SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the quarterly period ended September 30,
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 379,199,245
Description of Class Shares Outstanding
as of October 31, 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 September 30, 1994
and December 31, 1993. . . . . . . . . . . . . . . . . . . . .1 16
Consolidated statements of operations for the three
and nine months ended September 30, 1994 and 1993. . . . . . .2 17
Consolidated statements of cash flows for the nine
months ended September 30, 1994 and 1993 . . . . . . . . . . .3 18
Notes to consolidated financial statements . . . . . . . . . .4 19
Management's discussion and analysis of results of
operations and financial condition . . . . . . . . . . . . . .9 23
Summarized financial information of Paragon Communications set forth at
page 12 in the Quarterly Report on Form 10-Q for the quarter ended
September 30, 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. . . . . . . . . . . . . . . . . 27
<PAGE>
PART I. FINANCIAL INFORMATION
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, December 31,
1994 1993
(millions, except
per share amounts)
ASSETS
Current assets
Cash and equivalents $ 318 $ 200
Receivables, less allowances of $723 and $676 1,139 1,400
Inventories 363 321
Prepaid expenses 710 613
Total current assets 2,530 2,534
Investments in and amounts due to and from
Entertainment Group 5,592 5,627
Investments, other 1,619 1,613
Music catalogues, contracts and copyrights 1,233 1,309
Excess of cost over net assets acquired 4,641 4,691
Other assets, primarily property, plant and equipment 1,156 1,118
Total assets $16,771 $16,892
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties payable $ 1,220 $ 1,099
Debt due within one year 37 120
Other current liabilities 1,220 1,006
Total current liabilities 2,477 2,225
Long-term debt 9,322 9,291
Deferred income taxes 2,720 2,998
Unearned portion of paid subscriptions 625 633
Other liabilities 429 375
Shareholders' equity
Preferred stock, $1 par value 1 1
Common stock, $1 par value, 379.1 million
and 378.3 million shares outstanding
(excluding 45.7 million and 45.2 million
treasury shares) 379 378
Paid-in capital 2,560 2,537
Unrealized appreciation of certain
marketable securities 175 205
Accumulated deficit (1,917) (1,751)
Total shareholders' equity 1,198 1,370
Total liabilities and shareholders' equity $16,771 $16,892
See accompanying notes.
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
1994 1993 1994 1993
(millions, except per share amounts)
Revenues (a) $1,884 $1,535 $5,109 $4,621
Cost of revenues (a)(b) 1,125 897 2,923 2,671
Selling, general and
administrative (a)(b) 618 547 1,763 1,612
Operating expenses 1,743 1,444 4,686 4,283
Business segment operating income 141 91 423 338
Equity in pretax income of
Entertainment Group (a) 66 118 177 279
Interest and other, net (a) (177) (189) (514) (543)
Corporate expenses (a) (20) (19) (57) (56)
Income before income taxes 10 1 29 18
Income taxes (42) (112) (132) (189)
Loss before extraordinary item (32) (111) (103) (171)
Extraordinary loss on retirement
of debt, net of $14 million and
$37 million income tax benefit - (22) - (57)
Net loss (32) (133) (103) (228)
Preferred dividend requirements (3) (3) (9) (115)
Net loss applicable to common
shares $ (35) $ (136) $ (112) $ (343)
Loss per common share:
Loss before extraordinary item $(0.09) $(0.30) $(0.30) $(0.77)
Net loss $(0.09) $(0.36) $(0.30) $(0.92)
Average common shares 379.1 375.2 378.8 373.9
__________________
(a) Includes the following income (expenses) resulting from transactions
with the Entertainment Group and other related companies for the three and
nine months ended September 30, 1994, respectively, and for the
corresponding periods in the prior year: revenues of $56 million and $148
million in 1994, and $41 million and $112 million in 1993; cost of revenues
of $(34) million and $(80) million in 1994, and $(28) million and $(57)
million in 1993; selling, general and administrative of $14 million and $33
million in 1994, and $12 million and $39 million in 1993; equity in pretax
income of Entertainment Group of $(31) million and $(95) million in 1994,
and $(27) million and $(84) million in 1993; interest and other, net of $2
million and $17 million in 1994; and corporate expenses of $15 million and
$45 million in both 1994 and 1993.
(b) Includes depreciation and
amortization expense of: $ 109 $ 106 $ 319 $ 316
See accompanying notes.
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
1994 1993
(millions)
OPERATIONS
Net loss $ (103) $ (228)
Adjustments for noncash and nonoperating items:
Depreciation and amortization 319 316
Noncash interest expense 162 132
Extraordinary loss on retirement of debt - 57
Equity in pretax income of Entertainment Group,
less distributions (58) (265)
Changes in operating assets and liabilities (32) 205
Cash provided by operations 288 217
INVESTING ACTIVITIES
Investments and acquisitions (123) (124)
Capital expenditures (143) (99)
Investment proceeds 144 101
Cash used by investing activities (122) (122)
FINANCING ACTIVITIES
Increase in debt 28 3,274
Dividends paid (105) (267)
Redemption of Series D preferred stock - (3,494)
Other 29 (31)
Cash used by financing activities (48) (518)
INCREASE (DECREASE) IN CASH AND EQUIVALENTS $118 $(423)
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. Certain reclassifications have been made to
the 1993 financial statements to conform to the 1994 presentation. 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 September 30, 1994 and December 31, 1993 consists of
the following:
September 30, December 31,
1994 1993
(millions)
Investment in TWE $5,300 $5,085
Income tax and stock option related
distributions due from TWE 386 547
Long-term debt due to TWE (250) -
Other liabilities due to TWE, principally related
to home video distribution (144) (257)
Investment in and amounts due to and from TWE 5,292 5,375
Investment in other Entertainment Group companies 300 252
Total $5,592 $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 their pro rata priority capital interests. 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 $145
million and $209 million in the nine months ended September 30, 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 September 30, 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 Nine Months
Ended September 30, Ended September 30,
1994 1993 1994 1993
(millions)
Operating Statement Information
Revenues $2,215 $2,179 $6,205 $5,804
Depreciation and amortization 261 240 719 675
Business segment operating
income 236 289 673 740
Interest and other, net 155 156 451 416
Income before income taxes 66 118 177 279
Income before extraordinary
item 42 90 137 231
Net income 42 82 137 221
Nine Months
Ended September 30,
1994 1993
(millions)
Cash Flow Information
Cash provided by operations $1,091 $ 972
Capital expenditures (772) (393)
Investments and acquisitions (154) (331)
Loan to Time Warner (250) -
Increase (decrease) in debt 42 (700)
Capital contributions 129 1,548
Capital distributions (119) (14)
Increase in cash and equivalents 10 1,146
September 30, December 31,
1994 1993
(millions)
Balance Sheet Information
Cash and equivalents $ 1,348 $ 1,338
Total current assets 3,685 3,766
Total assets 18,704 18,202
Total current liabilities 2,730 2,301
Long-term debt 7,175 7,125
TWE General Partners' senior capital 1,630 1,536
TWE partners' capital 6,195 6,000
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. The General
Partners received $115 million of tax-related distributions from TWE in
August 1994. There was an additional $297 million of such distributions due
from TWE at September 30, 1994, compared to $276 million at December 31,
1993. The General Partners also had accrued $89 million and $271 million,
respectively, of stock option related distributions due from TWE at
September 30, 1994 and December 31, 1993, respectively, based on closing
prices of Time Warner common stock of $35.13 and $44.25, respectively. TWE
pays stock option distributions when the options are exercised.
Time Warner and TWE entered into a credit agreement in 1994 which
allows Time Warner to borrow up to $400 million from TWE 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 annum.
Time Warner borrowed $250 million in April 1994 and $125 million in November
1994 under the credit agreement, and used the proceeds to repay like
principal amounts of Time Warner notes at their maturity.
TWE will manage a cable television joint venture it has agreed to form
with subsidiaries of Advance Publications, Inc. and Newhouse Broadcasting
Corporation ("Advance/Newhouse"). Advance/Newhouse will contribute cable
television systems and related assets serving approximately 1.4 million
subscribers for a one-third interest in the venture. TWE will contribute
cable television systems or interests therein and related assets serving
approximately 2.8 million subscribers for a two-thirds interest.
Separately, Time Warner agreed to acquire Summit Communications Group Inc.
("Summit"), which owns cable television systems serving approximately
162,000 subscribers, in exchange for 900,000 shares of Time Warner common
stock and $320 million liquidation value of a new preferred stock
convertible into Time Warner common stock at $48 per share. The Summit
cable television systems also will be managed by TWE. Both transactions are
expected to close in 1995.
3. CAPITAL STOCK
Changes in shareholders' equity are as follows:
Nine Months
Ended September 30,
1994 1993
(millions)
Balance at beginning of year $1,370 $ 8,167
Redemption and exchange of preferred stock - (6,620)
Net loss (103) (228)
Common dividends declared (99) (86)
Preferred dividends declared (9) (113)
Decline in market value of certain equity
investments (30) -
Other 69 56
Balance at September 30 $1,198 $ 1,176
In the first quarter of 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.
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 Nine Months
Ended September 30, Ended September 30,
1994 1993 1994 1993
(millions)
Revenues
TIME WARNER:
Publishing $ 840 $ 780 $2,442 $2,330
Music 1,051 759 2,685 2,310
Intersegment elimination (7) (4) (18) (19)
Total $1,884 $1,535 $5,109 $4,621
ENTERTAINMENT GROUP:
Filmed Entertainment $1,343 $1,320 $3,642 $3,253
Programming - HBO 386 344 1,122 1,060
Cable 552 551 1,663 1,657
Intersegment elimination (66) (36) (222) (166)
Total $2,215 $2,179 $6,205 $5,804
Three Months Nine Months
Ended September 30, Ended September 30,
1994 1993 1994 1993
(millions)
Operating Income
TIME WARNER:
Publishing $ 56 $ 45 $ 212 $ 168
Music 85 46 211 170
Total $ 141 $ 91 $ 423 $ 338
ENTERTAINMENT GROUP:
Filmed Entertainment $ 96 $ 124 $ 237 $ 253
Programming - HBO 61 53 179 157
Cable 79 112 257 330
Total $ 236 $ 289 $ 673 $ 740
Three Months Nine Months
Ended September 30, Ended September 30,
1994 1993 1994 1993
(millions)
Depreciation and amortization (a)
TIME WARNER:
Publishing $ 22 $ 20 $ 61 $ 58
Music 87 86 258 258
Total $ 109 $ 106 $ 319 $ 316
ENTERTAINMENT GROUP:
Filmed Entertainment $ 93 $ 80 $ 219 $ 200
Programming - HBO 5 4 15 12
Cable 163 156 485 463
Total $ 261 $ 240 $ 719 $ 675
(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:
Nine Months
Ended September 30,
1994 1993
(millions)
Interest expense $ 571 $ 515
Cash payments made for interest 453 253
Cash payments made for income taxes 320 177
Tax-related distributions received from TWE 115 -
Income tax refunds received 46 47
During the nine months ended September 30, 1994, Time Warner
realized $209 million from the securitization of receivables.
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Time Warner had revenues of $1.884 billion and a net loss of $32 million
($.09 per common share) for the three months ended September 30, 1994,
compared to revenues of $1.535 billion and a net loss of $133 million ($.36
per common share) for the three months ended September 30, 1993. Included
in the 1993 results is an extraordinary loss on the retirement of debt of
$22 million ($.06 per common share) and a one-time tax charge of $70 million
($.19 per common share) that resulted from the effect on the company's
deferred income tax liability of the increase in the corporate income tax
rate enacted in August 1993.
Revenues of $5.109 billion and a net loss of $103 million ($.30 per common
share) were reported for the nine months ended September 30, 1994, compared
to revenues of $4.621 billion and a net loss of $228 million ($.92 per
common share) for the nine months ended September 30, 1993. The 1993
results include an extraordinary loss on the retirement of debt of $57
million ($.15 per common share) and the one-time tax charge of $70 million
($.19 per common share).
Time Warner's equity in the pretax income of the Entertainment Group was
$66 million in the three months ended September 30, 1994, compared to $118
million in the three months ended September 30, 1993, and was $177 million
in the nine months ended September 30, 1994, compared to $279 million in the
nine months ended September 30, 1993. During the first quarter of 1993, the
Entertainment Group had a one-time gain from the sale of certain assets 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, and by the one-time tax charge
in 1993. 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 amortization of intangible assets
recognized in 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. Financial analysts
generally consider EBITDA to be an important measure of comparative
operating performance for the businesses of Time Warner and the
Entertainment Group, and when used in comparison to debt levels or the
coverage of interest expense, as a measure of liquidity. However, EBITDA
should be considered in addition to, not as a substitute for, operating
income, net income, cash flow and other measures of financial performance
and liquidity reported in accordance with generally accepted accounting
principles.
Operating income and EBITDA for Time Warner and the Entertainment Group
for the three and nine months ended September 30, 1994 and 1993 are as
follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three Months Nine Months
Ended September 30, Ended September 30,
EBITDA Operating Income EBITDA Operating Income
1994 1993 1994 1993 1994 1993 1994 1993
(millions)
Time Warner:
Publishing $ 78 $ 65 $ 56 $ 45 $ 273 $ 226 $212 $168
Music 172 132 85 46 469 428 211 170
Total $250 $197 $141 $ 91 $ 742 $ 654 $423 $338
Entertainment Group:
Filmed
Entertainment $189 $204 $ 96 $124 $ 456 $ 453 $237 $253
Programming-HBO 66 57 61 53 194 169 179 157
Cable 242 268 79 112 742 793 257 330
Total $497 $529 $236 $289 $1,392 $1,415 $673 $740
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1993
TIME WARNER
PUBLISHING. Revenues increased to $840 million, compared to $780
million in the third quarter of 1993. Operating income increased to $56
million from $45 million. Depreciation and amortization amounted to $22
million in 1994 and $20 million in 1993. EBITDA increased to $78 million
from $65 million. Revenues benefited from gains in advertising and
circulation at the magazine division and increased sales at the book
division. Operating income, EBITDA and operating margins improved
principally as a result of the revenue gains and continued cost containment.
MUSIC. Revenues increased to $1.051 billion, compared to $759 million
in the third quarter of 1993. Operating income increased to $85 million
from $46 million. Depreciation and amortization, including amortization
related to the purchase of WCI, amounted to $87 million in 1994 and $86
million in 1993. EBITDA increased to $172 million from $132 million. The
revenue growth resulted from increases in both domestic and international
recorded music revenues, which benefited from a number of popular releases
during the quarter and an increase in the percentage of compact disc to
total unit sales, and increased music publishing revenues. Operating income
and EBITDA benefited from the revenue gains and from increased results from
direct marketing activities, which was attributable to new members and lower
amortization of member acquisition costs. The operating income and EBITDA
gains were offset in part by costs associated with the reorganization of the
domestic music companies and continuing investment in new business ventures.
INTEREST AND OTHER, NET. Interest and other, net, decreased to $177
million in the third quarter of 1994, compared to $189 million in the third
quarter of 1993. Interest expense was $197 million in both periods. Other
income, net, increased to $20 million in the third quarter of 1994 from $8
million in 1993, principally because of an increase in the 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 as a result of the admission
of a subsidiary of U S WEST, Inc. ("USW") to the partnership in September
1993.
ENTERTAINMENT GROUP
FILMED ENTERTAINMENT. Revenues increased to $1.343 billion, compared
to $1.320 billion in the third quarter of 1993. Operating income decreased
to $96 million from $124 million. Depreciation and amortization, including
amortization related to the purchase of WCI, amounted to $93 million in 1994
and $80 million in 1993. EBITDA decreased to $189 million from $204
million. Worldwide syndication and consumer products revenues increased at
Warner Bros., but worldwide theatrical and home video revenues were lower
than last year's record-setting third quarter. Revenues at Six Flags
decreased slightly as a result of an attendance shift towards parks having
lower per capita revenue. Operating income and EBITDA margins were lower
than in the third quarter of 1993 when theatrical and home video results
were exceptionally strong.
PROGRAMMING - HBO. Revenues increased to $386 million, compared to
$344 million in the third quarter of 1993. Operating income increased to
$61 million from $53 million. Depreciation and amortization amounted to $5
million in 1994 and $4 million in 1993. EBITDA increased to $66 million
from $57 million. Revenues benefited from an increase in subscribers and
higher pay-TV rates, as well as increased revenues at the HBO Video and Time
Warner Sports units. Operating income, EBITDA and operating margins
improved principally as a result of the revenue gains and a smaller loss
from the COMEDY CENTRAL joint venture.
CABLE. Revenues increased to $552 million, compared to $551 million
in the third quarter of 1993. Operating income decreased to $79 million
from $112 million. Depreciation and amortization, including amortization
related to the purchase of WCI and the acquisition of the ATC minority
interest, amounted to $163 million in 1994 and $156 million in 1993. EBITDA
decreased to $242 million from $268 million. Revenues and operating results
in the third quarter of 1994 were adversely affected by two rounds of cable
rate regulation that in general reduced the rates cable operators are
allowed to charge for regulated services, the first of which went into
effect in September 1993 and the second of which went into effect in July
1994. The unfavorable effects of rate regulation were offset in part by an
increase in subscribers and nonregulated revenues during the quarter.
INTEREST AND OTHER, NET. Interest and other, net, decreased to $155
million in the third quarter of 1994, compared to $156 million in the third
quarter of 1993. Interest expense decreased to $141 million, compared to
$145 million in the third quarter of 1993. Other expense, net, increased to
$14 million in the third quarter of 1994 from $11 million in 1993,
principally because of losses on certain investments, offset in part by an
increase in interest income on higher cash balances and the interest-bearing
note receivable from USW.
NINE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1993
PUBLISHING. Revenues increased to $2.442 billion, compared to $2.330
billion in the first nine months of 1993. Operating income increased to
$212 million from $168 million. Depreciation and amortization amounted to
$61 million in 1994 and $58 million in 1993. EBITDA increased to $273
million from $226 million. Revenues benefited principally from increases in
advertising and circulation revenues at the magazine division, which were
aided in part by several special issues. Operating income, EBITDA and
operating margins improved principally as a result of the revenue gains and
continued cost containment.
MUSIC. Revenues increased to $2.685 billion, compared to $2.310
billion in the first nine months of 1993. Operating income increased to
$211 million from $170 million. Depreciation and amortization, including
amortization related to the purchase of WCI, amounted to $258 million in
1994 and 1993. EBITDA increased to $469 million from $428 million. The
revenue growth resulted from increases in both domestic and international
recorded music revenues, which benefited from a number of popular releases
during the third quarter and an increase in the percentage of compact disc
to total unit sales, and increased music publishing revenues. Operating
income and EBITDA benefited from the revenue gains and from increased
results from direct marketing activities, which was attributable to new
members and lower amortization of member acquisition costs. The operating
income and EBITDA gains were offset in part by costs associated with the
reorganization of the domestic music companies and continuing investment in
new business ventures.
INTEREST AND OTHER, NET. Interest and other, net, decreased to $514
million in the first nine months of 1994, compared to $543 million in the
first nine months of 1993. Interest expense increased to $571 million from
$515 million as a result of a full nine months of interest on the debt
issued during the first three months of 1993 for the redemption and exchange
of preferred stock, offset in part by savings from lower-cost debt used to
fund the redemption of certain notes and debentures in 1993. There was
other income, net, of $57 million in the first nine months of 1994, compared
to other expense, net, of $28 million in 1993, principally because of an
increase in investment-related income and an increase in the 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. Investment-related income
was reduced by adjustments to the carrying value of certain investments that
were taken in both years and higher losses in 1994 on foreign exchange
contracts used to hedge foreign exchange risk.
ENTERTAINMENT GROUP
FILMED ENTERTAINMENT. Revenues increased to $3.642 billion, compared
to $3.253 billion in the first nine months of 1993. Operating income
decreased to $237 million from $253 million. Depreciation and amortization,
including amortization related to the purchase of WCI, amounted to $219
million in 1994 and $200 million in 1993. EBITDA increased to $456 million
from $453 million. Worldwide home video, syndication and consumer products
revenues increased at Warner Bros., offset in part by lower worldwide
theatrical revenues. Revenues at Six Flags increased slightly as a result
of overall attendance growth and higher in-park spending for the first half
of 1994, which offset the small revenue decline experienced in the third
quarter. Operating income and EBITDA margins were lower than in the first
nine months of 1993 when worldwide theatrical results were exceptionally
strong.
PROGRAMMING - HBO. Revenues increased to $1.122 billion, compared to
$1.060 billion in the first nine months of 1993. Operating income increased
to $179 million from $157 million. Depreciation and amortization amounted
to $15 million in 1994 and $12 million in 1993. EBITDA increased to $194
million from $169 million. Revenues benefited from an increase in
subscribers and higher pay-TV rates, as well as increased revenues at the
HBO Video unit. Operating income, EBITDA 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 lower results from other new
businesses.
CABLE. Revenues increased to $1.663 billion, compared to $1.657
billion in the first nine months of 1993. Operating income decreased to
$257 million from $330 million. Depreciation and amortization, including
amortization related to the purchase of WCI and the acquisition of the ATC
minority interest, amounted to $485 million in 1994 and $463 million in
1993. EBITDA decreased to $742 million from $793 million. Revenues and
operating results in the first nine months of 1994 were adversely affected
by two rounds of cable rate regulation that in general reduced the rates
cable operators are allowed to charge for regulated services, the first of
which went into effect in September 1993 and the second of which went into
effect in July 1994. The unfavorable effects of rate regulation were offset
in part by an increase in subscribers and nonregulated revenues. Actions
undertaken to mitigate the impact of rate regulation include a hiring freeze
to reduce the cable workforce and other 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 $451
million in the first nine months of 1994, compared to $416 million in the
first nine months of 1993. Interest expense decreased to $417 million,
compared with $429 million in the first nine months of 1993. There was
other expense, net, of $34 million in the first nine months of 1994,
compared to other income, net, of $13 million in 1993. Investment-related
and foreign currency contract losses in 1994 exceeded an increase in
interest income on higher cash balances and the interest-bearing note
receivable from USW. A gain on the sale of certain assets and other
investment-related income exceeded investment losses in 1993.
FINANCIAL CONDITION AND LIQUIDITY
September 30, 1994
TIME WARNER
Time Warner had $9.4 billion of debt and $1.2 billion of equity at
September 30, 1994, compared to $9.4 billion of debt and $1.4 billion of
equity at December 31, 1993. Cash and equivalents were $318 million at
September 30, 1994, compared to $200 million at December 31, 1993, resulting
in debt-net-of-cash amounts of $9.1 billion and $9.2 billion at such dates.
Time Warner and TWE entered into a credit agreement in 1994 which allows
Time Warner to borrow up to $400 million from TWE through September 15,
2000. Time Warner borrowed $250 million in April 1994 and $125 million in
November 1994 under the credit agreement, and used the proceeds to repay
like principal amounts of Time Warner notes at their maturity.
Interest rate swap agreements are used by Time Warner to adjust the
proportion of total debt that is subject to changes in short-term rates. At
September 30, 1994, Time Warner had contracts to pay floating rates of
interest (average six-month LIBOR rate of 5.6%) and receive fixed rates of
interest (average rate of 5.5%) on $2.9 billion notional amount of
indebtedness, effectively converting approximately 31% of Time Warner's
underlying debt, all of which is fixed-rate, to a floating-rate basis. The
notional amount of outstanding contracts by year of maturity is as follows:
1995-$300 million; 1996-$300 million; 1998-$700 million; 1999-$1.2 billion;
and 2000-$400 million. Time Warner had interest rate swap contracts on $2.1
billion notional amount of indebtedness at December 31, 1993. Based on the
level of interest rates prevailing at September 30, 1994, the fair value of
Time Warner's fixed-rate debt was $322 million less than its carrying value
and it would have cost $196 million to terminate the related interest rate
swap agreements, which combined is the equivalent of an unrealized gain of
$126 million. Based on the level of interest rates prevailing at December
31, 1993, the fair value of Time Warner's fixed-rate debt exceeded its
carrying value by $530 million and the Company would have received $4
million to terminate its interest rate swap agreements, which combined was
the equivalent of an unrealized loss of $526 million. Accounting
recognition is not given to unrealized gains or losses on debt or interest
rate swap contracts unless the debt is retired or the contracts are
terminated prior to their maturity. Interest rate swap contracts are placed
with a number of major financial institutions in order to minimize credit
risk.
Cash provided by operations of $288 million in the first nine months
of 1994 reflects combined EBITDA from the Publishing and Music businesses
of $742 million, net distributions from TWE of $119 million and the
securitization of $209 million of receivables, less $453 million of interest
payments, $274 million of income taxes, $57 million of corporate expenses
and other working capital requirements. Cash provided by operations of $217
million in the first nine months of 1993 reflected combined EBITDA from the
Publishing and Music businesses of $654 million and net distributions from
TWE of $14 million, less $253 million of interest payments, $130 million of
income taxes, $56 million of corporate expenses and working capital
requirements. Cash flows used in investing activities in the first nine
months of 1994, excluding investment proceeds, were $266 million, compared
to $223 million in 1993. Cash dividends paid decreased to $105 million in
the first nine months of 1994, compared to $267 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.
Tax-related distributions of $115 million were received from TWE in August
1994.
Foreign exchange contracts are used to hedge the Company's foreign
exchange risk primarily with respect to anticipated royalty and license
payments international subsidiaries will make to Time Warner or TWE domestic
companies upon the sale of U.S. copyrighted music and filmed entertainment
product abroad. At September 30, 1994, Time Warner had contracts for the
sale and purchase of $628 million and $95 million, respectively, of foreign
currencies at fixed rates, primarily Japanese yen (26% of net contract
value), French francs (16%), English pounds (15%), Canadian dollars (15%)
and German marks (15%), compared to contracts for the sale and purchase of
$653 million and $80 million, respectively, of foreign currencies at
December 31, 1993. Unrealized gains or losses are recorded in the financial
statements; accordingly, the fair value of foreign exchange contracts
approximates carrying value. Losses on foreign exchange contracts during
the first nine months of 1994 were $35 million for Time Warner and $23
million for TWE and are offset principally by corresponding increases in the
dollar value of foreign currency royalties and license fee payments that
have been or are anticipated to be received from international subsidiaries.
Time Warner reimburses or is reimbursed by TWE for contract gains and losses
related to TWE's foreign currency exposure. Foreign currency contracts are
placed with a number of major financial institutions in order to minimize
credit risk.
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
$7.2 billion of long-term debt at September 30, 1994, $1.6 billion of
General Partners' senior capital and $6.2 billion of partners' capital (net
of the $876 million uncollected portion of the note receivable from USW),
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 $1.3 billion at September 30, 1994 and
December 31, 1993, reducing the debt-net-of-cash amounts to $5.9 billion and
$5.8 billion, respectively.
Cash provided by operations of $1.091 billion in the first nine months
of 1994 reflects combined EBITDA from the Filmed Entertainment, Programming-
HBO and Cable businesses of $1.392 billion and a $235 million reduction of
working capital requirements, less $411 million of interest payments, $48
million of income taxes and $45 million of corporate expenses. Cash
provided by operations of $972 million in the first nine months of 1993
reflected combined business segment EBITDA of $1.415 billion, less $329
million of interest payments, $47 million of income taxes, $45 million of
corporate expenses and working capital requirements. Capital expenditures
increased to $772 million in the first nine months of 1994, compared to $393
million in 1993. Increased capital spending by Time Warner Cable is
expected to continue in 1994 and subsequent years because management
believes that the conversion from coaxial to fiber-optic cable is essential
to achieving long-term growth in revenue from unregulated cable services.
TWE's agreement to form a cable television joint venture with
Advance/Newhouse and Time Warner's agreement to acquire Summit will increase
the number of basic subscribers managed by Time Warner Cable from 7.3
million to 8.9 million without requiring the expenditure of cash, and will
add to existing large market clusters of cable franchises. Both transactions
are expected to close in 1995.
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 $740
million at September 30, 1994, compared to $724 million at December 31, 1993
(including amounts relating to HBO of $137 million at September 30, 1994 and
$178 million at December 31, 1993). The backlog excludes advertising barter
contracts.
Management believes that TWE's operating cash flow, cash and
equivalents, collections on the note receivable from USW and additional
borrowing capacity are sufficient to meet its capital and liquidity needs.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, December 31,
1994 1993
(millions)
ASSETS
Current assets
Cash and equivalents $ 1,348 $ 1,338
Receivables, including $144 and $257 due
from Time Warner, less
allowances of $283 and $257 1,232 1,313
Inventories 1,014 980
Prepaid expenses 87 114
Total current assets 3,681 3,745
Loan receivable from Time Warner 250 -
Noncurrent inventories 1,794 1,760
Property, plant and equipment, net 3,505 3,100
Excess of cost over net assets acquired 4,456 4,560
Cable television franchises 3,298 3,510
Other assets 1,442 1,288
Total assets $18,426 $17,963
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable $ 360 $ 366
Participations and programming costs 892 770
Other current liabilities, including $297 and
$108 of distributions due to Time Warner 1,445 1,129
Total current liabilities 2,697 2,265
Long-term debt 7,166 7,125
Other long-term liabilities, including $89
and $439 of distributions due to Time Warner 738 1,037
General Partners' senior capital 1,630 1,536
Partners' capital
Contributed capital 7,398 7,398
Accumulated deficit (327) (393)
Note receivable from USW (876) (1,005)
Total partners' capital 6,195 6,000
Total liabilities and partners' capital $18,426 $17,963
See accompanying notes.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended Ended
September 30, September 30,
1994 1993 1994 1993
(millions)
Revenues (a) $2,203 $2,174 $6,177 $5,796
Cost of revenues (a)(b) 1,553 1,551 4,337 4,070
Selling, general and administrative (a)(b) 415 344 1,175 1,004
Operating expenses 1,968 1,895 5,512 5,074
Business segment operating income 235 279 665 722
Interest and other, net (a) (155) (152) (435) (410)
Corporate services (a) (15) (15) (45) (45)
Income before income taxes 65 112 185 267
Income taxes (24) (28) (40) (48)
Income before extraordinary item 41 84 145 219
Extraordinary loss on retirement of debt,
net of $6 million and $7 million
income tax benefit - (8) - (10)
Net income $ 41 $ 76 $ 145 $ 209
__________________
(a) Includes the following income (expenses) resulting from transactions
with the partners of TWE and their affiliates (Note 6):
Selling, general and administrative $ (26) $ (13) $ (69) $ (42)
Corporate services (15) (15) (45) (45)
Interest and other, net 7 - 10 -
In addition, includes the following income (expenses) resulting from
transactions with equity affiliates of TWE or Time Warner (Note 6):
Revenues $ 20 $ 24 $ 87 $ 66
Cost of revenues (22) (25) (53) (57)
Selling, general and administrative 5 6 19 19
(b) Includes depreciation and amortization
expense of: $ 254 $ 238 $ 707 $ 671
See accompanying notes.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1994 1993
(millions)
OPERATIONS
Net income $ 145 $ 209
Adjustments for noncash and nonoperating items:
Depreciation and amortization 707 671
Changes in operating assets and liabilities 199 84
Cash provided by operations 1,051 964
INVESTING ACTIVITIES
Investments and acquisitions (113) (323)
Capital expenditures (742) (393)
Loan to Time Warner (250) -
Investment proceeds 42 100
Cash used by investing activities (1,063) (616)
FINANCING ACTIVITIES
Increase (decrease) in debt 50 (700)
Capital contributions, including
collections on note receivable from USW 129 1,548
Capital distributions (157) (14)
Financing costs - (36)
Cash provided by financing activities 22 798
INCREASE IN CASH AND EQUIVALENTS $ 10 $1,146
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
subsidiaries of 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. 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. Certain reclassifications have been made to
the 1993 financial statements to conform to the 1994 presentation. 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:
September 30, 1994 December 31, 1993
Current Noncurrent Current Noncurrent
(millions)
Film costs:
Released, less amortization $ 497 $ 300 $ 604 $ 318
Completed and not released 242 33 140 23
In process 30 407 7 340
Library, less amortization - 782 - 821
Programming costs, less amortization 151 272 147 258
Merchandise 94 - 82 -
Total $1,014 $1,794 $ 980 $1,760
3. LONG-TERM DEBT
Long-term debt consists of:
September 30, December 31,
1994 1993
(millions)
Bank credit agreement, weighted average
interest rates of 5.7% and 4.2% $2,250 $2,425
Commercial paper, weighted average interest
rates of 5.3% and 3.8% 947 772
Publicly held notes and debentures 3,900 3,892
Other 69 36
Total $7,166 $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:
Nine Months Ended
September 30,
1994 1993
(millions)
Balance at beginning of year $6,000 $6,437
Net income 145 209
Distributions 5 (416)
Allocation of income to General Partners'
senior capital (94) -
Collections on note receivable from USW 129 -
Admission of USW:
Capital contribution, net of uncollected portion
of note receivable from USW - 1,548
Allocation of partners' capital to General
Partners' senior capital - (1,501)
Distribution of Time Warner Service
Partnership assets - (95)
Other 10 (10)
Balance at September 30 $6,195 $6,172
Certain assets formerly owned and operated by TWE have since September
1993 been owned and operated by other partnerships ("Time Warner Service
Partnerships") pending a legal determination that TWE is clearly not
prohibited from owning the assets. The Time Warner Service Partnerships
make certain of their assets available to TWE and TWE is required to make
quarterly cash distributions of $12.5 million to the General Partners, which
the partners in turn are required to contribute to the Time Warner Service
Partnerships. All or a substantial portion of the assets of the Time Warner
Service Partnerships are expected to be recontributed to TWE in early 1995.
For the nine months ended September 30, 1994, the Time Warner Service
Partnerships have recorded aggregate losses of $19 million.
In addition to Time Warner Service Partnership distributions, TWE also
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 its stock options granted to employees of TWE
based on the amount by which the market price of Time Warner common stock
exceeds the option exercise price on the exercise date. TWE accrues a stock
option distribution and a corresponding liability with respect to
unexercised options when the market price of Time Warner 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 common stock declines.
During the nine months ended September 30, 1994, TWE accrued $38
million of Time Warner Service Partnership distributions and $135 million of
tax-related distributions, and reversed $178 million of previously-accrued
stock option distributions as a result of the decline in the market price of
Time Warner common stock from $44.25 at December 31, 1993 to $35.13 at
September 30, 1994. During the nine months ended September 30, 1993, TWE
accrued $221 million of tax distributions and $195 million of stock option
distributions. TWE paid $115 million of accrued tax distributions to the
General Partners in August 1994.
5. SEGMENT INFORMATION
Information as to the operations of TWE in different business segments
is as set forth below:
Three Months Nine Months
Ended September 30, Ended September 30,
1994 1993 1994 1993
(millions)
Revenues
Filmed Entertainment $1,342 $1,317 $3,637 $3,247
Programming - HBO 381 343 1,108 1,059
Cable 546 550 1,654 1,656
Intersegment elimination (66) (36) (222) (166)
Total $2,203 $2,174 $6,177 $5,796
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
(millions)
Operating income
Filmed Entertainment $ 90 $114 $223 $235
Programming - HBO 59 53 177 157
Cable 86 112 265 330
Total $ 235 $279 $665 $722
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
(millions)
Depreciation and amortization (a)
Filmed Entertainment $ 92 $ 79 $216 $197
Programming - HBO 5 4 14 12
Cable 157 155 477 462
Total $ 254 $238 $707 $671
_______________
(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 management's
view results in reasonable allocations. Time Warner and TWE entered into a
credit agreement in 1994 which allows Time Warner to borrow up to $400
million from TWE through September 15, 2000, provided TWE remains in
compliance with its bank credit agreement. Outstanding loans to Time Warner
will earn interest at LIBOR plus 1% per annum. TWE loaned Time Warner $250
million in April 1994 and $125 million in November 1994 under the credit
agreement.
7. ADDITIONAL FINANCIAL INFORMATION
Additional financial information is as follows:
Nine Months Ended
September 30,
1994 1993
(millions)
Interest expense $ 414 $ 424
Cash payments made for interest 408 328
Cash payments made for income taxes (net) 48 47
Borrowings 677 3,029
Repayments 627 3,729
8. ADVANCE/NEWHOUSE JOINT VENTURE
TWE will manage a cable television joint venture it has agreed to form
with subsidiaries of Advance Publications, Inc. and Newhouse Broadcasting
Corporation ("Advance/Newhouse"). Advance/Newhouse will contribute cable
television systems and related assets serving approximately 1.4 million
subscribers for a one-third interest in the venture. TWE will contribute
cable television systems or interests therein and related assets serving
approximately 2.8 million subscribers for a two-thirds interest. The
transaction is expected to close in 1995.
<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 $2.203 billion and net income of $41 million for
the three months ended September 30, 1994, compared to revenues of $2.174
billion and net income of $76 million for the three months ended September
30, 1993. An extraordinary loss on the retirement of debt of $8 million is
included in the 1993 results.
Revenues of $6.177 billion and net income of $145 million were
reported for the nine months ended September 30, 1994, compared to revenues
of $5.796 billion and net income of $209 million for the nine months ended
September 30, 1993. An extraordinary loss on the retirement of debt of $10
million and a one-time gain from the sale of certain assets are included in
the 1993 results.
As a U.S. partnership, TWE is not subject to U.S. federal and state
income taxation. Income and withholding taxes of $24 million and $40
million in the three and nine months ended September 30, 1994, respectively,
and $28 million and $48 million in the three and nine months ended September
30, 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 amortization of intangible assets recognized in 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. Financial analysts generally consider EBITDA to be an
important measure of comparative operating performance for the businesses of
TWE, and when used in comparison to debt levels or the coverage of interest
expense, as a measure of liquidity. However, EBITDA should be considered in
addition to, not as a substitute for, operating income, net income, cash
flow and other measures of financial performance and liquidity reported in
accordance with generally accepted accounting principles.
Operating income and EBITDA for TWE for the three and nine months
ended September 30, 1994 and 1993 are as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three Months Nine Months
Ended September 30, Ended September 30,
EBITDA Operating Income EBITDA Operating Income
1994 1993 1994 1993 1994 1993 1994 1993
(millions)
Filmed
Entertainment $182 $193 $ 90 $114 $ 439 $ 432 $223 $235
Programming-HBO 6 57 59 53 191 169 177 157
Cable 243 267 86 112 742 792 265 330
Total $489 $517 $235 $279 $1,372 $1,393 $665 $722
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1993
FILMED ENTERTAINMENT. Revenues increased to $1.342 billion, compared to
$1.317 billion in the third quarter of 1993. Operating income decreased to
$90 million from $114 million. Depreciation and amortization, including
amortization related to the purchase of WCI, amounted to $92 million in 1994
and $79 million in 1993. EBITDA decreased to $182 million from $193 million.
Worldwide syndication and consumer products revenues increased at Warner
Bros., but worldwide theatrical and home video revenues were lower than last
year's record-setting third quarter. Revenues at Six Flags decreased
slightly as a result of an attendance shift towards parks having lower per
capita revenue. Operating income and EBITDA margins were lower than in the
third quarter of 1993 when theatrical and home video results were
exceptionally strong.
PROGRAMMING - HBO. Revenues increased to $381 million, compared to $343
million in the third quarter of 1993. Operating income increased to $59
million from $53 million. Depreciation and amortization amounted to $5
million in 1994 and $4 million in 1993. EBITDA increased to $64 million
from $57 million. Revenues benefited from an increase in subscribers and
higher pay-TV rates, as well as increased revenues at the HBO Video and Time
Warner Sports units. Operating income, EBITDA and operating margins
improved principally as a result of the revenue gains and a smaller loss
from the COMEDY CENTRAL joint venture.
CABLE. Revenues were $546 million, compared to $550 million in the
third quarter of 1993. Operating income decreased to $86 million from $112
million. Depreciation and amortization, including amortization related to
the purchase of WCI and the acquisition of the ATC minority interest,
amounted to $157 million in 1994 and $155 million in 1993. EBITDA decreased
to $243 million from $267 million. Revenues and operating results in the
third quarter of 1994 were adversely affected by two rounds of cable rate
regulation that generally reduced the rates cable operators are allowed to
charge for regulated services, the first of which went into effect in
September 1993 and the second of which went into effect in July 1994. The
unfavorable effects of rate regulation were offset in part by an increase in
subscribers and nonregulated revenues during the quarter.
INTEREST AND OTHER, NET. Interest and other, net, increased to $155
million in the third quarter of 1994, compared to $152 million in the third
quarter of 1993. Interest expense decreased to $141 million, compared to
$142 million in the third quarter of 1993. Other expense, net, increased to
$14 million in the third quarter of 1994 from $10 million in 1993,
principally because of losses on certain investments, offset in part by an
increase in interest income on higher cash balances and the interest-bearing
note receivable from USW.
NINE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1993
FILMED ENTERTAINMENT. Revenues increased to $3.637 billion, compared to
$3.247 billion in the first nine months of 1993. Operating income decreased
to $223 million from $235 million. Depreciation and amortization, including
amortization related to the purchase of WCI, amounted to $216 million in
1994 and $197 million in 1993. EBITDA increased to $439 million from $432
million. Worldwide home video, syndication and consumer products revenues
increased at Warner Bros., offset in part by lower worldwide theatrical
revenues. Revenues at Six Flags increased slightly as a result of overall
attendance growth and higher in-park spending for the first half of 1994,
which offset the small revenue decline experienced in the third quarter.
Operating income and EBITDA margins were lower than in the first nine months
of 1993 when worldwide theatrical results were exceptionally strong.
PROGRAMMING - HBO. Revenues increased to $1.108 billion, compared to
$1.059 billion in the first nine months of 1993. Operating income increased
to $177 million from $157 million. Depreciation and amortization amounted
to $14 million in 1994 and $12 million in 1993. EBITDA increased to $191
million from $169 million. Revenues benefited from an increase in
subscribers and higher pay-TV rates, as well as increased revenues at the
HBO Video unit. Operating income, EBITDA 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 lower results from other new
businesses.
CABLE. Revenues decreased to $1.654 billion, compared to $1.656 billion
in the first nine months of 1993. Operating income decreased to $265
million from $330 million. Depreciation and amortization, including
amortization related to the purchase of WCI and the acquisition of the ATC
minority interest, amounted to $477 million in 1994 and $462 million in
1993. EBITDA decreased to $742 million from $792 million. Revenues and
operating results in the first nine months of 1994 were adversely affected
by two rounds of cable rate regulation that generally reduced the rates
cable operators are allowed to charge for regulated services, the first of
which went into effect in September 1993 and the second of which went into
effect in July 1994. The unfavorable effects of rate regulation were offset
in part by an increase in subscribers and nonregulated revenues. Actions
undertaken to mitigate the impact of rate regulation include a hiring freeze
to reduce the cable workforce and other 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 $435
million in the first nine months of 1994, compared to $410 million in the
first nine months of 1993. Interest expense decreased to $414 million,
compared with $424 million in the first nine months of 1993. There was
other expense, net, of $21 million in the first nine months of 1994,
compared to other income, net, of $14 million in 1993. Investment-related
and foreign currency contract losses in 1994 exceeded an increase in
interest income on higher cash balances and the interest-bearing note
receivable from USW. A gain on the sale of certain assets and other
investment-related income exceeded investment losses in 1993.
FINANCIAL CONDITION AND LIQUIDITY
September 30, 1994
The financial condition of TWE remained essentially unchanged from year
end 1993. TWE had $7.2 billion of long-term debt at September 30, 1994,
$1.6 billion of General Partners' senior capital and $6.2 billion of
partners' capital (net of the $876 million uncollected portion of the note
receivable from USW), compared to $7.1 billion of long-term debt, $1.5
billion of General Partners' senior capital and $6 billion of partners'
capital (net of the $1 billion uncollected portion of the note receivable
from USW) at December 31, 1993. Cash and equivalents were $1.3 billion at
September 30, 1994 and December 31, 1993, reducing the debt-net-of-cash
amounts to $5.9 billion and $5.8 billion, respectively. Time Warner and TWE
entered into a credit agreement in 1994 which allows Time Warner to borrow
up to $400 million from TWE through September 15, 2000. Time Warner
borrowed $250 million in April 1994 and $125 million in November 1994 under
the credit agreement.
Approximately 45% of TWE's debt is floating-rate debt and 55% is fixed-
rate. There were no material interest rate swap agreements outstanding at
September 30, 1994 or December 31, 1993. Based on the level of interest
rates prevailing at September 30, 1994, the fair value of TWE's long-term
debt was $330 million less than its carrying value. Based on the level of
interest rates prevailing at December 31, 1993, the fair value of TWE's
long-term debt exceeded its carrying value by $290 million. Accounting
recognition is not given to unrealized gains or losses on debt unless the
debt is retired prior to its maturity.
Cash provided by TWE's operations in the first nine months of 1994
reflects combined business segment EBITDA of $1.372 billion and a $199
million reduction of working capital requirements, less $408 million of
interest payments, $48 million of income taxes and $45 million of corporate
expenses. Cash provided by operations of $964 million in the first nine
months of 1993 reflected combined business segment EBITDA of $1.393 billion,
less $328 million of interest payments, $47 million of income taxes, $45
million of corporate expenses and working capital requirements. Capital
expenditures increased to $742 million in the first nine months of 1994,
compared to $393 million in 1993. Increased capital spending by Time Warner
Cable is expected to continue in 1994 and subsequent years because
management believes that the conversion from coaxial to fiber-optic cable is
essential to achieving long-term growth in revenue from unregulated cable
services.
Foreign exchange contracts are used by Time Warner to hedge TWE's
foreign exchange risk primarily with respect to anticipated license payments
international subsidiaries will make to TWE domestic companies upon the sale
of filmed entertainment product abroad. TWE is reimbursed by or reimburses
Time Warner for Time Warner contract gains and losses related to TWE's
exposure. At September 30, 1994, Time Warner had contracts for the sale of
$220 million of foreign currencies at fixed rates related to TWE's exposure,
primarily Japanese yen (44% of net contract value), French francs (16%),
German marks (13%) and Canadian dollars (12%), compared to contracts for the
sale of $226 million of foreign currencies at December 31, 1993. Unrealized
gains or losses are recorded in the financial statements; accordingly, the
fair value of foreign exchange contracts approximates carrying value.
Losses on foreign exchange contracts during the first nine months of 1994
were $23 million and are offset principally by corresponding increases in
the dollar value of foreign currency license fee payments that have been or
are anticipated to be received from international subsidiaries. Time Warner
places the contracts with a number of major financial institutions in order
to minimize credit risk.
TWE's agreement to form a cable television joint venture with
Advance/Newhouse and Time Warner's agreement to acquire Summit
Communications Group Inc. will increase the number of basic subscribers
managed by Time Warner Cable from 7.3 million to 8.9 million without
requiring the expenditure of cash, and will add to existing large market
clusters of cable franchises. Both transactions are expected to close in
1995.
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 $740 million
at September 30, 1994, compared to $724 million at December 31, 1993
(including amounts relating to HBO of $137 million at September 30, 1994 and
$178 million at December 31, 1993). The backlog excludes advertising barter
contracts.
Management believes that TWE's operating cash flow, cash and
equivalents, collections on the note receivable from USW and additional
borrowing capacity are sufficient to meet its capital and liquidity needs.
<PAGE>
PART II. OTHER INFORMATION
Item l. Legal Proceedings.
Reference is made to the litigation entitled BERGER, et al. v.
WARNER COMMUNICATIONS INC., et al. described on page I-40 of Time
Warner's Annual Report on Form 10-K for the year ended December 31,
1993 (the "Form 10-K"). On August 16, 1994, the court granted
defendants' motion for partial summary judgment and dismissed
plaintiffs' contract claim. Plaintiffs filed a Notice of Appeal on
September 14, 1994.
Reference is made to the litigation entitled IN RE TIME WARNER INC.
SECURITIES LITIGATION described on page I-41 of the Form 10-K. As
previously reported, defendants' petition for writ of certiorari to
the U.S. Supreme Court was denied. The parties have reached a
settlement in this matter. The settlement provides for the payment to
the class of $5.5 million which includes settlement expenses and
plaintiffs' counsel fees in exchange for releases from members of the
class. The court approved the settlement as fair at a hearing held on
November 10, 1994.
Reference is made to the investigation described in the first full
paragraph on page I-42 of the Form 10-K. In early October 1994, WEA (and
other major distributors of recorded music) received a subpoena from the
FTC. The subpoena states that the FTC is investigating whether members of
the pre-recorded music distribution industry may be engaging in unfair
methods of competition by fixing prices or by engaging in concerted
activities to limit the availability of cooperative advertising or
promotional funds to retailers who distribute used compact discs or
advertise prices of compact discs below specified levels. WEA and various
other Time Warner entities involved in the recorded music business are in
the process of gathering documents in response to the subpoena.
Reference is made to the litigation entitled SAMUEL B. MOORE, et al. v.
AMERICAN FEDERATION OF TELEVISION AND RADIO ARTISTS, et al. described on
page I-42 of the Form 10-K and on page 27 of Time Warner's quarterly report
on Form 10-Q for the quarter ended June 30, 1994 (the "Form 10-Q"). As
previously reported in the Form 10-Q, the record company defendants' motion
to dismiss plaintiffs' amended complaint was granted as to all claims except
the RICO claim. The record company defendants in the one remaining RICO
claim have answered the amended complaint and filed a motion for summary
judgment seeking dismissal of the claim. That motion is now before the
court. The record company defendants also have moved to stay discovery and
class certification proceedings pending the disposition of the motion for
summary judgment.
Reference is made to the investigation described on page 27 of the Form
10-Q. Time Warner has complied with the civil investigative demand to the
extent that it sought information and documents with respect to domestic
activities of the Warner Music Group and has objected to responding with
respect to foreign activities on the ground that the Department of Justice
lacks jurisdiction to inquire into such activities. On November 3, 1994,
the Department of Justice filed a petition in the United States District
Court for the District of Columbia seeking to compel Time Warner and the
other companies to provide documents from their files in the United States
that deal with overseas activities.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Contribution Agreement, dated as of September 9, 1994, among
TWE, Advance Publications, Inc., Newhouse Broadcasting Corporation,
Advance/Newhouse Partnership, and Time Warner Entertainment-Advance/Newhouse
Partnership (incorporated by reference to Exhibit 10(a) to TWE's Current
Report on Form 8-K dated September 9, 1994 (the "TWE 8-K")).
10.2 Partnership Agreement, dated as of September 9, 1994, between
TWE and Advance/Newhouse Partnership (incorporated by reference to Exhibit
10(b) to the TWE 8-K).
27 Financial Data Schedule
99.1 Summarized financial information of Paragon Communications.
(b) Reports on Form 8-K.
Time Warner filed a report on Form 8-K dated September 9, 1994
reporting in Item 5 the announcement by TWE that it had reached agreements
with Advance/Newhouse Partnership, a New York general partnership between
Newhouse Broadcasting Corporation and a wholly-owned subsidiary of Advance
Publications, Inc. ("Advance/Newhouse") to form a New York general
partnership known as the Time Warner Entertainment-Advance/Newhouse
Partnership (the "Partnership"), to which Advance/Newhouse will contribute
all of its cable television systems, which serve approximately 1.4 million
subscribers, and certain related assets and TWE will contribute cable
television systems (or interests therein), which serve approximately 2.8
million subscribers, and certain related assets. TWE will own a two-thirds
equity interest in the Partnership and Advance/Newhouse will own a one-third
equity interest. TWE will be the Managing Partner and will govern the day-
to-day affairs of the Partnership.
<PAGE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Exhibit No. Description of Exhibit
10.1 Contribution Agreement, dated as of September 9, 1994,
among TWE, Advance Publications, Inc., Newhouse
Broadcasting Corporation, Advance/Newhouse Partnership,
and Time Warner Entertainment-Advance/Newhouse Partnership
(incorporated by reference to Exhibit 10(a) to TWE's
Current Report on Form 8-K dated September 9, 1994 (the
"TWE 8-K")).*
10.2 Partnership Agreement, dated as of September 9, 1994,
between TWE and Advance/Newhouse Partnership (incorporated
by reference to Exhibit 10(b) to the TWE 8-K).*
27 Financial Data Schedule
99.1 Summarized financial information of Paragon Communications.
_______________________
*Incorporated by reference.
<PAGE>
TIME WARNER INC.
SIGNATURE
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 Inc.
(Registrant)
By: /s/ Bert W. Wasserman
Name: Bert W. Wasserman
Title: Executive Vice President and
Chief Financial Officer
Dated: November 14, 1994
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the financial statements of Time Warner Inc. for the quarterly period
ended September 30, 1994 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-1-1994
<PERIOD-END> SEP-30-1994
<CASH> 318
<SECURITIES> 0
<RECEIVABLES> 1,862
<ALLOWANCES> 723
<INVENTORY> 363
<CURRENT-ASSETS> 2,530
<PP&E> 1,369
<DEPRECIATION> 633
<TOTAL-ASSETS> 16,771
<CURRENT-LIABILITIES> 2,477
<BONDS> 9,322
0
1
<COMMON> 379
<OTHER-SE> 818
<TOTAL-LIABILITY-AND-EQUITY> 16,771
<SALES> 5,109
<TOTAL-REVENUES> 5,109
<CGS> 2,923
<TOTAL-COSTS> 2,923
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 571
<INCOME-PRETAX> 29
<INCOME-TAX> 132
<INCOME-CONTINUING> (103)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (103)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
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 Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
(millions)
Operating Statement Information
Revenues $ 87 $ 84 $260 $253
Operating income 21 21 62 64
Net income 17 17 48 47
September 30, December 31,
1994 1993
(millions)
Balance Sheet Information
Property, plant and equipment $388 $385
Cable television franchises 208 216
Total assets 625 627
Debt 272 320
Total liabilities 339 390
