SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
May 30, 1995
TIME WARNER INC.
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(Exact name of registrant as specified in its charter)
Delaware 1-8637 13-1388520
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(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
75 Rockefeller Plaza, New York, NY 10019
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(Address of principal executive offices) (zip code)
(212) 484-8000
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name or former address, if changed since last report)
<PAGE>
Item 5. Other Events.
Time Warner Inc. ("Time Warner") and Time Warner Entertainment
Company, L.P. ("TWE"), 63.27% of the residual equity as well as certain
priority capital interests of which are owned by subsidiaries of Time
Warner, have recently entered into, or intend to enter into, the
transactions described below:
(i) on May 18, 1995, Time Warner announced the sale by
TWE of 15 of its unclustered cable television systems serving
approximately 144,000 subscribers (the "Unclustered Cable
Disposition");
(ii) on May 2, 1995, Time Warner closed the acquisition of
Summit Communications Group, Inc. ("Summit"), which owns cable
television systems serving approximately 162,000 subscribers (the
"Summit Acquisition");
(iii) on April 17, 1995, TWE entered into certain
agreements, pursuant to which, subject to certain conditions, (A)
Six Flags Entertainment Corporation ("Six Flags") will be
recapitalized and TWE will sell 51% of the capital stock of Six
Flags to a third party and (B) TWE will grant certain licenses to
Six Flags (the "License") (collectively, the "Six Flags
Transaction");
(iv) on April 1, 1995 (as previously reported on the Form
8-K of Time Warner dated April 1, 1995), TWE closed its
transaction (the "TWE-A/N Transaction") with the Advance/Newhouse
Partnership ("Advance/Newhouse"), pursuant to which TWE and
Advance/Newhouse formed the Time Warner
Entertainment-Advance/Newhouse Partnership, a New York general
partnership (the "TWE-Advance/Newhouse Partnership"), in which
TWE owns a two-thirds equity interest and is the managing partner
and Advance/Newhouse owns a one-third equity interest. The
TWE-Advance/Newhouse Partnership owns cable television systems
(or interests therein), serving approximately 4.5 million
subscribers, as well as certain foreign cable investments and
certain programming investments;
(v) on February 6, 1995 (as previously reported on the Form
8-K of Time Warner dated February 6, 1995), Time Warner entered
into certain agreements with Cablevision Industries Corporation
("Cablevision"), certain affiliated entities of Cablevision (the
"Gerry Companies" and, together with Cablevision, the "Cablevision
Companies"), the direct holders of certain interests in the Gerry
Companies and Alan Gerry, the principal stockholder of Cablevision
and the Gerry Companies (the "CVI Acquisition"), pursuant to which
Time Warner will acquire Cablevision, and Time Warner or certain
subsidiaries of Time Warner will acquire each of the Gerry
Companies. Cablevision and the Gerry Companies own cable
television systems serving approximately 1.3 million subscribers;
(vi) on January 26, 1995 (as previously reported on the
Form 8-K of Time Warner dated January 26, 1995), Time Warner
entered into certain agreements with KBLCOM Incorporated
("KBLCOM") and its parent, Houston Industries Incorporated (the
"KBLCOM Acquisition"), pursuant to which Time Warner will acquire
KBLCOM, which owns cable television systems serving approximately
690,000 subscribers, and a 50% interest in Paragon
<PAGE>
Communications ("Paragon"), which owns cable television systems
serving approximately 967,000 subscribers (the other 50%
interest of which is already owned by TWE); and
(vii) Time Warner and TWE are currently in negotiations
with an administrative agent for a bank syndicate regarding a
five-year revolving credit facility (the "New Credit Agreement"),
expected to be executed in July 1995, pursuant to which TWE, the
TWE- Advance/Newhouse Partnership and a wholly owned subsidiary
of Time Warner ("TWI Cable") will be borrowers. The New Credit
Agreement will enable such entities to refinance certain
indebtedness assumed from the companies acquired or to be
acquired in the Acquisitions (as defined below), to refinance
existing indebtedness and to finance the ongoing working capital,
capital expenditure and other corporate needs of each borrower
(the "1995 Debt Refinancing").
The Unclustered Cable Disposition and the Six Flags Transaction
are referred to herein as the "Asset Sale Transactions"; the Summit
Acquisition, KBLCOM Acquisition and CVI Acquisition are referred to herein
as the "Acquisitions"; the Acquisitions and the TWE-A/N Transaction are
referred to herein as the "Cable Transactions" and the Asset Sale
Transactions, the Cable Transactions and the 1995 Debt Refinancing are
referred to herein as the "Transactions".
Pro Forma Consolidated Condensed Financial Statements
The following pro forma consolidated condensed balance sheets of
Time Warner and the Time Warner Entertainment Group (the "Entertainment
Group"), principally consisting of TWE, at March 31, 1995 give effect to
the Asset Sale Transactions, the TWE-A/N Transaction and the 1995 Debt
Refinancing and, with respect to the balance sheet of Time Warner only,
also give effect to the Acquisitions, in each case as if the Transactions
occurred at such date. The following pro forma consolidated condensed
statements of operations of Time Warner and the Entertainment Group for the
three months ended March 31, 1995 and the year ended December 31, 1994 give
effect to each applicable Transaction as if it had occurred at the
beginning of such periods. The pro forma consolidated condensed financial
statements should be read in conjunction with the historical financial
statements of Time Warner and TWE, including the notes thereto, which are
contained in the Time Warner Quarterly Report on Form 10-Q for the three
months ended March 31, 1995 and the Time Warner Annual Report on Form 10-K
for the year ended December 31, 1994, as well as the historical financial
statements of Cablevision and Summit (which reports are incorporated herein
by reference) and the historical financial statements of (i) Vision Cable
Division of Vision Cable Communications Inc. and Subsidiaries and Newhouse
Broadcasting Cable Division of Newhouse Broadcasting Corporation and
Subsidiaries (which entities contributed substantially all of their assets
to Advance/Newhouse prior to the closing of the TWE-A/N Transaction), (ii)
Cablevision Industries Limited Partnership and the Combined Entities (which
financial statements are the combined financial statements of the Gerry
Companies) and (iii) KBLCOM (which financial statements, in the case of
(i), (ii) and (iii), are attached as Exhibits hereto). The pro forma
consolidated condensed financial statements have been derived from the
historical financial statements of the respective entities as of and for
the three months ended March 31, 1995 and for the year ended December 31,
1994, except in the case of the Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries, which entities have
different fiscal years and, consequently, such pro forma financial
statements have been derived from the unaudited combined financial
statements of such entities as of and for the three months ended January
31, 1995 and for the twelve months ended October 31, 1994, respectively.
<PAGE>
The pro forma consolidated condensed financial statements are
presented for informational purposes only and are not necessarily
indicative of the financial position or operating results that would have
occurred if the Transactions had been consummated as of the dates
indicated, nor are they necessarily indicative of future financial
conditions or operating results.
The one-third equity interest in the TWE-Advance/Newhouse
Partnership owned by Advance/Newhouse is reflected in the Entertainment
Group pro forma consolidated condensed balance sheet as minority interest.
In accordance with the partnership agreement for the TWE-Advance/Newhouse
Partnership, Advance/Newhouse may require TWE to purchase its equity
interest for fair market value at specified intervals following the death of
both of its principal shareholders. Following the third anniversary of
the closing of the TWE-Advance/Newhouse Transaction, either partner can
initiate a dissolution in which TWE would receive two-thirds and
Advance/Newhouse would receive one-third of the partnership's net assets.
The assets contributed by TWE and Advance/Newhouse to the
TWE-Advance/Newhouse Partnership were recorded at their predecessor's
historical cost. No gain was recognized by TWE upon the capitalization of
the TWE-Advance/Newhouse Partnership.
As a result of the Acquisitions, Time Warner will acquire cable
television systems serving approximately 2.2 million subscribers and a 50%
interest in Paragon, which owns cable television systems serving
approximately 967,000 subscribers (the other 50% interest is already owned
by TWE). As described below, in order to consummate the Acquisitions
(including the Summit Acquisition), Time Warner will issue approximately
5.1 million shares of Common Stock, par value $1.00 per share, of Time
Warner (the "Common Stock") and approximately $2.1 billion aggregate
liquidation value of new series of convertible preferred stock, and will
assume or incur, directly or indirectly, approximately $3.4 billion of
debt.
In connection with the Summit Acquisition, Time Warner issued
1,550,936 shares of Common Stock and 3,264,508 shares of a new series of
convertible preferred stock (the "Series C Preferred Stock") and assumed or
incurred approximately $146 million of indebtedness. The Series C Preferred
Stock has a liquidation value of $100 per share, is convertible into 6.8
million shares of Common Stock at a conversion price of $48 per share
(based on its liquidation value), receives for five years an annual
dividend per share equal to the greater of $3.75 and an amount equal to the
dividends paid on the Common Stock into which a share of Series C Preferred
Stock may be converted, and is redeemable for cash at the liquidation value
plus unpaid dividends after five years, or exchangeable for Common Stock by
the holder beginning after the third year and by Time Warner after the
fourth year at the stated conversion price plus a declining premium in
years four and five and no premium thereafter.
In connection with the KBLCOM Acquisition, Time Warner will issue
one million shares of Common Stock and 11 million shares of a new series of
convertible preferred stock (the "Series D Preferred Stock") and assume or
incur approximately $1.3 billion of indebtedness, including $111 million of
Time Warner's allocable share of Paragon's indebtedness. The Series D
Preferred Stock will have a liquidation value of $100 per share, will be
convertible into 22.9 million shares of Common Stock at a conversion price
of $48 per share (based on its liquidation value), and will receive for four
years an annual dividend per share equal to the greater of $3.75 and an
amount equal to the dividends paid on the Common Stock into which a share of
Series D Preferred Stock may be converted. After four years, Time Warner
will have the right to exchange the Series D Preferred Stock for Common
Stock at the stated conversion price and after five years Time Warner will
<PAGE>
have the right to redeem the Series D Preferred Stock, in whole or in part,
for cash at the liquidation value plus accrued dividends.
In connection with the CVI Acquisition, Time Warner will issue
2.5 million shares of Common Stock and 3.25 million shares each of two new
series of convertible preferred stock (the "Series E Preferred Stock" and
"Series F Preferred Stock") and assume or incur approximately $2 billion of
indebtedness. The Series E Preferred Stock and Series F Preferred Stock
will have a liquidation value of $100 per share, will be convertible into
an aggregate of 13.5 million shares of Common Stock at a conversion price
of $48 per share (based on its liquidation value), and will receive, for a
period of five years with respect to the Series E Preferred Stock and a
period of four years with respect to the Series F Preferred Stock, an
annual dividend per share equal to the greater of $3.75 and an amount equal
to the dividends paid on the Common Stock into which a share of Series E
Preferred Stock or Series F Preferred Stock may be converted. Time Warner
will have the right to exchange each of the Series E Preferred Stock and
Series F Preferred Stock for Common Stock at the stated conversion price
after five years and four years, respectively, and will be permitted to
redeem each series, in whole or in part, for cash at the liquidation value
plus accrued dividends, in each case after five years. The amount of Series
F Preferred Stock and Common Stock to be issued in connection with the CVI
Acquisition will be adjusted if the aggregate level of indebtedness,
negative working capital and related items at the closing differs from
approximately $2 billion.
To the extent that any of the Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock or Series F Preferred Stock
remains outstanding at the end of the period in which the minimum $3.75 per
share dividend is to be paid, the holders thereafter will receive dividends
equal to the dividend declared on shares of Common Stock multiplied by the
number of shares into which their shares of preferred stock are
convertible. Holders of each series of preferred stock will be entitled to
vote with the Common Stock on all matters on which the Common Stock is
entitled to vote, and each share of each such series will be entitled to
two votes on any such matter.
The Acquisitions will be accounted for by the purchase method of
accounting for business combinations and, accordingly, the estimated cost
to acquire such assets will be allocated to the underlying net assets in
proportion to their respective fair values. The valuations and other
studies which will provide the basis for such an allocation have not been
completed. As more fully described in the notes to the pro forma
consolidated condensed financial statements, a preliminary allocation of
the excess of cost over the book value of the net assets acquired or to be
acquired has been made for pro forma purposes to investments and cable
television franchises in proportion to their estimated fair values.
In connection with the Cable Transactions, TWE will enter into
management services agreements pursuant to which TWE will be responsible for
the management and operations of the cable television systems owned by Time
Warner and the TWE-Advance/Newhouse Partnership, other than the cable
television systems located within the 14-state telephone service area of U S
WEST, Inc. The pro forma consolidated condensed statements of operations of
Time Warner and the Entertainment Group each reflect annual management fees
to be paid by Time Warner and the TWE-Advance/Newhouse Partnership to TWE,
based on a preliminary allocation, which management believes to be
reasonable, of the corporate expenses of the cable division of TWE in
proportion to the respective number of cable subscribers of Time Warner and
the TWE-Advance/Newhouse Partnership to be managed by TWE's cable division
as a percentage of the aggregate number of subscribers of all cable
television systems to be managed by TWE's cable division. As a result of
TWE's management of the Time Warner and the
<PAGE>
TWE-Advance/Newhouse Partnership-owned cable television systems, the pro
forma consolidated condensed statements of operations of Time Warner also
reflect certain reductions in corporate expenses of the acquired entities
relating to the closing of certain facilities and the termination of
related personnel as a direct result of the Acquisitions. Time Warner and
TWE expect to realize certain additional cost savings as a result of
initiatives to integrate the acquired cable television systems' operations
into TWE's operating structure; however, such cost savings have not been
reflected in the pro forma consolidated condensed statements of operations
of Time Warner due to the preliminary nature of such initiatives at this
time.
It is anticipated that the New Credit Agreement will permit
borrowings in an aggregate amount of up to $9 billion, which Time Warner
and TWE may reduce to the extent of any excess availability resulting from
the anticipated debt reductions associated with the Asset Sale
Transactions. Any reductions in excess availability under the New Credit
Agreement would not affect the pro forma consolidated condensed financial
statements. Based upon an assumed $9 billion of aggregate availability
under the New Credit Agreement, borrowings are expected to be limited to $4
billion in the case of TWI Cable, $5 billion in the case of the
TWE-Advance/Newhouse Partnership and $9 billion in the case of TWE, subject
in each case to certain limitations and adjustments. It is also anticipated
that such borrowings will bear interest at different rates for each of the
three borrowers, generally equal to LIBOR plus a margin ranging from 50 to
87.5 basis points based on the credit rating or financial leverage of the
applicable borrower.
Pro forma adjustments for the 1995 Debt Refinancing reflect
borrowings of $5.077 billion in the aggregate under the New Credit
Agreement. The proceeds of such borrowings are expected to be used to repay
or redeem $2.552 billion of indebtedness to be assumed in the
Acquisitions, plus redemption premiums thereon of $25 million; to repay
$2.45 billion of indebtedness outstanding under the existing TWE bank credit
agreement at March 31, 1995; and to pay for $50 million of financing costs.
In addition to such $5.077 billion of refinancings, $262 million is expected
to be borrowed under the New Credit Agreement to refinance additional
indebtedness incurred in connection with the Cable Transactions, of which
$193 million relates to the consummation of the CVI Acquisition and $69
million relates to the payment of transaction costs and other liabilities.
Based on the average LIBOR rates in effect during the three months ended
March 31, 1995 and the year ended December 31, 1994, LIBOR has been assumed
to be 6% and 4.5% per annum, respectively, and accordingly, the pro forma
consolidated condensed statements of operations reflect interest on
borrowings at estimated rates of (i) 6.875% and 5.375% per annum,
respectively, for TWI Cable, (ii) 6.5% and 5% per annum, respectively, for
TWE and (iii) 6.5% and 5% per annum, respectively, for the
TWE-Advance/Newhouse Partnership. Each 12.5 basis point increase in the pro
forma interest rate applicable to the aggregate $5.339 billion of assumed
borrowings under the New Credit Agreement would have the approximate effect
of increasing Time Warner's annual interest expense and net loss by $3
million and $4 million, respectively, and, in the case of borrowings by TWE
and the TWE-Advance/Newhouse Partnership only, of increasing TWE's annual
interest expense and decreasing its net income by $3 million.
The New Credit Agreement is expected to contain certain covenants
for each borrower relating to, among other things, additional indebtedness;
liens on assets; cash flow coverage and leverage ratios; and loans,
advances, distributions and other cash payments or transfers of assets from
the borrowers to their respective partners or affiliates.
The Asset Sale Transactions reflect the disposition by TWE of 51%
of its interest in Six Flags, the payment by Six Flags of certain
intercompany indebtedness and licensing fees to TWE in connection
therewith, and the sale of certain unclustered cable television systems for
aggregate gross proceeds of approximately $1.14 billion. TWE will
deconsolidate the assets, liabilities and operating
<PAGE>
results of Six Flags, including approximately $126 million of third-party
indebtedness, and will account for its remaining 49% interest in Six Flags
under the equity method of accounting. As a result of these transactions,
TWE will reduce debt by approximately $1.050 billion, after related taxes
and fees. TWE will realize aggregate net income of approximately $300
million as a result of the Asset Sale Transactions, of which approximately
$170 million will be recognized currently and approximately $130 million
will be deferred as a result of TWE's guarantee of third-party, zero-coupon
indebtedness of Six Flags due in 1999. Such income has not been
reflected in the pro forma consolidated condensed statement of operations
of the Entertainment Group included herein.
<PAGE>
<TABLE>
TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
March 31, 1995
(millions, unaudited)
<CAPTION>
Time Warner Summit KBLCOM CVI 1995 Debt TWE Pro
Historical Acquisition(a) Acquisition(b) Acquisition(c) Refinancing(d) Transactions(e) Forma
<S> <C> <C> <C> <C> <C> <C> <C>
A S S E T S
Cash and equivalents $ 309 $ 80 $ - $ 8 $ - $ 185 $ 582
Other current assets 2,331 2 32 26 - - 2,391
------ ------ ----- ----- ------ ------ ------
Total current assets 2,640 82 32 34 - 185 2,973
Investments in and amounts
due to and from Entertainment
Group 5,443 - - - (27) (15) 5,401
Other investments 1,543 - 843 17 111 - 2,514
Property, plant and equipment 748 51 280 385 - - 1,464
Goodwill 4,589 171 662 835 - - 6,257
Cable television franchises - 421 1,469 2,370 - - 4,260
Other assets 1,645 - 6 35 11 - 1,697
------ ------ ------ ------ ----- ----- ------
Total assets $16,608 $ 725 $3,292 $3,676 $ 95 $ 170 $24,566
======= ====== ====== ====== ===== ===== =======
LIABILITIES AND SHAREHOLDERS'
EQUITY
Total current liabilities $ 2,713 $ 6 $ 59 $ 129 $ (21) $ 185 $ 3,071
Long-term debt 9,001 146 1,130 1,950 147 - 12,374
Deferred income taxes 2,657 191 968 859 - (119) 4,556
Other long-term liabilities 1,124 1 - - - - 1,125
Shareholders' equity:
Preferred stock 1 3 11 7 - - 22
Common stock 380 2 1 2 - - 385
Paid-in capital 2,600 376 1,123 729 - - 4,828
Unrealized gains on certain
marketable securities 148 - - - - - 148
Accumulated deficit (2,016) - - - (31) 104 (1,943)
------- ------ ------ ------ ----- ----- -------
Total shareholders' equity 1,113 381 1,135 738 (31) 104 3,440
------- ------ ------ ------ ----- ----- -------
Total liabilities and
shareholders' equity $16,608 $ 725 $3,292 $3,676 $ 95 $ 170 $24,566
======= ====== ====== ====== ===== ===== =======
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Three Months Ended March 31, 1995
(millions, unaudited)
<CAPTION>
Time Warner Summit KBLCOM CVI 1995 Debt TWE Pro
Historical Acquisition(f) Acquisition(g) Acquisition(h) Refinancing(i) Transactions(j) Forma
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $1,817 $ 16 $ 67 $ 125 $ - $ - $2,025
Cost of revenues<F1> 1,103 12 45 84 - - 1,244
Selling, general and
administrative<F1> 576 4 26 26 - - 632
------ ------ ------ ------- ------ ------ ------
Operating expenses 1,679 16 71 110 - - 1,876
------ ------ ------ ------- ------ ------ ------
Business segment operating
income (loss) 138 - (4) 15 - - 149
Equity in pretax income
of Entertainment Group 22 - - - 11 23 56
Interest and other, net (155) (4) (30) (39) 8 - (220)
Corporate expenses (20) - - - - - (20)
------ ------ ------- ------- ------ ------ ------
Income (loss) before
income taxes (15) (4) (34) (24) 19 23 (35)
Income tax (provision) benefit (32) 1 13 11 (8) (9) (24)
------ ------- ------ ------ ------ ------ ------
Net income (loss) (47) (3) (21) (13) 11 14 (59)
Preferred dividend requirements (3) (3) (10) (6) - - (22)
------ ------- ------ ------ ------ ------ ------
Net income (loss) applicable
to common shares $ (50) $ (6) $ (31) $ (19) $ 11 $ 14 $ (81)
====== ======= ====== ====== ===== ====== ======
Net income (loss) per
common share $ (.13) $ (.02) $ (.08) $ (.05) $ .03 $ .04 $ (.21)
====== ======= ====== ====== ===== ====== ======
Average common shares 379.5 1.6 1.0 2.5 - - 384.6
====== ======= ====== ====== ===== ====== ======
<FN>
- ---------------
<F1> Includes depreciation and
amortization expense of: $ 112 $ 8 $ 43 $ 69 $ - $ - $ 232
====== ======= ====== ====== ====== ====== ======
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
TIME WARNER INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1994
(millions, unaudited)
<CAPTION>
Time Warner Summit KBLCOM CVI 1995 Debt TWE Pro
Historical Acquisition(f) Acquisition(g) Acquisition(h) Refinancing(i) Transactions(j) Forma
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $7,396 $ 63 $ 265 $ 493 $ - $ - $8,217
Cost of revenues<F1> 4,307 48 201 426 - - 4,982
Selling, general and
administrative<F1> 2,376 13 98 103 - - 2,590
------ ------ ------ ------ ----- ----- ------
Operating expenses 6,683 61 299 529 - - 7,572
------ ------ ------ ------ ----- ----- ------
Business segment operating
income (loss) 713 2 (34) (36) - - 645
Equity in pretax income
of Entertainment Group 176 - - - 29 12 217
Interest and other, net (724) (15) (104) (147) 52 - (938)
Corporate expenses (76) - - - - - (76)
------ ------ ------ ------ ----- ----- ------
Income (loss) before income taxes 89 (13) (138) (183) 81 12 (152)
Income tax (provision) benefit (180) 3 55 45 (33) (1) (111)
------ ------ ------ ------ ----- ----- ------
Net income (loss) (91) (10) (83) (138) 48 11 (263)
Preferred dividend requirements (13) (12) (41) (24) - - (90)
------ ------ ------ ------ ----- ----- ------
Net income (loss) applicable to
common shares $ (104) $ (22) $ (124) $ (162) $ 48 $ 11 $ (353)
====== ====== ====== ====== ===== ===== ======
Net income (loss) per
common share $ (.27) $ (.06) $ (.33) $ (.42) $ .13 $ .03 $ (.92)
====== ====== ====== ====== ===== ===== ======
Average Common shares 378.9 1.6 1.0 2.5 - - 384.0
====== ====== ====== ====== ===== ===== ======
<FN>
- ---------------
<F1> Includes depreciation and
amortization expense of: $ 437 $ 33 $ 173 $ 275 $ - $ - $ 918
====== ====== ====== ====== ===== ===== ======
</TABLE>
See accompanying notes.
<PAGE>
TIME WARNER INC.
NOTES TO THE TIME WARNER PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(a) Reflects the historical assets and liabilities of Summit as of March
31, 1995, including $140 million of indebtedness that is outstanding
following the Summit Acquisition, as well as certain pro forma
adjustments directly related to the Summit Acquisition. The pro forma
adjustments reflect (1) the issuance by Time Warner of 1,550,936
shares of its common stock and 3,264,508 shares of Series C preferred
stock, valued for pro forma purposes at an aggregate amount of $381
million, (2) the exclusion of approximately $48 million of net assets
principally related to the payment of certain liabilities prior to the
closing of the Summit Acquisition, (3) the incurrence of $6 million of
additional indebtedness for the payment of transaction costs and other
related liabilities, (4) the allocation of the excess of the purchase
price over the book value of the net assets acquired of $417 million
to cable television franchises, based on the estimated fair value of
such assets, (5) an increase of $171 million in deferred income tax
liabilities and goodwill, resulting from the fact that the tax basis
of the acquired assets will not be adjusted as a result of the Summit
Acquisition and (6) the elimination of Summit's historical
stockholders' equity.
(b) Reflects the historical assets and liabilities of KBLCOM as of March
31, 1995, including a 50% interest in Paragon not previously owned by
TWE and $1.124 billion of indebtedness that will be assumed in the
acquisition, as well as certain pro forma adjustments directly related
to the KBLCOM Acquisition. The pro forma adjustments reflect (1) the
issuance by Time Warner of 1 million shares of its common stock and 11
million shares of Series D preferred stock, valued for pro forma
purposes at an aggregate amount of $1.135 billion, (2) the exclusion of
approximately $301 million of net indebtedness and other liabilities of
KBLCOM that will not be assumed by Time Warner and the exclusion of
$505 million of pre-existing goodwill, (3) the incurrence of $6 million
of additional indebtedness for the payment of transaction costs and
other related liabilities, (4) the allocation of the excess of the
purchase price over the book value of the net assets acquired of $1.615
billion to the investment in Paragon in the amount of $659 million and
to cable television franchises in the amount of $956 million, based on
the estimated fair values of such assets, (5) an increase of $662
million in deferred income tax liabilities and goodwill, resulting from
the fact that the tax basis of the acquired assets will not be adjusted
as a result of the KBLCOM Acquisition and (6) the elimination of
KBLCOM's historical stockholders' equity.
(c) Reflects the historical assets and liabilities of CVI and the Gerry
Companies as of March 31, 1995, including $1.706 billion of
indebtedness that will be assumed in the acquisition, as well as
certain pro forma adjustments directly related to the CVI Acquisition.
The pro forma adjustments reflect (1) the issuance by Time Warner of
2.5 million shares of its common stock, 3.25 million shares of Series
E preferred stock and 3.25 million shares of Series F preferred stock,
valued for pro forma purposes at an aggregate amount of $738 million,
(2) the exclusion of approximately $303 million of net assets of CVI
and the Gerry Companies that will not be assumed by Time Warner, of
which $225 million represents pre-
<PAGE>
existing goodwill, (3) the incurrence of $244 million of additional
indebtedness, consisting of $193 million to consummate the CVI
Acquisition and $51 million to pay for transaction costs and other
related liabilities, (4) the allocation of the excess of the purchase
price over the book value of the net assets acquired of $2.036 billion
to cable television franchises, based on the estimated fair value of
such assets, (5) an increase of $835 million in deferred income tax
liabilities and goodwill, resulting from the fact that the tax basis
of the acquired assets will not be adjusted as a result of the CVI
Acquisition and (6) the elimination of the historical stockholders'
equity of CVI and the Gerry Companies.
(d) Pro forma adjustments to record the 1995 Debt Refinancing as of March
31, 1995 reflect (1) $2.477 billion of borrowings by TWI Cable under
the New Credit Agreement, the proceeds of which will be used (i) to
repay or redeem $2.33 billion of indebtedness assumed or incurred in
the KBLCOM and CVI Acquisitions, plus redemption premiums thereon of
$25 million, (ii) to repay on behalf of Paragon $111 million of its
aggregate $222 million of indebtedness, the other half of which will
be repaid by TWE, and (iii) to pay for an allocable $11 million of
deferred financing costs in connection with the New Credit Agreement
and (2) a reduction in Time Warner's investment in and amounts due to
and from the Entertainment Group and shareholders' equity by $31
million to reflect the one-time write-off by TWE of $27 million of
deferred financing costs with respect to the existing TWE bank credit
agreement and the $25 million of redemption premiums to be paid by TWI
Cable, net of $21 million of related tax benefits.
(e) Pro forma adjustments reflect the effect on Time Warner's financial
position from TWE's Asset Sale Transactions, as more fully described
in the notes to the Entertainment Group pro forma consolidated
condensed financial statements contained elsewhere herein. Pro forma
adjustments to record the Asset Sale Transactions as of March 31, 1995
reflect (1) an increase in Time Warner's investment in and amounts due
to and from the Entertainment Group and shareholders' equity of $170
million with respect to the aggregate net income on the transactions
to be recorded currently by TWE, (2) a decrease in shareholders'
equity of $66 million with respect to income taxes provided by Time
Warner on such net income, (3) a decrease in Time Warner's investment
in and amounts due to and from the Entertainment Group and an increase
in cash of $185 million with respect to the receipt from TWE of
tax-related distributions to reimburse Time Warner for the payment of
income taxes on its allocable share of the taxable income arising from
the Asset Sale Transactions, in accordance with the terms of the TWE
Partnership Agreement and (4) an increase in current liabilities of
$185 million with respect to the related current income tax payable
due as a result of the transaction, of which $119 million has been
reclassified from Time Warner's previously-provided deferred income
tax liability.
The TWE-A/N Transaction and TWE's consolidation of Paragon, as more
fully described in the notes to the Entertainment Group pro forma
consolidated condensed financial statements contained elsewhere
herein, have no pro forma effect on the underlying capital of TWE and,
accordingly, have no effect on the pro forma financial position of
Time Warner.
(f) Reflects the historical operating results of Summit for the three
months ended March 31, 1995 and the year ended December 31, 1994, as
well as certain pro forma adjustments directly related to the Summit
<PAGE>
Acquisition. The pro forma adjustments reflect (1) the exclusion of an
aggregate $32 million and $15 million, respectively, of net income
relating to (i) Summit's broadcasting operations that were sold by
Summit prior to the closing of the Summit Acquisition and (ii)
reductions in Summit's corporate expenses principally relating to the
closing of facilities and the termination of related personnel as a
direct result of the transaction, (2) an increase of $6 million and
$25 million, respectively, in cost of revenues with respect to the
amortization of the excess cost to acquire Summit that has been
allocated to (i) cable television franchises and amortized on a
straight-line basis over a twenty-year period and (ii) goodwill and
amortized on a straight-line basis over a forty-year period, (3) an
increase of $1 million and $2 million, respectively, in selling,
general and administrative expenses with respect to payments to be
made to TWE for its management of Summit's cable television systems,
(4) a decrease of $2 million and $9 million, respectively, in income
tax expense as a result of income tax benefits provided at a 41% tax
rate on the additional amortization expense and management fees to be
paid to TWE and (5) an increase of $3 million and $12 million,
respectively, in preferred dividend requirements of the Series C
Preferred Stock issued in the Summit Acquisition.
(g) Reflects the historical operating results of KBLCOM for the three
months ended March 31, 1995 and the year ended December 31, 1994, as
well as certain pro forma adjustments directly related to the KBLCOM
Acquisition. The pro forma adjustments reflect (1) the exclusion of an
aggregate $9 million and $14 million, respectively, of net losses
relating to (i) interest costs on the portion of KBLCOM's indebtedness
that will not be assumed by Time Warner, (ii) reductions in KBLCOM's
corporate expenses principally relating to the closing of facilities
and the termination of related personnel as a direct result of the
transaction and (iii) for the year ended December 31, 1994 only, the
pro forma effect of certain KBLCOM acquisitions which occurred during
the year, (2) an increase of $20 million and $78 million,
respectively, in cost of revenues consisting of a $5 million and $20
million, respectively, reduction of KBLCOM's historical amortization
of pre-existing goodwill and a $25 million and $98 million,
respectively, increase in amortization with respect to the excess cost
to acquire KBLCOM that has been allocated to (i) investments and
amortized on a straight-line basis over a twenty-year period, (ii)
cable television franchises and amortized on a straight-line basis
over a twenty-year period and (iii) goodwill and amortized on a
straight-line basis over a forty-year period, (3) an increase of $2
million and $8 million, respectively, in selling, general and
administrative expenses with respect to payments to be made to TWE for
its management of certain of KBLCOM's cable television systems, (4) a
decrease of $9 million and $36 million, respectively, in income tax
expense as a result of income tax benefits provided at a 41% tax rate
on the additional amortization expense and management fees to be paid
to TWE and (5) an increase of $10 million and $41 million,
respectively, in preferred dividend requirements of the Series D
Preferred Stock to be issued in the KBLCOM Acquisition.
(h) Reflects the historical operating results of CVI and the Gerry
Companies for the three months ended March 31, 1995 and the year ended
December 31, 1994, as well as certain pro forma adjustments directly
related to the CVI Acquisition. The pro forma adjustments reflect (1)
the exclusion of $6 million and $21 million, respectively, of net
losses with respect to reductions in the corporate expenses of CVI and
the Gerry Companies principally relating to the closing of facilities
and the termination of related personnel as a
<PAGE>
direct result of the transaction, (2) an increase of $28 million and
$111 million, respectively, in cost of revenues consisting of a $3
million and $12 million reduction, respectively, of CVI's historical
amortization of pre-existing goodwill and a $31 million and $123
million increase, respectively, in amortization with respect to the
excess cost to acquire CVI and the Gerry Companies that has been
allocated to (i) cable television franchises and amortized on a
straight-line basis over a twenty-year period and (ii) goodwill and
amortized on a straight-line basis over a forty-year period, (3) an
increase of $4 million and $15 million, respectively, in selling,
general and administrative expenses with respect to payments to be
made to TWE for its management of the cable television systems of CVI
and the Gerry Companies, (4) an increase of $4 million and $13
million, respectively, in interest expense on the $244 million of
borrowings under the New Credit Agreement, which will be used to
consummate the CVI Acquisition and to pay for transaction costs and
other related liabilities, (5) a decrease of $14 million and $53
million, respectively, in income tax expense as a result of income tax
benefits provided at a 41% tax rate on the additional amortization
expense, interest expense and management fees to be paid to TWE and
(6) an increase of $6 million and $24 million, respectively, in
preferred dividend requirements of the Series E Preferred Stock and
Series F Preferred Stock to be issued in the CVI Acquisition.
(i) Pro forma adjustments to record the 1995 Debt Refinancing for the
three months ended March 31, 1995 and the year ended December 31, 1994
reflect interest savings of $19 million and $81 million, respectively,
from $5.077 billion of aggregate borrowings under the New Credit
Agreement, which are expected to be used to refinance $5.002 billion
of indebtedness (plus $75 million of related financing costs), as
follows (in millions):
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1995 December 31, 1994
---------------------------- -----------------------------
Equity in Pretax Equity in Pretax
Income of Income of
Interest and Entertainment Interest and Entertainment
Other, Net Group Other, Net Group
------------ ---------------- ------------ ----------------
Increase (Decrease)
<S> <C> <C> <C> <C>
o Borrowings by TWI Cable, TWE and the
TWE-Advance/Newhouse Partnership in
the amounts of $2.477 billion,
$2.586 billion, and $14 million,
respectively, under the New Credit
Agreement, at estimated annual
interest rates of 6.875%, 6.5% and
6.5%, respectively, for the three
months ended March 31, 1995 and
5.375%, 5% and 5%, respectively,
for the year ended December 31, 1994 $ 43 $ 42 $133 $130
o Repayment by TWE of $2.45 billion
of outstanding indebtedness under
the existing TWE bank credit agreement - (41) - (124)
o Repayment by TWI Cable of $1.206 billion
of indebtedness assumed in the
CVI Acquisition (22) - (83) -
o Repayment by TWI Cable of $1.124 billion
of indebtedness assumed in the
KBLCOM Acquisition (30) - (104) -
o Repayment of $222 million of Paragon's
indebtedness, funded equally by
Time Warner and TWE - (5) - (18)
o Amortization of $11 million and
$39 million of deferred financing
costs allocated to Time Warner and the
Entertainment Group, respectively, in
connection with obtaining the New Credit
Agreement on a straight-line basis for
a five-year period 1 2 2 8
o Reduction of historical amortization of
deferred financing costs recorded with
respect to the existing TWE
credit agreement - (9) - (25)
---- ---- ---- ----
Net decrease in interest costs $ (8) $(11) $(52) $(29)
==== ==== ==== ====
</TABLE>
Income taxes of $8 million and $33 million, respectively, have been
provided at a 41% tax rate on the aggregate net reduction in interest
costs.
<PAGE>
(j) Pro forma adjustments to record $23 million and $12 million,
respectively, of increased income from Time Warner's equity in the
pretax income of the Entertainment Group reflect the aggregate effect
on TWE's operating results from (1) the TWE-A/N Transaction, (2) all
of the fees to be earned by TWE with respect to its management of
certain of Time Warner's cable television systems and (3) the Asset
Sale Transactions, as more fully described in the notes to the
Entertainment Group pro forma consolidated condensed financial
statements contained elsewhere herein.
TWE's consolidation of Paragon, as more fully described in the notes to
the Entertainment Group pro forma consolidated condensed financial
statements contained elsewhere herein, has no pro forma effect on the
net income of TWE and, accordingly, the consolidation of Paragon has no
effect on the pro forma operating results of Time Warner.
Income taxes of $9 million and $1 million, respectively, have been
provided at a 41% tax rate on the aggregate increase in income from
Time Warner's equity in the pretax income of the Entertainment Group,
adjusted for certain temporary differences.
<PAGE>
<TABLE>
TIME WARNER ENTERTAINMENT GROUP
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
March 31, 1995
(millions, unaudited)
<CAPTION>
Entertainment
Group TWE-A/N Consolidation 1995 Debt Asset Sale Pro
Historical Transaction(a) of Paragon(b) Refinancing(c) Transactions(d) Forma
<S> <C> <C> <C> <C> <C> <C>
A S S E T S
Cash and equivalents $ 1,267 $ - $ 8 $ - $ (10) $ 1,265
Other current assets 2,453 - 14 - (96) 2,371
------- ------ ------ ------- ------- -------
Total current assets 3,720 - 22 - (106) 3,636
Noncurrent inventories 1,752 - - - - 1,752
Loan receivable from Time Warner 400 - - - - 400
Investments 795 26 (340) - - 481
Property, plant and equipment 4,083 313 396 - (486) 4,306
Goodwill 4,400 68 86 - (279) 4,275
Cable television franchises 3,189 3 295 - (73) 3,414
Other assets 704 10 3 12 (77) 652
------- ------ ------ ------- ------- -------
Total assets $19,043 $ 420 $ 462 $ 12 $(1,021) $18,916
======= ====== ====== ======= ======= =======
LIABILITIES AND PARTNERS' CAPITAL
Total current liabilities $ 2,945 $ - $ 66 $ - $ (19) $ 2,992
Long-term debt 7,162 6 222 (72) (1,050) 6,268
Other long-term liabilities 777 414 174 111 63 1,539
Time Warner General Partners'
senior capital 1,696 - - - - 1,696
Partners' capital 6,463 - - (27) (15) 6,421
------- ------ ------ ------- -------- -------
Total liabilities and partners' capital $19,043 $ 420 $ 462 $ 12 $ (1,021) $18,916
======= ====== ====== ======= ======== =======
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
TIME WARNER ENTERTAINMENT GROUP
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Three Months Ended March 31, 1995
(millions, unaudited)
<CAPTION>
Entertainment TWI-TWE
Group TWE-A/N Consolidation 1995 Debt Management Asset Sale Pro
Historical Transaction(e) of Paragon(f) Refinancing(g) Fees (h) Transactions(i) Forma
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $2,073 $ 137 $ 87 $ - $ 6 $(39) $2,264
Cost of revenues<F1> 1,426 51 67 - - (26) 1,518
Selling, general and
administrative<F1> 446 56 15 - - (10) 507
------ ------ ----- ----- ----- ----- ------
Operating expenses 1,872 107 82 - - (36) 2,025
Business segment
operating income (loss) 201 30 5 - 6 (3) 239
Interest and other, net (164) (27) (5) 11 - 17 (168)
Corporate expenses (15) - - - - - (15)
------ ------ ----- ----- ----- ----- ------
Income before income taxes 22 3 - 11 6 14 56
Income tax provision (11) - - - - (4) (15)
------ ------ ----- ----- ----- ----- ------
Net income $ 11 $ 3 $ - $ 11 $ 6 $ 10 $ 41
====== ====== ===== ===== ===== ===== ======
<FN>
- ---------------
<F1> Includes depreciation and
amortization expense of: $ 230 $ 26 $ 20 $ - $ - $ (6) $ 270
====== ===== ===== ===== ===== ===== ======
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
TIME WARNER ENTERTAINMENT GROUP
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1994
(millions, unaudited)
<CAPTION>
TWI-TWE
TWE-A/N Consolidation 1995 Debt Management Asset Sale Pro
Historical Transaction(e) of Paragon(f) Refinancing(g) Fees (h) Transactions(i) Forma
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $8,509 $ 527 $ 348 $ - $ 25 $(619) $8,790
Cost of revenues<F1> 6,003 209 270 - - (511) 5,971
Selling, general and
administrative<F1> 1,654 206 60 - - (29) 1,891
------ ----- ----- ----- ------ ----- ------
Operating expenses 7,657 415 330 - - (540) 7,862
Business segment
operating income (loss) 852 112 18 - 25 (79) 928
Interest and other, net (616) (99) (18) 29 - 53 (651)
Corporate expenses (60) - - - - - (60)
------ ----- ----- ----- ------ ----- ------
Income (loss) before
income taxes 176 13 - 29 25 (26) 217
Income tax (provision) benefit (40) - - - - 6 (34)
------ ----- ----- ----- ----- ----- ------
Net income (loss) $ 136 $ 13 $ - $ 29 $ 25 $ (20) $ 183
====== ===== ===== ===== ===== ===== ======
<FN>
- ---------------
<F1> Includes depreciation and
amortization expense of: $ 959 $ 104 $ 63 $ - $ - $ (86) $1,040
====== ===== ===== ===== ====== ===== ======
</TABLE>
See accompanying notes.
<PAGE>
TIME WARNER INC.
NOTES TO THE ENTERTAINMENT GROUP PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(a) Reflects the historical assets and liabilities of Advance/Newhouse as
of March 31, 1995 (and as of January 31, 1995 with respect to the
Newhouse Broadcasting Cable Division of Newhouse Broadcasting
Corporation and Subsidiaries, which entities have different fiscal
years), as well as certain pro forma adjustments directly related to
the TWE-Advance/Newhouse Transaction. The pro forma adjustments reflect
(1) the exclusion of approximately $38 million of negative working
capital that was not assumed by the TWE-Advance/Newhouse Partnership
and (2) the incurrence of $6 million of additional indebtedness for the
payment of transaction costs. TWE owns a two-thirds equity interest and
will consolidate the partnership. Accordingly, the one-third equity
interest in the partnership owned by Advance/Newhouse has been
reflected in the Entertainment Group pro forma consolidated condensed
balance sheet as minority interest. The assets contributed by TWE and
Advance/Newhouse to the TWE-Advance/Newhouse Partnership have been
reflected in the pro forma consolidated condensed balance sheet at
their predecessor's historical cost. No gain was recognized by TWE upon
the capitalization of the partnership.
(b) Pro forma adjustments reflect the consolidation of Paragon's financial
position as of March 31, 1995 as a result of TWE's control over the
management of such entity. Minority interest of $174 million has been
recorded as a component of other long-term liabilities reflecting Time
Warner's interest in the joint venture.
(c) Pro forma adjustments to record the 1995 Debt Refinancing as of March
31, 1995 reflect (1) a net decrease in debt of $72 million, consisting
of (i) $2.6 billion of aggregate borrowings by TWE and the
TWE-Advance/Newhouse Partnership under the New Credit Agreement, (ii)
the repayment of $2.45 billion of outstanding indebtedness under the
existing TWE bank credit agreement at March 31, 1995 and (iii) the
repayment of $222 million of Paragon's indebtedness, (2) an increase of
$111 million in Time Warner's minority interest in Paragon,
representing Time Warner's capital contribution to Paragon in the form
of the repayment of its allocable share of Paragon's indebtedness, (3)
the payment of an allocable $39 million of deferred financing costs in
connection with the New Credit Agreement and (4) a reduction in TWE's
partners' capital by $27 million to reflect the one-time write-off of
deferred financing costs with respect to the existing TWE bank credit
agreement.
(d) Pro forma adjustments to record the Asset Sale Transactions as of
March 31, 1995 reflect (1) the receipt by TWE of approximately $1.14
billion of aggregate gross proceeds with respect to the disposition by
TWE of 51% of its interest in Six Flags, the payment by Six Flags of
certain intercompany indebtedness and licensing fees to TWE in
connection therewith and the sale by TWE of certain unclustered cable
television systems, (2) a reduction in debt of approximately $1.050
billion, principally consisting of the use of the aggregate net
proceeds received, after related taxes and fees, to repay indebtedness
under the New Credit Agreement, (3) the deconsolidation of the assets
and liabilities of Six Flags, including $126 million
<PAGE>
of third-party indebtedness, and a reduction in net assets with
respect to the cable television systems to be sold and (4) the payment
of $185 million in tax-related distributions that will reimburse Time
Warner for the payment of income taxes on its allocable share of the
taxable income arising from these transactions in accordance with the
terms of the TWE partnership agreement.
(e) Reflects the historical operating results of Advance/Newhouse for the
three months ended March 31, 1995 and the year ended December 31, 1994
(and for the three months ended January 31, 1995 and for the twelve
months ended October 31, 1994 with respect to certain contributed
businesses which have different fiscal years), as well as certain pro
forma adjustments directly related thereto. The pro forma adjustments
reflect (1) an increase of $1 million and $2 million, respectively, in
cost of revenues with respect to TWE's amortization of transaction
costs on a straight-line basis over a three-year period and (2) an
increase of $27 million and $99 million, respectively, in interest and
other, net, representing Advance/Newhouse's minority interest in the
net income of the TWE-Advance/Newhouse Partnership, including their
one-third share of $45 million of annual management fees to be paid by
the partnership to TWE.
(f) Pro forma adjustments reflect the consolidation of Paragon's operating
results for the three months ended March 31, 1995 and the year ended
December 31, 1994, offset by Time Warner's minority share of the net
income of Paragon in the amount of $16 million and $34 million,
respectively.
(g) Pro forma adjustments to record the 1995 Debt Refinancing for the
three months ended March 31, 1995 and the year ended December 31, 1994
reflect lower interest costs of $11 million and $29 million,
respectively, from (i) $2.6 billion of aggregate borrowings under the
New Credit Agreement, which are expected to be used to refinance
$2.561 billion of indebtedness (plus $39 million of related financing
costs) and (ii) the repayment by Time Warner of $111 million of
Paragon's indebtedness, as follows (in millions):
<PAGE>
Three Months Ended Year Ended
March 31, 1995 December 31, 1994
------------------ -----------------
Increase (Decrease)
o Borrowings by TWE and the TWE-
Advance/Newhouse Partnership in the
amounts of $2.586 billion and
$14 million, respectively, under the
New Credit Agreement, at estimated
annual interest rates for each
borrower of 6.5% for the three
months ended March 31, 1995 and 5%
for the year ended December 31, 1994 $ 42 $130
o Repayment by TWE of $2.45 billion
of indebtedness under the
existing TWE bank credit agreement (41) (124)
o Repayment of $222 million of
Paragon's indebtedness, funded
equally by TWE and Time Warner (5) (18)
o Amortization of an allocable
$39 million of deferred financing
costs in connection with obtaining
the New Credit Agreement on a straight-
line basis for a five-year period 2 8
o Reduction of historical amortization
of deferred financing costs
recorded with respect to the existing
TWE credit agreement (9) (25)
----- -----
Net decrease in interest costs $(11) $(29)
===== =====
(h) Pro forma adjustments for the three months ended March 31, 1995 and
the year ended December 31, 1994 reflect fees to be received from Time
Warner in the amount of $6 million and $25 million, respectively, with
respect to TWE's management of certain of Time Warner's cable
television systems.
(i) Pro forma adjustments to record an increase of $10 million and a
decrease of $20 million in net income, respectively, from the Asset
Sale Transactions for the three months ended March 31, 1995 and the
year ended December 31, 1994 reflect (1) the deconsolidation of the
operating results of Six Flags, (2) the elimination of the operating
results of the cable television systems to be sold and (3) a decrease
in interest expense, representing interest savings from the repayment
by TWE of indebtedness under the New Credit Agreement using the
aggregate net proceeds received in these transactions. TWE will
realize aggregate net income of approximately $300 million on these
transactions, of which approximately $170 million will be recognized
currently and approximately $130 million will be deferred as a result
of TWE's guarantee of third-party, zero-coupon indebtedness of Six
Flags due in 1999. Such income has not been reflected in the
pro forma consolidated condensed statement of operations included
elsewhere herein.
<PAGE>
Item 7. Financial Statements and Exhibits.
(a) Financial statements of businesses acquired:
(i) Summit Communications Group, Inc. and Subsidiaries (the
documents listed in this paragraph (i) being referred to as the
"Financial Statements of Summit Communications Group, Inc."):
(A) Unaudited Consolidated Financial Statements
as of March 31, 1995 and for each of the three months
ended March 31, 1994 and 1995; and
(B) Consolidated Financial Statements as of
December 31, 1993 and 1994 and for each of the years
ended December 31, 1992, 1993 and 1994, including the
report thereof of Deloitte & Touche LLP, independent
auditors ("Deloitte & Touche LLP");
(ii) Newhouse Broadcasting Cable Division of Newhouse
Broadcasting Corporation and Subsidiaries (the documents listed in
this paragraph (ii) being referred to as the "Financial Statements
of Newhouse Broadcasting Cable Division of Newhouse Broadcasting
Corporation"):
(A) Unaudited Condensed Financial Statements as
of January 31, 1995 and for each of the six months ended
January 31, 1994 and 1995; and
(B) Financial Statements as of July 31, 1993
and 1994 and for the three years ended July 31, 1992,
1993 and 1994, including the report thereon of Paul
Scherer & Company LLP, independent auditors ("Paul
Scherer & Company, LLP");
(iii) Vision Cable Division of Vision Cable Communications,
Inc. and Subsidiaries (the documents listed in this paragraph
(iii) being referred to as the "Financial Statements of Vision
Cable Division of Vision Cable Communications, Inc."):
(A) Unaudited Condensed Financial Statements as
of March 31, 1995 and for each of the three months ended
March 31, 1994 and 1995; and
(B) Financial Statements as of December 31,
1993 and 1994 and for each of the years ended December
31, 1992, 1993 and 1994, including the report thereon of
Paul Scherer & Company, LLP;
(iv) Cablevision Industries Corporation and Subsidiaries
(the documents listed in this paragraph (iv) being referred to as
the "Financial Statements of Cablevision Industries
Corporation"):
<PAGE>
(A) Unaudited Consolidated Financial Statements
as of March 31, 1995 and for each of the three months
ended March 31, 1994 and 1995; and
(B) Consolidated Financial Statements as of
December 31, 1993 and 1994 and for each of the years
ended December 31, 1992, 1993 and 1994, including the
report thereon of Arthur Andersen LLP;
(v) Cablevision Industries Limited Partnership and
Combined Entities (the documents listed in this paragraph (v)
being referred to as the "Financial Statements of Cablevision
Industries Limited Partnership"):
(A) Unaudited Combined Financial Statements as
of March 31, 1995 and for each of the three months ended
March 31, 1994 and 1995; and
(B) Combined Financial Statements as of
December 31, 1993 and 1994 and for each of the years
ended December 31, 1992, 1993 and 1994, including the report
thereon of Arthur Andersen LLP;
(vi) KBLCOM Incorporated (the documents listed in this
paragraph (vi) being referred to as the "Financial Statements of
KBLCOM Incorporated"):
(A) Unaudited Consolidated Financial Statements
as of March 31, 1995 and for each of the three months
ended March 31, 1994 and 1995; and
(B) Consolidated Financial Statements as of
December 31, 1993 and 1994 and for each of the years
ended December 31, 1992, 1993 and 1994, including the
report thereon of Deloitte & Touche LLP;
(b) Pro forma Consolidated Condensed Financial Statements:
(i) Time Warner Inc.:
(A) Pro Forma Consolidated Condensed Balance
Sheet as of March 31, 1995;
(B) Pro Forma Consolidated Condensed Statement
of Operations for the year ended December 31, 1994 and
the three months ended March 31, 1995; and
(C) Notes to Pro Forma Consolidated Condensed
Financial Statements.
(ii) Entertainment Group:
<PAGE>
(A) Pro Forma Consolidated Condensed Balance
Sheet as of March 31, 1995;
(B) Pro Forma Consolidated Condensed Statement
of Operations for the year ended December 31, 1994 and
the three months ended March 31, 1995; and
(C) Notes to Pro Forma Consolidated Condensed
Financial Statements.
(c) Exhibits:
(i) Exhibit 23(a): Consent of Deloitte & Touche LLP.
(ii) Exhibit 23(b): Consent of Paul Scherer & Company LLP.
(iii) Exhibit 23(c): Consent of Arthur Andersen LLP.
(iv) Exhibit 23(d): Consent of Deloitte & Touche LLP.
(v) Exhibit 99(a): Financial Statements of Summit
Communications Group, Inc. (incorporated by reference from
pages 34 to 49 of the Annual Report on Form 10-K for the
year ended December 31, 1994 and from pages 3 to 8 of the
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1995 of Summit Communications Group, Inc.)
(vi) Exhibit 99(b): Financial Statements of Newhouse
Broadcasting Cable Division of Newhouse Broadcasting Corporation.
(vii) Exhibit 99(c): Financial Statements of Vision Cable
Division of Vision Cable Communications, Inc.
(viii) Exhibit 99(d): Financial Statements of
Cablevision Industries Corporation (incorporated by
reference from pages 30 to 49 of the Annual Report on Form
10-K for the year ended December 31, 1994 and from pages 2
to 11 of the Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1995 of Cablevision Industries
Corporation).
(ix) Exhibit 99(e): Financial Statements of Cablevision
Industries Limited Partnership and Combined Entities.
(x) Exhibit 99(f): Financial Statements of KBLCOM
Incorporated.
<PAGE>
(xi) Exhibit 99(g): Pro Forma Consolidated Condensed
Balance Sheet as of March 31, 1995, Pro Forma Consolidated
Condensed Statement of Operations for the year ended
December 31, 1994 and the quarterly period ended March 31,
1995 and Notes to Pro Forma Consolidated Condensed Financial
Statements of Time Warner Entertainment Company, L.P. (the
"Pro Forma Financial Statements of Time Warner Entertainment
Company, L.P.") (incorporated by reference from pages 3 to
15 of the Current Report on Form 8-K of Time Warner
Entertainment Company, L.P. dated May 30, 1995).
<PAGE>
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, in the City of New York,
State of New York, on June 1, 1995.
TIME WARNER INC.,
By: /s/ Richard J. Bressler
-------------------------
Name: Richard J. Bressler
Title: Senior Vice President
and Chief Financial
Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit Sequential
Page Number
23(a) Consent of Deloitte & Touche LLP,
Independent Auditors.
23(b) Consent of Paul Scherer & Company LLP,
Independent Auditors.
23(c) Consent of Arthur Andersen LLP, Independent
Public Accountants.
23(d) Consent of Deloitte & Touche LLP,
Independent Auditors.
99(a) Financial Statements of Summit <F2>
Communications Group, Inc. (incorporated by
reference from pages 34 to 49 of the Annual
Report on Form 10-K for the year ended
December 31, 1994 and from pages 3 to 8 of
the Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1995 of
Summit Communications Group, Inc.)
99(b) Financial Statements of Newhouse Broadcasting
Cable Division of Newhouse Broadcasting
Corporation.
99(c) Financial Statements of Vision Cable Division of
Vision Cable Communications, Inc.
99(d) Financial Statements of Cablevision Industries <F2>
Corporation (incorporated by reference from
pages 30 to 49 of the Annual Report on Form
10-K for the year ended December 31, 1994 and
from pages 2 to 11 of the Quarterly Report on
Form 10-Q for the quarterly period ended
March 31, 1995 of Cablevision Industries
Corporation).
99(e) Financial Statements of Cablevision Industries
Limited Partnership and Combined Entities.
<PAGE>
Exhibit No. Description of Exhibit Sequential
Page Number
99(f) Financial Statements of KBLCOM Incorporated.
99(g) Pro Forma Financial Statements of Time <F2>
Warner Entertainment Company, L.P.
(incorporated by reference from pages 3
to 15 of the Current Report on Form 8-K
of Time Warner Entertainment Company,
L.P. dated May 30, 1995).
[FN]
- --------------------
<F2> Incorporated by reference.
EXHIBIT 23(a)
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference of our report dated March 10,
1995, with respect to the consolidated financial statements and schedule of
Summit Communications Group, Inc. included in the Annual Report on Form
10-K of Summit Communications Group, Inc. for each of the three years ended
December 31, 1994 in each of the following registration statements of Time
Warner, Inc.:
1. Post-Effective Amendment No. 2 to Registration Statements No. 33-11031
and No. 2-76753 on Form S-8;
2. Post-Effective Amendment No. 4 on Form S-3 to Registration Statement
No. 2-75960 on Form S-16 and Post-Effective Amendment No. 1 on Form
S-3 to Registration Statement No. 33-58262 on Form S-3;
3. Registration Statements No. 33-20883 and No. 33-35945 on Form S-8;
4. Post-Effective Amendment No. 8 to Registration Statements No. 2-26477
and No. 2-67216 on Form S-8;
5. Registration Statements No. 33-37929 and No. 33-47152 on Form S-8;
6. Post-Effective Amendment No. 2 to Registration Statement No. 33-16507
on Form S-8 and Registration Statement No. 33-48381 on Form S-8;
7. Post-Effective Amendment No. 1 to Registration Statement No. 33-29247
on Form S-8;
8. Registration Statement No. 33-33076 (the Prospectus constituting a
part thereof also applies to Registration Statements No. 33-29029 and
No. 33-29030) on Form S-8;
9. Amendment No. 1 to Registration Statement No. 33-33043 on Form S-8 and
Registration Statement No. 33-51471 on Form S-8;
10. Pre-Effective Amendment No. 1 to Registration Statement No. 33-29031
on Form S-3;
11. Registration Statement No. 33-35317 on Form S-8;
12. Registration Statements No. 33-40859 and No. 33-48382 on Form S-8;
13. Registration Statement No. 33-47151 on Form S-8;
14. Post-Effective Amendment No. 1 on Form S-8 to Registration Statement
No. 33-47705 on Form S-4;
15. Registration Statement No. 33-57812 on Form S-3;
16. Registration Statements No. 33-62774 and No. 33-51015 on Form S-8;
17. Registration Statement No. 33-50237 on Form S-3; and
18. Registration Statement No. 33-53213 on Form S-8 and Post-Effective
Amendment No. 1 to Registration Statement No. 33-57667 on Form S-8.
/s/ Deloitte & Touche LLP
- ------------------------------
DELOITTE & TOUCHE LLP
Atlanta, Georgia
May 30, 1995
EXHIBIT 23(b)
<PAGE>
EXHIBIT 23(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of (i) our report dated
Octobeer 7, 1994, with respect to the financial statements of Newhouse
Broadcasting Cable Division of Newhouse Broadcasting Corporation and
Subsidiaries for each of the three years ended July 31, 1994, and (ii) our
report dated March 24, 1995, with respect to the financial statements of
Vision Cable Division of Vision Cable Communications, Inc. and Subsidiaries
for each of the three years ended December 31, 1994, appearing in the
Current Report on Form 8-K of Time Warner Inc. dated May 30, 1995, in each
of the following:
1. Post-Effective Amendment No. 2 to Registration Statements No. 33-11031
and No. 2-76753 on Form S-8;
2. Post-Effective Amendment No. 4 on Form S-3 to Registration Statement
No. 2-75960 on Form S-16 and Post-Effective Amendment No. 1 on Form
S-3 to Registration Statement No. 33-58262 on Form S-3;
3. Registration Statements No. 33-20883 and No. 33-35945 on Form S-8;
4. Post-Effective Amendment No. 8 to Registration Statements No. 2-26477
and No. 2-67216 on Form S-8;
5. Registration Statements No. 33-37929 and No. 33-47152 on Form S-8;
6. Post-Effective Amendment No. 2 to Registration Statement No. 33-16507
on Form S-8 and Registration Statement No. 33-48381 on Form S-8;
7. Post-Effective Amendment No. 1 to Registration Statement No. 33-29247
on Form S-8;
8. Registration Statement No. 33-33076 (the Prospectus constituting a
part thereof also applies to Registration Statements No. 33-29029 and
No. 33-29030) on Form S-8;
9. Amendment No. 1 to Registration Statement No. 33-33043 on Form S-8 and
Registration Statement No. 33-51471 on Form S-8;
10. Pre-Effective Amendment No. 1 to Registration Statement No. 33-29031
on Form S-3;
11. Registration Statement No. 33-35317 on Form S-8;
12. Registration Statements No. 33-40859 and No. 33-48382 on Form S-8;
13. Registration Statement No. 33-47151 on Form S-8;
14. Post-Effective Amendment No. 1 on Form S-8 to Registration Statement
No. 33-47705 on Form S-4;
15. Registration Statement No. 33-57812 on Form S-3;
16. Registration Statements No. 33-62774 and No. 33-51015 on Form S-8;
17. Registration Statement No. 33-50237 on Form S-3; and
18. Registration Statement No. 33-53213 on Form S-8 and Post-Effective
Amendment No. 1 to Registration Statement No. 33-57667 on Form S-8.
/s/ Paul Scherer & Company LLP
-------------------------------
PAUL SCHERER & COMPANY LLP
New York, New York
May 30, 1995
EXHIBIT 23(c)
<PAGE>
EXHIBIT 23(c)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our reports dated March 1, 1995, included, or incorporated
by reference, in this Form 8-K, in each of the following:
1. Post-Effective Amendment No. 2 to Registration Statements No. 33-11031
and No. 2-76753 on Form S-8;
2. Post-Effective Amendment No. 4 on Form S-3 to Registration Statement
No. 2-75960 on Form S-16 and Post-Effective Amendment No. 1 on Form
S-3 to Registration Statement No. 33-58262 on Form S-3;
3. Registration Statements No. 33-20883 and No. 33-35945 on Form S-8;
4. Post-Effective Amendment No. 8 to Registration Statements No. 2-62477
and No. 2-67216 on Form S-8;
5. Registration Statements No. 33-37929 and No. 33-47152 on Form S-8;
6. Post-Effective Amendment No. 2 to Registration Statement No. 33-16507
on Form S-8 and Registration Statement No. 33-48381 on Form S-8;
7. Post-Effective Amendment No. 1 to Registration Statement No. 33-29247
on Form S-8;
8. Registration Statement No. 33-33076 (the Prospectus constituting a
part thereof also applies to Registration Statements No. 33-29029 and
No. 33-29030) on Form S-8;
9. Amendment No. 1 to Registration Statement No. 33-33043 on Form S-8 and
Registration Statement No. 33-51471 on Form S-8;
10. Pre-Effective Amendment No. 1 to Registration Statement No. 33-29031
on Form S-3;
11. Registration Statement No. 33-35317 on Form S-8;
12. Registration Statements No. 33-40859 and No. 33-48382 on Form S-8;
13. Registration Statement No. 33-47151 on Form S-8;
<PAGE>
14. Post-Effective Amendment No. 1 on Form S-8 to Registration Statement
No. 33-47705 on Form S-4;
15. Registration Statement No. 33-57812 on Form S-3;
16. Registration Statements No. 33-62774 and No. 33-51015 on Form S-8;
17. Registration Statement No. 33-50237 on Form S-3; and
18. Registration Statement No. 33-53213 on Form S-8 and Post-Effective
Amendment No. 1 to Registration Statement No. 33-57667 on Form S-8.
/s/ Arthur Andersen LLP
------------------------
ARTHUR ANDERSEN LLP
Stamford, Connecticut
May 30, 1995
EXHIBIT 23(d)
<PAGE>
EXHIBIT 23(d)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of our report dated April 20,
1995, with respect to the consolidated financial statements of KBLCOM
Incorporated included in this Form 8-K of Time Warner Inc. dated May 30,
1995, in each of the following:
1. Post-Effective Amendment No. 2 to Registration Statements No. 33-11031
and No. 2-76753 on Form S-8;
2. Post-Effective Amendment No. 4 on Form S-3 to Registration Statement
No. 2-75960 on Form S-16 and Post-Effective Amendment No. 1 on Form
S-3 to Registration Statement No. 33-58262 on Form S-3;
3. Registration Statements No. 33-20883 and No. 33-35945 on Form S-8;
4. Post-Effective Amendment No. 8 to Registration Statements No. 2-62477
and No. 2-67216 on Form S-8;
5. Registration Statements No. 33-37929 and No. 33-47152 on Form S-8;
6. Post-Effective Amendment No. 2 to Registration Statement No. 33-16507
on Form S-8 and Registration Statement No. 33-48381 on Form S-8;
7. Post-Effective Amendment No. 1 to Registration Statement No. 33-29247
on Form S-8;
8. Registration Statement No. 33-33076 (the Prospectus constituting a
part thereof also applies to Registration Statements No. 33-29029 and
No. 33-29030) on Form S-8;
9. Amendment No. 1 to Registration Statement No. 33-33043 on Form S-8 and
Registration Statement No. 33-51471 on Form S-8;
10. Pre-Effective Amendment No. 1 to Registration Statement No. 33-29031
on Form S-3;
11. Registration Statement No. 33-35317 on Form S-8;
12. Registration Statements No. 33-40859 and No. 33-48382 on Form S-8;
13. Registration Statement No. 33-47151 on Form S-8;
14. Post-Effective Amendment No. 1 on Form S-8 to Registration Statement
No. 33-47705 on Form S-4;
15. Registration Statement No. 33-57812 on Form S-3;
16. Registration Statements No. 33-62774 and No. 33-51015 on Form S-8;
17. Registration Statement No. 33-50237 on Form S-3; and
18. Registration Statement No. 33-53213 on Form S-8 and Post-Effective
Amendment No. 1 to Registration Statement No. 33-57667 on Form S-8.
/s/ Deloitte & Touche LLP
- --------------------------
DELOITTE & TOUCHE LLP
Houston, Texas
May 30, 1995
EXHIBIT 99(a)
<PAGE>
Financial Statements of Summit Communications
Group, Inc. (incorporated by reference from
pages 34 to 49 of the Annual Report on
Form 10-K for the year ended December 31, 1994
and from pages 3 to 8 of the Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1995
of Summit Communications Group, Inc.)
EXHIBIT 99(b)
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Condensed Balance Sheet
(UNAUDITED)
January 31, 1995
Assets
Current assets
Cash $ 7,913,802
Receivables:
Trade, less allowance for doubtful accounts 7,158,811
Other 2,548,697
Refundable income taxes 1,907,750
Prepaid expenses and other 1,536,780
Deferred income taxes 323,410
------------
Total current assets 21,389,250
Property, plant and equipment - less accumulated
depreciation 190,084,610
Notes receivable 2,727,644
Investments 12,524,698
Intangible assets - less accumulated amortization 68,372,391
Deferred income taxes 1,432,824
Other assets 941,897
------------
Total assets $297,473,314
============
Liabilities and divisional equity
Current liabilities
Accounts payable and accrued liabilities $ 27,762,555
Income taxes payable 7,715,499
------------
Total current liabilities 35,478,054
Long-term liabilities 2,423,731
-----------
Total liabilities 37,901,785
-----------
Divisional equity 259,571,529
-----------
Total liabilities and divisional equity $297,473,314
============
See notes to condensed financial statements.
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Condensed Statements of Operations and Divisional Equity
(UNAUDITED)
Six Months Ended
January 31,
1995 1994
Total operating revenues $161,224,896 $157,038,106
------------ ------------
Operating expenses
Programming costs 37,731,406 33,643,419
Selling, general and
administrative 63,888,324 59,294,203
Depreciation and amortization
23,439,560 19,408,041
------------ ------------
Total operating expenses 125,059,290 112,345,663
------------ ------------
Operating income 36,165,606 44,692,443
Other (expense) income (526,415) 181,015
----------- -----------
Income before taxes on income
and cumulative effect of
accounting change
35,639,191 44,873,458
Taxes on income 14,098,000 17,874,364
Income before cumulative ------------ -----------
effect of accounting change
21,541,191 26,999,094
Cumulative effect of a change in
accounting for income taxes
- 692,680
------------ ------------
Net income 21,541,191 27,691,774
Divisional equity - beginning of
period 226,095,948 158,519,280
Distributions from (to) parent
11,934,390 (2,682,427)
------------ ------------
Divisional equity - end of
period $259,571,529 $183,528,627
============ ============
See notes to condensed financial statements.
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Condensed Statements of Cash Flows
(UNAUDITED)
Six Months
Ended January 31,
--------------------------------
1995 1994
Cash flows from operating activities:
Net income $21,541,191 $27,691,774
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 23,439,560 19,408,041
Cumulative effect of change in accounting
for income taxes - (692,680)
Change in working capital items:
(Increase) in receivables - trade (74,796) (1,026,246)
Decrease (increase) in receivables - other 980,367 (2,132,942)
Decrease (increase) in refundable
income taxes 466,121 (186,689)
Decrease (increase) in prepaid expenses and
other 99,903 (423,557)
Decrease (increase) in other assets 67,201 (224,827)
(Decrease) in accounts payable and accrued
expenses (3,820,836) (3,336,356)
Increase (decrease) in income taxes payable 6,591,565 (1,994,699)
----------- ------------
Net cash provided by operating activities 49,290,276 37,081,819
----------- ------------
Cash flows used in investing activities:
Capital expenditures (54,838,366) (32,886,133)
(Increase) in investments - net (525,433) (486,583)
(Increase) in notes receivable - (39,000)
(Increase) in intangible assets (1,982,173) (131,510)
------------- -------------
Net cash used in investing activities (57,345,972) (33,543,226)
------------- -------------
Cash flows provided by (used in) financing
activities:
Distributions from (to) parent 11,934,390 (2,682,427)
------------ -------------
Net cash provided by (used in) financing
activities 11,934,390 (2,682,427)
------------ -------------
Net increase in cash 3,878,694 856,166
Cash - beginning of period 4,035,108 4,618,969
------------ -------------
Cash - end of period $ 7,913,802 $ 5,475,135
============ =============
- Continued -
See notes to condensed financial statements.
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Condensed Statements of Cash Flows
(UNAUDITED)
- Continued -
Six Months
Ended January 31,
--------------------------
1995 1994
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ - $ -
========== ===========
Income taxes $7,040,314 $20,055,752
========== ===========
Supplemental disclosure of non-cash transactions
On December 31, 1994, the division exchanged
notes receivable and accrued interest for
additional shares of E! Entertainment
Television, Inc. preferred stock. $3,437,196 $ -
========== ===========
See notes to condensed financial statements.
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Notes to Condensed Financial Statements
(UNAUDITED)
January 31, 1995
1. Basis of presentation
The accompanying unaudited condensed financial statements have
been prepared in accordance with generally accepted principles
for interim financial information. They do not include all
information and footnotes required by generally accepted
accounting principles for complete financial statements. However,
there has been no material change in the information disclosed in
the notes to financial statements included in the division's
financial statements for the year ended July 31, 1994. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included.
2. Subsequent event
On September 9, 1994, Newhouse Broadcasting Corporation and
subsidiaries and an affiliate (Vision Cable Communications, Inc. and
subsidiaries) entered into an agreement with Time Warner Entertainment
Company, L.P. The agreement stipulates that Newhouse Broadcasting
Corporation and subsidiaries and its affiliate will transfer their
cable system divisions, along with certain cable systems owned by Time
Warner Entertainment Company, L.P. to a newly formed partnership. The
transaction was completed on April 1, 1995.
<PAGE>
PAUL SCHERER & COMPANY LLP
CERTIFIED PUBLIC ACCOUNTANTS
330 MADISON AVENUE NEW YORK, NY 10017
TELEPHONE (212) 661-9300 FACSIMILE (212) 983-1921
Independent Auditor's Report
----------------------------
Board of Directors
Newhouse Broadcasting Corporation
We have audited the accompanying balance sheets of Newhouse
Broadcasting Cable Division of Newhouse Broadcasting Corporation
and subsidiaries as of July 31, 1994 and 1993, and the related
statements of operations and divisional equity and cash flows for
each of the three years in the period ended July 31, 1994. These
financial statements are the responsibility of the division's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audits to obtain reasonable assurance about
whether the financial statements are free from material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Newhouse Broadcasting Cable Division of Newhouse Broadcasting
Corporation and subsidiaries at July 31, 1994 and 1993, and the
results of its operations and its cash flows for each of the
three years in the period ended July 31, 1994, in conformity with
generally accepted accounting principles.
As discussed in Notes 1, 8 and 11 to the financial
statements, effective August 1, 1993, the division adopted
Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes."
As discussed in Note 2 to the accompanying financial
statements, on September 9, 1994, Newhouse Broadcasting
Corporation and subsidiaries entered into a partnership agreement
with another company for the purpose of merging certain cable
systems owned by both entities.
/s/ Paul Scherer & Company LLP
October 7, 1994
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Balance Sheets
July 31,
1994 1993
---- ----
Assets
------
Current assets
--------------
Cash $ 4,035,108 $ 4,618,969
Receivables:
Trade, less allowance for doubtful
accountsof $849,441 in 1994 and
$837,333 in 1993 7,084,015 6,292,208
Other 3,988,838 3,443,726
Refundable income taxes 2,373,871 709,960
Prepaid expenses and other 1,636,683 1,718,085
Deferred income taxes (Notes 1 and 8) 323,410 --
------------ ------------
Total current assets 19,441,925 16,782,948
--------------------
Property, plant and equipment - less
accumulated depreciation (Notes 1 and 4) 157,264,804 113,908,345
Notes receivable (Note 5) 5,705,066 5,358,399
Investments (Notes 1 and 6) 8,562,069 6,203,487
Intangible assets - less accumulated
amortization (Note 7) 67,811,218 70,325,948
Deferred income taxes (Notes 1 and 8) 1,432,824 406,490
Other assets 1,009,098 911,220
------------ ------------
Total assets $261,227,004 $213,896,837
------------ ============ ============
Liabilities and divisional equity
---------------------------------
Current liabilities
-------------------
Accounts payable $ 19,417,636 $ 12,825,820
Accrued liabilities:
Taxes, other than income taxes 5,485,239 4,725,002
Copyright fees 2,705,802 1,671,504
Payroll and related costs 2,071,859 1,057,038
Income taxes payable 1,123,934 32,055,567
Deferred revenue (Note 1) 1,902,855 2,218,767
------------ ------------
Total current liabilities 32,707,325 54,553,698
-------------------------
Long-term liabilities (Note 9) 2,423,731 823,859
----------------------------- ------------ ------------
Total liabilities 35,131,056 55,377,557
-----------------
Divisional equity 226,095,948 158,519,280
----------------- ------------ ------------
Total liabilities and divisional equity $261,227,004 $213,896,837
--------------------------------------- ============ ============
See accompanying Notes to Financial Statements.
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Statement of Operations and Divisional Equity
Years Ended July 31,
1994 1993 1992
---- ---- ----
Total operating revenues $318,224,972 $312,489,816 $287,493,010
- ------------------------ ------------ ------------ ------------
Operating expenses
- ------------------
Programming costs 72,444,428 67,038,684 60,892,411
Selling, general and administration 122,673,132 118,171,763 111,245,151
Depreciation and amortization 48,226,815 39,499,777 35,932,372
------------ ------------ ------------
Total operating expenses 243,344,375 224,710,224 208,069,934
------------------------ ------------ ------------ ------------
Operating income 74,880,597 87,779,592 79,423,076
----------------
Other (expense) (3,396,483) (2,701,461) (1,466,086)
------------ ------------ ------------
Income before taxes on income
and cumulative effect of
accounting change 71,484,114 85,078,131 77,956,990
-----------------
Taxes on income (Notes 1 and 8) 28,183,331 33,065,189 28,661,180
------------ ------------ ------------
Income before cumulative effect
of accounting change 43,300,783 52,012,942 49,295,810
--------------------
Cumulative effect of a change in
accounting for income taxes
(Notes 1 and 8) 692,680 -- --
------------ ------------ ------------
Net income 43,993,463 52,012,942 49,295,810
----------
Divisional equity - beginning of year 158,519,280 139,190,869 132,438,056
Distributions from (to) parent 23,583,205 (32,684,531) (42,542,997)
------------ ------------ ------------
Divisional equity - end of year $226,095,948 $158,519,280 $139,190,869
------------------------------- ============ ============ ============
See accompanying Notes to Financial Statements.
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Statement of Cash Flow
Years Ended July 31,
1994 1993 1992
---- ---- ----
Cash flows from operating activities:
- -------------------------------------
Net income $43,993,463 $52,012,942 $49,295,810
Adjustments to reconcile net income to
net cash provided by operating
activities:
-----------
Depreciation and amortization 48,226,815 39,499,777 35,932,372
Cumulative effect of change in
accounting for income taxes (692,680) -- --
Deferred income taxes (657,064) 11,358 (72,927)
Loss on disposal of property, plant
and equipment 1,010,181 -- --
Change in working capital items:
(Increase) decrease in receivables -
trade (791,807) (2,493,458) 1,154,779
(Increase) in receivables - other (545,112) (796,969) (284,263)
(Increase) in refundable income taxes (1,663,911) (183,482) (4,930)
Decrease (increase) in prepaid
expenses and other 81,402 (18,080) 575,843
(Increase) decrease in other assets (97,878) 79,359 (367,193)
Increase (decrease) in accounts
payable and accrued liabilities 9,401,172 625,234 (1,171,227)
(Decrease) increase in income taxes
payable (30,931,633) 3,704,130 2,002,188
(Decrease) increase in deferred
revenue (315,912) 1,480,767 (24,632)
Increase in long-term liabilities 1,599,872 149,420 674,439
----------- ----------- -----------
Net cash provided by operating
activities 68,616,908 94,070,998 87,710,259
---------- ----------- ----------- -----------
Cash flows provided by (used in)
investing activities:
---------------------
Capital expenditures (89,750,801)(52,403,365) (39,853,211)
(Increase) decrease in
investments - net (2,358,582) (369,201) 270,288
(Increase) in notes receivables (346,667) -- (1,626,917)
(Increase) in intangibles (327,924)(12,572,777) (262,583)
----------- ----------- -----------
Net cash used in investing
activities (92,783,974) (65,345,343)(41,472,423)
---------- ----------- ----------- -----------
Cash flows provided by (used in)
financing activities:
---------------------
Distributions from (to) parent 23,583,205 (32,684,531) (42,542,997)
----------- ----------- -----------
Net cash provided by (used in)
financing activities 23,583,205 (32,684,531) (42,542,997)
-------------------- ----------- ----------- -----------
Net (decrease) increase in cash (583,861) (3,958,876) 3,694,839
Cash - beginning of year 4,618,969 8,577,845 4,883,006
----------- ----------- -----------
Cash - end of year $ 4,035,108 $ 4,618,969 $ 8,577,845
------------------ =========== =========== ===========
- Continued -
See accompanying Notes to Financial Statements.
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Statement of Cash Flow
Years Ended July 31,
- Continued -
1994 1993 1992
---- ---- ----
Supplemental disclosures of cash flow
information
- -----------
Cash paid during the year for:
Interest $ 44,840 $ 6,666 $ 1,401
=========== =========== ===========
Income taxes $61,435,939 $29,656,677 $27,277,691
=========== =========== ===========
See accompanying Notes to Financial Statements.
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Notes to Financial Statements
1. Summary of significant accounting policies
------------------------------------------
Description of business The Newhouse Broadcasting Cable
Division of Newhouse Broadcasting Corporation and
subsidiaries ("the division") provides cable television
services and telecommunications services throughout the
United States. The division also provides advertising to
businesses and individuals in the areas in which it operates
cable systems.
Financial statement presentation The financial statements
include only those accounts related to the division's cable
operations after elimination of significant intercompany
transactions. All other accounts of Newhouse Broadcasting
Corporation and subsidiaries have not been included in the
financial statements since they are not directly related to
cable operations.
Credit risk A significant portion of the division's customer
base is concentrated within the local geographical areas of
the cable systems. The division generally extends credit to
its customers and the ultimate collection of accounts
receivable could be affected by the local economies.
Management performs continuous credit evaluations of its
customers and may require cash in advance or other special
arrangements for certain customers. Management does not
believe that there is any significant credit risk which
could have a material effect on the financial condition of
the division.
Property, plant and equipment Property, plant and equipment
is recorded at cost. Depreciation is calculated over the
estimated useful lives of the assets using straight-line and
accelerated methods for financial and income tax purposes.
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Notes to Financial Statements
Investments Investments in which the division has less than
a 20% interest are accounted for under the cost method.
Investment partnerships in which the division owns at least
a 20%, but not more than a 50% interest are accounted for
under the equity method.
Franchise costs Costs of obtaining franchises to operate
cable systems are amortized by the straight-line method over
the periods of the respective franchises. The remaining
lives of such franchises range from 1 to 19 years.
Goodwill The division has classified as goodwill the cost in
excess of fair market value of identifiable net assets
acquired in purchase transactions. Goodwill is being
amortized on a straight-line basis over a period of 10 to 40
years.
Deferred revenue Proceeds received from subscribers are
deferred at the time of receipt and are recorded as income
as services are provided.
Taxes on income In 1993, the division adopted Statement of
Financial Accounting Standards No. 109, "Accounting for
Income Taxes," which requires recognition of deferred tax
assets and liabilities for the expected future tax
consequences of events that have been included in the
financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to
reverse (Note 8).
Statement of cash flows For the purposes of the statement of
cash flows, the division considers all highly liquid
investments with a maturity of less than three months to be
cash equivalents.
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Notes to Financial Statements
2. Transfer of division to new partnership
---------------------------------------
On September 9, 1994, Newhouse Broadcasting Corporation and
subsidiaries and an affiliate (Vision Cable Communications,
Inc. and subsidiaries) entered into an agreement with Time
Warner Entertainment Company, L.P. The agreement stipulates
that Newhouse Broadcasting Corporation and subsidiaries and
its affiliate will transfer their cable system divisions,
along with certain cable systems owned by Time Warner
Entertainment Company, L.P. to a newly formed partnership.
The transaction is expected to close on April 1, 1995.
3. Acquisition
-----------
During 1993, the division purchased the remaining outside
interest in a cable subsidiary for $12,572,777.
4. Property, plant and equipment
-----------------------------
Property, plant and equipment consisted of the following:
July 31,
--------
1994 1993
---- ----
Land $ 3,454,455 $ 3,448,848
Buildings and improvements 20,237,377 20,176,824
Technical equipment 297,110,510 226,714,265
Other equipment, automobiles,
furniture and fixtures
and other 33,981,839 30,293,817
------------ ------------
Total cost 354,784,181 280,633,754
----------
Less: Accumulated depreciation 197,519,377 166,725,409
------------ ------------
Property, plant and
equipment - net $157,264,804 $113,908,345
--------------- ============= ============
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Notes to Financial Statements
Depreciation expense amounted to $45,384,161, $36,823,991
and $33,380,647 for the years ended July 31, 1994, 1993 and
1992, respectively.
5. Notes receivable
----------------
Notes receivable included the following:
July 31,
--------
1994 1993
---- ----
PPVN Holding Company - Series S
notes (a) $2,450,500 $2,450,500
PPVN Holding Company - Series A
note (a) 277,144 277,144
E! Entertainment Television,
Inc. (b) 2,977,422 2,630,755
---------- ----------
$5,705,066 $5,358,399
========== ==========
(a) The Series S notes bear simple interest of 7.5% and are
payable no later than 30 years from the date of
issuance. The Series S notes were issued as follows:
1988 $861,250
1989 585,000
1990 468,000
1991 260,000
1992 276,250
----------
$2,450,500
==========
The series A note was issued November 18, 1988 and
carries a 7.5% interest rate, compounded annually. All
principal and interest is payable no later than
November 18, 2018.
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Notes to Financial Statements
Both the Series S and Series A notes become payable in
each year when PPVN Holding Company generates a
positive cash flow in accordance with its by-laws. The
Series S notes have priority as to principal and
interest followed by the Series B notes, if any, and
the Series A note. The division has not accrued
interest on either the Series S or Series A notes and
to date, no interest or principal has been paid.
(b) The E! Entertainment Television, Inc. notes bear
interest at the applicable federal rate as set forth in
the Internal Revenue code. Principal and interest are
due on August 11, 2003, but may be repaid earlier if
certain conditions are met.
6. Investments
-----------
Investments (at cost) included the following:
July 31,
--------
1994 1993
---- ----
E! Entertainment Television, Inc. -
preferred stock - non-marketable
(7.0% owned) $4,350,577 $4,330,280
Partnerships and other (a) 4,211,492 1,873,207
---------- ----------
$8,562,069 $6,203,487
========== ==========
(a) Investment in partnerships and other includes the
division's 10.43% interest in PrimeStar Partners L.P.
The division has entered into a contract which
guarantees payment of up to $70,625,000 to finance part
of the total costs associated with the construction and
launch of two satellites for PrimeStar Partners L.P.
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Notes to Financial Statements
7. Intangible assets
-----------------
Intangible assets less accumulated amortization consisted of
the following:
July 31,
--------
1994 1993
---- ----
Goodwill $93,871,168 $93,608,404
Franchise costs 4,050,133 4,152,922
----------- -----------
Total 97,921,301 97,761,326
-----
Less: Accumulated amortization 30,110,083 27,435,378
----------- -----------
Intangible assets-net $67,811,218 $70,325,948
--------------------- =========== ===========
Amortization expense amounted to $2,842,654, $2,675,786 and
$2,551,725 for the years ended July 31, 1994, 1993 and 1992,
respectively.
8. Taxes on income
---------------
Taxes on income consisted of the following:
Years Ended July 31,
--------------------
1994 1993 1992
---- ---- ----
Current:
--------
Federal $ 25,171,766 $ 28,407,034 $ 26,691,145
State and local 3,668,629 4,646,797 2,042,962
------------ ------------ ------------
28,840,395 33,053,831 28,734,107
------------ ------------ ------------
Deferred:
--------
Federal (528,718) 11,358 (72,927)
State and local (128,346) -- --
------------ ------------ ------------
(657,064) 11,358 (72,927)
------------ ------------ ------------
Total $ 28,183,331 $ 33,065,189 $ 28,661,180
----- ============ ============ ============
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Notes to Financial Statements
Effective August 1, 1993, the division adopted the
provisions of Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes." The
cumulative effect of adopting this pronouncement as a change
in accounting principle resulted in an increase to net
income of $692,680 for the year ended July 31, 1994. Prior
years' financial statements were not restated to apply the
provisions of SFAS No. 109.
Deferred income taxes are provided for temporary differences
between the financial reporting bases and the tax bases of
the division's assets and liabilities.
Temporary differences which give rise to significant
deferred tax assets and liabilities at July 31, 1994 are as
follows:
Accrued pension cost $ 549,125
Postretirement benefits liability 426,296
Equity in partnership investments 457,401
Reserve for doubtful accounts 331,181
Accrued vacation pay (117,000)
Other 109,231
----------
$1,756,234
==========
Current $ 323,410
Long-term 1,432,824
----------
$1,756,234
==========
The division's taxable income is included in the
consolidated federal income tax return filed by Newhouse
Broadcasting Corporation and subsidiaries. Deferred income
tax expense is allocated to members of the group including
the division, by applying SFAS 109 to each member of the
group as if it were a separate taxpayer. Current income tax
expense is allocated to members of the group, including the
division, based on each member's proportionate share of
income (loss).
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Notes to Financial Statements
The income tax expense differs from the amount computed by
applying the federal statutory rate to income before taxes
on income. The difference is reconciled as follows:
Years Ended July 31,
--------------------
1994 1993 1992
---- ---- ----
Income before taxes on income $ 71,484,114 $ 85,078,131 $ 77,956,990
Federal statutory income tax rate 35% 34.58% 34%
------------ ------------ ------------
25,019,440 29,420,017 26,505,377
State and local income taxes,
net of federal effect 2,301,184 3,039,935 1,348,355
Other 862,707 605,237 807,448
----------- ----------- -----------
$28,183,331 $33,065,189 $28,661,180
=========== =========== ===========
9. Long-term liabilities
---------------------
Long-term liabilities consisted of the following:
July 31,
--------
1994 1993
---- ----
Accrued pension cost (Note 10) $1,391,829 $ 823,859
Postretirement benefits liability
(Note 11) 1,031,902 -
---------- ---------
$2,423,731 $ 823,859
========== =========
10. Pension plans
-------------
The division sponsors several pension plans which cover
substantially all employees. These plans provide
participating employees with retirement benefits in
accordance with benefit provision formulas which are based
on years of service and career pay. Funding is based on an
evaluation and review of the assets, liabilities and
requirements of each plan.
SEE TABLES ON FOLLOWING PAGES
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Notes to Financial Statements
The following table sets forth the plan's funded status and
amounts recognized in the division's balance sheets:
July 31,
--------
1994 1993
---- ----
Actuarial present value of
accumulated benefit obligations
Vested $(9,335,054) $(8,723,895)
Nonvested (140,572) (158,496)
------------ ------------
Total accumulated benefit obligations (9,475,626) (8,882,391)
- -------------------------------------
Projected compensation increases (3,662,990) (3,933,754)
------------ ------------
Projected accumulated benefit obligations (13,138,616) (12,816,145)
- -----------------------------------------
Plan assets at fair market value,
primarily fixed income securities, equities,
and short-term securities 9,050,780 7,991,538
------------ ------------
Projected accumulated benefit obligations in
excess of plan assets at fair
market value (4,087,836) (4,824,607)
------------
Unrecognized net transition obligation 700,153 777,221
Adjustment required to recognize minimum
liability - (5,198)
Unrecognized net loss 1,605,925 2,735,631
------------ ------------
Pension liability recognized in the balance
sheet $ (1,781,758) $ (1,316,953)
----- ============= ============
Pension liability recognized in the balance
sheet
Current $ (389,929) $ (493,094)
Long-term (1,391,829) (823,859)
------------ ------------
Net $ (1,781,758) $ (1,316,953)
--- ============ ============
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Notes to Financial Statements
Net periodic pension cost consisted of the following:
Years Ended July 31,
------------------------------
1994 1993 1992
-------- --------- ---------
Service cost-benefits earned during the
period $ 989,587 $ 741,452 $ 682,372
Interest cost on projected benefit
obligation 1,014,711 792,355 671,175
Actual return on plan assets (184,824) (951,346) (666,976)
Net amortization and deferral (395,340) 397,267 218,797
---------- --------- ---------
Net periodic pension cost $1,424,134 $ 979,728 $ 905,368
------------------------- ========== ========= =========
The discount rate, expected long-term rate of return on
assets and the rate of increase in future compensation used
in determining the plans' funded status was as follows:
July 31,
----------------------------
1994 1993 1992
------ ------ ------
Discount rate used to determine benefit
obligations 8.5% 8% 9%
Expected long-term rate of return on assets 9.5% 9.5% 9.5%
Rate of increase in future compensation 5% 5% 5%
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Notes to Financial Statements
11. Postretirement benefits other than pensions
-------------------------------------------
The division provides postretirement health care and life
insurance benefits to retirees and eligible dependents.
These benefits are funded as incurred from the general
assets of the division. Prior to 1994, the costs of retiree
health care and life insurance benefits were charged to
expense as premiums were paid (pay-as-you-go-basis).
Effective August 1, 1993, the division adopted Statement of
Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions."
This statement requires that the cost of postretirement
benefits be accrued during an employee's active working
career instead of recognizing these costs on the cash basis.
In accordance with SFAS No. 106, the transition obligation,
representing the unrecognized accumulated past-service
benefit obligation for all plan participants, may be
recognized as a cumulative effect of an accounting change or
may be amortized on a straight-line basis over the average
remaining service period of active plan participants. The
division has elected to amortize the $5,612,833 of
transitional obligation on a straight-line basis over 22
years. For the year 1994, the adoption of the statement
resulted in an increase in postretirement benefit costs of
$1,031,902. Prior years' financial statements were not
restated to apply the provisions of SFAS No. 106.
The following tables set forth the postretirement benefit
plans combined funding status reconciled to the balance
sheet at July 31, 1994 and net postretirement benefit cost
for the year then ended.
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Notes to Financial Statements
Funded status:
--------------
Accumulated postretirement benefit obligation (APBO)
attributable to:
----------------
Retiree $ 523,952
Fully eligible active participants 1,166,631
Other active participants 3,973,033
-----------
Accumulated postretirement benefit obligation 5,663,616
Unrecognized net loss 725,694
Unrecognized transition obligation (5,357,408)
-----------
Postretirement benefits liability $ 1,031,902
--------------------------------- ===========
Net postretirement benefit cost for the year ended July 31,
1994 consisted of the following components:
-------------------------------------------
Service cost - benefits earned during the year $ 363,165
Interest cost on projected benefit obligation 447,641
Net amortization and deferral 255,115
----------
Net postretirement benefit cost $1,065,921
------------------------------- ==========
The assumed weighted average discount rate used in
determining the actuarial present value of the accumulated
postretirement benefit obligation was 8.5%. The assumed
weighted average rate of increase in future compensation
levels related to pay-related life insurance benefits was
5%.
The assumed weighted average health-care cost trend rate in
1994 was approximately 11%, and is assumed to decrease to 7%
by the year 2009 and remain at that approximate level
thereafter. The effect of increasing the health-care cost
trend rate by one percentage point in each year would
increase the accumulated postretirement benefit obligation
at July 31, 1994 by $1,938,011 and the total service and
interest cost components of the 1994 net postretirement
benefit cost by $267,250.
The pay-as-you-go cost for postretirement benefits was
$34,018 for the year ended July 31, 1994.
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Notes to Financial Statements
12. Commitments and contingencies
-----------------------------
(a) The division is the defendant in several lawsuits,
which in the opinion of management, will not have a
material adverse effect upon the financial condition of
the division. No provision for any liability that may
result has been made in the financial statements.
(b) The division is obligated under long-term leases
expiring at various dates through 2010. Certain leases
contain renewal options. These leases generally provide
that the division is liable for increases in property
taxes and other operating expenses.
Minimum lease commitments under operating leases were as
follows:
Year Amount
---- ------
1995 $1,397,948
1996 1,174,773
1997 1,093,708
1998 999,478
1999 785,478
Thereafter 1,218,130
----------
$6,669,515
==========
Total rent expense was approximately $1,397,000, $1,573,000
and $1,310,000 for the years ended July 31, 1994, 1993 and
1992, respectively.
<PAGE>
Newhouse Broadcasting Cable Division of
Newhouse Broadcasting Corporation and Subsidiaries
Notes to Financial Statements
(c) At July 31, 1994 and 1993, the division was
contingently liable for approximately $17,700,000 and
$3,150,000, respectively, net of deposits paid under
contracts for the purchase of property, plant and
equipment, performance of services and programming
costs under various licensing agreements for which no
liability is shown on the balance sheets.
(d) Examination of the income tax returns of the division
has been completed (or in the case of income tax
returns which have not been examined, the period of
assessment of additional income tax has expired)
through at least the year 1983.
The division is contingently liable for additional income
taxes which may be assessed on examination of income tax
returns for subsequent years. Management believes that any
future assessments will not have a material adverse
effect upon the financial condition of the division. No
provision for any liability that may result has been
made in the financial statements.
(e) In October, 1992, the Cable Television Consumer
Protection and Competition Act was enacted, which among
other things, reimposed rate regulations on most cable
systems. The regulations under this Act were effective
September 1, 1993 and the required adjustments to
customer billings have been reflected in the operating
revenues of the company for the year ended July 31,
1994.
In February, 1994, the Federal Communications Commission
issued revised rules for calculating subscriber rates
which took effect in July 1994. The effects of these
revised rules on future operating revenues of the
company cannot be determined at this time.
EXHIBIT 99(c)
Vision Cable Division of
Vision Cable Communications, Inc.
and Subsidiaries
Financial Statements
<PAGE>
Vision Cable Division of
Vision Cable Communications, Inc. and Subsidiaries
Condensed Balance Sheet
(UNAUDITED)
March 31, 1995
Assets
Current assets
Cash $ 2,948,590
Receivables:
Trade, less allowance for doubtful accounts
of $297,322 4,101,162
Other 687,526
Refundable income taxes 45,537
Prepaid expenses and other 1,377,283
Deferred income taxes 162,679
------------
Total current assets 9,322,777
---------------------
Property, plant and equipment - less accumulated
depreciation 122,796,632
Notes receivable 1,319,500
Investments 10,032,352
Intangible assets - less accumulated amortization 2,777,580
Deferred income taxes 542,751
Other assets 178,712
------------
Total assets $146,970,304
------------ ============
Liabilities and divisional equity
Current liabilities
Accounts payable and accrued liabilities $ 27,568,629
Income taxes payable 3,982,482
Deferred revenue 1,423,201
------------
Total current liabilities 32,974,312
-------------------------
Long-term liabilities 1,094,381
------------
Total liabilities 34,068,693
-----------------
Divisional equity 112,901,611
-----------
Total liabilities and division equity $146,970,304
------------------------------------- ============
See notes to condensed financial statements.
<PAGE>
Vision Cable Division of
Vision Cable Communications, Inc. and Subsidiaries
Condensed Statements of Operations and Divisional Equity
(UNAUDITED)
Three Months Ended
March 31,
1995 1994
---- ----
Total operating revenues $ 55,316,795 $ 51,347,513
- ------------------------ ------------ -----------
Operating expenses
Programming costs 12,255,159 10,620,877
Selling, general and administrative 22,672,763 19,636,723
Depreciation and amortization 7,703,423 6,250,001
------------ ------------
Total operating expenses 42,631,345 36,507,601
------------------------ ------------ -----------
Operating income 12,685,450 14,839,912
----------------
Other income 9,314 181,089
------------ -----------
Income before taxes on income 12,694,764 15,021,001
-----------------------------
Taxes on income 5,331,801 6,060,667
------------ ------------
Net income 7,362,963 8,960,334
----------
Divisional equity - beginning of period 104,736,289 70,879,502
Distributions from (to) parent 802,359 (14,913,243)
------------ -----------
Divisional equity - end of period $112,901,611 $ 64,926,593
--------------------------------- =========== ===========
See notes to condensed financial statements.
<PAGE>
Vision Cable Division of
Vision Cable Communications, Inc. and Subsidiaries
Condensed Statements of Cash Flows
(UNAUDITED)
Three Months Ended
March 31,
1995 1994
---- ----
Cash flows from operating activities:
Net income $ 7,362,963 $ 8,960,334
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 7,703,423 6,250,001
Change in working capital items:
Decrease (increase) in receivables - trade 2,830,451 (181,834)
(Increase) decrease in receivables - other (15,621) 3,299,321
Decrease in refundable income taxes 528,337 -
(Increase) in prepaid expenses and other (93,715) (383,708)
(Increase) decrease in other assets (24,424) 12,843
Increase in accounts payable and
accrued liabilities 2,736,276 3,553,450
Increase in income taxes payable 3,707,302 1,668,474
Increase (decrease) in deferred revenue 313,434 (1,697)
Increase in long-term liabilities - 3,488
---------- ----------
Net cash provided by operating activities 25,048,426 23,180,672
----------------------------------------- ---------- ----------
Cash flows provided by (used in) investing activities:
Capital expenditures (23,631,755) (8,361,782)
(Increase) decrease in investments - net (899,392) 43,282
(Increase) in notes receivable - (136,111)
(Increase) in intangible assets (1,137) -
----------- ----------
Net cash used in investing activities (24,532,284) (8,454,611)
------------------------------------- ----------- -----------
Cash flows provided by (used in) financing activities:
Distributions from (to) parent 802,359 (14,913,243)
----------- -----------
Net cash provided by (used in)financing
activities 802,359 (14,913,243)
---------- ----------- -----------
Net increase (decrease) in cash 1,318,501 (187,182)
Cash - beginning of period 1,630,089 1,238,838
----------- -----------
Cash - end of period $ 2,948,590 $1,051,656
-------------------- =========== ===========
- Continued -
See notes to condensed financial statements.
<PAGE>
Vision Cable Division of
Vision Cable Communications, Inc. and Subsidiaries
Condensed Statements of Cash Flow
(UNAUDITED)
- Continued -
Three Months Ended
March 31,
1995 1994
---- ----
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ - $ -
========== ==========
Income taxes $1,096,162 $4,392,193
========== ==========
See notes to condensed financial statements.
<PAGE>
Vision Cable Division of
Vision Cable Communications, Inc. and Subsidiaries
Notes to Condensed Financial Statements
(UNAUDITED)
March 31, 1995
1. Basis of presentation
The accompanying unaudited condensed financial statements have
been prepared in accordance with generally accepted principles
for interim financial information. They do not include all
information and footnotes required by generally accepted
accounting principles for complete financial statements. However,
there has been no material change in the information disclosed in
the notes to financial statements included in the division's
financial statements for the year ended December 31, 1994. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included.
2. Subsequent event
On September 9, 1994, Vision Cable Communications, Inc. and
subsidiaries and an affiliate (Newhouse Broadcasting Corporation
and subsidiaries) entered into an agreement with Time Warner
Entertainment Company, L.P. The agreement stipulates that Vision
Cable Communications, Inc. and subsidiaries and it's affiliate
will transfer their cable system divisions, along with certain
cable systems owned by Time Warner Entertainment Company, L.P. to
a newly formed partnership. The transaction was completed on
April 1, 1995.
<PAGE>
PAUL SCHERER & COMPANY LLP
CERTIFIED PUBLIC ACCOUNTANTS
330 MADISON AVENUE - NEW YORK, NY 10017
TELEPHONE (212) 661-9300 FACSIMILE (212) 983-1921
Independent Auditor's Report
----------------------------
Board of Directors
Vision Cable Communications, Inc.
We have audited the accompanying balance sheets of Vision Cable
Division of Vision Cable Communications, Inc. and subsidiaries as of
December 31, 1994 and 1993, and the related statements of operations
and divisional equity and cash flows for each of the three years in
the period ended December 31, 1994. These financial statements are the
responsibility of the division's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Vision Cable Division of Vision Cable Communications, Inc. and
subsidiaries at December 31, 1994 and 1993, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 1994 in conformity with generally accepted
accounting principles.
As discussed in Notes 1 and 7 to the financial statements,
effective January 1, 1993, the division adopted Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes."
As discussed in Note 2 to the accompanying financial statements,
on September 9, 1994, Vision Cable Communications, Inc. and
subsidiaries entered into a partnership agreement with another company
for the purpose of merging certain cable systems owned by both
entities.
/s/ Paul Scherer & Company LLP
------------------------------
March 24, 1995
<PAGE>
Vision Cable Division of
Vision Cable Communications, Inc. and Subsidiaries
Balance Sheets
December 31,
1994 1993
---- ----
Assets
------
Current assets
- --------------
Cash $ 1,630,089 $ 1,238,838
Receivables:
Trade, less allowance for doubtful
accounts of $308,197 in 1994
and $265,705 in 1993 6,931,613 5,175,452
Other 671,905 3,819,205
Refundable income taxes 573,874 -
Prepaid expenses and other 1,283,568 914,718
Deferred income taxes (Notes 1 and 7) 162,679 125,349
----------- ----------
Total current assets 11,253,728 11,273,562
--------------------
Property, plant and equipment -
less accumulated depreciation
(Notes 1 and 3) 106,784,850 67,572,236
Notes receivable (Note 4) 1,319,500 2,889,269
Investments (Notes 1 and 5) 9,132,960 4,423,620
Intangible assets - less accumulated
amortization (Note 6) 2,859,893 3,382,948
Deferred income taxes (Notes 1 and 7) 542,751 407,359
Other assets 154,288 173,101
------------ -----------
Total assets $132,047,970 $90,122,095
------------ ============ ===========
Liabilities and divisional equity
---------------------------------
Current liabilities
- -------------------
Accounts payable $ 22,913,613 $13,126,711
Accrued liabilities 1,918,740 1,272,712
Income taxes payable 275,180 2,493,627
Deferred revenue (Note 1) 1,109,767 1,520,469
------------ -----------
Total current liabilities 26,217,300 18,413,519
-------------------------
Long-term liabilities (Note 8) 1,094,381 829,074
- ------------------------------ ------------ -----------
Total liabilities 27,311,681 19,242,593
-----------------
Divisional equity 104,736,289 70,879,502
- ----------------- ------------ -----------
Total liabilities and division equity $132,047,970 $90,122,095
------------------------------------- ============ ===========
See accompanying Notes to Financial Statements.
<PAGE>
Vision Cable Division of
Vision Cable Communications, Inc. and Subsidiaries
Statement of Operations and Divisional Equity
Years Ended December 31,
1994 1993 1992
---- ---- ----
Total operating revenues $209,210,836 $204,124,761 $189,623,925
- ------------------------ ----------- ------------ ------------
Operating expenses
- ------------------
Programming costs 45,142,397 42,358,755 39,279,633
Selling, general and
administrative 79,618,826 80,839,207 75,238,836
Depreciation and amortization 32,954,207 24,476,033 25,638,171
---------- ------------ ------------
Total operating expenses 157,715,430 147,673,995 140,156,640
------------------------ ----------- ----------- -----------
Operating income 51,495,406 56,450,766 49,467,285
----------------
Other (expense) income (874,951) 231,427 (381,127)
----------- ---------- ----------
Income before taxes on income
and cumulative effect of
accounting change 50,620,455 56,682,193 49,086,158
-----------------
Taxes on income (Notes 1 and 7) 21,392,993 21,516,128 18,493,033
---------- ---------- ----------
Income before cumulative
effect of accounting
change 29,227,462 35,166,065 30,593,125
------------------------
Cumulative effect of a change in
accounting for income taxes
(Notes 1 and 7) - 514,476 -
----------- ---------- ----------
Net income 29,227,462 35,680,541 30,593,125
----------
Divisional equity - beginning of year 70,879,502 58,473,393 65,830,516
Distributions from (to) parent 4,629,325 (23,274,432) (37,950,248)
---------- ----------- -----------
Divisional equity - end of year $104,736,289 $70,879,502 $58,473,393
------------------------------- ============= =========== ===========
See accompanying Notes to Financial Statements.
<PAGE>
Vision Cable Division of
Vision Cable Communications, Inc. and Subsidiaries
Statement of Cash Flows
Years Ended December 31,
1994 1993 1992
---- ---- ----
Cash flows from operating activities:
- -------------------------------------
Net income $29,227,462 $35,680,541 $30,593,125
Adjustments to reconcile net income
to net cash provided by operating
activities:
-----------
Depreciation and amortization 32,954,207 24,476,033 25,638,171
Cumulative effect of accounting change - (514,476) -
Deferred income taxes (172,722) (18,232) -
Change in working capital items:
(Increase) in receivables - trade (1,756,161) (579,592) (844,758)
Decrease (increase) in receivables
- other 3,147,300 (3,275,373) (171,464)
(Increase) decrease in refundable
income taxes (573,874) 45,909 159,665
(Increase) decrease in prepaid
expenses and other (368,850) 277,647 170,211
Decrease (increase) in other assets 18,813 2,391 (26,145)
Increase (decrease) in accounts
payable and accrued liabilities 10,432,929 5,356,442 (6,329,916)
(Decrease) increase in income
taxes payable (2,218,477) (12,900,384) 3,124,832
(Decrease) increase in deferred
revenue (410,702) 102,368 876,128
Increase in long-term liabilities 265,308 97,668 199,240
----------- ----------- -----------
Net cash provided by operating
activities 70,545,263 48,750,942 53,389,089
------------------------------ ----------- ----------- -----------
Cash flows provided by (used in)
investing activities:
---------------------
Capital expenditures (71,569,201) (23,646,858) (22,178,214)
(Increase) decrease in
investments - net (2,957,527) (683,814) 977,865
(Increase) in notes receivables (182,044) (56,034) (862,770)
Acquisition of contracts,
agreements and franchises (74,565) (162,433) (33,000)
----------- ----------- ----------
Net cash used in
investing activities (74,783,337) (24,549,139) (22,096,118)
---------------------- ------------ ------------ -----------
Cash flows provided by (used in)
financing activities:
---------------------
Distributions from (to) parent 4,629,325 (23,274,432) (37,950,248)
------------ ------------ -----------
Net cash provided by
(used in) financing
activities 4,629,325 (23,274,432) (37,950,248)
--------------------- ----------- ------------ -----------
Net increase (decrease) in cash 391,251 927,371 (6,657,278)
Cash - beginning of year 1,238,838 311,467 6,968,745
----------- ----------- -----------
Cash - end of year $ 1,630,089 $ 1,238,838 $ 311,467
------------------ =========== =========== ===========
- Continued -
See accompanying Notes to Financial Statements.
<PAGE>
Vision Cable Division of
Vision Cable Communications, Inc. and Subsidiaries
Statement of Cash Flows
Years Ended December 31,
- Continued -
1994 1993 1992
---- ---- ----
Supplemental disclosures of cash
flow information
----------------
Cash paid during the year for:
Interest $ 4,053 $ 31,163 $ 126,105
=========== =========== ===========
Income taxes $24,378,861 $34,400,913 $15,120,981
=========== =========== ===========
Supplemental disclosure of non-cash transactions
- ------------------------------------------------
On December 31, 1994,
the division exchanged notes
receivable and accrued interest
for additional shares of preferred
stock of an investee. (Note 5) $ 1,751,813 $ - $ -
=========== =========== ===========
See accompanying Notes to Financial Statements.
<PAGE>
Vision Cable Division of
Vision Cable Communications, Inc. and Subsidiaries
Notes to Financial Statements
1. Summary of significant accounting policies
------------------------------------------
Description of business. The Vision Cable Division of Vision Cable
Communications, Inc. and subsidiaries ("the division"), provides
cable service to subscribers in New Jersey, Florida, Louisiana,
North Carolina, South Carolina and Pennsylvania. The division
also provides advertising to businesses and individuals in the
areas in which it operates cable systems.
Financial statement presentation. The financial statements include
only those accounts related to the division's cable operations
after elimination of significant intercompany transactions. All
other accounts of Vision Cable Communications, Inc. and
subsidiaries have not been included in the financial statements
since they are not directly related to cable operations.
Credit risk. A significant portion of the division's customer base
is concentrated within the local geographical areas of cable
systems. The division generally extends credit to its customers
and the ultimate collection of accounts receivable could be
affected by the local economies. Management performs continuous
credit evaluations of its customers and may require cash in
advance or other special arrangements from certain customers.
Management does not believe that there is any significant credit
risk which could have a material effect on the financial
condition of the division.
Property, plant and equipment. Property, plant and equipment is
recorded at cost. Depreciation is calculated over the estimated
useful lives of the assets using straight-line and accelerated
methods for financial and income tax purposes.
<PAGE>
Vision Cable Division of
Vision Cable Communications, Inc. and Subsidiaries
Notes to Financial Statements
Investments. Investments in which the division has less than a 20%
interest are accounted for under the cost method. Investment
partnerships in which the division owns at least a 20%, but not
more than a 50% interest are accounted for under the equity
method.
Franchise costs. Costs of obtaining franchises to operate cable
systems are amortized by the straight-line method over the
periods of the respective franchises. The lives of such
franchises range from 10 to 25 years.
Goodwill. The division has classified as goodwill the cost in
excess of fair market value of identifiable net assets acquired
in purchase transactions. Goodwill is being amortized on a
straight-line basis over a period of 10 to 40 years.
Deferred revenue. Proceeds from subscribers are deferred at the
time of receipt and are recorded as income as services are
provided.
Taxes on income. In 1993, the division adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes," which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax
returns. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are
expected to reverse (Note 7).
Statement of cash flows. For the purposes of the statement of cash
flows, the division considers all highly liquid investments with
a maturity of less than three months to be cash equivalents.
<PAGE>
Vision Cable Division of
Vision Cable Communications, Inc. and Subsidiaries
Notes to Financial Statements
2. Transfer of division to new partnership
----------------------------------------
On September 9, 1994, Vision Cable Communications, Inc. and
subsidiaries and an affiliate (Newhouse Broadcasting Corporation
and subsidiaries) entered into an agreement with Time Warner
Entertainment Company, L.P. The agreement stipulates that
Newhouse Broadcasting Corporation and subsidiaries and its
affiliate will transfer their cable system divisions, along with
certain cable systems owned by Time Warner Entertainment Company,
L.P., to a newly formed partnership. The transaction is expected
to close on April 1, 1995.
3. Property, plant and equipment
-----------------------------
Property, plant and equipment consisted of the following:
December 31,
-----------------------
1994 1993
---- ----
Land $ 2,022,003 $ 2,008,903
Buildings and improvements 11,098,530 11,489,098
Leasehold improvements 2,138,192 1,311,681
Technical equipment, automobiles,
furniture and fixtures 248,922,971 267,507,316
----------- -----------
Total Cost 264,181,696 282,316,998
----------
Less: Accumulated depreciation 157,396,846 214,744,762
----------- -----------
Property, plant and equipment-net $106,784,850 $ 67,572,236
--------------------------------- =========== ===========
Depreciation expense amounted to $32,356,587, $23,878,413 and $24,700,071
for the years ended December 31, 1994, 1993 and 1992, respectively.
<PAGE>
Vision Cable Division of
Vision Cable Communications, Inc. and Subsidiaries
Notes to Financial Statements
4. Notes receivables
-----------------
Notes receivables included the following:
December 31,
--------------
1994 1993
---- ----
PPVN Holding Company - Series S notes (a) $1,319,500 $1,319,500
E! Entertainment (b) - 1,569,769
---------- ---------
$1,319,500 $2,889,269
========= =========
(a) The Series S notes bear simple interest of 7.5% and are payable no
later than 30 years from the date of issuance.
The Series S notes will become payable in each year when PPVN
Holding Company generates a positive cash flow, as defined in the
by-laws. The Board of Directors has the discretion to limit
repayments if funds are needed for working capital requirements.
The division has not accrued interest on these notes and no
interest or principal has been paid.
(b) Principal and interest were due on August 11, 2003. On December 31,
1994, the division exchanged $1,751,813 of notes receivable and
accrued interest from E! Entertainment Television, Inc. for
additional shares of class A preferred stock (Note 5).
<PAGE>
Vision Cable Division of
Vision Cable Communications, Inc. and Subsidiaries
Notes to Financial Statements
5. Investments
-----------
Investments (at cost) included the following:
December 31,
------------
1994 1993
---- ----
E! Entertainment Television, Inc. -
preferred stock - non-marketable
(3.8% owned) (Note 4(b)) $ 4,094,430 $ 2,331,687
Partnerships and other 5,038,530 2,091,933
------------ -----------
$ 9,132,960 $ 4,423,620
=========== ===========
6. Intangible assets
-----------------
Intangible assets less accumulated amortization consisted of the
following:
December 31,
------------
1994 1993
---- ----
Franchise, contracts and agreements $10,796,526 $10,706,577
Goodwill 1,154,680 1,154,680
Net transitional pension asset 2,641 18,025
----------- -----------
Total 11,953,847 11,879,282
-----
Less: Accumulated amortization 9,093,954 8,496,334
----------- -----------
Intangible assets - net $ 2,859,893 $ 3,382,948
----------------------- =========== ===========
Amortization amounted to $597,620, $846,508 and $938,100 for the
years ended December 31, 1994, 1993 and 1992, respectively.
<PAGE>
Vision Cable Division of
Vision Cable Communications, Inc. and Subsidiaries
Notes to Financial Statements
7. Taxes on income
---------------
Taxes on income consisted of the following:
Years Ended December 31,
------------------------
1994 1993 1992
---- ---- ----
Current
- -------
Federal $17,825,141 $18,539,010 $15,792,827
State and local 3,740,574 2,995,350 2,700,206
---------- ---------- ----------
21,565,715 21,534,360 18,493,033
---------- ---------- ----------
Deferred:
- ---------
Federal (140,928) (17,271) -
State and local (31,794) (961) -
----------- ------------ -----------
(172,722) (18,232) -
----------- ------------ -----------
Total $21,392,993 $21,516,128 $18,493,033
----- =========== =========== ===========
Effective January 1, 1993, the division adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." The cumulative effect of adopting this
pronouncement as a change in accounting principle resulted in an
increase to net income of $514,476 for the year ended December 31,
1993. Prior years' financial statements were not restated to apply the
provisions of SFAS No. 109.
Deferred income taxes are provided for temporary differences between
the financial reporting bases and the tax bases of the company's
assets and liabilities.
<PAGE>
Vision Cable Division of
Vision Cable Communications, Inc. and Subsidiaries
Notes to Financial Statements
Temporary differences which give rise to significant deferred tax
assets are as follows:
December 31,
------------
1994 1993
---- ----
Accrued pension cost $435,718 $264,642
Reserve for doubtful accounts 109,266 88,784
Other 160,446 179,282
------- -------
$705,430 $532,708
======= =======
Current $162,679 $125,349
Non-current 542,751 407,359
------- -------
$705,430 $532,708
======= =======
The division's taxable income is included in the consolidated
federal income tax return filed by Vision Cable Communications, Inc.
and subsidiaries with its ultimate parent, Advance Publications, Inc.
Deferred income tax expense is allocated to members of the group
including the division, by applying SFAS 109 to each member of the
group as if it were a separate taxpayer. Current income tax expense is
allocated to members of the group, including the division, based on
each member's proportionate share of income (loss).
The income tax expense differs from the amount computed by
applying the federal statutory rate to income before taxes on income.
The difference is reconciled as follows:
Years Ended December 31,
-------------------------
1994 1993 1992
---- ---- ----
Income before taxes on income $50,620,455 $56,682,193 $49,086,158
Federal statutory income tax rate 35% 35% 34%
---------- ---------- ----------
17,717,159 19,838,768 16,689,294
State and local income taxes, net of
federal effect 2,410,707 1,870,445 1,782,136
Non-deductible depreciation expense 1,211,754 - -
Other 53,373 (193,085) 21,603
---------- ---------- ----------
Total $21,392,993 $21,516,128 $18,493,033
----- ========== ========== ==========
<PAGE>
Vision Cable Division of
Vision Cable Communications, Inc. and Subsidiaries
Notes to Financial Statements
8. Long-term liabilities
---------------------
Long-term liabilities consisted of the following:
December 31,
-----------
1994 1993
---- ----
Accrued pension cost (Note 9) $1,094,381 $678,977
Other - 150,097
--------- -------
$1,094,381 $829,074
========= =======
9. Pension plans
-------------
The division sponsors several pension plans which cover
substantially all employees. These plans provide participating
employees with retirement benefits in accordance with benefit
provision formulas which are based on years of service and career
pay. Funding is based on an evaluation and review of the assets,
liabilities and requirements of each plan.
SEE TABLES ON FOLLOWING PAGES
<PAGE>
Vision Cable Division of
Vision Cable Communications, Inc. and Subsidiaries
Notes to Financial Statements
The following table sets forth the plan's funded status and amounts
recognized in the division's balance sheet:
December 31,
------------
1994 1993
---- ----
Actuarial present value of
accumulated benefit obligations
Vested $(4,682,268) $(4,040,688)
Nonvested (260,547) (308,079)
----------- -----------
Total accumulated benefit obligations (4,942,815) (4,348,767)
-------------------------------------
Projected compensation increases (2,171,942) (2,023,491)
----------- ----------
Projected accumulated benefit obligations (7,114,757) (6,372,258)
-----------------------------------------
Plan assets at fair market value,
primarily fixed income
securities, equities, and
short-term securities 4,196,966 3,856,540
--------- ---------
Projected accumulated benefit
obligations in excess of plan
assets at fair market value (2,917,791) (2,515,718)
---------------------------
Unrecognized net transition obligation 219,478 243,254
Adjustment required to recognize
minimum liability (2,641) (18,025)
Unrecognized net loss 1,606,573 1,611,512
---------- ---------
Pension liability recognized
in the balance sheet $(1,094,381) $ (678,977)
-------------------- =========== ===========
<PAGE>
Vision Cable Division of
Vision Cable Communications, Inc. and Subsidiaries
Notes to Financial Statements
Net periodic pension cost consisted of the following:
Years Ended December 31,
------------------------
1994 1993 1992
---- ---- ----
Service cost-benefits earned
during the period $577,671 $390,265 $348,578
Interest cost on projected
benefit obligation 491,541 364,082 300,720
Actual return on plan assets (482) (375,040) (280,016)
Net amortization and deferral (263,053) 106,047 55,865
--------- --------- --------
Net periodic pension cost $805,677 $485,354 $425,147
------------------------- ======= ======= =======
The discount rate, expected long-term rate on return on assets and the
rate of increase in future compensation used in determining the plans'
funded status were as follows:
December 31,
------------
1994 1993 1992
---- ---- ----
Discount rate used to determine benefit
obligations 7.75% 7.75% 9%
Expected long-term rate of return on assets 9.5% 9.5% 9.5%
Rate of increase in future compensation 5% 5% 5%
10. Commitments and contingencies
-----------------------------
a. The division is the defendant in several lawsuits, which in the
opinion of management, will not have a material adverse effect
upon the financial condition of the division. No provision for
any liability that may result has been made in the financial
statements.
<PAGE>
Vision Cable Division of
Vision Cable Communications, Inc. and Subsidiaries
Notes to Financial Statements
b. The division is obligated under long-term leases expiring at
various dates through 2018. These leases generally provide
that the division is liable for increases in property taxes
and other operating expenses.
Minimum lease commitments under operating leases were as
follows:
Year Amount
---- ------
1995 $1,238,647
1996 635,028
1997 318,629
1998 157,166
1999 2,100
Thereafter 289,000
---------
$2,640,570
=========
Total rent expense was approximately $1,455,000, $1,267,000
and $1,161,000 for the years ended December 31, 1994, 1993
and 1992, respectively.
c. Examination of the income tax returns of the company has
been completed (or in the case of income tax returns which
have not been examined, the period of assessment of
additional income tax has expired) through at least the year
1983.
The division is contingently liable for additional income taxes
which may be assessed on examination of income tax returns for
subsequent years. Management believes that any future assessments
will not have a material adverse effect upon the financial
condition of the division. No provision for any liability that
may result has been made in the financial statements.
EXHIBIT 99(d)
<PAGE>
Financial Statements of Cablevision Industries
Corporation (incorporated by reference from
pages 30 to 49 of the Annual Report on
Form 10-K for the year ended December 31, 1994
and from pages 2 to 11 of the Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1995)
EXHIBIT 99(e)
<PAGE>
CABLEVISION INDUSTRIES LIMITED PARTNERSHIP AND COMBINED ENTITIES
COMBINED BALANCE SHEETS
(All dollar amounts in 000's)
March 31, December 31,
1995 1994
---------- ------------
ASSETS (Unaudited)
Cash and cash equivalents $ 4,146 $ 1,455
Subscriber receivables, net of allowance for
doubtful accounts of $197 and $205 2,852 2,854
Prepaid expenses and other assets 7,523 3,413
Investment in cable television systems:
Property, plant and equipment, at cost 177,771 176,915
Less - accumulated depreciation (113,833) (111,476)
---------- ---------
63,938 65,439
Franchising costs, net 18,993 20,250
Intangible assets, net 12,615 13,130
---------- ---------
Total investment in cable television
systems 95,546 98,819
---------- ---------
$ 110,067 $ 106,541
========== =========
LIABILITIES AND STOCKHOLDER'S AND PARTNERS' DEFICIT
Senior bank debt $ 173,420 $ 173,420
Senior subordinated bank debt 53,019 53,690
Senior unsecured subordinated debt -
Series A Notes 672 564
Senior unsecured subordinated debt -
Series B Notes 5,000 5,000
Accounts payable and accrued expenses 14,688 14,288
Subscriber advance payments and deposits 2,074 2,970
Management fee payable 9,681 8,565
Commitments and contingencies
Stockholder's and partners' deficit:
Common stock 3 3
Additional paid-in capital 10,053 10,053
Accumulated deficit (13,836) (15,640)
Partners' deficit (144,707) (146,372)
---------- ----------
Total stockholder's and partners'
deficit (148,487) (151,956)
---------- ----------
$ 110,067 $ 106,541
========== =========
The accompanying notes to combined financial statements
are an integral part of these balance sheets.
<PAGE>
CABLEVISION INDUSTRIES LIMITED PARTNERSHIP
AND COMBINED ENTITIES
COMBINED STATEMENTS OF OPERATIONS (NOTE 1)
(All dollar amounts in 000's)
(Unaudited)
Three Months ended
March 31,
-----------------
1995 1994
---- ----
Revenues 22,311 21,816
------ ------
Costs and expenses:
Service costs 6,868 6,630
Selling, general and administrative expenses 3,903 3,836
Management fee expense 1,116 1,078
Depreciation and amortization 5,758 6,197
------ ------
17,645 17,741
------ ------
Operating income 4,666 4,075
Gain on sale of assets (2,747) -
------- ------
Interest expense:
Bank debt, net 3,836 3,827
Unsecured subordinated debt and other 108 70
------- ------
3,944 3,897
------- ------
Net income $ 3,469 $ 178
======= ======
The accompanying notes to combined financial statements
are an integral part of these statements.
<PAGE>
CABLEVISION INDUSTRIES LIMITED PARTNERSHIP
AND COMBINED ENTITIES
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S AND
PARTNERS'DEFICIT (NOTE 1)
(All dollar amounts in 000's)
(Unaudited)
Accumulated Partners'
Deficit Deficit
----------- -----------
BALANCE, December 31, 1994 $(15,640) $(146,372)
Net income 1,804 1,665
---------- ----------
BALANCE, March 31,1995 $(13,836) $(144,707)
========== ==========
The accompanying notes to combined financial statements
are an integral part of these statements.
<PAGE>
CABLEVISION INDUSTRIES LIMITED PARTNERSHIP
AND COMBINED ENTITIES
COMBINED STATEMENTS OF CASH FLOWS (NOTE 1)
(All dollar amounts in 000's)
(Unaudited)
Three Months Ended
March 31,
------------------
1995 1994
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,469 $178
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation and amortization 5,758 6,197
Net increase in subscriber receivables,
prepaid expenses and other assets,
accounts payable and accrued expenses,
subscriber advance payments and deposits
and management fee payable (3,488) (1,155)
-------- -------
Net cash flows from operating activities 5,739 5,220
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in cable television systems (4,104) (1,063)
Sale of cable television assets 1,682 -
-------- -------
Net cash flows from investing activities (2,422) (1,063)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior bank debt - (4,320)
Repayment of senior subordinated bank debt (671) -
Increase in senior unsecured subordinated
debt - Series A Notes 108 70
Other (63) (63)
--------- --------
Net cash flows from financing activities (626) (4,313)
--------- --------
Net increase (decrease) in cash 2,691 (156)
CASH AND CASH EQUIVALENTS, beginning of year 1,455 13,894
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 4,146 $13,738
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on bank debt
(net of amount capitalized) $4,344 $4,231
The accompanying notes to combined financial statements
are an integral part of these statements.
<PAGE>
CABLEVISION INDUSTRIES LIMITED PARTNERSHIP
AND COMBINED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
(Unaudited)
(1) Basis of Preparation of Combined Financial Statements
The accompanying combined financial statements include the
accounts of Cablevision Industries Limited Partnership ("CILP"),
Cablevision Industries of Tennessee L.P. ("TLP"), Cablevision
Industries of Florida, Inc. ("CIF"), Cablevision Industries of Middle
Florida, Inc. ("CIMF"), Cablevision of Fairhaven/Acushnet ("CFA"), a
partnership, and Cablevision Industries of Saratoga Associates
("CISA"), a partnership, collectively referred to as the "Company."
All of the stock and partnerships' interest of the Company are owned
directly or indirectly by one individual (the "Owner"). The
accompanying combined financial statements have been prepared to
comply with the terms of bank credit agreements referred to in Note 4.
All significant intercompany accounts and transactions related to
these entities have been eliminated in the combined financial
statements.
(2) Responsibility for Interim Financial Statements
The financial statements as of March 31, 1995 and 1994 are
unaudited; however, in the opinion of management, such statements
include all adjustments necessary for a fair presentation of the
results for the periods presented. The interim financial statements
should be read in conjunction with the Combined Financial Statements
and Notes for the fiscal year ended December 31, 1994. The results of
operations for the interim periods are not necessarily indicative of
the results that might be expected for future interim periods or for
the full year ended December 31, 1995.
(3) Bank Debt
(a) The Company had $173,420 outstanding at March 31, 1995 and
December 31, 1994, under a senior credit agreement (the
"Senior Agreement") with a group of banks. The outstanding
loans on March 31, 1995 are being repaid in 18 remaining
consecutive quarterly installments, ranging from 2.75% to
6.0% of the principal outstanding on December 31, 1992. The
Senior Agreement also provides for mandatory prepayments
from excess cash flow, as defined.
The Company has the option of paying interest at the prime
rate, the Eurodollar rate, or the CD rate, plus a margin
which is based on the attainment of certain financial
ratios. The effective interest rate at March 31, 1995 and
1994 was 6.88% and 4.44%, respectively, before giving effect
to interest rate exchange agreements discussed below. The
applicable margins for the respective borrowing rate options
have the following ranges:
Interest Rate Option Margin Range
-------------------- ------------
Prime rate 0% to 5/8%
Eurodollar rate 3/4% to 1-1/2%
CD rate 7/8% to 1-5/8%
<PAGE>
(b) The Company had $53,019 and $53,690 outstanding at March 31,
1995 and December 31, 1994, respectively, under a
subordinated credit agreement (the "Subordinated Agreement")
with a group of banks. The outstanding loans on March 31,
1995 will be repaid in 21 remaining consecutive quarterly
installments ranging from 1.25% to 10.0% of the principal.
The Subordinated Agreement also provides for mandatory
prepayments from excess cash flow, as defined.
The Company has the option of paying interest at either the
prime rate, the Eurodollar rate, or the CD rate, plus a
margin which is based on the attainment of certain financial
ratios. The effective interest rate at March 31, 1995 and
1994 was 7.88% and 5.38%, respectively, before giving effect
to interest rate exchange agreements discussed below. The
applicable margins for the respective borrowing rate options
have the following ranges:
Interest Rate Option Margin Range
-------------------- ------------
Prime rate 3/4% to 2-1/4%
Eurodollar rate 1-3/4% to 3-1/4%
CD rate 1-7/8% to 3-3/8%
The Senior and Subordinated Agreements contain restrictive
covenants regarding additional indebtedness, investments, guarantees,
loans, acquisitions, dividends and other distributions, and require
the maintenance of certain financial ratios. All ownership interests
of the Company have been pledged as security for the outstanding debt
under these Agreements. In addition, the Owner has guaranteed up to
$23,000 of the outstanding debt through the execution of two
assumption agreements.
The Company has entered into interest rate exchange
agreements (the "Swaps") with various banks pursuant to which the
interest rate on $75,000 is fixed at a weighted average swap rate of
6.09%, plus the weighted average applicable margin over the Eurodollar
rate option under the Senior and Subordinated Agreements. Under the
terms of the Swaps, which expire in 1996 through 1998, the Company is
exposed to credit loss in the event of nonperformance by the other
parties to the Swaps. However, the Company does not anticipate
nonperformance by the counterparties.
(4) Senior Unsecured Subordinated Debt - Series A Notes
The senior unsecured subordinated Series A notes are payable
to Cablevision Industries Corporation ("CVI"), an affiliated company,
the Owner and partners. Cash interest payments may be made as
permitted under the Senior and Subordinated Agreements at an annual
interest rate which cannot exceed the lesser of 10% or the effective
interest rate on the senior subordinated bank debt. The interest rate
at March 31, 1995 and 1994 was 7.0% and 4.5%, respectively.
(5) Senior Unsecured Subordinated Debt - Series B Notes
The senior unsecured subordinated Series B notes are payable
to CVI, the Owner and partners. The annual interest rate cannot exceed
the lesser of 10% or the effective interest rate on the senior
subordinated bank debt. The interest rate at March 31, 1995 and 1994
was 7.0% and 4.5%, respectively. Principal and interest payments
cannot be made until all debt outstanding under the Senior and
Subordinated Agreements is paid in full. Any debt outstanding is
subordinated to debt outstanding under the Senior and Subordinated
Agreements.
<PAGE>
(6) Related Party Transactions
The Company incurred management fees of approximately $1,116
and $1,078 in the three months ended March 31, 1995 and 1994,
respectively.
(7) Commitments and Contingencies
Recent Regulation
The Federal Communications Commission (the "FCC") has
adopted regulations implementing almost all of the requirements of the
Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act"), and it is in the process of completing the
remaining rulemaking proceedings. The FCC promulgated regulations
governing the rates charged to subscribers for basic service, cable
programming service (other than premium, pay-per-view and a la carte
services) and equipment, and ordered a freeze on these rates from
April 5, 1993 until May 15, 1994.
The FCC adopted a benchmark methodology as the principal
method of regulating basic service and cable programming service
rates. Under the FCC's initial regulations, cable operators whose
rates are above FCC benchmark levels would be required to reduce those
rates to the benchmark level or by up to 10% of the rates in effect on
September 30, 1992, whichever reduction was less, adjusted for
equipment costs and for inflation and channel modifications occurring
subsequent to September 30, 1992. On February 22, 1994, the FCC
adopted a rate order which revised its benchmark regulatory scheme.
This revision generally requires rate reductions, absent a successful
cost-of-service showing, of 17% of September 30, 1992 rates, adjusted
for inflation, channel modifications, equipment costs and increases in
programming costs. The revised regulations became effective for the
Company on July 15, 1994. Rate reductions will not be required if a
cable operator can demonstrate that the rates for basic and other
regulated programming services are justified and reasonable using FCC
interim cost-of-service guidelines. The FCC will consider individual
showings to rebut certain presumptions made under these guidelines.
The Company cannot predict the ultimate outcome of the FCC's
cost-of-service rulemaking.
<PAGE>
Rate increases for existing regulated services will be
limited to an inflation-indexed amount plus increases in certain
external costs which are beyond the cable operator's control, such as
taxes and programming costs. Operators are able to increase rates
under the benchmark regulatory scheme for new channels pursuant to an
FCC-prescribed formula, which includes a 7.5% mark-up on new
programming services. In addition to this formula for calculating the
permissible rate for new services, the FCC adopted on November 10,
1994 a three-year flat fee mark-up plan for charges relating to new
channels of cable programming services.
In response to the 1992 Cable Act the Company repackaged
certain existing cable services, added new channels, introduced a la
carte services and adjusted rates for programming services and
equipment. The FCC reviewed the a la carte packages offered in certain
of the Cablevision systems to determine whether such packages should
be subject to rate regulations and concluded that these a la carte
packages qualify as "new product tiers" ("NPTs") which are not subject
to rate regulation. Because the a la carte packages offered in the
systems reviewed by the FCC are substantially identical to those
offered in most of the Company's systems, the Company believes that
all of such packages will qualify as NPTs that are not subject to rate
regulation. On November 10, 1994, the FCC adopted regulations
permitting cable operators to create NPTs that will not be subject to
rate regulation upon compliance with certain conditions. Beyond its
affect on a la carte service packages as described above, the FCC's
NPT decision also provides the Company with additional pricing
flexibility by affording the option of offering new services at rates
that are not regulated under the FCC's rules.
The Company continues to develop various strategies to
minimize the adverse impact of rate regulations and the other
provisions of the 1992 Cable Act on the Company's results of
operations. Such strategies to date have included: (i) placing an
increased emphasis on developing revenues from sources that are not
subject to rate regulation, including advertising, premium programming
services, NPT services and pay-per-view programming services; (ii)
expanding channel capacity to add new unregulated services; and (iii)
charging for certain equipment and installation services previously
offered without charge or at discounted prices. In addition, only 31 %
of the Company's subscribers are in communities that have sought FCC
certification to regulate basic service rates, and the Company has
received complaints concerning its cable programming rates in
communities representing only approximately 29% of its subscribers.
The Company elected to use both benchmark and cost-of-service
methodology to justify its rates. The Company decided to use
cost-of-service standards only after extensive evaluation and legal
analyses by experts in the rate regulation area, and is justifying its
regulated rates for approximately 27% of the Company's subscribers
using such cost-of-service standards. Having decided to pursue the
cost-of-service process, the Company added the resources and availed
itself of the expertise needed to support the filings. The Company has
reached agreements with local and state regulatory authorities in most
of these cost-of-service proceedings regarding the prices that the
Company is permitted to charge for basic service. These agreements
allow the Company to charge its existing basic rates and to increase
such rates under the FCC's "going forward" rules. The Company may not
be able to justify its rates in the remaining cost-of-service
showings and accordingly has recorded reserves it believes are
adequate if the Company is unsuccessful in justifying such rates. No
assurances can be given that the Company will be able to develop and
successfully implement its other rate regulation strategies in order
to minimize the potentially material adverse impact of the FCC's rate
regulations on its results of
<PAGE>
operations. Additionally, the FCC's rate regulations and
policies may be subject to further interpretation, clarification and
modification by the FCC and the courts.
The Company believes that the regulation of its industry,
including the rates charged for regulated services under present FCC
rules and the cable industry's restructuring of rates and services in
response to the 1992 Cable Act, remains a matter of interest to
Congress, the FCC and other regulatory authorities. Congress is
currently considering legislation which would amend the rate
regulation provisions of the 1992 Cable Act. Under the proposed
legislation, the FCC could only consider a rate for cable programming
services to be unreasonable if it substantially exceeds the national
average rate for comparable cable programming services. A provision of
another bill would eliminate rate regulation of cable programming
services within a cable operator's franchise area if a common carrier
is authorized to provide video programming directly to subscribers
pursuant to a franchise, upon authorization by the FCC to a common
carrier to provide video dialtone service or when the FCC has
completed all actions necessary to prescribe regulations relating to
video platforms. There can be no assurance as to what, if any, future
actions such legislative and regulatory authorities may take or the
effect thereof on the Company.
Pending Merger
On February 6, 1995, CVI entered into an Agreement and Plan
of Merger (the "CVI Merger Agreement") with Time Warner Inc. ("Time
Warner"), the majority stockholder of CVI and a direct, wholly-owned
subsidiary of Time Warner. In connection with the CVI Merger
Agreement, two additional merger agreements and a purchase agreement
were entered into providing for the acquisition of the Company by Time
Warner. The closing of the merger and acquisition transactions with
Time Warner is subject to customary conditions for transactions of
this type, including certain stockholder and regulatory approvals, as
specified in the respective agreements.
(8) Sale of Certain Cable Assets
On February 27, 1995, the Company sold certain assets used
in providing cable television services in Orange County Florida for a
purchase price of $4,856. Approximately 4,800 subscribers were sold as
a result of this transaction.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Partners of
Cablevision Industries Limited Partnership
and Combined Entities:
We have audited the accompanying combined balance sheets of
Cablevision Industries Limited Partnership and Combined
Entities (as described in Note 1 to the combined financial
statements) as of December 31, 1994 and 1993, and the
related combined statements of operations, changes in
stockholder's and partners' deficit and cash flows for each
of the three years in the period ended December 31, 1994.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Cablevision Industries Limited Partnership and
Combined Entities as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of
the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut,
March 1, 1995
<PAGE>
CABLEVISION INDUSTRIES LIMITED PARTNERSHIP
AND COMBINED ENTITIES
COMBINED BALANCE SHEETS (NOTE 1)
(All dollar amounts in 000's)
December 31,
----------------
ASSETS 1994 1993
------ ---- ----
Cash and cash equivalents (Note 2) $ 1,455 $ 13,894
Subscriber receivables, net of allowance for doubtful
accounts of $205 and $190 2,854 2,783
Prepaid expenses and other assets (Note 10) 3,413 2,541
Investment in cable television systems (Notes 2
and 3):
Inventory and construction in progress 4,011 2,555
Property, plant and equipment, at cost 172,904 164,779
--------- ---------
176,915 167,334
Less - accumulated depreciation (111,476) (95,437)
--------- ---------
65,439 71,897
Franchising costs, net of accumulated amortization of
$30,843 and $36,870 20,250 24,717
Intangible assets, net of accumulated amortization of
$16,405 and $34,048 13,130 17,044
--------- --------
Total investment in cable television systems 98,819 113,658
--------- --------
$ 106,541 $132,876
========= ========
LIABILITIES AND STOCKHOLDER'S AND PARTNERS' DEFICIT
Senior bank debt (Note 4) $ 173,420 $ 205,200
Senior subordinated bank debt (Note 4) 53,690 55,000
Senior unsecured subordinated debt - Series A Notes
(Note 5) 564 282
Senior unsecured subordinated debt - Series B Notes
(Note 6) 5,000 5,000
Accounts payable and accrued expenses 14,288 12,059
Subscriber advance payments and deposits 2,970 2,803
Management fee payable (Note 7) 8,565 4,216
Commitments and contingencies (Note 9)
Stockholder's and partners' deficit:
Common stock (Note 11) 3 3
Additional paid-in captial 10,053 10,053
Accumulated deficit (15,640) (17,913)
Partners' deficit (146,372) (143,827)
--------- ---------
Total stockholder's and partners' deficit (151,956) (151,684)
--------- ---------
$ 106,541 $ 132,876
========= =========
The accompanying notes to combined financial statements
are an integral part of these balance sheets.
<PAGE>
CABLEVISION INDUSTRIES LIMITED PARTNERSHIP
AND COMBINED ENTITIES
COMBINED STATEMENTS OF OPERATIONS (NOTE 1)
(All dollar amounts in 000's)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Revenues $ 88,560 $ 84,760 $ 77,921
-------- -------- --------
Costs and expenses:
Service costs 26,554 24,979 23,180
Selling, general and administrative
expenses 16,321 15,427 14,539
Management fee expense (Note 7) 4,349 4,216 3,895
Depreciation and amortization (Notes 2
and 3) 25,204 29,697 30,283
-------- -------- --------
Operating income 16,132 10,441 6,024
-------- -------- --------
Interest expense (Notes 2, 4, 5 and 6):
Bank debt, net 16,122 16,474 20,416
Unsecured subordinated debt and other 282 282 668
-------- -------- --------
16,404 16,756 21,084
-------- -------- --------
Net loss $ (272) $ (6,315) $(15,060)
======== ======== ========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these statements.
<PAGE>
CABLEVISION INDUSTRIES LIMITED PARTNERSHIP
AND COMBINED ENTITIES
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S AND
PARTNERS' DEFICIT (NOTE 1)
(All dollar amounts in 000's)
Accumulated Partners'
Deficit Deficit
----------- ----------
BALANCE, January 1, 1992 $(20,426) $(119,939)
Net income (loss) 432 (15,492)
-------- ---------
BALANCE, December 31, 1992 (19,994) (135,431)
Net income (loss) 2,081 (8,396)
-------- ---------
BALANCE, December 31, 1993 (17,913) (143,827)
Net income (loss) 2,273 (2,545)
-------- ---------
BALANCE, December 31, 1994 $(15,640) $(146,372)
======== =========
<PAGE>
CABLEVISION INDUSTRIES LIMITED PARTNERSHIP
AND COMBINED ENTITIES
COMBINED STATEMENTS OF CASH FLOWS (NOTE 1)
(All dollar amounts in 000's)
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (272) $ (6,315) $(15,060)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 25,204 29,697 30,283
Net increase (decrease) in subscriber
receivables, prepaid expenses and
other assets, accounts payable and
accrued expenses, subscriber advance
payments and deposits and management
fee payable 5,802 4,850 (4,310)
-------- -------- --------
Net cash flows from operating
activities 30,734 28,232 10,913
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in cable television systems (10,265) (6,841) (7,680)
Acquisition of cable television system - - (1,000)
-------- -------- --------
Net cash flows from investing (10,265) (6,841) (8,680)
activities -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in senior bank debt - - 17,000
Repayment of senior bank debt (31,780) (10,800) (16,000)
Increase in senior subordinated bank debt - - 10,000
Repayment of senior subordinated bank debt (1,310) - (5,000)
Repayment of other debt - - (788)
Increase (decrease) in senior unsecured
subordinated debt - Series A Notes 282 282 (1,063)
Decrease in senior unsecured subordinated
debt - Series B Notes - - (4,000)
Other (100) (110) (200)
-------- -------- --------
Net cash flows from financing activities (32,908) (10,628) (51)
-------- -------- --------
Net (decrease) increase in cash (12,439) 10,763 2,182
CASH AND CASH EQUIVALENTS, beginning of year 13,894 3,131 949
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 1,455 $ 13,894 $ 3,131
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on bank debt (net of amount
capitalized) $ 15,975 $ 16,098 $ 22,100
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these statements.
<PAGE>
CABLEVISION INDUSTRIES LIMITED PARTNERSHIP
AND COMBINED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
(1) Basis of Preparation of Combined Financial Statements
The accompanying combined financial statements
include the accounts of Cablevision Industries Limited
Partnership ("CILP"), Cablevision Industries of Tennessee
L.P. ("TLP"), Cablevision Industries of Florida, Inc.
("CIF"), Cablevision Industries of Middle Florida, Inc.
("CIMF"), Cablevision of Fairhaven/Acushnet ("CFA"), a
partnership, and Cablevision Industries of Saratoga
Associates ("CISA"), a partnership, collectively referred to
as the "Company." All of the stock and partnerships'
interest of the Company are owned directly or indirectly by
one individual (the "Owner"). The accompanying combined
financial statements have been prepared to comply with the
terms of bank credit agreements referred to in Note 4. All
significant intercompany accounts and transactions related
to these entities have been eliminated in the combined
financial statements.
(2) Significant Accounting Policies
Cash equivalents
Cash equivalents consist of short-term investments
with original maturities less than or equal to three months.
Property, plant and equipment
Property, plant and equipment is recorded at
purchased and capitalized cost. Capitalized costs
principally consist of employee costs and interest on funds
borrowed during construction. Capitalized labor amounted to
approximately $1,252, $1,076 and $1,077 in 1994, 1993 and
1992, respectively. Capitalized interest amounted to
approximately $237, $190 and $276 in 1994, 1993 and 1992,
respectively. Cable systems' materials and supplies of
approximately $3,059 and $2,366 at December 31, 1994 and
1993, respectively, are stated at the lower of cost or
market and are included in inventory and construction in
progress. Repairs and maintenance are charged to
operations, and replacements, renewals and additions are
capitalized. At the time of retirements, sales or other
<PAGE>
dispositions of property, the original cost and related
accumulated depreciation are written off.
Franchising costs
Franchising costs include the assigned fair value
of the franchises from purchased cable television systems
and the costs of original franchise applications which are
deferred until the franchise has been granted, at which time
such costs are amortized. All costs relating to
unsuccessful franchise applications are charged to expense
when it is determined that the efforts to obtain the
franchise were unsuccessful. Franchising costs are
amortized on a straight line basis over the lives of the
current franchises, which range from five to thirty years.
Intangible assets
Intangible assets include goodwill, which is being
amortized over fifteen years, and subscriber lists, which
are being amortized over four years, the estimated average
period that a subscriber is expected to remain connected to
one of the Company's cable television systems.
Income taxes
Since CILP, TLP, CISA and CFA are partnerships,
and CIF and CIMF are S Corporations, they are not subject to
federal income taxes and no provision for income taxes
relating to their operations has been reflected in the
accompanying combined financial statements. The partners
and stockholders of the applicable entities are required to
report their share of income or loss in their respective
income tax returns.
(3) Investment in Property, Plant and Equipment
As of December 31, 1994 and 1993, property, plant
and equipment consisted of:
1994 1993
---- ----
Land $ 832 $ 832
Buildings and leasehold
improvements 3,218 3,036
Cable systems, equipment
and subscriber devices 162,564 154,736
Vehicles 3,908 3,838
Furniture, fixtures and
office equipment 2,382 2,337
------- -------
$172,904 $164,779
======= =======
Depreciation is calculated on a straight line
basis over the following useful lives:
Buildings 45 years
Leasehold improvements Life of respective lease
Cable systems, equipment
and subscriber devices 5 to 10 years
Vehicles 5 years
Furniture, fixtures and
office equipment 5 to 10 years
<PAGE>
(4) Bank Debt
(a) The Company had $173,420 and $205,200 outstanding at December 31,
1994 and 1993, respectively, under a senior credit agreement (the
"Senior Agreement") with a group of banks. The outstanding loans
on December 31, 1994 are being repaid in 18 remaining consecutive
quarterly installments, ranging from 2.75% to 6.0% of the
principal outstanding on December 31, 1992. The Senior Agreement
also provides for mandatory prepayments from excess cash flow, as
defined. The Company made an optional prepayment of $11,880 in
1994. The Company does not expect to make a mandatory prepayment
in 1995.
The Company has the option of paying interest at the prime rate,
the Eurodollar rate, or the CD rate, plus a margin which is based
on the attainment of certain financial ratios. The effective
interest rate at December 31, 1994 and 1993 was 6.67% and 4.37%,
respectively, before giving effect to interest rate exchange
agreements discussed below. The applicable margins for the
respective borrowing rate options have the following ranges:
Interest Rate Option Margin Range
-------------------- ------------
Prime rate 0% to 5/8%
Eurodollar rate 3/4% to 1- 1/2%
CD rate 7/8% to 1-5/8%
(b) The Company had $53,690 and $55,000 outstanding at December 31,
1994 and 1993, respectively, under a subordinated credit
agreement (the "Subordinated
<PAGE>
Agreement") with a group of banks. The outstanding loans on
December 31, 1994 will be repaid in 22 consecutive quarterly
installments ranging from 1.25% to 10.0% of the principal, with
the first installment due on March 31, 1995. The Subordinated
Agreement also provides for mandatory prepayments from excess
cash flow, as defined. The Company does not expect to make a
mandatory prepayment in 1995.
The Company has the option of paying interest at either the prime
rate, the Eurodollar rate, or the CD rate, plus a margin which is
based on the attainment of certain financial ratios. The
effective interest rate at December 31, 1994 and 1993 was 7.68%
and 5.25%, respectively, before giving effect to interest rate
exchange agreements discussed below. The applicable margins for
the respective borrowing rate options have the following ranges:
Interest Rate Option Margin Range
-------------------- ---------------
Prime rate 3/4% to 2-1/4%
Eurodollar rate 1-3/4% to 3-1/4%
CD rate 1-7/8% to 3-3/8%
The Senior and Subordinated Agreements contain restrictive covenants
regarding additional indebtedness, investments, guarantees, loans,
acquisitions, dividends and other distributions, and require the
maintenance of certain financial ratios. All ownership interests of the
Company have been pledged as security for the outstanding debt under these
Agreements. In addition, the Owner has guaranteed up to $23,000 of the
outstanding debt through the execution of two assumption agreements.
The stated maturities of all debt outstanding as of December 31, 1994,
other than the senior unsecured subordinated debt, are as follows:
1995 $ 14,630
1996 35,740
1997 47,130
1998 62,840
1999 57,080
Thereafter 9,690
--------
$227,110
========
<PAGE>
The Company has entered into interest rate exchange agreements (the
"Swaps") with various banks pursuant to which the interest rate on $135,000
is fixed at a weighted average swap rate of 6.32%, plus the weighted
average applicable margin over the Eurodollar rate option under the Senior
and Subordinated Agreements. Under the terms of the Swaps, which expire in
1995 through 1998, the Company is exposed to credit loss in the event of
nonperformance by the other parties to the Swaps. However, the Company does
not anticipate nonperformance by the counterparties.
(5) Senior Unsecured Subordinated Debt - Series A Notes
The senior unsecured subordinated Series A notes are payable to
Cablevision Industries Corporation ("CVI"), an affiliated company, the
Owner and partners. Cash interest payments may be made as permitted under
the Senior and Subordinated Agreements at an annual interest rate which
cannot exceed the lesser of 10% or the effective interest rate on the
senior subordinated bank debt. The interest rate at December 31, 1994 and
1993 was 4.5%.
(6) Senior Unsecured Subordinated Debt - Series B Notes
The senior unsecured subordinated Series B notes are payable to
CVI, the Owner and partners. The annual interest rate cannot exceed the
lesser of 10% or the effective interest rate on the senior subordinated
bank debt. The interest rate at December 31, 1994 and 1993 was 4.5%.
Principal and interest payments cannot be made until all debt outstanding
under the Senior and Subordinated Agreements is paid in full. Any debt
outstanding is subordinated to debt outstanding under the Senior and
Subordinated Agreements.
(7) Related Party Transactions
The Company incurred management fees of approximately $4,349,
$4,216 and $3,895 in 1994, 1993 and 1992, respectively, for management
services provided by CVI.
Net transfers in of approximately $35 and $194 of certain
construction inventory and converters were made, at cost, between the
Company and CVI in 1994 and 1993, respectively.
<PAGE>
(8) Profit Sharing Plan
Substantially all of the employees of the Company are eligible to
participate in a profit sharing plan of an affiliate. The plan provides
that the Company may contribute, at the discretion of the affiliate's board
of directors, an amount up to 15% of compensation for all eligible
participants out of its accumulated earnings and profits, as defined.
Profit sharing expense amounted to approximately $311, $326 and $277 in
1994, 1993 and 1992, respectively.
(9) Commitments and Contingencies
Under various lease and rental agreements for offices, warehouses
and computer terminals, the Company had rental expense of approximately
$347, $354 and $358 in 1994, 1993 and 1992, respectively. Future minimum
annual rental payments under noncancellable leases are as follows:
1995 $206
1996 124
1997 17
1998 15
1999 15
In addition, the Company rents utility poles in its operations
generally under short-term arrangements, but the Company expects these
arrangements to recur. Total rental expense for utility poles was
approximately $896, $859 and $790 in 1994, 1993 and 1992, respectively.
Recent Regulation
The Federal Communications Commission (the "FCC") has adopted
regulations implementing almost all of the requirements of the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act"), and it is in the process of completing the remaining rulemaking
proceedings. On April 1, 1993, the FCC adopted regulations, effective
September 1, 1993, governing the rates charged to subscribers for basic
service, cable programming service (other than premium, pay-per-view and a
la carte services) and equipment, and ordered a freeze on these rates from
April 5, 1993 until May 15, 1994.
<PAGE>
The FCC adopted a benchmark methodology as the principal method
of regulating basic service and cable programming service rates. Cable
operators with rates above the allowable level under the FCC's benchmark
methodology may justify such rates using cost-of-service principles. Local
franchising authorities may not elect cost-of-service as their primary form
of rate regulation but must apply the FCC benchmark rules unless the
operator justifies its basic rates on a cost-of-service basis. Under the
FCC's initial regulations, in order to avoid refund liability, cable
operators whose rates are above FCC benchmark levels would be required,
absent a successful cost-of-service showing, to reduce those rates to the
benchmark level or by up to 10% of the rates in effect on September 30,
1992, whichever reduction was less, adjusted for inflation and channel
modifications occurring subsequent to September 30, 1992, and equipment
costs. Refund liability for basic service rates is limited to a one-year
period, initially calculated from the effective date of the FCC's initial
rate regulations. Refund liability for cable programming service rates is
calculated from the date a complaint is filed with the FCC until the refund
is implemented. A complaint alleging an unreasonable rate for a cable
programming service in effect on September 1, 1993 must have been filed by
February 28, 1994. After that date, a complaint regarding a rate increase
for a cable programming service must be filed with the FCC within 45 days
from the date that the complainant receives the bill for such service.
On February 22, 1994, the FCC adopted several rate orders,
including an order which revised its benchmark regulatory scheme. This
revision generally requires rate reductions, absent a successful
cost-of-service showing, of 17% of September 30, 1992 rates, adjusted for
inflation, channel modifications, equipment costs, and increases in
programming costs. The revised regulations became effective on May 15,
1994, but operators were permitted to elect to defer rate reductions until
July 14, 1994, if there were no changes in their rates or if there were no
restructuring of service offerings between May 15 and July 14. The Company,
like most operators, elected to defer such rate reductions until July 14,
1994. The FCC also announced its intention to investigate the rates for
cable systems whose rates are substantially above the permitted benchmark
levels.
Rate reductions will not be required if a cable operator can
demonstrate that the rates for basic and other regulated programming
services are justified and reasonable
<PAGE>
using cost-of-service guidelines. On February 22, 1994, the FCC
adopted interim cost-of-service standards and regulations. As part of
these standards, the FCC established an interim industry-wide 11.25%
rate of return. The FCC requested comments on whether this standard
and other interim cost-of-service standards should be made permanent.
The FCC also established a rebuttable presumption that purchase price
adjustments above a system's original book value should be excluded
from the rate base. However, the FCC will consider individual showings
to rebut this presumption. The FCC indicated that the cable system
rate base will include, among other factors, plant in service,
specified intangibles and certain permitted operating expenses and
that it would establish a uniform system of accounts and rules to
govern affiliate transactions for operators choosing a cost-of-service
showing. The FCC will also consider the need for special rate relief
if an operator demonstrates that the rates set by a cost-of-service
proceeding would constitute confiscation of investment and that,
absent a higher rate, the credit necessary to operate and to attract
investment could not be maintained. The Company cannot predict the
ultimate outcome of the FCC's cost-of-service rulemaking.
Beginning in September 1993, the Company repackaged certain
existing cable services, added new channels, introduced a la carte
services and adjusted rates for programming services and equipment. In
February 1994, the FCC announced that it would revise its treatment of
a la carte programming offerings (which the FCC previously had
indicated would not be subject to rate regulation) by applying various
criteria, on a case-by-case basis, to determine whether a cable
operator's a la carte packages should be subject to rate regulation.
The FCC stated that if an operator was found to have bundled channels
as an a la carte package to evade rate regulations, the FCC could
impose forfeitures or other sanctions. In November 1994, as part of
its decision relating to "new product tiers" or "NPTs" (discussed
below), the FCC again modified its policy regarding packages of a la
carte services by ruling that such packages would now be subject to
rate regulation by the FCC. However, because of the uncertainties
created by the FCC's shifting a la carte package guidelines, the FCC
stated that it would allow cable operators (such as the Company) that
had implemented a la carte service packages under the FCC's prior rate
regulations to treat such previously offered a la carte packages as
NPTs, which would not be subject to rate regulation unless the FCC
found that such
<PAGE>
packages were implemented to evade rate regulations. The FCC reviewed
the a la carte packages offered in certain of CVI's systems and
concluded that such packages qualify as NPTs that will not be subject
to rate regulation. Because the a la carte packages offered in the
systems reviewed by the FCC are substantially identical to those
offered in the Company's systems, the Company believes that all of
such packages will qualify as NPTs that are not subject to rate
regulation.
On November 10, 1994, the FCC adopted regulations permitting
cable operators to create NPTs that will not be subject to rate
regulation upon compliance with certain conditions. Operators will be
able to price these tiers as they elect so long as, among other
conditions, other channels that are subject to rate regulation are
priced in conformity with applicable regulations and operators do not
remove programming services from existing service tiers and offer them
on the NPT. Beyond its effect on a la carte service packages as
described above, the FCC's NPT decision also provides the Company with
additional pricing flexibility by affording the option of offering new
services at rates that are not regulated under the FCC's rules.
Rate increases for existing regulated services will be
limited to an inflation-indexed amount plus increases in certain
external costs which are beyond the cable operator's control, such as
taxes and programming costs. Operators are able to increase rates
under the benchmark regulatory scheme for new channels pursuant to an
FCC-prescribed formula, which includes a 7.5% mark-up on new
programming services. On November 10, 1994, the FCC announced a
revision to its regulations governing the manner in which cable
operators may charge subscribers for new cable programming services.
In addition to the present formula for calculating the permissible
rate for new services, the FCC instituted a three-year flat fee
mark-up plan for charges relating to new channels of cable programming
services. Commencing on January 1, 1995, operators may charge for new
channels of cable programming services added after May 14, 1994 at a
rate of up to 20 cents per channel, but may not make adjustments to
monthly rates totalling more than $1.20 plus an additional 30 cents
for programming license fees per subscriber over the first two years
of the three-year period for these new services. Operators may charge
an additional 20 cents in the third year only for channels added in
that year plus the costs for the programming. Operators electing to
use the 20 cent per
<PAGE>
channel adjustment may not also take a 7.5% mark-up on programming
cost increases. In connection with its November 10, 1994 revision to
these regulations governing the manner in which cable operators may
charge subscribers for new programming services, the FCC has proposed
to eliminate the 7.5% mark-up on new programming services.
The Company continues to develop various strategies to
minimize the adverse impact of rate regulations and the other
provisions of the 1992 Cable Act on the Company's results of
operations. Such strategies to date have included: (i) placing an
increased emphasis on developing revenues from sources that are not
subject to rate regulation, including advertising, premium programming
services, a la carte programming services and pay-per-view programming
services; (ii) expanding channel capacity to add new unregulated
services; and (iii) charging for certain equipment and installation
services previously offered without charge or at discounted prices. In
addition, only 36% of the Company's subscribers are in communities
that have sought FCC certification to regulate basic service rates,
and the Company has received complaints concerning its cable
programming rates in communities representing only approximately 34%
of its subscribers. In September 1993, the Company used the FCC's
benchmark methodology in setting its rates. In response to the FCC's
revisions to its benchmark methodology requiring further rate
reductions effective July 14, 1994, the Company elected to use both
benchmark and cost-of-service methodology to justify its rates. The
Company decided to use cost-of-service standards only after extensive
evaluation and legal analyses by experts in the rate regulation area,
and is justifying its regulated rates for approximately 27% of the
Company's subscribers using such cost-of-service standards. Having
decided to pursue the cost-of-service process, the Company has added
the resources and availed itself of the expertise needed to support
the filings. The Company has reached agreements with local and state
regulatory authorities for basic service tier cost-of-service
proceedings. These agreements allow the Company to charge its existing
basic rates and to increase such rates under the FCC's "going forward"
rules. The Company may not be able to successfully justify its rates
in the cable programming service tier cost-of-service showings and
accordingly has recorded reserves it believes are adequate, if
unsuccessful. No assurances can be given that the Company will be able
to develop and successfully implement its rate regulation strategies
in order to minimize the potentially material
<PAGE>
adverse impact of the FCC's rate regulations on its results of
operations. Additionally, the FCC's rate regulations and policies may
be subject to further interpretation, clarification and modification
by the FCC and the courts, and such administrative and/or judicial
actions may require the Company to make further reductions to its
regulated service rates.
The 1984 Cable Act codified the FCC's cross-ownership
regulations, which prohibit local exchange telephone companies
("LECs"), including the Regional Bell Operating Companies ("RBOCs"),
from providing video programming directly to subscribers within their
local exchange telephone service areas, except in rural areas or by
specific waiver of FCC rules. This federal cross-ownership rule has
been particularly important to the cable industry because these
telephone companies already own certain facilities needed for cable
television operation, such as poles, ducts and associated
rights-of-way. Several federal district courts have struck down the
1984 Cable Act's telco cross-ownership provision as facially invalid
and inconsistent with the First Amendment. The U.S. Courts of Appeals
for the Fourth and the Ninth Circuits have upheld the appeals of two
of these district court decisions, and the U.S. Justice Department is
expected to request the U.S. Supreme Court to review these two
decisions. Even in the absence of changes in the cross-ownership
restrictions, the expansion of telephone companies' fiber optic
systems and recent changes in FCC policies may facilitate competition
between other video service providers and cable systems. In
anticipation of this development, the Company and the cable industry
generally have been rebuilding and upgrading its cable plant to create
advanced fiber optic and coaxial networks, which will serve as the
infrastructure for the provision of expanded video services and wire
and wireless telephony services. The Company and the cable industry
believe that their fiber optic networks will position them to provide
new services as they become available and to compete with the
telephone companies.
Legislation is expected to be considered by Congress that
would permit the local exchange telephone companies to provide cable
television service within their own local service areas. The
legislation would also enable cable television companies and others to
offer telephone services by eliminating state and local barriers to
entry.
<PAGE>
(10) Prepaid Expenses and Other Assets
As of December 31, 1994 and 1993, prepaid expenses and other
assets include a $1,000 noninterest bearing deposit held by the City
of Dearborn, Michigan.
(11) Common Stock
As of December 31, 1994 and 1993, common stock of the
corporations combined in these financial statements consisted of:
CIMF CIF
Par value None None
Authorized shares 60 60
Issued shares 20 60
Outstanding shares 20 60
(12) Subsequent Event
On February 6, 1995, CVI entered into an Agreement and Plan
of Merger (the "CVI Merger Agreement") with Time Warner Inc. ("Time
Warner"), the majority stockholder of CVI and a direct wholly-owned
subsidiary of Time Warner. In connection with the CVI Merger
Agreement, two additional merger agreements and a purchase agreement
were entered into providing for the acquisition of the Company by Time
Warner. The closing of the merger and acquisition transactions with
Time Warner is subject to customary conditions for transactions of
this type, including certain stockholder and regulatory approvals, as
specified in the respective agreements.
EXHIBIT 99(f)
<PAGE>
KBLCOM INCORPORATED
CONSOLIDATED BALANCE SHEETS,
MARCH 31, 1995 AND DECEMBER 31, 1994
(in Thousands Except Share Amounts)
- ------------------------------------------------------------------------------
March 31, 1995 December 31,
ASSETS (Unaudited) 1994
-------------------- ---------------------
Subscriber receivables, net of
allowance for doubtful accounts of
$868 and $924 at March 31, 1995 and
December 31, 1994, respectively
$ 11,707 $ 12,028
Other receivables, net 6,091 7,152
Prepaid expenses 3,146 3,466
Inventory 10,520 9,952
Property, plant and equipment, net 280,247 276,624
Equity investments:
Paragon 167,879 152,364
Other partnerships 8,512 7,999
Investments in marketable equity securities 7,861 7,861
Cable television franchises and intangible
assets, net 1,018,388 1,029,440
Other deferred costs, net of accumulated
amoritzation of $9,972 and $9,853 at
March 31, 1995 and December 31, 1994,
respectively
9,701 8,104
Due from parent 45,092 41,615
---------- ----------
TOTAL $1,569,144 $1,556,605
========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
LIABILITIES:
Accounts payable $ 20,576 $ 24,309
Accrued liabilities 40,517 31,176
Accrued interest:
Due to third parties 6,144 8,790
Due to parent 106,626 86,363
Prepayments for services and
subscriber deposits 10,413 7,717
Short-term borrowings from parent 191,300 140,300
Senior bank debt 339,000 364,000
Senior notes 54,670 62,480
Senior subordinated notes 70,113 78,100
Notes payable to parent 694,097 694,097
Deferred tax liability 305,700 311,823
---------- ----------
Total liabilities 1,839,156 1,809,155
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT:
Common stock, $1 par; 1,000 shares
authorized, issued and outstanding 1 1
Paid-in capital 388,876 388,876
Accumulated deficit (658,889) (641,427)
---------- ----------
Total stockholder's deficit (270,012) (252,550)
---------- ----------
TOTAL $1,569,144 $1,556,605
========== ==========
See notes to consolidated financial statements.
<PAGE>
KBLCOM INCORPORATED
STATEMENTS OF CONSOLIDATED OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (in Thousands)
(UNAUDITED)
- ---------------------------------------------------------------------------
Three Months
Ended March 31,
--------------------------------
1995 1994
---- ----
REVENUES $ 67,105 $ 60,250
COSTS AND EXPENSES:
Programming 17,166 15,115
Selling, general and administrative 26,035 25,295
Depreciation and amortization 23,371 20,375
-------- ----------
Total 66,572 60,785
-------- ----------
OPERATING INCOME (LOSS) 533 (265)
-------- ----------
OTHER INCOME:
Equity in income of partnerships 7,378 7,910
Other, net 286 350
-------- ----------
Total 7,664 8,260
-------- ----------
INTEREST EXPENSE:
Third parties 10,419 10,626
Parent, net of interest income 23,358 16,584
-------- ----------
Total 33,777 27,210
-------- ----------
LOSS BEFORE INCOME TAXES (25,580) (19,215)
INCOME TAX BENEFIT (8,118) (5,267)
--------- ----------
<PAGE>
KBLCOM INCORPORATED
STATEMENTS OF CONSOLIDATED ACCUMULATED DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (in Thousands)
(UNAUDITED)
- -------------------------------------------------------------------------
Three Months
Ended March 31,
------------------------------
1995 1994
---- ----
BALANCE AT BEGINNING OF PERIOD $ (641,427) $ (594,630)
NET LOSS (17,462) (13,948)
---------- ----------
BALANCE AT END OF PERIOD $ (658,889) $ (608,578)
========== ==========
See notes to consolidated financial statements.
<PAGE>
KBLCOM INCORPORATED
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (in Thousands)
(UNAUDITED)
- -------------------------------------------------------------------------
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES ----------- ------------
Net loss $ (17,462) $ (13,948)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and amortization 23,371 20,375
Equity in income of partnerships (7,378) (7,910)
Deferred income tax benefit (6,123) (827)
Changes in operating assets
and liabilities
Subscriber and other receivables, net 1,382 (491)
Inventory and prepaid expenses (248) 176
Due from parent (2,432) (7,975)
Accounts payable and accrued
liabilities (4,242) 685
Interest payable 17,617 12,346
Prepayments for services and
subscriber deposits 2,696 1,111
Other (324) (40)
---------- ----------
Net cash provided by operating
activities
6,857 3,502
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment (16,663) (12,127)
Other investments (3,501)
Other (397) 10
---------- ---------
Net cash used in investing
activities (17,060) (15,618)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt (40,797) (10,384)
Proceeds from short-term borrowings
from parent 51,000 22,500
---------- ----------
Net Cash provided by financing
activities 10,203 12,116
---------- ----------
<PAGE>
NET CHANGE IN CASH AND CASH EQUIVALENTS 0 0
CASH AND CASH EQUIVALENTS, BEGINNING OF 0 0
YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR $ 0 $ 0
=========== ===========
See notes to consolidated financial statements.
<PAGE>
KBLCOM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1995
- --------------------------------------------------------------------------
1. GENERAL
The information presented in the following notes should be read
in conjunction with the KBLCOM Incorporated ("KBLCOM")
consolidated financial statements for the years ended December
31, 1994, 1993 and 1992. These quarterly financial statements are
unaudited, however, in the opinion of management, the interim
information reflects all adjustments (consisting only of normal
recurring adjustments) necessary for a full presentation of the
results for the interim periods.
2. EQUITY INVESTMENTS IN PARTNERSHIPS
KBLCOM's equity investments include its 50% ownership in Paragon.
Equity in Paragon's income represents substantially all of the
equity in income of the partnerships during the quarterly periods
ended March 31, 1995 and 1994. The following table sets forth
certain summarized operating information of Paragon:
Three Months
Ended March 31,
--------------------------------
1995 1994
---- ----
Paragon:
Revenues $ 86,989 $ 86,052
Operating expenses 65,297 63,378
Net income 31,031 16,006
<PAGE>
KLBCOM's underlying equity in the
earnings of investee:
Paragon $ 7,516 $ 8,004
Other partnerships (138) (94)
----------- ---------
Total $ 7,378 $ 7,910
=========== =========
During the first quarter of 1995, Paragon recognized a $16
million gain on the sale of certain marketable equity securities.
Because the merger agreement described in Note 5 provides that
proceeds from selling certain assets inure to the benefit of Time
Warner Inc. ("Time Warner"), KBLCOM's share of such gain has been
deferred and is included in the consolidated balance sheet in accrued
liabilities.
3. LONG-TERM DEBT
In March 1995, KBL Cable, Inc. ("KBL Cable"), a wholly owned
subsidiary of KBLCOM, made a scheduled repayment of $15.8 million
principal amount of its senior notes and senior subordinated
notes. In the first quarter of 1995, KBL Cable repaid borrowings
under its senior bank credit facility in the amount of $25
million.
4. COMMITMENTS AND CONTINGENCIES
KBLCOM is routinely involved in litigation incidental to its
business, which involves claims for monetary amounts, some, but
not all, of which would be covered by insurance. In the opinion
of management, none of the existing litigation will have any
material adverse effect on the Company.
Taxes. In connection with the Internal Revenue Service's ("IRS")
audit of Houston Industries Incorporated's ("HII") consolidated
federal income tax returns for 1987 through 1989, the IRS
proposed adjustments that would reduce KBLCOM's net operating
losses for such three-year period by $12.2 million. If the IRS
prevails in its position regarding the proposed adjustments,
KBLCOM would be liable to EHI for $4.3 million in tax benefits
previously recorded, plus interest. HII has initiated
administrative appeals with the IRS regarding KBLCOM's proposed
adjustments and substantive discussions have taken place. In the
opinion of management, no material adverse effect will result
from resolution of the IRS audit.
<PAGE>
5. SUBSEQUENT EVENT
On January 26, 1995, Time Warner and HII reached an agreement in
which Time Warner would acquire KBLCOM in a tax-deferred,
stock-for-stock merger with a subsidiary of Time Warner. Time
Warner will issue to HII one million shares of Time Warner common
stock and 11 million shares of a newly issued series of its
convertible preferred stock, which will have a liquidation value
of $100 per share. The preferred stock will be convertible into
approximately 22.9 million shares of Time Warner common stock
and, until the earlier of conversion or the fourth anniversary of
its issuance, pays an annual dividend of $3.75 per share. After
four years, Time Warner will have the right to exchange the Time
Warner preferred stock for Time Warner common stock at the stated
conversion rate. In addition, at the closing Time Warner will
purchase for cash certain intercompany debt of KBLCOM from HII
for approximately $600 million subject to adjustment for changes
in or levels of specified indebtedness and liabilities, working
capital, capital expenditures and related items. The agreement
includes certain restrictions, including restrictions on
dividends, sales or acquisitions of assets and new indebtedness.
Closing of the merger, which is conditioned upon, among other
things, (i) the parties obtaining necessary consents of certain
franchise authorities and other governmental entities, (ii) the
absence of any change that might have a material adverse effect
on KBLCOM or Time Warner and (iii) the absence of any material
litigation, is expected to take place in mid-1995.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholder and Board
of Directors of KBLCOM Incorporated:
We have audited the accompanying consolidated balance sheets of
KBLCOM Incorporated (the "Company"), a wholly owned subsidiary of
Houston Industries Incorporated, and its subsidiaries as of December
31, 1994 and 1993, and the related statements of consolidated
operations, consolidated stockholder's deficit and consolidated cash
flows for each of the three years in the period ended December 31,
1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the
financial statements of Paragon Communications ("Paragon"), the
Company's investment in which is accounted for by use of the equity
method. The Company's equity of $152 million and $119 million in
Paragon's net assets at December 31, 1994 and 1993, respectively, and
of $33.6 million, $32.2 million and $24.9 million in Paragon's net
income for the respective years ended December 31, 1994, 1993 and 1992
are included in the accompanying consolidated financial statements.
The financial statements of Paragon were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for such company, is based solely on
the report of such other auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1994 in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Houston, Texas
April 20, 1995
<PAGE>
KBLCOM INCORPORATED
CONSOLIDATED BALANCE SHEETS,
DECEMBER 31, 1994 AND 1993 (in Thousands Except Share Amounts)
ASSETS 1994 1993
Subscriber receivables, net of
allowance for doubtful accounts of
$924 and $1,146 at December 31, 1994
and 1993, respectively $ 12,028 $ 10,428
Other receivables, net 7,152 6,679
Prepaid expenses 3,466 3,148
Inventory 9,952 6,072
Property, plant and equipment, net 276,624 220,506
Equity investments:
Paragon 152,364 118,901
Other partnerships 7,999 3,630
Investments in marketable equity securities 7,861 8,870
Cable television franchises and intangible
assets, net 1,029,440 984,032
Other deferred costs, net of accumulated
amortization of $9,853 and $9,391 at
December 31, 1994 and 1993, respectively 8,104 5,535
Due from parent 41,615 45,786
------ ------
TOTAL $1,556,605 $1,413,587
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
LIABILITIES:
Accounts payable $ 24,309 $ 19,699
Accrued liabilities 31,176 18,824
Accured interest:
Due to third parties 8,790 10,485
Due to parent 86,363 15,216
Prepayments for services and subscriber deposits 7,717 7,964
Short-term borrowings from parent 140,300 57,700
Senior bank debt 364,000 364,000
Senior notes 62,480 67,095
Senior subordinated notes 78,100 83,869
Notes payable to parent 694,097 694,097
Deferred tax liability 311,823 301,225
--------- ---------
Total liabilites 1,809,155 1,640,174
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT:
Preferred stock, no par; 500,000 shares
authorized, none outstanding
Common stock, $1 par; 1,000 shares
authorized, issued and outstanding 1 1
Paid-in capital 388,876 368,042
Accumulated deficit (641,427) (594,630)
---------- ----------
Total stockholder's deficit (252,550) (226,587)
---------- ----------
TOTAL $1,556,605 $1,413,587
========== ==========
See notes to consolidated financial statements.
<PAGE>
KBLCOM INCORPORATED
STATEMENTS OF CONSOLIDATED OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (in Thousands)
1994 1993 1992
REVENUES $255,772 $244,067 $235,258
-------- -------- --------
COSTS AND EXPENSES:
Programming 61,972 54,611 52,940
Selling, general and administrative 97,340 98,091 92,446
Depreciation and amortization 85,038 78,525 75,622
------- ------- -------
Total 244,350 231,227 221,008
------- ------- -------
OPERATING INCOME 11,422 12,840 14,250
------- ------- -------
OTHER INCOME:
Equity in income of partnerships 33,313 31,979 24,871
Other, net 1,190 770 1,345
-------- ------- -------
Total 34,503 32,749 26,216
-------- ------- -------
INTEREST EXPENSE:
Third parties 41,874 46,799 63,223
Parent, net of interest income 78,662 18,256 6,693
-------- -------- --------
Total 120,536 65,055 69,916
-------- -------- --------
LOSS BEFORE INCOME TAXES (74,611) (19,466) (29,450)
INCOME TAX (BENEFIT) EXPENSE (27,814) 3,225 (8,201)
------- ------- --------
NET LOSS (46,797) (22,691) (21,249)
DIVIDENDS ON PREFERRED STOCK 19,097 25,000
-------- -------- --------
LOSS AFTER PREFERRED DIVIDENDS $(46,797) $(41,788) $(46,249)
======== ======== ========
See notes to consolidated financial statements.
<PAGE>
KBLCOM INCORPORATED
STATEMENTS OF CONSOLIDATED STOCKHOLDER'S DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(in Thousands of Dollars Except Per Share Amounts)
Common Stock Preferred Stock
-------------- --------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit
BALANCE AT
JANUARY 1, 1992 1,000 $1 250,000 $ 250,000 $ 319,481 $(506,593)
Capital contribution -
cash 116,900
Dividends on preferred
stock at a 10% rate (25,000)
Net loss (21,249)
----- -- ------- --------- --------- ---------
BALANCE AT
DECEMBER 31, 1992 1,000 1 250,000 250,000 436,381 (552,842)
Capital contributions:
Cash 177,349
Forgiveness by parent of:
Senior and senior
subordinated notes 64,913
Short-term borrowings
from parent 39,399
Common stock dividend
($350,000 per share) (350,000)
Dividends on preferred
stock at a 10% rate (19,097)
Repurchase of stock in
exchange for notes
payable to parent (250,000) (250,000)
Net loss (22,691)
----- -- ------- --------- --------- ---------
BALANCE AT
DECEMBER 31, 1993 1,000 1 368,042 (594,630)
Capital contribution -
forgiveness by parent
of note payable 20,834
Net loss (46,797)
----- -- ------- --------- --------- ---------
BALANCE AT
DECEMBER 31, 1994 1,000 $1 0 $ 0 $ 388,876 $(641,427)
===== == ======= ========= ========= ==========
See notes to consolidated financial statements.
<PAGE>
KBLCOM INCORPORATED
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (in Thousands)
1994 1993 1992
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(46,797) $(22,691) $(21,249)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 85,038 78,525 75,622
Equity in income of partnerships (33,313) (31,979) (24,871)
Deferred income tax benefit (17,700) (2,202) (3,265)
Changes in operating assets and liabilities:
Subscriber and other receivables, net (2,073) (4,758) (1,307)
Inventory and prepaid expenses (4,198) (3,221) 346
Due from parent 4,171 (2,728) 5,653
Accounts payable and accrued liabilities 13,162 (795) 8,738
Interest payable 69,452 11,319 (2,906)
Prepayments for services and subscriber
deposits (247) (8,137) 1,988
Other 2,160 584 4,890
------ ------ ------
Net cash provided by operating
activities 69,655 13,917 43,639
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (80,318) (54,482) (40,642)
Other investments (3,610) (5,903) (3,664)
Other (143) (1,471) (927)
-------- -------- -------
Net cash used in investing activities (84,071) (61,856) (45,233)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt (68,184) (244,810) (11,506)
Proceeds from long-term debt 20,000
Capital contributions 177,349 116,900
Proceeds from (payment of) short-term
borrowings from parent 82,600 95,400 (103,800)
-------- -------- ---------
Net cash provided by financing activities 14,416 47,939 1,594
-------- -------- ---------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 0 0 0
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 0 0 0
-------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 0 $ 0 $ 0
======== ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash payments (receipts):
Interest, net of amounts capitalized $ 51,464 $ 52,450 $ 70,428
Income taxes:
Received $(21,158) $ (6,837) $(10,008)
Paid $ 523 $ 1,119 $ 403
See notes to consolidated financial statements.
<PAGE>
KBLCOM INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
1. ORGANIZATION AND BUSINESS
KBLCOM Incorporated ("KBLCOM"), a wholly owned subsidiary of
Houston Industries Incorporated ("HII"), was formed August 22,
1985, to engage in the acquisition and operation of cable
television systems. KBL Cable, Inc. ("KBL Cable"), a subsidiary
of KBLCOM, owns five cable television systems located in four
states (Texas, Minnesota, Oregon and California). In July 1994,
KBLCOM acquired the stock of three cable television companies
located in the Minneapolis, Minnesota area in exchange for shares
of HII common stock valued at approximately $20.1 million. (See
Note 11.) See Note 3 regarding KBLCOM's investment in Paragon
Communications ("Paragon").
As of December 31, 1994, KBLCOM served approximately 690,000
basic cable customers who subscribed to approximately 545,000
premium programming units. As of the same date, Paragon provided
services to approximately 967,000 basic cable customers with
approximately 552,000 premium programming units.
The cable television business of KBLCOM consists primarily of
selling to subscribers, for a monthly fee, television programming
that is distributed through a network of coaxial and fiber optic
cables. See Note 12 regarding the pending sale of KBLCOM to Time
Warner Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statements. The accompanying financial
statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The financial
statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be
necessary should KBLCOM be unable to continue as a going concern.
As shown in the financial statements, during the years ended
December 31, 1994, 1993 and 1992 KBLCOM incurred net losses of
$46.8 million, $22.7 million and $21.2 million, respectively. At
December 31, 1994 and 1993, the excess of liabilities over assets
was $252.6 million and $226.6 million, respectively. At December
31, 1994 and 1993, KBLCOM's net liabilities due to HII for notes,
short-term borrowings, accrued interest and due from parent
totalled $879.1 million and $721.2 million, respectively.
KBLCOM generated positive cash flows from operations in 1994,
1993 and 1992, and management believes positive cash flows from
operations will continue with execution of its business plan. As
shown in Note 5, scheduled debt principal requirements for 1995
are $15.8 million. Capital expenditures of $91 million are
budgeted for 1995. A substantial portion of these capital
requirements is expected to be met through internally generated
funds. HII has represented its intention to fund any shortfalls
through either equity contributions, debt or a combination
thereof.
<PAGE>
Principles of Consolidation. The consolidated financial
statements include the accounts of KBLCOM and all of its
subsidiaries. All significant intercompany transactions and
balances are eliminated in consolidation.
Property, Plant and Equipment. Additions to property, plant and
equipment are recorded at cost which includes amounts for
material, labor, overhead and interest. Expenditures for
maintenance and repairs are expensed as incurred. The cost of
initial subscriber installation is capitalized. Costs of
subsequent disconnections and reconnections are expensed.
Depreciation is computed using the straight-line method of
accounting. The depreciation provision as a percentage of the
depreciable cost of property was 11.3% for both 1994 and 1993 and
12.1% for 1992.
Investments. Investments in affiliates in which KBLCOM holds a
20% to 50% interest (which includes the investment in Paragon) or
a lesser percent in which KBLCOM has management influence, are
recorded using the equity method of accounting. Investments in
marketable equity securities are accounted for in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115.
(See Note 3.)
Cable Television Franchises and Intangible Assets. The
acquisition cost in excess of the fair market value of the
tangible assets and liabilities is recorded on the balance sheet
as cable television franchises and intangible assets. Such
amounts are amortized over periods ranging from 8 to 40 years on
a straight-line basis. Amortization expense as a percentage of
cable television franchises and intangible assets was 3.3% for
1994, 1993 and 1992. The accumulated amortization related to
cable television franchises and intangible assets as of December
31, 1994 and 1993 was $223.5 million and $184.1 million,
respectively. Management of KBLCOM periodically reviews the
carrying value of cable television franchises and intangible
assets in relation to current and expected operating results of
the business in order to assess whether there has been a
permanent impairment of such amounts.
Inventory. Inventory consists of plant and maintenance materials
and subscriber equipment. Inventory is recorded at the lower of
cost or market using the first-in, first-out method.
Income Taxes. KBLCOM follows a policy of comprehensive
interperiod income tax allocation. Investment tax credits are
deferred and amortized over the estimated lives of the related
property. Deferred tax assets and liabilities are determined
based on the temporary differences between the financial
statement carrying amounts and the tax bases of existing assets
and liabilities and available tax credit carryforwards.
(See Note 7.)
Statements of Consolidated Cash Flows. For purposes of reporting
cash flows, cash equivalents are considered to be short-term,
highly liquid investments readily convertible to cash.
Revenues and Programming Costs. Revenues include amounts for
basic cable services, premium services, pay-per-view services and
advertising. Service revenues are recognized as services
provided to subscribers, and advertising revenues are recognized
when earned. Subscriber fees for regulated services and equipment
are based on rates that management believes are determined in
accordance with the regulations established by the Federal
Communications Commission pursuant to the Cable Television
Consumer Protection Act of 1992 ("1992 Cable Act"). The cost to
acquire the rights to the programming ("programming costs")
generally is recorded when the product is initially available for
exhibition.
<PAGE>
Interest Rate Swap Agreements. The differential to be paid or
received under interest rate swap agreements is accrued and is
recognized as interest expense or income over the term of each
swap. (See Note 5.)
3. INVESTMENTS
a. Equity investments in partnerships. KBLCOM has equity
investments in five partnerships with ownership interests
ranging from 10% to 50%. KBLCOM's 50% ownership in Paragon
represents $152.4 million or 95% of its total equity
investments at December 31, 1994. Equity in Paragon's income
of $33.6 million represents substantially all of KBLCOM's
equity in income of the partnerships for 1994.
The following tables set forth certain summarized financial
information of Paragon and summarized combined financial
information of the other partnerships.
Combined Financial Statement Data of Equity Investments in
- ----------------------------------------------------------
Partnerships (in thousands):
- ----------------------------
December 31, 1994
-------------------------------
Other
Paragon Partnerships Total
Property, plant and equipment, net $391,726 $32,319 $424,045
Other assets 236,101 24,081 260,182
-------- ------- --------
Total assets 627,827 56,400 684,227
Debt 249,000 12,850 261,850
Other liabilities 74,105 8,800 82,905
-------- ------- --------
Net assets $304,722 $34,750 $339,472
======== ======= ========
KBLCOM's underlying equity in the
net assets of investees $152,364 $ 7,999 $160,363
======== ======= ========
December 31, 1993
--------------------------------
Other
Paragon Partnerships Total
Property, plant and equipment, net $384,869 $27,822 $412,691
Other assets 242,538 21,928 264,466
-------- ------- --------
Total assets 627,407 49,750 677,157
Debt 320,317 10,048 330,365
Other liabilities 69,468 13,800 83,268
-------- ------- --------
Net assets $237,622 $25,902 $263,524
======== ======= ========
KBLCOM's underlying equity in the
net assets of investees $118,901 $ 3,630 $122,531
======== ======= ========
<PAGE>
Year Ended December 31,
--------------------------------
1994 1993 1992
Revenues:
Paragon $348,323 $338,200 $315,999
Other partnerships 40,075 32,853 30,964
-------- -------- --------
Total 388,398 371,053 346,963
Operating expenses:
Paragon 263,014 253,063 240,578
Other partnerships 37,707 30,122 28,558
-------- -------- --------
Total 300,721 283,185 269,136
Net income:
Paragon 67,100 64,482 49,822
Other partnerships 1,847 1,983 903
-------- -------- --------
Total $ 68,947 $ 66,465 $ 50,725
======== ======== ========
KBLCOM's underlying equity in the earnings
of investees:
Paragon $ 33,550 $ 32,241 $ 24,911
Other partnerships (237) (262) (40)
-------- -------- --------
Total $ 33,313 $ 31,979 $ 24,871
======== ======== ========
Paragon, a Colorado partnership, owns 19 cable television
systems located in 7 states. The remaining interest is owned
by American Television and Communications Corporation
("ATC"), a subsidiary of Time Warner Inc. The partnership
agreement provides that at any time after December 31, 1993,
either partner may elect to divide the assets of the
partnership under certain pre-defined procedures set forth in
the agreement. Paragon is a party to a $225 million revolving
credit agreement with a group of banks. This credit agreement
contains certain covenants which restrict merger or sale of
assets, amount of debt, distributions to partners and certain
investments. Paragon also has outstanding $50 million
principal amount of 9.56% senior notes, due in 1995. In each
case, borrowings are nonrecourse to KBLCOM and ATC.
One of the other partnerships that KBLCOM has an equity
interest in has a loan agreement that specifies future
capital commitments for the partners. KBLCOM's remaining
capital commitment was $4 million at December 31, 1994.
b. Marketable equity securities. KBLCOM adopted SFAS No.
115, "Accounting for Certain Investments in Debt and Equity
Securities," effective January 1, 1994. At December 31,
1994, the securities held were classified as available for
sale. Such securities are reported on the balance sheets at
fair value based on quoted market prices, which at December
31, 1994 approximated cost.
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment was comprised of the following:
December 31,
-------------------
1994 1993
(In Thousands)
Land and buildings $ 6,097 $ 5,277
Towers and headend 17,248 10,536
Distribution cable 215,735 197,334
Subscriber drops and devices 89,430 77,680
Subscriber equipment 56,763 42,053
Other equipment 47,020 34,423
Leasehold improvements 5,733 4,875
-------- --------
Total 438,026 372,178
Less accumulated depreciation 161,402 151,672
-------- --------
Net property, plant and equipment $276,624 $220,506
========= ========
5. LONG-TERM DEBT
KBLCOM and its subsidiaries are parties to several financing
agreements:
a. KBL Cable Senior Bank Credit Facility. KBL Cable is a party
to a $475.2 million revolving credit and letter of credit
facility agreement with annual mandatory commitment
reductions (which may require principal payments). At
December 31, 1994, KBL Cable had $76 million available under
such credit facility. The credit facility has scheduled
commitment reductions in March of each year (including $55
million on March 1, 1995) until it is terminated in March
1999. Loans have generally borne interest at an interest
rate of London Interbank Offered Rate plus an applicable
margin. The margin was 0.75% and 0.625% at December 31, 1994
and 1993, respectively. The effective interest rate was
5.871% and 4.060% at December 31, 1994 and 1993,
respectively. The credit facility includes restrictions on
dividends and sales of assets and limitations on total
indebtedness. The amount of indebtedness outstanding at
December 31, 1994 and 1993 was $364 million. Commitment fees
are required on the unused portion of the senior bank credit
facility.
In October 1989 KBL Cable entered into interest rate swaps
to effectively fix the interest rate on $375 million of
loans under the bank credit facility. The objective of the
swaps was to reduce the financial exposure to increases in
interest rates. Interest rate swaps aggregating $75 million
and $150 million terminated in October 1992 and October
1994, respectively. As of December 31, 1994, KBL Cable had
one remaining interest rate swap terminating in 1996 which
effectively fixes the rate on $50 million of debt under the
bank credit facility at 8.88% plus the applicable margin. As
of December 31, 1994 and 1993, the effective interest rate
on the debt subject to the interest rate swaps was
approximately 9.63%. KBL Cable is exposed to risk of
nonperformance by the other party to the swap. However, KBL
Cable does not anticipate nonperformance by the other party.
<PAGE>
b. KBL Cable Senior and Senior Subordinated Notes. As of
December 31, 1994, KBL Cable had outstanding $62.5 million
of 10.95% senior notes and $78.1 million of 11.30% senior
subordinated notes. Both series mature in 1999 with annual
principal payments which began in 1992. The agreement under
which the notes were issued contains restrictions and
covenants similar to those contained in the KBL Cable Senior
Bank Credit Facility. In March 1994 KBL Cable made principal
payments in the amount of $4.6 million on the 10.95% senior
notes and $5.8 million on the 11.30% senior subordinated
notes. As of December 31, 1992, HII owned $28.9 million
principal amount of the senior notes and $36.1 million
principal amount of the senior subordinated notes. Effective
April 1, 1993, these $65 million of notes held by HII were
contributed to KBLCOM. KBLCOM subsequently contributed such
notes to KBL Cable, which retired and canceled the notes.
c. Notes Payable to Parent. In October 1993 all the outstanding
shares of preferred stock and dividends in arrears thereon
were exchanged by HII for notes payable totaling $344
million. KBLCOM also declared a common stock dividend
totaling $350 million and issued HII a note for the same
amount. The notes bear interest at the prime rate (8.5% and
6% as of December 31, 1994 and 1993, respectively) plus 3%
and have no stated maturity or required principal
amortization.
Consolidated annual maturities of long-term debt for KBLCOM are as
follows:
(In Thousands)
1995 $ 15,798
1996 76,188
1997 130,175
1998 140,323
1999 142,096
Thereafter 694,097
----------
Total payments required $1,198,677
==========
6. COMMITMENTS AND CONTINGENCIES
KBLCOM is routinely involved in litigation incidental to its
business, which involves claims for monetary amounts, some, but
not all, of which would be covered by insurance. In the opinion
of management, none of the existing litigation will have any
material adverse effect on the Company.
Taxes. In connection with the Internal Revenue Service's ("IRS")
audit of HII's consolidated federal income tax returns for
1987 through 1989, the IRS proposed adjustments that would reduce
KBLCOM's net operating losses for such three-year period by $12.2
million. If the IRS prevails in its position regarding the
proposed adjustments, KBLCOM would be liable to HII for $4.3
million in tax benefits previously recorded, plus interest. HII
has initiated administrative appeals with the IRS regarding
KBLCOM's proposed adjustments and substantive discussions have
taken place. In the opinion of management, no material adverse
effect will result from resolution of the IRS audit.
<PAGE>
Franchise Obligations. KBLCOM's cable television systems
generally operate pursuant to non-exclusive franchises or permits
awarded by local governmental authorities, and, accordingly,
other applicants may obtain franchises or permits in areas served
by KBLCOM. Cable television franchises generally can be
terminated prior to their stated expiration date under
circumstances such as a material breach of the franchise by the
cable operator. Franchises typically contain a number of
provisions dealing with, among other things, minimum technical
specifications for the systems; operational requirements; total
channel capacity; local governmental, community and educational
access; franchise fees (which range up to 5% of cable system
revenues); and procedures for renewal of the franchise. Franchise
fees paid to franchising authorities in accordance with the
franchise agreement are reflected in the statements of
consolidated operations, net of amounts collected from
subscribers. In connection with certain obligations under
existing franchise agreements, KBLCOM obtains surety bonds and
letters of credit guaranteeing performance to municipalities and
public utilities. Payment is required only in the event of
nonperformance. KBLCOM has fulfilled all of its obligations such
that no payments have been required. Letters of credit were
available at December 31, 1994 in the amount of $5.4 million
including $4.1 million which supported performance bonds of the
same amount. The provisions of state and local franchises are
subject to federal regulation under the Cable Communications
Policy Act of 1984 and the 1992 Cable Act.
KBLCOM franchises are also subject to renewal upon expiration and
generally are not transferable without the prior approval of the
franchising authority. As of December 31, 1994, KBLCOM held 70
franchises with unexpired terms ranging from under one year to
approximately 17 years. In the 1995-1998 period, franchises
representing approximately 20% of total subscribers are subject
to renewal. In addition, some franchises provide for purchase of
the franchise under certain circumstances, such as failure to
renew the franchise. To date, KBLCOM's franchises generally have
been renewed or extended upon their stated expirations, but there
can be no assurance of renewal of franchises in the future.
Operating Leases. KBLCOM leases certain premises, distribution
facilities and various equipment. KBLCOM also has various
renewable commitments for rental of utility poles which are based
on the number of poles used. Under these leases, KBLCOM's lease
expense for 1994, 1993 and 1992 was $3.9 million, $3.6 million
and $3.2 million, respectively, with $1.3 million, $1.2 million
and $1.2 million related to pole rentals in each respective year.
The following is a schedule of future minimum commitments under
leases, excluding renewable commitments for the rental of utility
poles, that have initial lease terms in excess of one year at
December 31, 1994:
(In Thousands)
1995 $2,639
1996 2,174
1997 1,785
1998 1,058
1999 347
Thereafter 61
------
Total payments required $8,064
======
<PAGE>
7. INCOME TAXES
KBLCOM and its subsidiaries are members of the HII consolidated
group and are included in the consolidated federal income tax
return of HII. KBLCOM and HII have entered into a tax-sharing
agreement which provides for the determination of federal income
taxes for KBLCOM and its subsidiaries equal to the tax that would
be incurred if KBLCOM were a separate taxable entity. KBLCOM is
paid by HII for its operating losses and tax credits ("tax
benefits") which are used in HII's consolidated tax return to
offset the tax liabilities of other members of the HII
consolidated group. KBLCOM recognizes such tax benefits for
financial reporting purposes through the income tax provision and
due from parent accounts.
The current and deferred components of income tax (benefit)
expense are as follows:
Year Ended December 31,
------------------------------
1994 1993 1992
(In Thousands)
Current:
Federal $(13,174) $ 3,250 $(5,895)
State and local 3,060 2,177 959
Deferred (17,700) (2,202) (3,265)
-------- -------- -------
Income tax (benefit) expense) $(27,814) $ 3,225 $(8,201)
======== ======== =======
Effective income tax rates differ from statutory corporate rates
for each year as follows:
Year Ended December 31,
------------------------------
1994 1993 1992
(In Thousands)
Loss before income taxes $(74,611) $(19,466) $(29,450)
Statutory rate 35% 35% 34%
-------- -------- --------
Income tax benefit at statutory rate (26,114) (6,813) (10,013)
Adjustments to taxes resulting from:
Amortization of intangible assets 4,487 4,389 4,264
Rate change in federal corporate tax 6,876
Reduction in deferred state income
tax liabilities (7,497)
Adjustment of prior years'
estimated liability (2,367)
Other 1,310 (1,227) (85)
-------- -------- --------
Income tax (benefit) expense $(27,814) $ 3,225 $ (8,201)
======== ======== ========
Effective rate 37% (17)% 28%
======== ======== =========
<PAGE>
Following are the tax effects of temporary differences resulting
in deferred tax assets and liabilities:
December 31,
------------------------
1994 1993
(In Thousands)
Deferred tax assets:
Loss, ITC and alternative minimum
tax carryforwards $ 57,919 $ 57,661
Valuation allowance (57,919) (57,661)
-------- --------
Total deferred tax assets - net 0 0
-------- --------
Deferred tax liabilities:
Depreciation 68,255 60,253
Identifiable intangibles 244,636 236,475
Other (1,068) 4,497
------- --------
Total deferred tax liabilities 311,823 301,225
-------- --------
Accumulated deferred income taxes - net $311,823 $301,225
======== ========
At December 31, 1994, pursuant to the acquisition of
cablesystems, KBLCOM has unutilized Separate Return Limitation
Year ("SRLY") net operating loss tax benefits of approximately
$22.1 million and unutilized SRLY investment tax credits of
approximately $14.0 million which expire in the years 1995
through 2008 and the years 1995 through 2003, respectively. In
addition, KBLCOM has unutilized restricted state loss tax
benefits of $20.0 million which expire in years 1995 through 2009
and unutilized minimum tax credits of $1.8 million. KBLCOM does
not anticipate full utilization of these losses and tax credits
and, therefore, has established a valuation allowance.
Utilization of preacquisition carryforwards in the future would
not affect KBLCOM's income, but would be applied to reduce the
carrying value of cable television franchises and intangible
assets.
8. EMPLOYEE BENEFIT PLANS
Retirement Plans. KBLCOM has a noncontributory defined benefit
retirement plan covering substantially all employees. The plan
provides retirement benefits based on years of service and
compensation. The funding policy of KBLCOM is to contribute
amounts annually in accordance with applicable regulations in
order to achieve adequate funding of projected benefit
obligations. The assets of the plan consist principally of
high-quality, interest-bearing obligations.
Net pension cost includes the following components:
Year Ended December 31,
------------------------
1994 1993 1992
(In Thousands)
Service cost - benefits earned during
the period $ 738 $ 650 $ 601
Interest cost on projected benefit
obligation 326 281 273
Actual (return) loss on plan assets 45 (240) (173)
Net amortization and deferrals (355) 1 3
------ ------ ------
Net pension cost $ 754 $ 692 $ 704
====== ====== ======
<PAGE>
The funded status of the retirement plan was as follows:
December 31,
-------------------
1994 1993
(In Thousands)
Actuarial present value of:
Vested benefit obligation $ 3,532 $ 2,525
======= =======
Accumulated benefit obligation $ 4,360 $ 3,447
======= =======
Plan assets at fair value $ 3,575 $ 2,996
Projected benefit obligation 5,766 4,514
------- -------
Projected benefit obligation in excess
of plan assets (2,191) (1,518)
Unrecognized net loss 1,095 504
------- -------
Accrued pension cost $(1,096) $(1,014)
======= =======
The projected benefit obligation was determined using an assumed
discount rate of 8% in 1994 and 7.25% in 1993. A long-term rate
of compensation increase of 5.5% was used in both 1994 and 1993.
The assumed long-term rate of return on plan assets was 9.5% in
1994 and 1993.
Savings Plan. KBLCOM participates in a HII savings plan covering
substantially all employees. The plan allows only pretax
contributions in amounts not to exceed 10% of an employee's
annualized compensation and no withdrawal of pretax contributions
because of legal restrictions. The employer matches 70% of the
first 6% of annualized compensation contributed by the employee
subject to a vesting schedule which entitles the employee to a
percentage of the matching contributions, depending on years of
service. Prior to 1994, the matching percentage was 50% for the
first 6% of contributed compensation. Employer contributions for
1994, 1993 and 1992 were approximately $1,480,000, $747,000 and
$587,000, respectively.
Upon the closing of the sale of KBLCOM (see Note 12), the savings
plan will be amended to provide for full vesting for all KBLCOM
participants and KBLCOM will terminate its participation in the
savings plan.
Retention and Severance Agreements. In anticipation of a possible
change in ownership control of KBLCOM, certain agreements were
established to provide incentives for continued employment and to
provide severance benefits, including medical, to certain
executives and employees. The agreements include the Incentive
Bonus Plan, Retention Agreements and Special Severance Benefits
Plan. The $3.8 million estimated liability for the Incentive
Bonus Plan and Retention Agreements, assuming a June 30, 1995
closing of the sale, was recorded at December 31, 1994. The
effective dates of the Incentive Bonus Plan and Retention
Agreements vary and events triggering payment include the earlier
of an effective change of ownership control, termination without
cause or, in the case of the Incentive Bonus Plan, September 1,
1996.
The Special Severance Benefits Plan provides benefits, but only
if the covered employees are involuntarily terminated between
September 1, 1994 and June 30, 1996. There are also certain
severance agreements for selected executives and employees that
were put in place between December
<PAGE>
1993 and October 1994. The primary event triggering payment of
benefits under the agreements is involuntary termination within a
specified period in connection with a change in control. KBLCOM
has not accrued the estimated liabilities for these agreements,
which total approximately $10.4 million, since the event
triggering payment is not certain of occurrence as of December
31, 1994.
9. RELATED-PARTY TRANSACTIONS
Related-party transactions are as follows:
Related Year Ended December 31,
Party Description ---------------------------
1994 1993 1992
(In Thousands)
HII Dividends $369,097 $ 25,000
Capital contributrions-
cash 177,349 116,900
Interest on notes
payable (b) $71,132 16,719 4,123
Service fees (a) 3,620 5,034 3,374
Money fund expense (b) 7,530 1,537 2,570
Paragon Management fee
income (c) 1,696 1,653 1,543
Other equity
investments Management fee
income (a) 382 819 600
Houston Industries
Finance Discount expenses (a) 5,398
(a) Included in selling, general and administrative expenses
(b) Included in interest expense - parent
(c) Included in other income
Related party balances are as follows:
Related Year Ended December 31,
Party Description -----------------------
1994 1993
(In Thousands)
HII Notes payable $694,097 $694,097
Short-term borrowings 140,300 57,700
Accrued interest 86,363 15,216
Tax-related receivable (a) 42,537 46,583
Service fee payable (a) (922) (797)
(a) Included in due from parent
<PAGE>
HII has established a "money fund" through which KBLCOM can
borrow or invest on a short-term basis. KBLCOM's weighted average
short-term borrowing rates for the money fund are established at
the prime rate.
During 1992, Houston Industries Finance, a wholly owned
subsidiary of HII, purchased advance service billings of KBLCOM.
In January 1993 Houston Industries Finance sold the billings back
to KBLCOM and ceased operations.
10. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of KBLCOM's
financial instruments are as follows:
December 31,
-----------------------------------
1994 1993
---------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
(In Thousands)
Financial liabilities:
Senior bank debt $364,000 $364,000 $364,000 $364,000
Senior and senior subordinated notes 140,580 154,654 150,964 180,890
Notes payable to parent 694,097 694,097 694,097 694,097
Unrecognized financial instruments -
Interest rate swaps (net payable
position) 1,019 13,604
The fair values of senior and senior subordinated notes are
estimated using rates currently available for debt with similar
terms and remaining maturities. The fair values of senior bank
debt and notes payable to parent are equivalent to the carrying
amounts. The fair value of interest rate swaps is the estimated
amount that the swap counterparties would receive or pay to
terminate the swap agreements, taking into account current
interest rates and the current creditworthiness of the swap
counterparties.
11. CABLE TELEVISION ACQUISITION
In July 1994 KBLCOM acquired the stock of three cable companies
then serving approximately 48,000 customers in the Minneapolis
area in exchange for 587,646 shares of common stock of HII valued
at approximately $20.1 million in a business combination
accounted for using the purchase method of accounting. The total
purchase price of approximately $80 million included the
assumption of approximately $60 million in liabilities. Notes
were repaid in connection with the acquisition in the amount of
$57.7 million. The acquisition cost in excess of the fair market
value of the tangible assets and liabilities is recorded on the
balance sheet as cable television franchises and intangible
assets and is amortized over periods ranging from 15 to 40 years
on a straight-line basis.
12. SUBSEQUENT EVENT
On January 26, 1995, Time Warner Inc. ("Time Warner") and HII
reached an agreement in which Time Warner would acquire KBLCOM in
a tax-deferred, stock-for-stock merger with a subsidiary of Time
Warner. Time Warner will issue to HII one million shares of Time
Warner common stock and
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11 million shares of a newly issued series of its convertible
preferred stock, which will have a liquidation value of $100 per
share. The preferred stock will be convertible into approximately
22.9 million shares of Time Warner common stock and, until the
earlier of conversion or the fourth anniversary of its issuance,
pays an annual dividend of $3.75 per share. After four years,
Time Warner will have the right to exchange the Time Warner
preferred stock for Time Warner common stock at the stated
conversion rate. In addition, at the closing Time Warner will
purchase for cash certain intercompany debt of KBLCOM from HII
for approximately $600 million subject to adjustment for changes
in or levels of specified indebtedness and liabilities, working
capital, capital expenditures and related items. The agreement
includes certain restrictions, including restrictions on
dividends, sales or acquisitions of assets and new indebtedness.
Closing of the merger, which is conditioned upon, among other
things, (i) the parties obtaining necessary consents of certain
franchise authorities and other governmental entities, (ii) the
absence of any change that might have a material adverse effect
on KBLCOM or Time Warner and (iii) the absence of any material
litigation, is expected to take place during the second half of
1995.
EXHIBIT 99(g)
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Pro Forma Financial Statements of Time Warner
Entertainment Company, L.P. (incorporated by
reference from pages 3 to 15 of the
Current Report on Form 8-K of
Time Warner Entertainment Company, L.P.
dated May 30, 1995)
