SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT of 1934 for the quarterly period ended
September 30, 1995 , or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT of 1934 for the transition period from
to
Commission file number 1-8637
TIME WARNER INC.
(Exact name of registrant as specified in its charter)
Delaware 13-1388520
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
75 Rockefeller Plaza
New York, New York 10019
(212) 484-8000
(Address, including zip code, and telephone number, including
area code, of each registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock - $1 par value 387,466,914
Description of Class Shares Outstanding
as of October 31, 1995
<PAGE>
TIME WARNER INC. AND
TIME WARNER ENTERTAINMENT COMPANY, L.P.
INDEX TO FORM 10-Q
Page
Time
Warner TWE
PART I. FINANCIAL INFORMATION
Consolidated balance sheets at September 30, 1995
and December 31, 1994 1 27
Consolidated statements of operations for the
three and nine months ended
September 30, 1995 and 1994 2 28
Consolidated statements of cash flows for the
nine months ended September 30, 1995 and 1994 3 29
Notes to consolidated financial statements 4 30
Management's discussion and analysis of results
of operations and financial condition 16 37
PART II. OTHER INFORMATION 43
<PAGE>
PART I. FINANCIAL INFORMATION
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, December 31,
1995 1994
(millions, except
per share amounts)
ASSETS
Current assets
Cash and equivalents $ 378 $ 282
Receivables, less allowances of
$757 and $768 1,426 1,439
Inventories 461 370
Prepaid expenses 868 726
Total current assets 3,133 2,817
Investments in and amounts due to and
from Entertainment Group 6,022 5,350
Investments, other 2,499 1,555
Property, plant and equipment, net 1,088 753
Music catalogues, contracts
and copyrights 1,167 1,207
Goodwill 5,263 4,630
Cable television franchises 1,716 -
Other assets 534 404
Total assets $21,422 $16,716
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties payable $ 1,346 $ 1,379
Debt due within one year 14 355
Other current liabilities 1,477 1,238
Total current liabilities 2,837 2,972
Long-term debt 9,931 8,839
Deferred income taxes 3,469 2,700
Unearned portion of paid subscriptions 633 631
Other liabilities 486 426
Company-obligated mandatorily redeemable
preferred securities of
subsidiary (1) 374 -
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Shareholders' equity
Preferred stock, $1 par value, 29.7 million
and 962 thousand shares outstanding,
$2.994 billion and $140 million liquidation
preference 30 1
Common stock, $1 par value, 387.4 million
and 379.3 million shares outstanding
(excluding 45.7 million treasury shares) 387 379
Paid-in capital 5,410 2,588
Unrealized gains on certain
marketable securities 134 130
Accumulated deficit (2,269) (1,950)
Total shareholders' equity 3,692 1,148
Total liabilities and shareholders'
equity $21,422 $16,716
_______________
(1) The sole assets of the subsidiary that is the obligor on the
preferred securities are $385 million principal amount of
subordinated notes of Time Warner due December 23, 1997. Such
preferred securities are redeemable for cash or, at Time Warner's
option, approximately 12.1 million shares of Hasbro, Inc. common
stock owned by Time Warner.
See accompanying notes.
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TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
(millions, except per share amounts)
Revenues (a) $1,981 $1,884 $5,705 $5,109
Cost of revenues (a)(b) 1,274 1,125 3,396 2,923
Selling, general and
administrative (a)(b) 686 618 1,966 1,763
Operating expenses 1,960 1,743 5,362 4,686
Business segment operating income 21 141 343 423
Equity in pretax income of
Entertainment Group (a) 129 66 235 177
Interest and other, net (a) (259) (177) (615) (514)
Corporate expenses (a) (18) (20) (57) (57)
Income (loss) before income taxes (127) 10 (94) 29
Income tax (provision) benefit 25 (42) (63) (132)
Loss before extraordinary item (102) (32) (157) (103)
Extraordinary loss on retirement of
debt, net of $26 million income
tax benefit (42) - (42) -
Net loss (144) (32) (199) (103)
Preferred dividend requirements (16) (3) (24) (9)
Net loss applicable to
common shares $ (160) $ (35) $(223) $(112)
Loss per common share:
Loss before extraordinary item $(0.30) $(0.09) $(0.47) $(0.30)
Net loss $(0.41) $(0.09) $(0.58) $(0.30)
Average common shares 386.5 379.1 382.5 378.8
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__________________
(a) Includes the following income (expenses) resulting from
transactions with the Entertainment Group and other related companies
for the three and nine months ended September 30, 1995, respectively,
and for the corresponding periods in the prior year: revenues of $50
million and $144 million in 1995, and $56 million and $148 million in
1994; cost of revenues of $(25) million and $(74) million in 1995,
and $(34) million and $(80) million in 1994; selling, general and
administrative of $10 million and $39 million in 1995, and $14
million and $33 million in 1994; equity in pretax income of
Entertainment Group of $(19) million and $(79) million in 1995, and
$(31) million and $(95) million in 1994; interest and other, net of
$(14) million and $(13) million in 1995, and $2 million and $17
million in 1994; and corporate expenses of $17 million and $47
million in 1995, and $15 million and $45 million in 1994.
(b) Includes depreciation and
amortization expense of: $ 167 $ 109 $ 398 $ 319
See accompanying notes.
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TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
1995 1994
(millions)
OPERATIONS
Net loss $ (199) $ (103)
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt 42 -
Depreciation and amortization 398 319
Noncash interest expense 156 162
Excess (deficiency) of distributions over
equity in pretax income of
Entertainment Group 722 (58)
Changes in operating assets and liabilities (465) (32)
Cash provided by operations 654 288
INVESTING ACTIVITIES
Investments and acquisitions (353) (123)
Capital expenditures (176) (143)
Investment proceeds 332 144
Cash used by investing activities (197) (122)
FINANCING ACTIVITIES
Borrowings 1,997 404
Debt repayments (2,643) (376)
Issuance of PERCS 374 -
Dividends paid (110) (105)
Other 21 29
Cash used by financing activities (361) (48)
INCREASE IN CASH AND EQUIVALENTS 96 118
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 282 200
CASH AND EQUIVALENTS AT END OF PERIOD $378 $318
See accompanying notes.
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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include 100% of the
assets, liabilities, revenues, expenses, income, loss and cash
flows of Time Warner Inc. ("Time Warner" or the "Company") and
all companies in which Time Warner has a controlling voting
interest ("subsidiaries"), as if Time Warner and its subsidiaries
were a single company. Subsidiaries of Time Warner are engaged
principally in the Publishing, Music and Cable businesses. Time
Warner's Entertainment Group, consisting of the Filmed
Entertainment, Six Flags Theme Parks, Broadcasting-The WB
Network, Programming-HBO and Cable businesses owned primarily by
Time Warner Entertainment Company, L.P. ("TWE"), and investments
in certain other companies in which Time Warner has significant
influence but less than a controlling voting interest, are
accounted for using the equity method.
The accompanying financial statements are unaudited but in the
opinion of management contain all the adjustments (consisting of
those of a normal recurring nature) considered necessary to
present fairly the financial position and the results of
operations and cash flows for the periods presented in conformity
with generally accepted accounting principles applicable to
interim periods. Certain reclassifications have been made to the
1994 financial statements to conform to the 1995 presentation.
The accompanying financial statements should be read in
conjunction with the audited consolidated financial statements of
Time Warner for the year ended December 31, 1994.
Intangible Assets
Intangible assets are recorded when the cost of acquired
companies exceeds the fair value of their tangible assets.
Intangible assets are amortized over periods up to forty years
using the straight-line method. Time Warner separately reviews
the carrying value of intangible assets for each acquired entity
on a quarterly basis to determine whether an impairment may
exist. Time Warner considers relevant cash flow and profitability
information, including estimated future operating results, trends
and other available information, in assessing whether the
carrying value of intangible assets can be recovered. Upon a
determination that the carrying value of intangible assets will
not be recovered from the undiscounted future cash flows of the
acquired business, the carrying value of such intangible assets
would be considered impaired and will be reduced by a charge to
operations in the amount of the impairment. Impairment is
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measured as any deficiency in estimated undiscounted future cash
flows of the acquired business to recover the carrying value
related to the intangible assets.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets to Be Disposed Of," ("FAS
121") effective for fiscal years beginning after December 15,
1995. The new rules establish standards for the recognition and
measurement of impairment losses on long-lived assets and certain
identifiable intangible assets, including goodwill. Time Warner
expects that the adoption of FAS 121 will not have a material
effect on its financial statements.
Interest Rate Swap Contracts
Interest rate swap contracts are used to adjust the proportion
of total debt that is subject to variable and fixed interest
rates. Under interest rate swap contracts, the Company either
agrees to pay an amount equal to a specified floating rate of
interest times a notional principal amount, and to receive in
return an amount equal to a specified fixed rate of interest
times the same notional principal amount or, vice versa, to
receive a floating rate amount and to pay a fixed rate amount.
The notional amounts of the contracts are not exchanged. No other
cash payments are made unless the contract is terminated prior to
maturity, in which case the amount paid or received in settlement
is established by agreement at the time of termination, and
usually represents the net present value, at current rates of
interest, of the remaining obligations to exchange payments under
the terms of the contract. Interest rate swap contracts are
entered into with a number of major financial institutions in
order to minimize credit risk.
The net amounts paid or payable, or received or receivable,
through the end of the accounting period are included in interest
expense. Because interest rate swap contracts are used to modify
the interest characteristics of Time Warner's outstanding debt
from a fixed to a floating rate basis or, vice versa, unrealized
gains or losses on interest rate swap contracts are not
recognized unless the contracts are terminated prior to their
maturity. Gains or losses on the termination of contracts are
deferred and amortized to income over the remaining average life
of the terminated contracts.
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2. ENTERTAINMENT GROUP
Time Warner's investment in and amounts due to and from the
Entertainment Group at September 30, 1995 and December 31, 1994
consists of the following:
September 30, December 31,
1995 1994
(millions)
Investment in TWE $6,237 $5,284
Income tax and stock option related
distributions due from TWE 178 423
Credit agreement debt due to TWE (400) (400)
Other liabilities due to TWE, principally
related to home video distribution (176) (266)
Other receivables due from TWE 78 -
Investment in and amounts due to and from TWE 5,917 5,041
Investment in other Entertainment
Group companies 105 309
Total $6,022 $5,350
TWE is a Delaware limited partnership that was capitalized on
June 30, 1992 to own and operate substantially all of the Filmed
Entertainment, Programming-HBO and Cable businesses previously
owned by subsidiaries of Time Warner. Certain Time Warner
subsidiaries are the general partners of TWE ("Time Warner
General Partners"). Time Warner acquired the limited partnership
interests previously held by subsidiaries of each of ITOCHU
Corporation and Toshiba Corporation effective in the third
quarter of 1995 for an aggregate cost of $1.36 billion,
consisting of 15 million shares of convertible preferred stock
(Series G Preferred Stock, Series H Preferred Stock and Series I
Preferred Stock) and $10 million in cash (the "ITOCHU/Toshiba
Transaction"). Accordingly, Time Warner and certain of its
wholly-owned subsidiaries collectively now own 74.49% of the pro
rata priority capital and residual equity interests in TWE, and
certain additional senior and junior priority capital interests.
The remaining 25.51% pro rata priority capital and residual
equity limited partnership interests are owned by a subsidiary of
U S WEST, Inc. ("U S WEST"). The ITOCHU/Toshiba Transaction was
accounted for by the purchase method of accounting for business
combinations.
The TWE partnership agreement provides for special allocations
of income, loss and distributions of partnership capital,
including priority distributions in the event of liquidation. TWE
reported net income of $83 million and $145 million in the nine
months ended September 30, 1995 and 1994, respectively, no
portion of which was allocated to the limited partners.
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Each Time Warner General Partner has guaranteed a pro rata
portion of approximately $6 billion of TWE's debt and accrued
interest at September 30, 1995, based on the relative fair value
of the net assets each Time Warner General Partner contributed to
TWE. Such indebtedness is recourse to each Time Warner General
Partner only to the extent of its guarantee.
Set forth below is summarized financial information of the
Entertainment Group, which reflects the consolidation by TWE of
the TWE-Advance/Newhouse Partnership effective as of April 1,
1995, the deconsolidation of Six Flags Entertainment Corporation
("Six Flags") effective as of June 23, 1995 and the consolidation
of Paragon Communications ("Paragon") effective as of July 6,
1995.
TIME WARNER ENTERTAINMENT GROUP
Three Months Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
(millions)
Operating Statement Information
Revenues $2,363 $2,215 $6,871 $6,205
Depreciation and amortization 267 261 780 719
Business segment operating income 274 236 749 673
Interest and other, net 128 155 467 451
Income before income taxes 129 66 235 177
Income before extraordinary item 103 42 173 137
Net income 79 42 149 137
Nine Months
Ended September 30,
1995 1994
(millions)
Cash Flow Information
Cash provided by operations $ 1,205 $1,091
Capital expenditures (1,099) (772)
Investments and acquisitions (143) (154)
Investment proceeds 1,040 43
Loan to Time Warner - (250)
Increase (decrease) in debt (1,094) 42
Collections on note receivable from U S WEST 375 129
Capital distributions (957) (119)
Increase (decrease) in cash and equivalents (632) 10
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September 30, December 31,
1995 1994
(millions)
Balance Sheet Information
Cash and equivalents $ 439 $1,071
Total current assets 2,943 3,571
Total assets 18,541 18,992
Total current liabilities 2,955 2,953
Long-term debt 6,181 7,160
Minority interests 634 -
Time Warner General Partners' senior capital 1,398 1,663
TWE partners' capital 6,351 6,233
The assets and cash flows of TWE are restricted by the TWE
partnership and credit agreements and are unavailable for use by
the partners and their affiliates except through the payment of
certain fees, reimbursements, cash distributions and loans, which
are subject to limitations. At September 30, 1995 and December
31, 1994, the Time Warner General Partners had recorded $178
million and $89 million, respectively, of stock option related
distributions due from TWE, based on closing prices of Time
Warner common stock of $39.75 and $35.125, respectively. Time
Warner is paid when the options are exercised. During 1995, the
Time Warner General Partners received net distributions from TWE
in the amount of $957 million, consisting of $366 million of TWE
partnership income allocated to the Time Warner General Partners'
senior capital interest, $575 million of tax-related
distributions (of which $334 million was accrued at December 31,
1994) and $16 million of stock option related distributions.
On June 23, 1995, TWE sold 51% of its interest in Six Flags to
an investment group led by Boston Ventures for $204 million and
received $640 million in additional proceeds from Six Flags,
representing payment of certain intercompany indebtedness and
licensing fees. As a result of the transaction, Six Flags has
been deconsolidated and TWE's remaining 49% interest in Six Flags
is now accounted for under the equity method of accounting. TWE
reduced debt by approximately $850 million in connection with the
transaction, and approximately $140 million of income on the
transaction was deferred by TWE principally as a result of its
guarantee of certain third-party, zero-coupon indebtedness of Six
Flags due in 1999.
3. TBS TRANSACTION
Time Warner has entered into an Agreement and Plan of Merger
dated as of September 22, 1995 (the "Merger Agreement"),
providing for the merger of Turner Broadcasting System, Inc.
("TBS") with a wholly-owned subsidiary of Time Warner (the
"Merger"). Alternatively, the Merger Agreement contemplates that
the structure of the transaction may be changed, if the parties
so agree, so that each of Time Warner and TBS will merge with
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separate subsidiaries of a newly formed holding company (the
"Holding Company Transaction" and together with the Merger, the
"TBS Transaction"). If the Holding Company Transaction is
implemented, it is expected that the issued and outstanding
shares of each class of the capital stock of Time Warner will be
converted into shares of an identical class of capital stock of
the newly formed holding company. In connection with the TBS
Transaction, Time Warner has agreed to enter into certain
agreements and related transactions with certain shareholders of
TBS, including R. E. Turner and Liberty Media Corporation
("LMC"). The Merger Agreement and certain related agreements
provide for either Time Warner or the newly formed holding
company, as applicable, to issue approximately 171.3 million
shares of common stock ("Common Stock") in exchange for the
outstanding TBS capital stock, to issue approximately 13 million
stock options to replace all outstanding TBS options, and to
assume TBS' indebtedness (which approximated $2.3 billion at
September 30, 1995). As part of the TBS Transaction, LMC will
exchange the 50.8 million shares of Common Stock to be received
by LMC in the TBS Transaction for a number of shares of a new
class of voting stock economically equivalent to such Common
Stock ("LMC Class Stock") and will receive a number of additional
shares of LMC Class Stock equivalent to five million shares of
Common Stock pursuant to a separate option agreement, all of
which will be placed in a voting trust or, in certain
circumstances, exchanged for non-voting stock.
The Merger is subject to customary closing conditions,
including the approval of the shareholders of TBS and of Time
Warner, all necessary approvals of the Federal Communications
Commission and appropriate antitrust approvals. There can be no
assurance that all these approvals can be obtained or, in the
case of governmental approvals, if obtained, will not be
conditioned upon changes to the terms of the Merger Agreement or
the related agreements.
4. CABLE TRANSACTIONS
On April 1, 1995, TWE formed a cable television joint venture
with the Advance/Newhouse Partnership ("Advance/Newhouse") to
which Advance/Newhouse and TWE contributed cable television
systems (or interests therein) serving approximately 4.5 million
subscribers, as well as certain foreign cable investments and
programming investments. TWE owns a two-thirds equity interest in
the TWE-Advance/Newhouse Partnership and is the managing partner.
TWE consolidates the partnership and the one-third equity
interest owned by Advance/Newhouse is reflected in TWE's balance
sheet as minority interest. In accordance with the partnership
agreement, Advance/Newhouse can require TWE to purchase its
equity interest for fair market value at specified intervals
following the death of both of its principal shareholders.
Beginning in the third year, either partner can initiate a
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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
partnership were recorded at their predecessor's historical cost.
No gain was recognized by TWE upon the capitalization of the partnership.
On May 2, 1995, Time Warner acquired Summit Communications
Group, Inc. ("Summit"), which owns cable television systems
serving approximately 162,000 subscribers, in exchange for the
issuance of approximately 1.5 million shares of Common Stock and
approximately 3.3 million shares of a new convertible preferred
stock ("Series C Preferred Stock") and the assumption of $140
million of indebtedness. The acquisition was accounted for by the
purchase method of accounting for business combinations;
accordingly, the cost to acquire Summit of approximately $351
million was preliminarily allocated to the assets acquired in the
amount of $666 million and to the liabilities assumed in the
amount of $315 million, in proportion to estimates of their
respective fair values.
On July 6, 1995, Time Warner acquired KBLCOM Incorporated
("KBLCOM"), which owns cable television systems serving
approximately 700,000 subscribers and a 50% interest in Paragon,
which owns cable television systems serving an additional 972,000
subscribers. The other 50% interest in Paragon was already owned
by TWE. To acquire KBLCOM, Time Warner issued 1 million shares of
Common Stock and 11 million shares of a new convertible preferred
stock ("Series D Preferred Stock") and assumed or incurred
approximately $1.2 billion of indebtedness. The acquisition was
accounted for by the purchase method of accounting for business
combinations; accordingly, the cost to acquire KBLCOM of
approximately $1.033 billion was preliminarily allocated to the
assets acquired in the amount of $3.091 billion and to the
liabilities assumed in the amount of $2.058 billion, in
proportion to estimates of their respective fair values.
Time Warner's previously-announced acquisition of Cablevision
Industries Corporation ("CVI") and related companies is expected
to close during the fourth quarter of 1995 or in early 1996.
On a pro forma basis, giving effect to Time Warner's
acquisitions of KBLCOM and Summit and the ITOCHU/Toshiba
Transaction as if they had occurred at the beginning of the
periods, Time Warner would have reported revenues of $5.866
billion and $5.351 billion, a loss before extraordinary item of
$221 million and $183 million ($.81 and $.72 per common share,
respectively) and a net loss of $263 million and $183 million
($.92 and $.72 per common share, respectively) for the nine
months ended September 30, 1995 and 1994, respectively.
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5. LONG-TERM DEBT
On June 30, 1995, a wholly-owned subsidiary of Time Warner
("TWI Cable"), TWE and the TWE-Advance/Newhouse Partnership
executed a five-year revolving credit facility (the "New Credit
Agreement"). The New Credit Agreement enables such entities to
refinance certain indebtedness assumed from the companies
acquired or to be acquired in the cable acquisitions, to
refinance TWE's indebtedness under a pre-existing bank credit
agreement and to finance the ongoing working capital, capital
expenditure and other corporate needs of each borrower.
The New Credit Agreement permits borrowings in an aggregate
amount of up to $8.3 billion. Borrowings are limited to $4
billion in the case of TWI Cable, $5 billion in the case of the
TWE-Advance/Newhouse Partnership and $8.3 billion in the case of
TWE, subject in each case to certain limitations and adjustments.
Such borrowings will bear interest at specific rates for each of
the three borrowers, generally equal to LIBOR plus a margin
initially ranging from 50 to 87.5 basis points based on the
credit rating or financial leverage of the applicable borrower.
The New Credit Agreement contains 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.
On July 6, 1995, TWI Cable borrowed approximately $1.2 billion
under the New Credit Agreement to refinance certain indebtedness
assumed or incurred in the acquisition of KBLCOM.
On August 15, 1995, Time Warner redeemed all of its $1.8
billion principal amount of outstanding Redeemable Reset Notes
due August 15, 2002 (the "Reset Notes") in exchange for new
securities, consisting of approximately $454 million aggregate
principal amount of Floating Rate Notes due August 15, 2000,
approximately $272 million aggregate principal amount of 7.975%
Notes due August 15, 2004, approximately $545 million aggregate
principal amount of 8.11% Debentures due August 15, 2006, and
approximately $545 million aggregate principal amount of 8.18%
Debentures due August 15, 2007.
On September 18, 1995, Time Warner redeemed approximately $1
billion principal amount of its 8.75% Convertible Subordinated
Debentures due 2015 (the "8.75% Convertible Debentures") for an
aggregate redemption price of $1.06 billion, including redemption
premiums and accrued interest thereon. The redemption was
financed with approximately $500 million of proceeds raised from
the issuance of 7.75% ten-year notes in June 1995, $363 million
of net proceeds raised from the issuance of Company-obligated
mandatorily redeemable preferred securities of a subsidiary in
August 1995 and available cash and equivalents.
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An extraordinary loss of $42 million was recognized in the third
quarter of 1995 in connection with Time Warner's redemption of
the 8.75% Convertible Debentures and the write-off by TWE of
deferred financing costs related to its former bank credit
agreement.
6. MANDATORILY REDEEMABLE PREFERRED SECURITIES
On August 15, 1995, Time Warner issued approximately 12.1
million Company-obligated mandatorily redeemable preferred
securities of a wholly-owned subsidiary ("PERCS") for aggregate
gross proceeds of $374 million. The sole assets of the subsidiary
that is the obligor on the PERCS are $385 million principal
amount of 4% subordinated notes of Time Warner due December 23,
1997. Cumulative cash distributions are payable on the PERCS at
an annual rate of 4%, or $1.24 per PERCS. The PERCS are
mandatorily redeemable on December 23, 1997, for an amount per
PERCS equal to the lesser of $54.41, and the market value of a
share of common stock of Hasbro, Inc. ("Hasbro") on December 17,
1997, payable in cash or, at Time Warner's option, Hasbro common
stock. Time Warner has the right to redeem the PERCS at any time
prior to December 23, 1997, at an amount per PERCS equal to
$54.41 (or in certain limited circumstances the lesser of such
amount and the market value of a share of Hasbro common stock at
the time of redemption) plus accrued and unpaid distributions
thereon and a declining premium, payable in cash or, at Time
Warner's option, Hasbro common stock. Time Warner owns
approximately 12.1 million shares of Hasbro common stock, which
can be used by Time Warner, at its election, to satisfy its
obligations under the PERCS or its obligations under its zero
coupon exchangeable notes due 2012. Such zero coupon notes are
exchangeable and redeemable into an aggregate 12.1 million shares
of Hasbro common stock. Time Warner has certain obligations
relating to the PERCS which amount to a full and unconditional
guaranty of such subsidiary's obligations with respect thereto.
7. CAPITAL STOCK
Changes in shareholders' equity are as follows:
Nine Months
Ended September 30,
1995 1994
(millions)
Balance at beginning of year $1,148 $1,370
Net loss (199) (103)
Common dividends declared (103) (99)
Preferred dividends declared (24) (9)
Issuance of common stock and preferred
stock in KBLCOM and Summit acquisitions 1,384 -
Issuance of preferred stock in
ITOCHU/Toshiba Transaction 1,350 -
Unrealized gains (losses) on certain
marketable equity investments 4 (30)
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Other, principally shares issued pursuant
to stock option and dividend
reinvestment plans 132 69
Balance at September 30 $3,692 $1,198
During 1995, Time Warner issued approximately 29.3 million
shares of convertible preferred stock in connection with the
ITOCHU/Toshiba Transaction and its acquisitions of KBLCOM and
Summit. Set forth below is a summary of the principal terms of
Time Warner's outstanding issuances of preferred stock at
September 30, 1995:
Number of Shares
of Common Stock Earliest Earliest
Shares Issuable Upon Exchange Redemption
Description Outstanding Conversion Date Date
(millions) (millions)
Series B Preferred Stock .4 - - At any time
Series C Preferred Stock 3.3 6.8 5/2/98 5/2/00
Series D Preferred Stock 11.0 22.9 7/6/99 7/6/00
Series G Preferred Stock 6.2 12.9 9/5/99 9/5/99
Series H Preferred Stock 1.8 3.7 9/5/00 9/5/99
Series I Preferred Stock 7.0 14.6 10/2/99 10/2/99
29.7 60.9
Each share of Series B Preferred Stock: (1) is entitled to a
liquidation preference of $145 per share, (2) is not convertible,
(3) entitles the holder thereof to receive an annual dividend
equal to $4.35 per share, (4) does not generally entitle the
holder thereof to vote, except in certain limited circumstances,
and (5) is redeemable, in whole or in part, by Time Warner and
the holders thereof in exchange for cash or shares of any class
or series of publicly-traded Time Warner stock, at Time Warner's
option, equal in value to the liquidation value of the Series B
Preferred Stock plus a premium of 2% of liquidation value for
each year after May 31, 1995 to the redemption date.
The principal terms of each series of convertible preferred
stock issued in 1995 (the Series C Preferred Stock, the Series D
Preferred Stock, the Series G Preferred Stock, the Series H
Preferred Stock and the Series I Preferred Stock, and
collectively, the "Convertible Preferred Stock") are similar in
nature, unless otherwise noted below. Each share of Convertible
Preferred Stock: (1) is entitled to a liquidation preference of
$100 per share, (2) is immediately convertible into 2.08264
shares of Time Warner common stock at a conversion price of $48
per share (based on its liquidation value), except that shares of
the Series H Preferred Stock are generally not convertible until
after five years, (3) entitles the holder thereof (i) to receive
for a four year period from the date of issuance (or a five year
period with respect to the Series C Preferred Stock) an annual
dividend per share equal to the greater of $3.75 and an amount
equal to the dividends paid on the Time Warner common stock into
which each share may be converted and (ii) to the extent that any
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of such shares of preferred stock remain 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 dividends paid on shares of Time Warner common stock
multiplied by the number of shares into which their shares of
preferred stock are convertible and (4) except for the the Series
H Preferred Stock which is generally not entitled to vote,
entitles the holder thereof to vote with the common stockholders
on all matters on which the common stockholders are entitled to
vote, and each share of such Convertible Preferred Stock is
entitled to two votes on any such matter.
Time Warner has the right to exchange each series of
Convertible Preferred Stock for Time Warner common stock at the
stated conversion price at any time on or after the respective
exchange date. The Series C Preferred Stock is exchangeable by
the holder beginning after the third year from its date of
issuance 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 addition, Time Warner has the right
to redeem each series of Convertible Preferred Stock, in whole or
in part, for cash at the liquidation value plus accrued
dividends, at any time on or after the respective redemption date.
8. SEGMENT INFORMATION
Information as to the operations of Time Warner and the
Entertainment Group in different business segments is set forth
below. Cable business segment information for Time Warner
reflects the 1995 acquisitions of KBLCOM and Summit. Cable
business segment information for the Entertainment Group reflects
the consolidation by TWE of the TWE-Advance/Newhouse Partnership
effective as of April 1, 1995 and Paragon effective as of July 6,
1995. The operating results of Six Flags have been deconsolidated
effective as of June 23, 1995 and are now reported separately to
facilitate comparability.
Three Months Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
Revenues (millions)
Time Warner:
Publishing $ 914 $ 840 $2,673 $2,442
Music 992 1,051 2,969 2,685
Cable 83 - 83 -
Intersegment elimination (8) (7) (20) (18)
Total $1,981 $1,884 $5,705 $5,109
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Entertainment Group:
Filmed Entertainment $1,176 $1,056 $3,514 $3,143
Six Flags Theme Parks - 287 227 499
Broadcasting - The WB Network 7 - 13 -
Programming - HBO 409 386 1,195 1,122
Cable 858 552 2,196 1,663
Intersegment elimination (87) (66) (274) (222)
Total $2,363 $2,215 $6,871 $6,205
Three Months Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
Operating income (millions)
Time Warner:
Publishing $ 62 $ 56 $ 231 $ 212
Music(1) (39) 85 114 211
Cable (2) - (2) -
Total $ 21 $ 141 $ 343 $ 423
Entertainment Group:
Filmed Entertainment $ 70 $ 61 $ 196 $ 185
Six Flags Theme Parks - 35 29 52
Broadcasting - The WB Network (7) - (40) -
Programming - HBO 70 61 207 179
Cable 141 79 357 257
Total $ 274 $ 236 $ 749 $ 673
_______________
(1) Includes pretax losses of $85 million recorded in the third quarter of
1995 related to certain businesses and joint ventures owned by the Music
Division which are being restructured or closed. The losses are primarily
related to Warner Music Enterprises, one of the Company's direct marketing
efforts, and the write off of its related direct mail order assets that will
not be recoverable due to the closure of this business. Such closure will be
completed in the fourth quarter of 1995 and will not require any significant
cash outlays. The activities that will not be continued are not material
to the Company's results of operations, having resulted in insignificant
operating losses in prior periods.
Three Months Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
(millions)
Depreciation of Property, Plant and Equipment
Time Warner:
Publishing $ 15 $ 13 $ 43 $ 36
Music 24 21 71 60
Cable 13 - 13 -
Total $ 52 $ 34 $ 127 $ 96
Entertainment Group:
Filmed Entertainment $ 28 $ 20 $ 73 $ 53
Six Flags Theme Parks - 25 20 43
Broadcasting - The WB Network - - - -
Programming - HBO 4 2 13 10
Cable 123 85 330 251
Total $ 155 $ 132 $ 436 $ 357
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Three Months Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
(millions)
Amortization of Intangible Assets (1)
Time Warner:
Publishing $ 9 $ 9 $ 27 $ 25
Music 72 66 210 198
Cable 34 - 34 -
Total $ 115 $ 75 $ 271 $ 223
Entertainment Group:
Filmed Entertainment $ 31 $ 33 $ 100 $ 97
Six Flags Theme Parks - 15 11 26
Broadcasting - The WB Network - - - -
Programming - HBO - 3 - 5
Cable 81 78 233 234
Total $ 112 $ 129 $ 344 $ 362
______________________
(1) Amortization includes all amortization relating to the
acquisitions of Warner Communications Inc. ("WCI") in 1989, the
American Television and Communications Corporation ("ATC")
minority interest in 1992, the acquisitions of KBLCOM and Summit
in 1995 and to other business combinations accounted for by the
purchase method.
9. CONTINGENCIES
Pending legal proceedings are substantially limited to
litigation incidental to businesses of Time Warner, alleged
damages in connection with class action lawsuits and the pending
litigation with U S WEST. In the opinion of counsel and
management, the ultimate resolution of these matters will not
have a material effect on the consolidated financial statements
of Time Warner.
10. ADDITIONAL FINANCIAL INFORMATION
Additional financial information is as follows:
Nine Months
Ended September 30,
1995 1994
(millions)
Interest expense $ 663 $ 571
Cash payments made for interest 537 453
Cash payments made for income taxes 207 320
Tax-related distributions received from TWE 575 115
Income tax refunds received 20 46
During the nine months ended September 30, 1995 and 1994, Time
Warner realized $35 million and $209 million, respectively, from
the securitization of receivables.
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TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The comparability of the results of operations and financial
condition of Time Warner and its Entertainment Group has been
affected during 1995 by (1) the ITOCHU/Toshiba Transaction which
resulted in a partial restructuring of Time Warner's ownership of
TWE, (2) Time Warner's acquisitions of KBLCOM and Summit, (3) the
consolidation of Paragon by TWE effective as of July 6, 1995, (4)
the deconsolidation of Six Flags by TWE effective as of June 23,
1995 as a result of the Six Flags transaction, (5) the formation
of the TWE-Advance/Newhouse Partnership on April 1, 1995 and (6)
certain debt refinancings and asset sales. The impact of these
transactions on the financial statements of Time Warner and the
Entertainment Group is discussed below.
RESULTS OF OPERATIONS
Time Warner had revenues of $1.981 billion, a loss of $102
million ($.30 per common share) before an extraordinary loss on
the retirement of debt and a net loss of $144 million ($.41 per
common share) for the three months ended September 30, 1995,
compared to revenues of $1.884 billion and a net loss of $32
million ($.09 per common share) for the three months ended
September 30, 1994.
Revenues of $5.705 billion, a loss of $157 million ($.47 per
common share) before an extraordinary loss on the retirement of
debt and a net loss of $199 million ($.58 per common share) were
reported for the nine months ended September 30, 1995, compared
to revenues of $5.109 billion and a net loss of $103 million
($.30 per common share) for the nine months ended September 30,
1994.
Time Warner's net loss for the three and nine month periods
ended September 30, 1995 was adversely affected by a $42 million
extraordinary loss on the retirement of debt and $85 million in
pretax losses ($52 million after taxes) related to certain
businesses and joint ventures owned by the Music Division which
are being restructured or closed. As discussed more fully below,
the increase in Time Warner's net loss for the three and nine
month periods ended September 30, 1995, was also principally
affected by lower operating income generated by Time Warner's
Music Division, a decrease in investment-related income and
higher interest expense on approximately $1.3 billion of debt
assumed in the cable acquisitions, offset in part by higher
operating income generated by Time Warner's Publishing Division
and increased income from Time Warner's equity in the pretax
income of the Entertainment Group.
Time Warner's equity in the pretax income of the Entertainment
Group was $129 million in the three months ended September 30,
1995, compared to $66 million in the three months ended September
30, 1994, and was $235 million in the nine months ended September
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30, 1995, compared to $177 million in the nine months ended
September 30, 1994. As discussed more fully below, the
Entertainment Group's operating results for the three and nine
month periods ended September 30, 1995 reflect an overall
increase in operating income generated by its business segments
(including the contribution by the TWE-Advance/Newhouse
Partnership), an increase in investment-related income and gains
on the sale of certain unclustered cable systems, offset by
higher floating-rates of interest paid on borrowings under TWE's
bank credit agreements and minority interest expense related to
the consolidation of the operating results of the TWE-
Advance/Newhouse Partnership effective as of April 1, 1995.
The relationship between income before income taxes and income
tax expense of Time Warner is principally affected by the
amortization of goodwill and certain other financial statement
expenses that are not deductible for income tax purposes. Income
tax expense of Time Warner includes all income taxes related to
its allocable share of partnership income and its equity in the
income tax expense of corporate subsidiaries of the Entertainment
Group.
EBITDA and operating income for Time Warner and the
Entertainment Group for the three and nine months ended September
30, 1995 and 1994 are as follows:
Three Months Ended September 30, Nine Months Ended September 30,
EBITDA Operating Income EBITDA Operating Income
1995 1994 1995 1994 1995 1994 1995 1994
Time Warner: (millions)
Publishing $ 86 $ 78 $ 62 $ 56 $ 301 $ 273 $231 $212
Music(1) 57 172 (39) 85 395 469 114 211
Cable 45 - (2) - 45 - (2) -
Total $188 $250 $ 21 $141 $ 741 $ 742 $343 $423
Entertainment Group:
Filmed
Entertainment $129 $114 $ 70 $ 61 $ 369 $ 335 $196 $185
Six Flags Theme
Parks - 75 - 35 60 121 29 52
Broadcasting - The
WB Network (7) - (7) - (40) - (40) -
Programming -
HBO 74 66 70 61 220 194 207 179
Cable 345 242 141 79 920 742 357 257
Total $541 $497 $274 $236 $1,529 $1,392 $749 $673
_______________
(1) Includes pretax losses of $85 million recorded in the third
quarter of 1995 related to certain businesses and joint ventures
owned by the Music Division which are being restructured or closed.
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Certain factors affecting comparative operating results are
discussed below on a business segment basis. That discussion
includes, among other factors, an analysis of changes in the
operating income of the business segments before depreciation and
amortization ("EBITDA") in order to eliminate the effect on the
operating performance of the music, filmed entertainment and
cable businesses of significant amounts of amortization of
intangible assets recognized in the $14 billion acquisition of
WCI in 1989, the $1.3 billion acquisition of the ATC minority
interest in 1992, the $1.4 billion acquisitions of KBLCOM and
Summit in 1995 and other business combinations accounted for by
the purchase method. Financial analysts generally consider EBITDA
to be an important measure of comparative operating performance
for the businesses of Time Warner and the Entertainment Group,
and when used in comparison to debt levels or the coverage of
interest expense, as a measure of liquidity. However, EBITDA
should be considered in addition to, not as a substitute for,
operating income, net income, cash flow and other measures of
financial performance and liquidity reported in accordance with
generally accepted accounting principles.
Three Months Ended September 30, 1995 Compared to the Three
Months Ended September 30, 1994
Time Warner
PUBLISHING. Revenues increased to $914 million, compared to
$840 million in the third quarter of 1994. EBITDA increased to
$86 million from $78 million. Depreciation and amortization
amounted to $24 million in 1995 and $22 million in 1994.
Operating income increased to $62 million from $56 million.
Revenues benefited from increases in magazine advertising and
book revenues, offset in part by a marginal decline in magazine
circulation revenues. Contributing to the revenue gain were
increases achieved by PEOPLE, SPORTS ILLUSTRATED, ENTERTAINMENT
WEEKLY and book publisher Oxmoor House. EBITDA and operating
income increased as a result of the revenue gains, offset in part
by significantly higher postal and paper costs as a result of
price increases.
MUSIC. Revenues decreased to $992 million, compared to $1.051
billion in the third quarter of 1994. EBITDA decreased to $57
million from $172 million. Depreciation and amortization,
including amortization related to the purchase of WCI, amounted
to $96 million in 1995 and $87 million in 1994. Operating income
decreased to a loss of $39 million from income of $85 million.
Operating results were adversely affected by $85 million in
losses recorded in the third quarter of 1995 that related to
certain businesses and joint ventures owned by the Music Division
which are being restructured or closed. Revenues decreased
principally due to a decline in international recorded music
sales relating to artist delays in the release of new product,
offset in part by increased music publishing revenues and the
effect from consolidating the operating results of certain
companies which had previously been accounted for under the
equity method of accounting (due to increases in Time Warner's
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ownership of such entities). EBITDA and operating income decreased as
a result of the losses, lower international recorded music results
and higher start-up losses for new business ventures, which more than
offset improved results for domestic recorded music and music publishing.
Operating income was further affected in 1995 by higher depreciation and
amortization related to certain acquisitions made in 1995 and 1994.
The losses relating to certain businesses and joint ventures being
restructured or closed are primarily related to Warner Music Enterprises,
one of the Company's direct marketing efforts, and the write off of its
related direct mail order assets that will not be recoverable due to the
closure of this business. Such closure will be completed in the fourth
quarter of 1995 and will not require any significant cash outlays or
otherwise significantly affect the results of future operations.
CABLE. As a result of Time Warner's acquisitions of KBLCOM and Summit
in 1995, cable operating results for 1995 included revenues of $83 million,
EBITDA of $45 million, depreciation and amortization of $47 million and an
operating loss of $2 million.
INTEREST AND OTHER, NET. Interest and other, net, increased to $259
million in the third quarter of 1995, compared to $177 million in the third
quarter of 1994. Interest expense increased to $234 million, compared to
$197 million, principally as a result of approximately $1.3 billion of
debt assumed in the cable acquisitions. There was other expense, net, of
$25 million in the third quarter of 1995, compared to other income, net,
of $20 million in 1994, principally because of a decrease in investment-
related income that included gains on the sale of certain assets in 1994.
Entertainment Group
FILMED ENTERTAINMENT. Revenues increased to $1.176 billion, compared
to $1.056 billion in the third quarter of 1994. EBITDA increased to $129
million from $114 million. Depreciation and amortization, including
amortization related to the purchase of WCI, amounted to $59 million in
1995 and $53 million in 1994. Operating income increased to $70 million
from $61 million. Revenues benefited from increases in worldwide theatrical,
home video and consumer products operations. Worldwide theatrical revenues in
1995 were led by the success of BATMAN FOREVER. EBITDA and operating income
benefited from the revenue gains.
SIX FLAGS THEME PARKS. As a result of TWE's sale of 51% of its interest
in Six Flags, the operating results of Six Flags have been deconsolidated
effective as of June 23, 1995 and TWE's remaining 49% interest in Six Flags
is now accounted for under the equity method of accounting. Operating results
for the third quarter of 1994 included revenues of $287 million, EBITDA of
$75 million, depreciation and amortization of $40 million and operating
income of $35 million.
BROADCASTING - THE WB NETWORK. The WB Network was launched in January
1995, and generated $7 million of operating losses on $7 million of
revenues in the third quarter of 1995. The third-quarter operating loss
was mitigated by a favorable legal settlement, as well as by funding from
a new limited partner in the network. Due to the start-up nature of this
new national broadcast operation, losses are expected to continue.
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PROGRAMMING - HBO. Revenues increased to $409 million,
compared to $386 million in the third quarter of 1994. EBITDA
increased to $74 million from $66 million. Depreciation and
amortization amounted to $4 million in 1995 and $5 million in
1994. Operating income increased to $70 million from $61 million.
Revenues benefited primarily from an increase in subscribers, as
well as from higher pay-TV rates. EBITDA and operating income
improved principally as a result of the revenue gains.
CABLE. Revenues increased to $858 million, compared to $552
million in the third quarter of 1994. EBITDA increased to $345
million from $242 million. Depreciation and amortization,
including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $204
million in 1995 and $163 million in 1994. Operating income
increased to $141 million from $79 million. Revenues and
operating results benefited from the formation of the TWE-
Advance/Newhouse partnership on April 1, 1995 and the
consolidation of Paragon effective as of July 6, 1995. Excluding
such effects, revenues benefited from increases in basic cable
and direct broadcast satellite subscribers and nonregulated
revenues, including pay-TV, pay-per-view and advertising.
Excluding the positive contributions from the TWE-
Advance/Newhouse Partnership and the consolidation of Paragon,
EBITDA and operating income increased as a result of the revenue
gains, offset in part by higher start-up costs for telephony
operations and, with respect to operating income only, higher
depreciation and amortization relating to increased capital spending.
INTEREST AND OTHER, NET. Interest and other, net, decreased to
$128 million in the third quarter of 1995, compared to $155
million in the third quarter of 1994. Interest expense increased
to $148 million, compared to $141 million in the third quarter of
1994, principally as a result of higher floating-rates of
interest paid on borrowings under TWE's bank credit agreement.
There was other income, net, of $20 million in the third quarter
of 1995, compared to other expense, net, of $14 million in 1994,
principally because of an increase in investment-related income
and gains on the sale of certain unclustered cable systems in
1995, offset in part by the inclusion in 1995 of minority
interest expense related to the TWE-Advance/Newhouse Partnership.
Investment-related income in 1995 benefited from income
recognized in connection with the restructuring of the
Entertainment Group's interest in Court TV.
Nine Months Ended September 30, 1995 Compared to the Nine Months
Ended September 30, 1994
Time Warner
PUBLISHING. Revenues increased to $2.673 billion, compared to
$2.442 billion in the first nine months of 1994. EBITDA increased
to $301 million from $273 million. Depreciation and amortization
amounted to $70 million in 1995 and $61 million in 1994.
Operating income increased to $231 million from $212 million.
Revenues benefited from increases in magazine circulation,
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advertising and book revenues. Contributing to the revenue gain
were increases achieved by PEOPLE, SPORTS ILLUSTRATED,
ENTERTAINMENT WEEKLY and book publisher Oxmoor House. EBITDA and
operating income increased as a result of the revenue gains,
offset in part by significantly higher postal and paper costs as
a result of price increases.
MUSIC. Revenues increased to $2.969 billion, compared to $2.685
billion in the first nine months of 1994. EBITDA decreased to
$395 million from $469 million. Depreciation and amortization,
including amortization related to the purchase of WCI, amounted
to $281 million in 1995 and $258 million in 1994. Operating
income decreased to $114 million from $211 million. Operating
results were adversely affected by $85 million in losses recorded
in the third quarter of 1995 that related to certain businesses
and joint ventures owned by the Music Division which are being
restructured or closed. The revenue growth in the first half of
1995 surpassed the third quarter decline and resulted from
increases on a year-to-date basis in both domestic and
international recorded music revenues, which benefited from a
number of popular releases and an increase in the percentage of
compact disc to total unit sales, and increased music publishing
revenues. As a result of increases in Time Warner's ownership in
certain direct marketing and merchandising joint ventures,
revenues also benefited from the consolidation of the operating
results of such companies which had previously been accounted for
under the equity method of accounting. Excluding the losses,
EBITDA increased, and operating income benefited, principally
from the revenue gains and interest income on the resolution of a
recorded music tax matter, offset in part by lower results from
direct marketing activities attributable to higher amortization
of member acquisition costs and expenses incurred in connection
with the settlement of certain employment contracts. Operating
income was further affected in 1995 by higher depreciation and
amortization related to certain acquisitions made in 1995 and
1994.
CABLE. As a result of Time Warner's acquisitions of KBLCOM and
Summit in 1995, cable operating results for 1995 included
revenues of $83 million, EBITDA of $45 million, depreciation and
amortization of $47 million and an operating loss of $2 million.
INTEREST AND OTHER, NET. Interest and other, net, increased to
$615 million in the first nine months of 1995, compared to $514
million in the first nine months of 1994. Interest expense
increased to $663 million from $571 million as a result of
approximately $1.3 billion of debt assumed in the cable
acquisitions and higher floating-rates of interest paid on $2.6
billion notional amount of interest rate swap contracts. Other
income, net, of $48 million in the first nine months of 1995
decreased from $57 million in 1994, principally because of a
decrease in investment-related income, which was offset by the
recognition in 1995 of interest income on the resolution of a
corporate tax matter. Investment-related income in both periods
benefited primarily from gains on the sale of certain assets,
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including the sale of an interest in QVC, Inc. in 1995, which
exceeded losses from reductions in the carrying value of certain
investments taken in each period.
Entertainment Group
FILMED ENTERTAINMENT. Revenues increased to $3.514 billion,
compared to $3.143 billion in the first nine months of 1994.
EBITDA increased to $369 million from $335 million. Depreciation
and amortization, including amortization related to the purchase
of WCI, amounted to $173 million in 1995 and $150 million in
1994. Operating income increased to $196 million from $185
million. Revenues benefited from increases in worldwide
theatrical, consumer products and television distribution
operations, as well as from international home video. Worldwide
theatrical revenues in 1995 were led by the success of BATMAN
FOREVER. EBITDA and operating income benefited from the revenue
gains and increased income from licensing operations.
SIX FLAGS THEME PARKS. As a result of TWE's sale of 51% of its
interest in Six Flags, the operating results of Six Flags have
been deconsolidated effective as of June 23, 1995 and TWE's
remaining 49% interest in Six Flags is now accounted for under
the equity method of accounting. Accordingly, revenues decreased
to $227 million, compared to $499 million in the first nine
months of 1994. EBITDA decreased to $60 million from $121
million. Depreciation and amortization amounted to $31 million in
1995 and $69 million in 1994. Operating income decreased to $29
million from $52 million.
BROADCASTING - THE WB NETWORK. The WB Network was launched in
January 1995, and generated $40 million of operating losses on
$13 million of revenues for the first nine months of 1995. The
operating loss was offset in part by a favorable legal settlement
in the third quarter of 1995 and funding from a new limited
partner in the network. Due to the start-up nature of this new
national broadcast operation, losses are expected to continue.
PROGRAMMING - HBO. Revenues increased to $1.195 billion,
compared to $1.122 billion in the first nine months of 1994.
EBITDA increased to $220 million from $194 million. Depreciation
and amortization amounted to $13 million in 1995 and $15 million
in 1994. Operating income increased to $207 million from $179
million. Revenues benefited primarily from an increase in
subscribers, as well as from higher pay-TV rates. EBITDA and
operating income improved principally as a result of the revenue gains.
CABLE. Revenues increased to $2.196 billion, compared to
$1.663 billion in the first nine months of 1994. EBITDA
increased to $920 million from $742 million. Depreciation and
amortization, including amortization related to the purchase of
WCI and the acquisition of the ATC minority interest, amounted to
$563 million in 1995 and $485 million in 1994. Operating income
increased to $357 million from $257 million. Revenues and
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operating results benefited from the formation of the TWE-
Advance/Newhouse Partnership on April 1, 1995 and the
consolidation of Paragon effective as of July 6, 1995. Excluding
such effects, revenues benefited from increases in basic cable and
direct broadcast satellite subscribers and nonregulated revenues,
including pay-TV, pay-per-view and advertising. Excluding the
positive contributions from the TWE-Advance/Newhouse Partnership
and the consolidation of Paragon, EBITDA and operating income
increased as a result of the revenue gains, offset in part by the
impact of the second round of cable rate regulations that went
into effect in July 1994, higher start-up costs for telephony
operations and, with respect to operating income only, higher
depreciation and amortization relating to increased capital
spending.
INTEREST AND OTHER, NET. Interest and other, net, increased to
$467 million in the first nine months of 1995, compared to $451
million in the first nine months of 1994. Interest expense
increased to $447 million, compared with $417 million in the
first nine months of 1994, principally as a result of higher
floating-rates of interest paid on borrowings under TWE's bank
credit agreements. Other expense, net, decreased to $20 million
in the first nine months of 1995 from $34 million in 1994,
principally because of an increase in investment-related income
and gains on the sale of certain unclustered cable systems,
offset in part by the inclusion in 1995 of minority interest
expense related to the TWE-Advance/Newhouse Partnership.
Investment-related income in 1995 benefited from income
recognized in connection with the restructuring of the
Entertainment Group's interest in Court TV.
FINANCIAL CONDITION AND LIQUIDITY
September 30, 1995
Time Warner
The financial condition of Time Warner was affected during 1995
by the ITOCHU/Toshiba Transaction, the cable transactions, debt
refinancings and asset sales that have closed during the year and
is expected to be further affected by the CVI acquisition and TBS
Transaction that are expected to close during the fourth quarter
of 1995 (or in early 1996) and in mid-1996, respectively. Time
Warner had $9.9 billion of debt, $378 million of cash and
equivalents (net debt of $9.5 billion) and $3.7 billion of
shareholders' equity at September 30, 1995, compared to $9.2
billion of debt, $282 million of cash and equivalents (net debt
of $8.9 billion) and $1.1 billion of shareholders' equity at
December 31, 1994. The increase in debt principally reflects the
assumption of approximately $1.3 billion of debt related to the
cable acquisitions, offset in part by debt reductions using
proceeds raised from asset sales. The increase in shareholders'
equity reflects the issuance in 1995 of approximately 2.5 million
shares of common stock and approximately 29.3 million shares of
preferred stock in connection with the ITOCHU/Toshiba Transaction
and the KBLCOM and Summit acquisitions. On a combined basis
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(Time Warner and the Entertainment Group together), there was
$15.3 billion of net debt at September 30, 1995, compared to $15
billion of net debt at the beginning of the year.
During 1995, Time Warner and TWE made progress in achieving
certain of their financial and operational objectives,
principally relating to the expansion of their reach in cable
television, the attainment of a new bank credit facility and
their plan to reduce debt with funds raised from the sale of non-
core assets. In addition, with the announcement in September 1995
of Time Warner's plan to merge with TBS, Time Warner has taken an
important step towards attaining one of its operational
objectives of achieving the appropriate balance between its
content and distribution businesses. The TBS Transaction is
expected to result in the issuance by Time Warner of
approximately 176 million shares of common stock and the
assumption of TBS' debt, which approximated $2.3 billion at
September 30, 1995. On a pro forma basis, giving effect to the
TBS Transaction and other previously announced transactions
(consisting of the cable transactions, ITOCHU/Toshiba
Transaction, asset sales and debt refinancings) as if they had
occurred at the beginning of 1994, Time Warner and the
Entertainment Group would have reported combined EBITDA of
approximately $4 billion for the year ended December 31, 1994,
compared to historical combined EBITDA of approximately $3 billion.
Time Warner completed its previously-announced acquisition of
KBLCOM in July 1995 and Summit in May 1995 and, together with the
formation of the TWE-Advance/Newhouse Partnership in April 1995,
the total number of subscribers under the management of Time
Warner Cable has increased to over 10 million, compared to 7.5
million at the end of 1994. The number of subscribers is expected
to increase further, to over 11.5 million, after the consummation
of the acquisition of CVI and related companies, which is
expected to close in the fourth quarter of 1995 or in early 1996.
On June 30, 1995, TWI Cable, TWE and the TWE-Advance/Newhouse
Partnership executed a five-year revolving credit facility. The
New Credit Agreement enables such entities to refinance certain
indebtedness assumed from the companies acquired or to be
acquired in the cable acquisitions, to refinance TWE's
indebtedness under a pre-existing bank credit agreement and to
finance the ongoing working capital, capital expenditure and
other corporate needs of each borrower.
The New Credit Agreement permits borrowings in an aggregate
amount of up to $8.3 billion. Borrowings are limited to $4
billion in the case of TWI Cable, $5 billion in the case of the
TWE-Advance/Newhouse Partnership and $8.3 billion in the case of
TWE, subject in each case to certain limitations and adjustments.
Such borrowings will bear interest at specific rates for each of
the three borrowers, generally equal to LIBOR plus a margin
initially ranging from 50 to 87.5 basis points based on the
credit rating or financial leverage of the applicable borrower.
The New Credit Agreement contains certain covenants for each
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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.
On July 6, 1995, TWI Cable borrowed approximately $1.2 billion
under the New Credit Agreement to refinance certain indebtedness
assumed or incurred in the acquisition of KBLCOM, and TWE
borrowed approximately $2.6 billion to repay and terminate its
pre-existing bank credit agreement.
Time Warner continues to pursue its plan to enhance its
financial position and that of the Entertainment Group through
sales of non-core assets and, to the extent that market
conditions remain favorable, through the issuance of debt to
redeem or otherwise repay certain higher-cost debt securities
that are currently outstanding. With the sale of 51% of TWE's
interest in Six Flags in June 1995, the sale of an interest in
QVC, Inc. in February 1995, the sale or expected sale of certain
unclustered cable systems and the proceeds raised from the
issuance of the PERCS in August 1995, Time Warner and the
Entertainment Group on a combined basis will have raised
approximately $1.6 billion for debt reduction.
The $363 million of net proceeds raised from the issuance of
the PERCS, taken together with approximately $500 million of
proceeds raised from the issuance of 7.75% ten-year notes in June
1995 and available cash and equivalents, were used to finance the
partial redemption in September 1995 of approximately $1 billion
principal amount of Time Warner's 8.75% Convertible Debentures
for an aggregate redemption price of $1.06 billion, including
redemption premiums and accrued interest thereon. Time Warner
also filed a shelf registration statement with the Securities and
Exchange Commission in August 1995 for the offering of up to $500
million of other mandatorily redeemable preferred securities of
certain subsidiaries, the proceeds of which will be used to reduce debt.
However, there can be no assurance that such offering will be completed.
On August 15, 1995, Time Warner redeemed all of its $1.8 billion
principal amount of outstanding Reset Notes in exchange for new
securities, consisting of approximately $454 million aggregate
principal amount of Floating Rate Notes due August 15, 2000, approximately
$272 million aggregate principal amount of 7.975% Notes due
August 15, 2004, approximately $545 million aggregate principal amount
of 8.11% Debentures due August 15, 2006, and approximately $545 million
aggregate principal amount of 8.18% Debentures due August 15, 2007.
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During the first nine months of 1995, cash provided by Time
Warner's operations amounted to $654 million and reflected $741
million of EBITDA from the Publishing, Music and Cable
businesses, $957 million of net distributions from TWE and $35
million from the securitization of receivables, less $537 million
of interest payments, $187 million of income taxes, $57 million
of corporate expenses and an increase in working capital
requirements. Cash provided by operations of $288 million in the
the first nine months of 1994 reflected $742 million of EBITDA
from the Publishing and Music businesses, $119 million of net
distributions from TWE, $209 million from the securitization of
receivables and a reduction in working capital requirements, less
$453 million of interest payments, $274 million of income taxes
and $57 million of corporate expenses.
Cash flows used in investing activities, excluding investment
proceeds, increased to $529 million in the first nine months of
1995, compared to $266 million in the first nine months of 1994,
principally as a result of higher investment spending by Time
Warner's business segments. As a result of management's debt
reduction program, investment proceeds increased to $332 million
in the first nine months of 1995, compared to $144 million in the
first nine months of 1994.
Cash flows used in financing activities increased to $361
million in the first nine months of 1995, compared to $48 million
in the first nine months of 1994, principally as a result of the
use of available cash and equivalents to redeem a portion of the
8.75% Convertible Debentures in September 1995. In addition, cash
dividends paid increased to $110 million in the first nine months
of 1995, compared to $105 million in the first nine months of 1994.
Time Warner has no claim on the assets and cash flows of TWE,
except through the payment of certain fees and reimbursements,
cash distributions and loans. Time Warner received over $950
million of net distributions from TWE in 1995 and an additional
$75 million of tax-related distributions are expected to be
received from TWE in the fourth quarter of 1995. Management
believes that Time Warner's operating cash flow, cash and
marketable securities and additional borrowing capacity are
sufficient to meet its capital and liquidity needs for the
foreseeable future without distributions and loans from TWE above
those permitted by existing agreements.
Time Warner uses derivative financial instruments to manage its
risk against fluctuations in interest rates and foreign currency
exchange rates. Interest rate swap contracts are used to adjust
the proportion of total debt that is subject to changes in short-
term rates. At September 30, 1995, Time Warner had interest rate
swap contracts to pay floating-rates of interest (average six-
month LIBOR rate of 6.2%) and receive fixed-rates of interest
(average rate of 5.4%) on $2.6 billion notional amount of
indebtedness, effectively converting 39% of Time Warner's
underlying debt, a substantial portion of which is fixed-rate,
and 39% of the combined debt of Time Warner and the Entertainment
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Group, to a floating-rate basis. Time Warner had interest rate
swap contracts on $2.9 billion notional amount of indebtedness at
December 31, 1994. Based on the current levels of outstanding
debt and interest rate swap contracts, each 25 basis point
increase in the level of interest rates prevailing at September
30, 1995 would reduce Time Warner's annual pretax income by an
estimated $14 million. Interest rate swap contracts are placed
with a number of major financial institutions in order to
minimize credit risk.
Based on the level of interest rates prevailing at September
30, 1995, the fair value of Time Warner's fixed-rate debt
exceeded its carrying value by $247 million and it would have
cost $66 million to terminate the related interest rate swap
contracts, which combined is the equivalent of an unrealized loss
of $313 million. Based on the level of interest rates prevailing
at December 31, 1994, the fair value of Time Warner's fixed-rate
debt was less than its carrying value by $572 million and it
would have cost $236 million to terminate its interest rate swap
contracts, which combined was the equivalent of an unrealized
gain of $336 million. Unrealized gains or losses on debt or
interest rate swap contracts are not recognized unless the debt
is retired or the contracts are terminated prior to their
maturity.
Foreign exchange contracts are used primarily to hedge the risk
that unremitted or future royalties and license fees owed to Time
Warner or TWE domestic companies for the sale or anticipated sale
of U.S. copyrighted products abroad may be adversely affected by
changes in foreign currency exchange rates. At September 30,
1995, Time Warner had contracts for the sale of $505 million and
the purchase of $144 million of foreign currencies at fixed
rates, primarily Japanese yen (9% of net contract value), French
francs (11%), English pounds (32%), Canadian dollars (17%) and
German marks (19%), compared to contracts for the sale of $551
million and the purchase of $109 million of foreign currencies at
December 31, 1994. Unrealized gains or losses are recorded in
income; accordingly, the carrying value of foreign exchange
contracts approximates market value. Time Warner had $20 million
and TWE had $8 million of net losses on foreign exchange
contracts during the first nine months of 1995, which were or are
expected to be offset by corresponding increases in the dollar
value of foreign currency royalties and license fee payments that
have been or are anticipated to be received from the sale of U.S.
copyrighted products abroad. Time Warner reimburses or is
reimbursed by TWE for contract gains and losses related to TWE's
foreign currency exposure. Foreign currency contracts are placed
with a number of major financial institutions in order to
minimize credit risk.
Entertainment Group
The financial condition of the Entertainment Group companies,
principally TWE, at September 30, 1995 was affected by the
formation of the TWE-Advance/Newhouse Partnership, the Six Flags
transaction and the consolidation of Paragon. TWE had $6.2
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billion of debt, $1.4 billion of Time Warner General Partners'
senior capital and $6.4 billion of partners' capital (net of the
$396 million uncollected portion of the note receivable from U S
WEST) at September 30, 1995, compared to $7.2 billion of debt,
$1.7 billion of Time Warner General Partners' senior capital and
$6.2 billion of partners' capital at December 31, 1994. The $1
billion reduction in debt resulted principally from the Six Flags
transaction. In addition, principally as a result of the payment
of over $950 million of distributions to Time Warner in 1995,
cash and equivalents decreased to $439 million at September 30,
1995, compared to $1.1 billion at December 31, 1994, reducing the
debt-net-of-cash amounts for TWE to $5.8 billion and $6.1
billion, respectively.
In the first nine months of 1995, cash provided by
Entertainment Group operations amounted to $1.205 billion and
reflected $1.529 billion of EBITDA from the Filmed Entertainment,
Six Flags Theme Parks, Broadcasting-The WB Network, Programming-
HBO and Cable businesses and a reduction in working capital
requirements, less $447 million of interest payments, $59 million
of income taxes and $47 million of corporate expenses. Cash
provided by operations of $1.091 billion in the first nine months
of 1994 reflected $1.392 billion of business segment EBITDA and a
reduction in working capital requirements, less $411 million of
interest payments, $48 million of income taxes and $45 million of
corporate expenses.
Cash flows used in investing activities decreased to $202
million in the first nine months of 1995, compared to $1.133
billion in the first nine months of 1994, principally as a result
of a $997 million increase in investment proceeds relating to
management's debt reduction program. Capital expenditures
increased to $1.099 billion in the first nine months of 1995,
compared to $772 million in the first nine months of 1994.
Capital spending by the Cable Division amounted to $832 million
in the first nine months of 1995, compared to $431 million in the
first nine months of 1994, and was financed in part through $375
million of collections on the note receivable from U S WEST.
Cable capital expenditures are budgeted to be approximately $400
million in the fourth quarter of 1995, and are expected to be
partially financed by approximately $250 million of additional
collections on the note receivable from U S WEST. Because
management believes that the conversion from coaxial to fiber-
optic cable is essential to achieving long-term growth in revenue
from telephony, cable and other services, significant cable
capital expenditures also are expected in subsequent years and
will be timed to match the rate at which demand for the new
services develops.
Cash flows from financing activities decreased to a use of cash
of $1.635 billion in the first nine months of 1995, compared to
$52 million of cash provided in the first nine months of 1994,
principally as a result of an approximate $1 billion reduction in
debt in 1995 and an $838 million increase in distributions paid
to Time Warner, offset in part by a $246 million increase in
collections on the note receivable from U S WEST.
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Warner Bros.' backlog, representing the amount of future
revenue not yet recorded from cash contracts for the licensing of
films for pay and basic cable, network and syndicated television
exhibition amounted to $958 million at September 30, 1995,
compared to $852 million at December 31, 1994 (including amounts
relating to HBO of $172 million at September 30, 1995 and $175
million at December 31, 1994). The backlog excludes advertising
barter contracts.
Management believes that TWE's operating cash flow, cash and
equivalents, collections on the note receivable from U S WEST and
additional borrowing capacity are sufficient to meet its capital
and liquidity needs for the foreseeable future.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, December 31,
1995 1994
(millions)
ASSETS
Current assets
Cash and equivalents $ 439 $ 1,071
Receivables, including $176 and $266 due from
Time Warner, less allowances of $325 and $306 1,351 1,426
Inventories 1,042 956
Prepaid expenses 111 120
Total current assets 2,943 3,573
Noncurrent inventories 1,763 1,807
Loan receivable from Time Warner 400 400
Property, plant and equipment, net 4,791 3,784
Goodwill 4,151 4,433
Cable television franchises 3,385 3,236
Other assets 1,053 1,429
Total assets $18,486 $18,662
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable $ 535 $ 514
Participations and programming costs 1,042 857
Other current liabilities, including $334
due to Time Warner at Dec. 31, 1994 1,361 1,486
Total current liabilities 2,938 2,857
Long-term debt 6,181 7,160
Other long-term liabilities, including
$256 and $89 due to Time Warner 984 749
Minority interests 634 -
Time Warner General Partners' senior capital 1,398 1,663
Partners' capital
Contributed capital 7,398 7,398
Undistributed partnership earnings (deficit) (651) (394)
Note receivable from U S WEST (396) (771)
Total partners' capital 6,351 6,233
Total liabilities and partners' capital $18,486 $18,662
See accompanying notes.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
(millions)
Revenues (a) $2,324 $2,203 $6,762 $6,177
Cost of revenues (a)(b) 1,589 1,553 4,640 4,337
Selling, general and
administrative (a)(b) 467 415 1,397 1,175
Operating expenses 2,056 1,968 6,037 5,512
Business segment operating income 268 235 725 665
Interest and other, net (a) (178) (155) (509) (435)
Corporate services (a) (17) (15) (47) (45)
Income before income taxes 73 65 169 185
Income taxes (26) (24) (62) (40)
Income before extraordinary item 47 41 107 145
Extraordinary loss on retirement
of debt (24) - (24) -
Net income $ 23 $ 41 $ 83 $ 145
__________________
(a) Includes the following income (expenses) resulting from
transactions with the partners of TWE:
Selling, general and administrative $(24) $ (26) $ (76) $ (69)
Corporate services (17) (15) (47) (45)
Interest and other, net 14 7 20 10
In addition, includes the following income (expenses) resulting
from transactions with equity affiliates of TWE or Time Warner:
Revenues $ 17 $ 20 $ 75 $ 87
Cost of revenues (19) (22) (72) (53)
Selling, general and administrative 2 5 14 19
(b) Includes depreciation and amortization
expense of: $260 $ 254 $ 761 $ 707
See accompanying notes.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
1995 1994
(millions)
OPERATIONS
Net income $ 83 $ 145
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt 24 -
Depreciation and amortization 761 707
Changes in operating assets and liabilities 326 199
Cash provided by operations 1,194 1,051
INVESTING ACTIVITIES
Investments and acquisitions (130) (113)
Capital expenditures (983) (742)
Loan to Time Warner - (250)
Investment proceeds 1,031 42
Cash used by investing activities (82) (1,063)
FINANCING ACTIVITIES
Borrowings 2,041 677
Debt repayments (3,135) (627)
Capital distributions (982) (157)
Collections on note receivable from U S WEST 375 129
Other (43) -
Cash provided (used) by financing activities (1,744) 22
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (632) 10
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,071 1,338
CASH AND EQUIVALENTS AT END OF PERIOD $ 439 $1,348
See accompanying notes.
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Time Warner Entertainment Company, L.P., a Delaware limited
partnership ("TWE"), is engaged principally in the Filmed
Entertainment, Six Flags Theme Parks, Broadcasting-The WB
Network, Programming-HBO and Cable businesses. Subsidiaries of
Time Warner Inc. ("Time Warner") are the general partners of TWE
("Time Warner General Partners"). Time Warner acquired the
limited partnership interests previously held by subsidiaries of
each of ITOCHU Corporation and Toshiba Corporation effective in
the third quarter of 1995. As a result, Time Warner and certain
of its wholly-owned subsidiaries collectively now own 74.49% of
the pro rata priority capital and residual equity partnership
interests in TWE, and certain priority capital interests senior
("Time Warner General Partners' senior capital") and junior to
the pro rata priority capital interests. The remaining 25.51%
pro rata priority capital and residual equity limited partnership
interests are owned by a subsidiary of U S WEST, Inc. ("U S
WEST"). The TWE partnership agreement provides for special
allocations of income, loss and distributions of partnership
capital, including priority distributions in the event of liquidation.
The consolidated financial statements include 100% of the
assets, liabilities, revenues, expenses, income, loss and cash
flows of TWE and all companies in which TWE has a direct and
indirect controlling voting interest ("subsidiaries"), as if TWE
and its subsidiaries were a single company. Investments in certain other
companies in which TWE has significant influence but less than a
controlling voting interest, are accounted for using the equity method.
The consolidated financial statements reflect the
deconsolidation of Six Flags Entertainment Corporation ("Six
Flags") effective as of June 23, 1995 as a result of the Six
Flags transaction, and the consolidation of Paragon Communications
("Paragon") effective as of July 6, 1995 as a result of an
increase in TWE's control over the management of such entity.
The accompanying financial statements are unaudited but in the
opinion of management contain all the adjustments (consisting of
those of a normal recurring nature) considered necessary to
present fairly the financial position and the results of
operations and cash flows for the periods presented, in
conformity with generally accepted accounting principles applicable
to interim periods. The accompanying financial statements should
be read in conjunction with the audited consolidated financial
statements of TWE for the year ended December 31, 1994.
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Intangible Assets
Intangible assets are recorded when the cost of acquired
companies exceeds the fair value of their tangible assets.
Intangible assets are amortized over periods up to forty years
using the straight-line method. TWE separately reviews the
carrying value of intangible assets for each acquired entity on a
quarterly basis to determine whether an impairment may exist. TWE
considers relevant cash flow and profitability information,
including estimated future operating results, trends and other
available information, in assessing whether the carrying value of
intangible assets can be recovered. Upon a determination that the
carrying value of intangible assets will not be recovered from
the undiscounted future cash flows of the acquired business, the
carrying value of such intangible assets would be considered
impaired and will be reduced by a charge to operations in the
amount of the impairment. Impairment is measured as any deficiency in
estimated undiscounted future cash flows of the acquired business
to recover the carrying value related to the intangible assets.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets to Be Disposed Of," ("FAS
121") effective for fiscal years beginning after December 15,
1995. The new rules establish standards for the recognition and
measurement of impairment losses on long-lived assets and certain
identifiable intangible assets, including goodwill. TWE expects
that the adoption of FAS 121 will not have a material effect on
its financial statements.
2. TWE-ADVANCE/NEWHOUSE PARTNERSHIP
On April 1, 1995, TWE formed a cable television joint venture
with the Advance/Newhouse Partnership ("Advance/Newhouse") to
which Advance/Newhouse and TWE contributed cable television
systems (or interests therein) serving approximately 4.5 million
subscribers, as well as certain foreign cable investments and
programming investments. TWE owns a two-thirds equity interest in
the TWE-Advance/Newhouse Partnership and is the managing partner.
TWE consolidates the partnership and the one-third equity
interest owned by Advance/Newhouse is reflected in TWE's balance
sheet as minority interest. In accordance with the partnership
agreement, Advance/Newhouse can require TWE to purchase its
equity interest for fair market value at specified intervals
following the death of both of its principal shareholders.
Beginning in the third year, 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
partnership were recorded at their predecessor's historical cost,
which, with respect to Advance/Newhouse, consisted of assets
contributed to the partnership of approximately $338 million and
liabilities assumed by the partnership of approximately $9
million. No gain was recognized by TWE upon the capitalization of
the partnership. On a pro forma basis, giving effect to the
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formation of the TWE-Advance/Newhouse Partnership as if it had
occurred at the beginning of the periods, TWE would have reported
revenues of $6.899 billion and $6.572 billion, for the nine
months ended September 30, 1995 and 1994, respectively. The pro
forma effect on TWE's net income for each of the nine month
periods ended September 30, 1995 and 1994 is not material.
3. SIX FLAGS
On June 23, 1995, TWE sold 51% of its interest in Six Flags to
an investment group led by Boston Ventures for $204 million and
received $640 million in additional proceeds from Six Flags,
representing payment of certain intercompany indebtedness and
licensing fees. As a result of the transaction, Six Flags has been
deconsolidated and TWE's remaining 49% interest in Six Flags is now
accounted for under the equity method of accounting. TWE reduced debt
by approximately $850 million in connection with the transaction,
and approximately $140 million of income on the transaction was
deferred by TWE principally as a result of its guarantee of
certain third-party, zero-coupon indebtedness of Six Flags due in 1999.
4. INVENTORIES
Inventories consist of:
September 30, 1995 December 31, 1994
Current Noncurrent Current Noncurrent
(millions)
Film costs:
Released, less amortization $ 623 $ 361 $ 585 $ 347
Completed and not released 124 27 123 24
In process and other 16 322 18 361
Library, less amortization - 730 - 769
Programming costs, less amortization 193 323 149 306
Merchandise 86 - 81 -
Total $1,042 $1,763 $ 956 $1,807
5. LONG-TERM DEBT
Long-term debt consists of:
September 30, December 31,
1995 1994
(millions)
Bank credit agreement, weighted average
interest rates of 6.4% and 6.5% $1,805 $2,550
Commercial paper, weighted average
interest rate of 6.2% at each date 583 649
Publicly held notes and debentures 3,781 3,903
Other 12 58
Total $6,181 $7,160
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On June 30, 1995, TWE, the TWE-Advance/Newhouse Partnership and
a wholly-owned subsidiary of Time Warner ("TWI Cable") executed a
five-year revolving credit facility (the "New Credit Agreement").
The New Credit Agreement enables such entities to refinance
certain indebtedness assumed from the companies acquired or to be
acquired in the cable acquisitions, to refinance TWE's
indebtedness under a pre-existing bank credit agreement and to
finance the ongoing working capital, capital expenditure and
other corporate needs of each borrower.
The New Credit Agreement permits borrowings in an aggregate
amount of up to $8.3 billion. Borrowings are limited to $4
billion in the case of TWI Cable, $5 billion in the case of the
TWE-Advance/Newhouse Partnership and $8.3 billion in the case of
TWE, subject in each case to certain limitations and adjustments.
Such borrowings will bear interest at specific rates for each of
the three borrowers, generally equal to LIBOR plus a margin
initially ranging from 50 to 87.5 basis points based on the
credit rating or financial leverage of the applicable borrower.
The New Credit Agreement contains 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.
On July 6, 1995, TWE borrowed approximately $2.6 billion under
the New Credit Agreement to repay and terminate its pre-existing
bank credit agreement. In connection therewith, TWE recognized
an extraordinary loss of $24 million to write-off deferred
financing costs related to the former credit agreement.
Long-term debt was reduced by approximately $850 million in
1995 as a result of the Six Flags transaction.
Each Time Warner General Partner has guaranteed a pro rata
portion of approximately $6 billion of TWE's debt and accrued
interest thereon based on the relative fair value of the net
assets each Time Warner General Partner contributed to TWE. Such
indebtedness is recourse to each Time Warner General Partner only
to the extent of its guarantee.
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6. PARTNERS' CAPITAL
Changes in partners' capital were as follows:
Nine Months
Ended September 30,
1995 1994
(millions)
Balance at beginning of year $6,233 $6,000
Net income 83 145
Distributions (371) (173)
Reduction of stock option distribution liability - 178
Reacquisition of Time Warner Service
Partnership Assets 124 -
Allocation of income to Time Warner General
Partners' senior capital (101) (94)
Collections on note receivable from U S WEST 375 129
Other 8 10
Balance at September 30 $6,351 $6,195
Since September 1993, certain assets formerly owned and
operated by TWE were owned and operated by other partnerships
(the "Time Warner Service Partnerships") in order to ensure
compliance with the Modification of Final Judgment entered on
August 24, 1982 by the United States District Court for the
District of Columbia applicable to U S WEST and its affiliated
companies, which may have included TWE. In 1994, U S WEST
received a judicial order that TWE was no longer prohibited from
owning or operating substantially all of such assets.
Accordingly, in September 1995, TWE reacquired substantially all
of the assets of the Time Warner Service Partnerships, subject to
the liabilities relating thereto, (the "Time Warner Service
Partnership Assets") in exchange for junior priority capital
interests in TWE equal to approximately $400 million. The
reacquisition was recorded for financial statement purposes based
on the $124 million historical cost of the Time Warner Service
Partnership Assets. Effective as of September 15, 1995, TWE is no
longer required to make quarterly cash distributions of $12.5
million to the Time Warner General Partners with respect to the
Time Warner Service Partnerships.
TWE is required to make distributions to reimburse the partners
for income taxes at statutory rates based on their allocable
share of taxable income, and to reimburse Time Warner for its
stock options granted to employees of TWE based on the amount by
which the market price of Time Warner common stock exceeds the
option exercise price on the exercise date. TWE accrues a stock
option distribution and a corresponding liability with respect to
unexercised options when the market price of Time Warner common
stock increases during the accounting period, and reverses
previously-accrued stock option distributions and the
corresponding liability when the market price of Time Warner
common stock declines.
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During the nine months ended September 30, 1995, TWE accrued
$25 million of Time Warner Service Partnership distributions,
$241 million of tax-related distributions and $105 million of
stock option distributions, based on closing prices of Time
Warner common stock of $39.75 at September 30, 1995 and $35.125
at December 31, 1994. During the nine months ended September 30,
1994, TWE accrued $38 million of Time Warner Service Partnership
distributions and $135 million of tax-related distributions, and
reversed $178 million of previously-accrued stock option
distributions as a result of a decline in the market price of
Time Warner common stock. During 1995, TWE paid $982 million of
distributions to the Time Warner General Partners, consisting of
$575 million of tax-related distributions, $25 million of Time
Warner Service Partnership distributions, $16 million of stock
option related distributions and $366 million of distributions of
TWE partnership income that had been allocated to the Time Warner
General Partners' senior capital interest.
7. SEGMENT INFORMATION
Information as to the operations of TWE in different business
segments is set forth below. Cable business segment information
reflects the consolidation by TWE of the TWE-Advance/Newhouse
Partnership effective as of April 1, 1995 and Paragon effective
as of July 6, 1995. The operating results of Six Flags have been
deconsolidated effective as of June 23, 1995 and are now reported
separately to facilitate comparability.
Three Months Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
(millions)
Revenues
Filmed Entertainment $1,174 $1,055 $3,508 $3,138
Six Flags Theme Parks - 287 227 499
Broadcasting - The WB
Network 7 - 13 -
Programming - HBO 404 381 1,181 1,108
Cable 826 546 2,107 1,654
Intersegment elimination (87) (66) (274) (222)
Total $2,324 $2,203 $6,762 $6,177
Three Months Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
(millions)
Operating Income
Filmed Entertainment $ 60 $ 55 $ 179 $ 171
Six Flags Theme Parks - 35 29 52
Broadcasting - The WB Network (7) - (40) -
Programming - HBO 70 59 207 177
Cable 145 86 350 265
Total $ 268 $ 235 $ 725 $ 665
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Three Months Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
(millions)
Depreciation of Property, Plant and Equipment
Filmed Entertainment $ 27 $ 19 $ 69 $ 50
Six Flags Theme Parks - 25 20 43
Broadcasting - The WB Network - - - -
Programming - HBO 3 2 11 9
Cable 118 79 317 243
Total $ 148 $ 125 $ 417 $ 345
Three Months Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
(millions)
Amortization of Intangible Assets (1)
Filmed Entertainment $ 31 $ 33 $ 100 $ 97
Six Flags Theme Parks - 15 11 26
Broadcasting - The WB Network - - - -
Programming - HBO - 3 - 5
Cable 81 78 233 234
Total $ 112 $ 129 $ 344 $ 362
______________
(1) Amortization includes amortization relating to the
acquisition of Warner Communications Inc. ("WCI") in 1989 and the
American Television and Communications Corporation ("ATC")
minority interest in 1992 and to other business combinations
accounted for by the purchase method.
8. COMMITMENTS AND CONTINGENCIES
Minimum commitments and guarantees under certain programming,
licensing, franchise and other agreements at September 30, 1995
aggregated approximately $5.4 billion, which are payable
principally over a five-year period.
Pending legal proceedings are substantially limited to
litigation incidental to the businesses of TWE. In the opinion of
counsel and management, the ultimate resolution of these matters
will not have a material effect on the consolidated financial
statements of TWE.
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9. ADDITIONAL FINANCIAL INFORMATION
Additional financial information is as follows:
Nine Months
Ended September 30,
1995 1994
(millions)
Interest expense $440 $414
Cash payments made for interest 442 408
Cash payments made for income taxes (net) 59 48
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TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The comparability of the results of operations and financial
condition of TWE has been affected during 1995 by (1) the
consolidation of Paragon by TWE effective as of July 6, 1995, (2)
the deconsolidation of Six Flags by TWE effective as of June 23,
1995 as a result of the Six Flags transaction, (3) the formation
of the TWE-Advance/Newhouse Partnership on April 1, 1995 and (4)
certain debt refinancings and asset sales. The impact of these
transactions on the financial statements of TWE is discussed
below.
RESULTS OF OPERATIONS
TWE had revenues of $2.324 billion, income of $47 million
before an extraordinary loss on the retirement of debt and net
income of $23 million for the three months ended September 30,
1995, compared to revenues of $2.203 billion and net income of
$41 million for the three months ended September 30, 1994.
Revenues of $6.762 billion, income of $107 million before an
extraordinary loss on the retirement of debt and net income of
$83 million were reported for the nine months ended September 30,
1995, compared to revenues of $6.177 billion and net income of
$145 million for the nine months ended September 30, 1994.
As discussed more fully below, TWE's operating results for the
three and nine month periods ended September 30, 1995 reflect an
overall increase in operating income generated by its business
segments (including the contribution by the TWE-Advance/Newhouse
Partnership) and gains on the sale of certain unclustered cable
systems, offset by higher floating-rates of interest paid on
borrowings under TWE's bank credit agreements and minority interest
expense related to the consolidation of the operating results of
the TWE-Advance/Newhouse Partnership effective as of April 1, 1995.
As a U.S. partnership, TWE is not subject to U.S. federal and
state income taxation. Income and withholding taxes of $26
million and $62 million in the three and nine months ended
September 30, 1995, respectively, and $24 million and $40 million
in the three and nine months ended September 30, 1994,
respectively, have been provided in respect of the operations of
TWE's domestic and foreign subsidiary corporations.
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EBITDA and operating income for TWE for the three and nine
months ended September 30, 1995 and 1994 are as follows:
Three Months Ended September 30,
EBITDA Operating Income
1995 1994 1995 1994
(millions)
Filmed Entertainment $118 $107 $ 60 $ 55
Six Flags Theme Parks - 75 - 35
Broadcasting - The WB Network (7) - (7) -
Programming - HBO 73 64 70 59
Cable 344 243 145 86
Total $528 $489 $268 $235
Nine Months Ended September 30,
EBITDA Operating Income
1995 1994 1995 1994
(millions)
Filmed Entertainment $ 348 $ 318 $179 $171
Six Flags Theme Parks 60 121 29 52
Broadcasting - The WB Network (40) - (40) -
Programming - HBO 218 191 207 177
Cable 900 742 350 265
Total $1,486 $1,372 $725 $665
Certain factors affecting comparative operating results are
discussed below on a business segment basis. That discussion
includes, among other factors, an analysis of changes in the
operating income of the business segments before depreciation and
amortization ("EBITDA") in order to eliminate the effect on the
operating performance of the filmed entertainment and cable
businesses of significant amounts of amortization of intangible
assets recognized in Time Warner's $14 billion acquisition of WCI
in 1989, the $1.3 billion acquisition of the ATC minority
interest in 1992 and other business combinations accounted for by
the purchase method. Financial analysts generally consider EBITDA
to be an important measure of comparative operating performance
for the businesses of TWE, and when used in comparison to debt
levels or the coverage of interest expense, as a measure of
liquidity. However, EBITDA should be considered in addition to,
not as a substitute for, operating income, net income, cash flow
and other measures of financial performance and liquidity
reported in accordance with generally accepted accounting principles.
Three Months Ended September 30, 1995 Compared to the Three
Months Ended September 30, 1994
FILMED ENTERTAINMENT. Revenues increased to $1.174 billion,
compared to $1.055 billion in the third quarter of 1994. EBITDA
increased to $118 million from $107 million. Depreciation and
amortization, including amortization related to the purchase of
WCI, amounted to $58 million in 1995 and $52 million in 1994.
Operating income increased to $60 million from $55 million.
video and consumer products operations. Worldwide theatrical
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revenues in 1995 were led by the success of BATMAN FOREVER.
EBITDA and operating income benefited from the revenue gains.
SIX FLAGS THEME PARKS. As a result of TWE's sale of 51% of
its interest in Six Flags, the operating results of Six Flags
have been deconsolidated effective as of June 23, 1995 and TWE's
remaining 49% interest in Six Flags is now accounted for under
the equity method of accounting. Operating results for the third
quarter of 1994 included revenues of $287 million, EBITDA of $75
million, depreciation and amortization of $40 million and
operating income of $35 million.
BROADCASTING - THE WB NETWORK. The WB Network was launched in
January 1995, and generated $7 million of operating losses on
$7 million of revenues in the third quarter of 1995. The third-
quarter operating loss was mitigated by a favorable legal
settlement, as well as by funding from a new limited partner in
the network. Due to the start-up nature of this new national
broadcast operation, losses are expected to continue.
PROGRAMMING - HBO. Revenues increased to $404 million,
compared to $381 million in the third quarter of 1994. EBITDA
increased to $73 million from $64 million. Depreciation and
amortization amounted to $3 million in 1995 and $5 million in
1994. Operating income increased to $70 million from $59 million.
Revenues benefited primarily from an increase in subscribers, as
well as from higher pay-TV rates. EBITDA and operating income
improved principally as a result of the revenue gains.
CABLE. Revenues increased to $826 million, compared to $546
million in the third quarter of 1994. EBITDA increased to $344
million from $243 million. Depreciation and amortization,
including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $199
million in 1995 and $157 million in 1994. Operating income
increased to $145 million from $86 million. Revenues and
operating results benefited from the formation of the TWE-
Advance/Newhouse partnership on April 1, 1995 and the
consolidation of Paragon effective as of July 6, 1995. Excluding
such effects, revenues benefited from increases in basic cable
subscribers and nonregulated revenues, including pay-TV, pay-per-
view and advertising. Excluding the positive contributions from
the TWE-Advance/Newhouse Partnership and the consolidation of
Paragon, EBITDA and operating income increased as a result of the
revenue gains, offset in part by higher start-up costs for telephony
operations and, with respect to operating income only, higher
depreciation and amortization relating to increased capital spending.
INTEREST AND OTHER, NET. Interest and other, net, increased to
$178 million in the third quarter of 1995, compared to $155
million in the third quarter of 1994. Interest expense increased
to $144 million, compared to $141 million in the third quarter of
1994, principally as a result of higher floating-rates of
interest paid on borrowings under TWE's bank credit agreement.
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Other expense, net, increased to $34 million in the third
quarter of 1995 from $14 million in 1994, principally because of
the inclusion in 1995 of minority interest expense related to the
TWE-Advance/Newhouse Partnership, offset in part by gains on the
sale of certain unclustered cable systems.
Nine Months Ended September 30, 1995 Compared to the Nine Months
Ended September 30, 1994
FILMED ENTERTAINMENT. Revenues increased to $3.508 billion,
compared to $3.138 billion in the first nine months of 1994.
EBITDA increased to $348 million from $318 million. Depreciation
and amortization, including amortization related to the purchase
of WCI, amounted to $169 million in 1995 and $147 million in
1994. Operating income increased to $179 million from $171
million. Revenues benefited from increases in worldwide
theatrical, consumer products and television distribution
operations, as well as from international home video. Worldwide
theatrical revenues in 1995 were led by the success of BATMAN
FOREVER. EBITDA and operating income benefited from the revenue
gains and increased income from licensing operations.
SIX FLAGS THEME PARKS. As a result of TWE's sale of 51% of
its interest in Six Flags, the operating results of Six Flags
have been deconsolidated effective as of June 23, 1995 and TWE's
remaining 49% interest in Six Flags is now accounted for under
the equity method of accounting. Accordingly, revenues decreased
to $227 million, compared to $499 million in the first nine
months of 1994. EBITDA decreased to $60 million from $121
million. Depreciation and amortization amounted to $31 million in
1995 and $69 million in 1994. Operating income decreased to $29
million from $52 million.
BROADCASTING-THE WB NETWORK. The WB Network was launched on
January 11, 1995, and generated $40 million of operating losses
on $13 million of revenues in the first nine months of 1995. The
operating loss was offset in part by a favorable legal settlement
in the third quarter of 1995 and funding from a new limited
partner in the network. Due to the start-up nature of this new
national broadcast operation, losses are expected to continue.
PROGRAMMING-HBO. Revenues increased to $1.181 billion,
compared to $1.108 billion in the first nine months of 1994.
EBITDA increased to $218 million from $191 million. Depreciation
and amortization amounted to $11 million in 1995 and $14 million
in 1994. Operating income increased to $207 million from $177
million. Revenues benefited primarily from an increase in
subscribers, as well as from higher pay-TV rates. EBITDA and
operating income improved principally as a result of the revenue
gains.
CABLE. Revenues increased to $2.107 billion, compared to
$1.654 billion in the first nine months of 1994. EBITDA increased
to $900 million from $742 million. Depreciation and amortization,
including amortization related to the purchase of WCI and the
acquisition of the ATC minority interest, amounted to $550
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million in 1995 and $477 million in 1994. Operating income
increased to $350 million from $265 million. Revenues and
operating results benefited from the formation of the TWE-
Advance/Newhouse Partnership on April 1, 1995 and the
consolidation of Paragon effective as of July 6, 1995. Excluding
such effects, revenues benefited from increases in basic cable
subscribers and nonregulated revenues, including pay-TV, pay-per-
view and advertising. Excluding the positive contributions from
the TWE-Advance/Newhouse Partnership and the consolidation of
Paragon, EBITDA and operating income increased as a result of the
revenue gains, offset in part by the impact of the second round
of cable rate regulations that went into effect in July 1994,
higher start-up costs for telephony operations and, with respect
to operating income only, higher depreciation and amortization
relating to increased capital spending.
INTEREST AND OTHER, NET. Interest and other, net, increased to
$509 million in the first nine months of 1995, compared to $435
million in the first nine months of 1994. Interest expense
increased to $440 million, compared with $414 million in the
first nine months of 1994, principally as a result of higher
floating-rates of interest paid on borrowings under TWE's bank
credit agreement. Other expense, net, increased to $69 million in
the first nine months of 1995 from $21 million in 1994,
principally because of the inclusion in 1995 of minority interest
expense related to the TWE-Advance/Newhouse Partnership, offset
in part by gains on the sale of certain unclustered cable
systems.
FINANCIAL CONDITION AND LIQUIDITY
September 30, 1995
The financial condition of TWE at September 30, 1995 was
affected by the formation of the TWE-Advance/Newhouse
Partnership, the Six Flags transaction and the consolidation of
Paragon. TWE had $6.2 billion of debt, $1.4 billion of Time
Warner General Partners' senior capital and $6.4 billion of
partners' capital (net of the $396 million uncollected portion of
the note receivable from U S WEST) at September 30, 1995,
compared to $7.2 billion of debt, $1.7 billion of Time Warner
General Partners' senior capital and $6.2 billion of partners'
capital at December 31, 1994. The $1 billion reduction in debt
resulted principally from the Six Flags transaction. In addition,
principally as a result of the payment of $982 million of
distributions to Time Warner in 1995, cash and equivalents
decreased to $439 million at September 30, 1995, compared to $1.1
billion at December 31, 1994, reducing the debt-net-of-cash
amounts to $5.8 billion and $6.1 billion, respectively.
During 1995, TWE and Time Warner made progress in achieving
certain of their financial and operational objectives,
principally relating to the expansion of their reach in cable
television, the attainment of a new bank credit facility and
their plan to reduce debt with funds raised from the sale of non-
core assets. TWE formed the TWE-Advance/Newhouse Partnership in
April 1995 and, together with Time Warner's completion of its
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previously-announced acquisitions of KBLCOM Incorporated in July
1995 and Summit Communications Group, Inc. in May 1995, the total
number of subscribers under the management of Time Warner Cable has
increased to over 10 million, compared to 7.5 million at the end of
1994. The number of subscribers is expected to increase further, to
over 11.5 million, after the consummation of Time Warner's acquisition of
Cablevision Industries Corporation and related companies, which is
expected to close in the fourth quarter of 1995 or in early 1996.
On June 30, 1995, TWE, the TWE-Advance/Newhouse Partnership
and TWI Cable executed a five-year revolving credit facility. The
New Credit Agreement enables such entities to refinance certain
indebtedness assumed from the companies acquired or to be
acquired in the cable acquisitions, to refinance TWE's
indebtedness under a pre-existing bank credit agreement and to
finance the ongoing working capital, capital expenditure and
other corporate needs of each borrower.
The New Credit Agreement permits borrowings in an aggregate
amount of up to $8.3 billion. Borrowings are limited to $4
billion in the case of TWI Cable, $5 billion in the case of the
TWE-Advance/Newhouse Partnership and $8.3 billion in the case of
TWE, subject in each case to certain limitations and adjustments.
Such borrowings will bear interest at specific rates for each of
the three borrowers, generally equal to LIBOR plus a margin
initially ranging from 50 to 87.5 basis points based on the
credit rating or financial leverage of the applicable borrower.
The New Credit Agreement contains 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.
On July 6, 1995, TWE borrowed approximately $2.6 billion under
the New Credit Agreement to repay and terminate its pre-existing
bank credit agreement.
TWE continues to pursue its plan to enhance its financial
position through sales of non-core assets. Principally as a result
of the sale of 51% of its interest in Six Flags in June 1995,
TWE has realized a $1 billion reduction in debt from the levels
existing at December 31, 1994. Proceeds to be raised from the sale
of certain unclustered cable systems scheduled to close over the
next six months are expected to be used for additional debt reduction.
In the first nine months of 1995, cash provided by TWE's
operations amounted to $1.194 billion and reflected $1.486
billion of EBITDA from the Filmed Entertainment, Six Flags Theme
Parks, Broadcasting-The WB Network, Programming-HBO and Cable
businesses and a reduction in working capital requirements, less
$442 million of interest payments, $59 million of income taxes
and $47 million of corporate expenses. Cash provided by
operations of $1.051 billion in the first nine months of 1994
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reflected $1.372 billion of business segment EBITDA and a
reduction in working capital requirements, less $408 million of
interest payments, $48 million of income taxes and $45 million of
corporate expenses.
Cash flows used in investing activities decreased to $82
million in the first nine months of 1995, compared to $1.063
billion in the first nine months of 1994, principally as a result
of a $989 million increase in investment proceeds relating to
management's debt reduction program. Capital expenditures
increased to $983 million in the first nine months of 1995,
compared to $742 million in the first nine months of 1994.
Capital spending by the Cable Division amounted to $718 million
in the first nine months of 1995, compared to $402 million in the
first nine months of 1994, and was financed in part through $375
million of collections on the note receivable from U S WEST.
Cable capital expenditures are budgeted to be approximately $400
million in the fourth quarter of 1995, and are expected to be
partially financed by approximately $250 million of additional
collections on the note receivable from U S WEST. Because
management believes that the conversion from coaxial to fiber-
optic cable is essential to achieving long-term growth in revenue
from telephony, cable and other services, significant cable capital
expenditures also are expected in subsequent years and will be
timed to match the rate at which demand for the new services develops.
Cash flows from financing activities decreased to a use of
cash of $1.744 billion in the first nine months of 1995, compared
to $22 million of cash provided in the first nine months of 1994,
principally as a result of an approximate $1 billion reduction in
debt in 1995 and an $825 million increase in distributions paid
to Time Warner, offset in part by a $246 million increase in
collections on the note receivable from U S WEST.
Warner Bros.' backlog, representing the amount of future
revenue not yet recorded from cash contracts for the licensing of
films for pay and basic cable, network and syndicated television
exhibition amounted to $958 million at September 30, 1995, compared
to $852 million at December 31, 1994 (including amounts relating to
HBO of $172 million at September 30, 1995 and $175 million at
December 31, 1994). The backlog excludes advertising barter contracts.
Management believes that TWE's operating cash flow, cash and
equivalents, collections on the note receivable from U S WEST and
additional borrowing capacity are sufficient to meet its capital
and liquidity needs for the foreseeable future.
Based on the level of interest rates prevailing at September
30, 1995, the fair value of TWE's long-term debt exceeded its
carrying value by $149 million. Based on the level of interest
rates prevailing at December 31, 1994, the fair value of TWE's
long-term debt was $460 million less than its carrying value.
Unrealized gains or losses on debt are not recognized unless the
debt is retired prior to its maturity.
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Foreign exchange contracts are used primarily to hedge the
risk that unremitted or future license fees owed to TWE domestic
companies for the sale or anticipated sale of U.S. copyrighted
products abroad may be adversely affected by changes in foreign
currency exchange rates. TWE is reimbursed by or reimburses Time
Warner for Time Warner contract gains and losses related to TWE's
exposure. At September 30, 1995, Time Warner had contracts for
the sale of $505 million and the purchase of $144 million of
foreign currencies at fixed rates and maturities of three months
or less. Of Time Warner's $361 million net sale contract
position, $119 million related to TWE's exposure, primarily
Japanese yen (24% of net contract position related to TWE),
French francs (20%), German marks (11%) and Canadian dollars
(19%), compared to a net sale contract position of $188 million
of foreign currencies at December 31, 1994. Unrealized gains or
losses are recorded in income; accordingly, the carrying value of
foreign exchange contracts approximates market value. TWE had $8
million of net losses on foreign exchange contracts during the
first nine months of 1995, which were or are expected to be
offset by corresponding increases in the dollar value of foreign
currency license fee payments that have been or are anticipated
to be received from the sale of U.S. copyrighted products abroad.
Time Warner places foreign currency contracts with a number of
major financial institutions in order to minimize credit risk.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the purported class actions entitled DIGITAL
DISTRIBUTION INC. d/b/a COMPACT DISC WAREHOUSE v. CEMA DISTRIBUTION,
et al. (the "California Federal Action") and BRENDEN BARRY v. CEMA
DISTRIBUTION, et al. (the "California State Action") described on
page 38 of Time Warner's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1995. In the California Federal Action,
the defendants moved to dismiss the complaint and, following an initial
court conference held in late August 1995, the plaintiff decided to
withdraw the complaint and file an amended complaint. On October 6, 1995,
the plaintiff filed an amended complaint, which defendants moved to
dismiss for failure to state a claim. A hearing on the motion to dismiss
is scheduled for January 8, 1996. In the California State Action, the
defendants filed a demurrer to the complaint for failure to state a cause
of action. The plaintiff has decided to withdraw the complaint and proposes
to file an amended complaint in December 1995.
Reference is made to the litigation entitled SAMUEL D. MOORE, et al. v.
AMERICAN FEDERATION OF TELEVISION AND RADIO ARTISTS, et al. described on
page I-43 of Time Warner's Annual Report on Form 10-K for the year ended
December 31, 1994. With respect to the remaining RICO claim against
the defendant recording companies, on September 21, 1995, the court
denied the recording company defendants' motion for summary judgment
seeking dismissal of the claim as premature.
Reference is made to the litigation commenced in September
1995 by U S WEST and a wholly owned subsidiary against Time
Warner and three of TWE's general partners (U S WEST, INC., et
al. v. TIME WARNER INC., et al. No. 14555) described on page 5 of
Time Warner's Current Report on Form 8-K dated September 22,
1995, which description is incorporated herein by reference. Time
Warner filed its answer and counterclaims to the lawsuit on
October 11, 1995. U S WEST filed a reply to the counterclaims on
October 31, 1995. Discovery is proceeding toward a scheduled
trial date of March 13, 1996.
In addition to the complaint filed by U S WEST, seventeen
complaints have been filed against TBS, Time Warner, certain
officers and directors of TBS, Time Warner or TWE, and other
defendants, purportedly on behalf of a class of TBS shareholders,
and two complaints have been filed against Time Warner, certain
officers and directors of Time Warner, and other defendants, by
Time Warner shareholders, purportedly derivatively on behalf of
Time Warner. The two complaints filed by Time Warner shareholders
were filed in the Court of Chancery of the State of Delaware in
and for New Castle County on October 30, 1995 (BERNARD v. TIME
WARNER INC., et al., No. 14651; PARNES v. TIME WARNER INC., et
al., No. 14660). Sixteen of the seventeen complaints filed by TBS
shareholders were filed in Superior Court, Fulton County,
Georgia; the other was filed in the Court of Chancery of the
State of Delaware in and for New Castle County. Of the complaints
filed in Georgia, fourteen were filed prior to the approval of
the TBS Transaction on September 22, 1995 by the Board of
Directors of Time Warner and the Board of Directors of
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TBS (SHINGALA v. TURNER BROADCASTING SYS., INC., et al., No. E-41502; SCHRANK
v. R. E. TURNER, et al., No. E-41501; LEWIS, et al. v. TURNER BROADCASTING
SYS., INC., et al., No. E-41500; SILVERSTEIN AND SILVERSTEIN v. TURNER
BROADCASTING SYS., INC., et al., No. E-41526; STRAUSS v. TURNER
BROADCASTING SYS., INC., et al., No. E-41538; HOFFMAN v. TED TURNER, et al.,
No. E-41544; BARRY v. TURNER BROADCASTING SYS., INC., et al., No. 41545;
MERSEL AND MERSEL v. R. E. TURNER, et al., No. E-41554; FRIEDLAND AND
FRIEDLAND v. TURNER BROADCASTING SYS., INC., et al., No. E-41562;
SCHWARZCHILD v. TURNER BROADCASTING SYS., INC., et al., No. E-41586; TURNER
AND HANSON v. TURNER BROADCASTING SYS., INC., et al., No. E-41637; H. MARK
SOLOMON v. TURNER BROADCASTING SYS., INC., et al., No. E-41685; SHORES v.
TURNER BROADCASTING SYS., INC., et al., No. E-41749; and KRIM AND DAVIDSON v.
TURNER BROADCASTING SYS., INC., et al., No. E-41779). Two of the complaints
filed in Georgia were filed after the TBS Transaction was approved by the
Board of Directors of Time Warner and the Board of Directors of TBS (ALTMAN
v. TURNER BROADCASTING SYS., INC., et al., No. E-43205; JOYCE v. TELE-
COMMUNICATIONS, INC., et al., No. 43321). On September 27, 1995, an amended
complaint was filed in SHINGALA. On October 24, 1995, an amended complaint
was filed in LEWIS, which apparently would consolidate thirteen of the
sixteen complaints filed in Georgia. On November 1, 1995, a second amended
complaint was filed in LEWIS. The second amended LEWIS complaint is essentially
the same as the first amended LEWIS complaint. The purported class action
filed by a TBS shareholder in Delaware was filed on October 2, 1995 (JOYCE
v. JOHN C. MALONE, et al., No. 14592). As noted above, an action on behalf
of the same plaintiff was filed in Georgia on October 23, 1995. (JOYCE
v. TELE-COMMUNICATIONS, INC., et al., No. 43321)
The seventeen purported class action complaints filed by TBS shareholders
allege, among other things, that the terms of the TBS Transaction are unfair
to TBS shareholders and that some or all of the defendants have breached
or aided and abetted the breach of fiduciary, common law and/or statutory
duties owed to TBS shareholders. Among the breaches alleged in many of the
complaints are (i) payment of unfair consideration for class members' shares,
(ii) conferral of benefits on controlling shareholders at the expense of
other shareholders, (iii) corporate waste, (iv) failure to seek competitive
bids and an independent appraisal of TBS and (v) entrenchment of TBS board
members. Some of the complaints allege that some or all of the defendants
have committed fraud and/or have used deceptive and coercive practices to
accomplish the TBS Transaction. Among other relief demanded, all of these
complaints seek damages, most seek an injunction against consummation of
the TBS Transaction, and many seek an auction of TBS.
By letter dated October 20, 1995, certain of the plaintiffs in the
Georgia actions made a demand upon TBS to repudiate certain of the
transactions relating to the Merger as corporate waste or, absent
repudiation, seek indemnification from any officers or directors of
TBS who authorized the challenged transactions. These plaintiffs indicated
that a shareholders' derivative suit seeking injunctive relief would
be filed in less than 90 days. These derivative claims have been asserted
in the LEWIS amended complaint referred to above.
The two purported class action complaints filed by Time Warner
shareholders allege, among other things, that some or all of the
defendants have violated fiduciary duties owed to Time Warner and
its shareholders by, among other things, (i) seeking to entrench
themselves in board and management positions and to eliminate the
threat of a hostile takeover, (ii) securing economic benefits for
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<PAGE>
themselves or conferring special benefits on Tele-Communications,
Inc. and others at the expense of Time Warner's public
shareholders, and (iii) structuring the TBS Transaction so as to
place Time Warner's chief executive officer in a position which
allegedly will involve a conflict between the interests of Tele-
Communications, Inc. and Time Warner. Among other relief
demanded, both complaints seek an injunction against consummation
of the TBS Transaction and an order directing the individual
defendants to account to Time Warner for their alleged profits
and plaintiffs' alleged damages.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The exhibits listed on the accompanying Exhibit Index are
filed or incorporated by reference as a part of this report and
such Exhibit Index is incorporated herein by reference.
(b) Reports on Form 8-K.
(i) Time Warner filed a Current Report on Form 8-K dated
August 14, 1995, which sets forth in Item 5 certain pro forma
financial statements of Time Warner and the Time Warner
Entertainment Group at June 30, 1995 that give effect to certain
transactions entered into by Time Warner and TWE during 1995.
(ii) Time Warner filed a Current Report on Form 8-K dated
August 31, 1995, reporting in Items 2 and 5 that it had signed definitive
agreements with each of ITOCHU Corporation ("ITOCHU") and Toshiba
Corporation ("Toshiba"), pursuant to which each of ITOCHU and Toshiba
agreed to exchange its pro rata priority capital and residual equity
interests in TWE, its residual equity interests in certain sister
partnerships of TWE, and its option to increase its interest in TWE under
certain circumstances for preferred stock of Time Warner and cash.
(iii) Time Warner filed a Current Report on Form 8-K dated
September 22, 1995, reporting in Item 5 that it had agreed to
acquire TBS (the "TBS Transaction") and, in connection with the
TBS Transaction, had agreed to enter into certain agreements and
related transactions with certain shareholders of TBS. The Merger
Agreement and certain related agreements provide for the issuance
of approximately 171.3 million shares of Common Stock in exchange
for the outstanding shares of TBS capital stock and approximately 13
million stock options to replace all outstanding TBS options, and the
assumption of TBS' indebtedness.
The Merger is subject to customary closing conditions,
including the approval of the shareholders of TBS and of Time
Warner, all necessary approvals of the Federal Communications
Commission and appropriate antitrust approvals. There can be no
assurance that all these approvals can be obtained or, in the
case of governmental approvals, if obtained, will not be
conditioned upon changes to the terms of the Merger Agreement or
the related agreements.
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<PAGE>
TIME WARNER INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Time Warner Inc.
(Registrant)
By: /s/ Richard J. Bressler
Name: Richard J. Bressler
Title: Senior Vice President and
Chief Financial Officer
Dated: November 14, 1995
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<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
2.1 Restructuring Agreement, dated as of August
31, 1995, among Time Warner Inc., ITOCHU
Corporation and ITOCHU Entertainment Inc.
(incorporated by reference to Exhibit 2(a)
to Time Warner's Current Report on Form 8-K
dated August 31, 1995 (the "August 31, 1995
Form 8-K")).
2.2 Restructuring Agreement, dated as of August
31, 1995, between Time Warner Inc. and Toshiba
Corporation (including Form of Registration
Rights Agreement, between Time Warner Inc.
and Toshiba Corporation) (incorporated by
reference to Exhibit 2(b) to the August 31,
1995 Form 8-K).
2.3 Agreement and Plan of Merger dated as of
September 22, 1995, among Time Warner Inc.,
Turner Broadcasting System, Inc. and Time
Warner Acquisition Corp. (incorporated by
reference to Exhibit 2(a) to Time Warner's
Current Report on Form 8-K dated September
22, 1995 (the "September 1995 Form 8-K")).
4.1 Form of Floating Rate Note Due August 15,
2000 of Time Warner Inc. (incorporated by
reference to Exhibit 4.2 to Time Warner's
Registration Statement on Form S-8 (File
No. 33-61497) filed with the Securities and
Exchange Commission on August 1, 1995 (the
"August 1995 Form S-8")).
4.2 Form of 7.975% Note Due August 15, 2004 of
Time Warner Inc. (incorporated by reference
to Exhibit 4.3 to the August 1995 Form S-8).
4.3 Form of 8.11% Debenture Due August 15, 2006
of Time Warner Inc. (incorporated by
reference to Exhibit 4.4 to the August 1995
Form S-8).
4.4 Form of 8.18% Debenture Due August 15, 2007
of Time Warner Inc. (incorporated by
reference to Exhibit 4.5 to the August 1995
Form S-8).
4.5 Certificate of Designations for Series G
Convertible Preferred Stock of Time Warner
Inc. (incorporated by reference to Exhibit
4(a) to the August 31, 1995 Form 8-K).
4.6 Certificate of Designations for Series H
Convertible Preferred Stock of Time Warner
Inc. (incorporated by reference to Exhibit
4(b) to the August 31, 1995 Form 8-K).
10.1 Shareholders' Agreement dated as of September
22, 1995, among Time Warner Inc., R.E. Turner
and certain associates and affiliates of R.E.
Turner (incorporated by reference to Exhibit
10(a) to the September 1995 Form 8-K).
10.2 LMC Agreement dated as of September 22, 1995,
among Time Warner Inc., Liberty Media
Corporation, TCI Turner Preferred, Inc.,
Communication Capital Corp. and United Turner
Investment, Inc. (incorporated by reference
to Exhibit 10(b) to the September 1995 Form 8-K).
10.3 Registration Rights Agreement, dated as of
September 5, 1995, among Time Warner Inc.,
ITOCHU Corporation and ITOCHU Entertainment Inc.
(incorporated by reference to Exhibit 10(a)
to the August 31, 1995 Form 8-K).
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<PAGE>
12 Computation of Ratio of Earnings to Fixed
Charges of Time Warner Inc.
27 Financial Data Schedule
99.1 Notice of Redemption of Redeemable Reset
Notes of Time Warner Inc. (incorporated by
reference to Exhibit T3E-1 to Amendment
No. 1 to Time Warner's Application for
Qualification of Indenture on Form T-3
(File No. 22-22213) filed with the
Securities and Exchange Commission on
August 1, 1995).
99.2 Complaint in U S WEST, Inc. et al. v. Time
Warner Inc., et al. (Civil Action No. 14555)
filed by U S WEST, Inc. in the Court of
Chancery of the State of Delaware in and
for New Castle County (incorporated by
reference to Exhibit 99(c) to the September
1995 Form 8-K).
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<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
TIME WARNER INC.
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted
from the financial statements of Time Warner Inc. for the quarter
ended September 30, 1995 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 378
<SECURITIES> 0
<RECEIVABLES> 2,183
<ALLOWANCES> 757
<INVENTORY> 461
<CURRENT-ASSETS> 3,133
<PP&E> 2,108
<DEPRECIATION> 1,020
<TOTAL-ASSETS> 21,422
<CURRENT-LIABILITIES> 2,837
<BONDS> 9,931
<COMMON> 387
0
30
<OTHER-SE> 3,275
<TOTAL-LIABILITY-AND-EQUITY> 21,422
<SALES> 5,705
<TOTAL-REVENUES> 5,705
<CGS> 3,396
<TOTAL-COSTS> 3,396
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 663
<INCOME-PRETAX> (94)
<INCOME-TAX> 63
<INCOME-CONTINUING> (157)
<DISCONTINUED> 0
<EXTRAORDINARY> (42)
<CHANGES> 0
<NET-INCOME> (199)
<EPS-PRIMARY> (.58)
<EPS-DILUTED> (.58)
</TABLE>
Time Warner
Ratio of Earnings to Fixed Charges EXHIBIT 12
(In millions, except ratios)
Nine Months Ended
September 30,
1995 1994
Earnings:
Net income (loss) before income taxes and
extraordinary item $ (94) $ 29
Interest expense 663 571
Amortization of capitalized interest 1 1
Portion of rents representative of an interest factor 39 40
Preferred stock dividend requirements of majority-
owned subsidiaries 3 -
Adjustment for partially owned subsidiaries and 50%
owned companies 530 485
Undistributed losses of less than 50%
owned companies 51 66
Total earnings $1,193 $1,192
Fixed Charges:
Interest expense $ 663 $ 571
Capitalized interest 1 1
Portion of rents representative of an
interest factor 39 40
Preferred stock dividend requirements
of majority-owned subsidiaries 3 -
Adjustment for partially owned subsidiaries
and 50% owned companies 533 485
Total fixed charges $1,239 $1,097
Ratio of earnings to fixed charges
(deficiency in the coverage of fixed
charges by earnings before fixed charges)(a) $ (46) $ 1.1x
Years Ended December 31
Restated
1994 1993 1992 1992 1991 1990
Earnings:
Net income (loss) before
income taxes and
extraordinary item $ 89 $ 81 $323 $320 $ 52 $(145)
Interest expense 769 698 287 729 912 1,096
Amortization of
capitalized interest 2 - 1 19 23 22
Portion of rents
representative of
an interest factor 52 54 52 85 78 74
Preferred stock dividend
requirements of majority-
owned subsidiaries - - - - - -
Adjustment for partially
owned subsidiaries and
50% owned companies 665 663 590 97 73 57
Undistributed losses
of less than 50%
owned companies 82 47 56 56 56 17
Total earnings $1,659 $1,543 $1,309 $1,306 $1,194 $1,121
Fixed Charges:
Interest expense $ 769 $ 698 $ 287 $ 729 $ 912 $1,096
Capitalized interest 2 - - 15 17 19
Portion of rents
representative of
an interest factor 52 54 52 85 78 74
Preferred stock dividend
requirements of
majority-owned
subsidiaries - - - - - -
Adjustment for partially
owned subsidiaries and
50% owned companies 668 664 571 81 45 33
Total fixed charges $1,491 $1,416 $910 $910 $1,052 $1,222
Ratio of earnings to fixed
charges (deficiency in
the coverage of fixed
charges by earnings
before fixed charges)(a) 1.1x 1.1x 1.4x 1.4x 1.1x ($101)
(a) For purposes of the ratio of earnings to fixed charges, earnings
were calculated by adding pretax income, interest expense, previously
capitalized interest amortized to expense, the portion of rents
representative of an interest factor, preferred stock dividend requirements
of majority-owned subsidiaries, Time Warner's proportionate share of
such items for its partially-owned subsidiaries and 50%-owned companies,
and undistributed losses of less-than-50% owned companies. Fixed charges
consist of interest expense, interest capitalized, the portion of rents
representative of an interest factor, preferred stock dividend require-
ments of majority-owned subsidiaries and Time Warner's proportionate
share of such items for partially-owned subsidiaries and 50%-owned
companies. For periods in which earnings before fixed charges were
insufficient to cover fixed charges, the dollar amount of coverage
deficiency, instead of the ratio, is disclosed. Earnings as defined
include significant noncash charges for depreciation and
amortization. Fixed charges for the nine months ended September
30, 1995 and 1994 include noncash interest expense of $156 million
and $162 million, respectively, relating to the Redeemable Reset
Notes due August 15, 2002 and Time Warner's zero coupon convertible
notes due 2012 and 2013.
