SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the quarterly period ended June 30, 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 (I.R.S. Employer
jurisdiction Identification Number)
of incorporation
or organization)
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 Number)
or organization)
75 Rockefeller Plaza
New York, New York 10019
(212) 484-8000
(Address, including zip code, and telephone number,
including area code, of each registrant's principal
executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /x/ No / /
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY L.P.
AND TWE GENERAL PARTNERS
INDEX TO FORM 10-Q
Page
_____________________
TWE General
TWE Partners
___ ________
PART I. FINANCIAL INFORMATION
Management's discussion and analysis of
results of operations and financial condition............. 1 22
Consolidated balance sheets at June 30, 199
and December 31, 1998...................................... 12 29
Consolidated statements of operations for the three months
and six months ended June 30, 1999 and 1998................ 13 30
Consolidated statements of cash flows for the six
months ended June 30, 1999 and 1998........................ 14 32
Consolidated statements of partnership capital and
shareholders' equity for the six months ended
June 30, 1999 and 1998..................................... 15 33
Notes to consolidated financial statements.................. 16 34
PART II. OTHER INFORMATION................................. 39
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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;
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 also is 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 Acquisition
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"). On
August 3, 1999, TWE received a notice from MediaOne concerning the termination
of its covenant not to compete with TWE. As a result of the termination notice
and the operation of the partnership agreement governing TWE, MediaOne's rights
to participate in the management of TWE's businesses have terminated
immediately and irrevocably. MediaOne has retained only certain protective
governance rights pertaining to certain limited matters affecting TWE as a
whole.
In addition, in connection with the proposed acquisition of MediaOne by
AT&T, Time Warner and AT&T are engaged in discussions concerning the overall
relationship of the companies following that acquisition. Among the subjects
included in those discussions are the structure of TWE, the structure of
AT&T/MediaOne's investment in TWE, as well as potential changes to the proposed
cable telephony joint venture discussed on page F-8 of TWE's Annual Report on
Form 10-K for the year ended December 31, 1998.
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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 acquisition of MediaOne by AT&T is subject to customary
closing conditions, including regulatory approvals. Accordingly, there is no
assurance that it will occur.
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 distri-
bution agreement and (ii) net pretax gains in the amount of $760 million in the
second quarter of 1999 relating to the sale or exchange of various cable
television systems and investments. This compares to net pretax gains in the
first half of 1998 of $84 million also relating to the sale or exchange of
cable television systems.
In order to meaningfully assess underlying operating trends, management
believes that the results of operations for each period should be analyzed
after excluding the effects of these significant nonrecurring gains. As such,
the following discussion and analysis focuses on amounts and trends adjusted to
exclude the impact of these unusual items. However, unusual items may occur in
any period. Accordingly, investors and other financial statement users
individually should consider the types of events and transactions for which
adjustments have been made.
In addition, the comparability of TWE's Cable division results has been
affected further by certain cable-related transactions, as described more fully
in Note 8 to the accompanying consolidated financial statements. While these
transactions had a significant effect on the comparability of the Cable
division's EBITA and operating income principally due to the deconsolidation of
the related operations, they did not have a significant effect on the
comparability of TWE's net income.
RESULTS OF OPERATIONS
EBITA and operating income are as follows:
<TABLE>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
Operating Operating
EBITA Income EBITA Income
----- ------ ----- ------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros.(1).................$ 132 $121 $ 101 $ 88 $ 478 $ 240 $ 417 $174
Broadcasting-The WB Network.......................... (30) (23) (31) (24) (71) (61) (73) (63)
Cable Networks-HBO................................... 131 113 131 113 256 222 256 222
Cable(2)............................................. 1,099 374 1,011 278 1,436 681 1,263 491
----- --- ----- --- ----- --- ----- ---
Total................................................$1,332 $585 $1,212 $455 $2,099 $1,082 $1,863 $824
===== ==== ===== === ===== ===== ===== ===
_______________
(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 $760 million in the second quarter of 1999
and $70 million in the second quarter of 1998. Similarly, six-month results
include net pretax gains of $760 million in 1999 and $84 million in 1998.
</TABLE>
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Three Months Ended June 30, 1999 Compared to the Three Months Ended
June 30, 1998
TWE had revenues of $3.060 billion and net income of $767 million for
the three months ended June 30, 1999, compared to revenues of $2.850 billion
and net income of $155 million for the three months ended June 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 $760 million
of net pretax gains in 1999, compared to $70 million of net pretax gains in
1998.
TWE's net income increased to $767 million in 1999, compared to $155
million in 1998. However, excluding the effect of the nonrecurring items
referred to earlier, net income increased by $65 million to $165 million in
1999 from $100 million in 1998. As discussed more fully below, this improvement
principally resulted from an overall increase in TWE's business segment
operating income.
As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $27 million and $17 million
for the three months ended June 30, 1999 and 1998, respectively, have been
provided for the operations of TWE's domestic and foreign subsidiary
corporations.
Filmed Entertainment-Warner Bros. Revenues increased to $1.446 billion,
compared to $1.327 billion in the second quarter of 1998. EBITA increased to
$132 million from $121 million. Operating income increased to $101 million from
$88 million. Revenues benefited from increases in worldwide theatrical and
television distribution operations, offset in part by lower revenues from
consumer products operations. Also contributing to the revenue increase were
marginally higher revenues from worldwide home video operations, which
benefited from increased sales of DVDs. EBITA and operating income benefited
principally from improved results from worldwide theatrical and television
distribution operations, offset in part by lower gains on the sale of assets
and lower results from consumer products operations.
Broadcasting - The WB Network. Revenues increased to $83 million,
compared to $61 million in the second quarter of 1998. EBITA decreased to a
loss of $30 million from a loss of $23 million. Operating losses increased to
$31 million from $24 million. Revenues increased as a result of improved
television ratings and the addition of a fifth night of prime-time programming
in September 1998. 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 $546 million, compared to
$509 million in the second quarter of 1998. EBITA and operating income
increased to $131 million from $113 million. Revenues benefited primarily from
an increase in subscriptions. EBITA and operating income increased principally
as a result of the revenue gains, increased cost savings and higher income from
Comedy Central, a 50%-owned equity investee.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Cable. Revenues increased to $1.114 billion, compared to $1.084 billion
in the second quarter of 1998. EBITA increased to $1.099 billion from $374
million. Operating income increased to $1.011 billion from $278 million. The
Cable division's 1999 operating results were affected by certain cable-related
transactions that occurred in 1998 (the "1998 Cable Transactions") and by net
pretax gains of $760 million in 1999 and $70 million in 1998 relating 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, an increase in advertising 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, decreased to an
expense of $167 million in the second quarter of 1999, compared to an expense
of $183 million in the second quarter of 1998. Interest expense increased to
$136 million, compared to $132 million in the second quarter of 1998,
principally due to higher average debt levels. Other expense, net, decreased
to $31 million in the second quarter of 1999, compared to $51 million in the
second quarter of 1998. The decrease principally related to lower losses from
certain investments accounted for under the equity method of accounting and a
gain on the sale of an investment.
Minority Interest. Minority interest expense increased to $233 million,
compared to $82 million in the second quarter of 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 each
period, minority interest expense for 1999 and 1998 was comparable in amount
and did not have any significant effect on operating trends.
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
TWE had revenues of $5.994 billion and net income of $1.079 billion for
the six months ended June 30, 1999, compared to revenues of $5.760 billion and
net income of $263 million for the six months ended June 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 billion of net pretax gains in 1999, compared to $84 million of net pretax
gains in 1998.
TWE's net income increased to $1.079 billion in 1999, compared to $263
million in 1998. However, excluding the significant effect of the nonrecurring
items referred to earlier, net income increased by $63 million to $262 million
in 1999 from $199 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.
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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 $55 million and $32 million
for the six months ended June 30, 1999 and 1998, respectively, have been
provided for the operations of TWE's domestic and foreign subsidiary
corporations.
Filmed Entertainment-Warner Bros. Revenues increased to $2.826 billion,
compared to $2.637 billion in the first six months of 1998. EBITA increased to
$478 million from $240 million. Operating income increased to $417 million
from $174 million. Revenues benefited from increases in worldwide theatrical
and television distribution operations, offset in part by lower revenues from
consumer products operations. Also contributing to the revenue increase were
higher revenues from worldwide home video operations, which benefited 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. In addition, EBITA and
operating income benefited principally from improved results from worldwide
theatrical and home video operations and an increase in investment-related
income, offset in part by lower results from consumer products operations.
Broadcasting - The WB Network. Revenues increased to $162 million,
compared to $106 million in the first six months of 1998. EBITA decreased to a
loss of $71 million from a loss of $61 million. Operating losses increased to
$73 million from $63 million. Revenues increased as a result of improved
television ratings and the addition of a fifth night of prime-time programming
in September 1998. 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, a lower allocation of losses
to a minority partner in the network 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 $1.072 billion, compared to
$1.021 billion in the first six months of 1998. EBITA and operating income
increased to $256 million from $222 million. Revenues benefited primarily from
an increase in subscriptions. EBITA and operating income increased principally
as a result of the revenue gains, increased cost savings, one-time gains from
the sale of certain investments and higher income from Comedy Central, a
50%-owned equity investee. These increases were offset in part by higher
marketing expenses.
Cable. Revenues decreased to $2.188 billion, compared to $2.237 billion
in the first six months of 1998. EBITA increased to $1.436 billion from $681
million. Operating income increased to $1.263 billion from $491 million. The
Cable division's 1999 operating results were affected by the 1998 Cable
Transactions and by net pretax gains of $760 million in 1999 and $84 million in
1998 relating 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.
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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, increased to an
expense of $392 million in the first six months of 1999, compared to an expense
of $347 million in the first six months of 1998. Interest expense was $273
million in both periods. Other expense, net, increased to $119 million in the
first six months of 1999, compared to $74 million in the first six months of
1998. This increase principally related to higher losses from certain
investments accounted for under the equity method of accounting, offset in part
by a gain on the sale of an investment.
Minority Interest. Minority interest expense was $301 million in the
first six months of 1999, compared to $146 million in the first six months of
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 for 1999 and 1998 was
comparable in amount and did not have any significant effect on operating
trends.
FINANCIAL CONDITION AND LIQUIDITY
June 30, 1999
Financial Condition
At June 30, 1999, TWE had $6.5 billion of debt, $117 million of cash and
equivalents (net debt of $6.4 billion), $627 million of Time Warner General
Partners' senior priority capital and $5.7 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.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Cash Flows
During the first six months of 1999, TWE's cash provided by operations
amounted to $1.519 billion and reflected $2.099 billion of EBITA from its
Filmed Entertainment-Warner Bros., Broadcasting-The WB Network, Cable Networks-
HBO and Cable businesses, $406 million of noncash depreciation expense and $21
million of proceeds from TWE's asset securitization program, less $242 million
of interest payments, $49 million of income taxes, $36 million of corporate
expenses, and $680 million related to an aggregate increase in working capital
requirements, other balance sheet accounts and noncash items. Cash provided by
operations of $586 million in the first six months of 1998 reflected $1.082
billion of EBITA from its Filmed Entertainment-Warner Bros., Broadcasting-The
WB Network, Cable Networks-HBO and Cable businesses, $469 million of noncash
depreciation expense and $135 million of proceeds from TWE's asset
securitization program, less $260 million of interest payments, $39 million of
income taxes, $36 million of corporate expenses and $765 million related to an
aggregate increase in working capital requirements, other balance sheet
accounts and noncash items.
Cash used by investing activities was $662 million in the first six
months of 1999, compared to $493 million in the first six months of 1998. The
increase principally resulted from a $296 million decrease in investment
proceeds relating to the 1998 sale of TWE's remaining interest in Six Flags
Entertainment Corporation. The decrease in investment proceeds was partially
offset by lower capital expenditures. Capital expenditures decreased to $649
million in the first six months of 1999, compared to $734 million in the first
six months of 1998.
Cash used by financing activities was $827 million in the first six
months of 1999, compared to $343 million in the first six 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 $280 million of
capital distributions to Time Warner and $229 million of debt reduction. The
use of cash in 1998 principally resulted from the payment of $298 million of
capital distributions to Time Warner, offset in part by an $11 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 $587 million in the six months ended June 30, 1999, compared to $666 million
in the six months ended June 30, 1998. Cable capital spending is expected to
approximate $700 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.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Filmed Entertainment
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 $2.663 billion at
June 30, 1999 (including amounts relating to the licensing of film product to
TWE's cable television networks of $359 million and to Time Warner's cable
television networks of $655 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 principally is dependent
only 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.
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 techno-
logical 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 is being 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 has generally completed the process of identifying,
assessing and planning the remediation of 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 distinguishing 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. Of these, as of June 30, 1999,
approximately 72% have been identified by the divisions as Year 2000 compliant
and approximately 28% as in the remediation implementation or final testing
stages. The Company currently expects that remediation with respect to well
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
over 90% of all these identified operations will be substantially completed in
all material respects by the end of the third quarter of 1999. The Company,
however, could experience unexpected delays. The Company is currently planning
to impose a "quiet" period at some point during the fourth quarter of 1999
during which any remaining remediation involving installation or modification
of systems that interface with other systems will be minimized to permit the
Company to conduct testing in a stable environment and to focus on its
contingency and transition plans, as necessary.
As stated above, however, the Company's business is heavily dependent on
third parties and these parties are themselves heavily dependent on technology.
For example, in a situation endemic to the cable industry, much of the
Company's headend equipment that controls cable set-top boxes was not Year 2000
compliant. The box manufacturers and cable industry groups together developed
solutions that the Company has been installing in its headend equipment at its
various geographic locations. The few remaining installations are currently
scheduled during the third quarter of 1999. In addition, 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. 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 is in various stages of completing its determination
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 65% to 75% has been incurred through
June 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.
-9-
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
The Company continues to focus its efforts on remediation of its Year 2000
exposures. Simultaneously, it is examining 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. 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.
-10-
<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 viewer-
ship 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.
-11-
<PAGE>
<TABLE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
1999 1998
---- ----
(millions)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents........................................................................ $ 117 $ 87
Receivables, including $469 and $765 million due from Time Warner,
less allowances of $476 and $506 million................................................ 2,639 2,618
Inventories................................................................................. 1,247 1,312
Prepaid expenses............................................................................ 220 166
----- -----
Total current assets........................................................................ 4,223 4,183
Noncurrent inventories...................................................................... 2,114 2,327
Loan receivable from Time Warner............................................................ 400 400
Investments................................................................................. 903 886
Property, plant and equipment............................................................... 6,302 6,041
Cable television franchises................................................................. 4,527 3,773
Goodwill.................................................................................... 3,795 3,854
Other assets................................................................................ 625 766
----- -----
Total assets................................................................................ $22,889 $22,230
====== ======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable............................................................................ $ 1,400 $ 1,473
Participations and programming costs payable................................................ 1,494 1,515
Debt due within one year.................................................................... 6 6
Other current liabilities, including $365 and $370 million due to Time Warner............... 1,845 1,942
----- -----
Total current liabilities................................................................... 4,745 4,936
Long-term debt.............................................................................. 6,535 6,578
Other long-term liabilities, including $1.347 and $1.130 billion due to Time Warner......... 3,527 3,267
Minority interests.......................................................................... 1,744 1,522
Preferred stock of subsidiary holding solely a mortgage note of its parent.................. - 217
Time Warner General Partners' Senior Capital................................................ 627 603
Partners' capital
Contributed capital......................................................................... 7,341 7,341
Undistributed partnership deficit........................................................... (1,630) (2,234)
----- -----
Total partners' capital..................................................................... 5,711 5,107
----- -----
Total liabilities and partners' capital..................................................... $22,889 $22,230
====== ======
See accompanying notes.
</TABLE>
-12-
<PAGE>
<TABLE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
Revenues (a)....................................................... $3,060 $2,850 $5,994 $5,760
----- ----- ----- -----
Cost of revenues (a)(b)............................................ (1,985) (1,876) (3,904) (3,836)
Selling, general and administrative (a)(b)......................... (623) (589) (1,202) (1,184)
Gain on sale or exchange of cable systems and investments.......... 760 70 760 84
Gain on early termination of video distribution agreement.......... - - 215 -
----- ----- ----- -----
Business segment operating income.................................. 1,212 455 1,863 824
Interest and other, net (a)........................................ (167) (183) (392) (347)
Minority interest.................................................. (233) (82) (301) (146)
Corporate services (a)............................................. (18) (18) (36) (36)
----- ----- ----- -----
Income before income taxes......................................... 794 172 1,134 295
Income taxes....................................................... (27) (17) (55) (32)
----- ----- ----- -----
Net income......................................................... $ 767 $ 155 $1,079 $ 263
==== ===== ===== =====
_______________
(a) Includes the following income (expenses) resulting from transactions with
the partners of TWE and other related companies for the three and six
months ended June 30, 1999, respectively, and for the corresponding periods
in the prior year: revenues-$152 million and $272 million in 1999, $118
million and $247 million in 1998; cost of revenues-$(58) million and $(136)
million in 1999, $(55) million and $(93) million in 1998; selling, general
and administrative-$(12) million and $(16) million in 1999, $(3) million
and $(2) million in 1998; interest and other, net-$8 million and $28
million in 1999, $3 million and $5 million in 1998; and corporate
services-$(18) million and $(36) million in each of 1999 and 1998.
<S> <C> <C> <C> <C>
(b) Includes depreciation and amortization expense of:............. $334 $356 $642 $727
=== === === ===
See accompanying notes.
</TABLE>
-13-
<PAGE>
<TABLE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
--------------
1999 1998
---- ----
(millions)
<S> <C> <C>
OPERATIONS
Net income.................................................................................. $1,079 $263
Adjustments for noncash and nonoperating items:
Depreciation and amortization............................................................... 642 727
Changes in operating assets and liabilities................................................. (202) (404)
----- -----
Cash provided by operations................................................................. 1,519 586
----- ----
INVESTING ACTIVITIES
Investments and acquisitions................................................................ (223) (265)
Capital expenditures........................................................................ (649) (734)
Investment proceeds......................................................................... 210 506
----- -----
Cash used by investing activities........................................................... (662) (493)
------ -----
FINANCING ACTIVITIES
Borrowings.................................................................................. 1,310 503
Debt repayments............................................................................. (1,539) (492)
Redemption of preferred stock of subsidiary................................................. (217) -
Capital distributions....................................................................... (280) (298)
Other....................................................................................... (101) (56)
----- -----
Cash used by financing activities........................................................... (827) (343)
----- -----
INCREASE (DECREASE) IN CASH AND EQUIVALENTS................................................. 30 (250)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................................................. 87 322
----- -----
CASH AND EQUIVALENTS AT END OF PERIOD....................................................... $ 117 $ 72
===== =====
See accompanying notes.
</TABLE>
-14-
<PAGE>
<TABLE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
(Unaudited)
Six Months
Ended June 30,
--------------
1999 1998
---- ----
(millions)
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD.............................................................. $5,107 $6,333
Net income.................................................................................. 1,079 263
Other comprehensive income (loss)........................................................... 47 (16)
----- -----
Comprehensive income(a)..................................................................... 1,126 247
Distributions............................................................................... (497) (552)
Allocation of income to Time Warner General Partners' Senior Capital........................ (24) (45)
Other....................................................................................... (1) -
----- -----
BALANCE AT END OF PERIOD.................................................................... $5,711 $5,983
===== =====
- ---------------
(a)Comprehensive income for the three months ended June 30, 1999 and 1998 was
$773 million and $153 million, respectively.
See accompanying notes.
</TABLE>
-15-
<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;
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, 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 interests 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
interests generate significant operating income and cash flow from operations.
The cash flow from operations generated by such business interests is
considerably greater than their operating income due to significant amounts of
noncash amortization of intangible assets recognized principally in Time Warner
Companies, Inc.'s ("Time Warner") $14 billion acquisition of Warner
Communications Inc. ("WCI") in 1989 and $1.3 billion acquisition of the
minority interest in American Television and Communications Corporation ("ATC")
in 1992, a portion of which cost was allocated to TWE upon the capitalization
of the partnership. Noncash amortization of intangible assets recorded by
TWE's businesses amounted to $120 million and $130 million in the three months
ended June 30, 1999 and 1998, respectively and $236 million and $258 million
for the six months ended June 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").
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
-16-
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
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"). 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 their 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. As a result of these
transactions, the operating results of TWE's Cable division include net pretax
gains for the second quarter of $760 million in 1999 and $70 million in 1998.
Net pretax gains for the first half of the year amounted to $760 million in
1999 and $84 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.
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. Future wind-down losses are not expected to be
material to TWE's operating results.
-17-
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
<TABLE>
5. INVENTORIES
TWE's inventories consist of:
June 30, 1999 December 31, 1998
------------- -----------------
Current Noncurrent Current Noncurrent
------- ---------- ------- ----------
(millions)
<S> <C> <C> <C> <C>
Film costs:
Released, less amortization..................................... $ 529 $ 778 $ 614 $ 744
Completed and not released...................................... 224 64 179 76
In process and other............................................ 54 367 23 572
Library, less amortization...................................... - 534 - 560
Programming costs, less amortization............................... 361 371 426 375
Merchandise........................................................ 79 - 70 -
----- ----- ----- -----
Total.............................................................. $1,247 $2,114 $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.
During the six months ended June 30, 1999, TWE accrued $138 million of
tax-related distributions and $359 million of stock option distributions, based
on closing prices of Time Warner Inc. common stock of $72.63 at June 30, 1999
and $62.06 at December 31, 1998. During the six months ended June 30, 1998, TWE
accrued $138 million of tax-related distributions and $414 million of stock
option distributions as a result of an increase at that time in the market
price of Time Warner Inc. common stock. During the six months ended June 30,
1999, TWE paid distributions to the Time Warner General Partners in the amount
of $280 million, consisting of $138 million of tax-related distributions and
$142 million of stock option related distributions. During the six months ended
June 30,
-18-
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
1998, TWE paid the Time Warner General Partners distributions in the amount of
$298 million, consisting of $138 million of tax-related distributions and $160
million of stock option related distributions.
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; 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.
<TABLE>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
Revenues
Filmed Entertainment-Warner Bros. ................................. $1,446 $1,327 $2,826 $2,637
Broadcasting-The WB Network........................................ 83 61 162 106
Cable Networks-HBO................................................. 546 509 1,072 1,021
Cable.............................................................. 1,114 1,084 2,188 2,237
Intersegment elimination........................................... (129) (131) (254) (241)
----- ----- ----- -----
Total.............................................................. $3,060 $2,850 $5,994 $5,760
===== ===== ===== =====
</TABLE>
-19-
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
<TABLE>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C> <C>
EBITA(1)
Filmed Entertainment-Warner Bros.(2)............................... $ 132 $ 121 $ 478 $ 240
Broadcasting-The WB Network........................................ (30) (23) (71) (61)
Cable Networks-HBO................................................. 131 113 256 222
Cable(3)........................................................... 1,099 374 1,436 681
----- ----- ----- -----
Total.............................................................. $1,332 $ 585 $2,099 $1,082
===== ===== ===== =====
______________
(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
six months ended June 30, 1999, respectively, and for the corresponding periods
in the prior year was $1.212 billion and $1.863 billion in 1999 and $455
million and $824 million 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 $760 million in the second quarter of 1999 and $70
million in the second quarter of 1998. Similarly, six-month results include
net pretax gains of $760 million in 1999 and $84 million in 1998.
</TABLE>
<TABLE>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
Depreciation of Property, Plant and Equipment
Filmed Entertainment-Warner Bros. ................................. $ 36 $ 38 $ 65 $ 78
Broadcasting-The WB Network........................................ 1 - 1 -
Cable Networks-HBO................................................. 6 5 13 10
Cable.............................................................. 171 183 327 381
---- ---- ---- ----
Total.............................................................. $ 214 $226 $406 $469
==== ==== ==== ====
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
</TABLE>
<TABLE>
(millions)
<S> <C> <C> <C> <C>
Amortization of Intangible Assets (1)
Filmed Entertainment-Warner Bros. ................................. $ 31 $ 33 $ 61 $ 66
Broadcasting-The WB Network........................................ 1 1 2 2
Cable Networks-HBO................................................. - - - -
Cable.............................................................. 88 96 173 190
---- ---- ---- ----
Total.............................................................. $120 $130 $236 $258
==== ==== ==== ====
(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>
-20-
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
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.
<TABLE>
10. ADDITIONAL FINANCIAL INFORMATION
Six Months
Ended June 30,
--------------
1999 1998
---- ----
(millions)
<S> <C> <C>
Interest expense............................................................................ $273 $273
Cash payments made for interest............................................................. 242 260
Cash payments made for income taxes, net.................................................... 49 39
Noncash capital distributions............................................................... 359 414
Noncash investing activities included the exchange of certain cable
television systems in 1999 and 1998 (see Note 3). Noncash investing activities
in the first six 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>
-21-
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On June 30, 1992, thirteen direct or indirect subsidiaries of Time Warner
Companies, Inc. ("TW Companies") contributed the assets and liabilities or the
rights to the cash flows of substantially all of TW Companies's Filmed
Entertainment-Warner Bros., Cable Networks-HBO and Cable businesses to Time
Warner Entertainment Company, L.P., a Delaware limited partnership ("TWE"), for
general partnership interests, and each general partner guaranteed a pro rata
portion of substantially all of TWE's debt and accrued interest 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.
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 nearly 10% of all 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 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
_____________
* As measured by MediaMetrix as of June 1999.
-22-
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
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 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 by the end of 1999 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.
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 June 30, 1999 Compared to the Three Months Ended June
30, 1998
WCI had revenues of $828 million and net income of $353 million for the
three months ended June 30, 1999, compared to revenues of $905 million and net
income of $77 million for the three months ended June 30, 1998. EBITA increased
to $100 million from $94 million. Operating income increased to $33 million
from $26 million. Revenues decreased primarily due to lower international
recorded music sales and, to a lesser extent, lower domestic recorded music
sales. The revenue decline principally related to lower sales of new releases
in comparison to the prior year, which benefited from popular releases by
established artists, like Madonna and Eric Clapton. Despite the revenue
decrease, EBITA and operating income increased due to higher results from
domestic recorded music operations, which benefited from increased cost
savings, lower artist royalty costs and improved results from joint ventures
that had successful releases during the period. The improvements in domestic
recorded music operations were offset in part by lower results from
international recorded music operations relating to lower international sales.
Management expects that the revenue decline relating to lower worldwide sales
levels will continue into the third quarter of 1999, which could negatively
affect operating results.
WCI's equity in the pretax income of TWE was $470 million for the three
months ended June 30, 1999, compared to $102 million for the three months ended
June 30, 1998. TWE's pretax income increased in 1999 as compared to 1998
-23-
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
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 $760
million of net pretax gains in 1999, compared to $70 million of net pretax
gains in 1998. Excluding the effect of these nonrecurring items, TWE's pretax
income increased to $192 million in 1999 from $117 million in 1998. This
increase principally resulted from an overall increase in TWE's business
segment operating income.
Interest and other, net was income of $76 million in the second quarter
of 1999, compared to income of $16 million in the second quarter of 1998.
Interest expense was $6 million in 1998 and 1999. Other income, net, increased
to $82 million in the second quarter of 1999, compared to $22 million in the
second quarter of 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.
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
WCI had revenues of $1.764 billion and net income of $471 million for the
six months ended June 30, 1999, compared to revenues of $1.793 billion and net
income of $119 million for the six months ended June 30, 1998. EBITA increased
to $194 million from $186 million. Operating income increased to $64 million
from $54 million. Revenues decreased primarily due to lower international
recorded music sales and a decline in music publishing revenues, offset in part
by a marginal increase in domestic recorded music revenues. The international
revenue decline principally related to lower sales of new releases in
comparison to the prior year, which benefited from popular releases by
established artists, like Madonna and Eric Clapton. Despite the revenue
decrease, EBITA and operating income increased due to higher results from
domestic recorded music operations, which benefited from increased cost
savings, lower artist royalty costs and improved results from joint ventures
that had successful releases during the period. The improvements in domestic
recorded music operations were offset in part by lower results from
international recorded music operations relating to lower international sales
levels and less licensing income from direct-marketing activities. Management
expects that the revenue decline relating to lower worldwide sales levels will
continue into the third quarter of 1999, which could negatively affect
operating results.
WCI's equity in the pretax income of TWE was $672 million for the six
months ended June 30, 1999, compared to $175 million for the six months ended
June 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 $1 billion of net
pretax gains in 1999, compared to $84 million of net pretax gains in 1998.
Excluding the significant effect of these nonrecurring items, TWE's pretax
income increased to $317 million in 1999 from $231 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.
Interest and other, net was income of $80 million for the six months
ended June 30, 1999, compared to income of $15 million for the six months ended
June 30, 1998. Interest expense was $10 million in 1999 and 1998. There was
other income, net, of $90 million in 1999, compared to other income, net, of
$25 million in 1998,
-24-
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
principally because of an approximate $53 million pretax gain recognized in
connection with the Time Warner Telecom IPO.
The relationship between income before income taxes and income tax
expense for the General Partners is principally affected by the amortization of
goodwill and certain other financial statement expenses that are not deductible
for income tax purposes. Income tax expense for each of the General Partners
includes all income taxes related to its allocable share of partnership income
and its equity in the income tax expense of corporate subsidiaries of TWE.
Financial Condition and Liquidity
June 30, 1999
Financial Condition
WCI had $8.0 billion of equity at June 30, 1999, compared to $7.7
billion of equity at December 31, 1998. Cash and equivalents decreased to $113
million at June 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 June 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 six months of 1999, WCI's cash provided by operations
amounted to $15 million and reflected $194 million of EBITA, $35 million of
noncash depreciation expense, $166 million of distributions from TWE, $42
million of proceeds received under WCI's asset securitization program, less $6
million of interest payments, $352 million of income taxes ($284 million of
which was paid to TW Companies under a tax sharing agreement) and $64 million
related to an aggregate increase in working capital requirements, other balance
sheet accounts and noncash items. In the first six months of 1998, WCI's cash
provided by operations of $115 million reflected $186 million of EBITA, $38
million of noncash depreciation expense and $177 million of distributions from
TWE, less $5 million of interest payments, $103 million of income taxes ($71
million of which was paid to TW Companies under a tax sharing agreement), $172
million of proceeds repaid under WCI's asset securitization program and $6
million related to an aggregate increase in working capital requirements, other
balance sheet accounts and noncash items.
Cash used by investing activities was $55 million in the first six
months of 1999, compared to $2 million in 1998, principally as a result of a
decrease in investment proceeds and an increase in capital spending.
-25-
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Cash used by financing activities was $7 million in the first six months
of 1999, compared to $74 million in the first six months of 1998, principally
as a result of lower advances to TW Companies and decreased dividend payments.
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 technolo-
gical 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 is 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 has generally completed the process of identifying, assessing and
planning the remediation of 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 distinguishing 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.
-26-
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
WCI has identified approximately 200 worldwide, "mission critical" potential
exposures. Of these, as of June 30, 1999, approximately 82% have been
identified as Year 2000 compliant and the remaining 18% as in the remediation
implementation or final testing stages. WCI currently expects that remediation
with respect to substantially all of all these identified operations will be
substantially completed in all material respects by the end of the third
quarter of 1999. WCI, however, could experience unexpected delays. WCI is
currently planning to impose a "quiet" period at some point during the fourth
quarter of 1999 during which any remaining remediation involving installation
or modification of systems that interface with other systems will be minimized
to permit WCI to conduct testing in a stable environment and to focus on its
contingency and transition plans, as necessary.
As stated above, however, WCI's business is dependent on third parties 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 is in various stages of completing its determination 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 80% to 90% has been incurred through June 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.
-27-
<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.
WCI continues to focus its efforts on remediation of its Year 2000
exposures. Simultanteously, it is examining 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. 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.
-28-
<PAGE>
<TABLE>
TWE GENERAL PARTNERS
CONSOLIDATED BALANCE SHEETS
(Unaudited)
WCI ATC
--- ---
June 30, December 31, June 30, December 31,
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and equivalents............................................ $ 113 $ 160 $ - $ -
Receivables, less allowances of $235 and $278 million........... 856 1,454 - -
Inventories..................................................... 139 151 - -
Prepaid expenses................................................ 755 670 - -
------ ------ ------ ------
Total current assets............................................ 1,863 2,435 - -
Investments in and amounts due to and from TWE.................. 2,377 1,632 1,850 1,494
Investments in TW Companies..................................... 103 103 61 61
Other investments............................................... 1,435 1,350 441 404
Music catalogues, contracts and copyrights...................... 824 876 - -
Goodwill........................................................ 3,445 3,509 - -
Other assets, primarily property, plant and equipment........... 435 443 - -
------ ------ ------ ------
Total assets.................................................... $10,482 $10,348 $2,352 $1,959
====== ====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties payable.................................. $ 950 $ 1,079 $ - $ -
Other current liabilities....................................... 434 548 - -
------ ------ ------ ------
Total current liabilities....................................... 1,384 1,627 - -
Long-term liabilities, including $799, $670, $565 and
$477 million due to TW Companies............................. 1,067 1,020 565 477
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................................................. 10,195 10,195 2,523 2,523
Retained earnings (accumulated deficit)......................... 249 (1) (192) (360)
--- -- ---- ----
10,445 10,195 2,332 2,164
Due from TW Companies, net...................................... (1,828) (1,908) (209) (346)
Reciprocal interest in TW Companies stock....................... (586) (586) (336) (336)
---- ---- ---- ----
Total shareholders' equity...................................... 8,031 7,701 1,787 1,482
----- ----- ----- -----
Total liabilities and shareholders' equity...................... $10,482 $10,348 $2,352 $1,959
====== ====== ===== =====
See accompanying notes.
</TABLE>
-29-
<PAGE>
<TABLE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30,
(Unaudited)
WCI ATC
----------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
Revenues (a)....................................................... $828 $905 $ - $ -
--- --- --- ---
Cost of revenues (a)(b)............................................ 491 555 - -
Selling, general and administrative (a)(b)......................... 304 324 - -
--- --- --- ---
Operating expenses................................................. 795 879 - -
--- --- --- ---
Business segment operating income.................................. 33 26 - -
Equity in pretax income of TWE (a)................................. 470 102 324 70
Interest and other, net (a)(c)..................................... 76 16 44 9
--- --- --- ---
Income before income taxes......................................... 579 144 368 79
Income taxes (a)................................................... (226) (67) (144) (33)
Net income......................................................... $353 $ 77 $224 $ 46
=== === === ===
____________________
(a) Includes the following income (expenses) resulting from transactions with
Time Warner, TW Companies, TWE or equity investees of the General
Partners:
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Revenues........................................................... $ 49 $ (2) $ - $ -
Cost of revenues................................................... (7) (2) - -
Selling, general and administrative................................ (9) (5) - -
Equity in pretax income of TWE..................................... (9) (3) - -
Interest and other, net............................................ 35 30 - -
Income taxes....................................................... (199) (36) (133) (26)
(b) Includes depreciation and amortization expense of:.......... $ 85 $ 87 $ - $ 1
==== ==== ==== ====
(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>
-30-
<PAGE>
<TABLE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30,
(Unaudited)
WCI ATC
----------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
Revenues (a)....................................................... $1,764 $1,793 $ - $ -
----- ----- ---- ----
Cost of revenues (a)(b)............................................ 1,034 1,131 - -
Selling, general and administrative (a)(b)......................... 666 608 - -
----- ----- ---- ----
Operating expenses................................................. 1,700 1,739 - -
----- ----- ---- ----
Business segment operating income.................................. 64 54 - -
Equity in pretax income of TWE (a)................................. 672 175 462 120
Interest and other, net (a)(c)..................................... 80 15 48 14
----- ----- ---- ----
Income before income taxes......................................... 816 244 510 134
Income taxes (a)................................................... (345) (125) (205) (60)
---- ---- ---- ---
Net income......................................................... $ 471 $ 119 $ 305 $ 74
===== ===== ===== ====
- ------------------
(a) Includes the following income (expenses) resulting from transactions with
Time Warner, TW Companies, TWE or equity investees of the General
Partners:
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Revenues........................................................... $ 113 $ 46 $ - $ -
Cost of revenues................................................... (12) (11) - -
Selling, general and administrative................................ (10) (2) - -
Equity in pretax income of TWE..................................... (25) (12) - -
Interest and other, net............................................ 65 38 - -
Income taxes....................................................... (284) (71) (183) (47)
(b) Includes depreciation and amortization expense of:.......... $ 165 $170 $ - $ -
==== ==== ==== ====
(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>
-31-
<PAGE>
<TABLE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
(Unaudited)
WCI ATC
--- ---
1999 1998 1999 1998
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
OPERATIONS
Net income......................................................... $471 $119 $305 $ 74
Adjustments for noncash and nonoperating items:
Depreciation and amortization...................................... 165 170 - -
Excess (deficiency) of distributions over equity in pretax
income of TWE................................................. (506) 2 (348) 1
Equity in losses (income) of other investee companies after
distributions................................................. (3) 48 (2) -
Changes in operating assets and liabilities........................ (112) (224) (34) (1)
---- ---- --- ---
Cash provided (used) by operations................................. 15 115 (79) 74
---- ---- --- ---
INVESTING ACTIVITIES
Investments and acquisitions....................................... (20) (22) - -
Capital expenditures............................................... (60) (44) - -
Investment proceeds................................................ 25 64 - -
---- ---- --- ---
Cash used by investing activities.................................. (55) (2) - -
---- ---- --- ---
FINANCING ACTIVITIES
Dividends.......................................................... (87) (98) (58) (65)
Decrease (increase) in amounts due from TW Companies, net.......... 80 24 137 (9)
---- ---- --- ---
Cash provided (used) by financing activities....................... (7) (74) 79 (74)
---- ---- --- ---
INCREASE (DECREASE) IN CASH AND EQUIVALENTS........................ (47) 39 - -
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD........................ 160 102 - -
---- ---- --- ---
CASH AND EQUIVALENTS AT END OF PERIOD.............................. $113 $141 $ - $ -
==== ==== ==== ====
See accompanying notes.
</TABLE>
-32-
<PAGE>
<TABLE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Six Months Ended June 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......................................................... 471 119 305 74
Other comprehensive income (loss).................................. (6) (19) 9 (7)
----- ----- ----- -----
Comprehensive income (a)........................................... 465 100 314 67
Increase in stock option distribution liability to
TW Companies (b)................................................ (213) (246) (146) (168)
Dividends.......................................................... (3) (3) - -
Transfers to TW Companies, net..................................... 80 24 137 (9)
Other.............................................................. 1 1 - -
----- ----- ----- -----
BALANCE AT END OF PERIOD........................................... $8,031 $8,397 $1,787 $1,977
===== ===== ===== =====
________________
(a)Comprehensive income for WCI was $354 million and $76 million for the three
months ended June 30, 1999 and 1998, respectively. Comprehensive income for
ATC was $225 million and $43 million for the three months ended June 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
$213 million and $246 million for WCI and $146 million and $168 million for
ATC were accrued in the first six 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>
-33-
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
On June 30, 1992, thirteen direct or indirect subsidiaries of Time
Warner Companies, Inc. ("TW Companies") contributed the assets and liabilities
or the rights to the cash flows of substantially all of TW Companies's Filmed
Entertainment-Warner Bros., Cable Networks-HBO and Cable businesses to Time
Warner Entertainment Company, L.P., a Delaware limited partnership ("TWE"), for
general partnership interests, and each general partner guaranteed a pro rata
portion of substantially all of TWE's debt and accrued interest 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.
2. TWE
The General Partners' investment in and amounts due to and from TWE at
June 30, 1999 and December 31, 1998 consists of the following:
<TABLE>
June 30, 1999 WCI ATC
_____________ --- ---
(millions)
<S> <C> <C>
Investment in TWE........................................................................... $1,846 $1,302
Stock option related distributions due from TWE............................................. 799 548
Other net liabilities due to TWE, principally related to home video distribution............ (268) -
----- -----
Total....................................................................................... $2,377 $1,850
===== =====
</TABLE>
-34-
<PAGE>
<TABLE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
December 31, 1998 WCI ATC
_________________ --- ---
(millions)
<S> <C> <C>
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
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 owned 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 $1.079 billion and $263
million for the six months ended June 30, 1999 and 1998, respectively, no
portion of which was allocated to the limited partnership interests.
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.
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(millions)
Operating Statement Information
<S> <C> <C> <C> <C>
Revenues........................................................... $3,060 $2,850 $5,994 $5,760
Depreciation and amortization...................................... (334) (356) (642) (727)
Business segment operating income (1).............................. 1,212 455 1,863 824
Interest and other, net............................................ (167) (183) (392) (347)
Minority interest.................................................. (233) (82) (301) (146)
Income before income taxes......................................... 794 172 1,134 295
Net income......................................................... 767 155 1,079 263
_________________
(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 and net pretax
gains relating to the sale or exchange of certain cable television systems
and investments of $760 million recognized in the second quarter of 1999,
$70 million recognized in the second quarter of 1998, and $84 million for
the six months ended June 30, 1998.
</TABLE>
-35-
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
<TABLE>
Six Months
Ended June 30,
--------------
1999 1998
---- ----
(millions)
Cash Flow Information
<S> <C> <C>
Cash provided by operations................................................................. $1,519 $ 586
Capital expenditures........................................................................ (649) (734)
Investments and acquisitions................................................................ (223) (265)
Investment proceeds......................................................................... 210 506
Borrowings.................................................................................. 1,310 503
Debt repayments............................................................................. (1,539) (492)
Redemption of preferred stock of subsidiary................................................. (217) -
Capital distributions....................................................................... (280) (298)
Other financing activities, net............................................................. (101) (56)
Increase (decrease) in cash and equivalents................................................. 30 (250)
June 30, December 31,
-------- ------------
1999 1998
---- ----
(millions)
Balance Sheet Information
<S> <C> <C>
Cash and equivalents........................................................................ $ 117 $ 87
Total current assets........................................................................ 4,223 4,183
Total assets................................................................................ 22,889 22,230
Total current liabilities................................................................... 4,745 4,936
Long-term debt ............................................................................. 6,535 6,578
Minority interests.......................................................................... 1,744 1,522
Preferred stock of subsidiary............................................................... - 217
General Partners' Senior Capital............................................................ 627 603
Partners' capital........................................................................... 5,711 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 June 30, 1999 and December 31, 1998, the
General Partners had recorded $1.347 billion and $1.130 billion, respectively,
of stock option related distributions due from TWE, based on closing prices of
Time Warner common stock of $72.63 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 six
months ended June 30, 1999, the General Partners received distributions from
TWE in the amount of $280 million, consisting of $138 million of tax-related
distributions and $142 million of stock option related distributions. During
the six months ended June 30, 1998, the General Partners received distributions
from TWE in the mount of $298 million, consisting of $138 million of tax-
related distributions and $160 million of stock option related distributions.
Of such aggregate distributions in 1999 and 1998, WCI received $166 million and
$177 million, respectively, and ATC received $114 million and $121 million,
respectively.
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.
-36-
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
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.
Gain on Sale or Exchange of Cable Television Systems and Investments
In 1999 and 1998, largely in an effort to enhance their geographic
clustering of cable television properties, TWE sold or exchanged various cable
television systems and investments. The 1999 transactions included an 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. As a result of these transactions, the operating
results of TWE's Cable division include net pretax gains for the second quarter
of $760 million in 1999 compared to $70 million of net pretax gains recognized
in the second quarter of 1998. Of such amounts, approximately $450 million and
$41 million has been included in WCI's equity in the pretax income of TWE in
the accompanying consolidated statements of operations for the second quarter
of 1999 and 1998, respectively. In addition, approximately $310 million and $29
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
second quarter of 1999 and 1998, respectively. Net pretax gains for the first
half of 1998 amounted to $84 million, of which $50 million has been recognized
by WCI and $34 million has been recognized by ATC.
Primestar
TWE owns an approximate 24% equity interest in Primestar. In January 1999,
Primestar, an indirect wholly owned subsidiary of Primestar and the stock-
holders 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. Future wind-down losses are not expected to be material to TWE's
operating results.
-37-
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
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 its 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.
4. GENERAL PARTNER GUARANTEES
Each General Partner has guaranteed a pro rata portion of approximately
$5.2 billion of TWE's debt and accrued interest at June 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 June 30, 1999 that was
guaranteed by each General Partner is set forth below (dollars in millions):
<TABLE>
Total Guaranteed by
Each General Partner
--------------------
<S> <C> <C>
General Partner % Amount
- --------------- ----- ------
WCI ..................................................................................... 59.27 $3,093
ATC ..................................................................................... 40.73 2,125
----- -----
Total..................................................................................... 100.00 $5,218
====== ======
</TABLE>
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.
6. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash flows is as
follows:
<TABLE>
Six Months Ended June 30,
-------------------------
1999 1998
------------- ------------
WCI ATC WCI ATC
--- --- --- ---
(millions)
<S> <C> <C> <C> <C>
Cash payments made for interest.......................................... $ 6 $ - $ 5 $ -
Cash payments made for income taxes, net................................. 352 183 103 47
Tax-related distributions received from TWE.............................. 82 56 82 56
Noncash capital distributions, net....................................... (213) (146) (246) (168)
</TABLE>
-38-
<PAGE>
Part II. Other Information
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 that MediaOne Group Inc.'s management and governance rights
over all of TWE's businesses have terminated, resulting in Time Warner Inc.
consolidating TWE's operating results and financial position for accounting
purposes, which is expected to occur no later than the third quarter of this
year.
-39-
<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: August 13, 1999
-40-
<PAGE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulations S-K
Exhibit No. Description of Exhibit
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
financial statements of Time Warner Entertainment Company, L.P. for the six
months ended June 30, 1999 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000893657
<NAME> TIME WARNER ENTERTAINMENT COMPANY, L.P.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 117
<SECURITIES> 0
<RECEIVABLES> 3,115
<ALLOWANCES> 476
<INVENTORY> 3,361
<CURRENT-ASSETS> 4,223
<PP&E> 10,142
<DEPRECIATION> 3,840
<TOTAL-ASSETS> 22,889
<CURRENT-LIABILITIES> 4,745
<BONDS> 6,535
<COMMON> 0
627
0
<OTHER-SE> 5,711
<TOTAL-LIABILITY-AND-EQUITY> 22,889
<SALES> 5,994
<TOTAL-REVENUES> 5,994
<CGS> 2,929
<TOTAL-COSTS> 2,929
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 273
<INCOME-PRETAX> 1,134
<INCOME-TAX> 55
<INCOME-CONTINUING> 1,079
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,079
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
