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 June 30, 1996 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT of 1934 for the transition period
from ----------------- to ------------------
Registration Number 33-53742
TIME WARNER ENTERTAINMENT COMPANY, L.P.
(Exact name of registrant as specified in its charter)
Delaware 13-3666692
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
American Television and Communications
Corporation Delaware 13-2922502
Time Warner Operations Inc. Delaware 13-3544870
Warner Cable Communications Inc. Delaware 13-3134949
Warner Communications Inc. Delaware 13-2696809
(Exact name of registrant as
specified in its charter) (State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or Number)
organization)
75 Rockefeller Plaza
New York, New York 10019
(212) 484-8000
(Address, including zip code, and telephone number, including
area code, of each 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 [ ]
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
AND TWE GENERAL PARTNERS
INDEX TO FORM 10-Q
Page
-------
TWE
General
TWE Partners
--- --------
PART I. FINANCIAL INFORMATION
Management's discussion and analysis of
results of operations and financial
condition 1 18
Consolidated balance sheets at
June 30, 1996 and December 31, 1995 9 22
Consolidated statements of operations
for the three and six months ended
June 30, 1996 and 1995 10 24
Consolidated statements of cash flows
for the six months ended June 30, 1996
and 1995 11 28
Notes to consolidated financial statements 12 30
PART II. OTHER INFORMATION 36
<PAGE>
PART I. FINANCIAL INFORMATION
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
TWE is engaged principally in two fundamental areas of business:
Entertainment, consisting principally of interests in filmed
entertainment, broadcasting, theme parks and cable television
programming; and Telecommunications, consisting principally of
interests in cable television systems. TWE also manages the
telecommunications properties owned by Time Warner and the combined
cable television operations are conducted under the name of Time
Warner Cable. Capitalized terms are as defined and described in the
accompanying consolidated financial statements, or elsewhere herein.
Significant Transactions
In 1996, certain transactions were completed by Time Warner and
TWE that have had an effect on TWE's results of operations and
financial condition. Such transactions include:
* The acquisition by Time Warner of Cablevision Industries
Corporation ("CVI") and related companies on January 4,
1996, which strengthened Time Warner Cable's geographic
clusters of cable television systems and substantially
increased the number of cable subscribers managed by
Time Warner Cable. Time Warner Cable now serves
approximately 11.8 million subscribers in neighborhoods
passing nearly 20% of the television homes
in the U.S.
* The closing of certain previously-announced sales by TWE
of unclustered cable television systems which raised
approximately $90 million of net proceeds for debt
reduction. Including the 1995 sale of 51% of its
interest in Six Flags Entertainment Corporation ("Six
Flags"), TWE has now completed transactions that have
raised approximately $1.1 billion for debt reduction.
The nature of these transactions and their impact on the results of
operations and financial condition of TWE are further discussed below.
Use of EBITDA
The following comparative discussion of the results of operations
and financial condition of TWE includes, among other factors, an
analysis of changes in the operating income of the business segments
before depreciation and amortization ("EBITDA") in order to eliminate
the effect on the operating performance of the filmed entertainment
and cable businesses of significant amounts of amortization of
intangible assets recognized in Time Warner's $14 billion acquisition
of WCI in 1989, the $1.3 billion acquisition of the ATC minority
interest in 1992 and other business combinations accounted for by the
purchase method. Financial analysts generally consider EBITDA to be an
important measure of comparative operating performance for the
businesses of TWE, and when used in comparison to debt levels or the
coverage of interest expense, as a measure of liquidity. However,
EBITDA should be considered in addition to, not as a substitute for,
operating income, net income, cash flow and other measures of
financial performance and liquidity reported in accordance with
generally accepted accounting principles.
RESULTS OF OPERATIONS
EBITDA and operating income for TWE for the three and six months
ended June 30, 1996 and 1995 are as follows:
Three Months Ended June 30,
EBITDA Operating Income
1996 1995 1996 1995
(millions)
-----------------------------------
Filmed Entertainment. . . . . . . $140 $109 $ 79 $ 52
Six Flags Theme Parks . . . . . . - 58 - 31
Broadcasting - The WB Network. . . (12) (12) (12) (12)
Programming - HBO. . . . . . . . . 87 74 83 70
Cable 376 312 147 125
Total. . . . . . . . . . . . $591 $541 $297 $266
==== ===== ===== ====
Six Months Ended June 30,
EBITDA Operating Income
1996 1995 1996 1995
---------------------------------------
(millions)
Filmed Entertainment $271 $230 $ 149 $119
Six Flags Theme Parks - 60 - 29
Broadcasting - The WB Network (36) (33) (36) (33)
Programming - HBO 168 145 159 137
Cable 744 556 293 205
Total. . . . . . . . . $1,147 $958 $565 $457
====== ==== ==== ====
Three Months Ended June 30, 1996 Compared to the Three Months Ended
June 30, 1995
TWE had revenues of $2.608 billion, and net income of $74 million
for the three months ended June 30, 1996, compared to revenues of
$2.392 billion and net income of $56 million for the three months
ended June 30, 1995.
On a pro forma basis, giving effect to (i) the 1995 formation of
the TWE-Advance/Newhouse Partnership, (ii) the 1995 refinancing of
approximately $2.6 billion of pre-existing bank debt, (iii) the 1995
consolidation of Paragon, (iv) the 1995 reacquisition of the Time
Warner Service Partnership Assets, (v) the 1995 sale of 51% of TWE's
interest in Six Flags and (vi) the sale or expected sale or transfer
of certain unclustered cable television systems owned by TWE, as if
each of such transactions had occurred at the beginning of 1995, TWE
would have reported for the three months ended June 30, 1995, revenues
of $2.317 billion, depreciation and amortization of $259 million,
operating income of $241 million and net income of $47 million. No pro
forma financial information has been presented for TWE for the three
months ended June 30, 1996 because all of such transactions are
already reflected, in all material respects, in the historical
financial statements of TWE.
As discussed more fully below, TWE's historical operating results
in 1996 as compared to pro forma results in 1995 reflect an overall
increase in operating income generated by its business segments,
offset in part by a decrease in investment-related income and an
increase in minority interest expense related to the
TWE-Advance/Newhouse Partnership. On a historical basis, the
positive effect from such underlying operating trends was slightly
mitigated by the lack of contribution of Six Flags's operating results
in 1996 which exceeded interest savings on lower average debt levels
related to management's debt reduction program.
As a U.S. partnership, TWE is not subject to U.S. federal and
state income taxation. Income and withholding taxes of $21 million and
$25 million in the three months ended June 30, 1996 and 1995,
respectively, have been provided in respect of the operations of TWE's
domestic and foreign subsidiary corporations.
Filmed Entertainment. Revenues increased to $1.270 billion,
compared to $1.151 billion in the second quarter of 1995. EBITDA
increased to $140 million from $109 million. Depreciation and
amortization, including amortization related to the purchase of WCI,
amounted to $61 million in 1996 and $57 million in 1995. Operating
income increased to $79 million from $52 million. Revenues benefited
from increases in worldwide theatrical, home video and television
distribution operations. Domestic theatrical revenues in 1996 were led
by the success of Twister and exceeded the prior year's performance
despite difficult comparisons to successful films such as Batman
Forever. EBITDA and operating income benefited from the revenue gains.
Six Flags Theme Parks. As a result of TWE's sale of 51% of its
interest in Six Flags, the operating results of Six Flags have been
deconsolidated effective as of June 23, 1995 and TWE's remaining 49%
interest in Six Flags is accounted for under the equity method of
accounting.
Broadcasting - The WB Network. The WB Network recorded an
operating loss of $12 million on $18 million of revenues in the second
quarter of 1996, compared to $12 million of an operating loss on $3
million of revenues in the second quarter of 1995. The increase in
revenues, as well as a corresponding increase in costs, primarily
resulted from the expansion of programming in September 1995 to two
nights of primetime scheduling, and the unveiling of Kids' WB!, the
network's animated programming lineup on Saturday mornings and
weekdays. Due to the start-up nature of this new broadcast operation,
losses are expected to continue.
Programming - HBO. Revenues increased to $456 million, compared
to $392 million in the second quarter of 1995. EBITDA increased to $87
million from $74 million. Depreciation and amortization amounted to $4
million in 1996 and 1995. Operating income increased to $83 million
from $70 million. Revenues benefited primarily from a significant
increase in subscriptions. EBITDA and operating income improved
principally as a result of the revenue gains.
Cable. Revenues increased to $961 million, compared to $724
million in the second quarter of 1995. EBITDA increased to $376
million from $312 million. Depreciation and amortization, including
amortization related to the purchase of WCI and the acquisition of the
ATC minority interest, amounted to $229 million in 1996 and $187
million in 1995. Operating income increased to $147 million from $125
million. Revenues and operating results benefited from the
consolidation of Paragon effective as of July 6, 1995. Excluding such
effect, revenues benefited from an aggregate increase of 5% in basic
cable and Primestar-related, direct broadcast satellite subscribers,
increases in regulated cable rates as permitted under Time Warner
Cable's "social contract" with the Federal Communications Commission
(the "FCC") and increases in pay-per-view and advertising revenues.
Excluding the effect of consolidating Paragon, EBITDA and operating
income increased as a result of the revenue gains, offset in part,
with respect to operating income only, by higher depreciation and
amortization relating to increased capital spending.
Interest and Other, Net. Interest and other, net, decreased to
$132 million in the second quarter of 1996, compared to $135 million
in the second quarter of 1995. Interest expense decreased to $117
million, compared to $146 million in the second quarter of 1995,
principally as a result of interest savings on lower average debt
levels related to management's debt reduction program and lower
short-term, floating-rates of interest paid on borrowings under TWE's
former and existing bank credit agreements. There was other expense,
net, of $15 million in the second quarter of 1996, compared to other
income, net, of $11 million in 1995, principally due to a decrease in
investment-related income, including a reduction in interest income
resulting from lower average cash balances and lower average principal
amounts due under the note receivable from U S WEST.
Six Months Ended June 30, 1996 Compared to the Six Months Ended June
30, 1995
TWE had revenues of $5.093 billion and net income of $168
million for the six months ended June 30, 1996, compared to revenues
of $4.438 billion and net income of $60 million for the six months
ended June 30, 1995.
On a pro forma basis, giving effect to (i) the 1995 formation of
the TWE-Advance/Newhouse Partnership, (ii) the 1995 refinancing of
approximately $2.6 billion of pre-existing bank debt, (iii) the 1995
consolidation of Paragon, (iv) the 1995 reacquisition of the Time
Warner Service Partnership Assets, (v) the 1995 sale of 51% of TWE's
interest in Six Flags and (vi) the sale or expected sale or transfer
of certain unclustered cable television systems owned by TWE, as if
each of such transactions had occurred at the beginning of 1995, TWE
would have reported for the six months ended June 30, 1995, revenues
of $4.583 billion, depreciation and amortization of $528 million,
operating income of $460 million and net income of $77 million. No pro
forma financial information has been presented for TWE for the six
months ended June 30, 1996 because all of such transactions are
already reflected, in all material respects, in the historical
financial statements of TWE.
As discussed more fully below, TWE's historical operating results
in 1996 as compared to pro forma results in 1995 reflect an overall
increase in operating income generated by its business segments and an
increase in investment-related income, offset in part by an increase
in minority interest expense related to the TWE-Advance/Newhouse
Partnership. On a historical basis, such underlying operating trends
were enhanced by interest savings in 1996 on lower average debt levels
related to management's debt reduction program, and were offset in
part by an increase in minority interest expense related to the
operations of the TWE-Advance/Newhouse Partnership for a full
six-month period.
As a U.S. partnership, TWE is not subject to U.S. federal and
state income taxation. Income and withholding taxes of $39 million in
the six months ended June 30, 1996, and $36 million in the six months
ended June 30, 1995, have been provided in respect of the operations
of TWE's domestic and foreign subsidiary corporations.
Filmed Entertainment. Revenues increased to $2.486 billion,
compared to $2.334 billion in the first six months of 1995. EBITDA
increased to $271 million from $230 million. Depreciation and
amortization, including amortization related to the purchase of WCI,
amounted to $122 million in 1996 and $111 million in 1995. Operating
income increased to $149 million from $119 million. Revenues benefited
from increases in worldwide home video and consumer products
operations. Lower domestic theatrical revenues in the first quarter of
1996 were overcome by the second quarter domestic box office
performance of theatrical releases, led by the success of Twister.
EBITDA and operating income benefited from the revenue gains.
Six Flags Theme Parks. As a result of TWE's sale of 51% of its
interest in Six Flags, the operating results of Six Flags have been
deconsolidated effective as of June 23, 1995 and TWE's remaining 49%
interest in Six Flags is accounted for under the equity method of
accounting.
Broadcasting - The WB Network. The WB Network recorded an
operating loss of $36 million on $33 million of revenues in the first
six months of 1996, compared to $33 million of an operating loss on $6
million of revenues in the first six months of 1995. The increased
revenues and operating losses are primarily due to the expansion of
programming in September 1995 to two nights of primetime scheduling,
and the unveiling of Kids' WB!, the network's animated programming
lineup on Saturday mornings and weekdays. Due to the start-up nature
of this new broadcast operation, losses are expected to continue.
Programming - HBO. Revenues increased to $875 million, compared
to $777 million in the first six months of 1995. EBITDA increased to
$168 million from $145 million. Depreciation and amortization amounted
to $9 million in 1996 and $8 million in 1995. Operating income
increased to $159 million from $137 million. Revenues benefited
primarily from a significant increase in subscriptions. EBITDA and
operating income improved principally as a result of the revenue
gains.
Cable. Revenues increased to $1.908 billion, compared to $1.281
billion in the first six months of 1995. EBITDA increased to $744
million from $556 million. Depreciation and amortization, including
amortization related to the purchase of WCI and the acquisition of the
ATC minority interest, amounted to $451 million in 1996 and $351
million in 1995. Operating income increased to $293 million from $205
million. Revenues and operating results benefited from the
contribution of the TWE-Advance/Newhouse Partnership for a full
six-month period and the consolidation of Paragon effective as of July
6, 1995. Excluding such effects, revenues benefited from an aggregate
increase of 5% in basic cable and Primestar-related, direct broadcast
satellite subscribers, increases in regulated cable rates as permitted
under Time Warner Cable's "social contract" with the FCC and increases
in pay-per-view and advertising revenues. Excluding the
TWE-Advance/Newhouse Partnership and Paragon effects noted above,
EBITDA and operating income increased as a result of the revenue
gains, offset in part, with respect to operating income only, by
higher depreciation and amortization relating to increased capital
spending.
Interest and Other, Net. Interest and other, net, decreased to
$221 million in the first six months of 1996, compared to $296 million
in the first six months of 1995. Interest expense decreased to $239
million, compared to $296 million in the first six months of 1995,
principally as a result of interest savings on lower average debt
levels related to management's debt reduction program and lower
short-term, floating-rates of interest paid on borrowings under TWE's
former and existing bank credit agreements. Other income, net,
increased to $18 million in the first six months of 1996, principally
due to an overall increase in investment-related income resulting from
gains on the sale of certain unclustered cable systems recognized in
1996 in connection with management's debt reduction program, which
more than exceeded a reduction in interest income resulting from lower
average cash balances and lower average principal amounts due under
the note receivable from U S WEST.
FINANCIAL CONDITION AND LIQUIDITY
June 30, 1996
Financial Condition
TWE had $5.6 billion of debt, $1.5 billion of Time Warner General
Partners' Senior Capital and $6.6 billion of partners' capital at June
30, 1996, compared to $6.2 billion of debt, $1.4 billion of Time
Warner General Partners' Senior Capital and $6.5 billion of partners'
capital (net of the $169 million uncollected portion of the note
receivable from U S WEST) at December 31, 1995. Cash and equivalents
were $218 million at June 30, 1996, compared to $209 million at
December 31, 1995, reducing the debt-net-of-cash amounts for TWE to
$5.4 billion and $6 billion, respectively.
Debt Reduction Program
In the first six months of 1996, TWE closed certain
previously-announced sales of unclustered cable television systems
which raised approximately $90 million of proceeds for debt reduction.
Including the 1995 sale of 51% of its interest in Six Flags, TWE has
now completed transactions that have raised approximately $1.1 billion
for debt reduction.
Cash Flows
In the first six months of 1996, TWE's cash provided by operations
amounted to $1.197 billion and reflected $1.147 billion of EBITDA from
the Filmed Entertainment, Broadcasting-The WB Network, Programming-HBO
and Cable businesses and $364 million related to a reduction in
working capital requirements, other balance sheet accounts and noncash
items, less $247 million of interest payments, $32 million of income
taxes and $35 million of corporate expenses. Cash provided by
operations of $725 million in the first six months of 1995 reflected
$958 million of business segment EBITDA and $132 million related to a
reduction in working capital requirements, other balance sheet
accounts and noncash items, less $301 million of interest payments,
$34 million of income taxes and $30 million of corporate expenses.
Cash used by investing activities was $650 million in the first
six months of 1996, compared to cash provided by investing activities
of $256 million in the first six months of 1995, principally as a
result of a $757 million decrease in investment proceeds realized in
1995 in connection with management's debt reduction program. Capital
expenditures increased to $781 million in the first six months of
1996, compared to $622 million in the first six months of 1995,
principally as a result of higher cable capital spending as discussed
more fully below.
Cash used by financing activities was $538 million in the first
six months of 1996, compared to cash provided by financing activities
of $211 million in the first six months of 1995, principally as a
result of a $607 million net reduction in debt in 1996 and a $102
million increase in distributions paid to Time Warner, offset in part
by a $74 million decrease in collections on the note receivable
from U S WEST.
Management believes that TWE's operating cash flow, cash and
equivalents and additional borrowing capacity are sufficient to meet
its capital and liquidity needs for the foreseeable future.
Cable Capital Spending
Since the beginning of 1994, 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 $610 million in the six
months ended June 30, 1996, compared to $433 million in the six months
ended June 30, 1995, and was financed in part through collections on
the note receivable from U S WEST of $169 million and $243 million,
respectively. Cable capital spending by TWE's Cable division is
budgeted to be approximately $700 million for the remainder of 1996
and is expected to be funded principally by cable operating cash flow.
In exchange for certain flexibility in establishing cable rate pricing
structures for regulated services that went into effect on January 1,
1996 and consistent with Time Warner Cable's long-term strategic plan,
Time Warner Cable has agreed with the FCC to invest a total of $4
billion in capital costs in connection with the upgrade of its cable
infrastructure, which is expected to be substantially completed over
the next five years. The agreement with the FCC covers all of the
cable operations of Time Warner Cable, including the owned or managed
cable television systems of Time Warner, TWE and the
TWE-Advance/Newhouse Partnership. Management expects to continue to
finance such level of investment principally through the growth in
cable operating cash flow derived from increases in subscribers and
cable rates, bank credit agreement borrowings and the development of
new revenue streams from expanded programming options, high speed data
transmission, telephony and other services.
Warner Bros. Backlog
Warner Bros.' backlog, representing the amount of future revenue
not yet recorded from cash contracts for the licensing of theatrical
and television product for pay cable, network, basic cable and
syndicated television exhibition, amounted to $1.601 billion at June
30, 1996, compared to $1.056 billion at December 31, 1995 (including
amounts relating to HBO of $208 million at June 30, 1996 and $175
million at December 31, 1995). Warner Bros.' backlog increased
principally as a result of the licensing of the hit television series
Friends and ER for domestic syndication and cable television
exhibition beginning in 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. In addition, cash licensing fees are collected
periodically over the term of the related licensing agreements.
Accordingly, the portion of backlog for which cash advances have 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 cash through the sale of advertising spots received under such
contracts.
Foreign Currency Risk Management
Time Warner uses foreign exchange contracts primarily to hedge the
risk that unremitted or future license fees owed to TWE domestic
companies for the sale or anticipated sale of U.S. copyrighted
products abroad may be adversely affected by changes in foreign
currency exchange rates. As part of its overall strategy to manage the
level of exposure to the risk of foreign currency exchange rate
fluctuations, Time Warner hedges a portion of its foreign currency
exposures anticipated over the ensuing twelve-month period, including
those related to TWE. At June 30, 1996, Time Warner has effectively
hedged approximately half of TWE's total estimated foreign currency
exposures that principally relate to anticipated cash flows to be
remitted to the U.S. over the ensuing twelve-month period, using
foreign exchange contracts that generally have maturities of three
months or less, which generally are rolled over to provide continuing
coverage throughout the year. TWE is reimbursed by or reimburses Time
Warner for Time Warner contract gains and losses related to TWE's
foreign currency exposure. Time Warner often closes foreign exchange
sale contracts by purchasing an offsetting purchase contract. At June
30, 1996, Time Warner had contracts for the sale of $483 million and
the purchase of $165 million of foreign currencies at fixed rates and
maturities of three months or less. Of Time Warner's $318 million net
sale contract position, none of the foreign exchange purchase
contracts and $98 million of the foreign exchange sale contracts
related to TWE's foreign currency exposure, primarily Japanese yen
(21% of net contract position related to TWE), French francs (25%),
German marks (12%) and Canadian dollars (18%), compared to a net sale
contract position of $113 million of foreign currencies at December
31, 1995.
Unrealized gains or losses related to foreign exchange contracts
are recorded in income as the market value of such contracts change;
accordingly, the carrying value of foreign exchange contracts
approximates market value. The carrying value of foreign exchange
contracts was not material at June 30, 1996 and December 31, 1995. No
cash is required to be received or paid with respect to such gains and
losses until the related foreign exchange contracts are settled,
generally at their respective maturity dates. For the six months ended
June 30, 1996 and 1995, TWE recognized $4 million in gains and $13
million in losses, respectively, on foreign exchange contracts, which
were or are expected to be offset by corresponding increases in the
dollar value of foreign currency license fee payments that have been
or are anticipated to be received in cash from the sale of U.S.
copyrighted products abroad. Time Warner places foreign currency
contracts with a number of major financial institutions in order to
minimize credit risk.
Based on Time Warner's outstanding foreign exchange contracts
related to TWE's exposure outstanding at June 30, 1996, each 5%
devaluation of the U.S. dollar as compared to the level of foreign
exchange rates for currencies under contract at June 30, 1996 would
result in approximately $5 million of unrealized losses on foreign
exchange contracts. Conversely, a 5% appreciation of the U.S. dollar
as compared to the level of foreign exchange rates for currencies
under contract at June 30, 1996 would result in $5 million of
unrealized gains on contracts. Consistent with the nature of the
economic hedge provided by such foreign exchange contracts, such
unrealized gains or losses would be offset by corresponding decreases
or increases, respectively, in the dollar value of future foreign
currency license fee payments that would be received in cash within
the ensuing twelve-month period from the sale of U.S. copyrighted
products abroad.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
1996 1995
---------- ------------
(millions)
ASSETS
Current assets
Cash and equivalents $ 218 $ 209
Receivables, including $281 and
$354 due from Time Warner,
less allowances of $343 and $365 1,439 1,635
Inventories 891 904
Prepaid expenses 160 161
------- ------
Total current assets 2,708 2,909
Noncurrent inventories 1,958 1,909
Loan receivable from Time Warner 400 400
Investments 400 383
Property, plant and equipment, net 5,585 5,205
Cable television franchises 3,212 3,360
Goodwill 4,058 4,119
Other assets 592 620
------ ------
Total assets $18,913 $18,905
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable $ 603 $ 697
Participations and programming costs 1,274 1,090
Other current liabilities 1,401 1,427
------ -------
Total current liabilities 3,278 3,214
Long-term debt 5,575 6,137
Other long-term liabilities, including
$272 and $198 due to Time Warner 1,093 924
Minority interests 848 726
Time Warner General Partners' Senior Capital 1,483 1,426
Partners' capital
Contributed capital 7,537 7,522
Undistributed partnership earnings (deficit) (901) (875)
Note receivable from U S WEST - (169)
------ -----
Total partners' capital 6,636 6,478
------ -------
Total liabilities and partners' capital $18,913 $18,905
======= ========
See accompanying notes.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
(millions)
-----------------------------------
Revenues (a) . . . . . . . . . $2,608 $2,392 $5,093 $4,438
------ ------ ------ ------
Cost of revenues (a)(b). . . . 1,730 1,611 3,395 3,051
Selling, general and
administrative (a)(b) . . . . 581 515 1,133 930
------ ----- ------ -----
Operating expenses . . . . . . 2,311 2,126 4,528 3,981
------ ----- ------ -----
Business segment operating
income. . . . . . . . . . . . . 297 266 565 457
Interest and other, net (a). . . (132) (135) (221) (296)
Minority interest. . . . . . . . (52) (35) (102) (35)
Corporate services (a) . . . . . (18) (15) (35) (30)
------ ------- ------- ------
Income before income taxes . . . 95 81 207 96
Income taxes . . . . . . . . . . (21) (25) (39) (36)
------ ------- ------- ------
Net income . . . . . . . . . . . $ 74 $ 56 $ 168 $ 60
======= ====== ====== =====
__________________
(a) Includes the following income (expenses) resulting from
transactions with the partners of TWE and other related companies for
the three and six months ended June 30, 1996, respectively, and for
the corresponding periods in the prior year: revenues- $76 million and
$99 million in 1996, $32 million and $58 million in 1995; cost of
revenues- $(14) million and $(38) million in 1996, $(36) million and
$(53) million in 1995; selling, general and administrative- $(7)
million and $(9) million in 1996, $(23) million and $(40) million in
1995; interest and other, net- $7 million and $16 million in 1996, $6
million and $6 million in 1995; and corporate services- $(18) million
and $(35) million in 1996, $(15) million and $(30) million in 1995.
(b) Includes depreciation and amortization
expense of: . . . . . . . $ 294 $ 275 $ 582 $ 501
====== ===== ===== =====
See accompanying notes.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
1996 1995
(millions)
---------------
OPERATIONS
Net income $ 168 $ 60
Adjustments for noncash and nonoperating
items:
Depreciation and amortization 582 501
Changes in operating assets and liabilities 447 164
----- ------
Cash provided by operations 1,197 725
------ -----
INVESTING ACTIVITIES
Investments and acquisitions (65) (75)
Capital expenditures (781) (622)
Investment proceeds 196 953
----- ----
Cash provided (used) by investing
activities (650) 256
----- ----
FINANCING ACTIVITIES
Borrowings 63 235
Debt repayments (670) (237)
Capital distributions (132) (30)
Collections on note receivable from U S WEST 169 243
Other 32 -
----- -----
Cash provided (used) by financing activities (538) 211
----- -----
INCREASE IN CASH AND EQUIVALENTS 9 1,192
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 209 1,071
----- ------
CASH AND EQUIVALENTS AT END OF PERIOD $ 218 $2,263
====== ======
See accompanying notes.
<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"), is engaged principally in two fundamental areas
of business: Entertainment, consisting principally of interests in
filmed entertainment, broadcasting, theme parks and cable television
programming; and Telecommunications, consisting principally of
interests in cable television systems.
Each of the business interests within Entertainment and
Telecommunications is important to TWE's objective of increasing
partner value through the creation, extension and distribution of
recognizable brands and copyrights throughout the world. Such brands
and copyrights include (1) the unique and extensive film and
television libraries of Warner Bros. and trademarks such as the Looney
Tunes characters and Batman, (2) The WB Network, a new national
broadcasting network launched in 1995 as an extension of the Warner
Bros. brand and as an additional distribution outlet for Warner Bros.'
collection of children's cartoons and television programming, (3) Six
Flags, the largest regional theme park operator in the United States,
in which TWE owns a 49% interest, (4) HBO and Cinemax, the leading pay
television services and (5) Time Warner Cable, the second
largest operator of cable television systems in the U.S.
The operating results of TWE's various business interests are
presented herein as an indication of financial performance (Note 7).
Except for start-up losses incurred in connection with The WB Network,
TWE's principal business interests generate significant operating
income and cash flow from operations. The cash flow from operations
generated by such business interests is significantly greater than
their operating income due to significant amounts of noncash
amortization of intangible assets recognized principally in Time
Warner 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 in accordance with the pushdown method of accounting. Non-cash
amortization of intangible assets recorded by TWE's businesses
amounted to $101 million and $119 million for the three months ended
June 30, 1996 and 1995, respectively, and $211 million and $232
million for the six months ended June 30, 1996 and 1995, respectively.
Subsidiaries of Time Warner are the general partners of TWE ("Time
Warner General Partners"). During 1995, Time Warner acquired the
aggregate 11.22% limited partnership interests previously held by
subsidiaries of each of ITOCHU Corporation and Toshiba Corporation. As
a result, Time Warner and certain of its wholly-owned subsidiaries
collectively own general and limited partnership interests in 74.49%
of the pro rata priority capital ("Series A Capital") and residual
equity capital ("Residual Capital") of TWE, and 100% of the
senior priority capital ("Senior Capital") and junior priority capital
("Series B Capital") of TWE. The remaining 25.51% limited partnership
interests in the Series A Capital and Residual Capital of TWE are held
by a subsidiary of U S WEST, Inc. ("U S WEST").
Basis of Presentation
The accompanying financial statements are unaudited but in the
opinion of management contain all the adjustments (consisting of those
of a normal recurring nature) considered necessary to present fairly
the financial position and the results of operations and cash flows for
the periods presented, in conformity with generally accepted
accounting principles applicable to interim periods. The accompanying
financial statements should be read in conjunction with the
audited consolidated financial statements of TWE for the year ended
December 31, 1995.
The consolidated financial statements reflect (i) the formation by
TWE of the TWE-Advance/Newhouse Partnership effective as of April 1,
1995, (ii) the deconsolidation of Six Flags Entertainment Corporation
("Six Flags") effective as of June 23, 1995 and (iii) the
consolidation of Paragon Communications ("Paragon") effective as of
July 6, 1995. Certain reclassifications have been made to the prior
year's financial statements to conform to the 1996 presentation.
Effective January 1, 1996, TWE adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ("FAS
121") which established standards for the recognition and measurement
of impairment losses on long-lived assets and certain intangible
assets. The adoption of FAS 121 did not have a material effect on
TWE's financial statements.
2. TWE-ADVANCE/NEWHOUSE PARTNERSHIP
On April 1, 1995, TWE formed a cable television joint venture with
the Advance/Newhouse Partnership ("Advance/Newhouse") to which
Advance/Newhouse and TWE contributed cable television systems (or
interests therein) serving approximately 4.5 million subscribers, as
well as certain foreign cable investments and programming investments
that included Advance/Newhouse's 10% interest in Primestar Partners,
L.P. ("Primestar"). TWE owns a two-thirds equity interest in the
TWE-Advance/Newhouse Partnership and is the managing partner.
TWE consolidates the partnership and the one-third equity interest
owned by Advance/Newhouse is reflected in TWE's balance sheet as
minority interest. In accordance with the partnership agreement,
Advance/Newhouse can require TWE to purchase its equity interest for
fair market value at specified intervals following the death of both
of its principal shareholders. Beginning in the third year, either
partner can initiate a dissolution in which TWE would
receive two-thirds and Advance/Newhouse would receive one-third of the
partnership's net assets. The assets contributed by TWE and
Advance/Newhouse to the partnership were recorded at their
predecessor's historical cost, which, with respect to
Advance/Newhouse, consisted of assets contributed to the partnership
of approximately $338 million and liabilities assumed by the
partnership of approximately $9 million. No gain was recognized by TWE
upon the capitalization of the partnership.
The accompanying consolidated statement of operations includes the
operating results of the Advance/Newhouse businesses from the date of
contribution to the partnership. On a pro forma basis, giving effect
to (i) the 1995 formation of the TWE-Advance/Newhouse Partnership,
(ii) the 1995 refinancing of approximately $2.6 billion of
pre-existing bank debt, (iii) the 1995 consolidation of Paragon, (iv)
the 1995 reacquisition of the Time Warner Service Partnership Assets
(Note 6), (v) the 1995 sale of 51% of TWE's interest in Six Flags and
(vi) the sale or expected sale or transfer of certain unclustered
cable television systems owned by TWE, as if each of such transactions
had occurred at the beginning of 1995, TWE would have reported for the
three and six months ended June 30, 1995, respectively, revenues of
$2.317 billion and $4.583 billion, depreciation and amortization of
$259 million and $528 million, operating income of $241 million and
$460 million and net income of $47 million and $77 million.
3. SIX FLAGS
On June 23, 1995, TWE sold 51% of its interest in Six Flags to an
investment group led by Boston Ventures for $204 million and received
$640 million in additional proceeds from Six Flags, representing
payment of certain intercompany indebtedness and licensing fees. As a
result of the transaction, Six Flags has been deconsolidated and TWE's
remaining 49% interest in Six Flags is accounted for under the equity
method of accounting. TWE reduced debt by approximately $850 million
in 1995 in connection with the transaction, and a portion of the
income on the transaction has been deferred by TWE principally as a
result of its guarantee of certain third-party, zero-coupon
indebtedness of Six Flags due in 1999.
4. INVENTORIES
Inventories consist of:
June 30, 1996 December 31, 1995
Current Noncurrent Current Noncurrent
-------------------------------------------
(millions)
Film costs:
Released, less
amortization $ 353 $ 447 $ 529 $ 437
Completed and not
released 192 53 74 22
In process and other 63 454 11 396
Library, less amorti-
zation - 690 - 717
Programming costs, less
amortization 204 314 219 337
Merchandise 79 - 71 -
---- ---- ------ -----
Total $ 891 $1,958 $ 904 $1,909
===== ====== ====== ======
5. LONG-TERM DEBT
Long-term debt consists of:
June 30, December 31,
1996 1995
------------------------
(millions)
Credit agreement, weighted average
interest rates of 6.0% and 6.4% $1,384 $2,185
Commercial paper, weighted average
interest rates of 5.8% and 6.2% 397 157
Publicly held notes and debentures 3,781 3,781
Other 13 14
----- ------
Total. . . . . . . . . . . . $5,575 $6,137
====== ======
Each Time Warner General Partner has guaranteed a pro rata
portion of approximately $5.5 billion of TWE's debt and accrued
interest thereon based on the relative fair value of the net assets
each Time Warner General Partner contributed to TWE. Such indebtedness
is recourse to each Time Warner General Partner only to the extent of
its guarantee.
6. PARTNERS' CAPITAL
Changes in partners' capital were as follows:
Six Months
Ended June 30,
1996 1995
-----------------
(millions)
Balance at beginning of year . . . . . . . $6,478 $6,233
Net income . . . . . . . . . . . . . . . . 168 60
Capital contributions. . . . . . . . . . . 15 -
Distributions. . . . . . . . . . . . . . . (147) (316)
Allocation of income to Time Warner General
Partners' Senior Capital. . . . . . . . . (57) (67)
Collections on note receivable from
U S WEST. . . . . . . . . . . . . . . . . 169 243
Other. . . . . . . . . . . . . . . . . . . 10 1
----- -----
Balance at June 30 . . . . . . . . . . . . $6,636 $6,154
====== ======
In September 1995, TWE reacquired substantially all of the assets
of the Time Warner Service Partnerships, subject to the liabilities
relating thereto, (the Time Warner Service Partnership Assets") in
exchange for Series B Capital interests in TWE equal to approximately
$400 million. The reacquisition was recorded for financial statement
purposes based on the $124 million historical cost of the Time Warner
Service Partnership Assets. Prior to such reacquisition, the Time
Warner Service Partnerships owned and operated certain assets of
TWE which had been distributed to the Time Warner General Partners in
September 1993 in order to ensure compliance with the Modification of
Final Judgment entered on August 24, 1982 by the United States
District Court for the District of Columbia applicable to U S WEST and
its affiliated companies, which may have included TWE. Prior to
September 1995, TWE was required to make quarterly cash
distributions related to its Series B Capital in the amount of $12.5
million to the Time Warner General Partners ("TWSP Distributions"),
which the General Partners were then required to contribute to the
Time Warner Service Partnerships.
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 its stock options
granted to employees of TWE based on the amount by which the market
price of Time Warner 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 and
the $27.75 market price of Time Warner 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 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 common stock declines.
During the six months ended June 30, 1996, TWE accrued $123
million of tax-related distributions and $24 million of stock option
distributions, based on closing prices of Time Warner common stock of
$39.25 at June 30, 1996 and $37.875 at December 31, 1995. During the
six months ended June 30, 1995, TWE accrued $25 million of TWSP
Distributions and $156 million of tax-related distributions, as well
as $135 million of stock option distributions as a result of
an increase at that time in the market price of Time Warner common
stock. In the six months ended June 30, 1996, TWE paid distributions
to the Time Warner General Partners in the amount of $132 million,
consisting of $123 million of tax-related distributions and $9 million
of stock option related distributions. In the six months ended June
30, 1995, TWE paid the Time Warner General Partners distributions in
the amount of $30 million, consisting of $25 million of
TWSP Distributions and $5 million of stock option related
distributions.
7. SEGMENT INFORMATION
TWE's businesses are conducted in two fundamental areas of
business: Entertainment, consisting principally of interests in filmed
entertainment, broadcasting, theme parks and cable television
programming; and Telecommunications, consisting principally of
interests in cable television systems.
Information as to the operations of TWE in different business
segments is set forth below. The operating results of TWE reflect the
formation of the TWE-Advance/Newhouse Partnership effective as of
April 1, 1995, the deconsolidation of Six Flags effective as of June
23, 1995 and the consolidation of Paragon effective as of July 6,
1995. The operating results of Six Flags prior to June 23, 1995 are
reported separately to facilitate comparability.
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
---------------------------------
(millions)
Revenues
Filmed Entertainment . . . . . . . . $1,270 $1,151 $2,486 $2,334
Six Flags Theme Parks. . . . . . . . - 204 - 227
Broadcasting - The WB Network. . . . 18 3 33 6
Programming - HBO. . . . . . . . . . 456 392 875 777
Cable. . . . . . . . . . . . . . . . 961 724 1,908 1,281
Intersegment elimination . . . . . . (97) (82) (209) (187)
----- ----- ----- -----
Total. . . . . . . . . . . . . . . . $2,608 $2,392 $5,093 $4,438
====== ====== ====== ======
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
---------------------------------
(millions)
Operating Income
Filmed Entertainment . . . . . . . . $ 79 $ 52 $ 149 $ 119
Six Flags Theme Parks. . . . . . . . - 31 - 29
Broadcasting - The WB Network. . . . (12) (12) (36) (33)
Programming - HBO. . . . . . . . . . 83 70 159 137
Cable. . . . . . . . . . . . . . . . 147 125 293 205
---- ------ ----- -----
Total. . . . . . . . . . . . . . . . $ 297 $ 266 $ 565 $ 457
===== ===== ===== =====
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
---------------------------------
(millions)
Depreciation of Property, Plant and Equipment
Filmed Entertainment . . . . . . . . $ 32 $ 22 $ 62 $ 42
Six Flags Theme Parks. . . . . . . . - 19 - 20
Broadcasting - The WB Network. . . . - - - -
Programming - HBO. . . . . . . . . . 4 4 9 8
Cable. . . . . . . . . . . . . . . . 157 111 300 199
---- ----- ----- ----
Total. . . . . . . . . . . . . . . . $ 193 $ 156 $ 371 $ 269
===== ===== ===== =====
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
---------------------------------
(millions)
Amortization of Intangible
Assets (1)
Filmed Entertainment . . . . . . . . . $ 29 $ 35 $ 60 $ 69
Six Flags Theme Parks. . . . . . . . . - 8 - 11
Broadcasting - The WB Network. . . . . - - - -
Programming - HBO. . . . . . . . . . . - - - -
Cable. . . . . . . . . . . . . . . . . 72 76 151 152
----- ----- ----- -----
Total. . . . . . . . . . . . . . . . . $ 101 $ 119 $ 211 $ 232
===== ===== ===== =====
______________
(1) Amortization includes amortization relating to the acquisition of
WCI in 1989 and the ATC minority interest in 1992 and to other
business combinations accounted for by the purchase method.
8. COMMITMENTS AND CONTINGENCIES
Pending legal proceedings are substantially limited to litigation
incidental to the businesses of TWE. In the opinion of counsel and
management, the ultimate resolution of these matters will not have a
material effect on the consolidated financial statements of TWE.
9. ADDITIONAL FINANCIAL INFORMATION
Additional financial information is as follows:
Six Months
Ended June 30,
1996 1995
----------------
(millions)
Interest expense . . . . . . . . . . . . . . . $ 239 $296
Cash payments made for interest. . . . . . . . 247 301
Cash payments made for income taxes (net). . . 32 34
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Set forth below is a discussion of the results of operations and
financial condition of WCI, the only General Partner with independent
business operations. The financial position and results of operations
of ATC, TWOI and WCCI (the other General Partners of TWE, as described
in Note 1 to the accompanying consolidated financial statements) are
principally derived from their investments in TWE, their revolving
credit agreements with Time Warner and, to a lesser extent,
their investments in Time Warner and Turner Broadcasting System, Inc.
Capitalized terms are as defined and described in the accompanying
consolidated financial statements, or elsewhere herein.
The following comparative discussion of the results of operations
and financial condition of WCI includes, among other factors, an
analysis of changes in operating income before depreciation and
amortization ("EBITDA") in order to eliminate the effect on WCI's
operating performance of significant amounts of amortization of
intangible assets recognized in Time Warner's $14 billion acquisition
of WCI in 1989 and other business combinations accounted for by
the purchase method. Financial analysts generally consider EBITDA to
be an important measure of comparative operating performance for WCI,
and when used in comparison to debt levels or the coverage of interest
expense, as a measure of liquidity. However, EBITDA should be
considered in addition to, not as a substitute for, operating income,
net income, cash flow and other measures of financial performance and
liquidity reported in accordance with generally accepted accounting
principles.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1996 Compared to the Three Months Ended
June 30, 1995
WCI had revenues of $876 million and net income of $15 million for
the three months ended June 30, 1996, compared to revenues of $986
million and net income of $56 million for the three months ended June
30, 1995. EBITDA decreased to $153 million from $156 million.
Depreciation and amortization, including amortization related to the
purchase of WCI was $91 million in both 1996 and 1995. Operating
income decreased to $62 million from $65 million. Revenues decreased
principally due to a decline in international recorded music sales,
as well as the absence of revenues from certain start-up businesses
which are no longer being operated by WCI. In addition, the
industry-wide softness experienced in the first quarter in the
overexpanded U.S. retail marketplace did not deteriorate further
which, together with a number of popular releases, contributed to an
increase in domestic recorded music revenues. EBITDA and operating
income decreased principally because the improved domestic recorded
music results, higher music publishing results and the absence of
losses from certain start-up businesses, were offset by lower
international recorded music results.
WCI's equity in the pretax income of TWE was $46 million in the
second quarter of 1996, compared to $39 million in the second quarter
of 1995. TWE's operating results for the quarter ended June 30, 1996
as compared to the quarter ended June 30, 1995 reflect an overall
increase in operating income generated by its business segments and
interest savings on lower average debt levels related to management's
debt reduction program, offset in part by an increase in
minority interest expense related to the consolidation of the
operating results of the TWE-Advance/Newhouse Partnership, a decrease
in investment-related income and the lack of contribution of Six
Flags's operating results in 1996 resulting from TWE's sale of 51% of
its interest in Six Flags in 1995.
Interest and other, net was $16 million of expense for the three
months ended June 30, 1996, compared to $20 million of income for the
three months ended June 30, 1995. Interest expense decreased to $7
million from $8 million. There was other expense, net, of $9 million
in the second quarter of 1996, compared to other income, net, of $28
million in 1995, principally because of a reduction in interest income
related to the resolution of a corporate tax matter in 1995 and a
decrease in investment-related income.
Six Months Ended June 30, 1996 Compared to the Six Months Ended June
30, 1995
WCI had revenues of $1.859 billion and net income of $42 million
for the six months ended June 30, 1996, compared to revenues of $1.977
billion and net income of $50 million for the six months ended June
30, 1995. EBITDA decreased to $294 million from $326 million.
Depreciation and amortization, including amortization related to the
purchase of WCI was $179 million in both 1996 and 1995. Operating
income was $115 million in 1996 compared to $147 million in
1995. Despite maintaining its leading domestic market position (over
23%), WCI's domestic recorded music operating results in 1996 were
negatively affected by the industry-wide softness in the overexpanded
U.S. retail marketplace, which has resulted in a number of music
retail store closings and higher returns of music product. The decline
in revenues reflects (i) the effects from the current U.S. retail
environment, including an increase in WCI's reserve for returns to
provide for an anticipated higher level of returns (ii) a decline in
international recorded music sales and (iii) the absence of revenues
from certain start-up businesses which are no longer being operated by
WCI. These effects were partially offset by an increase in music
publishing revenues. EBITDA and operating income decreased principally
as a result of the decline in the worldwide recorded music business,
offset in part by improved music publishing results and the absence of
losses from certain start-up businesses.
WCI's equity in the pretax income of TWE was $99 million for the
six months ended June 30, 1996, compared to $46 million for the six
months ended June 30, 1995. TWE's operating results for the six months
ended June 30, 1996 as compared to the six months ended June 30, 1995
reflect an overall increase in operating income generated by its
business segments, interest savings on lower average debt levels
related to management's debt reduction program and an increase in
investment-related income, offset in part by an increase in
minority interest expense related to the consolidation of the
operating results of the TWE-Advance/Newhouse Partnership for a full
six-month period.
Interest and other, net was $28 million in the first six months
of 1996 compared to $27 million in the first six months of 1995.
Interest expense decreased to $14 million from $69 million. The
decrease in interest expense was primarily due to lower average debt
levels associated with the recapitalization of WCI, which occurred on
April 1, 1995. There was other expense, net, of $14 million in the
first six months of 1996, compared to other income, net, of $42
million in the first six months of 1995, principally because of a
decrease in investment-related income resulting from gains on certain
asset sales recognized in 1995 and a reduction in interest income
related to the resolution of a corporate tax matter in 1995.
The relationship between income before income taxes and income
tax expense for the General Partners 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 for each of the General Partners includes all income taxes
related to its allocable share of partnership income and its equity in
the income tax expense of corporate subsidiaries of TWE.
FINANCIAL CONDITION AND LIQUIDITY
June 30, 1996
WCI had $9.2 billion of equity at June 30, 1996, compared to $9.3
billion of equity at December 31, 1995. Cash and equivalents increased
to $160 million at June 30, 1996, compared to $106 million at December
31, 1995. WCI had no long-term debt due to Time Warner at the end
of either period.
The total capitalization of ATC, TWOI and WCCI at June 30, 1996
consisted of equity capital of $2.3 billion, $650 million and $809
million, respectively, compared to $2.3 billion, $644 million and $803
million at December 31, 1995, respectively. Although these General
Partners have no independent operations, it is expected that
additional tax-related and other distributions from TWE, as well as
availability under each General Partner's revolving credit
agreement with Time Warner, will continue to be sufficient to satisfy the
General Partners' obligations with respect to their tax sharing agreements
with Time Warner for the foreseeable future.
Cash Flows
In the first six months of 1996, WCI's cash provided by
operations amounted to $361 million and reflected $294 million of
EBITDA, $63 million of distributions from TWE and $141 million related
to a reduction in other working capital requirements, balance sheet
accounts and noncash items, less $9 million of interest payments and
$128 million of income taxes ($68 million of which was paid to Time
Warner under a tax sharing agreement). Cash provided by WCI's
operations of $219 million in the first six months of 1995 reflected
$326 million of EBITDA, $14 million of distributions from TWE and $57
million related to a reduction in other working capital requirements,
balance sheet accounts and noncash items, less $63 million of interest
payments and $115 million of income taxes ($34 million of which was
paid to Time Warner under a tax sharing agreement). Management
believes that the operating cash flow of WCI is sufficient to meet its
capital and liquidity needs for the foreseeable future without
cash distributions from TWE above those permitted by existing
agreements.
WCI and the other General Partners have no claims on the assets
and cash flows of TWE except through the payment of certain
reimbursements and cash distributions. During the first six months of
1996, the General Partners received in aggregate $132 million,
consisting of $123 million of tax-related distributions and $9 million
of stock option related distributions. During the first six months of
1995, the General Partners received in aggregate $30 million,
consisting of $25 million of Time Warner Service Partnership
distributions and $5 million of stock option related distributions. Of
such aggregate distributions in the first six months of 1996 and 1995,
WCI, ATC, TWOI and WCCI received $63 million and $14 million,
respectively; $54 million and $12 million, respectively;
$15 million and $4 million, respectively; and $19 million and $4
million, respectively.
Foreign Currency Risk Management
Time Warner uses foreign exchange contracts primarily to hedge
the risk that unremitted or future royalties owed to WCI domestic
companies for the sale or anticipated sale of U.S. copyrighted
products abroad may be adversely affected by changes in foreign
currency exchange rates. As part of its overall strategy to manage the
level of exposure to the risk of foreign currency exchange rate
fluctuations, Time Warner hedges a portion of its combined foreign
currency exposures anticipated over the ensuing twelve month period,
including those related to WCI. At June 30, 1996, Time Warner has
effectively hedged approximately half of WCI's total estimated foreign
currency exposures that principally relate to anticipated cash flows
to be remitted to the U.S. over the ensuing twelve month period, using
foreign exchange contracts that generally have maturities of three
months or less, which generally are rolled over to provide continuing
coverage throughout the year. WCI is reimbursed by or reimburses
Time Warner for Time Warner contract gains and losses related to WCI's
foreign currency exposure. Time Warner often closes foreign exchange
sale contracts by purchasing an offsetting purchase contract. At June
30, 1996, Time Warner had contracts for the sale of $483 million and
the purchase of $165 million of foreign currencies at fixed rates and
maturities of three months or less. Of Time Warner's $318 million net
sale contract position, $368 million of foreign exchange sale
contracts and $162 million of foreign exchange purchase
contracts related to WCI's exposure, primarily English pounds (41% of
net contract position related to WCI), Canadian dollars (13%) and
German marks (31%), compared to a net sale contract position of $232
million of foreign currencies at December 31, 1995.
Unrealized gains or losses related to foreign exchange contracts
are recorded in income as the market value of such contracts change;
accordingly, the carrying value of foreign exchange contracts
approximates market value. The carrying value of foreign exchange
contracts was not material at June 30, 1996 and December 31, 1995. No
cash is required to be received or paid with respect to such gains and
losses until the related foreign exchange contracts are settled,
generally at their respective maturity dates. In the first six
months of 1996 and 1995, WCI had $12 million of net gains and $16
million of net losses, respectively, on foreign exchange contracts,
which were or are expected to be offset by corresponding decreases or
increases, respectively, in the dollar value of foreign currency
royalty payments that have been or are anticipated to be received in
cash from the sale of U.S. copyrighted products abroad. Time
Warner places foreign currency contracts with a number of major
financial institutions in order to minimize credit risk.
Based on Time Warner's outstanding foreign exchange contracts
related to WCI's exposure at June 30, 1996, each 5% devaluation of the
U.S. dollar as compared to the level of foreign exchange rates for
currencies under contract at June 30, 1996 would result in
approximately $18 million of unrealized losses and $8 million of
unrealized gains on foreign exchange contracts involving
foreign currency sales and purchases, respectively. Conversely, a 5%
appreciation of the U.S. dollar would result in $18 million of
unrealized gains and $8 million of unrealized losses, respectively.
Consistent with the nature of the economic hedge provided by such
foreign exchange contracts, such unrealized gains or losses would be
offset by corresponding decreases or increases, respectively, in
the dollar value of future foreign currency royalty payments that
would be received in cash within the ensuing twelve month period from
the sale of U.S. copyrighted products abroad.
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED BALANCE SHEETS
June 30, 1996
(Unaudited)
WCI ATC TWOI WCCI
(millions)
----------------------------------
ASSETS
Current assets
Cash and equivalents . . . . . . $ 160 $ - $ - $ -
Receivables, less allowances
of $286 . . . . . . . . . . . . 640 - - -
Inventories. . . . . . . . . . . 169 - - -
Prepaid expenses . . . . . . . . 584 - - -
----- ------ ------ ------
Total current assets . . . . . . 1,553 - - -
Investments in and amounts due
to and from TWE . . . . . . . . 2,155 1,989 557 703
Investments in Time Warner
Service Partnerships. . . . . . 144 133 33 23
Investments in Time Warner . . . 86 64 17 21
Investments, other . . . . . . . 1,643 210 59 82
Music catalogues, contracts and
copyrights . . . . . . . . . . 1,080 - - -
Goodwill . . . . . . . . . . . . 3,800 - - -
Other assets, primarily property,
plant and equipment . . . . . . 519 - - -
------ ----- ---- ----
Total assets . . . . . . . . . . $10,980 $2,396 $ 666 $ 829
======= ====== ===== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties payable . . $ 840 $ - $ - $ -
Other current liabilities. . . . . 502 2 - -
----- ------ ----- -----
Total current liabilities. . . . . 1,342 2 - -
Long-term debt due to Time Warner. - 17 - -
Other amounts due to Time Warner . 189 56 16 20
Other liabilities. . . . . . . . . 236 2 - -
Shareholders' equity
Common stock . . . . . . . . . . . 1 1 1 1
Paid-in capital. . . . . . . . . . 10,009 2,893 830 1,033
Unrealized gains on certain
marketable securities 178 - - -
Retained earnings (accumulated
deficit). . . . . . . . . . . . . 111 (11) (14) (17)
------ ----- ---- -----
10,299 2,883 817 1,017
Due from Time Warner, net. . . . . (596) (228) (71) (89)
Reciprocal interest in Time Warner
stock . . . . . . . . . . . . . . (490) (336) (96) (119)
------ ----- ---- -----
Total shareholders' equity . . . . 9,213 2,319 850 809
------ ------ ---- ------
Total liabilities and shareholders'
equity . . . . . . . . . . . . . $10,980 $2,396 $ 666 $ 829
======= ====== ===== =====
See accompanying notes.
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED BALANCE SHEETS
December 31, 1995
(Unaudited)
WCI ATC TWOI WCCI
(millions)
----------------------------------
ASSETS
Current assets
Cash and equivalents. . . . . . $ 106 $ - $ - $ -
Receivables, less allowances of
$308 . . . . . . . . . . . . . 1,162 - - -
Inventories . . . . . . . . . . 189 - - -
Prepaid expenses. . . . . . . . 519 - - -
------ ------ ------ ------
Total current assets 1,976 - - -
Investments in and amounts due
to and from TWE 1,984 1,959 548 693
Investments in Time Warner Service
Partnerships 143 132 33 22
Investments in Time Warner 86 65 17 21
Other investments 1,526 212 60 84
Music catalogues, contracts and
copyrights 1,140 - - -
Goodwill 3,849 - - -
Other assets, primarily property,
plant and equipment 532 - - -
------ ------ ----- ------
Total assets $11,236 $2,368 $ 658 $ 820
======= ====== ===== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties payable $ 840 $ - $ - $ -
Other current liabilities 642 2 - -
----- ------- ------ ------
Total current liabilities 1,482 2 - -
Long-term debt due to Time Warner - 17 - -
Other amounts due to Time Warner 140 49 14 17
Other liabilities 272 3 - -
Shareholders' equity
Common stock 1 1 1 1
Paid-in capital 10,009 2,893 830 1,034
Unrealized gains (losses) on
certain marketable securities 11 (1) - -
Retained earnings (accumulated
deficit) 84 (46) (25) (30)
------ ------ ----- -----
10,211 2,847 806 1,005
Due from Time Warner, net (379) (214) (66) (83)
Reciprocal interest in Time
Warner stock (490) (336) (96) (119)
----- ----- ---- ----
Total shareholders' equity 9,342 2,297 644 803
------ ----- ---- ----
Total liabilities and share-
holders' equity $11,236 $ 2,368 $ 658 $ 820
======= ======= ===== =====
See accompanying notes.
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 1996
(Unaudited)
WCI ATC TWOI WCCI
(millions)
--------------------------------
Revenues(a). . . . . . . . . . . $ 876 $ - $ - $ -
------ ------ ------ ------
Cost of revenues(a)(b). . . . . 647 - - -
Selling, general and admini-
strative (a)(b) . . . . . . . 167 - - -
------ ------ ------ ------
Operating expenses. . . . . . . 814 - - -
------ ------ ------ ------
Business segment operating
income . . . . . . . . . . . . 62 - - -
Equity in pretax income of
TWE (a) . . . . . . . . . . . 46 38 11 14
Interest and other, net (a) . . (16) 7 2 2
------ ------ ------ -----
Income before income taxes . . . 92 45 13 16
Income taxes (a) . . . . . . . . (77) (25) (7) (8)
------ ---- ------ -----
Net income . . . . . . . . . . . $ 15 $ 20 $ 6 $ 8
====== ===== ==== =====
__________________________
(a) Includes the following income (expenses) resulting from
transactions with Time Warner, TWE or equity investees of the General
Partners:
Revenues . . . . . . . . . . . . . $ 61 $ - $ - $ -
Cost of revenues . . . . . . . . . (16) - - -
Selling, general and admini-
strative. . . . . . . . . . . . . 6 - - -
Equity in pretax income of TWE . . (2) - - -
Interest and other, net. . . . . . 14 - - -
Income taxes . . . . . . . . . . . (43) (16) (4) (5)
(b) Includes depreciation and
amortization expense of: $ 91 $ - $ - $ -
===== ===== ===== ======
See accompanying notes.
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 1995
(Unaudited)
WCI ATC TWOI WCCI
(millions)
---------------------------------
Revenues(a). . . . . . . . . . . . $ 986 $ - $ - $ -
------ ------ ------ -----
Cost of revenues (a)(b). . . . . . 651 - - -
Selling, general and admini-
strative (a)(b) . . . . . . . . . 270 - - -
------ ------ ------ -----
Operating expenses . . . . . . . . 921 - - -
------ ------ ------ -----
Business segment operating
income. . . . . . . . . . . . . . 65 - - -
Equity in pretax income of
TWE (a) . . . . . . . . . . . . . 39 33 9 12
Interest and other, net (a) . . . 20 6 2 2
----- ------ ---- -----
Income before income taxes . . . . 124 39 11 14
Income taxes (a) . . . . . . . . . (68) (19) (6) (7)
----- ------ ---- -----
Net income . . . . . . . . . . . . $ 56 $ 20 $ 5 $ 7
===== ====== ==== =====
_______________________
(a) Includes the following income (expenses) resulting from
transactions with Time Warner, TWE or equity investees of the General
Partners:
Revenues . . . . . . . . . . . . . $ 43 $ - $ - $ -
Cost of revenues . . . . . . . . . (14) - - -
Selling, general and admini-
strative . . . . . . . . . . . . 9 - - -
Equity in pretax income of TWE . . (3) - - -
Interest and other, net. . . . . . (29) - - -
Income taxes . . . . . . . . . . . (28) (8) (3) (4)
(b) Includes depreciation and
amortization expense of:. . . . . $ 91 $ - $ - $ -
==== ===== ==== =====
See accompanying notes.
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, 1996
(Unaudited)
WCI ATC TWOI WCCI
(millions)
---------------------------------
Revenues(a). . . . . . . . . . . . $ 1,859 $ - $ - $ -
------- ----- ------ -----
Cost of revenues (a)(b). . . . . . 1,351 - - -
Selling, general and administrative
(a)(b) . . . . . . . . . . . . . 393 - - -
------- ------- ------- ------
Operating expenses . . . . . . . . 1,744 - - -
------ ---- ----- ----
Business segment operating income. . 115 - - -
Equity in pretax income of TWE (a) . 99 84 24 30
Interest and other, net (a). . . . . (28) 10 3 4
----- ---- ----- ----
Income before income taxes . . . . . 186 94 27 34
Income taxes (a) . . . . . . . . . . (144) (52) (15) (18)
----- ---- ----- ----
Net income . . . . . . . . . . . . . $ 42 $ 42 $ 12 $ 16
===== ===== ===== =====
_______________________
(a) Includes the following income (expenses) resulting from
transactions with Time Warner, TWE or equity investees of the General
Partners:
Revenues . . . . . . . . . . . . . . $ 99 $ - $ - $ -
Cost of revenues . . . . . . . . . . (27) - - -
Selling, general and admini-
strative. . . . . . . . . . . . . 24 - - -
Equity in pretax income of TWE . . . (7) - - -
Interest and other, net. . . . . . . 28 - - -
Income taxes . . . . . . . . . . . . (68) (36) (10) (12)
(b) Includes depreciation and
amortization expense of: . . . . . $179 $ - $ - $ -
==== ===== ===== =====
See accompanying notes.
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, 1995
(Unaudited)
WCI ATC TWOI WCCI
(millions)
------------------------------------
Revenues(a). . . . . . . . . . . . $1,977 $ - $ - $ -
------ ------ ------ -----
Cost of revenues (a)(b). . . . . . 1,344 - - -
Selling, general and admini-
strative . . . . . . . . . . . . 486 - - -
------- ----- ------ -----
Operating expenses . . . . . . . . 1,830 - - -
------- ----- ------ -----
Business segment operating
income. . . . . . . . . . . . . . 147 - - -
Equity in pretax income of
TWE (a) . . . . . . . . . . . . . 46 39 11 14
Interest and other, net (a). . . . (27) 89 8 10
------ ----- ----- -----
Income before income taxes . . . . 166 128 19 24
Income taxes (a) . . . . . . . . . (116) (63) (11) (14)
----- ----- ----- -----
Net income . . . . . . . . . . . . $ 50 $ 65 $ 8 $ 10
====== ==== ===== ====
_______________________
(a) Includes the following income (expenses) resulting from
transactions with Time Warner, TWE or equity investees of the General
Partners:
Revenues . . . . . . . . . . . . . $ 87 $ - $ - $ -
Cost of revenues . . . . . . . . . (28) - - -
Selling, general and admini-
strative. . . . . . . . . . . . 16 - - -
Equity in pretax income of TWE . . (6) - - -
Interest and other, net. . . . . . (80) - - -
Income taxes . . . . . . . . . . . (34) (48) (7) (9)
(b) Includes depreciation and
amortization expense of:. . . . . $179 $ - $ - $ -
==== ==== ===== ====
See accompanying notes.
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1996
(Unaudited)
WCI ATC TWOI WCCI
(millions)
--------------------------------
OPERATIONS
Net income. . . . . . . . . . . . . $ 42 $ 42 $ 12 $ 16
Adjustments for noncash and
nonoperating items:. . . . . . . .
Depreciation and amortization 179 - - -
Excess of equity in pretax income
of TWE over distributions. . . . . (36) (30) (9) (11)
Equity in (income) loss of other
investee companies, net of
distributions. . . . . . . . . . . (18) 1 - -
Changes in operating assets and
liabilities. . . . . . . . . . . . 194 5 3 2
----- ---- ---- ----
Cash provided by operations 361 18 6 7
----- ---- ---- ----
INVESTING ACTIVITIES
Investments and acquisitions. . . . (38) - - -
Capital expenditures. . . . . . . . (55) - - -
Investment proceeds . . . . . . . . 7 - - -
----- ---- ---- ----
Cash used by investing
activities . . . . . . . . . . . . (86) - - -
---- ---- ---- ----
FINANCING ACTIVITIES
Dividends. . . . . . . . . . . . . (4) (4) (1) (1)
Increase in amounts due from Time
Warner, net. . . . . . . . . . . . (217) (14) (5) (6)
---- ---- ---- ----
Cash used by financing
activities. . . . . . . . . . . . (221) (18) (6) (7)
---- ---- ---- ----
INCREASE IN CASH AND EQUIVALENTS. . 54 - - -
CASH AND EQUIVALENTS AT BEGINNING
OF PERIOD. . . . . . . . . . . . . 106 - - -
---- ---- ---- ----
CASH AND EQUIVALENTS AT END OF
PERIOD . . . . . . . . . . . . . . $160 $ - $ - $ -
==== ===== ===== =====
See accompanying notes.
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1995
(Unaudited)
WCI ATC TWOI WCCI
(millions)
--------------------------------
OPERATIONS
Net income. . . . . . . . . . . . . $ 50 $ 65 $ 8 $ 10
Adjustments for noncash and non-
operating items:
Depreciation and amortization . . . 179 - - -
Excess of equity in pretax income of
TWE over distributions. . . . . . (32) (27) (7) (9)
Equity in income of other investee
companies, net of
distributions. . . . . . . . . . . (58) (75) (4) (5)
Changes in operating assets and
liabilities. . . . . . . . . . . . 80 1 - -
----- ----- ----- -----
Cash provided (used) by operations 219 (36) (3) (4)
----- ----- ----- -----
INVESTING ACTIVITIES
Investments and acquisitions . . . (119) (10) (3) (4)
Capital expenditures . . . . . . . (56) - - -
Investment proceeds. . . . . . . . 97 - - -
----- ---- ---- ----
Cash used by investing activities (78) (10) (3) (4)
---- ----- ---- ----
FINANCING ACTIVITIES
Borrowings. . . . . . . . . . . . 9 48 7 9
Debt repayments . . . . . . . . . (166) - - -
Dividends . . . . . . . . . . . . (2) (2) (1) (1)
Capital contributions . . . . . . 142 - - -
Increase in amounts due to Time Warner,
net 39 - - -
---- ---- ---- ----
Cash provided by financing
activities. . . . . . . . . . . 22 46 6 8
---- ---- ---- ----
INCREASE IN CASH AND EQUIVALENTS. . . 163 - - -
CASH AND EQUIVALENTS AT BEGINNING OF
PERIOD. . . . . . . . . . . . . . . 148 - - -
---- ---- ---- ----
CASH AND EQUIVALENTS AT END OF
PERIOD. . . . . . . . . . . . . . . $311 $ - $ - $ -
==== ==== ==== =====
See accompanying notes.
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
On June 30, 1992, thirteen direct or indirect subsidiaries of
Time Warner Inc. ("Time Warner") contributed the assets and
liabilities or the rights to the cash flows of substantially all of
Time Warner's Filmed Entertainment, Programming-HBO and Cable
businesses to Time Warner Entertainment Company, L.P., a Delaware
limited partnership ("TWE"), for general partnership interests, and
each general partner guaranteed a pro rata portion of substantially
all of TWE's debt and accrued interest based on the relative fair
value of the net assets each contributed to TWE (the "General Partner
Guarantees", see Note 3). Nine of the thirteen original general
partners have been merged or dissolved into the other four. Warner
Communications Inc. ("WCI", a subsidiary of Time Warner), American
Television and Communications Corporation ("ATC", a subsidiary of Time
Warner), Warner Cable Communications Inc. ("WCCI", a consolidated
subsidiary of WCI) and Time Warner Operations Inc. ("TWOI", formerly
Time Warner Cable Inc., a subsidiary of Time Warner) are the four
remaining general partners of TWE. They have succeeded to the general
partnership interests and have assumed the General Partner Guarantees
of the nine former general partners. WCI, ATC, WCCI, TWOI and, where
appropriate, the former general partners are referred to herein as
the "General Partners".
In lieu of contributing certain assets to the partnership at its
capitalization in 1992 (the "Beneficial Assets"), the General Partners
assigned to TWE the net cash flow generated by such assets or agreed
to pay an amount equal to the net cash flow generated by such assets.
TWE has the right to receive from the General Partners, at the limited
partner's option, an amount equal to the fair value of the Beneficial
Assets, net of associated liabilities, that had not been contributed
to TWE as of June 30, 1996, rather than continuing to receive the net
cash flow, or an amount equal to the net cash flow, generated by such
Beneficial Assets. The consolidated financial statements of the
General Partners exclude the Beneficial Assets.
WCI conducts substantially all of Time Warner's Music operations,
which include copyrighted music from many of the world's leading
recording artists that is produced and distributed from a family of
established record labels such as Warner Bros. Records, the Atlantic
and Elektra Entertainment Groups and Warner Music International. The
remaining General Partners do not conduct operations independent of
their ownership interests in TWE and certain other investments.
Basis of Presentation
The consolidated financial statements of each General Partner
include 100% of its assets, liabilities, revenues, expenses, income,
loss and cash flows and that of all companies in which the General
Partner has a controlling voting interest ("subsidiaries"), as if the
General Partner and its subsidiaries were a single company.
Investments in TWE, and certain other companies in which the General
Partners have significant influence but less than a controlling
voting interest, are accounted for using the equity method. As a
result of a recapitalization of WCI effective as of April 1, 1995 and
cash distributions received from TWE by each of the General Partners
(Note 2), certain amounts due from or to Time Warner are reflected by
the General Partners as a separate component of shareholders' equity
under the caption "Due from Time Warner, net."
The accompanying financial statements are unaudited but in the
opinion of management contain all the adjustments (consisting of those
of a normal recurring nature) considered necessary to present fairly
the financial position and the results of operations and cash flows
for the periods presented in conformity with generally accepted
accounting principles applicable to interim periods.
Certain reclassifications have been made to the 1995 financial
statements to conform to the 1996 presentation. The accompanying
financial statements should be read in conjunction with the audited
consolidated financial statements of the General Partners for the year
ended December 31, 1995.
Effective January 1, 1996, WCI adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("FAS
121") which established standards for the recognition and measurement
of impairment losses on long-lived assets and certain intangible
assets. The adoption of FAS 121 did not have a material effect on
WCI's financial statements.
2. TWE
The General Partners' investments in and amounts due to or from
TWE at June 30, 1996 and December 31, 1995 are as follows (millions):
June 30, 1996 WCI ATC TWOI WCCI
--- --- ---- ----
Investment in TWE $2,231 $1,933 $ 541 $ 683
Stock option related
distributions due
from TWE 65 56 56 20
Other liabilities due to
TWE, principally related
to home video distribution (276) - - -
Other receivables due from
TWE 135 - - -
------ ------ ----- -----
Total $2,155 $1,989 $ 557 $ 703
====== ====== ====== ======
December 31, 1995 WCI ATC TWOI WCCI
--- --- ---- ----
Investment in TWE $2,201 $1,909 $ 534 $ 675
Stock option related
distributions due from TWE 58 50 14 18
Other liabilities due to TWE,
principally related to
home video distribution (351) - - -
Other receivables due from
TWE 76 - - -
----- ----- ----- -----
Total $1,984 $1,959 $ 548 $ 693
====== ====== ===== =====
TWE was capitalized on June 30, 1992 to own and operate
substantially all of the Filmed Entertainment, Programming-HBO and
Cable businesses previously owned by the General Partners. The General
Partners in the aggregate hold, directly or indirectly, 63.27% of the
pro rata priority capital ("Series A Capital") and residual equity
capital ("Residual Capital") of TWE and 100% of the senior priority
capital ("Senior Capital") and junior priority capital ("Series B
Capital") of TWE. Time Warner acquired 11.22% of the Series A Capital
and Residual Capital limited partnership interests previously held by
subsidiaries of each of ITOCHU Corporation and Toshiba Corporation in
1995. The remaining 25.51% limited partnership interests in the Series
A Capital and Residual Capital of TWE are held by a subsidiary of U S
WEST, Inc. ("U S WEST").
The TWE partnership agreement provides for special allocations of
income, loss and distributions of partnership capital, including
priority distributions in the event of liquidation. No portion of
TWE's net income has been allocated to the limited partnership
interests.
Set forth below is summarized financial information of TWE, which
reflects the consolidation by TWE of the TWE-Advance/Newhouse
Partnership effective as of April 1, 1995, the deconsolidation of Six
Flags Entertainment Corporation ("Six Flags") effective as of June 23,
1995 and the consolidation of Paragon Communications effective as of
July 6, 1995:
TIME WARNER ENTERTAINMENT COMPANY, L.P.
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
(millions)
----------------------------------
Operating Statement Information
Revenues $2,608 $2,392 $5,093 $4,438
Depreciation and amortization 294 275 582 501
Business segment operating income 297 266 565 457
Interest and other, net 132 135 221 296
Minority interest 52 35 102 35
Income before income taxes 95 81 207 96
Net income 74 56 168 60
Six Months
Ended June 30,
1996 1995
(millions)
---------------
Cash Flow Information
Cash provided by operations $1,197 $ 725
Capital expenditures (781) (622)
Investments and acquisitions (65) (75)
Investment proceeds 196 953
Borrowings 63 235
Debt repayments (670) (237)
Capital distributions (132) (30)
Collections on note receivable from U S WEST 169 243
Increase in cash and equivalents 9 1,192
June 30, December 31,
1996 1995
(millions)
-----------------------
Balance Sheet Information
Cash and equivalents $ 218 $ 209
Total current assets 2,708 2,909
Total assets 18,913 18,905
Total current liabilities 3,278 3,214
Long-term debt 5,575 6,137
Minority interests 848 726
General Partners' Senior Capital 1,483 1,426
Partners' capital 6,636 6,478
The assets and cash flows of TWE are restricted by the TWE
partnership and credit agreements and are unavailable for use by the
partners except through the payment of certain fees, reimbursements,
cash distributions and loans, which are subject to limitations. At
June 30, 1996 and December 31, 1995, the General Partners had recorded
$137 million and $122 million, respectively, of stock option related
distributions due from TWE, based on closing prices of Time
Warner common stock of $39.25 and $37.875, respectively. Time Warner
is paid when the options are exercised. The General Partners also
receive tax-related distributions from TWE. The payment of such
distributions was previously subject to restrictions until July 1995
and is now made to the General Partners on a current basis. In the
first six months of 1996, the General Partners received distributions
from TWE in the amount of $132 million, consisting of $123 million of
tax-related distributions and $9 million of stock option
related distributions. In the first six months of 1995, the General
Partners received distributions from TWE in the amount of $30 million,
consisting of $25 million of Time Warner Service Partnership
distributions and $5 million of stock option related distributions. Of
such aggregate distributions in the first six months of 1996 and 1995,
WCI received $63 million and $14 million, respectively; ATC received
$54 million and $12 million, respectively; TWOI received $15 million
and $4 million, respectively; and WCCI received $19 million and $4
million, respectively.
In September 1995, TWE reacquired substantially all of the assets
of the Time Warner Service Partnerships, subject to the liabilities
relating thereto, (the "Time Warner Service Partnership Assets") in
exchange for Series B Capital interests in TWE equal to approximately
$400 million. The reacquisition was recorded for financial statement
purposes by TWE based on the $124 million historical cost of the Time
Warner Service Partnership Assets. Prior to such reacquisition, the
Time Warner Service Partnerships owned and operated certain assets of
TWE which had been distributed to the General Partners in
September 1993 in order to ensure compliance with the Modification of
Final Judgment entered on August 24, 1982 by the United States
District Court for the District of Columbia applicable to U S WEST and
its affiliated companies, which may have included TWE. Prior to
September 1995, TWE was required to make quarterly cash distributions
related to its Series B Capital in the amount of $12.5 million to the
General Partners, which the General Partners were then required to
contribute to the Time Warner Service Partnerships.
On April 1, 1995, TWE formed a cable television joint venture
with the Advance/Newhouse Partnership ("Advance/Newhouse") to which
Advance/Newhouse and TWE contributed cable television systems (or
interests therein) serving approximately 4.5 million subscribers, as
well as certain foreign cable investments and programming investments
that included Advance/Newhouse's 10% interest in Primestar Partners,
L.P. TWE owns a two-thirds equity interest in the TWE-Advance/Newhouse
Partnership and is the managing partner. TWE consolidates the
partnership and the one-third equity interest owned by
Advance/Newhouse is reflected in TWE's consolidated financial
statements as minority interest. In accordance with the partnership
agreement, Advance/Newhouse can require TWE to purchase its equity
interest for fair market value at specified intervals following the
death of both of its principal shareholders. Beginning in the
third year, either partner can initiate a dissolution in which TWE
would receive two-thirds and Advance/Newhouse would receive
one-third of the partnership's net assets. The assets contributed by
TWE and Advance/Newhouse to the partnership were recorded at their
predecessor's historical cost. No gain was recognized by TWE upon the
capitalization of the partnership.
On June 23, 1995, TWE sold 51% of its interest in Six Flags to an
investment group led by Boston Ventures for $204 million and received
$640 million in additional proceeds from Six Flags, representing
payment of certain intercompany indebtedness and licensing fees. As a
result of the transaction, Six Flags has been deconsolidated and TWE's
remaining 49% interest in Six Flags is accounted for under the equity
method of accounting. TWE reduced debt by approximately $850 million
in 1995 in connection with the transaction, and a portion of the
income on the transaction has been deferred by TWE principally as a
result of its guarantee of certain third-party, zero-coupon indebtedness
of Six Flags due in 1999.
3. GENERAL PARTNER GUARANTEES
Each General Partner has guaranteed a pro rata portion of
approximately $5.5 billion of TWE's debt and accrued interest at June
30, 1996, based on the relative fair value of the net assets each
General Partner contributed to TWE (the "General Partner Guarantees").
Such indebtedness is recourse to each General Partner only to the
extent of its guarantee. There are generally no restrictions on the
ability of the General Partner guarantors to transfer material
assets, other than TWE assets, to parties who are not guarantors.
The portion of TWE debt and accrued interest at June 30, 1996
that was guaranteed by each General Partner, individually and on a
consolidated basis for each General Partner and its subsidiaries, is
set forth below:
Total Guaranteed
by Each General
Total Guaranteed by Partner and its
Each General Partner Subsidiaries
-------------------- ----------------
General Partner % Amount % Amount
--------------- -------------------------------------------
(dollars in millions)
WCI 33.19 $1,810 47.58 $2,595
ATC 40.73 2,221 40.73 2,221
TWOI 11.69 638 11.69 638
WCCI, a subsidiary of
WCI 14.39 785 14.39 785
----- ------ ----- ------
Total 100.00 $5,454 * *
====== ====== ===== ======
_______________
* Adds to more than 100% and $5.454 billion, respectively, because
of the parent-subsidiary relationship between WCI and WCCI.
4. SHAREHOLDERS' EQUITY
Changes in shareholders' equity for WCI are as follows:
Six Months
Ended June 30,
1996 1995
(millions)
-----------------
Balance at beginning of year $9,342 $7,105
Net income 42 50
Increase in stock option
distribution liability to Time Warner (11) (64)
Capital contributions - 2,642
Transfers (to) from Time Warner, net (217) 39
Unrealized gains of certain marketable
equity investments 61 22
Other (4) 19
------ ------
Balance at June 30 $9,213 $9,813
====== ======
In 1993, WCI declared and paid a special dividend to Time Warner
in the form of a $3 billion subordinated reset note due 2008 and
entered into a $1 billion revolving credit agreement with Time Warner,
under which $500 million was borrowed and used to prepay a
corresponding portion of the subordinated reset note. On April 1,
1995, such debt obligations to Time Warner were satisfied as part of a
recapitalization of WCI, in which Time Warner made a capital
contribution to WCI, consisting of a $2.5 billion subordinated
reset note receivable due from WCI and cash of $142 million. WCI used
the cash proceeds therefrom to repay its obligations to Time Warner
under their revolving credit agreement.
5. CONTINGENCIES
Pending legal proceedings are substantially limited to litigation
incidental to businesses of the General Partners. In the opinion of
counsel and management, the ultimate resolution of these matters will
not have a material effect on the consolidated financial statements of
the General Partners.
6. ADDITIONAL FINANCIAL INFORMATION
Additional financial information is as follows (millions):
WCI ATC TWOI WCCI
--- --- ---- ----
Six Months Ended June 30, 1996
Interest expense $ 14 $ - $ - $ -
Cash payments made for
interest 9 - - -
Cash payments made for
income taxes, net 128 36 10 12
Tax-related distributions
received from TWE 59 50 14 18
WCI ATC TWOI WCCI
--- --- ---- ----
Six Months Ended June 30, 1995
Interest expense $ 69 $ 2 $ - $ -
Cash payments made for interest 63 - - -
Cash payments made for income
taxes, net 115 48 7 9
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the litigation entitled U S West, Inc. et
al. v. Time Warner Inc., et al., described on page 31 of TWE's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. On
June 6, 1996, the Court of Chancery of the State of Delaware rendered
an opinion dismissing with prejudice all of the claims asserted by U S
WEST and reserving decision on the counterclaims interposed by Time
Warner. U S WEST has not appealed the decision of the Court of
Chancery, and the period for filing a notice of appeal has closed.
On July 8, 1996, a purported class action was filed in the
Circuit Court of Blount County, Tennessee at Maryville, entitled
Robinson and Silvey v. EMI Music Distribution, Inc., Sony Music
Entertainment, Inc., Warner Elektra Atlantic Corporation, Uni
Distribution Corporation, Bertelsmann Music Group, Inc. and PolyGram
Group Distribution, Inc., No. L-10462. The action is brought on
behalf of persons who, from June 26, 1992 to the present, purchased
recorded music compact discs ("CDS") indirectly from defendants in
Tennessee, Alabama, California, Florida, Kansas, Maine, Michigan,
Minnesota, Mississippi, New Mexico, North Dakota, South Dakota, West
Virginia, Wisconsin and the District of Columbia, and alleges that the
defendants are engaged in a conspiracy to fix the prices of CDS, in
violation of the antitrust, unfair trade practices and
consumer protection statutes of each of those jurisdictions. Also on
July 8, the Circuit Court issued an order conditionally granting class
certification, subject to defendants' right to move to decertify the
class.
On July 25, 1996, Warner Elektra Atlantic Corporation was served
with an antitrust civil investigative demand from the Office of the
Attorney General of the State of Florida that calls for the production
of documents in connection with an investigation to determine whether
there "is, has been or may be" a "conspiracy to fix the prices" of CDS
or conduct consisting of "unfair methods of competition" or "unfair
trade practices" in the sale and marketing of CDS.
Reference is made to the litigation entitled Samuel D. Moore, et
al. v. American Federation of Television and Radio Artists, et al.,
described on page I-36 of TWE's Annual Report on Form 10-K for the
year ended December 31, 1995 (the "1995 Form 10-K"). In July 1996, the
plaintiffs filed a motion to amend the complaint, which the recording
companies will oppose. The proposed second amended complaint is based
on substantially the same allegations as the prior complaint and seeks
to recover substantial monetary damages, liquidated damages, equitable
relief, and attorney's fees from the recording companies. The
proposed complaint includes a claim asserted derivatively on behalf of
the American Federation of Television and Radio Artists Health and
Retirement Fund as well as a renewal of some of the claims that had
previously been dismissed from this lawsuit.
Reference is made to the litigation entitled Samuel D. Moore, et
al. v. Sony Music Entertainment Group, et al., described on page I-37
of the 1995 Form 10-K. The plaintiffs have filed an appeal from the
District Court for the Southern District of New York's order of
dismissal and have filed the motion described in the preceding
paragraph to amend the complaint in the Samuel D. Moore,
et al. v. American Federation of Television and Radio Artists,
et al. lawsuit.
Reference is made to the description of the Federal lawsuit filed
by TWE in November 1992 seeking to overturn major provisions of the
1992 Cable Act, described on pages I-35 and I-36 of the 1995 Form
10-K. Argument on the appeal to the United States Supreme Court of
the December 1995 decision of the District Court for the District of
Columbia upholding the "must-carry" requirements of the 1992 Cable Act
has been set for October 7, 1996.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The exhibits listed on the accompanying Exhibit Index are filed
or incorporated by reference as a part of this report and such Exhibit
Index is incorporated herein by reference.
(b) Reports on Form 8-K.
No Current Report on Form 8-K was filed by TWE during the quarter
ended June 30, 1996.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
AND TWE GENERAL PARTNERS
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, each of the registrants has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Time Warner Entertainment Company, L.P.
By: Warner Communications Inc.,
as General Partner
By: /s/ Richard J. Bressler
Name: Richard J. Bressler
Title: Senior Vice President and
Chief Financial Officer
American Television and Communications
Corporation
Time Warner Operations Inc.
Warner Cable Communications Inc.
Warner Communications Inc.
By: /s/ Richard J. Bressler
Name: Richard J. Bressler
Title: Senior Vice President and
Chief Financial Officer
Dated: August 14, 1996
<PAGE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Exhibit No. Description of Exhibit
27 Financial Data Schedule.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information
extracted from the financial statements of Time Warner Entertainment
Company, L.P. for the quarter ended June 30, 1996 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000893657
<NAME> TIME WARNER ENTERTAINMENT
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 218
<SECURITIES> 0
<RECEIVABLES> 1,782
<ALLOWANCES> 343
<INVENTORY> 891
<CURRENT-ASSETS> 2,708
<PP&E> 8,917
<DEPRECIATION> 3,332
<TOTAL-ASSETS> 18,913
<CURRENT-LIABILITIES> 3,278
<BONDS> 5,575
<COMMON> 0
0
0
<OTHER-SE> 6,636
<TOTAL-LIABILITY-AND-EQUITY> 18,913
<SALES> 5,093
<TOTAL-REVENUES> 5,093
<CGS> 3,395
<TOTAL-COSTS> 3,395
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 239
<INCOME-PRETAX> 207
<INCOME-TAX> 39
<INCOME-CONTINUING> 168
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 168
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
