SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT of 1934 for the quarterly period
ended June 30, 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 379,113,336
Description of Class Shares Outstanding
as of July 29, 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 June 30, 1994
and December 31, 1993 1 16
Consolidated statements of operations for
the three and six months ended
June 30, 1994 and 1993 2 17
Consolidated statements of cash flows for
the six months ended June 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 June 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)
June 30, December 31,
1994 1993
(millions, except
per share amounts)
ASSETS
Current assets
Cash and equivalents $ 292 $ 200
Receivables, less allowances of $675 and $676 952 1,400
Inventories 337 321
Prepaid expenses 721 613
Total current assets 2,302 2,534
Investments in and amounts due to and from
Entertainment Group 5,561 5,627
Investments, other 1,608 1,613
Music catalogues, contracts and copyrights 1,258 1,309
Excess of cost over net assets acquired 4,627 4,691
Other assets, primarily property, plant
and equipment 1,109 1,118
Total assets $16,465 $16,892
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties payable $ 1,016 $ 1,099
Debt due within one year 34 120
Other current liabilities 1,103 1,006
Total current liabilities 2,153 2,225
Long-term debt 9,188 9,291
Deferred income taxes 2,881 2,998
Unearned portion of paid subscriptions 627 633
Other liabilities 403 375
Shareholders' equity
Preferred stock, $1 par value 1 1
Common stock, $1 par value, 379.0 million
and 378.3 million shares outstanding
(excluding 45.4 million and 45.2 million
treasury shares) 379 378
Paid-in capital 2,560 2,537
Unrealized appreciation of certain
marketable securities 131 205
Accumulated deficit (1,858) (1,751)
Total shareholders' equity 1,213 1,370
Total liabilities and shareholders' equity $ 16,465 $ 16,892
See accompanying notes.
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
(millions, except per share amounts)
Revenues (a) $1,667 $1,567 $3,225 $3,086
Cost of revenues (a)(b) 906 855 1,798 1,745
Selling, general and
administrative (a)(b) 591 577 1,145 1,094
Operating expenses 1,497 1,432 2,943 2,839
Business segment operating income 170 135 282 247
Equity in pretax income of
Entertainment Group(a) 66 53 111 161
Interest and other, net (a) (179) (194) (337) (354)
Corporate expenses (a) (19) (18) (37) (37)
Income (loss) before income taxes 38 (24) 19 17
Income taxes (58) (21) (90) (77)
Loss before extraordinary item (20) (45) (71) (60)
Extraordinary loss on retirement
of debt, net of $23 million
income tax benefit - (35) - (35)
Net loss (20) (80) (71) (95)
Preferred dividend requirements (3) (3) (6) (112)
Net loss applicable to common shares $ (23) $ (83) $ (77) $ (207)
Loss per common share:
Loss before extraordinary item $(0.06) $(0.13) $(0.20) $(0.46)
Net loss $(0.06) $(0.22) $(0.20) $(0.55)
Average common shares 378.8 373.8 378.7 373.2
__________________
(a) Includes the following income (expenses) resulting from
transactions with the Entertainment Group and other related
companies for the three and six months ended June 30, 1994,
respectively, and for the corresponding periods in the prior
year: revenues of $53 million and $92 million in 1994, and $39
million and $71 million in 1993; cost of revenues of $(25)
million and $(46) million in 1994, and $(13) million and $(29)
million in 1993; selling, general and administrative of $7
million and $19 million in 1994, and $14 million and $27 million
in 1993; equity in pretax income of Entertainment Group of $(26)
million and $(64) million in 1994, and $(29) million and $(57)
million in 1993; interest and other, net of $4 million and $15
million in 1994; and corporate expenses of $15 million and $30
million in both 1994 and 1993.
(b) Includes depreciation and
amortization expense of: $ 105 $ 106 $ 210 $ 210
See accompanying notes.
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
1994 1993
(millions)
OPERATIONS
Net loss $ (71) $ (95)
Adjustments for noncash and nonoperating items:
Depreciation and amortization 210 210
Noncash interest expense 107 76
Extraordinary loss on retirement of debt - 35
Equity in pretax income of Entertainment Group,
less distributions (109) (152)
Changes in operating assets and liabilities 106 249
Cash provided by operations 243 323
INVESTING ACTIVITIES
Investments and acquisitions (67) (64)
Capital expenditures (95) (67)
Investment proceeds 111 48
Cash used by investing activities (51) (83)
FINANCING ACTIVITIES
Increase (decrease) in debt (54) 3,462
Dividends paid (69) (235)
Redemption of Series D preferred stock - (3,494)
Other 23 (51)
Cash used by financing activities (100) (318)
INCREASE (DECREASE) IN CASH AND EQUIVALENTS $ 92 $ (78)
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 June 30, 1994 and December 31, 1993
consists of the following:
June 30, December 31,
1994 1993
(millions)
Investment in TWE $5,287 $5,085
Income tax and stock option related
distributions due from TWE 466 547
Long-term debt due to TWE (250) -
Other liabilities due to TWE,
principally related to
home video distribution (199) (257)
Investment in and amounts due
to and from TWE 5,304 5,375
Investment in other Entertainment
Group companies 257 252
Total $5,561 $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 $104 million and $133
million in the six months ended June 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 June 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 Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
(millions)
Operating Statement Information
Revenues $2,063 $1,867 $3,990 $3,625
Depreciation and amortization 242 229 458 435
Business segment operating income 231 241 437 451
Interest and other, net 150 173 296 260
Income before income taxes 66 53 111 161
Income before extraordinary item 54 47 95 141
Net income 54 45 95 139
Six Months
Ended June 30,
1994 1993
(millions)
Cash Flow Information
Cash provided by operations $ 707 $ 627
Capital expenditures (504) (239)
Investments and acquisitions (78) (152)
Loan to Time Warner (250) -
Increase (decrease) in debt 28 (169)
Capital distributions (2) (9)
Increase in cash and equivalents 8 148
June 30, December 31,
1994 1993
(millions)
Balance Sheet Information
Cash and equivalents $1,346 $1,338
Total current assets 3,725 3,766
Total assets 18,410 18,202
Total current liabilities 2,326 2,301
Long-term debt 7,162 7,125
TWE General Partners' senior capital 1,598 1,536
TWE partners' capital 6,171 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. At June 30, 1994 and December 31,
1993, the General Partners had recorded $371 million and $276
million, respectively, of tax related distributions due from TWE,
approximately $108 million of which is receivable in 1994, and
$95 million and $271 million, respectively, of stock option
related distributions due from TWE, based on closing prices of
Time Warner common stock of $35.50 and $44.25, respectively,
receivable when the options are exercised.
Time Warner and TWE entered into a credit agreement in 1994
that 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 under the credit agreement in April 1994, which was
used to repay a like principal amount of Time Warner notes at
their maturity.
3. CAPITAL STOCK
Changes in shareholders' equity are as follows:
Six Months
Ended June 30,
1994 1993
(millions)
Balance at beginning of year $1,370 $8,167
Net loss (71) (95)
Common dividends declared (64) (56)
Preferred dividends declared (6) (110)
Unrealized depreciation of certain marketable
equity investments (74) -
Redemption and exchange of preferred stock - (6,620)
Other 58 15
Balance at June 30 $1,213 $1,301
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 Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
(millions)
Revenues
TIME WARNER:
Publishing $ 851 $ 819 $1,602 $1,550
Music 822 756 1,634 1,551
Intersegment elimination (6) (8) (11) (15)
Total $1,667 1,567 $3,225 $3,086
ENTERTAINMENT GROUP:
Filmed Entertainment $1,216 $1,016 $2,299 $1,933
Programming - HBO 374 357 736 716
Cable 560 560 1,111 1,106
Intersegment elimination (87) (66) (156) (130)
Total $2,063 $1,867 $3,990 $3,625
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
(millions)
Operating income
TIME WARNER:
Publishing $ 106 $ 85 $ 156 $ 123
Music 64 50 126 124
Total $ 170 $ 135 $ 282 $ 247
ENTERTAINMENT GROUP:
Filmed Entertainment $ 75 $ 72 $ 141 $ 129
Programming - HBO 62 53 118 104
Cable 94 116 178 218
Total $ 231 $ 241 $ 437 $ 451
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
(millions)
Depreciation and amortization (a)
TIME WARNER:
Publishing $ 19 $ 20 $ 39 $ 38
Music 86 86 171 172
Total $ 105 $ 106 $ 210 $ 210
ENTERTAINMENT GROUP:
Filmed Entertainment $ 75 $ 71 $ 126 $ 120
Programming - HBO 5 4 10 8
Cable 162 154 322 307
Total $ 242 $ 229 $ 458 $ 435
(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:
Six Months
Ended June 30,
1994 1993
(millions)
Interest expense $ 374 $ 317
Cash payments made for interest 246 54
Cash payments made for income taxes 135 112
Income tax refunds received 39 43
During the six months ended June 30, 1994, Time Warner
realized $210 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 $1.667 billion and a net loss of
$20 million ($.06 per common share) for the three months ended
June 30, 1994, compared to revenues of $1.567 billion, a loss of
$45 million ($.13 per common share) before an extraordinary loss
on the retirement of debt, and a net loss of $80 million ($.22
per common share) for the three months ended June 30, 1993.
Revenues of $3.225 billion and a net loss of $71 million
($.20 per common share) were reported for the six months ended
June 30, 1994, compared to revenues of $3.086 billion, a loss of
$60 million ($.46 per common share) before the extraordinary
loss, and a net loss of $95 million ($.55 per common share) for
the six months ended June 30, 1993.
Time Warner's equity in the pretax income of the
Entertainment Group was $66 million in the three months ended
June 30, 1994, compared to $53 million in the three months ended
June 30, 1993, and was $111 million in the six months ended June
30, 1994, compared to $161 million in the six months ended June
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. 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.
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, operating
income, net income, cash flow and other measures of financial
performance reported in accordance with generally accepted
accounting principles.
EBITDA for Time Warner and the Entertainment Group for the
three and six months ended June 30, 1994 and 1993 is as follows:
Three Months Six Months
Ended Ended
June 30, June 30,
1994 1993 1994 1993
(millions)
TIME WARNER:
Publishing $125 $105 $195 $161
Music 150 136 297 296
Total $275 $241 $492 $457
ENTERTAINMENT GROUP:
Filmed Entertainment $150 $143 $267 $249
Programming - HBO 67 57 128 112
Cable 256 270 500 525
Total $473 $470 $895 $886
THREE MONTHS ENDED JUNE 30, 1994 COMPARED TO THE THREE MONTHS
ENDED JUNE 30, 1993
Time Warner
PUBLISHING. Revenues increased to $851 million, compared to
$819 million in the second quarter of 1993. Operating income
increased to $106 million from $85 million. Depreciation and
amortization amounted to $19 million in 1994 and $20 million in
1993. EBITDA increased to $125 million from $105 million.
Revenues benefited from increases in both magazine advertising
and circulation revenues, aided by special issues at several of
the magazines. The largest revenue gains were achieved by
PEOPLE, SPORTS ILLUSTRATED, ENTERTAINMENT WEEKLY and SOUTHERN
LIVING. EBITDA increased and operating margins improved
principally as a result of the revenue gains and continued cost
containment.
MUSIC. Revenues increased to $822 million, compared to $756
million in the second quarter of 1993. Operating income
increased to $64 million from $50 million. Depreciation and
amortization, including amortization related to the purchase of
WCI, amounted to $86 million in each period. EBITDA increased to
$150 million from $136 million. Worldwide recorded music
revenues increased, benefiting from increased unit sales of
compact discs. EBITDA benefited from improved international
operating results and higher EBITDA from direct marketing
activities resulting from increased new membership and lower
amortization of member acquisition costs, offset in part by
higher operating costs for domestic recorded music and start-up
costs for new business ventures.
INTEREST AND OTHER, NET. Interest and other, net, decreased
to $179 million in the second quarter of 1994, compared to $194
million in the second quarter of 1993. Interest expense
decreased to $192 million, compared to $200 million, principally
because of interest savings realized from the issuance of lower-
cost debt in 1993 to fund the redemption of certain Time Warner
and WCI debentures. Other income, net, of $13 million in the
second quarter of 1994 increased from $6 million in 1993,
principally because of an increase in investment-related income,
which in 1994 benefited from a gain on the sale of certain assets
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 as a result of the admission of
a subsidiary of U S WEST, Inc. to the partnership in September
1993 (the "USW Transaction"). Those increases in investment-
related income were reduced in large part by losses on and
reductions in the carrying value of other investments and losses
on foreign exchange contracts. Losses on foreign exchange
contracts are offset by corresponding increases in the dollar
value of foreign currency cash flows and earnings that have been
or are anticipated to be realized.
ENTERTAINMENT GROUP
FILMED ENTERTAINMENT. Revenues increased to $1.216 billion,
compared to $1.016 billion in the second quarter of 1993.
Operating income increased to $75 million from $72 million.
Depreciation and amortization, including amortization related to
the purchase of WCI, amounted to $75 million in 1994 and $71
million in 1993. EBITDA increased to $150 million from $143
million. The revenue growth resulted primarily from increases in
domestic theatrical, worldwide home video and consumer products
revenues, offset in part by lower international theatrical
revenues. Revenues at Six Flags increased due to higher
attendance and in-park spending. EBITDA benefited from the
revenue gains.
PROGRAMMING - HBO. Revenues increased to $374 million,
compared to $357 million in the second quarter of 1993.
Operating income increased to $62 million from $53 million.
Depreciation and amortization amounted to $5 million in 1994 and
$4 million in 1993. EBITDA increased to $67 million from $57
million. Revenues benefited from an increase in subscribers and
higher pay-TV rates. EBITDA benefited principally as a result of
the revenue gains.
CABLE. Revenues were $560 million in the second quarter of
1994 and 1993. Operating income decreased to $94 million from
$116 million. Depreciation and amortization, including
amortization related to the purchase of WCI and the acquisition
of the ATC minority interest, amounted to $162 million in 1994
and $154 million in 1993. EBITDA decreased to $256 million from
$270 million. Revenues and operating results in the second
quarter of 1994 were adversely affected by the initial round of
cable rate regulation that went into effect in September 1993,
which in general reduced rates cable operators, including Time
Warner Cable, can charge for regulated services. The unfavorable
effects of rate regulation were offset in part by an increase in
subscribers and nonregulated revenues during the quarter.
Revised rules for determining rates for regulated services that
went into effect in July 1994 will have an additional adverse
effect on revenues and operating results. 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, decreased
to $150 million in the second quarter of 1994, compared to $173
million in the second quarter of 1993. Interest expense
decreased to $139 million, compared to $142 million in the second
quarter of 1993. Other expense, net, decreased to $11 million in
the second quarter of 1994 from $31 million in 1993, principally
as a result of an increase in interest income on higher cash
balances and the interest-bearing note ("USW Note") received in
the USW Transaction.
SIX MONTHS ENDED JUNE 30, 1994 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1993
PUBLISHING. Revenues increased to $1.602 billion, compared
to $1.550 billion in the first six months of 1993. Operating
income increased to $156 million from $123 million. Depreciation
and amortization amounted to $39 million in 1994 and $38 million
in 1993. EBITDA increased to $195 million from $161 million.
Revenues benefited from increases in both magazine advertising
and circulation revenues, aided by special issues at several of
the magazines. The largest revenue gains were achieved by
PEOPLE, SPORTS ILLUSTRATED, ENTERTAINMENT WEEKLY and SOUTHERN
LIVING. EBITDA increased and operating margins improved
principally as a result of the revenue gains and continued cost
containment.
MUSIC. Revenues increased to $1.634 billion, compared to
$1.551 billion in the first six months of 1993. Operating income
increased to $126 million from $124 million. Depreciation and
amortization, including amortization related to the purchase of
WCI, amounted to $171 million in 1994 and $172 million in 1993.
EBITDA increased to $297 million from $296 million. Flat
revenues and a decline in EBITDA during the first quarter of
1994, due in large part to lower domestic music catalogue sales,
were overcome by the revenue and EBITDA increases recorded in the
second quarter of 1994.
INTEREST AND OTHER, NET. Interest and other, net, decreased
to $337 million in the first six months of 1994, compared to $354
million in the first six months of 1993. Interest expense
increased to $374 million from $317 million as a result of an
increase in debt from the redemption and exchange of preferred
stock in 1993, offset in part by savings from the lower-cost debt
issued in 1993 to fund the redemption of certain Time Warner and
WCI debentures. There was other income, net, of $37 million in
the first six months of 1994, compared to other expense, net, of
$37 million in 1993, principally because of an increase in
investment-related income, which in 1994 benefited from a gain on
the sale of certain assets 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 as a
result of the USW Transaction. Investment-related income was
reduced by adjustments to the carrying value of certain
investments that were taken in both periods and higher losses on
foreign exchange contracts in 1994. Losses on foreign exchange
contracts are offset by corresponding increases in the dollar
value of foreign currency cash flows and earnings that have been
or are anticipated to be realized.
ENTERTAINMENT GROUP
FILMED ENTERTAINMENT. Revenues increased to $2.299 billion,
compared to $1.933 billion in the first six months of 1993.
Operating income increased to $141 million from $129 million.
Depreciation and amortization, including amortization related to
the purchase of WCI, amounted to $126 million in 1994 and $120
million in 1993. EBITDA increased to $267 million from $249
million. The revenue growth resulted primarily from increases in
domestic theatrical, worldwide home video and consumer products
revenues, offset in part by lower international theatrical
revenues. Revenues at Six Flags increased due to higher
attendance and in-park spending. EBITDA benefited from the
revenue gains.
PROGRAMMING - HBO. Revenues increased to $736 million,
compared to $716 million in the first six months of 1993.
Operating income increased to $118 million from $104 million.
Depreciation and amortization amounted to $10 million in 1994 and
$8 million in 1993. EBITDA increased to $128 million from $112
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 lower results from other new businesses.
CABLE. Revenues increased to $1.111 billion, compared to
$1.106 billion in the first six months of 1993. Operating income
decreased to $178 million from $218 million. Depreciation and
amortization, including amortization related to the purchase of
WCI and the acquisition of the ATC minority interest, amounted to
$322 million in 1994 and $307 million in 1993. EBITDA decreased
to $500 million from $525 million. Revenues and operating results
in the first six months of 1994 were adversely affected by the
initial round of cable rate regulation that went into effect in
September 1993. The unfavorable effects of rate regulation were
offset in part by an increase in subscribers and nonregulated
revenues.
INTEREST AND OTHER, NET. Interest and other, net, increased
to $296 million in the first six months of 1994, compared to $260
million in the first six months of 1993. Interest expense
decreased to $276 million, compared with $284 million in the
first six months of 1993. There was other expense, net, of $20
million in the first six months of 1994, compared to other
income, net, of $24 million in 1993 that resulted from a gain on
the sale of certain assets. Other investment-related expenses in
1994 were partially offset by an increase in interest income on
higher cash balances and the USW Note received in the USW
Transaction.
FINANCIAL CONDITION AND LIQUIDITY
June 30, 1994
TIME WARNER
Time Warner had $9.2 billion of debt and $1.2 billion of
equity at June 30, 1994, compared to $9.4 billion of debt and
$1.4 billion of equity at December 31, 1993. Cash and
equivalents were $292 million at June 30, 1994, compared to $200
million at December 31, 1993, resulting in debt-net-of-cash
amounts of $8.9 billion and $9.2 billion at such dates. Time
Warner and TWE entered into a credit agreement in 1994 that
allows Time Warner to borrow up to $400 million from TWE through
September 15, 2000. Time Warner borrowed $250 million under the
agreement in April 1994, which was used to repay a like principal
amount of Time Warner 5.2% notes at maturity. Available credit
under the facility also is intended to be used to refinance $125
million aggregate principal amount of Time Warner 9.5% notes at
maturity on November 1, 1994.
Interest rate swap agreements are used by Time Warner to
manage its exposure to interest rate changes by adjusting the
proportion of total debt that is subject to changes in short-term
rates. At June 30, 1994, Time Warner had contracts to pay
floating rates of interest (average six-month LIBOR rate of 4.3%)
and receive fixed rates of interest (average rate of 5.5%) on
$2.9 billion notional amount of indebtedness over an average
remaining term of approximately four years, effectively
converting approximately 30% of Time Warner's debt, all of which
is fixed-rate, to a floating-rate basis. Time Warner had
interest rate swap contracts on $2.1 billion notional amount of
indebtedness at December 31, 1993. The fair value of Time
Warner's fixed-rate debt was $231 million less than its carrying
value at June 30, 1994, and it would have cost $171 million to
terminate the related interest rate swap agreements, which
combined is the equivalent of an unrealized gain of $60 million.
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 is 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 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 $243 million in the first six
months of 1994 was aided by the securitization of $210 million of
receivables and reflects $246 million of interest payments, $96
million of income taxes and other working capital requirements,
compared to $323 million of cash provided by operations in the
first six months of 1993, after $54 million of interest payments,
$69 million of income taxes and working capital requirements.
Cash flows used in investing activities in the first six months
of 1994, excluding investment proceeds, were $162 million,
compared to $131 million in 1993. Cash dividends paid decreased
to $69 million in the first six months of 1994, compared to $235
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 $110 million are expected to be
received by Time Warner or the General Partners during 1994,
primarily because of tax-related distributions.
Foreign exchange contracts are used to manage exchange rate
exposure on future cash flows and earnings denominated in foreign
currencies. At June 30, 1994, Time Warner had contracts for the
sale of $615 million of foreign currencies at fixed rates,
primarily Japanese yen, German marks, Canadian dollars and French
francs, compared to contracts for the sale of $573 million of
foreign currencies at December 31, 1993. The fair value of
foreign exchange contracts approximates carrying value as the
unrealized gains or losses are recorded in the financial
statements. Losses on foreign exchange contracts during the
first six months of 1994 of $24 million relating to Time Warner
and $17 million relating to TWE are offset by corresponding
increases in the dollar value of foreign currency cash flows and
earnings that have been or are anticipated to be realized.
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 June
30, 1994, $1.6 billion of General Partners' senior capital and
$6.2 billion of partners' capital (net of the $937 million
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 $1.3 billion at June 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 the operations of the Entertainment Group
in the first six months of 1994 amounted to $707 million, after
$240 million of interest payments, $29 million of income taxes
and working capital requirements, compared to cash from
operations of $627 million in the first six months of 1993, after
$213 million of interest payments, $27 million of income taxes
and working capital requirements. Capital expenditures increased
to $504 million in the first six months of 1994, compared to $239
million in 1993. Capital spending by Time Warner Cable is
expected to continue to be much greater in 1994 and subsequent
years as long-term growth in revenue from unregulated services
largely depends on fiber-optic upgrades of its plant.
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 $770 million at June 30, 1994, compared to
$724 million at December 31, 1993 (including amounts relating to
HBO of $140 million at June 30, 1994 and $178 million at December
31, 1993). The backlog excludes advertising barter contracts.
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 under its $400 million credit agreement with Time
Warner.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
1994 1993
(millions)
ASSETS
Current assets
Cash and equivalents $1,343 $ 1,338
Receivables, including $199 and $257
due from Time Warner, less allowances
of $294 and $257 1,224 1,313
Inventories 983 980
Prepaid expenses 168 114
Total current assets 3,718 3,745
Loan receivable from Time Warner 250 -
Noncurrent inventories 1,707 1,760
Property, plant and equipment, net 3,370 3,100
Excess of cost over net assets acquired 4,488 4,560
Cable television franchises 3,350 3,510
Other assets 1,289 1,288
Total assets $18,172 $17,963
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable $ 358 $ 366
Participations and programming costs 895 770
Other current liabilities, including
$108 and $108 of distributions due
to Time Warner 1,038 1,129
Total current liabilities 2,291 2,265
Long-term debt 7,162 7,125
Other long-term liabilities, including
$358 and $439 of distributions due
to Time Warner 950 1,037
General Partners' senior capital 1,598 1,536
Partners' capital
Contributed capital 7,398 7,398
Accumulated deficit (290) (393)
Note receivable from USW (937) (1,005)
Total partners' capital 6,171 6,000
Total liabilities and partners' capital $18,172 $17,963
See accompanying notes.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
(millions)
Revenues (a) $2,055 $1,865 $3,974 $3,622
Cost of revenues (a)(b) 1,441 1,287 2,784 2,519
Selling, general and administrative (a)(b) 387 343 760 660
Operating expenses 1,828 1,630 3,544 3,179
Business segment operating income 227 235 430 443
Interest and other, net (a) (144) (172) (280) (258)
Corporate services (a) (15) (15) (30) (30)
Income before income taxes 68 48 120 155
Income taxes (12) (6) (16) (20)
Income before extraordinary item 56 42 104 135
Extraordinary loss on retirement of debt,
net of $1 million income tax benefit - (2) - (2)
Net income $ 56 $ 40 $ 104 $ 133
__________________
(a) Includes the following income (expenses) resulting from transactions
with the partners of TWE and their affiliates (Note 6):
Selling, general and administrative $ (26) $ (16) $ (43) $ (29)
Corporate services (15) (15) (30) (30)
Interest and other, net 3 - 3 -
In addition, includes the following income (expenses) resulting from
transactions with equity affiliates of TWE or Time Warner (Note 6):
Revenues $ 58 $ 14 $ 67 $ 42
Cost of revenues (19) (23) (31) (32)
Selling, general and administrative 9 6 14 13
(b) Includes depreciation and
amortization expense of: $ 240 $ 228 $ 453 $ 433
See accompanying notes.
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
1994 1993
(millions)
OPERATIONS
Net income $ 104 $ 133
Adjustments for noncash and nonoperating items:
Depreciation and amortization 453 433
Changes in operating assets and liabilities 120 61
Cash provided by operations 677 627
INVESTING ACTIVITIES
Investments and acquisitions (46) (149)
Capital expenditures (496) (239)
Loan to Time Warner (250) -
Investment proceeds 39 100
Cash used by investing activities (753) (288)
FINANCING ACTIVITIES
Increase (decrease) in debt 40 (169)
Capital distributions (27) (9)
Collections on USW note receivable 68 -
Financing costs - (10)
Cash provided (used) by financing activities 81 (188)
INCREASE IN CASH AND EQUIVALENTS $ 5 $ 151
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. 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:
June 30, 1994 December 31, 1993
Current Noncurrent Current Noncurrent
(millions)
Film costs:
Released, less amortization $ 506 $ 318 $ 604 $ 318
Completed and not released 174 25 140 23
In process and other 32 305 7 340
Library, less amortization - 795 - 821
Programming costs, less amortization 172 264 147 258
Other 99 - 82 -
Total $ 983 $1,707 $ 980 $1,760
3. LONG-TERM DEBT
Long-term debt consists of:
June 30, December 31,
1994 1993
(millions)
Bank credit agreement, weighted average
interest rates of 5.3% and 4.2% $2,600 $2,425
Commercial paper, weighted average interest
rates of 4.9% and 3.8% 598 772
Publicly held notes and debentures 3,897 3,892
Other 67 36
Total $7,162 $7,125
Effective July 1, 1994, the interest rate on TWE's bank
credit agreement was reduced from 7/8% to 5/8% over LIBOR.
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:
Six Months
Ended June 30,
1994 1993
(millions)
Balance at beginning of year $6,000 $6,437
Net income 104 133
Distributions (54) (271)
Allocation of income to General
Partners' Senior Capital (62) -
Collections on USW note receivable 68 -
Other 7 9
Balance at June 30 $6,171 $6,308
Certain assets formerly owned and operated by TWE have since
September 1993 been owned and operated by other partnerships ("Time Warner
Service Partnerships"). The Time Warner Service Partnerships make certain
of their assets available to TWE. TWE is required to make quarterly cash
distributions of $12.5 million to the General Partners, which they in turn
are required to contribute to the Time Warner Service Partnerships. Under
the partnership agreement, 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 records 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-provided stock option distributions and
the corresponding liability when the market price of Time Warner common
stock declines.
During the six months ended June 30, 1994, TWE recorded $25 million
of Time Warner Service Partnership distributions and $95 million of tax
distributions, offset by a $174 million reversal of previously-provided
stock option distributions as a result of the decline in the market price
of Time Warner common stock from $44.25 to $35.50. During the six months
ended June 30, 1993, TWE recorded $125 million of tax distributions and
$146 million of stock option distributions. Approximately $108 million
of accrued tax distributions at June 30, 1994 is permitted to be paid
in 1994.
5. SEGMENT INFORMATION
Information as to the operations of TWE in different
business segments is as set forth below:
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
(millions)
REVENUES
Filmed Entertainment $1,214 $1,014 $2,295 $1,930
Programming - HBO 369 357 727 716
Cable 559 560 1,108 1,106
Intersegment elimination (87) (66) (156) (130)
Total $2,055 $1,865 $3,974 $3,622
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
(millions)
OPERATING INCOME
Filmed Entertainment $ 72 $ 66 $133 $121
Programming - HBO 61 53 118 104
Cable 94 116 179 218
Total $227 $235 $430 $443
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
(millions)
DEPRECIATION AND AMORTIZATION (a)
Filmed Entertainment $ 74 $ 70 $124 $118
Programming - HBO 5 4 9 8
Cable 161 154 320 307
Total $ 240 $ 228 $453 $433
_______________
(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 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.
7. ADDITIONAL FINANCIAL INFORMATION
Additional financial information is as follows:
Six Months
Ended June 30,
1994 1993
(millions)
Interest expense $ 273 $ 282
Cash payments made for interest 240 213
Cash payments made for income taxes (net) 29 27
Borrowings 317 1,159
Repayments 277 1,328
<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 $2.055 billion and net income of $56
million for the three months ended June 30, 1994, compared to
revenues of $1.865 billion, income of $42 million before an
extraordinary loss on the retirement of debt, and net income of
$40 million for the three months ended June 30, 1993.
Revenues of $3.974 billion and net income of $104 million
were reported for the six months ended June 30, 1994, compared to
revenues of $3.622 billion, income of $135 million before the
extraordinary loss, and net income of $133 million for the six
months ended June 30, 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 $12
million and $16 million in the three and six months ended June
30, 1994, respectively, and $6 million and $20 million in the
three and six months ended June 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 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. 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, operating income, net
income, cash flow and other measures of financial performance
reported in accordance with generally accepted accounting
principles.
EBITDA for TWE for the three and six months ended June 30,
1994 and 1993 is as follows:
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
(millions)
Filmed Entertainment $146 $136 $257 $239
Programming - HBO 66 57 127 112
Cable 255 270 499 525
Total $467 $463 $883 $876
THREE MONTHS ENDED JUNE 30, 1994 COMPARED TO THE THREE MONTHS
ENDED JUNE 30, 1993
FILMED ENTERTAINMENT. Revenues increased to $1.214 billion,
compared to $1.014 billion in the second quarter of 1993.
Operating income increased to $72 million from $66 million.
Depreciation and amortization, including amortization related to
the purchase of WCI, amounted to $74 million in 1994 and $70
million in 1993. EBITDA increased to $146 million from $136
million. The revenue growth resulted primarily from increases in
domestic theatrical, worldwide home video and consumer products
revenues, offset in part by lower international theatrical
revenues. Revenues at Six Flags increased due to higher
attendance and in-park spending. EBITDA benefited from the
revenue gains.
PROGRAMMING - HBO. Revenues increased to $369 million,
compared to $357 million in the second 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. EBITDA benefited principally as a result of
the revenue gains.
CABLE. Revenues were $559 million, compared to $560 million
in the second quarter of 1993. Operating income decreased to $94
million from $116 million. Depreciation and amortization,
including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $161
million in 1994 and $154 million in 1993. EBITDA decreased to
$255 million from $270 million. Revenues and operating results
in the second quarter of 1994 were adversely affected by the
initial round of cable rate regulation that went into effect in
September 1993, which in general reduced rates cable operators,
including Time Warner Cable, can charge for regulated services.
The unfavorable effects of rate regulation were offset in part by
an increase in subscribers and nonregulated revenues during the
quarter. Revised rules for determining rates for regulated
services that went into effect in July 1994 will have an
additional adverse effect on revenues and operating results.
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, decreased
to $144 million in the second quarter of 1994, compared to $172
million in the second quarter of 1993. Interest expense
decreased to $138 million, compared to $141 million in the second
quarter of 1993. Other expense, net, decreased to $6 million in
the second quarter of 1994 from $31 million in 1993, principally
as a result of an increase in interest income on higher cash
balances and the interest-bearing note ("USW Note") received upon
the admission of USW to the partnership in September 1993 (the
"USW Transaction").
SIX MONTHS ENDED JUNE 30, 1994 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1993
FILMED ENTERTAINMENT. Revenues increased to $2.295 billion,
compared to $1.930 billion in the first six months of 1993.
Operating income increased to $133 million from $121 million.
Depreciation and amortization, including amortization related to
the purchase of WCI, amounted to $124 million in 1994 and $118
million in 1993. EBITDA increased to $257 million from $239
million. The revenue growth resulted primarily from increases in
domestic theatrical, worldwide home video and consumer products
revenues, offset in part by lower international theatrical
revenues. Revenues at Six Flags increased due to higher
attendance and in-park spending. EBITDA benefited from the
revenue gains.
PROGRAMMING - HBO. Revenues increased to $727 million,
compared to $716 million in the first six months of 1993.
Operating income increased to $118 million from $104 million.
Depreciation and amortization amounted to $9 million in 1994 and
$8 million in 1993. EBITDA increased to $127 million from $112
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 lower results from other new businesses.
CABLE. Revenues increased to $1.108 billion, compared to
$1.106 billion in the first six months of 1993. Operating income
decreased to $179 million from $218 million. Depreciation and
amortization, including amortization related to the purchase of
WCI and the acquisition of the ATC minority interest, amounted to
$320 million in 1994 and $307 million in 1993. EBITDA decreased
to $499 million from $525 million. Revenues and operating
results in the first six months of 1994 were adversely affected
by the initial round of cable rate regulation that went into
effect in September 1993. The unfavorable effects of rate
regulation were offset in part by an increase in subscribers and
nonregulated revenues.
INTEREST AND OTHER, NET. Interest and other, net, increased to
$280 million in the first six months of 1994, compared to $258
million in the first six months of 1993. Interest expense
decreased to $273 million, compared with $282 million in the
first six months of 1993. There was other expense, net, of $7
million in the first six months of 1994, compared to other
income, net, of $24 million in 1993 that resulted from a gain on
the sale of certain assets. Other investment-related expenses in
1994 were partially offset by an increase in interest income on
higher cash balances and the USW Note received in the USW
Transaction.
FINANCIAL CONDITION AND LIQUIDITY
June 30, 1994
The financial condition of TWE remained essentially unchanged
from year end 1993. TWE had $7.2 billion of long-term debt at
June 30, 1994, $1.6 billion of General Partners' Senior Capital
and $6.2 billion of partners' capital (net of the $937 million
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 $1.3 billion at June 30, 1994 and December
31, 1993, reducing the debt-net-of-cash amounts to $5.9 billion
and $5.8 billion, respectively.
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 June 30, 1994 or December 31, 1993. At
June 30, 1994, the fair value of TWE's long-term debt was $250
million less than its carrying value. 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 these
unrealized gains or losses unless the debt is retired prior to
its maturity.
Cash provided by TWE's operations in the first six months of
1994 amounted to $677 million, after $240 million of interest
payments, $29 million of income taxes and working capital
requirements, compared to cash from operations of $627 million in
the first six months of 1993, after $213 million of interest
payments, $27 million of income taxes and working capital
requirements. Capital expenditures increased to $496 million in
the first six months of 1994, compared to $239 million in 1993.
Capital spending by Time Warner Cable is expected to continue to
be much greater in 1994 and subsequent years as long-term growth
in revenue from unregulated services largely depends on fiber-
optic upgrades of its plant.
Foreign exchange contracts are used to manage exchange rate
exposure on future cash flows and earnings denominated in foreign
currencies. TWE is reimbursed by or reimburses Time Warner for
Time Warner contract gains and losses related to TWE's exposure.
At June 30, 1994, Time Warner had contracts for the sale of $204
million of foreign currencies at fixed rates related to TWE's
exposure, primarily Japanese yen, German marks, Canadian dollars
and French francs, compared to contracts for the sale of $226
million of foreign currencies at December 31, 1993. The fair
value of foreign exchange contracts approximates carrying value
as the unrealized gains or losses are recorded in the financial
statements. Losses on foreign exchange contracts of $17 million
during the first six months of 1994 are offset by corresponding
increases in the dollar value of foreign currency cash flows and
earnings that have been or are anticipated to be realized. Time
Warner places the contracts with a number of major financial
institutions in order to minimize credit risk.
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 $770 million at June 30, 1994, compared to
$724 million at December 31, 1993 (including amounts relating to
HBO of $140 million at June 30, 1994 and $178 million at December
31, 1993). The backlog excludes advertising barter contracts.
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 under its $400 million credit agreement with Time
Warner.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the fourth paragraph 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"), in which there is described
a November 1992 lawsuit filed in the U.S. District Court for the
District of Columbia (the "District Court") by TWE that
challenges certain provisions of the 1992 Cable Act. As reported
therein, on May 3, 1993 TWE filed an appeal directly to the U.S.
Supreme Court from a 2-1 decision of the District Court which
upheld the constitutionality of the must-carry provisions of the
1992 Cable Act. On June 27, 1994, the U.S. Supreme Court vacated
the judgment of the District Court regarding the must-carry
provisions and remanded the case to that court for further
factual findings.
Reference is made to the class action litigation described
in the third full paragraph on page I-42 of the Form 10-K. On
June 1, 1994, the settlement agreement reached in the
consolidated action was approved by the court.
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. In March
and April 1994, AFTRA, the Fund, the Fund's trustees and certain
of the defendant recording companies, including the four WCI
subsidiaries, moved to dismiss plaintiffs' amended complaint. On
August 2, 1994, the court, among other things, dismissed the
claims against the Fund and the Fund's trustees, and dismissed
all claims against the defendant recording companies except the
RICO claim. The time for the recording companies named in the
RICO claim to respond to plaintiffs' amended complaint has not
yet expired.
Reference is made to the litigation described in the last
paragraph on page I-43 of the Form 10-K. On June 20, 1994, the
New York Supreme Court approved the settlement reached in the
matter and issued an order dismissing the lawsuit and awarding
attorneys' fees to plaintiffs' counsel. A related action in
Delaware was dismissed by the Delaware Chancery Court on the
basis of the New York Supreme Court's order.
On July 14, 1994, Time Warner received a civil investigative
demand from the United States Department of Justice in
furtherance of an investigation into certain worldwide activities
of the Warner Music Group and other companies in the recorded
music industry principally related to cable, wire and satellite-
delivered music and music video programmers. Preliminary
discussions are taking place with Justice Department
representatives concerning the nature and scope of the
investigation.
Item 4. Submission of Matters to a Vote of Security-Holders.
(a) The Annual Meeting of Stockholders of Time Warner was
held on May 19, 1994.
(b) Not applicable.
(c) The following matters were voted upon at the Time
Warner Annual Meeting of Stockholders:
(i) Election of directors for terms expiring in 1997:
Broker
For Withheld Non-Votes
Lawrence B. Buttenwieser 306,656,860 4,491,565 0
David T. Kearns 307,105,118 4,043,307 0
Gerald M. Levin 307,259,989 3,888,436 0
J. Richard Munro 303,874,762 7,273,663 0
Richard D. Parsons 307,442,592 3,705,833 0
(ii) Adoption of Annual Bonus Plan for the Chief
Executive Officer:
Broker
Votes For Votes Against Abstentions Non-Votes
280,337,630 27,609,224 3,201,571 0
(iii) Appointment of Ernst & Young as independent
auditors of Time Warner for 1994:
Broker
Votes For Votes Against Abstentions Non-Votes
308,229,485 1,399,833 1,519,107 0
(iv) Stockholder resolution calling for the
election of directors annually and not by classes:
Broker
Votes For Votes Against Abstentions Non-Votes
127,900,170 144,043,114 2,723,214 36,481,927
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Amendment No. 5, effective as of July 1, 1994, to
the Amended and Restated Credit Agreement, dated as of June 23,
1992, among TWE, Bankers Trust Company and Chemical Bank, as
Managing Agents, the Agents and the Co-Agents named therein and
the banks named therein.
10.2 Time Warner Inc. Annual Bonus Plan for the Chief
Executive Officer (which is incorporated by reference to Annex A
to Time Warner's definitive Proxy Statement dated March 30, 1994,
used in connection with Time Warner's 1994 Annual Meeting of
Stockholders).
99.1 Summarized financial information of Paragon
Communications.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by Time Warner during the
quarter ended June 30, 1994.
<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: August 12, 1994
<PAGE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Exhibit
Number Description
10.1 Amendment No. 5, effective as of July 1, 1994, to the
Amended and Restated Credit Agreement, dated as of June 23,
1992, among TWE, Bankers Trust Company and Chemical Bank,
as Managing Agents, the Agents and the Co-Agents named
therein and the banks named therein.
10.2 Time Warner Inc. Annual Bonus Plan for the Chief Executive
Officer (which is incorporated by reference to Annex A to
Time Warner's definitive Proxy Statement dated March 30,
1994, used in connection with Time Warner's 1994 Annual
Meeting of Stockholders).
99.1 Summarized financial information of Paragon Communications.
EXHIBIT 10.1
Amendment No. 5 to
TWE Credit Agreement
Amendment No. 5
AMENDMENT NO. 5 ("Amendment No. 5") to the Credit
Agreement, dated as of June 23, 1992 (the "Credit Agreement"),
among Time Warner Entertainment Company, L.P., a Delaware limited
partnership (the "Borrower"), the Guarantors listed on Annex VI
thereto (the "Guarantors"), Bankers Trust Company and Chemical
Bank, as Managing Agents (the "Managing Agents"), the Agents
named therein (the "Agents"), the Co-Agents named therein (the
"Co-Agents"), Chemical Bank Agency Services Corporation, as
Payments Administrator (the "Payments Administrator"), and the
Banks parties thereto (the "Banks"), is entered into by the
Borrower, the Guarantors, the Managing Agents, the Agents, the
Co-Agents, the Payments Administrator and the Banks signatories
hereto. Unless otherwise specifically defined herein, each term
used herein that is defined in the Credit Agreement shall have
the meaning assigned to such term in the Credit Agreement.
W I T N E S S E T H:
WHEREAS, the Borrower and the Banks wish to enter into
the amendments set forth below.
NOW, THEREFORE, in consideration of the mutual promises
herein contained and for other valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:
SECTION 1. This Amendment No. 5 shall become effective
as of July 1, 1994.
SECTION 2. Subsection 2.01(a) is hereby amended by
deleting the table contained therein in its entirety and
substituting the following table therefor:
Applicable Debt Rating*
S & P Moody's Commitment Fee
BB- or lower or Ba3 or lower or .50%
no rating no rating
BB Ba2 .375
BB+ Ba1 .3125
BBB- Baa3 .225
BBB Baa2 .1875
BBB+ or higher Baa1 or higher .15
* In the case of "split" ratings (i.e., if the ratings of each
such rating agency differ by one or more categories,
including numerical modifiers and (+) and (-) as
categories), the margin will be based upon the higher of the
two ratings, provided that if the split ratings differ by
more than one category, a rating which is one category lower
than the higher rating shall be utilized.
SECTION 3. The definition of "Applicable Certificate
of Deposit Rate Margin" is hereby amended by deleting the table
contained therein in its entirety and substituting the following
table therefor:
Applicable Debt Rating*
S & P Moody's Applicable Margin
BB- or lower or Ba3 or lower or 1.375%
no rating no rating
BB Ba2 1.125
BB+ Ba1 .875
BBB- Baa3 .75
BBB Baa2 .625
BBB+ or higher Baa1 or higher .5625
* In the case of "split" ratings (i.e., if the ratings of each
such rating agency differ by one or more categories,
including numerical modifiers and (+) and (-) as
categories), the margin will be based upon the higher of the
two ratings, provided that if the split ratings differ by
more than one category, a rating which is one category
lower than the higher rating shall be utilized.
SECTION 4. The definition of "Applicable Eurodollar
Rate Margin" is hereby amended by deleting the table contained
therein in its entirety and substituting the following table
therefor:
Applicable Debt Rating*
S & P Moody's Applicable Margin
BB- or lower or Ba3 or lower or 1.25%
no rating no rating
BB Ba2 1.00
BB+ Ba1 .75
BBB- Baa3 .625
BBB Baa2 .50
BBB+ or higher Baa1 or higher .4375
* In the case of "split" ratings (i.e., if the ratings of each
such rating agency differ by one or more categories,
including numerical modifiers and (+) and (-) as categories),
the margin will be based upon the higher of the two ratings,
provided that if the split ratings differ by more than one
category, a rating which is one category lower than the
higher rating shall be utilized.
SECTION 5. The Borrower hereby represents and warrants
that as of the date hereof each of the conditions that are
required to be satisfied with respect to a making of a Loan under
Section 5 of the Credit Agreement are satisfied.
SECTION 6. All terms provisions, covenants,
representations, warranties, agreements and conditions contained
in the Credit Agreement shall remain in full force and effect
except as expressly contemplated herein and shall not otherwise
be deemed waived, modified or amended hereby.
SECTION 7. This Amendment shall be governed by, and
construed in accordance with, the laws of the State of New York
without regard to principles of conflict of laws.
SECTION 8. This Amendment may be executed and accepted
in any number of counterparts, each of which counterparts, when
so executed and delivered, shall be deemed to be an original and
all of which counterparts, taken together, shall constitute but
one and the same agreement and shall become effective when
executed and delivered by the Borrower, the Guarantors, the
Managing Agents, the Agents, the Co-Agents, the Payments
Administrator and the Required Banks.
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 Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
(millions)
OPERATING STATEMENT INFORMATION
Revenues $ 87 $ 85 $173 $169
Operating income 20 23 41 43
Net income 15 16 31 30
June 30, December 31,
1994 1993
(millions)
Balance Sheet Information
Property, plant and equipment $ 387 $ 385
Cable television franchises 211 216
Total assets 625 627
Debt 287 320
Total liabilities 356 390
