SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
October 1, 1996
TWI CABLE INC.
(Exact name of registrant as specified in its charter)
Delaware 33-43948 59-1353813
(State or other (Commission (I.R.S.
Employer jurisdiction File Number) Identification No.)
of incorporation)
One Cablevision Center, Liberty, NY 12754
(Address of principal executive offices) (zip code)
(914) 292-7550
(Registrant's telephone number, including area code)
Cablevision Industries Corporation
(Former name or former address, if changed since last report)
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Item 5. Other Events
TWI Cable Inc. ("TWI Cable" or the "Company"), formerly
named Cablevision Industries Corporation ("CVI") and a
wholly-owned subsidiary of Time Warner Inc. ("Time Warner")_1/,
has recently entered into the transactions described below.
(i) On October 1, 1996, Time Warner effectuated a
reorganization amongst certain of its wholly owned cable
subsidiaries, whereby (a) Time Warner contributed to the
Company all of the capital stock of a wholly owned
subsidiary of Time Warner owning and operating the net
assets acquired in Time Warner's 1995 acquisition of
KBLCOM Incorporated (formerly TWI Cable Inc., or "Old
TWI Cable", and, prior to its acquisition by Time
Warner, "KBLCOM"), (b) Time Warner contributed to the
Company all of the capital stock of Summit
Communications Group, Inc. ("Summit"), which was
acquired by Time Warner in 1995 and (c) CVI changed
its name to TWI Cable Inc. In connection therewith, the
Company assumed (1) approximately $1.5 billion of Old
TWI Cable's indebtedness under its five-year, revolving
credit agreement (the "Credit Agreement"), which was
assumed in cancellation of the Company's $1.5 billion
note payable to Old TWI Cable and (2) $1.3 billion of
indebtedness due to Time Warner. Such transactions are
collectively referred to herein as the "TWI Cable
Reorganization". References herein to the "Company"
refer to CVI prior to October 1, 1996 and TWI Cable
thereafter.
(ii) On January 4, 1996, the Company completed the
transactions with Time Warner that were previously
described in the Company's Current Report on Form 8-K
dated February 6, 1995, pursuant to which (a) the
Company merged with a wholly owned subsidiary of Time
Warner and became a direct, wholly owned subsidiary of
Time Warner (the "CVI Merger") and (b) Cablevision
Management Corporation of Philadelphia ("CMP") merged
with a wholly owned subsidiary of Time Warner and became
a direct, wholly owned subsidiary of Time Warner (the
"CMP Merger") and was immediately contributed into, and
became a direct, wholly owned subsidiary of, the
Company. Immediately following the CVI Merger, (a)
Cablevision Industries of Middle Florida, Inc. ("CIMF")
merged into the Company (the "CIMF Merger") and (b) the
Company and certain of its subsidiaries purchased the
entire equity interests or all of the assets
(collectively, the "Gerry Purchase") of each of
Cablevision Industries of Tennessee L.P. ("CITLP"),
Cablevision Industries Limited Partnership ("CILP"),
Cablevision Industries of Saratoga Associates ("CISA"),
Cablevision of Fairhaven/Acushnet ("CFA") and
Cablevision Industries of Florida, Inc.
("CIF" and, together with CIMF, CMP, CITLP, CILP, CISA
and CFA, the "Gerry Companies"). The CMP Merger, the
CIMF Merger and the Gerry Purchase are referred to
herein as the "Gerry Acquisition". The CVI Merger and
the Gerry Acquisition are referred to herein as the
"Time Warner Transactions".
In connection with the consummation of the Time
Warner Transactions, the Company borrowed $1.525 billion
from Old TWI Cable under the same terms as set forth in
the Credit Agreement as more fully described herein.
The Company used approximately $1.2 billion of such
proceeds to repay or redeem all of its outstanding
indebtedness with the exception of $200 million
principal amount of 9-1/4% Senior Debentures and $300
million principal amount of 10-3/4% Senior Notes, as
well as $220 million of indebtedness that was assumed in
the Gerry Acquisition, plus redemption premiums thereon
of $16 million (the "CVI Debt Refinancing"). In addition
to the CVI Debt Refinancing, $211 million was used to
consummate the Gerry Acquisition and $62 million was
used to pay for one-time costs related to the CVI Merger
and transaction costs related to the Gerry Acquisition.
The consideration received by the stockholders of
the Company (principally Alan Gerry) for the CVI Merger
was 457,075 shares of the common stock of Time Warner,
3,250,000 and 3,080,202 shares, respectively, of two
newly designated series of convertible preferred stock
of Time Warner and the assumption of the liabilities of
the Company. The aggregate consideration received by
Alan Gerry and certain related parties for the Gerry
Acquisition was 2,467,294 shares of the common stock of
Time Warner, $211 million in cash and the assumption of
the liabilities of the Gerry Companies.
The TWI Cable Reorganization, the Time Warner
Transactions and the CVI Debt Refinancing are referred to
herein as the "Transactions".
_______
1/ On October 10, 1996, Time Warner acquired the remaining 80% interest
in Turner Broadcasting System, Inc. ("TBS") that it did not already
own. The transaction was structured so that each of Time Warner
("Old Time Warner") and TBS were merged with wholly-owned, separate
subsidiaries of a holding company that was renamed "Time Warner
Inc." ("New Time Warner"). Accordingly, all references herein to
"Time Warner" refer to Old Time Warner.
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Item 7. Financial Statements and Exhibits.
(a) Pro Forma Consolidated Condensed Financial Statements
The following pro forma consolidated condensed
financial statements of the Company as of and for the six
months ended June 30, 1996 give effect to the TWI Cable
Reorganization as if the transactions occurred at such date,
with respect to the balance sheet, and at the beginning of
1995, with respect to the statement of operations. The Time
Warner Transactions and the CVI Debt Refinancing are already
reflected in the historical financial statements of the
Company as of and for the six months ended June 30, 1996.
The pro forma consolidated condensed statement of operations
of the Company for the year ended December 31, 1995 gives
effect to the Time Warner Transactions, the CVI Debt
Refinancing, and the TWI Cable Reorganization in each case
as if such transactions occurred at the beginning of the
period. The pro forma consolidated condensed financial
statements should be read in conjunction with the historical
financial statements of the Company, including the notes
thereto, which are contained in the Company's Quarterly
Report on Form 10-Q for the six months ended June 30, 1996
and the Company's Annual Report on Form 10-K for the year
ended December 31, 1995, as well as the historical financial
statements of (i) Cablevision Industries Limited Partnership
and the Combined Entities (which financial statements are
the combined financial statements of the Gerry Companies),
(ii) Old TWI Cable (formerly KBLCOM) and (iii) Summit. The
pro forma consolidated condensed financial statements have
been derived from the historical financial statements of the
respective entities as of and for the six months ended June
30, 1996 and for the year ended December 31, 1995, except in
the case of the Gerry Companies, which were acquired on
January 4, 1996 and consequently, such pro forma financial
statements have been derived from the combined financial
statements for such entities for the year ended December 31,
1995. Historical financial statements for the Gerry
Companies are incorporated by reference from Time Warner's
Current Report on Form 8-K dated November 14, 1995.
Historical financial statements for Old TWI Cable (formerly
KBLCOM) as of and for the six months ended June 30, 1996 and
the year ended December 31, 1995 are attached as exhibits
hereto. Historical financial statements of Summit are
incorporated herein by reference from its Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1996
and its Annual Report on Form 10-K for the year ended
December 31, 1995.
The pro forma consolidated condensed financial
statements are presented for informational purposes only and
are not necessarily indicative of the financial position or
operating results that would have occurred if the
Transactions had been consummated as of the dates indicated,
nor are they necessarily indicative of future financial
conditions or operating results.
TWI Cable Reorganization
Pro forma adjustments for the TWI Cable Reorganization
reflect the contribution of Summit and Old TWI Cable
(formerly KBLCOM) to the Company. In connection therewith,
the Company acquired wholly owned subsidiaries with (a)
cable television systems serving approximately 862,000
subscribers and a 50% interest in Paragon Communications
("Paragon"), which owns cable television systems serving an
additional 972,000 subscribers and (b) approximately $2.9
billion of indebtedness, consisting of (i) $1.5 billion of
Old TWI Cable's indebtedness under the Credit Agreement,
which was assumed in cancellation of the Company's $1.5
billion note payable to Old TWI Cable, (ii) $1.3 billion of
indebtedness due to Time Warner and (ii) $140 million of
indebtedness of Summit. The other 50% interest in Paragon is
already owned directly and indirectly by Time Warner
Entertainment Company, L.P. ("TWE"), a partnership in which
74.49% of the pro rata priority capital and residual equity
interests and 100% of the senior priority capital and junior
priority capital interests are owned by Time Warner and
certain of its wholly owned subsidiaries.
Because all of the merged entities are under the common
control of Time Warner, the Company has recorded the
contributed net assets at Time Warner's historical cost
basis of accounting.
Time Warner Transactions
The CVI Merger did not result in the "push down" of
Time Warner's accounting basis due to the Company's public
debt which remains outstanding. Therefore, the Company's
accounting basis of net assets did not change as a result of
the CVI Merger. As a result of the Gerry Acquisition, the
Company acquired cable television systems serving
approximately 247,000 subscribers in exchange for 2,467,294
shares of Time Warner common stock and the assumption or
incurrence of approximately $431 million of debt. The
Company has accounted for the Gerry Acquisition under the
purchase method of accounting for business combinations and,
accordingly, the estimated cost to acquire such assets has
been allocated to the underlying net assets in proportion to
their respective fair values. The valuations and other
studies which will provide the basis for such an allocation
have not been completed and accordingly, a preliminary
allocation of the excess of cost over the book value of the
net assets acquired has been made principally to cable
television franchises in proportion to their estimated fair
values, as more fully described in the notes to the pro
forma consolidated condensed financial statements.
In connection with the Time Warner Transactions, the
Company has entered into management services agreements with
TWE, pursuant to which TWE is responsible for the management
and operations of certain of its cable television systems.
The pro forma consolidated condensed statements of
operations of the Company reflect annual management fees to
be paid to TWE, based on an allocation, which management
believes to be reasonable, of the corporate expenses of the
cable division of TWE in proportion to the respective number
of cable subscribers of the Company to be managed by TWE's
cable division as a percentage of the aggregate number of
subscribers of all cable television systems to be managed by
TWE's cable division. As a result of TWE's management of
certain of the cable television systems owned by the
Company, the pro forma consolidated condensed statement of
operations of the Company for the year ended December 31,
1995 also reflects certain reductions in corporate expenses
of the Company and its acquired entities relating to the
closing of certain corporate and regional facilities and the
termination of related personnel as a direct result of the
integration of the operations of the Company and its
acquired entities into Time Warner's operating structure.
In connection with the consummation of the Time Warner
Transactions, Old TWI Cable borrowed $1.525 billion under
its Credit Agreement and loaned such proceeds to the Company
under the same terms set forth in the Credit Agreement as
more fully explained below. The Company used approximately
$1.2 billion of such proceeds to repay or redeem all of its
outstanding indebtedness with the exception of $200 million
principal amount of 9-1/4% Senior Debentures and $300
million principal amount of 10-3/4% Senior Notes, as well as
$220 million of indebtedness that was assumed in the Gerry
Acquisition, plus redemption premiums thereon of $16
million. In addition to such CVI Debt Refinancing, $211
million was used to consummate the Gerry Acquisition and $62
million was used to pay for one-time costs related to the
CVI Merger and transaction costs related to the Gerry
Acquisition. Upon consummation of the TWI Cable
Reorganization, the Company assumed all of Old TWI Cable's
obligations under the Credit Agreement, resulting in the
cancellation of its $1.5 billion note payable to Old TWI
Cable. Prior to the TWI Cable Reorganization, the Company
had guaranteed the obligations of Old TWI Cable under the
Credit Agreement.
Based on the average LIBOR rates in effect during the
six months ended June 30, 1996 and the year ended December
31, 1995, LIBOR has been assumed to be 5.5% and 6% per
annum, respectively, and accordingly, the pro forma
consolidated condensed statements of operations reflect
interest on the $1.3 billion note payable to Time Warner and
borrowings under the Credit Agreement at estimated rates of
6.375% and 6.875% per annum, respectively. Each 12.5 basis
point increase in the pro forma interest rate applicable to
the aggregate $2.8 billion of indebtedness due to Time
Warner and borrowings under the Credit Agreement would have
the approximate effect of increasing the Company's annual
interest expense and net loss by $4 million and $2 million,
respectively.
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TWI CABLE INC.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
June 30, 1996
(millions, unaudited)
TWI Cable Reorganization
Old TWI Cable
Company (formerly Company
Historical Summit(a) KBLCOM)(b) Pro Forma
A S S E T S
Cash and equivalents $ 4 $104 $ 14 $ 122
Other current assets 60 7 34 101
Total current assets 64 111 48 223
Loan to Time Warner - 24 - 24
Other investments 1 - 961 962
Property, plant and equipment 393 44 316 753
Cable television franchises 720 350 1,301 2,371
Goodwill 274 142 572 988
Other assets - 2 9 11
Total assets $1,452 $673 $3,207 $5,332
LIABILITIES AND SHAREHOLDERS' EQUITY
Total current liabilities $ 93 $ 12 $ 90 $ 195
Note payable to Old TWI Cable 1,500 - (1,500) -
Note payable to Time Warner - - 1,291 1,291
Other long-term debt 500 140 1,500 2,140
Deferred income taxes 53 162 863 1,078
Other long-term liabilities 1 - 1 2
Shareholders' equity (deficit):
Paid-in capital 126 354 1,033 1,513
Accumulated earnings (deficit) (821) 5 (71) (887)
Total shareholders' equity
(deficit) (695) 359 962 626
Total liabilities and
shareholders' equity $1,452 $673 $3,207 $5,332
See accompanying notes.
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TWI CABLE INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Six Months Ended June 30, 1996
(millions, unaudited)
TWI Cable Reorganization
Old TWI Cable
Company (formerly Company
Historical Summit(c) KBLCOM)(d) Pro Forma
Revenues $ 265 $ 36 $ 150 $ 451
Costs and expenses:
Operating 90 11 60 161
General and administrative 46 5 31 82
Depreciation and amortization 81 15 83 179
Operating expenses 217 31 174 422
Business segment operating
income (loss) 48 5 (24) 29
Interest and other, net (75) (3) (31) (109)
Income (loss) before income taxes (27) 2 (55) (80)
Income tax (provision) benefit 8 (2) 19 25
Loss before extraordinary item $ (19) $ - $ (36) $ (55)
See accompanying notes.
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TWI CABLE INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1995
(millions, unaudited)
TWI Cable Reorganization
Time
Warner Old TWI Cable
Company Trans- CVI Debt (formerly Company
Historical actions Refinancing Summit KBLCOM) Pro Forma
(e) (f) (g) (h)
Revenues $ 429 $ 85 $ - $ 66 $277 $ 857
Costs and expenses:
Operating 129 28 - 18 82 257
Selling, general
and administrative 97 9 - 13 81 200
Depreciation and
amortization 141 45 - 30 164 380
Employment arrangements 63 (63) - - - -
Operating expenses 430 19 - 61 327 837
Business segment operating
income (loss) (1) 66 - 5 (50) 20
Interest and other, net (104) (28) 4 (11) (71) (210)
Non-recurring charge (26) - - - - (26)
Income (loss) before
income taxes (131) 38 4 (6) (121) (216)
Income tax (provision)
benefit 6 (13) (2) 6 43 39
Net income (loss) $(125) $ 25 $ 2 $ - $ (78) $(177)
See accompanying notes.
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TWI CABLE INC.
NOTES TO THE PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(a) Reflects the assets and liabilities of Summit at June
30, 1996, as included in the historical balance sheet
of Time Warner at June 30, 1996 filed in Time Warner's
Quarterly Report on Form 10-Q for the six months ended
June 30, 1996, consisting of (i) the historical cost
basis of net assets of $30 million as reflected in the
historical financial statements of Summit, which do not
include the push down of Time Warner's excess cost to
acquire Summit and (ii) Time Warner's unamortized
excess cost to acquire Summit of $329 million.
(b) Reflects (i) the assets and liabilities of Old TWI
Cable (formerly KBLCOM) at June 30, 1996, as included
in the historical balance sheet of Time Warner at June
30, 1996 filed in Time Warner's Quarterly Report on
Form 10-Q for the six months ended June 30, 1996
and reflected in the historical financial statements of
Old TWI Cable (formerly KBLCOM), which include the push
down of Time Warner's excess cost to acquire Old TWI
Cable (formerly KBLCOM) and (ii) the cancellation of
the Company's $1.5 billion note payable to Old TWI
Cable.
(c) Reflects the operating results of Summit for the six
months ended June 30, 1996, as included in the
historical statement of operations of Time Warner for
the six months ended June 30, 1996 filed in Time
Warner's Quarterly Report on Form 10-Q for the six
months ended June 30, 1996, consisting of (i) the
historical net income of Summit of $7 million as
reflected in its historical financial statements,
which do not include the push down of Time Warner's
excess cost to acquire Summit and (ii) $7 million of
incremental net losses with respect to Time Warner's
amortization of the excess cost to acquire Summit.
(d) Reflects the operating results of Old TWI Cable
(formerly KBLCOM) for the six months ended June 30,
1996, as included in the historical statement of
operations of Time Warner for the six months ended June
30, 1996 filed in Time Warner's Quarterly Report on
Form 10-Q for the six months ended June 30, 1996 and
reflected in the historical financial statements of Old
TWI Cable (formerly KBLCOM), which include the push
down of Time Warner's excess cost to acquire Old TWI
Cable (formerly KBLCOM).
(e) Reflects the historical operating results of the Gerry
Companies for the year ended December 31, 1995,
including revenues of $90 million, operating income of
$19 million and net income of $6 million, as well as
certain pro forma adjustments directly related to the
Time Warner Transactions. The pro forma adjustments for
the year ended December 31, 1995 reflect (1) the
exclusion of $84 million of expenses, consisting of $63
million of severance costs directly attributable to
Company employees terminated as a result of the Time
Warner Transactions and $21 million of reductions in
corporate expenses, principally relating to the closing
of certain corporate and regional facilities and the
termination of related personnel as a direct result of
the integration of the operations of the Company and
the Gerry Companies into Time Warner's operating
structure, (2) an increase of $22 million in
amortization consisting of a $1 million reduction of
the Gerry Companies' historical amortization of
pre-existing goodwill and a $23 million increase in
amortization with respect to the excess cost to acquire
the Gerry Companies that has been allocated to (i)
cable television franchises in the amount of $441
million and amortized on a straight-line basis over a
twenty-year period and (ii) goodwill in the amount of
$33 million and amortized on a straight-line basis over
a forty-year period, (3) an increase of $15 million in
selling, general and administrative expenses with
respect to payments to be made to TWE for its
management of the Company's cable television systems,
(4) an increase of $15 million in interest expense on
the $211 million of borrowings under the Credit
Agreement, which was used to consummate the Gerry
Acquisition and to pay for transaction costs related to
the Gerry Acquisition and (5) an increase of $13
million in income taxes, consisting of a $34 million
increase in income taxes resulting from the exclusion
of certain operating expenses, offset in part by $21
million in income tax benefits on the additional
amortization expense, interest expense and management
fees to be paid to TWE provided at a 41% tax rate.
(f) Pro forma adjustments to record the CVI Debt
Refinancing for the year ended December 31, 1995
reflect interest savings of $4 million from $1.2
billion of aggregate borrowings under the Credit
Agreement which were used to repay or redeem $1.184
billion of outstanding indebtedness, plus redemption
premiums thereon of $16 million. Income taxes of $2
million have been provided at a 41% tax rate on the
reduction in interest costs.
(g) Reflects the pro forma operating results of Summit for
the year ended December 31, 1995, as included in Time
Warner's pro forma statement of operations for the year
ended December 31, 1995 filed in Time Warner's Current
Report on Form 8-K dated May 15, 1996, including (i)
the historical net income of Summit of $38 million as
reflected in its historical financial statements, which
do not include the push down of Time Warner's excess
cost to acquire Summit, (ii) $9 million of incremental
net losses with respect to Time Warner's amortization
of the excess cost to acquire Summit for the period
beginning May 2, 1995, the date of Time Warner's
acquisition of Summit, through December 31, 1995 and
(iii) certain pro forma adjustments directly related to
Time Warner's acquisition of Summit for the four-month
pre-acquisition period ending May 2, 1995. The pro
forma adjustments reflect (1) the exclusion of an
aggregate $23 million of net income relating to (i)
Summit's broadcasting operations that were sold by
Summit prior to Time Warner's acquisition of Summit and
(ii) reductions in Summit's corporate expenses
principally relating to the closure of Summit's
corporate facilities and the termination of related
personnel as a direct result of the integration of
Summit's operations into Time Warner's and TWE's
operating structure, (2) an increase of $8 million in
cost of revenues with respect to the amortization of
Time Warner's excess cost to acquire Summit, (3) an
increase of $1 million in selling, general and
administrative expenses with respect to payments to be
made to TWE for its management of Summit's cable
television systems and (4) a decrease of $3 million in
income tax expense as a result of income tax benefits
provided at a 41% tax rate on the additional
amortization expense and management fees to
be paid to TWE. Operating results of Summit beginning
May 2, 1995 are included in the historical statement of
operations of Time Warner for the year ended December
31, 1995 filed in Time Warner's Annual Report on Form
10-K for the year ended December 31, 1995.
(h) Reflects the pro forma operating results of Old TWI
Cable (formerly KBLCOM) for the year ended December 31,
1995, as included in Time Warner's pro forma statement
of operations for the year ended December 31, 1995
filed in Time Warner's Current Report on Form 8-K
dated May 15, 1996, including (i) the historical net
losses of Old TWI Cable (formerly KBLCOM) of $71
million as reflected in its historical financial
statements, which include the push down of Time
Warner's excess cost to acquire Old TWI Cable (formerly
KBLCOM) from the date of acquisition through December
31, 1995 and (ii) certain pro forma adjustments
directly related to Time Warner's acquisition
of Old TWI Cable (formerly KBLCOM) for the six-month
pre-acquisition period ended July 6, 1995. The pro
forma adjustments reflect (1) the exclusion of an
aggregate $19 million of net losses relating to (i)
interest costs on the portion of KBLCOM's indebtedness
that was not assumed by Time Warner and (ii) reductions
in KBLCOM's corporate expenses principally relating to
the closure of KBLCOM's corporate and regional
facilities and the termination of related personnel as
a direct result of the integration of KBLCOM's
operations into Time Warner's and TWE's operating
structure, (2) an increase of $39 million in cost of
revenues with respect to the amortization of Time
Warner's excess cost to acquire KBLCOM, (3) an increase
of $4 million in selling, general and administrative
expenses with respect to payments to be made to TWE for
its management of certain of KBLCOM's cable television
systems and (4) a decrease of $17 million in income tax
expense as a result of income tax benefits provided at
a 41% tax rate on the additional amortization expense
and management fees to be paid to TWE. Operating
results of Old TWI Cable (formerly KBLCOM) beginning
July 6, 1995 are included in the historical statement
of operations of Time Warner for the year ended
December 31, 1995 filed in Time Warner's Annual Report
on Form 10-K for the year ended December 31, 1995.
<PAGE>
(b) Financial statements of businesses acquired:
(i) TWI Cable Inc. (formerly KBLCOM Incorporated) (the documents
listed in this paragraph (i) being referred to as the "Financial
Statements of Old TWI Cable Inc."):
(A) Unaudited Consolidated Financial Statements as of June 30,
1996 and for each of the six months ended June 30, 1996 and 1995; and
(B) Consolidated Financial Statements as of and for the year
ended December 31, 1995, including the report thereon of
Ernst & Young LLP, independent auditors; and
(C) Consolidated Financial Statements as of December 31,
1994 and for each of the years ended December 31, 1994 and
1993, including the report thereon of Deloitte & Touche LLP.
(ii) Summit Communications Group, Inc. (the documents listed in
this paragraph (ii) being referred to as the "Financial Statements
of Summit Communications Group, Inc."):
(A) Unaudited Consolidated Financial Statements as of June 30,
1996 and for each of the six months ended June 30, 1996 and 1995; and
(B) Consolidated Financial Statements as of December 31, 1995
and for each of the years ended December 31, 1995 and 1994,
including the reports thereon of Ernst & Young LLP, independent
auditors and Deloitte & Touche LLP, respectively.
(iii) Cablevision Industries Limited Partnership and Combined Entities
(the documents listed in this paragraph (iii) being referred to as the
"Financial Statements of Cablevision Industries Limited Partnership"):
(A) Unaudited Combined Financial Statements of Cablevision
Industries Limited Partnership and Combined Entities as of
and for the nine months ended September 30, 1995; and
(B) Combined Financial Statements of Cablevision Industries
Limited Partnership and Combined Entities as of December 31,
1994 and 1993 and for each of the years ended December 31, 1994,
1993 and 1992, including the report thereon of Arthur Andersen LLP.
(iv) Paragon Communications (the documents listed in this
paragraph (iv) being referred to as the "Financial Statements of Paragon"):
(A) Unaudited Consolidated Financial Statements as of June 30,
1996 and for each of the six months ended June 30, 1996 and 1995;
(B) Consolidated Financial Statements as of and for the year
ended December 31, 1995, including the report thereon of Ernst
& Young LLP, independent auditors; and
(C) Consolidated Financial Statements as of December 31, 1994
and for each of the years ended December 31, 1994 and 1993,
including the report thereon of Price Waterhouse LLP.
(c) Pro forma Consolidated Condensed Financial Statements:
(i) TWI Cable Inc. (formerly Cablevision Industries Corporation):
(A) Pro Forma Consolidated Condensed Balance Sheet as of
June 30, 1996;
(B) Pro Forma Consolidated Condensed Statements of Operations
for the six months ended June 30, 1996 and the year ended
December 31, 1995; and
(C) Notes to Pro Forma Consolidated Condensed
Financial Statements.
(d) Exhibits:
(i) Exhibit 99(a): Financial Statements of Old TWI Cable Inc.
(ii) Exhibit 99(b): Financial Statements of Summit
Communications Group, Inc. (incorporated by
reference from pages 15 to 30 of the Annual
Report on Form 10-K for the year ended December
31, 1995 of Summit Communications Group, Inc. and
from pages 2 to 8 of the Quarterly Report on Form
10-Q for the six months ended June 30, 1996 of
Summit Communications Group Inc.).
(iii) Exhibit 99(c): Financial Statements of Cablevision
Industries Limited Partnership (incorporated by
reference from Exhibit 99(e) of the Current
Report on Form 8-K of Time Warner Inc. dated May
30, 1995 and Exhibit 99(b) of the Current Report
on Form 8-K of Time Warner Inc. dated November 14, 1995).
(iv) Exhibit 99(d): Consolidated Financial Statements
of Paragon as of June 30, 1996 and for each of the
six months ended June 30, 1996 and 1995.
(v) Exhibit 99(e): Consolidated Financial Statements of
Paragon as of and for the year ended December 31, 1995.
(vi) Exhibit 99(f): Consolidated Financial Statements
of Paragon as of December 31, 1994 and for each of
the years ended December 31, 1994 and 1993
(incorporated by reference from pages F-74 to F-82
of the Annual Report on Form 10-K for the year
ended December 31, 1994 of TWE).
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SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized,
in the City of New York, State of New York, on October 15, 1996.
TWI CABLE INC.
By: /s/ Richard M. Petty
Name: Richard M. Petty
Title: Vice President and Controller
(Principal Accounting Officer)
<PAGE>
<PAGE>
EXHIBIT INDEX
Sequential
Exhibit Page
No. Description of Exhibits Number
99(a) Financial Statements of Old TWI Cable Inc.
99(b) Financial Statements of Summit Communications Group,
Inc. (incorporated by reference from pages 15 to 30 of the
Annual Report on Form 10-K for the year ended December 31,
1995 of Summit Communications Group, Inc. and from pages 2
to 8 of the Quarterly Report on Form 10-Q for the six months
ended June 30, 1996 of Summit Communications Group, Inc.). *
99(c) Financial Statements of Cablevision Industries
Limited Partnership (incorporated by reference from exhibit
99(e) of the Current Report on Form 8-K of Time Warner Inc.
dated May 30, 1995 and Exhibit 99(b) of the Current Report
on Form 8-K of Time Warner Inc. dated November 14, 1995). *
99(d) Consolidated Financial Statements of Paragon as of
June 30, 1996 and for each of the six months ended June 30,
1996 and 1995.
99(e) Consolidated Financial Statements of Paragon as of
and for the year ended December 31, 1995.
99(f) Consolidated Financial Statements of Paragon as of
December 31, 1994 and for each of the years ended December
31, 1994 and 1993 (incorporated by reference from pages F-74
to F-82 of the Annual Report on Form 10-K for the year ended
December 31, 1994 of TWE). *
* Incorporated by reference.
<PAGE>
TWI CABLE INC.
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
Unaudited
June 30, December 31,
1996 1995
ASSETS
Current assets
Cash and cash equivalents . . . . . . . . 13,880 14,994
Receivables, less allowances of $4,186
and $2,434 19,843 17,410
Income tax receivable from Time Warner Inc. 5,356 3,296
Interest receivable from CVI. . . . . . . 6,578 --
Other current assets. . . . . . . . . . . 2,091 2,498
Total current assets. . . . . . . . . . . 47,748 38,198
Investments . . . . . . . . . . . . . . . 961,002 956,146
Note receivable from CVI. . . . . . . . . 1,500,000 --
Property, plant and equipment, net. . . . 315,774 304,500
Cable television franchises, net. . . . . 1,301,430 1,336,361
Goodwill, net . . . . . . . . . . . . . . 571,404 578,730
Other assets. . . . . . . . . . . . . . . 9,254 16,890
Total assets. . . . . . . . . . . . . . . $4,706,612 $3,230,825
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Accounts payable. . . . . . . . . . . . . $ 11,545 $ 21,438
Accrued expenses. . . . . . . . . . . . . 69,263 61,020
Subscriber advance payments and deposits. 8,748 4,449
Total current liabilities . . . . . . . . 89,556 86,907
Note payable to Time Warner . . . . . . . 1,291,275 --
Other long-term debt . . . . . . . . . . . 1,500,000 1,265,000
Deferred income taxes . . . . . . . . . . 863,208 879,352
Other noncurrent liabilities. . . . . . . 646 2,002
Shareholder's equity
Common stock, no par value, 200 shares authorized,
100 shares issued and outstanding . . . . -- --
Paid-in capital . . . . . . . . . . . . . 1,033,250 1,033,250
Accumulated deficit . . . . . . . . . . . (71,323) (35,686)
Total shareholder's equity. . . . . . . . 961,927 997,564
Total liabilities and shareholder's equity. $4,706,612 $3,230,825
See accompanying notes.
<PAGE>
<PAGE>
TWI CABLE INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in Thousands)
Unaudited
Six Months Ended June 30,
1996 1995
Revenues. . . . . . . . . . . . . . . . . $ 149,609 $ 139,440
Costs and expenses
Operating and programming*. . . . . . . 59,842 53,916
Selling, general and administrative*. . 31,241 34,370
Depreciation and amortization. . . . . . 82,839 45,423
Total costs and expenses. 173,922 133,709
Operating income (loss). . . . . . . . . (24,313) 5,731
Equity in income of investees . . . . . . 21,780 15,128
Interest expense, net** . . . . . . . . . (52,075) (68,593)
Other expense . . . . . . . . . . . . . . -- (854)
Loss before income taxes. . . . . . . . . (54,608) (48,588)
Income tax benefit. . . . . . . . . . . . 18,971 13,889
Net loss. . . . . . . . . . . . . . . . . $(35,637) $ (34,699)
* Includes the following (expenses) income
resulting from transactions with
affiliates (Note 4). . . . . . . $ (9,200) $ 900
**Includes interest income (expense)
with affiliates (Note 4) $ 32,600 $ (41,000)
See accompanying notes.
<PAGE>
<PAGE>
TWI CABLE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
Unaudited
Six Months Ended June 30,
1996 1995
OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . $ (35,637) $ (34,699)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation an amortization. . . . . . 82,839 45,423
Equity income of investees. . . . . . . (21,780) (15,128)
Deferred income taxes . . . . . . . . . (16,144) (2,852)
Changes in operating assets and
liabilities . . . (1,357) 32,722
Net cash provided by operating activities. 7,921 25,466
INVESTING ACTIVITIES
Purchases of property, plant and equipment. (35,310) (46,103)
Loan to CVI . . . . . . . . . . . . . . . (1,500,000) --
Other investments . . . . . . . . . . . . -- 834
Net cash used in investing activities . . (1,535,310) (45,269)
FINANCING ACTIVITIES
Borrowings. . . . . . . . . . . . . . . . 2,817,550 60,600
Debt repayments . . . . . . . . . . . . . (1,291,275) (40,797)
Net cash provided by financing activities. 1,526,275 19,803
DECREASE IN CASH AND EQUIVALENTS. . . . . (1,114) --
CASH AND EQUIVALENTS AT BEGINNING OF YEAR. 14,994 --
CASH AND EQUIVALENTS AT END OF PERIOD . . $ 13,880 $ --
Supplemental disclosure of cash flow information:
Cash paid during the period:
Interest (net of amount capitalized) . . $ 33,478 $ 23,218
Income taxes . . . . . . . . . . . . . . $ 589 $ 345
See accompanying notes.
<PAGE>
<PAGE>
TWI Cable Inc.
Notes to Consolidated Financial Statements
Unaudited
1. Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
TWI Cable Inc. ("TWI Cable") is a direct wholly-owned subsidiary
of Time Warner Inc. ("Time Warner"). On July 6, 1995
("Acquisition Date"), Time Warner acquired KBLCOM Incorporated
("KBLCOM"), which owns cable television systems serving
approximately 700,000 subscribers, and a 50% interest in Paragon
Communications ("Paragon"), which owns cable television systems
serving an additional 978,000 subscribers, from Houston Industries
Incorporated ("HII"). Time Warner changed the name of KBLCOM to TWI
Cable Inc. on the Acquisition Date.
Time Warner's acquisition of KBLCOM was accounted for by the
purchase method of accounting for business combinations.
Accordingly, the accompanying consolidated balance sheets and the
accompanying statements of operations and cash flows for the six
months ended June 30, 1996 of TWI Cable reflect Time Warner's
cost to acquire KBLCOM of approximately $1.033 billion 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 non-current assets-$289 million; long-term debt-$1.213
billion; deferred income tax liabilities-$895 million; and other
liabilities-$50 million. Pursuant to the KBLCOM Acquisition,
KBLCOM was recapitalized and the new capital structure consists
of 100 shares of common stock with a $1 par value issued to Time
Warner. The consolidated statements of operations and cash flows
for the six months ended June 30, 1995 reflect KBLCOM's
historical basis of accounting.
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, the results of operations,
and the cash flows for the periods presented in conformity with
generally accepted accounting principles applicable to interim periods.
Results for the interim periods are not necessarily indicative
of the results to be expected for a full year. These consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year
ended December 31, 1995. Certain reclassifications have been made
to the 1995 financial statements to conform to 1996 presentation.
The cable television business of TWI Cable consists primarily of
operating cable television systems that distribute television
programming to subscribers for a monthly fee. TWI Cable operates
in various regions of California, Texas, Minnesota, and Oregon
under non-exclusive franchise agreements which expire at different
times through the year 2010. Paragon's cable television systems
operate in various regions of New York, California, Texas, and Florida.
In March 1995, the FASB issued 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")
effective for fiscal years beginning after December 15, 1995. The
new rules establish standards for the recognition and measurement
of impairment losses on long-lived assets and certain intangible
assets. The adoption of FAS 121 did not have a material effect on
TWI Cable's financial statements.
2. Investments
June 30, December 31,
1996 1995
(In Thousands)
Equity method investments $952,781 $947,925
Cost method investments 8,221 8,221
$961,002 $956,146
TWI Cable's 50% investment in Paragon is accounted for using the
equity method. A summary of combined financial information as
reported by Paragon is set forth below:
Six Months ended June 30,
1996 1995
(In Thousands)
Revenues $200,014 $177,856
Operating income 43,560 39,589
Net income 44,161 46,556
Current assets 58,815 40,249
Total assets 706,703 655,606
Current liabilities 62,436 78,328
Long-term debt -- 226,000
Total liabilities 62,436 304,328
At June 30, 1996, TWI Cable's investment in Paragon exceeded the
share of underlying net assets of Paragon by $622 million as a
result of the allocation of Time Warner's cost to acquire KBLCOM
(see Note 1). The excess is being amortized using the
straight-line method over 20 years.
3. Debt
TWI Cable has a five-year revolving credit facility ("Credit
Agreement") which permits borrowings of up to $4 billion subject
to certain limitations and adjustments, with no scheduled
reduction in credit availability prior to maturity. Borrowings
bear interest at LIBOR plus a margin of 87.5 basis points, which
margin will vary based on TWI Cable's credit rating or financial
leverage. TWI Cable is required to pay a commitment fee ranging
from .2% to .35% per annum on the unused portioned of its
commitment. TWI Cable may also be required to pay an annual
facility fee equal to .1875% of the entire amount of its
commitment, depending on the level of its financial leverage in
any given year. The Credit Agreement contains certain covenants
relating to, among other things, additional indebtedness; liens
on assets; cash flow coverage and leverage ratios; and loans,
advances, distributions and other cash payments or transfers of
assets from TWI Cable to its affiliates.
On January 4, 1996, TWI Cable borrowed $1.5 billion under the
Credit Agreement and loaned such proceeds to Cablevision
Industries Corporation ("CVI"), a direct wholly-owned subsidiary
of Time Warner, under the same terms set forth in the Credit
Agreement. CVI reimburses TWI Cable on a monthly basis for the
related interest expense.
During the second quarter of 1996, TWI Cable borrowed
approximately $1.3 billion from Time Warner under the same terms
set forth in the Credit Agreement and used such proceeds to pay
down indebtedness under the Credit Agreement.
Interest expense including amortization of deferred financing
costs amounted to $52.1 million for the six month period ended
June 30, 1996. Prior to the Acquisition Date, interest expense
was charged to KBLCOM on various notes payable to HII. Such
interest expense aggregated $41 million for the six months ended
June 30, 1995.
4. Related Party Transactions
The 1996 statement of operations includes interest income of
$47.6 million from a note receivable from CVI and interest
expense of $15 million from a note payable to Time Warner for the
six month period ended June 30, 1996. Prior to the Acquisition
Date, interest expense was charged to KBLCOM on various notes
payable to HII. Such interest expense aggregated $41 million for
the six months ended June 30, 1995.
The 1996 statement of operations also includes charges for
programming and promotional services provided by Home Box Office
and Cinemax, affiliates of Time Warner Entertainment Company,
L.P. ("TWE") a limited partnership in which certain subsidiaries
of Time Warner are the general partners. These charges are based
upon customary rates. The total charges for the programming costs
and expenses aggregated $6.6 million for the six month period
ended June 30, 1996.
Time Warner Cable ("TWC"), a division of TWE, manages the
operations of TWI Cable for a management fee. Such fees charged
to TWI Cable by TWE aggregated $3.6 million for the six months
ended June 30, 1996. TWI Cable also receives management fees from
Paragon for various services. Such fees received by TWI Cable
aggregated $1.0 and $.9 million for the six month periods ended
June 30, 1996 and 1995, respectively.
5. Commitments and Contingencies
Pending legal proceedings are substantially limited to litigation
incidental to the business of TWI Cable. In the opinion of
counsel and management, the ultimate resolution of these matters
will not have a material effect on the financial statements.
6. Subsequent Event
Effective October 1, 1996, all of the capital stock of each of
TWI Cable and Summit Communications Group, Inc. ("Summit"), each
formerly a direct wholly-owned subsidiary of Time Warner, was
contributed to CVI, whereupon (i) TWI Cable was renamed TW/KBLCOM
Inc., and (ii) CVI was renamed TWI Cable Inc. and assumed all
the outstanding borrowings and other obligations and rights of
TWI Cable under the Credit Agreement. Prior to such time, certain
subsidiaries of CVI guaranteed TWI Cable's obligations under the
Credit Agreement.
<PAGE>
Report of Independent Auditors
To the Board of Directors of
Time Warner Inc.
We have audited the consolidated balance sheet of TWI Cable Inc.
(Formerly KBLCOM Incorporated) as of December 31, 1995, and the
related consolidated statements of operations, changes in
shareholder's equity, and cash flows for the periods from January
1, 1995 through July 5, 1995 and from July 6, 1995 (date of
change in accounting basis - Note 1) through December 31, 1995.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of TWI Cable Inc. at December 31, 1995, and
the consolidated results of its operations and its cash flows for
the periods from January 1, 1995 through July 5, 1995 and from
July 6, 1995 (date of change in accounting basis - Note 1)
through December 31, 1995 in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
October 4, 1996
New York, New York
<PAGE>
<PAGE>
TWI CABLE INC.
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
December 31, 1995
ASSETS
Current assets
Cash and cash equivalents . . . . . . . . . . . $ 14,994
Receivables, less allowances of $2,434. . . . . 17,410
Income tax receivable from Time Warner Inc. . . 3,296
Other current assets. . . . . . . . . . . . . . 2,498
Total current assets. . . . . . . . . . . . . . 38,198
Investments . . . . . . . . . . . . . . . . . . 956,146
Property, plant and equipment, less accumulated
depreciation of $16,903 . . . . . . . . . . . 304,500
Cable television franchises, less accumulated
amortization of $34,424 . . . . . . . . . . . 1,336,361
Goodwill, net of accumulated amortization of $7,326 578,730
Other intangible assets, net of accumulated
amortization of $1,787. . . . . . . . . . . . 16,159
Other noncurrent assets . . . . . . . . . . . . 731
Total assets . . . . . . . . . . . . . . . . . $ 3,230,825
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Accounts payable. . . . . . . . . . . . . . . . $ 21,438
Accrued expenses . . . . . . . . . . . . . . . 65,469
Total current liabilities . . . . . . . . . . . 86,907
Long-term debt. . . . . . . . . . . . . . . . . 1,265,000
Deferred income taxes . . . . . . . . . . . . . 879,352
Other noncurrent liabilities. . . . . . . . . . 2,002
Shareholder's equity
Common stock, no par value, 200 shares authorized,
100 shares issued and outstanding . . . . . . -
Paid-in capital . . . . . . . . . . . . . . . . 1,033,250
Accumulated deficit. . . . . . . . . . . . . . (35,686)
Total shareholder's equity . . . . . . . . . . 997,564
Total liabilities and shareholder's equity . . $ 3,230,825
See accompanying notes.
<PAGE>
<PAGE>
TWI CABLE INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in Thousands)
1995
Period from Period from
January 1, July 6,
through through
July 5 December 31
Revenues . . . . . . . . . . . . . . $ 143,898 $ 137,660
Costs and expenses:
Operating and programming*. . . . . 55,008 55,578
Selling, general, and administrative* 35,950 32,012
Depreciation and amortization . . . 46,422 80,263
Total costs and expenses. . . . . 137,380 167,853
Operating income (loss) . . . . . . 6,518 (30,193)
Equity in income of investees . . . 15,130 21,089
Interest expense, net** . . . . . . (69,914) (45,552)
Other . . . . . . . . . . . . . . . (854) -
Loss before income tax benefit. . . (49,120) (54,656)
Income tax benefit. . . . . . . . . 13,888 18,970
Net loss. . . . . . . . . . . . . . $ (35,232) $ (35,686)
* Includes the following income (expenses)
resulting from transactions with
affiliates (Note 6). . . . $ 900 $ (7,800)
**Includes interest expense with
affiliates (Note 6). . . . . . . . $ (41,000) $ --
See accompanying notes.
<PAGE>
<PAGE>
TWI CABLE INC.
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDER'S EQUITY
(Dollars in Thousands)
Additional Total
Common Paid-in Accumulated Shareholder's
Stock Capital Deficit Equity
Balance, December 31, 1994 $ 1 $ 388,876 $ (641,427) $ (252,550)
Net loss for the period
January 1, 1995
through July 5, 1995 -- -- (35,232) (35,232)
Balance, July 5, 1995 1 388,876 (676,659) (287,782)
KBLCOM Acquisition:
Elimination of shareholder's
equity at July 6, 1995 (1) (388,876) 676,659 287,782
Issuance of 100 shares of
common stock to Time Warner -- 1,033,250 -- 1,033,250
Net loss for the period
July 6, 1995 through
December 31, 1995 -- -- (35,686) (35,686)
Balance, December 31, 1995 $ -- $1,033,250 $ (35,686) $ 997,564
See accompanying notes.
<PAGE>
<PAGE>
TWI CABLE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
1995
Period from Period from
January 1, July 6,
through through
July 5 December 31
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . $ (35,232) $ (35,686)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization . . . 46,422 80,263
Equity in income of investees . . . (15,130) (21,089)
Deferred income taxes. . . . . . . (2,853) (18,970)
Changes in operating assets and
liabilities:
Accounts receivable and other
current assets (458) 3,196
Accounts payable and accrued expenses 31,596 21,050
Other 1,131 (5,869)
Net cash provided by operating activities 25,476 22,895
Cash flows from investing activities:
Capital expenditures . . . . . . . . (46,113) (47,558)
Investments. . . . . . . . . . . . . 834 (102,250)
Net cash used in investing activities (45,279) (149,808)
Cash flows from financing activities:
Borrowings . . . . . . . . . . . . . 60,600 1,315,000
Debt repayments. . . . . . . . . . . (40,797) (1,155,226)
Other. . . . . . . . . . . . . . . . -- (17,867)
Net cash provided by financing activities 19,803 141,907
Net increase in cash and cash equivalents -- 14,994
Cash and cash equivalents at beginning of period -- --
Cash and cash equivalents at end of period $ -- $ 14,994
Supplemental cash flow disclosure:
Interest paid . . . . . . . . . . . $ 32,128 $ 42,728
Income taxes paid . . . . . . . . . $ 345 $ 120
See accompanying notes.
<PAGE>
<PAGE>
TWI Cable Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
TWI Cable Inc. ("TWI Cable") is a direct wholly-owned subsidiary
of Time Warner Inc. ("Time Warner"). On July 6, 1995
("Acquisition Date"), Time Warner acquired KBLCOM Incorporated
("KBLCOM"), which owns cable television systems serving
approximately 700,000 subscribers, and a 50% interest in Paragon
Communications ("Paragon"), which owns cable television systems
serving an additional 978,000 subscribers, from Houston
Industries Incorporated ("HII"). Time Warner changed the name of
KBLCOM to TWI Cable Inc. on the Acquisition Date.
Time Warner's acquisition of KBLCOM ("KBLCOM Acquisition") was
accounted for by the purchase method of accounting for business
combinations. Accordingly, the accompanying consolidated balance
sheet, and statements of operation, changes in shareholder's equity,
and cash flows for the period from the Acquisition Date through
December 31, 1995 of TWI Cable reflect Time Warner's cost to
acquire KBLCOM of approximately $1.033 billion 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 tax liabilities-$895 million; and other
liabilities-$50 million. Pursuant to the KBLCOM Acquisition,
KBLCOM was recapitalized and the new capital structure consists
of 100 shares of common stock with a $1 par value issued to Time
Warner. The consolidated statements of operations, changes in
shareholder's equity and cash flows for the period from January 1,
1995 through July 5, 1995 reflect KBLCOM's historical basis of accounting.
Certain reclassifications have been made to the financial statements
for the period from the Acquisition Date through December 31, 1995
to conform to the presentation for the period from January 1, 1995
through July 5, 1995.
The cable television business of TWI Cable consists primarily of
operating cable television systems that distribute television
programming to subscribers for a monthly fee. TWI Cable operates
in various regions of California, Texas, Minnesota, and Oregon
under non-exclusive franchise agreements which expire at
different times through the year 2010. Paragon's cable
television systems operate in various regions of New York,
California, Texas, and Florida.
Basis of Consolidation and Accounting for Investments
The consolidated financial statements include 100% of assets,
liabilities, revenues, expenses, income, loss and cash flows of
TWI Cable and all companies in which TWI Cable has a controlling
voting interest ("subsidiaries"), as if TWI Cable and its
subsidiaries were a stand alone company. Significant intercompany
accounts and transactions between the consolidated companies have
been eliminated.
Investments in companies in which TWI Cable has significant
influence but less than a controlling voting interest, are
accounted for using the equity method. Under the equity method,
only TWI Cable's investment in and amounts due to and from the
equity investee are included in the consolidated balance sheet.
In addition, only TWI Cable's share of the investee's earnings is
included in the consolidated operating results, and only the
dividends, cash distributions, loans or other cash received from
the investee, less any additional cash investment, loan repayment
or other cash paid to the investee are included in the
consolidated statement of cash flows. Amortization of the
acquisition cost in excess of the book value of equity method
investments is included in amortization.
Property, Plant and Equipment
Additions to property, plant and equipment are recorded at cost
which includes material, labor, overhead and interest.
Depreciation is provided on the straight-line basis over the
estimated useful lives as follows:
Buildings and improvements . . . . 5-20 years
Distribution system. . . . . . . . 5-25 years
Vehicles and other equipment . . . 3-10 years
In March 1995, the FASB issued 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")
effective for fiscal years beginning after December 15, 1995. The
new rules establish standards for the recognition and measurement
of impairment losses on long-lived assets and certain intangible
assets. The adoption of FAS 121 did not have a material effect
on TWI Cable's financial statements.
Intangible Assets
TWI Cable has recorded the acquisition cost in excess of the fair
market value of its tangible assets and liabilities as cable
television franchises and goodwill. Such amounts are being
amortized over periods ranging from 8 to 40 years on a
straight-line basis.
TWI Cable separately reviews the carrying value of intangible
assets for each acquired entity on a periodic basis to determine
whether an impairment may exist. TWI Cable considers relevant
cash flow and profitability information, including estimated
future operating results, trends and other available information,
in assessing whether the carrying value of intangibles can be
recovered. Upon a determination that the carrying value of the
intangible assets will not be recovered from the undiscounted
future cash flows of the acquired business, the carrying value of
such intangible assets would be considered impaired and will be
reduced by a charge to operations in the amount of the
impairment. Impairment is measured as any deficiency in estimated
undiscounted future cash flows of the acquired business to
recover the carrying value related to the intangible assets.
Franchise Costs
Costs incurred to acquire and renew franchises are deferred and
amortized on the straight-line basis over periods ranging up to
forty years.
Advertising
Advertising costs are expensed upon release of the advertisement.
Advertising expense amounted to $2.4 and $3.7 million for the
periods from January 1, 1995 through July 5, 1995 and from July
6, 1995 through December 31, 1995, respectively.
Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments
which are readily convertible into cash and have maturities of
three months or less when purchased.
Income Taxes
Income taxes are provided using the liability method prescribed
by FASB Statement No. 109, "Accounting for Income Taxes." Under
the liability method, deferred income taxes reflect tax carry
forwards and the net tax effect of temporary differences between
the carrying amount of assets and liabilities for financial
statement and income tax purposes as determined under enacted tax
laws and rates. The financial effect of changes in tax laws or
rates is accounted for in the period of enactment.
Realization of net operating loss and investment tax credit carry
forwards which were acquired in acquisitions are accounted for as
a reduction of goodwill.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that effect the amounts reported
in the financial statements and footnotes thereto. Actual results
could differ from those estimates.
2. Investments
December 31, 1995
(In Thousands)
Equity method investments $947,925
Cost method investments 8,221
$956,146
TWI Cable's 50% investment in Paragon is accounted for using the
equity method. A summary of combined financial information as
reported by Paragon is set forth below:
Year ended
December 31, 1995
(In Thousands)
Revenues $367,549
Operating income 84,387
Net income 90,884
Current assets 38,207
Total assets 667,391
Current liabilities 67,285
Total liabilities 67,285
At December 31, 1995, TWI Cable's investment in Paragon exceeded
the share of underlying net assets of Paragon by $638 million as
a result of the allocation of Time Warner's cost to acquire
KBLCOM (see Note 1). The excess is being amortized using the
straight-line method over 20 years.
3. Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31, 1995
(In Thousands)
Land and buildings $ 6,159
Distribution system 252,979
Vehicles and other equipment 61,676
Construction in progress 589
321,403
Less accumulated depreciation 16,903
$304,500
4. Debt
TWI Cable has a five-year revolving credit facility ("Credit
Agreement") which permits borrowings of up to $4 billion subject
to certain limitations and adjustments, with no scheduled
reduction in credit availability prior to maturity. Borrowings
bear interest at LIBOR plus a margin ranging from 50 to 87.5
basis points, which margin will vary based on TWI Cable's credit
rating or financial leverage. TWI Cable is required to pay a
commitment fee ranging from .2% to .35% per annum on the unused
portion of its commitment. TWI Cable may also be required to pay
an annual facility fee equal to .1875% of the entire amount of
its commitment, depending on the level of its financial leverage
in any given year. The Credit Agreement contains certain
covenants relating to, among other things, additional
indebtedness; liens on assets; cash flow coverage and leverage
ratios; and loans, advances, distributions and other cash
payments or transfers of assets from TWI Cable to its affiliates.
In July 1995, TWI Cable borrowed approximately $1.2 billion under
the credit facility to refinance certain indebtedness assumed or
incurred in the KBLCOM Acquisition ("KBLCOM Debt Refinancing ").
At December 31, 1995, the effective interest rate for the amounts
outstanding under the Credit Agreement was 6.815%. TWI Cable's
long term debt at December 31, 1995 of $1.265 billion
approximates its fair value.
Prior to the KBLCOM Acquisition, KBLCOM had approximately $1.2
billion of debt comprised of the following debt instruments which
were all paid off in connection with the KBLCOM Debt Refinancing:
A. KBL Cable Senior Bank Credit Facility. KBL Cable, Inc. ("KBL
Cable"), a subsidiary of KBLCOM, was a party to a $475.2 million
revolving credit and letter of credit facility agreement with
annual mandatory commitment reductions (which may have required
principal payments). Loans had generally borne interest at an
interest rate of London Interbank Offered Rate plus an applicable
margin. The effective interest rate was approximately 5.9% at
July 5, 1995. The credit facility included restrictions on dividends
and sales of assets and limitations on total indebtedness. The amount
of indebtedness outstanding at July 5, 1995 was $339 million.
B. KBL Cable Senior and Senior Subordinated Notes. As of July
5, 1995, KBL Cable had outstanding $54.7 million of 10.95%
senior notes and $70.1 million of 11.30% senior subordinated
notes. The agreement under which the notes were issued contained
restrictions and covenants similar to those contained in the KBL
Cable Senior Bank Credit Facility.
C. Notes payable to Parent. In October 1993, all the
outstanding shares of preferred stock and dividends in arrears
thereon were exchanged by HII for notes payable totaling $344
million. KBLCOM also declared a common stock dividend totaling
$350 million and issued HII a note for the same amount. The notes
bore interest at the prime rate (8.75% as of July 5, 1995) plus
3% and had no stated maturity or required principal amortization.
Interest expense including amortization of deferred financing
costs amounted to $69.9 million for the period January 1, 1995
through July 5, 1995, and $47.6 million for the period from July
6, 1995 through December 31, 1995.
On January 4, 1996, TWI Cable borrowed $1.473 billion under the
Credit Agreement and loaned such proceeds to Cablevision
Industries Corporation ("CVI"), a direct wholly owned subsidiary
of Time Warner, under the same terms set forth in the Credit
Agreement.
5. Income Taxes
As of July 6, 1995 TWI Cable is included in the consolidated
Federal Income Tax Return of Time Warner. Prior to the KBLCOM
Acquisition, KBLCOM was included in the Consolidated Federal Income
Tax Return of HII. The provision for the income taxes has been
calculated on a separate company basis. Current and deferred income
tax benefits (expense) provided are as follows:
Period from Period from
January 1, 1995 July 6,
through through
July 5, 1995 December 31, 1995
(In Thousands)
Current:
Federal $ 4,961 $ 2,640
State (345) 656
Deferred:
Federal 10,422 12,554
State (1,150) 3,120
Total $ 13,888 $ 18,970
The difference between the income tax benefit at the U.S. federal
statutory income tax rate and the income tax benefit provided are
set forth below:
Period from Period from
January 1, 1995 July 6,
through through
July 5, 1995 December 31, 1995
(In Thousands)
Tax benefit on loss at U.S. federal
statutory rate $17,192 $19,128
State and local taxes, net (971) 2,454
Nondeductible goodwill amortization (2,316) 2,608)
Other (17) (4)
Total $13,888 $18,970
Significant components of TWI Cable's net deferred tax
liabilities are as follows:
December 31, 1995
(In Thousands)
Allowance $2,450
Tax carry forwards 31,225
Valuation allowance (31,225)
Deferred tax assets 2,450
Amortization and depreciation 881,802
Deferred tax liabilities 881,802
Net deferred tax liabilities $879,352
As of December 31, 1995, TWI Cable has net operating loss carry
forwards for federal income tax purposes, subject to Internal
Revenue Service review, of approximately $41.1 million, which
expire in 1996 through 2008 if not utilized. A portion of the net
operating losses are restricted during the carry forward period
due to limitations imposed by the federal taxing authority. TWI
Cable also has investment tax credit carry forwards for federal
income tax purposes of approximately $15 million, which expire in
1996 through 2003 if not utilized. For financial reporting
purposes, a valuation allowance of $31.2 million has been
recognized to offset the deferred tax assets related to TWI
Cable's tax carry forwards.
6. Related Party Transactions
The statement of operations for the period from July 6, 1995
through December 31, 1995 includes charges for programming and
promotional services provided by Home Box Office and Cinemax,
affiliates of Time Warner Entertainment Company, L.P. ("TWE") a
limited partnership in which certain subsidiaries of Time Warner
are the general partners. These charges are based upon customary
rates. The total charges for programming costs and expenses
aggregated $6.2 million for the period from July 6, 1995 through
December 31, 1995.
Time Warner Cable ("TWC"), a division of TWE, manages the
operations of TWI Cable for a management fee. Such fees charged
to TWI Cable by TWE aggregated $2.5 million for the period from
July 6, 1995 through December 31, 1995. TWI Cable also receives
management fees from Paragon for various services. Such fees
received by TWI Cable aggregated $0.9 million for each of the
periods from January 1, 1995 through July 5, 1995 and July 6,
1995 through December 31, 1995, respectively.
Prior to the KBLCOM Acquisition, interest expense was charged to
KBLCOM on various notes payable to HII (see note 4). For the
period from January 1, 1995 through July 5, 1995, interest
expense aggregated $41 million.
7. Benefit Plans
Prior to the KBLCOM Acquisition, KBLCOM had a noncontributory
defined benefit retirement plan (the "Plan") covering
substantially all employees. The Plan provided retirement
benefits based on years of service and compensation. The funding
policy of KBLCOM was to contribute amounts annually in accordance
with applicable regulations in order to achieve adequate funding
of projected benefit obligations. The assets of the Plan
consisted principally of high-quality, interest-bearing
obligations. Effective with the KBLCOM Acquisition, TWI Cable
froze participation in the Plan and merged with the Time Warner
Cable Pension Plan (the "Pension Plan"), a noncontributory
defined benefit pension plan. Benefits under the Pension Plan are
determined based on formulas which reflect the employees' years
of service and compensation levels during their employment
period. Total aggregate pension cost under both plans for the
year ended December 31, 1995 was $942,000.
Prior to the KBLCOM Acquisition, KBLCOM also participated in an
HII savings plan ("the HII Plan") covering substantially all
employees. The HII Plan allowed only pretax contributions in
amounts not to exceed 10% of an employee's annualized
compensation and no withdrawal of pretax contributions because of
legal restrictions. The employer matched 70% of the 6% of
annualized compensation contributed by the employee subject to a
vesting schedule which entitled the employee to a percentage of
the matching contributions, depending on years of service.
Following the KBLCOM Acquisition, the HII Plan was amended to
provide for full vesting for all KBLCOM participants, KBLCOM
terminated its participation in the HII Plan and TWI Cable
enrolled in the Time Warner Cable Employees Savings Plan (the
"Savings Plan"). TWI Cable's contributions to the Savings Plan
can represent up to 6.67% of the employees' compensation during
the plan year. TWE's Board of Representatives has the right in
any year to set the maximum amount of TWI Cable's annual
contribution. Defined contribution plan expense for the period
from January 1 through July 5, 1995 approximated $740,000.
Defined contribution plan expense under both plans for the period
from July 6, 1995 through December 31, 1995 was $806,000.
The Pension Plan and the Savings Plan are administered by a
committee appointed by the Board of Representatives of TWE and
cover substantially all employees.
In anticipation of the change in ownership control of KBLCOM,
certain agreements were established in 1994 to provide incentives
for continued employment and to provide severance benefits,
including medical, to certain executives and employees. The
agreements include the incentive bonus plan and retention
agreements (collectively, known as the "HII Incentive and
Retention Agreements"). A $3.8 million liability for the HII
Incentive and Retention Agreements was recorded at December 31,
1994. The effective dates of the HII Incentive and Retention
Agreements varied and events triggering payment included the
earlier of an effective change of ownership control, termination
without cause or, in the case of the Incentive Bonus Plan,
September 1, 1996. The entire $3.8 million liability balance was
paid off in connection with the KBLCOM Acquisition.
8. Commitments and Contingencies
Future minimum rental payments required under noncancelable
operating leases are as follows (in thousands):
1996 $2,443
1997 1,973
1998 1,484
1999 1,206
2000 1,444
Thereafter 3,704
___________
Total $12,254
Rental expense for all operating leases, principally pole rental
fees and office rentals, aggregated $1.8 million and $2.0 million
for the periods from January 1, 1995 through July 5, 1995 and
from July 6, 1995 through December 31, 1995, respectively.
Pending legal proceedings are substantially limited to
litigation incidental to the business of TWI Cable. In the
opinion of counsel and management, the ultimate resolution of
these matters will not have a material effect on the financial
statements of TWI Cable.
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 TWC's long term strategic
plan, TWC has agreed with the Federal Communications Commission
(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
TWC, including the owned cable television systems of TWI Cable
and the other owned or managed cable television systems of Time
Warner and TWE. TWI Cable expects that a portion of its cable
television systems will be upgraded in connection with this
agreement. Including Time Warner's acquisition of CVI, which was
consummated on January 4, 1996, TWC owns or manages a total of
approximately 11.7 million subscribers, of which approximately
700,000 subscribers are owned by TWI Cable.
9. Subsequent Event
Effective October 1, 1996, all of the capital stock of each of
TWI Cable and Summit Communications Group Inc. ("Summit"), each
formerly a direct wholly-owned subsidiary of Time Warner, was
contributed to CVI, whereupon (i) TWI Cable was renamed TW/KBLCOM
Inc., and (ii) CVI was renamed TWI Cable, Inc. and assumed all
the outstanding borrowings and other obligations and rights of
TWI Cable under the Credit Agreement. Prior to such time, certain
subsidiaries of CVI guaranteed TWI Cable's obligations under the
Credit Agreement.
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
Unaudited
June 30, December 31,
1996 1995
ASSETS
Current assets
Cash and cash equivalents . . . . . . $ 43,277 $ 15,363
Receivables, net of allowances of
$2,869 and $2,456 . . . . . . . . . 14,437 21,248
Other current assets. . . . . . . . . 1,101 1,596
Total current assets. . . . . . . . . 58,815 38,207
Property, plant and equipment, net. . 453,084 429,883
Cable television franchises, net. . . 193,065 197,919
Other intangible assets, net. . . . . 1,739 1,382
Total assets. . . . . . . . . . . . . $ 706,703 $ 667,391
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable and accrued expenses $ 62,436 $ 67,285
Total current liabilities . . . . . . . 62,436 67,285
Partners' capital
Partners' capital . . . . . . . . . . . 348,404 348,404
Retained earnings . . . . . . . . . . . 295,863 251,702
Total partners' capital . . . . . . . . 644,267 600,106
Total liabilities and partners' capital $706,703 $ 667,391
See accompanying notes.
<PAGE>
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in Thousands)
Unaudited
Six Months Ended June 30,
1996 1995
Revenues. . . . . . . . . . . . . . . . $ 200,014 $ 177,856
Costs and expenses: . . . . . . . . . . .
Operating and programming* . . . . . . 89,948 73,403
Selling, general and administrative* . 29,647 28,473
Depreciation and amortization. . . . . 36,859 36,391
Total costs and expenses. . . . . . . 156,454 138,267
Operating income. . . . . . . . . . . . . 43,560 39,589
Gain on sale of securities. . . . . . . . -- 15,703
Interest income (expense), net. . . . . . 601 (8,736)
Net income. . . . . . . . . . . . . . . . $ 44,161 $ 46,556
* Includes the following expenses resulting from transactions
with the partners or their affiliates (Note 2):
$ 15,700 $ 14,700
See accompanying notes.
<PAGE>
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
Unaudited
Six Months Ended June 30,
1996 1995
OPERATING ACTIVITIES:
Net income $ 44,161 $ 46,556
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 36,859 36,391
Gain on sale of securities -- (15,703)
Changes in operating assets and liabilities:
Accounts receivable and other assets 6,958 1,495
Accounts payable and accrued expenses (4,849) 4,342
Net cash provided by operating activities 83,129 73,081
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (55,786) (51,502)
Proceeds from sale of securities -- 18,456
Other 571 (718)
Net cash used in investing activities (55,215) (33,764)
FINANCING ACTIVITIES:
Changes in revolving credit facility, net -- (23,000)
Net cash used in financing activities -- (23,000)
INCREASE IN CASH AND EQUIVALENTS 27,914 16,317
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 15,363 9,114
CASH AND EQUIVALENTS AT END OF PERIOD $ 43,277 $ 25,431
Supplemental disclosure of cash flow information:
Cash paid for interest $ 14 $ 8,792
See accompanying notes.
<PAGE>
<PAGE>
Paragon Communications
(A Partnership)
Notes to Consolidated Financial Statements
Unaudited
1. Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
Paragon Communications ("Paragon") is a Colorado general
partnership owned equally by subsidiaries of American Television
and Communications Corporation ("ATC") and by TWI Cable Inc.
("TWI Cable"). ATC is an indirect, and TWI Cable a direct,
wholly-owned subsidiary of Time Warner Inc. ("Time Warner"). TWI
Cable's interest in Paragon was owned by KBLCOM Incorporated
("KBLCOM") until July 6, 1995. On that date, Time Warner
acquired KBLCOM and renamed it TWI Cable.
Time Warner Entertainment Company, L.P. ("TWE"), is a limited
partnership that was capitalized on June 30, 1992 to own and
operate substantially all of the Filmed Entertainment,
Programming-HBO, and Cable businesses previously owned by
subsidiaries of Time Warner. Time Warner and certain of its
wholly-owned subsidiaries, including ATC, own 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 and
junior priority 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 US WEST, Inc. In lieu
of contributing its legal interest in Paragon to TWE at its
capitalization, ATC, as a general partner of TWE, agreed to pay
TWE an amount equal to the net cash flow generated by such interest.
The accompanying financial statements are unaudited, but in the
opinion of management, contain all adjustments, consisting of those
of a recurring nature, considered necessary to present fairly the
financial position, the results of operations, and the cash flows
for the periods presented in conformity with generally accepted
accounting principles applicable to interim periods. Results for
the interim periods are not necessarily indicative of the results to
be expected for the full year. These consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements and notes thereto for the year ended December 31, 1995.
Paragon is principally engaged in the operation of a cable
television business. Such operations consist primarily of the
distribution of television programming to subscribers for a
monthly fee. Paragon operates in various regions of New York,
California, Texas and Florida.
In March 1995, the Financial Accounting Standards Board issued
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") effective for fiscal years
beginning after December 15, 1995. The new rules establish
standards for the recognition and measurement of impairment
losses on long-lived assets and certain intangible assets. The
adoption of FAS 121 did not have a material effect on Paragon's
financial statements.
2. Related Party Transactions
ATC and KBLCOM receive management fees for various services equal
to a total of two and one-half percent of Paragon's gross
receipts. Such fees aggregated $3.8 and $3.5 million to ATC and
$1.0 and $.7 million to KBLCOM for the six months ended June 30,
1996 and 1995, respectively.
Additionally, Paragon has various transactions with ATC in the
normal course of conducting its business. ATC charges Paragon
for certain expenses incurred on the behalf of Paragon. Advances
to or from ATC fluctuate daily and are settled on a monthly
basis. The statement of operations includes charges primarily
related to programming in addition to construction and design
services provided by TWE. The total of these charges was $10.9
and $9.5 million for the six months ended June 30, 1996 and 1995,
respectively. These charges were based on customary rates.
3. Commitments and Contingencies
Pending legal proceedings are substantially limited to litigation
incidental to the business of Paragon. In the opinion of counsel
and management, the ultimate resolution of these matters will not
have a material effect on the financial statements.
<PAGE>
Report of Independent Auditors
To the Partners of
Paragon Communications
We have audited the consolidated balance sheet of Paragon
Communications (a Partnership) as of December 31, 1995, and the
related consolidated statements of operations, changes in
partners' capital and cash flows for the year then ended. These
financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Paragon Communications (a Partnership) at
December 31, 1995, and the consolidated results of its operations
and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
May 31, 1996
New York, New York
<PAGE>
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
December 31, 1995
ASSETS
Current assets
Cash and cash equivalents $ 15,363
Receivables, net of allowance for doubtful
accounts of $2,456 21,248
Other current assets 1,596
Total current assets 38,207
Property, plant and equipment 717,328
Less accumulated depreciation (287,445)
Property, plant and equipment, net 429,883
Cable television franchises, less accumulated
amortization of $104,024 197,919
Other intangible assets, less accumulated
amortization of $3,113 1,382
Total assets $ 667,391
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable and accrued expenses $ 67,285
Total current liabilities 67,285
Partners' capital
Partners' capital 348,404
Retained earnings 251,702
Total partners' capital 600,106
Total liabilities and partners' capital $ 667,391
See accompanying notes.
<PAGE>
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in Thousands)
Year Ended
December 31, 1995
Revenue . . . . . . . . . . . . . . . . . . . . $ 367,549
Costs and expenses:
Operating and programming*. . . . . . . . . . . 154,647
Selling, general and administrative*. . . . . . 57,149
Depreciation and amortization . . . . . . . . . 71,366
Total costs and expenses. . . . . . . . . . . 283,162
Operating income. . . . . . . . . . . . . . . . 84,387
Gain on sale of securities. . . . . . . . . . . 15,703
Other income. . . . . . . . . . . . . . . . . . 792
Interest expense, net . . . . . . . . . . . . . (9,998)
Net income. . . . . . . . . . . . . . . . . . . $ 90,884
* Includes the following expenses resulting
from transactions with the partners or
their affiliates (Note 5): $ 30,100
See accompanying notes.
<PAGE>
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
CONSOLIDATED STATEMENT OF CHANGES
IN PARTNERS' CAPITAL
(Dollars in Thousands)
Total
Partners'
ATC TWI Cable Capital
Balance, December 31, 1994 $152,361 $ 152,361 $ 304,722
Net income 45,442 45,442 90,884
Partners' contributions, net 102,250 102,250 204,500
Balance, December 31, 1995 $300,053 $ 300,053 $ 600,106
See accompanying notes.
<PAGE>
<PAGE>
PARAGON COMMUNICATIONS
(A PARTNERSHIP)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
Year Ended
December 31, 1995
OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . $ 90,884
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . 71,366
Gain on sale of securities. . . . . . . . . . (15,703)
Change in operating assets and liabilities:
Accounts receivable and other current assets. (6,531)
Accounts payable and accrued expenses . . . . (6,820)
Other . . . . . . . . . . . . . . . . . . . . 502
Net cash provided by operating activities. . . . 133,698
INVESTING ACTIVITIES:
Purchases of property, plant and equipment . . . (99,978)
Proceeds from sale of securities . . . . . . . . 18,456
Other. . . . . . . . . . . . . . . . . . . . . . (1,427)
Net cash used in investing activities. . . . . . (82,949)
FINANCING ACTIVITIES:
Partners' contributions, net . . . . . . . . . . 204,500
Debt repayments. . . . . . . . . . . . . . . . . (249,000)
Net cash used in financing activities. . . . . . (44,500)
INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . 6,249
CASH AND EQUIVALENTS AT BEGINNING OF YEAR. . . . 9,114
CASH AND EQUIVALENTS AT END OF PERIOD. . . . . . $ 15,363
Supplemental disclosure of cash flow information:
Cash paid for interest . . . . . . . . . . . . . 12,361
See accompanying notes.
<PAGE>
<PAGE>
Paragon Communications
(A Partnership)
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
Paragon Communications ("Paragon") is a Colorado general
partnership owned equally by subsidiaries of American Television
and Communications Corporation ("ATC") and by TWI Cable Inc.
("TWI Cable") at December 31, 1995. ATC is an indirect, and TWI
Cable a direct, wholly-owned subsidiary of Time Warner Inc.
("Time Warner"). TWI Cable's interest in Paragon was owned by
KBLCOM Incorporated ("KBLCOM") until July 6, 1995. On that date,
Time Warner acquired KBLCOM and renamed it TWI Cable.
Time Warner Entertainment Company, L.P. ("TWE"), is a limited
partnership that was capitalized on June 30, 1992 to own and
operate substantially all of the Filmed Entertainment,
Programming-HBO, and Cable businesses previously owned by
subsidiaries of Time Warner. Time Warner and certain of its
wholly-owned subsidiaries, including ATC, own 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 and
junior priority 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 US WEST, Inc. In lieu
of contributing its legal interest in Paragon to TWE at its
capitalization, ATC, as a general partner of TWE, agreed to pay
TWE an amount equal to the net cash flow generated by such
interest.
Paragon is principally engaged in the operation of a cable
television business. Such operations consist primarily of the
distribution of television programming to subscribers for a
monthly fee. Paragon operates in various regions of New
York, California, Texas and Florida.
Property, Plant and Equipment
Additions to property, plant and equipment are recorded at cost
which includes amounts for material, labor, overhead and
interest. Depreciation is provided on the straight-line basis
over the estimated useful lives as follows:
Buildings and improvements . . . . . . . . . . 5-20 years
Distribution system. . . . . . . . . . . . . . 5-25 years
Vehicles and other equipment . . . . . . . . . 3-10 years
In March 1995, the Financial Accounting Standards Board issued
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") effective for fiscal years
beginning after December 15, 1995. The new rules establish
standards for the recognition and measurement of impairment
losses on long-lived assets and certain intangible assets.
Paragon expects that the adoption of FAS 121 will not have a
material effect on its financial statements.
<PAGE>
<PAGE>
Paragon Communications
(A Partnership)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (continued)
Revenue and Programming
Subscriber fees are recorded as revenue in the period service is
provided.
Franchise Costs
Cable television franchises are stated at cost. Amortization is
computed using the straight-line method over periods ranging up
to forty years.
Advertising
Advertising costs are expensed upon release of the advertisement.
Advertising expense amounted to $4.1 million for the year ended
December 31, 1995.
Income Taxes
As a U.S. partnership, Paragon is not subject to federal and
state income taxation and, therefore, no income taxes are
recorded in the accompanying financial statements.
Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments
which are readily convertible into cash and have maturities of
three months or less when purchased.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that effect the amounts reported
in the financial statements and footnotes thereto. Actual results
could differ from those estimates.
2. Property, Plant and Equipment
Property, plant and equipment consist of the following:
December 31, 1995
(In Thousands)
Land and buildings $24,304
Distribution system 633,147
Vehicles and other equipment 44,049
Construction in progress 15,828
717,328
Less accumulated depreciation (287,445)
$429,883
3. Debt
Paragon's revolving credit agreement was terminated and all
outstanding indebtedness under the agreement was repaid in
connection with Time Warner's acquisition of KBLCOM on July 6,
1995. In addition, Paragon's senior institutional notes matured
and were repaid in July 1995. The repayments, which totaled
approximately $204.5 million, were funded equally by the partners.
Interest expense for the year ended December 31, 1995 totaled
approximately $10 million.
4. Gain on Marketable Securities
In February 1995, Paragon sold its interest in QVC, Inc. to a
group that had tendered for all of that company's capital stock.
Proceeds of approximately $18.5 million were received resulting
in a gain of approximately $15.7 million.
5. Related Party Transactions
ATC and TWI Cable receive management fees for various services
equal to a total of two and one-half percent of Paragon's gross
receipts. Paragon paid management fees of $7.1 million to ATC and
$1.8 million to TWI Cable for the year ended December 31, 1995.
Additionally, Paragon has various transactions with ATC in the
normal course of conducting its business. ATC charges Paragon
for certain expenses incurred on the behalf of Paragon. Advances
to or from ATC fluctuate daily and are settled on a monthly
basis. The statement of operations includes charges primarily
related to programming in addition to construction and design
services provided by TWE. The total of these charges was $21.2
million in 1995. These charges were based on customary rates.
6. Benefit Plans
Prior to Time Warner's acquisition of KBLCOM (the "Acquisition"),
Paragon maintained a non-contributory defined benefit pension
plan (the "Plan") covering the majority of its employees. The
benefits under the Plan were determined based on formulas which
reflect employees' years of service and compensation levels
during their employment period. The projected unit credit method
was used to determine pension costs of the Plan. Paragon's
funding policy was to contribute amounts to the plan sufficient
to meet minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974, plus such additional
amounts as Paragon determined to be appropriate. Effective with
the Acquisition, Paragon froze participation in the Plan and
merged with the Time Warner Cable Pension Plan (the "Pension
Plan"), a non-contributory defined benefit pension plan. The net
assets of the Plan were merged with the Pension Plan on September
30, 1995. Benefits under the Pension Plan are determined based on
formulas which reflect the employee's years of service and
compensation during their employment period. Total aggregate
pension cost under both plans for the year ended December 31,
1995 was $1,587,000.
Prior to the Acquisition, Paragon also maintained a defined
contribution plan, the Paragon Employee Savings Plan (the"ESSP"),
covering substantially all of its employees, whereby two dollars
were contributed by Paragon to a participant's account for each
three dollars contributed by a participant through payroll
deductions. The Paragon management committee had the right in any
year to set a maximum amount of Paragon's contribution. Effective
with the Acquisition, Paragon froze contributions to the ESSP and
merged with the Time Warner Cable Employees Savings Plan (the
"Savings Plan"). The net assets of the ESSP were merged into the
Savings Plan on November 30, 1995. Paragon's contributions to the
Savings Plan can represent up to 6.67% of the employees' compensation
during the plan year. TWE's Board of Representatives has the right
in any year to set the maximum amount of Paragon's annual contribution.
Total aggregate defined contribution plan expense under both plans
for the year ended December 31, 1995 was $1,111,000.
The Pension Plan and the Savings Plan are administered by a committee
appointed by the Board of Representatives of TWE and cover substantially
all employees.
7. Commitments and Contingencies
Paragon presently has certain cable television franchises containing
provisions for construction of cable plant and services to
customers according to various requirements within the franchise
areas. In connection with certain obligations under existing franchise
agreements, Paragon obtains surety bonds or letters of credit
guaranteeing performance to municipalities and public utilities.
Payment is required only in the event of nonperformance and no
such payments have been made.
Future minimum rental payments under noncancelable operating
leases are as follows: $3.1 million in 1996; $2.8 million in
1997; $2.2 million in 1998; $1.9 million in 1999; $1.7 million in
2000; and $6.4 million thereafter, totaling $18.1 million.
Rental expense for all operating leases, principally pole rental
fees and office rentals, aggregated $5.6 million for the year
ended December 31, 1995.
Pending legal proceedings are substantially limited to litigation
incidental to the business of Paragon. In the opinion of counsel
and management, the ultimate resolution of these matters will not
have a material effect on the financial statements.
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
("TWC") long term strategic plan, TWC has agreed with the Federal
Communications Commission (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 TWC, including cable
television systems of Paragon and other owned or managed cable
television systems of Time Warner and TWE. Paragon expects that
a portion of its cable television systems will be upgraded in
connection with this agreement. Including Time Warner's
acquisition of Cablevision Industries Corporation, which was
consummated on January 4, 1996, TWC owns or manages a total of
approximately 11.7 million subscribers, of which approximately
1,000,000 subscribers are included in Paragon.
