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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, 1997, or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT of 1934 for the transition period
from ------------------- to --------------------- .
Registration Number 33-53742
TIME WARNER ENTERTAINMENT COMPANY, L.P.
(Exact name of registrant as specified in its charter)
Delaware 13-3666692
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
American Television and Communications
Corporation Delaware 13-2922502
Time Warner Operations Inc. Delaware 13-3544870
Warner Cable Communications Inc. Delaware 13-3134949
Warner Communications Inc. Delaware 13-2696809
(Exact name of registrant as
specified in its charter) (State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or Number)
organization)
75 Rockefeller Plaza
New York, New York 10019
(212) 484-8000
(Address, including zip code, and telephone number, including
area code, of each registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes /x/ No / /
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TIME WARNER ENTERTAINMENT COMPANY L.P.
AND TWE GENERAL PARTNERS
INDEX TO FORM 10-Q
Page
TWE
General
TWE Partners
PART I. FINANCIAL INFORMATION
Management's discussion and analysis of
results of operations and financial condition 1 14
Consolidated balance sheets at March 31, 1997
and December 31, 1996 6 17
Consolidated statements of operations for
the three months ended March 31 1997 and 1996 7 19
Consolidated statements of cash flows for the
three months ended March 31 1997 and 1996 8 21
Notes to consolidated financial statements 9 23
PART II. OTHER INFORMATION 28
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
TWE classifies its business interests into three fundamental areas:
Entertainment, consisting principally of interests in filmed
entertainment, television production, television broadcasting and theme
parks; Cable Networks, consisting principally of interests in cable
television programming; and Cable, consisting principally of interests
in cable television systems. TWE also manages the cable properties owned
by Time Warner and the combined cable television operations are
conducted under the name of Time Warner Cable. Capitalized terms are as
defined and described in the accompanying consolidated financial
statements, or elsewhere herein.
Use of EBITDA
The following comparative discussion of the results of operations and
financial condition of TWE includes, among other factors, an analysis of
changes in the operating income of the business segments before
depreciation and amortization ("EBITDA") in order to eliminate the
effect on the operating performance of the filmed entertainment and
cable businesses of significant amounts of amortization of intangible
assets recognized in Time Warner's $14 billion acquisition of WCI in
1989, the $1.3 billion acquisition of the ATC minority interest in 1992
and other business combinations accounted for by the purchase method.
Financial analysts generally consider EBITDA to be an important measure
of comparative operating performance for the businesses of TWE, and,
when used in comparison to debt levels or the coverage of interest
expense, as a measure of liquidity. However, EBITDA should be considered
in addition to, not as a substitute for, operating income, net income,
cash flow and other measures of financial performance and liquidity
reported in accordance with generally accepted accounting principles.
RESULTS OF OPERATIONS
EBITDA and operating income for TWE for the three months ended March
31, 1997 and 1996 are as follows:
Three Months Ended March 31,
EBITDA Operating Income
1997 1996 1997 1996
(millions)
Filmed Entertainment-Warner Bros. $146 $131 $ 75 $ 70
Broadcasting-The WB Network (20) (24) (20) (24)
Cable Networks-HBO 96 81 91 76
Cable 431 368 183 146
Total $653 $556 $329 $268
TWE had revenues of $2.6 billion and net income of $320 million for
the three months ended March 31, 1997, compared to revenues of $2.485
billion and net income of $94 million for the three months ended March 31,
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1996. As discussed more fully below, TWE's net income increased
significantly in 1997 as compared to results in 1996 due to an overall
increase in operating income generated by its business segments and the
inclusion of an approximately $250 million pretax gain on the sale of
TWE's 58% interest in E! Entertainment Television, Inc., offset in part
by an increase in minority interest expense related to the
TWE-Advance/Newhouse Partnership.
As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $12 million and $18
million for the three months ended March 31, 1997 and 1996,
respectively, have been provided for the operations of TWE's domestic
and foreign subsidiary corporations.
Filmed Entertainment-Warner Bros. Revenues decreased to $1.172
billion, compared to $1.216 billion in the first quarter of 1996. EBITDA
increased to $146 million from $131 million. Depreciation and
amortization, including noncash amortization of intangible assets
related to the purchase of WCI, amounted to $71 million in 1997 and $61
million in 1996. Operating income increased to $75 million from $70
million. Revenues decreased principally as a result of lower worldwide
theatrical and home video revenues, offset in part by increases in
international syndication revenues. EBITDA and operating income
increased principally as a result of the strong performance of
international syndication and a gain on the sale of an investment.
Operating income was further affected by higher depreciation and
amortization principally related to the expansion of consumer products
operations.
Broadcasting - The WB Network. The WB Network recorded an
operating loss of $20 million on $24 million of revenues in the first
quarter of 1997, compared to an operating loss of $24 million on $15
million of revenues in the first quarter of 1996. The increase in
revenues primarily resulted from the expansion of programming in
September 1996 to three nights of primetime scheduling and the expansion
of Kids' WB!, the network's animated programming lineup on Saturday
mornings and weekdays. The 1997 operating loss principally resulted from
the expanded programming schedule and was mitigated by the exercise of
an option by a limited partner to increase its ownership in this
network. Due to the start-up nature of this national broadcast
operation, losses are expected to continue.
Cable Networks-HBO. Revenues increased to $483 million, compared to
$419 million in the first quarter of 1996. EBITDA increased to $96
million from $81 million. Depreciation and amortization amounted to $5
million in 1997 and 1996. Operating income increased to $91 million from
$76 million. Revenues benefitted primarily from a significant increase in
subscriptions. EBITDA and operating income improved principally as a
result of the revenue gains.
Cable. Revenues increased to $1.020 billion, compared to $947
million in the first quarter of 1996. EBITDA increased to $431 million
from $368 million. Depreciation and amortization, including noncash
amortization of intangible assets related to the purchase of WCI and the
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acquisition of the ATC minority interest, amounted to $248 million in
1997 and $222 million in 1996. Operating income increased to $183
million from $146 million. Revenues benefitted from an increase in basic
cable subscribers, increases in regulated cable rates as permitted under
Time Warner Cable's "social contract" with the Federal Communications
Commission (the "FCC") and an increase in advertising revenues. EBITDA
and operating income increased as a result of the revenue gains, as well
as net gains of approximately $24 million on the sale or exchange of
certain cable systems. Operating income was further affected by higher
depreciation and amortization related to capital spending.
Interest and Other, Net. Interest and other, net, was $129 million
income in the first quarter of 1997, compared to $89 million expense in
the first quarter of 1996. Interest expense decreased to $115 million,
compared to $122 million in 1996. There was other income, net, of $244
million in the first quarter of 1997, compared to $33 million in the
first quarter of 1996, principally due to the inclusion of an
approximately $250 million pretax gain on the sale of an interest in E!
Entertainment Television, Inc. in March 1997.
FINANCIAL CONDITION AND LIQUIDITY
March 31, 1997
Financial Condition
TWE had $5.6 billion of debt, $243 million of preferred stock of a
subsidiary, $1.6 billion of Time Warner General Partners' Senior Capital
and $6.7 billion of partners' capital at March 31, 1997, compared to
$5.7 billion of debt, $1.5 billion of Time Warner General Partners'
Senior Capital and $6.6 billion of partners' capital at December 31,
1996. Cash and equivalents were $312 million at March 31, 1997, compared
to $216 million at December 31, 1996, reducing the debt-net-of-cash
amounts for TWE to $5.3 billion and $5.5 billion, respectively.
Cash Flows
During the first three months of 1997, TWE's cash used by
operations amounted to $48 million and reflected $653 million of EBITDA
from the Filmed Entertainment-Warner Bros., Broadcasting-The WB Network,
Cable Networks-HBO and Cable businesses, less $146 million of interest
payments, $12 million of income taxes, $18 million of corporate
expenses, and $525 million related to an increase in working capital
requirements, other balance sheet accounts and noncash items. Cash
provided by operations of $557 million in the first quarter of 1996
reflected $556 million of business segment EBITDA 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 investing activities was $5 million in the first
three months of 1997, compared to cash used by investing activities of
$243 million in the first quarter of 1996, principally as a result of a
$248 million increase in proceeds from the sale of investments. Capital
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expenditures were $331 million in each period.
Cash provided by financing activities was $139 million in the first
three months of 1997, compared to cash used by financing activities of
$382 million in the first quarter of 1996, principally as a result of a
lower level of debt reduction in the first three months of 1997 and the
issuance of 250,000 shares of preferred stock of a subsidiary for
aggregate net proceeds of $243 million, offset in part by the absence of
$71 million of collections on the note receivable from U S WEST that was
fully paid in 1996. The preferred stock was issued by a newly formed,
substantially owned subsidiary intended to qualify as a real estate
investment trust under the Internal Revenue Code of 1986, as amended.
Management believes that TWE's operating cash flow, cash and
equivalents and additional borrowing capacity are sufficient to fund its
capital and liquidity needs for the foreseeable future.
Cable Capital Spending
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 $292 million in the three
months ended March 31, 1997, compared to $268 million in the three
months ended March 31, 1996. For the full year of 1997, cable capital
spending is expected to be comparable to 1996 levels, with approximately
$1.1 billion budgeted for the remainder of 1997. Capital spending by
TWE's Cable division is expected to be funded principally by cable
operating cash flow. In exchange for certain flexibility in establishing
cable rate pricing structures for regulated services that went into
effect on January 1, 1996 and consistent with Time Warner Cable's
long-term strategic plan, Time Warner Cable has agreed with the FCC to
invest a total of $4 billion in capital costs in connection with the
upgrade of its cable infrastructure, which is expected to be substantially
completed over a five-year period ending December 31, 2000. The
agreement with the FCC covers all of the cable operations of Time Warner
Cable, including the owned or managed cable television systems of TWE,
the TWE-Advance/Newhouse Partnership and Time Warner. 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 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, basic cable, network and syndicated
television exhibition, amounted to $1.636 billion at March 31, 1997,
compared to $1.502 billion at December 31, 1996 (including amounts
relating to TWE's cable television networks of $222 million and $189
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million, respectively, and to Time Warner's cable television networks of
$396 million and $274 million, respectively). Because backlog generally
relates to contracts for the licensing of theatrical and television
product which have already been produced, the recognition of revenue for
such completed product is principally only dependent upon the
commencement of the availability period for telecast under the terms of
the related licensing agreement. Cash licensing fees are collected
periodically over the term of the related licensing agreements.
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 revenues and cash through the sale of advertising spots received
under such contracts.
Foreign Currency Risk Management
Time Warner uses foreign exchange contracts primarily to hedge the
risk that unremitted or future license fees owed to TWE domestic
companies for the sale or anticipated sale of U.S. copyrighted products
abroad may be adversely affected by changes in foreign currency exchange
rates. As part of its overall strategy to manage the level of exposure
to the risk of foreign currency exchange rate fluctuations, Time Warner
hedges a portion of its foreign currency exposures anticipated over the
ensuing twelve month period, including those related to TWE. At March
31, 1997, Time Warner had effectively hedged approximately half of TWE's
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 are generally 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, 1997, Time Warner had contracts for the sale of
$523 million and the purchase of $183 million of foreign currencies at
fixed rates. Of Time Warner's $340 million net sale contract position,
none of the foreign exchange purchase contracts and $100 million of the
foreign exchange sale contracts related to TWE's foreign currency
exposure, primarily Japanese yen (24% of net contract position related
to TWE), French francs (20%), German marks (12%) and Canadian dollars
(19%). This compares to a net sale contract position of $102 million of
foreign currencies at December 31, 1996.
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, 1997 and December 31, 1996. 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, 1997 and 1996, TWE recognized $7 million and $2 million in
gains, respectively, on foreign exchange contracts, which were or are
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expected to be offset by corresponding decreases 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, 1997, each 5%
devaluation of the U.S. dollar as compared to the level of foreign
exchange rates for currencies under contract at March 31, 1997 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, 1997 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.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31,
1997 1996
(millions)
ASSETS
Current assets
Cash and equivalents $ 312 $ 216
Receivables, including $391 and $383 million
due from Time Warner, less allowances of $358
and $373 million 1,638 1,637
Inventories 1,192 1,134
Prepaid expenses 168 159
Total current assets 3,310 3,146
Noncurrent inventories 2,302 2,263
Loan receivable from Time Warner 400 400
Investments 337 351
Property, plant and equipment, net 6,076 5,999
Cable television franchises 3,032 3,054
Goodwill 3,966 3,996
Other assets 671 764
Total assets $20,094 $19,973
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable $ 769 $ 935
Participations and programming costs payable 1,269 1,393
Debt due within one year 7 7
Other current liabilities, including $83 million
and $82 million due to Time Warner 1,524 1,740
Total current liabilities 3,569 4,075
Long-term debt 5,640 5,676
Other long-term liabilities, including $219
and $138 million due to Time Warner 1,254 1,085
Minority interests 1,103 1,020
Preferred stock of subsidiary holding solely
a mortgage note of its parent 243 -
Time Warner General Partners' Senior Capital 1,574 1,543
Partners' capital
Contributed capital 7,537 7,537
Undistributed partnership earnings (deficit) (826) (963)
Total partners' capital 6,711 6,574
Total liabilities and partners' capital $20,094 $19,973<PAGE>
See accompanying notes.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months
Ended March 31,
1997 1996
(millions)
Revenues (a) $2,600 $2,485
Cost of revenues (a)(b) 1,665 1,665
Selling, general and administrative (a)(b) 606 552
Operating expenses 2,271 2,217
Business segment operating income 329 268
Interest and other, net (a) 129 (89)
Minority interest (108) (50)
Corporate services (a) (18) (17)
Income before income taxes 332 112
Income taxes (12) (18)
Net income $ 320 $ 94
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(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, 1997, and 1996, respectively: revenues-$66
million and $23 million; cost of revenues-$(10) million and $(24)
million; selling, general and administrative-$19 million and $(2)
million; interest and other, net-$12 million and $9 million; and
corporate services-$(18) million and $(17) million.
(b) Includes depreciation and amortization expense of: $ 324 $ 288
See accompanying notes.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
1997 1996
(millions)
OPERATIONS
Net income $320 $ 94
Adjustments for noncash and nonoperating items:
Depreciation and amortization 324 288
Changes in operating assets and liabilities (692) 175
Cash provided (used) by operations (48) 557
INVESTING ACTIVITIES
Investments and acquisitions (31) (31)
Capital expenditures (331) (331)
Investment proceeds 367 119
Cash provided (used) by investing activities 5 (243)
FINANCING ACTIVITIES
Borrowings 282 63
Debt repayments (318) (498)
Issuance of preferred stock of subsidiary 243 -
Capital distributions (54) (63)
Collections on note receivable from U S WEST - 71
Other (14) 45
Cash provided (used) by financing activities 139 (382)
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 96 (68)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 216 209
CASH AND EQUIVALENTS AT END OF PERIOD $312 $141
See accompanying notes.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Time Warner Entertainment Company, L.P., a Delaware limited
partnership ("TWE"), classifies its businesses into three fundamental
areas: Entertainment, consisting principally of interests in filmed
entertainment, television production, television broadcasting and theme
parks; Cable Networks, consisting principally of interests in cable
television programming; and Cable, consisting principally of interests in
cable television systems.
Each of the business interests within Entertainment, Cable Networks
and Cable is important to TWE's objective of increasing partner value
through the creation, extension and distribution of recognizable brands
and copyrights throughout the world. Such brands and copyrights include
(1) the unique and extensive film, television and animation libraries of
Warner Bros. and trademarks such as the Looney Tunes characters and
Batman, (2) The WB Network, a national broadcasting network launched in
1995 as an extension of the Warner Bros. brand and as an additional
distribution outlet for Warner Bros.' collection of children's cartoons
and television programming, (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 considerably greater than their operating
income due to significant amounts of noncash amortization of intangible
assets recognized principally in Time Warner Companies, Inc.'s ("Time
Warner")* $14 billion acquisition of Warner Communications Inc. ("WCI") in
1989 and $1.3 billion acquisition of the minority interest in American
Television and Communications Corporation ("ATC") in 1992, a portion of
which cost was allocated to TWE upon the capitalization of the
partnership. Noncash amortization of intangible assets recorded by TWE's
businesses amounted to $107 million and $110 million in the three months
ended March 31, 1997 and 1996, respectively.
Time Warner and certain of its wholly owned subsidiaries collectively
own general and limited partnership interests in TWE consisting of 74.49%
of the pro rata priority capital ("Series A Capital") and residual equity
capital ("Residual Capital"), and 100% of the senior priority capital
("Senior Capital") and junior priority capital ("Series B Capital"). The
remaining 25.51% limited partnership interests in the Series A Capital and
Residual Capital of TWE are held by a subsidiary of U S WEST, Inc. ("U S
WEST"). Certain of Time Warner's subsidiaries are the general partners of
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TWE ("Time Warner General Partners").
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* On October 10, 1996, Time Warner Inc. acquired the remaining 80%
interest in Turner Broadcasting System, Inc. ("TBS") that it did not
already own. As a result of this transaction, a new parent company with
the name "Time Warner Inc." replaced the old parent company of the same
name ("Old Time Warner", now known as Time Warner Companies, Inc.), and
Old Time Warner and TBS became separate, wholly owned subsidiaries of the
new parent company. Unless the context indicates otherwise, references
herein to "Time Warner" refer to Old Time Warner.
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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, 1996. Certain
reclassifications have been made to the prior year's financial statements
to conform to the 1997 presentation.
2. INVENTORIES
TWE's inventories consist of:
March 31, 1997 December 31, 1996
Current Noncurrent Current Noncurrent
(millions)
Film costs:
Released, less amortization $ 418 $ 562 $ 544 $ 535
Completed and not released 379 86 168 42
In process and other 24 696 21 704
Library, less amortization - 651 - 664
Programming costs, less
amortization 288 307 319 318
Merchandise 83 - 82 -
Total $1,192 $2,302 $1,134 $2,263
3. INVESTMENTS
In March 1997, TWE sold its 58% interest in E! Entertainment
Television, Inc. A pretax gain of approximately $250 million relating to
this sale has been included in the accompanying consolidated statement of
operations.
4. LONG-TERM DEBT
Long-term debt consists of:
March 31, December 31,
1997 1996
(millions)
Credit agreement, weighted average
interest rates of 6.0% and 6.1% $1,230 $1,555
Commercial paper, weighted average
interest rates of 6.0% and 5.8% 599 310
Publicly held notes and debentures 3,782 3,781
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Other 29 30
Total $5,640 $5,676
Each Time Warner General Partner has guaranteed a pro rata portion of
approximately $5.4 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.
5. PREFERRED STOCK OF SUBSIDIARY
In February 1997, a newly formed, substantially owned subsidiary of
TWE (the "REIT") issued 250,000 shares of step-down preferred stock
("Step-Down Preferred Stock"). The REIT is intended to qualify as a real
estate investment trust under the Internal Revenue Code of 1986, as
amended. TWE used the aggregate net proceeds from the transaction of $243
million to reduce its bank debt. The sole asset of the REIT is a $432
million mortgage note payable of TWE, which will be secured by certain
real estate owned by TWE or its affiliates.
Each share of Step-Down Preferred Stock is entitled to a liquidation
preference of $1,000 and entitles the holder thereof to receive cumulative
cash dividends, payable quarterly, at the rate of 14.253% per annum
through December 30, 2006 and 1% per annum thereafter, which results in an
effective dividend yield of 8.48%. Shares of Step-Down Preferred Stock
are redeemable only in the event of certain changes or proposed changes to
the tax laws or regulations, such that dividends paid by the REIT or
interest paid under the mortgage note would not be fully deductible for
federal income tax purposes. Time Warner has the right to liquidate or
dissolve the REIT at any time after December 30, 2006 or, at any time
prior thereto, upon the approval of the holders of at least two-thirds of
the outstanding shares of Step-Down Preferred Stock.
6. PARTNERS' CAPITAL
Changes in partners' capital were as follows:
Three Months
Ended March 31,
1997 1996
(millions)
Balance at beginning of year $6,574 $6,478
Net income 320 94
Distributions (139) (121)
Allocation of income to Time Warner General
Partners' Senior Capital (31) (28)
Collections on note receivable from U S WEST - 71
Other (13) 8
Balance at March 31 $6,711 $6,502
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
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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
September 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, 1997, TWE accrued $50 million
of tax-related distributions and $89 million of stock option
distributions, based on closing prices of Time Warner common stock of
$43.25 at March 31, 1997 and $37.50 at December 31, 1996. During the
three months ended March 31, 1996, TWE accrued $56 million of tax-related
distributions and $65 million of stock option distributions as a result of
an increase at that time in the market price of Time Warner common stock.
In the three months ended March 31, 1997, TWE paid distributions to the
Time Warner General Partners in the amount of $54 million, consisting of
$50 million of tax-related distributions and $4 million of stock option
related distributions. In the three months ended March 31, 1996, TWE paid
the Time Warner General Partners distributions in the amount of $63
million, consisting of $56 million of tax-related distributions and $7
million of stock option related distributions.
7. SEGMENT INFORMATION
TWE classifies its businesses into three fundamental areas:
Entertainment, consisting principally of interests in filmed
entertainment, television production, television broadcasting and theme
parks; Cable Networks, consisting principally of interests in cable
television programming; and Cable, consisting principally of interests in
cable television systems.
Information as to the operations of TWE in different business
segments is set forth below.
Three Months
Ended March 31,
1997 1996
(millions)
Revenues
Filmed Entertainment-Warner Bros. $1,172 $1,216
Broadcasting-The WB Network 24 15
Cable Networks-HBO 483 419
Cable 1,020 947
Intersegment elimination (99) (112)
Total $2,600 $2,485
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Three Months
Ended March 31,
1997 1996
(millions)
Operating Income
Filmed Entertainment-Warner Bros. $ 75 $ 70
Broadcasting-The WB Network (20) (24)
Cable Networks-HBO 91 76
Cable 183 146
Total $329 $268
Three Months
Ended March 31,
1997 1996
(millions)
Depreciation of Property, Plant and Equipment
Filmed Entertainment-Warner Bros. $ 40 $ 30
Broadcasting-The WB Network - -
Cable Networks-HBO 5 5
Cable 172 143
Total $217 $178
Three Months
Ended March 31,
1997 1996
(millions)
Amortization of Intangible Assets (1)
Filmed Entertainment-Warner Bros. $ 31 $ 31
Broadcasting-The WB Network - -
Cable Networks-HBO - -
Cable 76 79
Total $107 $ 110
__________________
(1) Amortization includes amortization relating to the acquisitions
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 and the pending litigation with the
City of New York and Fox News Channel ("FNC") relating to Time Warner's
acquisition of Turner Broadcasting System, Inc. and the carriage of FNC on
Time Warner Cable's New York City cable television system. In the opinion
of 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 with respect to cash flows is as
follows:
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Three Months
Ended March 31,
1997 1996
(millions)
Interest expense $115 $122
Cash payments made for interest 146 151
Cash payments made for income taxes, net 12 12
Noncash capital distributions 89 65
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TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Set forth below is a discussion of the results of operations and
financial condition of WCI, the only General Partner with independent
business operations. The financial position and results of operations of
ATC, TWOI and WCCI (the other General Partners of TWE, as described in
Note 1 to the accompanying consolidated financial statements) are
principally derived from their investments in TWE, Time Warner Companies,
Inc. ("Time Warner"), Turner Broadcasting System, Inc. ("TBS") and their
revolving credit agreements with Time Warner. 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 $933 million and net income of $115 million for
the three months ended March 31, 1997, compared to revenues of $983
million and net income of $27 million for the three months ended March 31,
1996. EBITDA decreased to $136 million from $141 million. Depreciation
and amortization, including amortization related to the purchase of WCI,
was $86 million in 1997 and $88 million in 1996. Operating income
decreased to $50 million from $53 million. Despite WCI maintaining its
leading domestic market share (over 21%), the decline in revenues
principally related to continuing industry-wide softness in the
overexpanded U.S. retail marketplace and a decline in international
recorded music sales. EBITDA and operating income decreased principally
as a result of the decline in revenues, offset in part by certain one-time
gains. Management expects that these domestic and international trends
will continue to affect 1997 operating results.
WCI's equity in the pretax income of TWE was $158 million for the
three months ended March 31, 1997, compared to $53 million for the three
months ended March 31, 1996. TWE's pretax income increased significantly
in 1997 as compared to results in 1996 due to an overall increase in
operating income generated by its business segments and the inclusion of
an approximately $250 million pretax gain on the sale of TWE's 58%
interest in E! Entertainment Television, Inc., offset in part by an
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increase in minority interest expense related to the TWE-Advance/Newhouse
Partnership.
Interest and other, net was $17 million of income for the three
months ended March 31, 1997 compared to $12 million of expense for the
three months ended March 31, 1996. Interest expense increased to $9
million from $7 million. There was other income, net, of $26 million in
1997, compared to other expense, net, of $5 million in 1996, principally
because of an increase in gains on foreign exchange contracts and lower
losses from reductions in the carrying value of certain investments.
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, 1997
WCI had $8.8 billion of equity at March 31, 1997, compared to $9
billion of equity at December 31, 1996. Cash and equivalents increased to
$113 million at March 31, 1997, compared to $91 million at December 31,
1996. 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, 1997
consisted of equity capital of $2.4 billion, $674 million and $839
million, respectively, compared to $2.3 billion, $654 million and $814
million at December 31, 1996, 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 three months of 1997, WCI's cash provided by operations
amounted to $247 million and reflected $136 million of EBITDA, $26 million
of distributions from TWE and $206 million related to a reduction in
working capital requirements, other balance sheet accounts and noncash
items, less $7 million of interest payments and $114 million of income
taxes ($74 million of which was paid to Time Warner under a tax sharing
agreement). Cash provided by WCI's operations of $240 million in the
first three months of 1996 reflected $141 million of EBITDA, $30 million
of distributions from TWE and $130 million related to a reduction in
working capital requirements, other 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).
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Management believes that WCI's operating cash flow and borrowing
availability under its revolving credit agreement with Time Warner are
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 three months of 1997, the General
Partners received an aggregate $54 million of distributions, consisting of
$50 million of tax-related distributions and $4 million of stock option
related distributions. During the first three months of 1996, the General
Partners received an aggregate $63 million of distributions, consisting of
$56 million of tax-related distributions and $7 million of stock option
related distributions. Of such aggregate distributions in the first
quarter of 1997 and 1996, WCI, ATC, TWOI and WCCI received $26 million and
$30 million, respectively; $22 million and $26 million, respectively; $6
million and $7 million, respectively; and $8 million and $9 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,
1997, Time Warner had effectively hedged approximately half of WCI's
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 are generally 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, 1997, Time Warner had contracts for the sale of $523 million and
the purchase of $183 million of foreign currencies at fixed rates. Of Time
Warner's $340 million net sale contract position, $387 million of foreign
exchange sale contracts and $166 million of foreign exchange purchase
contracts related to WCI's exposure, primarily English pounds (28% of net
contract position related to WCI), Canadian dollars (10%) and German marks
(22%), compared to a net sale contract position of $221 million of foreign
currencies at December 31, 1996.
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, 1997 and December 31, 1996. No cash is required to
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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 three months of 1997 and 1996,
WCI had $14 million and $7 million in gains, respectively, on foreign
exchange contracts, which were or are expected to be offset by
corresponding decreases 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, 1997, each 5% devaluation of the U.S.
dollar as compared to the level of foreign exchange rates for currencies
under contract at March 31, 1997 would result in approximately $19 million
of unrealized losses and $8 million of unrealized gains on foreign
exchange contracts involving foreign currency sales and purchases,
respectively. Conversely, a 5% appreciation of the U.S. dollar would
result in $19 million of unrealized gains and $8 million of unrealized
losses, respectively. Consistent with the nature of the economic hedge
provided by such foreign exchange contracts, such unrealized gains or
losses would be offset by corresponding decreases or increases,
respectively, in the dollar value of future foreign currency royalty
payments that would be received in cash within the ensuing twelve-month
period from the sale of U.S. copyrighted products abroad.
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TWE GENERAL PARTNERS
CONSOLIDATED BALANCE SHEETS
March 31, 1997
(Unaudited)
WCI ATC TWOI WCCI
(millions)
ASSETS
Current assets
Cash and equivalents $ 113 $ - $ - $ -
Receivables, less allowances of
$314 million 767 - - -
Inventories 146 - - -
Prepaid expenses 613 - - -
Total current assets 1,639 - - -
Investments in and amounts due
to and from TWE 2,115 2,089 586 739
Investments in Time Warner 86 64 17 21
Other investments 1,707 343 92 105
Music catalogues, contracts and
copyrights 1,002 - - -
Goodwill 3,677 - - -
Other assets, primarily property,
plant and equipment 518 - - -
Total assets $10,744 $2,496 $695 $865
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties payable 997 $ - $ - $ -
Other current liabilities 505 2 - -
Total current liabilities 1,502 2 - -
Long-term liabilities, including $176,
$90, $21 and $26 million due to
Time Warner 412 91 21 26
Shareholders' equity
Common stock 1 1 1 1
Paid-in capital 10,009 2,893 830 1,033
Retained earnings 443 62 8 9
10,453 2,956 839 1,043
Due from Time Warner, net (1,133) (217) (69) (85)
Reciprocal interest in Time
Warner stock (490) (336) (96) (119)
Total shareholders' equity 8,830 2,403 674 839<PAGE>
Total liabilities and shareholders'
equity $10,744 $2,496 $695 $865
See accompanying notes.
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TWE GENERAL PARTNERS
CONSOLIDATED BALANCE SHEETS
December 31, 1996
WCI ATC TWOI WCCI
(millions)
ASSETS
Current assets
Cash and equivalents $ 91 $ - $ - $ -
Receivables, less allowances of
$362 million 1,013 - - -
Inventories 165 - - -
Prepaid expenses 510 - - -
Total current assets 1,779 - - -
Investments in and amounts due
to and from TWE 1,998 1,980 555 701
Investments in Time Warner 86 64 17 21
Other investments 1,695 345 93 105
Music catalogues, contracts and
copyrights 1,035 - - -
Goodwill 3,704 - - -
Other assets, primarily property,
plant and equipment 537 - - -
Total assets $10,834 $2,389 $ 665 $ 827
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties payable $ 934 $ - $ - $ -
Other current liabilities 518 2 - -
Total current liabilities 1,452 2 - -
Long-term liabilities, including
$137, $55, $11 and $13 million due
to Time Warner 395 56 11 13
Shareholders' equity
Common stock 1 1 1 1
Paid-in capital 10,009 2,893 830 1,033
Retained earnings (accumulated
deficit) 390 27 (2) (3)
10,400 2,921 829 1,031
Due from Time Warner, net (923) (254) (79) (98)
Reciprocal interest in
Time Warner stock (490) (336) (96) (119)
Total shareholders' equity 8,987 2,331 654 814
Total liabilities and shareholders'
equity $10,834 $2,389 $ 665 $ 827
See accompanying notes.
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TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1997
(Unaudited)
WCI ATC TWOI WCCI
(millions)
Revenues (a) $ 933 $ - $ - $ -
Cost of revenues (a)(b) 606 - - -
Selling, general and
administrative (a)(b) 277 - - -
Operating expenses 883 - - -
Business segment operating income 50 - - -
Equity in pretax income of TWE (a) 158 135 39 48
Interest and other, net (a) 17 3 1 1
Income before income taxes 225 138 40 49
Income taxes (a) (110) (62) (18) (22)
Net income $ 115 $ 76 $ 22 $ 27
__________________
(a) Includes the following income (expenses) resulting from transactions
with Time Warner, TWE or equity investees of the General Partners:
Revenues $ 35 $ - $ - $ -
Cost of revenues (10) - - -
Selling, general and administrative 20 - - -
Equity in pretax income of TWE (5) - - -
Interest and other, net 25 - - -
Income taxes (74) (57) (17) (20)
(b) Includes depreciation and
amortization expense of: $ 86 $ - $ - $ -
See accompanying notes.
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TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1996
(Unaudited)
WCI ATC TWOI WCCI
(millions)
Revenues (a) $ 983 $ - $ - $ -
Cost of revenues (a)(b) 675 - - -
Selling, general and
administrative (a)(b) 255 - - -
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
________________
(a) Includes the following income (expenses) resulting from transactions
with Time Warner, TWE or equity investees of the General Partners:
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 $ - $ - $ -
See accompanying notes.
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TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1997
(Unaudited)
WCI ATC TWOI WCCI
(millions)
OPERATIONS
Net income $115 $ 76 $ 22 $ 27
Adjustments for noncash and non-
operating items:
Depreciation and amortization 86 - - -
Excess of equity in pretax income
of TWE over distributions (132) (113) (33) (40)
Equity in loss of other investee
companies, net of distributions 19 2 1 1
Changes in operating assets and
liabilities 159 - - -
Cash provided (used) by operations 247 (35) (10) (12)
INVESTING ACTIVITIES
Investments and acquisitions (30) - - -
Capital expenditures (24) - - -
Investment proceeds 41 - - -
Cash used by investing activities (13) - - -
FINANCING ACTIVITIES
Dividends (2) (2) - (1)
Decrease (increase) in amounts due
from Time Warner, net (210) 37 10 13
Cash provided (used) by financing
activities (212) 35 10 12
INCREASE IN CASH AND EQUIVALENTS 22 - - -
CASH AND EQUIVALENTS AT BEGINNING
OF PERIOD 91 - - -
CASH AND EQUIVALENTS AT END
OF PERIOD $113 $ - $ - $ -
See accompanying notes.
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TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1996
(Unaudited)
WCI ATC TWOI WCCI
(millions)
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 $ - $ - $ -
See accompanying notes.
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TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
On June 30, 1992, thirteen direct or indirect subsidiaries of Time
Warner Companies, Inc. ("Time Warner")* contributed the assets and
liabilities or the rights to the cash flows of substantially all of Time
Warner's Filmed Entertainment-Warner Bros., Cable Networks-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."
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 by a family of established record
labels such as Warner Bros. Records, Atlantic Records, Elektra
Entertainment and Warner Music International. The remaining General
Partners do not conduct operations independent of their ownership
interests in TWE and certain other investments.
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 the General Partners for the year ended December
31, 1996. Certain reclassifications have been made to the 1996 financial
statements to conform to the 1997 presentation.
__________________
* On October 10, 1996, Time Warner Inc. acquired the remaining 80%
interest in TBS that it did not already own (the "TBS Transaction"). As
a result of this transaction, a new parent company with the name "Time
Warner Inc." replaced the old parent company of the same name ("Old Time
Warner", now known as Time Warner Companies, Inc.), and Old Time Warner
and TBS became separate, wholly owned subsidiaries of the new parent
company. The General Partners' pre-existing ownership interests in Old
Time Warner and TBS were unaffected by the TBS Transaction. Unless the
context indicates otherwise, references herein to "Time Warner" refer to
Old Time Warner.
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TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
2. TWE
The General Partners' investment in and amounts due to or from TWE at
March 31, 1997 and December 31, 1996 is as follows (millions):
March 31, 1997 WCI ATC TWOI WCCI
Investment in TWE $2,327 $2,017 $ 565 $ 713
Stock option related distributions
due from TWE 85 72 21 26
Other net liabilities due to TWE,
principally related to home video
distribution (297) - - -
Total $2,115 $2,089 $ 586 $ 739
December 31, 1996 WCI ATC TWOI WCCI
Investment in TWE $2,242 $1,942 $ 544 $ 688
Stock option related distributions
due from TWE 44 38 11 13
Other net liabilities due to TWE,
principally related to home video
distribution (288) - - -
Total $1,998 $1,980 $ 555 $ 701
TWE was capitalized on June 30, 1992 to own and operate substantially
all of the Filmed Entertainment-Warner Bros., Cable Networks-HBO and Cable
businesses previously owned by 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 the 11.22% of the Series A Capital and Residual
Capital limited partnership interests previously held by subsidiaries of
each of ITOCHU Corporation and Toshiba Corporation in 1995. The remaining
25.51% limited partnership interests in the Series A Capital and Residual
Capital of TWE are held by a subsidiary of U S WEST, Inc. ("U S WEST").
The TWE partnership agreement provides for special allocations of
income, loss and distributions of partnership capital, including priority
distributions in the event of liquidation. No portion of TWE's net income
has been allocated to the limited partnership interests.
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TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Set forth below is summarized financial information of TWE:
TIME WARNER ENTERTAINMENT COMPANY, L.P.
Three Months
Ended March 31,
1997 1996
(millions)
Operating Statement Information
Revenues $2,600 $2,485
Depreciation and amortization 324 288
Business segment operating income 329 268
Interest and other, net (1) 129 (89)
Minority interest 108 50
Income before income taxes 332 112
Net income 320 94
__________________
(1) Includes a pretax gain of approximately $250 million recognized in
the first quarter of 1997 related to the sale of an interest in E!
Entertainment Television, Inc.
Three Months
Ended March 31,
1997 1996
(millions)
Cash Flow Information
Cash provided (used) by operations $ (48) $ 557
Capital expenditures (331) (331)
Investments and acquisitions (31) (31)
Investment proceeds 367 119
Borrowings 282 63
Debt repayments (318) (498)
Issuance of preferred stock of subsidiary 243 -
Capital distributions (54) (63)
Collections on note receivable from U S WEST - 71
Other financing activities, net (14) 45
Increase (decrease) in cash and equivalents 96 (68)
March 31, December 31,
1997 1996
(millions)
Balance Sheet Information
Cash and equivalents $ 312 $ 216
Total current assets 3,310 3,146
Total assets 20,094 19,973
Total current liabilities 3,569 4,075
Long-term debt 5,640 5,676
Minority interests 1,103 1,020
Preferred stock of subsidiary 243 -
General Partners' Senior Capital 1,574 1,543
Partners' capital 6,711 6,574
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TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
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,
1997 and December 31, 1996, the General Partners had recorded $178 million
and $93 million, respectively, of stock option related distributions due
from TWE, based on closing prices of Time Warner common stock of $43.25
and $37.50, respectively. Time Warner is paid when the options are
exercised. The General Partners also receive tax-related distributions
from TWE on a current basis. During the first three months of 1997, the
General Partners received distributions from TWE in the amount of $54
million, consisting of $50 million of tax-related distributions and $4
million of stock option related distributions. During the first three
months 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. Of
such aggregate distributions in 1997 and 1996, WCI received $26 million
and $30 million, respectively; ATC received $22 million and $26 million,
respectively; TWOI received $6 million and $7 million, respectively; and
WCCI received $8 million and $9 million, respectively.
3. GENERAL PARTNER GUARANTEES
Each General Partner has guaranteed a pro rata portion of
approximately $5.4 billion of TWE's debt and accrued interest at March 31,
1997, based on the relative fair value of the net assets each General
Partner contributed to TWE. 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, 1997 that
was guaranteed by each General Partner, individually and on a consolidated
basis for each General Partner and its subsidiaries, is set forth below:
Total Guaranteed by
Total Guaranteed by Each General Partner
Each General Partner and its Subsidiaries
General Partner
% Amount % Amount
(dollars in millions)
WCI 33.19 $1,794 47.58 $2,572
ATC 40.73 2,202 40.73 2,202
TWOI 11.69 632 11.69 632
WCCI, a subsidiary
of WCI 14.39 778 14.39 778
Total 100.00 $5,406 * *
_____________
* Adds to more than 100% and $5.406 billion, respectively, because of
the parent-subsidiary relationship between WCI and WCCI.
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
4. SHAREHOLDERS' EQUITY
Changes in shareholders' equity for WCI are as follows:
Three Months
Ended March 31,
1997 1996
(millions)
Balance at beginning of year $8,987 $9,342
Net income 115 27
Increase in stock option distribution
liability to Time Warner (42) (31)
Transfers to Time Warner, net (210) (185)
Unrealized gains (losses) of certain marketable
equity investments (3) 59
Other (17) (3)
Balance at March 31 $8,830 $9,209
5. CONTINGENCIES
Pending legal proceedings are substantially limited to litigation
incidental to the businesses of the General Partners. In the opinion of
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 with respect to cash flows is as
follows (millions):
WCI ATC TWOI WCCI
Three Months Ended March 31, 1997
Cash payments made for interest $ 7 $ - $ - $ -
Cash payments made for income
taxes, net 114 57 17 20
Tax-related distributions received
from TWE 24 20 6 7
WCI ATC TWOI WCCI
Three Months Ended March 31, 1996
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
<PAGE>
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings.
Reference is made to the Federal lawsuit filed by TWE in November
1992 seeking to overturn the must carry provisions of the 1992 Cable Act
on First Amendment grounds, described on pages I-26 and I-27 of TWE's
Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996
Form 10-K"). On March 31, 1997, the U.S. Supreme Court upheld the
constitutionality of the must carry requirements.
Reference is made to the investigation commenced in 1994 by the U.S.
Department of Justice into certain worldwide activities of Warner Music
Group ("WMG") and other companies in the recorded music industry,
described on page I-27 of the 1996 Form 10-K. On April 25, 1997, WMG
provided information and produced documents in accordance with the order
of the United States District Court for the District of Columbia.
Reference is made to the litigation entitled Fox News Network, L.L.C.
v. Time Warner Inc., Time Warner Entertainment Company, L.P., Turner
Broadcasting System, Inc. and R.E. "Ted" Turner III, described on page
I-28 of the 1996 Form 10-K. On March 21, 1997, defendants filed a motion
for summary judgment addressed to Fox's remaining state law claims, which
motion is scheduled to be argued on May 15, 1997. On April 10, 1997, the
court denied plaintiff's motion to dismiss the counterclaims.
On April 11, 1997, the Washington and Dallas offices of the Federal
Trade Commission notified Warner Elektra Atlantic Corporation ("WEA") that
it had commenced a preliminary investigation into whether WEA or others
may be violating or have violated laws against unfair competition by the
adoption, implementation and maintenance of minimum advertised pricing
programs.
On March 19, 1997, Six Flags Theme Parks Inc. and its wholly-owned
subsidiary Six Flags Over Georgia, Inc. commenced a declaratory judgment
action in the Superior Court of Gwinnett County, Georgia, entitled Six
Flags Over Georgia, Inc. and Six Flags Theme Parks, Inc. v. Six Flags
Fund, Ltd. and Avram Salkin, as Trustee of the Claims Trust. The
plaintiffs are affiliates of TWE and seek, among other things, a
declaration and determination of the rights and obligations of the
partners of Six Flags Over Georgia, L.P. with respect to certain disputed
partnership affairs and an accounting of all partnership affairs. On
April 21, 1997, defendants filed a motion to dismiss the declaratory
judgment action as well as an answer and counterclaim naming Six Flags
Entertainment Corporation and TWE as additional counterclaim-defendants.
The counterclaim seeks imposition of a constructive trust, compensatory
damages of in excess of $250 million and unspecified punitive damages for
alleged breach of fiduciary duty, conversion, fraud and conspiracy
allegedly committed by the counterclaim-defendants in connection with the
management of the Six Flags Over Georgia theme park. The
counterclaim-defendants intend to vigorously contest these allegations.
<PAGE>
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as a part of this report and such Exhibit Index
is incorporated herein by reference.
(b) Reports on Form 8-K.
No Current Report on Form 8-K was filed by TWE during the quarter
ended March 31, 1997.
<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 12, 1997
<PAGE>
<PAGE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulations S-K
Exhibit No. Description of Exhibit
27 Financial Data Schedule.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5 Exhibit 27
<LEGEND> TIME WARNER ENTERTAINMENT COMPANY, L.P.
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted
from the financial statements of Time Warner Entertainment Company,
L.P. for the three months ended March 31, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 312
<SECURITIES> 0
<RECEIVABLES> 1,996
<ALLOWANCES> 358
<INVENTORY> 1,192
<CURRENT-ASSETS> 3,310
<PP&E> 9,759
<DEPRECIATION> 3,683
<TOTAL-ASSETS> 20,094
<CURRENT-LIABILITIES> 3,569
<BONDS> 5,640
<COMMON> 0
0
0
<OTHER-SE> 6,711
<TOTAL-LIABILITY-AND-EQUITY> 20,094
<SALES> 2,600
<TOTAL-REVENUES> 2,600
<CGS> 1,665
<TOTAL-COSTS> 1,665
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115
<INCOME-PRETAX> 332
<INCOME-TAX> 12
<INCOME-CONTINUING> 320
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 320
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
