SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the quarterly period ended March 31, 1999, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the transition period from to .
Commission file number 1-12259
TIME WARNER INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3527249
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
75 Rockefeller Plaza
New York, New York 10019
(212) 484-8000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock - $.01 par value 1,135,787,052
Series LMCN-V Common Stock - $.01 par value 57,061,942
- ------------------------------------------- ----------------------
Description of Class Shares Outstanding
as of April 30, 1999
<PAGE>
TIME WARNER INC. AND
TIME WARNER ENTERTAINMENT COMPANY, L.P.
INDEX TO FORM 10-Q
Page
----
Time
Warner TWE
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PART I. FINANCIAL INFORMATION
Management's discussion and analysis of results of
operations and financial condition.................... 1 33
Consolidated balance sheet at March 31, 1999
and December 31, 1998................................. 14 41
Consolidated statement of operations for the
three months ended March 31, 1999 and 1998............ 15 42
Consolidated statement of cash flows for the
three months ended March 31, 1999 and 1998............ 16 43
Consolidated statement of shareholders' equity
and partnership capital..................... ......... 17 44
Notes to consolidated financial statements............ 18 45
Supplementary information............................. 27
PART II. OTHER INFORMATION................................ 50
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Description of Business
Time Warner Inc. ("Time Warner" or the "Company"), together with its
consolidated and unconsolidated subsidiaries, is the world's largest media and
entertainment company. Time Warner's principal business objective is to create
and distribute branded information and entertainment copyrights throughout the
world. Time Warner classifies its business interests into four fundamental
areas: Cable Networks, consisting principally of interests in cable television
programming; Publishing, consisting principally of interests in magazine
publishing, book publishing and direct marketing; Entertainment, consisting
principally of interests in recorded music and music publishing, filmed
entertainment, television production and television broadcasting; and Cable,
consisting principally of interests in cable television systems.
Investment in TWE
A majority of Time Warner's interests in filmed entertainment,
television production, television broadcasting and cable television systems, and
a portion of its interests in cable television programming are held through Time
Warner Entertainment Company, L.P. ("TWE"). Time Warner owns general and limited
partnership interests in TWE consisting of 74.49% of the pro rata priority
capital ("Series A Capital") and residual equity capital ("Residual Capital"),
and 100% of the senior priority capital ("Senior Capital") and junior priority
capital ("Series B Capital"). The remaining 25.51% limited partnership interests
in the Series A Capital and Residual Capital of TWE are held by a subsidiary of
MediaOne Group, Inc. ("MediaOne"). Time Warner does not consolidate TWE and
certain related companies (the "Entertainment Group") for financial reporting
purposes because of certain limited partnership approval rights currently held
by MediaOne related to TWE's cable television business.
At the time of this filing, MediaOne had agreed to be acquired by AT&T
Corp. ("AT&T"). This acquisition is subject to customary conditions, including
regulatory approvals, and accordingly, there is no assurance that it will
occur. However, if AT&T's acquisition of MediaOne proceeds as announced, the
minority interest in TWE held by MediaOne would be affected, and the governance
rights presently held by MediaOne would be reduced materially. Such a reduction
in governance rights is expected to trigger other changes affecting TWE,
including Time Warner's consolidation of TWE's operating results and financial
position for accounting purposes.
Use of EBITA
Time Warner evaluates operating performance based on several factors,
including its primary financial measure of operating income before noncash
amortization of intangible assets ("EBITA"). Consistent with management's
financial focus on controlling capital spending, EBITA measures operating
performance after charges for depreciation. In addition, EBITA eliminates the
uneven effect across all business segments of considerable amounts of noncash
amortization of intangible assets recognized in business combinations accounted
for by the purchase method. These business combinations, including the $14
billion acquisition of Warner Communications Inc. in 1989, the $6.2 billion
acquisition of Turner Broadcasting System, Inc. ("TBS") in 1996 and the $2.3
billion of cable acquisitions in 1996 and 1995, created over $25 billion of
intangible assets that generally are being amortized over a twenty to forty year
period. The exclusion of noncash amortization charges also is consistent with
management's belief that Time Warner's intangible assets, such as cable
television and sports franchises, music catalogues and copyrights, film and
television libraries and the goodwill associated with its brands, generally are
increasing in value
1
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TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
and importance to Time Warner's business objective of creating, extending and
distributing recognizable brands and copyrights throughout the world. As such,
the following comparative discussion of the results of operations of Time Warner
and the Entertainment Group includes, among other factors, an analysis of
changes in business segment EBITA. However, EBITA should be considered in
addition to, not as a substitute for, operating income, net income and other
measures of financial performance reported in accordance with generally accepted
accounting principles.
Transactions Affecting Comparability of Results of Operations
The comparability of Time Warner's and the Entertainment Group's
operating results has been affected by a $215 million net pretax gain recognized
by TWE in 1999 in connection with the early termination and settlement of a
long-term home video distribution agreement.
In order to meaningfully assess underlying operating trends, management
believes that the results of operations for 1999 should be analyzed after
excluding the effects of this significant nonrecurring gain. As such, the
following discussion and analysis focuses on amounts and trends adjusted to
exclude the impact of this unusual item. However, unusual items may occur in any
period. Accordingly, investors and other financial statement users individually
should consider the types of events and transactions for which adjustments have
been made.
In addition, the comparability of Time Warner's and the Entertainment
Group's Cable division results has been affected by certain cable-related
transactions, as described more fully under the caption "Summarized Financial
Information of the Entertainment Group" in Note 2 to the accompanying
consolidated financial statements. While these transactions had a significant
effect on the comparability of the Cable division's EBITA and operating income
principally due to the deconsolidation of the related operations, they did not
have a significant effect on the comparability of Time Warner's net income and
per share results.
Finally, per common share amounts have been restated to give effect to
a two-for-one common stock split that occurred on December 15, 1998.
RESULTS OF OPERATIONS
EBITA and operating income are as follows:
Three Months Ended March 31,
----------------------------
EBITA Operating Income
----- ----------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
Time Warner:
Publishing..................... $ 94 $ 85 $ 84 $ 76
Music.......................... 102 93 35 25
Cable Networks-TBS............. 184 153 134 103
Filmed Entertainment-TBS....... 29 (15) 10 (35)
Cable(1)....................... 66 74 22 20
Intersegment elimination....... 10 (19) 10 (19)
----- ----- ----- -----
Total.......................... $ 485 $ 371 $ 295 $ 170
===== ===== ===== =====
2
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Three Months Ended March 31,
----------------------------
EBITA Operating Income
----- ----------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
Entertainment Group:
Filmed Entertainment-
Warner Bros.(2)............. $346 $119 $316 $ 86
Broadcasting-The WB Network.... (41) (38) (42) (39)
Cable Networks-HBO............. 125 109 125 109
Cable(1)....................... 337 307 252 213
---- ---- ---- ----
Total.......................... $767 $497 $651 $369
==== ==== ==== ====
(1) The comparability of Time Warner's and the Entertainment Group's Cable
division results has been affected by certain cable-related
transactions that occurred in 1998, as described more fully under the
caption "Summarized Financial Information of the Entertainment Group"
in Note 2 to the accompanying consolidated financial statements.
(2) Includes a net pretax gain of approximately $215 million recognized
in 1999 in connection with the early termination and settlement of a
long-term home video distribution agreement.
Time Warner had revenues of $3.266 billion and net income of $138
million ($0.10 income per common share after preferred dividend requirements)
for the three months ended March 31, 1999, compared to revenues of $3.137
billion and a net loss of $62 million ($.12 loss per common share) for the three
months ended March 31, 1998. Time Warner's equity in the pretax income of the
Entertainment Group was $342 million for the three months ended March 31, 1999,
compared to $107 million for the three months ended March 31, 1998.
Time Warner reported net income of $138 million for the three months
ended March 31, 1999, which represents an improvement over a net loss of $62
million for the three months ended March 31, 1998. As discussed more fully
below, this improvement principally resulted from the inclusion of an
approximate $215 million net pretax gain ($.10 per common share) recognized by
TWE in 1999 in connection with the early termination and settlement of a
long-term home video distribution agreement. Excluding the effect of this gain,
net income increased to $11 million in 1999 from a net loss of $62 million in
the prior year. This improvement principally resulted from an overall increase
in Time Warner's business segment operating income and higher income from Time
Warner's equity in the pretax income of the Entertainment Group.
Similarly, excluding the effect of the $215 million net pretax gain
referred to above, normalized net income per common share was at breakeven in
1999, compared to a normalized net loss per common share of $.12 in 1998. In
addition to the factors discussed above, the improvement in 1999 normalized per
share results reflects a $64 million reduction in preferred dividend
requirements relating to the redemption of Time Warner's Series M exchangeable
preferred stock ("Series M Preferred Stock") in late 1998 and the conversion of
approximately 15 million shares of preferred stock into shares of common stock
that also occurred during 1998.
The Entertainment Group had revenues of $2.934 billion and net income
of $312 million for the three months ended March 31, 1999, compared to revenues
of $2.912 billion and net income of $108 million for the three months ended
March 31, 1998. As discussed more fully below, the Entertainment Group's net
income increased principally due to the recognition of the $215 million net
pretax gain referred to above. Similarly, excluding this gain, the Entertainment
Group's net income decreased to $97 million in 1999 from $108 million in the
prior year. This decrease principally resulted from higher losses from certain
investments accounted for under the equity method of accounting, which more than
offset an overall increase in business segment operating income.
3
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
The relationship between income before income taxes and income tax
expense of Time Warner principally is affected by the amortization of goodwill
and certain other financial statement expenses that are not deductible for
income tax purposes. Income tax expense of Time Warner includes all income taxes
related to its allocable share of partnership income and its equity in the
income tax expense of corporate subsidiaries of the Entertainment Group.
Time Warner
Publishing. Revenues increased to $974 million, compared to $948
million in the first three months of 1998. EBITA increased to $94 million from
$85 million. Operating income increased to $84 million from $76 million.
Revenues benefited primarily from significant increases in magazine advertising
revenues, offset in part by lower direct-marketing revenues. Circulation
revenues also increased marginally. The increase in advertising revenues was
principally due to a strong overall advertising market for most of the
division's magazines, primarily led by Time, Fortune, People, In Style and
Entertainment Weekly. The increase in circulation revenues principally was due
to higher subscription revenues, primarily led by the same magazines. EBITA and
operating income increased principally as a result of the revenue gains, cost
savings and a one-time gain on the sale of an asset. These increases were offset
in part by lower results from direct-marketing activities, including losses of
American Family Enterprises, a 50%-owned equity investee.
Music. Revenues increased to $936 million, compared to $888 million in
the first three months of 1998. EBITA increased to $102 million from $93
million. Operating income increased to $35 million from $25 million. Revenues
benefited from an increase in domestic and international recorded music sales
principally relating to higher compact disc sales of a broad range of popular
releases from new and established artists, offset in part by lower music
publishing revenues. EBITA and operating income increased principally as a
result of the revenue gains, offset in part by lower licensing income from
direct-marketing activities.
Cable Networks-TBS. Revenues increased to $838 million, compared to
$728 million in the first three months of 1998. EBITA increased to $184 million
from $153 million. Operating income increased to $134 million from $103 million.
Revenues benefited from increases in advertising and subscription revenues. The
increase in advertising revenues was principally due to a strong overall
advertising market for most of the division's networks, including TNT, TBS
Superstation, CNN and Cartoon Network. The increase in subscription revenues
principally related to an increase in subscriptions and higher rates, primarily
led by revenue increases at TNT, TBS Superstation, Turner Classic Movies and
CNN. EBITA and operating income increased principally as a result of the revenue
gains, offset in part by higher programming costs.
Filmed Entertainment-TBS. Revenues decreased to $317 million, compared
to $372 million in the first three months of 1998. EBITA increased to $29
million from a loss of $15 million. Operating income increased to $10 million
from a loss of $35 million. Revenues decreased principally as a result of fewer
theatrical releases, offset in part by increased international television
syndication and worldwide home video revenues. Despite the decline in revenues,
EBITA and operating income increased principally due to the absence in 1999 of
film write-offs relating to disappointing results for theatrical releases of
Castle Rock Entertainment in the first quarter of 1998.
Cable. Revenues decreased to $222 million, compared to $248 million in
the first three months of 1998. EBITA decreased to $66 million from $74 million.
Operating income increased to $22 million from $20 million.
4
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
The Cable division's 1999 operating results were negatively affected by certain
cable-related transactions that occurred in 1998 (the "1998 Cable
Transactions"), as described more fully in Note 2 to the accompanying
consolidated financial statements. Excluding the effect of the 1998 Cable
Transactions, revenues benefited from an increase in basic cable subscribers,
increases in basic cable rates and an increase in advertising and pay-per-view
revenues. Similarly excluding the effect of the 1998 Cable Transactions, EBITA
and operating income increased principally as a result of the revenue gains.
Interest and Other, Net. Interest and other, net, increased to $311
million in the first three months of 1999, compared to $283 million in the first
three months of 1998. Interest expense was unchanged at $233 million for both
periods, principally because interest savings associated with the Company's 1998
debt reduction efforts fully offset increased interest costs incurred in
connection with the $2.1 billion of borrowings used to redeem the Company's
Series M Preferred Stock in December 1998. Other expense, net, increased to $78
million in the first three months of 1999 from $50 million in the first three
months of 1998, principally due to higher losses from certain investments
accounted for under the equity method of accounting.
Entertainment Group
Filmed Entertainment-Warner Bros. Revenues increased to $1.380 billion,
compared to $1.312 billion in the first three months of 1998. EBITA increased to
$346 million from $119 million. Operating income increased to $316 million from
$86 million. Revenues benefited from increases in worldwide home video and
theatrical operations, offset in part by lower worldwide television production
and distribution revenues. EBITA and operating income increased primarily from
the inclusion of an approximate $215 million net pretax gain recognized in
connection with the early termination and settlement of a long-term home video
distribution agreement. In addition, EBITA and operating income benefited from
improved results from worldwide theatrical and home video operations and an
increase in investment-related income, offset in part by lower results from
television production, television distribution and consumer products operations.
Broadcasting - The WB Network. Revenues increased to $79 million,
compared to $45 million in the first three months of 1998. EBITA decreased to a
loss of $41 million from a loss of $38 million. Operating losses increased to
$42 million from $39 million. Revenues increased as a result of improved
television ratings and the addition of a fifth night of primetime programming in
September 1998. Despite the revenue increase, operating losses increased because
of a lower allocation of losses to a minority partner in the network. However,
excluding this minority interest effect, operating losses improved principally
as a result of the revenue gains, which outweighed higher programming costs
associated with the expanded programming schedule.
Cable Networks-HBO. Revenues increased to $526 million, compared to
$512 million in the first three months of 1998. EBITA and operating income
increased to $125 million from $109 million. Revenues benefited primarily from
an increase in subscriptions. EBITA and operating income increased principally
as a result of the revenue gains, cost savings, one-time gains from the sale of
certain investments and higher income from Comedy Central, a 50%-owned equity
investee, offset in part by higher marketing expenses.
Cable. Revenues decreased to $1.074 billion, compared to $1.153 billion
in the first three months of 1998. EBITA increased to $337 million from $307
million. Operating income increased to $252 million from $213 million.
5
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
The Cable division's 1999 operating results were affected by the 1998 Cable
Transactions. Excluding the effect of the 1998 Cable Transactions, revenues
benefited from an increase in basic cable subscribers, increases in basic cable
rates and an increase in advertising and pay-per-view revenues. Similarly
excluding the effect of the 1998 Cable Transactions, EBITA and operating income
increased principally as a result of the revenue gains, offset in part by the
absence of approximately $14 million of net pretax gains recognized in 1998
relating to the sale or exchange of certain cable television systems.
Interest and Other, Net. Interest and other, net, was $225 million in
the first three months of 1999, compared to $164 million in the first three
months of 1998. Interest expense decreased to $137 million, compared to $141
million in the first three months of 1998, principally due to lower average debt
levels. There was other expense, net, of $88 million in the first three months
of 1999, compared to $23 million in the first three months of 1998, principally
due to higher losses from certain investments accounted for under the equity
method of accounting.
FINANCIAL CONDITION AND LIQUIDITY
March 31, 1999
Time Warner
Financial Condition
At March 31, 1999, Time Warner had $10.6 billion of debt, $300 million
of cash and equivalents (net debt of $10.3 billion), $1.1 billion of borrowings
against future stock option proceeds, $575 million of mandatorily redeemable
preferred securities of a subsidiary and $8.9 billion of shareholders' equity.
This compares to $10.9 billion of debt, $442 million of cash and equivalents
(net debt of $10.5 billion), $895 million of borrowings against future stock
option proceeds, $575 million of mandatorily redeemable preferred securities of
a subsidiary and $8.9 billion of shareholders' equity at December 31, 1998.
Common Stock Repurchase Program
In January 1999, Time Warner's Board of Directors authorized a new
common stock repurchase program that allows the Company to repurchase, from time
to time, up to $5 billion of common stock. This program is expected to be
completed over a three-year period; however, actual repurchases in any period
will be subject to market conditions. Along with stock option exercise proceeds
and borrowings under Time Warner's $1.3 billion stock option proceeds credit
facility, additional funding for this program is expected to be provided by
anticipated future free cash flow and financial capacity.
During the first quarter of 1999, Time Warner acquired 5.1 million
shares of its common stock at an aggregate cost of $330 million under its $5
billion common stock repurchase program. These repurchases increased the
cumulative shares purchased under this and its previous common stock repurchase
program begun in 1996 to approximately 100.2 million shares at an aggregate cost
of $3.37 billion.
6
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Cash Flows
During the first three months of 1999, Time Warner's cash provided by
operations amounted to $183 million and reflected $485 million of EBITA from its
Publishing, Music, Cable Networks-TBS, Filmed Entertainment-TBS and Cable
businesses, $87 million of noncash depreciation expense, $125 million of
proceeds from Time Warner's asset securitization program and $154 million of
distributions from TWE, less $308 million of interest payments, $75 million of
income taxes, $22 million of corporate expenses and $263 million related to an
increase in working capital requirements, other balance sheet accounts and
noncash items. Cash provided by operations of $332 million for the first three
months of 1998 reflected $371 million of EBITA from its Publishing, Music, Cable
Networks-TBS, Filmed Entertainment-TBS and Cable businesses, $95 million of
noncash depreciation expense, $172 million of distributions from TWE, $37
million of proceeds from Time Warner's asset securitization program and $10
million related to a decrease in working capital requirements, other balance
sheet accounts and noncash items, less $316 million of interest payments, $18
million of income taxes and $19 million of corporate expenses.
Cash used by investing activities was $154 million in the first three
months of 1999, compared to $42 million in the first three months of 1998,
principally as a result of higher capital expenditures and a decrease in
investment proceeds. Capital expenditures increased to $136 million in the first
three months of 1999, compared to $103 million in the first three months of
1998.
Cash used by financing activities was $171 million in the first three
months of 1999, compared to $391 million in the first three months of 1998. The
use of cash in 1999 principally resulted from $127 million of debt reduction,
the repurchase of approximately 5.1 million shares of Time Warner common stock
at an aggregate cost of $330 million and the payment of $75 million of
dividends, offset in part by $205 million of net borrowings against future stock
option proceeds and $156 million of proceeds received principally from the
exercise of employee stock options. Cash used by financing activities in the
first three months of 1998 principally resulted from $190 million of debt
reduction, the repayment of $68 million of net borrowings against future stock
option proceeds, the repurchase of approximately 4.4 million shares of Time
Warner common stock at an aggregate cost of $277 million and the payment of $133
million of dividends, offset in part by $290 million of proceeds received
principally from the exercise of employee stock options. The decrease in
dividends paid in 1999 reflects the effect of Time Warner's redemption of its
Series M Preferred Stock in December 1998 and the conversion of approximately 15
million shares of preferred stock into shares of common stock that also occurred
during 1998.
The assets and cash flows of TWE are restricted by certain borrowing
and partnership agreements and are unavailable to Time Warner except through the
payment of certain fees, reimbursements, cash distributions and loans, which are
subject to limitations. Under its bank credit agreement, TWE is permitted to
incur additional indebtedness to make loans, advances, distributions and other
cash payments to Time Warner, subject to its individual compliance with the cash
flow coverage and leverage ratio covenants contained therein.
Management believes that Time Warner's operating cash flow, cash and
equivalents and additional borrowing capacity are sufficient to fund its capital
and liquidity needs for the foreseeable future without distributions and loans
from TWE above those permitted by existing agreements.
7
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Entertainment Group
Financial Condition
At March 31, 1999, the Entertainment Group had $6.9 billion of debt,
$321 million of cash and equivalents (net debt of $6.6 billion), $615 million of
Time Warner General Partners' Senior Capital and $5.1 billion of partners'
capital. This compares to $6.6 billion of debt, $87 million of cash and
equivalents (net debt of $6.5 billion), $217 million of preferred stock of a
subsidiary, $603 million of Time Warner General Partners' Senior Capital and
$5.2 billion of partners' capital at December 31, 1998.
Redemption of REIT Preferred Stock
In March 1999, a subsidiary of TWE (the "REIT") redeemed all of its
shares of preferred stock ("REIT Preferred Stock") at an aggregate cost of $217
million, which approximated net book value. The redemption was funded with
borrowings under TWE's bank credit agreement. Pursuant to its terms, the REIT
Preferred Stock was redeemed as a result of proposed changes to federal tax
regulations that substantially increased the likelihood that dividends paid by
the REIT or interest paid to the REIT under a mortgage note of TWE would not be
fully deductible for federal income tax purposes.
Cash Flows
During the first three months of 1999, the Entertainment Group's cash
provided by operations amounted to $788 million and reflected $767 million of
EBITA from its Filmed Entertainment-Warner Bros., Broadcasting-The WB Network,
Cable Networks-HBO and Cable businesses, $192 million of noncash depreciation
expense and $44 million related to a decrease in working capital requirements,
other balance sheet accounts and noncash items, less $144 million of interest
payments, $22 million of income taxes, $18 million of corporate expenses and $31
million of proceeds repaid under TWE's asset securitization program. Cash
provided by operations of $441 million in the first three months of 1998
reflected $497 million of EBITA from its Filmed Entertainment-Warner Bros.,
Broadcasting-The WB Network, Cable Networks-HBO and Cable businesses, $243
million of noncash depreciation expense and $148 million of proceeds from TWE's
asset securitization program, less $156 million of interest payments, $20
million of income taxes, $18 million of corporate expense and $253 million
related to an increase in working capital requirements, other balance sheet
accounts and noncash items.
Cash used by investing activities was $322 million in the first three
months of 1999, compared to $559 million in the first three months of 1998,
principally as a result of a $183 million decrease in cash used for investments
and acquisitions and a decrease in capital expenditures. Capital expenditures
decreased to $305 million in the first three months of 1999, compared to $352
million in the first three months of 1998.
Cash used by financing activities was $232 million in the first three
months of 1999, compared to $97 million in the first three months of 1998. The
use of cash in 1999 principally resulted from the redemption of REIT Preferred
Stock at an aggregate cost of $217 million and the payment of $154 million of
capital distributions to Time Warner, offset in part by a $157 million increase
in net borrowings. The use of cash in 1998 principally resulted
8
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
from the payment of $172 million of capital distributions to Time Warner, offset
in part by a $113 million increase in net borrowings.
Management believes that the Entertainment Group's operating cash flow,
cash and equivalents and additional borrowing capacity are sufficient to fund
its capital and liquidity needs for the foreseeable future.
Cable Capital Spending
Time Warner Cable has been engaged in a plan to upgrade the
technological capability and reliability of its cable television systems and
develop new services, which it believes will position the business for
sustained, long-term growth. Capital spending by Time Warner Cable, including
the cable operations of both Time Warner and TWE, amounted to $321 million in
the three months ended March 31, 1999, compared to $369 million in the three
months ended March 31, 1998. For the full year of 1999, cable capital spending
is expected to be comparable to 1998 levels, with approximately $1.2 billion
budgeted for the remainder of 1999. Capital spending by Time Warner Cable is
expected to continue to be funded by cable operating cash flow.
Filmed Entertainment Backlog
Backlog represents the amount of future revenue not yet recorded from
cash contracts for the licensing of theatrical and television product for pay
cable, basic cable, network and syndicated television exhibition. Backlog of
TWE's Filmed Entertainment-Warner Bros. division amounted to $2.313 billion at
March 31, 1999, compared to $2.298 billion at December 31, 1998 (including
amounts relating to the licensing of film product to Time Warner's and TWE's
cable television networks of $802 million at March 31, 1999 and $769 million at
December 31, 1998). In addition, backlog of Time Warner's Filmed
Entertainment-TBS division amounted to $636 million at March 31, 1999 and
December 31, 1998 (including amounts relating to the licensing of film product
to Time Warner's and TWE's cable television networks of $222 million at March
31, 1999 and $226 million at December 31, 1998).
Because backlog generally relates to contracts for the licensing of
theatrical and television product which already have been produced, the
recognition of revenue for such completed product principally is dependent only
upon the commencement of the availability period for telecast under the terms of
the related licensing agreement. Cash licensing fees are collected periodically
over the term of the related licensing agreements or on an accelerated basis
using TWE's $500 million securitization facility. The portion of backlog for
which cash has not already been received has significant off-balance sheet asset
value as a source of future funding. The backlog excludes advertising barter
contracts, which also are expected to result in the future realization of
revenues and cash through the sale of advertising spots received under such
contracts.
Year 2000 Technology Preparedness
Time Warner, together with its Entertainment Group and like most large
companies, depends on many different computer systems and other chip-based
devices for the continuing conduct of its business. Older computer programs,
computer hardware and chip-based devices may fail to recognize dates beginning
on January 1, 2000 as being valid dates, and as a result may fail to operate or
may operate improperly when such dates are introduced.
9
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Time Warner's exposure to potential Year 2000 problems arises both in
technological operations under the control of the Company and in those dependent
on one or more third parties. These technological operations include information
technology ("IT") systems and non-IT systems, including those with embedded
technology, hardware and software. Most of Time Warner's potential Year 2000
exposures are dependent to some degree on one or more third parties. Failure to
achieve high levels of Year 2000 compliance could have a material adverse impact
on Time Warner and its financial statements.
The Company's Year 2000 initiative is being conducted at the
operational level by divisional project managers and senior technology
executives overseen by senior divisional executives, with assistance internally
as well as from outside professionals. The progress of each division through the
different phases of remediation--inventorying, assessment, remediation planning,
implementation and final testing--is actively overseen and reviewed on a regular
basis by an executive oversight group that reports through the Company's Chief
Financial Officer to the Audit Committee of the Board of Directors.
The Company has generally completed the process of identifying
potential Year 2000 difficulties in its technological operations, including IT
applications, IT technology and support, desktop hardware and software, non-IT
systems and important third party operations, and distinguishing those that are
"mission critical" from those that are not. An item is considered "mission
critical" if its Year 2000-related failure would significantly impair the
ability of one of the Company's major business units to (1) produce, market and
distribute the products or services that generate significant revenues for that
business, (2) meet its obligations to pay its employees, artists, vendors and
others or (3) meet its obligations under regulatory requirements and internal
accounting controls. The Company and its divisions, including the Entertainment
Group, have identified approximately 1,000 worldwide, "mission critical"
potential exposures. Of these, as of March 31, 1999, approximately 51% have been
identified by the divisions as Year 2000 compliant, approximately 46% as in the
remediation implementation or final testing stages, approximately 2% as in the
remediation planning stage and less than 1% as in the assessment stage. The
Company currently expects that the assessment phase for the few remaining
potential exposures should be completed during the second quarter of 1999 and
that remediation with respect to approximately 80% of all these identified
operations will be substantially completed in all material respects by the end
of the second quarter of 1999. The Company, however, could experience unexpected
delays. The Company is currently planning to impose a "quiet" period at the
beginning of the fourth quarter of 1999 during which any remaining remediation
involving installation or modification of systems that interface with other
systems will be minimized to permit the Company to conduct testing in a stable
environment.
As stated above, however, the Company's business is heavily dependent
on third parties and these parties are themselves heavily dependent on
technology. For example, in a situation endemic to the cable industry, much of
the Company's headend equipment that controls cable set-top boxes was not Year
2000 compliant. The box manufacturers have been working with cable industry
groups to develop solutions that the Company is installing in its head-end
equipment. It is currently expected that these solutions will be substantially
implemented by the end of the second quarter of 1999. In addition, if a
television broadcaster or cable programmer encounters Year 2000 problems that
impede its ability to deliver its programming, the Company will be unable to
provide that programming to its cable customers. Because the Company is also a
programming supplier, third-party signal delivery problems would affect its
ability to deliver its programming to its customers. The Company has attempted
to include in its "mission critical" inventory such significant service
providers, vendors, suppliers, customers and governmental entities
10
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
that are believed to be critical to business operations and is in various stages
of ascertaining their state of Year 2000 readiness through various means,
including questionnaires, interviews, on-site visits, system interface testing
and industry group participation. The Company continues to monitor these
situations. Moreover, Time Warner is dependent, like all large companies, on the
continued functioning, domestically and internationally, of basic, heavily
computerized services such as banking, telephony, water and power, and various
distribution mechanisms ranging from the mail, railroads and trucking to
high-speed data transmission. Time Warner is taking steps to attempt to satisfy
itself that the third parties on which it is heavily reliant are Year 2000
compliant, are developing satisfactory contingency plans or that alternate means
of meeting its requirements are available, but cannot predict the likelihood of
such compliance nor the direct or indirect costs to the Company of
non-compliance by those third parties or of securing such services from
alternate compliant third parties. In areas in which the Company is uncertain
about the anticipated Year 2000 readiness of a significant third party, the
Company is investigating available alternatives, if any.
The Company, including the Entertainment Group, currently estimates
that the aggregate cost of its Year 2000 remediation program, which started in
1996, will be approximately $125 to $175 million, of which an estimated 50% to
60% has been incurred through March 31, 1999. These costs include estimates of
the costs of assessment, replacement, repair and upgrade, both planned and
unplanned, of certain IT and non-IT systems and their implementation and
testing. The Company anticipates that its remediation program, and related
expenditures, may continue into 2001 as temporary solutions to Year 2000
problems are replaced with upgraded equipment. These expenditures have been and
are expected to continue to be funded from the Company's operating cash flow and
have not and are not expected to impact materially the Company's financial
statements.
Management believes that it has established an effective program to
resolve all significant Year 2000 issues in its control in a timely manner. As
noted above, however, the Company has not yet completed all phases of its
program and is dependent on third parties whose progress is not within its
control. In the event that the Company does not complete any of its currently
planned additional remediation prior to the Year 2000, management believes that
the Company could experience significant difficulty in producing and delivering
its products and services and conducting its business in the Year 2000 as it has
in the past. In addition, disruptions experienced by third parties with which
the Company does business as well as by the economy generally could also
materially adversely affect the Company. The amount of potential liability and
lost revenue cannot be reasonably estimated at this time.
The Company has been focusing its efforts on identification and
remediation of its Year 2000 exposures and is beginning to develop specific
contingency plans in the event it does not successfully complete its remaining
remediation as anticipated or experiences unforeseen problems. The Company is
also examining its existing standard business interruption strategies to
evaluate whether they would satisfactorily meet the demands of failures arising
from Year-2000 related problems. The Company intends to examine its status
periodically to determine the necessity of establishing and implementing such
contingency plans or additional strategies, which could involve, among other
things, manual workarounds, adjusting staffing strategies and sharing resources
across divisions.
11
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Caution Concerning Forward-Looking Statements
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This document, together
with management's public commentary related thereto, contains such
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, particularly statements anticipating future
growth in revenues, EBITA and cash flow. Words such as "anticipate," "estimate,"
"expects," "projects," "intends," "plans," "believes" and words and terms of
similar substance used in connection with any discussion of future operating or
financial performance identify such forward-looking statements. Those
forward-looking statements are management's present expectations of future
events. As with any projection or forecast, they are inherently susceptible to
uncertainty and changes in circumstances, and the Company is under no obligation
to (and expressly disclaims any such obligation to) update or alter its
forward-looking statements whether as a result of such changes, new information,
future events or otherwise.
Time Warner operates in highly competitive, consumer driven and rapidly
changing media and entertainment businesses that are dependent on government
regulation and economic, political and social conditions in the countries in
which they operate, consumer demand for their products and services,
technological developments and (particularly in view of technological changes)
protection of their intellectual property rights. Time Warner's actual results
could differ materially from management's expectations because of changes in
such factors. Some of the other factors that also could cause actual results to
differ from those contained in the forward-looking statements include those
identified in Time Warner's other filings and:
o For Time Warner's cable business, more aggressive than expected competition
from new technologies and other types of video programming distributors,
including DBS; increases in government regulation of cable or equipment
rates or other terms of service (such as "digital must-carry" or
"unbundling" requirements); increased difficulty in obtaining franchise
renewals; the failure of new equipment (such as digital set-top boxes) or
services (such as high-speed on-line services or telephony over cable or
video on demand) to function properly, to appeal to enough consumers or to
be available at reasonable prices and to be delivered in a timely fashion;
and greater than expected increases in programming or other costs.
o For Time Warner's cable programming and television businesses, greater than
expected programming or production costs; public and cable operator
resistance to price increases (and the negative impact on premium
programmers of increases in basic cable rates); increased regulation of
distribution agreements; the sensitivity of advertising to economic
cyclicality; and greater than expected fragmentation of consumer viewership
due to an increased number of programming services or the increased
popularity of alternatives to television.
o For Time Warner's film and television businesses, their ability to continue
to attract and select desirable talent and scripts at manageable costs;
increases in production costs generally; fragmentation of consumer leisure
and entertainment time (and its possible negative effects on the broadcast
and cable networks, which are significant customers of these businesses);
continued popularity of merchandising; and the uncertain impact of
technological developments such as DVD and the Internet.
12
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
o For Time Warner's music business, its ability to continue to attract and
select desirable talent at manageable costs; the timely completion of
albums by major artists; the popular demand for particular artists and
albums; its ability to continue to enforce its intellectual property rights
in digital environments; and the overall strength of global music sales.
o For Time Warner's print media and publishing businesses, increases in paper
and distribution costs; the introduction and increased popularity of
alternative technologies for the provision of news and information, such as
the Internet; and fluctuations in advertiser and consumer spending.
o The ability of the Company and its key service providers, vendors,
suppliers, customers and governmental entities to replace, modify or
upgrade computer systems in ways that adequately address the Year 2000
issue, including their ability to identify and correct all relevant
computer codes and embedded chips, unanticipated difficulties or delays in
the implementation of the Company's remediation plans and the ability of
third parties to address adequately their own Year 2000 issues.
In addition, Time Warner's overall financial strategy, including growth
in operations, maintaining its financial ratios and strengthened balance sheet,
could be adversely affected by increased interest rates, failure to meet
earnings expectations, significant acquisitions or other transactions,
consequences of the euro conversion and changes in Time Warner's plans,
strategies and intentions.
13
<PAGE>
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- -----------
(millions, except
per share amounts)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents.................................................... $ 300 $ 442
Receivables, less allowances of $945 million and $1.007 billion......... 2,253 2,885
Inventories............................................................. 1,009 946
Prepaid expenses........................................................ 1,299 1,176
------- -------
Total current assets.................................................... 4,861 5,449
Noncurrent inventories.................................................. 1,813 1,900
Investments in and amounts due to and from Entertainment Group.......... 5,607 4,980
Other investments....................................................... 813 794
Property, plant and equipment, net...................................... 1,978 1,991
Music catalogues, contracts and copyrights.............................. 851 876
Cable television and sports franchises.................................. 2,660 2,868
Goodwill................................................................ 11,734 11,919
Other assets............................................................ 856 863
------- -------
Total assets............................................................ $31,173 $31,640
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable........................................................ $ 836 $ 996
Participations, royalties and programming costs payable................. 1,195 1,199
Debt due within one year................................................ 19 19
Other current liabilities............................................... 2,120 2,404
------- -------
Total current liabilities............................................... 4,170 4,618
Long-term debt ......................................................... 10,606 10,925
Borrowings against future stock option proceeds......................... 1,100 895
Deferred income taxes................................................... 3,497 3,491
Unearned portion of paid subscriptions.................................. 777 741
Other liabilities....................................................... 1,547 1,543
Company-obligated mandatorily redeemable preferred securities of
a subsidiary holding solely subordinated debentures of a
subsidiary of the Company ........................................... 575 575
Shareholders' equity
Preferred stock, $.10 par value, 19.6 and 22.6 million shares
outstanding, $1.960 and $2.260 billion liquidation preference........ 2 2
Series LMCN-V Common Stock, $.01 par value, 57.1 million
shares outstanding .................................................. 1 1
Common stock, $.01 par value, 1.134 and 1.118 billion
shares outstanding .................................................. 11 11
Paid-in capital......................................................... 13,358 13,134
Accumulated deficit..................................................... (4,471) (4,296)
------- -------
Total shareholders' equity.............................................. 8,901 8,852
------- -------
Total liabilities and shareholders' equity.............................. $31,173 $31,640
======= =======
See accompanying notes.
</TABLE>
14
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1999
---- ----
(millions, except
per share amounts)
<S> <C> <C>
Revenues (a)............................................................ $3,266 $3,137
------ ------
Cost of revenues (a)(b)................................................. 1,786 1,887
Selling, general and administrative (a)(b).............................. 1,185 1,080
------ ------
Operating expenses...................................................... 2,971 2,967
------ ------
Business segment operating income....................................... 295 170
Equity in pretax income of Entertainment Group (a)...................... 342 107
Interest and other, net (a)............................................. (311) (283)
Corporate expenses (a).................................................. (22) (19)
------ ------
Income (loss) before income taxes....................................... 304 (25)
Income tax provision.................................................... (166) (37)
------ ------
Net income (loss)....................................................... 138 (62)
Preferred dividend requirements......................................... (18) (82)
------ ------
Net income (loss) applicable to common shares........................... $ 120 $ (144)
====== ======
Basic and diluted income (loss) per common share:
Net income (loss)....................................................... $ .10 $ (.12)
====== ======
Average common shares................................................... 1,243.1 1,156.6
======== ========
- --------------
(a)Includes the following income (expenses) resulting from transactions with the
Entertainment Group and other related companies for the three months ended
March 31, 1999 and 1998, respectively: revenues-$134 million and $112
million; cost of revenues-$(86) million and $(67) million; selling, general
and administrative-$(9) million in both periods; equity in pretax income of
Entertainment Group-$(16) million and $(5) million; interest and other,
net-$(10) million and $(3) million; and corporate expenses-$18 million in
both periods.
(b)Includes depreciation and amortization expense of: .................. $ 277 $ 296
====== ======
</TABLE>
See accompanying notes.
15
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
<S> <C> <C>
OPERATIONS
Net income (loss)....................................................... $138 $ (62)
Adjustments for noncash and nonoperating items:
Depreciation and amortization........................................... 277 296
Noncash interest expense................................................ 1 15
Excess (deficiency) of distributions over equity in pretax income of
Entertainment Group.................................................. (188) 65
Changes in operating assets and liabilities............................. (45) 18
----- -----
Cash provided by operations............................................. 183 332
----- -----
INVESTING ACTIVITIES
Investments and acquisitions............................................ (46) (24)
Capital expenditures.................................................... (136) (103)
Investment proceeds..................................................... 28 85
----- -----
Cash used by investing activities....................................... (154) (42)
----- -----
FINANCING ACTIVITIES
Borrowings.............................................................. 116 510
Debt repayments......................................................... (243) (700)
Borrowings against future stock option proceeds......................... 205 465
Repayments of borrowings against future stock option proceeds........... - (533)
Repurchases of Time Warner common stock................................. (330) (277)
Dividends paid.......................................................... (75) (133)
Proceeds received from stock option and dividend reinvestment plans..... 156 290
Other, principally financing costs...................................... - (13)
----- -----
Cash used by financing activities....................................... (171) (391)
----- -----
DECREASE IN CASH AND EQUIVALENTS........................................ (142) (101)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD............................. 442 645
----- -----
CASH AND EQUIVALENTS AT END OF PERIOD................................... $300 $544
====== ======
See accompanying notes.
</TABLE>
16
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD.......................................... $8,852 $9,356
Net income (loss)....................................................... 138 (62)
Other comprehensive income (loss)....................................... 3 (24)
------ ------
Comprehensive income (loss)............................................. 141 (86)
Common stock dividends.................................................. (57) (52)
Preferred stock dividends............................................... (18) (82)
Repurchases of Time Warner common stock................................. (330) (277)
Other, principally shares issued pursuant to stock option,
dividend reinvestment and benefit plans.............................. 313 438
------ ------
BALANCE AT END OF PERIOD................................................ $8,901 $9,297
====== ======
See accompanying notes.
</TABLE>
17
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Time Warner Inc. ("Time Warner" or the "Company"), together with its
consolidated and unconsolidated subsidiaries, is the world's leading media and
entertainment company. Time Warner's principal business objective is to create
and distribute branded information and entertainment copyrights throughout the
world. Time Warner classifies its business interests into four fundamental
areas: Cable Networks, consisting principally of interests in cable television
programming; Publishing, consisting principally of interests in magazine
publishing, book publishing and direct marketing; Entertainment, consisting
principally of interests in recorded music and music publishing, filmed
entertainment, television production and television broadcasting; and Cable,
consisting principally of interests in cable television systems.
A majority of Time Warner's interests in filmed entertainment,
television production, television broadcasting and cable television systems, and
a portion of its interests in cable television programming are held through Time
Warner Entertainment Company, L.P. ("TWE"). Time Warner owns general and limited
partnership interests in TWE consisting of 74.49% of the pro rata priority
capital ("Series A Capital") and residual equity capital ("Residual Capital"),
and 100% of the senior priority capital ("Senior Capital") and junior priority
capital ("Series B Capital"). The remaining 25.51% limited partnership interests
in the Series A Capital and Residual Capital of TWE are held by a subsidiary of
MediaOne Group, Inc. ("MediaOne"). Time Warner does not consolidate TWE and
certain related companies (the "Entertainment Group") for financial reporting
purposes because of certain limited partnership approval rights currently held
by MediaOne related to TWE's cable television business.
Each of the business interests within Cable Networks, Publishing,
Entertainment and Cable is important to management's objective of increasing
shareholder value through the creation, extension and distribution of
recognizable brands and copyrights throughout the world. Such brands and
copyrights include (1) leading cable television networks, such as HBO, Cinemax,
CNN, TNT and TBS Superstation, (2) magazine franchises such as Time, People and
Sports Illustrated and direct marketing brands such as Time Life Inc. and
Book-of-the-Month Club, (3) copyrighted music from many of the world's leading
recording artists that is produced and distributed by a family of established
record labels such as Warner Bros. Records, Atlantic Records, Elektra
Entertainment and Warner Music International, (4) the unique and extensive film,
television and animation libraries of Warner Bros. and Turner Broadcasting
System, Inc. ("TBS"), and trademarks such as the Looney Tunes characters, Batman
and The Flintstones, (5) The WB Network, a national broadcasting network
launched in 1995 as an extension of the Warner Bros. brand and as an additional
distribution outlet for the Company's collection of children's cartoons and
television programming, and (6) Time Warner Cable, currently the largest
operator of cable television systems in the U.S.
The operating results of Time Warner's various business interests are
presented herein as an indication of financial performance (Note 6). Except for
start-up losses incurred in connection with The WB Network, Time Warner's
principal business interests generate significant operating income and cash flow
from operations. The cash flow from operations generated by such business
interests is considerably greater than their operating income due to significant
amounts of noncash amortization of intangible assets recognized in various
acquisitions accounted for by the purchase method of accounting. Noncash
amortization of intangible assets recorded by Time Warner's business
18
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
interests, including the unconsolidated business interests of the
Entertainment Group, amounted to $306 million and $329 million for the three
months ended March 31, 1999 and 1998, respectively.
Basis of Presentation
The accompanying consolidated financial statements are unaudited but,
in the opinion of management, contain all the adjustments (consisting of those
of a normal recurring nature) considered necessary to present fairly the
financial position and the results of operations and cash flows for the periods
presented in conformity with generally accepted accounting principles applicable
to interim periods. The accompanying financial statements should be read in
conjunction with the audited consolidated financial statements of Time Warner
included in its Annual Report on Form 10-K for the year ended December 31, 1998
(the "1998 Form 10-K"). Certain reclassifications have been made to the prior
year's financial statements to conform to the 1999 presentation.
Per common share and average common share amounts for all prior periods
have been restated to give effect to a two-for-one common stock split that
occurred on December 15, 1998.
2. ENTERTAINMENT GROUP
Time Warner's investment in and amounts due to and from the Entertainment
Group at March 31, 1999 and December 31, 1998 consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- -----------
(millions)
<S> <C> <C>
Investment in TWE................................................ $3,882 $3,850
Stock option related distributions due from TWE.................. 1,309 1,130
Credit agreement debt due to TWE................................. (400) (400)
Other net liabilities due to TWE, principally related to
home video distribution ..................................... (120) (395)
------ ------
Investment in and amounts due to and from TWE.................... 4,671 4,185
Investment in TWE-A/N and other Entertainment Group companies.... 936 795
------ ------
Total............................................................ $5,607 $4,980
====== ======
</TABLE>
Partnership Structure and Allocation of Income
TWE is a Delaware limited partnership that was capitalized on June 30,
1992 to own and operate substantially all of the Filmed Entertainment-Warner
Bros., Cable Networks-HBO and Cable businesses previously owned by subsidiaries
of Time Warner. Time Warner, through its wholly owned subsidiaries, collectively
owns general and limited partnership interests in TWE consisting of 74.49% of
the Series A Capital and Residual Capital and 100% of the Senior Capital and
Series B Capital. The remaining 25.51% limited partnership interests in the
Series A Capital and Residual Capital of TWE are owned by MediaOne. Certain Time
Warner subsidiaries are the general partners of TWE (the "Time Warner General
Partners").
The TWE partnership agreement provides for special allocations of
income, loss and distributions of partnership capital, including priority
distributions in the event of liquidation. TWE reported net income of $312
19
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
million and $108 million in the three months ended March 31, 1999 and 1998,
respectively, no portion of which was allocated to the limited partnership
interests.
Summarized Financial Information of the Entertainment Group
Set forth below is summarized financial information of the
Entertainment Group. This information reflects (i) the transfer of Time Warner
Cable's direct broadcast satellite operations to Primestar, Inc. ("Primestar"),
a separate holding company, effective as of April 1, 1998, (ii) the formation of
the Road Runner joint venture to operate and expand Time Warner Cable's and
MediaOne's existing high-speed online businesses, effective as of June 30, 1998,
(iii) the reorganization of Time Warner Cable's business telephony operations
into a separate entity named Time Warner Telecom LLC, effective as of July 1,
1998 and (iv) the formation of a joint venture in Texas that owns cable
television systems serving approximately 1.1 million subscribers, effective as
of December 31, 1998 (collectively, the "1998 Cable Transactions"). These
transactions are described more fully in Time Warner's 1998 Form 10-K.
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
Operating Statement Information
Revenues................................................ $2,934 $2,912
Depreciation and amortization........................... (308) (371)
Business segment operating income(1).................... 651 369
Interest and other, net................................. (225) (164)
Minority interest....................................... (68) (64)
Income before income taxes ............................. 340 123
Net income.............................................. 312 108
- --------------
(1) Includes a net pretax gain of approximately $215 million recognized in
1999 in connection with the early termination and settlement of a long-term
home video distribution agreement.
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
Cash Flow Information
Cash provided by operations............................. $ 788 $ 441
Capital expenditures.................................... (305) (352)
Investments and acquisitions............................ (47) (230)
Investment proceeds..................................... 30 23
Borrowings.............................................. 1,160 489
Debt repayments......................................... (1,003) (376)
Redemption of preferred stock of subsidiary............. (217) -
Capital distributions................................... (154) (172)
Other financing activities, net......................... (18) (38)
Increase (decrease) in cash and equivalents............. 234 (215)
20
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
March 31, December 31,
1999 1998
------- -----------
(millions)
Balance Sheet Information
Cash and equivalents.................................... $ 321 $ 87
Total current assets.................................... 4,123 4,187
Total assets............................................ 22,532 22,241
Total current liabilities............................... 4,818 4,940
Long-term debt.......................................... 6,921 6,578
Minority interests...................................... 1,623 1,522
Preferred stock of subsidiary........................... - 217
Time Warner General Partners' Senior Capital............ 615 603
Partners' capital ...................................... 5,115 5,210
Capital Distributions
The assets and cash flows of TWE are restricted by the TWE partnership
and credit agreements and are unavailable for use by the partners except through
the payment of certain fees, reimbursements, cash distributions and loans, which
are subject to limitations. At March 31, 1999 and December 31, 1998, the Time
Warner General Partners had recorded $1.309 billion and $1.130 billion,
respectively, of stock option related distributions due from TWE, based on
closing prices of Time Warner common stock of $70.81 and $62.06, respectively.
Time Warner is paid when the options are exercised. The Time Warner General
Partners also receive tax-related distributions from TWE on a current basis.
During the three months ended March 31, 1999, the Time Warner General Partners
received distributions from TWE in the amount of $154 million, consisting of $67
million of tax-related distributions and $87 million of stock option related
distributions. During the three months ended March 31, 1998, the Time Warner
General Partners received distributions from TWE in the amount of $172 million,
consisting of $52 million of tax-related distributions and $120 million of stock
option related distributions.
Gain on Termination of MGM Video Distribution Agreement
In March 1999, Warner Bros. and Metro-Goldwyn-Mayer, Inc. ("MGM")
terminated a long-term distribution agreement under which Warner Bros. had
exclusive worldwide distribution rights for MGM/United Artists home video
product. In connection with the early termination and settlement of this
distribution agreement, Warner Bros. recognized a net pretax gain of
approximately $215 million ($.10 per common share), which has been included in
Time Warner's equity in the pretax income of the Entertainment Group in the
accompanying consolidated statement of operations.
Primestar
TWE owns an approximate 24% equity interest in Primestar. In the fourth
quarter of 1998, TWE recorded a charge of approximately $210 million principally
to reduce the carrying value of its interest in Primestar to fair value.
In January 1999, Primestar, an indirect wholly owned subsidiary of
Primestar and the stockholders of Primestar entered into an agreement to sell
Primestar's medium-power direct broadcast satellite business and assets to
DirecTV, a competitor of Primestar owned by Hughes Electronics Corp. In
addition, a second agreement was
21
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
entered into with DirecTV, pursuant to which DirecTV agreed to purchase
Primestar's rights with respect to the use or acquisition of certain high-power
satellites from a wholly owned subsidiary of one of the stockholders of
Primestar.
In April 1999, Primestar closed on the sale of its medium-power direct
broadcast satellite business to DirecTV. The final terms of this medium-power
transaction confirmed the decline in value of TWE's interest in Primestar
recognized in 1998. The closing of the sale of Primestar's high-power satellite
rights to DirecTV is expected to occur in the second quarter of 1999, subject to
customary closing conditions, including all necessary governmental and
regulatory approvals. There can be no assurance that such approvals will be
obtained and that this high-power transaction will be consummated.
During the period in which Primestar's operations are being wound down,
TWE continues to recognize its share of losses of Primestar under the equity
method of accounting. Such losses are included in interest and other, net, in
TWE's consolidated statement of operations.
3. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
Current Noncurrent Current Noncurrent
------- ---------- ------- ----------
(millions)
<S> <C> <C> <C> <C>
Film costs:
Released, less amortization......................... $ 82 $ 242 $ 51 $ 308
Completed and not released.......................... - - 20 -
In process and other................................ 4 226 2 240
Library, less amortization.......................... - 993 - 1,007
Programming costs, less amortization................... 501 352 457 345
Magazines, books and recorded music.................... 422 - 416 -
------ ------ ------ ------
Total ................................................ $1,009 $1,813 $946 $1,900
====== ====== ====== ======
</TABLE>
4. MANDATORILY REDEEMABLE PREFERRED SECURITIES
In December 1995, Time Warner Companies, Inc.("TW Companies"), a wholly
owned subsidiary of Time Warner, issued approximately 23 million
Company-obligated mandatorily redeemable preferred securities of a wholly owned
subsidiary ("Preferred Trust Securities") for aggregate gross proceeds of $575
million. The sole assets of the subsidiary that is the obligor on the Preferred
Trust Securities are $592 million principal amount of 8 7/8% subordinated
debentures of TW Companies due December 31, 2025. Cumulative cash distributions
are payable on the Preferred Trust Securities at an annual rate of 8 7/8%. The
Preferred Trust Securities are mandatorily redeemable for cash on December 31,
2025, and TW Companies has the right to redeem the Preferred Trust Securities,
in whole or in part, on or after December 31, 2000, or in other certain
circumstances. If TW Companies elects to redeem these securities, the redemption
amount would be in each case at an amount per Preferred Trust Security equal to
$25 per security, plus accrued and unpaid distributions thereon.
Time Warner has certain obligations relating to the Preferred Trust
Securities which amount to a full and unconditional guaranty (on a subordinated
basis) of its subsidiary's obligations with respect thereto.
22
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
5. SHAREHOLDERS' EQUITY
In January 1999, Time Warner's Board of Directors authorized a new
common stock repurchase program that allows the Company to repurchase, from time
to time, up to $5 billion of common stock. This program is expected to be
completed over a three-year period; however, actual repurchases in any period
will be subject to market conditions. Along with stock option exercise proceeds
and borrowings under Time Warner's $1.3 billion stock option proceeds credit
facility, additional funding for this program is expected to be provided by
anticipated future free cash flow and financial capacity.
During the first quarter of 1999, Time Warner acquired 5.1 million
shares of its common stock at an aggregate cost of $330 million under its $5
billion common stock repurchase program. These repurchases increased the
cumulative shares purchased under this and its previous common stock repurchase
program begun in 1996 to approximately 100.2 million shares at an aggregate cost
of $3.37 billion.
6. SEGMENT INFORMATION
Time Warner classifies its business interests into four fundamental
areas: Cable Networks, consisting principally of interests in cable television
programming; Publishing, consisting principally of interests in magazine
publishing, book publishing and direct marketing; Entertainment, consisting
principally of interests in recorded music and music publishing, filmed
entertainment, television production and television broadcasting; and Cable,
consisting principally of interests in cable television systems. A majority of
Time Warner's interests in filmed entertainment, television production,
television broadcasting and cable television systems, and a portion of its
interests in cable television programming are held by the Entertainment Group.
The Entertainment Group is not consolidated for financial reporting purposes.
Information as to the operations of Time Warner and the Entertainment
Group in different business segments is set forth below based on the nature of
the products and services offered. Time Warner evaluates performance based on
several factors, of which the primary financial measure is business segment
operating income before noncash amortization of intangible assets ("EBITA"). The
operating results of Time Warner's and the Entertainment Group's cable segments
reflect the 1998 Cable Transactions.
23
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
Revenues
Time Warner:
Publishing........................................... $ 974 $ 948
Music................................................ 936 888
Cable Networks-TBS................................... 838 728
Filmed Entertainment-TBS............................. 317 372
Cable................................................ 222 248
Intersegment elimination............................. (21) (47)
------ ------
Total................................................ $3,266 $3,137
====== ======
Entertainment Group:
Filmed Entertainment-Warner Bros..................... $1,380 $1,312
Broadcasting-The WB Network.......................... 79 45
Cable Networks-HBO................................... 526 512
Cable................................................ 1,074 1,153
Intersegment elimination............................. (125) (110)
------ ------
Total................................................ $2,934 $2,912
====== ======
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
EBITA(1)
Time Warner:
Publishing........................................... $ 94 $ 85
Music................................................ 102 93
Cable Networks-TBS................................... 184 153
Filmed Entertainment-TBS............................. 29 (15)
Cable................................................ 66 74
Intersegment elimination............................. 10 (19)
------ ------
Total................................................ $ 485 $ 371
====== ======
Entertainment Group:
Filmed Entertainment-Warner Bros.(2)................. $ 346 $ 119
Broadcasting-The WB Network.......................... (41) (38)
Cable Networks-HBO................................... 125 109
Cable................................................ 337 307
------ ------
Total................................................ $ 767 $ 497
====== ======
- ---------------
(1) EBITA represents business segment operating income before noncash
amortization of intangible assets. After deducting amortization of
intangible assets, Time Warner's business segment operating income for the
three months ended March 31, 1999 and 1998 was $295 million and $170
million, respectively. Similarly, business segment operating income of the
Entertainment Group for the three months ended March 31, 1999 and 1998 was
$651 million and $369 million, respectively.
(2) Includes a net pretax gain of approximately $215 million recognized in
1999 in connection with the early termination and settlement of a
long-term home video distribution agreement.
24
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
Depreciation of Property, Plant and Equipment
Time Warner:
Publishing........................................... $ 19 $ 19
Music................................................ 17 19
Cable Networks-TBS................................... 24 22
Filmed Entertainment-TBS............................. 1 2
Cable................................................ 26 33
----- -----
Total................................................ $ 87 $ 95
===== =====
Entertainment Group:
Filmed Entertainment-Warner Bros..................... $ 29 $ 40
Broadcasting-The WB Network.......................... - -
Cable Networks-HBO................................... 7 5
Cable................................................ 156 198
----- -----
Total................................................ $ 192 $ 243
===== =====
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
Amortization of Intangible Assets(1)
Time Warner:
Publishing........................................... $ 10 $ 9
Music................................................ 67 68
Cable Networks-TBS................................... 50 50
Filmed Entertainment-TBS............................. 19 20
Cable................................................ 44 54
----- -----
Total................................................ $ 190 $ 201
===== =====
Entertainment Group:
Filmed Entertainment-Warner Bros..................... $ 30 $ 33
Broadcasting-The WB Network.......................... 1 1
Cable Networks-HBO................................... - -
Cable................................................ 85 94
----- -----
Total................................................ $ 116 $ 128
===== =====
(1) Amortization includes amortization relating to all business combinations
accounted for by the purchase method, including the $14 billion acquisition
of Warner Communications Inc. in 1989, the $6.2 billion acquisition of
Turner Broadcasting System, Inc. in 1996 and the $2.3 billion of cable
acquisitions in 1996 and 1995.
25
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
7. COMMITMENTS AND CONTINGENCIES
Time Warner is subject to numerous legal proceedings. In management's
opinion and considering established reserves, the resolution of these matters
will not have a material effect, individually and in the aggregate, on Time
Warner's consolidated financial statements.
8. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash flows is as
follows:
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
Interest expense..................................... $233 $233
Cash payments made for interest..................... 308 316
Cash payments made for income taxes.................. 80 60
Tax-related distributions received from TWE.......... 67 52
Income tax refunds received.......................... 5 42
Noncash investing activities in the first three months of 1998 included
the transfer of cable television systems (or interests therein) serving
approximately 650,000 subscribers that were formerly owned by subsidiaries of
Time Warner to the TWE-Advance/Newhouse Partnership, subject to approximately $1
billion of debt, in exchange for common and preferred partnership interests
therein, as well as certain related transactions (collectively, the "TWE-A/N
Transfers"). For a more comprehensive description of the TWE-A/N Transfers, see
Time Warner's 1998 Form 10-K.
26
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(unaudited)
Time Warner Companies, Inc. ("TW Companies") and Turner Broadcasting
System, Inc. ("TBS" and, together with TW Companies, the "Guarantor
Subsidiaries") are wholly owned subsidiaries of Time Warner Inc. ("Time
Warner"). Time Warner, TW Companies and TBS have fully and unconditionally
guaranteed all of the outstanding publicly traded indebtedness of each other.
Set forth below are condensed consolidating financial statements of Time Warner,
including each of the Guarantor Subsidiaries, presented for the information of
each company's public debtholders. Separate financial statements and other
disclosures relating to the Guarantor Subsidiaries have not been presented
because management has determined that this information would not be material to
such debtholders. The following condensed consolidating financial statements
present the results of operations, financial position and cash flows of (i) Time
Warner, TW Companies and TBS (in each case, reflecting investments in its
consolidated subsidiaries under the equity method of accounting), (ii) the
direct and indirect non-guarantor subsidiaries of Time Warner and (iii) the
eliminations necessary to arrive at the information for Time Warner on a
consolidated basis. These condensed consolidating financial statements should be
read in conjunction with the accompanying consolidated financial statements of
Time Warner.
Consolidating Statement of Operations
For The Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Non- Time
Time TW Guarantor Elimina- Warner
Warner Companies TBS Subsidiaries tions Consolidated
------ --------- --- ------------ ----- ------------
(millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues ................................... $ - $ - $184 $3,084 $ (2) $3,266
----- ----- ----- ------ ----- ------
Cost of revenues (1)........................ - - 68 1,720 (2) 1,786
Selling, general and administrative (1)..... - - 56 1,129 - 1,185
----- ----- ----- ------ ----- ------
Operating expenses.......................... - - 124 2,849 (2) 2,971
----- ----- ----- ------ ----- ------
Business segment operating income........... - - 60 235 - 295
Equity in pretax income of consolidated
subsidiaries............................. 378 474 76 - (928) -
Equity in pretax income of Entertainment
Group ................................... - - - 340 2 342
Interest and other, net..................... (52) (183) (34) (25) (17) (311)
Corporate expenses.......................... (22) (14) (4) (16) 34 (22)
----- ----- ----- ------ ----- ------
Income before income taxes.................. 304 277 98 534 (909) 304
Income taxes................................ (166) (151) (56) (264) 471 (166)
----- ----- ----- ------ ----- ------
Net income.................................. $ 138 $126 $ 42 $ 270 $(438) $ 138
===== ===== ===== ===== ===== ======
- --------------
(1) Includes depreciation and amortization
expense of:.......................... $ - $ - $ 2 $ 275 $ - $ 277
===== ===== ===== ===== ===== ======
</TABLE>
27
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(unaudited)
Consolidating Statement of Operations
For The Three Months Ended March 31, 1998
<TABLE>
<CAPTION>
Non- Time
Time TW Guarantor Elimina- Warner
Warner Companies TBS Subsidiaries tions Consolidated
------ --------- --- ------------ ------- ------------
(millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues ................................... $ - $ - $168 $2,969 $ - $3,137
----- ----- ----- ------ ----- ------
Cost of revenues (1)........................ - - 61 1,826 - 1,887
Selling, general and administrative (1)..... - - 50 1,030 - 1,080
----- ----- ----- ------ ----- ------
Operating expenses.......................... - - 111 2,856 - 2,967
----- ----- ----- ------ ----- ------
Business segment operating income........... - - 57 113 - 170
Equity in pretax income (loss) of consolidated
subsidiaries............................. 4 217 (21) - (200) -
Equity in pretax income of Entertainment
Group ................................... - - - 123 (16) 107
Interest and other, net..................... (10) (185) (44) (40) (4) (283)
Corporate expenses.......................... (19) (13) (4) (16) 33 (19)
----- ----- ----- ------ ----- ------
Income (loss) before income taxes........... (25) 19 (12) 180 (187) (25)
Income taxes................................ (37) (18) (13) (106) 137 (37)
----- ----- ------ ------ ------ ------
Net income (loss)........................... $ (62) $ 1 $ (25) $ 74 $ (50) $ (62)
===== ====== ====== ====== ====== ======
- --------------
(1) Includes depreciation and amortization
expense of:.......................... $ - $ - $ 2 $ 294 $ - $ 296
===== ====== ====== ====== ====== ======
</TABLE>
28
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(unaudited)
Consolidating Balance Sheet
March 31, 1999
<TABLE>
<CAPTION>
Non- Time
Time TW Guarantor Elimina- Warner
Warner Companies TBS Subsidiaries tions Consolidated
------ --------- --- ------------ ------- ------------
(millions)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and equivalents....................................... $ - $ 1 $ 24 $ 275 $ - $ 300
Receivables, net........................................... 8 45 81 2,119 - 2,253
Inventories................................................ - - 125 884 - 1,009
Prepaid expenses........................................... 83 - 1 1,215 - 1,299
------ ------ ------ ------ ------ -------
Total current assets....................................... 91 46 231 4,493 - 4,861
Noncurrent inventories..................................... - 153 1,660 - 1,813
Investments in and amounts due to and from
consolidated subsidiaries............................... 15,384 13,811 9,372 - (38,567) -
Investments in and amounts due to and
from Entertainment Group................................ - 904 - 4,809 (106) 5,607
Other investments.......................................... 238 13 24 1,203 (665) 813
Property, plant and equipment, net......................... 54 - 44 1,880 - 1,978
Music catalogues, contracts and copyrights................. - - - 851 - 851
Cable television and sports franchises..................... - - - 2,660 - 2,660
Goodwill................................................... - - - 11,734 - 11,734
Other assets............................................... 65 105 64 622 - 856
------ ------ ------ ------ ------ -------
Total assets............................................... $15,832 $14,879 $9,888 $29,912 $(39,338) $31,173
======= ======= ====== ======= ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable........................................... $ 12 $ - $ 1 $ 823 $ - $ 836
Participations, royalties and programming costs
payable................................................. - - 33 1,162 - 1,195
Debt due within one year................................... - - - 19 - 19
Other current liabilities.................................. 290 100 166 1,578 (14) 2,120
------ ------ ------ ------ ------ -------
Total current liabilities.................................. 302 100 200 3,582 (14) 4,170
Long-term debt ............................................ 1,584 7,457 747 818 - 10,606
Debt due to affiliates..................................... - - 1,647 158 (1,805) -
Borrowings against future stock option proceeds............ 1,100 - - - - 1,100
Deferred income taxes...................................... 3,497 3,413 164 3,578 (7,155) 3,497
Unearned portion of paid subscriptions..................... - - - 777 - 777
Other liabilities.......................................... 448 - 83 1,016 - 1,547
TW Companies-obligated mandatorily redeemable preferred
securities of a subsidiary holding solely subordinated
debentures of TW Companies.............................. - - - 575 - 575
Shareholders' equity
Due to (from) Time Warner and subsidiaries................. - (2,550) (483) (2,408) 5,441 -
Other shareholders' equity................................. 8,901 6,459 7,530 21,816 (35,805) 8,901
------ ------ ------ ------ ------- -------
Total shareholders' equity................................. 8,901 3,909 7,047 19,408 (30,364) 8,901
------ ------ ------ ------ ----- -------
Total liabilities and shareholders' equity................. $15,832 $14,879 $9,888 $29,912 $(39,338) $31,173
======= ======= ====== ======= ======== =======
</TABLE>
29
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(unaudited)
Consolidating Balance Sheet
December 31, 1998
<TABLE>
<CAPTION>
Non- Time
Time TW Guarantor Elimina- Warner
Warner Companies TBS Subsidiaries tions Consolidated
------ --------- --- ------------ ------ ------------
(millions)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and equivalents....................................... $ - $ 66 $ 25 $ 351 $ - $ 442
Receivables, net........................................... 10 56 78 2,750 (9) 2,885
Inventories................................................ - - 131 815 - 946
Prepaid expenses........................................... 17 5 - 1,166 (12) 1,176
------ ------ ------ ------ ------ ------
Total current assets....................................... 27 127 234 5,082 (21) 5,449
Noncurrent inventories..................................... - - 156 1,744 - 1,900
Investments in and amounts due to and from
consolidated subsidiaries............................... 15,222 13,745 9,465 - (38,432) -
Investments in and amounts due to and
from Entertainment Group................................ - 919 - 4,169 (108) 4,980
Other investments.......................................... 211 15 24 1,194 (650) 794
Property, plant and equipment, net......................... 55 - 44 1,892 - 1,991
Music catalogues, contracts and copyrights................. - - - 876 - 876
Cable television and sports franchises..................... - - - 2,868 - 2,868
Goodwill................................................... - - - 11,919 - 11,919
Other assets............................................... 65 116 59 631 (8) 863
------ ------ ------ ------ ------- ------
Total assets............................................... $15,580 $14,922 $9,982 $30,375 $(39,219) $31,640
======= ======= ====== ======= ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable........................................... $ 20 $ - $ 11 $ 965 $ - $ 996
Participations, royalties and programming costs
payable................................................. - - 31 1,168 - 1,199
Debt due within one year................................... - - - 19 - 19
Other current liabilities.................................. 308 229 176 1,705 (14) 2,404
------ ------ ------ ------ ------- -------
Total current liabilities.................................. 328 229 218 3,857 (14) 4,618
Long-term debt ............................................ 1,584 7,346 747 1,248 - 10,925
Debt due to affiliates..................................... - - 1,647 158 (1,805) -
Borrowings against future stock option proceeds............ 895 - - - - 895
Deferred income taxes...................................... 3,491 3,324 246 3,570 (7,140) 3,491
Unearned portion of paid subscriptions..................... - - - 741 - 741
Other liabilities.......................................... 430 - 116 997 - 1,543
TW Companies-obligated mandatorily redeemable preferred
securities of a subsidiary holding solely subordinated
debentures of TW Companies.............................. - - - 575 - 575
Shareholders' equity
Due to (from) Time Warner and subsidiaries................. - (2,313) (479) (2,317) 5,109 -
Other shareholders' equity................................. 8,852 6,336 7,487 21,546 (35,369) 8,852
------ ------ ------ ------ ------- -------
Total shareholders' equity................................. 8,852 4,023 7,008 19,229 (30,260) 8,852
------ ------ ------ ------ ------- -------
Total liabilities and shareholders' equity................. $15,580 $14,922 $9,982 $30,375 $(39,219) $31,640
======= ======= ====== ======= ======== =======
</TABLE>
30
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(unaudited)
Consolidating Statement of Cash Flows
For The Three Months Ended March 31, 1999
<TABLE>
<CAPTION>
Non- Time
Time TW Guarantor Elimina- Warner
Warner Companies TBS Subsidiaries tions Consolidated
------ --------- --- ------------------ ------------
(millions)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net income................................................. $138 $126 $ 42 $270 $ (438) $138
Adjustments for noncash and nonoperating items:
Depreciation and amortization.............................. - - 2 275 - 277
Noncash interest expense................................... - 1 - - - 1
Excess (deficiency) of distributions over equity in
pretax income of consolidated subsidiaries.............. 49 (258) 244 - (35) -
Deficiency of distributions over equity in
pretax income of Entertainment Group.................... - - - (186) (2) (188)
Changes in operating assets and liabilities................ 89 (119) (287) 39 233 (45)
------ ------ ------ ------ ------- -------
Cash provided (used) by operations......................... 276 (250) 1 398 (242) 183
------ ------ ------ ------ ------- -------
INVESTING ACTIVITIES
Investments and acquisitions............................... - - - (46) - (46)
Repayments of advances from consolidated subsidiaries...... - 71 - 232 (303) -
Capital expenditures....................................... - - (2) (134) - (136)
Investment proceeds........................................ - - - 28 - 28
------ ------ ------ ------ ------- -------
Cash provided (used) by investing activities............... - 71 (2) 80 (303) (154)
------ ------ ------ ------ ------- -------
FINANCING ACTIVITIES
Borrowings................................................. - 114 - 2 - 116
Debt repayments............................................ - - - (243) - (243)
Change in due to/from parent............................... (232) - - (313) 545 -
Borrowings against future stock option proceeds............ 205 - - - - 205
Repayments of borrowings against future stock
option proceeds......................................... - - - - - -
Repurchases of Time Warner common stock.................... (330) - - - - (330)
Dividends paid............................................. (75) - - - - (75)
Proceeds received from stock option and dividend
reinvestment plans...................................... 156 - - - - 156
------ ------ ------ ------ ------- -------
Cash provided (used) by financing activities............... (276) 114 - (554) 545 (171)
------ ------ ------ ------ ------- -------
DECREASE IN CASH AND EQUIVALENTS........................... - (65) (1) (76) - (142)
------ ------ ------ ------ ------- -------
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD..................................... - 66 25 351 - 442
------ ------ ------ ------ ------- -------
CASH AND EQUIVALENTS AT END OF PERIOD...................... $ - $ 1 $ 24 $275 $ - $300
======= ======= ====== ======= ======== =======
</TABLE>
31
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(unaudited)
Consolidating Statement of Cash Flows
For The Three Months Ended March 31, 1998
<TABLE>
<CAPTION>
Non- Time
Time TW Guarantor Elimina- Warner
Warner Companies TBS Subsidiaries tions Consolidated
------ --------- --- ------------ ------- ------------
(millions)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net income (loss) ......................................... $ (62) $ 1 $ (25) $ 74 $ (50) $ (62)
Adjustments for noncash and nonoperating items:
Depreciation and amortization.............................. - - 2 294 - 296
Noncash interest expense................................... - 15 - - - 15
Excess (deficiency) of distributions over equity in pretax
income of consolidated subsidiaries..................... 50 (120) 190 - (120) -
Excess of distributions over equity in pretax income
of Entertainment Group.................................. - - - 49 16 65
Changes in operating assets and liabilities................ 336 174 (88) 124 (528) 18
------ ------ ------ ------ ------- -------
Cash provided (used) by operations......................... 324 70 79 541 (682) 332
------ ------ ------ ------ ------- -------
INVESTING ACTIVITIES
Investments and acquisitions............................... (213) - - 189 - (24)
Advances to parents and consolidated subsidiaries - (187) - (2) 189 -
Repayment of advances from consolidated subsidiaries 75 - - - (75) -
Capital expenditures....................................... - - (2) (101) - (103)
Investment proceeds........................................ - - - 85 - 85
------ ------ ------ ------ ------- -------
Cash provided (used) by investing activities............... (138) (187) (2) 171 114 (42)
------ ------ ------ ------ ------- -------
FINANCING ACTIVITIES
Borrowings................................................. - 495 - 15 - 510
Debt repayments............................................ - (500) (75) (200) 75 (700)
Change in due to/from parent............................... 2 - - (495) 493 -
Borrowings against future stock option proceeds............ 465 - - - - 465
Repayments of borrowings against
future stock option proceeds............................ (533) - - - - (533)
Repurchases of Time Warner common stock.................... (277) - - - - (277)
Dividends paid............................................. (133) - - - - (133)
Proceeds received from stock option and dividend
reinvestment plans...................................... 290 - - - - 290
Other, principally financing costs......................... - (13) - - - (13)
------ ------ ------ ------ ------- -------
Cash provided (used) by financing activities............... (186) (18) (75) (680) 568 (391)
------ ------ ------ ------ ------- -------
INCREASE (DECREASE) IN CASH AND
EQUIVALENTS............................................. - (135) 2 32 - (101)
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD..................................... - 372 9 264 - 645
------ ------ ------ ------ ------- -------
CASH AND EQUIVALENTS AT END OF PERIOD...................... $ - $237 $ 11 $296 $ - $544
======= ======= ====== ======= ======== =======
</TABLE>
32
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Description of Business
Time Warner Entertainment Company, L.P. ("TWE" or the "Company")
classifies its business interests into three fundamental areas: Cable Networks,
consisting principally of interests in cable television programming;
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; and Cable, consisting
principally of interests in cable television systems. TWE also manages the cable
properties owned by Time Warner and the combined cable television operations are
conducted under the name of Time Warner Cable.
Use of EBITA
TWE evaluates operating performance based on several factors, including
its primary financial measure of operating income before noncash amortization of
intangible assets ("EBITA"). Consistent with management's financial focus on
controlling capital spending, EBITA measures operating performance after charges
for depreciation. In addition, EBITA eliminates the uneven effect across all
business segments of considerable amounts of noncash amortization of intangible
assets recognized in business combinations accounted for by the purchase method.
These business combinations, including Time Warner's $14 billion acquisition of
Warner Communications Inc. in 1989 and $1.3 billion acquisition of the minority
interest in American Television and Communications Corporation in 1992, created
over $10 billion of intangible assets that generally are being amortized over a
twenty to forty year period. The exclusion of noncash amortization charges also
is consistent with management's belief that TWE's intangible assets, such as
cable television franchises, film and television libraries and the goodwill
associated with its brands, generally are increasing in value and importance to
TWE's business objective of creating, extending and distributing recognizable
brands and copyrights throughout the world. As such, the following comparative
discussion of the results of operations of TWE includes, among other factors, an
analysis of changes in business segment EBITA. However, EBITA should be
considered in addition to, not as a substitute for, operating income, net income
and other measures of financial performance reported in accordance with
generally accepted accounting principles.
Transactions Affecting Comparability of Results of Operations
The comparability of TWE's operating results has been affected by a
$215 million net pretax gain recognized by TWE in 1999 in connection with the
early termination and settlement of a long-term home video distribution
agreement.
In order to meaningfully assess underlying operating trends, management
believes that the results of operations for 1999 should be analyzed after
excluding the effects of this significant nonrecurring gain. As such, the
following discussion and analysis focuses on amounts and trends adjusted to
exclude the impact of this unusual item. However, unusual items may occur in any
period. Accordingly, investors and other financial statement users individually
should consider the types of events and transactions for which adjustments have
been made.
In addition, the comparability of TWE's Cable division results has been
affected by certain cable-related transactions, as described more fully in Note
7 to the accompanying consolidated financial statements. While these
transactions had a significant effect on the comparability of the Cable
division's EBITA and operating income principally due to the deconsolidation of
the related operations, they did not have a significant effect on the
comparability of TWE's net income.
33
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
EBITA and operating income are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
Operating
EBITA Income
----- ---------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros.(1).... $ 346 $119 $ 316 $ 86
Broadcasting-The WB Network............. (41) (38) (42) (39)
Cable Networks-HBO...................... 125 109 125 109
Cable(2)................................ 337 307 252 213
----- ---- ------ ----
Total................................... $ 767 $497 $ 651 $369
===== ==== ====== ====
- ------------------
(1) Includes a net pretax gain of approximately $215 million recognized in
1999 in connection with the early termination and settlement of a long-term
home video distribution agreement.
(2) The comparability of the Cable division's results has been affected by
certain cable-related transactions that occurred in 1998, as described more
fully in Note 7 to the accompanying consolidated financial statements.
</TABLE>
TWE had revenues of $2.934 billion and net income of $312 million for
the three months ended March 31, 1999, compared to revenues of $2.910 billion
and net income of $108 million for the three months ended March 31, 1998.
As discussed more fully below, TWE's net income increased principally
as a result of the inclusion of an approximate $215 million net pretax gain
recognized in 1999 in connection with the early termination and settlement of a
long-term home video distribution agreement. Excluding this gain, TWE's net
income decreased to $97 million in 1999 from $108 million in the prior year.
This decrease principally resulted from higher losses from certain investments
accounted for under the equity method of accounting, which more than offset an
overall increase in business segment operating income.
As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $28 million and $15 million for
the three months ended March 31, 1999 and 1998, respectively, have been provided
for the operations of TWE's domestic and foreign subsidiary corporations.
Filmed Entertainment-Warner Bros. Revenues increased to $1.380 billion,
compared to $1.310 billion in the first three months of 1998. EBITA increased to
$346 million from $119 million. Operating income increased to $316 million from
$86 million. Revenues benefited from increases in worldwide home video and
theatrical operations, offset in part by lower worldwide television production
and distribution revenues. EBITA and operating income increased primarily from
the inclusion of an approximate $215 million net pretax gain recognized in
connection with the early termination and settlement of a long-term home video
distribution agreement. In addition, EBITA and operating income benefited from
improved results from worldwide theatrical and home video operations and an
increase in investment-related income, offset in part by lower results from
television production, television distribution and consumer products operations.
Broadcasting - The WB Network. Revenues increased to $79 million,
compared to $45 million in the first three months of 1998. EBITA decreased to
a loss of $41 million from a loss of $38 million. Operating losses increased
to $42 million from $39 million. Revenues increased as a result of improved
television ratings and the addition of a fifth night of primetime programming
in September 1998. Despite the revenue increase, operating losses
34
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
increased because of a lower allocation of losses to a minority partner in
the network. However, excluding this minority interest effect, operating losses
improved principally as a result of the revenue gains, which outweighed higher
programming costs associated with the expanded programming schedule.
Cable Networks-HBO. Revenues increased to $526 million, compared to
$512 million in the first three months of 1998. EBITA and operating income
increased to $125 million from $109 million. Revenues benefited primarily from
an increase in subscriptions. EBITA and operating income increased principally
as a result of the revenue gains, cost savings, one-time gains from the sale of
certain investments and higher income from Comedy Central, a 50%-owned equity
investee, offset in part by higher marketing expenses.
Cable. Revenues decreased to $1.074 billion, compared to $1.153 billion
in the first three months of 1998. EBITA increased to $337 million from $307
million. Operating income increased to $252 million from $213 million. The Cable
division's 1999 operating results were affected by certain cable-related
transactions that occurred in 1998 (the "1998 Cable Transactions"), as described
more fully in Note 7 to the accompanying consolidated financial statements.
Excluding the effect of the 1998 Cable Transactions, revenues benefited from an
increase in basic cable subscribers, increases in basic cable rates and an
increase in advertising and pay-per-view revenues. Similarly excluding the
effect of the 1998 Cable Transactions, EBITA and operating income increased
principally as a result of the revenue gains, offset in part by the absence of
approximately $14 million of net pretax gains recognized in 1998 relating to the
sale or exchange of certain cable television systems.
Interest and Other, Net. Interest and other, net, was $225 million in
the first three months of 1999, compared to $164 million in the first three
months of 1998. Interest expense decreased to $137 million, compared to $141
million in the first three months of 1998, principally due to lower average debt
levels. There was other expense, net, of $88 million in the first three months
of 1999, compared to $23 million in the first three months of 1998, principally
due to higher losses from certain investments accounted for under the equity
method of accounting.
FINANCIAL CONDITION AND LIQUIDITY
March 31, 1999
Financial Condition
TWE had $6.9 billion of debt, $321 million of cash and equivalents
(net debt of $6.6 billion), $615 million of Time Warner General Partners' Senior
Capital and $5.1 billion of partners' capital at March 31, 1999, compared to
$6.6 billion of debt, $87 million of cash and equivalents (net debt of $6.5
billion), $217 million of preferred stock of a subsidiary, $603 million of Time
Warner General Partners' Senior Capital and $5.1 billion of partners' capital at
December 31, 1998.
Redemption of REIT Preferred Stock
In March 1999, a subsidiary of TWE (the "REIT") redeemed all of its
shares of preferred stock ("REIT Preferred Stock") at an aggregate cost of $217
million, which approximated net book value. The redemption was funded with
borrowings under TWE's bank credit agreement. Pursuant to its terms, the REIT
Preferred Stock was redeemed as a result of proposed changes to federal tax
regulations that substantially increased the likelihood that dividends paid by
the REIT or interest paid to the REIT under a mortgage note of TWE would not be
fully deductible for federal income tax purposes.
35
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Cash Flows
During the first three months of 1999, TWE's cash provided by
operations amounted to $788 million and reflected $767 million of EBITA from its
Filmed Entertainment-Warner Bros., Broadcasting-The WB Network, Cable
Networks-HBO and Cable businesses, $192 million of noncash depreciation expense
and $44 million related to a decrease in working capital requirements, other
balance sheet accounts and noncash items, less $144 million of interest
payments, $22 million of income taxes, $18 million of corporate expenses and $31
million of proceeds repaid under TWE's asset securitization program. Cash
provided by operations of $441 million in the first three months of 1998
reflected $497 million of EBITA from its Filmed Entertainment-Warner Bros.,
Broadcasting-The WB Network, Cable Networks-HBO and Cable businesses, $243
million of noncash depreciation expense and $148 million of proceeds provided by
TWE's asset securitization program, less $156 million of interest payments, $20
million of income taxes, $18 million of corporate expense and $253 million
related to an increase in working capital requirements, other balance sheet
accounts and noncash items.
Cash used by investing activities was $322 million in the first three
months of 1999, compared to $559 million in the first three months of 1998,
principally as a result of a $183 million decrease in cash used for investments
and acquisitions and a decrease in capital expenditures. Capital expenditures
decreased to $305 million in the first three months of 1999, compared to $352
million in the first three months of 1998.
Cash used by financing activities was $232 million in the first three
months of 1999, compared to $97 million in the first three months of 1998. The
use of cash in 1999 principally resulted from the redemption of REIT Preferred
Stock at an aggregate cost of $217 million and the payment of $154 million of
capital distributions to Time Warner, offset in part by a $157 million increase
in net borrowings. The use of cash in 1998 principally resulted from the payment
of $172 million of capital distributions to Time Warner, offset in part by a
$113 million increase in net borrowings.
Management believes that TWE's operating cash flow, cash and
equivalents and additional borrowing capacity are sufficient to fund its capital
and liquidity needs for the foreseeable future.
Cable Capital Spending
Time Warner Cable has been engaged in a plan to upgrade the
technological capability and reliability of its cable television systems and
develop new services, which it believes will position the business for
sustained, long-term growth. Capital spending by TWE's Cable division amounted
to $276 million in the three months ended March 31, 1999, compared to $326
million the three months ended March 31, 1998. For the full year of 1999, cable
capital spending is expected to be comparable to 1998 levels, with approximately
$900 million budgeted for the remainder of 1999. Capital spending by TWE's Cable
division is expected to continue to be funded by cable operating cash flow.
Warner Bros. Backlog
Warner Bros.' backlog, representing the amount of future revenue not
yet recorded from cash contracts for the licensing of theatrical and television
product for pay cable, basic cable, network and syndicated television
exhibition, amounted to $2.313 billion at March 31, 1999 (including amounts
relating to TWE's cable television networks of $218 million and to Time Warner's
cable television networks of $584 million), compared to $2.298
36
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
billion at December 31, 1998 (including amounts relating to TWE's cable
television networks of $199 million and to Time Warner's cable television
networks of $570 million).
Because backlog generally relates to contracts for the licensing of
theatrical and television product which already have been produced, the
recognition of revenue for such completed product principally is dependent only
upon the commencement of the availability period for telecast under the terms of
the related licensing agreement. Cash licensing fees are collected periodically
over the term of the related licensing agreements or on an accelerated basis
using TWE's $500 million securitization facility. The portion of backlog for
which cash has not already been received has significant off-balance sheet asset
value as a source of future funding. The backlog excludes advertising barter
contracts, which also are expected to result in the future realization of
revenues and cash through the sale of advertising spots received under such
contracts.
Year 2000 Technology Preparedness
TWE, like most large companies, depends on many different computer
systems and other chip-based devices for the continuing conduct of its business.
Older computer programs, computer hardware and chip-based devices may fail to
recognize dates beginning on January 1, 2000 as being valid dates, and as a
result may fail to operate or may operate improperly when such dates are
introduced.
TWE's exposure to potential Year 2000 problems arises both in
technological operations under the control of the Company and in those dependent
on one or more third parties. These technological operations include information
technology ("IT") systems and non-IT systems, including those with embedded
technology, hardware and software. Most of TWE's potential Year 2000 exposures
are dependent to some degree on one or more third parties. Failure to achieve
high levels of Year 2000 compliance could have a material adverse impact on TWE
and its financial statements.
The Company's Year 2000 initiative is being conducted at the
operational level by divisional project managers and senior technology
executives overseen by senior divisional executives, with assistance internally
as well as from outside professionals. The progress of each division through the
different phases of remediation--inventorying, assessment, remediation planning,
implementation and final testing--is actively overseen and reviewed on a regular
basis by an executive oversight group.
The Company has generally completed the process of identifying
potential Year 2000 difficulties in its technological operations, including IT
applications, IT technology and support, desktop hardware and software, non-IT
systems and important third party operations, and distinguishing those that are
"mission critical" from those that are not. An item is considered "mission
critical" if its Year 2000-related failure would significantly impair the
ability of one of the Company's major business units to (1) produce, market and
distribute the products or services that generate significant revenues for that
business, (2) meet its obligations to pay its employees, artists, vendors and
others or (3) meet its obligations under regulatory requirements and internal
accounting controls. The Company and its divisions have identified approximately
600 worldwide, "mission critical" potential exposures. Of these, as of March 31,
1999, approximately 50% have been identified by the divisions as Year 2000
compliant, approximately 45% as in the remediation implementation or final
testing stages, approximately 4% as in the remediation planning stage and less
than 2% as in the assessment stage. The Company currently expects that the
assessment phase for the few remaining potential exposures should be completed
during the second quarter of 1999 and that remediation with respect to
approximately 90% of all these identified operations will be substantially
completed in all material respects by the end of the second quarter of 1999. The
Company, however, could experience unexpected delays. The
37
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Company is currently planning to impose a "quiet" period at the beginning
of the fourth quarter of 1999 during which any remaining remediation involving
installation or modification of systems that interface with other systems will
be minimized to permit the Company to conduct testing in a stable environment.
As stated above, however, the Company's business is heavily dependent on
third parties and these parties are themselves heavily dependent on technology.
For example, in a situation endemic to the cable industry, much of the Company's
headend equipment that controls cable set-top boxes was not Year 2000 compliant.
The box manufacturers have been working with cable industry groups to develop
solutions that the Company is installing in its head-end equipment. It is
currently expected that these solutions will be substantially implemented by the
end of the second quarter of 1999. In addition, if a television broadcaster or
cable programmer encounters Year 2000 problems that impede its ability to
deliver its programming, the Company will be unable to provide that programming
to its cable customers. Because the Company is also a programming supplier,
third-party signal delivery problems would affect its ability to deliver its
programming to its customers. The Company has attempted to include in its
"mission critical" inventory such significant service providers, vendors,
suppliers, customers and governmental entities that are believed to be critical
to business operations and is in various stages of ascertaining their state of
Year 2000 readiness through various means, including questionnaires, interviews,
on-site visits, system interface testing and industry group participation. The
Company continues to monitor these situations. Moreover, TWE is dependent, like
all large companies, on the continued functioning, domestically and
internationally, of basic, heavily computerized services such as banking,
telephony, water and power, and various distribution mechanisms ranging from the
mail, railroads and trucking to high-speed data transmission. TWE is taking
steps to attempt to satisfy itself that the third parties on which it is heavily
reliant are Year 2000 compliant, are developing satisfactory contingency plans
or that alternate means of meeting its requirements are available, but cannot
predict the likelihood of such compliance nor the direct or indirect costs to
the Company of non-compliance by those third parties or of securing such
services from alternate compliant third parties. In areas in which the Company
is uncertain about the anticipated Year 2000 readiness of a significant third
party, the Company is investigating available alternatives, if any.
The Company currently estimates that the aggregate cost of its Year
2000 remediation program, which started in 1996, will be approximately $50 to
$85 million, of which an estimated 50% to 60% has been incurred through March
31, 1999. These costs include estimates of the costs of assessment, replacement,
repair and upgrade, both planned and unplanned, of certain IT and non-IT systems
and their implementation and testing. The Company anticipates that its
remediation program, and related expenditures, may continue into 2001 as
temporary solutions to Year 2000 problems are replaced with upgraded equipment.
These expenditures have been and are expected to continue to be funded from the
Company's operating cash flow and have not and are not expected to impact
materially the Company's financial statements.
Management believes that it has established an effective program to
resolve all significant Year 2000 issues in its control in a timely manner. As
noted above, however, the Company has not yet completed all phases of its
program and is dependent on third parties whose progress is not within its
control. In the event that the Company does not complete any of its currently
planned additional remediation prior to the Year 2000, management believes that
the Company could experience significant difficulty in producing and delivering
its products and services and conducting its business in the Year 2000 as it has
in the past. In addition, disruptions experienced by third parties with which
the Company does business as well as by the economy generally could also
materially adversely affect the Company. The amount of potential liability and
lost revenue cannot be reasonably estimated at this time.
The Company has been focusing its efforts on identification and
remediation of its Year 2000 exposures and is beginning to develop specific
contingency plans in the event it does not successfully complete its remaining
38
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
remediation as anticipated or experiences unforeseen problems. The Company is
also examining its existing standard business interruption strategies to
evaluate whether they would satisfactorily meet the demands of failures arising
from Year-2000 related problems. The Company intends to examine its status
periodically to determine the necessity of establishing and implementing such
contingency plans or additional strategies, which could involve, among other
things, manual workarounds, adjusting staffing strategies and sharing resources
across divisions.
Caution Concerning Forward-Looking Statements
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This document, together
with management's public commentary related thereto, contains such
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, particularly statements anticipating future
growth in revenues, EBITA and cash flow. Words such as "anticipate," "estimate,"
"expects," "projects," "intends," "plans," "believes" and words and terms of
similar substance used in connection with any discussion of future operating or
financial performance identify such forward-looking statements. Those
forward-looking statements are management's present expectations of future
events. As with any projection or forecast, they are inherently susceptible to
uncertainty and changes in circumstances, and TWE is under no obligation to (and
expressly disclaims any such obligation to) update or alter its forward-looking
statements whether as a result of such changes, new information, future events
or otherwise.
TWE operates in highly competitive, consumer driven and rapidly
changing media and entertainment businesses that are dependent on government
regulation and economic, political and social conditions in the countries in
which they operate, consumer demand for their products and services,
technological developments and (particularly in view of technological changes)
protection of their intellectual property rights. TWE's actual results could
differ materially from management's expectations because of changes in such
factors. Some of the other factors that also could cause actual results to
differ from those contained in the forward-looking statements include those
identified in TWE's other filings and:
o For TWE's cable business, more aggressive than expected competition from
new technologies and other types of video programming distributors,
including DBS; increases in government regulation of cable or equipment
rates or other terms of service (such as "digital must-carry" or
"unbundling" requirements); increased difficulty in obtaining franchise
renewals; the failure of new equipment (such as digital set-top boxes) or
services (such as high-speed on-line services or telephony over cable or
video on demand) to function properly, to appeal to enough consumers or to
be available at reasonable prices and to be delivered in a timely fashion;
and greater than expected increases in programming or other costs.
o For TWE's cable programming and television businesses, greater than
expected programming or production costs; public and cable operator
resistance to price increases (and the negative impact on premium
programmers of increases in basic cable rates); increased regulation of
distribution agreements; the sensitivity of advertising to economic
cyclicality; and greater than expected fragmentation of consumer viewership
due to an increased number of programming services or the increased
popularity of alternatives to television.
o For TWE's film and television businesses, their ability to continue to
attract and select desirable talent and scripts at manageable costs;
increases in production costs generally; fragmentation of consumer leisure
and entertainment time (and its possible negative effects on the broadcast
and cable networks, which are significant
39
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
customers of these businesses); continued popularity of merchandising;
and the uncertain impact of technological developments such as DVD and
the Internet.
o The ability of the Company and its key service providers, vendors,
suppliers, customers and governmental entities to replace, modify or
upgrade computer systems in ways that adequately address the Year 2000
issue, including their ability to identify and correct all relevant
computer codes and embedded chips, unanticipated difficulties or delays in
the implementation of the Company's remediation plans and the ability of
third parties to address adequately their own Year 2000 issues.
In addition, TWE's overall financial strategy, including growth in
operations, maintaining its financial ratios and strengthened balance sheet,
could be adversely affected by increased interest rates, failure to meet
earnings expectations, significant acquisitions or other transactions,
consequences of the euro conversion and changes in TWE's plans, strategies and
intentions.
40
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
--------- ------------
1999 1998
---- ----
(millions)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents........................................................................ $ 321 $ 87
Receivables, including $512 and $765 million due from Time Warner,
less allowances of $477 and $506 million................................................ 2,423 2,618
Inventories................................................................................. 1,191 1,312
Prepaid expenses............................................................................ 188 166
------- -------
Total current assets........................................................................ 4,123 4,183
Noncurrent inventories...................................................................... 2,353 2,327
Loan receivable from Time Warner............................................................ 400 400
Investments................................................................................. 1,070 886
Property, plant and equipment, net.......................................................... 6,185 6,041
Cable television franchises................................................................. 3,898 3,773
Goodwill.................................................................................... 3,828 3,854
Other assets................................................................................ 675 766
------- -------
Total assets................................................................................ $22,532 $22,230
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable............................................................................ $ 1,297 $ 1,473
Participations and programming costs payable................................................ 1,464 1,515
Debt due within one year.................................................................... 6 6
Other current liabilities, including $392 and $370 million due to Time Warner............... 2,051 1,942
------- -------
Total current liabilities................................................................... 4,818 4,936
Long-term debt.............................................................................. 6,921 6,578
Other long-term liabilities, including $1.309 and $1.130 billion due to Time Warner......... 3,440 3,267
Minority interests.......................................................................... 1,623 1,522
Preferred stock of subsidiary holding solely a mortgage note of its parent.................. - 217
Time Warner General Partners' Senior Capital................................................ 615 603
Partners' capital
Contributed capital......................................................................... 7,341 7,341
Undistributed partnership earnings (deficit)................................................ (2,226) (2,234)
------- -------
Total partners' capital..................................................................... 5,115 5,107
------- -------
Total liabilities and partners' capital..................................................... $22,532 $22,230
======= =======
See accompanying notes.
</TABLE>
41
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
<S> <C> <C>
Revenues (a)................................................................................ $ 2,934 $ 2,910
------- -------
Cost of revenues (a)(b)..................................................................... 1,704 1,946
Selling, general and administrative (a)(b).................................................. 579 595
------- -------
Operating expenses.......................................................................... 2,283 2,541
------- -------
Business segment operating income........................................................... 651 369
Interest and other, net (a)................................................................. (225) (164)
Minority interest........................................................................... (68) (64)
Corporate services (a)...................................................................... (18) (18)
------- -------
Income before income taxes.................................................................. 340 123
Income taxes................................................................................ (28) (15)
------- -------
Net income.................................................................................. $ 312 $ 108
======= =======
- ---------------
(a) Includes the following income (expenses) resulting from transactions with
the partners of TWE and other related companies for the three months ended
March 31, 1999 and 1998, respectively: revenues-$120 million and $129
million; cost of revenues-$(78) million and $(38) million; selling, general
and administrative-$(4) million and $1 million; interest and other, net-$20
million and $2 million; and corporate services-$(18) million in both
periods.
(b) Includes depreciation and amortization expense of:...................................... $ 308 $ 371
======= =======
See accompanying notes.
</TABLE>
42
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
<S> <C> <C>
OPERATIONS
Net income.................................................................................. $ 312 $ 108
Adjustments for noncash and nonoperating items:
Depreciation and amortization............................................................... 308 371
Changes in operating assets and liabilities................................................. 168 (38)
------- -------
Cash provided by operations................................................................. 788 441
------- -------
INVESTING ACTIVITIES
Investments and acquisitions................................................................ (47) (230)
Capital expenditures........................................................................ (305) (352)
Investment proceeds......................................................................... 30 23
------- -------
Cash used by investing activities........................................................... (322) (559)
------- -------
FINANCING ACTIVITIES
Borrowings.................................................................................. 1,160 489
Debt repayments............................................................................. (1,003) (376)
Redemption of preferred stock of subsidiary ................................................ (217) -
Capital distributions....................................................................... (154) (172)
Other....................................................................................... (18) (38)
------- -------
Cash used by financing activities........................................................... (232) (97)
------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS................................................. 234 (215)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................................................. 87 322
------- -------
CASH AND EQUIVALENTS AT END OF PERIOD....................................................... $ 321 $ 107
======= =======
See accompanying notes.
</TABLE>
43
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
(Unaudited)
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
BALANCE AT BEGINNING OF PERIOD....................... $5,107 $6,333
Net income........................................... 312 108
Other comprehensive income (loss).................... 41 (14)
------ ------
Comprehensive income................................. 353 94
Distributions........................................ (333) (277)
Allocation of income to Time Warner General
Partners' Senior Capital ......................... (12) (22)
------ ------
BALANCE AT END OF PERIOD............................. $5,115 $6,128
====== ======
See accompanying notes.
44
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Time Warner Entertainment Company, L.P., a Delaware limited partnership
("TWE"), classifies its business interests into three fundamental areas: Cable
Networks, consisting principally of interests in cable television programming;
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; and Cable, consisting
principally of interests in cable television systems.
Each of the business interests within Cable Networks, Entertainment and
Cable is important to TWE's objective of increasing partner value through the
creation, extension and distribution of recognizable brands and copyrights
throughout the world. Such brands and copyrights include (1) HBO and Cinemax,
the leading pay television services, (2) the unique and extensive film,
television and animation libraries of Warner Bros. and trademarks such as the
Looney Tunes characters and Batman, (3) The WB Network, a national broadcasting
network launched in 1995 as an extension of the Warner Bros. brand and as an
additional distribution outlet for Warner Bros.' collection of children's
cartoons and television programming, and (4) Time Warner Cable, currently the
largest operator of cable television systems in the U.S.
The operating results of TWE's various business interests are presented
herein as an indication of financial performance (Note 7). Except for start-up
losses incurred in connection with The WB Network, TWE's principal business
interests generate significant operating income and cash flow from operations.
The cash flow from operations generated by such business interests is
considerably greater than their operating income due to significant amounts of
noncash amortization of intangible assets recognized principally in Time Warner
Companies, Inc.'s ("Time Warner") $14 billion acquisition of Warner
Communications Inc. ("WCI") in 1989 and $1.3 billion acquisition of the minority
interest in American Television and Communications Corporation ("ATC") in 1992,
a portion of which cost was allocated to TWE upon the capitalization of the
partnership. Noncash amortization of intangible assets recorded by TWE's
businesses amounted to $116 million and $128 million in the three months ended
March 31, 1999 and 1998, respectively.
Time Warner and certain of its wholly owned subsidiaries collectively
own general and limited partnership interests in TWE consisting of 74.49% of the
pro rata priority capital ("Series A Capital") and residual equity capital
("Residual Capital"), and 100% of the senior priority capital ("Senior Capital")
and junior priority capital ("Series B Capital"). The remaining 25.51% limited
partnership interests in the Series A Capital and Residual Capital of TWE are
held by a subsidiary of MediaOne Group, Inc. ("MediaOne"). Certain of Time
Warner's subsidiaries are the general partners of TWE ("Time Warner General
Partners").
Basis of Presentation
The accompanying consolidated financial statements are unaudited but, in
the opinion of management, contain all the adjustments (consisting of those of a
normal recurring nature) considered necessary to present fairly the financial
position and the results of operations and cash flows for the periods presented
in conformity with generally accepted accounting principles applicable to
interim periods. The accompanying consolidated financial statements should be
read in conjunction with the audited consolidated financial statements of TWE
included in its Annual Report on Form 10-K for the year ended December 31, 1998
(the "1998 Form 10-K"). Certain reclassifications have been made to the prior
year's financial statements to conform to the 1999 presentation.
45
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. GAIN ON TERMINATION OF MGM VIDEO DISTRIBUTION AGREEMENT
In March 1999, Warner Bros. and Metro-Goldwyn-Mayer, Inc. ("MGM")
terminated a long-term distribution agreement under which Warner Bros. had
exclusive worldwide distribution rights for MGM/United Artists home video
product. In connection with the early termination and settlement of this
distribution agreement, Warner Bros. recognized a net pretax gain of
approximately $215 million, which has been included in operating income in the
accompanying consolidated statement of operations.
3. INVESTMENT IN PRIMESTAR
TWE owns an approximate 24% equity interest in Primestar, Inc.
("Primestar"). In the fourth quarter of 1998, TWE recorded a charge of
approximately $210 million principally to reduce the carrying value of its
interest in Primestar to fair value.
In January 1999, Primestar, an indirect wholly owned subsidiary of
Primestar and the stockholders of Primestar entered into an agreement to sell
Primestar's medium-power direct broadcast satellite business and assets to
DirecTV, a competitor of Primestar owned by Hughes Electronics Corp. In
addition, a second agreement was entered into with DirecTV, pursuant to which
DirecTV agreed to purchase Primestar's rights with respect to the use or
acquisition of certain high-power satellites from a wholly owned subsidiary of
one of the stockholders of Primestar.
In April 1999, Primestar closed on the sale of its medium-power direct
broadcast satellite business to DirecTV. The final terms of this medium-power
transaction confirmed the decline in value of TWE's interest in Primestar
recognized in 1998. The closing of the sale of Primestar's high-power satellite
rights to DirecTV is expected to occur in the second quarter of 1999, subject to
customary closing conditions, including all necessary governmental and
regulatory approvals. There can be no assurance that such approvals will be
obtained and that this high-power transaction will be consummated.
During the period in which Primestar's operations are being wound down,
TWE continues to recognize its share of losses of Primestar under the equity
method of accounting. Such losses are included in interest and other, net, in
TWE's consolidated statement of operations.
4. INVENTORIES
TWE's inventories consist of:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
Current Noncurrent Current Noncurrent
------- ---------- ------- ----------
(millions)
<S> <C> <C> <C> <C>
Film costs:
Released, less amortization..................................... $ 612 $ 782 $ 614 $ 744
Completed and not released...................................... 73 22 179 76
In process and other............................................ 25 628 23 572
Library, less amortization...................................... - 547 - 560
Programming costs, less amortization............................... 406 374 426 375
Merchandise........................................................ 75 - 70 -
------ ------ ------ ------
Total.............................................................. $1,191 $2,353 $1,312 $2,327
====== ====== ====== ======
</TABLE>
46
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. PREFERRED STOCK OF SUBSIDIARY
In February 1997, a newly formed, substantially owned subsidiary of TWE
(the "REIT") issued 250,000 shares of preferred stock ("REIT Preferred Stock").
The REIT was intended to qualify as a real estate investment trust under the
Internal Revenue Code of 1986, as amended.
In March 1999, the REIT redeemed all of its shares of REIT Preferred
Stock at an aggregate cost of $217 million, which approximated net book value.
The redemption was funded with borrowings under TWE's bank credit agreement.
Pursuant to its terms, the REIT Preferred Stock was redeemed as a result of
proposed changes to federal tax regulations that substantially increased the
likelihood that dividends paid by the REIT or interest paid to the REIT under a
mortgage note of TWE would not be fully deductible for federal income tax
purposes.
6. PARTNERS' CAPITAL
TWE is required to make distributions to reimburse the partners for
income taxes at statutory rates based on their allocable share of taxable
income, and to reimburse Time Warner for stock options granted to employees of
TWE based on the amount by which the market price of Time Warner Inc. common
stock exceeds the option exercise price on the exercise date or, with respect to
options granted prior to the TWE capitalization on June 30, 1992, the greater of
the exercise price or the $13.88 market price of Time Warner Inc. common stock
at the time of the TWE capitalization. TWE accrues a stock option distribution
and a corresponding liability with respect to unexercised options when the
market price of Time Warner Inc. common stock increases during the accounting
period, and reverses previously accrued stock option distributions and the
corresponding liability when the market price of Time Warner Inc.
common stock declines.
During the three months ended March 31, 1999, TWE accrued $67 million of
tax-related distributions and $266 million of stock option distributions, based
on closing prices of Time Warner Inc. common stock of $70.81 at March 31, 1999
and $62.06 at December 31, 1998. During the three months ended March 31, 1998,
TWE accrued $52 million of tax-related distributions and $225 million of stock
option distributions as a result of an increase at that time in the market price
of Time Warner Inc. common stock. During the three months ended March 31, 1999,
TWE paid distributions to the Time Warner General Partners in the amount of $154
million, consisting of $67 million of tax-related distributions and $87 million
of stock option related distributions. During the three months ended March 31,
1998, TWE paid the Time Warner General Partners distributions in the amount of
$172 million, consisting of $52 million of tax-related distributions and $120
million of stock option related distributions.
47
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. SEGMENT INFORMATION
TWE classifies its business interests into three fundamental areas:
Cable Networks, consisting principally of interests in cable television
programming; Entertainment, consisting principally of interests in filmed
entertainment, television production and television broadcasting; and Cable,
consisting principally of interests in cable television systems.
Information as to the operations of TWE in different business segments
is set forth below based on the nature of the products and services offered. TWE
evaluates performance based on several factors, of which the primary financial
measure is business segment operating income before noncash amortization of
intangible assets ("EBITA"). The operating results of TWE's cable segment
reflect: (i) the transfer of Time Warner Cable's direct broadcast satellite
operations to Primestar, effective as of April 1, 1998, (ii) the formation of
the Road Runner joint venture to operate and expand Time Warner Cable's and
MediaOne's existing high-speed online businesses, effective as of June 30, 1998,
(iii) the reorganization of Time Warner Cable's business telephony operations
into a separate entity named Time Warner Telecom LLC, effective as of July 1,
1998 and (iv) the formation of a joint venture in Texas that owns cable
television systems serving approximately 1.1 million subscribers, effective as
of December 31, 1998 (collectively, the "1998 Cable Transactions"). These
transactions are described more fully in TWE's 1998 Form 10-K.
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
Revenues
Filmed Entertainment-Warner Bros...................... $ 1,380 $1,310
Broadcasting-The WB Network........................... 79 45
Cable Networks-HBO.................................... 526 512
Cable................................................. 1,074 1,153
Intersegment elimination.............................. (125) (110)
------- ------
Total................................................. $ 2,934 $2,910
======= ======
Three Months
Ended March 31,
---------------
1999 1998
(millions)
EBITA(1)
Filmed Entertainment-Warner Bros(2)................... $346 $119
Broadcasting-The WB Network........................... (41) (38)
Cable Networks-HBO.................................... 125 109
Cable................................................. 337 307
------- ------
Total................................................. $767 $497
======= ======
- ---------------
(1) EBITA represents business segment operating income before noncash
amortization of intangible assets. After deducting amortization of
intangible assets, TWE's business segment operating income for the three
months ended March 31, 1999 and 1998 was $651 million and $369 million,
respectively.
(2) Includes a net pretax gain of approximately $215 million recognized in
1999 in connection with the early termination and settlement of a long-term
home video distribution agreement.
48
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
Depreciation of Property, Plant and Equipment
Filmed Entertainment-Warner Bros...................... $ 29 $ 40
Broadcasting-The WB Network........................... - -
Cable Networks-HBO.................................... 7 5
Cable................................................. 156 198
------- ------
Total................................................. $ 192 $ 243
======= ======
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
Amortization of Intangible Assets (1)
Filmed Entertainment-Warner Bros...................... $ 30 $ 33
Broadcasting-The WB Network........................... 1 1
Cable Networks-HBO.................................... - -
Cable................................................. 85 94
------- ------
Total................................................. $116 $128
======= ======
(1)Amortization includes amortization relating to all business combinations
accounted for by the purchase method, including Time Warner's $14 billion
acquisition of WCI in 1989 and $1.3 billion acquisition of the minority
interest in ATC in 1992.
8. COMMITMENTS AND CONTINGENCIES
TWE is subject to numerous legal proceedings. In management's opinion
and considering established reserves, the resolution of these matters will not
have a material effect, individually and in the aggregate, on TWE's consolidated
financial statements.
9. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash flows is as
follows:
Three Months
Ended March 31,
---------------
1999 1998
---- ----
(millions)
Interest expense...................................... $137 $141
Cash payments made for interest....................... 144 156
Cash payments made for income taxes, net.............. 22 20
Noncash capital distributions......................... 266 225
Noncash investing activities in the first three months of 1998 included
the transfer of cable television systems (or interests therein) serving
approximately 650,000 subscribers that were formerly owned by subsidiaries of
Time Warner to the TWE-Advance/Newhouse Partnership, subject to approximately $1
billion of debt, in exchange for common and preferred partnership interests
therein, as well as certain related transactions (collectively, the "TWE-A/N
Transfers"). For a more comprehensive description of the TWE-A/N Transfers, see
TWE's 1998 Form 10-K.
49
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings.
Reference is made to the litigation entitled Six Flags Over Georgia,
Inc., et al. v. Six Flags Fund, Ltd., et al. commenced in Superior Court in
Gwinnett County, Georgia in connection with the management of the Six Flags Over
Georgia Theme Park described on pages I-39 and I-40 of Time Warner's Annual
Report on Form 10-K for the year ended December 31, 1998 (the "1998 Form 10-K").
On April 22, 1999, the Court denied defendants' post-trial motions for judgment
notwithstanding the verdict, for a new trial and for the remittur of all or part
of the damages awarded by the jury, and also ordered defendants to post a
supersedeas bond in the amount of $454 million. Defendants filed a notice of
appeal on April 23, 1999.
Reference is made to the litigation entitled Parker, et al. v. TWE, et
al., described on page I-42 of Time Warner's 1998 Form 10-K. On April 30, 1999,
the Court granted defendants' motion to dismiss in its entirety and dismissed
this case.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
--------
The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as a part of this report and such Exhibit Index is
incorporated herein by reference.
(b) Reports on Form 8-K.
-------------------
No Current Report on Form 8-K was filed by Time Warner during the
quarter ended March 31, 1999.
50
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TIME WARNER INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Time Warner Inc.
(Registrant)
By: /s/ Richard J. Bressler
---------------------------
Name: Richard J. Bressler
Title: Senior Vice President and
Chief Financial Officer
Dated: May 12, 1999
<PAGE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulations S-K
---------------------------------------
Exhibit No. Description of Exhibit
- ----------- ----------------------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
TIME WARNER INC.
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
financial statements of Time Warner Inc. for the three months ended March 31,
1999 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
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<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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<ALLOWANCES> 945
<INVENTORY> 2,822
<CURRENT-ASSETS> 4,861
<PP&E> 3,400
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