<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1997
OR
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period
from to .
------------------------ ------------------------
Commission File Number: 33-43948
TWI CABLE INC.
(Exact name of registrant as specified in its charter)
Delaware 59-1353813
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
75 Rockefeller Plaza, New York, NY 10019
(Address of principal executive offices) (ZIP code)
212-484-8000
(Registrant's Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
100 shares of common stock, no par value per share, were issued and outstanding
as of May 12, 1997
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF TIME WARNER INC., MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION (H)(1)(a) AND (b) OF FORM 10-Q AND
IS FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
1
<PAGE>
TWI CABLE INC.
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated balance sheet at March 31, 1997 and December 31, 1996....... 3
Consolidated statement of operations for the three months ended
March 31, 1997 and 1996................................................ 4
Consolidated statement of cash flows for the three months ended
March 31, 1997 and 1996................................................ 5
Consolidated statement of shareholder's equity for the three months ended
March 31, 1997......................................................... 6
Notes to consolidated financial statements............................... 7
Item 2. Management's Discussion and Analysis of Results of Operations...... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 13
Item 6. Exhibits and Reports on Form 8-K................................... 13
2
<PAGE>
TWI CABLE INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------------ -------------------
ASSETS (thousands, except per share amounts)
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents............................................... $ 133,370 $ 114,546
Receivables, less allowances of $5.0 million and $4.7 million...... 43,902 42,493
Interest due from Time Warner...................................... 2,980 2,594
Prepaid expenses................................................... 5,338 4,773
---------- ----------
Total current assets............................................... 185,590 164,406
Income tax refunds due from Time Warner............................ 66,537 65,357
Investments and loans, including $24 million due from Time Warner.. 998,067 999,093
Property, plant and equipment, net................................. 837,092 821,665
Cable television franchises, net................................... 2,278,021 2,311,780
Goodwill and other intangibles, net................................ 972,754 980,913
Other assets....................................................... 13,449 13,176
---------- ----------
Total assets....................................................... $5,351,510 $5,356,390
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses.............................. $ 77,231 $ 88,571
Accrued interest expense........................................... 22,583 27,312
Subscriber advance payments and deposits........................... 22,121 18,532
Other current liabilities.......................................... 60,423 56,874
---------- ----------
Total current liabilities.......................................... 182,358 191,289
Long-term debt, including $309 million and $304 million due to
Time Warner....................................................... 3,509,056 3,474,145
Deferred income taxes.............................................. 1,055,155 1,060,763
Other liabilities.................................................. 18,296 17,899
SHAREHOLDER'S EQUITY
Common stock, no par value, 200 shares authorized, 100 shares......
issued and outstanding........................................... -- --
Paid-in capital.................................................... 1,509,081 1,509,081
Accumulated deficit................................................ (922,436) (896,787)
---------- ----------
Total shareholder's equity......................................... 586,645 612,294
---------- ----------
Total liabilities and shareholder's equity......................... $5,351,510 $5,356,390
========== ==========
</TABLE>
See accompanying notes.
3
<PAGE>
TWI CABLE INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1997 1996
------------ ------------
(thousands)
<S> <C> <C>
Revenues..................................... $241,630 $220,860
-------- --------
Costs and expenses:
Operating and programming(a)................ 88,815 79,683
Selling, general and administrative(a)...... 40,053 40,213
Depreciation and amortization............... 88,809 90,093
-------- --------
Total costs and expenses.................. 217,677 209,989
-------- --------
Operating income............................. 23,953 10,871
Interest and other, net(b)(c)................ (50,466) (48,723)
Gain on sale of investment................... 10,736 --
-------- --------
Loss before income tax
benefit..................................... (15,777) (37,852)
Income tax benefit........................... 2,697 14,123
-------- --------
Loss before extraordinary item............... (13,080) (23,729)
Extraordinary loss on retirement of debt
(less applicable income tax benefit
of $8,449 and $6,493)....................... (12,569) (9,658)
-------- --------
Net loss..................................... $(25,649) $(33,387)
======== ========
(a) Includes expenses resulting from
transactions with affiliates (Note 5).... $ 29,434 $ 23,349
======== ========
(b) Includes interest expense to affiliates
(Note 5)................................. $ 4,911 $ --
======== ========
(c) Includes interest income from
affiliates (Note 5)...................... $ 386 $ 392
======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
TWI CABLE INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1997 1996
--------- ---------
(thousands)
<S> <C> <C>
OPERATIONS
Net loss............................................ $ (25,649) $ (33,387)
Adjustments for noncash and nonoperating items:
Extraordinary loss on retirement of debt............ 12,569 9,658
Gain on sale of investment.......................... (10,736) --
Depreciation and amortization....................... 88,809 90,093
Amortization of financing costs..................... 2,438 --
Non-cash interest expense........................... 4,911 --
Equity in income of investees....................... (10,357) (11,385)
Deferred income tax benefit......................... (5,608) (35,963)
Changes in operating assets and liabilities......... (26,959) (88,213)
--------- -----------
Cash provided (used) by operations.................. 29,418 (69,197)
--------- -----------
INVESTING ACTIVITIES
Capital expenditures................................ (50,669) (24,674)
Investments and acquisitions, net of cash acquired.. (4,213) (189,171)
Cash acquired in TWI Cable Reorganization........... -- 109,318
Investment proceeds................................. 14,288 --
--------- -----------
Cash used by investing activities................... (40,594) (104,527)
--------- -----------
FINANCING ACTIVITIES
Borrowings.......................................... 350,000 1,535,000
Debt repayments..................................... (320,000) (1,216,732)
Distributions....................................... -- (764)
--------- -----------
Cash provided by financing activities............... 30,000 317,504
--------- -----------
INCREASE IN CASH AND EQUIVALENTS.................... 18,824 143,780
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD......... 114,546 7,649
--------- -----------
CASH AND EQUIVALENTS AT END OF PERIOD............... $ 133,370 $ 151,429
========= ===========
Supplemental disclosures of cash flow information:
Interest paid....................................... $ 59,758 $ 71,102
========= ===========
Income taxes paid................................... $ 611 $ 393
========= ===========
</TABLE>
See accompanying notes.
5
<PAGE>
TWI CABLE INC.
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Paid-In Accumulated
Capital Deficit Total
---------- ------------ ---------
<S> <C> <C> <C>
(thousands)
BALANCE AT DECEMBER 31, 1996.. $1,509,081 $(896,787) $612,294
Net loss...................... -- (25,649) (25,649)
---------- --------- --------
BALANCE AT MARCH 31, 1997..... $1,509,081 $(922,436) $586,645
========== ========= ========
</TABLE>
See accompanying notes.
6
<PAGE>
TWI CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
TWI Cable Inc. and subsidiaries (the "Company", formerly known as Cablevision
Industries Corporation and Subsidiaries ("CVI")) is a wholly owned subsidiary of
Time Warner Companies, Inc. ("Time Warner", formerly named Time Warner Inc.).
The Company owns and operates cable television systems located throughout the
United States.
On October 1, 1996, Time Warner completed a reorganization amongst certain of
its wholly owned cable subsidiaries (the "TWI Cable Reorganization") whereby (a)
Time Warner contributed to the Company all of the capital stock of each of (i)
TW/KBLCOM Inc. ("KBLCOM", formerly TWI Cable Inc.), a wholly owned subsidiary of
Time Warner owning and operating the net assets acquired in Time Warner's 1995
acquisition of KBLCOM Incorporated and (ii) Summit Communications Group, Inc.
("Summit", which was acquired by Time Warner in 1995) and (b) CVI was renamed
TWI Cable Inc. In connection with this reorganization, the Company assumed (a)
approximately $1.5 billion of KBLCOM's indebtedness under a five-year revolving
credit agreement (the "1995 Credit Agreement") which was assumed in cancellation
of the Company's $1.5 billion note payable to KBLCOM and (b) $1.3 billion of
indebtedness due to Time Warner. References herein to the "Company" refer to CVI
prior to October 1, 1996 and TWI Cable Inc. thereafter.
BASIS OF PRESENTATION
The TWI Cable Reorganization was accounted for as a merger of entities under
common control, similar to the pooling-of-interests method of accounting for
business combinations. Accordingly, the 1996 historical financial statements of
the Company have been restated to reflect the TWI Cable Reorganization effective
as of January 1, 1996.
The prior years' financial statements reflect the merger of the Company with
a wholly owned subsidiary of Time Warner (the "CVI Merger") and the acquisition
of the Gerry Companies, as more fully discussed in Note 2. The CVI Merger did
not result in a "pushdown" of Time Warner's accounting basis due to the
Company's public debt which remains outstanding (Note 4). Therefore, the
Company's accounting basis of net assets did not change as a result of the CVI
Merger.
The accompanying financial statements are unaudited, but in the opinion of
management, contain all adjustments (consisting of a normal recurring nature)
considered necessary to present fairly the financial position, results of
operations and cash flows for the periods presented in conformity with generally
accepted accounting principles applicable to interim periods. Certain
reclassifications have been made to the prior years' financial statements to
conform to the 1997 presentation. The accompanying financial statements should
be read in conjunction with the audited consolidated financial statements of the
Company for the year ended December 31, 1996.
7
<PAGE>
TWI CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
2. MERGERS AND ACQUISITIONS
On October 1, 1996, the TWI Cable Reorganization occurred (as more fully
described in Note 1), whereby Time Warner contributed the capital stock of
KBLCOM and Summit into the Company. In 1995 Time Warner acquired KBLCOM and
Summit on July 6 and May 2, respectively, by issuing an aggregate 2.6 million
shares of common stock and 14.3 million shares of two new series of convertible
preferred stock. KBLCOM owned cable television systems serving approximately
700,000 subscribers, in addition to a 50% ownership interest in Paragon
Communications which served an additional 972,000 subscribers. Summit owned
cable television systems serving approximately 162,000 subscribers.
Time Warner's acquisitions of KBLCOM and Summit were accounted for by the
purchase method of accounting for business combinations. Accordingly, Time
Warner's aggregate cost to acquire KBLCOM and Summit of approximately $1.384
billion was allocated to the net assets acquired in proportion to their
respective fair values as follows: investments-$950 million; cable television
franchises-$1.738 billion; goodwill-$732 million; other current and noncurrent
assets-$433 million; long-term debt-$1.353 billion; deferred income tax
liabilities-$1.061 billion; and other liabilities-$55 million.
On January 4, 1996. the Company merged with a wholly owned subsidiary of Time
Warner and became a direct, wholly owned subsidiary of Time Warner. Immediately
following the CVI Merger, the Company and certain of its subsidiaries purchased
the entire equity interests or all of the assets (collectively, the "Gerry
Acquisition") of Cablevision Industries Limited Partnership and combined
entities (collectively, the "Gerry Companies").
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 has, accordingly, allocated the total acquisition cost of $304 million to
the underlying net assets in proportion to their respective fair values as
follows: cable television franchises - $459 million; goodwill - $33 million;
other current and noncurrent assets - $103 million; long-term debt-$220 million;
deferred income taxes -$33 million; and other current liabilities - $38 million.
The accompanying consolidated statement of operations includes the operating
results of the Gerry Companies from the closing date of the Gerry Acquisition
and the operating results of Summit and KBLCOM from January 1, 1996. For the
three months ended March 31, 1996, KBLCOM and Summit had revenues of $74 million
and $18 million, respectively, and net (loss) income of $(14) million and $1
million, respectively.
8
<PAGE>
TWI CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
3. INVESTMENTS AND LOANS
As a result of the TWI Cable Reorganization, the Company acquired a 50%
investment in Paragon Communications ("Paragon"), which is accounted for using
the equity method. The Company's allocable share of Paragon's income is
reflected in interest and other, net in the consolidated statement of
operations. At March 31, 1997, the Company's investment in Paragon exceeded its
pro rata share of the underlying net assets of Paragon by $583.3 million as a
result of the allocation of Time Warner's cost to acquire KBLCOM (Note 2). The
excess is being amortized using the straight-line method over 20 years.
Summarized financial information as reported by Paragon is set forth below (in
millions):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------
1997 1996
------ -------
<S> <C> <C>
OPERATING STATEMENT INFORMATION
Revenues......................... $102.9 $100.8
Operating income................. 23.3 24.6
Net income....................... 23.0 24.8
<CAPTION>
March 31, December 31,
1997 1996
------ ------
<S> <C> <C>
BALANCE SHEET INFORMATION
Current assets................... 167.2 155.6
Total assets..................... 828.1 809.0
Current liabilities.............. 66.7 70.2
Total liabilities................ 74.1 78.0
</TABLE>
On February 4, 1997, the Company sold its ownership interest in a telephony
partnership for $14.3 million resulting in a gain of $10.7 million.
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
The Company's long-term debt consists of:
March 31, December 31,
1997 1996
-------- --------
(millions)
<S> <C> <C>
1995 Credit Agreement (6.45% and 6.50%)..... $2,860.0 $2,530.0
Time Warner demand loan (6.47% and 6.41%)... 309.1 304.1
10.75% senior notes due January 30, 2002.... -- 300.0
10.5% senior debentures due April 15, 2005.. 140.0 140.0
9.25% senior debentures due April 1, 2008... 200.0 200.0
-------- --------
Total...................................... $3,509.1 $3,474.1
======== ========
</TABLE>
9
<PAGE>
TWI CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
On January 31, 1997, the Company borrowed $335.0 million under the 1995
Credit Agreement and used the proceeds to redeem all of the outstanding 10.75%
senior notes due January 30, 2002 (the "Senior Notes"), including redemption
premiums and accrued interest. In connection with this transaction, the Company
realized an extraordinary loss, net of applicable tax benefit, of approximately
$12.6 million on the early extinguishment of debt. An extraordinary loss, net of
applicable tax benefit, of approximately $9.7 million was recognized in 1996 in
connection with certain debt refinancings associated with the CVI Merger and the
Gerry Acquisition. On March 28, 1997, the Company borrowed $15 million under the
1995 Credit Agreement.
Effective April 1, 1997, $300.0 million of the $309.1 million Time Warner
demand loan was settled in a capital transaction including the issuance of 10
shares of the Company's common stock to Time Warner. On April 28, 1997, the
Company paid Time Warner the remaining loan balance of $9.2 million, including
interest through such date, using funds borrowed under the 1995 Credit
Agreement.
Interest expense totaled $63.5 million and $64.1 million for the three
months ended March 31, 1997 and 1996, respectively.
5. RELATED PARTIES
In the normal course of conducting business, the Company had various
transactions with Time Warner and its affiliates, generally on terms resulting
from a negotiation between the affected units that in management's view results
in reasonable allocations.
Included in the Company's operating expenses are charges for programming and
promotional services provided by Home Box Office, Turner Broadcasting System,
Inc. and other Time Warner affiliates. These charges totaled $18.8 million and
$16.2 million for the three months ended March 31, 1997 and 1996, respectively.
These charges are based on customary rates and are in the ordinary course of
business. Accrued related party expenses for these programming and promotional
services are included in other current liabilities and amounted to $11.2 million
and $7.7 million as of March 31, 1997 and December 31, 1996, respectively.
The Company has entered into a management service arrangement with Time
Warner Entertainment Company, L.P. ("TWE"), pursuant to which TWE is responsible
for the management and operation of a majority of the Company's cable systems.
The management fees paid to TWE by the Company are based on an allocation of the
corporate expenses of TWE's cable division in proportion to the respective
number of subscribers of all cable systems managed by TWE's cable division. For
the three months ended March 31, 1997 and 1996, these fees totaled $10.5 and
$7.1 million, respectively.
Interest expense on the demand loan payable to Time Warner (Note 4) for the
three months ended March 31, 1997, totaled $4.9 million. Effective with the TWI
Cable Reorganization, the Company assumed a $24 million loan receivable from
Time Warner. Interest income on this loan totaled $386,000 and $392,000 for the
three months ended March 31, 1997 and 1996, respectively.
10
<PAGE>
TWI CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES
Pending legal proceedings are substantially limited to litigation incidental
to the business of the Company and pending litigation with the City of New York
relating to Time Warner's acquisition of Turner Broadcasting System, Inc. In the
opinion of management, the ultimate resolution of these matters will not have a
material effect on the consolidated financial statements of the Company.
11
<PAGE>
TWI CABLE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS
OVERVIEW
Operating results for the Company for the three months ended March 31, 1997
and 1996 are as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Revenues........................ $ 242 $ 221
EBITDA.......................... 113 101
Depreciation and amortization... 89 90
Operating income................ 24 11
Loss before extraordinary item.. (13) (24)
Net loss........................ (26) (33)
</TABLE>
As discussed more fully below, the improvement in net loss in the first
quarter of 1997 as compared to the same period in 1996 principally resulted from
(I) an increase in operating income primarily due to increased revenues and (ii)
an $11 million gain on the sale of an equity investment, partially offset by an
$11 million decrease in income tax benefit and a higher extraordinary loss on
the retirement of debt.
Revenues increased to $242 million in the first quarter of 1997, compared to
$221 million for the same period in 1996. Operating income increased to $24
million in the first quarter of 1997, compared to $11 million for the same
period in 1996. Revenues benefited from an aggregate increase in basic cable
subscribers, increases in regulated cable rates phased in during January 1997 as
permitted under Time Warner Cable's "social contract" with the Federal
Communications Commission and an increase in advertising revenues. Operating
income before depreciation and amortization ("EBITDA") and operating income
increased as a result of the revenue growth, partially offset by higher
operating and programming expense principally attributable to higher subscriber
levels and inflationary increases.
Industry analysts generally consider EBITDA to be an important measure of
comparative operating performance for the cable industry, and when used in
comparison to debt levels or the coverage of interest expense, as a measure of
liquidity. However, EBITDA should be considered in addition to, not as a
substitute for, operating income, net income, cash flow and other measures of
financial performance and liquidity reported in accordance with generally
accepted accounting principles.
The relationship between loss before income taxes and income tax benefit is
principally affected by the amortization of goodwill and certain other financial
statement expenses that are not deductible for income tax purposes.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
There were no material legal proceedings instituted during the three month
period ended March 31, 1997. There were also no material developments in any of
the other existing legal proceedings which were previously reported in the
Company's Annual Report filed with the SEC on Form 10-K for the fiscal year
ended December 31, 1996.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
None.
(b) Reports on Form 8-K
-------------------
None.
13
<PAGE>
TWI CABLE INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TWI CABLE INC.
(Registrant)
By: /S/ RICHARD M. PETTY
--------------------
Name: Richard M. Petty
Title Vice President and Controller
(Principal Accounting Officer)
Dated: May 12, 1997
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 0
<SECURITIES> 133,370
<RECEIVABLES> 48,933
<ALLOWANCES> 5,031
<INVENTORY> 0
<CURRENT-ASSETS> 185,590
<PP&E> 1,662,733
<DEPRECIATION> 825,641
<TOTAL-ASSETS> 5,351,510
<CURRENT-LIABILITIES> 182,358
<BONDS> 3,509,056
0
0
<COMMON> 0
<OTHER-SE> 586,645
<TOTAL-LIABILITY-AND-EQUITY> 5,351,510
<SALES> 241,630
<TOTAL-REVENUES> 241,630
<CGS> 88,815
<TOTAL-COSTS> 88,815
<OTHER-EXPENSES> 88,809<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63,119
<INCOME-PRETAX> (15,777)
<INCOME-TAX> (2,697)
<INCOME-CONTINUING> (13,080)
<DISCONTINUED> 0
<EXTRAORDINARY> (12,569)
<CHANGES> 0
<NET-INCOME> (25,649)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Depreciation and amortization
</FN>
</TABLE>
