-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TvCRLUgEc09r0jz3V6oCRZRHweaf+rrMUHNYmqs8X9vskHH89ppxrHIYCATi5X5E 8mI154H5MpQ0ZKFP0G+yzQ== 0000950144-95-003190.txt : 19951119 0000950144-95-003190.hdr.sgml : 19951119 ACCESSION NUMBER: 0000950144-95-003190 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: AMEX SROS: BSE SROS: CSX SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: TURNER BROADCASTING SYSTEM INC CENTRAL INDEX KEY: 0000100240 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 580950695 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08911 FILM NUMBER: 95591505 BUSINESS ADDRESS: STREET 1: ONE CNN CENTER STREET 2: 100 INTERNATIONAL BLVD CITY: ATLANTA STATE: GA ZIP: 30303 BUSINESS PHONE: 4048271700 MAIL ADDRESS: STREET 1: ONE CNN CENTER BOX 105366 CITY: ATLANTA STATE: GA ZIP: 30348-5366 FORMER COMPANY: FORMER CONFORMED NAME: TURNER COMMUNICATIONS CORP DATE OF NAME CHANGE: 19791016 FORMER COMPANY: FORMER CONFORMED NAME: RICE BROADCASTING CO INC DATE OF NAME CHANGE: 19700909 10-Q 1 TURNER BROADCASTING SYSTEM FORM 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ___ EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- --------------- Commission File No. 1-8911 TURNER BROADCASTING SYSTEM, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Georgia 58-0950695 - ------------------------------- -------------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) One CNN Center Atlanta, Georgia 30303 - ------------------------------- -------------------------------------- (Address of principal (Zip Code) executive offices) (404) 827-1700 - -------------------------------------------------------------------------------- (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. Outstanding at Class September 30, 1995 - ------------------------------- ----------------------------------- [S] [C] Class A Common Stock, par value $0.0625 68,330,388 Class B Common Stock, par value $0.0625 137,941,500 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TURNER BROADCASTING SYSTEM, INC. CONSOLIDATED CONDENSED BALANCE SHEETS UNAUDITED (IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 1995 1994 ---------------- ----------------- ASSETS Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 84,817 $ 52,895 Accounts receivable, less allowance of $40,135 and $31,862 Unaffiliated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415,563 567,404 Affiliated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,393 103,432 Film costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507,653 446,355 Installment contracts receivable, less allowance of $8,722 and $10,661 . . . . . . . . . . . . . . . . . . . 54,251 46,806 Prepaid expense and other current assets . . . . . . . . . . . . . . . . . 94,547 71,510 --------------- -------------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 1,233,224 1,288,402 Film costs, less current portion . . . . . . . . . . . . . . . . . . . . . 1,868,290 1,893,069 Property and equipment, less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331,509 308,960 Goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . 425,886 409,468 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280,428 172,646 --------------- -------------- TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,139,337 $ 4,072,545 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,390 $ 49,036 Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292,824 249,813 Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,457 108,122 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,343 61,376 Participants' share and royalties payable . . . . . . . . . . . . . . . . . 90,064 58,417 Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,723 37,338 Film contracts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 64,899 40,252 Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . 1,487 1,345 Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 90,456 40,702 --------------- -------------- Total current liabilities . . . . . . . . . . . . . . . . . . . . . 743,643 646,401 Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . 2,336,223 2,517,748 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 394,744 385,731 Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . 242,268 178,934 --------------- -------------- TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . 3,716,878 3,728,814 TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . 422,459 343,731 --------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . $ 4,139,337 $ 4,072,545 =============== ===============
See accompanying Notes to Consolidated Condensed Financial Statements. 2 3 TURNER BROADCASTING SYSTEM, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- -------------------------- 1995 1994 1995 1994 -------------- -------------- -------------- ----------- Revenue Unaffiliated . . . . . . . . . . . . . . . . . . . . . . $ 887,030 $625,527 $2,165,514 $1,674,270 Affiliated . . . . . . . . . . . . . . . . . . . . . . . 119,551 113,362 349,268 309,570 ---------- -------- ---------- ---------- 1,006,581 738,889 2,514,782 1,983,840 ---------- -------- ---------- ---------- Cost of operations . . . . . . . . . . . . . . . . . . . . 648,787 466,756 1,533,507 1,266,844 Selling, general and administrative . . . . . . . . . . . . 231,837 166,947 634,877 498,393 Gain on sale of equity investment . . . . . . . . . . . . . - - - (21,746) Costs of accounts receivable securitization program . . . . . . . . . . . . . . . . 4,811 - 8,069 - Depreciation of property and equipment and amortization of goodwill and other intangible assets . . . . . . . . . . . . . . . . . . 20,258 16,077 57,092 43,186 Interest expense, net of interest income . . . . . . . . . 43,348 52,425 140,632 157,801 Equity in (income) loss of unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . (6,185) 1,572 1,552 5,435 ---------- -------- ---------- ---------- 942,856 703,777 2,375,729 1,949,913 ---------- -------- ---------- ---------- Income before provision for income taxes . . . . . . . . . . . . . . . . . . 63,725 35,112 139,053 33,927 Provision for income taxes . . . . . . . . . . . . . . . . 23,969 14,729 55,607 14,249 ---------- -------- ---------- ---------- Income before extraordinary item . . . . . . . . . 39,756 20,383 83,446 19,678 Extraordinary item . . . . . . . . . . . . . . . . - (24,996) - (24,996) ---------- -------- ---------- ---------- Net income (loss) . . . . . . . . . . . . . . . . . $ 39,756 $ (4,613) $ 83,446 $ (5,318) ========== ======== ========== ========== Earnings (loss) per common share and common stock equivalent Income before extraordinary item . . . . . . $ 0.14 $ 0.07 $ 0.29 $ 0.07 Extraordinary item . . . . . . . . . . . . . - (0.09) - (0.09) ---------- -------- ---------- ---------- Net income (loss) . . . . . . . . . . . . . . $ 0.14 $ (0.02) $ 0.29 $ (0.02) ========== ======== ========== ========== Weighted average number of common shares outstanding, including conversion of common stock equivalents, when applicable . . . . . . . . . . . . . . . . . . . 285,433 282,532 283,817 280,994
See accompanying Notes to Consolidated Condensed Financial Statements. 3 4 TURNER BROADCASTING SYSTEM, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS UNAUDITED (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------- 1995 1994 ------------- --------------- Cash provided by operations before changes in film costs and liabilities, net . . . . . . . . . . . . . . . . . . . . . $ 196,384 $ 3,928 Changes in film costs and liabilities, net Purchased program rights . . . . . . . . . . . . . . . . . . . . . . . . . 65,817 65,008 Produced programming . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,403 (87,818) Licensed program and distribution rights . . . . . . . . . . . . . . . . . (8,839) 8,744 --------- --------- Net cash provided by (used for) operations . . . . . . . . . . . . . . . . . . . . 307,765 (10,138) --------- --------- Cash provided by (used for) investing activities Sale of equity investment . . . . . . . . . . . . . . . . . . . . . . . . . - 107,978 Distributions from unconsolidated entities . . . . . . . . . . . . . . . . . 7,605 - Acquisitions and advances to unconsolidated entities . . . . . . . . . . . . (7,051) (146,097) Additions to property and equipment . . . . . . . . . . . . . . . . . . . . (72,617) (80,825) --------- --------- Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . (72,063) (118,944) --------- --------- Cash provided by (used for) financing activities Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000 609,610 Payments of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (270,285) (576,346) Payments of cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . (14,720) (9,802) Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . 6,225 1,166 --------- --------- Net cash provided by (used for) financing activities . . . . . . . . . . . . . . (203,780) 24,628 --------- --------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . 31,922 (104,454) Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . 52,895 162,858 --------- --------- Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . $ 84,817 $ 58,404 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH INVESTING AND FINANCING ACTIVITIES: Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66,790 $ 28,359 Net interest paid, including interest capitalized of $12,115 and $10,383 . . . . . . . . . . . . . . . . . . . . . 155,426 134,107 Dividends declared but unpaid . . . . . . . . . . . . . . . . . . . . . . . . . . - 4,901 On January 28, 1994, the Company completed the merger with New Line Cinema Corporation as follows: Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . $ 695,400 Less: common stock issued or issuable . . . . . . . . . . . . . . . . . . . . . . 406,700 cash paid for debt and other acquisition costs. . . . . . . . . . . . . . . 139,600 --------- Liabilities assumed, including Convertible Debentures . . . . . . . . . . . . . . $ 149,100 =========
See accompanying Notes to Consolidated Condensed Financial Statements. 4 5 TURNER BROADCASTING SYSTEM, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS UNAUDITED NOTE 1. PREPARATION OF INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS The consolidated condensed financial statements included herein have been prepared by Turner Broadcasting System, Inc. (the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying consolidated condensed financial statements contain all adjustments, which are of a normal recurring nature, necessary for a fair presentation of such financial statements. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, management believes that the disclosures are adequate to make the information presented not misleading. For further information, reference is made to the consolidated financial statements and the notes thereto incorporated by reference in the Company's Form 10-K for the year ended December 31, 1994. Certain prior year amounts have been reclassified to conform to the current year presentation. NOTE 2. FILM COSTS The following table sets forth the components of unamortized film costs (in thousands):
September 30, December 31, 1995 1994 ----------------- ----------------- Purchased program rights . . . . . . . . . . . . . . . . . . . . . . . $1,038,513 $1,102,563 Produced programming Released . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381,296 302,559 Completed and not released . . . . . . . . . . . . . . . . . . . . . 61,015 40,021 In process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397,300 405,255 Episodic television . . . . . . . . . . . . . . . . . . . . . . . . 85,885 107,543 Licensed program and distribution rights . . . . . . . . . . . . . . . 305,987 257,796 Prepaid licensed program rights . . . . . . . . . . . . . . . . . . . 105,947 123,687 ---------- ---------- 2,375,943 2,339,424 Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . 507,653 446,355 ---------- ---------- $1,868,290 $1,893,069 ========== ==========
Episodic television includes serial television program costs. Prepaid licensed program rights represent licensed program rights for which payments have been made but the programming is not currently available for use. As these programs become available for use they are reclassified to licensed program rights. On the basis of the Company's anticipated total gross revenue estimates, over 86% of released and episodic television produced programming costs at September 30, 1995 will be amortized within the three-year period ending September 30, 1998. Amortization of film costs included in Cost of operations is composed of the following (in thousands):
Three months ended Nine months ended September 30, September 30, ----------------------------- --------------------------- 1995 1994 1995 1994 ------------ ------------ --------- ----------- Purchased program rights . . . . . . . . . . . . . . . $ 22,750 $ 22,226 $ 67,696 $ 66,565 Produced programming . . . . . . . . . . . . . . . . . 325,898 249,291 706,702 625,048 Licensed program and distribution rights . . . . . . . . . . . . . . . . . . . . . . 25,852 19,100 76,372 58,281 Participants' share and royalties . . . . . . . . . . . 78,201 13,831 115,641 37,230 Non-cash amortization of certain acquisition purchase adjustments . . . . . . . . . 13,013 674 16,305 2,432 -------- -------- -------- -------- $465,714 $305,122 $982,716 $789,556 ======== ======== ======== ========
5 6 NOTE 3. EARNINGS (LOSS) PER COMMON SHARE AND COMMON STOCK EQUIVALENT Net income (loss) per common share and common stock equivalent is computed by dividing net income (loss) applicable to common stock by the weighted average number of outstanding shares of common stock and common stock equivalents, when dilutive, during the applicable periods in 1995 and 1994. Common stock equivalents are principally the incremental shares associated with the Class C Convertible Preferred Stock (the "Class C Preferred Stock") and the outstanding stock options. Fully-diluted income (loss) per share amounts are similarly computed, but include the effect, when dilutive, of the Company's other potentially dilutive securities. The Company's zero coupon subordinated convertible notes and the convertible subordinated debentures of a wholly-owned subsidiary are excluded from the fully-diluted calculations of net income (loss) per common share for the three-month and nine-month periods ended September 30, 1995, and 1994 due to their anti-dilutive effect. The difference between the primary and fully-diluted earnings per share is not significant. NOTE 4. LONG-TERM DEBT Long-term debt is summarized as follows (in thousands):
SEPTEMBER 30, DECEMBER 31, 1995 1994 -------------------- --------------- Bank credit facilities . . . . . . . . . . . . . . . . . . . . $1,295,000 $1,490,000 8 3/8% Senior Notes . . . . . . . . . . . . . . . . . . . . . 297,426 297,381 7.4% Senior Notes . . . . . . . . . . . . . . . . . . . . . . 249,659 249,637 8.4% Senior Debentures . . . . . . . . . . . . . . . . . . . . 199,846 199,845 Zero coupon subordinated convertible notes . . . . . . . . . . 259,044 245,569 Convertible subordinated debentures of a wholly-owned subsidiary . . . . . . . . . . . . . . . . . . 29,075 29,075 Obligations under capital leases . . . . . . . . . . . . . . . 6,308 6,200 Other long-term debt . . . . . . . . . . . . . . . . . . . . . 1,352 1,386 ---------- ---------- 2,337,710 2,519,093 Less current portion . . . . . . . . . . . . . . . . . . . . . 1,487 1,345 ---------- ---------- $2,336,223 $2,517,748 ========== ==========
6 7 NOTE 5. STOCKHOLDERS' EQUITY Stockholders' equity consists of the following components (in thousands, except share data):
SEPTEMBER 30, DECEMBER 31, 1995 1994 --------------- ---------------- Class C Convertible Preferred Stock, par value $0.125; authorized 12,600,000 shares; issued and outstanding 12,396,976 shares . . . . . . . . . . $ 260,438 $ 260,438 Class A Common Stock, par value $0.0625; authorized 75,000,000 shares; issued and outstanding 68,330,388 shares . . . . . . . . . . . . . . . . 4,271 4,271 Class B Common Stock, par value $0.0625; authorized 300,000,000 shares; issued and outstanding 137,941,500 and 137,424,549 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,621 8,589 Capital in excess of par value . . . . . . . . . . . . . . . . 1,083,286 1,073,317 Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . (934,157) (1,002,884) ---------- ----------- Total stockholders' equity . . . . . . . . . . . . . . . . $ 422,459 $ 343,731 ========== ===========
On March 1, 1995, June 1, 1995, and September 1, 1995 the Board of Directors declared a cash dividend on the Company's outstanding shares of Class A Common Stock and Class B Common Stock, payable at the rate of $0.0175 for each share held on the record dates. In addition, holders of the Company's outstanding Class C Preferred Stock were entitled to an equivalent cash dividend of $0.105 for each share held on the record dates based on the number of shares of Class B Common Stock which would be issued upon conversion of each share of Class C Preferred Stock. Cash dividends of $4,902,000, $4,907,000, and $4,911,000 were paid on March 30, 1995, June 30, 1995, and September 30, 1995, respectively, to shareholders of record at the close of business on March 15, 1995, June 15, 1995, and September 15, 1995, respectively. The Company's ability to pay cash dividends to holders of shares of the Class A and Class B Common Stock and the Class C Preferred Stock is subject to certain covenants in the Company's outstanding debt instruments. Currently, the most restrictive of such covenants limits the maximum aggregate amount of dividends permitted to be paid annually to such holders to $30,000,000. NOTE 6. ACQUISITION The Company and New Line Cinema Corporation ("New Line"), a motion picture production and distribution company, completed a merger of New Line with a wholly-owned subsidiary of the Company on January 28, 1994 (the "New Line Merger"). As a result of the New Line Merger, each share of New Line Common Stock has been converted into the right to receive 0.96386 of a share of the Company's Class B Common Stock. The valuations used by New Line and the Company for purposes of arriving at the exchange ratio were $20 per share of New Line Common Stock and $20.75 per share of the Company's Class B Common Stock. The maximum number of shares of Class B Common Stock issuable pursuant to the New Line Merger is approximately 21,300,000 shares, valued at approximately $442,000,000. Cash will be distributed in lieu of any fractional shares. At September 30, 1995, approximately 16,500,000 shares of the Company's Class B Common Stock had been issued in connection with the New Line Merger. The remaining shares are issuable upon the exercise of New Line stock options and warrants and the conversion of the New Line convertible subordinated debentures 7 8 discussed below. Additionally, the Company assumed and incurred liabilities of approximately $149,100,000 and paid debt and certain other acquisition costs of approximately $140,000,000 in connection with the New Line Merger. Among the liabilities assumed in the New Line Merger were $29,125,000 of New Line 6 1/2% convertible subordinated debentures (the "Convertible Debentures"). The Convertible Debentures are convertible at the option of the holders into an aggregate of approximately 1,700,000 shares of Class B Common Stock. The New Line Merger was accounted for by the purchase method of accounting. Goodwill and other intangible assets in the amount of approximately $330,000,000 were recognized in the transaction, and are being amortized using a straight-line basis over periods not to exceed 40 years. The pro forma effect of the New Line Merger for the nine months ended September 30, 1994 is not significant. NOTE 7. ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM In May 1995, the Company entered into an agreement with a financial institution whereby the Company can sell on an ongoing basis up to $300,000,000 of an undivided percentage ownership interest in a designated pool of domestic cable and advertising accounts receivable. The initial sale generated proceeds of approximately $236,000,000 that were used to repay amounts outstanding under the Company's unsecured revolving credit facilities. As collections reduce the accounts receivable balance in the pool, the Company has continued to sell participating interests in new receivables up to the maximum allowable under the program. The sales of accounts receivable under this program have reduced the accounts receivable balance in the consolidated condensed balance sheet and the proceeds have been included as a source of cash provided by operations in the consolidated condensed statement of cash flows. Under the terms of the agreement, the difference between the cash proceeds and the undivided percentage ownership interest sold in the designated pool of domestic cable and advertising accounts receivable consists of receivables that have been designated as reserves principally for any potential credit costs that may be incurred under the program. However, these costs are not expected to exceed the full amount of the allowance for doubtful accounts which has been retained in the consolidated condensed balance sheet of the Company, as the Company expects to experience substantially the same risk of credit loss as if the receivables had not been sold. The ongoing costs of the program are largely based on the purchaser's level of investment and cost of funds. The costs of the program are anticipated to be less than those the Company would have otherwise incurred under the Company's unsecured revolving credit facilities. Under the agreement, which expires in May 1996, the Company performs collection and administrative responsibilities related to the receivables sold as agent for the purchaser. As of September 30, 1995, the Company had sold an undivided interest in this designated pool of domestic cable and advertising accounts receivable that aggregated $300,000,000, generating net proceeds of $212,000,000. The estimated total cost of the program for the sale of accounts receivable during the three and nine months ended September 30, 1995, approximated $4,800,000 and $8,100,000, respectively, and is reflected as a reduction of operating profit in the consolidated condensed statements of operations. NOTE 8. PROPOSED MERGER WITH TIME WARNER INC. On September 22, 1995, the Board of Directors of the Company approved the merger (the "Merger") of the Company with a wholly-owned subsidiary of Time Warner Inc., a Delaware corporation ("Time Warner"). Thereafter, the Company, 8 9 Time Warner and Time Warner Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Time Warner, executed an Agreement and Plan of Merger, dated as of September 22, 1995 (the "Merger Agreement"). In the Merger, each outstanding share of Class A Common Stock, par value $0.0625 per share, of the Company and each share of Class B Common Stock, par value $0.0625 per share, of the Company (other than shares held by Time Warner or in the treasury of the Company and other than shares with respect to which dissenters' rights are perfected) will be converted into 0.75 of a share of common stock, par value $1.00 per share, of Time Warner ("Time Warner Common Stock"), and each share of Class C Convertible Preferred Stock, par value $0.125 per share, of the Company (other than shares held by Time Warner or in the treasury of the Company and other than shares with respect to which dissenters' rights are perfected) will be converted into 4.80 shares of Time Warner Common Stock. The Company has agreed pursuant to the Merger Agreement not to solicit any other takeover proposal and, subject to certain conditions, not to provide any information to, or to negotiate with any other party. In addition, in the event the Merger Agreement is terminated under certain circumstances and a definitive agreement with respect to an alternative transaction is executed, or an alternative transaction is consummated, at or within 18 months after such termination, the Company would be obligated to pay to Time Warner a termination fee of $175,000,000. The Merger Agreement also contemplates an alternative structure, if the parties so agree, which would involve the merger of each of the Company and Time Warner with separate subsidiaries of a newly-formed holding company. If such holding company structure is implemented, each issued and outstanding share of the Company's capital stock (other than shares held by Time Warner or in the treasury of the Company and other than shares with respect to which dissenters' rights are perfected) will be converted into the right to receive common stock of such newly-formed holding company at the same exchange ratios described above. At the present time, the Company expects that the parties to the Merger Agreement will agree to the holding company structure. The Merger is subject to a number of closing conditions, including regulatory approvals and the approval of the shareholders of the Company and the stockholders of Time Warner. There can be no assurance that all of the conditions to the consummation of the Merger will be satisfied or that, as a condition to the grant of any approvals by government agencies, changes will not be required to the terms of the Merger Agreement or the other agreements entered into by the Company, Time Warner and Liberty Media Corporation ("LMC") and its affiliates in connection with the Merger. As a result of the arrangements among R.E. Turner, the Company, Time Warner and LMC and its affiliates, holders of a sufficient number of shares of the Company's capital stock of each class have agreed to vote in favor of the Merger to assure its approval by the Company's shareholders, regardless of the vote of any other shareholders of the Company. The LMC Agreement, however, provides that the obligation of LMC and its affiliates to vote for the Merger is subject to certain conditions, including there not having been amendments to the agreements that would have certain effects on LMC. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES SOURCES AND USES OF CASH Cash provided by operations after changes in film costs and associated liabilities for the nine months ended September 30, 1995 aggregated $308 million, including cash interest payments, net of cash interest received, of $155 million and a net change in film costs and liabilities of $111 million. Also included in cash provided by operations was $212 million which represents the current net proceeds from the accounts receivable securitization program discussed below. Other primary uses of cash during the period included repayments of amounts outstanding under the unsecured revolving credit facilities of $270 million and additions to property and equipment of $73 million. Included in the net change in film costs were $650 million utilized by the Company for original entertainment and sports programming (including $285 million for theatrical film productions, excluding promotional and advertising costs). In May 1995, the Company entered into an agreement with a financial institution whereby the Company can sell on an ongoing basis up to $300 million of an undivided percentage ownership interest in a designated pool of domestic cable and advertising accounts receivable. As of September 30, 1995, the Company had sold an undivided interest in this designated pool of its domestic cable and advertising accounts receivable that aggregated $300 million. The initial proceeds from the sale, $236 million, were used to repay amounts outstanding under the Company's unsecured revolving credit facilities. The Company has recognized costs of $8 million in connection with this accounts receivable securitization program. The ongoing costs of the program are anticipated to be less than those the Company would have otherwise incurred under the bank credit facilities. See Note 7 of Notes to Consolidated Condensed Financial Statements. See the Consolidated Condensed Statements of Cash Flows for additional details regarding sources and uses of cash and Note 4 and Note 7 of Notes to Consolidated Condensed Financial Statements for additional information about the Company's indebtedness and the accounts receivable securitization program. CREDIT FACILITIES AND FINANCING ACTIVITIES The Company had approximately $2.3 billion of outstanding indebtedness at September 30, 1995, of which $1.3 billion was outstanding under unsecured revolving credit facilities with banks. CAPITAL RESOURCES AND COMMITMENTS During the next 12 months, the Company anticipates making cash expenditures of approximately $280 million for sports programming, primarily rights fees, approximately $1.3 billion for original entertainment programming (excluding promotional and advertising costs) and approximately $150 million for licensed programming. Also, during the next 12 months, the Company expects to make total expenditures of approximately $125 million for additional or replacement property and equipment. Of the anticipated programming and capital 10 11 expenditures described above, firm commitments exist for approximately $625 million. Other capital resource commitments consist primarily of lease obligations, some of which are contingent on revenues derived from usage. Management expects to continue to lease satellite facilities, sports facilities and office facilities not already owned by the Company. Management expects to finance these commitments from working capital provided by operations and financing arrangements with lessors, vendors and film suppliers and additional borrowings. PROPOSED MERGER WITH TIME WARNER INC. On September 22, 1995, the Board of Directors of the Company approved the Merger of the Company with Time Warner. Thereafter, the Company, Time Warner and Time Warner Acquisition Corp., a Delaware corporation and a wholly- owned subsidiary of Time Warner, executed the Merger Agreement. In the Merger, each outstanding share of Class A Common Stock, par value $0.0625 per share, of the Company and each share of Class B Common Stock, par value $0.0625 per share, of the Company (other than shares held by Time Warner or in the treasury of the Company and other than shares with respect to which dissenters' rights are perfected) will be converted into 0.75 of a share of Time Warner Common Stock, and each share of Class C Convertible Preferred stock, par value $0.125 per share, of the Company (other than shares held by Time Warner or in the treasury of the Company and other than shares with respect to which dissenters' rights are perfected) will be converted into 4.80 shares of Time Warner Common Stock. The Company has agreed pursuant to the Merger Agreement not to solicit any other takeover proposal and, subject to certain conditions, not to provide any information to or to negotiate with any other party. In addition, in the event the Merger Agreement is terminated under certain circumstances and a definitive agreement with respect to an alternative transaction is executed, or an alternative transaction is consummated, at or within 18 months after such termination, the Company would be obligated to pay to Time Warner a termination fee of $175 million. The Merger Agreement also contemplates an alternative structure, if the parties so agree, which would involve the merger of each of the Company and Time Warner with separate subsidiaries of a newly-formed holding company. If such holding company structure is implemented, each issued and outstanding share of the Company's capital stock (other than shares held by Time Warner or in the treasury of the Company and other than shares with respect to which dissenters' rights are perfected) will be converted into the right to receive common stock of such newly-formed holding company at the same exchange ratios described above. At the present time, the Company expects that the parties to the Merger Agreement will agree to the holding company structure. The Merger is subject to a number of closing conditions, including regulatory approvals and the approval of the shareholders of the Company and the stockholders of Time Warner. There can be no assurance that all of the conditions to the consummation of the Merger will be satisfied or that, as a condition to the grant of any approvals by government agencies, changes will not be required to the terms of the Merger Agreement or the other agreements entered into by the Company, Time Warner and Liberty Media Corporation ("LMC") and its affiliates in connection with the Merger. As a result of the arrangements among R.E. Turner, the Company, Time Warner and LMC and its affiliates, holders of a sufficient number of shares of the Company's capital stock of each class have agreed to vote in favor of the Merger to assure its approval by the Company's shareholders, regardless of the vote of any other shareholders of the Company. The LMC Agreement, however, provides that the obligation of LMC and its affiliates to 11 12 vote for the Merger is subject to certain conditions, including there not having been amendments to the agreements that would have certain effects on LMC. RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1995 VS. THREE MONTHS ENDED SEPTEMBER 30, 1994
UNAUDITED UNAUDITED THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, 1995 SEPTEMBER 30, 1994 ------------------ ------------------ (IN THOUSANDS) Revenue Entertainment Networks $ 311,422 $283,124 Production & Distribution 476,893 280,203 Intrasegment revenue elimination (15,868) (21,456) ---------- -------- Total Entertainment 772,447 541,871 News 177,265 163,546 Other 67,752 37,750 Intersegment revenue elimination (10,883) (4,278) ---------- -------- $1,006,581 $738,889 ========== ======== Operating profit (loss) Entertainment Networks $ 70,030 $ 51,065 Production & Distribution (11,284) 4,753 Intrasegment elimination 3,918 2,097 ---------- -------- Total Entertainment 62,664 57,915 News 58,764 52,611 Other (15,729) (21,417) Costs of accounts receivable securitization program (4,811) - Equity in income (loss) of unconsolidated entities 6,185 (1,572) ---------- -------- $ 107,073 $ 87,537 ========== ========
ENTERTAINMENT SEGMENT Entertainment Segment revenue increased $230 million, or 43%, from $542 million to $772 million. The majority of the increase was due to syndication revenue, which increased $199 million, primarily due to the domestic syndication of "Seinfeld." In the entertainment networks, advertising revenue increased $40 million, or 32%, excluding any advertising revenue related to the 1994 Goodwill Games, due to an increase in the amount charged per thousand homes and higher viewership. The Entertainment Segment recognized $33 million in total revenue in the third quarter of 1994 from the telecast of the 1994 Goodwill Games. Subscription revenue increased $22 million, or 20%, due to higher rates and an increase in subscribers. Operating profit for the Entertainment Segment increased $5 million, or 8%, from $58 million to $63 million. Operating profit for the entertainment networks increased $20 million, or 33%, due to the revenue increases described above. Operating results for the production and distribution companies decreased $15 million. Losses from certain domestic theatrical releases in the quarter and lower than expected results from films released internationally exceeded the 12 13 third quarter operating profit of $28 million realized from the off-network syndication of the television series "Seinfeld." The impact of the 1994 Goodwill Games on operating profit for the Segment in the third quarter was not significant, as $26 million in losses on the games were recorded in the second quarter of 1994. NEWS SEGMENT News Segment revenue rose $14 million, or 8%, from $163 million to $177 million, due to higher domestic and international subscription revenue as a result of increased subscribers, and improved international advertising revenues. Revenue advances outpaced cost increases resulting in a $6 million, or 12%, improvement in operating profit, from $53 million to $59 million. OTHER SEGMENT Revenue for the segment increased $30 million, or 79%, from $38 million to $68 million, due primarily to the addition of 20 more Braves home games played in the third quarter of 1995 in comparison to the strike-shortened 1994 season. Overall, operating losses for the segment decreased $6 million, or 27%, from $22 million to $16 million. Decreases in the Braves' operating losses of $13 million were offset by increased general corporate costs in line with overall Company growth. EQUITY IN LOSS OF UNCONSOLIDATED ENTITIES/MISCELLANEOUS Operating profit increased $8 million due primarily to the Atlanta Hawks' allocation of franchise fees from the NBA's admission of two new teams starting in the 1995/96 season. By notice dated September 16, 1994, the Company called for redemption on October 17, 1994, all of its outstanding 12% Senior Subordinated Debentures (the "Subordinated Debentures") due 2001. The redemption of the Subordinated Debentures resulted in an extraordinary after-tax charge of $25 million representing the write-off of unamortized debt issue costs and premiums associated with early redemption. In May 1995, the Company sold an undivided percentage ownership interest in a designated domestic cable and advertising accounts receivable pool of approximately $300 million. The proceeds were used to repay amounts outstanding under the Company's unsecured revolving credit facilities. The Company recognized costs of $5 million in the third quarter in connection with this securitization program. The ongoing costs of the securitization program are anticipated to be less than those the Company would have otherwise incurred under its unsecured revolving credit facilities. Consolidated depreciation and amortization increased $4 million as a result of increased levels of property and equipment required to support the Company's growth. As a result of the information discussed above, the Company reported net income of $40 million in the third quarter of 1995 ($0.14 net income per common share and common share equivalent). This compares to a net loss of $5 million in the third quarter of 1994 ($0.02 net loss per common share). 13 14 RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1995 VS. NINE MONTHS ENDED SEPTEMBER 30, 1994
UNAUDITED UNAUDITED NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1995 SEPTEMBER 30, 1994 ------------------ ------------------ (IN THOUSANDS) Revenue Entertainment Networks $ 863,673 $ 745,847 Production & Distribution 1,021,276 699,714 Intrasegment revenue elimination (60,083) (51,670) ---------- ---------- Total Entertainment 1,824,866 1,393,891 News 557,244 477,502 Other 156,227 130,860 Intersegment revenue elimination (23,555) (18,413) ---------- ---------- $2,514,782 $1,983,840 ========== ========== Operating profit (loss) Entertainment Networks $ 178,134 $ 84,722 Production & Distribution (23,874) (29,520) Intrasegment elimination 548 10,851 ---------- ---------- Total Entertainment 154,808 66,053 News 196,395 156,564 Other (61,897) (47,200) Costs of accounts receivable securitization program (8,069) - Gain on sale of equity investment - 21,746 Equity in loss of unconsolidated entities (1,552) (5,435) ---------- ---------- $ 279,685 $ 191,728 ========== ==========
ENTERTAINMENT SEGMENT Entertainment Segment revenue increased $431 million, or 31%, from $1.4 billion to $1.8 billion. Syndication revenue increased $210 million due primarily to the domestic syndication of "Seinfeld." In addition, network advertising revenue increased $87 million, or 20% excluding any advertising revenue related to the 1994 Goodwill Games, due to an increase in the amount charged per thousand homes and higher viewership. The Entertainment segment recognized $33 million in revenue through the third quarter of 1994 from the telecast of the 1994 Goodwill Games. Subscription revenue also increased, rising $62 million, or 26%, to $303 million, due to higher rates and an increase in subscribers. In addition to the increased syndication revenue, the Company's production and distribution companies contributed increased revenue related to home video distribution, which increased $59 million, or 24%, to $302 million, and favorable box office results for theatrical film releases, which increased $32 million, or 20%, to $192 million. Operating profit for the Entertainment Segment increased $89 million over the first nine months of 1994, from $66 million to $155 million, $33 million of which related to losses in 1994 associated with the Goodwill Games. Additionally, increased operating profits from the entertainment networks, 14 15 exclusive of the Goodwill Games, of $69 million were primarily due to reduced sports programming costs as compared to the same period in the previous year when the 1994 Winter Olympics were telecast, as well as the advertising and subscription revenue advances mentioned above. After intrasegment eliminations, operating results at the production and distribution companies decreased $9 million due primarily to $28 million realized from the off-network syndication of the television series "Seinfeld", which was offset by losses from certain domestic theatrical releases and lower than expected results from films released internationally. NEWS SEGMENT News Segment revenue rose $79 million, or 17%, from $478 million to $557 million. The increase was due primarily to a $34 million, or 16%, increase in domestic advertising revenue associated with higher viewership levels, and a $17 million, or 10%, increase in domestic subscription revenue due primarily to higher rates and an increase in subscribers. The remaining increase in overall revenue was primarily generated by CNN International, where revenue rose $21 million, or 28%, from $77 million to $98 million. Revenue advances outpaced cost increases resulting in a $40 million, or 25%, improvement in operating profit, from $156 million to $196 million. OTHER SEGMENT Revenue for the segment increased $25 million, or 19%, from $131 million to $156 million. Revenues at World Championship Wrestling associated primarily with pay-per-view events increased $10 million, or 49%. In addition, revenues generated by the Atlanta Braves increased $11 million as a result of increased broadcast rights revenue due to the effects of the strike in 1994. Overall, operating losses for the segment increased $15 million, due primarily to increases in general corporate costs in line with overall Company growth. EQUITY IN LOSS OF UNCONSOLIDATED ENTITIES/OTHER CONSOLIDATED INFORMATION Operating losses decreased $4 million due primarily to the Atlanta Hawks' allocation of franchise fees from the NBA's admission of two new teams starting in the 1995/96 season. By notice dated September 16, 1994, the Company called for redemption on October 17, 1994, all of its outstanding Subordinated Debentures. The redemption of the Subordinated Debentures resulted in an extraordinary after- tax charge of $25 million representing the write-off of unamortized debt issue costs and premiums associated with early redemption. In May 1995, the Company sold an undivided percentage ownership interest in a designated domestic cable and advertising accounts receivable pool of approximately $300 million. The proceeds were used to repay amounts outstanding under the Company's unsecured revolving credit facilities. The Company has recognized costs of $8 million in connection with this securitization program. The ongoing costs of the securitization program are anticipated to be less than those the Company would have otherwise incurred under its unsecured revolving credit facilities. In June 1994, the Company sold its equity interest in RHI Entertainment for approximately $108 million in cash and recognized a pre-tax gain of approximately $22 million. 15 16 Consolidated depreciation and amortization increased approximately $14 million as a result of increased levels of property and equipment required to support the Company's growth. As a result of the information discussed above, the Company reported net income of $83 million for the nine months ended September 30, 1995 ($0.29 net income per common share and common share equivalent). This compares to a net loss of $5 million for the nine months ended September 30, 1994 ($0.02 net loss per common share). 16 17 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Turner Broadcasting System, Inc. v. Federal Communications Commission and The United States of America As last updated in the Company's Form 10-K for the year ended December 31, 1994, on October 5, 1992, the Company filed a lawsuit in the United States District Court for the District of Columbia challenging the provisions of the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Act") that would require cable television operators to devote up to one-third of their channel capacity to the carriage of local broadcast stations and provide certain channel positioning rights to local broadcast stations. The Company's complaint alleges that these provisions violate the First Amendment of the United States Constitution. Under a provision of the 1992 Act, the case was heard by a three-judge court. On April 8, 1993, the Court upheld the constitutionality of these provisions by a 2-1 vote. On June 27, 1994, the United States Supreme Court vacated the District Court's ruling and remanded the case for further proceedings. The Company is pursuing its claims. On July 17, 1995, the District Court heard oral arguments on cross-motions for summary judgment. Shareholder Litigation in Connection with Proposed Merger Since August 30, 1995, seventeen complaints have been filed against the Company, its directors and Time Warner, and in most cases, Tele-Communications, Inc. ("TCI") in connection with the proposed Merger of the Company with Time Warner. Sixteen of these complaints were filed in Superior Court in Fulton County, Georgia. An additional complaint was filed in the Court of Chancery in New Castle County in the State of Delaware on October 2, 1995; an action on behalf of the same plaintiff was filed in Georgia on October 23, 1995. Of the complaints filed in Georgia, fourteen were filed prior to the approval of the Merger on September 22, 1995 and two complaints were filed after the proposed Merger was approved by the TBS and Time Warner Boards of Directors. On September 27, 1995, an amended complaint was filed in one of the pre-September 22nd complaints. On October 24, 1995, an amended complaint was filed in another pre-September 22nd complaint which apparently would consolidate thirteen of the sixteen complaints filed in Georgia. These complaints, all purportedly brought on behalf of a class of the Company's public shareholders, allege, among other things, that some or all of the defendants have breached their fiduciary duties as directors and/or shareholders. All of the complaints seek damages, most of the complaints also seek, among other things, to enjoin consummation of the Merger, and many seek an auction of the Company. By letter dated October 20, 1995, certain of the plaintiffs in the Georgia suits made a demand upon the Company to repudiate certain of the transactions relating to the proposed Merger as corporate waste or, absent repudiation, seek indemnification from any officers or directors who authorized the challenged transactions. These plantiffs indicated that a shareholders' derivative suit would be filed in less than 90 days, seeking injunctive relief. These derivative claims have been asserted in the October 24, 1995 amended complaint referred to 17 18 above. The Board of Directors of the Company intends to establish a committee of the Board to investigate such derivative claims. The Company intends to vigorously defend each of these lawsuits. ITEM 5. OTHER INFORMATION REGULATION On October 5, 1992, the 1992 Act became law. The Federal Communications Commission (the "FCC" or the "Commission") is charged with implementation of the 1992 Act. RATE REGULATION Section 623 of the Communications Act of 1934, as amended by the 1992 Act, establishes a two-tier rate structure applicable to systems not found to be subject to "effective competition" as defined by the statute. Rates for a required "basic service tier" are subject to regulation by practically every community. Rates for cable programming services other than those carried on the basic tier are subject to regulation if, upon complaint, the FCC finds that such rates are "unreasonable." Programming offered by a cable operator on a per-channel or per-program basis, however, is exempt from rate regulation. On April 1, 1993, the FCC adopted implementing regulations for Section 623. The text of its Report and Order was released on May 3, 1993. The FCC adopted a benchmark approach to rate regulation. Rates above the benchmark would be presumed to be unreasonable. Once established, cable operators could adjust their rates based on appropriate factors and could pass through certain costs to customers, including increased programming costs. On February 22, 1994, the Commission adopted further regulations. Among other things, the additional regulations will govern the offering of bona fide "a la carte" channels that are exempted from rate regulation. The Commission also adopted a methodology for determining rates when channels are added to or deleted from regulated tiers. These regulations may adversely affect the Company's ability to sell its existing or new networks to cable customers and/or may adversely affect the prices the Company may charge for its services, although at this time the Company cannot predict their full effect on its operations. On April 5, 1993, the FCC also froze rates for cable services subject to regulation under the 1992 Act for 120 days. On June 11, 1993, the FCC deferred the implementation of rate regulation from June 21, 1993 until October 1, 1993, and extended the freeze on rates for cable services subject to regulation from August 4, 1993 to November 15, 1993. On November 10, 1993, the Commission further extended the freeze until February 15, 1994, and on February 8, 1994, extended the expiration date of the freeze until May 15, 1994. On July 27, 1993, the FCC moved the effective date of rate regulation back to September 1, 1993. Additionally, among other things, the FCC permitted cable operators to structure rates and service offerings up until September 1, 1993, without prior notice to subscribers. 18 19 On June 5, 1995, the United States Court of Appeals for the District of Columbia upheld the FCC's implementing regulations against challenge on constitutional, statutory and administrative law grounds. On July 16, 1993, the FCC issued a Notice of Proposed Rulemaking to add the regulatory requirements to govern cost-of-service showings that cable operators may submit under this provision to justify rates above the benchmarks. On February 22, 1994, the Commission adopted interim rules to govern the cost-of-service proceedings. The FCC on November 10, 1994 reversed its policy regarding rate regulation of packages of "a la carte" services. "A la carte" services that are offered in a package will now be subject to rate regulation by the FCC. In light of the uncertainty created by the various criteria that the FCC previously applied to "a la carte" packages, the FCC, in those cases in which it was not clear how the FCC's previous criteria should have been applied to the package at issue, and where only a "small number" of channels were moved from a previously regulated tier to the package, will allow cable operators to treat existing packages as New Product Tiers ("NPTs") as discussed below. The FCC, in addition to revising its rules governing "a la carte" channels, also on November 10, 1994 revised its regulations governing the manner in which cable operators may charge subscribers for new cable programming services. The FCC instituted a three-year flat fee mark-up plan for charges relating to new channels of cable programming services in addition to the present formula for calculating the permissible rate for new services. Commencing on January 1, 1995, operators may charge for new channels of cable programming services added after May 14, 1994 at a mark-up of 20 cents per channel over actual programming costs, but may not make adjustments to monthly rates for these new services totaling more than $1.20, plus an additional 30 cents solely for programming license fees, per subscriber over the first two years of the three-year period. Cable operators may charge an additional 20 cents in the third year only for channels added in that year. Cable operators electing to use the 20 cents per channel adjustment may not take a 7.5% mark-up on programming cost increases, which is permitted under the FCC's current rate regulations. The FCC requested further comment on whether cable operators should continue to receive the 7.5% mark-up on increases in license fees on existing programming services. Additionally, the FCC will permit cable operators to offer NPTs at rates which they elect so long as, among other conditions, other service tiers that are subject to rate regulation are priced in conformity with applicable FCC regulations and cable operators do not remove programming services from such existing tiers and offer them on the NPT. The constitutionality of these provisions has been challenged in litigation filed in the United States District Court for the District of Columbia. On September 27, 1993, the district court upheld the constitutionality of these provisions. An appeal of that decision is pending in the U.S. Court of Appeals for the District of Columbia. The Company cannot predict the ultimate outcome of the litigation. 19 20 MUST CARRY AND RETRANSMISSION CONSENT The 1992 Act contains provisions that would require cable television operators to devote up to one-third of their channel capacity to the carriage of local broadcast stations and provide certain channel position rights to local broadcast stations. The 1992 Act also includes provisions governing retransmission of broadcast signals by cable systems, whereby retransmission of broadcast signals would require the broadcaster's consent and provides each local broadcaster the right to make an election between must carry or retransmission consent. The retransmission consent provisions of the 1992 Act became effective on October 5, 1993. On March 11, 1993, the FCC adopted a Report and Order implementing these provisions. The provisions could affect the ability and willingness of cable systems to carry cable programming services. The Company has filed litigation challenging the provision as unconstitutional (see "Legal Proceedings - Turner Broadcasting System, Inc. v. Federal Communications Commission and The United States of America"). PROGRAM ACCESS On April 1, 1993, the Commission issued regulations implementing a provision that, among other things, makes it unlawful for a cable network, in which a cable operator has an attributable interest, to engage in certain "unfair methods of competition or unfair or deceptive acts or practices," the purpose and effect of which is to hinder significantly, or prevent, any multichannel video programming distributor from providing satellite cable programming or satellite broadcast programming to cable subscribers or consumers. The provisions contain an exemption for any contract that grants exclusive distribution rights to a person with respect to satellite cable programming or that was entered into on or before June 1, 1990. While the Company cannot predict the regulations' full effect on its operations, such regulations may affect the rates charged by the Company's cable programming services to its customers and could affect the terms and conditions of contracts between the Company and its customers. The constitutionality of this provision has been challenged in litigation filed in the United States District Court for the District of Columbia. On September 27, 1993, the district court upheld this provision. An appeal of that decision is pending in the United States Court of Appeals for the District of Columbia Circuit. Appeals of the Commission's implementing regulations have also been taken to the United States Court of Appeals for the District of Columbia Circuit. The Company cannot predict the ultimate outcome of the litigation. REGULATION OF CARRIAGE AGREEMENTS The 1992 Act contains a provision that requires the FCC to establish regulations governing program carriage agreements and related practices between cable operators and video programming vendors, including provisions to prevent the cable operator from requiring a financial interest in a program service as a condition of carriage and provisions designed to prohibit a cable operator from coercing a video programming vendor to provide exclusive rights as a condition of carriage. On October 22, 1993, the Commission issued regulations implementing this provision. The Company cannot at this time predict the effect of this provision on its operations. 20 21 The constitutionality of this provision has been challenged in litigation filed in the United States District Court for the District of Columbia. On September 27, 1993, the district court upheld the constitutionality of this provision. An appeal of that decision is pending in the United States Court of Appeals for the District of Columbia Circuit. The Company cannot predict the outcome of the litigation. OWNERSHIP LIMITATIONS Section 11 of the 1992 Act directed the Commission to prescribe rules and regulations establishing limits on the number of cable subscribers a person is authorized to reach through cable systems owned by such person and the number of channels that can be occupied by video programmers in which a cable operator has an attributable interest. The Commission must also consider the necessity of imposing limitations on the degree to which multichannel video programming distributors may engage in the creation or production of video programming. On December 28, 1992, the FCC issued a Notice of Proposed Rulemaking and Notice of Inquiry with respect to these provisions. On October 22, 1993, the FCC adopted a Second Report and Order that established a 40% limit on the number of channels that may be occupied by programming services in which the particular cable operator has an attributable interest. The Company is subject to this provision. The FCC also established a national limit of 30% on the number of homes passed that any one person can reach through cable systems owned by such person, but stayed implementation of that provision pending judicial review of its constitutionality. On April 5, 1995, the FCC denied the petitions for reconsideration. The Company cannot at this time predict the effect of this provision or these proposals on its operations. The constitutionality of these provisions has been challenged in litigation filed in the United States District Court for the District of Columbia. On September 27, 1993, the district court found the national limit on homes passed unconstitutional, but upheld the constitutionality of the channel capacity limits. An appeal of that decision is currently pending in the United States Court of Appeals for the District of Columbia Circuit. Appeals of the Commission's implementing regulations have also been taken to the United States Court of Appeals for the District of Columbia Circuit. The Company cannot predict the ultimate outcome of the litigation. SPORTS MIGRATION The 1992 Act directed the FCC to submit an interim report by July 1, 1993, and a final report by July 1, 1994, to Congress on the migration of sports programming from broadcast networks to cable networks and cable pay-per-view. On June 30, 1994, the FCC issued its final report in which it recommended that no action by Congress was necessary. 21 22 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.37.1 Amendment to Employment Agreement, dated as of July 17, 1995, by and between New Line Cinema Corporation and Robert Shaye, with respect to the Employment Agreement, dated as of January 28, 1994. 11 Computation of Earnings per Common and Common Equivalent Share. 27 Financial Data Schedule (for SEC use only). (b) Reports on Form 8-K On October 5, 1995, the Company filed a Form 8-K announcing that on September 22, 1995, the Board of Directors of the Company approved the merger of the Company with a wholly-owned subsidiary of Time Warner Inc. and thereafter, the Company, Time Warner Inc. and Time Warner Acquisition Corp., a wholly-owned subsidiary of Time Warner Inc., executed an Agreement and Plan of Merger, dated as of September 22, 1995. 22 23 SIGNATURES 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. TURNER BROADCASTING SYSTEM, INC. By: /s/ William S. Ghegan ------------------------------------ William S. Ghegan Vice President, Controller and Chief Accounting Officer Date: November 14, 1995 23 EX-10.37.1 2 AMENDMENT TO EMPLOYMENT AGREEMENT 1 EXHIBIT 10.37.1 AMENDMENT TO EMPLOYMENT AGREEMENT This Amendment to Employment Agreement (the "Agreement") is made and entered into as of the 17 day of July, 1995 by and between Robert Shaye (hereinafter referred to as "Employee"), and New Line Cinema Corporation, a corporation organized under the laws of the State of Delaware (hereinafter referred to as the "Employer"): W I T N E S S E T H: WHEREAS, Employee and the Employer are parties to that certain employment agreement of January 28, 1994, (the "Employment Agreement"); WHEREAS, the parties desire to enter into this Amendment to amend the Employment Agreement so as to extend the term thereof; NOW, THEREFORE, in consideration of the premises and the mutual promises and agreements contained herein, the parties hereto, intending to be legally bound, hereby agree to amend the Employment Agreement as follows: 1. Section 3(a) of the Employment Agreement is hereby deleted and the following new Section 3(a) shall be substituted therefor: 3. Term. (a) The initial term of this Agreement shall commence on the Effective Date of the merger of NL Acquisition Co. with and into the Employer (the 2 "Effective Date") and terminate on December 31, 1999, subject, however, to prior termination as provided in this Agreement. 2. Section 4(a) of the Employment Agreement is hereby amended to provide that, in full payment for all of his services hereunder and all rights granted herein, Employee's Base Salary for the period from January 1, 1999 through December 31, 1999 shall be the greater of One Million Nine Hundred Sixty Thousand Forty-seven Dollars and Fifty Cents ($1,960,047.50) or One Million Eight Hundred Twenty-three Thousand Three Hundred ($1,823,300.00) plus the greater of the rate of increase in the Consumer Price Index for all urban consumers for the year ended December 31, 1998 as determined by the U.S. Department of Labor (U.S. City Average, with 1982 as the base year), or the rate of increase for similarly situated executives for the year ended December 31, 1998 as determined in the American Compensation Association Survey, as provided by Towers Perrin. 3. This Amendment shall be contingent upon the Employer's parent, Turner Broadcasting System, Inc. ("TBS") granting to Employee the option to purchase 636,000 shares of TBS's Class B Common stock at an option price of $16.875 per share (the "Option Grant") pursuant to the Turner Broadcasting System 1993 Stock Option and Equity-Based Award Plan (the "Plan"). The Option Grant shall be contingent only upon approval by the TBS's Shareholders at the Annual Meeting of Shareholders on June 9, 1995 of the proposal to approve an amendment to the Plan (the "Plan Amendment"). 4. Except as expressly amended hereby, the terms and conditions of the Employment Agreement shall remain in full force and effect. 3 5. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. NEW LINE CINEMA CORPORATION By: /s/ Michael Lynne ---------------------------- Its: President ---------------------------- ATTEST: /s/ Steven W. Korn ---------------------------------- NAME: Steven W. Korn ---------------------------------- TITLE: Vice President and General Counsel ---------------------------------- EMPLOYEE /s/ Robert Shaye --------------------------------- Robert Shaye EX-11 3 COMPUTATION OF EARNINGS 1 EXHIBIT 11 (Page 1 of 2) TURNER BROADCASTING SYSTEM, INC. COMPUTATION OF PRIMARY EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1995 SEPTEMBER 30, 1995 ------------------ ------------------ Net income applicable to common stock $ 39,756 $ 83,446 ======== ======== Weighted average number of shares outstanding during the period 206,188 205,964 Add: Common equivalent shares issuable assuming conversion of Class C Convertible Preferred Stock 74,382 74,382 Shares issuable upon exercise of stock options 17,008 17,008 Subtract: Shares which would have been purchased with proceeds from exercise of such stock options (12,145) (13,537) -------- -------- Weighted average number of common stock, common stock equivalents and converted shares outstanding 285,433 283,817 ======== ======== Weighted average number of Class A common shares and common stock equivalents 68,330 68,330 ======== ======== Weighted average number of Class B common shares and common stock equivalents 217,103 215,487 ======== ======== Earnings per share and common stock equivalent of Class A and Class B Common Stock $ 0.14 $ 0.29 ======== ========
2 EXHIBIT 11 (Page 2 of 2) TURNER BROADCASTING SYSTEM, INC. COMPUTATION OF FULLY-DILUTED EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1995 SEPTEMBER 30, 1995 ------------------ ------------------ Net income applicable to common stock $ 39,756 $ 83,446 Add: Interest expense on zero coupon subordinated convertible notes due 2007 3,638 12,580 Interest expense on 6.5% convertible notes 473 1,418 Subtract: Additional income taxes (1,640) (5,585) -------- -------- Adjusted net income applicable to common stock $ 42,227 $ 91,859 ======== ======== Primary weighted average number of shares outstanding 285,433 283,817 Add: Common equivalent shares issuable assuming conversion of convertible notes due 2007 7,440 7,440 Change in shares due to options assumed converted using the end of period market value 788 2,180 Common equivalent shares issuable assuming conversion of 6.5% convertible notes 1,661 1,661 -------- -------- Weighted average number of common stock, common stock equivalents and convertible shares, assuming full dilution 295,322 295,098 ======== ======== Weighted average number of Class A common shares and common equivalents and convertible shares, assuming full dilution 68,330 68,330 ======== ======== Weighted average number of Class B common shares and common equivalents and convertible shares, assuming full dilution 226,992 226,768 ======== ======== Earnings per share and common stock equivalent of Class A and Class B Common Stock $ 0.14 $ 0.31 ======== ========
This calculation is submitted in accordance with the rules and regulations of the Securities and Exchange Commission. Under generally accepted accounting principles this presentation would not be made because it is anti-dilutive. EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 84,817 0 532,091 (40,135) 0 1,233,224 590,958 (259,449) 4,139,337 743,643 2,337,710 12,892 0 260,438 149,129 4,139,337 2,514,782 2,514,782 1,533,507 2,235,097 0 14,284 140,632 139,053 55,607 83,446 0 0 0 83,446 .29 .00
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