SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the quarterly period ended September 30, 1999, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the transition period from ___________to ___________.
Commission file number 001-12878
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
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 / /
1
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TIME WARNER ENTERTAINMENT COMPANY L.P.
AND TWE GENERAL PARTNERS
INDEX TO FORM 10-Q
<TABLE>
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 22
Consolidated balance sheets at September 30, 1999 and December 31, 1998......... 12 29
Consolidated statements of operations for the three months and nine months ended
September 30, 1999 and 1998................................................... 13 30
Consolidated statements of cash flows for the nine months ended September 30, 1999
and 1998 ...................................................................... 14 32
Consolidated statements of partnership capital and shareholders' equity for the
nine months ended September 30, 1999 and 1998................................. 15 33
Notes to consolidated financial statements...................................... 16 34
PART II. OTHER INFORMATION...................................................... 40
</TABLE>
2
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Description of Business
Time Warner Entertainment Company, L.P. ("TWE" or the "Company")
classifies its business interests into three fundamental areas: Cable Networks,
consisting principally of interests in cable television programming; Filmed
Entertainment, consisting principally of interests in filmed entertainment,
television production and television broadcasting; and Cable, consisting
principally of interests in cable television systems. TWE also manages the cable
properties owned by Time Warner and the combined cable television operations are
conducted under the name of Time Warner Cable.
Use of EBITA
TWE evaluates operating performance based on several factors, including
its primary financial measure of operating income before noncash amortization of
intangible assets ("EBITA"). Consistent with management's financial focus on
controlling capital spending, EBITA measures operating performance after charges
for depreciation. In addition, EBITA eliminates the uneven effect across all
business segments of considerable amounts of noncash amortization of intangible
assets recognized in business combinations accounted for by the purchase method.
These business combinations, including Time Warner's $14 billion acquisition of
Warner Communications Inc. in 1989 and $1.3 billion acquisition of the minority
interest in American Television and Communications Corporation in 1992, created
over $10 billion of intangible assets that generally are being amortized over a
twenty to forty year period. The exclusion of noncash amortization charges is
also consistent with management's belief that TWE's intangible assets, such as
cable television franchises, film and television libraries and the goodwill
associated with its brands, generally are increasing in value and importance to
TWE's business objective of creating, extending and distributing recognizable
brands and copyrights throughout the world. As such, the following comparative
discussion of the results of operations of TWE includes, among other factors, an
analysis of changes in business segment EBITA. However, EBITA should be
considered in addition to, not as a substitute for, operating income, net income
and other measures of financial performance reported in accordance with
generally accepted accounting principles.
AT&T-MediaOne Merger
At the time of this filing, MediaOne Group, Inc. ("MediaOne"), a limited
partner in TWE, had agreed to be acquired by AT&T Corp. ("AT&T"). In August
1999, TWE received a notice from MediaOne concerning the termination of its
covenant not to compete with TWE. The termination of that covenant is necessary
for MediaOne to complete its proposed merger with AT&T. As a result of the
termination notice and the operation of the TWE partnership agreement,
MediaOne's rights to participate in the management of TWE's businesses
terminated immediately and irrevocably. MediaOne retains only certain protective
governance rights pertaining to certain limited matters affecting TWE as a
whole.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
The proposed merger of MediaOne and AT&T is subject to customary
closing conditions, including regulatory approvals. Accordingly, there is no
assurance that it will occur. Also, there are no assurances that AT&T and Time
Warner will reach final agreement on the terms of a cable telephony joint
venture, either on the terms discussed on page F-8 of TWE's Annual Report on
Form 10-K for the year ended December 31, 1998, or any alternative terms.
Transactions Affecting Comparability of Results of Operations
As more fully described herein, the comparability of TWE's operating
results has been affected by certain significant transactions and nonrecurring
items in each period.
In 1999, these nonrecurring items consisted of (i) an approximate $215
million net pretax gain recognized in the first quarter of 1999 in connection
with the early termination and settlement of a long-term home video distribution
agreement and (ii) net pretax gains in the amount of $1.118 billion recognized
in the first nine months of 1999 relating to the sale or exchange of various
cable television systems and investments. This compares to net pretax gains
recognized in the first nine months of 1998 of $90 million relating to the sale
or exchange of cable television systems.
In order to meaningfully assess underlying operating trends, management
believes that the results of operations for each period should be analyzed after
excluding the effects of these significant nonrecurring gains. As such, the
following discussion and analysis focuses on amounts and trends adjusted to
exclude the impact of these unusual items. However, unusual items may occur in
any period. Accordingly, investors and other financial statement users
individually should consider the types of events and transactions for which
adjustments have been made.
In addition, the comparability of TWE's Cable division results has been
affected further by certain 1998 cable-related transactions, as described more
fully in Note 8 to the accompanying consolidated financial statements. While
these transactions had a significant effect on the comparability of the Cable
division's EBITA and operating income principally due to the deconsolidation of
the related operations, they did not have a significant effect on the
comparability of TWE's net income.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
RESULTS OF OPERATIONS
EBITA and operating income are as follows:
<TABLE>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
Operating Operating
EBITA Income EBITA Income
----- ------ ----- ------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros.(1)........ $180 $161 $150 $128 $ 658 $ 401 $ 567 $ 302
Broadcasting-The WB Network................. (24) (17) (25) (17) (95) (78) (98) (80)
Cable Networks-HBO.......................... 138 117 138 117 394 339 394 339
Cable(2).................................... 699 336 600 240 2,135 1,017 1,863 731
--- --- --- --- ----- ----- ----- ---
Total....................................... $993 $597 $863 $468 $3,092 $1,679 $2,726 $1,292
==== ==== ==== ==== ====== ====== ====== ======
- ------------
(1) Includes a net pretax gain of approximately $215 million recognized in the
first quarter of 1999 in connection with the early termination and
settlement of a long-term home video distribution agreement.
(2) Includes net pretax gains relating to the sale or exchange of certain cable
television systems and investments of $358 million in the third quarter of
1999 and $6 million in the third quarter of 1998. Similarly, nine-month
results include net pretax gains of $1.118 billion in 1999 and $90 million
in 1998.
</TABLE>
Three Months Ended September 30, 1999 Compared to the Three Months Ended
September 30, 1998
Consolidated Results
TWE had revenues of $3.474 billion and net income of $561 million for
the three months ended September 30, 1999, compared to revenues of $3.220
billion and net income of $172 million for the three months ended September 30,
1998.
As previously described, the comparability of TWE's operating results
for 1999 and 1998 has been affected by certain significant, nonrecurring items
recognized in each period. These nonrecurring items consisted of approximately
$358 million of net pretax gains in 1999, compared to $6 million of net pretax
gains in 1998.
TWE's net income increased to $561 million in 1999, compared to $172
million in 1998. However, excluding the effect of the nonrecurring items
referred to earlier, net income increased by $54 million to $220 million in 1999
from $166 million in 1998. As discussed more fully below, this improvement
principally resulted from an overall increase in TWE's business segment
operating income.
5
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $39 million and $23 million for
the three months ended September 30, 1999 and 1998, respectively, have been
provided for the operations of TWE's domestic and foreign subsidiary
corporations.
Business Segment Results
Filmed Entertainment-Warner Bros. Revenues increased to $1.862 billion
in 1999, compared to $1.727 billion in 1998. EBITA increased to $180 million in
1999 from $161 million in 1998. Operating income increased to $150 million in
1999 from $128 million in 1998. Revenues benefited from increases in worldwide
theatrical, home video and television syndication operations, offset in part by
lower revenues from consumer products operations. The increase in worldwide home
video revenues primarily resulted from increased sales of DVDs. EBITA and
operating income increased principally as a result of improved results from
worldwide theatrical, home video and television syndication operations, offset
in part by lower results from consumer products operations.
In connection with declines in the operations of certain of Warner
Bros.'s retail stores, management is in the process of evaluating several
strategic alternatives for its retail operations. These alternatives include the
gradual reduction and updating of Warner Bros.'s store portfolio, including the
transformation of some of the traditional retail outlets to smaller, more
efficient stores and an increasing emphasis on e-commerce opportunities. To the
extent management takes action under some of these alternatives, a non-cash
charge, principally relating to the acceleration of future depreciation expense,
may be required. Management's evaluation is expected to continue through the
1999 holiday shopping season.
Broadcasting-The WB Network. Revenues were $84 million in 1999,
compared to $64 million in 1998. EBITA decreased to a loss of $24 million in
1999 from a loss of $17 million in 1998. Operating losses increased to $25
million in 1999 from $17 million in 1998. Revenues increased principally as a
result of one additional night of weekly prime-time programming in comparison to
the prior year and advertising rate increases, offset in part by lower
television ratings for the summer repeat programming lineup. Operating losses
increased principally because the revenue gains were more than offset by the
combination of higher programming costs associated with the expanded programming
schedule and higher start-up costs associated with The WB Network 100+ station
group, a distribution alliance for The WB Network in smaller markets.
Cable Networks-HBO. Revenues increased to $540 million in 1999, compared
to $505 million in 1998. EBITA and operating income increased to $138 million in
1999 from $117 million in 1998. Revenues benefited primarily from an increase in
pay-television subscriptions. EBITA and operating income increased principally
due to the revenue gains and increased cost savings.
Cable. Revenues increased to $1.124 billion in 1999, compared to $1.052
billion in 1998. EBITA increased to $699 million in 1999 from $336 million in
1998. Operating income increased to $600 million in 1999 from $240 million in
1998. These operating results were affected by certain cable-related
transactions that occurred in 1998 (the "1998 Cable Transactions") and by net
pretax gains of $358 million recognized in 1999 and $6 million in 1998 related
to the sale or exchange of various cable television systems and investments. The
1998 Cable Transactions principally resulted in the deconsolidation or transfer
of certain operations and are described more fully in Note 8 to the accompanying
consolidated financial statements. Excluding the effect of the 1998 Cable
Transactions, revenues increased due to growth in basic cable subscribers,
increases in basic cable rates, increases in advertising and pay-per-view
revenues and an increase in revenues from providing Road Runner-branded,
high-speed online services. Similarly, excluding the effect of the 1998 Cable
Transactions and the one-time gains, EBITA and operating income increased
principally as a result of the revenue increases, offset in part by higher
programming costs.
6
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Interest and Other, Net. Interest and other, net, decreased to $185
million of expense in 1999, compared to $203 million of expense in 1998.
Interest expense decreased to $138 million in 1999, compared to $145 million in
1998, principally due to interest savings associated with the Company's 1998
debt reduction efforts. Other expense, net, decreased to $47 million in 1999,
compared to $58 million in 1998. The decrease principally related to lower
dividend requirements on preferred stock of a subsidiary that was redeemed in
March 1999.
Minority Interest. Minority interest expense increased to $60 million in
1999, compared to $52 million in 1998. Minority interest expense increased
primarily due to the allocation of a portion of the net pretax gains relating to
the sale or exchange of various cable television systems and investments owned
by the TWE-Advance/Newhouse Partnership ("TWE-A/N"), a majority-owned
partnership of TWE, to the minority owners of that partnership. Excluding the
significant effect of the gains recognized in 1999, minority interest expense
decreased slightly in 1999 principally due to a higher allocation of losses to a
minority partner in The WB Network.
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998
Consolidated Results
TWE had revenues of $9.468 billion and net income of $1.640 billion for
the nine months ended September 30, 1999, compared to revenues of $8.980 billion
and net income of $435 million for the nine months ended September 30, 1998.
As previously described, the comparability of TWE's operating results
for 1999 and 1998 has been affected by certain significant, nonrecurring items
recognized in each period. These nonrecurring items consisted of approximately
$1.333 billion of net pretax gains in 1999, compared to $90 million of net
pretax gains in 1998.
TWE's net income increased to $1.640 billion in 1999, compared to $435
million in 1998. However, excluding the significant effect of the nonrecurring
items referred to earlier, net income increased by $117 million to $482 million
in 1999 from $365 million in 1998. As more fully discussed below, this
improvement principally resulted from an overall increase in TWE's business
segment operating income, offset in part by higher equity losses from certain
investments accounted for under the equity method of accounting.
As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $94 million and $55 million for
the nine months ended September 30, 1999 and 1998, respectively, have been
provided for the operations of TWE's domestic and foreign subsidiary
corporations.
Business Segment Results
Filmed Entertainment-Warner Bros. Revenues increased to $4.688 billion
in 1999, compared to $4.364 billion in 1998. EBITA increased to $658 million in
1999 from $401 million in 1998. Operating income increased to $567 million in
1999 from $302 million in 1998. Revenues benefited from increases in worldwide
theatrical, home video and television distribution operations, offset in part by
lower revenues from consumer products operations. The increase in worldwide home
video revenues primarily resulted from increased sales of DVDs. EBITA and
operating income increased primarily from the inclusion of an approximate $215
million net pretax gain recognized in the first quarter of 1999 in connection
with the early termination and settlement of a long-term home video distribution
agreement. Excluding the gain, EBITA and operating income increased principally
as a result of improved results from worldwide theatrical, home video and
television distribution operations, offset in part by lower results from
consumer products operations.
7
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
In connection with declines in the operations of certain of Warner
Bros.'s retail stores, management is in the process of evaluating several
strategic alternatives for its retail operations. These alternatives include the
gradual reduction and updating of Warner Bros.'s store portfolio, including the
transformation of some of the traditional retail outlets to smaller, more
efficient stores and an increasing emphasis on e-commerce opportunities. To the
extent management takes action under some of these alternatives, a non-cash
charge, principally relating to the acceleration of future depreciation expense,
may be required. Management's evaluation is expected to continue through the
1999 holiday shopping season.
Broadcasting-The WB Network. Revenues were $246 million in 1999,
compared to $170 million in 1998. EBITA decreased to a loss of $95 million in
1999 from a loss of $78 million in 1998. Operating losses increased to $98
million in 1999 from $80 million in 1998. Revenues increased principally as a
result of one additional night of weekly prime-time programming in comparison to
the prior year, improved television ratings and advertising rate increases.
Operating losses increased principally because the revenue gains were more than
offset by the combination of higher programming costs associated with the
expanded programming schedule and higher start-up costs associated with The WB
Network 100+ station group, a distribution alliance for The WB Network in
smaller markets.
Cable Networks-HBO. Revenues increased to $1.612 billion in 1999,
compared to $1.526 billion in 1998. EBITA and operating income increased to $394
million in 1999 from $339 million in 1998. Revenues benefited primarily from an
increase in pay-television subscriptions. EBITA and operating income increased
principally due to the revenue gains, increased cost savings, and higher income
from Comedy Central, a 50%-owned equity investee.
Cable. Revenues increased to $3.312 billion in 1999, compared to $3.289
billion in 1998. EBITA increased to $2.135 billion in 1999 from $1.017 billion
in 1998. Operating income increased to $1.863 billion in 1999 from $731 million
in 1998. These operating results were affected by the 1998 Cable Transactions
and by net pretax gains of $1.118 billion recognized in 1999 and $90 million in
1998 related to the sale or exchange of various cable television systems and
investments. The 1998 Cable Transactions principally resulted in the
deconsolidation or transfer of certain operations and are described more fully
in Note 8 to the accompanying consolidated financial statements. Excluding the
effect of the 1998 Cable Transactions, revenues increased due to growth in basic
cable subscribers, increases in basic cable rates, increases in advertising and
pay-per-view revenues and an increase in revenues from providing Road
Runner-branded, high-speed online services. Similarly, excluding the effect of
the 1998 Cable Transactions and the one-time gains, EBITA and operating income
increased principally as a result of the revenue increases, offset in part by
higher programming costs.
Interest and Other, Net. Interest and other, net, increased to $577
million of expense in 1999, compared to $550 million of expense in 1998.
Interest expense decreased to $411 million in 1999, compared to $418 million in
1998, principally due to interest savings associated with the Company's 1998
debt reduction efforts. Other expense, net, increased to $166 million in 1999,
compared to $132 million in 1998. This increase principally related to higher
losses from certain investments accounted for under the equity method of
accounting, offset in part by lower dividend requirements on preferred stock of
a subsidiary that was redeemed in March 1999.
8
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Minority Interest. Minority interest expense increased to $361 million
in 1999, compared to $198 million in 1998. Minority interest expense increased
primarily due to the allocation of a portion of the net pretax gains relating to
the sale or exchange of various cable television systems and investments owned
by TWE-A/N to the minority owners of that partnership. Excluding the significant
effect of the gains recognized in each period, minority interest expense
decreased slightly in 1999 principally due to a higher allocation of losses to a
minority partner in The WB Network.
FINANCIAL CONDITION AND LIQUIDITY
September 30, 1999
Financial Condition
At September 30, 1999, TWE had $6.7 billion of debt, $235 million of
cash and equivalents (net debt of $6.5 billion) and $6.3 billion of partners'
capital. This compares to $6.6 billion of debt, $87 million of cash and
equivalents (net debt of $6.5 billion), $217 million of preferred stock of a
subsidiary, $603 million of Time Warner General Partners' senior priority
capital and $5.1 billion of partners' capital at December 31, 1998.
Senior Capital Distributions
In July 1999, TWE paid a $627 million distribution to the Time Warner
General Partners to redeem the remaining portion of their senior priority
capital interests, including a priority capital return of $173 million. Time
Warner used a portion of the proceeds received from this distribution to repay
all $400 million of outstanding borrowings under its credit agreement with TWE.
Redemption of REIT Preferred Stock
In March 1999, a subsidiary of TWE (the "REIT") redeemed all of its
shares of preferred stock ("REIT Preferred Stock") at an aggregate cost of $217
million, which approximated net book value. The redemption was funded with
borrowings under TWE's bank credit agreement. Pursuant to its terms, the REIT
Preferred Stock was redeemed as a result of proposed changes to federal tax
regulations that substantially increased the likelihood that dividends paid by
the REIT or interest paid to the REIT under a mortgage note of TWE would not be
fully deductible for federal income tax purposes.
Cash Flows
During the first nine months of 1999, TWE's cash provided by operations
amounted to $2.205 billion and reflected $3.092 billion of EBITA from its Filmed
Entertainment-Warner Bros., Broadcasting-The WB Network, Cable Networks-HBO and
Cable businesses, $632 million of noncash depreciation expense and $20 million
of proceeds from TWE's asset securitization program, less $394 million of
interest payments, $84 million of income taxes, $54 million of corporate
expenses, and $1.007 billion related to an aggregate increase in working capital
requirements, other balance sheet accounts and noncash items. Cash provided by
operations of $1.273 billion in the first nine months of 1998 reflected $1.679
billion of EBITA from its Filmed Entertainment-Warner Bros., Broadcasting-The WB
Network, Cable Networks-HBO and Cable businesses, $698 million of noncash
depreciation expense and $131 million of proceeds from TWE's asset
securitization program, less $419 million of interest payments, $57 million of
income taxes, $54 million of corporate expenses and $705 million related to an
aggregate increase in working capital requirements, other balance sheet accounts
and noncash items.
9
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Cash used by investing activities was $540 million in the first nine
months of 1999, compared to $887 million in the first nine months of 1998. The
decrease principally resulted from the collection of TWE's $400 million loan to
Time Warner and lower capital expenditures, offset in part by a $198 million
decrease in investment proceeds relating largely to the 1998 sale of TWE's
remaining interest in Six Flags Entertainment Corporation. Capital expenditures
decreased to $1.009 billion in the first nine months of 1999, compared to $1.092
billion in the first nine months of 1998.
Cash used by financing activities was $1.517 billion in the first nine
months of 1999, compared to $583 million in the first nine months of 1998. The
use of cash in 1999 principally resulted from the redemption of REIT Preferred
Stock at an aggregate cost of $217 million, the payment of $1.116 billion of
capital distributions to Time Warner and $39 million of debt reduction. The use
of cash in 1998 principally resulted from the payment of $1.060 billion of
capital distributions to Time Warner, offset in part by an $675 million increase
in net borrowings.
Management believes that TWE's operating cash flow, cash and equivalents
and additional borrowing capacity are sufficient to fund its capital and
liquidity needs for the foreseeable future.
Cable Capital Spending
Time Warner Cable has been engaged in a plan to upgrade the
technological capability and reliability of its cable television systems and
develop new services, which it believes will position the business for
sustained, long-term growth. Capital spending by TWE's Cable division amounted
to $910 million in the nine months ended September 30, 1999, compared to $991
million in the nine months ended September 30, 1998. Cable capital spending is
expected to approximate $350 million for the remainder of 1999. Capital spending
by TWE's Cable division is expected to continue to be funded by cable operating
cash flow.
Filmed Entertainment Backlog
Backlog represents the amount of future revenue not yet recorded from
cash contracts for the licensing of theatrical and television product for pay
cable, basic cable, network and syndicated television exhibition. Backlog of
TWE's Filmed Entertainment-Warner Bros. division amounted to $2.571 billion at
September 30, 1999 (including amounts relating to the licensing of film product
to TWE's cable television networks of $307 million and to Time Warner's cable
television networks of $612 million). This compares to $2.298 billion at
December 31, 1998 (including amounts relating to the licensing of film product
to TWE's cable television networks of $199 million and to Time Warner's cable
television networks of $570 million).
Because backlog generally relates to contracts for the licensing of
theatrical and television product which have already been produced, the
recognition of revenue for such completed product is principally only dependent
upon the commencement of the availability period for telecast under the terms of
the related licensing agreement. Cash licensing fees are collected periodically
over the term of the related licensing agreements or on an accelerated basis
using TWE's $500 million securitization facility. The portion of backlog for
which cash has not already been received has significant off-balance sheet asset
value as a source of future funding. The backlog excludes advertising barter
contracts, which are also expected to result in the future realization of
revenues and cash through the sale of advertising spots received under such
contracts.
10
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Year 2000 Technology Preparedness
TWE, like most large companies, depends on many different computer
systems and other chip-based devices for the continuing conduct of its business.
Older computer programs, computer hardware and chip-based devices may fail to
recognize dates beginning on January 1, 2000 as being valid dates, and as a
result may fail to operate or may operate improperly when such dates are
introduced.
TWE's exposure to potential Year 2000 problems arises both in
technological operations under the control of the Company and in those dependent
on one or more third parties. These technological operations include information
technology ("IT") systems and non-IT systems, including those with embedded
technology, hardware and software. Most of TWE's potential Year 2000 exposures
are dependent to some degree on one or more third parties. Failure to achieve
high levels of Year 2000 compliance could have a material adverse impact on TWE
and its financial statements.
The Company's Year 2000 initiative continues to be conducted at the
operational level by divisional project managers and senior technology
executives overseen by senior divisional executives, with assistance internally
as well as from outside professionals. The progress of each division through the
different phases of remediation--inventorying, assessment, remediation planning,
implementation and final testing--is actively overseen and reviewed on a regular
basis by an executive oversight group.
The Company, initially identified and assessed potential Year 2000
difficulties in its technological operations, including IT applications, IT
technology and support, desktop hardware and software, non-IT systems and
important third party operations, and distinguished those that are "mission
critical" from those that are not. An item is considered "mission critical" if
its Year 2000-related failure would significantly impair the ability of one of
the Company's major business units to (1) produce, market and distribute the
products or services that generate significant revenues for that business, (2)
meet its obligations to pay its employees, artists, vendors and others or (3)
meet its obligations under regulatory requirements and internal accounting
controls. The Company and its divisions have identified approximately 600
worldwide, "mission critical" potential exposures. As of September 30, 1999,
substantially all of the potential exposures have been identified by the
divisions as Year 2000 compliant and of those that are not reported as
compliant, substantially all were in the installation or final testing stages
and expected to be substantially completed in all material respects by the
middle of the fourth quarter of 1999. The Company, however, could experience
unexpected delays. The Company is expecting to focus its attention during the
fourth quarter of 1999 on conducting final integrated testing in a stable
environment and on refinements and testing of its contingency and transition
plans, as necessary.
11
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
As stated above, however, the Company's business is heavily dependent on
third parties, both domestically and internationally, and these parties are
themselves heavily dependent on technology. For example, if a television
broadcaster or cable programmer encounters Year 2000 problems that impede its
ability to deliver its programming, the Company will be unable to provide that
programming to its cable customers. Because the Company is also a programming
supplier, third-party signal delivery problems would affect its ability to
deliver its programming to its customers. In addition, in a situation endemic to
the cable industry, much of the Company's headend equipment that controls cable
set-top boxes needed to be upgraded to become Year 2000 compliant. The box
manufacturers and cable industry groups together developed solutions that the
Company has substantially completed installing and testing in its headend
equipment at its various geographic locations. The Company has attempted to
include in its "mission critical" inventory significant service providers,
vendors, suppliers, customers and governmental entities that are believed to
be critical to business operations and has made its determinations of their
state of Year 2000 readiness through various means, including questionnaires,
interviews, on-site visits, system interface testing and industry group
participation. The Company continues to monitor these situations. Moreover,
TWE is dependent, like all large companies, on the continued functioning,
domestically and internationally, of basic, heavily computerized services
such as banking, telephony, water and power, and various distribution
mechanisms ranging from the mail, railroads and trucking to high-speed data
transmission. TWE is taking steps to attempt to satisfy itself that the third
parties on which it is heavily reliant are Year 2000 compliant, are
developing satisfactory contingency plans or that alternate means of meeting
its requirements are available, but cannot predict the likelihood of
such compliance nor the direct or indirect costs to the Company of non-
compliance by those third parties or of securing such services from
alternate compliant third parties. In areas in which the Company is uncertain
about the anticipated Year 2000 readiness of a significant third party, the
Company is investigating available alternatives, if any.
The Company currently estimates that the aggregate cost of its Year 2000
remediation program, which started in 1996, will be approximately $50 to $85
million, of which an estimated 75% to 85% has been incurred through September
30, 1999. These costs include estimates of the costs of assessment, replacement,
repair and upgrade, both planned and unplanned, of certain IT and non-IT systems
and their implementation and testing. The Company anticipates that its
remediation program, and related expenditures, may continue into 2001 as
temporary solutions to Year 2000 problems are replaced with upgraded equipment.
These expenditures have been and are expected to continue to be funded from the
Company's operating cash flow and have not and are not expected to impact
materially the Company's financial statements.
Management believes that it has established an effective program to
resolve all significant Year 2000 issues in its control in a timely manner. As
noted above, however, the Company has not yet completed all phases of its
program and is dependent on third parties whose progress is not within its
control. In the event that the Company experiences unanticipated failures of the
systems within its control, management believes that the Company could
experience significant difficulty in producing and delivering its products and
services and conducting its business in the Year 2000 as it has in the past.
More importantly, disruptions experienced by third parties with which the
Company does business as well as by the economy generally could materially
adversely affect the Company. The amount of potential liability and lost revenue
cannot be reasonably estimated at this time.
12
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
As stated above, the Company is now focusing its attention on its
contingency and transition plans. It has examined its existing standard business
interruption strategies to evaluate whether they would satisfactorily meet the
demands of failures arising from Year 2000-related problems. It is also
developing and refining specific transition schedules and contingency plans in
the event it does not successfully complete its remaining remediation as
anticipated or experiences unforeseen problems outside the scope of these
standard strategies. These plans are intended to provide guidance and
alternatives for unanticipated failures of internal systems as well as external
failures that may impede any of the Company's businesses from operating
normally. The Company intends to examine its status periodically to determine
the necessity of implementing such contingency plans or additional strategies,
which could involve, among other things, manual workarounds, adjusting staffing
strategies and sharing resources across divisions.
Caution Concerning Forward-Looking Statements
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This document, together
with management's public commentary related thereto, contains such
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, particularly statements anticipating future
growth in revenues, EBITA and cash flow. Words such as "anticipate", "estimate",
"expects", "projects", "intends", "plans", "believes" and words and terms of
similar substance used in connection with any discussion of future operating or
financial performance identify such forward-looking statements. Those
forward-looking statements are management's present expectations of future
events. As with any projection or forecast, they are inherently susceptible to
changes in circumstances, and TWE is under no obligation to (and expressly
disclaims any such obligation to) update or alter its forward-looking
statements, whether as a result of such changes, new information, future events
or otherwise.
TWE operates in highly competitive, consumer driven and rapidly changing
media and entertainment businesses that are dependent on government regulation
and economic, political, social conditions in the countries in which they
operate, consumer demand for their products and services, technological
developments and (particularly in view of technological changes) protection of
their intellectual property rights. TWE's actual results could differ materially
from management's expectations because of changes in such factors. Some of the
other factors that also could cause actual results to differ from those
contained in the forward-looking statements include those identified in TWE's
other filings and:
. For TWE's cable business, more aggressive than expected competition from new
technologies and other types of video programming distributors, including
DBS; increases in government regulation of cable or equipment rates or other
terms of service (such as "digital must-carry" or "unbundling"
requirements); increased difficulty in obtaining franchise renewals; the
failure of new equipment (such as digital set-top boxes) or services (such
as high-speed on-line services or telephony over cable or video on demand)
to function properly, to appeal to enough consumers or to be available at
reasonable prices and to be delivered in a timely fashion; and greater than
expected increases in programming or other costs.
13
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
. For TWE's cable programming and television businesses, greater than expected
programming or production costs; public and cable operator resistance to
price increases (and the negative impact on premium programmers of increases
in basic cable rates); increased regulation of distribution agreements; the
sensitivity of advertising to economic cyclicality; and greater than
expected fragmentation of consumer viewership due to an increased number of
programming services or the increased popularity of alternatives to
television.
. For TWE's film and television businesses, their ability to continue to
attract and select desirable talent and scripts at manageable costs;
increases in production costs generally; fragmentation of consumer leisure
and entertainment time (and its possible negative effects on the broadcast
and cable networks, which are significant customers of these businesses);
continued popularity of merchandising; and the uncertain impact of
technological developments such as DVD and the Internet.
. For TWE's digital media businesses, their ability to develop products and
services that are attractive, accessible and commercially viable in terms of
content, technology and cost, their ability to manage costs and generate
revenues, aggressive competition from existing and developing technologies
and products, the resolution of issues concerning commercial activities via
the Internet, including security, reliability, cost, ease of use and access,
and the possibility of increased government regulation of new media
services.
. The ability of the Company and its key service providers, vendors,
suppliers, customers and governmental entities to replace, modify or upgrade
computer systems in ways that adequately address the Year 2000 issue,
including their ability to identify and correct all relevant computer codes
and embedded chips, unanticipated difficulties or delays in the
implementation of the Company's remediation plans and the ability of third
parties to address adequately their own Year 2000 issues.
In addition, TWE's overall financial strategy, including growth in
operations, maintaining its financial ratios and strengthened balance sheet,
could be adversely affected by increased interest rates, failure to meet
earnings expectations, significant acquisitions or other transactions,
consequences of the euro conversion and changes in TWE's plans, strategies and
intentions.
14
<PAGE>
<TABLE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, December 31,
1999 1998
---- ----
(millions)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents....................................................... $ 235 $ 87
Receivables, including $1.049 billion and $765 million due from Time Warner,
less allowances of $470 and $506 million................................ 2,885 2,618
Inventories................................................................ 1,238 1,312
Prepaid expenses........................................................... 223 166
--- ---
Total current assets....................................................... 4,581 4,183
Noncurrent inventories..................................................... 2,021 2,327
Loan receivable from Time Warner........................................... - 400
Investments................................................................ 829 886
Property, plant and equipment.............................................. 6,385 6,041
Cable television franchises................................................ 4,823 3,773
Goodwill................................................................... 3,764 3,854
Other assets............................................................... 825 766
--- ---
Total assets............................................................... $23,228 $22,230
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable........................................................... $ 1,440 $ 1,473
Participations and programming costs payable............................... 1,673 1,515
Debt due within one year................................................... 6 6
Other current liabilities, including $821 and $370 million due to Time Warner 2,075 1,942
----- -----
Total current liabilities.................................................. 5,194 4,936
Long-term debt............................................................. 6,725 6,578
Other long-term liabilities, including $1.024 and $1.130 billion due to
Time Warner .............................................................. 3,166 3,267
Minority interests......................................................... 1,801 1,522
Preferred stock of subsidiary holding solely a mortgage note of its parent. - 217
Time Warner General Partners' Senior Capital............................... - 603
Partners' capital
Contributed capital........................................................ 7,338 7,341
Undistributed partnership deficit.......................................... (996) (2,234)
---- ------
Total partners' capital.................................................... 6,342 5,107
----- -----
Total liabilities and partners' capital.................................... $23,228 $22,230
======= =======
See accompanying notes.
</TABLE>
15
<PAGE>
<TABLE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
Revenues (a)........................................... $3,474 $3,220 $9,468 $8,980
Cost of revenues (a)(b)................................ (2,362) (2,181) (6,266) (6,017)
Selling, general and administrative (a)(b)............. (607) (577) (1,809) (1,761)
Gain on sale or exchange of cable systems and investments 358 6 1,118 90
Gain on early termination of video distribution agreement - - 215 -
- - - -
--- --- --- ---
Business segment operating income...................... 863 468 2,726 1,292
Interest and other, net (a)............................ (185) (203) (577) (550)
Minority interest...................................... (60) (52) (361) (198)
Corporate services (a)................................. (18) (18) (54) (54)
--- --- --- ---
Income before income taxes............................. 600 195 1,734 490
Income taxes........................................... (39) (23) (94) (55)
--- --- --- ---
Net income............................................. $ 561 $ 172 $1,640 $ 435
====== ====== ====== =======
- ---------------
(a) Includes the following income (expenses) resulting from transactions with the partners of TWE and other related companies:
Revenues......................................... $150 $227 $422 $474
Cost of revenues................................. (62) (49) (198) (142)
Selling, general and administrative.............. (7) (14) (23) (16)
Gain on sale or exchange of cable systems and
investments 308 - 308 -
Interest and other, net.......................... (8) 1 20 6
Corporate expenses............................... (18) (18) (54) (54)
(b) Includes depreciation and amortization expense of:. $ 356 $ 358 $ 998 $1,085
====== ====== ====== ======
See accompanying notes.
</TABLE>
16
<PAGE>
<TABLE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
-------------------
1999 1998
---- ----
(millions)
<S> <C> <C>
OPERATIONS
Net income................................................................. $1,640 $ 435
Adjustments for noncash and nonoperating items:
Depreciation and amortization.............................................. 998 1,085
Changes in operating assets and liabilities................................ (433) (247)
---- ----
Cash provided by operations................................................ 2,205 1,273
----- -----
INVESTING ACTIVITIES
Investments and acquisitions............................................... (273) (335)
Capital expenditures....................................................... (1,009) (1,092)
Investment proceeds........................................................ 342 540
Collection of loan to Time Warner.......................................... 400 -
--- ---
Cash used by investing activities.......................................... (540) (887)
---- ----
FINANCING ACTIVITIES
Borrowings................................................................. 1,854 1,515
Debt repayments............................................................ (1,893) (840)
Redemption of preferred stock of subsidiary................................ (217) -
Capital distributions...................................................... (1,116) (1,060)
Other...................................................................... (145) (198)
---- ----
Cash used by financing activities.......................................... (1,517) (583)
------ ----
INCREASE (DECREASE) IN CASH AND EQUIVALENTS................................ 148 (197)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................................ 87 322
--- ---
CASH AND EQUIVALENTS AT END OF PERIOD...................................... $ 235 $ 125
======= ======
See accompanying notes.
</TABLE>
17
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
(Unaudited)
<TABLE>
Nine Months
Ended September 30,
-------------------
1999 1998
---- ----
(millions)
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD............................................. $5,107 $6,333
Net income................................................................. 1,640 435
Other comprehensive income (loss).......................................... 6 (21)
----- ---
Comprehensive income(a).................................................... 1,646 414
Stock option and tax-related distributions................................. (383) (746)
Distribution of Time Warner Telecom interests.............................. - (191)
Allocation of income to Time Warner General Partners' Senior Capital....... (24) (52)
Other...................................................................... (4) (2)
----- ----
BALANCE AT END OF PERIOD................................................... $6,342 $5,756
====== ======
- ---------------
(a) Comprehensive income for the three months ended September 30, 1999 and 1998 was $520 million and $167
million, respectively.
See accompanying notes.
</TABLE>
18
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Time Warner Entertainment Company, L.P., a Delaware limited partnership
("TWE"), classifies its business interests into three fundamental areas: Cable
Networks, consisting principally of interests in cable television programming;
Filmed Entertainment, consisting principally of interests in filmed
entertainment, television production and television broadcasting; and Cable,
consisting principally of interests in cable television systems.
Each of the business interests within Cable Networks, Filmed
Entertainment and Cable is important to TWE's objective of increasing partner
value through the creation, extension and distribution of recognizable brands
and copyrights throughout the world. Such brands and copyrights include (1) HBO
and Cinemax, the leading pay television services, (2) the unique and extensive
film, television and animation libraries of Warner Bros. and trademarks such as
the Looney Tunes characters and Batman, (3) The WB Network, a national
broadcasting network launched in 1995 as an extension of the Warner Bros. brand
and as an additional distribution outlet for Warner Bros.' collection of
children's cartoons and television programming, and (4) Time Warner Cable,
currently the largest operator of cable television systems in the U.S.
The operating results of TWE's various business segments are presented
herein as an indication of financial performance (Note 8). Except for start-up
losses incurred in connection with The WB Network, TWE's principal business
segments generate significant operating income and cash flow from operations.
The cash flow from operations generated by such business segments is
considerably greater than their operating income due to significant amounts of
noncash amortization of intangible assets recognized principally in Time Warner
Companies, Inc.'s ("Time Warner") $14 billion acquisition of Warner
Communications Inc. ("WCI") in 1989 and $1.3 billion acquisition of the minority
interest in American Television and Communications Corporation ("ATC") in 1992,
a portion of which cost was allocated to TWE upon the capitalization of the
partnership. Noncash amortization of intangible assets recorded by TWE's
business segments amounted to $130 million and $129 million for the three months
ended September 30, 1999 and 1998, respectively and $366 million and $387
million for the nine months ended September 30, 1999 and 1998, respectively.
Time Warner and certain of its wholly owned subsidiaries collectively
own general and limited partnership interests in TWE consisting of 74.49% of the
pro rata priority capital ("Series A Capital") and residual equity capital
("Residual Capital"), and 100% of the junior priority capital ("Series B
Capital"). The remaining 25.51% limited partnership interests in the Series A
Capital and Residual Capital of TWE are held by a subsidiary of MediaOne Group,
Inc. ("MediaOne"). Certain of Time Warner's subsidiaries are the general
partners of TWE ("Time Warner General Partners").
19
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Basis of Presentation
The accompanying consolidated financial statements are unaudited but, in
the opinion of management, contain all the adjustments (consisting of those of a
normal recurring nature) considered necessary to present fairly the financial
position and the results of operations and cash flows for the periods presented
in conformity with generally accepted accounting principles applicable to
interim periods. The accompanying consolidated financial statements should be
read in conjunction with the audited consolidated financial statements of TWE
included in its Annual Report on Form 10-K for the year ended December 31, 1998
(the "1998 Form 10-K").
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the 1999 presentation.
2. GAIN ON TERMINATION OF MGM VIDEO DISTRIBUTION AGREEMENT
In March 1999, Warner Bros. and Metro-Goldwyn-Mayer, Inc. ("MGM")
terminated a long-term distribution agreement under which Warner Bros. had
exclusive worldwide distribution rights for MGM/United Artists home video
product. In connection with the early termination and settlement of this
distribution agreement, Warner Bros. recognized a net pretax gain of
approximately $215 million, which has been included in operating income in the
accompanying consolidated statement of operations.
3. GAIN ON SALE OR EXCHANGE OF CABLE TELEVISION SYSTEMS AND INVESTMENTS
In 1999 and 1998, largely in an effort to enhance its geographic
clustering of cable television properties, TWE sold or exchanged various cable
television systems and investments. The 1999 transactions included a large
exchange of cable television systems serving approximately 450,000 subscribers
for other cable television systems of comparable size owned by TCI
Communications, Inc., a subsidiary of AT&T Corp., and a large exchange of cable
television systems serving approximately 160,000 subscribers for other cable
television systems of comparable size owned by MediaOne. As a result of these
transactions, the operating results of TWE include net pretax gains for the
third quarter of $358 million in 1999 and $6 million in 1998. Net pretax gains
for the first nine months of the year amounted to $1.118 billion in 1999 and $90
million in 1998.
4. INVESTMENT IN PRIMESTAR
TWE owns an approximate 24% equity interest in Primestar, Inc.
("Primestar"). In January 1999, Primestar, an indirect wholly owned subsidiary
of Primestar and the stockholders of Primestar entered into an agreement to sell
Primestar's medium-power direct broadcast satellite business and assets to
DirecTV, a competitor of Primestar owned by Hughes Electronics Corp. In
addition, a second agreement was entered into with DirecTV, pursuant to which
DirecTV agreed to purchase Primestar's rights with respect to the use or
acquisition of certain high-power satellites from a wholly owned subsidiary of
one of the stockholders of Primestar. In April 1999, Primestar closed on the
sale of its medium-power direct broadcast satellite business to DirecTV. Then,
in June 1999, Primestar completed the sale of its high-power satellite rights to
DirecTV.
20
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
As a result of those transactions, Primestar began to substantially wind
down its operations during the first quarter of 1999. TWE recognized its share
of Primestar's 1999 losses under the equity method of accounting. Such losses
are included in interest and other, net, in the accompanying consolidated
statement of operations. As of September 30, 1999, Primestar has substantially
completed the wind down of its operations. As such, future wind-down losses are
not expected to be material to TWE's operating results.
5. INVENTORIES
<TABLE>
Inventories consist of:
September 30, 1999 December 31, 1998
------------------ -----------------
Current Noncurrent Current Noncurrent
------- ---------- ------- ----------
(millions)
<S> <C> <C> <C> <C>
Film costs:
Released, less amortization......................... $ 609 $ 735 $ 614 $ 744
Completed and not released.......................... 164 64 179 76
In process and other................................ 36 324 23 572
Library, less amortization.......................... - 521 - 560
Programming costs, less amortization................... 331 377 426 375
Merchandise............................................ 98 - 70 -
------ ------ ------ ------
Total.................................................. $1,238 $2,021 $1,312 $2,327
====== ====== ====== ======
</TABLE>
6. PREFERRED STOCK OF SUBSIDIARY
In February 1997, a newly formed, substantially owned subsidiary of TWE
(the "REIT") issued 250,000 shares of preferred stock ("REIT Preferred Stock").
The REIT was intended to qualify as a real estate investment trust under the
Internal Revenue Code of 1986, as amended.
In March 1999, the REIT redeemed all of its shares of REIT Preferred
Stock at an aggregate cost of $217 million, which approximated net book value.
The redemption was funded with borrowings under TWE's bank credit agreement.
Pursuant to its terms, the REIT Preferred Stock was redeemed as a result of
proposed changes to federal tax regulations that substantially increased the
likelihood that dividends paid by the REIT or interest paid to the REIT under a
mortgage note of TWE would not be fully deductible for federal income tax
purposes.
7. PARTNERS' CAPITAL
TWE is required to make distributions to reimburse the partners for
income taxes at statutory rates based on their allocable share of taxable
income, and to reimburse Time Warner for stock options granted to employees of
TWE based on the amount by which the market price of Time Warner Inc. common
stock exceeds the option exercise price on the exercise date or, with respect to
options granted prior to the TWE capitalization on June 30, 1992, the greater of
the exercise price or the $13.88 market price of Time Warner Inc. common stock
at the time of the TWE capitalization. TWE accrues a stock option distribution
and a corresponding liability with respect to unexercised options when the
market price of Time Warner Inc. common stock increases during the accounting
period, and reverses previously accrued stock option distributions and the
corresponding liability when the market price of Time Warner Inc. common stock
declines.
21
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
During the nine months ended September 30, 1999, TWE accrued $316
million of tax-related distributions and $67 million of stock option
distributions, based on closing prices of Time Warner Inc. common stock of
$60.75 at September 30, 1999 and $62.06 at December 31, 1998. During the nine
months ended September 30, 1998, TWE accrued $264 million of tax-related
distributions and $482 million of stock option distributions as a result of an
increase at that time in the market price of Time Warner Inc. common stock.
Also, during the nine months ended September 30, 1998, Time Warner Cable's
business telephony operations were reorganized into a separate entity named Time
Warner Telecom Inc. ("Time Warner Telecom"). In connection with that
reorganization, TWE recorded a $191 million noncash distribution of its business
telephony net assets to its partners based on their historical cost.
During the nine months ended September 30, 1999, TWE paid distributions
to the Time Warner General Partners in the amount of $489 million, consisting of
$316 million of tax-related distributions and $173 million of stock option
related distributions. During the nine months ended September 30, 1998, TWE paid
the Time Warner General Partners distributions in the amount of $1.060 billion,
consisting of $264 million of tax-related distributions, $217 million of stock
option related distributions and a $579 million distribution to the Time Warner
General Partners relating to their Senior Capital interests.
In July 1999, TWE borrowed $627 million under its bank credit agreement
and paid a distribution to the Time Warner General Partners to redeem the
remaining portion of their senior priority capital interests, including a
priority capital return of $173 million. Time Warner used a portion of the
proceeds received from this distribution to repay all $400 million of
outstanding borrowings under its credit agreement with TWE.
8. SEGMENT INFORMATION
TWE classifies its business interests into three fundamental areas:
Cable Networks, consisting principally of interests in cable television
programming; Filmed Entertainment, consisting principally of interests in filmed
entertainment, television production and television broadcasting; and Cable,
consisting principally of interests in cable television systems.
Information as to the operations of TWE in different business segments
is set forth below based on the nature of the products and services offered. TWE
evaluates performance based on several factors, of which the primary financial
measure is business segment operating income before noncash amortization of
intangible assets ("EBITA"). The operating results of TWE's cable segment
reflect: (i) the transfer of Time Warner Cable's direct broadcast satellite
operations to Primestar, a separate holding company, effective as of April 1,
1998, (ii) the formation of the Road Runner joint venture to operate and expand
Time Warner Cable's and MediaOne's existing high-speed online businesses,
effective as of June 30, 1998, (iii) the reorganization of Time Warner Cable's
business telephony operations into a separate entity now named Time Warner
Telecom Inc., effective as of July 1, 1998 and (iv) the formation of a joint
venture in Texas that owns cable television systems serving approximately 1.1
million subscribers, effective as of December 31, 1998 (collectively, the "1998
Cable Transactions"). These transactions are described more fully in TWE's 1998
Form 10-K.
22
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
<TABLE>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
Revenues
Filmed Entertainment-Warner Bros....................... $1,862 $1,727 $4,688 $4,364
Broadcasting-The WB Network............................ 84 64 246 170
Cable Networks-HBO..................................... 540 505 1,612 1,526
Cable.................................................. 1,124 1,052 3,312 3,289
Intersegment elimination............................... (136) (128) (390) (369)
---- ---- ---- ----
Total.................................................. $3,474 $3,220 $9,468 $8,980
====== ====== ====== ======
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
EBITA(1)
Filmed Entertainment-Warner Bros.(2)................... $180 $161 $ 658 $ 401
Broadcasting-The WB Network............................ (24) (17) (95) (78)
Cable Networks-HBO..................................... 138 117 394 339
Cable(3)............................................... 699 336 2,135 1,017
--- --- ----- -----
Total.................................................. $993 $597 $3,092 $1,679
==== ==== ====== ======
- ---------------
(1)EBITA represents business segment operating income before noncash
amortization of intangible assets. After deducting amortization of intangible
assets, TWE's business segment operating income for the three and nine months
ended September 30, 1999, respectively, and for the corresponding periods in
the prior year was $863 million and $2.726 billion in 1999 and $468 million
and $1.292 billion in 1998.
(2)Includes a net pretax gain of approximately $215 million recognized in the
first quarter of 1999 in connection with the early termination and settlement
of a long-term home video distribution agreement.
(3)Includes net pretax gains relating to the sale or exchange of certain cable
television systems of $358 million in the third quarter of 1999 and $6
million in the third quarter of 1998. Similarly, nine-month results include
net pretax gains of $1.118 billion in 1999 and $90 million in 1998.
</TABLE>
23
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
<TABLE>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
Depreciation of Property, Plant and Equipment
Filmed Entertainment-Warner Bros....................... $ 44 $ 48 $109 $126
Broadcasting-The WB Network............................ - 1 1 1
Cable Networks-HBO..................................... 7 6 20 16
Cable.................................................. 175 174 502 555
--- --- --- ---
Total.................................................. $226 $229 $632 $698
==== ==== ==== ====
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
Amortization of Intangible Assets (1)
Filmed Entertainment-Warner Bros....................... $ 30 $ 33 $ 91 $ 99
Broadcasting-The WB Network............................ 1 - 3 2
Cable Networks-HBO..................................... - - - -
Cable.................................................. 99 96 272 286
-- -- --- ---
Total.................................................. $130 $129 $366 $387
==== ==== ==== ====
(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.
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
TWE is subject to numerous legal proceedings. In management's opinion
and considering established reserves, the resolution of these matters will not
have a material effect, individually and in the aggregate, on TWE's consolidated
financial statements.
24
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
<TABLE>
10. ADDITIONAL FINANCIAL INFORMATION
Nine Months
Ended September 30,
-------------------
1999 1998
---- ----
(millions)
<S> <C> <C>
Interest expense........................................................... $411 $418
Cash payments made for interest............................................ 394 419
Cash payments made for income taxes, net................................... 84 57
Noncash capital distributions.............................................. 67 673
Noncash investing activities included the exchange of certain cable
television systems in 1999 and 1998 (see Note 3). Noncash investing activities
in the first nine months of 1998 also included the transfer of cable television
systems (or interests therein) serving approximately 650,000 subscribers that
were formerly owned by subsidiaries of Time Warner to the TWE-Advance/Newhouse
Partnership, subject to approximately $1 billion of debt, in exchange for common
and preferred partnership interests therein, as well as certain related
transactions (collectively, the "TWE-A/N Transfers"). For a more comprehensive
description of the TWE-A/N Transfers, see TWE's 1998 Form 10-K.
</TABLE>
25
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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. In addition, at that time, 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"). Since then, eleven of the thirteen
original general partners have 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 (collectively,
the "General Partners"). They have succeeded to the general partnership
interests and have assumed the General Partner Guarantees of the eleven former
general partners.
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 investments in TWE, TW Companies, Turner
Broadcasting System, Inc. and Time Warner Telecom Inc. and its revolving credit
agreement with TW Companies. Capitalized terms are as defined and described in
the accompanying consolidated financial statements, or elsewhere herein.
Investment in TWE
TWE was capitalized in June 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 holds 11.22% of the Series A Capital
and Residual Capital limited partnership interests. The remaining 25.51% limited
partnership interests in the Series A Capital and Residual Capital of TWE are
held by a subsidiary of MediaOne Group, Inc. ("MediaOne").
At the time of this filing, MediaOne had agreed to be acquired by AT&T
Corp. ("AT&T"). In August 1999, TWE received a notice from MediaOne concerning
the termination of its covenant not to compete with TWE. The termination of that
covenant is necessary for MediaOne to complete its proposed merger with AT&T. As
a result of the termination notice and the operation of the TWE partnership
agreement, MediaOne's rights to participate in the management of TWE's
businesses terminated immediately and irrevocably. MediaOne retains only certain
protective governance rights pertaining to certain limited matters affecting TWE
as a whole. Because WCI and ATC jointly control TWE, each will continue to
account for its investment in TWE under the equity method of accounting.
26
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
The proposed merger of MediaOne and AT&T is subject to customary closing
conditions, including regulatory approvals. Accordingly, there is no assurance
that it will occur. Also, there are no assurances that AT&T and Time Warner will
reach final agreement on the terms of a cable telephony joint venture, either on
the terms discussed on page F-8 of TWE's Annual Report on Form 10-K for the year
ended December 31, 1998, or any alternative terms.
Columbia House-CDNOW Merger
In July 1999, Time Warner Inc. ("Time Warner") announced an agreement
with Sony Corporation of America ("Sony") to merge their jointly owned Columbia
House operations with CDNOW, Inc. ("CDNOW"), a leading music and video
e-commerce company. Time Warner, almost entirely through WCI, and Sony will each
own 37% of the combined entity and the existing CDNOW shareholders will own 26%
of the combined entity. This investment is expected to be accounted for using
the equity method of accounting.
With a combined reach of approximately 10% of all domestic Internet
users*, the combined entity is expected to create a significant platform for
Time Warner's music and video e-commerce initiatives and position WCI for
incremental growth opportunities relating to online sales of music and video
product and the digital distribution of music. In addition, management believes
that the use of Columbia House's existing active club members and the
cross-promotional opportunities to be offered by Time Warner and Sony will lower
customer acquisition costs and increase the combined entity's customer base.
As part of this transaction, Time Warner and Sony each have made certain
strategic and financial commitments to the combined entity. Among the strategic
commitments, which have a term of five years and are subject to certain
conditions and qualifications, Time Warner and Sony will provide the combined
entity with opportunities to purchase advertising and promotional support from
their diverse media properties. In addition, as part of their commitment to make
the combined entity their primary vehicle to pursue the packaged music
e-commerce business, Time Warner and Sony will link their own music-controlled
web sites in the U.S. and Canada to the combined entity's web sites. This will
enable consumers to sample content from their favorite artists and genres and
then immediately make a purchase. Time Warner and Sony have also each agreed to
guarantee, for up to a three-year period, one-half of the borrowings under a new
credit facility to be entered into by the combined entity upon the closing of
the merger. The credit facility is expected to provide for up to $450 million of
borrowings, which will be used to support the ongoing growth and capital needs
of the business and to refinance approximately $300 million of existing debt and
liabilities of Columbia House. WCI will not guarantee any of such borrowings.
The merger is expected to close in late 1999 or early 2000 and is
subject to customary closing conditions, including regulatory approvals and
approval by existing CDNOW shareholders. There can be no assurance that such
approvals will be obtained.
____________
* As measured by Media Metrix, Inc. as of September 1999.
27
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Use of EBITA
WCI evaluates operating performance based on several factors, including
its primary financial measure of operating income before noncash amortization of
intangible assets ("EBITA"). Consistent with management's financial focus on
controlling capital spending, EBITA measures operating performance after charges
for depreciation. The exclusion of noncash amortization charges is consistent
with management's belief that WCI's intangible assets, such as music catalogues
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. 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
Three Months Ended September 30, 1999 Compared to the Three Months Ended
September 30, 1998
WCI had revenues of $852 million and net income of $193 million for the
three months ended September 30, 1999, compared to revenues of $938 million and
net income of $66 million for the three months ended September 30, 1998. EBITA
decreased to $79 million from $97 million. Operating income decreased to $17
million from $31 million. Revenues decreased primarily due to lower domestic and
international recorded music sales. The worldwide revenue decline principally
related to less popular releases in comparison to the prior year, as well as
industry-wide softness in various international markets, like Brazil and
Germany. EBITA and operating income decreased principally as a result of the
decline in worldwide revenues, offset in part by increased cost savings, lower
artist royalty costs and higher income from DVD manufacturing operations.
Management expects that the revenue decline relating to lower worldwide sales
levels will continue into the fourth quarter of 1999, which could continue to
affect operating results negatively.
WCI's equity in the pretax income of TWE was $356 million for the three
months ended September 30, 1999, compared to $115 million for the three months
ended September 30, 1998. TWE's pretax income increased in 1999 as compared to
1998 because of the effect of certain significant nonrecurring items recognized
in each period, as described more fully in Note 2 to the accompanying
consolidated financial statements. These nonrecurring items consisted of $358
million of net pretax gains in 1999, compared to $6 million of net pretax gains
in 1998. Excluding the effect of these nonrecurring items, TWE's pretax income
increased by $70 million to $259 million in 1999 from $189 million in 1998. This
increase principally resulted from an overall increase in TWE's business segment
operating income.
WCI's interest and other, net was $16 million of income in the third
quarter of 1999, compared to $3 million of expense in the third quarter of 1998.
Interest expense was $4 million in both 1999 and 1998. Other income, net,
increased to $20 million in the third quarter of 1999, compared to $1 million in
the third quarter of 1998. The increase principally related to lower equity
losses from certain investments accounted for under the equity method of
accounting.
28
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
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.
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998
WCI had revenues of $2.616 billion and net income of $664 million for
the nine months ended September 30, 1999, compared to revenues of $2.731 billion
and net income of $185 million for the nine months ended September 30, 1998.
EBITA decreased to $273 million from $283 million. Operating income decreased to
$81 million from $85 million. Revenues decreased primarily due to lower domestic
and international recorded music sales. The worldwide revenue decline
principally related to less popular releases in comparison to the prior year, as
well as industry-wide softness in various international markets, like Brazil and
Germany. EBITA and operating income decreased principally as a result of the
decline in worldwide revenues and less licensing income from direct-marketing
activities, offset in part by increased cost savings, lower artist royalty costs
and higher income from DVD manufacturing operations. Management expects that the
revenue decline relating to lower worldwide sales levels will continue into the
fourth quarter of 1999, which could continue to affect operating results
negatively.
WCI's equity in the pretax income of TWE was $1.028 billion for the nine
months ended September 30, 1999, compared to $290 million for the nine months
ended September 30, 1998. TWE's pretax income increased in 1999 as compared to
1998 because of the effect of certain significant nonrecurring items recognized
in each period, as described more fully in Note 2 to the accompanying
consolidated financial statements. These nonrecurring items consisted of
approximately $1.333 billion of net pretax gains in 1999, compared to $90
million of net pretax gains in 1998. Excluding the significant effect of these
nonrecurring items, TWE's pretax income increased by $156 million to $576
million in 1999 from $420 million in 1998. This improvement principally resulted
from an overall increase in TWE's business segment operating income, offset in
part by higher equity losses from certain investments accounted for under the
equity method of accounting.
WCI's interest and other, net was $96 million of income for the nine
months ended September 30, 1999, compared to $12 million of income for the nine
months ended September 30, 1998. Interest expense was $14 million in both 1999
and 1998. Other income, net, increased to $110 million in 1999, compared to $26
million in 1998. The increase principally related to the recognition of an
approximate $53 million pretax gain in 1999 in connection with the initial
public offering of a 20% interest in Time Warner Telecom Inc. (the "Time Warner
Telecom IPO"), a competitive local exchange carrier that provides telephony
services to businesses, and lower equity losses from certain investments
accounted for under the equity method of accounting.
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.
29
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
FINANCIAL CONDITION AND LIQUIDITY
September 30, 1999
Financial Condition
WCI had $8.1 billion of equity at September 30, 1999, compared to $7.7
billion of equity at December 31, 1998. Cash and equivalents decreased to $143
million at September 30, 1999, compared to $160 million at December 31, 1998.
WCI had no long-term debt due to TW Companies under its revolving credit
agreement at the end of either period.
ATC had $1.8 billion of equity at September 30, 1999, compared to $1.5
billion of equity at December 31, 1998.
Senior Capital Distributions
In July 1999, TWE paid a $627 million distribution to the General
Partners to redeem the remaining portion of their senior priority capital
interests, including a priority capital return of $173 million. Of the $627
million distribution, WCI and ATC received $372 million and $255 million,
respectively.
Cash Flows
During the first nine months of 1999, WCI's cash provided by operations
amounted to $119 million and reflected $273 million of EBITA, $54 million of
noncash depreciation expense, $392 million of distributions from TWE (excluding
$269 million representing the return of a portion of the General Partners'
Senior Capital interests that has been classified as a source of cash from
investing activities), $90 million of proceeds received under WCI's asset
securitization program, less $8 million of interest payments, $550 million of
income taxes ($445 million of which was paid to TW Companies under a tax sharing
agreement) and $132 million related to an aggregate increase in working capital
requirements, other balance sheet accounts and noncash items. In the first nine
months of 1998, WCI's cash provided by operations of $382 million reflected $283
million of EBITA, $54 million of noncash depreciation expense and $358 million
of distributions from TWE (excluding $270 million representing the return of a
portion of the General Partners' Senior Capital interests that has been
classified as a source of cash from investing activities), less $7 million of
interest payments, $174 million of income taxes ($121 million of which was paid
to TW Companies under a tax sharing agreement), $120 million of proceeds repaid
under WCI's asset securitization program and $12 million related to an aggregate
increase in working capital requirements, other balance sheet accounts and
noncash items.
Cash provided by investing activities was $156 million in the first nine
months of 1999, compared to $296 million in 1998, principally as a result of an
increase in capital expenditures and a decrease in investment proceeds.
Cash used by financing activities was $292 million in the first nine
months of 1999, compared to $584 million in the first nine months of 1998,
principally as a result of lower advances to TW Companies.
30
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
The assets and cash flows of TWE are restricted by certain borrowing and
partnership agreements and are unavailable to the General Partners except
through the payment of certain reimbursements and cash distributions, which are
subject to limitations. Under its bank credit agreement, TWE is permitted to
incur additional indebtedness to make distributions and other cash payments to
the General Partners subject to its individual compliance with the cash flow and
leverage ratio covenants contained therein.
Management believes that WCI's operating cash flow, cash and equivalents
and additional borrowing capacity under its revolving credit agreement with TW
Companies are sufficient to fund its capital and liquidity needs for the
foreseeable future without distributions from TWE above those permitted by
existing agreements. 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.
Year 2000 Technology Preparedness
WCI, together with TWE and like most large companies, depends on many
different computer systems and other chip-based devices for the continuing
conduct of its business. Older computer programs, computer hardware and
chip-based devices may fail to recognize dates beginning on January 1, 2000 as
being valid dates, and as a result may fail to operate or may operate improperly
when such dates are introduced.
WCI's exposure to potential Year 2000 problems arises both in
technological operations under the control of WCI and in those dependent on one
or more third parties. These technological operations include information
technology ("IT") systems and non-IT systems, including those with embedded
technology, hardware and software. Most of WCI's potential Year 2000 exposures
are dependent to some degree on one or more third parties. Failure to achieve
high levels of Year 2000 compliance could have a material adverse impact on WCI
and its financial statements.
WCI's Year 2000 project has several phases: inventorying, assessment,
remediation planning, implementation and final testing. WCI's progress through
these phases continues to be actively overseen by a senior technology executive
who reports on a regular basis to the senior financial executive. Assistance is
obtained, when appropriate, from both internal and outside professional sources.
WCI initially identified and assessed potential Year 2000 difficulties
in its technological operations, including IT applications, IT technology and
support, desktop hardware and software, non-IT systems and important third party
operations, and distinguished those that are "mission critical" from those that
are not. An item is considered "mission critical" if its Year 2000-related
failure would significantly impair the ability of one of WCI's major business
units to (1) produce, market and distribute the products or services that
generate significant revenues for that business, (2) meet its obligations to pay
its employees, artists, vendors and others or (3) meet its obligations under
regulatory requirements and internal accounting controls. WCI has identified
approximately 200 worldwide, "mission critical" potential exposures. As of
September 30, 1999, substantially all of these potential exposures have been
identified as Year 2000 compliant and of those that are not reported as
compliant, substantially all were in the final testing stages and expected to be
substantially completed in all material respects by the middle of the fourth
quarter of 1999. WCI, however, could experience unexpected delays. WCI is
expecting to focus its attention during the fourth quarter of 1999 on conducting
final integrated testing in a stable environment and on refinements and testing
of its contingency and transition plans, as necessary.
31
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
As stated above, however, WCI's business is dependent on third parties,
both domestically and internationally, and these parties are themselves
dependent on technology. In some cases, WCI's third party dependence is on
vendors of technology who are themselves working toward solutions to Year 2000
problems. WCI has attempted to include in its "mission critical" inventory
significant service providers, vendors, suppliers, customers and governmental
entities that are believed to be critical to business operations and has made
its determinations of their state of Year 2000 readiness through various means,
including questionnaires, interviews, on-site visits, system interface testing
and industry group participation. WCI continues to monitor these situations.
Moreover, WCI is dependent, like all large companies, on the continued
functioning, domestically and internationally, of basic, heavily computerized
services such as banking, telephony, water and power, and various distribution
mechanisms ranging from the mail, railroads and trucking to high-speed data
transmission. WCI is taking steps to attempt to satisfy itself that the third
parties on which it is heavily reliant are Year 2000 compliant, are developing
satisfactory contingency plans or that alternate means of meeting its
requirements are available, but cannot predict the likelihood of such compliance
nor the direct or indirect costs to WCI of non-compliance by those third parties
or of securing such services from alternate compliant third parties. In areas in
which WCI is uncertain about the anticipated Year 2000 readiness of a
significant third party, WCI is investigating available alternatives, if any.
WCI currently estimates that the aggregate cost of its Year 2000
remediation program, which started in 1996, will be approximately $25 to $40
million, of which an estimated 85% to 95% has been incurred through September
30, 1999. These costs include estimates of the costs of assessment, replacement,
repair and upgrade, both planned and unplanned, of certain IT and non-IT systems
and their implementation and testing. WCI anticipates that its remediation
program, and related expenditures, may continue into 2001 as temporary solutions
to Year 2000 problems are replaced with upgraded equipment. These expenditures
have been and are expected to continue to be funded from WCI's operating cash
flow and have not and are not expected to impact materially WCI's financial
statements.
In addition to the foregoing areas, WCI is also exposed to potential
Year 2000 problems encountered by TWE in technological operations under its
control and those dependent on one or more third parties. ATC, while not having
any independent operations, is similarly exposed to potential Year 2000 problems
encountered by TWE. Although WCI and ATC anticipate that TWE will successfully
complete its efforts to be Year 2000 compliant in all material respects in
advance of January 1, 2000, failure by TWE to achieve high levels of Year 2000
compliance could have a material adverse impact on WCI and ATC. For a discussion
of TWE's Year 2000 technology preparedness, see TWE's Management's Discussion
and Analysis of Results of Operations and Financial Condition included elsewhere
herein.
32
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued
Management believes that it has established an effective program to
resolve all significant Year 2000 issues in its control in a timely manner. As
noted above, however, WCI has not yet completed all phases of its program and is
dependent on third parties whose progress is not within its control. In the
event that WCI experiences unanticipated failures of systems within its control,
management believes that WCI could experience significant difficulty in
producing and delivering its products and services and conducting its business
in the Year 2000 as it has in the past. More importantly, disruptions
experienced by third parties with which WCI does business as well as by the
economy generally could materially adversely affect WCI. The amount of potential
liability and lost revenue cannot be reasonably estimated at this time.
As stated above, WCI is now focusing its attention on its contingency
and transition plans. It has examined its existing standard business
interruption strategies to evaluate whether they would satisfactorily meet the
demands of failures arising from Year 2000-related problems. It is also
developing and refining specific transition schedules and contingency plans in
the event it does not successfully complete its remaining remediation as
anticipated or experiences unforeseen problems outside the scope of these
standard strategies. These plans are intended to provide guidance and
alternatives for unanticipated failures of internal systems as well as external
failures that may impede any of WCI's businesses from operating normally. WCI
intends to examine its status periodically to determine the necessity of
implementing such contingency plans or additional strategies, which could
involve, among other things, manual workarounds, adjusting staffing strategies
and sharing resources across divisions.
The discussion of WCI's expectations with respect to its Year 2000
remediation plans is based on management's current expectations of future
events. As with any projection, it is inherently susceptible to changes in
circumstances. WCI's actual results could differ materially from management's
expectations as a result of such factors as the ability of WCI and its key
service providers, vendors, suppliers, customers and governmental entities to
replace, modify or upgrade computer systems in ways that adequately address the
Year 2000 issue, including their ability to identify and correct all relevant
computer codes and embedded chips, unanticipated difficulties or delays in the
implementation of WCI's remediation plans and the ability of third parties to
adequately address their own Year 2000 issues.
33
<PAGE>
<TABLE>
TWE GENERAL PARTNERS
CONSOLIDATED BALANCE SHEETS
(Unaudited)
WCI ATC
--- ---
September 30, December 31, September 30, December 31,
------------- ------------ ------------- ------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and equivalents............................ $ 143 $ 160 $ - $ -
Receivables, less allowances of $241 and $278 million 936 1,454 - -
Inventories..................................... 151 151 - -
Prepaid expenses................................ 797 670 - -
--- --- --- ---
Total current assets............................ 2,027 2,435 - -
Investments in and amounts due to and from TWE.. 2,121 1,632 1,727 1,494
Investments in TW Companies..................... 103 103 61 61
Other investments............................... 1,469 1,350 442 404
Music catalogues, contracts and copyrights...... 801 876 - -
Goodwill........................................ 3,412 3,509 - -
Other assets, primarily property, plant and equipment 475 443 - -
- ----------------------------------------------------- --- --- --- ---
Total assets.................................... $10,408 $10,348 $2,230 $1,959
======= ======= ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties payable.................. $ 992 $ 1,079 $ - $ -
Other current liabilities....................... 483 548 - -
--- --- --- ---
Total current liabilities....................... 1,475 1,627 - -
Long-term liabilities, including $607, $670, $433 and
$477 million due to TW Companies............. 832 1,020 33 477
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................................. 9,926 10,195 2,338 2,523
Retained earnings (accumulated deficit)......... 481 (1) (15) (360)
--- -- --- ----
10,408 10,195 2,324 2,164
====== ====== ===== =====
Due from TW Companies, net...................... (1,721) (1,908) (191) (346)
Reciprocal interest in TW Companies stock....... (586) (586) (336) (336)
---- ---- ---- ----
Total shareholders' equity...................... 8,101 7,701 1,797 1,482
----- ----- ----- -----
Total liabilities and shareholders' equity...... $10,408 $10,348 $2,230 $1,959
======= ======= ====== ======
</TABLE>
See accompanying notes.
34
<PAGE>
<TABLE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30,
(Unaudited)
WCI ATC
--- ---
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
Revenues (a)........................................... $852 $938 $ - $ -
---- ---- ---- ----
Cost of revenues (a)(b)................................ 465 601 - -
Selling, general and administrative (a)(b)............. 370 306 - -
--- --- --- ---
Operating expenses..................................... 835 907 - -
--- --- --- ---
Business segment operating income...................... 17 31 - -
Equity in pretax income of TWE (a)..................... 356 115 244 80
Interest and other, net (a)............................ 16 (3) 8 3
-- -- -- --
Income before income taxes............................. 389 143 252 83
Income taxes (a)....................................... (196) (77) (113) (39)
---- --- ---- ---
Net income............................................. $193 $ 66 $139 $ 44
==== ==== ==== ====
- ------------------
(a) Includes the following income (expenses) resulting from transactions with
Time Warner, TW Companies, TWE or equity investees of the General Partners:
Revenues.......................................... $ 42 $ 93 $ - $ -
Cost of revenues.................................. (6) (7) - -
Selling, general and administrative............... (12) (10) - -
Equity in pretax income of TWE.................... (17) (13) - -
Interest and other, net........................... 36 16 - -
Income taxes...................................... (161) (50) (97) (30)
(b) Includes depreciation and amortization expense of: $ 81 $ 82 $ - $ -
==== ==== ===== =====
See accompanying notes.
</TABLE>
35
<PAGE>
<TABLE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30,
(Unaudited)
WCI ATC
--- ---
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
Revenues (a)........................................... $2,616 $2,731 $ - $ -
------ ------ ----- -----
Cost of revenues (a)(b)................................ 1,499 1,732 - -
Selling, general and administrative (a)(b)............. 1,036 914 - -
----- --- --- ---
Operating expenses..................................... 2,535 2,646 - -
----- ----- --- ---
Business segment operating income...................... 81 85 - -
Equity in pretax income of TWE (a)..................... 1,028 290 706 200
Interest and other, net (a)(c)......................... 96 12 56 17
-- -- -- --
Income before income taxes............................. 1,205 387 762 217
Income taxes (a)....................................... (541) (202) (318) (99)
---- ---- ---- ---
Net income............................................. $ 664 $ 185 $ 444 $118
====== ====== ===== ====
- ------------------
(a) Includes the following income (expenses) resulting from transactions with
Time Warner, TW Companies, TWE or equity investees of the General Partners:
Revenues....................................... $ 155 $139 $ - $ -
Cost of revenues............................... (18) (18) - -
Selling, general and administrative............ (22) (12) - -
Equity in pretax income of TWE................. (42) (25) - -
Interest and other, net........................ 101 54 - -
Income taxes................................... (445) (121) (280) (77)
(b) Includes depreciation and amortization expense of: $ 246 $252 $ - $ -
===== ==== ===== ====
(c) Includes an approximate $53 million pretax gain recognized by WCI and $36
million recognized by ATC in the second quarter of 1999 in connection with
the initial public offering of a 20% interest in Time Warner Telecom, Inc.
See accompanying notes.
</TABLE>
36
<PAGE>
<TABLE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
(Unaudited)
WCI ATC
--- ---
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
OPERATIONS
Net income............................................. $664 $185 $444 $118
Adjustments for noncash and nonoperating items:
Depreciation and amortization.......................... 246 252 - -
Excess (deficiency) of distributions over equity in pretax
income of TWE...................................... (636) 68 (436) 47
Equity in losses (income) of other investee companies after
distributions...................................... 9 63 (4) (1)
Changes in operating assets and liabilities............ (164) (186) (18) 5
---- ---- --- -
Cash provided (used) by operations..................... 119 382 (14) 169
--- --- --- ---
INVESTING ACTIVITIES
Investments and acquisitions........................... (37) (26) - -
Capital expenditures................................... (101) (73) - -
Investment proceeds.................................... 25 125 - -
Proceeds received from distribution of TWE Senior Capital 269 270 185 185
--- --- --- ---
Cash provided by investing activities.................. 156 296 185 185
--- --- --- ---
FINANCING ACTIVITIES
Dividends.............................................. (479) (477) (326) (324)
Decrease (increase) in amounts due from TW Companies, net 187 (107) 155 (30)
--- ---- --- ---
Cash used by financing activities...................... (292) (584) (171) (354)
---- ---- ---- ----
INCREASE (DECREASE) IN CASH AND EQUIVALENTS............ (17) 94 - -
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD............ 160 102 - -
--- --- --- ---
CASH AND EQUIVALENTS AT END OF PERIOD.................. $ 143 $196 $ - $ -
===== ==== ===== ====
See accompanying notes.
</TABLE>
37
<PAGE>
<TABLE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Nine Months Ended September 30,
(Unaudited)
WCI ATC
--- ---
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD......................... $7,701 $8,521 $1,482 $2,087
Net income............................................. 664 185 444 118
Other comprehensive income (loss)...................... (35) (17) - (8)
--- --- --- ---
Comprehensive income (a)............................... 629 168 444 110
Increase in stock option distribution liability to
TW Companies (b).................................... (40) (286) (27) (196)
Dividends.............................................. (377) (349) (255) (235)
Transfers to TW Companies, net......................... 187 (107) 155 (30)
Other.................................................. 1 5 ( 2) (1)
--- --- --- ---
BALANCE AT END OF PERIOD............................... $8,101 $7,952 $1,797 $1,735
====== ====== ====== ======
- ------------------
(a) Comprehensive income for WCI was $164 million and $68 million for the three
months ended September 30, 1999 and 1998, respectively. Comprehensive income
for ATC was $130 million and $43 million for the three months ended
September 30, 1999 and 1998, respectively.
(b) 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 $40 million and $286 million for WCI and $27 million and
$196 million for ATC were accrued in the first nine months of 1999 and 1998,
respectively, because of an increase in the market price of Time Warner
common stock (Note 2).
See accompanying notes.
</TABLE>
38
<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. In addition, at that time, 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 4). Since then, eleven of the
thirteen original general partners have 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 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 its
ownership interests in TWE and certain other investments.
Basis of Presentation
The accompanying consolidated financial statements are unaudited but, in
the opinion of management, contain all the adjustments (consisting of those of a
normal recurring nature) considered necessary to present fairly the financial
position and the results of operations and cash flows for the periods presented
in conformity with generally accepted accounting principles applicable to
interim periods. The accompanying consolidated financial statements should be
read in conjunction with the audited consolidated financial statements of the
General Partners included in TWE's Annual Report on Form 10-K for the year ended
December 31, 1998 (the "1998 Form 10-K"). Certain reclassifications have been
made to the prior year's financial statements to conform to the 1999
presentation.
39
<PAGE>
<TABLE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
2. TWE
The General Partners' investment in and amounts due to and from TWE at
September 30, 1999 and December 31, 1998 consists of the following:
September 30, 1999 WCI ATC
- ------------------ --- ---
(millions)
<S> <C> <C>
Investment in TWE.......................................................... $1,854 $1,311
Stock option related distributions due from TWE............................ 608 416
Other net liabilities due to TWE, principally related to home video distribution (341) -
---- ----
Total...................................................................... $2,121 $1,727
====== ======
December 31, 1998 WCI ATC
--- ---
(millions)
Investment in TWE.......................................................... $1,457 $1,034
Stock option related distributions due from TWE............................ 670 460
Other net liabilities due to TWE, principally related to home video distribution (495) -
---- ----
Total...................................................................... $1,632 $1,494
====== ======
Partnership Structure and Allocation of Income
</TABLE>
TWE is a Delaware limited partnership that 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 collectively own, 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 junior priority capital of
TWE. TW Companies owns limited partnership interests in TWE of 11.22% of the
Series A Capital and Residual Capital. The remaining 25.51% limited partnership
interests in the Series A Capital and Residual Capital of TWE are held by a
subsidiary of MediaOne Group, Inc. ("MediaOne").
The TWE partnership agreement provides for special allocations of
income, loss and distributions of partnership capital, including priority
distributions in the event of liquidation. TWE reported net income of $1.640
billion and $435 million for the nine months ended September 30, 1999 and 1998,
respectively, no portion of which was allocated to the limited partnership
interests.
AT&T-MediaOne Merger
At the time of this filing, MediaOne had agreed to be acquired by AT&T
Corp. ("AT&T"). In August 1999, TWE received a notice from MediaOne concerning
the termination of its covenant not to compete with TWE. The termination of that
covenant is necessary for MediaOne to complete its proposed merger with AT&T. As
a result of the termination notice and the operation of the TWE partnership
agreement, MediaOne's rights to participate in the management of TWE's
businesses terminated immediately and irrevocably. MediaOne retains only certain
protective governance rights pertaining to certain limited matters affecting TWE
as a whole. Each of WCI and ATC will continue to account for its investment in
TWE under the equity method of accounting.
40
<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. This
information reflects (i) the transfer of Time Warner Cable's direct broadcast
satellite operations to Primestar, Inc. ("Primestar"), a separate holding
company, effective as of April 1, 1998, (ii) the formation of the Road Runner
joint venture to operate and expand Time Warner Cable's and MediaOne's existing
high-speed online businesses, effective as of June 30, 1998, (iii) the
reorganization of Time Warner Cable's business telephony operations into a
separate entity now named Time Warner Telecom Inc. effective as of July 1, 1998
and (iv) the formation of a joint venture in Texas that owns cable television
systems serving approximately 1.1 million subscribers, effective as of December
31, 1998. These transactions are described more fully in TWE's 1998 Form 10-K.
<TABLE>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
Operating Statement Information
Revenues............................................... $3,474 $3,220 $9,468 $8,980
Depreciation and amortization.......................... (356) (358) (998) (1,085)
Business segment operating income (1).................. 863 468 2,726 1,292
Interest and other, net................................ (185) (203) (577) (550)
Minority interest...................................... (60) (52) (361) (198)
Income before income taxes............................. 600 195 1,734 490
Net income............................................. 561 172 1,640 435
- ------------------
(1) Includes a net pretax gain of approximately $215 million recognized in the
first quarter of 1999 in connection with the early termination and
settlement of a long-term home video distribution agreement. In addition,
includes net pretax gains relating to the sale or exchange of certain cable
television systems and investments for the third quarter of $358 million in
1999 and $6 million in 1998 and $1.118 billion and $90 million for the nine
months ended September 30, 1999 and 1998, respectively.
</TABLE>
<TABLE>
Nine months
Ended September 30,
-------------------
1999 1998
---- ----
(millions)
<S> <C> <C>
Cash Flow Information
Cash provided by operations................................................ $2,205 $1,273
Capital expenditures....................................................... (1,009) (1,092)
Investments and acquisitions............................................... (273) (335)
Investment proceeds........................................................ 342 540
Collection of loan to Time Warner.......................................... 400 -
Borrowings................................................................. 1,854 1,515
Debt repayments............................................................ (1,893) (840)
Redemption of preferred stock of subsidiary................................ (217) -
Capital distributions...................................................... (1,116) (1,060)
Other financing activities, net............................................ (145) (198)
Increase (decrease) in cash and equivalents................................ 148 (197)
</TABLE>
41
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
<TABLE>
September 30, December 31,
1999 1998
---- ----
(millions)
<S> <C> <C>
Balance Sheet Information
Cash and equivalents....................................................... $ 235 $ 87
Total current assets....................................................... 4,581 4,183
Total assets............................................................... 23,228 22,230
Total current liabilities.................................................. 5,194 4,936
Long-term debt ............................................................ 6,725 6,578
Minority interests......................................................... 1,801 1,522
Preferred stock of subsidiary.............................................. - 217
General Partners' Senior Capital........................................... - 603
Partners' capital.......................................................... 6,342 5,107
</TABLE>
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 September 30, 1999 and December 31, 1998, the
General Partners had recorded $1.024 billion and $1.130 billion, respectively,
of stock option related distributions due from TWE, based on closing prices of
Time Warner common stock of $60.75 and $62.06, 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 nine
months ended September 30, 1999, the General Partners received distributions
from TWE in the amount of $1.116 billion, consisting of $627 million of Senior
Capital distributions (representing the return of $454 million of contributed
capital and the distribution of a $173 million priority capital return), $316
million of tax-related distributions and $173 million of stock option related
distributions. During the nine months ended September 30, 1998, the General
Partners received distributions from TWE in the amount of $1.060 billion,
consisting of $579 million of Senior Capital distributions (representing the
return of $455 million of contributed capital and the distribution of $124
million of priority capital return), $264 million of tax-related distributions
and $217 million of stock option related distributions. Of such aggregate
distributions in 1999 and 1998, WCI received $661 million and $628 million,
respectively, and ATC received $455 million and $432 million, respectively.
Gain on Termination of MGM Video Distribution Agreement
In March 1999, Warner Bros. and Metro-Goldwyn-Mayer, Inc. ("MGM")
terminated a long-term distribution agreement under which Warner Bros. had
exclusive worldwide distribution rights for MGM/United Artists home video
product. In connection with the early termination and settlement of this
distribution agreement, Warner Bros. recognized a net pretax gain of
approximately $215 million, of which $127 million has been included in WCI's
equity in the pretax income of TWE and $88 million in ATC's equity in the pretax
income of TWE in the accompanying consolidated statements of operations.
42
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Gain on Sale or Exchange of Cable Television Systems and Investments
In 1999 and 1998, largely in an effort to enhance its geographic
clustering of cable television properties, TWE sold or exchanged various cable
television systems and investments. The 1999 transactions included a large
exchange of cable television systems serving approximately 450,000 subscribers
for other cable television systems of comparable size owned by TCI
Communications, Inc., a subsidiary of AT&T, and a large exchange of cable
television systems serving approximately 160,000 subscribers for other cable
television systems of comparable size owned by MediaOne. As a result of these
transactions, the operating results of TWE include net pretax gains for the
third quarter of $358 million in 1999 and $6 million in 1998. Of such amounts,
approximately $212 million and $4 million has been included in WCI's equity in
the pretax income of TWE in the accompanying consolidated statements of
operations for the third quarter of 1999 and 1998, respectively. In addition,
approximately $146 million and $2 million related to these gains has been
included in ATC's equity in the pretax income of TWE in the accompanying
consolidated statements of operations for the third quarter of 1999 and 1998,
respectively. TWE recognized net pretax gains of $1.118 billion for the first
nine months of 1999 and $90 million for the first nine months of 1998. Of such
amounts, approximately $663 million and $53 million has been included in WCI's
equity in the pretax income of TWE in the accompanying consolidated statements
of operations for the nine months ended September 30, 1999 and 1998,
respectively. In addition, approximately $455 million and $37 million has been
included in WCI's equity in the pretax income of TWE in the accompanying
consolidated statements of operations for the nine months ended September 30,
1999 and 1998, respectively.
Primestar
TWE owns an approximate 24% equity interest in Primestar, Inc.
("Primestar"). In January 1999, Primestar, an indirect wholly owned subsidiary
of Primestar and the stockholders of Primestar entered into an agreement to sell
Primestar's medium-power direct broadcast satellite business and assets to
DirecTV, a competitor of Primestar owned by Hughes Electronics Corp. In
addition, a second agreement was entered into with DirecTV, pursuant to which
DirecTV agreed to purchase Primestar's rights with respect to the use or
acquisition of certain high-power satellites from a wholly owned subsidiary of
one of the stockholders of Primestar. In April 1999, Primestar closed on the
sale of its medium-power direct broadcast satellite business to DirecTV. Then,
in June 1999, Primestar completed the sale of its high-power satellite rights to
DirecTV.
As a result of those transactions, Primestar began to substantially wind
down its operations during the first quarter of 1999. TWE recognized its share
of Primestar's 1999 losses under the equity method of accounting. Such losses
are included in interest and other, net, in TWE's consolidated statement of
operations. As of September 30, 1999, Primestar has substantially completed the
wind down of its operations. As such, future wind-down losses are not expected
to be material to TWE's operating results.
3. GAIN ON TIME WARNER TELECOM'S INITIAL PUBLIC OFFERING
In May 1999, Time Warner Telecom Inc. ("Time Warner Telecom"), a
competitive local exchange carrier that provides telephony services to
businesses, completed an initial public offering of 20% of its common stock (the
"Time Warner Telecom IPO"). Time Warner Telecom raised net proceeds of
approximately $270 million, of which $180 million was paid to Time Warner and
TWE in satisfaction of certain obligations. In turn, Time Warner and TWE used
those proceeds principally to reduce bank debt. In connection with the Time
Warner Telecom IPO and certain related transactions, WCI's ownership interest in
Time Warner Telecom was diluted from 27.70% to 21.55% and ATC's ownership
interest in Time Warner Telecom was diluted from 19.04% to 14.81%. As a result,
WCI and ATC recognized pretax gains of approximately $53 million and $36
million, respectively. These gains have been included in interest and other,
net, in the accompanying consolidated statements of operations.
43
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
4. 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 September 30, 1999, 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 September 30, 1999 that
was guaranteed by each General Partner is set forth below (dollars in millions):
<TABLE>
Total Guaranteed by
Each General Partner
--------------------
General Partner % Amount
---- ------
<S> <C> <C>
WCI ................................................................ 59.27 $3,193
ATC ................................................................ 40.73 2,195
----- -----
Total............................................................... 100.00 $5,388
====== ======
5. COMMITMENTS AND CONTINGENCIES
The General Partners are subject to numerous legal proceedings. In
management's opinion and considering established reserves, the resolution of
these matters will not have a material effect, individually and in the
aggregate, on the consolidated financial statements of the General Partners.
</TABLE>
<TABLE>
6. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash flows is as
follows:
Nine months Ended September 30,
-------------------------------
1999 1998
---- ----
WCI ATC WCI ATC
--- --- --- ---
(millions)
<S> <C> <C> <C> <C>
Cash payments made for interest............................. $ 8 $ - $ 7 $ -
Cash payments made for income taxes, net.................... 550 280 174 77
Tax-related distributions received from TWE................. 187 129 156 108
Noncash capital distributions, net.......................... 40 27 286 196
</TABLE>
44
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings.
Reference is made to the consolidated actions referenced as In re
Compact Disc Antitrust Litigation described on pages I-29 and I-30 of TWE's
Annual Report on Form 10-K for the year ended December 31, 1998 (the "1998 Form
10-K"). The Court has scheduled trial to commence on February 14, 2000.
Plaintiffs claim substantial and treble damages against all record company
defendants.
Reference is made to the litigation entitled Parker, et al. v. TWE, et
al., described on page I-31 of TWE's 1998 Form 10-K. The Court, on
reconsideration of its earlier decision to grant defendants' motion to dismiss
this action as had been reported on page 33 of TWE's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999, has now denied that motion.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
_________
The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as a part of this report and such Exhibit Index is
incorporated herein by reference.
(b) Reports on Form 8-K.
____________________
(i) TWE filed a Current Report on Form 8-K dated August 3, 1999
reporting in Item 5 a significant reduction in MediaOne Group Inc.'s governance
and management rights over TWE's businesses.
45
<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/Joseph A Ripp
-----------------
Name: Joseph A. Ripp
Title: Executive Vice President and
Chief Financial Officer
AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION
WARNER COMMUNICATIONS INC.
By: /s/ Joseph A. Ripp
-------------------
Name: Joseph A. Ripp
Title: Executive Vice President and
Chief Financial Officer
Dated: November 12, 1999
46
<PAGE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulations S-K
Exhibit No. Description of Exhibit
27 Financial Data Schedule.
47
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
TIME WARNER ENTERTAINMENT COMPANY, L.P.
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
financial statements of Time Warner Entertainment Company, L.P. for the nine
months ended September 30, 1999 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<CIK> 0000893657
<NAME> TIME WARNER ENTERTAINMENT
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 235
<SECURITIES> 0
<RECEIVABLES> 3,355
<ALLOWANCES> 470
<INVENTORY> 3,259
<CURRENT-ASSETS> 4,581
<PP&E> 10,340
<DEPRECIATION> 3,955
<TOTAL-ASSETS> 23,228
<CURRENT-LIABILITIES> 5,194
<BONDS> 6,725
<COMMON> 0
0
0
<OTHER-SE> 6,342
<TOTAL-LIABILITY-AND-EQUITY> 23,228
<SALES> 9,468
<TOTAL-REVENUES> 9,468
<CGS> 4,933
<TOTAL-COSTS> 4,933
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 411
<INCOME-PRETAX> 1,734
<INCOME-TAX> 94
<INCOME-CONTINUING> 1,640
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,640
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
