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, 1994 , 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 1-8637
TIME WARNER INC.
(Exact name of registrant as specified in its charter)
Delaware 13-1388520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock - $1 par value 378,745,598
Description of Class Shares Outstanding
as of April 30, 1994
<PAGE>
TIME WARNER INC. AND
TIME WARNER ENTERTAINMENT COMPANY, L.P.
INDEX TO FORM 10-Q
Page
Time
Warner TWE
PART I. FINANCIAL INFORMATION
Consolidated balance sheets at March 31, 1994
and December 31, 1993 1 14
Consolidated statements of operations for the three
months ended March 31, 1994 and 1993 2 15
Consolidated statements of cash flows for the three
months ended March 31, 1994 and 1993 3 16
Notes to Consolidated financial statements 4 17
Management's discussion and analysis of results of
operations and financial condition 9 21
Summarized financial information of Paragon Communications set forth at page
11 in the Quarterly Report on Form 10-Q for the period ended March 31, 1994 of
Time Warner Entertainment Company, L.P. (Reg. No. 33-53742) is incorporated
herein by reference and filed as an exhibit to this report.
PART II. OTHER INFORMATION 24
<PAGE>
PART I. FINANCIAL INFORMATION
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31,
1994 1993
(millions, except
per share amounts)
ASSETS
Current assets
Cash and equivalents $ 348 $ 200
Receivables, less allowances
of $696 and $676 953 1,400
Inventories 326 321
Prepaid expenses 647 613
Total current assets 2,274 2,534
Investments in and amounts due to and
from Entertainment Group 5,722 5,627
Investments, other 1,663 1,613
Music catalogues, contracts and copyrights 1,283 1,309
Excess of cost over net assets acquired 4,647 4,691
Other assets, primarily property, plant
and equipment 1,082 1,118
Total assets $16,671 $16,892
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties payable $ 1,019 $ 1,099
Debt due within one year 17 120
Other current liabilities 982 1,006
Total current liabilities 2,018 2,225
Long-term debt 9,340 9,291
Deferred income taxes 2,948 2,998
Unearned portion of paid subscriptions 670 633
Other liabilities 368 375
Shareholders' equity
Preferred stock, $1 par value 1 1
Common Stock, $1 par value, 378.7 million
and 378.3 million shares outstanding
(excluding 45.4 million and
45.2 million treasury shares) 379 378
Paid-in capital 2,557 2,537
Unrealized appreciation of certain
marketable securities 204 205
Accumulated deficit (1,814) (1,751)
Total shareholders' equity 1,327 1,370
Total liabilities and shareholders' equity $16,671 $16,892
See accompanying notes.
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months
Ended March 31,
1994 1993
(millions, except
per share amounts)
Revenues (b) $1,558 $1,519
Cost of revenues (a)(b) 892 890
Selling, general and administrative (a)(b) 554 517
Operating expenses 1,446 1,407
Business segment operating income 112 112
Equity in pretax income of Entertainment Group (b) 45 108
Interest and other, net (b) (158) (160)
Corporate expenses (b) (18) (19)
Income (loss) before income taxes (19) 41
Income taxes (32) (56)
Net loss (51) (15)
Preferred dividend requirements (3) (109)
Net loss applicable to common shares $ (54) $ (124)
Net loss per common share $ (.14) $ (.33)
Average common shares 378.6 372.5
__________________
(a) Includes depreciation and amortization
expense of: $ 105 $ 104
(b) Includes the following income (expenses) resulting from transactions
with the Entertainment Group and other related companies for the three months
ended March 31, 1994 and 1993, respectively: revenues-$39 million and $32
million; cost of revenues-$(21) million and $(16) million; selling, general
and administrative-$12 million and $13 million; equity in pretax income of
Entertainment Group-$(38) million and $(28) million; interest and other, net-
$11 million in 1994; and corporate expenses-$15 million and $15 million.
See accompanying notes.
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
1994 1993
(millions)
OPERATIONS
Net loss $ (51) $ (15)
Adjustments for noncash and nonoperating items:
Depreciation and amortization 105 104
Noncash interest expense 52 37
Equity in pretax income of Entertainment Group,
less distributions (44) (106)
Changes in operating assets and liabilities 185 128
Cash provided by operations 247 148
INVESTING ACTIVITIES
Investments and acquisitions (20) (52)
Capital expenditures (47) (33)
Investment proceeds 93 37
Cash provided (used) by investing activities 26 (48)
FINANCING ACTIVITIES
Increase (decrease) in debt (106) 3,279
Dividends paid (33) (135)
Redemption of Series D preferred stock - (3,494)
Other 14 (8)
Cash used by financing activities (125) (358)
INCREASE (DECREASE) IN CASH AND EQUIVALENTS $ 148 $ (258)
See accompanying notes.
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Time Warner
Inc. and its subsidiaries ("Time Warner"), which are engaged principally in
the Publishing and Music businesses. Investments in Entertainment Group
companies, principally Time Warner Entertainment Company, L.P. ("TWE"), which
are engaged principally in the Filmed Entertainment, Programming-HBO and Cable
businesses, and investments in certain other companies in which Time Warner
has significant influence but less than a controlling financial interest, are
accounted for on the equity basis.
The accompanying financial statements are unaudited but in the opinion of
management contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the financial
position and the results of operations and cash flows for the periods
presented in conformity with generally accepted accounting principles
applicable to interim periods. The accompanying financial statements should
be read in conjunction with the audited consolidated financial statements of
Time Warner for the year ended December 31, 1993.
2. ENTERTAINMENT GROUP
Time Warner's investment in and amounts due to and from the Entertainment
Group at March 31, 1994 and December 31, 1993 consists of the following:
March 31, December 31,
1994 1993
(millions)
Investment in TWE $5,210 $5,085
Due from TWE 487 547
Due to TWE (218) (257)
Investment in and amounts due to and from TWE 5,479 5,375
Investment in other Entertainment Group companies 243 252
Total $5,722 $5,627
TWE is a Delaware limited partnership that owns and operates
substantially all of the Filmed Entertainment, Programming-HBO and Cable
businesses previously owned by subsidiaries of Time Warner. The general
partners are subsidiaries of Time Warner ("General Partners") and in the
aggregate hold 63.27% pro rata priority capital and residual equity
partnership interests in TWE, and certain priority capital interests senior
and junior to the pro rata priority capital interest. The limited partners are
not affiliated with Time Warner and in the aggregate hold 36.73% pro rata
priority capital and residual equity partnership interests. 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 $48 million and $93 million
in the three months ended March 31, 1994 and 1993, respectively, no portion of
which was allocated to the limited partners.
Each General Partner has guaranteed a pro rata portion of $7 billion of
TWE's debt and accrued interest at March 31, 1994, based on the relative fair
value of the net assets each General Partner contributed to TWE. Such
indebtedness is recourse to each General Partner only to the extent of its
guarantee.
Set forth below is summarized financial information of the Entertainment
Group:
TIME WARNER ENTERTAINMENT GROUP
Three Months
Ended March 31,
1994 1993
(millions)
OPERATING STATEMENT INFORMATION
Revenues $ 1,927 $1,758
Depreciation and amortization 216 206
Business segment operating income 206 210
Interest and other, net 146 87
Income before income taxes 45 108
Net income 41 94
Three Months
Ended March 31,
1994 1993
(millions)
CASH FLOW INFORMATION
Cash provided by operations $ 352 $ 377
Capital expenditures (241) (101)
Investments and acquisitions (48) (101)
Increase (decrease) in debt 17 (148)
Capital distributions (1) (2)
Increase in cash and equivalents 111 115
March 31, December 31,
1994 1993
(millions)
BALANCE SHEET INFORMATION
Cash and equivalents $ 1,449 $ 1,338
Total current assets 3,752 3,766
Total assets 18,230 18,202
Total current liabilities 2,276 2,301
Long-term debt 7,145 7,125
TWE General Partners' Senior Capital 1,567 1,536
TWE partners' capital 6,075 6,000
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The assets and cash flows of TWE are restricted by the TWE partnership
and credit agreements and are unavailable for use by the partners and their
affiliates except through the payment of certain fees, reimbursements, cash
distributions and loans, which are subject to limitations. At March 31, 1994
and December 31, 1993, the General Partners had recorded $324 million and $276
million, respectively, of tax related distributions due from TWE,
approximately $108 million of which is receivable in 1994, and $157 million
and $271 million, respectively, of stock option related distributions due from
TWE, based on closing prices of Time Warner common stock of $38.75 and $44.25,
respectively, receivable when the options are exercised.
During 1994, Time Warner entered into a credit agreement with TWE that
provides up to $400 million of borrowings by Time Warner through September 15,
2000, provided TWE remains in compliance with its bank credit agreement.
Outstanding borrowings from TWE bear interest at LIBOR plus 1% per anum. Time
Warner borrowed $250 million under the credit agreement in April 1994 and used
the proceeds to repay a like principal amount of its 5.2% notes at their
maturity.
3. CAPITAL STOCK
Changes in shareholders' equity are as follows:
Three Months
Ended March 31,
1994 1993
(millions)
Balance at beginning of year $1,370 $8,167
Net loss (51) (15)
Common dividends declared (30) (26)
Preferred dividends declared (3) (109)
Redemption and exchange of
preferred stock - (6,620)
Other 41 20
Balance at March 31 $1,327 $1,417
In 1993, Time Warner redeemed its Series D convertible preferred stock
for cash and exchanged its Series C convertible preferred stock for 8.75%
convertible subordinated debentures due January 10, 2015. The Series D
redemption was financed principally by the proceeds from the issuance of long-
term notes and debentures.
<PAGE>
4. SEGMENT INFORMATION
Information as to the operations of Time Warner and the Entertainment
Group in different business segments is set forth below:
Three Months
Ended March 31,
1994 1993
(millions)
Revenues
Time Warner:
Publishing $ 751 $ 731
Music 812 795
Intersegment elimination (5) (7)
Total $1,558 $1,519
Entertainment Group:
Filmed Entertainment $1,083 $ 917
Programming - HBO 362 359
Cable 551 546
Intersegment elimination (69) (64)
Total $1,927 $1,758
Three Months
Ended March 31,
1994 1993
(millions)
Operating income
Time Warner:
Publishing $ 50 $ 38
Music 62 74
Total $ 112 $ 112
Entertainment Group:
Filmed Entertainment $ 66 $ 57
Programming - HBO 56 51
Cable 84 102
Total $ 206 $ 210
Three Months
Ended March 31,
1994 1993
(millions)
Depreciation and amortization (a)
Time Warner:
Publishing $ 20 $ 18
Music 85 86
Total $ 105 $ 104
Entertainment Group:
Filmed Entertainment $ 51 $ 49
Programming - HBO 5 4
Cable 160 153
Total $ 216 $ 206
(a) Depreciation and amortization includes all amortization relating to the
acquisition of Warner Communications Inc. ("WCI") in 1989, the acquisition of
the American Television and Communications Corporation ("ATC") minority
interest in 1992 and other business combinations accounted for by the purchase
method.
5. ADDITIONAL FINANCIAL INFORMATION
Additional financial information is as follows:
Three Months
Ended March 31,
1994 1993
(millions)
Interest expense $ 182 $ 117
Cash payments made for interest 183 19
Cash payments made for income taxes 54 49
Income tax refunds received 34 34
Interest expense includes the net amount of payments made and received
under interest rate swap agreements. At March 31, 1994, Time Warner had
contracts to pay floating rates of interest (average rate of 3.8%) and receive
fixed rates of interest (average rate of 5.5%) on $2.8 billion notional amount
of indebtedness over an average remaining term of four years. $180 million was
realized from the securitization of receivables during the three months ended
March 31, 1994.
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Time Warner had revenues of $1.558 billion, a net loss of $51 million and
a net loss after preferred dividends of $54 million ($.14 per common share)
for the three months ended March 31, 1994, compared to revenues of $1.519
billion, a net loss of $15 million and a net loss after preferred dividend
requirements of $124 million ($.33 per common share) for the three months
ended March 31, 1993. Interest expense at Time Warner increased and income
tax expense and preferred dividends decreased in 1994 as a result of a full-
quarter's effect of the redemption of the Series D preferred stock in February
1993 and the exchange of the Series C preferred stock for debentures as of
April 1, 1993.
Time Warner's 1994 results include $45 million of pretax income from its
equity in the results of the Entertainment Group, compared to $108 million of
pretax income in the first three months of 1993. The Entertainment Group had a
one-time gain from the sale of certain assets in 1993 that was substantially
offset by investment reserves included in Time Warner's other expenses.
The relationship between income before income taxes and income tax
expense of Time Warner is principally affected by the amortization of excess
of cost over net assets acquired and certain other financial statement
expenses that are not deductible for income tax purposes. Income tax expense
of Time Warner includes all income taxes related to its allocable share of
partnership income and its equity in the income tax expense of corporate
subsidiaries of the Entertainment Group.
Other factors affecting comparative operating results are discussed below
on a business segment basis. That discussion includes, among other factors,
an analysis of changes in the operating income of the business segments before
depreciation and amortization ("EBITDA") in order to eliminate the effect on
the operating performance of the music, filmed entertainment and cable
businesses of significant amounts of purchase price amortization from the $14
billion acquisition of WCI in 1989, the $1.3 billion acquisition of the ATC
minority interest in 1992 and other business combinations accounted for by the
purchase method.
EBITDA for Time Warner and the Entertainment Group for the three months
ended March 31, 1994 and 1993 is as follows:
Three Months
Ended March 31,
1994 1993
(millions)
TIME WARNER:
Publishing $ 70 $ 56
Music 147 160
Total $ 217 $ 216
ENTERTAINMENT GROUP:
Filmed Entertainment $ 117 $ 106
Programming - HBO 61 55
Cable 244 255
Total $ 422 $ 416
While many financial analysts consider EBITDA to be an important measure
of comparative operating performance for the businesses of Time Warner and the
Entertainment Group, it should be considered in addition to, but not as a
substitute for, or superior to, operating income, net income, cash flow and
other measures of financial performance reported in accordance with generally
accepted accounting principles.
TIME WARNER
PUBLISHING. Revenues increased to $751 million compared to $731 million
in the first quarter of 1993. Operating income increased to $50 million from
$38 million. Depreciation and amortization amounted to $20 million in the
first quarter of 1994 and $18 million in the first quarter of 1993. EBITDA
increased to $70 million from $56 million. Revenues benefited from increases
in both magazine circulation and advertising revenues, offset in part by lower
book publishing revenues. All major magazine titles achieved circulation
revenue gains. Magazine advertising revenue gains were led by PEOPLE and its
20th Anniversary issue and SPORTS ILLUSTRATED, which benefited from its Winter
Olympics coverage. EBITDA increased and operating margins improved principally
as a result of the revenue gains and cost containment.
MUSIC. Revenues increased to $812 million compared to $795 million in
the first quarter of 1993. Operating income decreased to $62 million from $74
million. Depreciation and amortization, including amortization related to the
purchase of WCI, amounted to $85 million in the first quarter of 1994 and $86
million in the first quarter of 1993. EBITDA declined to $147 million from
$160 million. Revenues from domestic recorded music distributed through retail
stores decreased because of lower music catalog sales. International recorded
music revenues increased, benefiting from increased unit sales of compact
discs. Worldwide revenues from Warner/Chappell Music Publishing also
increased. EBITDA decreased primarily as a result of lower domestic recorded
music catalog sales and start-up costs for new business ventures in cable
music programming and direct marketing.
INTEREST AND OTHER, NET. Interest and other, net, decreased to $158
million in the first quarter of 1994 compared to $160 million in the first
quarter of 1993. Interest expense increased to $182 million compared to $117
million, primarily as a result of higher debt levels associated with the 1993
redemption and exchange of preferred stock. There was other income, net, of
$24 million in the first quarter of 1994 compared to other expense, net, of
$43 million in 1993, principally because of an increase in investment related
income. Other expenses also include reductions in the carrying value of
certain investments that were taken in both periods. Amortization of the
excess of the General Partners' interest in the net assets of TWE over the net
book value of their investment in TWE contributed $18 million to investment
related income in the first quarter of 1994, compared to $4 million in 1993,
as a result of the admission of a subsidiary of U S WEST, Inc. to the
partnership in September 1993 (the "USW Transaction").
ENTERTAINMENT GROUP
FILMED ENTERTAINMENT. Revenues increased to $1.083 billion compared to
$917 million in the first quarter of 1993. Operating income increased to $66
million from $57 million. Depreciation and amortization, including
amortization related to the purchase of WCI, amounted to $51 million in the
first quarter of 1994 and $49 million in the first quarter of 1993. EBITDA
increased to $117 million from $106 million. The revenue growth resulted
primarily from increases in domestic theatrical and worldwide home video
revenues. EBITDA benefited from the revenue gains.
PROGRAMMING-HBO. Revenues increased to $362 million compared to $359
million in the first quarter of 1993. Operating income increased to $56
million from $51 million. Depreciation and amortization amounted to $5 million
in the first quarter of 1994 and $4 million in the first quarter of 1993.
EBITDA increased to $61 million from $55 million. Revenues benefited from an
increase in subscribers and higher pay-TV rates. EBITDA benefited and
operating margins improved principally as a result of the revenue gains and a
smaller loss from the COMEDY CENTRAL joint venture, offset in part by losses
from the start-up of international pay-TV ventures.
CABLE. Revenues increased to $551 million compared to $546 million in
the first quarter of 1993. Operating income decreased to $84 million from $102
million. Depreciation and amortization, including amortization related to the
purchase of WCI and the acquisition of the ATC minority interest, amounted to
$160 million in the first quarter of 1994 and $153 million in the first
quarter of 1993. EBITDA declined to $244 million from $255 million. Revenues
and operating results in the first quarter of 1994 were adversely affected by
the initial round of cable rate regulation that went into effect on September
1, 1993, which in general reduced rates cable operators, including Time Warner
Cable, can charge for regulated services. In addition, benefits achieved in
the current quarter from an increase in subscribers and nonregulated revenues
such as advertising and pay-per-view were largely offset by annual increases
in nonvariable expenses.
On March 30, 1994, the Federal Communications Commission released revised
rules for determining rates for regulated services that will have an
additional adverse effect on revenues and operating results after they go into
effect on July 14, 1994. Actions undertaken to mitigate the impact of rate
regulation include a hiring freeze to reduce the cable workforce, additional
measures to reduce operating expenses, a $100 million cut in capital
expenditures previously budgeted for 1994 and a continued emphasis on near and
long-term strategies to increase revenues from unregulated services.
INTEREST AND OTHER, NET. Interest and other, net, increased to $146
million compared to $87 million in the first quarter of 1993. Interest
expense decreased to $137 million compared to $142 million, principally
because the increased cost of the long-term notes and debentures issued to
reduce TWE floating rate LIBOR based bank debt was more than offset by savings
from the retirement of debt of Six Flags Entertainment Corporation in the
third quarter of 1993 and a decrease in the amortization of the costs incurred
in prior years to terminate certain interest-rate swap agreements. There was
other expense, net, of $9 million in the first quarter of 1994 compared to
other income, net, of $55 million in 1993 that resulted from the one-time gain
on the sale of certain assets. Other expenses in 1994 were partially offset by
interest income on the cash balances and interest-bearing note receivable
("USW Note") arising from the USW Transaction.
FINANCIAL CONDITION AND LIQUIDITY
MARCH 31, 1994
TIME WARNER
Time Warner's financial condition was essentially unchanged from year end
1993. There was $9.4 billion of debt and $1.3 billion of equity at March 31,
1994 compared to $9.4 billion of debt and $1.4 billion of equity at December
31, 1993. Cash and equivalents were $348 million at March 31, 1994 compared
to $200 million at December 31, 1993, resulting in debt-net-of-cash amounts of
$9 billion and $9.2 billion at such dates. Substantially all of Time Warner's
debt at March 31, 1994 consisted of long-term fixed-rate or zero coupon
obligations, approximately $2.8 billion of which was effectively converted to
a floating rate basis through the use of interest rate swap agreements.
Cash provided by operations of $247 million in the first quarter of 1994
was aided by the securitization of $180 million of receivables and reflects
$183 million of interest payments, $20 million of income taxes and other
working capital requirements, compared to $148 million of cash provided by
operations in the first quarter of 1993, after $19 million of interest
payments, $15 million of income taxes and working capital requirements. Cash
flows used in investing activities in the first quarter of 1994, excluding
investment proceeds, were $67 million compared to $85 million in 1993. Cash
dividends paid decreased to $33 million in the first quarter of 1994 compared
to $135 million in 1993, principally as a result of the redemption and
exchange of preferred stock in 1993.
Time Warner has no claim on the assets and cash flows of TWE except
through the payment of certain fees and reimbursements, cash distributions and
loans. Distributions from TWE of $125 million are expected to be received by
Time Warner or the General Partners during 1994, primarily because of tax-
related distributions.
During 1994, Time Warner entered into a credit agreement with TWE which
provides for up to $400 million of borrowings by Time Warner through September
15, 2000. $250 million was borrowed under the credit agreement in April 1994
and used to repay a like principal amount of 5.2% notes at their maturity.
Available credit under the facility is intended to be used to refinance $125
million aggregate principal amount of 9.5% notes upon their maturity on
November 1, 1994.
Management believes that 1994 operating cash flow, cash and marketable
securities and additional borrowing capacity are sufficient to meet Time
Warner's liquidity needs without distributions and loans from TWE above those
permitted by existing agreements.
ENTERTAINMENT GROUP
The financial condition of the Entertainment Group companies, principally
TWE, remained essentially unchanged from year end 1993. TWE had $7.1 billion
of long-term debt at March 31, 1994, $1.6 billion of General Partners' Senior
Capital and $6.1 billion of partners' capital (net of the $1 billion
uncollected portion of the USW Note), compared to $7.1 billion of long-term
debt, $1.5 billion of General Partners' Senior Capital and $6 billion of
partners' capital at December 31, 1993. Cash and equivalents were $1.4 billion
at March 31, 1994, compared to $1.3 billion at December 31, 1993, reducing the
debt-net-of-cash amounts to $5.7 billion and $5.8 billion, respectively.
Cash provided by the operations of the Entertainment Group in the first
quarter of 1994 amounted to $352 million, after $143 million of interest
payments, $13 million of income taxes and working capital requirements,
compared to cash from operations of $377 million in the first quarter of 1993,
after $92 million of interest payments, $13 million of income taxes and
working capital requirements. Capital expenditures increased to $241 million
in the first quarter of 1994 compared to $101 million in 1993. Capital
spending by Time Warner Cable is expected to be much greater this year as
long-term growth in revenue from unregulated services largely depends on
fiber-optic upgrades of its plant.
Management believes that 1994 operating cash flow, cash and equivalents,
the USW note and additional borrowing capacity are sufficient to meet the
capital and liquidity needs of TWE, and to fund loans to Time Warner.
Warner Bros.' backlog, representing the amount of future revenue not yet
recorded from cash contracts for the licensing of films for pay and basic
cable, network and syndicated television exhibition amounted to $788 million
at March 31, 1994 compared to $724 million at December 31, 1993 (including
amounts relating to HBO of $168 million at March 31, 1994 and $178 million at
December 31, 1993). The backlog excludes advertising barter contracts.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31,
1994 1993
(millions)
ASSETS
Current assets
Cash and equivalents $ 1,446 $ 1,338
Receivables, including $218 and
$257 due from Time Warner,
less allowances of $282 and $257 1,182 1,313
Inventories 906 980
Prepaid expenses 210 114
Total current assets 3,744 3,745
Noncurrent inventories 1,775 1,760
Property, plant and equipment, net 3,228 3,100
Excess of cost over net assets
acquired 4,520 4,560
Cable television franchises 3,404 3,510
Other assets 1,333 1,288
Total assets $18,004 $17,963
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts payable $ 363 $ 366
Participations and programming
costs 841 770
Other current liabilities,
including $108 and $108 of
distributions due to Time Warner 1,042 1,129
Total current liabilities 2,246 2,265
Long-term debt 7,145 7,125
Other long-term liabilities,
including $373 and $439 of
distributions due to Time Warner 971 1,037
General Partners' Senior Capital 1,567 1,536
Partners' capital
Contributed capital 7,398 7,398
Undistributed partnership
earnings (deficit) (318) (393)
Note receivable from USW (1,005) (1,005)
Total partners' capital 6,075 6,000
Total liabilities and partners'
capital $18,004 $17,963
See accompanying notes.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months
Ended March 31,
1994 1993
(millions)
Revenues (b) $1,919 $1,757
Cost of revenues (a)(b) 1,343 1,232
Selling, general and administrative (a)(b) 373 317
Operating expenses 1,716 1,549
Business segment operating income 203 208
Interest and other, net (b) (136) (86)
Corporate services (b) (15) (15)
Income before income taxes 52 107
Income taxes (4) (14)
Net income $ 48 $ 93
__________________
(a) Includes depreciation and amortization
expense of: $ 213 $ 205
(b) Includes the following income (expenses)
resulting from transactions with the
partners of TWE and their affiliates (Note 6):
Selling, general and administrative $ (17) $ (13)
Corporate services (15) (15)
In addition, includes the following income (expenses) resulting from
transactions with equity affiliates of TWE or Time Warner (Note 6):
Revenues $ 9 $ 28
Cost of revenues (12) (9)
Selling, general and administrative 5 7
See accompanying notes.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
1994 1993
(millions)
OPERATIONS
Net income $ 48 $ 93
Adjustments for noncash and nonoperating items:
Depreciation and amortization 213 205
Changes in operating assets and liabilities 81 79
Cash provided by operations 342 377
INVESTING ACTIVITIES
Investments and acquisitions (29) (101)
Capital expenditures (239) (101)
Investment proceeds 31 99
Cash used by investing activities (237) (103)
FINANCING ACTIVITIES
Increase (decrease) in debt 17 (148)
Capital distributions (14) (2)
Other - (9)
Cash provided (used) by financing activities 3 (159)
INCREASE IN CASH AND EQUIVALENTS $ 108 $ 115
See accompanying notes.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Time Warner Entertainment Company, L.P., a Delaware limited partnership
("TWE"), owns and operates substantially all of the Filmed Entertainment,
Programming-HBO and Cable businesses previously owned by Time Warner Inc.
("Time Warner"). The general partners of TWE, subsidiaries of Time Warner
("General Partners"), collectively hold 63.27% pro rata priority capital and
residual equity partnership interests in TWE, and certain priority capital
interests senior ("General Partners' Senior Capital") and junior to the pro
rata priority capital interests, which they received for the net assets, or
the rights to cash flows, they contributed to the partnership at the
capitalization of TWE; and the limited partners, subsidiaries of U S WEST,
Inc. ("USW"), ITOCHU Corporation and Toshiba Corporation, hold 25.51%, 5.61%
and 5.61% pro rata priority capital and residual equity partnership interests,
respectively. The TWE partnership agreement provides for special allocations
of income, loss and distributions of partnership capital, including priority
distributions in the event of liquidation.
The accompanying financial statements are unaudited but in the opinion of
management contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the financial
position and the results of operations and cash flows for the periods
presented, in conformity with generally accepted accounting principles
applicable to interim periods. The accompanying financial statements should be
read in conjunction with the audited consolidated financial statements of TWE
for the year ended December 31, 1993.
2. INVENTORIES
Inventories consist of:
March 31, 1994 December 31, 1993
Current Noncurrent Current Noncurrent
(millions)
Film costs:
Released, less amortization $ 537 $ 320 $ 604 $ 318
Completed and not released 93 16 140 23
In process and other 20 365 7 340
Library, less amortization - 808 - 821
Programming costs,
less amortization 164 266 147 258
Other 92 - 82 -
Total $ 906 $1,775 $ 980 $1,760
3. LONG-TERM DEBT
Long-term debt consists of:
March 31, December 31,
1994 1993
(millions)
Bank credit agreement, weighted average interest
rates of 4.5% and 4.2% $2,650 $2,425
Commercial paper, weighted average interest
rates of 3.9% and 3.8% 549 772
Publicly held notes and debentures 3,895 3,892
Other 51 36
Total $7,145 $7,125
Each General Partner has guaranteed a pro rata portion of substantially
all of TWE's debt and accrued interest thereon based on the relative fair
value of the net assets each General Partner contributed to TWE. Such
indebtedness is recourse to each General Partner only to the extent of its
guarantee.
4. PARTNERS' CAPITAL
Changes in partners' capital were as follows:
Three Months
Ended March 31,
1994 1993
(millions)
Balance at beginning of year $6,000 $6,437
Net income 48 93
Distributions (61) (131)
Reduction of stock option distribution liability 113 -
Allocation of income to General Partners' Senior Capital (31) -
Other 6 1
Balance at March 31 $6,075 $6,400
During the three months ended March 31, 1994 and 1993, TWE accrued
distributions of $48 million and $63 million, respectively, that are required
under the partnership agreement to reimburse the partners for income taxes at
statutory rates based on their allocable share of taxable income.
Approximately $108 million of accrued tax distributions at March 31, 1994 is
permitted to be paid in 1994.
TWE distributions also are required to reimburse Time Warner for its
stock options granted to employees of TWE generally based upon the amount by
which the market price of Time Warner common stock exceeds the option exercise
price on the exercise date. TWE adjusts its stock option liability with
respect to unexercised options at the end of each accounting period based on
the market price of Time Warner common stock at such dates. During the three
months ended March 31, 1994, TWE reduced its stock option liability by $113
million as a result of a decline in the market price of Time Warner common
stock to $38.75, resulting in a corresponding credit to partners' capital.
5. SEGMENT INFORMATION
Information as to the operations of TWE in different business segments is
as set forth below:
Three Months
Ended March 31,
1994 1993
(millions)
REVENUES
Filmed Entertainment $1,081 $ 916
Programming - HBO 358 359
Cable 549 546
Intersegment elimination (69) (64)
Total $1,919 $1,757
Three Months
Ended March 31,
1994 1993
(millions)
Operating income
Filmed Entertainment $ 61 $ 55
Programming - HBO 57 51
Cable 85 102
Total $ 203 $ 208
Three Months
Ended March 31,
1994 1993
(millions)
Depreciation and amortization (a)
Filmed Entertainment $ 50 $ 48
Programming - HBO 4 4
Cable 159 153
Total $ 213 $ 205
_______________
(a) Depreciation and amortization includes amortization relating to the
acquisition of Warner Communications Inc. ("WCI") in 1989, the acquisiton of
the American Television and Communications Corporation ("ATC") minority
interest in 1992 and other business combinations accounted for by the purchase
method.
6. RELATED PARTIES
In the normal course of conducting its businesses, TWE has had various
transactions with its partners and their affiliates, generally on terms
resulting from a negotiation among the affected parties that in managements'
view results in reasonable allocations. Time Warner may borrow up to $400
million from TWE through September 15, 2000 pursuant to a credit agreement both
parties entered into during 1994, provided TWE remains in compliance with its
bank credit agreement. Outstanding loans to Time Warner will earn interest at
LIBOR plus 1% per annum. $250 million was loaned to Time Warner under this
facility in April 1994. During the three months ended March 31, 1994, TWE paid
$37 million in connection with the receipt of an undivided beneficial interest
in certain shared assets previously owned by subsidiaries of Time Warner, and
acquired interests in new assets with Time Warner for which TWE's share of the
cost was $31 million.
7. ADDITIONAL FINANCIAL INFORMATION
Additional financial information is as follows:
Three Months
Ended March 31,
1994 1993
(millions)
Interest expense $ 135 $ 141
Cash payments made for interest 143 92
Cash payments made for income taxes 13 13
Borrowings 244 1,061
Repayments 227 1,209
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
TWE had revenues of $1.919 billion and net income of $48 million for the
three months ended March 31, 1994, compared to revenues of $1.757 and net
income of $93 million for the three months ended March 31, 1993. The 1993
results included a one-time gain from the sale of certain assets.
As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $4 million and $14 million in
the three months ended March 31, 1994 and 1993, respectively, have been
provided in respect of the operations of TWE's domestic and foreign subsidiary
corporations.
Other factors affecting comparative operating results are discussed below
on a business segment basis. That discussion includes, among other factors,
an analysis of changes in the operating income of the business segments before
depreciation and amortization ("EBITDA") because the operating income of
certain businesses has been affected by significant amounts of purchase price
amortization from Time Warner's $14 billion acquisition of WCI in 1989, the
$1.3 billion acquisition of the ATC minority interest in 1992 and other
business combinations accounted for by the purchase method.
EBITDA for TWE for the three months ended March 31, 1994 and 1993 is as
follows:
Three Months
Ended March 31,
1994 1993
(millions)
Filmed Entertainment $111 $103
Programming - HBO 61 55
Cable 244 255
Total $416 $413
While many financial analysts consider EBITDA to be an important measure
of comparative operating performance for the businesses of TWE, it should be
considered in addition to, but not as a substitute for, or superior to,
operating income, net income, cash flow and other measures of financial
performance reported in accordance with generally accepted accounting
principles.
FILMED ENTERTAINMENT. Revenues increased to $1.081 billion compared to
$916 million in the first quarter of 1993. Operating income increased to $61
million from $55 million. Depreciation and amortization, including
amortization related to the purchase of WCI, amounted to $50 million in the
first quarter of 1994 and $48 million in the first quarter of 1993. EBITDA
increased to $111 million from $103 million. The revenue growth resulted
primarily from increases in domestic theatrical and worldwide home video
revenues. EBITDA benefited from the revenue gains.
PROGRAMMING-HBO. Revenues were $358 million compared to $359 million in
the first quarter of 1993. Operating income increased to $57 million from $51
million. Depreciation and amortization amounted to $4 million in each of the
first quarter of 1994 and 1993. EBITDA increased to $61 million from $55
million. Revenues benefited from an increase in subscribers and higher pay-TV
rates, which was offset by the loss of transmission revenues related to the
assets and operations that were distributed to the General Partners in
connection with the admission of USW to the partnership in September 1993.
EBITDA benefited principally as a result of the increase in pay-TV revenues
and a smaller loss from the COMEDY CENTRAL joint venture, offset in part by
losses from the start-up of international pay-TV ventures.
CABLE. Revenues increased to $549 million compared to $546 million in
the first quarter of 1993. Operating income decreased to $85 million from $102
million. Depreciation and amortization, including amortization related to the
purchase of WCI and the acquisition of the ATC minority interest, amounted to
$159 million in the first quarter of 1994 and $153 million in the first
quarter of 1993. EBITDA declined to $244 million from $255 million. Revenues
and operating results in the first quarter of 1994 were adversely affected by
the initial round of cable rate regulation that went into effect on September
1, 1993, which in general reduced rates cable operators, including Time Warner
Cable, can charge for regulated services. In addition, benefits achieved in
the current quarter from an increase in subscribers and nonregulated revenues
such as advertising and pay-per-view were largely offset by annual increases
in nonvariable expenses.
On March 30, 1994, the Federal Communications Commission released revised
rules for determining rates for regulated services that will have an
additional adverse effect on revenues and operating results after they go into
effect on July 14, 1994. Actions undertaken to mitigate the impact of rate
regulation include a hiring freeze to reduce the cable workforce, additional
measures to reduce operating expenses, a $100 million cut in capital
expenditures previously budgeted for 1994 and a continued emphasis on near and
long-term strategies to increase revenues from unregulated services.
INTEREST AND OTHER, NET. Interest and other, net, increased to $136
million compared to $86 million in the first quarter of 1993. Interest
expense decreased to $135 million compared to $141 million, principally
because the increased cost of the long-term notes and debentures issued to
reduce TWE floating rate LIBOR based bank debt was more than offset by savings
from the retirement of debt of Six Flags Entertainment Corporation in the
third quarter of 1993 and a decrease in the amortization of the costs incurred
in prior years to terminate certain interest-rate swap agreements. There was
other expense, net, of $1 million in the first quarter of 1994 compared to
other income, net, of $55 million in 1993 that resulted from the one-time gain
on the sale of certain assets. Other expenses in 1994 were partially offset by
interest income on the cash balances and interest-bearing note receivable
("USW Note") arising from the admission of USW to the partnership in September
1993.
FINANCIAL CONDITION AND LIQUIDITY
MARCH 31, 1994
The financial condition of TWE remained essentially unchanged from year
end 1993. TWE had $7.1 billion of long-term debt at March 31, 1994, $1.6
billion of General Partners' Senior Capital and $6.1 billion of partners'
capital (net of the $1 billion uncollected portion of the USW Note), compared
to $7.1 billion of long-term debt, $1.5 billion of General Partners' Senior
Capital and $6 billion of partners' capital at December 31, 1993. Cash and
equivalents were $1.4 billion at March 31, 1994, compared to $1.3 billion at
December 31, 1993, reducing the debt-net-of-cash amounts to $5.7 billion and
$5.8 billion, respectively.
Cash provided by TWE's operations in the first quarter of 1994 amounted
to $342 million, after $143 million of interest payments, $13 million of income
taxes and working capital requirements, compared to cash from operations of
$377 million in the first quarter of 1993, after $92 million of interest
payments, $13 million of income taxes and working capital requirements.
Capital expenditures increased to $239 million in the first quarter of 1994
compared to $101 million in 1993. Capital spending by Time Warner Cable is
expected to be much greater this year as long-term growth in revenue from
unregulated services largely depends on fiber-optic upgrades of its plant.
During 1994, TWE entered into a credit agreement with Time Warner which
provides for up to $400 million of loans to Time Warner through September 15,
2000. Management believes that 1994 operating cash flow, cash and equivalents,
the USW note and additional borrowing capacity are sufficient to meet the
capital and liquidity needs of TWE, and to fund loans to Time Warner.
Warner Bros.' backlog, representing the amount of future revenue not yet
recorded from cash contracts for the licensing of films for pay and basic
cable, network and syndicated television exhibition amounted to $788 million
at March 31, 1994 compared to $724 million at December 31, 1993 (including
amounts relating to HBO of $168 million at March 31, 1994 and $178 million at
December 31, 1993). The backlog excludes advertising barter contracts.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the litigation entitled IN RE TIME WARNER INC.
SECURITIES LITIGATION described on page I-41 of Time Warner's Annual Report on
Form 10-K for the year ended December 31, 1993 (the "Form 10-K"). On April 4,
1994, the U.S. Supreme Court denied defendants' petition for a writ of
certiorari and plaintiffs' cross-petition.
Reference is made to the description of the preliminary investigation
being conducted by the Dallas Regional Office of the Federal Trade Commission
appearing on page I-42 of the Form 10-K. More recently, the Federal Trade
Commission issued a subpoena to take the deposition of a former WEA executive
as part of an investigation to determine whether members of the pre-recorded
music distribution industry fixed prices or engaged in concerted activities to
limit the availability of co-op advertising or promotional funds to retailers
who sell used compact discs or who advertise prices of compact discs below
specified levels.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
99.1 Summarized financial information of Paragon Communications.
(b) Reports on Form 8-K.
Time Warner filed a report on Form 8-K dated January 20, 1994,
reporting in Item 5 the declaration of a dividend of one Right for each
outstanding share of Time Warner Common Stock, which, when it becomes
exercisable, will entitle the registered holder to purchase from Time Warner
one one-thousandth (1/1,000th) of a share of Time Warner Series A
Participating Cumulative Preferred Stock, par value $1.00 per share, at a
price of $150.
<PAGE>
TIME WARNER INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Time Warner Inc.
(Registrant)
By: /s/ Bert W. Wasserman
Name: Bert W. Wasserman
Title: Executive Vice President and
Chief Financial Officer
Dated: May 13, 1994
<PAGE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Exhibit
Number Description
99.1 Summarized Financial Information of Paragon Communications.
Exhibit 99.1
TIME WARNER ENTERTAINMENT COMPANY, L.P.
SUPPLEMENTARY INFORMATION
SUMMARIZED FINANCIAL INFORMATION OF PARAGON COMMUNICATIONS
(Unaudited)
TWE has an indirect 50% ownership interest in Paragon Communications
("Paragon"), a cable system joint venture accounted for on the equity basis.
A summary of financial information of Paragon (100% basis) is set forth below:
PARAGON COMMUNICATIONS
Three Months
Ended March 31,
1994 1993
(millions)
Operating Statement Information
Revenues $ 86 $ 84
Operating income 21 20
Net income 16 14
March 31, December 31,
1994 1993
(millions)
Balance Sheet Information
Property, plant and equipment $386 $385
Cable television franchises 213 216
Total assets 622 627
Debt 306 320
Total liabilities 368 390
