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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934 for the quarterly period ended March 31, 1996 , 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 391,596,162
Description of Class Shares Outstanding
as of April 30, 1996
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TIME WARNER INC. AND
TIME WARNER ENTERTAINMENT COMPANY, L.P.
INDEX TO FORM 10-Q
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Time
Warner TWE
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PART I. FINANCIAL INFORMATION
<S> <C> <C>
Management's discussion and analysis of results of operations and financial condition............ 1 31
Consolidated balance sheets at March 31, 1996 and December 31, 1995.............................. 15 37
Consolidated statements of operations for the three months ended March 31, 1996 and 1995......... 16 38
Consolidated statements of cash flows for the three months ended March 31, 1996 and 1995......... 17 39
Notes to consolidated financial statements....................................................... 18 40
PART II. OTHER INFORMATION........................................................................ 46
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PART I. FINANCIAL INFORMATION
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Time Warner has interests in three fundamental areas of business:
Entertainment, consisting principally of interests in recorded music and music
publishing, filmed entertainment, broadcasting, theme parks and cable television
programming; News and Information, consisting principally of interests in
magazine publishing, book publishing and direct marketing; and
Telecommunications, consisting principally of interests in cable television
systems. Substantially all of Time Warner's interests in filmed entertainment,
broadcasting, theme parks, cable television programming and a majority of its
cable television systems are held through the Entertainment Group, consisting
principally of TWE, which is not consolidated for financial reporting purposes.
TWE manages the telecommunications properties owned by Time Warner and the
combined cable television operations are conducted under the name of Time Warner
Cable. Capitalized terms are as defined and described in the accompanying
consolidated financial statements, or elsewhere herein.
Significant Transactions
In 1996, Time Warner and the Entertainment Group have announced or
completed a number of transactions that had or are expected to have a
significant effect on their results of operations and financial condition. Such
transactions include:
The acquisition by Time Warner of Cablevision Industries
Corporation ("CVI") and related companies on January 4, 1996, which
strengthened Time Warner Cable's geographic clusters of cable
television systems and substantially increased the number of cable
subscribers managed by Time Warner Cable. Time Warner Cable now
serves over 11.7 million subscribers in neighborhoods passing
nearly 20% of the television homes in the U.S. In connection with
the acquisition, Time Warner issued 2.9 million shares of common
stock and 6.5 million shares of new convertible preferred stock,
and assumed or incurred approximately $2 billion of indebtedness.
The issuance in April 1996 of 1.6 million shares of a new series of
exchangeable preferred stock ("Series K Preferred Stock"), which
pays cumulative dividends at the rate of 10 1/4% per annum. The
approximate $1.55 billion of net proceeds raised from this
transaction have been or will be used to reduce debt and, together
with other actions since the initiation of a $2-$3 billion debt
reduction program in February 1995, Time Warner and the
Entertainment Group have raised approximately $3.2 billion for debt
reduction.
The announcement in April 1996 of Time Warner's program to
repurchase, from time to time, up to 15 million shares of its
common stock. The common stock repurchase program will be supported
by a new five-year, $750 million revolving credit facility which is
expected to be repaid principally from the cash proceeds to be
received by Time Warner from the future exercise of employee stock
options.
The redemption in February 1996 of approximately $1.2 billion of
convertible debt using proceeds from 1995 and 1996 financings, the
effect of which was to lower interest rates, stagger debt
maturities and
1
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TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
eliminate the potential dilution from the conversion of such
security into 25.7 million shares of common stock.
The nature of these transactions and their impact on the results of
operations and financial condition of Time Warner and the Entertainment Group
are further discussed below.
TBS Transaction
With the announcement in September 1995 of Time Warner's plan to merge
with Turner Broadcasting System, Inc. ("TBS"), Time Warner has taken a strategic
step that would further enhance Time Warner's interests in entertainment and
news and information assets while improving the balance between such interests
and its interests in the telecommunications business. The addition of TBS's news
and entertainment programming networks, film and cartoon libraries, film
production companies and sports franchises is expected to complement virtually
all of Time Warner's business interests and expand the emphasis on growth
through Time Warner's interests in its entertainment and news and information
businesses.
As more fully described in Time Warner's audited consolidated financial
statements for the year ended December 31, 1995, the merger agreement between
Time Warner and TBS provides for the merger of each of Time Warner and TBS with
separate subsidiaries of a holding company ("New Time Warner" and collectively,
the "TBS Transaction") that will combine, for financial reporting purposes, the
consolidated net assets and operating results of Time Warner and TBS. Based on
TBS's financial position and results of operations as of and for the three
months ended March 31, 1996, and giving pro forma effect to the TBS Transaction
as if it had occurred on March 31, 1996 for balance sheet purposes and at the
beginning of the year for statement of operations purposes, the incremental
effect on Time Warner reflected in the combined pro forma financial statements
of New Time Warner would have been (i) an increase in shareholder's equity of
approximately $7.3 billion, principally due to the issuance by New Time Warner
of approximately 177.8 million shares of common stock, (ii) an increase in
long-term debt of approximately $2.5 billion due to the assumption of TBS's
debt, (iii) an increase in goodwill of approximately $7.9 billion as a result of
a preliminary allocation of the excess cost over the net book value of assets
acquired, (iv) an increase in revenues of $775 million, (v) an increase in
EBITDA (as defined below) of $63 million, (vi) an increase in depreciation and
amortization of $92 million, including approximately $50 million of noncash
amortization of goodwill, (vii) a decrease in operating income of $29 million,
(viii) an increase in net loss of $58 million and (ix) a reduction in net loss
per common share of $.01 per common share resulting from the dilutive effect of
issuing 177.8 million shares of common stock.
The TBS Transaction 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 (the "FCC") 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 related agreements. In addition, certain litigation is pending
relating to the TBS Transaction, including a lawsuit by U S WEST to enjoin the
consummation of the TBS Transaction. For further information, see "Legal
Proceedings" included elsewhere herein.
2
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TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Use of EBITDA
The following comparative discussion of the results of operations and
financial condition of Time Warner and the Entertainment Group 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 $2.3 billion acquisitions
of Summit, KBLCOM and CVI and related companies in 1995 and early 1996 and other
business combinations accounted for by the purchase method, including the
proposed TBS Transaction with respect to certain discussions on a pro forma
basis. 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.
RESULTS OF OPERATIONS
Time Warner had revenues of $2.068 billion, a loss of $93 million ($.32
per common share) before an extraordinary loss on the retirement of debt and a
net loss of $119 million ($.39 per common share) for the three months ended
March 31, 1996, compared to revenues of $1.817 billion and a net loss of $47
million ($.13 per common share) for the three months ended March 31, 1995. Time
Warner's equity in the pretax income of the Entertainment Group was $116 million
for the three months ended March 31, 1996, compared to $22 million for the three
months ended March 31, 1995.
On a pro forma basis, giving effect to (i) the 1995 and early 1996
acquisitions by Time Warner of Summit, KBLCOM and CVI and related companies, and
the 1995 formation by TWE of the TWE-Advance/Newhouse Partnership, (ii) the 1995
exchange of ITOCHU Corporation's and Toshiba Corporation's interests in TWE for
equity interests in Time Warner, (iii) the 1995 and early 1996 refinancing of
approximately $4 billion of public debt by Time Warner and the 1995 execution of
a new $8.3 billion credit agreement, under which approximately $2.7 billion of
debt assumed in the cable acquisitions was refinanced by subsidiaries of Time
Warner and $2.6 billion of pre-existing bank debt was refinanced by TWE, (iv)
the 1995 sale of 51% of TWE's interest in Six Flags and (v) the sale or expected
sale or transfer of certain unclustered cable television systems owned by TWE,
as if each of such transactions had occurred at the beginning of 1995, Time
Warner would have reported for the three months ended March 31, 1995, revenues
of $2.025 billion, depreciation and amortization of $230 million, operating
income of $119 million, equity in the pretax income of the Entertainment Group
of $55 million and a net loss of $61 million ($.25 per common share).
As discussed more fully below, the increase in Time Warner's loss
before the extraordinary item for the three months ended March 31, 1996 as
compared to pro forma results for the three months ended March 31, 1995 was
principally due to an overall decrease in operating income primarily related to
industry-wide softness in the domestic recorded music business associated with
the overexpanded U.S. retail marketplace and a decrease in
3
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TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
investment-related income related to gains on the sale of certain assets
recognized in 1995, offset in part by increased income from its equity in the
pretax income of the Entertainment Group. The comparison to historical results
for the three months ended March 31, 1995 is further affected by a $26 million
extraordinary loss in 1996 on the retirement of debt ($.07 per common share) and
higher interest expense in 1996 on approximately $3.3 billion of debt assumed or
incurred in the cable acquisitions. The increase in Time Warner's net loss per
common share for the three months ended March 31, 1996 over 1995 on an
historical basis also related to an increase in preferred dividend requirements
as a result of the preferred stock issued in 1995 and early 1996 in connection
with the cable acquisitions and the ITOCHU/Toshiba Transaction.
The Entertainment Group had revenues of $2.487 billion and net income
of $98 million for the three months ended March 31, 1996, compared to revenues
of $2.073 billion and net income of $11 million for the three months ended March
31, 1995. On a pro forma basis, giving effect to (i) the 1995 formation of the
TWE-Advance/Newhouse Partnership, (ii) the 1995 refinancing of approximately
$2.6 billion of pre-existing bank debt, (iii) the 1995 consolidation of
Paragon, (iv) the 1995 sale of 51% of TWE's interest in Six Flags and (v) the
sale or expected sale or transfer of certain unclustered cable television
systems owned by TWE, as if each of such transactions had occurred at the
beginning of 1995, the Entertainment Group would have reported for the three
months ended March 31, 1995, revenues of $2.261 billion, depreciation and
amortization of $270 million, operating income of $229 million and net income of
$40 million. As discussed more fully below, the Entertainment Group's operating
results for the three months ended March 31, 1996 as compared to pro forma
results for the three months ended March 31, 1995 reflect an overall increase in
operating income generated by its business segments and an increase in
investment-related income resulting from gains on the sale of certain
unclustered cable systems. The comparison to historical results for the three
months ended March 31, 1995 is further affected by the contribution to 1996
operating income by the TWE-Advance/Newhouse Partnership and interest savings in
1996 on lower average debt levels related to management's debt reduction
program, offset in part by 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.
4
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TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
EBITDA and operating income for Time Warner and the Entertainment Group
for the three months ended March 31, 1996 and 1995 are as follows:
<TABLE>
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Three Months Ended March 31,
-----------------------------------
EBITDA Operating Income
---------------- ----------------
1996 1995 1996 1995
---- ---- ---- ----
(millions)
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Time Warner:
Publishing.................................................................... $ 80 $ 77 $ 56 $ 55
Music......................................................................... 146 173 55 83
Cable......................................................................... 112 - (1) -
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Total......................................................................... $338 $250 $110 $138
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Entertainment Group:
Filmed Entertainment.......................................................... $136 $123 $ 73 $ 67
Six Flags Theme Parks......................................................... - 2 - (2)
Broadcasting - The WB Network................................................. (24) (21) (24) (21)
Programming - HBO............................................................. 81 71 76 67
Cable......................................................................... 368 256 146 90
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Total......................................................................... $561 $431 $271 $201
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Time Warner
Publishing. Revenues increased to $879 million, compared to $831
million in the first quarter of 1995. EBITDA increased to $80 million from $77
million. Depreciation and amortization amounted to $24 million in 1996 and $22
million in 1995. Operating income increased to $56 million from $55 million.
Revenues benefited from increases in magazine advertising and book revenues,
while magazine circulation revenues were flat. Contributing to the revenue gain
were increases achieved by People, Entertainment Weekly, Southern Living and the
direct marketing book businesses. EBITDA and operating income increased as a
result of the revenue gains, offset in part by substantially higher paper costs
as a result of price increases and development spending in new direct-marketing
businesses.
Music. Revenues decreased to $983 million, compared to $991 million in
the first quarter of 1995. EBITDA decreased to $146 million from $173 million.
Depreciation and amortization, including amortization related to the purchase of
WCI, amounted to $91 million in 1996 and $90 million in 1995. Operating income
decreased to $55 million from $83 million. Despite maintaining its leading
domestic market position (over 21%), the Music Division's domestic recorded
music operating results in 1996 were negatively affected by the industry-wide
softness in the overexpanded U.S. retail marketplace, which has and is expected
to continue to result in a number of music retail store closings and higher
returns of music product. The modest decline in revenues reflects the effects
from the current U.S. retail environment, including an increase in the Music
Division's reserve for returns to provide for an anticipated higher level of
returns, which was offset in part by slightly higher international recorded
music sales and an increase in music publishing revenues. EBITDA and operating
income decreased principally as a result of the decline in the domestic recorded
music business and lower results from direct marketing activities.
Cable. The 1996 Cable operating results reflect the acquisitions of
Summit effective as of May 2, 1995, KBLCOM effective as of July 6, 1995 and CVI
and related companies effective as of January 4, 1996 and are not comparative to
the corresponding period in the prior year. Cable operating results for the
first quarter of 1996
5
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TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
consisted of revenues of $217 million, EBITDA of $112 million, depreciation and
amortization of $113 million and an operating loss of $1 million.
Interest and Other, Net. Interest and other, net, increased to $296
million in the first quarter of 1996, compared to $155 million in the first
quarter of 1995. Interest expense increased to $247 million, compared to $210
million. The increase in interest expense was principally due to the assumption
or incurrence of approximately $3.3 billion of debt in the cable acquisitions,
offset in part by the favorable effect from Time Warner's redemption of the
8.75% Convertible Debentures. There was other expense, net, of $49 million in
the first quarter of 1996, compared to other income, net, of $55 million in
1995, principally because of a decrease in investment-related income resulting
from gains on certain asset sales recognized in 1995 in connection with
management's debt reduction program.
Entertainment Group
Filmed Entertainment. Revenues increased to $1.218 billion, compared to
$1.184 billion in the first quarter of 1995. EBITDA increased to $136 million
from $123 million. Depreciation and amortization, including amortization
related to the purchase of WCI, amounted to $63 million in 1996 and $56 million
in 1995. Operating income increased to $73 million from $67 million. Revenues
benefited from increases in worldwide home video and consumer products
operations. Worldwide theatrical revenues decreased due to a light release
schedule and difficult comparisons to successful films in the first quarter of
1995. 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
accounted for under the equity method of accounting.
Broadcasting - The WB Network. The WB Network recorded an operating
loss of $24 million on $15 million of revenues in the first quarter of 1996,
compared to an operating loss of $21 million on $3 million of revenues in the
first quarter of 1995. The increased revenues and operating losses are due to
the expansion of programming in September 1995 to two nights of primetime
scheduling, and the unveiling of Kids' WB!, the network's animated programming
lineup on Saturday mornings and weekdays. Due to the start-up nature of this new
national broadcast operation, losses are expected to continue.
Programming - HBO. Revenues increased to $419 million, compared to $390
million in the first quarter of 1995. EBITDA increased to $81 million from $71
million. Depreciation and amortization amounted to $5 million in 1996 and $4
million in 1995. Operating income increased to $76 million from $67 million.
Revenues benefited primarily from a significant increase in subscriptions.
EBITDA and operating income improved principally as a result of the revenue
gains.
Cable. Revenues increased to $947 million, compared to $578 million in
the first quarter of 1995. EBITDA increased to $368 million from $256 million.
Depreciation and amortization, including amortization related to the purchase of
WCI and the acquisition of the ATC minority interest, amounted to $222 million
in 1996 and $166 million in 1995. Operating income increased to $146 million
from $90 million. Revenues and operating results
6
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TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
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 an aggregate increase in basic cable and
Primestar-related, direct broadcast satellite subscribers that approached 6%,
increases in regulated cable rates as permitted under Time Warner Cable's
"social contract" with the FCC and increases in pay-per-view and advertising
revenues. 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, with respect to
operating income only, by higher depreciation and amortization relating to
increased capital spending.
Interest and Other, Net. Interest and other, net, decreased to $88
million in the first quarter of 1996, compared to $164 million in the first
quarter of 1995. Interest expense decreased to $121 million, compared to $151
million in the first quarter of 1995, principally as a result of interest
savings on lower average debt levels related to management's debt reduction
program and lower short-term, floating-rates of interest paid on borrowings
under TWE's former and existing bank credit agreements. There was other income,
net, of $33 million in the first quarter of 1996, compared to other expense,
net, of $13 million in 1995, principally due to an increase in
investment-related income resulting from gains on the sale of certain
unclustered cable systems recognized in 1996 in connection with management's
debt reduction program.
FINANCIAL CONDITION AND LIQUIDITY
March 31, 1996
Time Warner
Financial Condition
Time Warner had $11.5 billion of debt, $644 million of cash and
equivalents (net debt of $10.9 billion), $949 million of mandatorily redeemable
preferred securities of subsidiaries, and $4.3 billion of shareholders' equity
at March 31, 1996, compared to $9.9 billion of debt, $1.2 billion of cash and
equivalents (net debt of $8.7 billion), $949 million of mandatorily redeemable
preferred securities of subsidiaries and $3.7 billion of shareholders' equity at
December 31, 1995. The increase in debt principally reflects the assumption of
approximately $2 billion of debt related to the CVI acquisition, offset in part
by the use of $557 million of noncurrent cash and equivalents raised in the
December 1995 issuance of the Preferred Trust Securities to redeem the 8.75%
Convertible Debentures in early 1996. The increase in shareholders' equity
reflects the issuance in 1996 of approximately 2.9 million shares of common
stock and approximately 6.5 million shares of preferred stock in connection with
the CVI acquisition. On a combined basis (Time Warner and the Entertainment
Group together), there was $16.5 billion of net debt at March 31, 1996, compared
to $14.7 billion of net debt at the beginning of the year.
Investment in TWE
Time Warner's investment in TWE at March 31, 1996 consisted of
interests in 74.49% of the pro rata priority capital ("Series A Capital") and
residual equity capital ("Residual Capital") of TWE, and 100% of the senior
priority capital ("Senior Capital") and junior priority capital ("Series B
Capital") of TWE. Such priority capital interests provide Time Warner (and with
respect to the Series A Capital only, U S WEST) with certain priority
7
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TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
claims to the net partnership income of TWE and distributions of TWE partnership
capital, including certain priority distributions of partnership capital in the
event of liquidation or dissolution of TWE. Each level of priority capital
interest provides for an annual rate of return equal to or exceeding 8%,
including an above-market 13.25% annual rate of return (11.25% to the extent
concurrently distributed) related to Time Warner's Series B Capital interest,
which, when taken together with Time Warner's contributed capital, represented a
cumulative priority Series B Capital interest of $4.7 billion at March 31, 1996.
While the TWE partnership agreement contemplates the reinvestment of
significant partnership cash flows in the form of capital expenditures and
otherwise provides for certain other restrictions that are expected to limit
cash distributions on partnership interests for the foreseeable future, Time
Warner's $1.5 billion Senior Capital interest and, to the extent not previously
distributed, partnership income allocated thereto (based on an 8% annual rate of
return) is required to be distributed to Time Warner in three annual
installments beginning on July 1, 1997.
Series K Exchangeable Preferred Stock
In April 1996, Time Warner raised approximately $1.55 billion of net
proceeds for debt reduction in a private placement of 1.6 million shares of
Series K Preferred Stock, which pay cumulative dividends at the rate of 10 1/4%
per annum. The issuance of the Series K Preferred Stock allowed the Company to
realize cash proceeds through a security whose payment terms are principally
linked (until a reorganization of TWE occurs, if any) to a portion of Time
Warner's currently noncash-generating interest in the Series B Capital of TWE,
as more fully described herein. Time Warner used a portion of the proceeds
raised from the issuance of the Series K Preferred Stock to redeem $250 million
principal amount of 8.75% Debentures due April 1, 2017 for approximately $265
million in May 1996 (including redemption premiums and accrued interest
thereon), and to reduce bank debt of TWI Cable Inc. by $1 billion. In connection
with the redemption of the 8.75% Debentures due April 1, 2017, Time Warner
recognized an extraordinary loss of $9 million in May 1996.
Generally, the terms of the Series K Preferred Stock only require Time
Warner to pay cash dividends or to redeem, prior to its mandatory redemption
date, any portion of the security for cash upon the receipt of certain cash
distributions from TWE with respect to Time Warner's interests in the Series B
Capital and Residual Capital of TWE (excluding stock option related
distributions and certain tax related distributions). However, because such cash
distributions are subject to restrictions under the TWE partnership agreement,
Time Warner does not expect to pay cash dividends or to redeem any portion of
the Series K Preferred Stock for cash in the foreseeable future. Instead, Time
Warner expects to satisfy its dividend requirements through the issuance of
additional shares of Series K Preferred Stock with an aggregate liquidation
preference equal to the amount of such dividends. In addition, upon a
reorganization of TWE, Time Warner must elect either to redeem each outstanding
share of Series K Preferred Stock for cash, subject to certain conditions, or to
exchange the Series K Preferred Stock for new Series L Preferred Stock, which
also pays cumulative dividends at the rate of 10 1/4% per annum. The terms of
the Series L Preferred Stock do not require Time Warner to pay cash dividends
until July 2006 and provide Time Warner with an option to exchange the Series L
Preferred Stock, subject to certain conditions, into 10 1/4% Senior Subordinated
Debentures which do not require the payment of cash interest until July 2006.
See Note 7 to the accompanying consolidated financial statements for a summary
of the principal terms of the Series K Preferred Stock.
8
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TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Common Stock Repurchase Program
In April 1996, Time Warner's Board of Directors authorized a program to
repurchase, from time to time, up to 15 million shares of Time Warner common
stock. In connection therewith, Time Warner has entered into a letter of
commitment with a bank relating to a five-year, $750 million revolving credit
facility (the "Stock Option Proceeds Credit Facility") principally to support
such stock repurchases. The common stock repurchased under the program is
expected to be used to satisfy future share issuances related to the exercise of
existing employee stock options. Actual repurchases in any period will be
subject to market conditions. As of May 1, 1996, Time Warner has acquired
approximately 2.3 million shares of its common stock for an aggregate cost of
approximately $92 million. Such repurchases were funded with short-term
borrowings that are expected to be refinanced with borrowings under the Stock
Option Proceeds Credit Facility expected to be in effect by the end of May 1996.
The Stock Option Proceeds Credit Facility will provide for borrowings
of up to $750 million, of which up to $100 million will be reserved solely for
the payment of interest and fees thereunder. Borrowings under the Stock Option
Proceeds Credit Facility will generally bear interest at LIBOR plus a margin
equal to 75 basis points and will generally be required to be prepaid from the
cash proceeds received by Time Warner from the exercise of designated employee
stock options. Such prepayments will permanently reduce the borrowing
availability under the facility. At March 31, 1996, the aggregate exercise
prices of outstanding vested, "in the money" stock options was approximately
$1.95 billion, representing a 2.6 to 1 coverage ratio over the related borrowing
availability. To the extent that such stock option proceeds are not sufficient
to satisfy Time Warner's obligations under the Stock Option Proceeds Credit
Facility, Time Warner will generally be required to repay such borrowings using
proceeds from the sale of shares of its common stock to be placed in escrow
under the Stock Option Proceeds Credit Facility or, at Time Warner's election,
using available cash on hand. Time Warner will initially place an estimated 37.5
million shares in escrow under this arrangement and may, from time to time, have
up to 52.5 million shares held in escrow. Such shares will not be considered to
be issued and outstanding capital stock of the Company.
Because borrowings under the Stock Option Proceeds Credit Facility are
expected to be principally repaid by Time Warner from the cash proceeds from the
exercise of employee stock options, Time Warner's principal credit rating
agencies have concluded that such borrowings and related financing costs will be
credit neutral and will be excludable from long-term debt and interest expense,
respectively, for purposes of determining Time Warner's leverage and coverage
ratios.
Debt Refinancings
In 1996, as more fully described below, Time Warner continued to
capitalize on favorable market conditions through certain debt refinancings,
which lowered interest rates, staggered debt maturities and, with respect to the
redemption of the 8.75% Convertible Debentures in February 1996, eliminated the
potential dilution from the conversion of such security into 25.7 million shares
of common stock.
In January 1996, in connection with its acquisition of CVI and related
companies, Time Warner assumed $500 million of public notes and debentures of
CVI and a subsidiary of Time Warner borrowed $1.5 billion under
9
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
its $8.3 billion credit agreement to refinance a like-amount of other
indebtedness assumed or incurred in such acquisition.
In February 1996, Time Warner redeemed the remaining $1.2 billion
principal amount of 8.75% Convertible Debentures for $1.28 billion, including
redemption premiums and accrued interest thereon. The redemption was financed
with (1) proceeds raised from a $575 million issuance of Company-obligated
mandatorily redeemable preferred securities of a subsidiary in December 1995 and
(2) $750 million of proceeds raised from the issuance in January 1996, of (i)
$400 million principal amount of 6.85% debentures due 2026, which are redeemable
at the option of the holders thereof in 2003, (ii) $200 million principal amount
of 8.3% discount debentures due 2036, which do not pay cash interest until 2016,
(iii) $166 million principal amount of 7.48% debentures due 2008 and (iv) $150
million principal amount of 8.05% debentures due 2016. In connection with the
1996 redemption of the 8.75% Convertible Debentures, Time Warner recognized an
extraordinary loss of $26 million.
Cash Flows
During the first three months of 1996, Time Warner's cash used by
operations amounted to $59 million and reflected $338 million of EBITDA from its
Publishing, Music and Cable businesses, $63 million of distributions from TWE,
less $291 million of interest payments, $16 million of income taxes, $18 million
of corporate expenses and $135 million related to an increase in other working
capital requirements, balance sheet accounts and noncash items. Cash used by
operations of $74 million for the first quarter of 1995 reflected $250 million
of EBITDA from the Publishing and Music businesses, $1 million of net
distributions from TWE, less $204 million of interest payments, $73 million of
income taxes, $20 million of corporate expenses and $28 million related to an
increase in other working capital requirements, balance sheet accounts and
noncash items.
Cash used by investing activities, excluding investment proceeds,
increased to $345 million for the first quarter of 1996, compared to $181
million in 1995, principally as a result of the cash portion of the
consideration paid to acquire CVI and related companies. Capital expenditures
increased to $67 million in the first quarter of 1996, compared to $38 million
in 1995, principally as a result of higher cable capital spending associated
with Time Warner's cable acquisitions. Investment proceeds were $150 million for
the first quarter of 1996, compared to $212 million for the first quarter of
1995.
Cash used by financing activities was $287 million for the first
quarter of 1996, compared to cash provided by financing activities of $70
million for the first quarter of 1995, principally as a result of the use of
$557 million of noncurrent cash and equivalents raised in the December 1995
issuance of the Preferred Trust Securities to redeem the remaining portion of
8.75% Convertible Debentures in February 1996, offset in part by borrowings
incurred to finance the cash portion of the consideration paid to acquire CVI
and related companies. In addition, cash dividends paid increased to $67 million
for the first quarter of 1996, compared to $36 million for the first quarter of
1995 principally as a result of dividends paid on the preferred stock issued
subsequent to the first quarter of 1995.
The assets and cash flows of TWE are restricted by the TWE partnership
agreement and are unavailable to Time Warner except through the payment of
certain fees, reimbursements, cash distributions and loans, which are subject to
limitations. Under the New Credit Agreement, TWE and TWI Cable are permitted to
incur additional
10
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
indebtedness to make loans, advances, distributions and other cash payments to
Time Warner, subject to their respective compliance with the cash flow coverage
and leverage ratio covenants contained therein.
Management believes that Time Warner's operating cash flow, cash and
marketable securities and additional borrowing capacity are sufficient to fund
its capital and liquidity needs for the foreseeable future without distributions
and loans from TWE above those permitted by existing agreements.
Entertainment Group
Financial Condition
The Entertainment Group had $5.7 billion of debt, $1.5 billion of Time
Warner General Partners' Senior Capital and $6.6 billion of partners' capital
(net of the $98 million uncollected portion of the note receivable from U S
WEST) at March 31, 1996, compared to $6.2 billion of debt, $1.4 billion of Time
Warner General Partners' Senior Capital and $6.6 billion of partners' capital
(net of the $169 million uncollected portion of the note receivable from U S
WEST) at December 31, 1995. Cash and equivalents were $141 million at March 31,
1996, compared to $209 million at December 31, 1995, reducing the
debt-net-of-cash amounts for the Entertainment Group to $5.6 billion and $6
billion, respectively.
Cash Flows
In the first quarter of 1996, the Entertainment Group's cash provided
by operations amounted to $557 million and reflected $561 million of EBITDA from
the Filmed Entertainment, Broadcasting-The WB Network, Programming-HBO and Cable
businesses and $174 million related to a reduction in working capital
requirements, other balance sheet accounts and noncash items, less $149 million
of interest payments, $12 million of income taxes and $17 million of corporate
expenses. Cash provided by operations of $317 million in the first quarter of
1995 reflected $431 million of business segment EBITDA and $85 million related
to a reduction in working capital requirements, less $169 million of interest
payments, $15 million of income taxes and $15 million of corporate expenses.
Cash used by investing activities decreased to $243 million in the
first three months of 1996, compared to $322 million in the first three months
of 1995, principally as a result of a $113 million increase in investment
proceeds relating to certain sales of unclustered cable television systems in
connection with management's debt reduction program. Capital expenditures
increased to $331 million in the first three months of 1996, compared to $300
million in the first three months of 1995, principally as a result of higher
cable capital spending as discussed more fully below.
Cash provided by financing activities decreased to a use of cash of
$382 million in the first three months of 1996, compared to $201 million of cash
provided by financing activities in the first three months of 1995, principally
as a result of a $435 million net reduction in debt in 1996 and a $62 million
increase in distributions paid to Time Warner, offset in part by a $79 million
decrease in collections on the note receivable from U S WEST.
11
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Management believes that TWE's operating cash flow, cash and
equivalents, collections on the U S WEST Note and additional borrowing capacity
are sufficient to fund its capital and liquidity needs for the foreseeable
future.
Cable Capital Spending
Since the beginning of 1994, Time Warner Cable has been engaged in a
plan to upgrade the technological capability and reliability of its cable
television systems and develop new services, which it believes will position the
business for sustained, long-term growth. Capital spending by Time Warner Cable,
including the cable operations of both Time Warner and TWE, amounted to $293
million in the three months ended March 31, 1996, compared to $222 million in
the three months ended March 31, 1995, and was financed in part through
collections on the note receivable from U S WEST of $71 million and $150
million, respectively. Cable capital spending is budgeted to be approximately
$1.3 billion for the remainder of 1996 and is expected to be funded principally
by cable operating cash flow and $98 million of collections on the remaining
portion of the note receivable from U S WEST. In exchange for certain
flexibility in establishing cable rate pricing structures for regulated services
that went into effect on January 1, 1996 and consistent with Time Warner Cable's
long-term strategic plan, Time Warner Cable has agreed with the FCC to invest a
total of $4 billion in capital costs in connection with the upgrade of its cable
infrastructure, which is expected to be substantially completed over the next
five years. The agreement with the FCC covers all of the cable operations of
Time Warner Cable, including the owned or managed cable television systems of
Time Warner, TWE and the TWE-Advance/Newhouse Partnership. Management expects to
continue to finance such level of investment principally through the growth in
cable operating cash flow derived from increases in subscribers and cable rates,
bank credit agreement borrowings and the development of new revenue streams from
expanded programming options, high speed data transmission, telephony and other
services.
Warner Bros. Backlog
Warner Bros.' backlog, representing the amount of future revenue not
yet recorded from cash contracts for the licensing of theatrical and television
product for pay cable, network, basic cable and syndicated television
exhibition, amounted to $1.017 billion at March 31, 1996, compared to $1.056
billion at December 31, 1995 (including amounts relating to HBO of $209 million
at March 31, 1996 and $175 million at December 31, 1995). Such amounts exclude
open orders for the domestic syndication of the hit television series Friends
and ER, which are expected to result in signed contracts and generate
significant revenue in the future. Because backlog generally relates to
contracts for the licensing of theatrical and television product which have
already been produced, the recognition of revenue is principally only dependent
upon the commencement of the availability period for telecast under the terms of
the related licensing agreement. In addition, cash licensing fees are collected
periodically over the term of the related licensing agreements. Accordingly, the
portion of backlog for which cash advances have not already been received has
significant off-balance sheet asset value as a source of future funding. The
backlog excludes advertising barter contracts, which are also expected to result
in the future realization of cash through the sale of advertising spots received
under such contracts.
12
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Interest Rate and Foreign Currency Risk Management
Interest Rate Swap Contracts
Time Warner uses interest rate swap contracts to adjust the proportion
of total debt that is subject to variable and fixed interest rates. At March 31,
1996, Time Warner had interest rate swap contracts to pay floating-rates of
interest (average six-month LIBOR rate of 5.7%) and receive fixed-rates of
interest (average rate of 5.4%) on $2.6 billion notional amount of indebtedness,
which resulted in approximately 51% of Time Warner's underlying debt, and 45% of
the debt of Time Warner and the Entertainment Group combined, being subject to
variable interest rates. The notional amount of outstanding contracts at March
31, 1996 by year of maturity, along with the related average fixed-rates of
interest to be received and the average floating-rates of interest to be paid,
are as follows: 1996-$300 million (receive-4.6%; pay-5.8%); 1998-$700 million
(receive-5.5%; pay-5.7%); 1999-$1.2 billion (receive-5.5%; pay-5.6%); and
2000-$400 million (receive-5.5%; pay-5.6%). At December 31, 1995, Time Warner
had interest rate swap contracts on a like-amount of $2.6 billion notional
amount of indebtedness.
Based on the level of interest rates prevailing at March 31, 1996, the
fair value of Time Warner's fixed-rate debt exceeded its carrying value by $221
million and it would have cost $39 million to terminate the related interest
rate swap contracts, which combined is the equivalent of an unrealized loss of
$260 million. Based on the level of interest rates prevailing at December 31,
1995, the fair value of Time Warner's fixed-rate debt exceeded its carrying
value by $407 million and it would have cost $9 million to terminate its
interest rate swap contracts, which combined was the equivalent of an unrealized
loss of $416 million. Unrealized gains or losses on debt or interest rate swap
contracts are not recognized for financial reporting purposes unless the debt is
retired or the contracts are terminated prior to their maturity.
Changes in the unrealized gains or losses on interest rate swap
contracts and debt do not result in the realization or expenditure of cash
unless the contracts are terminated or the debt is retired. However, based on
Time Warner's variable-rate debt and related interest rate swap contracts
outstanding at March 31, 1996, each 25 basis point increase or decrease in the
level of interest rates would respectively increase or decrease Time Warner's
annual interest expense and related cash payments by approximately $16 million,
including $7 million related to interest rate swap contracts. Such potential
increases or decreases are based on certain simplifying assumptions, including a
constant level of variable-rate debt and related interest rate swap contracts
during the period and, for all maturities, an immediate, across-the-board
increase or decrease in the level of interest rates with no other subsequent
changes for the remainder of the period.
Foreign Exchange Contracts
Time Warner uses foreign exchange contracts 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.
As part of its overall strategy to manage the level of exposure to the risk of
foreign currency exchange rate fluctuations, Time Warner hedges a portion of its
and TWE's combined foreign currency exposures anticipated over the ensuing
twelve month period. At March 31, 1996, Time Warner has effectively hedged
approximately half of the combined estimated
13
<PAGE>
<PAGE>
TIME WARNER INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
foreign currency exposures that principally relate to anticipated cash flows to
be remitted to the U.S. over the ensuing twelve month period, using foreign
exchange contracts that generally have maturities of three months or less, which
are generally rolled over to provide continuing coverage throughout the year.
Time Warner often closes foreign exchange sale contracts by purchasing an
offsetting purchase contract. At March 31, 1996, Time Warner had contracts for
the sale of $551 million and the purchase of $216 million of foreign currencies
at fixed rates, primarily English pounds (30% of net contract value), German
marks (23%), Canadian dollars (18%), French francs (12%) and Japanese yen (11%),
compared to contracts for the sale of $504 million and the purchase of $140
million of foreign currencies at December 31, 1995.
Unrealized gains or losses related to foreign exchange contracts are
recorded in income as the market value of such contracts change; accordingly,
the carrying value of foreign exchange contracts approximates market value. The
carrying value of foreign exchange contracts was not material at March 31, 1996
and December 31, 1995. No cash is required to be received or paid with respect
to such gains and losses until the related foreign exchange contracts are
settled, generally at their respective maturity dates. For the three months
ended March 31, 1996 and 1995, Time Warner recognized $6 million in gains and
$18 million in losses, respectively, and TWE recognized $2 million in gains and
$12 million in losses, respectively, on foreign exchange contracts, which were
or are expected to be offset by corresponding decreases and increases,
respectively, in the dollar value of foreign currency royalties and license fee
payments that have been or are anticipated to be received in cash 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.
Based on the foreign exchange contracts outstanding at March 31, 1996,
each 5% devaluation of the U.S. dollar as compared to the level of foreign
exchange rates for currencies under contract at March 31, 1996 would result in
approximately $28 million of unrealized losses and $11 million of unrealized
gains on foreign exchange contracts involving foreign currency sales and
purchases, respectively. Conversely, a 5% appreciation of the U.S. dollar would
result in $28 million of unrealized gains and $11 million of unrealized losses,
respectively. At March 31, 1996, none of Time Warner's foreign exchange purchase
contracts relates to TWE's foreign currency exposure. However, with regard to
the $28 million of unrealized losses or gains on foreign exchange sale
contracts, Time Warner would be reimbursed by TWE, or would reimburse TWE,
respectively, for approximately $5 million related to TWE's foreign currency
exposure. Consistent with the nature of the economic hedge provided by such
foreign exchange contracts, such unrealized gains or losses would be offset by
corresponding decreases or increases, respectively, in the dollar value of
future foreign currency royalty and license fee payments that would be received
in cash within the ensuing twelve month period from the sale of U.S. copyrighted
products abroad.
14
<PAGE>
<PAGE>
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---- ----
(millions, except
per share amounts)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents................................................................. $ 644 $ 628
Receivables, less allowances of $755 and $786........................................ 1,442 1,755
Inventories.......................................................................... 446 443
Prepaid expenses..................................................................... 943 894
------- -------
Total current assets................................................................. 3,475 3,720
Cash and equivalents segregated for redemption of long-term debt..................... - 557
Investments in and amounts due to and from Entertainment Group....................... 5,931 5,734
Other investments.................................................................... 2,485 2,389
Property, plant and equipment, net................................................... 1,453 1,119
Music catalogues, contracts and copyrights........................................... 1,121 1,140
Cable television franchises.......................................................... 4,033 1,696
Goodwill............................................................................. 5,857 5,213
Other assets......................................................................... 477 564
------- -------
Total assets......................................................................... $24,832 $22,132
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and royalties payable....................................................... $ 1,392 $ 1,427
Debt due within one year............................................................. 50 34
Other current liabilities............................................................ 1,320 1,566
------- -------
Total current liabilities............................................................ 2,762 3,027
Long-term debt....................................................................... 11,457 9,907
Deferred income taxes................................................................ 4,065 3,420
Unearned portion of paid subscriptions............................................... 716 654
Other liabilities.................................................................... 556 508
Company-obligated mandatorily redeemable preferred securities of subsidiaries
holding solely subordinated notes and debentures of the Company (a)............... 949 949
Shareholders' equity
Preferred stock, $1 par value, 36.2 million and 29.7 million shares outstanding,
$3.643 billion and $2.994 billion liquidation preference.......................... 36 30
Common stock, $1 par value, 392.9 million and 387.7 million shares
outstanding (excluding 45.3 million and 45.7 million treasury shares)............. 393 388
Paid-in capital...................................................................... 6,199 5,422
Unrealized gains on certain marketable securities.................................... 175 116
Accumulated deficit.................................................................. (2,476) (2,289)
------- -------
Total shareholders' equity........................................................... 4,327 3,667
------- -------
Total liabilities and shareholders' equity........................................... $24,832 $22,132
------- -------
------- -------
</TABLE>
- ---------------
(a) Includes $374 million of preferred securities that are redeemable for cash,
or at Time Warner's option, approximately 12.1 million shares of Hasbro, Inc.
common stock owned by Time Warner (Note 6).
See accompanying notes.
15
<PAGE>
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------
1996 1995
---- ----
(millions, except per
share amounts)
<S> <C> <C>
Revenues (a)................................................................................ $2,068 $1,817
------ ------
Cost of revenues (a)(b)..................................................................... 1,277 1,103
Selling, general and administrative (a)(b).................................................. 681 576
------ ------
Operating expenses.......................................................................... 1,958 1,679
------ ------
Business segment operating income........................................................... 110 138
Equity in pretax income of Entertainment Group (a).......................................... 116 22
Interest and other, net (a)................................................................. (296) (155)
Corporate expenses (a)...................................................................... (18) (20)
------ ------
Loss before income taxes.................................................................... (88) (15)
Income tax provision........................................................................ (5) (32)
------ ------
Loss before extraordinary item.............................................................. (93) (47)
Extraordinary loss on retirement of debt, net of $17 million income tax benefit............. (26) -
------ ------
Net loss.................................................................................... (119) (47)
Preferred dividend requirements............................................................. (34) (3)
------ ------
Net loss applicable to common shares........................................................ $ (153) $ (50)
------ ------
------ ------
Loss per common share:
Loss before extraordinary item.............................................................. $(0.32) $(0.13)
------ ------
------ ------
Net loss.................................................................................... $(0.39) $(0.13)
------ ------
------ ------
Average common shares....................................................................... 391.7 379.5
------ ------
------ ------
- ------------------
(a) Includes the following income (expenses) resulting from transactions with
the Entertainment Group and other related companies for the three months ended
March 31, 1996 and 1995, respectively: revenues-$41 million and $45 million;
cost of revenues-$(26) million and $(24) million; selling, general and
administrative-$13 million in 1995; equity in pretax income of Entertainment
Group-$(8) million and $(34) million; interest and other, net-$(9) million and
$6 million; and corporate expenses- $17 million and $15 million.
(b) Includes depreciation and amortization expense of:...................................... $ 228 $ 112
</TABLE>
See accompanying notes.
16
<PAGE>
<PAGE>
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION
Three Months
Ended March 31,
-----------------
1996 1995
---- ----
(millions)
<S> <C> <C>
OPERATIONS
Net loss................................................................................. $ (119) $ (47)
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt................................................. 26 -
Depreciation and amortization............................................................ 228 112
Noncash interest expense................................................................. 22 57
Excess of equity in pretax income of Entertainment Group over distributions.............. (53) (21)
Changes in operating assets and liabilities.............................................. (163) (175)
----- -----
Cash used by operations.................................................................. (59) (74)
----- -----
INVESTING ACTIVITIES
Investments and acquisitions............................................................. (278) (143)
Capital expenditures..................................................................... (67) (38)
Investment proceeds...................................................................... 150 212
----- -----
Cash provided (used) by investing activities............................................. (195) 31
----- -----
FINANCING ACTIVITIES
Borrowings............................................................................... 2,293 130
Debt repayments.......................................................................... (2,513) (36)
Dividends paid........................................................................... (67) (36)
Other.................................................................................... - 12
----- -----
Cash provided (used) by financing activities............................................. (287) 70
----- -----
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.............................................. (541) 27
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD (a).......................................... 1,185 282
----- -----
CASH AND EQUIVALENTS AT END OF PERIOD.................................................... $ 644 $ 309
----- -----
----- -----
</TABLE>
- ---------------
(a) Includes current and noncurrent cash and equivalents at December 31, 1995.
See accompanying notes.
17
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Time Warner Inc. ("Time Warner" or the "Company") is the world's
leading media company, whose principal business objective is to create and
distribute branded information and entertainment copyrights throughout the
world. Time Warner has interests in three fundamental areas of business:
Entertainment, consisting principally of interests in recorded music and music
publishing, filmed entertainment, broadcasting, theme parks and cable television
programming; News and Information, consisting principally of interests in
magazine publishing, book publishing and direct marketing; and
Telecommunications, consisting principally of interests in cable television
systems. Substantially all of Time Warner's interests in filmed entertainment,
broadcasting, theme parks, cable television programming and a majority of its
cable television systems are held through Time Warner Entertainment Company,
L.P. ("TWE"), a partnership in which Time Warner owns general and limited
partnership interests in 74.49% of the pro rata priority capital ("Series A
Capital") and residual equity capital ("Residual Capital") of TWE and 100% of
the senior priority capital ("Senior Capital") and junior priority capital
("Series B Capital") of TWE. The remaining 25.51% limited partnership interests
in the Series A Capital and Residual Capital of TWE are held by a subsidary of U
S WEST, Inc. ("U S WEST"). Time Warner does not consolidate TWE and certain
related companies (the "Entertainment Group") for financial reporting purposes
because of certain limited partnership approval rights related to TWE's interest
in certain cable television systems.
Each of the business interests within Entertainment, News and
Information and Telecommunications is important to management's objective of
increasing shareholder value through the creation, extension and distribution of
recognizable brands and copyrights throughout the world. Such brands and
copyrights include (1) copyrighted music from many of the world's leading
recording artists that is produced and distributed by a family of established
record labels such as Warner Bros. Records, the Atlantic and Elektra
Entertainment Groups and Warner Music International, (2) the unique and
extensive film and television libraries of Warner Bros. and trademarks such as
the Looney Tunes characters and Batman, (3) The WB Network, a new national
broadcasting network launched in 1995 as an extension of the Warner Bros. brand
and as an additional distribution outlet for Warner Bros.' collection of
children cartoons and television programming, (4) Six Flags, the largest
regional theme park operator in the United States, in which TWE owns a 49%
interest, (5) HBO and Cinemax, the leading pay television services, (6) magazine
franchises such as Time, People and Sports Illustrated and direct marketing
brands such as Time Life Inc. and Book-of-the-Month Club and (7) Time Warner
Cable, the second largest operator of cable television systems in the U.S.
The operating results of Time Warner's various business interests are
presented herein as an indication of financial performance (Note 9). Except for
start-up losses incurred in connection with The WB Network, Time Warner's
principal business interests generate significant operating income and cash flow
from operations. The cash flow from operations generated by such business
interests is significantly greater than their operating income due to
significant amounts of noncash amortization of intangible assets recognized in
various acquisitions accounted for by the purchase method of accounting. Noncash
amortization of intangible assets recorded by Time Warner's business
18
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
interests, including the unconsolidated business interests of the Entertainment
Group, amounted to $267 million and $189 million in the three months ended March
31, 1996 and 1995, respectively.
Basis of Presentation
The accompanying financial statements are unaudited but in the opinion
of management contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the financial position
and the results of operations and cash flows for the periods presented in
conformity with generally accepted accounting principles applicable to interim
periods. The accompanying financial statements should be read in conjunction
with the audited consolidated financial statements of Time Warner for the year
ended December 31, 1995.
The consolidated financial statements of Time Warner reflect the
acquisitions of Summit Communications Group, Inc. ("Summit") effective as of May
2, 1995, KBLCOM Incorporated ("KBLCOM") effective as of July 6, 1995 and
Cablevision Industries Corporation ("CVI") and related companies effective as of
January 4, 1996. Certain reclassifications have been made to the 1995 financial
statements to conform to the 1996 presentation.
Effective January 1, 1996, Time Warner adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121") which
established standards for the recognition and measurement of impairment losses
on long-lived assets and certain intangible assets. The adoption of FAS 121 did
not have a material effect on Time Warner's financial statements.
2. ENTERTAINMENT GROUP
Time Warner's investment in and amounts due to and from the
Entertainment Group at March 31, 1996 and December 31, 1995 consists of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
-------- ------------
1996 1995
---- ----
(millions)
<S> <C> <C>
Investment in TWE.................................................................... $6,166 $6,179
Stock option related distributions due from TWE...................................... 180 122
Credit agreement debt due to TWE..................................................... (400) (400)
Other liabilities due to TWE, principally related to home video distribution......... (265) (354)
Other receivables due from TWE....................................................... 134 76
----- ------
Investment in and amounts due to and from TWE........................................ 5,815 5,623
Investment in other Entertainment Group companies.................................... 116 111
----- ------
Total................................................................................ $5,931 $5,734
----- ------
----- ------
</TABLE>
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
19
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
subsidiaries of Time Warner. Certain Time Warner subsidiaries are the general
partners of TWE ("Time Warner General Partners"). Time Warner acquired the
aggregate 11.22% limited partnership interests previously held by subsidiaries
of each of ITOCHU Corporation and Toshiba Corporation in 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 own 74.49%
of the Series A Capital and Residual Capital of TWE, and 100% of the Senior
Capital and Series B Capital of TWE. The remaining 25.51% limited partnership
interest in the Series A Capital and Residual Capital of TWE are owned by 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 $94
million and $4 million in the three months ended March 31, 1996 and 1995,
respectively, no portion of which was allocated to the limited partners.
Each Time Warner General Partner has guaranteed a pro rata portion of
approximately $5.5 billion of TWE's debt and accrued interest at March 31, 1996,
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
<TABLE>
<CAPTION
Three Months
Ended March 31,
----------------
1996 1995
---- ----
(millions)
<S> <C> <C>
Operating Statement Information
Revenues.................................................................................... $2,487 $2,073
Depreciation and amortization............................................................... 290 230
Business segment operating income........................................................... 271 201
Interest and other, net .................................................................... 88 164
Minority interest........................................................................... 50 -
Income before income taxes ................................................................. 116 22
Net income.................................................................................. 98 11
</TABLE>
20
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
<TABLE>
<CAPTION
Three Months
Ended March 31,
------------------
1996 1995
---- ----
(millions)
<S> <C> <C>
Cash Flow Information
Cash provided by operations.............................................................. $ 557 $ 317
Capital expenditures..................................................................... (331) (300)
Investments and acquisitions............................................................. (31) (28)
Investment proceeds...................................................................... 119 6
Borrowings............................................................................... 63 154
Debt repayments.......................................................................... (498) (102)
Collections on note receivable from U S WEST............................................. 71 150
Capital distributions.................................................................... (63) (1)
Increase (decrease) in cash and equivalents.............................................. (68) 196
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---- ----
(millions)
<S> <C> <C>
Balance Sheet Information
Cash and equivalents.................................................................... $ 141 $ 209
Total current assets.................................................................... 2,615 2,909
Total assets............................................................................ 18,636 18,960
Total current liabilities............................................................... 3,145 3,230
Long-term debt.......................................................................... 5,724 6,137
Minority interests...................................................................... 775 726
Time Warner General Partners' Senior Capital............................................ 1,454 1,426
Partners' capital ...................................................................... 6,604 6,576
</TABLE>
The assets and cash flows of TWE are restricted by the TWE partnership
and credit agreements and are unavailable for use by the partners except through
the payment of certain fees, reimbursements, cash distributions and loans, which
are subject to limitations. At March 31, 1996 and December 31, 1995, the Time
Warner General Partners had recorded $180 million and $122 million,
respectively, of stock option related distributions due from TWE, based on
closing prices of Time Warner common stock of $40.875 and $37.875, respectively.
Time Warner is paid when the options are exercised. The Time Warner General
Partners also receive tax-related distributions from TWE. The payment of such
distributions was previously subject to restrictions until July 1995 and is now
made to the Time Warner General Partners on a current basis. In the first
quarter of 1996, the Time Warner General Partners received distributions from
TWE in the amount of $63 million, consisting of $56 million of tax-related
distributions and $7 million of stock option related distributions. In the first
quarter of 1995, the Time Warner General Partners received $1 million of stock
option related distributions from TWE.
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 accounted for under the equity method of accounting. TWE reduced debt by
approximately $850 million in 1995 in connection with the transaction, and a
portion of the income on the
21
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
transaction has been deferred by TWE principally as a result of its guarantee of
certain third-party, zero-coupon indebtedness of Six Flags due in 1999.
3. 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 that included Advance/Newhouse's 10%
interest in Primestar Partners, L.P. ("Primestar"). 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 consolidated financial statements 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. No gain was recognized by TWE upon the capitalization of the
partnership.
On May 2, 1995, Time Warner acquired Summit, which owned cable
television systems serving approximately 162,000 subscribers, in exchange for
the issuance of approximately 1.6 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 allocated to the assets acquired in proportion to their respective
fair values, as follows: cable television franchises-$372 million;
goodwill-$146 million; other current and noncurrent assets-$144 million;
long-term debt-$140 million; deferred income taxes-$166 million; and other
current liabilities-$5 million.
On July 6, 1995, Time Warner acquired KBLCOM which owned cable
television systems serving approximately 700,000 subscribers and a 50% interest
in Paragon, which owned 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 allocated to the net assets acquired in proportion to their
respective fair values, as follows: investments-$950 million; cable television
franchises-$1.366 billion; goodwill-$586 million; other current and noncurrent
assets-$289 million; long-term debt-$1.213 billion; deferred income taxes-$895
million; and other current liabilities-$50 million.
On January 4, 1996, Time Warner acquired CVI and related companies that
owned cable television systems serving approximately 1.3 million subscribers, in
exchange for the issuance of approximately 2.9 million shares of common stock
and approximately 6.5 million shares of new convertible preferred stock ("Series
E Preferred Stock"
22
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
and "Series F Preferred Stock") and the assumption or incurrence of
approximately $2 billion of indebtedness. The acquisition was accounted for by
the purchase method of accounting for business combinations; accordingly, the
cost to acquire CVI and related companies of $904 million was preliminarily
allocated to the net assets acquired in proportion to estimates of their
respective fair values, as follows: cable television franchises-$2.390 billion;
goodwill-$688 million; other current and noncurrent assets-$481 million;
long-term debt-$1.766 billion; deferred income taxes-$731 million; and other
current and noncurrent liabilities-$158 million.
The accompanying consolidated statement of operations includes the
operating results of each business from the respective closing date of each
transaction. On a pro forma basis, giving effect to (i) all of the
aforementioned cable transactions, (ii) the ITOCHU/Toshiba Transaction, (iii)
the 1995 and early 1996 refinancing of approximately $4 billion of public debt
by Time Warner and the 1995 execution of a new $8.3 billion credit agreement,
under which approximately $2.7 billion of debt assumed in the cable acquisitions
was refinanced by subsidiaries of Time Warner and $2.6 billion of pre-existing
bank debt was refinanced by TWE, (iv) the sale of 51% of TWE's interest in Six
Flags and (v) the sale or expected sale or transfer of certain unclustered cable
television systems owned by TWE, as if each of such transactions had occurred at
the beginning of 1995, Time Warner would have reported for the three months
ended March 31, 1995, revenues of $2.025 billion, depreciation and amortization
of $230 million, operating income of $119 million, equity in the pretax income
of the Entertainment Group of $55 million and a net loss of $61 million ($.25
per common share).
4. LONG-TERM DEBT
In January 1996, in connection with its acquisition of CVI and related
companies, Time Warner assumed $500 million of public notes and debentures of
CVI and a subsidiary of Time Warner borrowed $1.5 billion under its $8.3 billion
credit agreement to refinance a like-amount of other indebtedness assumed or
incurred in such acquisition.
In February 1996, Time Warner redeemed the remaining $1.2 billion
principal amount of 8.75% Convertible Subordinated Debentures due 2015 (the
"8.75% Convertible Debentures") for $1.28 billion, including redemption premiums
and accrued interest thereon. The redemption was financed with (1) proceeds
raised from a $575 million issuance of Company-obligated mandatorily redeemable
preferred securities of a subsidiary in December 1995 and (2) $750 million of
proceeds raised from the issuance in January 1996, of (i) $400 million principal
amount of 6.85% debentures due 2026, which are redeemable at the option of the
holders thereof in 2003, (ii) $200 million principal amount of 8.3% discount
debentures due 2036, which do not pay cash interest until 2016, (iii) $166
million principal amount of 7.48% debentures due 2008 and (iv) $150 million
principal amount of 8.05% debentures due 2016. In connection with the 1996
redemption of the 8.75% Convertible Debentures, Time Warner recognized an
extraordinary loss of $26 million.
In April 1996, Time Warner raised approximately $1.55 billion of net
proceeds in a private placement of a new series of preferred stock, which have
been or will be used by Time Warner to reduce debt (Note 7). A portion of the
proceeds was used by Time Warner to redeem $250 million principal amount of
8.75% Debentures due April 1, 2017 for approximately $265 million in May 1996
(including redemption premiums and accrued interest thereon), and to reduce bank
debt of TWI Cable Inc. by $1 billion. In connection with the redemption of the
8.75% Debentures due April 1, 2017, Time Warner recognized an extraordinary loss
of $9 million in May 1996.
23
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
5. BORROWINGS AGAINST FUTURE STOCK OPTION PROCEEDS
In connection with a newly-authorized common stock repurchase program
(Note 8), Time Warner has entered into a letter of commitment with a bank
relating to a five-year, $750 million revolving credit facility (the "Stock
Option Proceeds Credit Facility") principally to support such stock repurchases,
of which up to $100 million will be reserved solely for the payment of interest
and fees thereunder. Borrowings under the Stock Option Proceeds Credit Facility
will generally bear interest at LIBOR plus a margin equal to 75 basis points and
will generally be required to be prepaid from the cash proceeds received by Time
Warner from the exercise of designated employee stock options. Such prepayments
will permanently reduce the borrowing availability under the facility. At March
31, 1996, the aggregate exercise prices of outstanding vested, "in the money"
stock options was approximately $1.95 billion, representing a 2.6 to 1 coverage
ratio over the related borrowing availability. To the extent that such stock
option proceeds are not sufficient to satisfy Time Warner's obligations under
the Stock Option Proceeds Credit Facility, Time Warner will generally be
required to repay such borrowings using proceeds from the sale of shares of its
common stock to be placed in escrow under the Stock Option Proceeds Credit
Facility or, at Time Warner's election, using available cash on hand. Time
Warner will initially place an estimated 37.5 million shares in escrow under
this arrangement and may, from time to time, have up to 52.5 million shares held
in escrow. Such shares will not be considered to be issued and outstanding
capital stock of the Company.
6. MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES
In August 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%.
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.
In December 1995, Time Warner issued approximately 23 million
Company-obligated mandatorily redeemable preferred securities of a wholly-owned
subsidiary ("Preferred Trust Securities") for aggregate gross proceeds of $575
million. The sole assets of the subsidiary that is the obligor on the Preferred
Trust Securities are $592 million principal amount of 8-7/8% subordinated
debentures of Time Warner due December 31, 2025. Cumulative cash distributions
are payable on the Preferred Trust Securities at an annual rate of 8-7/8%. Cash
distributions may be deferred at the election of Time Warner for any period not
exceeding 20 consecutive quarters. The Preferred Trust Securities are
mandatorily redeemable for cash on December 31, 2025, and Time Warner has the
right to redeem the Preferred Trust Securities, in whole or in part, on or after
December 31, 2000, or in other
24
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
certain circumstances, in each case at an amount per Preferred Trust Security
equal to $25 plus accrued and unpaid distributions thereon.
Time Warner has certain obligations relating to the PERCS and the
Preferred Trust Securities which amount to a full and unconditional guaranty of
each subsidiary's obligations with respect thereto.
7. SERIES K EXCHANGEABLE PREFERRED STOCK
In April 1996, Time Warner raised approximately $1.55 billion of net
proceeds in a private placement of 1.6 million shares of 10 1/4% Series K
exchangeable preferred stock ("Series K Preferred Stock"). The issuance of the
Series K Preferred Stock allowed the Company to realize cash proceeds through a
security whose payment terms are principally linked (until a reorganization of
TWE occurs, if any) to a portion of Time Warner's currently noncash-generating
interest in the Series B Capital of TWE. The proceeds raised from this
transaction have been or will be used by Time Warner to reduce debt. Pursuant to
registered exchange offers expected to be made, Time Warner plans to exchange
the privately-placed Series K Preferred Stock for registered preferred stock
with substantially identical terms.
Each share of Series K Preferred Stock is entitled to a liquidation
preference of $1,000 and entitles the holder thereof to receive cumulative
dividends at the rate of 10 1/4% per annum, payable quarterly (1) in cash, to
the extent of an amount equal to the Pro Rata Percentage (as defined below)
multiplied by the amount of cash distributions received by Time Warner from TWE
with respect to its interests in the Series B Capital and Residual Capital of
TWE, excluding stock option related distributions and certain tax related
distributions (collectively, "Eligible TWE Cash Distributions"), or (2) to the
extent of any balance, at Time Warner's option, (i) in cash or (ii) in-kind,
through the issuance of additional shares of Series K Preferred Stock with an
aggregate liquidation preference equal to the amount of such dividends. The "Pro
Rata Percentage" is equal to the ratio of (1) the aggregate liquidation
preference of the outstanding shares of Series K Preferred Stock, including any
accumulated and unpaid dividends thereon, to (2) Time Warner's total interest in
the Series B Capital of TWE, including any undistributed priority capital return
thereon. Because cash distributions to Time Warner with respect to its interests
in the Series B Capital and Residual Capital of TWE are generally restricted
until June 30, 1998 and are subject to additional limitations thereafter under
the TWE partnership agreement, Time Warner does not expect to pay cash dividends
in the foreseeable future.
The Series K Preferred Stock may be redeemed at the option of Time
Warner, in whole or in part, on or after July 1, 2006, subject to certain
conditions, at an amount per share equal to its liquidation preference plus
accumulated and accrued and unpaid dividends thereon, and a declining premium
through July 1, 2010 (the "Optional Redemption Price"). Time Warner is required
to redeem shares of Series K Preferred Stock representing up to 20%, 25%, 331/3%
and 50% of the then outstanding liquidation preference of the Series K Preferred
Stock on July 1 of 2012, 2013, 2014 and 2015, respectively, at an amount equal
to the aggregate liquidation preference of the number of shares to be redeemed
plus accumulated and accrued and unpaid dividends thereon (the "Mandatory
Redemption Price"). Total payments in respect of such mandatory redemption
obligations on any redemption date are limited to an amount equal to the Pro
Rata Percentage of any cash distributions received by Time Warner from TWE in
the preceding year in connection with the redemption of Time Warner's interest
in the Series B Capital of TWE and in connection with certain cash distributions
related to Time Warner's interest in the Residual Capital of TWE. The redemption
of the Series B Capital of TWE is scheduled to occur ratably over a five-year
period commencing on
25
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
June 30, 2011. Time Warner is required to redeem any remaining outstanding
shares of Series K Preferred Stock on July 1, 2016 at the Mandatory Redemption
Price; however, in the event that Time Warner's interest in the Series B Capital
of TWE has not been redeemed in full prior to such final mandatory redemption
date, payments in respect of the final mandatory redemption obligation of the
Series K Preferred Stock in 2016 will be limited to an amount equal to the
lesser of the Mandatory Redemption Price and an amount equal to the Pro Rata
Percentage of the fair market value of TWE (net of taxes) attributable to Time
Warner's interests in the Series B Capital and Residual Capital of TWE.
Accordingly, there is no assurance that such value will result in the redemption
of the Series K Preferred Stock at its full liquidation preference plus
accumulated and accrued and unpaid dividends thereon.
Upon a reorganization of TWE, as defined in the related certificate of
designation, Time Warner must elect either to (1) exchange each outstanding
share of Series K Preferred Stock for shares of a new series of 10 1/4%
exchangeable preferred stock ("Series L Preferred Stock") or (2) subject to
certain conditions, redeem the outstanding shares of Series K Preferred Stock at
an amount per share equal to 110% of the liquidation preference thereof, plus
accumulated and accrued and unpaid dividends thereon or, after July 1, 2006, at
the Optional Redemption Price. The Series L Preferred Stock has terms similar to
those of the Series K Preferred Stock, except that (i) Time Warner may only pay
dividends in-kind until June 30, 2006, (ii) Time Warner is required to redeem
the outstanding shares of Series L Preferred Stock on July 1, 2011 at an amount
per share equal to the liquidation preference thereof, plus accumulated and
accrued and unpaid dividends thereon and (iii) Time Warner has the option to
exchange, in whole but not in part, subject to certain conditions, the
outstanding shares of Series L Preferred Stock for Time Warner 10 1/4% Senior
Subordinated Debentures due July 1, 2011 (the "Senior Subordinated Debentures")
having a principal amount equal to the liquidation preference of the Series L
Preferred Stock plus accrued and unpaid dividends thereon. Interest on the
Senior Subordinated Debentures is payable in cash or, at Time Warner's option
through June 30, 2006, in-kind through the issuance of additional Senior
Subordinated Debentures with a principal amount equal to such interest. The
Senior Subordinated Debentures may be redeemed at the option of Time Warner, in
whole or in part, on or after July 1, 2006, subject to certain conditions, at an
amount per debenture equal to its principal amount plus accrued and unpaid
interest, and a declining premium through July 1, 2010.
Giving pro forma effect to the issuance of the Series K Preferred Stock
and the use of the proceeds therefrom to reduce debt as if it had occurred at
the beginning of the year, the incremental effect on Time Warner for the three
months ended March 31, 1996, would have been a decrease in the loss before
extraordinary item of $16 million resulting from the after-tax effect of lower
interest expense, and an increase in the loss before extraordinary item per
common share of $.07 per common share resulting from an increase in preferred
dividend requirements that more than offsets the effect of lower interest
expense.
26
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
8. CAPITAL STOCK
Changes in shareholders' equity are as follows:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------
1996 1995
---- ----
(millions)
<S> <C> <C>
Balance at beginning of year............................................................. $3,667 $1,148
Net loss................................................................................. (119) (47)
Common dividends declared................................................................ (35) (34)
Preferred dividends declared............................................................. (34) (3)
Issuance of common stock and preferred stock in acquisition of CVI and
related companies..................................................................... 693 -
Unrealized gains on certain marketable equity investments................................ 59 18
Other, principally shares issued pursuant to stock option and dividend
reinvestment plans.................................................................... 96 31
------ ------
Balance at March 31...................................................................... $4,327 $1,113
------ ------
------ ------
</TABLE>
In April 1996, Time Warner's Board of Directors authorized a program
to repurchase, from time to time, up to 15 million shares of Time Warner common
stock. The common stock repurchased under the program is expected to be used to
satisfy future share issuances related to the exercise of existing employee
stock options. Actual repurchases in any period will be subject to market
conditions. As of May 1, 1996, Time Warner has acquired approximately 2.3
million shares of its common stock for an aggregate cost of approximately $92
million. Such repurchases were funded with short-term borrowings that are
expected to be refinanced with borrowings under the Stock Option Proceeds Credit
Facility expected to be in effect by the end of May 1996 (Note 5).
9. SEGMENT INFORMATION
Time Warner's businesses are conducted in three fundamental areas:
Entertainment, consisting principally of interests in recorded music and music
publishing, filmed entertainment, broadcasting, theme parks and cable television
programming; News and Information, consisting principally of interests in
magazine publishing, book publishing and direct marketing; and
Telecommunications, consisting principally of interests in cable television
systems. Time Warner's interests in filmed entertainment, broadcasting, theme
parks, cable television programming and most of its telecommunications business
are held by the Entertainment Group, which is not consolidated for financial
reporting purposes.
Information as to the operations of Time Warner and the Entertainment
Group in different business segments is set forth below. The 1996 operating
results of Time Warner reflect the acquisitions of Summit effective as of May 2,
1995, KBLCOM effective as of July 6, 1995 and CVI and related companies
effective as of January 4, 1996. The 1996 operating results of the Entertainment
Group reflect the formation of the TWE-Advance/Newhouse Partnership effective as
of April 1, 1995, the deconsolidation of Six Flags effective as of June 23, 1995
and the consolidation of Paragon effective as of July 6, 1995. The operating
results of Six Flags prior to June 23, 1995 are reported separately to
facilitate comparability.
27
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------
1996 1995
---- ----
(millions)
<S> <C> <C>
Revenues
Time Warner:
Publishing.................................................................................. $ 879 $ 831
Music....................................................................................... 983 991
Cable....................................................................................... 217 -
Intersegment elimination.................................................................... (11) (5)
------ ------
Total....................................................................................... $2,068 $1,817
------ ------
------ ------
Entertainment Group:
Filmed Entertainment........................................................................ $1,218 $1,184
Six Flags Theme Parks....................................................................... - 23
Broadcasting - The WB Network............................................................... 15 3
Programming - HBO........................................................................... 419 390
Cable....................................................................................... 947 578
Intersegment elimination.................................................................... (112) (105)
------ ------
Total....................................................................................... $2,487 $2,073
------ ------
------ ------
</TABLE>
<TABLE>
<CAPTION
Three Months
Ended March 31,
-----------------
1996 1995
---- ----
(millions)
<S> <C> <C>
Operating income
Time Warner:
Publishing.................................................................................. $ 56 $ 55
Music....................................................................................... 55 83
Cable....................................................................................... (1) -
----- ----
Total....................................................................................... $110 $138
----- ----
----- ----
Entertainment Group:
Filmed Entertainment........................................................................ $ 73 $ 67
Six Flags Theme Parks....................................................................... - (2)
Broadcasting - The WB Network............................................................... (24) (21)
Programming - HBO........................................................................... 76 67
Cable....................................................................................... 146 90
----- ----
Total....................................................................................... $271 $201
----- ----
----- ----
</TABLE>
28
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
<TABLE>
<CAPTION
Three Months
Ended March 31,
-----------------
1996 1995
---- ----
(millions)
<S> <C> <C>
Depreciation of Property, Plant and Equipment
Time Warner:
Publishing.................................................................................. $ 15 $ 13
Music....................................................................................... 23 23
Cable....................................................................................... 33 -
----- ----
Total....................................................................................... $ 71 $ 36
----- ----
----- ----
Entertainment Group:
Filmed Entertainment........................................................................ $ 32 $ 22
Six Flags Theme Parks....................................................................... - 1
Broadcasting - The WB Network............................................................... - -
Programming - HBO........................................................................... 5 4
Cable....................................................................................... 143 90
----- ----
Total....................................................................................... $180 $117
----- ----
----- ----
</TABLE>
<TABLE>
<CAPTION
Three Months
Ended March 31,
-----------------
1996 1995
---- ----
(millions)
<S> <C> <C>
Amortization of Intangible Assets (1)
Time Warner:
Publishing.................................................................................. $ 9 $ 9
Music....................................................................................... 68 67
Cable....................................................................................... 80 -
----- ----
Total....................................................................................... $157 $ 76
----- ----
----- ----
Entertainment Group:
Filmed Entertainment........................................................................ $ 31 $ 34
Six Flags Theme Parks....................................................................... - 3
Broadcasting - The WB Network............................................................... - -
Programming - HBO........................................................................... - -
Cable....................................................................................... 79 76
----- ----
Total....................................................................................... $110 $113
----- ----
----- ----
</TABLE>
- ------------------
(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 CVI and related companies in 1996, and to other
business combinations accounted for by the purchase method.
10. 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.
29
<PAGE>
<PAGE>
TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
11. ADDITIONAL FINANCIAL INFORMATION
Additional financial information is as follows:
<TABLE>
<CAPTION
Three Months
Ended March 31,
-----------------
1996 1995
---- ----
(millions)
<S> <C> <C>
Interest expense............................................................................ $247 $210
Cash payments made for interest............................................................. 291 204
Cash payments made for income taxes......................................................... 47 80
Tax-related distributions received from TWE................................................. 56 -
Income tax refunds received................................................................. 31 7
</TABLE>
30
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
TWE is engaged principally in two fundamental areas of business:
Entertainment, consisting principally of interests in filmed entertainment,
broadcasting, theme parks and cable television programming; and Telecommunica-
tions, consisting principally of interests in cable television systems. TWE also
manages the telecommunications properties owned by Time Warner and the combined
cable television operations are conducted under the name of Time Warner Cable.
Capitalized terms are as defined and described in the accompanying consolidated
financial statements, or elsewhere herein.
Significant Transactions
In 1996, certain transactions were completed by Time Warner and TWE
that have had an effect on TWE's results of operations and financial condition.
Such transactions include:
The acquisition by Time Warner of Cablevision Industries
Corporation ("CVI") and related companies on January 4, 1996, which
strengthened Time Warner Cable's geographic clusters of cable
television systems and substantially increased the number of cable
subscribers managed by Time Warner Cable. Time Warner Cable now
serves over 11.7 million subscribers in neighborhoods passing
nearly 20% of the television homes in the U.S.
The closing of certain previously-announced sales by TWE of
unclustered cable television systems which raised approximately $75
million of net proceeds for debt reduction. Including the 1995 sale
of 51% of its interest in Six Flags Entertainment Corporation ("Six
Flags"), TWE has now completed transactions that have raised
approximately $1.1 billion for debt reduction.
The nature of these transactions and their impact on the results of operations
and financial condition of TWE are further discussed below.
Use of EBITDA
The following comparative discussion of the results of operations and
financial condition of TWE 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.
31
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
RESULTS OF OPERATIONS
TWE had revenues of $2.485 billion, and net income of $94 million for
the three months ended March 31, 1996, compared to revenues of $2.046 billion
and net income of $4 million for the three months ended March 31, 1995.
On a pro forma basis, giving effect to (i) the 1995 formation of the
TWE-Advance/Newhouse Partnership, (ii) the 1995 refinancing of approximately
$2.6 billion of pre-existing bank debt, (iii) the 1995 consolidation of Paragon,
(iv) the 1995 reacquisition of the Time Warner Service Partnership Assets, (v)
the 1995 sale of 51% of TWE's interest in Six Flags and (vi) the sale or
expected sale or transfer of certain unclustered cable television systems owned
by TWE, as if each of such transactions had occurred at the beginning of 1995,
TWE would have reported for the three months ended March 31, 1995, revenues of
$2.266 billion, depreciation and amortization of $269 million, operating income
of $219 million and net income of $30 million.
As discussed more fully below, TWE's operating results for the three
month period ended March 31, 1996 as compared to pro forma results for the three
months ended March 31, 1995 reflect an overall increase in operating income
generated by its business segments and an increase in investment-related income
resulting from gains on the sale of certain unclustered cable systems. The
comparison to historical results for the three months ended March 31, 1995 is
further affected by the contribution to 1996 operating income by the
TWE-Advance/Newhouse Partnership and interest savings in 1996 on lower average
debt levels related to management's debt reduction program, offset in part by
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 $18 million in the three months
ended March 31, 1996, and $11 million in the three months ended March 31, 1995,
respectively, have been provided in respect of the operations of TWE's domestic
and foreign subsidiary corporations.
EBITDA and operating income for TWE for the three months ended March
31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION
Three Months Ended March 31,
-------------------------------------------
EBITDA Operating Income
---------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
(millions)
<S> <C> <C> <C> <C>
Filmed Entertainment............................................... $131 $121 $ 70 $ 67
Six Flags Theme Parks.............................................. - 2 - (2)
Broadcasting - The WB Network...................................... (24) (21) (24) (21)
Programming - HBO.................................................. 81 71 76 67
Cable.............................................................. 368 244 146 80
---- ---- ---- ----
Total.............................................................. $556 $417 $268 $191
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
Filmed Entertainment. Revenues increased to $1.216 billion, compared to
$1.183 billion in the first quarter of 1995. EBITDA increased to $131 million
from $121 million. Depreciation and amortization, including amortization related
to the purchase of WCI, amounted to $61 million in 1996 and $54 million in 1995.
Operating income increased to $70 million from $67 million. Revenues benefited
from increases in worldwide home video and
32
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
consumer products operations. Worldwide theatrical revenues decreased due to a
light release schedule and difficult comparisons to successful films in the
first quarter of 1995. 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
accounted for under the equity method of accounting.
Broadcasting - The WB Network. The WB Network recorded an operating
loss of $24 million on $15 million of revenues in the first quarter of 1996,
compared to $21 million of an operating loss on $3 million of revenues in the
first quarter of 1995. The increased revenues and operating losses are due to
the expansion of programming in September 1995 to two nights of primetime
scheduling, and the unveiling of Kids' WB!, the network's animated programming
lineup on Saturday mornings and weekdays. Due to the start-up nature of this new
broadcast operation, losses are expected to continue.
Programming - HBO. Revenues increased to $419 million, compared to $385
million in the first quarter of 1995. EBITDA increased to $81 million from $71
million. Depreciation and amortization amounted to $5 million in 1996 and $4
million in 1995. Operating income increased to $76 million from $67 million.
Revenues benefited primarily from a significant increase in subscriptions.
EBITDA and operating income improved principally as a result of the revenue
gains.
Cable. Revenues increased to $947 million, compared to $557 million in
the first quarter of 1995. EBITDA increased to $368 million from $244 million.
Depreciation and amortization, including amortization related to the purchase of
WCI and the acquisition of the ATC minority interest, amounted to $222 million
in 1996 and $164 million in 1995. Operating income increased to $146 million
from $80 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 an aggregate increase in basic cable and Primestar-related, direct
broadcast satellite subscribers that approached 6%, increases in regulated cable
rates as permitted under Time Warner Cable's "social contract" with the Federal
Communications Commission (the "FCC") and increases in pay-per-view and
advertising revenues. 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,
with respect to operating income only, by higher depreciation and amortization
relating to increased capital spending.
Interest and Other, Net. Interest and other, net, decreased to $89
million in the first quarter of 1996, compared to $161 million in the first
quarter of 1995. Interest expense decreased to $122 million, compared to $150
million in the first quarter of 1995, principally as a result of interest
savings on lower average debt levels related to management's debt reduction
program and lower short-term, floating-rates of interest paid on borrowings
under TWE's former and existing bank credit agreements. There was other income,
net, of $33 million in the first quarter of 1996, compared to other expense,
net, of $11 million in 1995, principally due to an increase in
investment-related income resulting from gains on the sale of certain
unclustered cable systems recognized in 1996 in connection with management's
debt reduction program.
33
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
FINANCIAL CONDITION AND LIQUIDITY
March 31, 1996
Financial Condition
TWE had $5.7 billion of debt, $1.5 billion of Time Warner General
Partners' Senior Capital and $6.5 billion of partners' capital (net of the $98
million uncollected portion of the note receivable from U S WEST) at March 31,
1996, compared to $6.2 billion of debt, $1.4 billion of Time Warner General
Partners' Senior Capital and $6.5 billion of partners' capital (net of the $169
million uncollected portion of the note receivable from U S WEST) at December
31, 1995. Cash and equivalents were $141 million at March 31, 1996, compared to
$209 million at December 31, 1995, reducing the debt-net-of-cash amounts for TWE
to $5.6 billion and $6 billion, respectively.
Debt Reduction Program
In the first quarter of 1996, TWE closed certain previously-announced
sales of unclustered cable television systems which raised approximately $75
million of proceeds for debt reduction. Including the 1995 sale of 51% of its
interest in Six Flags, TWE has now completed transactions that have raised
approximately $1.1 billion for debt reduction.
Cash Flows
In the first three months of 1996, TWE's cash provided by operations
amounted to $557 million and reflected $556 million of EBITDA from the Filmed
Entertainment, Broadcasting-The WB Network, Programming-HBO and Cable
businesses and $181 million related to a reduction in working capital
requirements, other balance sheet accounts and noncash items, less $151 million
of interest payments, $12 million of income taxes and $17 million of corporate
expenses. Cash provided by operations of $346 million in the first three months
of 1995 reflected $417 million of business segment EBITDA and $127 million
related to a reduction in working capital requirements, other balance sheet
accounts and noncash items, less $168 million of interest payments, $15 million
of income taxes and $15 million of corporate expenses.
Cash flows used by investing activities decreased to $243 million in
the first three months of 1996, compared to $290 million in the first three
months of 1995, principally as a result of a $118 million increase in investment
proceeds relating to certain sales of unclustered cable television systems in
connection with management's debt reduction program. Capital expenditures
increased to $331 million in the first three months of 1996, compared to $270
million in the first three months of 1995, principally as a result of higher
cable capital spending as discussed more fully below.
Cash flows provided by financing activities decreased to a use of cash
of $382 million in the first three months of 1996, compared to $140 million of
cash provided by financing activities in the first three months of 1995,
principally as a result of a $435 million net reduction in debt in 1996 and a
$49 million increase in distributions paid to Time Warner, offset in part by a
$79 million decrease in collections on the note receivable from U S WEST.
34
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
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.
Cable Capital Spending
Since the beginning of 1994, Time Warner Cable has been engaged in a
plan to upgrade the technological capability and reliability of its cable
television systems and develop new services, which it believes will position the
business for sustained, long-term growth. Capital spending by TWE's Cable
division amounted to $268 million in the three months ended March 31, 1996,
compared to $192 million in the three months ended March 31, 1995, and was
financed in part through collections on the note receivable from U S WEST of $71
million and $150 million, respectively. Cable capital spending by TWE's Cable
division is budgeted to be approximately $1 billion for the remainder of 1996
and is expected to be funded principally by cable operating cash flow and $98
million of collections on the remaining portion of the note receivable from U S
WEST. In exchange for certain flexibility in establishing cable rate pricing
structures for regulated services that went into effect on January 1, 1996 and
consistent with Time Warner Cable's long-term strategic plan, Time Warner Cable
has agreed with the FCC to invest a total of $4 billion in capital costs in
connection with the upgrade of its cable infrastructure, which is expected to be
substantially completed over the next five years. The agreement with the FCC
covers all of the cable operations of Time Warner Cable, including the owned or
managed cable television systems of Time Warner, TWE and the
TWE-Advance/Newhouse Partnership. Management expects to continue to finance such
level of investment principally through the growth in cable operating cash flow
derived from increases in subscribers and cable rates, bank credit agreement
borrowings and the development of new revenue streams from expanded programming
options, high speed data transmission, telephony and other services.
Warner Bros. Backlog
Warner Bros.' backlog, representing the amount of future revenue not
yet recorded from cash contracts for the licensing of theatrical and television
product for pay cable, network, basic cable and syndicated television
exhibition, amounted to $1.017 billion at March 31, 1996, compared to $1.056
billion at December 31, 1995 (including amounts relating to HBO of $209 million
at March 31, 1996 and $175 million at December 31, 1995). Such amounts exclude
open orders for the domestic syndication of the hit television series Friends
and ER, which are expected to result in signed contracts and generate
significant revenue in the future. Because backlog generally relates to
contracts for the licensing of theatrical and television product which have
already been produced, the recognition of revenue is principally only dependent
upon the commencement of the availability period for telecast under the terms of
the related licensing agreement. In addition, cash licensing fees are collected
periodically over the term of the related licensing agreements. Accordingly, the
portion of backlog for which cash advances have not already been received has
significant off-balance sheet asset value as a source of future funding. The
backlog excludes advertising barter contracts, which are also expected to result
in the future realization of cash through the sale of advertising spots received
under such contracts.
35
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Foreign Currency Risk Management
Time Warner uses foreign exchange contracts 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. As part of its overall
strategy to manage the level of exposure to the risk of foreign currency
exchange rate fluctuations, Time Warner hedges a portion of its foreign currency
exposures anticipated over the ensuing twelve month period, including those
related to TWE. At March 31, 1996, Time Warner has effectively hedged
approximately half of TWE's total estimated foreign currency exposures that
principally relate to anticipated cash flows to be remitted to the U.S. over the
ensuing twelve month period, using foreign exchange contracts that generally
have maturities of three months or less, which generally are rolled over to
provide continuing coverage throughout the year. TWE is reimbursed by or
reimburses Time Warner for Time Warner contract gains and losses related to
TWE's foreign currency exposure. Time Warner often closes foreign exchange sale
contracts by purchasing an offsetting purchase contract. At March 31, 1996, Time
Warner had contracts for the sale of $551 million and the purchase of $216
million of foreign currencies at fixed rates and maturities of three months or
less. Of Time Warner's $335 million net sale contract position, none of the
foreign exchange purchase contracts and $104 million of the foreign exchange
sale contracts related to TWE's foreign currency exposure, primarily Japanese
yen (19% of net contract position related to TWE), French francs (26%), German
marks (12%) and Canadian dollars (18%), compared to a net sale contract position
of $113 million of foreign currencies at December 31, 1995.
Unrealized gains or losses related to foreign exchange contracts are
recorded in income as the market value of such contracts change; accordingly,
the carrying value of foreign exchange contracts approximates market value. The
carrying value of foreign exchange contracts was not material at March 31, 1996
and December 31, 1995. No cash is required to be received or paid with respect
to such gains and losses until the related foreign exchange contracts are
settled, generally at their respective maturity dates. For the three months
ended March 31, 1996 and 1995, TWE recognized $2 million in gains and $12
million in losses, respectively, on foreign exchange contracts, 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 in cash 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.
Based on Time Warner's outstanding foreign exchange contracts related
to TWE's exposure outstanding at March 31, 1996, each 5% devaluation of the U.S.
dollar as compared to the level of foreign exchange rates for currencies under
contract at March 31, 1996 would result in approximately $5 million of
unrealized losses on foreign exchange contracts. Conversely, a 5% appreciation
of the U.S. dollar as compared to the level of foreign exchange rates for
currencies under contract at March 31, 1996 would result in $5 million of
unrealized gains on contracts. Consistent with the nature of the economic hedge
provided by such foreign exchange contracts, such unrealized gains or losses
would be offset by corresponding decreases or increases, respectively, in the
dollar value of future foreign currency license fee payments that would be
received in cash within the ensuing twelve month period from the sale of U.S.
copyrighted products abroad.
36
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION
March 31, December 31,
1996 1995
---- ----
(millions)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents................................................................ $ 141 $ 209
Receivables, including $265 and $354 due from Time Warner,
less allowances of $359 and $365.................................................. 1,414 1,635
Inventories......................................................................... 926 904
Prepaid expenses.................................................................... 134 161
------- -------
Total current assets................................................................ 2,615 2,909
Noncurrent inventories.............................................................. 1,883 1,909
Loan receivable from Time Warner.................................................... 400 400
Investments......................................................................... 412 383
Property, plant and equipment, net.................................................. 5,338 5,205
Cable television franchises......................................................... 3,270 3,360
Goodwill............................................................................ 4,089 4,119
Other assets........................................................................ 572 620
------- -------
Total assets........................................................................ $18,579 $18,905
------- -------
------- -------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable.................................................................... $ 578 $ 697
Participations and programming costs................................................ 1,197 1,090
Other current liabilities........................................................... 1,354 1,427
------- -------
Total current liabilities........................................................... 3,129 3,214
Long-term debt...................................................................... 5,724 6,137
Other long-term liabilities, including $314 and $198 due to Time Warner............. 995 924
Minority interests.................................................................. 775 726
Time Warner General Partners' Senior Capital........................................ 1,454 1,426
Partners' capital
Contributed capital................................................................. 7,522 7,522
Undistributed partnership earnings (deficit)........................................ (922) (875)
Note receivable from U S WEST....................................................... (98) (169)
------- -------
Total partners' capital............................................................. 6,502 6,478
------- -------
Total liabilities and partners' capital............................................. $18,579 $18,905
------- -------
------- -------
</TABLE>
See accompanying notes.
37
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION
Three Months
Ended March 31,
----------------
1996 1995
---- ----
(millions)
<S> <C> <C>
Revenues (a)................................................................................ $2,485 $2,046
------ ------
Cost of revenues (a)(b)..................................................................... 1,665 1,440
Selling, general and administrative (a)(b).................................................. 552 415
------ ------
Operating expenses.......................................................................... 2,217 1,855
------ ------
Business segment operating income........................................................... 268 191
Interest and other, net (a)................................................................. (89) (161)
Minority interest........................................................................... (50) -
Corporate services (a)...................................................................... (17) (15)
------ ------
Income before income taxes.................................................................. 112 15
Income taxes................................................................................ (18) (11)
------ ------
Net income.................................................................................. $ 94 $ 4
------ ------
------ ------
- ------------------
(a) Includes the following income (expenses) resulting from transactions with
the partners of TWE and other related companies for the three months ended March
31, 1996 and 1995, respectively: revenues-$23 million and $26 million; cost of
revenues-$(24) million and $(17) million; Selling, general and
administrative-$(2) million and $(17) million; interest and other, net-$9
million in 1996; and corporate services-$(17) million and $(15) million.
(b) Includes depreciation and amortization expense of:..................................... $ 288 $ 226
------ ------
------ ------
</TABLE>
See accompanying notes.
38
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION
Three Months
Ended March 31,
-----------------
1996 1995
---- ----
(millions)
<S> <C> <C>
OPERATIONS
Net income............................................................................... $ 94 $ 4
Adjustments for noncash and nonoperating items:
Depreciation and amortization............................................................ 288 226
Changes in operating assets and liabilities.............................................. 175 116
---- ------
Cash provided by operations.............................................................. 557 346
---- ------
INVESTING ACTIVITIES
Investments and acquisitions............................................................. (31) (21)
Capital expenditures..................................................................... (331) (270)
Investment proceeds ..................................................................... 119 1
---- ------
Cash used by investing activities........................................................ (243) (290)
---- ------
FINANCING ACTIVITIES
Borrowings............................................................................... 63 106
Debt repayments.......................................................................... (498) (102)
Capital distributions.................................................................... (63) (14)
Collections on note receivable from U S WEST............................................. 71 150
Other.................................................................................... 45 -
---- ------
Cash provided (used) by financing activities............................................. (382) 140
---- ------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.............................................. (68) 196
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD.............................................. 209 1,071
---- ------
CASH AND EQUIVALENTS AT END OF PERIOD.................................................... $141 $1,267
---- ------
---- ------
</TABLE>
See accompanying notes.
39
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Time Warner Entertainment Company, L.P., a Delaware limited partnership
("TWE"), is engaged principally in two fundamental areas of business:
Entertainment, consisting principally of interests in filmed entertainment,
broadcasting, theme parks and cable television programming; and
Telecommunications, consisting principally of interests in cable television
systems.
Each of the business interests within Entertainment and
Telecommunications is important to TWE's objective of increasing partner value
through the creation, extension and distribution of recognizable brands and
copyrights throughout the world. Such brands and copyrights include (1) the
unique and extensive film and television libraries of Warner Bros. and
trademarks such as the Looney Tunes characters and Batman, (2) The WB Network, a
new national broadcasting network launched in 1995 as an extension of the Warner
Bros. brand and as an additional distribution outlet for Warner Bros.'
collection of children's cartoons and television programming, (3) Six Flags, the
largest regional theme park operator in the United States, in which TWE owns a
49% interest, (4) HBO and Cinemax, the leading pay television services and (5)
Time Warner Cable, the second largest operator of cable television systems in
the U.S.
The operating results of TWE's various business interests are presented
herein as an indication of financial performance (Note 7). Except for start-up
losses incurred in connection with The WB Network, TWE's principal business
interests generate significant operating income and cash flow from operations.
The cash flow from operations generated by such business interests is
significantly greater than their operating income due to significant amounts of
noncash amortization of intangible assets recognized principally in Time Warner
Inc.'s ("Time Warner") $14 billion acquisition of Warner Communications Inc.
("WCI") in 1989 and $1.3 billion acquisition of the minority interest in
American Television and Communications Corporation ("ATC") in 1992, a portion of
which cost was allocated to TWE in accordance with the pushdown method of
accounting. Non-cash amortization of intangible assets recorded by TWE's
businesses amounted to $110 million and $113 million in the three months ended
March 31, 1996 and 1995, respectively.
Subsidiaries of Time Warner are the general partners of TWE ("Time
Warner General Partners"). During 1995, Time Warner acquired the aggregate
11.22% limited partnership interests previously held by subsidiaries of each of
ITOCHU Corporation and Toshiba Corporation. As a result, Time Warner and certain
of its wholly-owned subsidiaries collectively own 74.49% of the pro rata
priority capital ("Series A Capital") and residual equity capital ("Residual
Capital") in TWE, and 100% of the senior priority capital ("Senior Capital") and
junior priority capital ("Series B Capital") of TWE. The remaining 25.51%
limited partnership interests in the Series A Capital and Residual Capital of
TWE are held by a subsidiary of U S WEST, Inc. ("U S WEST").
Basis of Presentation
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
40
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
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, 1995.
The consolidated financial statements reflect (i) the formation by TWE
of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995, (ii) the
deconsolidation of Six Flags Entertainment Corporation ("Six Flags") effective
as of June 23, 1995 and (iii) the consolidation of Paragon Communications
("Paragon") effective as of July 6, 1995. Certain reclassifications have been
made to the prior year's financial statements to conform to the 1996
presentation.
Effective January 1, 1996, TWE adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," ("FAS 121") which
established standards for the recognition and measurement of impairment losses
on long-lived assets and certain intangible assets. The adoption of FAS 121 did
not have a material effect on TWE's 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 that included Advance/Newhouse's 10%
interest in Primestar Partners, L.P. ("Primestar"). 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.
The accompanying consolidated statement of operations includes the
operating results of the Advance/Newhouse businesses from the date of
contribution to the partnership. On a pro forma basis, giving effect to (i) the
1995 formation of the TWE-Advance/Newhouse Partnership, (ii) the 1995
refinancing of approximately $2.6 billion of pre-existing bank debt, (iii) the
1995 consolidation of Paragon, (iv) the 1995 reacquisition of the Time Warner
Service Partnership Assets (Note 6), (v) the 1995 sale of 51% of TWE's interest
in Six Flags and (vi) the sale or expected sale or transfer of certain
unclustered cable television systems owned by TWE, as if each of such
transactions had occurred at the beginning of 1995, TWE would have reported for
the three months ended March 31, 1995, revenues of $2.266 billion, depreciation
and amortization of $269 million, operating income of $219 million and net
income of $30 million.
41
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
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 accounted for under the equity method of accounting. TWE reduced debt by
approximately $850 million in 1995 in connection with the transaction, and a
portion of the income on the transaction has been 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:
<TABLE>
<CAPTION
March 31, 1996 December 31, 1995
------------------- -------------------
Current Noncurrent Current Noncurrent
------- ---------- ------- ----------
(millions)
<S> <C> <C> <C> <C>
Film costs:
Released, less amortization.................................. $ 384 $ 452 $ 529 $ 437
Completed and not released................................... 212 31 74 22
In process and other......................................... 40 369 11 396
Library, less amortization................................... - 703 - 717
Programming costs, less amortization............................ 221 328 219 337
Merchandise..................................................... 69 - 71 -
----- ------ ----- -----
Total ......................................................... $ 926 $1,883 $ 904 $1,909
----- ------ ----- -----
----- ------ ----- -----
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION
March 31, December 31,
1996 1995
---- ----
(millions)
<S> <C> <C>
Credit agreement, weighted average interest rates of 5.9% and 6.4%...................... $1,740 $2,185
Commercial paper, weighted average interest rates of 5.7% and 6.2%...................... 190 157
Publicly held notes and debentures...................................................... 3,781 3,781
Other................................................................................... 13 14
------ ------
Total................................................................................... $5,724 $6,137
------ ------
------ ------
</TABLE>
Each Time Warner General Partner has guaranteed a pro rata portion of
approximately $5.5 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.
42
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
6. PARTNERS' CAPITAL
Changes in partners' capital were as follows:
<TABLE>
<CAPTION
Three Months
Ended March 31,
-----------------
1996 1995
---- ----
(millions)
<S> <C> <C>
Balance at beginning of year............................................................. $6,478 $6,233
Net income............................................................................... 94 4
Distributions............................................................................ (121) (71)
Allocation of income to Time Warner General Partners' Senior Capital..................... (28) (33)
Collections on note receivable from U S WEST............................................. 71 150
Other.................................................................................... 8 (4)
------ ------
Balance at March 31...................................................................... $6,502 $6,279
------ ------
------ ------
</TABLE>
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 Series B
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. Prior to such
reacquisition, the Time Warner Service Partnerships owned and operated certain
assets of TWE which had been distributed to the Time Warner General Partners in
September 1993 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. Prior to September 1995, TWE was required to make
quarterly cash distributions related to its Series B Capital in the amount of
$12.5 million to the Time Warner General Partners ("TWSP Distributions"), which
the General Partners were then required to contribute 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 or, with respect to
options granted prior to the TWE capitalization on June 30, 1992, the greater of
the exercise price and the $27.75 market price of Time Warner common stock at
the time of the TWE capitalization. TWE accrues a stock option distribution and
a corresponding liability with respect to unexercised options when the market
price of Time Warner common stock increases during the accounting period, and
reverses previously-accrued stock option distributions and the corresponding
liability when the market price of Time Warner common stock declines.
During the three months ended March 31, 1996, TWE accrued $56 million
of tax-related distributions and $65 million of stock option distributions,
based on closing prices of Time Warner common stock of $40.875 at March 31, 1996
and $37.875 at December 31, 1995. During the three months ended March 31, 1995,
TWE accrued $13 million of TWSP Distributions and $8 million of tax-related
distributions, as well as $50 million of stock option distributions as a result
of an increase in the market price of Time Warner common stock. In the first
quarter of 1996, TWE paid distributions to the Time Warner General Partners in
the amount of $63 million, consisting of $56 million of tax-related
distributions and $7 million of stock option related distributions. In the first
quarter of 1995,
43
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
TWE paid the Time Warner General Partners distributions in the amount of $13.5
million, consisting of $12.5 million of Time Warner Service Partnership
Distributions and $1 million of stock option related distributions.
7. SEGMENT INFORMATION
TWE's businesses are conducted in two funadamental areas of business:
Entertainment, consisting principally of interests in filmed entertainment,
broadcasting, theme parks and cable television programming; and
Telecommunications, consisting principally of interests in cable television
systems.
Information as to the operations of TWE in different business segments
is set forth below. The 1996 operating results of TWE reflect the formation of
the TWE-Advance/Newhouse Partnership effective as of April 1, 1995, the
deconsolidation of Six Flags effective as of June 23, 1995 and the consolidation
of Paragon effective as of July 6, 1995. The operating results of Six Flags
prior to June 23, 1995 are reported separately to facilitate comparability.
<TABLE>
<CAPTION
Three Months
Ended March 31,
-----------------
1996 1995
---- ----
(millions)
<S> <C> <C>
Revenues
Filmed Entertainment........................................................................ $1,216 $1,183
Six Flags Theme Parks....................................................................... - 23
Broadcasting - The WB Network............................................................... 15 3
Programming - HBO........................................................................... 419 385
Cable....................................................................................... 947 557
Intersegment elimination.................................................................... (112) (105)
------ ------
Total....................................................................................... $2,485 $2,046
------ ------
------ ------
<CAPTION
Three Months
Ended March 31,
----------------
1996 1995
---- ----
(millions)
<S> <C> <C>
Operating Income
Filmed Entertainment........................................................................ $ 70 $ 67
Six Flags Theme Parks....................................................................... - (2)
Broadcasting - The WB Network............................................................... (24) (21)
Programming - HBO........................................................................... 76 67
Cable....................................................................................... 146 80
----- -----
Total....................................................................................... $ 268 $ 191
----- -----
----- -----
</TABLE>
44
<PAGE>
<PAGE>
TIME WARNER ENTERTAINMENT COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
<TABLE>
<CAPTION
Three Months
Ended March 31,
----------------
1996 1995
---- ----
(millions)
<S> <C> <C>
Depreciation of Property, Plant and Equipment
Filmed Entertainment........................................................................ $ 30 $ 20
Six Flags Theme Parks....................................................................... - 1
Broadcasting - The WB Network............................................................... - -
Programming - HBO........................................................................... 5 4
Cable....................................................................................... 143 88
---- ----
Total....................................................................................... $178 $113
---- ----
---- ----
<CAPTION
Three Months
Ended March 31,
----------------
1996 1995
---- ----
(millions)
<S> <C> <C>
Amortization of Intangible Assets (1)
Filmed Entertainment........................................................................ $ 31 $ 34
Six Flags Theme Parks....................................................................... - 3
Broadcasting - The WB Network............................................................... - -
Programming - HBO........................................................................... - -
Cable....................................................................................... 79 76
---- ----
Total....................................................................................... $110 $113
---- ----
---- ----
</TABLE>
- --------------
(1) Amortization includes amortization relating to the acquisition of WCI in
1989 and the ATC minority interest in 1992 and to other business combinations
accounted for by the purchase method.
8. COMMITMENTS AND CONTINGENCIES
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.
9. ADDITIONAL FINANCIAL INFORMATION
Additional financial information is as follows:
<TABLE>
<CAPTION
Three Months
Ended March 31,
----------------
1996 1995
---- ----
(millions)
<S> <C> <C>
Interest expense......................................................................... $122 $150
Cash payments made for interest.......................................................... 151 168
Cash payments made for income taxes (net)................................................ 12 15
</TABLE>
45
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the litigation entitled U S West, Inc. et al. v.
Time Warner Inc., et al., described on pages I-44 and I-45 of Time Warner's
Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 Form
10-K"). The trial concluded on March 22, 1996, and a decision is expected in the
middle of June.
Reference is made to the litigation entitled Brendan Barry v. CEMA
Distribution, Sony Music Entertainment, Inc., Warner Elektra Atlantic
Corporation, UNI Distribution Corporation, Bertelsman Music Group, Inc. and
PolyGram Group Distribution, Inc., described on page I-44 of the 1995 Form 10-K.
The plaintiffs have voluntarily dismissed the amended complaint, and an Order of
Dismissal Without Prejudice was entered on April 5, 1996.
Reference is made to the litigation entitled Trust for the Benefit of
Paula C. Rand v. Gerald M. Levin, et al., described on page I-45 to the 1995
Form 10-K. On April 8, 1996, Time Warner and the other defendants named in this
complaint moved to dismiss such complaint.
Reference is made to the actions filed in Superior Court, Fulton
County, Georgia, and consolidated as Lewis, et al. v. Turner Broadcasting Sys.,
Inc., et al. described on pages I-45 and I-46 of the 1995 Form 10-K. The
plaintiffs filed a third amended complaint on February 29, 1996. Time Warner and
defendants affiliated with Time Warner answered such complaint on March 29,
1996. The plaintiffs filed an opposition to defendants' motion for a judgment
based on the pleadings on April 24, 1996.
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
January 4, 1996, reporting in Item 2 that it had completed its
previously announced acquisition of Cablevision Industries Corporation
and related companies ("CVI"). In connection with the acquisition, Time
Warner issued approximately 2.9 million shares of common stock and 6.5
million shares of new convertible preferred stock to CVI stockholders
and assumed or incurred approximately $2 billion of indebtedness.
(ii) Time Warner filed a Current Report on Form 8-K dated
March 22, 1996, setting forth in Item 7 certain pro forma financial
statements of Time Warner and the Time Warner Entertainment Group at
December 31, 1995 that give effect to certain transactions entered into
by Time Warner and TWE during 1995 and 1996.
(iii) Time Warner filed a Current Report on Form 8-K dated
March 25, 1996, reporting in Item 5 that it had issued a press release
dated March 25, 1996 announcing plans to issue a new series of
exchangeable preferred stock to be designated Series K Exchangeable
Preferred Stock, the proceeds of which would be used to reduce debt.
46
<PAGE>
<PAGE>
(iv) Time Warner filed a Current Report on Form 8-K dated
April 2, 1996, reporting in Item 5 that it had issued a press release
dated April 2, 1996 announcing that it had raised $1.5 billion for debt
reduction by issuing 1.5 million shares of Series K Exchangeable
Preferred Stock under Rule 144A.
(v) Time Warner filed a Current Report on Form 8-K dated April
4, 1996, reporting in Item 5 that it had issued a press release dated
April 4, 1996 announcing that its offering of Series K Exchangeable
Preferred Stock had been increased to 1.6 million shares as a result of
the exercise by the underwriters of an option to purchase an additional
100,000 shares to cover overallotments.
(vi) Time Warner filed a Current Report on Form 8-K dated
April 11, 1996, filing pursuant to Item 7 thereof the Certificate of
Designation of the 10 1/4% Series K Exchangeable Preferred Stock and
the related Form of Senior Subordinated Indenture.
47
<PAGE>
<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: May 15, 1996
<PAGE>
<PAGE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Exhibit No. Description of Exhibit
3(i) Certificate of the Voting Powers, Designations, Preferences and
Relative, Participating, Optional or Other Special Rights and
Qualifications, Limitations or Restrictions Thereof, of the 10
1/4% Series K Exchangeable Preferred Stock of Time Warner
(which is incorporated herein by reference to Exhibit 4.1 to
Time Warner's Current Report on Form 8-K dated April 11, 1996
(the "April 1996 Form 8-K")).
4.2 Form of Senior Subordinated Indenture (which is incorporated
herein by reference to Exhibit 4.2 to the April 1996 Form 8-K).
10.1 Agreement and Plan of Merger dated as of December 8, 1995 among
Cablevision Industries of Middle Florida, Inc., Alan Gerry,
Time Warner and Cablevision Industries Corporation ("CVI")
(which is incorporated herein by reference to Exhibit 2(c) to
Time Warner's Current Report on Form 8-K dated January 4, 1996
(the "January 1996 Form 8-K")).
10.2 Purchase Agreement dated as of February 6, 1995, as amended and
restated as of December 8, 1995 among Alan Gerry, the
corporations and partnerships listed on the signature pages
thereof as the Purchase Gerry Companies and the Direct Holders,
and Time Warner (which is incorporated herein by reference to
Exhibit 2(d) to the January 1996 Form 8-K).
10.3 Amendment Agreement dated as of December 8, 1995 to the
Supplemental Agreement dated as of February 6, 1995, including
Annex A thereto, among CVI, the corporations and partnerships
listed on the signature pages thereof as the Gerry Companies
and the Direct Holders, Alan Gerry, Time Warner and TW CVI
Acquisition Corp. (which is incorporated herein by reference to
Exhibit 2(f) to the January 1996 Form 8-K).
27 Financial Data Schedule.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> TIME WARNER INC. Exhibit 27
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from
the financial statements of Time Warner Inc. for the quarter ended March 31,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 644
<SECURITIES> 0
<RECEIVABLES> 2,197
<ALLOWANCES> 755
<INVENTORY> 446
<CURRENT-ASSETS> 3,475
<PP&E> 2,360
<DEPRECIATION> 907
<TOTAL-ASSETS> 24,832
<CURRENT-LIABILITIES> 2,762
<BONDS> 11,457
<COMMON> 393
0
36
<OTHER-SE> 3,898
<TOTAL-LIABILITY-AND-EQUITY> 24,832
<SALES> 2,068
<TOTAL-REVENUES> 2,068
<CGS> 1,277
<TOTAL-COSTS> 1,277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 247
<INCOME-PRETAX> (88)
<INCOME-TAX> 5
<INCOME-CONTINUING> (93)
<DISCONTINUED> 0
<EXTRAORDINARY> (26)
<CHANGES> 0
<NET-INCOME> (119)
<EPS-PRIMARY> (.39)
<EPS-DILUTED> (.39)
</TABLE>
