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 September 30, 1999, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the transition period from to .
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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 1,172,397,199
Series LMCN-V Common Stock - $.01 par value 114,123,884
- --------------------------------------------- ------------------
Description of Class Shares Outstanding
as of October 31, 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 38
Consolidated balance sheet at September 30, 1999
and December 31, 1998................................. 17 48
Consolidated statement of operations for the three
and nine months ended September 30, 1999 and 1998..... 18 49
Consolidated statement of cash flows for the nine
months ended September 30, 1999 and 1998.............. 19 50
Consolidated statement of shareholders' equity and
partnership capital................................... 20 51
Notes to consolidated financial statements............ 21 52
Supplementary information............................. 30
PART II. OTHER INFORMATION................................ 58
<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") 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 five 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; Music, consisting
principally of interests in recorded music and music publishing; Filmed
Entertainment, consisting principally of interests in 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 junior priority 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").
Since 1993, Time Warner historically had not consolidated TWE and
certain related companies (the "Entertainment Group") for financial reporting
purposes because MediaOne had rights that allowed it to participate in the
management of TWE's businesses. However, in August 1999, TWE received a notice
from MediaOne concerning the termination of its covenant not to compete with
TWE. The termination of that covenant is necessary for MediaOne to complete its
proposed merger with AT&T Corp. ("AT&T"). As a result of the termination notice
and the operation of the TWE partnership agreement, MediaOne's rights to
participate in the management of TWE's businesses terminated immediately and
irrevocably. MediaOne retains only certain protective governance rights
pertaining to certain limited matters affecting TWE as a whole. Because of this
significant reduction in MediaOne's rights, Time Warner has consolidated the
Entertainment Group, which substantially consists of TWE, in its 1999 financial
statements, retroactive to the beginning of 1999.
The proposed merger of MediaOne and AT&T is subject to customary closing
conditions, including regulatory approvals. Accordingly, there is no assurance
that it will occur. Also, there are no assurances that AT&T and Time Warner will
reach final agreement on the terms of a cable telephony joint venture, either on
the terms discussed on page F-17 of Time Warner's Annual Report on Form 10-K for
the year ended December 31, 1998, as amended, or any alternative terms.
1
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Columbia House-CDNOW Merger
In July 1999, Time Warner announced an agreement with Sony Corporation
of America ("Sony") to merge their jointly owned Columbia House operations with
CDNOW, Inc. ("CDNOW"), a leading music and video e-commerce company. Time Warner
and Sony will each own 37% of the combined entity and the existing CDNOW
shareholders will own 26% of the combined entity. This investment is expected to
be accounted for using the equity method of accounting.
With a combined reach of approximately 10% of all domestic Internet
users(1), the combined entity is expected to create a significant platform for
Time Warner's music and video e-commerce initiatives and position the Company
for incremental growth opportunities relating to online sales of music and video
product and the digital distribution of music. In addition, management believes
that the use of Columbia House's existing active club members and the
cross-promotional opportunities to be offered by Time Warner and Sony will lower
customer acquisition costs and increase the combined entity's customer base.
As part of this transaction, Time Warner and Sony each have made
certain strategic and financial commitments to the combined entity. Among the
strategic commitments, which have a term of five years and are subject to
certain conditions and qualifications, Time Warner and Sony will provide the
combined entity with opportunities to purchase advertising and promotional
support from their diverse media properties. In addition, as part of their
commitment to make the combined entity their primary vehicle to pursue the
packaged music e-commerce business, Time Warner and Sony will link their own
music-controlled web sites in the U.S. and Canada to the combined entity's web
sites. This will enable consumers to sample content from their favorite artists
and genres and then immediately make a purchase. Further, Time Warner and Sony
have each agreed to guarantee, for up to a three-year period, one-half of the
borrowings under a new credit facility to be entered into by the combined entity
upon the closing of the merger. The credit facility is expected to provide for
up to $450 million of borrowings, which will be used to support the ongoing
growth and capital needs of the business and to refinance approximately $300
million of existing debt and liabilities of Columbia House.
The merger is expected to close in late 1999 or early 2000 and is
subject to customary closing conditions, including regulatory approvals and
approval by existing CDNOW shareholders. There can be no assurance that such
approvals will be obtained.
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 is also consistent with
management's belief that Time Warner's intangible assets, such as cable
television and sports franchises, music catalogues and copyrights, film and
television libraries and the goodwill associated with its brands, generally are
increasing in value and importance to Time Warner's business objective of
creating, extending and distributing recognizable brands and copyrights
throughout the world. As such, the following comparative discussion of the
results of operations of Time Warner 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.
- ----------------------
(1) As measured by Media Metrix, Inc. as of September 1999.
2
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Transactions Affecting Comparability of Results of Operations and
Financial Condition
Consolidation of the Entertainment Group
As previously described, Time Warner's 1999 operating results and
financial condition reflect the consolidation of the Entertainment Group, which
substantially consists of TWE, retroactive to the beginning of 1999. Time
Warner's 1998 historical operating results and financial condition have not been
changed, but are no longer comparable to 1999 because the Entertainment Group
was reflected on an unconsolidated basis using the equity method of accounting.
Accordingly, in order to enhance comparability and make an analysis of 1999 and
1998 more meaningful, the following discussion of results of operations and
changes in financial condition and liquidity is based upon pro forma financial
information for 1998 as if the consolidation of the Entertainment Group had
occurred at the beginning of that period. Historical financial information of
Time Warner for 1998 is included in the accompanying consolidated financial
statements.
Other Significant Transactions and Nonrecurring Items
As more fully described herein, the comparability of Time Warner's
operating results has been affected by certain other significant transactions
and nonrecurring items in each period.
In 1999, these nonrecurring items consisted of (i) an approximate $215
million net pretax gain recognized in the first quarter of 1999 in connection
with the early termination and settlement of a long-term home video distribution
agreement, (ii) an approximate $115 million pretax gain recognized in the second
quarter of 1999 in connection with the initial public offering of a 20% interest
in Time Warner Telecom Inc. (the "Time Warner Telecom IPO"), a competitive local
exchange carrier that provides telephony services to businesses, (iii) net
pretax gains in the amount of $1.248 billion recognized in the first nine months
of 1999 relating to the sale or exchange of various cable television systems and
investments and (iv) an extraordinary loss of $12 million recognized in the
third quarter of 1999 relating to the retirement of debt. This compares to net
pretax gains recognized in the first nine months of 1998 of $90 million relating
to the sale or exchange of cable television systems.
In order to meaningfully assess underlying operating trends, management
believes that the results of operations for each period should be analyzed after
excluding the effects of these significant nonrecurring items. As such, the
following discussion and analysis focuses on amounts and trends adjusted to
exclude the impact of these unusual items. 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 Cable division results
has been affected further by certain 1998 cable-related transactions, as
described more fully in Note 8 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.
1998 Stock Split
Per common share and average common share amounts have been restated to
give effect to a two-for-one common stock split that occurred on December 15,
1998.
3
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
RESULTS OF OPERATIONS
EBITA and operating income are as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30
------------------------------------ ----------------------------------
EBITA Operating Income EBITA Operating Income
----- ---------------- ----- ----------------
1999 1998 1999 1998 1999 1998 1999 1998
Historical Pro Forma(a) Historical Pro Forma(a) Historical Pro Forma(a) Historical Pro Forma(a)
---------- --------- ---------- --------- ---------- --------- ---------- ---------
(millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cable Networks................... $ 328 $ 271 $ 277 $221 $1,003 $ 844 $ 851 $ 694
Publishing....................... 129 112 118 102 419 373 388 346
Music............................ 76 99 11 30 279 288 77 80
Filmed Entertainment(b).......... 228 233 177 175 806 497 655 331
Broadcasting-The WB Network...... (24) (17) (25) (17) (95) (78) (98) (80)
Cable(c)......................... 894 417 752 269 2,477 1,246 2,068 798
Intersegment elimination......... (23) (33) (23) (33) (10) (76) (10) (76)
------ ----- ------ ---- ------ ------ ------ ------
Total............................ $1,608 $1,082 $1,287 $747 $4,879 $3,094 $3,931 $2,093
====== ====== ====== ==== ====== ====== ====== ======
</TABLE>
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(a) Time Warner's 1999 operating results reflect the consolidation of the
Entertainment Group, which substantially consists of TWE, retroactive
to the beginning of the year. Pro forma operating results for 1998,
reflecting only the consolidation of the Entertainment Group and not
adjusting for the effects of other transactions and nonrecurring items
discussed separately herein, are presented in order to enhance
comparability. Time Warner's historical EBITA and operating income for
1998, which exclude the unconsolidated operating results of the
Entertainment Group, were $516 million and $315 million, respectively,
for the third quarter and $1.468 billion and $869 million,
respectively, for the first nine months of the year.
(b) Includes a net pretax gain of approximately $215 million recognized in
the first quarter of 1999 in connection with the early termination and
settlement of a long-term home video distribution agreement.
(c) Includes net pretax gains related to the sale or exchange of certain
cable television systems and investments of $477 million in the third
quarter of 1999 and $6 million in 1998. Similarly, nine-month results
include net pretax gains of $1.248 billion in 1999 and $90 million in
1998.
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
Consolidated Results
Time Warner had revenues of $6.723 billion, income of $381 million
before an extraordinary loss on the retirement of debt and net income of $369
million for the three months ended September 30, 1999, compared to revenues on a
pro forma basis of $6.593 billion and net income of $39 million for the three
months ended September 30, 1998. After preferred dividend requirements, Time
Warner had basic income per common share before the extraordinary item of $.29
in 1999, and $.28 after, compared to a net loss of $.03 per common share in
1998. On a diluted basis, income per common share before the extraordinary item
was $.28 in 1999, and $.27 after, compared to a net loss of $.03 per common
share in 1998.
As previously described, in addition to the consolidation of the
Entertainment Group retroactive to the beginning of 1999, the comparability of
Time Warner's operating results for 1999 and 1998 has been further affected by
certain significant, nonrecurring items recognized in each period. These
nonrecurring items consisted of approximately $477 million of net pretax gains
in 1999, compared to $6 million of net pretax gains in 1998. In addition, net
income in 1999 included an extraordinary loss on the retirement of debt of $12
million. The aggregate net effect of these items in 1999 was an increase in
basic net income per common share of $.20. On a diluted basis, the aggregate net
effect of these items in 1999 was an increase in basic net income per common
share of $.19. The 1998 gains had no significant impact on per share results.
Time Warner's net income increased to $369 million in 1999, compared to
$39 million in 1998. However, excluding the significant effect of the
nonrecurring items referred to earlier, net income increased by $75 million to
$110 million in 1999 from $35 million in 1998. As discussed more fully below,
this improvement principally resulted from an overall increase in Time Warner's
business segment operating income and lower losses from certain investments
accounted for under the equity method of accounting, offset in part by higher
interest expense principally in connection with borrowings used to redeem Time
Warner's Series M exchangeable preferred stock ("Series M Preferred Stock") in
4
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
December 1998 and higher income taxes due to the increase in Time Warner's
income. Similarly, excluding the aggregate effect of these nonrecurring items,
normalized basic and diluted net income per common share increased to $.08,
compared to a normalized net loss of $.03 per common share in 1998. In addition
to the factors discussed above, the improvement in 1999 normalized per share
results reflects a $67 million reduction in preferred dividend requirements
principally relating to the redemption of Series M Preferred Stock in late 1998.
The relationship between income before income taxes and income tax
expense of Time Warner is principally affected by the amortization of goodwill
and certain other financial statement expenses that are not deductible for
income tax purposes. Income tax expense of Time Warner includes all income taxes
related to its allocable share of partnership income and its equity in the
income tax expense of corporate subsidiaries of the Entertainment Group.
Business Segment Results
Cable Networks. Revenues increased to $1.450 billion in 1999, compared
to $1.330 billion on a pro forma basis in 1998. EBITA increased to $328 million
in 1999 from $271 million on a pro forma basis in 1998. Operating income
increased to $277 million in 1999 from $221 million on a pro forma basis in
1998. Revenues grew due to increases at the Turner cable networks group and HBO.
For the Turner cable networks group, revenues benefited from increases in
advertising and subscription revenues, offset in part by the absence of revenues
from the Goodwill Games sponsored in the summer of 1998. The increase in
advertising revenues was principally due to a strong overall advertising market
for most of the group's networks, including CNN, TBS Superstation, TNT and
Cartoon Network. The increase in subscription revenues was principally due to an
increase in subscriptions and higher rates, primarily led by revenue increases
at CNN, TBS Superstation, TNT and Turner Classic Movies. For HBO, revenues
benefited primarily from an increase in pay-television subscriptions.
Likewise, EBITA and operating income were higher due to increases at
the Turner cable networks group and HBO. For the Turner cable networks group,
the increase in EBITA and operating income was principally due to the revenue
gains and the absence of losses associated with the Goodwill Games, offset in
part by higher programming costs. For HBO, the increase in EBITA and operating
income was principally due to the revenue gains and increased cost savings.
Publishing. Revenues increased to $1.110 billion in 1999, compared to
$1.076 billion in 1998. EBITA increased to $129 million in 1999 from $112
million in 1998. Operating income increased to $118 million in 1999 from $102
million in 1998. Revenues in 1999 were affected negatively by the
deconsolidation of a direct-marketing operation, which is now being accounted
for under the equity method of accounting. Excluding this change, revenues
increased primarily from significant growth in magazine advertising revenues, as
well as increases in magazine circulation revenues. The increase in advertising
revenues was principally due to a strong overall advertising market for most of
the division's magazines, primarily led by In Style, People, Sports Illustrated,
Entertainment Weekly and Teen People. The increase in circulation revenues was
principally due to higher newsstand sales, led by People and Time, offset in
part by lower net subscription revenues generated by American Family Enterprises
("AFE"), a 50%-owned equity investee, and other third-party agencies. EBITA and
operating income increased principally as a result of the revenue gains and
increased cost savings. These increases were offset in part by the absence of
certain one-time gains on the sale of assets recognized in 1998 and lower
results from direct-marketing activities, including Book-of-the-Month Club and
AFE.
In addition, in October 1999, AFE voluntarily filed for Chapter 11
bankruptcy protection under the U.S. Bankruptcy Code. This action is expected to
allow AFE to resolve its pending private litigation relating to its sweepstakes
promotions and to restructure its operations and finances. Time Warner's
management expects that the outcome of the bankruptcy proceedings will not be
material to Time Warner's future operating results and financial condition.
5
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Music. Revenues decreased to $852 million in 1999, compared to $938
million in 1998. EBITA decreased to $76 million in 1999 from $99 million in
1998. Operating income decreased to $11 million in 1999 from $30 million in
1998. Revenues decreased primarily due to lower domestic and international
recorded music sales. The worldwide revenue decline principally related to less
popular releases in comparison to the prior year, as well as industry-wide
softness in various international markets, like Brazil and Germany. EBITA and
operating income decreased principally as a result of the decline in worldwide
revenues and lower results from Columbia House, a 50%-owned equity investee,
offset in part by increased cost savings, lower artist royalty costs and higher
income from DVD manufacturing operations. Management expects that the revenue
decline relating to lower worldwide sales levels will continue into the fourth
quarter of 1999, which could continue to affect operating results negatively.
Filmed Entertainment. Revenues decreased to $2.208 billion in 1999,
compared to $2.272 billion on a pro forma basis in 1998. EBITA decreased to $228
million in 1999 from $233 million on a pro forma basis in 1998. Operating income
increased to $177 million in 1999 from $175 million on a pro forma basis in
1998. Revenues decreased because revenue increases at Warner Bros. were more
than offset by revenue declines at the Turner filmed entertainment businesses,
which include New Line Cinema, Castle Rock Entertainment and the former film and
television libraries of Metro-Goldwyn-Mayer, Inc. and RKO Pictures, Inc. For
Warner Bros., revenues benefited from increases in worldwide theatrical, home
video and television syndication operations, offset in part by lower revenues
from consumer products operations. The increase in worldwide home video revenues
primarily resulted from increased sales of DVDs. For the Turner filmed
entertainment businesses, revenues decreased principally as a result of the
absence in 1999 of significant syndication revenues from the sale of
second-cycle broadcasting rights for Seinfeld in 1998, and fewer and less
popular third-quarter theatrical releases in 1999.
EBITA was lower and operating income was relatively flat because
increases at Warner Bros. were either more than or substantially offset by EBITA
and operating income declines at the Turner filmed entertainment businesses. For
Warner Bros., EBITA and operating income increased principally as a result of
improved results from worldwide theatrical, home video and television
syndication operations, offset in part by lower results from consumer products
operations. For the Turner filmed entertainment businesses, EBITA and operating
income decreased principally as a result of the decline in revenues, offset in
part by lower participation costs payable to creative talent.
In connection with declines in the operations of certain of Warner
Bros.'s retail stores, management is in the process of evaluating several
strategic alternatives for its retail operations. These alternatives include the
gradual reduction and updating of Warner Bros.'s store portfolio, including the
transformation of some of the traditional retail outlets to smaller, more
efficient stores and an increasing emphasis on e-commerce opportunities. To the
extent management takes action under some of these alternatives, a non-cash
charge, principally relating to the acceleration of future depreciation expense,
may be required. Management's evaluation is expected to continue through the
1999 holiday shopping season.
Broadcasting - The WB Network. Revenues were $84 million in 1999,
compared to $64 million on a pro forma basis in 1998. EBITA decreased to a loss
of $24 million in 1999 from a loss of $17 million on a pro forma basis in 1998.
Operating losses increased to $25 million in 1999 from $17 million on a pro
forma basis in 1998. Revenues increased principally as a result of one
additional night of weekly prime-time programming in comparison to the prior
year and advertising rate increases, offset in part by lower television ratings
for the summer repeat programming lineup. Operating losses increased principally
because the revenue gains were more than offset by the combination of higher
programming costs associated with the expanded programming schedule and higher
start-up costs associated with The WB Network 100+ station group, a distribution
alliance for The WB Network in smaller markets.
Cable. Revenues increased to $1.342 billion in 1999, compared to $1.288
billion on a pro forma basis in 1998. EBITA increased to $894 million in 1999
from $417 million on a pro forma basis in 1998. Operating income increased to
$752 million in 1999 from $269 million on a pro forma basis in 1998. These
operating results were affected by certain
6
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
cable-related transactions that occurred in 1998 (the "1998 Cable
Transactions") and by net pretax gains of $477 million recognized in 1999 and $6
million in 1998 related to the sale or exchange of various cable television
systems and investments. The 1998 Cable Transactions principally resulted in the
deconsolidation of certain operations and are described more fully in Note 8 to
the accompanying consolidated financial statements. Excluding the effect of the
1998 Cable Transactions, revenues increased due to growth in basic cable
subscribers, increases in basic cable rates, increases in advertising and
pay-per-view revenues and an increase in revenues from providing Road
Runner-branded, high-speed online services. Similarly, excluding the effect of
the 1998 Cable Transactions and the one-time gains, EBITA and operating income
increased principally as a result of the revenue increases, offset in part by
higher programming costs.
Interest and Other, Net. Interest and other, net, decreased to $490
million of expense in 1999, compared to $508 million of expense on a pro forma
basis in 1998. Interest expense increased to $376 million in 1999, compared to
$358 million on a pro forma basis in 1998. Interest expense increased
principally because of higher 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, offset in part by interest savings associated with the
Company's 1998 debt reduction efforts. Other expense, net, decreased to $114
million in 1999, compared to $150 million on a pro forma basis in 1998. The
decrease principally related to lower losses from certain investments accounted
for under the equity method of accounting.
Minority Interest. Minority interest expense increased to $59 million
in 1999, compared to $53 million on a pro forma basis in 1998. Minority interest
expense increased primarily due to the allocation of a portion of the net pretax
gains relating to the sale or exchange of various cable television systems and
investments owned by the TWE-Advance/Newhouse Partnership ("TWE-A/N"), a
majority-owned partnership of TWE, to the minority owners of that partnership.
Excluding the significant effect of the gains recognized in 1999, minority
interest expense decreased slightly in 1999 principally due to a higher
allocation of losses to a minority partner in The WB Network.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
Consolidated Results
Time Warner had revenues of $19.345 billion, income of $1.112 billion
before an extraordinary loss on retirement of debt and net income of $1.100
billion for the nine months ended September 30, 1999, compared to revenues on a
pro forma basis of $18.977 billion and net income of $78 million for the nine
months ended September 30, 1998. After preferred dividend requirements, Time
Warner had basic income per common share before the extraordinary item of $.85
in 1999, and $.84 after, compared to a net loss of $.13 per common share in
1998. On a diluted basis, income per common share before the extraordinary item
was $.82 in 1999, and $.81 after, compared to a net loss of $.13 per common
share in 1998.
As previously described, in addition to the consolidation of the
Entertainment Group retroactive to the beginning of 1999, the comparability of
Time Warner's operating results for 1999 and 1998 has been further affected by
certain significant, nonrecurring items recognized in each period. These
nonrecurring items consisted of approximately $1.578 billion of net pretax gains
in 1999, compared to $90 million of net pretax gains in 1998. In addition, net
income in 1999 included an extraordinary loss on the retirement of debt of $12
million. The aggregate net effect of these items was an increase in basic net
income per common share of $.64 in 1999. On a diluted basis, the aggregate net
effect of these items was an increase of $.61 per common share in 1999, compared
to an increase of $.03 per common share in 1998.
Time Warner's net income increased to $1.100 billion in 1999, compared
to $78 million in 1998. However, excluding the significant effect of the
nonrecurring items referred to earlier, net income increased by $247 million to
$284 million in 1999 from $37 million in 1998. As discussed more fully below,
this improvement principally resulted from an overall increase in Time Warner's
business segment operating income, offset in part by higher equity losses from
certain investments accounted for under the equity method of accounting, higher
7
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
interest expense principally in connection with borrowings used to redeem the
Company's Series M Preferred Stock in December 1998 and higher income taxes due
to the increase in Time Warner's income. Similarly, excluding the aggregate
effect of these nonrecurring items, normalized basic and diluted net income per
common share increased to $.20, compared to a normalized net loss of $.16 per
common share in 1998. In addition to the factors discussed above, the
improvement in 1999 normalized per share results reflects a $191 million
reduction in preferred dividend requirements principally relating to the
redemption of Time Warner's Series M Preferred Stock in late 1998.
The relationship between income before income taxes and income tax
expense of Time Warner is principally affected by the amortization of goodwill
and certain other financial statement expenses that are not deductible for
income tax purposes. Income tax expense of Time Warner includes all income taxes
related to its allocable share of partnership income and its equity in the
income tax expense of corporate subsidiaries of the Entertainment Group.
Business Segment Results
Cable Networks. Revenues increased to $4.425 billion in 1999, compared
to $3.985 billion on a pro forma basis in 1998. EBITA increased to $1.003
billion in 1999 from $844 million on a pro forma basis in 1998. Operating income
increased to $851 million in 1999 from $694 million on a pro forma basis in
1998. Revenues grew due to increases at the Turner cable networks group and HBO.
For the Turner cable networks group, revenues benefited from increases in
advertising and subscription revenues, offset in part by the absence of revenues
from the Goodwill Games sponsored in the summer of 1998. The increase in
advertising revenues was principally due to a strong overall advertising market
for most of the group's networks, including CNN, TBS Superstation, TNT, Cartoon
Network and Headline News. The increase in subscription revenues was principally
due to an increase in subscriptions and higher rates, primarily led by revenue
increases at CNN, TBS Superstation, TNT and Turner Classic Movies. For HBO,
revenues benefited primarily from an increase in pay-television subscriptions.
Likewise, EBITA and operating income were higher due to increases at
the Turner cable networks group and HBO. For the Turner cable networks group,
the increase in EBITA and operating income was principally due to the revenue
gains and the absence of losses associated with the Goodwill Games, offset in
part by higher programming costs. For HBO, the increase in EBITA and operating
income was principally due to the revenue gains, increased cost savings, and
higher income from Comedy Central, a 50%-owned equity investee.
Publishing. Revenues increased to $3.237 billion in 1999, compared to
$3.160 billion in 1998. EBITA increased to $419 million in 1999 from $373
million in 1998. Operating income increased to $388 million in 1999 from $346
million in 1998. Revenues in 1999 were affected negatively by the
deconsolidation of a direct-marketing operation, which is now being accounted
for under the equity method of accounting. Excluding this change, revenues
increased primarily from significant growth in magazine advertising revenues.
The increase in advertising revenues was principally due to a strong overall
advertising market for most of the division's magazines, primarily led by In
Style, People, Time, Teen People and Sports Illustrated. Magazine circulation
revenues were flat principally because higher newsstand sales, led by Time and
In Style, were offset by lower net subscription revenues generated by AFE and
other third-party agencies. EBITA and operating income increased principally as
a result of the revenue gains, increased cost savings and higher gains on the
sale of assets. These increases were offset in part by lower results from
direct-marketing activities, including Book-of-the-Month Club and AFE.
In addition, in October 1999, AFE voluntarily filed for Chapter 11
bankruptcy protection under the U.S. Bankruptcy Code. This action is expected to
allow AFE to resolve its pending private litigation relating to its sweepstakes
promotions and to restructure its operations and finances. Time Warner's
management expects that the outcome of the bankruptcy proceedings will not be
material to Time Warner's future operating results and financial condition.
8
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Music. Revenues decreased to $2.616 billion in 1999, compared to $2.731
billion in 1998. EBITA decreased to $279 million in 1999 from $288 million in
1998. Operating income decreased to $77 million in 1999 from $80 million in
1998. Revenues decreased primarily due to lower domestic and international
recorded music sales. The worldwide revenue decline principally related to less
popular releases in comparison to the prior year, as well as industry-wide
softness in various international markets, like Brazil and Germany. EBITA and
operating income decreased principally as a result of the decline in worldwide
revenues and lower results from Columbia House, a 50%-owned equity investee,
offset in part by increased cost savings, lower artist royalty costs and higher
income from DVD manufacturing operations. Management expects that the revenue
decline relating to lower worldwide sales levels will continue into the fourth
quarter of 1999, which could continue to affect operating results negatively.
Filmed Entertainment. Revenues decreased to $5.688 billion in 1999,
compared to $5.790 billion on a pro forma basis in 1998. EBITA increased to $806
million in 1999 from $497 million on a pro forma basis in 1998. Operating income
increased to $655 million in 1999 from $331 million on a pro forma basis in
1998. Revenues decreased because revenue increases at Warner Bros. were more
than offset by revenue declines at the Turner filmed entertainment businesses,
which include New Line Cinema, Castle Rock Entertainment and the former film and
television libraries of Metro-Goldwyn-Mayer, Inc. and RKO Pictures, Inc. For
Warner Bros., revenues benefited from increases in worldwide theatrical, home
video and television distribution operations, offset in part by lower revenues
from consumer products operations. The increase in worldwide home video revenues
primarily resulted from increased sales of DVDs. For the Turner filmed
entertainment businesses, revenues decreased principally as a result of the
absence in 1999 of significant syndication revenues from the sale of
second-cycle broadcasting rights for Seinfeld in 1998 and fewer theatrical
releases in 1999.
EBITA and operating income were higher due to increases at Warner Bros.
and the Turner filmed entertainment businesses, including an approximate $215
million net pretax gain recognized by Warner Bros. in the first quarter of 1999
in connection with the early termination and settlement of a long-term home
video distribution agreement. Excluding the gain, Warner Bros.'s EBITA and
operating income increased principally as a result of improved results from
worldwide theatrical, home video and television distribution operations, offset
in part by lower results from consumer products operations. For the Turner
filmed entertainment businesses, EBITA and operating income increased
principally due to the absence of film write-offs relating to disappointing
results for theatrical releases of Castle Rock Entertainment in 1998, offset in
part by lower results from television distribution operations relating to the
absence in 1999 of significant syndication sales of broadcasting rights for
Seinfeld in 1998.
In connection with declines in the operations of certain of Warner
Bros.'s retail stores, management is in the process of evaluating several
strategic alternatives for its retail operations. These alternatives include
the gradual reduction and updating of Warner Bros.'s store portfolio,
including the transformation of some of the traditional retail outlets to
smaller, more efficient stores and an increasing emphasis on e-commerce
opportunities. To the extent management takes action under some of these
alternatives, a non-cash charge, principally relating to the acceleration of
future depreciation expense, may be required. Management's evaluation is
expected to continue through the 1999 holiday shopping season.
Broadcasting - The WB Network. Revenues were $246 million in 1999,
compared to $170 million on a pro forma basis in 1998. EBITA decreased to a loss
of $95 million in 1999 from a loss of $78 million on a pro forma basis in 1998.
Operating losses increased to $98 million in 1999 from $80 million on a pro
forma basis in 1998. Revenues increased principally as a result of one
additional night of weekly prime-time programming in comparison to the prior
year, improved television ratings and advertising rate increases. Operating
losses increased principally because the revenue gains were more than offset by
the combination of higher programming costs associated with the expanded
programming schedule and higher start-up costs associated with The WB Network
100+ station group, a distribution alliance for The WB Network in smaller
markets.
9
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Cable. Revenues decreased to $3.968 billion in 1999, compared to $4.015
billion on a pro forma basis in 1998. EBITA increased to $2.477 billion in 1999
from $1.246 billion on a pro forma basis in 1998. Operating income increased to
$2.068 billion in 1999 from $798 million on a pro forma basis in 1998. These
operating results were affected by the 1998 Cable Transactions and by net pretax
gains of $1.248 billion recognized in 1999 and $90 million in 1998 related to
the sale or exchange of various cable television systems and investments. The
1998 Cable Transactions principally resulted in the deconsolidation of certain
operations and are described more fully in Note 8 to the accompanying
consolidated financial statements. Excluding the effect of the 1998 Cable
Transactions, revenues increased due to growth in basic cable subscribers,
increases in basic cable rates, increases in advertising and pay-per-view
revenues and an increase in revenues from providing Road Runner-branded,
high-speed online services. Similarly, excluding the effect of the 1998 Cable
Transactions and the one-time gains, EBITA and operating income increased
principally as a result of the revenue increases, offset in part by higher
programming costs.
Interest and Other, Net. Interest and other, net, decreased to $1.387
billion of expense in 1999, compared to $1.410 billion of expense on a pro forma
basis in 1998. Interest expense increased to $1.116 billion in 1999, compared to
$1.082 billion on a pro forma basis in 1998. Interest expense increased
principally because of higher 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, offset in part by interest savings associated with the
Company's 1998 debt reduction efforts. Other expense, net, decreased to $271
million in 1999, compared to $328 million on a pro forma basis in 1998. The
decrease principally related to the recognition of an approximate $115 million
pretax gain in 1999 in connection with the Time Warner Telecom IPO, offset in
part by higher losses from certain investments accounted for under the equity
method of accounting.
Minority Interest. Minority interest expense increased to $358 million
in 1999, compared to $200 million on a pro forma basis in 1998. Minority
interest expense increased primarily due to the allocation of a portion of the
net pretax gains relating to the sale or exchange of various cable television
systems and investments owned by TWE-A/N to the minority owners of that
partnership. Excluding the significant effect of the gains recognized in each
period, minority interest expense decreased slightly in 1999 principally due to
a higher allocation of losses to a minority partner in The WB Network.
FINANCIAL CONDITION AND LIQUIDITY
September 30, 1999
Financial Condition
At September 30, 1999, Time Warner had $17.8 billion of debt, $645
million of cash and equivalents (net debt of $17.2 billion), $1.2 billion of
borrowings against future stock option proceeds, $575 million of mandatorily
redeemable preferred securities of subsidiaries and $8.8 billion of
shareholders' equity, compared to $17.5 billion of debt, $529 million of cash
and equivalents (net debt of $17.0 billion), $895 million of borrowings against
future stock option proceeds, $792 million of mandatorily redeemable preferred
securities of subsidiaries and $8.9 billion of shareholders' equity on a pro
forma basis at December 31, 1998.
Debt Refinancings
In July 1999, Time Warner Companies, Inc., a wholly owned subsidiary of
Time Warner, redeemed all of its $600 million principal amount of Floating Rate
Reset Notes due July 29, 2009. The aggregate redemption cost of approximately
$620 million was funded with borrowings under Time Warner's bank credit
agreement. In connection with this redemption, an extraordinary loss of $12
million was recognized in the third quarter of 1999.
10
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Preferred Stock Conversion
In July 1999, Time Warner issued approximately 46 million shares of
common stock in connection with the conversion of all outstanding 11 million
shares of its Series D convertible preferred stock. Because holders of Series D
preferred stock were entitled to cash dividends at a preferential rate through
July 1999, Time Warner's historical cash dividend requirements will be reduced,
going forward, by approximately $30 million on an annualized basis.
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
future free cash flow and financial capacity.
During the first nine months of 1999, Time Warner acquired 24.3 million
shares of its common stock at an aggregate cost of $1.636 billion. These
repurchases increased the cumulative shares purchased under this and its
previous common stock repurchase program begun in 1996 to approximately 119.4
million shares at an aggregate cost of $4.676 billion.
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 nine months of 1999, Time Warner's cash provided by
operations amounted to $2.802 billion and reflected $4.879 billion of EBITA,
$905 million of noncash depreciation expense and $85 million of proceeds from
Time Warner's asset securitization program, less $1.137 billion of interest
payments, $261 million of income taxes, $120 million of corporate expenses and
$1.549 billion related to an aggregate increase in working capital requirements,
other balance sheet accounts and noncash items. Cash provided by operations of
$1.844 billion on a pro forma basis for the first nine months of 1998 reflected
$3.094 billion of business segment EBITA, $983 million of noncash depreciation
expense and $233 million of proceeds from Time Warner's asset securitization
program, less $1.122 billion of interest payments, $200 million of income taxes,
$112 million of corporate expenses and $1.032 billion related to an aggregate
increase in working capital requirements, other balance sheet accounts and
noncash items.
Cash used by investing activities was $1.392 billion in the first nine
months of 1999, compared to $922 million on a pro forma basis in the first nine
months of 1998. This increase principally resulted from a $463 million decrease
in investment proceeds largely relating to the 1998 sale of TWE's remaining
interest in Six Flags Entertainment Corporation. Capital expenditures increased
to $1.532 billion in the first nine months of 1999, compared to $1.440 billion
on a pro forma basis in the first nine months of 1998.
Cash used by financing activities was $1.207 billion in the first nine
months of 1999, compared to $1.371 billion on a pro forma basis in the first
nine months of 1998. The use of cash in 1999 principally resulted from the
repurchase of approximately 24.3 million shares of Time Warner common stock at
an aggregate cost of $1.636 billion, the redemption of REIT Preferred Stock at
11
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
an aggregate cost of $217 million and the payment of $226 million of dividends,
offset in part by a $316 million increase in net borrowings, $335 million of
borrowings against future stock option proceeds and $350 million of proceeds
received principally from the exercise of employee stock options. During the
first nine months of 1998, on a pro forma basis, excluding additional borrowings
that offset the noncash reduction of $1.15 billion of debt relating to the
conversion of its zero-coupon convertible notes into common stock, Time Warner
reduced debt by approximately $1.1 billion. Time Warner used proceeds from the
borrowings associated with the conversion of its zero-coupon convertible notes,
together with most of the $599 million of proceeds received from the exercise of
employee stock options and $482 million of net borrowings against future stock
option proceeds, to repurchase approximately 26.4 million shares of Time Warner
common stock at an aggregate cost of $1.944 billion during the first nine months
of 1998. Time Warner also paid $394 million of dividends in the first nine
months of 1998. 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.
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 amounted to
$1.107 billion in the nine months ended September 30, 1999, compared to $1.149
billion in the nine months ended September 30, 1998. Cable capital spending is
expected to approximate $450 million 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 for
all of Time Warner's filmed entertainment companies amounted to $3.153 billion
at September 30, 1999, compared to $2.934 billion on a pro forma basis at
December 31, 1998 (including amounts relating to the licensing of film product
to Time Warner's cable television networks of $1.144 billion at September 30,
1999 and $995 million at December 31, 1998).
Because backlog generally relates to contracts for the licensing of
theatrical and television product which have already been produced, the
recognition of revenue for such completed product is principally only dependent
upon the commencement of the availability period for telecast under the terms of
the related licensing agreement. Cash licensing fees are collected periodically
over the term of the related licensing agreements or on an accelerated basis
using a $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 are also expected to result in the future realization of
revenues and cash through the sale of advertising spots received under such
contracts.
12
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Year 2000 Technology Preparedness
Time Warner, 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.
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 continues to be 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 initially identified and assessed 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 distinguished 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 1,000
worldwide, "mission critical" potential exposures. As of September 30, 1999,
substantially all of these potential exposures have been identified by the
divisions as Year 2000 compliant and of those that are not reported as
compliant, substantially all were in final testing stages and expected to be
substantially completed in all material respects by the middle of the fourth
quarter of 1999. The Company, however, could experience unexpected delays. The
Company is expecting to focus its attention during the fourth quarter of 1999 on
conducting final integrated testing in a stable environment and on refinements
and testing of its contingency and transition plans, as necessary.
As stated above, however, the Company's business is heavily dependent on
third parties, both domestically and internationally, and these parties are
themselves heavily dependent on technology. For example, 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. In addition, in a situation endemic to
the cable industry, much of the Company's headend equipment that controls cable
set-top boxes needed to be upgraded to become Year 2000 compliant. The box
manufacturers and cable industry groups together developed solutions that the
Company has substantially completed installing and testing in its headend
equipment at its various geographic locations. The Company has attempted to
include in its "mission critical" inventory significant service providers,
vendors, suppliers, customers and governmental entities that are believed to be
critical to business operations and has made its determinations of 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
13
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
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, as a whole, 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 80% to 90% has been incurred through
September 30, 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 experiences unanticipated failures of the
systems within its control, 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.
More importantly, disruptions experienced by third parties with which the
Company does business as well as by the economy generally could materially
adversely affect the Company. The amount of potential liability and lost revenue
cannot be reasonably estimated at this time.
As stated above, the Company is now focusing its attention on its
contingency and transition plans. It has examined its existing divisional
standard business interruption strategies to evaluate whether they would
satisfactorily meet the demands of failures arising from Year 2000-related
problems. It is also developing and refining specific transition schedules and
contingency plans in the event it does not successfully complete its remaining
remediation as anticipated or experiences unforeseen problems outside the scope
of these standard strategies. These plans are intended to provide guidance and
alternatives for unanticipated failures of internal systems as well as external
failures that may impede any of the Company's businesses from operating
normally. The Company intends to examine its status periodically to determine
the necessity of 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
14
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
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.
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 and capitalize on 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 For Time Warner's digital media businesses, their ability to develop
products and services that are attractive, accessible and commercially
viable in terms of content, technology and cost, their ability to manage
costs and generate revenues, aggressive competition from existing and
developing technologies and products, the resolution of issues concerning
commercial activities via the Internet, including security, reliability,
cost, ease of use and access, and the possibility of increased government
regulation of new media services.
15
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
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.
16
<PAGE>
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
----------------
1999 1998 1998
Historical(a) Pro Forma(a) Historical(a)
---------- --------- ----------
(millions, except per share amounts)
ASSETS
Current assets
<S> <C> <C> <C>
Cash and equivalents........................................... $ 645 $ 529 $ 442
Receivables, less allowances of $1.385, $1.514
and $1.007 billion.......................................... 4,190 4,640 2,885
Inventories.................................................... 2,195 2,258 946
Prepaid expenses............................................... 1,570 1,342 1,176
------ ------- ------
Total current assets........................................... 8,600 8,769 5,449
Noncurrent inventories......................................... 3,942 4,219 1,900
Investment in and amounts due to and from
Entertainment Group......................................... - - 4,980
Other investments.............................................. 1,702 1,665 794
Property, plant and equipment.................................. 8,489 8,037 1,991
Music catalogues, contracts and copyrights..................... 802 876 876
Cable television and sports franchises......................... 7,863 6,943 2,868
Goodwill....................................................... 15,377 15,830 11,919
Other assets................................................... 1,657 1,612 863
------- ------- ------
Total assets................................................... $48,432 $47,951 $31,640
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable............................................... $ 1,456 $ 1,966 $ 996
Participations, royalties and programming costs payable........ 2,865 2,714 1,199
Debt due within one year....................................... 26 25 19
Other current liabilities...................................... 4,229 4,365 2,404
------- ------- ------
Total current liabilities...................................... 8,576 9,070 4,618
Long-term debt ................................................ 17,812 17,503 10,925
Borrowings against future stock option proceeds................ 1,230 895 895
Deferred income taxes.......................................... 3,848 3,491 3,491
Unearned portion of paid subscriptions......................... 742 741 741
Other liabilities.............................................. 3,688 3,580 1,543
Minority interests............................................. 3,175 3,027 -
Mandatorily redeemable preferred securities of
subsidiaries holding solely notes and
debentures of subsidiaries of the Company................... 575 792 575
Shareholders' equity
Preferred stock, $.10 par value, 8.4, 22.6 and 22.6
million shares outstanding, $.840, $2.260 and
$2.260 billion liquidation preference....................... 1 2 2
Series LMCN-V common stock, $.01 par value, 114.1
million shares outstanding.................................. 1 1 1
Common stock, $.01 par value, 1.172, 1.118 and
1.118 billion shares outstanding............................ 12 11 11
Paid-in capital................................................ 12,880 13,134 13,134
Accumulated deficit............................................ (4,108) (4,296) (4,296)
------- ------- -------
Total shareholders' equity..................................... 8,786 8,852 8,852
------- ------- ------
Total liabilities and shareholders' equity..................... $48,432 $47,951 $31,640
======= ======= =======
</TABLE>
- ---------------
(a) The 1999 financial statements reflect the consolidation of the
Entertainment Group, which substantially consists of TWE, retroactive to
the beginning of 1999. Time Warner's historical financial statements for
1998 have not been changed; however, in order to enhance comparability, pro
forma financial statements for 1998 reflecting the consolidation of the
Entertainment Group are presented supplementally (Note 1).
See accompanying notes.
17
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- ---------------------------------------
1999 1998 1998 1999 1998 1998
Historical(a) Pro Forma(a) Historical(a) Historical(a) Pro Forma(a) Historical(a)
---------- --------- ---------- ---------- --------- ----------
(millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Revenues (b)................................ $ 6,723 $ 6,593 $ 3,578 $19,345 $ 18,977 $10,387
-------- ------- ------- -------- -------- -------
Cost of revenues (b)(c)..................... (4,007) (4,064) (2,052) (11,404) (11,710) (6,016)
Selling, general and administrative
(b)(c) (1,906) (1,788) (1,211) (5,473) (5,264) (3,502)
Gain on sale or exchange of cable
systems and investments (b).............. 477 6 - 1,248 90 -
Gain on early termination of
video distribution agreement............. - - - 215 - -
-------- ------- ------- ------- -------- -------
Business segment operating income........... 1,287 747 315 3,931 2,093 869
Equity in pretax income of
Entertainment Group (b).................. - - 164 - - 437
Interest and other, net (b)(d).............. (490) (508) (311) (1,387) (1,410) (877)
Minority interest........................... (59) (53) - (358) (200) -
Corporate expenses (b)...................... (40) (38) (20) (120) (112) (58)
-------- ------- ------- ------- -------- -------
Income before income taxes.................. 698 148 148 2,066 371 371
Income tax provision........................ (317) (109) (109) (954) (293) (293)
-------- ------- ------- ------- -------- -------
Income before extraordinary item............ 381 39 39 1,112 78 78
Extraordinary loss on retirement
of debt, net of $9 million
income tax benefit in 1999............... (12) - - (12) - -
-------- ------- ------- ------- -------- -------
Net income.................................. 369 39 39 1,100 78 78
Preferred dividend requirements............. (9) (76) (76) (45) (236) (236)
-------- ------- ------- ------- -------- -------
Net income (loss) applicable to
common shares............................ $ 360 $ (37) $ (37) $ 1,055 $ (158) $ (158)
======== ======= ======= ======= ======== =======
Income (loss) per common share before
extraordinary item:
Basic.................................... $ .29 $ (0.03) $ (0.03) $ .85 $ (0.13) $ (0.13)
======== ======= ======= ======= ======== ========
Diluted.................................. $ .28 $( 0.03) $ (0.03) $ .82 $ (0.13) $ (0.13)
======== ======= ======= ======= ======== =======
Net income (loss) per common share:
Basic.................................... $ .28 $ (0.03) $ (0.03) $ .84 $ (0.13) $ (0.13)
======== ======= ======= ======= ======== =======
Diluted.................................. $ .27 $ (0.03) $ (0.03) $ .81 $ (0.13) $ (0.13)
======== ======= ======= ======= ======== =======
Average common shares:
Basic.................................... 1,288.9 1,202.6 1,202.6 1,260.5 1,184.0 1,184.0
======== ======= ======= ======= ======== =======
Diluted.................................. 1,397.8 1,202.6 1,202.6 1,400.4 1,184.0 1,184.0
======== ======= ======= ======= ======== =======
- --------------
(a) The 1999 financial statements reflect the consolidation
of the Entertainment Group, which substantially consists
of TWE, retroactive to the beginning of 1999. Time Warner's
historical financial statements for 1998 have not been
changed; however, in order to enhance comparability,
pro forma financial statements for 1998 reflecting the
consolidation of the Entertainment Group are presented
supplementally (Note 1).
<PAGE>
(b) Includes the following income (expenses) resulting from
transactions with related companies and, for 1998
historical purposes only, the Entertainment Group:
Revenues.............................. $109 $ 118 $ 120 $ 376 $ 357 $ 334
Cost of revenues...................... (50) (34) (70) (151) (87) (207)
Selling, general and administrative... (6) (7) (8) (17) (18) (28)
Gain on sale or exchange of cable
systems and investments............. 427 - - 427 - -
Equity in pretax income of
Entertainment Group................. - - 72 - - 52
Interest and other, net............... 2 2 (2) 10 1 (8)
Corporate expenses.................... - - 18 - - 54
(c) Includes depreciation and amortization
expense of:............................. $641 $ 658 $ 295 $ 1,853 $ 1,984 $ 884
==== ======= ======= ======= ======== =======
(d) Includes an approximate $115 million pretax gain
recognized in the second quarter of 1999 in
connection with the initial public offering of
a 20% interest in Time Warner Telecom Inc.
</TABLE>
See accompanying notes.
18
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998 1998
Historical(a) Pro Forma(a) Historical(a)
------------ ----------- -------------
(millions)
OPERATIONS
<S> <C> <C> <C>
Net income............................................................ $1,100 $ 78 $ 78
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt.............................. 12 - -
Depreciation and amortization......................................... 1,853 1,984 884
Noncash interest expense.............................................. 3 29 29
Excess of distributions over equity in pretax income of
Entertainment Group................................................ - - 168
Changes in operating assets and liabilities........................... (166) (247) 35
------ ------ -----
Cash provided by operations........................................... 2,802 1,844 1,194
------ ------ -----
INVESTING ACTIVITIES
Consolidation of the Entertainment Group's cash and equivalents....... 87 - -
Investments and acquisitions.......................................... (423) (421) (86)
Capital expenditures.................................................. (1,532) (1,440) (348)
Investment proceeds................................................... 476 939 458
Proceeds received from distribution of TWE Senior Capital............. - - 455
------ ------ -----
Cash provided (used) by investing activities.......................... (1,392) (922) 479
------ ------ -----
FINANCING ACTIVITIES
Borrowings............................................................ 3,127 3,184 1,669
Debt repayments....................................................... (2,811) (3,140) (2,300)
Borrowings against future stock option proceeds....................... 335 1,015 1,015
Repayments of borrowings against future stock option proceeds......... - (533) (533)
Redemption of mandatorily redeemable preferred securities
of subsidiary..................................................... (217) - -
Repurchases of Time Warner common stock............................... (1,636) (1,944) (1,944)
Dividends paid........................................................ (226) (394) (394)
Proceeds received from stock option and dividend reinvestment plans... 350 599 599
Other................................................................. (129) (158) (37)
------ ------ ------
Cash used by financing activities..................................... (1,207) (1,371) (1,925)
------ ------ ------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS........................... 203 (449) (252)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD........................... 442 967 645
------ ------ -----
CASH AND EQUIVALENTS AT END OF PERIOD................................. $ 645 $ 518 $ 393
====== ====== =====
(a) The 1999 financial statements reflect the consolidation of the
Entertainment Group, which substantially consists of TWE, retroactive to
the beginning of 1999. Time Warner's historical financial statements for
1998 have not been changed; however, in order to enhance comparability, pro
forma financial statements for 1998 reflecting the consolidation of the
Entertainment Group are presented supplementally (Note 1).
</TABLE>
See accompanying notes
19
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
------------------
1999 1998
Historical Historical
---------- ----------
(millions)
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD........................................ $8,852 $9,356
Net income............................................................ 1,100 78
Other comprehensive income (loss)..................................... (40) (59)
Cumulative effect of change in accounting for derivative
instruments, net of $3 million tax benefit......................... - (18)
------ ------
Comprehensive income (loss)(a)........................................ 1,060 1
Common stock dividends................................................ (170) (161)
Preferred stock dividends............................................. (45) (236)
Repurchases of Time Warner common stock............................... (1,636) (1,944)
Issuance of common stock in connection with the conversion
of the zero-coupon convertible notes due 2013...................... - 1,150
Other, principally shares issued pursuant to stock option,
dividend reinvestment and benefit plans............................ 725 974
------ ------
BALANCE AT END OF PERIOD.............................................. $8,786 $9,140
====== ======
- ---------------
(a) Comprehensive income (loss) for the three months ended September 30, 1999
and 1998 was $339 million and $(16) million, respectively. Comprehensive
loss for the three-month period ended September 30, 1998 includes an $18
million cumulative effect of a change in accounting for derivative
instruments that occurred during the period.
</TABLE>
See accompanying notes.
20
<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") 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 five 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; Music, consisting
principally of interests in recorded music and music publishing; Filmed
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, Publishing,
Music, Filmed 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.
Financial information for Time Warner's various business segments are
presented herein as an indication of financial performance (Note 8). Except for
start-up losses incurred in connection with The WB Network, Time Warner's
principal business segments generate significant operating income and cash flow
from operations. The cash flow from operations generated by such business
segments 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 segments
amounted to $321 million and $335 million for the three months ended September
30, 1999 and 1998, respectively, and $948 million and $1.001 billion in the nine
months ended September 30, 1999 and 1998, respectively.
Basis of Presentation
Consolidation of 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 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").
Since 1993, Time Warner historically had not consolidated TWE and
certain related companies (the "Entertainment Group") for financial reporting
purposes because MediaOne had rights that allowed it to participate in the
management of TWE's businesses. However, in August 1999, TWE received a notice
21
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
from MediaOne concerning the termination of its covenant not to compete with
TWE. The termination of that covenant is necessary for MediaOne to complete its
proposed merger with AT&T Corp. ("AT&T"). As a result of the termination notice
and the operation of the TWE partnership agreement, MediaOne's rights to
participate in the management of TWE's businesses terminated immediately and
irrevocably. MediaOne retains only certain protective governance rights
pertaining to certain limited matters affecting TWE as a whole.
Because of this significant reduction in MediaOne's rights, Time
Warner's 1999 financial statements reflect the consolidation of the
Entertainment Group, which substantially consists of TWE, retroactive to the
beginning of 1999. Time Warner's historical financial statements for 1998 have
not been changed, but are no longer comparable to 1999 because the Entertainment
Group was reflected on an unconsolidated basis using the equity method of
accounting. Accordingly, in order to enhance comparability, pro forma financial
statements for 1998 reflecting the consolidation of the Entertainment Group are
presented supplementally.
1998 Stock Split
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.
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the 1999 presentation.
Interim Financial Statements
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 Time
Warner included in its Annual Report on Form 10-K for the year ended December
31, 1998, as amended (the "1998 Form 10-K").
2. CABLE TRANSACTIONS
Time Warner's operating results have been affected by a number of
significant cable-related transactions that occurred in each period.
Gain on Sale or Exchange of Cable Television Systems and Investments
In 1999 and 1998, largely in an effort to enhance their geographic
clustering of cable television properties, Time Warner, largely through TWE,
sold or exchanged various cable television systems and investments. The 1999
transactions included a large exchange of cable television systems serving
approximately 575,000 subscribers for other cable television systems of
comparable size owned by TCI Communications, Inc., a subsidiary of AT&T Corp.,
and a large exchange of cable television systems serving approximately 310,000
subscribers for other cable television systems of comparable size owned by
MediaOne. As a result of these transactions, the operating results of Time
Warner include net pretax gains for the third quarter of $477 million in 1999
and $6 million in 1998 on a pro forma basis. Net pretax gains for the first nine
months of the year amounted to $1.248 billion in 1999 and $90 million in 1998 on
a pro forma basis. There were no gains included in the operating results of Time
Warner on a historical basis for 1998.
22
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Gain on Time Warner Telecom's Initial Public Offering
In May 1999, Time Warner Telecom, a competitive local exchange carrier
that provides telephony services to businesses, completed an initial public
offering of 20% of its common stock (the "Time Warner Telecom IPO"). Time Warner
Telecom raised net proceeds of approximately $270 million. Approximately $180
million of these proceeds were used to pay obligations owed to Time Warner and
TWE. In turn, Time Warner and TWE used those proceeds principally to reduce bank
debt. In connection with the Time Warner Telecom IPO and certain related
transactions, Time Warner's ownership interest in Time Warner Telecom was
diluted from 61.98% to 48.21%. As a result, Time Warner recognized a pretax gain
of approximately $115 million ($.05 per basic common share after taxes). This
gain has been included in interest and other, net, in Time Warner's 1999
consolidated statement of operations.
Primestar
Time Warner and TWE own an approximate 24% equity interest in
Primestar. 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. Then,
in June 1999, Primestar completed the sale of its high-power satellite rights to
DirecTV.
As a result of those transactions, Primestar began to substantially
wind down its operations during the first quarter of 1999. Time Warner
recognized its share of Primestar's 1999 losses under the equity method of
accounting. Such losses are included in interest and other, net. As of September
30, 1999, Primestar has substantially completed the wind down of its operations.
As such, future wind-down losses are not expected to be material to Time
Warner's operating results.
3. 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 basic common share), which has been
included in operating income in the accompanying consolidated statement of
operations.
23
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
4. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998 December 31, 1998
------------------ ----------------- -----------------
Historical Pro Forma Historical
---------- --------- ----------
Current Noncurrent Current Noncurrent Current Noncurrent
------- ---------- ------ ---------- ------- ----------
(millions)
Film costs:
<S> <C> <C> <C> <C> <C> <C>
Released, less amortization............ $ 682 $ 932 $ 665 $1,051 $ 51 $ 308
Completed and not released............. 194 64 199 76 20 -
In process and other................... 36 746 24 912 2 240
Library, less amortization............. - 1,486 - 1,567 - 1,007
Programming costs, less amortization...... 742 714 883 613 457 345
Magazines, books, recorded music and
merchandise............................ 541 - 487 - 416 -
------ ------ ------ ------ ---- ------
Total ................................... $2,195 $3,942 $2,258 $4,219 $946 $1,900
====== ====== ====== ====== ==== ======
</TABLE>
5. INVESTMENT IN ENTERTAINMENT GROUP
Time Warner's investment in the Entertainment Group consists
substantially of its investment in TWE. TWE is a Delaware limited partnership
that was capitalized in 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 Series B Capital. The remaining 25.51% limited partnership interests in the
Series A Capital and Residual Capital of TWE are held 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 $1.640
billion and $435 million for the nine months ended September 30, 1999 and 1998,
respectively. Because of the priority rights over allocations of income and
distributions of TWE held by the Time Warner General Partners, all of TWE's
income was allocated to Time Warner and none was allocated to MediaOne.
In addition, the assets and cash flows of TWE are restricted by the TWE
partnership and credit agreements. As such, they are unavailable for use by the
partners except through the payment of certain fees, reimbursements, cash
distributions and loans, which are subject to limitations. TWE had $6.3 billion
of net assets at September 30, 1999.
Pursuant to the TWE partnership agreement, TWE makes certain cash
distributions to its partners. During the nine months ended September 30, 1999,
the Time Warner General Partners received distributions from TWE in the amount
of $1.116 billion, consisting of $627 million of senior capital distributions
(representing the return of $454 million of contributed capital and the
distribution of $173 million of priority capital return), $316 million of
tax-related distributions and $173 million of stock option related
distributions. During the nine months ended September 30, 1998, the Time Warner
General Partners received distributions from TWE in the amount of $1.060
billion, consisting of $579 million of senior capital distributions
(representing the return of $455 million of contributed capital and the
distribution of $124 million of priority capital return), $264 million of
tax-related distributions and $217 million of stock option related
distributions.
24
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
6. MANDATORILY REDEEMABLE PREFERRED SECURITIES
REIT Preferred Stock
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.
Preferred Trust 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.
7. SHAREHOLDERS' EQUITY
Preferred Stock Conversion
In July 1999, Time Warner issued approximately 46 million shares of
common stock in connection with the conversion of all outstanding 11 million
shares of its Series D convertible preferred stock. Because holders of Series D
preferred stock were entitled to cash dividends at a preferential rate through
July 1999, Time Warner's historical cash dividend requirements will be reduced,
going forward, by approximately $30 million on an annualized basis.
Series LMCN-V Stock Split
In May 1999, Time Warner amended the terms of its Series LMCN-V common
stock, which effectively resulted in a two-for-one stock split and the issuance
of approximately 57 million shares of Series LMCN-V common stock. As a result,
each share of Series LMCN-V common stock now is equivalent effectively to one
share of common stock instead of two. Because the equivalent number of shares of
common stock did not change, the split did not have any effect on Time Warner's
consolidated financial statements. Shares of Series LMCN-V common stock continue
to have limited voting rights.
25
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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 nine months of 1999, Time Warner acquired 24.3 million
shares of its common stock at an aggregate cost of $1.636 billion. These
repurchases increased the cumulative shares purchased under this and its
previous common stock repurchase program begun in 1996 to approximately 119.4
million shares at an aggregate cost of $4.676 billion.
Income (Loss) Per Common Share Before Extraordinary Item
Set forth below is a reconciliation of basic and diluted income (loss)
per common share before extraordinary item for each period.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------------ -----------------------------------
1999 1998 1998 1999 1998 1998
Historical Pro Forma(1) Historical(1) Historical Pro Forma(1) Historical(1)
---------- --------- ---------- ---------- --------- ----------
(millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before extraordinary
item - basic.......................... $ 372 $ (37) $ (37) $ 1,067 $ (158) $ (158)
Interest savings, net of tax(2)......... 12 - - 31 - -
Preferred dividends..................... 9 - - 45 - -
-------- -------- -------- ------- --------- --------
Income (loss) before extraordinary
item - diluted........................ $ 393 $ (37) $ (37) $ 1,143 $ (158) $ (158)
======== ======== ======== ======= ========= ========
Average number of common shares
outstanding - basic................... 1,288.9 1,202.6 1,202.6 1,260.5 1,184.0 1,184.0
Dilutive effect of stock options........ 71.8 - - 73.3 - -
Dilutive effect of convertible
preferred shares...................... 37.1 - - 66.6 - -
--------- -------- -------- ------- --------- --------
Average number of common shares
outstanding - diluted................. 1,397.8 1,202.6 1,202.6 1,400.4 1,184.0 1,184.0
======= ======== ======== ======= ========= ========
Income (loss) per common share before
extraordinary item:
Basic.............................. $ 0.29 $ (0.03) $ (0.03) $ 0.85 $ (0.13) $ (0.13)
======== ======== ======== ======= ========= ========
Diluted............................ $ 0.28 $ (0.03) $ (0.03) $ 0.82 $ (0.13) $ (0.13)
======== ======== ======== ======= ========= ========
- ---------------
(1) 1998 basic and diluted income (loss) per common share before extraordinary
item are the same because the effect of Time Warner's stock options and
convertible preferred stock was antidilutive.
(2) Reflects the required use of a portion of the proceeds from the future
exercise of employee stock options to repay all outstanding borrowings
under Time Warner's stock option proceeds credit facility.
</TABLE>
8. SEGMENT INFORMATION
Time Warner classifies its business interests into five 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; Music, consisting principally
of interests in recorded music and music publishing; Filmed Entertainment,
consisting principally of interests in filmed entertainment, television
production and television broadcasting; and Cable, consisting principally of
interests in cable television systems.
26
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Information as to the operations of Time Warner 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"). As a result of the
consolidation of the Entertainment Group in 1999, Time Warner's and the
Entertainment Group's business segments have been combined. Accordingly, segment
information for 1998 has been restated in order to conform to the new
presentation.
The operating results of Time Warner's Cable segment reflect (i) the
transfer of Time Warner Cable's direct broadcast satellite operations to
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 now named Time Warner Telecom Inc.,
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. These transactions are all more
fully described in Time Warner's 1998 Form 10-K.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
Revenues
<S> <C> <C> <C> <C>
Cable Networks................................. $1,450 $ 1,330 $ 4,425 $ 3,985
Publishing..................................... 1,110 1,076 3,237 3,160
Music.......................................... 852 938 2,616 2,731
Filmed Entertainment........................... 2,208 2,272 5,688 5,790
Broadcasting-The WB Network.................... 84 64 246 170
Cable.......................................... 1,342 1,288 3,968 4,015
Intersegment elimination....................... (323) (375) (835) (874)
------ ------ ------ ------
Total business segment revenues................ 6,723 6,593 19,345 18,977
Entertainment Group revenues reported on
an unconsolidated basis(1)..................... - (3,015) - (8,590)
------ ------- ------- -------
Total consolidated revenues.................... $6,723 $ 3,578 $19,345 $10,387
====== ======= ======= =======
- ----------------
(1) Represents amounts previously reported for the Entertainment Group,
adjusted by intercompany eliminations and other consolidating adjustments
necessary for Time Warner to reflect the Entertainment Group on a
consolidated basis.
</TABLE>
27
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
EBITA(1)
<S> <C> <C> <C> <C>
Cable Networks........................... $ 328 $ 271 $1,003 $ 844
Publishing............................... 129 112 419 373
Music.................................... 76 99 279 288
Filmed Entertainment(2).................. 228 233 806 497
Broadcasting-The WB Network.............. (24) (17) (95) (78)
Cable(3)................................. 894 417 2,477 1,246
Intersegment elimination................. (23) (33) (10) (76)
------ ----- ------ ------
Total business segment EBITA............. 1,608 1,082 4,879 3,094
Entertainment Group EBITA reported
on an unconsolidated basis(4)......... - (566) - (1,626)
------ ----- ------ ------
Total consolidated EBITA................. $1,608 $ 516 $4,879 $1,468
====== ===== ====== ======
</TABLE>
- ---------------
(1) EBITA represents business segment operating income before noncash
amortization of intangible assets. After deducting amortization of
intangible assets, Time Warner's historical business segment operating
income for the third quarter was $1.287 billion in 1999 and $315 million
in 1998. Time Warner's historical business segment operating income for
the first nine months of the year was $3.931 billion in 1999 and $869
million in 1998.
(2) Includes a net pretax gain of approximately $215 million recognized in the
first quarter of 1999 in connection with the early termination and
settlement of a long-term home video distribution agreement.
(3) Includes net pretax gains relating to the sale or exchange of certain
cable television systems and investments of $477 million in the third
quarter of 1999 and $6 million in the third quarter of 1998. Similarly,
nine month results include net pretax gains of $1.248 billion in 1999 and
$90 million in 1998.
(4) Represents amounts previously reported for the Entertainment Group,
adjusted by intercompany eliminations and other consolidating adjustments
necessary for Time Warner to reflect the Entertainment Group on a
consolidated basis.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
Depreciation of Property, Plant and Equipment
<S> <C> <C> <C> <C>
Cable Networks...............................$ 33 $ 31 $ 96 $ 88
Publishing................................... 19 20 57 58
Music........................................ 19 16 54 54
Filmed Entertainment......................... 46 49 114 130
Broadcasting-The WB Network.................. - 1 1 1
Cable........................................ 203 206 583 652
------ ------ ------ ------
Total business segment depreciation.......... 320 323 905 983
Entertainment Group depreciation reported
on an unconsolidated basis(1)............... - (229) - (698)
------ ------ ------ ------
Total consolidated depreciation..............$ 320 $ 94 $ 905 $ 285
====== ====== ====== ======
- ---------------
(1) Represents amounts previously reported for the Entertainment Group,
adjusted by intercompany eliminations and other consolidating adjustments
necessary for Time Warner to reflect the Entertainment Group on a
consolidated basis.
</TABLE>
28
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
Amortization of Intangible Assets(1)
<S> <C> <C> <C> <C>
Cable Networks...............................$ 51 $ 50 $ 152 $ 150
Publishing................................... 11 10 31 27
Music........................................ 65 69 202 208
Filmed Entertainment......................... 51 58 151 166
Broadcasting-The WB Network.................. 1 - 3 2
Cable........................................ 142 148 409 448
------ ------ ------ ------
Total business segment amortization.......... 321 335 948 1,001
Entertainment Group amortization reported on
an unconsolidated basis(2)................ - (134) - (402)
------ ------ ------ ------
Total consolidated amortization........... $ 321 $ 201 $ 948 $ 599
====== ====== ====== ======
</TABLE>
(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.
(2) Represents amounts previously reported for the Entertainment Group,
adjusted by intercompany eliminations and other consolidating adjustments
necessary for Time Warner to reflect the Entertainment Group on a
consolidated basis.
9. 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.
10. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash flows is as
follows:
Nine Months Ended September 30,
-------------------------------
1999 1998 1998
Historical Pro Forma Historical
---------- --------- ----------
(millions)
Interest expense............................. $1,116 $1,082 $ 669
Cash payments made for interest.............. 1,137 1,122 708
Cash payments made for income taxes.......... 304 251 191
Income tax refunds received.................. 43 51 48
Noncash investing activities include the exchange of certain cable
television systems in 1999 and 1998 (see Note 2). Noncash investing activities
in the first six months of 1998 also 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.
29
<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 September 30, 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 ................................... $ - $ - $ 200 $6,586 $ (63) $6,723
------ ------ ------ ------ ------ ------
Cost of revenues (1)........................ - - (88) (3,991) 72 (4,007)
Selling, general and administrative (1)..... - - (50) (1,856) - (1,906)
Gain on sale or exchange of cable systems
and investments.......................... - - - 477 - 477
------ ------ ------ ------ ------ ------
Operating expenses.......................... - - (138) (5,370) 72 (5,436)
------ ------ ------ ------ ------ ------
Business segment operating income........... - - 62 1,216 9 1,287
Equity in pretax income of consolidated
subsidiaries............................. 782 869 81 - (1,732) -
Interest and other, net..................... (63) (158) (39) (203) (27) (490)
Minority interest........................... - - - (59) - (59)
Corporate expenses.......................... (21) (14) (4) (35) 34 (40)
------ ------ ------ ------ ------ ------
Income before income taxes.................. 698 697 100 919 (1,716) 698
Income tax provision........................ (317) (305) (57) (386) 748 (317)
------ ------ ------ ------ ------ ------
Income before extraordinary item............ 381 392 43 533 (968) 381
Extraordinary loss on retirement of debt,
net of $9 million income tax benefit..... (12) (12) - - 12 (12)
------ ------ ------ ------ ------ ------
Net income.................................. $ 369 $ 380 $ 43 $ 533 $ (956) $ 369
====== ====== ====== ====== ====== ======
- ---------------
(1) Includes depreciation and amortization
expense of:......................... $ - $ - $ 2 $ 649 $ (10) $ 641
====== ====== ====== ====== ====== ======
</TABLE>
30
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Consolidating Statement of Operations
For The Three Months Ended September 30, 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 ................................... $ - $ - $ 176 $3,418 $ (16) $3,578
------- ------ ------ ------ ------ ------
Cost of revenues (1)........................ - - (83) (1,985) 16 (2,052)
Selling, general and administrative (1)..... - - (45) (1,166) - (1,211)
------ ------ ------ ------ ------ ------
Operating expenses.......................... - - (128) (3,151) 16 (3,263)
------ ------ ------ ------ ------ ------
Business segment operating income........... - - 48 267 - 315
Equity in pretax income of consolidated
subsidiaries............................. 203 335 87 - (625) -
Equity in pretax income of Entertainment
Group ................................... - - - 196 (32) 164
Interest and other, net..................... (35) (183) (37) (40) (16) (311)
Corporate expenses.......................... (20) (14) (3) (15) 32 (20)
------ ------ ------ ------ ------ ------
Income before income taxes.................. 148 138 95 408 (641) 148
Income tax provision........................ (109) (102) (54) (232) 388 (109)
------ ------ ------ ------ ------ ------
Net income.................................. $ 39 $ 36 $ 41 $ 176 $ (253) $ 39
====== ====== ====== ====== ====== ======
- ---------------
(1) Includes depreciation and amortization
expense of:.......................... $ - $ - $ 2 $ 293 $ - $ 295
====== ====== ====== ====== ====== ======
</TABLE>
31
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Consolidating Statement of Operations
For The Nine Months Ended September 30, 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 .................................. $ - $ - $ 626 $18,766 $ (47) $19,345
------ ------ ------ ------- ------- -------
Cost of revenues (1)........................ - - (288) (11,163) 47 (11,404)
Selling, general and administrative (1)..... - - (154) (5,319) - (5,473)
Gain on sale or exchange of cable systems
and investments.......................... - - - 1,248 - 1,248
Gain on early termination of video
distribution agreement................... - - - 215 - 215
------ ------ ------ ------- ------- -------
Operating expenses.......................... - - (442) (15,019) 47 (15,414)
------ ------ ------ ------- ------- -------
Business segment operating income........... - - 184 3,747 - 3,931
Equity in pretax income of consolidated
subsidiaries............................. 2,316 2,505 315 - (5,136) -
Interest and other, net..................... (185) (504) (108) (528) (62) (1,387)
Minority interest........................... - - - (358) - (358)
Corporate expenses.......................... (65) (42) (12) (103) 102 (120)
------ ------ ------ ------- ------- -------
Income before income taxes.................. 2,066 1,959 379 2,758 (5,096) 2,066
Income tax provision........................ (954) (892) (202) (1,231) 2,325 (954)
------ ------ ------ ------- ------- -------
Income before extraordinary item............ 1,112 1,067 177 1,527 (2,771) 1,112
Extraordinary loss on retirement of debt,
net of tax............................... (12) (12) - - 12 (12)
------ ------ ------ -------- ------- -------
Net income.................................. $1,100 $1,055 $ 177 $ 1,527 $(2,759) $ 1,100
====== ====== ====== ======= ======= =======
- ---------------
(1) Includes depreciation and amortization
expense of:............................ $ - $ - $ 7 $ 1,846 $ - $ 1,853
====== ====== ====== ======= ======= =======
</TABLE>
32
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Consolidating Statement of Operations
For The Nine Months Ended September 30, 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 ................................... $ - $ - $ 542 $ 9,861 $ (16) $10,387
------ ------ ------ ------- ------- -------
Cost of revenues (1)........................ - - (244) (5,788) 16 (6,016)
Selling, general and administrative (1)..... - - (142) (3,360) - (3,502)
------ ------ ------ ------- ------- -------
Operating expenses.......................... - - (386) (9,148) 16 (9,518)
------ ------ ------ ------- ------- -------
Business segment operating income........... - - 156 713 - 869
Equity in pretax income of consolidated
subsidiaries............................. 486 949 165 - (1,600) -
Equity in pretax income of Entertainment
Group ................................... - - - 492 (55) 437
Interest and other, net..................... (57) (570) (121) (91) (38) (877)
Corporate expenses.......................... (58) (40) (11) (46) 97 (58)
------ ------ ------ ------- ------- -------
Income before income taxes.................. 371 339 189 1,068 (1,596) 371
Income tax provision........................ (293) (237) (127) (599) 963 (293)
------ ------ ------ ------- ------- -------
Net income.................................. $ 78 $ 102 $ 62 $ 469 $ (633) $ 78
====== ====== ====== ======= ======= =======
- ---------------
(1) Includes depreciation and amortization
expense of:............................ $ - $ - $ 6 $ 878 $ - $ 884
====== ====== ====== ======= ======= =======
</TABLE>
33
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Consolidating Balance Sheet
September 30, 1999
<TABLE>
<CAPTION>
Non- Time
Time TW Guarantor Elimina- Warner
Warner Companies TBS Subsidiaries tions Consolidated
------ --------- --- ------------ ------- ------------
(millions)
ASSETS
Current assets
<S> <C> <C> <C> <C> <C> <C>
Cash and equivalents.................................. $ - $ 1 $ 15 $ 629 $ - $ 645
Receivables, net...................................... 6 27 92 4,065 - 4,190
Inventories........................................... - - 150 2,045 - 2,195
Prepaid expenses...................................... 57 - - 1,513 - 1,570
------- ------- ------- ------- -------- -------
Total current assets.................................. 63 28 257 8,252 - 8,600
Noncurrent inventories................................ - - 175 3,767 - 3,942
Investments in and amounts due to and from
consolidated subsidiaries.......................... 15,810 15,474 9,361 - (40,645) -
Other investments..................................... 210 8 24 2,167 (707) 1,702
Property, plant and equipment......................... 39 - 44 8,406 - 8,489
Music catalogues, contracts and copyrights............ - - - 802 - 802
Cable television and sports franchises................ - - - 7,863 - 7,863
Goodwill.............................................. - - - 15,377 - 15,377
Other assets.......................................... 99 104 65 1,389 - 1,657
------- ------- ------- ------- -------- --------
Total assets.......................................... $16,221 $15,614 $ 9,926 $48,023 $(41,352) $ 48,432
======= ======= ======= ======= ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable...................................... $ 25 $ - $ 5 $ 1,426 $ - $ 1,456
Participations, royalties and
programming costs payable.......................... - - 38 2,827 - 2,865
Debt due within one year.............................. - - - 26 - 26
Other current liabilities............................. 295 106 151 3,938 (261) 4,229
------- ------- ------- ------- -------- --------
Total current liabilities............................. 320 106 194 8,217 (261) 8,576
Long-term debt ....................................... 1,585 6,802 747 8,678 - 17,812
Debt due to affiliates................................ - - 1,647 158 (1,805) -
Borrowings against future stock option proceeds....... 1,230 - - - - 1,230
Deferred income taxes................................. 3,848 3,661 267 3,928 (7,856) 3,848
Unearned portion of paid subscriptions................ - - - 742 - 742
Other liabilities..................................... 452 - 156 3,080 - 3,688
Minority interests.................................... - - - 3,175 - 3,175
TW Companies-obligated mandatorily redeemable
preferred securities of subsidiaries
holding solely debentures of TW Companies.......... - - - 575 - 575
Shareholders' equity
Due from Time Warner and subsidiaries................. - (2,293) (752) (3,450) 6,495 -
Other shareholders' equity............................ 8,786 7,338 7,667 22,920 (37,925) 8,786
------- ------- ------- ------- -------- --------
Total shareholders' equity............................ 8,786 5,045 6,915 19,470 (31,430) 8,786
------- ------- ------- ------- -------- --------
Total liabilities and shareholders' equity............ $16,221 $15,614 $ 9,926 $48,023 $(41,352) $ 48,432
======= ======= ======= ======= ======== ========
</TABLE>
34
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Consolidating Balance Sheet
December 31, 1998
<TABLE>
<CAPTION>
Non- Time
Time TW Guarantor Elimina- Warner
Warner Companies TBS Subsidiaries tions Consolidated
------ --------- --- ----------- ------- ------------
(millions)
ASSETS
Current assets
<S> <C> <C> <C> <C> <C> <C>
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......................... 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 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>
35
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Consolidating Statement of Cash Flows
For The Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Non- Time
Time TW Guarantor Elimina- Warner
Warner Companies TBS Subsidiaries tions Consolidated
------ --------- --- ------------ ------ ------------
(millions)
OPERATIONS
<S> <C> <C> <C> <C> <C> <C>
Net income............................................ $1,100 $ 1,055 $ 177 $ 1,527 $ (2,759) $ 1,100
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt.............. 12 12 - - (12) 12
Depreciation and amortization......................... - - 7 1,846 - 1,853
Noncash interest expense.............................. - 3 - - - 3
Excess (deficiency) of distributions over equity in
pretax income of consolidated subsidiaries......... (756) (511) 14 - 1,253 -
Changes in operating assets and liabilities........... (101) (141) 74 685 (683) (166)
------- ------- ------- ------- -------- --------
Cash provided by operations........................... 255 418 272 4,058 (2,201) 2,802
------- ------- ------- ------- -------- --------
INVESTING ACTIVITIES
Consolidation of the Entertainment Group's cash and
equivalents........................................ - - - 87 - 87
Investments and acquisitions.......................... - - - (423) - (423)
Advances to parents and consolidated subsidiaries..... - - - (1,153) 1,153 -
Repayment of advances from consolidated subsidiaries.. - 107 - 232 (339) -
Capital expenditures.................................. - - (9) (1,523) - (1,532)
Investment proceeds................................... - - - 476 - 476
------ ------- ------- ------- -------- --------
Cash provided (used) by investing activities.......... - 107 (9) (2,304) 814 (1,392)
------ ------- ------- ------- -------- --------
FINANCING ACTIVITIES
Borrowings............................................ - 1,978 - 1,149 - 3,127
Debt repayments....................................... - (2,567) - (244) - (2,811)
Change in due to/from parent.......................... 922 20 (273) (2,056) 1,387 -
Borrowings against future stock option proceeds....... 335 - - - - 335
Redemption of mandatorily redeemable preferred
securities of subsidiary........................... - - - (217) - (217)
Repurchases of Time Warner common stock............... (1,636) - - - - (1,636)
Dividends paid........................................ (226) - - - - (226)
Proceeds received from stock option and
dividend reinvestment plans........................ 350 - - - - 350
Other................................................. - (21) - (108) - (129)
------- ------- ------- ------- -------- --------
Cash used by financing activities..................... (255) (590) (273) (1,476) 1,387 (1,207)
------- ------- ------- ------- -------- --------
INCREASE (DECREASE) IN CASH AND
EQUIVALENTS........................................ - (65) (10) 278 - 203
------- ------- ------- ------- -------- --------
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD................................ - 66 25 351 - 442
------- ------- ------- ------- -------- --------
CASH AND EQUIVALENTS AT END OF PERIOD................. $ - $ 1 $ 15 $ 629 $ - $ 645
======= ======= ======= ======= ======== ========
</TABLE>
36
<PAGE>
TIME WARNER INC.
SUPPLEMENTARY INFORMATION
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Consolidating Statement of Cash Flows
For The Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Non- Time
Time TW Guarantor Elimina- Warner
Warner Companies TBS Subsidiaries tions Consolidated
------ --------- --- ------------ ------- ------------
(millions)
OPERATIONS
<S> <C> <C> <C> <C> <C> <C>
Net income.............................................$ 78 $ 102 $ 62 $ 469 $ (633) $ 78
Adjustments for noncash and nonoperating items:
Depreciation and amortization.......................... - - 6 878 - 884
Noncash interest expense............................... - 29 - - - 29
Excess (deficiency) of distributions over equity in
pretax income of consolidated subsidiaries.......... 1,140 (467) 335 - (1,008) -
Excess of distributions over equity in pretax income of
Entertainment Group................................. - - - 113 55 168
Changes in operating assets and liabilities............ 472 5 (125) (233) (84) 35
------- ------- ------- ------- -------- --------
Cash provided (used) by operations..................... 1,690 (331) 278 1,227 (1,670) 1,194
------- ------- ------- ------- -------- --------
INVESTING ACTIVITIES
Investments and acquisitions.......................... (213) - - 127 - (86)
Advances to parents and consolidated subsidiaries..... (873) (187) - (39) 1,099 -
Repayment of advances from consolidated subsidiaries.. 75 360 - - (435) -
Capital expenditures.................................. - - (9) (339) - (348)
Investment proceeds................................... - - - 458 - 458
Proceeds received from distribution of TWE Senior
Capital............................................ - - - 455 - 455
------- ------- ------- ------- -------- --------
Cash provided (used) by investing activities.......... (1,011) 173 (9) 662 664 479
------- ------- ------- ------- -------- --------
FINANCING ACTIVITIES
Borrowings............................................ 601 496 - 579 (7) 1,669
Debt repayments....................................... - (500) (75) (1,800) 75 (2,300)
Change in due to/from parent.......................... - (188) (192) (558) 938 -
Borrowings against future stock option proceeds....... 1,015 - - - - 1,015
Repayments of borrowings against future stock
option proceeds.................................... (533) - - - - (533)
Repurchases of Time Warner common stock............... (1,944) - - - - (1,944)
Dividends paid........................................ (394) - - - - (394)
Proceeds received from stock options and dividend
reinvestment plans................................. 599 - - - - 599
Other................................................. (23) (14) - - - (37)
------- ------- ------- ------- -------- --------
Cash used by financing activities..................... (679) (206) (267) (1,779) 1,006 (1,925)
------- ------- ------- ------- -------- --------
INCREASE (DECREASE) IN CASH AND
EQUIVALENTS........................................ - (364) 2 110 - (252)
------- ------- ------- ------- -------- --------
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD................................ - 372 9 264 - 645
------- ------- ------- ------- -------- --------
CASH AND EQUIVALENTS AT END OF PERIOD................. $ - $ 8 $ 11 $ 374 $ - $ 393
======= ======= ======= ======= ======== ========
</TABLE>
37
<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; Filmed
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 is
also consistent with management's belief that TWE's intangible assets, such as
cable television franchises, film and television libraries and the goodwill
associated with its brands, 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.
AT&T-MediaOne Merger
At the time of this filing, MediaOne Group, Inc. ("MediaOne"), a
limited partner in TWE, had agreed to be acquired by AT&T Corp. ("AT&T"). In
August 1999, TWE received a notice from MediaOne concerning the termination of
its covenant not to compete with TWE. The termination of that covenant is
necessary for MediaOne to complete its proposed merger with AT&T. As a result of
the termination notice and the operation of the TWE partnership agreement,
MediaOne's rights to participate in the management of TWE's businesses
terminated immediately and irrevocably. MediaOne retains only certain protective
governance rights pertaining to certain limited matters affecting TWE as a
whole.
The proposed merger of MediaOne and AT&T is subject to customary
closing conditions, including regulatory approvals. Accordingly, there is no
assurance that it will occur. Also, there are no assurances that AT&T and Time
Warner will reach final agreement on the terms of a cable telephony joint
venture, either on the terms discussed on page F-8 of TWE's Annual Report on
Form 10-K for the year ended December 31, 1998, or any alternative terms.
38
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)
Transactions Affecting Comparability of Results of Operations
As more fully described herein, the comparability of TWE's operating
results has been affected by certain significant transactions and nonrecurring
items in each period.
In 1999, these nonrecurring items consisted of (i) an approximate $215
million net pretax gain recognized in the first quarter of 1999 in connection
with the early termination and settlement of a long-term home video distribution
agreement and (ii) net pretax gains in the amount of $1.118 billion recognized
in the first nine months of 1999 relating to the sale or exchange of various
cable television systems and investments. This compares to net pretax gains
recognized in the first nine months of 1998 of $90 million relating to the sale
or exchange of cable television systems.
In order to meaningfully assess underlying operating trends, management
believes that the results of operations for each period should be analyzed after
excluding the effects of these significant nonrecurring gains. As such, the
following discussion and analysis focuses on amounts and trends adjusted to
exclude the impact of these unusual items. 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 further by certain 1998 cable-related transactions, as described more
fully in Note 8 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.
RESULTS OF OPERATIONS
EBITA and operating income are as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
Operating Operating
EBITA Income EBITA Income
------------- -------------- ------------- --------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros.(1)................. $180 $161 $150 $128 $ 658 $ 401 $ 567 $ 302
Broadcasting-The WB Network.......................... (24) (17) (25) (17) (95) (78) (98) (80)
Cable Networks-HBO................................... 138 117 138 117 394 339 394 339
Cable(2)............................................. 699 336 600 240 2,135 1,017 1,863 731
---- ---- ---- ---- ----- ----- ----- -----
Total................................................ $993 $597 $863 $468 $3,092 $1,679 $2,726 $1,292
==== ==== ==== ==== ====== ====== ====== ======
</TABLE>
- ------------
(1) Includes a net pretax gain of approximately $215 million recognized in
the first quarter of 1999 in connection with the early termination and
settlement of a long-term home video distribution agreement.
(2) Includes net pretax gains relating to the sale or exchange of certain cable
television systems and investments of $358 million in the third quarter of
1999 and $6 million in the third quarter of 1998. Similarly, nine-month
results include net pretax gains of $1.118 billion in 1999 and $90 million
in 1998.
Three Months Ended September 30, 1999 Compared to the Three Months Ended
September 30, 1998
Consolidated Results
TWE had revenues of $3.474 billion and net income of $561 million for
the three months ended September 30, 1999, compared to revenues of $3.220
billion and net income of $172 million for the three months ended September 30,
1998.
39
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)
As previously described, the comparability of TWE's operating results
for 1999 and 1998 has been affected by certain significant, nonrecurring items
recognized in each period. These nonrecurring items consisted of approximately
$358 million of net pretax gains in 1999, compared to $6 million of net pretax
gains in 1998.
TWE's net income increased to $561 million in 1999, compared to $172
million in 1998. However, excluding the effect of the nonrecurring items
referred to earlier, net income increased by $54 million to $220 million in 1999
from $166 million in 1998. As discussed more fully below, this improvement
principally resulted from an overall increase in TWE's 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 $39 million and $23 million for
the three months ended September 30, 1999 and 1998, respectively, have been
provided for the operations of TWE's domestic and foreign subsidiary
corporations.
Business Segment Results
Filmed Entertainment-Warner Bros. Revenues increased to $1.862 billion
in 1999, compared to $1.727 billion in 1998. EBITA increased to $180 million in
1999 from $161 million in 1998. Operating income increased to $150 million in
1999 from $128 million in 1998. Revenues benefited from increases in worldwide
theatrical, home video and television syndication operations, offset in part by
lower revenues from consumer products operations. The increase in worldwide home
video revenues primarily resulted from increased sales of DVDs. EBITA and
operating income increased principally as a result of improved results from
worldwide theatrical, home video and television syndication operations, offset
in part by lower results from consumer products operations.
In connection with declines in the operations of certain of Warner
Bros.'s retail stores, management is in the process of evaluating several
strategic alternatives for its retail operations. These alternatives
include the gradual reduction and updating of Warner Bros.'s store portfolio,
including the transformation of some of the traditional retail outlets to
smaller, more efficient stores and an increasing emphasis on e-commerce
opportunities. To the extent management takes action under some of these
alternatives, a non-cash charge, principally relating to the acceleration of
future depreciation expense, may be required.
Management's evaluation is expected to continue through the 1999 holiday
shopping season.
Broadcasting-The WB Network. Revenues were $84 million in 1999,
compared to $64 million in 1998. EBITA decreased to a loss of $24 million in
1999 from a loss of $17 million in 1998. Operating losses increased to $25
million in 1999 from $17 million in 1998. Revenues increased principally as a
result of one additional night of weekly prime-time programming in comparison to
the prior year and advertising rate increases, offset in part by lower
television ratings for the summer repeat programming lineup. Operating losses
increased principally because the revenue gains were more than offset by the
combination of higher programming costs associated with the expanded programming
schedule and higher start-up costs associated with The WB Network 100+ station
group, a distribution alliance for The WB Network in smaller markets.
Cable Networks-HBO. Revenues increased to $540 million in 1999,
compared to $505 million in 1998. EBITA and operating income increased to $138
million in 1999 from $117 million in 1998. Revenues benefited primarily from an
increase in pay-television subscriptions. EBITA and operating income increased
principally due to the revenue gains and increased cost savings.
Cable. Revenues increased to $1.124 billion in 1999, compared to $1.052
billion in 1998. EBITA increased to $699 million in 1999 from $336 million in
1998. Operating income increased to $600 million in 1999 from $240 million in
40
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)
1998. These operating results were affected by certain cable-related
transactions that occurred in 1998 (the "1998 Cable Transactions") and by net
pretax gains of $358 million recognized in 1999 and $6 million in 1998 related
to the sale or exchange of various cable television systems and investments. The
1998 Cable Transactions principally resulted in the deconsolidation or transfer
of certain operations and are described more fully in Note 8 to the accompanying
consolidated financial statements. Excluding the effect of the 1998 Cable
Transactions, revenues increased due to growth in basic cable subscribers,
increases in basic cable rates, increases in advertising and pay-per-view
revenues and an increase in revenues from providing Road Runner-branded,
high-speed online services. Similarly, excluding the effect of the 1998 Cable
Transactions and the one-time gains, EBITA and operating income increased
principally as a result of the revenue increases, offset in part by higher
programming costs.
Interest and Other, Net. Interest and other, net, decreased to $185
million of expense in 1999, compared to $203 million of expense in 1998.
Interest expense decreased to $138 million in 1999, compared to $145 million in
1998, principally due to interest savings associated with the Company's 1998
debt reduction efforts. Other expense, net, decreased to $47 million in 1999,
compared to $58 million in 1998. The decrease principally related to lower
dividend requirements on preferred stock of a subsidiary that was redeemed in
March 1999.
Minority Interest. Minority interest expense increased to $60 million
in 1999, compared to $52 million in 1998. Minority interest expense increased
primarily due to the allocation of a portion of the net pretax gains relating to
the sale or exchange of various cable television systems and investments owned
by the TWE-Advance/Newhouse Partnership ("TWE-A/N"), a majority owned
partnership of TWE, to the minority owners of that partnership. Excluding the
significant effect of the gains recognized in 1999, minority interest expense
decreased slightly in 1999 principally due to a higher allocation of losses to a
minority partner in The WB Network.
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998
Consolidated Results
TWE had revenues of $9.468 billion and net income of $1.640 billion for
the nine months ended September 30, 1999, compared to revenues of $8.980 billion
and net income of $435 million for the nine months ended September 30, 1998.
As previously described, the comparability of TWE's operating results
for 1999 and 1998 has been affected by certain significant, nonrecurring items
recognized in each period. These nonrecurring items consisted of approximately
$1.333 billion of net pretax gains in 1999, compared to $90 million of net
pretax gains in 1998.
TWE's net income increased to $1.640 billion in 1999, compared to $435
million in 1998. However, excluding the significant effect of the nonrecurring
items referred to earlier, net income increased by $117 million to $482 million
in 1999 from $365 million in 1998. As more fully discussed below, this
improvement principally resulted from an overall increase in TWE's business
segment operating income, offset in part by higher equity losses from certain
investments accounted for under the equity method of accounting.
As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $94 million and $55 million for
the nine months ended September 30, 1999 and 1998, respectively, have been
provided for the operations of TWE's domestic and foreign subsidiary
corporations.
Business Segment Results
Filmed Entertainment-Warner Bros. Revenues increased to $4.688 billion
in 1999, compared to $4.364 billion in 1998. EBITA increased to $658 million in
1999 from $401 million in 1998. Operating income increased to $567 million in
41
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)
1999 from $302 million in 1998. Revenues benefited from increases in worldwide
theatrical, home video and television distribution operations, offset in part by
lower revenues from consumer products operations. The increase in worldwide home
video revenues primarily resulted from increased sales of DVDs. EBITA and
operating income increased primarily from the inclusion of an approximate $215
million net pretax gain recognized in the first quarter of 1999 in connection
with the early termination and settlement of a long-term home video distribution
agreement. Excluding the gain, EBITA and operating income increased principally
as a result of improved results from worldwide theatrical, home video and
television distribution operations, offset in part by lower results from
consumer products operations.
In connection with declines in the operations of certain of Warner
Bros.'s retail stores, management is in the process of evaluating several
strategic alternatives for its retail operations. These alternatives
include the gradual reduction and updating of Warner Bros.'s store portfolio,
including the transformation of some of the traditional retail outlets to
smaller, more efficient stores and an increasing emphasis on e-commerce
opportunities. To the extent management takes action under some of these
alternatives, a non-cash charge, principally relating to the acceleration of
future depreciation expense, may be required. Management's evaluation is
expected to continue through the 1999 holiday shopping season.
Broadcasting - The WB Network. Revenues were $246 million in 1999,
compared to $170 million in 1998. EBITA decreased to a loss of $95 million in
1999 from a loss of $78 million in 1998. Operating losses increased to $98
million in 1999 from $80 million in 1998. Revenues increased principally as a
result of one additional night of weekly prime-time programming in comparison to
the prior year, improved television ratings and advertising rate increases.
Operating losses increased principally because the revenue gains were more than
offset by the combination of higher programming costs associated with the
expanded programming schedule and higher start-up costs associated with The WB
Network 100+ station group, a distribution alliance for The WB Network in
smaller markets.
Cable Networks-HBO. Revenues increased to $1.612 billion in 1999,
compared to $1.526 billion in 1998. EBITA and operating income increased to $394
million in 1999 from $339 million in 1998. Revenues benefited primarily from an
increase in pay-television subscriptions. EBITA and operating income increased
principally due to the revenue gains, increased cost savings, and higher income
from Comedy Central, a 50%-owned equity investee.
Cable. Revenues increased to $3.312 billion in 1999, compared to $3.289
billion in 1998. EBITA increased to $2.135 billion in 1999 from $1.017 billion
in 1998. Operating income increased to $1.863 billion in 1999 from $731 million
in 1998. These operating results were affected by the 1998 Cable Transactions
and by net pretax gains of $1.118 billion recognized in 1999 and $90 million in
1998 related to the sale or exchange of various cable television systems and
investments. The 1998 Cable Transactions principally resulted in the
deconsolidation or transfer of certain operations and are described more fully
in Note 8 to the accompanying consolidated financial statements. Excluding the
effect of the 1998 Cable Transactions, revenues increased due to growth in basic
cable subscribers, increases in basic cable rates, increases in advertising and
pay-per-view revenues and an increase in revenues from providing Road
Runner-branded, high-speed online services. Similarly, excluding the effect of
the 1998 Cable Transactions and the one-time gains, EBITA and operating income
increased principally as a result of the revenue increases, offset in part by
higher programming costs.
Interest and Other, Net. Interest and other, net, increased to $577
million of expense in 1999, compared to $550 million of expense in 1998.
Interest expense decreased to $411 million in 1999, compared to $418 million in
1998, principally due to interest savings associated with the Company's 1998
debt reduction efforts. Other expense, net, increased to $166 million in 1999,
compared to $132 million in 1998. This increase principally related to higher
losses from certain investments accounted for under the equity method of
accounting, offset in part by lower dividend requirements on preferred stock of
a subsidiary that was redeemed in March 1999.
42
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)
Minority Interest. Minority interest expense increased to $361 million
in 1999, compared to $198 million in 1998. Minority interest expense increased
primarily due to the allocation of a portion of the net pretax gains relating to
the sale or exchange of various cable television systems and investments owned
by TWE-A/N to the minority owners of that partnership. Excluding the significant
effect of the gains recognized in each period, minority interest expense
decreased slightly in 1999 principally due to a higher allocation of losses to a
minority partner in The WB Network.
FINANCIAL CONDITION AND LIQUIDITY
September 30, 1999
Financial Condition
At September 30, 1999, TWE had $6.7 billion of debt, $235 million of
cash and equivalents (net debt of $6.5 billion) and $6.3 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 priority
capital and $5.1 billion of partners' capital at December 31, 1998.
Senior Capital Distributions
In July 1999, TWE paid a $627 million distribution to the Time Warner
General Partners to redeem the remaining portion of their senior priority
capital interests, including a priority capital return of $173 million. Time
Warner used a portion of the proceeds received from this distribution to repay
all $400 million of outstanding borrowings under its credit agreement with TWE.
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 nine months of 1999, TWE's cash provided by operations
amounted to $2.205 billion and reflected $3.092 billion of EBITA from its Filmed
Entertainment-Warner Bros., Broadcasting-The WB Network, Cable Networks-HBO and
Cable businesses, $632 million of noncash depreciation expense and $20 million
of proceeds from TWE's asset securitization program, less $394 million of
interest payments, $84 million of income taxes, $54 million of corporate
expenses, and $1.007 billion related to an aggregate increase in working capital
requirements, other balance sheet accounts and noncash items. Cash provided by
operations of $1.273 billion in the first nine months of 1998 reflected $1.679
billion of EBITA from its Filmed Entertainment-Warner Bros., Broadcasting-The WB
Network, Cable Networks-HBO and Cable businesses, $698 million of noncash
depreciation expense and $131 million of proceeds from TWE's asset
securitization program, less $419 million of interest payments, $57 million of
income taxes, $54 million of corporate expenses and $705 million related to an
aggregate increase in working capital requirements, other balance sheet accounts
and noncash items.
Cash used by investing activities was $540 million in the first nine
months of 1999, compared to $887 million in the first nine months of 1998. The
decrease principally resulted from the collection of TWE's $400 million loan to
43
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)
Time Warner and lower capital expenditures, offset in part by a $198 million
decrease in investment proceeds relating largely to the 1998 sale of TWE's
remaining interest in Six Flags Entertainment Corporation. Capital expenditures
decreased to $1.009 billion in the first nine months of 1999, compared to $1.092
billion in the first nine months of 1998.
Cash used by financing activities was $1.517 billion in the first nine
months of 1999, compared to $583 million in the first nine 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, the payment of $1.116 billion of
capital distributions to Time Warner and $39 million of debt reduction. The use
of cash in 1998 principally resulted from the payment of $1.060 billion of
capital distributions to Time Warner, offset in part by an $675 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 $910 million in the nine months ended September 30, 1999, compared to $991
million in the nine months ended September 30, 1998. Cable capital spending is
expected to approximate $350 million for the remainder of 1999. Capital spending
by TWE's Cable division 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 $2.571 billion at
September 30, 1999 (including amounts relating to the licensing of film product
to TWE's cable television networks of $307 million and to Time Warner's cable
television networks of $612 million). This compares to $2.298 billion at
December 31, 1998 (including amounts relating to the licensing of film product
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 have already been produced, the
recognition of revenue for such completed product is principally only dependent
upon the commencement of the availability period for telecast under the terms of
the related licensing agreement. Cash licensing fees are collected periodically
over the term of the related licensing agreements or on an accelerated basis
using 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 are also 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.
44
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)
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 continues to be 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, initially identified and assessed 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 distinguished 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. As of September 30, 1999,
substantially all of the potential exposures have been identified by the
divisions as Year 2000 compliant and of those that are not reported as
compliant, substantially all were in the installation or final testing stages
and expected to be substantially completed in all material respects by the
middle of the fourth quarter of 1999. The Company, however, could experience
unexpected delays. The Company is expecting to focus its attention during the
fourth quarter of 1999 on conducting final integrated testing in a stable
environment and on refinements and testing of its contingency and transition
plans, as necessary.
As stated above, however, the Company's business is heavily dependent on
third parties, both domestically and internationally, and these parties are
themselves heavily dependent on technology. For example, 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. In addition, in a situation endemic to
the cable industry, much of the Company's headend equipment that controls cable
set-top boxes needed to be upgraded to become Year 2000 compliant. The box
manufacturers and cable industry groups together developed solutions that the
Company has substantially completed installing and testing in its headend
equipment at its various geographic locations. The Company has attempted to
include in its "mission critical" inventory significant service providers,
vendors, suppliers, customers and governmental entities that are believed to be
critical to business operations and has made its determinations of 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.
45
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)
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 75% to 85% has been incurred through
September 30, 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 experiences unanticipated failures of the
systems within its control, 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.
More importantly, disruptions experienced by third parties with which the
Company does business as well as by the economy generally could materially
adversely affect the Company. The amount of potential liability and lost revenue
cannot be reasonably estimated at this time.
As stated above, the Company is now focusing its attention on its
contingency and transition plans. It has examined its existing standard business
interruption strategies to evaluate whether they would satisfactorily meet the
demands of failures arising from Year 2000-related problems. It is also
developing and refining specific transition schedules and contingency plans in
the event it does not successfully complete its remaining remediation as
anticipated or experiences unforeseen problems outside the scope of these
standard strategies. These plans are intended to provide guidance and
alternatives for unanticipated failures of internal systems as well as external
failures that may impede any of the Company's businesses from operating
normally. The Company intends to examine its status periodically to determine
the necessity of 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
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, 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:
46
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)
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 customers of these businesses);
continued popularity of merchandising; and the uncertain impact of
technological developments such as DVD and the Internet.
o For TWE's digital media businesses, their ability to develop products and
services that are attractive, accessible and commercially viable in terms
of content, technology and cost, their ability to manage costs and generate
revenues, aggressive competition from existing and developing technologies
and products, the resolution of issues concerning commercial activities via
the Internet, including security, reliability, cost, ease of use and
access, and the possibility of increased government regulation of new media
services.
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.
47
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(millions)
ASSETS
Current assets
<S> <C> <C>
Cash and equivalents............................................................ $ 235 $ 87
Receivables, including $1.049 billion and $765 million
due from Time Warner, less allowances of $470 and $506 million.............. 2,885 2,618
Inventories..................................................................... 1,238 1,312
Prepaid expenses................................................................ 223 166
------ ------
Total current assets............................................................ 4,581 4,183
Noncurrent inventories.......................................................... 2,021 2,327
Loan receivable from Time Warner................................................ - 400
Investments..................................................................... 829 886
Property, plant and equipment................................................... 6,385 6,041
Cable television franchises..................................................... 4,823 3,773
Goodwill........................................................................ 3,764 3,854
Other assets.................................................................... 825 766
------- ------
Total assets.................................................................... $23,228 $22,230
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable................................................................ $ 1,440 $ 1,473
Participations and programming costs payable.................................... 1,673 1,515
Debt due within one year........................................................ 6 6
Other current liabilities, including $821 and $370 million due to Time Warner... 2,075 1,942
------ ------
Total current liabilities....................................................... 5,194 4,936
Long-term debt.................................................................. 6,725 6,578
Other long-term liabilities, including $1.024 and $1.130
billion due to Time Warner................................................... 3,166 3,267
Minority interests.............................................................. 1,801 1,522
Preferred stock of subsidiary holding solely a mortgage note of its parent...... - 217
Time Warner General Partners' Senior Capital.................................... - 603
Partners' capital
Contributed capital............................................................. 7,338 7,341
Undistributed partnership deficit............................................... (996) (2,234)
------- ------
Total partners' capital......................................................... 6,342 5,107
------ ------
Total liabilities and partners' capital......................................... $23,228 $22,230
======= =======
See accompanying notes.
</TABLE>
48
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
Revenues (a)....................................................... $3,474 $3,220 $9,468 $8,980
------ ------ ------ ------
Cost of revenues (a)(b)............................................ (2,362) (2,181) (6,266) (6,017)
Selling, general and administrative (a)(b)......................... (607) (577) (1,809) (1,761)
Gain on sale or exchange of cable systems and investments.......... 358 6 1,118 90
Gain on early termination of video distribution agreement.......... - - 215 -
------ ------- ------ ------
Business segment operating income.................................. 863 468 2,726 1,292
Interest and other, net (a)........................................ (185) (203) (577) (550)
Minority interest.................................................. (60) (52) (361) (198)
Corporate services (a)............................................. (18) (18) (54) (54)
------- ------ ------ ------
Income before income taxes......................................... 600 195 1,734 490
Income taxes....................................................... (39) (23) (94) (55)
------ ------ ------ ------
Net income......................................................... $ 561 $ 172 $1,640 $ 435
====== ====== ====== =======
- ---------------
(a) Includes the following income (expenses) resulting from
transactions with the partners of TWE and other related companies:
Revenues.................................................... $150 $227 $422 $474
Cost of revenues............................................ (62) (49) (198) (142)
Selling, general and administrative......................... (7) (14) (23) (16)
Gain on sale or exchange of cable systems and investments... 308 - 308 -
Interest and other, net..................................... (8) 1 20 6
Corporate expenses.......................................... (18) (18) (54) (54)
(b) Includes depreciation and amortization expense of:............. $ 356 $ 358 $ 998 $1,085
====== ====== ====== ======
See accompanying notes.
</TABLE>
49
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
------------------
1999 1998
---- ----
(millions)
OPERATIONS
<S> <C> <C>
Net income......................................................... $1,640 $ 435
Adjustments for noncash and nonoperating items:
Depreciation and amortization...................................... 998 1,085
Changes in operating assets and liabilities........................ (433) (247)
------ ------
Cash provided by operations........................................ 2,205 1,273
------ ------
INVESTING ACTIVITIES
Investments and acquisitions....................................... (273) (335)
Capital expenditures............................................... (1,009) (1,092)
Investment proceeds................................................ 342 540
Collection of loan to Time Warner.................................. 400 -
------- ------
Cash used by investing activities.................................. (540) (887)
------ ------
FINANCING ACTIVITIES
Borrowings......................................................... 1,854 1,515
Debt repayments.................................................... (1,893) (840)
Redemption of preferred stock of subsidiary........................ (217) -
Capital distributions.............................................. (1,116) (1,060)
Other.............................................................. (145) (198)
------ ------
Cash used by financing activities.................................. (1,517) (583)
------ ------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS........................ 148 (197)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD........................ 87 322
------- ------
CASH AND EQUIVALENTS AT END OF PERIOD.............................. $ 235 $ 125
======= ======
See accompanying notes.
</TABLE>
50
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
1999 1998
---- ----
(millions)
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD........................................... $5,107 $6,333
Net income............................................................... 1,640 435
Other comprehensive income (loss)........................................ 6 (21)
------ ------
Comprehensive income(a).................................................. 1,646 414
Stock option and tax-related distributions............................... (383) (746)
Distribution of Time Warner Telecom interests............................ - (191)
Allocation of income to Time Warner General Partners' Senior Capital..... (24) (52)
Other.................................................................... (4) (2)
------ -------
BALANCE AT END OF PERIOD................................................. $6,342 $5,756
====== ======
- ---------------
(a) Comprehensive income for the three months ended September 30, 1999 and
1998 was $520 million and $167 million, respectively.
See accompanying notes.
</TABLE>
51
<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;
Filmed 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, Filmed
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 segments are presented
herein as an indication of financial performance (Note 8). Except for start-up
losses incurred in connection with The WB Network, TWE's principal business
segments generate significant operating income and cash flow from operations.
The cash flow from operations generated by such business segments 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
business segments amounted to $130 million and $129 million for the three months
ended September 30, 1999 and 1998, respectively and $366 million and $387
million for the nine months ended September 30, 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 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").
52
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the 1999 presentation.
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. GAIN ON SALE OR EXCHANGE OF CABLE TELEVISION SYSTEMS AND INVESTMENTS
In 1999 and 1998, largely in an effort to enhance its geographic
clustering of cable television properties, TWE sold or exchanged various cable
television systems and investments. The 1999 transactions included a large
exchange of cable television systems serving approximately 450,000 subscribers
for other cable television systems of comparable size owned by TCI
Communications, Inc., a subsidiary of AT&T Corp., and a large exchange of cable
television systems serving approximately 160,000 subscribers for other cable
television systems of comparable size owned by MediaOne. As a result of these
transactions, the operating results of TWE include net pretax gains for the
third quarter of $358 million in 1999 and $6 million in 1998. Net pretax gains
for the first nine months of the year amounted to $1.118 billion in 1999 and $90
million in 1998.
4. INVESTMENT IN PRIMESTAR
TWE owns an approximate 24% equity interest in Primestar, Inc.
("Primestar"). 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. Then,
in June 1999, Primestar completed the sale of its high-power satellite rights to
DirecTV.
As a result of those transactions, Primestar began to substantially
wind down its operations during the first quarter of 1999. TWE recognized its
share of Primestar's 1999 losses under the equity method of accounting. Such
losses are included in interest and other, net, in the accompanying consolidated
statement of operations. As of September 30, 1999, Primestar has substantially
completed the wind down of its operations. As such, future wind-down losses are
not expected to be material to TWE's operating results.
53
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
5. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
-------------------- ------------------
Current Noncurrent Current Noncurrent
------- ---------- ------- ----------
(millions)
Film costs:
<S> <C> <C> <C> <C>
Released, less amortization..................... $ 609 $ 735 $ 614 $ 744
Completed and not released...................... 164 64 179 76
In process and other............................ 36 324 23 572
Library, less amortization...................... - 521 - 560
Programming costs, less amortization............... 331 377 426 375
Merchandise........................................ 98 - 70 -
------ -------- ------ --------
Total.............................................. $1,238 $2,021 $1,312 $2,327
====== ====== ====== ======
</TABLE>
6. 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.
7. 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 nine months ended September 30, 1999, TWE accrued $316
million of tax-related distributions and $67 million of stock option
distributions, based on closing prices of Time Warner Inc. common stock of
$60.75 at September 30, 1999 and $62.06 at December 31, 1998. During the nine
months ended September 30, 1998, TWE accrued $264 million of tax-related
distributions and $482 million of stock option distributions as a result of an
increase at that time in the market price of Time Warner Inc. common stock.
Also, during the nine months ended September 30, 1998, Time Warner Cable's
business telephony operations were reorganized into a separate entity named Time
Warner Telecom Inc. ("Time Warner Telecom"). In connection with that
reorganization, TWE recorded a $191 million noncash distribution of its business
telephony net assets to its partners based on their historical cost.
During the nine months ended September 30, 1999, TWE paid distributions
to the Time Warner General Partners in the amount of $489 million, consisting of
$316 million of tax-related distributions and $173 million of stock option
related distributions. During the nine months ended September 30, 1998, TWE paid
the Time Warner General Partners distributions in the amount of $1.060 billion,
consisting of $264 million of tax-related distributions, $217 million of stock
54
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
option related distributions and a $579 million distribution to the Time Warner
General Partners relating to their Senior Capital interests.
In July 1999, TWE borrowed $627 million under its bank credit agreement
and paid a distribution to the Time Warner General Partners to redeem the
remaining portion of their senior priority capital interests, including a
priority capital return of $173 million. Time Warner used a portion of the
proceeds received from this distribution to repay all $400 million of
outstanding borrowings under its credit agreement with TWE.
8. SEGMENT INFORMATION
TWE classifies its business interests into three fundamental areas:
Cable Networks, consisting principally of interests in cable television
programming; Filmed 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, 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 now named Time Warner
Telecom Inc., 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.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
Revenues
<S> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros.......... $1,862 $1,727 $4,688 $4,634
Broadcasting-The WB Network............... 84 64 246 170
Cable Networks-HBO........................ 540 505 1,612 1,526
Cable..................................... 1,124 1,052 3,312 3,289
Intersegment elimination.................. (136) (128) (390) (369)
------ ------ ------ ------
Total..................................... $3,474 $3,220 $9,468 $8,980
====== ====== ====== ======
</TABLE>
55
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ -------------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
EBITA(1)
<S> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros.(2).......... $180 $161 $ 658 $ 401
Broadcasting-The WB Network................... (24) (17) (95) (78)
Cable Networks-HBO............................ 138 117 394 339
Cable(3)...................................... 699 336 2,135 1,017
---- ---- ------ ------
Total......................................... $993 $597 $3,092 $1,679
==== ==== ====== ======
</TABLE>
- ---------------
(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 and nine months
ended September 30, 1999, respectively, and for the corresponding periods in
the prior year was $863 million and $2.726 billion in 1999 and $468 million
and $1.292 billion in 1998.
(2)Includes a net pretax gain of approximately $215 million recognized in the
first quarter of 1999 in connection with the early termination and
settlement of a long-term home video distribution agreement.
(3)Includes net pretax gains relating to the sale or exchange of certain cable
television systems of $358 million in the third quarter of 1999 and $6
million in the third quarter of 1998. Similarly, nine-month results include
net pretax gains of $1.118 billion in 1999 and $90 million in 1998.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
Depreciation of Property, Plant and Equipment
<S> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros................. $ 44 $ 48 $109 $126
Broadcasting-The WB Network...................... - 1 1 1
Cable Networks-HBO............................... 7 6 20 16
Cable............................................ 175 174 502 555
---- ---- ---- ----
Total............................................ $226 $229 $632 $698
==== ==== ==== ====
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
Amortization of Intangible Assets (1)
Filmed Entertainment-Warner Bros................. $ 30 $ 33 $ 91 $ 99
Broadcasting-The WB Network...................... 1 - 3 2
Cable Networks-HBO............................... - - - -
Cable............................................ 99 96 272 286
--- ---- ---- ----
Total............................................ $130 $129 $366 $387
==== ==== ==== ====
</TABLE>
(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.
56
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
9. 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.
10. ADDITIONAL FINANCIAL INFORMATION
Nine Months
Ended September 30,
--------------------
1999 1998
---- ----
(millions)
Interest expense................................... $411 $418
Cash payments made for interest.................... 394 419
Cash payments made for income taxes, net........... 84 57
Noncash capital distributions...................... 67 673
Noncash investing activities included the exchange of certain cable
television systems in 1999 and 1998 (see Note 3). Noncash investing activities
in the first nine months of 1998 also 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.
57
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings.
Reference is made to the various actions filed against American Family
Enterprises ("AFE"), a company engaged in magazine sweepstakes solicitations
which is 50% owned by a subsidiary of Time Inc., described on page I-42 of Time
Warner's Annual Report on Form 10-K for the year ended December 31, 1998 (the
"1998 Form 10-K"). On October 29, 1999, AFE filed for bankruptcy protection
pursuant to Chapter 11 of the Bankruptcy Code. In conjunction with the
bankruptcy filing, AFE has also announced a settlement in principle of the
consolidated private actions presently pending against it in Federal court, the
terms of which remain confidential. Private actions pending against AFE in
various State courts have been stayed and Time Warner expects these actions to
be resolved by the operation of the Federal court settlement and the bankruptcy
proceedings. Time Warner does not expect that the outcome of the bankruptcy
proceedings and the costs of settlement of such actions will be material to its
future operating results and financial condition.
Reference is made to the consolidated actions referenced as In re
Compact Disc Antitrust Litigation described on pages I-40 and I-41 of Time
Warner's 1998 Form 10-K. The Court has scheduled trial to commence on February
14, 2000. Plaintiffs claim substantial and treble damages against all record
company defendants.
Reference is made to the lawsuit filed by former President of Indonesia
H.M. Suharto against Time Inc. Asia described on page 64 of Time Warner's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. The
Indonesian Court has denied a pre-trial motion contesting jurisdiction. Further
pre-trial proceedings have been scheduled and Time Inc. Asia expects that trial
will commence shortly thereafter.
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. The Court, on
reconsideration of its earlier decision to grant defendants' motion to dismiss
this action, as had been reported on page 50 of Time Warner's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999, has now denied that motion.
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.
-------------------
(i) Time Warner filed a Current Report on Form 8-K dated July
12, 1999 in which it reported in Item 5 that Time Warner had entered into an
agreement with CDNOW, Inc. and Sony Corporation of America to combine the
businesses of CDNOW and Columbia House.
(ii) Time Warner filed a Current Report on Form 8-K dated
August 3, 1999 reporting in Item 5 Time Warner's consolidation, for accounting
purposes, of the Entertainment Group (which substantially consists of TWE)
retroactive to the beginning of 1999.
58
<PAGE>
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/ Joseph A. Ripp
Name: Joseph A. Ripp
Title: Executive Vice President and
Chief Financial Officer
Dated: November 12, 1999
59
<PAGE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulations S-K
Exhibit No. Description of Exhibit
27.1 Financial Data Schedule with respect to the period
ending September 30, 1999.
27.2 Restated Financial Data Schedule with respect to
the period ending March 31, 1999.
27.3 Restated Financial Data Schedule with respect to
the period ending June 30, 1999.
60
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.1
TIME WARNER INC.
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
financial statements of Time Warner Inc. for the nine months ended September 30,
1999 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 645
<SECURITIES> 0
<RECEIVABLES> 5,575
<ALLOWANCES> 1,385
<INVENTORY> 6,137
<CURRENT-ASSETS> 8,600
<PP&E> 13,910
<DEPRECIATION> 5,421
<TOTAL-ASSETS> 48,432
<CURRENT-LIABILITIES> 8,576
<BONDS> 17,812
<COMMON> 13
0
1
<OTHER-SE> 8,772
<TOTAL-LIABILITY-AND-EQUITY> 48,432
<SALES> 19,345
<TOTAL-REVENUES> 19,345
<CGS> 9,941
<TOTAL-COSTS> 9,941
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,116
<INCOME-PRETAX> 2,066
<INCOME-TAX> 954
<INCOME-CONTINUING> 1,112
<DISCONTINUED> 0
<EXTRAORDINARY> 12
<CHANGES> 0
<NET-INCOME> 1,100
<EPS-BASIC> 0.84
<EPS-DILUTED> 0.81
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.2
TIME WARNER INC.
RESTATED FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
restated 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>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 620
<SECURITIES> 0
<RECEIVABLES> 5,437
<ALLOWANCES> 1,422
<INVENTORY> 6,359
<CURRENT-ASSETS> 8,322
<PP&E> 13,434
<DEPRECIATION> 5,270
<TOTAL-ASSETS> 47,367
<CURRENT-LIABILITIES> 8,446
<BONDS> 17,527
<COMMON> 12
0
2
<OTHER-SE> 8,887
<TOTAL-LIABILITY-AND-EQUITY> 47,367
<SALES> 6,091
<TOTAL-REVENUES> 6,091
<CGS> 3,385
<TOTAL-COSTS> 3,385
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 368
<INCOME-PRETAX> 304
<INCOME-TAX> 166
<INCOME-CONTINUING> 138
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 138
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.3
TIME WARNER INC.
RESTATED FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
restated financial statements of Time Warner Inc. for the six months ended June
30, 1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 421
<SECURITIES> 0
<RECEIVABLES> 5,566
<ALLOWANCES> 1,351
<INVENTORY> 6,113
<CURRENT-ASSETS> 8,305
<PP&E> 13,601
<DEPRECIATION> 5,272
<TOTAL-ASSETS> 47,633
<CURRENT-LIABILITIES> 8,165
<BONDS> 17,300
<COMMON> 12
0
2
<OTHER-SE> 9,078
<TOTAL-LIABILITY-AND-EQUITY> 47,633
<SALES> 12,622
<TOTAL-REVENUES> 12,622
<CGS> 6,411
<TOTAL-COSTS> 6,411
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 740
<INCOME-PRETAX> 1,368
<INCOME-TAX> 637
<INCOME-CONTINUING> 731
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 731
<EPS-BASIC> 0.56
<EPS-DILUTED> 0.54
</TABLE>
