis,
et al. v. Turner Broadcasting Sys., Inc., et al., Case No. E-41500;
Silverstein and Silverstein v. Turner Broadcasting Sys., Inc., et al., Case No.
E-41526; Strauss v. Turner Broadcasting Sys., Inc., et al., Case No. E-41538;
Hoffman v. Ted Turner, et al., Case No. E-41544; Barry v. Turner Broadcasting
Sys., Inc., et al., Case No. E-41545; Mersel and Mersel v. R.E. Turner, et
al., Case No. E-41554; Friedland
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<PAGE> 16
and Friedland v. Turner Broadcasting Sys., Inc., et al., Case No. E-41562;
Schwarzchild v. Turner Broadcasting Sys., Inc., et al., Case No. E-41586;
Turner and Hanson v. Turner Broadcasting Sys., Inc., et al., Case No. E-041637;
H. Mark Solomon v. Turner Broadcasting Sys., et al., Case No. E-41685; Shores
v. Turner Broadcasting Sys., Inc., et al., Case No. E-41749; and Krim and
Davidson v. Turner Broadcasting Sys., Inc., et al., Case No. E-41779). Two of
the complaints filed in Georgia were filed after the Mergers were approved
(Altman v. Turner Broadcasting Sys., Inc., et al., Case No. E-43205; and Joyce
v. Tele-Communications, Inc., et al., Case No. E-43321). The plaintiff in
Altman filed a voluntary dismissal of that action without prejudice on November
10, 1995.
On November 13, 1995, Judge Elizabeth Long, to whom all remaining
actions had been assigned, consolidated all actions except the Joyce action.
On December 20,1995, the defendants filed answers in response to the second
amended complaint (the "Second Amended Complaint") previously filed in Lewis on
November 1, 1995.
On January 19, 1996 the defendants in these actions filed a motion for
judgment on the pleadings (the "Defendants' Motion") on all claims asserted in
the Second Amended Complaint on the grounds that, under Georgia law, the valid
grant of dissenters' rights to the Company's shareholders with respect to the
TBS Merger prohibits plaintiffs from maintaining the claims asserted in the
Second Amended Complaint. On January 31, 1996, the Court consolidated the
Joyce action with the other consolidated actions, and ordered plaintiffs to
file a consolidated amended complaint. Additionally, the Court stayed
discovery in these consolidated actions until the Court rules on the
Defendants' Motion.
On February 29, 1996, plaintiffs filed their third amended consolidated
supplemental and derivative class action complaint (the "Third Amended
Complaint"). The Third Amended Complaint, which includes a derivative claim,
alleges, among other things, that the terms of the TBS Merger are unfair to the
Company's shareholders and that the defendants have breached or aided and
abetted the breach of fiduciary common law and statutory duties owed to the
Company's shareholders. The Third Amended Complaint further alleges that the
defendants acted fraudulently in negotiating and approving the proposed TBS
Merger, that the approval of the TBS Merger by the Company's Board of Directors
was fraudulently obtained, and that the vote of the Company's Board of
Directors approving the TBS Merger did not comply with the Company's Restated
Articles of Incorporation and Bylaws or with Georgia law. Among other relief
demanded, the Third Amended Complaint seeks damages, an injunction against the
consummation of the TBS Merger and related transactions, and an auction of the
Company. On April 1, 1996, defendants in this action filed a motion for
judgment on the pleadings on all claims asserted in the Third Amended
Complaint. On April 24, 1996, plaintiffs filed a memorandum in opposition to
the defendants' motion for judgment on the pleadings.
The Company intends to defend vigorously these actions.
By letter dated October 20, 1995, plaintiffs in certain of the Georgia
actions described above made a demand upon the Company to repudiate the
SportSouth Agreement and the fee authorized to be paid by the Company to one of
its advisors in connection with the Mergers as corporate waste or, absent
repudiation, to seek indemnification from any officers or directors of the
Company who authorized the challenged matters. These plaintiffs indicated that
a shareholders' derivative suit seeking injunctive relief would be filed in
less than 90 days, which claims were asserted four days later in the first
amended
16
<PAGE> 17
complaint filed in Lewis and later asserted in both the Second Amended
Complaint and the Third Amended Complaint. The Company's Board of Directors
has established a committee of directors to investigate such claims.
ITEM 5. OTHER INFORMATION
REGULATION
The Telecommunications Act of 1996 (the "1996 Act") was enacted into law
on February 8, 1996. The 1996 Act modifies various provisions of the
Communications Act of 1934, as amended (the "Communications Act"), and the 1992
Act, with the intent of establishing a pro-competitive, deregulatory policy
framework for telecommunications. The Federal Communications Commission (the
"FCC" or the "Commission") is charged with implementation of the 1996 Act. The
Company at this time cannot predict the full effect that the 1996 Act or the
FCC's implementing regulations may have on the Company's operations.
BROADCAST REGULATION
Television broadcasting is subject to the jurisdiction of the FCC under
the Communications Act. Among other things, FCC regulations govern the
issuance, term, renewal and transfer of licenses which must be obtained by
persons to operate any television station. The current broadcast license of
TBS Superstation was renewed on April 15, 1992 and will expire on April 1,
1997. In addition, FCC regulations govern certain programming practices.
The 1996 Act extends the future term of licenses granted by the FCC
for the operation of television broadcast stations from five to eight years.
The 1996 Act also provides that the FCC shall grant an application for renewal
of a broadcast station license if the FCC finds that the station has served the
public interest, has engaged in no serious violations of the Communications Act
or the FCC's rule, and has not engaged in violations that demonstrate a pattern
of abuse. The comparative license renewal process has been abolished. These
changes could enhance the value of the broadcast license of TBS Superstation by
lengthening the station's future license terms, streamlining the renewal
process, and eliminating the prospect of a comparative renewal challenge.
On August 9, 1995, the FCC released a Fourth Further Notice of Proposed
Rulemaking and Third Notice of Inquiry to consider a broad range of issues
regarding the conversion by television broadcasters from analog to digital
technology. Among other things, the FCC is considering regulations to promote
the efficient use of advance television ("ATV") spectrum, whether restrictions
should be placed on the use of ATV channels, what public interest standards
should apply to ATV service, what transition period should apply, and how
existing laws will be affected by the transition to digital broadcasting. On
November 25, 1995, the Company filed comments with the FCC opposing any
extension of must-carry rights to ATV broadcast stations. Any regulatory
change, if adopted, could affect the operations of TBS Superstation and the
Atlanta and national markets in which the Company operates. The Company at
this time cannot predict the outcome of this proceeding or the overall effect,
if any, that regulatory changes may have on the Company's operations.
The 1996 Act provides that if the FCC issues additional licenses for ATV
service, it must limit eligibility for such licenses to current broadcast
licensees. As a condition for grant of an ATV license, a broadcaster must
agree
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<PAGE> 18
to surrender its original spectrum or its ATV spectrum for reallocation
pursuant to FCC regulation. These changes could enhance the value of the
broadcast license of TBS Superstation by making the station eligible to hold an
ATV license. The Company at this time cannot predict the overall effect, if
any, that these requirements may have on the Company's operations.
The 1996 Act directs the FCC to modify its rules to eliminate the
restrictions on the number of television stations that a single person or
entity may own nationally and to permit a single television broadcast licensee
to own stations with a combined national audience reach of 35 percent. The
1996 Act, also directs the FCC to conduct a rulemaking proceeding to determine
whether to retain, modify or eliminate its limitations on the number of
television stations that a single person or entity may own or operate within
the same television market. Any regulatory change, if adopted, could affect
the Atlanta and national markets in which the Company operates. The Company at
this time cannot predict the outcome of these proceedings or the overall
effect, if any, that they may have on the Company's operations.
The 1996 Act directs the FCC to revise its regulations to permit a
television broadcast station to affiliate with a person or entity that
maintains two or more networks of television broadcast stations, subject to
certain restrictions set forth in the statute. These changes could affect the
Atlanta and national markets in which the Company operates. The Company at
this time cannot predict the overall effect, if any, that such regulatory
revisions may have on the Company's operations.
CABLE REGULATION
Cable television systems are regulated by the FCC and by states,
municipalities or other local governmental authorities ("Local Authorities").
Local Authorities generally have the jurisdiction to review and grant renewal
and transfer of cable franchises, to review rates charged to subscribers, and
to require public, educational, government and/or leased-access channels,
except to the extent that such jurisdiction is preempted by federal law. Rate
regulations or other franchise conditions could place downward pressure on
subscriber fees earned by the Company, and regulatory carriage requirements
could adversely affect the number of channels available to carry the Company's
networks.
The 1992 Act became law on October 5, 1992. The 1996 Act modifies the
1992 Act in a variety of ways. The principal provisions of the 1992 Act and
the 1996 Act that may affect the Company's operations are discussed below. The
Company cannot predict the full effect that the 1996 Act may have on the
Company's operations.
DEFINITION OF CABLE SYSTEM
The 1996 Act amends the definition of cable system to exclude facilities
that do not use public rights-of-way (e.g., satellite master antenna television
services, serving multiple buildings not under common ownership or control),
thus exempting such facilities from franchise and other requirements applicable
to cable operators. The Company at this time cannot predict the overall
effect, if any, that this change may have on the Company's operations.
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RATE REGULATION
Section 623 of the Communications Act, as amended by the 1992 Act,
established 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 implementation regulations for Section
623. The text of its Report and Order was released on May 3, 1993. The FCC
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 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 FCC on November 10, 1994 adopted a policy regarding rate regulation
of packages of "a la carte" services. "A la carte" services that are offered
in a package will now be subject to rate regulation by the FCC. In light of
the uncertainty created by the various criteria that the FCC previously applied
to "a la carte" packages, the FCC, in those cases in which it was not clear how
the FCC's previous criteria should have been applied to the package at issue,
and where only a "small number" of channels were moved from a previously
regulated tier to the package, will allow cable operators to treat existing
packages as New Product Tiers ("NPTs") as discussed below.
The FCC, in addition to revising its rules governing "a la carte"
channels, also on November 10, 1994 revised its regulations governing the
manner in which cable operators may charge subscribers for new cable
programming services. The FCC instituted a three-year flat fee mark-up plan
for charges relating to new channels of cable programming services in addition
to the present formula for calculating the permissible rate for new services.
Commencing on January 1, 1995, operators may charge for new channels of cable
programming services added after May 14, 1994 at a mark-up of 20 cents per
channel over actual programming costs, but may not make adjustments to monthly
rates for these new services totaling more than $1.20, plus an additional 30
cents solely for programming license fees, per subscriber over the first two
years of the three-year period. Cable operators may charge an additional 20
cents in the third year only for channels added in that year. Cable operators
electing to use the 20 cents per channel adjustment may not take a 7.5% mark-up
on programming cost increases, which is permitted under the FCC's current rate
regulations. The FCC requested further comment on whether cable operators
should continue to receive the 7.5% mark-up on increases in license fees on
existing programming services.
Additionally, the FCC will permit cable operators to offer NPTs at rates
which they elect so long as, among other conditions, other service tiers that
are subject to rate regulation are priced in conformity with applicable FCC
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regulations and cable operators do not remove programming services from
existing tiers and offer them on the NPT.
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. The Commission's
implementing regulations were upheld by the United States Court of Appeals for
the District of Columbia Circuit, and a petition for a writ of certiorari was
denied by the United States Supreme Court. The Company cannot predict the
ultimate outcome of the litigation.
The 1996 Act expands the definition of "effective competition" to include
instances in which a local exchange carrier or its affiliate (or a
multichannel video programming distributor using the facilities of such carrier
or its affiliates) offers comparable video programming directly to subscribers
by any means (other than direct-to-home satellite service) in the operator's
franchise area. This expansion of the definition of "effective competition"
will trigger deregulation of cable rates in any cable franchise area where a
telephone company offers comparable video programming as defined by the
statute. This change could increase distribution of the Company's networks and
enhance subscriber fees earned by the Company from cable operators affected by
rate deregulation. The Company at this time cannot predict the overall effect,
if any, that this change may have on the Company's operations.
The 1996 Act deregulates the rates for cable programming services (i.e.,
upper tiers of service) provided after March 31, 1999, and immediately
deregulates upper tier rates for entities that operate small cable systems as
defined under the statute. The 1996 Act also eliminates the uniform rate
structure requirements for cable operators in areas subject to effective
competition or to video programming offered on a per channel or per program
basis. These changes could increase distribution of the Company's networks and
enhance subscriber fees earned by the Company from facilities affected by rate
deregulation. The Company at this time cannot predict the overall effect, if
any, that these changes may have on the Company's operations.
LEASED ACCESS
The 1984 Cable Act established commercial leased access to assure access
to the channel capacity of cable systems by parties unaffiliated with the cable
operators. Channel set-aside requirements were established in proportion to a
system's total activated channel capacity. A cable operator was permitted to
use any unused leased access channel capacity until such time as a written
agreement for a leased channel use was obtained. The 1992 Cable Act authorized
the Commission to determine the maximum reasonable rates that a cable operator
may establish for leased access use.
On March 29, 1996, the Commission issued an Order and Further Notice of
Proposed Rulemaking on leased access. The Commission is considering changes in
its maximum rate formula and regulatory scheme for leased access. The Company
at this time cannot predict the overall effect, if any, that any regulatory
revisions may have on the Company's operations.
20
<PAGE> 21
MUST CARRY AND RETRANSMISSION CONSENT
Sections 4 and 5 of the 1992 Act require cable television systems to
devote up to one-third or more of their channel capacity to the mandatory
carriage of local television stations and to provide certain channel
positioning rights to such stations. The 1992 Act also includes provisions
governing the retransmission of television broadcast signals by cable systems.
These provisions require cable operators to obtain the consent of a commercial
television station prior to retransmitting the station's broadcast signal, and
also provide those stations with the right to make a binding election every
three years between must-carry and retransmission consent. The must-carry
provisions applicable to non-commercial and commercial television stations
became effective on December 4, 1992, and October 5, 1993, respectively. These
provisions adversely affect the ability and willingness of cable systems to
carry the Company's networks by reducing the number of channels available for
the carriage of cable programming services and by limiting the cable operator's
discretion to select the mix of programming to be carried on their systems.
Pursuant to FCC regulations implementing the 1992 Act, commercial
broadcast stations must notify cable systems on or before October 1, 1996, of
their binding elections between must-carry and retransmission consent. These
elections could require affected cable systems to modify their existing channel
lineups, thereby adversely affecting carriage of the Company's networks. The
Company at this time cannot predict the overall effect, if any, that such
elections may have on the Company's operations.
The 1992 Act provides that commercial television stations have mandatory
carriage rights only on cable systems serving communities located within a
station's local television market as defined by the statute and the FCC's
regulations. The 1992 Act further provides that cable operators and television
broadcast stations may petition the FCC to modify the market of a particular
station by adding or subtracting communities from its market. The grant or
denial of such a petition could adversely affect the ability or willingness of
an affected cable operator to carry the Company's networks. On December 8,
1995, the FCC initiated a rulemaking proceeding to consider modifying its
regulations governing the determination of local television markets. Any
regulatory change, if adopted, could affect the Atlanta and national markets in
which the Company operates. The Company at this time cannot predict the
outcome of this proceeding or the overall effect, if any, that a regulatory
change may have on the Company's operations.
The Company has initiated litigation challenging the must-carry and
retransmission consent provisions of the 1992 Act as unconstitutional (see
"Legal Proceedings - Turner Broadcasting System, Inc. et al. v. Federal
Communications Commissions, et al.").
PROGRAM ACCESS
On April 1, 1993, the Commission issued regulations implementing a
provision of the 1992 Act 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
21
<PAGE> 22
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 the 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 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. On April 5, 1995, the FCC denied the
petitions for reconsideration. The Company cannot at this time predict the
effect of this provision or these proposals on its operations.
22
<PAGE> 23
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.
CABLE CROSS-OWNERSHIP RULES
The 1996 Act repeals the statutory bar on cable-broadcast station
cross-ownership to permit a person or entity to own or control a television
station and a cable system with overlapping service areas. The 1996 Act leaves
in place, however, the cable-broadcast station cross-ownership restriction
contained in the FCC's rules and does not prejudge the Commission's review of
the regulation. The 1996 Act also directs the FCC to revise its regulations to
permit a person or entity to own or control a television network and a cable
system and, if necessary, to revise its regulations to ensure carriage, channel
positioning and non-discriminatory treatment of nonaffiliated broadcast
stations by a cable system subject to cross-ownership. The 1996 Act further
provides that the ban on cable-MMDS cross-ownership shall not apply to any
cable operator in a franchise area in which one cable operator is subject to
effective competition as determined under the statute. The Company at this
time cannot predict the overall effect that these changes may have on the
Company's operations, if any.
TELCO ENTRY IN VIDEO PROGRAMMING
The 1996 Act provides that a local exchange carrier may provide video
programming directly to subscribers through a variety of means, including (1)
as a radio-based multichannel video programming distributor, not subject to the
Cable Act; (2) as a cable operator, fully subject to the Cable Act; and (3)
through an "open video system" certified by the FCC to be offering
nondiscriminatory capacity for unaffiliated programmers, subject only to
selected provisions of the Cable Act. A local exchange carrier also may
provide the "transmission of video programming" on a common carrier basis, with
no Cable Act obligations. The 1996 Act extends the program access requirements
of the 1992 Act to a telephone company that provides video programming by any
means directly to subscribers and to programming in which such a company holds
an attributable ownership interest. The Company at this time cannot predict
the overall effect that the entry of telephone companies into the delivery of
video programming may have on the Company's operations, if any.
RATING OF VIDEO PROGRAMMING
The 1996 Act provides that if the FCC determines, one year after
enactment, that program distributors, of which the Company is one, have not
voluntarily established content ratings and agreed to broadcast signals
containing such ratings, the FCC shall prescribe: (1) guidelines and procedures
for identification and rating of certain classes of video programming as
defined by the statute; and (2) rules requiring video programming distributors
to transmit the rating in a manner that permits parents to block the display of
programming they determine to be inappropriate for children. The 1996 Act also
provides
23
<PAGE> 24
that the FCC shall require television manufacturers to equip sets with a device
that enables viewers to block programs that have been designated with a
specific rating. The effective date of the manufacturing requirement must be
established by the FCC after consultation with the television manufacturing
industry, but the date may not be earlier than two years after enactment.
These requirements could affect the dissemination of the Company's networks and
impose regulatory burdens that affect the Company's operations. The Company at
this time cannot predict the overall effect, if any, that these requirements
may have on the Company's operations.
24
<PAGE> 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Earnings per Common and Common Equivalent Share.
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
On January 3, 1996, the Company filed a Current Report on Form 8-K which
described the previously reported transactions contemplated by the Amended and
Restated Agreement and Plan of Merger, dated as of September 22, 1995, among
the Company, Time Warner, TW Inc., Time Warner Acquisition Corp. and TW
Acquisition Corp. (the "Merger Agreement") and provided certain pro forma
financial statements with respect to the mergers contemplated by the Merger
Agreement.
25
<PAGE> 26
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 10, 1996
26
<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, 1996
-------------------------
<S> <C>
Net income applicable to common stock $ (9,808)
============
Weighted average number of shares outstanding during the period 206,976
Weighted average number of common stock, common stock
equivalents and converted shares outstanding 206,976
============
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 138,646
============
Earnings per share and common stock equivalent of Class A
and Class B Common Stock $ (0.05)
============
</TABLE>
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, 1996
---------------------------
<S> <C>
Net income applicable to common stock $ (9,808)
Add:Interest expense on zero coupon subordinated convertible
notes due 2007 4,770
Interest expense on 6.5% convertible notes 344
Subtract: Additional income taxes (2,148)
-------------
Adjusted net income applicable to common stock $ (6,842)
=============
Primary weighted average number of shares outstanding 206,976
Add:Common equivalent shares issuable assuming conversion of
convertible notes due 2007 7,440
Common equivalent shares issuable assuming conversion of 6.5%
convertible notes 1,095
Common equivalent shares issuable assuming conversion of
Class C Convertible Preferred Stock 74,382
Incremental shares issuable assuming exercise of outstanding
options 5,430
-------------
Weighted average number of common stock, common stock
equivalents and convertible shares, assuming full dilution 295,323
=============
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 226,993
=============
Earnings per share and common stock equivalent of Class A
and Class B Common Stock $ (0.02)
=============
</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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 67,651
<SECURITIES> 52
<RECEIVABLES> 520,358
<ALLOWANCES> (40,358)
<INVENTORY> 0
<CURRENT-ASSETS> 1,343,141
<PP&E> 648,977
<DEPRECIATION> (294,476)
<TOTAL-ASSETS> 4,318,836
<CURRENT-LIABILITIES> 751,902
<BONDS> 2,496,934
0
260,438
<COMMON> 13,011
<OTHER-SE> 184,639
<TOTAL-LIABILITY-AND-EQUITY> 4,318,836
<SALES> 775,201
<TOTAL-REVENUES> 775,201
<CGS> 496,416
<TOTAL-COSTS> 750,828
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,525
<INTEREST-EXPENSE> 42,232
<INCOME-PRETAX> (17,859)
<INCOME-TAX> (8,051)
<INCOME-CONTINUING> (9,808)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,808)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> 0.00
</TABLE>
