<PAGE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the quarterly period ended March 31, 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)
<TABLE>
<S> <C> <C>
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 jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
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 |_|
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
AND TWE GENERAL PARTNERS
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
------------------
TWE
General
TWE Partners
--- --------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Management's discussion and analysis of results of operations and financial condition......... 1 16
Consolidated balance sheets at March 31, 1996 and December 31, 1995........................... 7 19
Consolidated statements of operations for the three months ended March 31, 1996 and 1995...... 8 21
Consolidated statements of cash flows for the three months ended March 31, 1996 and 1995...... 9 23
Notes to consolidated financial statements.................................................... 10 25
PART II. OTHER INFORMATION..................................................................... 31
</TABLE>
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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 Telecommunica
tions, 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 over 11.7 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 $75
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.
1
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)
RESULTS OF OPERATIONS
TWE had revenues of $2.485 billion, and net income of $94 million for
the three months ended March 31, 1996, compared to revenues of $2.046 billion
and net income of $4 million for the three months ended March 31, 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 March 31, 1995, revenues of
$2.266 billion, depreciation and amortization of $269 million, operating income
of $219 million and net income of $30 million.
As discussed more fully below, TWE's operating results for the three
month period ended March 31, 1996 as compared to pro forma results for the three
months ended March 31, 1995 reflect an overall increase in operating income
generated by its business segments and an increase in investment-related income
resulting from gains on the sale of certain unclustered cable systems. The
comparison to historical results for the three months ended March 31, 1995 is
further affected by the contribution to 1996 operating income by the
TWE-Advance/Newhouse Partnership and interest savings in 1996 on lower average
debt levels related to management's debt reduction program, offset in part by
minority interest expense related to the consolidation of the operating results
of the TWE-Advance/ Newhouse Partnership effective as of April 1, 1995.
As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $18 million in the three months
ended March 31, 1996, and $11 million in the three months ended March 31, 1995,
respectively, have been provided in respect of the operations of TWE's domestic
and foreign subsidiary corporations.
EBITDA and operating income for TWE for the three months ended March
31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------
EBITDA Operating Income
---------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
Filmed Entertainment............................................... $131 $121 $ 70 $ 67
Six Flags Theme Parks.............................................. - 2 - (2)
Broadcasting - The WB Network...................................... (24) (21) (24) (21)
Programming - HBO.................................................. 81 71 76 67
Cable.............................................................. 368 244 146 80
----- ----- ----- -----
Total.............................................................. $556 $417 $268 $191
==== ==== ==== ====
</TABLE>
Filmed Entertainment. Revenues increased to $1.216 billion, compared to
$1.183 billion in the first quarter of 1995. EBITDA increased to $131 million
from $121 million. Depreciation and amortization, including amortization related
to the purchase of WCI, amounted to $61 million in 1996 and $54 million in 1995.
Operating
2
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<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)
income increased to $70 million from $67 million. Revenues benefited from
increases in worldwide home video and consumer products operations. Worldwide
theatrical revenues decreased due to a light release schedule and difficult
comparisons to successful films in the first quarter of 1995. 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 $24 million on $15 million of revenues in the first quarter of 1996,
compared to $21 million of an operating loss on $3 million of revenues in the
first quarter of 1995. The increased revenues and operating losses are 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 $419 million, compared to $385
million in the first quarter of 1995. EBITDA increased to $81 million from $71
million. Depreciation and amortization amounted to $5 million in 1996 and $4
million in 1995. Operating income increased to $76 million from $67 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 $947 million, compared to $557 million in
the first quarter of 1995. EBITDA increased to $368 million from $244 million.
Depreciation and amortization, including amortization related to the purchase of
WCI and the acquisition of the ATC minority interest, amounted to $222 million
in 1996 and $164 million in 1995. Operating income increased to $146 million
from $80 million. Revenues and operating results benefited from the formation of
the TWE-Advance/Newhouse partnership on April 1, 1995 and the consolidation of
Paragon effective as of July 6, 1995. Excluding such effects, revenues benefited
from an aggregate increase in basic cable and Primestar-related, direct
broadcast satellite subscribers that approached 6%, 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 positive contributions from the
TWE-Advance/Newhouse Partnership and the consolidation of 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 $89
million in the first quarter of 1996, compared to $161 million in the first
quarter of 1995. Interest expense decreased to $122 million, compared to $150
million in the first 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 income,
net, of $33 million in the first quarter of 1996, compared to other expense,
net, of $11 million in 1995, principally due to an 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.
3
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<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)
FINANCIAL CONDITION AND LIQUIDITY
March 31, 1996
Financial Condition
TWE had $5.7 billion of debt, $1.5 billion of Time Warner General
Partners' Senior Capital and $6.5 billion of partners' capital (net of the $98
million uncollected portion of the note receivable from U S WEST) at March 31,
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 $141 million at March 31, 1996, compared to
$209 million at December 31, 1995, reducing the debt-net-of-cash amounts for TWE
to $5.6 billion and $6 billion, respectively.
Debt Reduction Program
In the first quarter of 1996, TWE closed certain previously-announced
sales of unclustered cable television systems which raised approximately $75
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 three months of 1996, TWE's cash provided by operations
amounted to $557 million and reflected $556 million of EBITDA from the Filmed
Entertainment, Broadcasting-The WB Network, Programming- HBO and Cable
businesses and $181 million related to a reduction in working capital
requirements, other balance sheet accounts and noncash items, less $151 million
of interest payments, $12 million of income taxes and $17 million of corporate
expenses. Cash provided by operations of $346 million in the first three months
of 1995 reflected $417 million of business segment EBITDA and $127 million
related to a reduction in working capital requirements, other balance sheet
accounts and noncash items, less $168 million of interest payments, $15 million
of income taxes and $15 million of corporate expenses.
Cash flows used by investing activities decreased to $243 million in
the first three months of 1996, compared to $290 million in the first three
months of 1995, principally as a result of a $118 million increase in investment
proceeds relating to certain sales of unclustered cable television systems in
connection with management's debt reduction program. Capital expenditures
increased to $331 million in the first three months of 1996, compared to $270
million in the first three months of 1995, principally as a result of higher
cable capital spending as discussed more fully below.
Cash flows provided by financing activities decreased to a use of cash
of $382 million in the first three months of 1996, compared to $140 million of
cash provided by financing activities in the first three months of 1995,
principally as a result of a $435 million net reduction in debt in 1996 and a
$49 million increase in distributions paid to Time Warner, offset in part by a
$79 million decrease in collections on the note receivable from U S WEST.
4
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<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)
Management believes that TWE's operating cash flow, cash and
equivalents, collections on the note receivable from U S WEST 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 $268 million in the three months ended March 31, 1996,
compared to $192 million in the three months ended March 31, 1995, and was
financed in part through collections on the note receivable from U S WEST of $71
million and $150 million, respectively. Cable capital spending by TWE's Cable
division is budgeted to be approximately $1 billion for the remainder of 1996
and is expected to be funded principally by cable operating cash flow and $98
million of collections on the remaining portion of the note receivable from U S
WEST. 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 $1.017 billion at March 31, 1996, compared to $1.056
billion at December 31, 1995 (including amounts relating to HBO of $209 million
at March 31, 1996 and $175 million at December 31, 1995). Such amounts exclude
open orders for the domestic syndication of the hit television series Friends
and ER, which are expected to result in signed contracts and generate
significant revenue in the future. Because backlog generally relates to
contracts for the licensing of theatrical and television product which have
already been produced, the recognition of revenue 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.
5
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<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)
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 March 31, 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 March 31, 1996, Time
Warner had contracts for the sale of $551 million and the purchase of $216
million of foreign currencies at fixed rates and maturities of three months or
less. Of Time Warner's $335 million net sale contract position, none of the
foreign exchange purchase contracts and $104 million of the foreign exchange
sale contracts related to TWE's foreign currency exposure, primarily Japanese
yen (19% of net contract position related to TWE), French francs (26%), 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 March 31, 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 three months
ended March 31, 1996 and 1995, TWE recognized $2 million in gains and $12
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 March 31, 1996, each 5% devaluation of the U.S.
dollar as compared to the level of foreign exchange rates for currencies under
contract at March 31, 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 March 31, 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.
6
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------ -------
(millions)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents................................................................ $ 141 $ 209
Receivables, including $265 and $354 due from Time Warner,
less allowances of $359 and $365.................................................. 1,414 1,635
Inventories......................................................................... 926 904
Prepaid expenses.................................................................... 134 161
------- -------
Total current assets................................................................ 2,615 2,909
Noncurrent inventories.............................................................. 1,883 1,909
Loan receivable from Time Warner.................................................... 400 400
Investments......................................................................... 412 383
Property, plant and equipment, net.................................................. 5,338 5,205
Cable television franchises......................................................... 3,270 3,360
Goodwill............................................................................ 4,089 4,119
Other assets........................................................................ 572 620
------- -------
Total assets........................................................................ $18,579 $18,905
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable.................................................................... $ 578 $ 697
Participations and programming costs................................................ 1,197 1,090
Other current liabilities........................................................... 1,354 1,427
------- -------
Total current liabilities........................................................... 3,129 3,214
Long-term debt...................................................................... 5,724 6,137
Other long-term liabilities, including $314 and $198 due to Time Warner............. 995 924
Minority interests.................................................................. 775 726
Time Warner General Partners' Senior Capital........................................ 1,454 1,426
Partners' capital
Contributed capital................................................................. 7,522 7,522
Undistributed partnership earnings (deficit)........................................ (922) (875)
Note receivable from U S WEST....................................................... (98) (169)
------- -------
Total partners' capital............................................................. 6,502 6,478
------- -------
Total liabilities and partners' capital............................................. $18,579 $18,905
======= =======
</TABLE>
See accompanying notes.
7
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------
1996 1995
------ ------
(millions)
<S> <C> <C>
Revenues (a)................................................................................ $2,485 $2,046
------ ------
Cost of revenues (a)(b)..................................................................... 1,665 1,440
Selling, general and administrative (a)(b).................................................. 552 415
------ ------
Operating expenses.......................................................................... 2,217 1,855
------ ------
Business segment operating income........................................................... 268 191
Interest and other, net (a)................................................................. (89) (161)
Minority interest........................................................................... (50) -
Corporate services (a)...................................................................... (17) (15)
------ ------
Income before income taxes.................................................................. 112 15
Income taxes................................................................................ (18) (11)
------ ------
Net income.................................................................................. $ 94 $ 4
====== ======
</TABLE>
- ------------------
(a) Includes the following income (expenses) resulting from transactions with
the partners of TWE and other related companies for the three months ended March
31, 1996 and 1995, respectively: revenues-$23 million and $26 million; cost of
revenues-$(24) million and $(17) million; Selling, general and
administrative-$(2) million and $(17) million; interest and other, net-$9
million in 1996; and corporate services-$(17) million and $(15) million.
<TABLE>
<S> <C> <C>
(b) Includes depreciation and amortization expense of:..................................... $ 288 $ 226
====== ======
</TABLE>
See accompanying notes.
8
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
1996 1995
----- --------
(millions)
<S> <C> <C>
OPERATIONS
Net income............................................................................... $ 94 $ 4
Adjustments for noncash and nonoperating items:
Depreciation and amortization............................................................ 288 226
Changes in operating assets and liabilities.............................................. 175 116
----- ------
Cash provided by operations.............................................................. 557 346
----- ------
INVESTING ACTIVITIES
Investments and acquisitions............................................................. (31) (21)
Capital expenditures..................................................................... (331) (270)
Investment proceeds ..................................................................... 119 1
----- ------
Cash used by investing activities........................................................ (243) (290)
----- ------
FINANCING ACTIVITIES
Borrowings............................................................................... 63 106
Debt repayments.......................................................................... (498) (102)
Capital distributions.................................................................... (63) (14)
Collections on note receivable from U S WEST............................................. 71 150
Other.................................................................................... 45 -
----- ------
Cash provided (used) by financing activities............................................. (382) 140
----- ------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.............................................. (68) 196
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.............................................. 209 1,071
----- ------
CASH AND EQUIVALENTS AT END OF PERIOD.................................................... $ 141 $1,267
===== ======
</TABLE>
See accompanying notes.
9
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<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 $110 million and $113 million in the three months ended
March 31, 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 74.49% of the pro rata
priority capital ("Series A Capital") and residual equity capital ("Residual
Capital") in 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").
10
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<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
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 months ended March 31,
11
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
1995, revenues of $2.266 billion, depreciation and amortization of $269 million,
operating income of $219 million and net income of $30 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:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
------------------- -------------------
Current Noncurrent Current Noncurrent
------- ----------- ------- ----------
(millions)
<S> <C> <C> <C> <C>
Film costs:
Released, less amortization.................................. $ 384 $ 452 $ 529 $ 437
Completed and not released................................... 212 31 74 22
In process and other......................................... 40 369 11 396
Library, less amortization................................... - 703 - 717
Programming costs, less amortization............................ 221 328 219 337
Merchandise..................................................... 69 - 71 -
----- ------ ----- ------
Total ......................................................... $ 926 $1,883 $ 904 $1,909
===== ====== ===== ======
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----- ----
(millions)
<S> <C> <C>
Credit agreement, weighted average interest rates of 5.9% and 6.4%...................... $1,740 $2,185
Commercial paper, weighted average interest rates of 5.7% and 6.2%...................... 190 157
Publicly held notes and debentures...................................................... 3,781 3,781
Other................................................................................... 13 14
------ ------
Total................................................................................... $5,724 $6,137
====== ======
</TABLE>
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.
12
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
6. PARTNERS' CAPITAL
Changes in partners' capital were as follows:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------
1996 1995
---- ----
(millions)
<S> <C> <C>
Balance at beginning of year............................................................. $6,478 $6,233
Net income............................................................................... 94 4
Distributions............................................................................ (121) (71)
Allocation of income to Time Warner General Partners' Senior Capital..................... (28) (33)
Collections on note receivable from U S WEST............................................. 71 150
Other.................................................................................... 8 (4)
------ ------
Balance at March 31...................................................................... $6,502 $6,279
====== ======
</TABLE>
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 three months ended March 31, 1996, TWE accrued $56 million
of tax-related distributions and $65 million of stock option distributions,
based on closing prices of Time Warner common stock of $40.875 at March 31, 1996
and $37.875 at December 31, 1995. During the three months ended March 31, 1995,
TWE accrued $13 million of TWSP Distributions and $8 million of tax-related
distributions, as well as $50 million of stock option distributions as a result
of an increase in the market price of Time Warner common stock. In the first
quarter of 1996, TWE paid distributions to the Time Warner General Partners in
the amount of $63 million, consisting of $56 million of tax-related
distributions and $7 million of stock option related distributions. In the first
quarter of 1995,
13
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
TWE paid the Time Warner General Partners distributions in the amount of $13.5
million, consisting of $12.5 million of Time Warner Service Partnership
Distributions and $1 million of stock option related distributions.
7. SEGMENT INFORMATION
TWE's businesses are conducted in two funadamental 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 1996 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.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------
1996 1995
------ -----
(millions)
<S> <C> <C>
Revenues
Filmed Entertainment........................................................................ $1,216 $1,183
Six Flags Theme Parks....................................................................... - 23
Broadcasting - The WB Network............................................................... 15 3
Programming - HBO........................................................................... 419 385
Cable....................................................................................... 947 557
Intersegment elimination.................................................................... (112) (105)
------ ------
Total....................................................................................... $2,485 $2,046
====== ======
<CAPTION>
Three Months
Ended March 31,
------------------
1996 1995
------ ------
(millions)
Operating Income
Filmed Entertainment........................................................................ $ 70 $ 67
Six Flags Theme Parks....................................................................... - (2)
Broadcasting - The WB Network............................................................... (24) (21)
Programming - HBO........................................................................... 76 67
Cable....................................................................................... 146 80
----- -----
Total....................................................................................... $ 268 $ 191
===== =====
</TABLE>
14
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------
1996 1995
------ -----
(millions)
<S> <C> <C>
Depreciation of Property, Plant and Equipment
Filmed Entertainment........................................................................ $ 30 $ 20
Six Flags Theme Parks....................................................................... - 1
Broadcasting - The WB Network............................................................... - -
Programming - HBO........................................................................... 5 4
Cable....................................................................................... 143 88
---- ----
Total....................................................................................... $178 $113
==== ====
<CAPTION>
Three Months
Ended March 31,
-----------------
1996 1995
----- ------
(millions)
Amortization of Intangible Assets (1)
Filmed Entertainment........................................................................ $ 31 $ 34
Six Flags Theme Parks....................................................................... - 3
Broadcasting - The WB Network............................................................... - -
Programming - HBO........................................................................... - -
Cable....................................................................................... 79 76
---- ----
Total....................................................................................... $110 $113
==== ====
</TABLE>
- --------------
(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:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
1996 1995
---- -----
(millions)
<S> <C> <C>
Interest expense......................................................................... $122 $150
Cash payments made for interest.......................................................... 151 168
Cash payments made for income taxes (net)................................................ 12 15
</TABLE>
15
<PAGE>
<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 the other
General Partners 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
WCI had revenues of $983 million and net income of $27 million in the
first quarter of 1996, compared to revenues of $991 million and a net loss of $6
million in the first quarter of 1995. EBITDA decreased to $141 million from $170
million. Depreciation and amortization, including amortization related to the
purchase of WCI was $88 million in both 1996 and 1995. Operating income was $53
million in the first quarter of 1996 compared to $82 million in the first
quarter of 1995. Despite maintaining its leading domestic market position (over
21%), 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 and is expected to continue to result in a number of
music retail store closings and higher returns of music product. The modest
decline in revenues reflects 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, which was offset in part by slightly
higher international recorded music sales and an increase in music publishing
revenues. EBITDA and operating income decreased principally as a result of the
decline in the domestic recorded music business.
WCI's equity in the pretax income of TWE was $53 million in the first
quarter of 1996, compared to $7 million in the first quarter of 1995. TWE's
operating results for the quarter ended March 31, 1996 as compared to the
quarter ended March 31, 1995 reflect an overall increase in operating income
generated by its business segments (including the contribution by the
Advance/Newhouse Partnership), interest savings on lower average debt levels
related to management's debt reduction program and an increase in
investment-related income resulting from gains on the sale of certain
unclustered cable systems, offset in part by minority interest expense related
to the consolidation of the operating results of the TWE-Advance/Newhouse
Partnership effective as of April 1, 1995.
Interest and other, net was $12 million in the first quarter of 1996
compared to $47 million in the first quarter of 1995. Interest expense decreased
to $7 million from $61 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,
16
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)
1995. There was other expense, net, of $5 million in the first quarter of 1996,
compared to other income, net, of $14 million in 1995, principally because of a
decrease in investment-related income resulting from gains on certain asset
sales recognized 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
March 31, 1996
WCI had $9.2 billion of equity at March 31, 1996 compared to $9.3
billion of equity at December 31, 1995. Cash and equivalents decreased to $103
million at March 31, 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 March 31, 1996
consisted of equity capital of $2.3 billion, $642 million and $801 million,
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 quarter of 1996, WCI's cash provided by operations
amounted to $240 million and reflected $141 million of EBITDA, $30 million of
distributions from TWE and $130 million related to a reduction in other working
capital requirements, balance sheet accounts and noncash items, less $4 million
of interest payments and $57 million of income taxes ($25 million of which was
paid to Time Warner under a tax sharing agreement). Cash provided by WCI's
operations of $136 million in the first quarter of 1995 reflected $170 million
of EBITDA, $6 million of distributions from TWE, $33 million from the
securitization of receivables and $43 million related to a reduction in other
working capital requirements, balance sheet accounts and noncash items, less $58
million of interest payments and $58 million of income taxes ($6 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 quarter of 1996, the General Partners received
in aggregate $63 million, consisting of $56 million of tax-related distributions
and $7 million of stock option related distributions. During the first quarter
of 1995, the General Partners received in aggregate $13.5 million, consisting of
$12.5 million of Time Warner Service Partnership distributions and $1 million of
stock option related
17
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)
distributions. Of such aggregate distributions in the first quarter of 1996 and
1995, WCI, ATC, TWOI and WCCI received $30 million and $6 million, respectively;
$26 million and $5.5 million, respectively; $7 million and $2 million,
respectively; and $9 million and $2 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 March 31, 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 March 31, 1996, Time
Warner had contracts for the sale of $551 million and the purchase of $216
million of foreign currencies at fixed rates and maturities of three months or
less. Of Time Warner's $335 million net sale contract position, $434 million of
foreign exchange sale contracts and $216 million of foreign exchange purchase
contracts related to WCI's exposure, primarily English pounds (44% of net
contract position related to WCI), Canadian dollars (12%) and German marks
(30%), 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 March 31, 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 quarter of
1996 and 1995, WCI had $7 million of net gains and $10 million of net losses,
respectively, on foreign exchange contracts, which were or are expected to be
offset by corresponding increases 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 March 31, 1996, each 5% devaluation of the U.S. dollar as
compared to the level of foreign exchange rates for currencies under contract at
March 31, 1996 would result in approximately $22 million of unrealized losses
and $11 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 $22 million of unrealized gains
and $11 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.
18
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED BALANCE SHEETS
March 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
WCI ATC TWOI WCCI
----- ----- ------ ------
(millions)
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and equivalents..................................................... $ 103 $ - $ - $ -
Receivables, less allowances of $285..................................... 757 - - -
Inventories.............................................................. 166 - - -
Prepaid expenses......................................................... 571 - - -
------- ------ ----- -----
Total current assets..................................................... 1,597 - - -
Investments in and amounts due to and from TWE........................... 2,161 1,980 554 700
Investments in Time Warner Service Partnerships.......................... 144 132 33 23
Investments in Time Warner............................................... 86 65 17 21
Investments, other....................................................... 1,605 210 59 82
Music catalogues, contracts and copyrights............................... 1,121 - - -
Goodwill................................................................. 3,831 - - -
Other assets, primarily property, plant and equipment.................... 509 - - -
------- ------ ----- -----
Total assets............................................................. $11,054 $2,387 $ 663 $ 826
======= ====== ===== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties payable........................................... $ 886 $ - $ - $ -
Other current liabilities................................................ 497 2 - -
------- ------ ----- -----
Total current liabilities................................................ 1,383 2 - -
Long-term debt due to Time Warner........................................ - 17 - -
Other amounts due to Time Warner......................................... 208 72 21 25
Other liabilities........................................................ 254 3 - -
Shareholders' equity
Common stock............................................................. 1 1 1 1
Paid-in capital.......................................................... 10,009 2,893 830 1,033
Unrealized gains (losses) on certain marketable securities............... 176 (1) - -
Retained earnings (accumulated deficit).................................. 77 (47) (25) (30)
------- ------ ----- -----
10,263 2,846 806 1,004
Due from Time Warner, net................................................ (564) (217) (68) (84)
Reciprocal interest in Time Warner stock................................. (490) (336) (96) (119)
------- ------ ----- -----
Total shareholders' equity............................................... 9,209 2,293 642 801
------- ------ ----- -----
Total liabilities and shareholders' equity............................... $11,054 $2,387 $ 663 $ 826
======= ====== ===== =====
</TABLE>
See accompanying notes.
19
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED BALANCE SHEETS
December 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
WCI ATC TWOI WCCI
----- ----- ------ ------
(millions)
<S> <C> <C> <C> <C>
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.... 117 (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 shareholders' equity.................... $11,236 $ 2,368 $ 658 $ 820
======= ======= ===== =====
</TABLE>
See accompanying notes.
20
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
WCI ATC TWOI WCCI
----- ------ ----- ------
(millions)
<S> <C> <C> <C> <C>
Revenues (a)............................................................. $983 $ - $ - $ -
---- --- --- ---
Cost of revenues (a)(b).................................................. 704 - - -
Selling, general and administrative (a)(b)............................... 226 - - -
---- --- --- ---
Operating expenses....................................................... 930 - - -
---- --- --- ---
Business segment operating income........................................ 53 - - -
Equity in pretax income of TWE (a)....................................... 53 46 13 16
Interest and other, net (a).............................................. (12) 3 1 2
---- --- --- ---
Income before income taxes............................................... 94 49 14 18
Income taxes (a)......................................................... (67) (27) (8) (10)
---- --- --- ---
Net income............................................................... $ 27 $ 22 $ 6 $ 8
==== === === ===
</TABLE>
- --------------------------
(a) Includes the following income (expenses) resulting from transactions with
Time Warner, TWE or equity investees of the General Partners:
<TABLE>
<S> <C> <C> <C> <C>
Revenues................................................................. $ 38 $ - $ - $ -
Cost of revenues......................................................... (11) - - -
Selling, general and administrative...................................... 18 - - -
Equity in pretax income of TWE........................................... (5) - - -
Interest and other, net.................................................. 14 - - -
Income taxes............................................................. (25) (20) (6) (7)
(b) Includes depreciation and amortization expense of:................... $ 88 $ - $ - $ -
==== ==== ==== ====
</TABLE>
See accompanying notes.
21
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
WCI ATC TWOI WCCI
----- ------ ------- -------
(millions)
<S> <C> <C> <C> <C>
Revenues (a)............................................................. $991 $ - $ - $ -
---- ----- ----- -----
Cost of revenues (a)(b).................................................. 693 - - -
Selling, general and administrative (a)(b)............................... 216 - - -
---- ----- ----- -----
Operating expenses....................................................... 909 - - -
---- ----- ----- -----
Business segment operating income........................................ 82 - - -
Equity in pretax income of TWE (a)....................................... 7 6 2 2
Interest and other, net (a).............................................. (47) 83 6 8
---- ----- ----- -----
Income before income taxes............................................... 42 89 8 10
Income taxes (a)......................................................... (48) (44) (5) (7)
---- ----- ----- -----
Net income (loss)........................................................ $ (6) $ 45 $ 3 $ 3
==== ===== ===== =====
</TABLE>
- -----------------------
(a) Includes the following income (expenses) resulting from transactions with
Time Warner, TWE or equity investees of the General Partners:
<TABLE>
<S> <C> <C> <C> <C>
Revenues................................................................. $ 44 $ - $ - $ -
Cost of revenues......................................................... (14) - - -
Selling, general and administrative...................................... 7 - - -
Equity in pretax income of TWE........................................... (3) - - -
Interest and other, net.................................................. (51) - - -
Income taxes............................................................. (6) (40) (4) (5)
(b) Includes depreciation and amortization expense of:................... $ 88 $ - $ - $ -
==== ===== ===== =====
</TABLE>
See accompanying notes.
22
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
WCI ATC TWOI WCCI
------ ----- ----- -----
(millions)
<S> <C> <C> <C> <C>
OPERATIONS
Net income............................................................... $ 27 $ 22 $ 6 $ 8
Adjustments for noncash and nonoperating items:
Depreciation and amortization............................................ 88 - - -
Excess of equity in pretax income of TWE over distributions.............. (23) (20) (6) (7)
Equity in (income) loss of other investee companies, net
of distributions...................................................... (3) 2 1 1
Changes in operating assets and liabilities.............................. 151 2 2 -
---- ---- ---- -----
Cash provided by operations.............................................. 240 6 3 2
---- ---- ---- -----
INVESTING ACTIVITIES
Investments and acquisitions............................................. (30) - - -
Capital expenditures..................................................... (27) - - -
Investment proceeds...................................................... 2 - - -
---- ---- ---- -----
Cash used by investing activities........................................ (55) - - -
---- ---- ---- -----
FINANCING ACTIVITIES
Dividends................................................................ (3) (3) (1) (1)
Increase in amounts due from Time Warner, net............................ (185) (3) (2) (1)
---- ---- ---- -----
Cash used by financing activities........................................ (188) (6) (3) (2)
---- ---- ---- -----
DECREASE IN CASH AND EQUIVALENTS......................................... (3) - - -
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.............................. 106 - - -
---- ---- ---- -----
CASH AND EQUIVALENTS AT END OF PERIOD.................................... $103 $ - $ - $ -
==== ===== ==== ======
</TABLE>
See accompanying notes.
23
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
WCI ATC TWOI WCCI
------ ----- ----- -----
(millions)
<S> <C> <C> <C> <C>
OPERATIONS
Net income (loss)........................................................ $ (6) $ 45 $ 3 $ 3
Adjustments for noncash and nonoperating items:
Depreciation and amortization............................................ 88 - - -
Excess of equity in pretax income of TWE over distributions.............. (1) (1) (1) -
Equity in income of other investee companies, net
of distributions...................................................... (56) (76) (4) (5)
Changes in operating assets and liabilities.............................. 111 (3) (1) (1)
---- ---- ---- ----
Cash provided (used) by operations....................................... 136 (35) (3) (3)
---- ---- ---- ----
INVESTING ACTIVITIES
Investments and acquisitions............................................. (94) (5) (1) (2)
Capital expenditures..................................................... (20) - - -
Investment proceeds...................................................... 43 - - -
---- ---- ---- ----
Cash used by investing activities........................................ (71) (5) (1) (2)
---- ---- ---- ----
FINANCING ACTIVITIES
Borrowings............................................................... 6 40 4 5
Debt repayments.......................................................... (32) - - -
Dividends................................................................ (1) - - -
---- ---- ---- ----
Cash provided (used) by financing activities............................. (27) 40 4 5
---- ---- ---- ----
INCREASE IN CASH AND EQUIVALENTS......................................... 38 - - -
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.............................. 148 - - -
---- ---- ---- ----
CASH AND EQUIVALENTS AT END OF PERIOD.................................... $186 $ - $ - $ -
==== ===== ===== =====
</TABLE>
See accompanying notes.
24
<PAGE>
<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 have not been contributed to TWE by 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),
25
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
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
March 31, 1996 and December 31, 1995 are as follows (millions):
<TABLE>
<CAPTION>
March 31, 1996 WCI ATC TWOI WCCI
- -------------- --- --- ---- ----
<S> <C> <C> <C> <C>
Investment in TWE...................................................... $2,200 $1,907 $ 533 $ 674
Stock option related distributions due from TWE........................ 86 73 21 26
Other liabilities due to TWE, principally related to
home video distribution............................................. (259) - - -
Other receivables due from TWE........................................ 134 - - -
------ ------ ----- -----
Total.................................................................. $2,161 $1,980 $ 554 $ 700
====== ====== ===== =====
<CAPTION>
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
====== ====== ===== =====
</TABLE>
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
26
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
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 partners.
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.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------
1996 1995
----- ----
(millions)
<S> <C> <C>
Operating Statement Information
Revenues.................................................................................... $2,485 $2,046
Depreciation and amortization............................................................... 288 226
Business segment operating income........................................................... 268 191
Interest and other, net..................................................................... 89 161
Minority interest........................................................................... 50 -
Income before income taxes.................................................................. 112 15
Net income.................................................................................. 94 4
<CAPTION>
Three Months
Ended March 31,
-----------------
1996 1995
----- ----
(millions)
Cash Flow Information
Cash provided by operations................................................................. $ 557 $ 346
Capital expenditures........................................................................ (331) (270)
Investments and acquisitions................................................................ (31) (21)
Investment proceeds......................................................................... 119 1
Borrowings.................................................................................. 63 106
Debt repayments............................................................................. (498) (102)
Collections on note receivable from U S WEST................................................ 71 150
Capital distributions....................................................................... (63) (14)
Increase (decrease) in cash and equivalents................................................. (68) 196
</TABLE>
27
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- ------------
(millions)
<S> <C> <C>
Balance Sheet Information
Cash and equivalents................................................................... $ 141 $ 209
Total current assets................................................................... 2,615 2,909
Total assets........................................................................... 18,579 18,905
Total current liabilities.............................................................. 3,129 3,214
Long-term debt......................................................................... 5,724 6,137
Minority interests..................................................................... 775 726
General Partners' Senior Capital....................................................... 1,454 1,426
Partners' capital...................................................................... 6,502 6,478
</TABLE>
The assets and cash flows of TWE are restricted by the TWE partnership
and credit agreements and are unavailable for use by the partners except through
the payment of certain fees, reimbursements, cash distributions and loans, which
are subject to limitations. At March 31, 1996 and December 31, 1995, the General
Partners had recorded $180 million and $122 million, respectively, of stock
option related distributions due from TWE, based on closing prices of Time
Warner common stock of $40.875 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 quarter of 1996, the General Partners received
distributions from TWE in the amount of $63 million, consisting of $56 million
of tax-related distributions and $7 million of stock option related
distributions. In the first quarter of 1995, the General Partners received
distributions from TWE in the amount of $13.5 million, consisting of $12.5
million of Time Warner Service Partnership distributions and $1 million of stock
option related distributions. Of such aggregate distributions in the first
quarter of 1996 and 1995, WCI received $30 million and $6 million, respectively;
ATC received $26 million and $5.5 million, respectively; TWOI received $7
million and $2 million, respectively; and WCCI received $9 million and $2
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
28
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
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 March 31, 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 March 31, 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:
<TABLE>
<CAPTION>
Total Guaranteed by
Total Guaranteed by Each General Partner
Each General Partner and its Subsidiaries
-------------------- ---------------------
General Partner % Amount % Amount
----- ------ ----- ------
(dollars in millions)
<S> <C> <C> <C> <C>
WCI............................................................. 33.19 $1,842 47.58 $2,641
ATC............................................................. 40.73 2,260 40.73 2,260
TWOI............................................................ 11.69 649 11.69 649
WCCI, a subsidiary of WCI....................................... 14.39 799 14.39 799
------ ------
Total........................................................... 100.00 $5,550 * *
====== ======
</TABLE>
- ---------------
* Adds to more than 100% and $5.550 billion, respectively, because of the
parent-subsidiary relationship between WCI and WCCI.
29
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
4. SHAREHOLDERS' EQUITY
Changes in shareholders' equity for WCI are as follows:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------
1996 1995
---- -----
(millions)
<S> <C> <C>
Balance at beginning of year............................................................ $9,342 $7,105
Net income (loss)....................................................................... 27 (6)
Increase to stock option distribution liability......................................... (31) (24)
Transfers to Time Warner, net........................................................... (185) -
Unrealized gains of certain marketable equity investments............................... 59 36
Other................................................................................... (3) -
------ ------
Balance at March 31..................................................................... $9,209 $7,111
====== ======
</TABLE>
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 and pending litigation with U S
WEST. 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):
<TABLE>
<CAPTION>
WCI ATC TWOI WCCI
--- --- --- ----
<S> <C> <C> <C> <C>
Three Months Ended March 31, 1996
Interest expense.............................................................. $ 7 $ - $ - $ -
Cash payments made for interest............................................... 4 - - -
Cash payments made for income taxes, net...................................... 57 20 6 7
Tax-related distributions received from TWE................................... 27 23 6 8
<CAPTION>
WCI ATC TWOI WCCI
--- --- ---- ----
Three Months Ended March 31, 1995
Interest expense.............................................................. $ 61 $ - $ - $ -
Cash payments made for interest............................................... 58 - - -
Cash payments made for income taxes, net...................................... 58 40 4 5
</TABLE>
30
<PAGE>
<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 pages I-37 and I-38 of TWE's Annual
Report on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K").
The trial concluded on March 22, 1996, and a decision is expected in the middle
of June.
Reference is made to the litigation entitled Brendan Barry v. CEMA
Distribution, Sony Music Entertainment, Inc., Warner Elektra Atlantic
Corporation, UNI Distribution Corporation, Bertelsman Music Group, Inc. and
PolyGram Group Distribution, Inc., described on page I-37 of the 1995 Form 10-K.
The plaintiffs have voluntarily dismissed the amended complaint, and an Order of
Dismissal Without Prejudice was entered on April 5, 1996.
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
March 31, 1996.
31
<PAGE>
<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: May 15, 1996
<PAGE>
<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>
Exhibit 27
TIME WARNER ENTERTAINMENT COMPANY, L.P.
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from
the financial statements of Time Warner Inc. for the quarter ended March 31,
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 141
<SECURITIES> 0
<RECEIVABLES> 1,773
<ALLOWANCES> 359
<INVENTORY> 926
<CURRENT-ASSETS> 2,615
<PP&E> 8,601
<DEPRECIATION> 3,263
<TOTAL-ASSETS> 18,579
<CURRENT-LIABILITIES> 3,129
<BONDS> 5,724
<COMMON> 0
0
0
<OTHER-SE> 6,502
<TOTAL-LIABILITY-AND-EQUITY> 18,579
<SALES> 2,485
<TOTAL-REVENUES> 2,485
<CGS> 1,665
<TOTAL-COSTS> 1,665
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 122
<INCOME-PRETAX> 112
<INCOME-TAX> 18
<INCOME-CONTINUING> 94
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 94
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
