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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, 1998, 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)
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<S> <C>
Delaware 13-3666692
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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<TABLE>
<S> <C> <C>
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION Delaware 13-2922502
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)
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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
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PAGE
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TWE
GENERAL
TWE PARTNERS
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PART I. FINANCIAL INFORMATION
<S> <C> <C>
Management's discussion and analysis of results of operations and financial condition............. 1 16
Consolidated balance sheets at March 31, 1998 and December 31, 1997............................... 6 19
Consolidated statements of operations for the three months ended March 31, 1998
and 1997....................................................................................... 7 20
Consolidated statements of cash flows for the three months ended March 31, 1998
and 1997....................................................................................... 8 21
Consolidated statements of partnership capital and shareholders' equity for the
three months ended March 31, 1998 and 1997..................................................... 9 22
Notes to consolidated financial statements........................................................ 10 23
PART II. OTHER INFORMATION........................................................................ 29
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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 and television broadcasting; 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 EBITA
TWE evaluates operating performance based on several factors, of which
the primary financial measure is operating income before noncash amortization of
intangible assets ("EBITA"). Consistent with management's financial focus on
controlling capital spending, EBITA measures operating performance after charges
for depreciation. In addition, EBITA eliminates the uneven effect across all
business segments of considerable amounts of noncash amortization of intangible
assets recognized in business combinations accounted for by the purchase method,
including Time Warner's $14 billion acquisition of Warner Communications Inc. in
1989 and $1.3 billion acquisition of the minority interest in American
Television and Communications Corporation in 1992. The exclusion of noncash
amortization charges is also consistent with management's belief that TWE's
intangible assets, such as cable television franchises, film and television
libraries and the goodwill associated with its brands, are generally increasing
in value and importance to TWE's business objective of creating, extending and
distributing recognizable brands and copyrights throughout the world. As such,
the following comparative discussion of the results of operations of TWE
includes, among other factors, an analysis of changes in business segment EBITA.
However, EBITA should be considered in addition to, not as a substitute for,
operating income, net income and other measures of financial performance
reported in accordance with generally accepted accounting principles.
RESULTS OF OPERATIONS
As more fully described herein, TWE's 1998 operating results have been
affected by the transfer of cable television systems (or interests therein)
serving approximately 650,000 subscribers that were formerly owned by
subsidiaries of Time Warner to the TWE-Advance/Newhouse Partnership ("TWE-A/N"),
subject to approximately $1 billion of debt, in exchange for common and
preferred partnership interests therein, as well as certain related transactions
(collectively, the "TWE-A/N Transfers"). For a more comprehensive description of
the TWE-A/N Transfers, see Note 2 to the accompanying consolidated financial
statements.
1
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(CONTINUED)
EBITA and operating income for TWE for the three months ended March 31,
1998 and 1997 are as follows:
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THREE MONTHS ENDED MARCH 31,
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OPERATING
EBITA INCOME
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1998 1997 1998 1997
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(MILLIONS)
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Filmed Entertainment-Warner Bros.................................. $119 $106 $ 86 $ 75
Broadcasting-The WB Network....................................... (38) (20) (39) (20)
Cable Networks-HBO................................................ 109 91 109 91
Cable............................................................. 307 259 213 183
---- ---- ---- ----
Total............................................................. $497 $436 $369 $329
==== ==== ==== ====
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TWE had revenues of $2.910 billion and net income of $108 million for
the three months ended March 31, 1998, compared to revenues of $2.6 billion and
net income of $320 million for the three months ended March 31, 1997. As
discussed more fully below, TWE's net income decreased in 1998 as compared to
1997 principally due to the absence of the E! Entertainment gain recognized in
1997, offset in part by an overall increase in operating income generated by its
business segments and a decrease in minority interest expense related to
TWE-A/N.
As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $15 million and $12 million for
the three months ended March 31, 1998 and 1997, respectively, have been provided
for the operations of TWE's domestic and foreign subsidiary corporations.
Filmed Entertainment-Warner Bros. Revenues increased to $1.310 billion,
compared to $1.172 billion in the first three months of 1997. EBITA increased to
$119 million from $106 million. Operating income increased to $86 million from
$75 million. Revenues benefited from increases in worldwide television
production and distribution operations, offset in part by lower worldwide
theatrical and home video revenues. EBITA and operating income benefited
principally from the revenue gains and increased income from licensing
operations, offset in part by the absence of a gain on the sale of an investment
recognized in 1997.
Broadcasting - The WB Network. Revenues increased to $45 million,
compared to $24 million in the first three months of 1997. EBITA decreased to a
loss of $38 million from a loss of $20 million. Operating losses increased to
$39 million from $20 million. Revenues increased as a result of improved
television ratings and the addition of a fourth night of primetime programming
in January 1998, but were offset by higher programming costs associated with the
expanded programming schedule. Operating losses increased principally as a
result of a lower allocation of losses to a limited partner in the network. Due
to the start-up nature of this national broadcast operation, losses are expected
to continue.
Cable Networks-HBO. Revenues increased to $512 million, compared to
$483 million in the first three months of 1997. EBITA and operating income
increased to $109 million from $91 million. Revenues benefited primarily from an
increase in subscriptions. EBITA and operating income increased principally as a
result of the revenue gains, and, to a lesser extent, cost savings.
Cable. Revenues increased to $1.153 billion, compared to $1.020
billion in the first three months of 1997. EBITA increased to $307 million from
$259 million. Operating income increased to $213 million from $183 million.
2
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(CONTINUED)
The Cable division's 1998 operating results were positively affected by the
TWE-A/N Transfers. Excluding the effect of the TWE-A/N Transfers, revenues
benefited from an increase in basic cable and Primestar-related, direct
broadcast satellite subscribers, increases in regulated cable rates as permitted
under Time Warner Cable's "social contract" with the Federal Communications
Commission ("FCC") and an increase in advertising and pay-per-view revenues.
Similarly excluding the effect of the TWE-A/N Transfers, EBITA and operating
income increased as a result of the revenue gains, offset in part by higher
depreciation related to capital spending and lower gains relating to the sale or
exchange of certain cable systems.
Interest and Other, Net. Interest and other, net, was $164 million of
expense in the first three months of 1998, compared to $129 million of income in
the first three months of 1997. Interest expense increased to $141 million,
compared to $115 million in the first three months of 1997, principally due to
higher average debt levels associated with the TWE-A/N Transfers. There was
other expense, net, of $23 million in the first three months of 1998, compared
to other income, net, of $244 million in the first three months of 1997,
principally due to the absence of an approximate $250 million pretax gain on
the sale of an interest in E! Entertainment recognized in 1997.
FINANCIAL CONDITION AND LIQUIDITY
MARCH 31, 1998
FINANCIAL CONDITION
TWE had $7.1 billion of debt, $107 million of cash and equivalents
(net debt of $7.0 billion), $229 million of preferred stock of a subsidiary,
$1.1 billion of Time Warner General Partners' Senior Capital and $6.1 billion of
partners' capital at March 31, 1998, compared to $6.0 billion of debt, $322
million of cash and equivalents (net debt of $5.7 billion), $233 million of
preferred stock of a subsidiary, $1.1 billion of Time Warner General Partners'
Senior Capital and $6.3 billion of partners' capital at December 31, 1997. Net
debt increased principally as a result of the TWE-A/N Transfers.
DEBT TRANSACTIONS
In April 1998, TWE consummated two previously announced transactions,
consisting of the sale of TWE's 49% interest in Six Flags Entertainment
Corporation and the transfer of TWE's and TWE-A/N's direct broadcast satellite
operations and related assets to Primestar, Inc., a separate holding company
that is ultimately expected to be the publicly traded parent of TCI Satellite
Entertainment, Inc. As a result of these transactions, TWE reduced debt by
approximately $540 million.
In early 1998, TWE-A/N assumed approximately $1 billion of debt from
TWI Cable Inc. ("TWI Cable"), a wholly owned subsidiary of Time Warner, in
connection with the TWE-A/N Transfers. The debt assumed by TWE-A/N has been
guaranteed by TWI Cable and certain of its subsidiaries.
CASH FLOWS
During the first three months of 1998, TWE's cash provided by
operations amounted to $441 million and reflected $497 million of EBITA from its
Filmed Entertainment-Warner Bros., Broadcasting-The WB Network, Cable
3
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(CONTINUED)
Networks-HBO and Cable businesses, $243 million of noncash depreciation expense
and $148 million from the securitization of film and television backlog, less
$156 million of interest payments, $20 million of income taxes, $18 million of
corporate expenses and $253 million related to an increase in working capital
requirements, other balance sheet accounts and noncash items. Cash used by
operations of $48 million in the first three months of 1997 reflected $436
million of business segment EBITA and $217 million of noncash depreciation
expense, 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 used by investing activities was $559 million in the first three
months of 1998, compared to cash provided by investing activities of $5 million
in the first three months of 1997, principally as a result of the effect of
deconsolidating approximately $200 million of cash of Paragon Communications in
connection with the TWE-A/N Transfers that has been included in cash flows from
investments and acquisitions, and a $344 million decrease in proceeds from the
sale of investments. Capital expenditures increased to $352 million in the first
three months of 1998, compared to $331 million in the first three months of
1997.
Cash used by financing activities was $97 million in the first three
months of 1998, compared to cash provided by financing activities of $139
million in the first three months of 1997, principally as a result of the
absence of $243 million of aggregate net proceeds from the issuance of preferred
stock of a subsidiary in the first three months of 1997 and a $118 million
increase in distributions paid to Time Warner, offset in part by an increase in
debt used to fund cash distributions to Time Warner.
Management believes that TWE's operating cash flow, cash and
equivalents and additional borrowing capacity are sufficient to fund its capital
and liquidity needs for the foreseeable future.
CABLE CAPITAL SPENDING
Time Warner Cable has been engaged in a plan to upgrade the
technological capability and reliability of its cable television systems and
develop new services, which it believes will position the business for
sustained, long-term growth. Capital spending by TWE's Cable division amounted
to $326 million in the three months ended March 31, 1998, compared to $292
million the three months ended March 31, 1997. For the full year of 1998, cable
capital spending is expected to be comparable to 1997 levels, with approximately
$1.1 billion budgeted for the remainder of 1998. Capital spending by TWE's Cable
division is expected to continue to be funded 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 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, TWE-A/N and Time Warner.
Management expects to continue to finance such level of investment through cable
operating cash flow and the development of new revenue streams from expanded
programming options, high-speed Internet access, telephony and other services.
4
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(CONTINUED)
WARNER BROS. BACKLOG
Warner Bros.' backlog, representing the amount of future revenue not
yet recorded from cash contracts for the licensing of theatrical and television
product for pay cable, basic cable, network and syndicated television
exhibition, amounted to $2.152 billion at March 31, 1998, compared to $2.126
billion at December 31, 1997 (including amounts relating to TWE's cable
television networks of $238 million, in both periods, and to Time Warner's cable
television networks of $515 million and $481 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 or on an accelerated basis
using a $600 million securitization facility. The portion of backlog for which
cash has not already been received has significant off-balance sheet asset value
as a source of future funding. The backlog excludes advertising barter
contracts, which are also expected to result in the future realization of
revenues and cash through the sale of advertising spots received under such
contracts.
5
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
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<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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(MILLIONS)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and equivalents........................................................................ $ 107 $ 322
Receivables, including $465 and $385 million due from Time Warner,
less allowances of $410 and $424 million................................................ 1,840 1,914
Inventories................................................................................. 1,201 1,204
Prepaid expenses............................................................................ 190 182
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Total current assets........................................................................ 3,338 3,622
Noncurrent inventories...................................................................... 2,310 2,254
Loan receivable from Time Warner............................................................ 400 400
Investments................................................................................. 308 315
Property, plant and equipment............................................................... 6,713 6,557
Cable television franchises................................................................. 4,041 3,063
Goodwill.................................................................................... 4,168 3,859
Other assets................................................................................ 734 661
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Total assets................................................................................ $22,012 $20,731
======= =======
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable............................................................................ $ 834 $ 1,123
Participations and programming costs payable................................................ 1,365 1,176
Debt due within one year.................................................................... 7 8
Other current liabilities, including $216 and $184 million due to Time Warner............... 1,555 1,667
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Total current liabilities................................................................... 3,761 3,974
Long-term debt.............................................................................. 7,108 5,990
Other long-term liabilities, including $586 and $477 million due to Time Warner............. 2,181 1,873
Minority interests.......................................................................... 1,465 1,210
Preferred stock of subsidiary holding solely a mortgage note of its parent.................. 229 233
Time Warner General Partners' Senior Capital................................................ 1,140 1,118
PARTNERS' CAPITAL
Contributed capital......................................................................... 7,537 7,537
Undistributed partnership earnings (deficit)................................................ (1,409) (1,204)
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Total partners' capital..................................................................... 6,128 6,333
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Total liabilities and partners' capital..................................................... $22,012 $20,731
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See accompanying notes.
6
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
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THREE MONTHS
ENDED MARCH 31,
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1998 1997
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(MILLIONS)
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Revenues (a)................................................................................ $2,910 $2,600
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Cost of revenues (a)(b)..................................................................... 1,946 1,665
Selling, general and administrative (a)(b).................................................. 595 606
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Operating expenses.......................................................................... 2,541 2,271
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Business segment operating income........................................................... 369 329
Interest and other, net (a)................................................................. (164) 129
Minority interest........................................................................... (64) (108)
Corporate services (a)...................................................................... (18) (18)
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Income before income taxes.................................................................. 123 332
Income taxes................................................................................ (15) (12)
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Net income.................................................................................. $ 108 $ 320
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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, 1998 and 1997, respectively: revenues-$129 million and $66
million; cost of revenues-$(38) million and $(10) million; selling, general
and administrative-$1 million and $19 million; interest and other, net-$2
million and $12 million; and corporate services-$(18) million in both
periods.
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(b) Includes depreciation and amortization expense of:...................................... $371 $324
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See accompanying notes.
7
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
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THREE MONTHS
ENDED MARCH 31,
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1998 1997
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(MILLIONS)
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OPERATIONS
Net income.................................................................................. $108 $320
Adjustments for noncash and nonoperating items:
Depreciation and amortization............................................................... 371 324
Changes in operating assets and liabilities................................................. (38) (692)
---- -----
Cash provided (used) by operations.......................................................... 441 (48)
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INVESTING ACTIVITIES
Investments and acquisitions................................................................ (230) (31)
Capital expenditures........................................................................ (352) (331)
Investment proceeds......................................................................... 23 367
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Cash provided (used) by investing activities................................................ (559) 5
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FINANCING ACTIVITIES
Borrowings.................................................................................. 489 282
Debt repayments............................................................................. (376) (318)
Issuance of preferred stock of subsidiary................................................... - 243
Capital distributions....................................................................... (172) (54)
Other....................................................................................... (38) (14)
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Cash provided (used) by financing activities................................................ (97) 139
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INCREASE (DECREASE) IN CASH AND EQUIVALENTS................................................. (215) 96
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................................................. 322 216
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CASH AND EQUIVALENTS AT END OF PERIOD....................................................... $107 $312
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See accompanying notes.
8
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
(UNAUDITED)
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THREE MONTHS
ENDED MARCH 31,
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1998 1997
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(MILLIONS)
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BALANCE AT BEGINNING OF YEAR................................................................ $6,333 $6,574
Net income.................................................................................. 108 320
Other comprehensive income (loss)........................................................... (14) (13)
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Comprehensive income........................................................................ 94 307
Distributions............................................................................... (277) (139)
Allocation of income to Time Warner General Partners' Senior Capital........................ (22) (31)
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BALANCE AT MARCH 31,........................................................................ $6,128 $6,711
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See accompanying notes.
9
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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 and television broadcasting; 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) HBO and
Cinemax, the leading pay television services and (4) Time Warner Cable,
currently 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 6). 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 $128 million and $107 million in the three months ended
March 31, 1998 and 1997, 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 TWE ("Time Warner General Partners").
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
10
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
conjunction with the audited consolidated financial statements of TWE for the
year ended December 31, 1997. Certain reclassifications have been made to the
prior year's financial statements to conform to the 1998 presentation.
2. ACQUISITIONS AND DISPOSITIONS
TWE-A/N TRANSFERS
In early 1998, Time Warner (through a wholly owned subsidiary)
contributed cable television systems (or interests therein) serving
approximately 650,000 subscribers to the TWE-Advance/Newhouse Partnership ("TWE-
A/N"), subject to approximately $1 billion of debt, in exchange for common and
preferred partnership interests therein, and completed certain related
transactions (collectively, the "TWE-A/N Transfers"). The cable television
systems transferred to TWE-A/N were formerly owned by TWI Cable Inc. ("TWI
Cable"), a wholly owned subsidiary of Time Warner, and Paragon Communications
("Paragon"), a partnership formerly owning cable television systems serving
approximately 1 million subscribers that was previously wholly owned by
subsidiaries of Time Warner, with 50% beneficially owned in the aggregate by TWE
and TWE-A/N. The debt assumed by TWE-A/N has been guaranteed by TWI Cable and
certain of its subsidiaries, including Paragon.
As part of the TWE-A/N Transfers, TWE exchanged substantially all of
its beneficial interest in Paragon for an equivalent share of Paragon's cable
television systems (or interests therein) serving approximately 500,000
subscribers. TWE, in turn, transferred such systems and certain related assets
to TWE-A/N in exchange for TWE-A/N's beneficial interest in Paragon and in
satisfaction of certain pre-existing obligations to TWE-A/N. This resulted in
wholly owned subsidiaries of Time Warner owning 100% of the restructured Paragon
entity, with less than 1% beneficially held for TWE. Accordingly, effective as
of January 1, 1998, TWE has deconsolidated Paragon. Because this transaction
represented an exchange of TWE's and TWE-A/N's beneficial interests in Paragon
for an equivalent amount of its cable television systems, it did not have a
significant economic impact on Time Warner, TWE or TWE-A/N.
In connection with the TWE-A/N Transfers, the Advance/Newhouse
Partnership ("Advance/Newhouse"), a limited partner in TWE-A/N, made a capital
contribution to TWE-A/N in order to maintain its 33.3% common partnership
interest therein. Accordingly, TWE-A/N is now owned 65.3% by TWE, 33.3% by
Advance/Newhouse and 1.4% indirectly by Time Warner. The TWE-A/N Transfers were
accounted for effective as of January 1, 1998.
On a pro forma basis, giving effect to the TWE-A/N Transfers as if they
had occurred at the beginning of 1997, TWE would have reported for the three
months ended March 31, 1997, revenues of $2.616 billion, depreciation expense of
$218 million, operating income before noncash amortization of intangible assets
of $465 million, operating income of $342 million and net income of $318
million.
PRIMESTAR
In April 1998, TWE and Advance/Newhouse transferred the direct
broadcast satellite operations conducted by TWE and TWE-A/N (the "DBS
Operations") and the 31% partnership interest in Primestar Partners, L.P. held
by TWE-A/N ("Primestar" and collectively, the "Primestar Assets") to Primestar,
Inc. ("New Primestar"), a new holding company that is ultimately expected to be
the publicly traded parent of TCI Satellite Entertainment, Inc.
11
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
("TSAT"). New Primestar owns the DBS Operations and Primestar partnership
interests formerly owned by TSAT and other previously existing partners of
Primestar. In exchange for contributing its interests in the Primestar Assets,
TWE received an approximate 24% equity interest in New Primestar and realized
approximately $240 million of debt reduction. In partial consideration for
contributing its indirect interest in certain of the Primestar Assets, Advance/
Newhouse received an approximate 6% equity interest in New Primestar.
In a related transaction, Primestar also entered into an agreement in
June 1997 with The News Corporation Limited, MCI Telecommunications Corporation
and American Sky Broadcasting LLC ("ASkyB"), pursuant to which New Primestar
would acquire certain assets relating to the high-power, direct broadcast
satellite business of ASkyB (the "Primestar ASkyB Transaction"). In exchange for
such assets, ASkyB would receive non-voting securities of New Primestar that
would be convertible into non-voting common stock of New Primestar and,
accordingly, would reduce TWE's equity interest in New Primestar to
approximately 16% on a fully diluted basis. The Primestar ASkyB Transaction is
expected to close in 1998, subject to customary closing conditions, including
all necessary governmental and regulatory approvals, including the approval of
the FCC which is currently conducting an extensive review of the transaction.
There can be no assurance that such approvals will be obtained.
SIX FLAGS
In April 1998, TWE sold its remaining 49% interest in Six Flags
Entertainment Corporation ("Six Flags") to Premier Parks Inc. ("Premier"), a
regional theme park operator, for approximately $475 million of cash. TWE used
the net, after-tax proceeds from this transaction to reduce debt by
approximately $300 million. As part of the transaction, TWE will continue to
license its animated cartoon and comic book characters to Six Flags's theme
parks and will similarly license such rights to Premier's theme parks in the
United States and Canada under a long-term agreement covering an aggregate of
twenty-five existing and all future locations. A substantial portion of the gain
on this transaction has been deferred principally as a result of TWE's
continuing guarantees of certain significant long-term obligations of Six Flags
relating to the Six Flags Over Texas and Six Flags Over Georgia theme parks.
3. INVENTORIES
TWE's inventories consist of:
<TABLE>
<CAPTION> MARCH 31, 1998 DECEMBER 31, 1997
--------------------- ----------------------
CURRENT NONCURRENT CURRENT NONCURRENT
------- ---------- ------- ----------
(MILLIONS)
<S> <C> <C> <C> <C>
FILM COSTS:
Released, less amortization..................................... $ 498 $ 683 $ 545 $ 658
Completed and not released...................................... 185 48 170 50
In process and other............................................ 43 644 27 595
Library, less amortization...................................... - 599 - 612
Programming costs, less amortization............................... 393 336 382 339
Merchandise........................................................ 82 - 80 -
----- ------ ---- ------
Total.............................................................. $1,201 $2,310 $1,204 $2,254
====== ====== ====== ======
</TABLE>
12
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
4. 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 1997 consolidated statement of
operations.
5. PARTNERS' CAPITAL
TWE is required to make distributions to reimburse the partners for
income taxes at statutory rates based on their allocable share of taxable
income, and to reimburse Time Warner for stock options granted to employees of
TWE based on the amount by which the market price of Time Warner Inc. common
stock exceeds the option exercise price on the exercise date or, with respect to
options granted prior to the TWE capitalization on September 30, 1992, the
greater of the exercise price and the $27.75 market price of Time Warner Inc.
common stock at the time of the TWE capitalization. TWE accrues a stock option
distribution and a corresponding liability with respect to unexercised options
when the market price of Time Warner Inc. common stock increases during the
accounting period, and reverses previously accrued stock option distributions
and the corresponding liability when the market price of Time Warner Inc. common
stock declines.
During the three months ended March 31, 1998, TWE accrued $52 million
of tax-related distributions and $225 million of stock option distributions,
based on closing prices of Time Warner Inc. common stock of $72.00 at March 31,
1998 and $62.00 At December 31, 1997. During the three months ended March 31,
1997, TWE accrued $50 million of tax-related distributions and $89 million of
stock option distributions as a result of an increase at that time in the market
price of Time Warner Inc. common stock. During the three months ended March 31,
1998, TWE paid distributions to the Time Warner General Partners in the amount
of $172 million, consisting of $52 million of tax-related distributions and $120
million of stock option related distributions. During the three months ended
March 31, 1997, TWE paid the Time Warner General Partners distributions in the
amount of $54 million, consisting of $50 million of tax-related distributions
and $4 million of stock option related distributions.
6. SEGMENT INFORMATION
TWE classifies its businesses into three fundamental areas:
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; 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 based on the nature of the products and services offered. TWE
evaluates performance based on several factors, of which the primary financial
measure is business segment operating income before noncash amortization of
intangible assets ("EBITA"). The operating results of TWE's cable segment
reflects the TWE-A/N Transfers effective as of January 1, 1998.
13
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
Information as to the operations of TWE in different business segments
is set forth below.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
Revenues
Filmed Entertainment-Warner Bros............................................................ $1,310 $1,172
Broadcasting-The WB Network................................................................. 45 24
Cable Networks-HBO.......................................................................... 512 483
Cable....................................................................................... 1,153 1,020
Intersegment elimination.................................................................... (110) (99)
------ -----
Total....................................................................................... $2,910 $2,600
====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
EBITA(1)
Filmed Entertainment-Warner Bros............................................................ $ 119 $ 106
Broadcasting-The WB Network................................................................. (38) (20)
Cable Networks-HBO.......................................................................... 109 91
Cable....................................................................................... 307 259
------ -----
Total....................................................................................... $ 497 $ 436
====== ======
</TABLE>
- ---------------
(1) EBITA represents business segment operating income before noncash
amortization of intangible assets. After deducting amortization of
intangible assets, TWE's business segment operating income for the three
months ended March 31, 1998 and 1997 was $369 million and $329 million,
respectively.
<TABLE>
<CAPTION> THREE MONTHS
ENDED MARCH 31,
-----------------
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Filmed Entertainment-Warner Bros............................................................ $ 40 $ 40
Broadcasting-The WB Network................................................................. - -
Cable Networks-HBO.......................................................................... 5 5
Cable....................................................................................... 198 172
----- -----
Total....................................................................................... $ 243 $ 217
====== ======
</TABLE>
14
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
AMORTIZATION OF INTANGIBLE ASSETS (1)
Filmed Entertainment-Warner Bros............................................................ $ 33 $ 31
Broadcasting-The WB Network................................................................. 1 -
Cable Networks-HBO.......................................................................... - -
Cable....................................................................................... 94 76
----- -----
Total....................................................................................... $ 128 $ 107
===== =====
</TABLE>
(1) Amortization includes amortization relating to all business combinations
accounted for by the purchase method, including Time Warner's $14 billion
acquisition of WCI in 1989 and $1.3 billion acquisition of the minority
interest in ATC in 1992.
7. COMMITMENTS AND CONTINGENCIES
Pending legal proceedings are substantially limited to litigation
incidental to the businesses of TWE. In the opinion of management, the ultimate
resolution of these matters will not have a material effect on the consolidated
financial statements of TWE.
8. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash flows is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
Interest expense............................................................................ $141 $115
Cash payments made for interest............................................................. 156 146
Cash payments made for income taxes, net.................................................... 20 12
Noncash capital distributions............................................................... 225 89
</TABLE>
Noncash investing activities in the first quarter of 1998 included the
TWE-A/N Transfers (Note 2). During the three months ended March 31, 1998, TWE
received $148 million of proceeds under its film and television backlog
securitization program.
15
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On June 30, 1992, thirteen direct or indirect subsidiaries of Time
Warner Companies, Inc. ("TW Companies") contributed the assets and liabilities
or the rights to the cash flows of substantially all of TW Companies'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 at that time
based on the relative fair value of the net assets each contributed to TWE (the
"General Partner Guarantees"). In 1997, two of the original general partners,
Warner Cable Communications Inc. ("WCCI") and Time Warner Operations Inc.
("TWOI"), were merged into another original general partner, Warner
Communications Inc. (the "WCCI Merger" and the "TWOI Merger," respectively, and
collectively, the "1997 General Partner Mergers"). After the 1997 General
Partner Mergers, eleven of the thirteen original general partners have now been
merged or dissolved into the other two. Warner Communications Inc. ("WCI") and
American Television and Communications Corporation ("ATC" ) are the two
remaining general partners of TWE. They have succeeded to the general
partnership interests and have assumed the General Partner Guarantees of the
eleven former general partners.
In addition to the 1997 General Partner Mergers, WCI acquired two
wholly owned subsidiaries of Turner Broadcasting System, Inc. ("TBS") in 1997
that conduct certain of TBS's cable television programming operations in the
United Kingdom (the "TBS UK Merger"). The WCCI Merger had no effect on the
consolidated results of operations and financial condition of WCI because WCCI
was a consolidated subsidiary of WCI prior to the merger and, as such, WCCI's
net assets, operating results and cash flows were already included in the
consolidated financial statements of WCI. The TWOI Merger and the TBS UK Merger
have each been accounted for as a merger of entities under common control,
similar to the pooling-of-interest method of accounting for business
combinations. Accordingly, the 1997 consolidated financial statements of WCI
have been restated to reflect the TWOI Merger and the TBS UK Merger effective as
of January 1, 1997.
Set forth below is a discussion of the results of operations and
financial condition of WCI, the only General Partner with independent business
operations. WCI conducts substantially all of TW Companies'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 financial position and results of operations of
ATC are principally derived from its investment in TWE, TW Companies, TBS and
its revolving credit agreement with TW Companies. Capitalized terms are as
defined and described in the accompanying consolidated financial statements, or
elsewhere herein.
USE OF EBITA
WCI evaluates operating performance based on several factors, of which
the primary financial measure is operating income before noncash amortization of
intangible assets ("EBITA"). Consistent with management's financial focus on
controlling capital spending, EBITA measures operating performance after charges
for depreciation. The exclusion of noncash amortization charges is consistent
with management's belief that WCI's intangible assets, such as music catalogues,
contracts and copyrights and the goodwill associated with its brands, are
generally increasing in value and importance to WCI's business objective of
creating, extending and distributing recognizable brands and copyrights
throughout the world. As such, the following comparative discussion of the
results of operations of WCI includes, among other factors, an analysis of
changes in business segment EBITA.
16
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
However, EBITA should be considered in addition to, not as a substitute for,
operating income, net income and other measures of financial performance
reported in accordance with generally accepted accounting principles.
RESULTS OF OPERATIONS
WCI had revenues of $888 million and net income of $42 million for the
three months ended March 31, 1998, compared to revenues of $933 million and net
income of $135 million for the three months ended March 31, 1997. EBITA
decreased to $92 million from $114 million. Operating income decreased to $28
million from $50 million. Despite WCI having a domestic market share of 19.5%,
the decrease in revenues principally related to a decline in domestic and
international recorded music sales. EBITA and operating income decreased
principally as a result of the decline in revenues, offset in part by increased
licensing income from direct marketing activities.
WCI's equity in the pretax income of TWE was $73 million for the three
months ended March 31, 1998, compared to $197 million for the three months ended
March 31, 1997. TWE's pretax income decreased in 1998 as compared to 1997
principally due to the absence of an approximate $250 million pretax gain
recognized by TWE in 1997 in connection with the sale of TWE's interest in E!
Entertainment Television, Inc., offset in part by an overall increase in
operating income generated by its business segments and a decrease in minority
interest expense related to the TWE-Advance/Newhouse Partnership.
Interest and other, net was $1 million of expense in the first three
months of 1998, compared to $16 million of income for the first three months of
1997. Interest expense decreased to $4 million from $9 million. There was other
income, net, of $3 million in 1998, compared to $25 million in 1997, principally
because of lower gains on foreign exchange contracts and higher losses
associated with WCI's receivables securitization program.
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, 1998
WCI had $8.3 billion of equity at March 31, 1998, compared to $8.5
billion of equity at December 31, 1997. Cash and equivalents increased to $151
million at March 31, 1998, compared to $102 million at December 31, 1997. WCI
had no long-term debt due to TW Companies under its revolving credit agreement
at the end of either period.
ATC had $2 billion of equity at March 31, 1998, compared to $2.1
billion at December 31, 1997. Although ATC has no independent operations, it is
expected that additional tax-related and other distributions from TWE, as well
as availability under ATC's revolving credit agreement with TW Companies, will
continue to be sufficient to satisfy ATC's obligations with respect to its tax
sharing agreement with TW Companies for the foreseeable future.
CASH FLOWS
In the first three months of 1998, WCI's cash provided by operations
amounted to $164 million and reflected $92 million of EBITA, $19 million of
noncash depreciation expense and $102 million of distributions from TWE, less $1
million of interest payments, $46 million of income taxes ($35 million of which
was paid to TW Companies under a tax sharing agreement) and $2 million related
to a reduction in working capital requirements,
17
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED)
other balance sheet accounts and noncash items. Cash provided by WCI's
operations of $237 million in the first three months of 1997 reflected $114
million of EBITA, $22 million of noncash depreciation expense, $32 million of
distributions from TWE and $207 million related to a reduction in working
capital requirements, other balance sheet accounts and noncash items, less $7
million of interest payments and $131 million of income taxes ($91 million of
which was paid to TW Companies under a tax sharing agreement).
Cash provided by investing activities was $32 million in the first
three months of 1998, compared to cash used by investing activities of $13
million in 1997, principally as a result of a decrease in investment spending
and an increase in investment proceeds.
Cash used by financing activities was $147 million in the first three
months of 1998, compared to $202 million in the first three months of 1997,
principally as a result of lower advances to TW Companies, offset in part by
higher dividend payments of $71 million.
Management believes that WCI's operating cash flow and borrowing
availability under its revolving credit agreement with TW Companies 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 ATC 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 1998, the General Partners received an aggregate $172
million of distributions from TWE, consisting of $52 million of tax-related
distributions and $120 million of stock option related 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. Of such aggregate
distributions in the first three months of 1998 and 1997, WCI received $102
million and $32 million, respectively, and ATC received $70 million and $22
million, respectively.
18
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
WCI ATC
----------------------- ----------------------
MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31,
1998 1997 1998 1997
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents............................................ $ 151 $ 102 $ - $ -
Receivables, less allowances of $258 and $264 million........... 700 866 - -
Inventories..................................................... 137 140 - -
Prepaid expenses................................................ 678 651 - -
----- ------ ----- -------
Total current assets............................................ 1,666 1,759 - -
Investments in and amounts due to and from TWE.................. 2,394 2,423 1,835 1,861
Investments in TW Companies..................................... 103 103 62 62
Other investments............................................... 1,255 1,259 351 352
Music catalogues, contracts and copyrights...................... 902 928 - -
Goodwill........................................................ 3,520 3,554 - -
Other assets, primarily property, plant and equipment........... 412 464 - -
------ ------ ----- -----
Total assets.................................................... $10,252 $10,490 $2,248 $2,275
======= ======= ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts and royalties payable.................................. $ 966 $ 978 $ - $ -
Other current liabilities....................................... 375 464 1 1
------ ------ ----- ------
Total current liabilities....................................... 1,341 1,442 1 1
Long-term liabilities, including $313, $251, $229 and
$187 million due to TW Companies............................. 575 527 229 187
SHAREHOLDERS' EQUITY
Common stock.................................................... 1 1 1 1
Preferred stock of WCI, $.01 par value, 90,000 shares
outstanding, $90 million liquidation preference.............. - - - -
Paid-in capital................................................. 10,465 10,465 2,708 2,708
Retained earnings (accumulated deficit)......................... 339 450 (72) (4)
------ ------- ------- -------
10,805 10,916 2,637 2,705
Due from TW Companies, net...................................... (1,883) (1,809) (283) (282)
Reciprocal interest in TW Companies stock....................... (586) (586) (336) (336)
------ ------ ----- ------
Total shareholders' equity...................................... 8,336 8,521 2,018 2,087
------ ------- ------ ------
Total liabilities and shareholders' equity...................... $10,252 $10,490 $2,248 $2,275
======= ======= ====== ======
</TABLE>
See accompanying notes.
19
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
<TABLE>
<CAPTION>
WCI ATC
---------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
Revenues (a)....................................................... $888 $933 $ - $ -
---- ---- ----- -----
Cost of revenues (a)(b)............................................ 576 606 - -
Selling, general and administrative (a)(b)......................... 284 277 - -
---- ---- ----- -----
Operating expenses................................................. 860 883 - -
---- ---- ----- -----
Business segment operating income.................................. 28 50 - -
Equity in pretax income of TWE (a)................................. 73 197 50 135
Interest and other, net (a)........................................ (1) 16 5 3
----- ---- ----- -----
Income before income taxes......................................... 100 263 55 138
Income taxes (a)................................................... (58) (128) (27) (62)
----- ----- ----- -----
Net income......................................................... $ 42 $135 $ 28 $ 76
==== ==== ==== ====
</TABLE>
- ------------------
(a) Includes the following income (expenses) resulting from transactions with
Time Warner, TW Companies, TWE or equity investees of the General
Partners:
<TABLE>
<S> <C> <C> <C> <C>
Revenues........................................................... $48 $ 35 $ - $ -
Cost of revenues................................................... (9) (10) - -
Selling, general and administrative................................ 3 20 - -
Equity in pretax income of TWE..................................... (9) (6) - -
Interest and other, net............................................ 8 25 - -
Income taxes....................................................... (35) (91) (21) (57)
(b) Includes depreciation and amortization expense of:.......... $83 $ 86 $ - $ -
=== ==== ==== =====
</TABLE>
See accompanying notes.
20
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
<TABLE>
<CAPTION>
WCI ATC
---------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
OPERATIONS
Net income......................................................... $ 42 $135 $ 28 $ 76
Adjustments for noncash and nonoperating items:
Depreciation and amortization...................................... 83 86 - -
Excess (deficiency) of distributions over equity in
pretax income of TWE.......................................... 29 (165) 20 (113)
Equity in loss of other investee companies, net of distributions... 8 22 2 2
Changes in operating assets and liabilities........................ 2 159 - -
---- ---- ----- -----
Cash provided (used) by operations................................. 164 237 50 (35)
---- ---- ---- ----
INVESTING ACTIVITIES
Investments and acquisitions....................................... (11) (30) - -
Capital expenditures............................................... (20) (24) - -
Investment proceeds................................................ 63 41 - -
---- ---- ----- -----
Cash provided (used) by investing activities....................... 32 (13) - -
---- ----- ----- -----
FINANCING ACTIVITIES
Dividends.......................................................... (73) (2) (49) (2)
Decrease (increase) in amounts due from TW Companies, net.......... (74) (200) (1) 37
---- ----- ----- ----
Cash provided (used) by financing activities....................... (147) (202) (50) 35
---- ----- ----- ----
INCREASE IN CASH AND EQUIVALENTS................................... 49 22 - -
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD........................ 102 91 - -
---- ---- ----- -----
CASH AND EQUIVALENTS AT END OF PERIOD.............................. $151 $113 $ - $ -
==== ==== ===== =====
</TABLE>
See accompanying notes.
21
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
<TABLE>
<CAPTION>
WCI ATC
---------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
(MILLIONS)
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR....................................... $8,521 $9,541 $2,087 $2,331
Net income ........................................................ 42 135 28 76
Other comprehensive income (loss).................................. (18) (21) (4) (5)
------ ----- ------ -----
Comprehensive income .............................................. 24 114 24 71
Increase in stock option distribution liability to
TW Companies (a)................................................ (133) (53) (92) (36)
Dividends.......................................................... (2) - - -
Transfers to TW Companies, net..................................... (74) (200) (1) 37
----- ----- ----- -----
BALANCE AT MARCH 31,............................................... $8,336 $9,402 $2,018 $2,403
====== ====== ====== ======
</TABLE>
- ------------------
(a)The General Partners record distributions to TW Companies and a corresponding
receivable from TWE as a result of the stock option related distribution
provisions of the TWE partnership agreement. Stock option distributions of
$133 million and $53 million for WCI and $92 million and $36 million for ATC
were accrued in the first three months of 1998 and 1997, respectively,
because of an increase in the market price of Time Warner common stock (Note
3).
See accompanying notes.
22
<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 Companies, Inc. ("TW Companies") contributed the assets and liabilities
or the rights to the cash flows of substantially all of TW Companies'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 at that time
based on the relative fair value of the net assets each contributed to TWE (the
"General Partner Guarantees," see Note 4). In 1997, two of the original general
partners, Warner Cable Communications Inc. ("WCCI") and Time Warner Operations
Inc. ("TWOI"), were merged into another original general partner, Warner
Communications Inc. (the "WCCI Merger" and the "TWOI Merger," respectively, and
collectively, the "1997 General Partner Mergers"). After the 1997 General
Partner Mergers, eleven of the thirteen original general partners have now been
merged or dissolved into the other two. Warner Communications Inc. ("WCI") and
American Television and Communications Corporation ("ATC") are the two remaining
general partners of TWE. They have succeeded to the general partnership
interests and have assumed the General Partner Guarantees of the eleven former
general partners. WCI, ATC and, where appropriate, the former general partners
are referred to herein as the "General Partners."
In addition to the 1997 General Partner Mergers, WCI acquired two
wholly owned subsidiaries of Turner Broadcasting Systems, Inc. ("TBS"), a wholly
owned subsidiary of Time Warner Inc. ("Time Warner"), in 1997 that conduct
certain of TBS's cable television programming operations in the United Kingdom
(the "TBS UK Merger," see Note 2). The WCCI Merger had no effect on the
consolidated financial statements of WCI because WCCI was a consolidated
subsidiary of WCI prior to the merger and, as such, WCCI's net assets, operating
results and cash flows were already included in the consolidated financial
statements of WCI. The TWOI Merger and the TBS UK Merger have each been
accounted for as a merger of entities under common control, similar to the
pooling-of-interest method of accounting for business combinations. Accordingly,
the 1997 consolidated financial statements of WCI have been restated to reflect
the TWOI Merger and the TBS UK Merger effective as of January 1, 1997.
WCI conducts substantially all of TW Companies'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. ATC does not conduct operations independent of their
ownership interests in TWE and certain other investments.
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 the General Partners for
the year ended December 31, 1997. Certain reclassifications have been made to
the prior year's financial statements to conform to the 1998 presentation.
23
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
2. TBS UK MERGER
In June 1997, WCI acquired TBS's interests in Turner Broadcasting
System Europe Limited ("TBSEL") and Turner Entertainment Networks International
Limited ("TENIL"), wholly owned subsidiaries of TBS, which conduct certain of
TBS's cable television programming operations in the United Kingdom. To acquire
TBSEL and TENIL, WCI issued 90,000 shares of a new series of preferred stock.
Each share of preferred stock is entitled to a liquidation preference of $1,000
per share and entitles the holder thereof to receive an $80 annual dividend per
share, payable in cash on a quarterly basis. The TBS UK Merger was accounted for
as a merger of entities under common control effective as of January 1, 1997,
similar to the pooling-of-interest method of accounting for business
combinations. The operating results of the companies acquired are not material
to WCI's results of operations.
3. TWE
The General Partners' investment in and amounts due to and from TWE at
March 31, 1998 and December 31, 1997 consists of the following:
<TABLE>
<CAPTION>
MARCH 31, 1998 WCI ATC
- -------------- --- ---
(MILLIONS)
<S> <C> <C>
Investment in TWE........................................................................... $2,318 $1,622
Stock option related distributions due from TWE............................................. 309 213
Other net liabilities due to TWE, principally related to home video distribution............ (233) -
----- ------
Total....................................................................................... $2,394 $1,835
====== ======
DECEMBER 31, 1997 WCI ATC
- ----------------- --- ---
(MILLIONS)
Investment in TWE........................................................................... $2,418 $1,691
Stock option related distributions due from TWE............................................. 247 170
Other net liabilities due to TWE, principally related to home video distribution............ (242) -
----- -------
Total....................................................................................... $2,423 $1,861
====== ======
</TABLE>
PARTNERSHIP STRUCTURE AND ALLOCATION OF INCOME
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. TW Companies 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.
24
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
SUMMARIZED FINANCIAL INFORMATION OF TWE
Set forth below is summarized financial information of TWE, which
reflects the TWE-A/N Transfers (as defined hereinafter) effective as of January
1, 1998.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
OPERATING STATEMENT INFORMATION
Revenues.................................................................................... $2,910 $2,600
Depreciation and amortization............................................................... (371) (324)
Business segment operating income........................................................... 369 329
Interest and other, net (1)................................................................. (164) 129
Minority interest........................................................................... (64) (108)
Income before income taxes.................................................................. 123 332
Net income.................................................................................. 108 320
</TABLE>
- ------------------
(1) Includes a pretax gain of approximately $250 million recognized in the
first three months of 1997 related to the sale of an interest in E!
Entertainment Television, Inc.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------
1998 1997
---- ----
(MILLIONS)
<S> <C> <C>
CASH FLOW INFORMATION
Cash provided (used) by operations.......................................................... $ 441 $ (48)
Capital expenditures........................................................................ (352) (331)
Investments and acquisitions................................................................ (230) (31)
Investment proceeds......................................................................... 23 367
Borrowings.................................................................................. 489 282
Debt repayments............................................................................. (376) (318)
Issuance of preferred stock of subsidiary................................................... - 243
Capital distributions....................................................................... (172) (54)
Other financing activities, net............................................................. (38) (14)
Increase (decrease) in cash and equivalents................................................. (215) 96
MARCH 31, DECEMBER 31,
1998 1997
---- ----
(MILLIONS)
BALANCE SHEET INFORMATION
Cash and equivalents........................................................................ $ 107 $ 322
Total current assets........................................................................ 3,338 3,622
Total assets................................................................................ 22,012 20,731
Total current liabilities................................................................... 3,761 3,974
Long-term debt ............................................................................. 7,108 5,990
Minority interests.......................................................................... 1,465 1,210
Preferred stock of subsidiary............................................................... 229 233
General Partners' Senior Capital............................................................ 1,140 1,118
Partners' capital........................................................................... 6,128 6,333
</TABLE>
25
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
CAPITAL DISTRIBUTIONS
The assets and cash flows of TWE are restricted by the TWE partnership
and credit agreements and are unavailable for use by the partners except through
the payment of certain fees, reimbursements, cash distributions and loans, which
are subject to limitations. At March 31, 1998 and December 31, 1997, the General
Partners had recorded $522 million and $417 million, respectively, of stock
option related distributions due from TWE, based on closing prices of Time
Warner common stock of $72.00 and $62.00, respectively. The General Partners are
paid when the options are exercised. The General Partners also receive
tax-related distributions from TWE on a current basis. During the three months
ended March 31, 1998, the General Partners received distributions from TWE in
the amount of $172 million, consisting of $52 million of tax-related
distributions and $120 million of stock option related distributions. During the
three months ended March 31, 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. Of such
aggregate distributions in 1998 and 1997, WCI received $102 million and $32
million, respectively and ATC received $70 million and $22 million,
respectively.
TWE-A/N TRANSFERS
In early 1998, TW Companies (through a wholly owned subsidiary)
contributed cable television systems (or interests therein) serving
approximately 650,000 subscribers to the TWE-Advance/Newhouse Partnership ("TWE-
A/N"), subject to approximately $1 billion of debt, in exchange for common and
preferred partnership interests therein, and completed certain related
transactions (collectively, the "TWE-A/N Transfers"). The cable television
systems transferred to TWE-A/N were formerly owned by TWI Cable Inc. ("TWI
Cable"), a wholly owned subsidiary of TW Companies, and Paragon Communications
("Paragon"), a partnership formerly owning cable television systems serving
approximately 1 million subscribers that was wholly owned by subsidiaries of TW
Companies, with 50% beneficially owned in the aggregate by TWE and TWE-A/N. The
debt assumed by TWE-A/N has not been guaranteed by the General Partners, but has
been guaranteed by TWI Cable and certain of its subsidiaries.
In connection with the TWE-A/N Transfers, the Advance/Newhouse
Partnership ("Advance/Newhouse"), a limited partner in TWE-A/N, made a capital
contribution to TWE-A/N in order to maintain its 33.3% common partnership
interest therein. Accordingly, TWE-A/N is now owned 65.3% by TWE, 33.3% by
Advance/Newhouse and 1.4% indirectly by TW Companies. The TWE-A/N Transfers were
accounted for effective as of January 1, 1998. For a more comprehensive
description of the TWE-A/N Transfers, see Note 2 to the accompanying TWE
consolidated financial statements.
PRIMESTAR
In April 1998, TWE and Advance/Newhouse transferred the direct
broadcast satellite operations conducted by TWE and TWE-A/N (the "DBS
Operations") and the 31% partnership interest in Primestar Partners, L.P. held
by TWE-A/N ("Primestar" and collectively, the "Primestar Assets") to Primestar,
Inc. ("New Primestar"), a new holding company that is ultimately expected to be
the publicly traded parent of TCI Satellite Entertainment, Inc. ("TSAT"). New
Primestar owns the DBS Operations and Primestar partnership interests formerly
owned by TSAT and other previously existing partners of Primestar. In exchange
for contributing its interests in the Primestar Assets, TWE received an
approximate 24% equity interest in New Primestar and realized approximately $240
million of debt
26
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
reduction. In partial consideration for contributing its indirect interest in
certain of the Primestar Assets, Advance/Newhouse received an approximate 6%
equity interest in New Primestar.
In a related transaction, Primestar also entered into an agreement in
June 1997 with The News Corporation Limited, MCI Telecommunications Corporation
and American Sky Broadcasting LLC ("ASkyB"), pursuant to which New Primestar
would acquire certain assets relating to the high-power, direct broadcast
satellite business of ASkyB (the "Primestar ASkyB Transaction"). In exchange for
such assets, ASkyB would receive non-voting securities of New Primestar that
would be convertible into non-voting common stock of New Primestar and,
accordingly, would reduce TWE's equity interest in New Primestar to
approximately 16% on a fully diluted basis. The Primestar ASkyB Transaction is
expected to close in 1998, subject to customary closing conditions, including
all necessary governmental and regulatory approvals, including the approval of
the FCC which is currently conducting an extensive review of the transaction.
There can be no assurance that such approvals will be obtained.
SIX FLAGS
In April 1998, TWE sold its remaining 49% interest in Six Flags
Entertainment Corporation ("Six Flags") to Premier Parks Inc. ("Premier"), a
regional theme park operator, for approximately $475 million of cash. TWE used
the net, after-tax proceeds from this transaction to reduce debt by
approximately $300 million. As part of the transaction, TWE will continue to
license its animated cartoon and comic book characters to Six Flags's theme
parks and will similarly license such rights to Premier's theme parks in the
United States and Canada under a long-term agreement covering an aggregate of
twenty-five existing and all future locations. A substantial portion of the gain
on this transaction has been deferred by TWE principally as a result of its
continuing guarantees of certain significant long-term obligations of Six Flags
relating to the Six Flags Over Texas and Six Flags Over Georgia theme parks.
4. GENERAL PARTNER GUARANTEES
Each General Partner has guaranteed a pro rata portion of approximately
$6 billion of TWE's debt and accrued interest at March 31, 1998, based on the
relative fair value of the net assets each General Partner (or its predecessor)
contributed to TWE. Such indebtedness is recourse to each General Partner only
to the extent of its guarantee. There are no restrictions on the ability of the
General Partner guarantors to transfer assets, other than TWE assets, to parties
that are not guarantors.
The portion of TWE debt and accrued interest at March 31, 1998 that was
guaranteed by each General Partner is set forth below:
<TABLE>
<CAPTION>
TOTAL GUARANTEED BY
EACH GENERAL PARTNER
--------------------
GENERAL PARTNER % AMOUNT
--------------- - ------
(DOLLARS IN MILLIONS)
<S> <C> <C>
WCI....................................................................................... 59.27 $3,548
ATC....................................................................................... 40.73 2,438
------ ------
Total..................................................................................... 100.00 $5,986
====== ======
</TABLE>
27
<PAGE>
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(UNAUDITED)
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------
1998 1997
-------------------- -----------------
WCI ATC WCI ATC
--- --- --- ---
(MILLIONS)
<S> <C> <C> <C> <C>
Cash payments made for interest.......................................... $ 1 $ - $ 7 $ -
Cash payments made for income taxes, net................................. 46 21 131 57
Tax-related distributions received from TWE.............................. 31 21 30 20
Noncash capital distributions, net....................................... (133) (92) (53) (36)
</TABLE>
28
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On May 12, 1998, the U.S. Department of Justice brought a civil action
in the United States District Court for the District of Columbia against
Primestar, Inc. ("Primestar"), each of its cable company owners, including TWE,
and The News Corporation Ltd. and MCI Telecommunications Corporation, to enjoin
on antitrust grounds Primestar's proposed acquisition of certain assets
relating to the high-power, direct broadcast satellite business of American
Sky Broadcasting LLC. For further information with respect to such proposed
acquisition, see Note 2 "Acquisitions and Dispositions," to TWE's consolidated
financial statements.
On April 22, 1998, the purported class actions entitled (i) Chandu Dani
d/b/a Compact Disc Warehouse and Record Revolution v. EMI Music Distribution,
Sony Music Entertainment, Inc., Warner Elektra Atlantic Corporation, Universal
Music and Video Distribution, Bertelsmann Music Group, Inc. and PolyGram Group
Distribution, Inc., No. 97-7226, (ii) Third Street Jazz and Rock Holding
Corporation v. EMI Music Distribution, Sony Music Entertainment, Inc., Warner
Elektra Atlantic Corporation, Universal Music and Video Distribution,
Bertelsmann Music Group, Inc. and PolyGram Group Distribution, Inc.,
No. 97-8864, and (iii) Nathan Muchnick, Inc. v. Sony Music Entertainment, Inc.,
PolyGram Group Distribution, Inc., Bertelsmann Music Group, Inc., Universal
Music and Video Distribution, Warner Elektra Atlantic Corporation and EMI Music
Distribution, No. 98 Civ. 0612, as described on page I-29 of TWE's Annual
Report on Form 10-K for the year ended December 31, 1997, were consolidated by
the Judicial Panel on Multidistrict Litigation before the United States
District Court for the Central District of California for coordinated and
consolidated pretrial proceedings.
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, 1998.
29
<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: Executive Vice President and
Chief Financial Officer
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
WARNER COMMUNICATIONS INC.
By: /s/ RICHARD J. BRESSLER
------------------------------------------
Name: Richard J. Bressler
Title: Executive Vice President and
Chief Financial Officer
Dated: May 14, 1998
<PAGE>
<PAGE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulations S-K
Exhibit No. Description of Exhibit
- ----------- ----------------------
27 Financial Data Schedule.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000893657
<NAME> TIME WARNER ENTERTAINMENT COMPANY, L.P.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 107
<SECURITIES> 0
<RECEIVABLES> 2,250
<ALLOWANCES> 410
<INVENTORY> 3,511
<CURRENT-ASSETS> 3,338
<PP&E> 10,987
<DEPRECIATION> 4,274
<TOTAL-ASSETS> 22,012
<CURRENT-LIABILITIES> 3,761
<BONDS> 7,108
<COMMON> 0
1,140
0
<OTHER-SE> 6,128
<TOTAL-LIABILITY-AND-EQUITY> 22,012
<SALES> 2,910
<TOTAL-REVENUES> 2,910
<CGS> 1,946
<TOTAL-COSTS> 1,946
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 141
<INCOME-PRETAX> 123
<INCOME-TAX> 15
<INCOME-CONTINUING> 108
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
