SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT of 1934 for the quarterly period ended
March 31, 2000, or ___________________
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the transition period from _________________
to ___________________.
Commission file number 001-12878
_________
TIME WARNER ENTERTAINMENT COMPANY, L.P.
(Exact name of registrant as specified in its charter)
Delaware 13-3666692
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
American Television and Communications
Corporation Delaware 13-2922502
Warner Communications Inc. Delaware 13-2696809
(Exact name of registrant a (State or other (I.R.S. Employer
specified in its charter) jurisdiction of (Identification Number)
incorporation 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
<TABLE>
Page
----
TWE
General
TWE Partners
--- --------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Management's discussion and analysis of results of operations and
financial condition ........................................................... 1 17
Consolidated balance sheets at March 31, 2000 and December 31, 1999............. 7 20
Consolidated statements of operations for the three months ended March 31, 2000
and 1999....................................................................... 8 21
Consolidated statements of cash flows for the three months ended March 31, 2000
and 1999....................................................................... 9 22
Consolidated statements of partnership capital and shareholders' equity for the
three months ended March 31, 2000 and 1999..................................... 10 23
Notes to consolidated financial statements...................................... 11 24
PART II. OTHER INFORMATION...................................................... 30
</TABLE>
<PAGE>
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 four fundamental areas: Cable Networks, consisting
principally of interests in cable television programming; Filmed Entertainment,
consisting principally of interests in filmed entertainment, television
production and television broadcasting; Cable, consisting principally of
interests in cable television systems; and Digital Media, consisting principally
of interests in Internet-related and digital media businesses. TWE also manages
the cable properties owned by Time Warner Inc. ("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 include 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, which
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.
Transactions Affecting Comparability of Results of Operations
As more fully described herein, the comparability of TWE's 1999 operating
results has been affected by an approximate $215 million net pretax gain
recognized in connection with the early termination and settlement of a
long-term, home video distribution agreement.
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 significant nonrecurring items. As such, the following
discussion and analysis focuses on amounts and trends adjusted to exclude the
impact of this unusual item. 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.
<PAGE>
<TABLE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
RESULTS OF OPERATIONS
EBITA and operating income are as follows:
Three Months Ended March 31,
----------------------------
Operating
EBITA Income
----- ---------
2000 1999 2000 1999
----- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
Filmed Entertainment-Warner Bros.(a)................... $144 $346 $114 $316
Broadcasting-The WB Network............................ (31) (41) (32) (42)
Cable Networks-HBO..................................... 144 125 144 125
Cable.................................................. 393 337 284 252
Digital Media.......................................... (13) - (13) -
---- ---- ---- ----
Total.................................................. $637 $767 $497 $651
==== ==== ==== ====
________________
(a) 1999 results include a net pretax gain of $215 million recognized in
connection with the early termination and settlement of a long-term, home
video distribution agreement.
</TABLE>
Consolidated Results
TWE had revenues of $3.297 billion and net income of $222 million for the
three months ended March 31, 2000, compared to revenues of $2.934 billion and
net income of $312 million for the three months ended March 31, 1999.
As discussed more fully below, TWE's net income decreased principally as a
result of the inclusion in 1999 of a $215 million net pretax gain recognized in
connection with the early termination and settlement of a long-term, home video
distribution agreement.
Excluding this gain, TWE's net income increased by $125 million to $222
million in 2000 from $97 million in 1999. This increase principally resulted
from an overall increase in TWE's business segment operating income and lower
losses from certain investments accounted for under the equity method.
As a U.S. partnership, TWE is not subject to U.S. federal and state income
taxation. Income and withholding taxes of $36 million and $28 million for the
three months ended March 31, 2000 and 1999, respectively, have been provided for
the operations of TWE's domestic and foreign subsidiary corporations.
Business Segment Results
Filmed Entertainment-Warner Bros. Revenues increased to $1.553 billion in
2000, compared to $1.380 billion in 1999. EBITA decreased to $144 million in
2000 from $346 million in 1999. Operating income decreased to $114 million in
2000 from $316 million in 1999. Revenues benefited from increases in the
distribution of both theatrical and television product, offset in part by lower
revenues from consumer product operations. Revenues from the distribution of
theatrical product increased principally due to higher worldwide home video and
DVD sales, higher revenues from worldwide television exhibition and higher
domestic revenues from theatrical exhibition, offset in part by lower
international revenues from theatrical exhibition. Revenues from the
distribution of television product increased principally due to higher aggregate
revenues from pay-TV, basic cable, broadcast network and syndicated television
exhibition.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Operating results for 1999 included an approximate $215 million net pretax
gain recognized in connection with the early termination and settlement of a
long-term, home video distribution agreement. Excluding the effect of this item,
EBITA and operating income increased primarily as a result of the revenue gains,
offset in part by lower investment-related income.
Broadcasting - The WB Network. Revenues increased to $102 million in
2000, compared to $79 million in 1999. EBITA improved to a loss of $31 million
in 2000 from a loss of $41 million in 1999. Operating losses decreased to $32
million in 2000 from $42 million in 1999. Revenues increased principally as a
result of one additional night of prime-time programming in comparison to the
prior year and advertising rate increases, offset in part by lower prime-time
television ratings. Prime-time television ratings were negatively affected by
lower household delivery associated with the WGN Superstation discontinuing its
carriage of The WB Network's programming beginning in the fall of 1999. The
EBITA and operating loss improvements were due to the revenue gains, which more
than offset higher programming costs associated with the expanded programming
schedule.
Cable Networks-HBO. Revenues increased to $554 million in 2000, compared to
$526 million in 1999. EBITA and operating income increased to $144 million in
2000 from $125 million in 1999. Revenues benefited primarily from an increase in
subscriptions. EBITA and operating income increased principally due to the
revenue gains and increased cost savings, offset in part by lower gains from the
sale of certain investments.
Cable. Revenues increased to $1.231 billion in 2000, compared to $1.074
billion in 1999. EBITA increased to $393 million in 2000 from $337 million in
1999. Operating income increased to $284 million in 2000 from $252 million in
1999. Revenues increased due to growth in basic cable subscribers, increases in
basic cable rates, increases in advertising revenues and increases from the
deployment of digital cable and high-speed online services. EBITA and operating
income increased principally as a result of the revenue gains and
pension-related cost savings, offset in part by higher programming costs and
higher depreciation related to capital spending.
Digital Media. Digital Media operating results reflect costs associated
with the fourth quarter 1999 start-up of TWE's digital media businesses. Digital
Media had $13 million of operating losses on $1 million of revenues in 2000. Due
to the start-up nature of these businesses, losses are expected to continue in
2000.
Interest and Other, Net. Interest and other, net, decreased to $180 million
of expense in 2000, compared to $220 million of expense in 1999. Interest
expense increased to $144 million in 2000, compared to $137 million in 1999 as a
result of higher market interest rates on variable-rate debt. Other expense, net
decreased to $36 million in 2000, compared to $83 million in 1999. This decrease
principally related to lower losses from certain investments accounted for under
the equity method.
Minority Interest. Minority interest expense decreased to $40 million in
2000, compared to $73 million in 1999. Minority interest decreased principally
due to a higher allocation of losses to a minority partner in The WB Network.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
FINANCIAL CONDITION AND LIQUIDITY
March 31, 2000
Financial Condition
At March 31, 2000, TWE had $6.7 billion of debt, $360 million of cash and
equivalents (net debt of $6.3 billion) and $6.3 billion of partners' capital.
This compares to $6.7 billion of debt, $517 million of cash and equivalents (net
debt of $6.2 billion) and $7.1 billion of partners' capital at December 31,
1999.
Cash Flows
During the first three months of 2000, TWE's cash provided by operations
amounted to $776 million and reflected $637 million of business segment EBITA,
$215 million of noncash depreciation expense and $121 million related to a
decrease in working capital requirements, other balance sheet accounts and
noncash items, less $157 million of interest payments, $19 million of income
taxes, $19 million of corporate expenses and $2 million of proceeds repaid under
TWE's asset securitization program. Cash provided by operations of $788 million
in the first three months of 1999 reflected $767 million of business segment
EBITA, $192 million of noncash depreciation expense and $44 million related to a
decrease in working capital requirements, other balance sheet accounts and
noncash items, less $144 million of interest payments, $22 million of income
taxes, $18 million of corporate expense and $31 million of proceeds repaid under
TWE's asset securitization program.
Cash used by investing activities was $599 million in the first three
months of 2000, compared to $322 million in 1999, principally as a result of an
increase in cash used for investments and acquisitions and an increase in
capital expenditures. Capital expenditures increased to $391 million in the
first three months of 2000, compared to $305 million in 1999.
Cash used by financing activities was $334 million in the first three
months of 2000, compared to $232 million in 1999. The use of cash in 2000
principally related to $308 million of capital distributions to Time Warner. The
use of cash in 1999 principally resulted from the redemption of preferred stock
of a subsidiary at an aggregate cost of $217 million and the payment of $154
million of capital distributions to Time Warner, offset in part by a $157
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 $360 million in the
three months ended March 31, 2000, compared to $276 million in 1999. Cable
capital spending for the remainder of 2000 is budgeted to be approximately $1.3
billion, reflecting higher spending on variable capital to facilitate a more
aggressive roll-out of Time Warner Cable's popular digital cable and high-speed
online services. Capital spending is expected to continue to be funded by cable
operating cash flow.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
Warner Bros. Backlog
Warner Bros.'s backlog, representing the amount of future revenue not yet
recorded from cash contracts for the licensing of theatrical and television
product for pay cable, basic cable, network and syndicated television
exhibition, amounted to $2.749 billion at March 31, 2000 (including amounts
relating to TWE's cable television networks of $331 million and to Time Warner's
cable television networks of $558 million), compared to $3.033 billion at
December 31, 1999 (including amounts relating to TWE's cable television networks
of $365 million and $599 million to Time Warner's cable television networks).
Because backlog generally relates to contracts for the licensing of
theatrical and television product which have already been produced, the
recognition of revenue for such completed product is principally only dependent
upon the commencement of the availability period for telecast under the terms of
the related licensing agreement. Cash licensing fees are received periodically
over the term of the related licensing agreements or on an accelerated basis
using a $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. As of March 31, 2000, including cash received
under the securitization facility and other advanced payments, approximately
$600 million of cash licensing fees had been collected against the backlog. 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.
Caution Concerning Forward-Looking Statements
The SEC 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 with the SEC and:
. For TWE's cable business, more aggressive than expected competition
from new technologies and other types of video programming
distributors, including DBS and DSL; increases in government
regulation of basic cable or equipment rates or other terms of service
(such as "digital must-carry" or common carrier requirements);
increased difficulty in obtaining franchise renewals; the failure of
new equipment (such as digital set-top boxes) or services (such as
digital cable and 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
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
reasonable prices and to be delivered in a timely fashion; and greater than
expected increases in programming or other costs.
. For TWE's cable programming and television businesses, greater than expected
programming or production costs; public and cable operator resistance to
price increases (and the negative impact on premium programmers of increases
in basic cable rates); increased regulation of distribution agreements; the
sensitivity of advertising to economic cyclicality; and greater than
expected fragmentation of consumer viewership due to an increased number of
programming services or the increased popularity of alternatives to
television.
. For TWE's film and television businesses, their ability to continue to
attract and select desirable talent and scripts at manageable costs;
increases in production costs generally; fragmentation of consumer leisure
and entertainment time (and its possible negative effects on the broadcast
and cable networks, which are significant customers of these businesses);
continued popularity of merchandising; and the uncertain impact of
technological developments such as DVD and the Internet.
. For TWE's digital media businesses, their ability to locate and invest in
profitable businesses, 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.
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.
<PAGE>
<TABLE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31,
2000 1999
-----------------------
(millions)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents....................................................... $ 360 $ 517
Receivables, including $1.165 and $1.354 billion due from Time Warner,
less allowances of $685 and $668 million................................. 2,837 3,328
Inventories................................................................ 1,192 1,220
Prepaid expenses........................................................... 195 246
------ ------
Total current assets....................................................... 4,584 5,311
Noncurrent inventories..................................................... 2,259 2,274
Investments................................................................ 767 774
Property, plant and equipment.............................................. 6,708 6,488
Cable television franchises................................................ 5,558 5,464
Goodwill................................................................... 3,698 3,731
Other assets............................................................... 698 801
------ ------
Total assets............................................................... $24,272 $24,843
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable........................................................... $ 1,636 $ 1,791
Participations and programming costs payable............................... 1,676 1,717
Debt due within one year................................................... 6 6
Other current liabilities, including $951 and $893 million due to
Time Warner.............................................................. 1,966 2,209
----- -----
Total current liabilities.................................................. 5,284 5,723
Long-term debt............................................................. 6,648 6,655
Other long-term liabilities, including $2.014 and $1.292 billion due to
Time Warner.............................................................. 4,192 3,501
Minority interests......................................................... 1,805 1,815
Partners' capital
Contributed capital........................................................ 7,349 7,338
Partnership deficit........................................................ (1,006) (189)
------ ------
Total partners' capital.................................................... 6,343 7,149
------ ------
Total liabilities and partners' capital.................................... $24,272 $24,843
======= =======
</TABLE>
See accompanying notes.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
Three Months
Ended March 31,
---------------
2000 1999
---- ----
(millions)
<S> <C> <C>
Revenues(a)................................................................ $3,297 $2,934
Cost of revenues(a)(b)..................................................... (2,080) (1,818)
Selling, general and administrative(a)(b).................................. (580) (564)
Amortization of goodwill and other intangible assets....................... (140) (116)
Gain on early termination of video distribution agreement.................. - 215
----- -----
Business segment operating income.......................................... 497 651
Interest and other, net(a)................................................. (180) (220)
Corporate services(a)...................................................... (19) (18)
Minority interest.......................................................... (40) (73)
------ ------
Income before income taxes................................................. 258 340
Income taxes............................................................... (36) (28)
------ ------
Net income................................................................. $ 222 $ 312
====== ======
- ---------------
(a) Includes the following income (expenses) resulting from transactions with
the partners of TWE and other related companies:
Revenues............................................................. $ 93 $120
Cost of revenues..................................................... (63) (78)
Selling, general and administrative.................................. (24) (4)
Interest and other, net.............................................. 3 20
Corporate expenses................................................... (19) (18)
(b) Includes depreciation expense of:...................................... $215 $192
==== ====
</TABLE>
See accompanying notes.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
Three Months
Ended March 31,
---------------
2000 1999
---- ----
(millions)
<S> <C> <C>
OPERATIONS
Net income................................................................. $ 222 $ 312
Adjustments for noncash and nonoperating items:
Depreciation and amortization........................................... 355 308
Amortization of film costs.............................................. 478 436
Equity in losses of investee companies after distributions.............. 31 63
Changes in operating assets and liabilities................................ (310) (331)
----- -----
Cash provided by operations................................................ 776 788
----- -----
INVESTING ACTIVITIES
Investments and acquisitions............................................... (272) (47)
Capital expenditures....................................................... (391) (305)
Investment proceeds........................................................ 64 30
----- -----
Cash used by investing activities.......................................... (599) (322)
----- -----
FINANCING ACTIVITIES
Borrowings................................................................. 894 1,160
Debt repayments............................................................ (901) (1,003)
Redemption of preferred stock of subsidiary................................ - (217)
Capital distributions...................................................... (308) (154)
Other...................................................................... (19) (18)
------ -----
Cash used by financing activities.......................................... (334) (232)
------ -----
INCREASE (DECREASE) IN CASH AND EQUIVALENTS................................ (157) 234
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................................ 517 87
----- -----
CASH AND EQUIVALENTS AT END OF PERIOD...................................... $ 360 $ 321
====== ======
</TABLE>
See accompanying notes.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL
(Unaudited)
<TABLE>
Three Months
Ended March 31,
---------------
2000 1999
----- ----
(millions)
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD............................................. $7,149 $5,107
Net income................................................................. 222 312
Other comprehensive income (loss).......................................... (9) 41
------- -----
Comprehensive income....................................................... 213 353
Distributions.............................................................. (1,030) (333)
Allocation of income to Time Warner General Partners' Senior Capital....... - (12)
Other...................................................................... 11 -
------- -------
BALANCE AT END OF PERIOD................................................... $6,343 $5,115
====== ======
</TABLE>
See accompanying notes.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Time Warner Entertainment Company, L.P., a Delaware limited partnership
("TWE"), classifies its business interests into four fundamental areas: Cable
Networks, consisting principally of interests in cable television programming;
Filmed Entertainment, consisting principally of interests in filmed
entertainment, television production and television broadcasting; Cable,
consisting principally of interests in cable television systems; and Digital
Media, consisting principally of interests in Internet-related and digital media
businesses.
Each of the business interests within Cable Networks, Filmed Entertainment,
Cable and Digital Media 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.'s collection of
children's cartoons and television programming, (4) Time Warner Cable, currently
the largest operator of cable television systems in the U.S. and (5) Internet
websites, such as Entertaindom.com.
The operating results of TWE's various business segments are presented
herein as an indication of financial performance (Note 5). Except for start-up
losses incurred in connection with The WB Network and Digital Media, TWE's
principal business segments generate significant operating income and cash flow
from operations. The cash flow from operations generated by such business
segments is considerably greater than their operating income due to significant
amounts of noncash amortization of intangible assets recognized principally in
Time Warner Inc.'s ("Time Warner") $14 billion acquisition of Warner
Communications Inc. ("WCI") in 1989 and $1.3 billion acquisition of the minority
interest in American Television and Communications Corporation ("ATC") in 1992,
a portion of which cost was allocated to TWE upon the capitalization of the
partnership. Noncash amortization of intangible assets recorded by TWE's
business segments amounted to $140 million in 2000 and $116 million in 1999.
Certain of Time Warner's 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 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, 1999
(the "1999 Form 10-K").
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the 2000 presentation.
2. SIGNIFICANT TRANSACTIONS
America Online-Time Warner Merger
In January 2000, Time Warner and America Online, Inc. ("America Online")
announced that they had entered into an agreement to merge (the "Merger") by
forming a new holding company named AOL Time Warner Inc. ("AOL Time Warner").
The Merger will create a leading, fully integrated media and communications
company that will combine Time Warner's and TWE's collection of media,
entertainment and news brands and its technologically advanced cable
infrastructure with America Online's extensive Internet franchises and
technology. Management believes that the combined company will be well
positioned to expand the use of the Internet in consumers' everyday lives and,
accordingly, provide Time Warner's and TWE's content businesses with increased
access to consumers through a new and growing distribution medium. Management
further believes that the Merger will result in significant new business and
other value-creation opportunities, including additional opportunities for
e-commerce, growth in subscribers for each company's products and services, and
cost and operating efficiencies from cross-promotional and other opportunities.
As a result of the Merger, the former shareholders of America Online will
have an approximate 55% interest in AOL Time Warner and the former shareholders
of Time Warner will have an approximate 45% interest in the combined entity,
expressed on a fully diluted basis. The Merger is expected to be accounted for
by AOL Time Warner as an acquisition of Time Warner under the purchase method of
accounting for business combinations.
The Merger is expected to close in the fall of 2000 and is subject to
customary closing conditions, including the approval of the shareholders of each
of America Online and Time Warner and all necessary regulatory approvals. There
can be no assurance that such approvals will be obtained.
1999 Gain on Termination of 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 1999 business segment
operating income in the accompanying consolidated statement of operations.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
3. INVENTORIES
<TABLE>
Inventories consist of:
March 31, 2000 December 31, 1999
---------------- ------------------
Current Noncurrent Current Noncurrent
------- ---------- ------- ----------
(millions)
<S> <C> <C> <C> <C>
Film costs:
Released, less amortization................... $ 598 $ 758 $ 652 $ 774
Completed and not released.................... 90 24 60 17
In process and other.......................... 7 513 8 532
Library, less amortization.................... - 495 - 508
Programming costs, less amortization............. 417 469 411 443
Merchandise...................................... 80 - 89 -
------ ------ ------ ------
Total............................................ $1,192 $2,259 $1,220 $2,274
====== ====== ====== ======
</TABLE>
4. 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 three months ended March 31, 2000, TWE accrued $145 million of
tax-related distributions and $885 million of stock option distributions, based
on closing prices of Time Warner Inc. common stock of $100.00 at March 31, 2000
and $72.31 at December 31, 1999. During the three months ended March 31, 1999,
TWE accrued $67 million of tax-related distributions and $266 million of stock
option distributions as a result of an increase at that time in the market price
of Time Warner Inc. common stock. During the three months ended March 31, 2000,
TWE paid distributions to the Time Warner General Partners in the amount of $308
million, consisting of $145 million of tax-related distributions and $163
million of stock option related distributions. During the three months ended
March 31, 1999, TWE paid the Time Warner General Partners distributions in the
amount of $154 million, consisting of $67 million of tax-related distributions
and $87 million of stock option related distributions.
5. SEGMENT INFORMATION
TWE classifies its business interests into four fundamental areas: Cable
Networks, consisting principally of interests in cable television programming;
Filmed Entertainment, consisting principally of interests in filmed
entertainment, television production and television broadcasting; Cable,
consisting principally of interests in cable television systems; and Digital
Media, consisting principally of interests in Internet-related and digital media
businesses. TWE's Digital Media segment commenced operations in the fourth
quarter of 1999.
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
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
accounting policies of the business segments are the same as those
described in the summary of significant accounting policies under Note 1 in
TWE's 1999 Annual Report on Form 10-K. Intersegment sales are accounted for at
fair value as if the sales were to third parties.
<TABLE>
Three Months
Ended March 31,
---------------
2000 1999
---- ----
(millions)
<S> <C> <C>
Revenues
Filmed Entertainment-Warner Bros........................................... $1,553 $1,380
Broadcasting-The WB Network................................................ 102 79
Cable Networks-HBO......................................................... 554 526
Cable...................................................................... 1,231 1,074
Digital Media.............................................................. 1 -
Intersegment elimination................................................... (144) (125)
------ -------
Total...................................................................... $3,297 $2,934
====== ======
Three Months
Ended March 31,
---------------
2000 1999
---- ----
(millions)
EBITA(a)
Filmed Entertainment-Warner Bros.(b)....................................... $144 $346
Broadcasting-The WB Network................................................ (31) (41)
Cable Networks-HBO......................................................... 144 125
Cable...................................................................... 393 337
Digital Media.............................................................. (13) -
----- -------
Total...................................................................... $637 $767
==== ====
- ---------------
(a) EBITA represents business segment operating income before noncash
amortization of intangible assets. After deducting amortization of
intangible assets, TWE's business segment operating income was $497 million
in 2000 and $651 million in 1999.
(b) 1999 results include a net pretax gain of $215 million recognized in
connection with the early termination and settlement of a long-term, home
video distribution agreement.
Three Months
Ended March 31,
---------------
2000 1999
---- ----
(millions)
Depreciation of Property, Plant and Equipment
Filmed Entertainment-Warner Bros........................................... $ 21 $ 29
Broadcasting-The WB Network................................................ - -
Cable Networks-HBO......................................................... 7 7
Cable...................................................................... 186 156
Digital Media.............................................................. 1 -
----- ------
Total...................................................................... $215 $192
==== ====
</TABLE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
<TABLE>
Three Months
Ended March 31,
---------------
2000 1999
---- ----
(millions)
<S> <C> <C>
Amortization of Intangible Assets(a)
Filmed Entertainment-Warner Bros........................................... $ 30 $ 30
Broadcasting-The WB Network................................................ 1 1
Cable Networks-HBO......................................................... - -
Cable...................................................................... 109 85
Digital Media.............................................................. - -
---- -----
Total...................................................................... $140 $116
==== ====
- -------------------
(a)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>
6. COMMITMENTS AND CONTINGENCIES
TWE is subject to certain litigation relating to Six Flags. In December
1998, a jury returned an adverse verdict in the Six Flags matter in the amount
of $454 million. TWE and its former 51% partner in Six Flags are financially
responsible for this judgment. Management believes that there were numerous
legal errors in the case and has appealed the verdict. In management's opinion
and considering the gain deferred on the sale of Six Flags described on page
F-41 of TWE's 1999 Form 10-K to cover this potential exposure, the resolution of
this matter is not expected to have a material effect on TWE's financial
statements.
TWE is subject to numerous other 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.
7. ADDITIONAL FINANCIAL INFORMATION
Cash Flows
Additional financial information with respect to cash flows is as
follows:
<TABLE>
Three Months
Ended March 31,
---------------
2000 1999
---- ----
(millions)
<S> <C> <C>
Cash payments made for interest.................................... $157 $144
Cash payments made for income taxes, net........................... 19 22
Noncash capital distributions...................................... 885 266
</TABLE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Interest and Other, Net
Interest and other, net, consists of:
<TABLE>
Three Months
Ended March 31,
---------------
2000 1999
---- ----
(millions)
<S> <C> <C>
Interest expense................................................... $(144) $(137)
Other investment-related activity, principally net losses on
corporate-related equity investees................................ (14) (66)
Corporate finance-related activity, including losses on asset
securitization programs........................................... (7) (9)
Miscellaneous...................................................... (15) (8)
----- ------
Total interest and other, net...................................... $(180) $(220)
===== =====
</TABLE>
<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. 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 LLC, and its revolving credit
agreement with TW Companies. Capitalized terms are as defined and described in
the accompanying consolidated financial statements, or elsewhere herein.
Use of EBITA
WCI evaluates operating performance based on several factors, 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, generally are
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
WCI's operating results for 1999 reflect a change in the way management
evaluates its investment in the Columbia House Company Partnerships ("Columbia
House"), an equity investee. Effective on January 1, 2000, management
reclassified WCI's share of the operating results of Columbia House from
business segment operating income to interest and other, net, in the
accompanying statement of operations. This reclassification resulted primarily
from the planned restructuring of Columbia House's traditional direct-marketing
business and an increasing dependency on the sale of video product.
WCI had revenues of $917 million and a net loss of $1 million for the three
months ended March 31, 2000, compared to revenues of $936 million and net income
of $118 million for the three months ended March 31, 1999. EBITA decreased to
$80 million in 2000 from $89 million in 1999 after giving effect to the Columbia
House
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
reclassification described earlier. Operating income decreased to $21
million in 2000 from $27 million in 1999 after giving effect to the Columbia
House reclassification. Revenues decreased primarily due to lower domestic
recorded music sales, offset in part by increased revenues from DVD
manufacturing operations. The revenue decline principally related to lower sales
of new releases and carryover product in comparison to the prior year. EBITA and
operating income decreased principally as a result of the decline in revenues,
offset in part by lower artist royalty costs and higher income from DVD
manufacturing operations.
WCI's equity in the pretax income of TWE was $153 million for the three
months ended March 31, 2000, compared to $202 million for the three months ended
March 31, 1999. TWE's pretax income decreased in 2000 as compared to 1999
principally as a result of the inclusion of an approximate $215 million net
pretax gain recognized in 1999 in connection with the early termination and
settlement of a long-term, home video distribution agreement. Excluding this
gain, TWE's pretax income increased to $258 million in 2000 from $125 million in
the prior year. This increase principally resulted from an overall increase in
business segment operating income and lower losses from certain investments
accounted for under the equity method of accounting.
Interest and other, net was $143 million of expense for the three months
ended March 31, 2000, compared to $8 million of income for the three months
ended March 31, 1999. Interest expense was $2 million both in 2000 and in 1999.
There was other expense, net, of $141 million in 2000, compared to other income,
net, of $10 million in 1999. The decrease in other income, net was principally
because of a $115 million noncash pretax charge in 2000 to reduce the carrying
value of WCI's investment in Columbia House and higher losses from certain
investments accounted for under the equity method of accounting.
The relationship between income before income taxes and income tax expense
for the General Partners is principally affected by the amortization of goodwill
and certain other financial statement expenses that are not deductible for
income tax purposes. Income tax expense for each of the General Partners
includes all income taxes related to its allocable share of partnership income
and its equity in the income tax expense of corporate subsidiaries of TWE.
FINANCIAL CONDITION AND LIQUIDITY
March 31, 2000
Financial Condition
WCI had $8.3 billion of equity at March 31, 2000, compared to $8.7 billion
of equity at December 31, 1999. Cash and equivalents increased to $143 million
at March 31, 2000, compared to $107 million at December 31, 1999. WCI had no
borrowings outstanding to TW Companies under its revolving credit agreement at
the end of either period.
ATC had $1.8 billion of equity at March 31, 2000, compared to $2.1 billion
at December 31, 1999. Although ATC has no independent operations, it is expected
that additional tax-related and other distributions from TWE, as well as
availability under ATC's revolving credit agreement with TW Companies, will
continue to be sufficient to satisfy ATC's obligations with respect to its tax
sharing agreement with TW Companies for the foreseeable future.
Cash Flows
In the first three months of 2000, cash provided by WCI's operations of $92
million reflected $80 million of EBITA, $20 million of noncash depreciation
expense, $183 million of distributions from TWE, less $2 million of interest
<PAGE>
TWE GENERAL PARTNERS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(Continued)
payments, $15 million of income taxes (net of $13 million which was received
from TW Companies under a tax sharing agreement), $31 million of proceeds repaid
under WCI's asset securitization program and $143 million related to an increase
in working capital requirements, other balance sheet accounts and noncash items.
In the first three months of 1999, WCI's cash provided by operations amounted to
$266 million and reflected $89 million of EBITA, $17 million of noncash
depreciation expense, $91 million of distributions from TWE, $125 million of
proceeds received under WCI's asset securitization program and $61 million
related to a decrease in working capital requirements, other balance sheet
accounts and noncash items, less $3 million of interest payments and $114
million of income taxes ($85 million of which was paid to TW Companies under a
tax sharing agreement).
Cash used by investing activities was $35 million in the first three months
of 2000, which was comparable to cash used by investing activities of $36
million in the first three months of 1999.
Cash used by financing activities was $21 million in the first three months
of 2000, compared to $295 million in the first three months of 1999, principally
as a result of a decrease in advances to TW Companies, offset in part by higher
dividend payments.
Management believes that WCI's operating cash flow and borrowing
availability under its revolving credit agreement with TW Companies are
sufficient to fund its capital and liquidity needs for the foreseeable future
without cash distributions from TWE above those permitted by existing
agreements.
WCI and ATC have no claims on the assets and cash flows of TWE except
through the payment of certain reimbursements and cash distributions. During the
three months ended March 31, 2000, the General Partners received an aggregate
$308 million of distributions, consisting of $145 million of tax-related
distributions and $163 million of stock option related distributions. During the
three months ended March 31, 1999, the General Partners received an aggregate
$154 million of distributions from TWE, consisting of $67 million of tax-related
distributions and $87 million of stock option related distributions. Of such
aggregate distributions, WCI received $183 million during the three months ended
March 31, 2000 and $91 million in 1999 and ATC received $125 million during the
three months ended March 31, 2000 and $63 million in 1999.
<PAGE>
<TABLE>
TWE GENERAL PARTNERS
CONSOLIDATED BALANCE SHEETS
(Unaudited)
WCI ATC
---------------------- ------------------------
March 31, December 31, March 31, December 31,
2000 1999 2000 1999
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and equivalents........................ $ 143 $ 107 $ - $ -
Receivables, less allowances of $282 and
$290 million............................. 1,162 1,528 - -
Inventories................................. 156 155 - -
Prepaid expenses............................ 807 727 - -
------ ------ ------ -----
Total current assets........................ 2,268 2,517 - -
Investments in and amounts due to and from TWE 2,702 2,476 2,142 2,170
Investments in TW Companies................. 103 103 60 60
Other investments........................... 1,348 1,497 453 449
Music catalogues, contracts and copyrights.. 755 779 - -
Goodwill.................................... 3,577 3,612 - -
Other assets, primarily property, plant and
equipment................................ 515 497 - -
------ ------ ------ -----
Total assets................................ $11,268 $11,481 $2,655 $2,679
======= ======= ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties payable.............. $ 1,099 $ 1,115 $ - $ -
Other current liabilities................... 399 534 - -
------- ------- ------ -----
Total current liabilities................... 1,498 1,649 - -
Long-term liabilities, including $1,194, $766
$837 and $542 million, respectively, due to
TW Companies................................ 1,458 1,095 837 542
Shareholders' equity
Common stock................................ 1 1 1 1
Preferred stock of WCI, $.01 par value, 90,000
shares outstanding and $90 million liquidation
preference............................... - - - -
Paid-in capital............................. 9,932 9,926 2,341 2,338
Retained earnings (deficit)................. (371) 833 (124) 172
------ -------- ------ ------
9,562 10,760 2,218 2,511
Due from TW Companies, net.................. (664) (1,437) (64) (38)
Reciprocal interest in TW Companies stock... (586) (586) (336) (336)
------- ------ ------ ------
Total shareholders' equity.................. 8,312 8,737 1,818 2,137
------- ------ ------ ------
Total liabilities and shareholders' equity.. $11,268 $11,481 $2,655 $2,679
======= ======= ====== ======
See accompanying notes.
</TABLE>
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
(Unaudited)
<TABLE>
WCI ATC
---------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
Revenues(a)............................................ $917 $936 $ - $ -
---- ---- ----- -----
Cost of revenues(a)(b)................................. (461) (485) - -
Selling, general and administrative(a)(b).............. (376) (362) - -
Amortization of goodwill and other intangibles......... (59) (62) - -
----- ----- ----- -----
Business segment operating income...................... 21 27 - -
Equity in pretax income of TWE(a)...................... 153 202 105 138
Interest and other, net(a)............................. (143) 8 10 4
---- ----- --- -----
Income before income taxes............................. 31 237 115 142
Income taxes (a)....................................... (32) (119) (48) (61)
----- ---- --- ----
Net income (loss)...................................... $ (1) $118 $ 67 $ 81
====== ==== ==== ====
- ------------------
(a) Includes the following income (expenses) resulting from transactions with
Time Warner, TW Companies, TWE or equity investees of the General Partners:
Revenues.......................................... $ 75 $ 64 $ - $ -
Cost of revenues.................................. (3) (2) - -
Selling, general and administrative............... 6 (1) - -
Equity in pretax income of TWE.................... (33) (16) - -
Interest and other, net........................... 6 27 - -
Income taxes...................................... 13 (85) (33) (50)
(b) Includes depreciation expense of:................. $ 20 $ 17 $ - $ -
==== ==== ===== =====
</TABLE>
See accompanying notes.
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
(Unaudited)
<TABLE>
WCI ATC
-------------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
OPERATIONS
Net income (loss)...................................... $ (1) $118 $ 67 $ 81
Adjustments for noncash and nonoperating items:
Depreciation and amortization....................... 79 79 - -
Excess (deficiency) of distributions over equity in
pretax income of TWE............................. 30 (111) 20 (75)
Equity in losses (income) of other investee companies
after distributions.............................. 23 (1) (4) 1
Changes in operating assets and liabilities............ (39) 181 9 (4)
---- ---- ----- -----
Cash provided by operations............................ 92 266 92 3
---- ---- ---- -----
INVESTING ACTIVITIES
Investments and acquisitions........................... (6) (9) - -
Capital expenditures................................... (29) (27) - -
---- ---- ----- -----
Cash used by investing activities...................... (35) (36) - -
---- ---- ----- -----
FINANCING ACTIVITIES
Dividends.............................................. (99) (54) (66) (35)
Decrease (increase) in amounts due from TW Companies, net 78 (241) (26) 32
-- ---- --- --
Cash used by financing activities...................... (21) (295) (92) (3)
---- ---- ---- ----
INCREASE (DECREASE) IN CASH AND EQUIVALENTS............ 36 (65) - -
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD............ 107 160 - -
---- ---- ----- -----
CASH AND EQUIVALENTS AT END OF PERIOD.................. $ 143 $ 95 $ - $ -
===== ==== ===== =====
See accompanying notes.
</TABLE>
<PAGE>
TWE GENERAL PARTNERS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Months Ended March 31,
(Unaudited)
<TABLE>
WCI ATC
-------------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD......................... $8,737 $7,701 $2,137 $1,482
Net income (loss)...................................... (1) 118 67 81
Other comprehensive income (loss)...................... 17 (7) (3) 8
----- ------ ------ -----
Comprehensive income .................................. 16 111 64 89
Increase in stock option distribution liability to
TW Companies(a)..................................... (525) (158) (360) (108)
Dividends.............................................. (697) (2) - -
Transfers to TW Companies, net......................... 773 (241) (26) 32
Other.................................................. 8 - 3 -
------ ------ ------- ------
BALANCE AT END OF PERIOD............................... $8,312 $7,411 $1,818 $1,495
====== ====== ====== ======
- ------------------
(a)The General Partners record distributions to TW Companies and a corresponding
receivable from TWE as a result of the stock option related distribution
provisions of the TWE partnership agreement. Stock option distributions of
$525 million and $158 million for WCI and $360 million and $108 million for
ATC were accrued in the first three months of 2000 and 1999, respectively,
because of an increase in the market price of Time Warner common stock (Note
3).
</TABLE>
See accompanying notes.
<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, ATC and, where
appropriate, the former general partners are referred to herein as the "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
Interim Financial Statements
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 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, 1999 (the "1999 Form 10-K").
Reclassifications
Certain reclassifications have been made to the prior year's financial
information to conform to the 2000 presentation, including a reclassification of
WCI's operating results for 1999 to reflect a change in how management
classifies WCI's share of the operating results of the Columbia House Company
Partnerships ("Columbia House"), an equity investee. Effective on January 1,
2000, management reclassified WCI's share of the operating results of Columbia
House from business segment operating income to interest and other, net. This
reclassification resulted primarily from the planned restructuring of Columbia
House's traditional direct-marketing business and an increasing dependency on
the sale of video product.
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
2. SIGNIFICANT TRANSACTIONS
America Online-Time Warner Merger
In January 2000, Time Warner and America Online, Inc. ("America Online")
announced that they had entered into an agreement to merge (the "Merger") by
forming a new holding company named AOL Time Warner Inc. ("AOL Time Warner"). As
part of the Merger, each issued and outstanding share of each class of common
stock of Time Warner will be converted into 1.5 shares of an identical series of
common stock of AOL Time Warner. In addition, each issued and outstanding share
of each class of preferred stock of Time Warner will be converted into one share
of preferred stock of AOL Time Warner, which will have substantially identical
terms except that such shares will be convertible into approximately 6.25 shares
of AOL Time Warner common stock. Lastly, each issued and outstanding share of
common stock of America Online will be converted into one share of common stock
of AOL Time Warner.
As a result of the Merger, the former shareholders of America Online will
have an approximate 55% interest in AOL Time Warner and the former shareholders
of Time Warner will have an approximate 45% interest in the combined entity,
expressed on a fully diluted basis. The Merger is expected to be accounted for
by AOL Time Warner as an acquisition of Time Warner under the purchase method of
accounting for business combinations.
The Merger is expected to close in the fall of 2000 and is subject to
customary closing conditions, including the approval of the shareholders of each
of America Online and Time Warner and all necessary regulatory approvals. There
can be no assurance that such approvals will be obtained.
Warner-EMI Music Merger
In January 2000, Time Warner and EMI Group plc ("EMI") announced they had
entered into an agreement to combine their global music operations into two
jointly owned ventures, to be referred to collectively as Warner EMI Music. WCI
will control the ventures through majority board representation, among other
factors, and will account for the transaction under the purchase method of
accounting for business combinations.
As part of the transaction, each company will contribute its music
operations to the ventures, subject to a comparable amount of debt. As of
December 31, 1999, EMI had approximately $1.5 billion of net debt. EMI
shareholders also will receive an aggregate, special cash dividend of
approximately $1.3 billion. This dividend is expected to be financed through a
combination of proceeds from debt incurred or assumed by the ventures and
consideration to be paid by Time Warner directly to EMI for a new class of EMI
equity securities. The new class of EMI equity securities to be held by Time
Warner will convert automatically into an 8% common equity interest in EMI, on a
fully diluted basis, if EMI's share price reaches (pound)9 for a short period of
time within the first three-and-a-half years after closing.
The transaction is expected to close by the end of 2000, subject to
customary closing conditions, including regulatory approvals and the approval of
EMI's shareholders. There can be no assurance that such approvals will be
obtained.
Columbia House Investment Write-Down
In July 1999, Time Warner announced an agreement with Sony Corporation of
America ("Sony") to merge their jointly owned music and video club operations of
Columbia House with CDNOW, Inc. ("CDNOW"), a music and video
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
e-commerce company. Since that time, the parties had been pursuing the
receipt of regulatory approvals. While awaiting these approvals, the March 13,
2000 termination date in the merger agreement was reached, and the parties
terminated the agreement. Accordingly, the merger will not occur.
In lieu of the merger, Time Warner and Sony each committed $25.5 million of
funding to CDNOW to help support the future growth of its business. Each
company's funding will be in the form of a $10.5 million equity investment and a
$15 million long-term convertible debt interest.
Time Warner and WCI are continuing to evaluate strategic alternatives for
Columbia House's operations. Those alternatives are focused primarily on ways to
improve Columbia House's declining operating performance, including online
initiatives, joint ventures and other strategic actions. Management believes
that such strategies are important to achieve a turnaround in Columbia House's
operating performance and to position it for long-term growth in a highly
competitive and rapidly changing business environment.
With the termination of the CDNOW merger in March 2000, the risk associated
with the timely execution of these strategies and the transformation of Columbia
House's traditional business model to an online one has increased. As a result,
management has concluded that the decline in Columbia House's business is going
to continue through the near term. As such, WCI recorded a $115 million noncash
pretax charge during the first quarter of 2000 to reduce the carrying value of
its investment in Columbia House to an estimate of its fair value. The charge
has been included in interest and other, net, in the accompanying consolidated
statement of operations.
3. TWE
<TABLE>
The General Partners' investment in and amounts due to and from TWE at
March 31, 2000 and December 31, 1999 consists of the following:
March 31, 2000 WCI ATC
-------------- --- ---
(millions)
<S> <C> <C>
Investment in TWE.................................................. $1,873 $1,322
Stock option related distributions due from TWE.................... 1,194 820
Other net liabilities due to TWE, principally related to home
video distribution (365) -
------ ------
Total.............................................................. $2,702 $2,142
====== ======
December 31, 1999 WCI ATC
----------------- --- ---
(millions)
Investment in TWE.................................................. $2,342 $1,644
Stock option related distributions due from TWE.................... 766 526
Other net liabilities due to TWE, principally related to home video
distribution (632) -
------ ------
Total.............................................................. $2,476 $2,170
====== ======
</TABLE>
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 in the aggregate hold, directly or indirectly,
63.27% of the pro rata priority capital ("Series A Capital") and residual equity
capital ("Residual Capital") of TWE and 100% of the junior priority capital
("Series B Capital") of TWE. TW Companies holds 11.22% of the Series A Capital
and Residual Capital limited partnership interests. The remaining 25.51% limited
partnership interests in the Series A Capital and Residual Capital of TWE are
held by a subsidiary of MediaOne Group, Inc. ("MediaOne").
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The TWE partnership agreement provides for special allocations of income,
loss and distributions of partnership capital, including priority distributions
in the event of liquidation. No portion of TWE's net income has been allocated
to the limited partnership interests.
Summarized Financial Information of TWE
<TABLE>
Set forth below is summarized financial information of TWE.
Three Months
Ended March 31,
---------------
2000 1999
---- ----
(millions)
<S> <C> <C>
Operating Statement Information
Revenues................................................................... $3,297 $2,934
Depreciation and amortization.............................................. (355) (308)
Business segment operating income(a)....................................... 497 651
Interest and other, net.................................................... (180) (220)
Minority interest.......................................................... (40) (73)
Income before income taxes................................................. 258 340
Net income................................................................. 222 312
- ------------------
(a) Includes a net pretax gain of approximately $215 million recognized in 1999
in connection with the early termination and settlement of a long-term, home
video distribution agreement.
Three Months
Ended March 31,
---------------
2000 1999
---- ----
(millions)
<S> <C> <C>
Cash Flow Information
Cash provided by operations................................................ $ 776 $ 788
Capital expenditures....................................................... (391) (305)
Investments and acquisitions............................................... (272) (47)
Investment proceeds........................................................ 64 30
Borrowings................................................................. 894 1,160
Debt repayments............................................................ (901) (1,003)
Redemption of preferred stock of subsidiary................................ - (217)
Capital distributions...................................................... (308) (154)
Other...................................................................... (19) (18)
Increase (decrease) in cash and equivalents................................ (157) 234
March 31, December 31,
2000 1999
-------- ------------
(millions)
Balance Sheet Information
Cash and equivalents....................................................... $ 360 $ 517
Total current assets....................................................... 4,584 5,311
Total assets............................................................... 24,272 24,843
Total current liabilities.................................................. 5,284 5,723
Long-term debt ............................................................ 6,648 6,655
Minority interests......................................................... 1,805 1,815
Partners' capital.......................................................... 6,343 7,149
Capital Distributions
</TABLE>
The assets and cash flows of TWE are restricted by the TWE partnership and
credit agreements and are unavailable for use by the partners except through the
payment of certain fees, reimbursements, cash distributions and loans,
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
which are subject to limitations. At March 31, 2000 and December 31, 1999,
the General Partners had recorded $2.014 billion and $1.292 billion,
respectively, of stock option related distributions due from TWE, based on
closing prices of Time Warner common stock of $100.00 and $72.31, respectively.
The General Partners are paid when the options are exercised. The General
Partners also receive tax-related distributions from TWE on a current basis.
During the three months ended March 31, 2000, the General Partners received cash
distributions from TWE in the amount of $308 million, consisting of $145 million
of tax-related distributions and $163 million of stock option related
distributions. During the three months ended March 31, 1999, the General
Partners received cash distributions from TWE in the amount of $154 million,
consisting of $67 million of tax-related distributions and $87 million of stock
option related distributions. Of such aggregate distributions, WCI received $183
million during the first three months of 2000 and $91 million in 1999 and ATC
received $125 million during the first three months of 2000 and $63 million in
1999.
1999 Gain on Termination of 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 1999 operating income in
the accompanying consolidated statement of operations.
4. GENERAL PARTNER GUARANTEES
Each General Partner has guaranteed a pro rata portion of approximately
$5.3 billion of TWE's debt and accrued interest at March 31, 2000, based on the
relative fair value of the net assets each General Partner (or its predecessor)
contributed to TWE. Such indebtedness is recourse to each General Partner only
to the extent of its guarantee. There are no restrictions on the ability of the
General Partner guarantors to transfer assets, other than TWE assets, to parties
that are not guarantors.
The portion of TWE debt and accrued interest at March 31, 2000 that was
guaranteed by each General Partner is set forth below:
<TABLE>
Total Guaranteed by
Each General Partner
--------------------
General Partner % Amount
--------------- ----- ------
(dollars in millions)
<S> <C> <C>
WCI............................................................... 59.27 $3,150
ATC............................................................... 40.73 2,164
------ ------
Total............................................................. 100.00 $5,314
====== ======
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
WCI is subject to a class action lawsuit alleging collusive pricing
practices by the major record companies in their capacity as distributors of
compact discs to CD wholesalers and retailers. The trial presently is scheduled
for the fall of 2000. Although management believes the case is without merit, an
adverse jury verdict could result in a material loss to WCI. Due to the lack of
specificity to plaintiffs' claims, a range of loss is not determinable at this
time.
The General Partners and TWE are also subject to numerous legal
proceedings, including certain litigation relating to Six Flags. 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.
<PAGE>
TWE GENERAL PARTNERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
6. ADDITIONAL FINANCIAL INFORMATION
Additional financial information with respect to cash flows is as
follows:
<TABLE>
Three Months Ended March 31,
----------------------------
2000 1999
------------- -----------
WCI ATC WCI ATC
--- --- --- ---
(millions)
<S> <C> <C> <C> <C>
Cash payments made for interest..................... $ 2 $ - $ 3 $ -
Cash payments made for income taxes, net............ 15 33 114 50
Tax-related distributions received from TWE......... 86 59 39 28
Noncash capital distributions, net.................. (525) (360) (158) (108)
Noncash financing activities in 2000 included the settlement of WCI's note
receivable from TW Companies through a WCI dividend in the amount of $695
million to TW Companies.
</TABLE>
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings.
Reference is made to the Consent Order entered into by Warner Music Group
with the Federal Trade Commission (FTC) staff relating to its investigation of
minimum advertised price (MAP) programs described on pages I-20 and I-24 of
TWE's Annual Report on Form 10-K for the year ended December 31, 1999. On May
10, 2000, the FTC granted its initial approval of the Consent Order as well as
similar Consent Orders for the other major record companies. Those Orders remain
subject to public comment and final approval by the FTC.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
--------
The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as a part of this report and such Exhibit Index is
incorporated herein by reference.
(b) Reports on Form 8-K.
-------------------
No Current Report on Form 8-K was filed by TWE during the quarter ended
March 31, 2000.
<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: May 15, 2000
<PAGE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulations S-K
---------------------------------------
Exhibit No. Description of Exhibit
- ----------- ----------------------
10 Restated Combination Agreement dated as of January 23, 2000,
between Time Warner Inc. and EMI Group plc (which is incorporated
herein by reference to Exhibit 10.2 to Time Warner Inc.'s
Quarterly Report on Form 10-Q for the quarter ended March 31,
2000 (File No. 1-12259)).
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
TIME WARNER ENTERTAINMENT COMPANY, L.P.
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
financial statements of Time Warner Entertainment Company, L.P. for the three
months ended March 31, 2000 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000893657
<NAME> TIME WARNER ENTERTAINMENT COMPANY, L.P.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 360
<SECURITIES> 0
<RECEIVABLES> 3,522
<ALLOWANCES> 685
<INVENTORY> 3,451
<CURRENT-ASSETS> 4,584
<PP&E> 10,993
<DEPRECIATION> 4,285
<TOTAL-ASSETS> 24,272
<CURRENT-LIABILITIES> 5,284
<BONDS> 6,648
<COMMON> 0
0
0
<OTHER-SE> 6,343
<TOTAL-LIABILITY-AND-EQUITY> 24,272
<SALES> 3,297
<TOTAL-REVENUES> 3,297
<CGS> 2,206
<TOTAL-COSTS> 2,206
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 144
<INCOME-PRETAX> 258
<INCOME-TAX> 36
<INCOME-CONTINUING> 222
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 222
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>