-----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, EEJTCa302Zi+PJhrncWGqpjCo3PYtXJPuq9Yi64kzlN4FLs4tpzknPanc22Rr3om PPENKiNJ8TZkWptL4yTkrg== 0000950144-96-001095.txt : 19960322 0000950144-96-001095.hdr.sgml : 19960322 ACCESSION NUMBER: 0000950144-96-001095 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960321 SROS: AMEX 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08911 FILM NUMBER: 96537151 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-K405 1 TURNER BROADCASTING SYSTEM, INC. FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO ---------------- ---------------- COMMISSION FILE NO. 0-9334 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 30303 ATLANTA, GEORGIA (Zip Code) (Address of principal executive offices) (404) 827-1700 (Registrant's telephone number, including area code) Securities registered pursuant to section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - -------------------------------------------------------------------------------- CLASS A COMMON STOCK, $0.0625 PAR VALUE PER SHARE AMERICAN STOCK EXCHANGE CLASS B COMMON STOCK, $0.0625 PAR VALUE PER SHARE AMERICAN STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of voting stock held by non-affiliates of the registrant as of January 31, 1996: $273,300,000 Class A Common Stock, $1,461,600,000 Class B Common Stock, $233,100,000 Class C Convertible Preferred Stock. The number of shares outstanding of each of the registrant's classes of common stock as of December 31, 1995: Class A Common Stock, par value $0.0625 -- 68,330,388 shares and Class B Common Stock, par value $0.0625 -- 137,982,831 shares. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1995 (the "1995 Annual Report to Shareholders") are incorporated by reference in Part I, Item 1 and Part II, Items 5-8 of this Report, as more particularly described herein. (2) Portions of the registrant's definitive Proxy Statement (the "1996 Proxy Statement") to be filed with the Commission on or about April 30, 1996 pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, are incorporated by reference in Part III of this Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS BACKGROUND Turner Broadcasting System, Inc. (the "Company") is a diversified information and entertainment company which was incorporated in the State of Georgia in 1965. Through its subsidiaries at December 31, 1995, the Company owned and operated four domestic entertainment networks, four international entertainment networks (together the "Entertainment Networks"), and four news networks. The Company produces and distributes entertainment and news programming worldwide, with operations in motion picture, animation, sports and television production, home video, television syndication, licensing and merchandising, and publishing. RECENT DEVELOPMENTS The Company has entered into an Amended and Restated Agreement and Plan of Merger dated as of September 22, 1995 (the "Merger Agreement") among the Company, Time Warner Inc. ("Time Warner"), TW Inc., a Delaware corporation and currently a wholly-owned subsidiary of Time Warner ("New Time Warner"), Time Warner Acquisition Corp., a Delaware corporation ("Delaware Sub") and TW Acquisition Corp., a Georgia corporation ("Georgia Sub"), which provides for a transaction in which the Company and Time Warner will each become a wholly-owned subsidiary of a new holding company, New Time Warner. Pursuant to the Merger Agreement, (a) Georgia Sub will be merged into the Company (the "TBS Merger"), (b) 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 directly or indirectly by Time Warner or New Time Warner or in the treasury of the Company and other than shares with respect to which dissenters' rights are properly exercised) will be converted into 0.75 of a share of common stock, par value $.01 per share, of New Time Warner ("New Time Warner Common Stock"), (c) each share of Class C Convertible Preferred Stock, par value $.125 per share, of the Company (other than shares held directly or indirectly by Time Warner or New Time Warner or in the treasury of the Company and other than shares with respect to which dissenters' rights are properly exercised) will be converted into 4.80 shares of New Time Warner Common Stock, (d) Delaware Sub will be merged into Time Warner (the "TW Merger" and together with the TBS Merger, the "Mergers"), (e) each outstanding share of common stock, par value $1.00 per share, of Time Warner (other than shares held directly or indirectly by Time Warner) will be converted into one share of New Time Warner Common Stock, (f) each outstanding share of each series of preferred stock of Time Warner (other than shares held directly or indirectly by Time Warner and shares with respect to which appraisal rights are properly exercised) will be converted into one share of a substantially identical series of preferred stock of New Time Warner having the same designation as the shares of preferred stock of Time Warner so converted, (g) each of Time Warner and the Company will become a wholly-owned subsidiary of New Time Warner and (h) New Time Warner will be renamed "Time Warner Inc." The Mergers are 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. Among the required regulatory approvals are (i) the approval of the Federal Communications Commission (the "FCC") and (ii) the expiration of all waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). Both the FCC and the Federal Trade Commission (the "FTC"), which has the responsibility for reviewing the parties' filings under the HSR Act, are closely reviewing the Mergers. There can be no assurance that all of the conditions to the consummation of the Mergers will be satisfied or that, as a condition to the grant of any approvals by government agencies, including the FCC and the FTC, 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 Mergers. 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 TBS Merger to assure its approval by the Company's shareholders, regardless of the vote of any other shareholders of the Company. The LMC Agreement described below, however, provides that the 2 3 obligation of LMC and its affiliates to vote in favor of the TBS Merger is subject to certain conditions, including there not having been amendments to the related agreements that would have certain effects on LMC. Concurrently with the execution of the Merger Agreement, the Company and LMC Southeast Sports Inc. ("LMC Sports"), entered into a Stock Purchase Agreement (the "SportSouth Agreement") pursuant to which the Company will sell to LMC Sports all of the outstanding capital stock of Turner Sports Programming, Inc. ("TPSI") which owns a 44% interest in SportSouth Network, Ltd. ("SportSouth"). The purchase price for the stock of TPSI (currently estimated to be $60 million) will be determined in accordance with a formula set forth in the SportSouth Agreement. The transaction contemplated by the SportSouth Agreement is conditioned upon the consummation of the Mergers. The Company has also agreed, subject to the consummation of the Mergers, to extend the existing affiliation agreements pursuant to which Tele-Communications, Inc. and its affiliates distribute programming produced by the Company. Pursuant to the Amended and Restated LMC Agreement (the "LMC Agreement"), dated as of September 22, 1995, among Time Warner, New Time Warner, LMC and certain of its affiliates, LMC and certain of its affiliates have agreed, subject to certain conditions, to vote all their shares of Company capital stock in favor of the approval of the TBS Merger and each of the other transactions contemplated by the Merger Agreement and in favor of the approval of the Merger Agreement. Pursuant to the LMC Agreement, Time Warner has agreed with LMC that, upon the happening of certain events, LMC will have the right to cause Time Warner to terminate the Merger Agreement and abandon the Mergers. On February 16, 1996, the Company and Time Warner Inc. announced plans to launch a 24-hour sports news cable service, CNN-SI, combining the resources of CNN's news operations and Sports Illustrated's print and television staff. The launch is currently scheduled for December 1996. BUSINESS SEGMENTS The Company's operations are in two primary industry segments: Entertainment and News. The Entertainment Segment consists of Entertainment Networks and Entertainment Production and Distribution, which accounted for approximately 73% of the Company's consolidated revenue (after elimination of intersegment revenues) for the year ended December 31, 1995. The News Segment consists of domestic and international news networks. For additional financial information about the Company's industry segments for each of the three years ended December 31, 1995, see Note 15 of Notes to Consolidated Financial Statements in the 1995 Annual Report to Shareholders, which is incorporated herein by reference. ENTERTAINMENT ENTERTAINMENT NETWORKS At December 31, 1995, the Entertainment Networks included four domestic networks, WTBS (commonly known as "TBS Superstation"), Turner Network Television ("TNT"), the Cartoon Network and Turner Classic Movies ("TCM"), and four international networks, TNT Latin America, Cartoon Network Latin America, TNT & Cartoon Network Europe and TNT & Cartoon Network Asia. For selected information concerning household coverage, viewership and ratings of the Entertainment Networks, refer to page 28 in the 1995 Annual Report to Shareholders incorporated herein by reference. Domestic TBS Superstation is a 24-hour per day independent UHF television station located in Atlanta, Georgia, which is transmitted over-the-air to the Atlanta market and also is retransmitted by common carrier via satellite to cable systems located in all 50 states, Puerto Rico and the Virgin Islands. TBS Superstation relies principally on advertising revenue and receives no compensation for its signal from cable systems (other than indirectly from copyright fees paid and allocated through the Federal Copyright Office, formerly the Federal 3 4 Copyright Royalty Tribunal ("CRT"), for Company-owned programs) or from Southern Satellite Systems, Inc. ("Southern"), the common carrier which delivers its signal to the cable systems. Generally, the Company does not have contracts with the local cable systems controlling coverage of the TBS Superstation signal; nor does the Company have a contract with Southern, which is a common carrier controlled by Tele-Communications, Inc. (see "I. Election of Directors," " -- Additional Information" and " -- Executive Compensation -- Certain Relationships and Related Transactions" in the Company's 1996 Proxy Statement), requiring retransmission of the TBS Superstation signal. Local cable systems contract with Southern for use of the TBS Superstation signal. This retransmission of the TBS Superstation signal could be discontinued by the carrier subject to Southern's contracts with the local cable systems. In view of the substantial fees received by Southern from the local cable systems for the TBS Superstation signal, the Company considers voluntary discontinuance of such retransmission by Southern unlikely. TNT is a 24-hour per day advertiser-supported cable television entertainment program service that was launched in October 1988. The Cartoon Network is a 24-hour per day advertiser-supported cable television animated program service that was launched in October 1992. Both networks are transmitted via satellite for distribution by cable television operators and other distributors. They derive revenue primarily from two sources: sale of advertising time on the networks and receipt of per-subscriber license fees paid by cable operators and other distributors. TCM is a 24-hour per day commercial-free cable television entertainment program service that was launched in April 1994. The network is transmitted via satellite for distribution by cable television operators and other distributors (primarily direct broadcast satellite), and derives its revenues primarily from receipt of per-subscriber license fees paid by cable operators and other distributors. The sale of advertising time is affected by viewer demographics, viewer ratings and market conditions. In order to evaluate the level of its viewing audience, the Company makes use of the metered method of audience measurement. This method, which provides a national sample through the use of meters attached to television sets, produces a continuous measurement of viewing activity within those households. The Company utilizes the services of A.C. Nielsen ("Nielsen"), the metered estimates of which are widely accepted by advertisers as a basis for determining advertising placement strategy and rates. The rating measurements supplied by Nielsen to the Company are translated into advertising revenues on the basis of the average cost per thousand homes charged for advertising ("CPM"), which is negotiated by the advertiser and the Company. The CPM will vary depending upon the type and schedule of the program that will carry the advertisement, as some programs and time slots are viewed by advertisers as delivering a more valuable audience segment than others. Advertising revenue is a function of the audience sold and delivered, the CPM charged to advertisers and the number of advertising spots sold. International TNT Latin America, which was launched in January 1991, is a 24-hour per day trilingual entertainment program service distributed principally to subscribing cable systems in Latin America and the Caribbean. All of the TNT Latin America schedule is dubbed audio or subtitled in English, Spanish and Portuguese. At December 31, 1995, TNT Latin America was distributed to subscribers in 36 countries and territories. Revenues from this service are derived primarily from subscription fees based on contracts with cable operators that specify minimum subscriber levels. Cartoon Network Latin America, which was launched in April 1993, is a 24-hour per day trilingual animated program service and is distributed principally to subscribing cable systems in Latin America and the Caribbean. All of the Cartoon Network Latin America schedule is dubbed audio or subtitled in English, Spanish and Portuguese. At December 31, 1995, Cartoon Network Latin America was distributed to subscribers in 33 countries and territories. Revenues from this service are derived primarily from subscription fees based on contracts with cable operators that specify minimum subscriber levels. TNT & Cartoon Network Europe, which was launched in September 1993, is a 24-hour per day program service which originates in the United Kingdom and is distributed throughout Europe. At December 31, 1995, 4 5 TNT & Cartoon Network Europe was distributed in 41 countries and territories via satellite. This dual programming service features 14 hours of animated programming during the day and 10 hours of film product at night. Approximately 45% of its schedule is dubbed audio or subtitled in six languages -- English, French, Spanish, Swedish, Norwegian and Finnish. This service derives most of its revenue from advertising sales and subscription fees. TNT & Cartoon Network Asia, which was launched in October 1994, is a 24-hour per day program service. The network originates in Hong Kong and is distributed throughout the Asia Pacific region. At December 31, 1995, TNT & Cartoon Network Asia was distributed in 20 countries and territories via satellite. This dual programming service features 14 hours of animated programming during the day and 10 hours of film product at night. All of the animated programming schedule is dubbed audio or subtitled in English and Mandarin, and 80% of the schedule is dubbed audio or subtitled in Thai. All of the film product programming schedule is dubbed audio or subtitled in English and 40% of the schedule is dubbed audio or subtitled in Mandarin and Thai with more languages expected to be added in later years. The service derives most of its revenues from advertising sales and subscription fees. Programming The Entertainment Networks telecast 24 hours per day, 7 days per week. The Company fulfills its programming needs through use of its copyright-owned program libraries, licensed programming, original productions and program rights to sports events. The Company's copyright ownership consists chiefly of the world's largest film and animation libraries: 3,400 films, 8,600 cartoon episodes and over 2,200 hours of made-for-television programming. The Company has acquired programming rights from the National Basketball Association (the "NBA") to televise a certain number of regular season and playoff games in each of the 1994-1995 through 1997-1998 seasons in return for rights fees aggregating $352 million plus a share of the advertising revenues generated in excess of specified amounts under the agreement. The Company also has an agreement with the National Football League to televise a certain number of preseason and regular season Thursday and Sunday night games in each of the 1994 through 1997 seasons in return for rights fees aggregating $496 million. See "Other Businesses -- The Atlanta Braves" for discussion of additional sports programming. The suppliers of substantially all programming telecast by TBS Superstation, other than programming owned by the Company, own or have rights to the copyrights to such programming. The use and telecast of such programming by TBS Superstation is subject to the Copyright Act of 1976, as amended (the "Copyright Act") and licensing agreements which, in most cases, grant to TBS Superstation nationwide non-exclusive rights to such programming. A small number of the licensing agreements contain provisions which restrict the broadcast of the programming by TBS Superstation to the Atlanta market and the Company typically pays a license fee significantly in excess of the market rate for programming aimed at the Atlanta market alone. In addition, the suppliers of such programs collect copyright royalties from the Federal Copyright Office funded by all cable operators that carry the TBS Superstation signal. Although it is possible that program suppliers could initiate legal action against the Company alleging breach of licensing agreements which are limited to the Atlanta market, no such actions have been instituted to date and the Company believes the probability of litigation against the Company in this regard is remote. Furthermore, as a basis for the position that the nationwide transmission of TBS Superstation programming by Southern does not infringe upon the rights of copyright owners or their licensees, the Company has relied upon the Copyright Act which exempts certain secondary transmissions by carriers from copyright liability. See "Business -- Regulation -- Copyright License System." Competition TBS Superstation, TNT, the Cartoon Network and TCM compete with other television programming services for distribution to viewers, and compete for viewers with all other forms of programming provided to television viewers, such as broadcast networks and local over-the-air television stations, home video, movie theaters and all other forms of audio/visual entertainment, and news and information services. In the Atlanta 5 6 market, TBS Superstation vies for viewers with affiliates of the four major networks, two other independent stations and two affiliates of the Public Broadcasting System, in addition to other programming available to local television viewers. The continued carriage of the TBS Superstation signal, or the addition of that signal to cable system operators, could be adversely affected relative to other cable-delivered programming by the requirement that cable operators pay copyright royalty fees for each distant non-network signal carried by their systems. See "Business -- Regulation -- Copyright License System." Internationally, TNT Latin America, Cartoon Network Latin America, TNT & Cartoon Network Europe and TNT & Cartoon Network Asia compete with all other television programming services for distribution to viewers, and compete for viewers with other forms of programming provided to television viewers, such as broadcast networks and local over-the-air television stations, satellite distributed programming services, home video, movie theaters and all other forms of audio/visual entertainment, and news and information services. ENTERTAINMENT PRODUCTION AND DISTRIBUTION The Entertainment Production and Distribution group is involved in the creation of programming or the distribution of original and library product to the Entertainment Networks and third parties. The Production companies include New Line Cinema Corporation ("New Line"), Castle Rock Entertainment ("Castle Rock"), and Turner Pictures Worldwide, Inc. ("Turner Pictures Worldwide"), each of which is principally involved in motion picture and television production. In 1995, these entities released an aggregate of 28 theatrical films. The Company anticipates that these three entities will release theatrically an aggregate of up to 40 films in 1996. After theatrical release, the films will be distributed both domestically and internationally by the Company primarily in the pay-per-view, home video, premium cable network, television and other syndication and basic cable network markets. The Company's fourth production entity, Hanna-Barbera, Inc. ("Hanna-Barbera"), is engaged primarily in the production of new animation product for the Company's Entertainment Networks. The Company owns two major copyright libraries. The Turner Entertainment Co. library (the "TEC Library") contains approximately 3,400 MGM, ("MGM"), RKO Pictures, Inc. ("RKO") and pre-1950 Warner Bros. films, 3,000 short subjects and 1,850 cartoon episodes, and approximately 2,600 television episodes, specials and pilots. The Hanna-Barbera library (the "HB Library") consists of over 3,000 half-hours of animation programming. Programming from both libraries has been used to launch Entertainment Networks, such as TNT, the Cartoon Network and TCM, and as cost-effective sources of on-going programming needs. The Company-owned programming is marketed and distributed in the theatrical, pay-per-view, home video, premium cable network, television and other syndication and basic cable network markets principally through its own organization, except for certain pre-existing agreements related to the TEC Library and Castle Rock product. Pursuant to a 1986 agreement with its predecessor, Metro-Goldwyn-Mayer, Inc. ("MGM/UA") became the designated distributor in the home video market of the MGM and pre-1950 Warner Bros. films in the TEC Library, both domestically and internationally. The distribution agreement (the "Home Video Agreement") provides for a fifteen-year term commencing June 6, 1986, with distribution fees payable based primarily on the suggested retail price of the films sold. Under the agreement, TEC is responsible for all recording and releasing costs and has significant consultation rights with respect to marketing, distribution and exploitation of the films. In November 1990, MGM/UA entered into an agreement with Warner Home Video, Inc. with respect to certain of MGM/UA's obligations under the Home Video Agreement. Also, pursuant to a 1986 agreement with a term of 10 years with its predecessor, MGM/UA became the designated distributor in the theatrical and non-theatrical exhibition markets of the TEC Library; however, the Company has distribution rights to certain RKO product in certain international markets. In addition, the Company has licensed original TNT productions for theatrical distribution through several distributors in various countries outside the United States. 6 7 After the termination or revision of pre-existing distribution agreements with Sony Pictures Entertainment, Inc. and certain of its affiliates, Castle Rock theatrical product became available for international theatrical and home video distribution by the Company in certain territories in 1994. In addition, Castle Rock theatrical product will become available for distribution by the Company in the domestic home video market in 1997 and domestic theatrical market in 1998. The Company's ancillary distribution capabilities include licensing and merchandising, publishing, educational applications, video games and interactive activities. The licensing of the Company's programming is accomplished through sales offices located in Atlanta, Chicago, Los Angeles and New York domestically, and internationally in Argentina, Australia, Brazil, France, Hong Kong, Japan, Mexico, the Netherlands, Puerto Rico and the United Kingdom. Competition The production and distribution of theatrical motion pictures, television product and videocassettes are highly competitive businesses. Production companies compete with numerous other motion picture and television production companies, and with television networks and pay cable systems, for the acquisition of literary properties, the services of performing artists, directors, producers, and other creative and technical personnel as well as for paying audiences. With respect to distribution of episodic television product, there is significant competition from independent producers and distributors as well as major studios. Revenues from filmed entertainment, depend in part upon general economic conditions, but the competitive position of a producer or distributor is still greatly affected by the quality of, and public response to, the entertainment product it makes available to the marketplace, and this in turn depends in part upon the marketing strategy of the producer or distributor as compared to that of the competition as well as the quality and variety of competing products. As a result of this competition for viewers, the Company is vulnerable to the risk of volatile operating results in future periods. NEWS At December 31, 1995, the Company's News Segment consisted of three domestic networks, Cable News Network ("CNN"), Headline News, and CNN Financial News Network ("CNNfn"), and one international network, Cable News Network International ("CNN International") (all such networks, the "News Networks"). For selected information concerning household coverage, viewership and ratings of the News Networks, refer to page 28 in the 1995 Annual Report to Shareholders incorporated herein by reference. DOMESTIC CNN is a 24-hour per day cable television news service which was launched in June 1980. CNN uses a format consisting of up-to-the minute national and international news, sports news, financial news, science news, medical news, weather, interviews, analysis and commentary. As of December 31, 1995, CNN obtains reports from 30 news bureaus, of which nine are in the United States (Atlanta, Chicago, Dallas, Detroit, Los Angeles, Miami, New York, San Francisco and Washington, D.C.) and 21 are located outside the United States (Amman, Bangkok, Beijing, Berlin, Brussels, Cairo, Hong Kong, Jakarta, Jerusalem, Johannesburg, London, Mexico City, Moscow, Nairobi, New Delhi, Paris, Rio de Janeiro, Rome, Santiago, Seoul and Tokyo). In addition to these permanent bureaus, CNN maintains satellite newsgathering trucks in the United States, portable satellite uplinks (flyaways) in the United States and abroad and a network of approximately 400 domestic and approximately 200 international broadcast television affiliates which permit CNN to report live from virtually anywhere in the world. The affiliate arrangements, from which CNN derives substantial news coverage, are generally represented by contracts having terms of one or more years. In addition, news is obtained through wire news services, television news services and from freelance reporters and camera crews. CNN is also a member, together with other news reporting companies, of various news pools including the White House pool which, under certain conditions, provides coverage of Presidential activities and White House events. 7 8 Headline News is a 24-hour per day cable television news service launched in December 1981 which uses a concise, fast paced format to provide constantly updated half-hour newscasts. Although Headline News has its own studio and transmission facilities, it utilizes CNN's newsgathering operations for the accumulation of its own news stories. CNN Interactive is a newly formed division within CNN which has as its mission to create and deliver the leading branded interactive news service over non-broadcast delivery platforms. On August 30, 1995, CNN Interactive launched its site on the World Wide Web portion of the Internet (at http://CNN.com). This site provides a wide range of news and information and is updated 24 hours per day. The stories are presented via a combination of video clips, sound files, still images and text. A complementary interactive news site dedicated to business news is provided by CNNfn (at http://CNNfn.com). In addition, in a joint effort with Time Magazine, a separate site covering politics was launched on January 29, 1996 (at http://AllPolitics.com). CNNfn is a 12-hour per day, 5-day per week financial news service which was launched on December 29, 1995 in the United States. CNNfn provides live, global market news and information, business news, political-economic analysis, consumer news and personal financial reports and is broadcast domestically in connection with the CNN International domestic feed. Revenues for CNN, Headline News and CNNfn are derived from the sale of advertising time and subscription sales of the services to cable system operators, broadcasters, hotels and other clients as well as from distribution of the service in the over-the-air and commercial and residential satellite markets. See "Business Segments -- Entertainment -- Entertainment Networks -- Domestic" for a discussion of the items affecting the sale of advertising time. The programming of CNN, Headline News and CNNfn is transmitted via satellite to local cable systems and others which have contracted directly with CNN to obtain these news program services. INTERNATIONAL CNN International is a 24-hour per day television news service consisting of programming produced by CNN and Headline News, as well as original programming, which is distributed to cable systems, broadcasters, hotels, direct-to-home satellite viewers and businesses around the world on a network of 12 satellites outside the United States as of December 31, 1995. At December 31, 1995, CNN International was available in over 200 countries and territories on five continents. In January 1995, the CNN International satellite feed became available on a limited basis in the United States and, since December 29, 1995, is distributed with CNNfn. CNN International is licensed and marketed by wholly-owned subsidiaries of the Company throughout the world. CNN International derives its revenues primarily from fees charged to cable operators, fees paid by other users (principally hotels and embassies) of the CNN International signal, the sale of advertising time, and fees charged to international over-the-air television stations for the use of the CNN International signal. In November 1995 the Company announced the planned addition of a new network, a 24-hour per day television news service in Spanish that will be available by April 1997 for all of Latin America. The Company expects the new network will provide a much greater penetration into the region's predominantly Spanish speaking population. Competition The News Networks compete nationally and CNN International also competes internationally with other cable and television news services for distribution to viewers, and each network competes for viewers with other forms of programming provided to television viewers, such as broadcast networks and local over-the-air television stations, with home video viewership, newspapers, news magazines, movie theaters and all other forms of audio/visual entertainment, news and information services. For other factors relating to competition, see "Business Segments -- Entertainment -- Entertainment Networks -- Competition." 8 9 OTHER BUSINESSES In addition to its Entertainment and News Segments, the Company owns or has an interest in a number of other businesses, among them, professional sports teams. THE ATLANTA BRAVES In January 1976, the Company acquired the Atlanta Braves (the "Braves"), a major league baseball club, through a wholly-owned subsidiary, Atlanta National League Baseball Club, Inc. ("ANLBC"). In addition to the Braves, ANLBC operates minor league farm clubs in Richmond, Virginia; Greenville, South Carolina; and Macon, Georgia. ANLBC also operates rookie league clubs in West Palm Beach, Florida and Danville, Virginia, and utilizes facilities under player development contracts in Durham, North Carolina and Eugene, Oregon. The Braves lease office, locker room and storage space and play all home games in the Atlanta-Fulton County Stadium in Atlanta, Georgia. ANLBC is a member of the National League of Professional Baseball Clubs (the "National League"). ANLBC is subject to payment of ongoing assessments and dues to the National League and to compliance with the constitution and bylaws of the National League, as the same may be modified from time to time by the membership, as well as with rules promulgated by the Commissioner of Baseball. These rules include standards of conduct for players and front office personnel; methods of operation; procedures for drafting new players and for purchasing, selling and trading player contracts; rules for implementing disciplinary action relative to players, coaches and front office personnel; and certain financial requirements. The baseball players under contract with clubs belonging to the National League or to the American League of Professional Baseball Clubs (collectively, the "Major League") are represented for collective bargaining purposes by the Major League Baseball Players' Association (the "Baseball Players' Association"). On March 19, 1990, the Major League and the Baseball Players' Association agreed to a collective bargaining agreement to be in effect until December 31, 1993. Under the terms of that agreement, once a player was drafted and executed a contract with a club, the club retained exclusive rights to that player until he had completed six years of Major League service. At the conclusion of this period, if the club and the player could not reach agreement as to the terms of his contract, the player became a free agent and could negotiate and enter into a contract with another club. The club losing a free agent to another club was entitled to compensation for such loss only in the form of additional amateur draft rights. The agreement also allowed for all players with three years of Major League service and 17% of players with between two and three years of Major League service to enter into salary arbitration. The opportunity for "free agent" status and the players' rights to salary arbitration have resulted in increased payroll cost for the major league clubs, including the Braves. The collective bargaining agreement specified that either the Major League or the Baseball Players' Association could reopen for negotiation certain provisions of the agreement, specifically minimum salary levels, salary arbitration and free agency issues, by providing written notice at least 30 days prior to January 10, 1993. In December 1992, the Major League reopened the collective bargaining agreement. The entire 1993 season and the 1994 season games prior to August 13, 1994 were played without an agreement. Subsequent to the completion of the last game played, on August 12, 1994, members of the Baseball Players' Association, which includes Braves players, began a strike (the "Baseball Strike") over certain unresolved collective bargaining agreement issues. On September 14, 1994, as a result of the Baseball Strike, the Office of the Commissioner of Baseball announced that the 1994 Major League season had ended. During 1995, the Baseball Players' Association and club owners reached an agreement whereby the Baseball Players' Association representatives played an abbreviated 1995 Championship Season. The strike did not have an adverse impact on the Company's consolidated financial position in 1994 or 1995. Currently, no collective bargaining agreement exists between the owners and Baseball Players' Association; however, the Braves expect to participate in the 1996 Championship Season. ANLBC receives a pro-rata distribution of revenues generated through contracts negotiated with television networks, certain other broadcast revenues and a portion of gate receipts from games away from home. During 1993, the Office of the Commissioner of Baseball entered into an agreement with Entertain- 9 10 ment and Sports Programming Network ("ESPN") covering the 1994 through 1999 seasons and entered into an agreement to form a joint venture with American Broadcasting Company and National Broadcasting Company ("NBC") to telecast certain major league games over six seasons beginning in 1994. The joint venture agreement contained provisions for the cancellation of the remaining term of the contract by the participants, without penalty if certain minimum revenues were not generated from such telecasts. This agreement was terminated with the last game of the 1995 World Series. In December 1995, the Major League negotiated with NBC, Fox Broadcasting Company ("Fox"), ESPN, and LMC to enter into four- and five-year agreements whereby NBC, Fox, ESPN and LMC will be granted broadcasting rights to various pre-season, regular season, and post-season games and series through the 2000 baseball season. Such agreements will supersede any existing agreements between those entities and the Major League. The terms of the agreements are subject to approval by the Major League and are expected to be finalized in advance of the 1996 Championship Season. In January 1985, an agreement was reached between ANLBC and the Office of the Commissioner of Baseball relative to the nationwide television exposure afforded the telecasts of the Braves games on TBS Superstation. The agreement, extended through the 1993 season, required the Company to make rights fee payments into the Major League Central Fund for equal distribution to all major league baseball clubs including the Braves. In exchange for these fees, the Commissioner of Baseball, among other things, would not seek to prohibit the telecast of a specified number of Braves games on TBS Superstation and the accompanying nationwide satellite distribution of the TBS Superstation signal by common carrier. In 1995 and 1994, no formal agreement existed; however, 108 and 88 games were telecast in each season, respectively. The Company is currently negotiating with the Office of the Commissioner of Baseball for a new long-term agreement that would resolve the amount of rights fees to be paid for 1995 and 1994, as well as address future seasons. An estimate of the 1995 and 1994 rights fees has been accrued in the Consolidated Financial Statements in the Company's 1995 Annual Report to Shareholders incorporated herein by reference. TBS Superstation expects to televise approximately 125 Braves games during 1996. Also, SportSouth Network, Ltd., an unconsolidated entity in which the Company holds a 44% interest, intends to telecast 30 games in 1996 pursuant to an agreement with ANLBC. In March 1993, the Braves entered into an agreement with the City of Atlanta and the Fulton County Recreation Authority (the "Authority") whereby the Braves agreed to lease from the Authority certain stadium facilities (the "Stadium") to be constructed for use in staging the 1996 Summer Olympic Games and then converted into a facility for use as a Major League baseball stadium. The minimum lease term is twenty years commencing upon the conversion of the Stadium into a baseball facility. The Braves have the option to extend the lease for four successive five year periods. This agreement is contingent upon certain factors including the construction of the Stadium and the conversion of the Stadium into a baseball facility. In November 1995, the Braves entered into an agreement with the Atlanta Committee for the Olympic Games, Inc., whereby the Braves have agreed, under certain conditions, to contribute the sum of $23.4 million toward the payment of certain costs to construct the Stadium, including modifications for permanent use as a baseball facility and demolition of the existing facility used by the Braves, both after the staging of the 1996 Summer Olympic Games. All such costs are expected to be paid in 1996 and 1997, and the 1997 Championship Season is scheduled to be played in the new facility. In March 1995, the baseball clubs of the National and American Leagues entered into agreements (the "Expansion Club Agreements") with the St. Petersburg Baseball Limited Partnership and the AZPB Limited Partnership whereby the 28 existing Major League clubs (the "Existing Clubs") would admit expansion clubs owned by the respective partnerships (the "Expansion Clubs"), located in St. Petersburg, Florida and Phoenix, Arizona, respectively, into the Major League commencing with the 1998 season. Pursuant to the Expansion Club Agreements, the Expansion Clubs will remit to the Existing Clubs a total of $260 million for their entrance into the Major League. During fiscal 1995, the Braves received approximately $2.3 million from the Expansion Clubs, representing its pro-rata allocation of the 1995 expansion payments. The Braves pro-rata allocation of the 1996 and 1997 payments is $1.8 million and $5.2 million, respectively. 10 11 THE ATLANTA HAWKS The Company, through Hawks Basketball, Inc., a wholly-owned subsidiary of the Company, has a 96% limited partnership interest in the Atlanta Hawks, L.P. (the "Hawks"), a member of the NBA. The Hawks play their home games in the 16,300-seat Omni Coliseum in Atlanta, Georgia, which is operated by a wholly- owned subsidiary of the Company. Professional basketball is organized in a manner similar to professional baseball, except that there is presently only one league and basketball clubs do not share in gate receipts from games away from home. The NBA, through its constitution, has established rules governing club operations, including drafting of players and trading player contracts. A portion of the Hawks' revenues is derived from a pro-rata share of the network broadcast rights fees received by the NBA, pursuant to the four-year broadcast rights fee agreement covering the 1994-1995 through 1997-1998 seasons awarded to NBC in 1993. The NBA has a separate agreement with the Company to televise a package of games. On September 22, 1993, the Company and the NBA entered into an agreement whereby both TNT and TBS Superstation will telecast a certain number of regular season and playoff games in each of the 1994-1995 through 1997-1998 seasons in return for rights fees aggregating $352 million plus a share of the advertising revenues generated in excess of specified amounts. On November 4, 1994, the Hawks entered into an agreement for local telecast by non-affiliated stations of 30 games during the 1994-1995 season and 30 games during the 1995-1996 season. NBA players are represented for collective bargaining purposes by the National Basketball Players' Association (the "NBPA"). During June 1988, the NBA and the NBPA agreed in principle to a new six-year collective bargaining agreement and for the 1994-1995 season, the NBA and NBPA operated under a one- year extension of the agreement. In September 1995, the NBA and the NBPA entered a new six-year collective bargaining agreement. The new agreement, among other things, will reduce the NBA draft to one round starting in 1998, continues the salary cap which ties a team's payroll to the league's gross revenues (as defined) and beginning July 1, 1996, provides unrestricted free agency for all players at the conclusion of their contracts. The Company has reached a preliminary agreement with the Authority to build a new multi-purpose arena adjacent to CNN Center to replace the Omni Coliseum. The agreement provides that the new arena and substantial infrastructure improvements surrounding the new arena would be funded primarily by the proceeds from bonds issued by the Authority and tax-exempt bonds secured by certain rental car tax revenues, respectively. The Company expects to contribute $10 million towards the cost of the infrastructure improvements and become a 50% partner in a joint venture that would operate the new arena. Revenues from arena operations would repay and secure the taxable arena bonds. The agreement is subject to a number of contingencies, including Company approval of the budgeted cost of the new arena and infrastructure, identification of a temporary playing venue for the Hawks during the two-year construction period, governmental approvals and authorizations, State of Georgia legislative approval to impose a rental car tax and the sale of the taxable arena bonds and the tax-exempt rental car tax bonds. As a part of the preliminary agreement, the Hawks have agreed to play their home games in the new arena so long as the taxable arena bonds are outstanding (up to 30 years). The Hawks have also agreed to pledge their revenues as collateral for the taxable arena bonds in exchange for a backup pledge by the City of Atlanta and Fulton County to guarantee payment of the taxable arena bonds. SPORTSOUTH NETWORK In May 1990, TSPI, a wholly-owned subsidiary of the Company, entered into an agreement with LMC and Scripps Howard Production, Inc. ("Scripps Howard") to form SportSouth. SportSouth was formed to launch SportSouth Network, a regional sports network serving the Southeast. As of December 31, 1995, TSPI owned a 44% interest in SportSouth. SportSouth Network programming includes Braves baseball, Hawks basketball and various programs from Prime Networks, a national service offering sports programming to 11 12 affiliated sports networks, cable operators and home satellite dish owners. SportSouth's revenues are principally derived from the sale of advertising time and the sale of its service to cable operators. At December 31, 1995, SportSouth Network served approximately 5.1 million U.S. television households. For additional information relative to SportSouth, see "Business -- Recent Developments." n-tv The Company acquired a 27.5% interest in n-tv in March 1993. n-tv is a 24-hour per day German language news network currently reaching 40 million homes in Germany and other parts of Europe, primarily via cable systems and satellite. Like TBS Superstation in the United States, n-tv relies principally on advertising revenues and receives no compensation for its signal from those cable systems. The studio and offices of n-tv are located in Berlin. At December 31, 1995, the Company's ownership interest in n-tv was 33.1%. For additional information concerning the acquisition of the ownership interest in n-tv, see Note 3 of Notes to Consolidated Financial Statements in the 1995 Annual Report to Shareholders incorporated herein by reference. OTHER The Company's corporate and news operations are headquartered in CNN Center, a multi-use office, retail and hotel complex in Atlanta, Georgia. The CNN Airport Network is a CNN-produced service that provides newscasts to travelers at airports across the United States. Through World Championship Wrestling ("WCW"), the Company produces wrestling programming for TBS Superstation and TNT, the domestic syndication markets, and pay-per-view television. WCW also stages live wrestling events. REGULATION The Telecommunications Act of 1996 (the "1996 Act") was enacted into law on February 8, 1996. The 1996 Act modifies various provisions of the Communications Act of 1934, as amended (the "Communications Act"), and the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Act"), with the intent of establishing a pro-competitive, deregulatory policy framework for telecommunications. The Federal Communications Commission (the "FCC" or the "Commission") is charged with implementation of the 1996 Act. The Company at this time cannot predict the full effect that the 1996 Act or the FCC's implementing regulations may have on the Company's operations. BROADCAST REGULATION Television broadcasting is subject to the jurisdiction of the FCC under the Communications Act. Among other things, FCC regulations govern the issuance, term, renewal and transfer of licenses which must be obtained by persons to operate any television station. The current broadcast license of TBS Superstation was renewed on April 15, 1992 and will expire on April 1, 1997. In addition, FCC regulations govern certain programming practices. The 1996 Act extends the future term of licenses granted by the FCC for the operation of television broadcast stations from five to eight years. The 1996 Act also provides that the FCC shall grant an application for renewal of a broadcast station license if the FCC finds that the station has served the public interest, has engaged in no serious violations of the Communications Act or the FCC's rules, and has not engaged in violations that demonstrate a pattern of abuse. The comparative license renewal process has been abolished. These changes could enhance the value of the broadcast license of TBS Superstation by lengthening the station's future license terms, streamlining the renewal process, and eliminating the prospect of a comparative renewal challenge. On August 9, 1995, the FCC released a Fourth Further Notice of Proposed Rulemaking and Third Notice of Inquiry to consider a broad range of issues regarding the conversion by television broadcasters from analog to digital technology. Among other things, the FCC is considering regulations to promote the efficient use of advanced television ("ATV") spectrum, whether restrictions should be placed on the use of ATV 12 13 channels, what public interest standards should apply to ATV service, what transition period should apply, and how existing laws will be affected by the transition to digital broadcasting. On November 25, 1995, the Company filed comments with the FCC opposing any extension of must-carry rights to ATV broadcast stations (see "Business -- Regulation -- Cable Regulation -- Must-Carry and Retransmission Consent"). Any regulatory change, if adopted, could affect the operations of TBS Superstation and the Atlanta and national markets in which the Company operates. The Company at this time cannot predict the outcome of this proceeding or the overall effect, if any, that regulatory changes may have on the Company's operations. The 1996 Act provides that if the FCC issues additional licenses for ATV service, it must limit eligibility for such licenses to current broadcast licensees. As a condition for grant of an ATV license, a broadcaster must agree to surrender its original spectrum or its ATV spectrum for reallocation pursuant to FCC regulation. These changes could enhance the value of the broadcast license of TBS Superstation by making the station eligible to hold an ATV license. The Company at this time cannot predict the overall effect, if any, that these requirements may have on the Company's operations. The 1996 Act directs the FCC to modify its rules to eliminate the restrictions on the number of television stations that a single person or entity may own nationally and to permit a single television broadcast licensee to own stations with a combined national audience reach of 35 percent. The 1996 Act also directs the FCC to conduct a rulemaking proceeding to determine whether to retain, modify or eliminate its limitations on the number of television stations that a single person or entity may own or operate within the same television market. Any regulatory change, if adopted, could affect the Atlanta and national markets in which the Company operates. The Company at this time cannot predict the outcome of these proceedings or the overall effect, if any, that they may have on the Company's operations. The 1996 Act directs the FCC to revise its regulations to permit a television broadcast station to affiliate with a person or entity that maintains two or more networks of television broadcast stations, subject to certain restrictions set forth in the statute. These changes could affect the Atlanta and national markets in which the Company operates. The Company at this time cannot predict the overall effect, if any, that such regulatory revisions may have on the Company's operations. CABLE REGULATION Cable television systems are regulated by the FCC and by states, municipalities or other local governmental authorities ("Local Authorities"). Local Authorities generally have the jurisdiction to review and grant renewal and transfer of cable franchises, to review rates charged to subscribers, and to require public, educational, government and/or leased-access channels, except to the extent that such jurisdiction is preempted by federal law. Rate regulations or other franchise conditions could place downward pressure on subscriber fees earned by the Company, and regulatory carriage requirements could adversely affect the number of channels available to carry the Company's networks. The 1992 Act became law on October 5, 1992. The 1996 Act modifies the 1992 Act in a variety of ways. The principal provisions of the 1992 Act and the 1996 Act that may affect the Company's operations are discussed below. The Company cannot predict the full effect that the 1996 Act may have on the Company's operations. Definition of Cable System The 1996 Act amends the definition of cable system to exclude facilities that do not use public rights-of-way (e.g., satellite master antenna television services serving multiple buildings not under common ownership or control), thus exempting such facilities from franchise and other requirements applicable to cable operators. The Company at this time cannot predict the overall effect, if any, that this change may have on the Company's operations. 13 14 Rate Regulation Section 623 of the Communications Act, as amended by the 1992 Act, established 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 implementation 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 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 adopted a 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 markup 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 cent 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 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 Circuit. The Commission's implementing regulations were upheld by the United States Court of Appeals for the District of Columbia Circuit, and a petition for a writ of certiorari was denied by the United States Supreme Court. The Company cannot predict the ultimate outcome of the litigation. The 1996 Act expands the definition of "effective competition" to include instances in which a local exchange carrier or its affiliate (or a multichannel video programming distributor using the facilities of such carrier or its affiliates) offers comparable video programming directly to subscribers by any means (other than 14 15 direct-to-home satellite service) in the operator's franchise area. This expansion of the definition of "effective competition" will trigger deregulation of cable rates in any cable franchise area where a telephone company offers comparable video programming as defined by the statute. This change could increase distribution of the Company's networks and enhance subscriber fees earned by the Company from cable operators affected by rate deregulation. The Company at this time cannot predict the overall effect, if any, that this change may have on the Company's operations. The 1996 Act deregulates the rates for cable programming services (i.e., upper tiers of service) provided after March 31, 1999, and immediately deregulates upper tier rates for entities that operate small cable systems as defined under the statute. The 1996 Act also eliminates the uniform rate structure requirements for cable operators in areas subject to effective competition or to video programming offered on a per channel or per program basis. These changes could increase distribution of the Company's networks and enhance subscriber fees earned by the Company from facilities affected by rate deregulation. The Company at this time cannot predict the overall effect, if any, that these changes may have on the Company's operations. Must Carry and Retransmission Consent Sections 4 and 5 of the 1992 Act require cable television systems to devote up to one-third or more of their channel capacity to the mandatory carriage of local television stations and to provide certain channel positioning rights to such stations. The 1992 Act also includes provisions governing the retransmission of television broadcast signals by cable systems. These provisions require cable operators to obtain the consent of a commercial television station prior to retransmitting the station's broadcast signal, and also provide those stations with the right to make a binding election every three years between must-carry and retransmission consent. The must-carry provisions applicable to non-commercial and commercial television stations became effective on December 4, 1992, and October 5, 1993, respectively. These provisions adversely affect the ability and willingness of cable systems to carry the Company's networks by reducing the number of channels available for the carriage of cable programming services and by limiting the cable operator's discretion to select the mix of programming to be carried on their systems. Pursuant to FCC regulations implementing the 1992 Act, commercial broadcast stations must notify cable systems on or before October 1, 1996, of their binding elections between must-carry and retransmission consent. These elections could require affected cable systems to modify their existing channel lineups, thereby adversely affecting carriage of the Company's networks. The Company at this time cannot predict the overall effect, if any, that such elections may have on the Company's operations. The 1992 Act provides that commercial television stations have mandatory carriage rights only on cable systems serving communities located within a station's local television market as defined by the statute and the FCC's regulations. The 1992 Act further provides that cable operators and television broadcast stations may petition the FCC to modify the market of a particular station by adding or subtracting communities from its market. The grant or denial of such a petition could adversely affect the ability or willingness of an affected cable operator to carry the Company's networks. On December 8, 1995, the FCC initiated a rulemaking proceeding to consider modifying its regulations governing the determination of local television markets. Any regulatory change, if adopted, could affect the Atlanta and national markets in which the Company operates. The Company at this time cannot predict the outcome of this proceeding or the overall effect, if any, that a regulatory change may have on the Company's operations. The Company has initiated litigation challenging the must-carry and retransmission consent provisions of the 1992 Act as unconstitutional (see "Legal Proceedings -- Turner Broadcasting System, Inc., et al. v. Federal Communications Commission, et al."). Program Access On April 1, 1993, the Commission issued regulations implementing a provision of the 1992 Act 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 15 16 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 that was entered into on or before June 1, 1990. While the Company cannot predict the regulations' full effect on its operations, they may affect the rates charged by the Company's cable programming services to its customers and could affect the terms and conditions of the 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 litigations. 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 at this time cannot predict the effect of this provision on its operations. 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 receive by 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 has 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 the implementation of that provision pending judicial review of its constitutionality. Petitions for reconsideration are pending. The Company cannot at this time predict the effect of this provision or of 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 litigations. 16 17 Sports Migration The 1992 Act directs 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 the 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. Cable Cross-Ownership Rules The 1996 Act repeals the statutory bar on cable-broadcast station cross-ownership to permit a person or entity to own or control a television station and a cable system with overlapping service areas. The 1996 Act leaves in place, however, the cable-broadcast station cross-ownership restriction contained in the FCC's rules and does not prejudge the Commission's review of the regulation. The 1996 Act also directs the FCC to revise its regulations to permit a person or entity to own or control a television network and a cable system and, if necessary, to revise its regulations to ensure carriage, channel positioning and non-discriminatory treatment of nonaffiliated broadcast stations by a cable system subject to cross-ownership. The 1996 Act further provides that the ban on cable-MMDS cross-ownership shall not apply to any cable operator in a franchise area in which one cable operator is subject to effective competition as determined under the statute. The Company at this time cannot predict the overall effect that these changes may have on the Company's operations, if any. Telco Entry in Video Programming The 1996 Act provides that a local exchange carrier may provide video programming directly to subscribers through a variety of means, including (1) as a radio-based multichannel video programming distributor, not subject to the Cable Act; (2) as a cable operator, fully subject to the Cable Act; and (3) through an "open video system" certified by the FCC to be offering nondiscriminatory capacity for unaffiliated programmers, subject only to selected provisions of the Cable Act. A local exchange carrier also may provide the "transmission of video programming" on a common carrier basis, with no Cable Act obligations. The 1996 Act extends the program access requirements of the 1992 Act to a telephone company that provides video programming by any means directly to subscribers and to programming in which such a company holds an attributable ownership interest. The Company at this time cannot predict the overall effect that the entry of telephone companies into the delivery of video programming may have on the Company's operations, if any. Rating of Video Programming The 1996 Act provides that if the FCC determines, one year after enactment, that program distributors, of which the Company is one, have not voluntarily established content ratings and agreed to broadcast signals containing such ratings, the FCC shall prescribe: (1) guidelines and procedures for identification and rating of certain classes of video programming as defined by the statute; and (2) rules requiring video programming distributors to transmit the rating in a manner that permits parents to block the display of programming they determine to be inappropriate for children. The 1996 Act also provides that the FCC shall require television manufacturers to equip sets with a device that enables viewers to block programs that have been designated with a specific rating. The effective date of the manufacturing requirement must be established by the FCC after consultation with the television manufacturing industry, but the date may not be earlier than two years after enactment. These requirements could affect the dissemination of the Company's networks and impose regulatory burdens that affect the Company's operations. The Company at this time cannot predict the overall effect, if any, that these requirements may have on the Company's operations. COPYRIGHT LICENSE SYSTEM The Copyright Act provides for the grant to cable systems of compulsory licenses for carriage of distant, non-network copyrighted programming (as typically originally transmitted by a broadcast television station). The Copyright Act also provides for payments of royalty fees by the cable systems for the benefit of copyright owners or licensors, which fees are payable for the privilege of retransmitting such programming to their subscribers. Under the Copyright Act, the amount of such royalty payments is generally based upon a formula 17 18 utilizing the amount of the system's semi-annual gross receipts and the number of distant non-network television signals carried by the system. Therefore, cable systems that carry TBS Superstation must contribute to the Copyright Office for distribution. However, no royalties are paid by cable systems in connection with their carriage of TNT, the Cartoon Network, TCM, CNN, Headline News, or the domestic feed of CNN International and CNNfn. There have been several legislative initiatives in Congress during the past several years to alter the present compulsory copyright license system provided under the Copyright Act, but none have been adopted into law. In October 1988, the FCC recommended that Congress phase out the compulsory license. The FCC, in its July 1990 Report to Congress, also proposed that Congress should repeal the compulsory copyright license under certain circumstances. The Company cannot predict the ultimate impact on the competitive position of TBS Superstation if legislation repealing the compulsory license were enacted. SATELLITE AND MICROWAVE REGULATION The Company operates various satellite transmission and reception equipment in the vicinity of its offices in Atlanta, at various bureau locations and at the sites of special events such as sporting events and breaking news sites. These radio transmission facilities are required to be licensed by the FCC prior to use and their operation must comply with applicable FCC regulations. EMPLOYEES At December 31, 1995, the Company and its wholly-owned subsidiaries had approximately 7,000 full-time employees. A subsidiary of TEC is signatory to collective bargaining agreements with two unions. These agreements cover approximately 40 employees and expire in 1997. In addition, certain subsidiaries of the Company are signatories to one or more of the following collective bargaining agreements: the Writers Guild of America Basic Agreement, the Directors Guild of America Basic Agreement, the Screen Actors Guild Basic Agreement, Television and Television Animation Agreements, the International Alliance of Theatrical Stage Employees Basic and Local 839 Agreements and the Union of British Columbia Performers Agreement. One of the Company's other subsidiaries is a member of the Alliance of the Motion Picture and Television Producers. ITEM 2. PROPERTIES The Company owns CNN Center, a hotel and office complex in Atlanta, Georgia, which houses the Company's corporate offices, certain operations of CNN, Headline News, CNNfn and CNN International and the operations of certain other subsidiaries. The Company subleases, until December 27, 2043, a parking facility next to the complex with approximately 2,000 parking spaces. The Company also manages and operates the Omni Coliseum pursuant to an operating agreement which expires in October 2002. The agreement requires the Company to apply certain revenues generated by the operation of the Omni Coliseum toward payment of the revenue bonds issued to finance the acquisition, construction and equipping of the Omni Coliseum. In addition to CNN Center, the Company owns buildings of approximately 313,000 square feet on approximately 29 acres of land in Atlanta, Georgia. The primary building currently houses the studios and offices of TBS Superstation, TNT, the Cartoon Network and TCM. In addition, adjacent to the primary building are twelve seven-meter, two ten-meter, two eleven-meter and one fifteen-meter earth stations used to transmit and monitor the signals of TBS Superstation, TNT, the Cartoon Network, TCM, CNN, Headline News and CNNfn to various satellites and to receive satellite feeds for use by CNN, Headline News and CNNfn, and five smaller operative antennas for receiving backhaul from various satellites. The Company also owns a building of approximately 85,000 square feet in Atlanta, Georgia. A portion of the building is used for general purposes and the remainder is available for lease to unaffiliated third parties. 18 19 The Company also leases office or studio space in major cities around the United States and abroad for certain of its operations. The Company owns a building of approximately 103,000 square feet in Los Angeles. The building is used primarily for animation studios and office space associated with the operations of Hanna-Barbera. The Hawks currently play their home games and occupy locker room and storage space at the Omni Coliseum. The space is rented from a wholly-owned subsidiary of the Company which operates the Omni Coliseum for a fee equal to 10% of net gate receipts. ANLBC leases office, locker room and storage space (aggregating approximately 70,000 square feet), and the Braves play all home games in the Atlanta-Fulton County Stadium pursuant to a lease running through December 31, 1996. This lease gives ANLBC priority in the scheduling of baseball games, exclusive year-round concession rights in the stadium and the non-exclusive right to use the stadium for other events. Lease payments are specified percentages of gate receipts and concession sales with a minimum of $650,000 per year. For additional information relative to ANLBC facilities, see "Business -- Other Businesses -- The Atlanta Braves." The Braves also lease facilities for use by its farm clubs in Richmond, Virginia; Greenville, South Carolina and Macon, Georgia. The Braves also utilize a facility under a player development contract in Durham, North Carolina and has teams in West Palm Beach, Florida; Danville, Virginia; and Eugene, Oregon that compete in rookie leagues. ITEM 3. LEGAL PROCEEDINGS LITIGATION Turner Broadcasting System, Inc., et al. v. Federal Communications Commission, et al. On October 5, 1992, the Company filed suit in the United States District Court for the District of Columbia challenging the provisions of the 1992 Act that require cable television systems to devote up to one-third or more of their channel capacity to the carriage of local television stations and provide certain channel positioning rights to such stations (see "Business -- Regulation -- Cable Regulation -- Must Carry and Retransmission Consent"). The provisions also grant television stations the right to require prior consent to the retransmission by a cable operator of the station's broadcast signal. The Company's complaint alleges that these provisions infringe upon the free speech rights of cable program networks and cable operators in violation of the First Amendment of the United States Constitution. Under a provision in the 1992 Act, the case was heard by a three-judge panel of the District Court. On April 8, 1993, the District Court upheld the constitutionality of the provisions by a 2-1 vote. On June 17, 1994, the United States Supreme Court vacated the District Court's ruling and remanded the case for further proceedings. On December 12, 1995, the District Court, on remand, again upheld the constitutionality of the provisions by a 2-1 vote. On December 21, 1995, the Company appealed the District Court's ruling to the United States Supreme Court. On February 20, 1996, the Supreme Court noted probable jurisdiction to hear the Company's appeal. The Company cannot predict the outcome of the litigation at this time. The Company is pursuing its claims. Shareholder Litigation in Connection with Proposed Merger Seventeen actions have been filed against the Company, Time Warner, certain officers and directors of the Company, Time Warner or Time Warner Entertainment Company, L.P., and other defendants, purportedly on behalf of a class of the Company's shareholders, in connection with the proposed merger transaction between the Company and Time Warner (see "Business -- Recent Developments"). Sixteen of the seventeen complaints were filed in Superior Court, Fulton County, Georgia; the other, which was filed in the Court of Chancery of the State of Delaware in and for New Castle County, was subsequently dismissed voluntarily without prejudice by the plaintiff. Of the complaints filed in Georgia, fourteen were filed prior to the approval of the Mergers on September 22, 1995 by the Boards of Directors of Time Warner and the Company (Shigala v. Turner Broadcasting Sys., Inc., et al., Case No. E-41502; Schrank v. R.E. Turner, et al., Case No. E-41501; Lewis, et al. v. Turner Broadcasting Sys., Inc., et al., Case No. E-41500; Silverstein and 19 20 Silverstein v. Turner Broadcasting Sys., Inc., et al., Case No. E-41526; Strauss v. Turner Broadcasting Sys., Inc., et al., Case No. E-41538; Hoffman v. Ted Turner, et al., Case No. E-41544; Barry v. Turner Broadcasting Sys., Inc., et al., Case No. E-41545; Mersel and Mersel v. R.E. Turner, et al., Case No. E-41554; Friedland and Friedland v. Turner Broadcasting Sys., Inc., et al., Case No. E-41562; Schwarzchild v. Turner Broadcasting Sys., Inc., et al., Case No. E-41586; Turner and Hanson v. Turner Broadcasting Sys., Inc., et al., Case No. E-041637; H. Mark Solomon v. Turner Broadcasting Sys., Inc., et al., Case No. E-41685; Shores v. Turner Broadcasting Sys., Inc., et al., Case No. E-41749; and Krim and Davidson v. Turner Broadcasting Sys. Inc., et al., Case No. E-41779). Two of the complaints filed in Georgia were filed after the Mergers were approved (Altman v. Turner Broadcasting Sys., Inc., et al., Case No. E-43205; and Joyce v. Tele-Communications, Inc., et al., Case No. E-43321). The plaintiff in Altman filed a voluntary dismissal of that action without prejudice on November 10, 1995. On November 13, 1995, Judge Elizabeth Long, to whom all remaining actions had been assigned, consolidated all actions except the Joyce action. On December 20, 1995, the defendants filed answers in response to the second amended complaint (the "Second Amended Complaint") previously filed in Lewis on November 1, 1995. On January 19, 1996, the defendants in these actions filed a Motion for Judgment on the Pleadings on all claims asserted in the Second Amended Complaint on the grounds that, under Georgia law, the valid grant of dissenters' rights to the Company's shareholders with respect to the TBS Merger prohibits plaintiffs from maintaining the claims asserted in the Second Amended Complaint. On January 31, 1996, the Court consolidated the Joyce action with the other consolidated actions, and ordered plaintiffs to file a Consolidated Amended Complaint within thirty days of the date of the order. Additionally, the Court stayed discovery in these consolidated actions until the Court rules on the defendants' Motion for Judgment on the Pleadings. On February 29, 1996, plaintiffs filed their Third Amended Consolidated Supplemental and Derivative Class Action Complaint (the "Third Amended Complaint"). The Third Amended Complaint, which includes a derivative claim, alleges, among other things, that the terms of the TBS Merger are unfair to the Company's shareholders and that the defendants have breached or aided and abetted the breach of fiduciary common law and statutory duties owed to the Company's shareholders. The Third Amended Complaint further alleges that the defendants acted fraudulently in negotiating and approving the proposed TBS Merger, that the approval of the TBS Merger by the Company's Board of Directors was fraudulently obtained, and that the vote of the Company's Board of Directors approving the TBS Merger did not comply with the Company's Restated Articles of Incorporation and Bylaws or with Georgia law. Among other relief demanded, the Third Amended Complaint seeks damages, an injunction against the consummation of the TBS Merger and related transactions, and an auction of the Company. The Company intends to defend vigorously these actions. By letter dated October 20, 1995, plaintiffs in certain of the Georgia actions described above made a demand upon the Company to repudiate the SportSouth Agreement and the fee authorized to be paid by the Company to one of its advisors in connection with the Mergers as corporate waste or, absent repudiation, to seek indemnification from any officers or directors of the Company who authorized the challenged matters. These plaintiffs indicated that a shareholders' derivative suit seeking injunctive relief would be filed in less than 90 days, which claims were asserted four days later in the first amended complaint filed in Lewis and later asserted in both the Second Amended Complaint and the Third Amended Complaint. The Company's Board of Directors has established a committee of directors to investigate such claims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 1995. 20 21 EXECUTIVE OFFICERS OF THE COMPANY The following table lists the executive officers of the Company, their ages and their positions as of February 29, 1996:
NAME AGE POSITION - ------------------------------------------ --- ----------------------------------- R. E. Turner.............................. 57 Chairman of the Board of Directors and President Christian L. Becken....................... 42 Vice President and Treasurer William S. Ghegan......................... 47 Vice President, Controller and Chief Accounting Officer William H. Grumbles*...................... 46 Vice President -- Worldwide Distribution Elahe Hessamfar........................... 42 Vice President and Chief Information Officer Steven J. Heyer........................... 43 Vice President -- Advertising Sales and Marketing W. Thomas Johnson......................... 54 Director and Vice President -- News Steven W. Korn............................ 42 Vice President, General Counsel and Secretary Terence F. McGuirk........................ 44 Director and Executive Vice President Wayne H. Pace............................. 49 Vice President -- Finance and Chief Financial Officer Scott M. Sassa............................ 37 Director and Vice President -- Turner Entertainment Group Harvey W. Schiller........................ 56 Vice President -- Sports Programming William M. Shaw........................... 51 Vice President -- Administration Robert Shaye.............................. 56 Director, and Chairman and Chief Executive Officer, New Line Cinema Corp. Julia W. Sprunt*.......................... 42 Vice President -- Marketing and Communications
- --------------- * William H. Grumbles and Julia W. Sprunt are married to each other. The executive officers of the Company are elected by the Board of Directors to serve until their successors are elected and qualified. The following is a brief description of the business experience of the executive officers of the Company for at least the past five years. R. E. Turner has been Chairman of the Board, President and controlling shareholder of the Company since 1970. Christian L. Becken joined the Company in December 1983 as Vice President of Financial Planning and was promoted to Vice President and Treasurer in 1986. William S. Ghegan, who joined the Company as Corporate Controller in 1985, was promoted to Vice President, Controller and Chief Accounting Officer in 1987. Formerly, he was a Senior Manager with Price Waterhouse, an international accounting firm, from 1979 to 1985. William H. Grumbles, who joined the Company in 1989 as Executive Vice President of Turner Network Sales, Inc. ("TNS"), previously known as Turner Cable Network Sales, Inc. ("TCNS"), was promoted to President of Turner International, Inc. in 1991 and Vice President -- International Sales of the Company in 1992. In 1993, his title became Vice President -- Worldwide Distribution. Previously, he served as Vice President -- Affiliate Relations for Home Box Office. 21 22 Elahe Hessamfar joined the Company in 1993 as Vice President and Chief Information Officer. Previously Ms. Hessamfar was Vice President, Information Systems for PacBell Directory from 1987 until joining the Company. Steven J. Heyer joined the Company in May 1994 as Vice President -- Advertising Sales and Marketing. He also serves as President of Turner Broadcasting Sales, Inc. Mr. Heyer was President and Chief Operating Officer of Young & Rubicam Inc., a worldwide advertising agency from September 1992 until joining the Company. From 1977 until September 1992 he was employed with the management consulting firm of Booz, Allen & Hamilton, Inc., where he served as Senior Vice President and Managing Partner of the New York office of the firm. W. Thomas Johnson joined the Company in 1990 as Vice President -- News and was elected as a director in 1990. He also serves as President of CNN. Previously, Mr. Johnson was Chairman of the Los Angeles Times from 1989 until joining the Company, and also Vice Chairman of the Times Mirror Company from 1987 until joining the Company. From 1980 he had served as Publisher and Chief Executive Officer of the Los Angeles Times. Steven W. Korn joined the Company in September 1983 as Assistant Vice President and Deputy General Counsel. He became Vice President in 1986, Secretary in 1987 and General Counsel in 1988. Formerly, he was an attorney with the law firm of Troutman Sanders. Terence F. McGuirk joined the Company in 1972 as an Account Executive. In 1975, he assumed the duties of Director of Cable Relations and three years later became the Director of Special Projects. He was promoted to Vice President of the Company in 1979 and was elected as a director in 1987. Mr. McGuirk was promoted to Executive Vice President in 1990. Wayne H. Pace joined the Company in July 1993 as Vice President -- Finance and Chief Financial Officer. From 1981 until July 1993, he was a partner with Price Waterhouse, an international accounting firm. Scott M. Sassa rejoined the Company in 1988 as Executive Vice President of TNT, Inc. He became Vice President -- Entertainment Networks in 1990 and was elected a director in 1992. In 1994, his title became Vice President -- Turner Entertainment Group. Mr. Sassa also serves as President of Turner Entertainment Group, Inc. Harvey W. Schiller joined the Company in September 1994 as Vice President -- Sports Programming. Dr. Schiller also serves as President of Turner Sports, Inc. Prior to joining the Company, Dr. Schiller was Executive Director of the United States Olympic Committee from 1989. William M. Shaw joined the Company in 1981 as Director of Personnel and was promoted to Vice President -- Personnel in 1982. He was promoted to Vice President -- Administration in 1991. Previously, he served as Director of Personnel at Siemens-Allis Corp. Robert Shaye has served as President or Chairman and Chief Executive Officer of New Line Cinema Corporation ("New Line") since its inception in 1967. He currently serves as Chairman and Chief Executive Officer of New Line, a wholly-owned subsidiary of the Company since January 28, 1994. Mr. Shaye was elected as a director of the Company in 1994. Julia W. Sprunt, who joined the Company in 1981 as a Marketing Manager of TCNS, became Director -- Southeast Region of TCNS in 1985. She was promoted to Vice President -- Western Region of TCNS in 1986 and became Senior Vice President of TNS in 1987. Ms. Sprunt was promoted to Vice President -- Marketing of TBS Superstation in 1989 before becoming Vice President -- Corporate Marketing and Communications in 1990. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information regarding the principal markets on which the Company's two classes of common stock are traded, the high and low sales price for the stock on the American Stock Exchange for each quarterly period during the past two years, the Company's dividend policy and the approximate number of holders of each class 22 23 of the common stock at December 31, 1995, is included under the caption entitled "Investor Information" on page 55 of the 1995 Annual Report to Shareholders and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA A summary of selected financial data for the Company for the five years ended December 31, 1995 is included under the caption entitled "Selected Financial Data" on page 30 of the 1995 Annual Report to Shareholders and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company reported consolidated revenue of approximately $3.4 billion for the year ended December 31, 1995, a 22% increase over the same period last year. Operating profit, defined as income before interest expense, interest income, income taxes, and extraordinary items, increased 25% from 1994 to $358 million. The Company realized net income of $103 million, or an $82 million increase from 1994 which included an extraordinary charge of $25 million, net of tax benefits, for the early redemption of the Company's 12% Senior Subordinated Debentures due 2001 (the "Subordinated Debentures"). Income before the provision for income taxes was $173 million, or a 118% increase from 1994. The consolidated financial statements and all related information included in the 1995 Annual Report to Shareholders incorporated herein by reference should be read in conjunction with the following review. See the financial statements set forth on pages 31 through 52 of the 1995 Annual Report to Shareholders, incorporated herein by reference. For a discussion of regulatory and legislative matters affecting the Company, refer to Part I -- Item 1, "Business -- Regulation." OVERVIEW The Company's present operations and future prospects are influenced by many factors, primarily the growth of the cable television industry and, to a lesser extent, motion picture production and distribution industries and the economic climate both in the United States and abroad, as well as the availability of programming for its entertainment and news networks. Additionally, government regulation and information technology changes relating to the entertainment and media industries also influence domestic and international prospects. U.S. CABLE TELEVISION INDUSTRY The growth of the Company's Entertainment and News Segments is influenced by the growth of the U.S. cable industry since that medium represents the principal distribution system for TBS Superstation, TNT, the Cartoon Network, CNN, Headline News and CNNfn. At the end of 1995, homes subscribing to cable television service in the United States reached approximately 65 million, which represented 68% of all U.S. television households and a 4.7% increase over 1994. Homes served by cable television are expected to grow through 2000 (the last year for which estimates are available) and are expected to represent approximately 71% of all U.S. television households by the end of that year. The growth of the Company's Entertainment and News Segments is also influenced by the channel capacity of individual cable system operators. U.S. DIRECT-TO-HOME SATELLITE INDUSTRY The development of the direct-to-home satellite market ("DTH") offers additional growth opportunities to the Company's Entertainment and News Segments. By December 31, 1995, homes subscribing to DTH television service in the United States reached approximately 4 million, which represented over 5% of U.S. television households. Homes served by DTH are expected to grow to approximately 10 million by 2000. MOTION PICTURE AND TELEVISION PRODUCTION AND DISTRIBUTION INDUSTRY The production and distribution of theatrical motion pictures, television product and videocassettes are highly competitive businesses. Production companies compete with numerous other motion picture and 23 24 television production companies, and with television networks and pay cable systems, for the acquisition of literary properties, the services of performing artists, directors, producers, and other creative and technical personnel as well as for paying audiences. With respect to distribution of episodic television product, there is significant competition from independent producers and distributors, major studios and, as a result of the elimination of the financial interest and syndication rules, broadcast television networks. Revenues from filmed entertainment depend in part upon general economic conditions, but the competitive position of a producer or distributor is still greatly affected by the quality of, and public response to, the entertainment product it makes available to the marketplace, and this in turn depends in part upon the marketing strategy of the producer or distributor as compared to that of the competition as well as the quality and variety of competing products. As a result of this competition for viewers, the Company is vulnerable to the risk of volatile operating results in future periods. ECONOMIC CLIMATE The state of the U.S. economy influences the results of the Entertainment and News Networks as those operations derive a significant portion of their revenues from advertising, which is sold largely within three to nine months of airing and which, under certain conditions, can be canceled by the buyer, as applicable. Overall, domestic advertising revenues, excluding those generated in connection with the Goodwill Games, as applicable, totaled $1 billion in 1995, $896 million in 1994 and $828 million in 1993, representing 30%, 32% and 43%, respectively, of total revenues in those years. The impact of changes in the economy is mitigated by the fact that the Company derives a portion of its revenues from subscription fees, which are relatively resistant to short-term domestic economic factors. Domestic subscription fees from cable system operators, which totaled $659 million in 1995, $556 million in 1994 and $502 million in 1993, representing 19%, 20% and 26% of total revenues in those respective years, are generally received under contracts with three to five year terms. PROGRAMMING The Company continues to make significant investments in original, sports and licensed entertainment programming and in newsgathering capabilities to increase the viewership of its Entertainment and News Networks. The Entertainment Networks use high-profile original movies, specials and sporting events to define identity and provide a base of highly promotable programming to attract viewers to their entire slate of offerings. The Company has acquired programming rights to two of the most promotable sporting franchises available. Under contracts entered into with the National Football League ("NFL"), TNT telecast three pre-season and nine regular season NFL games in 1995 and 1994. The NFL contract includes provisions to telecast a similar number of pre-season and regular season games each year through 1997. Since 1989, TNT also has telecast NBA regular season and playoff games. In 1994, the Company entered into a contract with the NBA covering the 1994-1995 through 1997-1998 seasons. Under the contract, TNT and TBS Superstation will telecast NBA regular season and playoff games. In addition, affiliations with sporting events such as the 1992 and 1994 Winter Olympics, telecast on TNT, and the Company's own Goodwill Games, telecast on TBS Superstation, provide exposure on an international level. In 1990, the Company negotiated a long-term television license agreement with MGM-Pathe Communications Co. (now Metro-Goldwyn-Mayer Inc. ("MGM")) for approximately 1,000 feature films, over 300 cartoon shorts and selected television series. In December 1991, the Company acquired a 50% interest in HB Holding Co., a newly-formed joint venture (the "Joint Venture"). The Joint Venture, through a merger, acquired Hanna-Barbera, Inc. ("Hanna-Barbera") and the HB Library, which provided the Company access to a library of over 3,000 half-hours of animated programming. On December 29, 1993, the Company acquired the remaining 50% interest in the Joint Venture. Coupled with the 1,850 cartoon episodes in the TEC Library, the Company now has access to a vast source of animated programming. On December 22, 1993, the Company acquired all of the equity interests in Castle Rock, a motion picture and television production company. In addition, on January 28, 1994, the Company completed the acquisition 24 25 of New Line, an independent producer and distributor of motion pictures. See Note 3 of Notes to Consolidated Financial Statements in the 1995 Annual Report to Shareholders incorporated herein by reference. The Company anticipates that New Line, Castle Rock and Turner Pictures Worldwide will release theatrically an aggregate of up to 40 films in 1996. In 1995, these entities released an aggregate of 28 theatrical films. After theatrical release, the films will be distributed, both domestically and internationally, by the Company primarily in the pay-per-view, home video, premium cable network, television and other syndication and basic cable network markets. See "Part I -- Item 1. Business -- Entertainment -- Entertainment Production and Distribution." When combined with existing arrangements for programming and the extensive library of feature films, cartoons and televisions series, these acquisitions continue to build core programming for the Entertainment Networks and allow for control of programming from production through various stages of distribution. The Company will continue to use this programming for new networks. Programming costs in the News Segment primarily relate to personnel, travel costs and satellite and communications access. CNN presently operates nine news bureaus in the United States and 21 bureaus in countries outside the United States. INTERNATIONAL While most of the Company's revenues are derived from domestic distribution of its products and services, the Company views the international market as an important source for future revenue growth. Historically, the Company has derived the majority of its international revenues from syndication and licensing to television stations, the sale of home videos of feature films from the TEC Library and, to a lesser degree, from theatrical release of original productions made for TNT. These operations continue to contribute an important revenue stream to the Company, while revenues from the Company's newly acquired theatrical film production and distribution entities, New Line and Castle Rock, have also contributed to 1995 international revenues. In 1995, international revenues, consisting of broadcast fees (including advertising), subscription, syndication, home video, theatrical film distribution and licensing and merchandising revenues, were $445 million or 13% of total revenue. The Company believes there is great potential for growth internationally in the area of satellite delivered programming. Currently, CNN International is the Company's predominant programming vehicle outside the United States. CNN International is distributed via satellite primarily to cable systems, broadcasters, hotels and private satellite dish owners. International subscription levels grew from 15 million households at the end of 1991 to 71 million households by the end of 1995. CNN International's programming generally is either CNN product as viewed in the United States or in a reformatted version which conforms to retransmission restrictions imposed by certain agreements under which CNN collects international news stories from certain overseas suppliers. It also includes segments specifically produced for the international markets. Revenues, which are derived from subscriber fees, broadcast fees, and advertising sales, are principally generated from Europe. Total international revenues from CNN International increased from $112 million in 1994 to $131 million in 1995. It is anticipated that these revenues will continue to increase as the Company capitalizes on the growing international reputation of CNN and the increased international opportunities to market the service, both in terms of increases in international advertising and in terms of overall growth in international television media and markets. In January 1991, the Company launched TNT Latin America, a 24-hour per day trilingual entertainment satellite-delivered program service serving Latin America and the Caribbean. Relying largely on existing programming from the TEC Library, this service allows the user to customize the service using Spanish, Portuguese and English audio tracks and subtitles. Contracts for carriage of this service are offered by the Company's sales and marketing organizations to operators of cable systems and similar technologies. Revenues from this service, which in many areas is being marketed together with CNN's news programming, are almost entirely from subscription fees based on contracts with cable operators which specify minimum subscription levels. 25 26 In March 1993, the Company acquired a 27.5% limited partnership interest in n-tv, a 24-hour German language news channel. The partnership provides for cooperation with CNN in newsgathering, exchange of news footage and cooperative access to facilities. At December 31, 1995, the Company's ownership interest in n-tv was 33.1%. For additional information concerning the acquisition of the ownership interest in n-tv, see Note 3 of Notes to Consolidated Financial Statements in the 1995 Annual Report to Shareholders incorporated herein by reference. In April 1993, the Company launched Cartoon Network Latin America, a 24-hour per day trilingual satellite-delivered program service in Latin America utilizing animated programming from both the HB Library and TEC Library. In September 1993, the Company launched TNT & Cartoon Network Europe originating in the United Kingdom, and distributed throughout Europe via satellite. In October 1994, the Company launched TNT & Cartoon Network Asia, a 24-hour per day program service utilizing animated programming and film product, a portion of which is dubbed audio or subtitled in English, Mandarin or Thai, with more languages to be added in later years, originating in Hong Kong and distributed throughout Asia via satellite. All of these new networks have revenue streams from advertising and subscription fees. The Company believes international markets provide substantial opportunities for revenue growth in the future. Such growth will be significantly influenced by, among other things, competition, government regulation, access to satellite transmission facilities, improvements in encryption technologies, the continued growth of distribution system alternatives to over-the-air broadcast technology, the availability of effective intellectual property protection and local market economic conditions in the countries served. LIQUIDITY AND CAPITAL RESOURCES Sources and Uses of Cash As part of its ongoing strategic plan to produce programming for ultimate use on its Entertainment Networks, the Company has invested, and will continue to invest, significant amounts of capital for network and television programming and filmed entertainment. Historically, the Company has relied extensively on debt to finance these initiatives and, as a result, has maintained a high degree of financial leverage. This approach continued in 1995 enabling the Company to continue its growth plans. See Note 3 and Note 6 of the Notes to Consolidated Financial Statements in the 1995 Annual Report to Shareholders incorporated herein by reference. Additionally, see "Liquidity and Capital Resources -- Credit Facilities and Financing Activities." The Company expects that internally generated funds supplemented by existing credit facilities and debt that may be issued pursuant to its shelf registration filed in May 1993, as well as access to debt and equity markets, will be sufficient to meet operating needs and scheduled debt maturities through the end of 1996 and beyond. Cash provided by operations for the year ended December 31, 1995 aggregated $210 million, including cash interest payments, net of cash interest received, of $184 million; current net proceeds from the accounts receivable securitization program of $222 million; and a net change in film cost and liabilities of $32 million. Other significant sources of cash included borrowings of $215 million under the 1993 Credit Agreement described below. Cash was primarily utilized for the repayment of amounts outstanding under the 1993 Credit Agreement of $271 million, additions to property and equipment of $103 million, and additional investment of $14 million in the German limited partnership, n-tv. Affecting cash provided by operations was $943 million utilized by the Company for original entertainment and sports programming (including $493 million for theatrical film productions, excluding promotional and advertising costs). See the Consolidated Statements of Cash Flows for details regarding sources and uses of cash, Note 3 of Notes to Consolidated Financial Statements for a detailed discussion of acquisitions, and Note 6 of Notes to Consolidated Financial Statements for a detailed discussion of definitions, terms and restrictive covenants associated with the Company's indebtedness, all of which are included in the 1995 Annual Report to Shareholders incorporated herein by reference. 26 27 CREDIT FACILITIES AND FINANCING ACTIVITIES The Company had approximately $2.5 billion of outstanding indebtedness at December 31, 1995, of which $1.4 billion was outstanding under unsecured revolving credit facilities with banks. On July 1, 1993, the Company entered into a credit agreement (the "1993 Credit Agreement") with a group of banks pursuant to which such banks extended a $750 million unsecured revolving credit facility. On December 15, 1993, the 1993 Credit Agreement was amended, among other things, to increase the amount available for borrowing to $1.5 billion. Amounts available for borrowing or reborrowing under this revolving facility will automatically decrease by $75 million as of the last business day of the calendar quarters ending March 31, 1998, June 30, 1998, September 30, 1998, and December 31, 1998, and by $150 million as of the last business day of each quarter thereafter until December 31, 2000, at which time the revolving credit facility will terminate. Under the 1993 Credit Agreement, amounts repaid under the revolving credit facility may be reborrowed subject to borrowing availability. The amount of borrowing availability is subject to other provisions of the 1993 Credit Agreement, including requirements that (a) minimum ratios be maintained, as from time to time are in effect, of funded debt to cash flow, cash flow to interest expense and cash flow to fixed charges; and (b) there does not exist, and that such borrowing would not create, a default or event of default, as defined. On September 7, 1994, the banks participating in the 1993 Credit Agreement provided a new $500 million unsecured revolving credit facility (the "1994 Credit Agreement" and, together with the 1993 Credit Agreement, the "Credit Agreements"). The terms and covenants that govern the new facility are identical to those provided in the 1993 Credit Agreement. Amounts outstanding under the 1993 and 1994 Credit Agreements bear interest at varying rates on the basis of different rate indices and the Company's operating performance. Interest is payable at intervals specified in the Credit Agreements. The interest rates under the Credit Agreements ranged from 6.63% to 9.50% during the year ended December 31, 1995. The Company pays fees of 3/8 of 1% per annum on the average unborrowed portion of the total amount available for borrowing. At December 31, 1995, the weighted average interest rate associated with this indebtedness was 6.83%. The Company had interest rate swap agreements having a total notional principal amount of $480 million at December 31, 1994 with commercial banks. The total notional amount of the contracts expired in the first quarter of 1995. The weighted average receipt and payment rates associated with the swap agreements were 6.46% and 9.02%, respectively, at December 31, 1994. The incremental interest expense related to the swap agreements was $2 million in 1995. The Company continually evaluates the need to hedge against rising interest rates. The factors which impact this decision include floating rate debt as a percentage of the entire debt portfolio, market interest rate risk and the impact of interest volatility on operating profit. During 1995, a 100 basis point change in the underlying base rate of the Credit Agreements would represent a change of approximately $15 million in interest expense. The Company did not enter into any interest rate swap agreements during 1995 and there were no interest rate swap agreements outstanding at December 31, 1995. On May 6, 1993, the Company filed a registration statement (the "Shelf Registration") with the Securities and Exchange Commission to allow the Company to offer for sale, from time to time, up to $1.1 billion of unsecured senior debt securities or unsecured senior subordinated debt securities (together, the "Debt Securities") consisting of notes, debentures or other evidence of indebtedness. The Debt Securities may be offered as a single series or as two or more separate series in amounts, at prices and on terms to be determined at the time of the offering. The Debt Securities may be sold to or through one or more agents designated from time to time. At December 31, 1995, $750 million of Debt Securities, comprised of $300 million of the Company's 8 3/8% Senior Notes (the "Notes"), $250 million of 7.4% Senior Notes (the "Senior Notes") and $200 million of 8.4% Senior Debentures (the "Senior Debentures", and together with the Senior Notes, the "Securities"), had been issued pursuant to the Shelf Registration. The Credit Agreements contain restrictive covenants (including, among other things, additional indebtedness, liens, guarantees, dispositions, investments and dividend payments), and require the maintenance of certain ratios, including funded debt to operating cash flow, operating cash flow to fixed charges and operating cash flow to interest expense, as defined. Furthermore, the terms of the Credit Agreements provide for acceleration of the indebtedness thereunder in the event of a change of control. The Notes, the Securities, and 27 28 the Company's zero coupon subordinated convertible notes due 2007 also provide each holder of such securities with the right, at the holder's option, to require the Company to purchase all or any portion of the holder's securities in the event of a change of control, provided that with respect to the Notes and the Securities, in addition to a change of control, such securities must also be downgraded to below BB+ by Standard and Poor's Corporation or Ba2 by Moody's Investors Service within 120 days of the change of control for the holder to have the repurchase option. A change of control is deemed to occur when neither R.E. Turner and his estate, heirs and legatees, those parties who beneficially owned the Company's Class C Preferred Stock at the date of the issuance of such securities nor any combination thereof have the power to vote at least a majority of the voting power of the Company's voting securities. On January 4, 1996, the Company called for redemption on February 5, 1996 all of the convertible subordinated debentures of a wholly-owned subsidiary. Of the $29 million debentures outstanding, substantially all were converted into the Company's Class B Common Stock at $17.51 per share or 57.11 shares of Class B Common Stock for each $1,000 face amount of debentures. The conversion resulted in the issuance of approximately 1.7 million shares of Class B Common Stock. Scheduled principal payments for all outstanding debt for 1996 total approximately $1.5 million, the majority of which relates to capital leases and other debt. 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 December 31, 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 $14 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 described above. Under the agreement, which expires in May 1996 but is intended to be renewed for another one-year term, the Company performs collection and administrative responsibilities as agent for the purchaser of the related purchased receivables. See Note 11 of Notes to Consolidated Financial Statements in the 1995 Annual Report to Shareholders incorporated herein by reference. INTERNATIONAL CURRENCY CONTRACTS The Company is exposed to limited financial risk as a result of international currency fluctuations due to its growing international operations. The Company has only limited involvement with international forward exchange contracts with commercial banks to mitigate the effect of potentially adverse changes in exchange rates. These financial instruments are designed to minimize exposure and reduce risk from exchange rate fluctuations in the regular course of business. Gains and losses on forward exchange contracts which are designated and effective as hedges of exposures from firm currency commitments are deferred and recognized as adjustments to the bases of those assets or liabilities. Gains and losses on forward exchange contracts which do not qualify as hedges of exposures from firm currency commitments are recognized in income as incurred. Such amounts effectively offset gains and losses on the associated international currency assets or liabilities. At December 31, 1995, the Company had forward exchange contracts for the purchase of approximately $29 million of international currencies at fixed rates, primarily in Canadian Dollars, Pounds Sterling, and European Currency Units. All of these contracts, which mature by September 1996, qualify for hedge accounting treatment. For the years ended December 31, 1995 and 1994, both realized and unrealized gains and losses on international forward exchange contracts were immaterial. As such, the carrying value of international currency forward exchange contracts approximated fair value. The Company has exposure to credit risk but does not anticipate nonperformance by the counterparties to these agreements. Based on the international forward exchange contracts outstanding at December 31, 1995, each 5% devaluation of the U.S. dollar as compared to the level of international exchange rates for currencies under contract at December 31, 1995 would result in approximately $1.5 million of unrealized gains on international currency purchases. Conversely, a 5% appreciation of the U.S. dollar would result in $1.5 million of unrealized 28 29 losses. Consistent with the nature of the economic hedge provided by such international forward exchange contracts, such gains or losses would be offset by corresponding decreases or increases, respectively, in the dollar value of the associated underlying asset or liability. CAPITAL RESOURCES AND COMMITMENTS During 1996, the Company anticipates making cash expenditures of approximately $1.2 billion for original entertainment programming (excluding promotional and advertising costs on theatrical film product), approximately $275 million for sports programming, primarily rights fees and approximately $155 million for licensed programming. Also, during 1996, the Company expects to make total expenditures of approximately $145 million for additional or replacement property and equipment. Of the anticipated programming and capital expenditures described above, firm commitments exist for approximately $760 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, film suppliers and additional borrowings. RESULTS OF OPERATIONS -- 1995 VS. 1994 Entertainment Segment Entertainment Segment revenue increased $502 million, or 25%, to $2.504 billion. For the entertainment networks, advertising revenue, excluding the effect of the 1994 Goodwill Games, increased $113 million, or 19%, to $721 million due to higher viewership and an increase in the amount charged per thousand homes by TBS Superstation, TNT and Cartoon Network, and an increase in sports revenue associated with the coverage of the NBA on TBS Superstation and the NBA and NFL on TNT. Subscription revenues increased $85 million, or 24%, to $440 million, primarily through an increase in rates and a higher number of subscribers at TNT, TCM and Cartoon Network. In the production and distribution companies, syndication revenue increased $214 million to $468 million due to the off-network syndication of Castle Rock's "Seinfeld" and premium cable and pay-per-view revenue generated from New Line's "Dumb & Dumber" and "The Mask." Home video revenue increased $46 million, or 12%, to $440 million. Increases in home video revenue related to New Line's home video release of "The Mask," "Dumb & Dumber" and "Mortal Kombat" were partially offset by higher 1994 revenues associated with the Company's motion picture library and animation product. Theatrical revenue increased $45 million, or 20%, to $271 million, due primarily to an increase in the number of theatrical releases in 1995 at Castle Rock, including "The American President," and the success of theatrical releases by New Line, including "Dumb & Dumber," "Mortal Kombat," and "Seven." Remaining increases in other ancillary markets for the production and distribution companies were wholly offset by revenues generated in 1994 by the 1994 Goodwill Games. Operating profit (defined as income before interest expense, interest income, income taxes, extraordinary items and the cumulative effect of a change in accounting for income taxes) for the Entertainment Segment increased $81 million, or 68%, to $201 million. The increase included a $119 million, or 72%, improvement in operating profits at the entertainment networks. This improvement in profitability was due to increased advertising and subscription revenue as described above, primarily at TBS Superstation, TNT and Cartoon Network, offset by increased entertainment and sports programming expenses, excluding costs related to the 1994 Winter Olympics. In addition, Cartoon Latin America, TNT & Cartoon Network Europe and TCM yielded significantly improved results, with operating losses decreasing by a combined $12 million due to advertising and subscription revenue increases. This improvement was offset by increased operating losses of $11 million at TNT & Cartoon Network Asia, which completed its first full year of operations in 1995. Operating results for the international networks have been and will continue to be impacted by the effect of international advertising markets and, to some extent, by subscriber penetration. At this time, the Company cannot predict the impact these external market factors will continue to have on future operations. Reduced losses of $26 million as a result of the prior year staging of the 1994 Goodwill Games and costs related to 29 30 TNT's telecast of the 1994 Winter Olympics of $32 million account for the remainder of the increase for the entertainment networks. Increases in operating profits for the entertainment networks were somewhat offset by increased losses in the Company's production and distribution units, where operating losses increased $38 million to $85 million. The increase in operating losses was primarily due to disappointing results associated with theatrical releases, notwithstanding the success of certain theatrical releases by New Line mentioned above, lower results for publishing and interactive products, as well as increased costs associated with building domestic and international production and distribution infrastructure, which more than offset the associated revenue gains mentioned above. See "Motion Picture and Television Production and Distribution Industry" for a discussion of the risk factors associated with this industry. News Segment News Segment revenue increased $98 million, or 15%, to $765 million. The increase was due primarily to a $41 million, or 14%, increase in domestic advertising revenue principally as a result of higher viewership from O.J. Simpson trial coverage and a $29 million increase in domestic subscription revenue due to an increase in rates and the domestic availability of CNN International. The remaining increase in overall revenue was primarily generated at CNN International, where international revenue increased $18 million, or 16%, to $131 million. Operating profit for the News Segment increased $37 million, or 16%, to $265 million. The revenue increases discussed above were somewhat offset by increased domestic newsgathering expenses related to O.J. Simpson trial coverage and the Oklahoma City bombing and increased international newsgathering costs related primarily to events in Bosnia and Russia. Other Segment Revenue increased $43 million, or 26%, to $207 million due primarily to increased revenues from the Braves and WCW. Braves revenue increased $16 million due to increased television and radio broadcast rights and increased attendance revenue as a result of a greater number of home games in comparison to the strike-shortened 1994 season. WCW revenue increased $15 million due primarily to increased television syndication from pay-per-view events as well as home video sales and licensing and merchandising activities. Operating losses for the segment increased $6 million, to $77 million, as improved operations at the Braves and WCW were offset by increased information technology and other infrastructure spending in line with corporate growth. EQUITY IN LOSS OF UNCONSOLIDATED ENTITIES/OTHER CONSOLIDATED INFORMATION The Company's share of operating losses from unconsolidated entities decreased $4 million to $6 million. The Atlanta Hawks' performance improved $2 million as a result of league expansion fees partially offset by increased team payroll costs. The remaining decrease in losses related primarily to increased profits at SportSouth Network. 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 bank credit facilities. The Company recognized costs of $14 million for the year 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 the bank credit facilities. See Note 11 of Notes to Consolidated Financial Statements in the 1995 Annual Report to Shareholders incorporated herein by reference. In June 1994, the Company sold its 37.4% equity investment in RHI Entertainment, Inc. for approximately $108 million in cash and recognized a pre-tax gain of approximately $22 million on the transaction. The Company has entered into an Amended and Restated Agreement and Plan of Merger dated as of September 22, 1995 with Time Warner pursuant to which the Company and Time Warner will each become a 30 31 wholly-owned subsidiary of a new Time Warner holding company. For the year, the Company incurred approximately $10 million of expenses related to the proposed merger with Time Warner. See Note 2 of Notes to Consolidated Financial Statements in the 1995 Annual Report to Shareholders incorporated herein by reference. Consolidated interest expense, net of interest income decreased approximately $23 million, primarily due to a net reduction in the Company's effective interest rate as a result of the expiration of interest rate swap agreements that were in existence in 1994. The 1994 extraordinary item represents $25 million, net of tax benefits, associated with the early redemption of the Company's 12% Senior Subordinated Debentures (the "Subordinated Debentures") in 1994. See Note 6 of Notes to the Consolidated Financial Statements in the 1995 Annual Report to Shareholders incorporated herein by reference. As a result of the information discussed, the Company reported net income of $103 million in 1995 ($0.36 net income per common share and common share equivalent). This compares to net income of $21 million in 1994 ($0.08 net income per common share and common share equivalent). RESULTS OF OPERATIONS -- 1994 VS. 1993 Entertainment Segment Entertainment Segment revenue increased $839 million to $2.001 billion, of which $621 million was contributed by the newly-acquired New Line, Castle Rock and the consolidated operations of Hanna-Barbera. Together, New Line and Castle Rock released 26 theatrical productions in 1994, two of which ultimately earned over $100 million in gross box office receipts in 1994 and the first quarter of 1995. In addition, the Company now benefits from full ownership of the more than 3,000 half-hours of animation product in the HB Library. Home video revenues outside of the newly-acquired entities increased a total of $63 million, or 61%, primarily from strong domestic distribution in the sell-through (consumer purchased) and rental markets. Advertising revenue increased $53 million, or 10%, to $608 million, due primarily to increased rates for TNT and TBS Superstation, and an increase in sports revenue associated with the coverage of the NBA on TBS Superstation and the NBA and NFL on TNT. Subscription revenues increased $37 million, or 12%, to $355 million, primarily through an increase in rates and a higher number of subscribers. The remaining increase was related to revenues contributed from the 1994 Goodwill Games of $32 million as well as increased domestic licensing and merchandising revenues of $32 million, primarily related to recent theatrical releases. Operating profit for the Entertainment Segment decreased $24 million to $119 million. The decrease included a $26 million increase in operating losses related to the 1994 Goodwill Games, $32 million in expense from TNT's telecast of the 1994 Winter Olympics and $9 million from increased operating losses at the Company's new networks (which consist of the Cartoon Network, Cartoon Latin America, TNT & Cartoon Network Europe, TCM and TNT & Cartoon Network Asia). These amounts were substantially offset by a $29 million decrease in other sports programming expense, primarily NFL programming, and $12 million of decreased operating losses at the production and distribution companies, including New Line, Castle Rock and the consolidated operations of Hanna-Barbera, primarily due to increased home video sales. News Segment News Segment revenue increased $68 million, or 11%, to $667 million, primarily related to increased domestic subscription revenue of $28 million primarily from the home satellite dish market and increased domestic advertising revenue of $20 million as a result of higher viewership. The remaining increase was related primarily to CNN International, where revenues increased $19 million due to increased viewership worldwide. Revenue increases outpaced increases in operating expenses related to higher newsgathering costs and the expansion of CNN International. As a result, operating profit for the News Segment increased $15 million to $227 million, a 7% increase compared to 1993. 31 32 Other Revenue decreased $18 million, or 10%, to $164 million, primarily as a result of reduced revenue for the Atlanta Braves due to the Baseball Strike. Braves operating profit decreased $23 million. Of this amount, $14 million related to the Baseball Strike and the remainder was primarily due to reduced pre-strike broadcast income. The Braves' results and a $13 million increase in information technology and other infrastructure spending to support the growth of the Company primarily accounted for the Other Segment's $38 million increase in operating losses, to $71 million overall. EQUITY IN LOSS OF UNCONSOLIDATED ENTITIES/OTHER CONSOLIDATED INFORMATION Operating losses decreased $10 million due primarily to improved operating results for n-tv and the Atlanta Hawks. In June 1994, the Company sold its 37.4% equity investment in RHI Entertainment, Inc. for approximately $108 million in cash and recognized a pre-tax gain of approximately $22 million on the transaction. Consolidated interest expense, net of interest income, increased approximately $27 million primarily due to the increase in debt associated with the purchase of Castle Rock and the remaining 50% interest in the Joint Venture as well as assumed debt associated with New Line and a higher effective interest rate primarily associated with the Credit Agreements. Extraordinary items represent $25 million, net of tax benefits, associated with the early redemption of the Subordinated Debentures in 1994. The 1993 extraordinary items represent $11 million, net of tax benefits, associated with the early termination of certain of the Company's bank credit facilities and the redemption of the zero coupon subordinated convertible notes due 2004. The Company also reflected a $306 million non-recurring charge for the cumulative effect of adopting Statement of Financial Accounting Standards No. 109 in 1993. This charge was primarily related to the TEC Library and, to a lesser degree, the Company's 50% interest in the Joint Venture. As a result of the information discussed, the Company reported net income of $21 million in 1994 ($0.08 net income per common share and common share equivalent). This compares to a net loss of $244 million in 1993 ($0.92 net loss per common share and common share equivalent). NEW ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121"). This Statement established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed. FAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the Company must estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Otherwise, an impairment loss is not recognized. Measurement of an impairment loss for long-lived assets and identifiable intangibles that an entity expects to hold and use should be based on the fair value of the asset. In addition, FAS 121 requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell, except for assets that are covered by APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions." Assets that are covered by Opinion 30 will continue to be reported at the lower of carrying amount or net realizable value. 32 33 The Company will adopt FAS 121 January 1, 1996. Based on analyses performed by the Company as of December 31, 1995, this standard is not expected to have a material impact on the Company's financial results. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). This Statement encourages the adoption of a fair-value-based method of accounting for stock-based compensation plans in place of the intrinsic-value-based method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), for all arrangements under which employees receive shares of stock or other equity instruments of the employer, or the employer incurs liabilities to employees based on the price of its stock. In addition, FAS 123, establishes fair value as the measurement basis for transactions in which an entity acquires goods or services from nonemployees in exchange for equity instruments. The Statement allows entities to choose to adopt the method defined in FAS 123 or continue to apply the method prescribed by APB 25 while providing disclosure of pro forma amounts representing the effect of fair-value-based accounting. The Company will adopt FAS 123 January 1, 1996. It is the Company's intention, as permitted by FAS 123, to continue to apply the measurement provisions of APB 25 and provide the required pro forma disclosures. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated financial statements and notes thereto for the Company and the report of the independent accountants, which are included on pages 31 through 53 of the 1995 Annual Report to Shareholders under the following captions listed below, are incorporated herein by reference. Consolidated Statements of Operations for the three years ended December 31, 1995. Consolidated Balance Sheets at December 31, 1995 and 1994. Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the three years ended December 31, 1995. Consolidated Statements of Cash Flows for the three years ended December 31, 1995. Notes to Consolidated Financial Statements. Report of Independent Accountants. Management's Responsibility for Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to directors of the Company is set forth under the caption entitled "Election of Directors" in the Company's 1996 Proxy Statement, and is incorporated herein by reference. Certain information concerning the executive officers of the Company is set forth in Part I of this Report on Form 10-K pursuant to General Instruction G(3) of Form 10-K under the caption entitled "Executive Officers of the Company." ITEM 11. EXECUTIVE COMPENSATION Information regarding compensation of directors of the Company is set forth under the caption "Compensation of Directors" in the Company's 1996 Proxy Statement, and is incorporated herein by reference. Information regarding compensation of officers of the Company is set forth under the caption "Executive Compensation" in the Company's 1996 Proxy Statement, and is incorporated herein by reference. 33 34 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding ownership of certain of the Company's securities is set forth under the captions entitled "Security Ownership of Management" and "Security Ownership of Certain Beneficial Owners" in the Company's 1996 Proxy Statement, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions with the Company is set forth under the caption entitled "Certain Relationships and Related Transactions" in the Company's 1996 Proxy Statement, and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements The financial statements set forth on pages 31 through 52 of the 1995 Annual Report to Shareholders are incorporated herein by reference (see Exhibit 13). (a)(2) Financial Statement Schedule for the three years ended December 31, 1995
SCHEDULE PAGE NUMBER DESCRIPTION NUMBER - -------- ---------------------------------------------------------------------------- ------ VIII Valuation and qualifying accounts and reserves.............................. 42
The report of the Company's independent accountants with respect to the above-referenced financial statement schedule appears on page 41 of this report. All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (a)(3) Exhibits
EXHIBIT NO. DESCRIPTION - ------- ---------------------------------------------------------------------------------- 2.1 -- Amended and Restated Agreement and Plan of Merger, dated as of September 22, 1995, among the Company, Time Warner Inc., TW Inc., Time Warner Acquisition Corp. and TW Acquisition Corp. (filed as Exhibit 2 to the Company's Form 8-K dated December 1, 1995, and incorporated herein by reference). 2.2 -- Stock Purchase Agreement, dated as of September 22, 1995, between the Company and LMC Southeast Sports, Inc. (filed as Exhibit 99.2 to the Company's Form 8-K dated September 22, 1995, and incorporated herein by reference). 3.1 -- Restated Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Company's Form 10-Q for the fiscal quarter ended June 30, 1994 (the "Second Quarter 1994 Form 10-Q"), and incorporated herein by reference). 3.2 -- Bylaws of the Company, as amended on and through November 13, 1990 (filed as Exhibit 3.2 to the Company's Form 10-K for the fiscal year ended December 31, 1991 (the "1991 Form 10-K"), and incorporated herein by reference). 4.1 -- Liquid Yield Option Notes Indenture, dated as of February 13, 1992, between the Company and Security Pacific National Bank, as Trustee (filed as Exhibit 4.4 to the 1991 Form 10-K, and incorporated herein by reference). 4.2.1 -- Form of Note relating to the Company's 8 3/8% Senior Notes due July 1, 2013 (filed as Exhibit 4(d) to the Company's Form 8-K dated June 16, 1993, and incorporated herein by reference).
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EXHIBIT NO. DESCRIPTION - ------- ---------------------------------------------------------------------------------- 4.2.2 -- Form of Officers' Certificate establishing the terms of the Company's 8 3/8% Senior Notes due July 1, 2013 (filed as Exhibit 4(e) to the Company's Form 8-K dated June 16, 1993, and incorporated herein by reference). 4.3.1 -- Form of Senior Indenture ("Senior Indenture"), dated as of May 15, 1993, between the Company and The First National Bank of Boston, relating to senior debt securities consisting of notes, debentures or other evidence of indebtedness in the aggregate amount of $1,100,000,000 (filed as Exhibit 4(a) to the Company's Registration Statement on Form S-3 (Registration No. 33-62218) filed with the Commission on May 6, 1993, and incorporated herein by reference). 4.3.2 -- Form of Subordinated Indenture ("Subordinated Indenture"), relating to senior subordinated debt securities consisting of notes, debentures or other evidence of indebtedness in the aggregate amount of $1,100,000,000 (filed as Exhibit 4(b) to the Company's Registration Statement on Form S-3 (Registration No. 33-62218) filed with the Commission on May 6, 1993, and incorporated herein by reference). 4.3.3 -- Form of the Company's Standard Multiple-Series Indenture Provisions relating to the Senior Indenture and the Subordinated Indenture (filed as Exhibit 4(c) to the Company's Registration Statement on Form S-3 (Registration No. 33-62218) filed with the Commission on May 6, 1993, and incorporated herein by reference). 4.4 -- Form of Officers' Certificate establishing the terms of the Company's 7.4% Senior Notes due February 1, 2004 with form of Note attached (filed as Exhibit 4(f) to the Company's Form 8-K dated January 27, 1994, and incorporated herein by reference). 4.5 -- Form of Officers' Certificate establishing the terms of the Company's 8.4% Senior Debentures due February 1, 2024 with the form of Debenture attached (filed as Exhibit 4(g) to the Company's Form 8-K dated January 27, 1994, and incorporated herein by reference). 4.6.1 -- Credit Agreement, dated as of July 1, 1993 ("1993 Credit Agreement"), between the Company and The Chase Manhattan Bank (National Association), as agent (filed as Exhibit 4.9.1 to the Company's Form 10-Q for the fiscal quarter ended June 30, 1993, and incorporated herein by reference). 4.6.2 -- Form of Amendment No. 1, dated as of December 1, 1993, to the 1993 Credit Agreement (filed as Exhibit 4.6.2 to the Company's Registration Statement on Form S-4 (Registration No. 33-51739) filed with the Commission on December 29, 1993, and incorporated herein by reference). 4.6.3 -- Form of Amendment No. 2, dated as of December 15, 1993, to the 1993 Credit Agreement (filed as Exhibit 4.6.3 to the Company's Registration Statement on Form S-4 (Registration No. 33-51739) filed with the Commission on December 29, 1993, and incorporated herein by reference). 4.6.4 -- Form of Consent and Agreement, dated as of December 21, 1993, relating to the 1993 Credit Agreement (filed as Exhibit 4.6.4 to the Company's Registration Statement on Form S-4 (Registration No. 33-51739) filed with the Commission on December 29, 1993, and incorporated herein by reference). 4.6.5 -- Amendment No. 3, dated as of June 30, 1994, to the 1993 Credit Agreement dated as of July 1, 1993 (filed as Exhibit 10.46 to the Company's Form 10-Q for the fiscal quarter ended September 30, 1994, and incorporated herein by reference). 4.4.6 -- Form of Amendment No. 4, dated as of December 5, 1994, to the 1993 Credit Agreement (filed as Exhibit 4.4.6 to the Company's Form 10-Q for the fiscal quarter ended March 31, 1995, and incorporated herein by reference).
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EXHIBIT NO. DESCRIPTION - ------- ---------------------------------------------------------------------------------- 4.7 -- Credit Agreement, dated as of September 7, 1994 (the "1994 Credit Agreement"), among the Company, the banks listed therein and The Chase Manhattan Bank (National Association), as agent (filed as Exhibit 10.45 to the Company's Form 10-Q for the fiscal quarter ended September 30, 1994, and incorporated herein by reference). 4.7.1 -- Form of Amendment No. 1, dated as of December 5, 1994, to the 1994 Credit Agreement (filed as Exhibit 4.7.1 to the Company's Form 10-Q for the fiscal quarter ended March 31, 1995, and incorporated herein by reference). 10.1 -- Agreement between City of Atlanta and Fulton County Recreation Authority and Milwaukee Braves, Inc., dated 1964, as amended by seven supplemental agreements and assigned to Atlanta National League Baseball Club, Inc. (filed as Exhibit 10(b)(i) to Amendment No. 1 on Form 8 to the Company's Form 10-K for the fiscal year ended December 31, 1980, and incorporated herein by reference). 10.2 -- License Agreement between City of Atlanta and Fulton County Recreation Authority and Atlanta Hawks Basketball, Inc. dated January 26, 1971, as amended by several letter agreements and as assigned to Atlanta Hawks, Ltd. (filed as Exhibit 10(b)(ii) to Amendment No. 1 on Form 8 to the Company's Form 10-K for the fiscal year ended December 31, 1980, and incorporated herein by reference). 10.3 -- Turner Broadcasting System, Inc. 1988 Stock Option Plan (filed as Exhibit 10.1 to the Company's Form 10-Q for the fiscal quarter ended June 30, 1988, and incorporated herein by reference).* 10.3.1 -- Amendment No. 1 to Turner Broadcasting System, Inc. 1988 Stock Option Plan (filed as Exhibit 10.42 to the Second Quarter 1994 Form 10-Q, and incorporated herein by reference).* 10.3.2 -- Amendment No. 2 to Turner Broadcasting System, Inc. 1988 Stock Option Plan (filed as Exhibit 10.43 to the Second Quarter 1994 Form 10-Q, and incorporated herein by reference).* 10.4 -- Lease Agreement between the Company and Omni Ventures (now CNN Center Ventures), dated May 28, 1985 (filed as Exhibit 10(n)(ii) to the Company's Amendment No. 2 to Form S-1 (Registration No. 2-97132) filed with the Commission on June 19, 1985, and incorporated herein by reference). 10.5 -- Amended and Restated Subscription and Registration Rights Agreement, dated as of May 27, 1987, by and among the Company and the persons listed on the signature pages thereof (filed as Exhibit 10.32 to the Company's Form 10-K for the fiscal year ended December 31, 1987 (the "1987 Form 10-K"), and incorporated herein by reference). 10.6 -- Shareholders' Agreement, dated as of June 3, 1987 (the "Shareholders' Agreement"), by and among the Company, R. E. Turner and the Original Investors (as defined) (filed as Exhibit 10.33 to the 1987 Form 10-K, and incorporated herein by reference). 10.7 -- Investors' Agreement, dated as of June 3, 1987, by and among the Company and the Investors (as defined) (filed as Exhibit 10.34 to the 1987 Form 10-K , and incorporated herein by reference). 10.8 -- First Amendment, dated as of April 15, 1988, to the Shareholders' Agreement (filed as Exhibit 10.2 to the Company's Form 10-Q for the fiscal quarter ended June 30, 1988, and incorporated herein by reference). 10.9 -- The Turner Incentive Plan (filed as Exhibit 19 to the Company's Form 10-Q for the fiscal quarter ended September 30, 1989, and incorporated herein by reference).* 10.10 -- Turner Broadcasting System, Inc. Supplemental Benefit Plan (filed as Exhibit 10.48 to the Company's Form 10-K for the fiscal year ended December 31, 1992, and incorporated herein by reference).*
36 37
EXHIBIT NO. DESCRIPTION - ------- ---------------------------------------------------------------------------------- 10.11 -- Turner Broadcasting System, Inc. Supplemental Executive Retirement Plan (filed as Exhibit 10.49 to the Company's Form 10-K for the fiscal year ended December 31, 1992, and incorporated herein by reference).* 10.12 -- Turner Broadcasting System, Inc. 1993 Stock Option and Equity-Based Award Plan (the "1993 Stock Option Plan") (filed as Exhibit 10.38 to the Second Quarter 1994 Form 10-Q, and incorporated herein by reference).* 10.12.1 -- Amendment No. 1 to the 1993 Stock Option Plan (filed as Exhibit 10.33.1 to the Company's Form 10-Q for the fiscal quarter ended June 30, 1995 (the "Second Quarter 1995 Form 10-Q"), and incorporated herein by reference).* 10.13 -- Employment Agreement, dated as of December 20, 1993, by and between the Company and W. Thomas Johnson, as amended by agreement dated January 26, 1994 (filed as Exhibit 10.39 to the Company's Form 10-K for the fiscal year ended December 31, 1993 (the "1993 Form 10-K"), and incorporated herein by reference).* 10.13.1 -- Amendment No. 2, dated as of May 24, 1995, to the Employment Agreement, dated as of December 20, 1993, by and between the Company and W. Thomas Johnson (filed as Exhibit 10.34.1 to the Second Quarter 1995 Form 10-Q, and incorporated herein by reference).* 10.14 -- Employment Agreement, dated as of December 20, 1993, by and between the Company and Terence F. McGuirk, as amended by agreement dated January 26, 1994 (filed as Exhibit 10.40 to the 1993 Form 10-K, and incorporated herein by reference).* 10.14.1 -- Amendment No. 2, dated as of May 24, 1995, to the Employment Agreement, dated as of December 20, 1993, by and between the Company and Terence F. McGuirk (filed as Exhibit 10.35.1 to the Second Quarter 1995 Form 10-Q, and incorporated herein by reference).* 10.15 -- Employment Agreement, dated as of January 1, 1994, by and between the Company and Scott M. Sassa, as amended by agreement dated January 26, 1994 (filed as Exhibit 10.41 to the 1993 Form 10-K, and incorporated herein by reference).* 10.16 -- Employment Agreement, dated as of January 28, 1994, by and between New Line Cinema Corporation and Robert Shaye (filed as Exhibit 10.37 to the Company's Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference).* 10.16.1 -- Amendment, dated as of July 17, 1995, to the Employment Agreement, dated as of January 28, 1994, by and between New Line Cinema Corporation and Robert Shaye (filed as Exhibit 10.37.1 to the Company's Form 10-Q for the fiscal quarter ended September 30, 1995, and incorporated herein by reference).* 10.17 -- Turner Broadcasting System, Inc. Long-Term Incentive Plan (filed as Exhibit 10.44 to the Second Quarter 1994 Form 10-Q, and incorporated herein by reference).* 11 -- Computation of Earnings per Common and Common Equivalent Share. 13 -- Portions of the 1995 Annual Report to Shareholders expressly incorporated by reference in Part I, Item 1 and Part II, Items 5-8 of this Report. 21 -- Subsidiaries of the Company. 23 -- Consent of Price Waterhouse LLP. 27 -- Financial Data Schedule (for SEC use only).
- --------------- * Management contract or compensatory plan or arrangement. 37 38 (b) Reports on Form 8-K On October 5, 1995, the Company filed a Current Report on 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. ("Time Warner") and Time Warner Acquisition Corp., a wholly-owned subsidiary of Time Warner, executed an Agreement and Plan of Merger, dated as of September 22, 1995. On December 19, 1995, the Company filed a Current Report on Form 8-K announcing that on December 1, 1995, the Company, Time Warner, TW Inc. ("New Time Warner"), Time Warner Acquisition Corp. and TW Acquisition Corp. entered into an Amended and Restated Agreement and Plan of Merger, dated as of September 22, 1995, which amends the original merger agreement to provide for a transaction in which each of the Company and Time Warner will become a wholly-owned subsidiary of a new holding company, New Time Warner, through two separate mergers. 38 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. (Registrant) By: /s/ R. E. TURNER ------------------------------------ R. E. Turner Chairman of the Board of Directors and President (Chief Executive Officer) Dated: March 21, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------------------------------------------- ------------------------------- --------------- Chairman of the Board of /s/ R. E. TURNER Directors and President (Chief - --------------------------------------------- Executive Officer) March 21, 1996 R. E. Turner /s/ WAYNE H. PACE Vice President -- Finance - --------------------------------------------- (Chief Financial Officer) March 21, 1996 Wayne H. Pace /s/ WILLIAM S. GHEGAN Vice President and Controller - --------------------------------------------- (Chief Accounting Officer) March 21, 1996 William S. Ghegan /s/ HENRY L. AARON Director March 21, 1996 - --------------------------------------------- Henry L. Aaron /s/ W. THOMAS JOHNSON Director March 21, 1996 - --------------------------------------------- W. Thomas Johnson /s/ RUBYE M. LUCAS Director March 21, 1996 - --------------------------------------------- Rubye M. Lucas /s/ TERENCE F. MCGUIRK Director March 21, 1996 - --------------------------------------------- Terence F. McGuirk /s/ BRIAN L. ROBERTS Director March 21, 1996 - --------------------------------------------- Brian L. Roberts
39 40
SIGNATURE TITLE DATE - --------------------------------------------- ------------------------------- --------------- /s/ SCOTT M. SASSA Director March 21, 1996 - --------------------------------------------- Scott M. Sassa /s/ ROBERT SHAYE Director March 21, 1996 - --------------------------------------------- Robert Shaye /s/ PETER R. BARTON Director March 21, 1996 - --------------------------------------------- Peter R. Barton /s/ JEFFREY L. BEWKES Director March 21, 1996 - --------------------------------------------- Jeffrey L. Bewkes /s/ JOSEPH J. COLLINS Director March 21, 1996 - --------------------------------------------- Joseph J. Collins /s/ GERALD M. LEVIN Director March 21, 1996 - --------------------------------------------- Gerald M. Levin Director - --------------------------------------------- John C. Malone /s/ TIMOTHY P. NEHER Director March 21, 1996 - --------------------------------------------- Timothy P. Neher /s/ FRED A. VIERRA Director March 21, 1996 - --------------------------------------------- Fred A. Vierra
40 41 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Turner Broadcasting System, Inc. Our audits of the consolidated financial statements referred to in our report dated February 5, 1996 appearing in the 1995 Annual Report to Shareholders of Turner Broadcasting System, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP Atlanta, Georgia February 5, 1996 41 42 SCHEDULE VIII TURNER BROADCASTING SYSTEM, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS)
RECOVERIES BALANCE AT CHARGED TO ON ACCOUNTS BALANCE ALLOWANCE FOR DOUBTFUL BEGINNING COSTS AND PREVIOUSLY AT END ACCOUNTS RECEIVABLE OF PERIOD EXPENSES WRITTEN OFF WRITE-OFFS OTHER OF PERIOD - ------------------------------------- ---------- ---------- ----------- ---------- ------ --------- Year ended December 31, 1993......... $ 29,094 $ 16,978 $ 4,052 $ (16,601) $1,475 $ 34,998 ======== ======== ========= ======== ====== ======= Year ended December 31, 1994......... $ 34,998 $ 19,125 $ 250 $ (18,010) $6,160 $ 42,523 ======== ======== ========= ======== ====== ======= Year ended December 31, 1995......... $ 42,523 $ 13,645 $ 449 $ (11,527) $1,046 $ 46,136 ======== ======== ========= ======== ====== =======
BALANCE AT CHARGED TO BALANCE VALUATION ALLOWANCE ON BEGINNING COSTS AND AT END DEFERRED TAX ASSETS OF PERIOD EXPENSES ADJUSTMENTS OTHER OF PERIOD - ------------------------------------ ---------- ---------- ----------- ------ --------- Year ended December 31, 1993........ $ 0 $8,723 $ 0 $ 0 $ 8,723 ======== ======== ========= ====== ======= Year ended December 31, 1994........ $8,723 $ 0 $ 3,500 $ 0 $ 5,223 ======== ======== ========= ====== ======= Year ended December 31, 1995........ $5,223 $ 0 $ 3,508 $ 0 $ 1,715 ======== ======== ========= ====== =======
42 EX-11 2 COMPUTATION OF PRIMARY EARNINGS 1 EXHIBIT 11 Page 1 of 2 TURNER BROADCASTING SYSTEM, INC. COMPUTATION OF PRIMARY EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
TWELVE MONTHS ENDED DECEMBER 31, 1995 ------------------ Net income applicable to common stock $102,681 ======== Weighted average number of shares outstanding during the period 206,049 Add: Common equivalent shares issuable assuming conversion of Class C Convertible Preferred Stock 74,382 Shares issuable upon exercise of stock options 16,932 Subtract: Shares which would have been purchased with proceeds from exercise of such stock options (13,004) -------- Weighted average number of common stock, common stock equivalents and converted shares outstanding 284,359 ======== Weighted average number of Class A common shares and common stock equivalents 68,330 ======== Weighted average number of Class B common shares and common stock equivalents 216,029 ======== Earnings per share and common stock equivalent of Class A and Class B Common Stock $ 0.36 ========
2 EXHIBIT 11 Page 2 of 2 TURNER BROADCASTING SYSTEM, INC. COMPUTATION OF FULLY-DILUTED EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
TWELVE MONTHS ENDED DECEMBER 31, 1995 ------------------- Net income applicable to common stock $102,681 Add: Interest expense on zero coupon subordinated convertible notes due 2007 18,218 Interest expense on 6.5% convertible notes 1,891 Subtract: Additional income taxes (8,180) -------- Adjusted net income applicable to common stock $114,610 ======== Primary weighted average number of shares outstanding 284,359 Add: Common equivalent shares issuable assuming conversion of convertible notes due 2007 7,440 Change in shares due to options assumed converted using the end of period market value 1,125 Common equivalent shares issuable assuming conversion of 6.5% convertible notes 1,661 -------- Weighted average number of common stock, common stock equivalents and convertible shares, assuming full dilution 294,585 ======== Weighted average number of Class A common shares and common equivalents and convertible shares, assuming full dilution 68,330 ======== Weighted average number of Class B common shares and common equivalents and convertible shares, assuming full dilution 226,255 ======== Earnings per share and common stock equivalent of Class A and Class B Common Stock $ 0.39 ========
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-13 3 ANNUAL REPORT 1 EXHIBIT 13
Selected Operating Data Turner Broadcasting System, Inc. Year ended December 31, 1995 1994 1993 1992 1991 Advertising Revenue in thousands (1) TBS Superstation $423,240 $356,021 $339,803 $313,068 $287,483 Turner Network Television 268,055 233,860 210,084 184,159 137,993 Cartoon Network 22,264 14,073 5,651 971 - CNN 239,318 206,475 191,572 179,023 171,844 Headline News 90,195 82,406 77,165 69,087 64,822 CNN International 53,154 43,905 34,136 25,983 13,222 International Entertainment Networks (2) 9,607 5,261 1,037 52 - Subscription Revenue in thousands (1) Turner Network Television $360,244 $308,344 $296,319 $260,048 $231,933 Cartoon Network 23,600 16,778 6,307 5 - Turner Classic Movies 18,384 3,611 - - - CNN/Headline News 247,375 227,646 199,165 173,457 154,213 International Entertainment Networks (2) 37,847 26,759 16,178 9,524 2,348 U.S. Coverage Households in thousands (3)(4) TBS Superstation 67,149 62,089 61,525 60,032 57,457 Turner Network Television 66,059 60,824 60,876 58,312 55,641 Cartoon Network 22,422 12,060 8,861 - - Turner Classic Movies (5) 7,818 2,527 - - - CNN 67,244 62,738 62,420 61,172 58,877 Headline News 59,326 54,191 54,219 51,354 48,223 CNNI/CNNfn (6) 5,299 - - - - International Coverage Households in thousands (5) CNN International (7) 71,381 57,392 45,100 34,700 15,500 TNT Latin America 4,666 3,200 1,462 929 142 Cartoon Network Latin America 5,656 3,531 997 - - TNT & Cartoon Network Europe 29,413 21,956 16,660 - - TNT & Cartoon Network Asia 2,222 768 - - - Average U.S. Rating/Average U.S. Viewing Households in thousands (4)(8) TBS Superstation 1.2/762 1.2/770 1.3/815 1.4/803 1.4/793 Turner Network Television 1.0/658 0.9/568 0.9/552 1.0/560 0.9/509 Cartoon Network 1.0/178 0.8/90 0.9/56 - - CNN 0.9/580(9) 0.6/361 0.6/369 0.7/400 1.2/685(10) Headline News 0.3/182 0.3/166 0.3/181 0.3/172 0.4/182(10) Gross Domestic Box Office Receipts in thousands (5)(11) $399,571 $379,717 $10,000 - - Number of Releases New Line Cinema 19 22 - - - Castle Rock Entertainment 8 4 - - - Turner Pictures Worldwide 1 - 1 - -
(1) Certain amounts have been reclassified to conform to the current year presentation. (2) Consists of TNT Latin America, Cartoon Network Latin America, TNT & Cartoon Network Europe and TNT & Cartoon Network Asia. (3) Measured as of the December rating period in each indicated year. (4) Information derived by the Company from A.C. Nielsen data. (5) Information based on Company estimates. (6) CNNfn is broadcast daily from 7:00 am to 7:00 pm EST on the domestic CNN International feed. (7) An additional 30 million, 27 million and 29 million homes received CNN International at least five hours per day in 1995, 1994 and 1993, respectively. (8) Average U.S. viewing households represents the average number of viewing households for the respective service at any time based upon an average for each 24-hour period in the 12 rating periods in each indicated year. (9) Increased average U.S. rating and average U.S. viewing households primarily due to the O.J. Simpson trial coverage. (10) Increased average U.S. rating and average U.S. viewing households primarily due to the Persian Gulf War coverage. (11) Gross domestic box office receipts represents amounts received at the box office attributable to current year releases. 28 2 INDEX TO FINANCIALS CONTENTS Selected Financial Data 30 Consolidated Statements of Operations 31 Consolidated Balance Sheets 32 Consolidated Statements of Changes in Stockholders' Equity (Deficit) 33 Consolidated Statements of Cash Flows 34 Notes to Consolidated Financial Statements 35 Report of Independent Accountants 53 Management's Responsibility for Financial Statements 53 29 3 Selected Financial Data Turner Broadcasting System, Inc. The following table summarizes certain consolidated financial data of Turner Broadcasting System, Inc. (the "Company") for the years indicated which, with respect to the latest three years, is qualified in its entirety by the accompanying Consolidated Financial Statements and Notes to Consolidated Financial Statements. Also see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in the accompanying 1995 Turner Broadcasting System, Inc. Form 10-K. Year ended December 31, in thousands, except per share data and current ratio 1995 1994 1993 1992 1991 Statement of Operations Data Revenue $3,437,350 $2,809,125 $1,921,606 $1,769,892 $1,480,243 Operating profit (1) 358,372 287,642 302,140 289,382 297,121 Interest expense, net of interest income 185,275 208,318 181,571 189,637 196,139 Income before extraordinary items and the cumulative effect of a change in accounting for income taxes 102,681 46,153 72,445 34,061 42,936 Extraordinary items (2) - (24,996) (10,693) 43,561 43,000 Cumulative effect of a change in accounting for income taxes (3) - - (306,000) - - Net income (loss) 102,681 21,157 (244,248) 77,622 85,936 Earnings (loss) per common share Income before extraordinary items and the cumulative effect of a change in accounting for income taxes 0.36 0.16 0.27 0.13 0.06 Net income (loss) 0.36 0.08 (0.92) 0.30 0.24 Balance Sheet Data (at end of year) Working capital $ 553,682 $ 642,001 $ 660,585 $ 475,397 $ 378,680 Current ratio 1.66 1.99 2.60 2.26 2.09 Total assets 4,395,400 4,072,545 3,244,862 2,523,573 2,397,227 Long-term debt, less current portion (4) 2,479,770 2,517,748 2,294,557 1,709,051 1,968,937 Redeemable preferred stock (5) - - - - 4,855 Cash dividends (6) 19,632 19,604 18,407 13,589 5,356 Stockholders' equity (deficit) 437,679 343,731 (1,103) 233,101 (37,603) Total capitalization (7) 2,917,449 2,861,479 2,293,454 1,942,152 1,936,189
(1) Operating profit is defined as income before interest expense, interest income, income taxes, extraordinary items and the cumulative effect of a change in accounting for income taxes. (2) The amounts in 1994 and 1993 represent, respectively, a $40,977,000 and $16,946,000 loss on early extinguishments of indebtedness, net of income tax benefits of $15,981,000 and $6,253,000, respectively. The amounts in 1992 and 1991 represent utilization of operating loss carryforwards. (3) The cumulative effect of adopting Statement of Financial Accounting Standards No. 109 ("FAS 109") was a non-recurring charge to the 1993 Consolidated Statement of Operations of $306,000,000. This charge was primarily related to the 1986 acquisition of the Turner Entertainment Co. Film Library (the "TEC Film Library") and, to a lesser degree, the Company's 50% interest in Hanna-Barbera Holding Company. In both transactions there were substantial differences between amounts recorded for financial reporting purposes and for income tax purposes. (4) See Note 6 of Notes to Consolidated Financial Statements for information regarding repayment terms for outstanding long-term debt. (5) The amount represents the accreted value of the Class B Cumulative Preferred Stock outstanding at year end. See Note 10 of Notes to Consolidated Financial Statements. (6) Amounts in 1992 and 1991 include dividends on Class B Cumulative Preferred Stock. See Note 10 of Notes to Consolidated Financial Statements for additional information. (7) Total capitalization is defined as stockholders' equity (deficit), long-term debt less current portion and Class B Cumulative Preferred Stock. 30 4 Consolidated Statements of Operations Turner Broadcasting System, Inc.
Year ended December 31, in thousands, except per share data 1995 1994 1993 - --------------------------------------------------------------------------- Revenue Unaffiliated $2,928,092 $2,388,057 $1,536,112 Affiliated 509,258 421,068 385,494 ---------- ---------- ---------- 3,437,350 2,809,125 1,921,606 ---------- ---------- ---------- Cost of operations 2,080,581 1,768,104 1,023,045 Selling, general and administrative 888,661 706,379 537,108 Equity in loss of unconsolidated entities 5,750 10,001 20,040 Costs of accounts receivable securitization program 14,297 - - Gain on sale of equity investment - (21,746) - Time Warner merger costs 9,749 - - Depreciation of property and equipment and amortization of intangible assets 79,940 58,745 39,273 Interest expense, net of interest income 185,275 208,318 181,571 ---------- ---------- ---------- 3,264,253 2,729,801 1,801,037 ---------- ---------- ---------- Income before provision for income taxes, extraordinary items and the cumulative effect of a change in accounting for income taxes 173,097 79,324 120,569 Provision for income taxes 70,416 33,171 48,124 ---------- ---------- ---------- Income before extraordinary items and the cumulative effect of a change in accounting for income taxes 102,681 46,153 72,445 Extraordinary items - (24,996) (10,693) ---------- ---------- ---------- Income before the cumulative effect of a change in accounting for income taxes 102,681 21,157 61,752 Cumulative effect of a change in accounting for income taxes - - (306,000) ---------- ---------- ---------- Net income (loss) $ 102,681 $ 21,157 $ (244,248) ========== ========== ========== Earnings (loss) per common share and common stock equivalent Income before extraordinary items and the cumulative effect of a change in accounting for income taxes $ 0.36 $ 0.16 $ 0.27 Extraordinary items - (0.08) (0.03) Cumulative effect of a change in accounting for income taxes - - (1.16) ---------- ---------- ---------- Net income (loss) $ 0.36 $ 0.08 $ (0.92) ========== ========== ========== Weighted average number of common shares outstanding, including conversion of common stock equivalents 284,359 281,310 264,443 ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements. 31 5 Consolidated Balance Sheets Turner Broadcasting System, Inc.
December 31, in thousands, except share data 1995 1994 Assets Cash and cash equivalents $ 85,185 $ 52,895 Accounts receivable, less allowance of $38,503 and $31,862 Unaffiliated 464,923 567,404 Affiliated 92,657 103,432 Film costs 567,031 446,355 Installment contracts receivable, less allowance of $7,633 and $10,661 47,928 46,806 Prepaid expense and other current assets 135,597 71,510 ---------- ---------- Total current assets 1,393,321 1,288,402 Film costs, less current portion 1,936,565 1,893,069 Property and equipment, less accumulated depreciation 358,528 308,960 Goodwill and other intangible assets 427,611 409,468 Other assets 279,375 172,646 ---------- ---------- Total assets $4,395,400 $4,072,545 ========== ========== Liabilities and Stockholders' Equity Accounts payable $ 64,704 $ 49,036 Accrued expenses 292,167 249,813 Deferred income 83,772 108,122 Income taxes payable 63,693 61,376 Participants' share and royalties payable 107,254 58,417 Interest payable 33,011 37,338 Film contracts payable 69,802 40,252 Current portion of long-term debt 1,543 1,345 Other current liabilities 123,693 40,702 ---------- ---------- Total current liabilities 839,639 646,401 Long-term debt, less current portion 2,479,770 2,517,748 Deferred income taxes 421,685 385,731 Other long-term liabilities 216,627 178,934 ---------- ---------- Total liabilities 3,957,721 3,728,814 ---------- ---------- Commitments and contingencies Stockholders' equity 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 Serial Preferred Stock, par value $0.10; authorized 500,000 shares - - Class D Serial Preferred Stock, par value $0.0625; authorized 100,000,000 shares - - 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 137,982,831 and 137,424,549 shares 8,624 8,589 Capital in excess of par value 1,084,181 1,073,317 Accumulated deficit (919,835) (1,002,884) ---------- ---------- Total stockholders' equity 437,679 343,731 ---------- ---------- Total liabilities and stockholders' equity $4,395,400 $4,072,545 ========== ==========
See accompanying Notes to Consolidated Financial Statements. 32 6 Consolidated Statements of Changes in Stockholders' Equity (Deficit) Turner Broadcasting System, Inc.
December 31, 1995 1994 1993 in thousands, except share data Shares Amount Shares Amount Shares Amount Class C Convertible Preferred Stock, par value $0.125 Balance at beginning and end of year 12,396,976 $ 260,438 12,396,976 $ 260,438 12,396,976 $ 260,438 ----------- ---------- ---------- ---------- ---------- ---------- Class A Common Stock, par value $0.0625 Balance at beginning and end of year 68,330,388 4,271 68,330,388 4,271 68,330,388 4,271 ----------- ---------- ---------- ---------- ---------- ---------- Class B Common Stock, par value $0.0625 Balance at beginning of year 137,424,549 8,589 120,887,672 7,555 119,845,121 7,490 Issuance of Class B Common Stock - - 23,903 1 287,930 18 Exercise of stock options 415,992 26 118,315 8 754,621 47 Issuance of stock related to New Line Merger 142,290 9 16,394,659 1,025 - - Balance at end of year 137,982,831 8,624 137,424,549 8,589 120,887,672 7,555 =========== --------- =========== ------- =========== ---------- Capital in excess of par value Balance at beginning of year 1,073,317 731,042 702,791 Issuance of Class B Common Stock - 599 7,449 Exercise of stock options 5,657 1,266 7,443 Tax benefit from exercise of stock options 2,263 459 13,359 Issuance of stock related to New Line Merger 2,944 339,951 - ---------- ---------- ---------- Balance at end of year 1,084,181 1,073,317 731,042 ---------- ---------- ---------- Accumulated deficit Balance at beginning of year (1,002,884) (1,004,409) (741,889) Net income (loss) 102,681 21,157 (244,248) Cash dividends (19,632) (19,604) (18,407) Other - (28) 135 ---------- ---------- ---------- Balance at end of year (919,835) (1,002,884) (1,004,409) ---------- ---------- ---------- Total stockholders' equity (deficit) $ 437,679 $ 343,731 $ (1,103) ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements. 33 7 Consolidated Statements of Cash Flows Turner Broadcasting System, Inc.
Year ended December 31, in thousands 1995 1994 1993 Cash provided by (used for) operations Net income (loss) $ 102,681 $ 21,157 $ (244,248) Adjustments to net income (loss) Equity in loss of unconsolidated entities 5,750 10,001 20,040 Gain on sale of equity investment - (21,746) - Depreciation of property and equipment and amortization of intangible assets 79,940 58,745 39,273 Pretax loss on early extinguishment of debt - 40,977 16,946 Cumulative effect of a change in accounting for income taxes - - 306,000 Change in assets and liabilities, net of acquisitions Net (increase) decrease in accounts receivable - current 113,256 (126,892) (30,914) Net decrease in installment contracts receivable 4,416 22,863 15,246 Change in film costs and related liabilities, net Purchased program rights 85,716 78,285 74,398 Produced programming (108,454) (182,764) (38,375) Licensed program rights (9,468) 1,514 7,223 Net (increase) decrease in accounts receivable - noncurrent (122,133) 16,204 (90,063) Net increase (decrease) in interest payable (4,327) 4,967 12,321 Net increase in income taxes payable 2,317 32,568 12,259 Net increase in accounts payable and accrued expenses 27,149 52,178 2,376 Net increase (decrease) in deferred tax liability (6,300) (46,049) 13,377 Other, net 39,443 (35,470) 36,463 --------- ---------- ---------- Net cash provided by (used for) operations 209,986 (73,462) 152,322 Cash provided by (used for) investing activities Acquisitions and advances to unconsolidated entities (13,766) (156,654) (592,275) Distributions from unconsolidated entities 8,705 - - Additions to property and equipment (103,265) (109,236) (50,570) Net proceeds from sale of assets - 107,978 - --------- ---------- ---------- Net cash used for investing activities (108,326) (157,912) (642,845) Cash provided by (used for) financing activities Borrowings 215,000 1,299,600 1,522,372 Payments of debt (271,378) (1,127,371) (968,008) Debt issue costs (106) (8,735) (16,322) Premium paid on early extinguishment of debt - (24,300) - Payments of cash dividends (19,632) (19,604) (18,407) Proceeds from exercise of stock options 6,746 1,821 7,490 Net cash provided by (used for) financing activities (69,370) 121,411 527,125 --------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 32,290 (109,963) 36,602 Cash and cash equivalents at beginning of period 52,895 162,858 126,256 --------- ---------- ---------- Cash and cash equivalents at end of period $ 85,185 $ 52,895 $ 162,858 ========= ========== ==========
See accompanying Notes to Consolidated Financial Statements. 34 8 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The Consolidated Financial Statements include the accounts of Turner Broadcasting System, Inc. and its subsidiaries (the "Company"). The Company's investments in unconsolidated entities where the ability to exercise significant influence is present are accounted for by the equity method. All significant intercompany accounts and transactions are eliminated in consolidation. Certain amounts in the consolidated financial statements prior to 1995 have been reclassified to conform to the current year presentation. CASH EQUIVALENTS All highly liquid investments, consisting primarily of treasury bills and commercial paper with an original maturity of 90 days or less, are reported as cash equivalents. Cash equivalents are reported at their cost basis, which approximates market value, and totaled $74,379,000 and $33,199,000 at December 31, 1995 and 1994, respectively. FILM COSTS Film costs include purchased program rights, produced programming and licensed program rights. Film costs are stated at the lower of cost less accumulated amortization or estimated net realizable value. Amortization of film costs and participants' share and royalties expense are recorded in cost of operations in the Consolidated Statements of Operations. Purchased program rights, representing purchased costs allocated to films that have been exhibited at least once in both primary (defined as the first markets in which such films are to be exploited) and secondary (defined as all other) markets, are amortized to expense using the greater of the ratio that the current period's gross revenues bear to the total estimated gross revenues to be derived from all sources (the "individual film forecast computation method") or straight-line over 20 years. Royalties and obligations to profit participants in the films are accrued using a method which approximates the individual film forecast computation method. Purchased program rights expected to be amortized within one year are classified as current assets. Produced programming includes motion picture, episodic television, animated programming, prepaid rights fees and other costs relating to sports events, and long-form original television programming. The related produced programming costs consist of direct production costs, profit participations and residuals, production overhead, capitalized interest, and print and exploitation costs (such as advertising), net of accumulated amortization. Distribution fees are charged to expense when the corresponding revenues are recognized. Motion picture, episodic television and animated programming costs are amortized using the individual film forecast computation method. Such estimates are revised periodically and estimated losses, if any, are provided for in full at the time determined. Motion picture, episodic television and animated produced programming costs classified as current assets include, net of amortization, the cost of completed theatrical films, television programs and animated produced programming that have been allocated to domestic and international primary markets. All other motion picture, episodic television and animated produced programming film costs are classified as noncurrent. Prepaid rights fees and other costs relating to sports events are generally expensed when the events are telecast. Other produced programming costs, which primarily relate to long-form original television programming, are generally charged to cost of operations when each production is aired or syndicated. Prepaid rights fees and other costs relating to sports events and other produced programming costs expected to be expensed within one year are classified as current assets. Licensed program rights represent amounts paid or payable to program suppliers for the limited right to broadcast the suppliers' programming and distribution rights to entertainment product. Licensed film contracts are recorded as assets when available for use at cost less an amount representing imputed interest; imputed interest is amortized to expense over the payment periods of the related obligations using the interest method (rates ranging from 8.50% to 10.75%). Exhibition rights under the licenses are generally limited to a contract period or a specific number of showings. Accordingly, licensed program rights are amortized to expense monthly at the greater of the straight-line rate or a rate based on actual usage. The portion of licensed program rights available for use at year-end, which are expected to be amortized within one year, are classified as current assets. Distribution rights are generally amortized over the term of the agreement. Prepaid licensed program rights represent licensed program rights for which payments have been made prior to their availability. As these programs become available for use they are reclassified to licensed program rights. 35 9 PROPERTY AND EQUIPMENT Property and equipment is stated at cost less accumulated depreciation. Expenditures for improvements that add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are expensed when incurred. When depreciable properties are retired or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts and the resultant gain or loss is included in the Consolidated Statements of Operations. Depreciation is provided over the estimated useful lives of the individual assets using the straight-line method for financial reporting purposes. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill resulting from business acquisitions consists of the excess of the acquisition cost over the fair value of the net assets of the businesses acquired. Goodwill in the amount of $265,148,000, net of $19,324,000 in accumulated amortization, is amortized on a straight-line basis over lives ranging from 20 to 40 years. Other intangible assets in the amount of $162,463,000, net of $16,165,000 in accumulated amortization, are amortized on a straight-line basis over their estimated useful lives. At each balance sheet date, the Company evaluates the realizability of goodwill and other intangible assets. Based upon the most recent analyses, primarily reviews of estimated undiscounted future cash flows of the associated entities, the Company believes goodwill and other intangible assets are recoverable at December 31, 1995. Total amortization expense related to goodwill was $8,392,000 and $10,134,000 in 1995 and 1994, respectively. REVENUE RECOGNITION Advertising revenues are recognized in the period during which the spots are aired. Subscription revenues are recognized in the period to which they pertain or when the programming event to which they relate is aired. Syndication revenues are recognized in the period in which the agreement is executed, provided certain conditions of sale have been met, including availability of the product for broadcast or sale. Motion picture theatrical revenues are recognized as films are exhibited. Home video revenues are recognized upon shipment of the product. Certain licensing distribution contracts provide for receipt of nonrefundable minimum guarantees which are recognized when the rights are available for use or the film is available for exhibition, providing other conditions of sale have been met. Revenues in excess of the nonrefundable guarantees are generally recognized when they are received. INTEREST Interest expense is shown net of interest income of $10,026,000, $10,856,000 and $13,864,000 for the years ended December 31, 1995, 1994 and 1993, respectively, and interest capitalized of $15,486,000 and $14,356,000 in 1995 and 1994, respectively. Costs associated with the refinancing and issuance of debt as well as debt discounts, if any, are expensed as interest using the interest method over the appropriate term of the related debt agreement. The Company has had only limited involvement with interest rate swap agreements with commercial banks to mitigate the effect of possible rising interest rates. These agreements were designated as hedges of interest rates, and the differential to be paid or received on interest rate swaps was accrued as an adjustment to interest expense as interest rates changed. The Company has not entered into any interest rate swap agreements or other financial instruments for trading purposes. The Company had interest rate swap agreements having a total notional principal amount of $480,000,000 with commercial banks to mitigate possible rising interest rates at December 31, 1994, all of which expired in the first quarter of 1995. The Company did not enter into any interest rate swap agreements during 1995 and there were no interest rate swap agreements outstanding at December 31, 1995. See Note 6 of Notes to Consolidated Financial Statements. INCOME TAXES The Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"), effective January 1, 1993. Differences in recording certain income and expenses for financial reporting and income tax purposes relate principally to amortization of film costs, recognition of revenue on syndication contracts and depreciation of fixed assets. Investment tax credits are accounted for on the "flow-through" method. See Note 8 of Notes to Consolidated Financial Statements. NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share and common share 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 1995, 1994 and 1993. Common stock equivalents are principally the incremental shares associated with the Class C Convertible Preferred Stock (the "Class C Preferred Stock") and outstanding stock options. Fully diluted income (loss) per share amounts are similarly computed, 36 10 but include the effect, when dilutive, of the Company's other potentially dilutive securities. The Company's zero coupon subordinated convertible notes due 2007 are excluded from the 1995, 1994 and 1993 calculations of net income (loss) per common share (when applicable) due to their anti-dilutive effect. The difference between the primary and fully diluted earnings per share is not significant. See Note 6 and Note 10 of Notes to Consolidated Financial Statements. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2 PROPOSED MERGER WITH TIME WARNER INC. The Company has entered into an Amended and Restated Agreement and Plan of Merger dated as of September 22, 1995 (the "Merger Agreement") which provides for a transaction (the "Mergers") in which the Company and Time Warner Inc. ("Time Warner") will each become a wholly-owned subsidiary of a new holding company ("New Time Warner"). Pursuant to the Merger Agreement, (i) each outstanding share of Class A Common Stock of the Company and each share of Class B Common Stock of the Company (other than shares held directly or indirectly by Time Warner or New Time Warner or in the treasury of the Company and other than shares with respect to which dissenters' rights are properly exercised) will be converted into 0.75 of a share of common stock, par value $.01 per share, of New Time Warner ("New Time Warner Common Stock"), (ii) each share of Class C Preferred Stock of the Company (other than shares held directly or indirectly by Time Warner or New Time Warner or in the treasury of the Company and other than shares with respect to which dissenters' rights are properly exercised) will be converted into 4.80 shares of New Time Warner Common Stock, (iii) each outstanding share of common stock, par value $1.00 per share, of Time Warner (other than shares held directly or indirectly by Time Warner) will be converted into one share of New Time Warner Common Stock and (iv) each outstanding share of each series of preferred stock of Time Warner (other than shares held directly or indirectly by Time Warner and shares with respect to which appraisal rights are properly exercised) will be converted into one share of preferred stock of New Time Warner having the same designation as the shares of preferred stock of Time Warner so converted. The Mergers are 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. Among the required regulatory approvals are the approval of the Federal Communications Commission (the "FCC") and the expiration of all waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). Both the FCC and the Federal Trade Commission (the "FTC"), which has the responsibility for reviewing the parties' filings under the HSR Act, are closely reviewing the Mergers. There can be no assurance that all of the conditions to the consummation of the Mergers will be satisfied or that, as a condition to the grant of any approvals by government agencies, including the FCC and the FTC, 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 Mergers. 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 which the Company will be a party to assure its approval by the Company's shareholders, regardless of the vote of any other shareholders of the Company. The LMC Agreement described below, however, provides that the obligation of LMC and its affiliates to vote in favor of such merger is subject to certain conditions, including there not having been amendments to the related agreements that would have certain effects on LMC. Concurrently with the execution of the Merger Agreement, the Company and LMC Southeast Sports, Inc. ("LMC Sports") entered into a Stock Purchase Agreement (the "SportSouth Agreement") pursuant to which the Company will sell to LMC Sports all of the outstanding capital stock of Turner Sports Programming, Inc. ("TSPI") which owns a 44% interest in SportSouth Network, Ltd. The purchase price for the stock of TSPI (currently estimated to be $60,000,000) will be determined in accordance with a formula set forth in the SportSouth Agreement. The transaction contemplated by the SportSouth Agreement is conditioned upon the consummation of the Mergers. The Company has also 37 11 agreed, subject to the consummation of the Mergers, to extend the existing affiliation agreements pursuant to which Tele-Communications, Inc. and its affiliates distribute programming produced by the Company. Pursuant to the Amended and Restated LMC Agreement (the "LMC Agreement"), dated as of September 22, 1995, among Time Warner, New Time Warner, LMC and certain of its affiliates, LMC and certain of its affiliates have agreed, subject to certain conditions, to vote all their shares of Company capital stock in favor of the approval of the merger to which the Company will be a party and each of the other transactions contemplated by the Merger Agreement and in favor of the approval of the Merger Agreement. Pursuant to the LMC Agreement, Time Warner has agreed with LMC that, upon the happening of certain events, LMC will have the right to cause Time Warner to terminate the Merger Agreement and abandon the Mergers. NOTE 3 ACQUISITIONS On December 29, 1993, the Company acquired the remaining 50% interest in a joint venture (the "Joint Venture") which principally owned the Hanna-Barbera Film Library. The Company originally acquired a 50% interest in the Joint Venture in December 1991. The other investors were Apollo Investment Fund, L.P. ("Apollo") and its affiliate, Altus Finance, S.A. ("Altus"). In the December 1993 transaction, the Company purchased the common stock held by Apollo for approximately $68,000,000 in cash, repaid a senior note of the Joint Venture from Altus for $33,000,000 and repaid or assumed all indebtedness and liabilities of the Joint Venture. The acquisition of the Joint Venture was accounted for by the purchase method of accounting. On December 22, 1993, the Company acquired from Main Street Partners, Sony Pictures Entertainment, Inc. and Group W Investments, Inc. the equity interests in Castle Rock Entertainment ("Castle Rock"), a motion picture production company, for approximately $100,000,000 in cash and approximately $298,000,000 for the repayment of certain outstanding indebtedness, other liabilities assumed and other acquisition costs. The acquisition of Castle Rock was also accounted for by the purchase method of accounting. Goodwill in the amount of approximately $110,000,000 was recognized as the excess of total purchase price over net assets acquired in the transaction, and is being amortized on a straight-line basis over 20 years. The Company and New Line Cinema Corporation ("New Line") 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 Class B common shares issuable pursuant to the New Line Merger is approximately 21,300,000 valued at approximately $442,000,000. Cash will be distributed in lieu of any fractional shares. At December 31, 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 discussed below. Included in Other Current Liabilities at December 31, 1995 and 1994 were $36,078,000 and $38,177,000, respectively, related to such remaining shares. 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 each holder into an aggregate of approximately 1,700,000 shares of Class B Common Stock. On January 4, 1996, the Convertible Debentures were called for redemption on February 5, 1996. See Note 6 of Notes to Consolidated Financial Statements. 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 on a straight-line basis over periods not exceeding 40 years. At the time of the New Line Merger, New Line owned approximately 3,000,000 shares, or 37.4%, of the outstanding capital stock of RHI Entertainment, Inc. ("RHI"). In April 1994, New Line entered into an agreement to tender for cash its equity interest in RHI to an unaffiliated entity for $36 per share. In June 1994, the Company received approximately $108,000,000 in cash in connection with the transaction and recognized a pre-tax gain of approximately $22,000,000. 38 12 The following unaudited pro forma financial information is not intended to reflect results of operations which would have actually resulted had the transactions described above been effective on the dates indicated. Moreover, this information is not intended to be indicative of results of operations which may be obtained in the future. The unaudited pro forma condensed statement of operations for the year ended December 31, 1993 presents the pro forma results of the continuing operations of the Company, the acquisitions of the Joint Venture and Castle Rock and the New Line Merger for those periods assuming the acquisitions and the New Line Merger occurred at the beginning of the period presented. The pro forma effect of the New Line Merger for the year ended December 31, 1994 is not considered significant. No pro forma information is presented for 1995 as the historical results reflect a full year's activity. The unaudited pro forma results of operations for the Company as adjusted for the pro forma effects of the above is as follows:
Unaudited Year ended December 31, in thousands, except per share data 1993 ---------------------------------------------------- Revenue $2,444,457 ---------------------------------------------------- Income before extraordinary items and the cumulative effect of a change in accounting for income taxes $ 33,308 Net income (loss) $ (283,385) ---------------------------------------------------- Income (loss) per share of Class A and B Common Stock Income before extraordinary items and the cumulative effect of a change in accounting for income taxes $ 0.12 Net income (loss) $ (0.99) ----------------------------------------------------
In March 1993, the Company acquired a 27.5% limited partnership interest in n-tv, a 24-hour German language news channel, for $19,205,000, of which $11,654,000 was determined to be goodwill. During the years ended December 31, 1995 and 1994, the Company contributed $13,766,000 and $17,019,000, respectively, in additional capital or advances convertible into capital, all of which was determined to be goodwill. This goodwill is being amortized on a straight-line basis over 20 years. The Company has committed to additional capital to the limited partnership of $9,000,000 in 1996 of which $6,700,000 was prepaid in December 1995. The Company's ownership percentage in n-tv was 33.1%, 30.3% and 25.8% at December 31, 1995, 1994 and 1993, respectively. The Company is accounting for this investment using the equity method and its share of the net losses of n-tv for the years ended December 31, 1995, 1994 and 1993 were $12,590,000, $12,502,000 and $18,622,000, respectively. The Company's other unconsolidated subsidiaries and 50% or less owned entities including n-tv are not significant for the year ended December 31, 1995. The summarized financial position at December 31, 1994 and results of operations for the years ended December 31, 1994 and 1993, respectively, of n-tv follow:
December 31, ---------------------------------- in thousands 1994 ---------------------------------- Current assets $16,917 Noncurrent assets 18,070 Current liabilities 47,780 Partners' deficit (12,793) ----------------------------------
Year ended December 31, in thousands 1994 1993 ----------------------------------- Revenue $ 17,618 $ 8,222 Operating loss (40,239) (84,169) Net loss (47,387) (85,815) -----------------------------------
NOTE 4 FILM COSTS The following table sets forth the components of unamortized film costs:
December 31, in thousands 1995 1994 -------------------------------------------- Purchased program rights $1,017,761 $1,102,563 Produced programming Released 397,639 302,559 Completed and not released 73,706 40,021 In process 504,997 405,255 Episodic television 101,430 107,543 Licensed program rights 302,370 257,796 Prepaid licensed program rights 105,693 123,687 -------------------------------------------- 2,503,596 2,339,424 Less current portion 567,031 446,355 -------------------------------------------- $1,936,565 $1,893,069 --------------------------------------------
On the basis of the Company's anticipated total gross revenue estimates, over 86% of produced programming classified as released and episodic television costs at December 31, 1995, will be amortized within the three-year period ending December 31, 1998. See Note 1 of Notes to Consolidated Financial Statements. 39 13 Film costs included in Cost of operations is composed of the following:
Year ended December 31, in thousands 1995 1994 1993 --------------------------------------------------------- Purchased program rights $ 90,438 $ 89,312 $ 75,814 Produced programming 973,771 879,527 360,511 Licensed program rights 104,471 82,086 71,503 Participants' share and royalties 137,024 54,994 32,072 Non-cash amortization of certain acquisition purchase adjustments 17,934 4,859 - --------------------------------------------------------- $1,323,638 $1,110,778 $539,900 ---------------------------------------------------------
Produced programming Completed and not released, In process and Episodic television costs are substantially made up of capitalized motion picture and television film production costs incurred at the Company's three theatrical film production units, New Line, Castle Rock and Turner Pictures Worldwide. The production and distribution of motion picture and television film product in its initial primary and secondary markets are highly competitive businesses, as each competes with the other as well as with other forms of entertainment. With respect to distribution of episodic television product, there is significant competition from independent producers and distributors as well as major studios. Revenues for motion picture and television film product depend in part upon general economic conditions, but the competitive position of a producer or distributor is still greatly affected by the quality of, and public response to, the entertainment product it makes available to the marketplace. As more fully discussed in Note 1 of Notes to Consolidated Financial Statements, the Company capitalizes such costs to be amortized to expense using the individual film forecast computation method. The individual film forecast computation method includes estimates of future revenues that are dependent on the risk factors described above. Therefore, the estimates included in the individual film forecast method computations are reevaluated periodically, and such reevaluations may require the Company to record losses in future periods related to amounts capitalized at December 31, 1995. NOTE 5 PROPERTY AND EQUIPMENT Property and equipment is summarized as follows: December 31, Estimated in thousands 1995 1994 useful lives -------------------------------------------------------------- Buildings $169,870 $155,995 10-50 years Equipment and furniture 367,408 285,199 3-15 years Leasehold Improvements 51,850 38,875 6-15 years Transponders 25,685 61,961 11-13 years Land 20,758 21,019 -------------------------------------------------------------- 635,571 563,049 Less accumulated depreciation 277,043 254,089 -------------------------------------------------------------- $358,528 $308,960 ==============================================================
Depreciation expense recorded in the Consolidated Statements of Operations related to property and equipment was $60,325,000, $39,595,000 and $34,150,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Buildings include capital leases of $17,154,000 and $18,542,000 at December 31, 1995 and 1994, respectively, net of accumulated depreciation of $19,818,000 and $18,430,000, respectively. Depreciation expense related to capital leases was $1,388,000, $1,393,000 and $1,346,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The Company has long-term noncancelable operating lease commitments for vehicles, sports facilities, satellite transmission facilities and office space. Total rental expense for these operating leases is summarized as follows:
Year ended December 31, in thousands 1995 1994 1993 ---------------------------------------------------- Total rental expense $92,790 $88,875 $78,137 Contingent rental expense 4,489 13,370 9,218 ----------------------------------------------------
Future minimum rental payments at December 31, 1995 for noncancelable operating leases with remaining terms in excess of one year aggregate $475,835,000 and are payable as follows: 1996 - $79,864,000; 1997 - $75,990,000; 1998 - $66,751,000; 1999 - $60,018,000; 2000 - $83,219,000; 2001 and thereafter in the aggregate - $109,993,000. 40 14 NOTE 6 LONG-TERM DEBT Long-term debt consists of:
December 31, in thousands 1995 1994 - ------------------------------------------------------------------------------- Bank credit facilities $1,435,000 $1,490,000 8 3/8% Senior Notes due July 1, 2013, net of unamortized discount of $2,558 and $2,619 297,442 297,381 7.4% Senior Notes due 2004, net of unamortized discount of $334 and $363 249,666 249,637 8.4% Senior Debentures due 2024, net of unamortized discount of $154 and $155 199,846 199,845 Zero coupon subordinated convertible notes, 7.25% yield, due February 13, 2007, net of unamortized discount of $318,362 and $336,487 263,694 245,569 Convertible subordinated debentures of a wholly-owned subsidiary 29,075 29,075 Obligations under capital leases due in varying amounts through 1999, net of imputed interest of $684 and $931 5,254 6,200 Other debt 1,336 1,386 - ------------------------------------------------------------------------------- $2,481,313 $2,519,093 Less current portion 1,543 1,345 - ------------------------------------------------------------------------------- $2,479,770 $2,517,748 - -------------------------------------------------------------------------------
BANK CREDIT FACILITIES On July 1, 1993, the Company entered into a credit agreement (the "1993 Credit Agreement") with a group of banks pursuant to which such banks extended a $750,000,000 unsecured revolving credit facility. On December 15, 1993, the 1993 Credit Agreement was amended, among other things, to increase the amount available for borrowing to $1,500,000,000. Amounts available for borrowing or reborrowing under this revolving facility will automatically decrease by $75,000,000 as of the last business day of the calendar quarters ending March 31, 1998, June 30, 1998, September 30, 1998 and December 31, 1998, and by $150,000,000 as of the last business day of each quarter thereafter until December 31, 2000, at which time the revolving credit facility will terminate. Under the 1993 Credit Agreement, amounts repaid under the revolving credit facility may be reborrowed subject to borrowing availability. On September 7, 1994, the banks participating in the 1993 Credit Agreement provided a new $500,000,000 unsecured revolving credit facility (the "1994 Credit Agreement"). The terms and covenants that govern the new facility are identical to those provided in the 1993 Credit Agreement. Amounts outstanding under the 1993 and 1994 Credit Agreements bear interest at varying rates on the basis of short-term market indices and the Company's operating performance. Interest is payable at intervals specified in the Credit Agreements. The interest rates under the Credit Agreements ranged from 6.63% to 9.50% and 4.13% to 9.00% during the years ended December 31, 1995 and 1994, respectively. The Company pays fees of 3/8 of 1% per annum on the average unborrowed portion of the total amount available for borrowing. At December 31, 1995 and 1994, the weighted average interest rates were 6.83% and 7.55%, respectively. The Company had interest rate swap agreements having a total notional principal amount of $480,000,000 at December 31, 1994 with commercial banks. The total notional amount of the contracts expired in the first quarter of 1995. The weighted average receipt and payment rates associated with the swap agreements were 6.46% and 9.02%, respectively, at December 31, 1994. The incremental interest expense related to the swap agreements was approximately $2,000,000, $22,000,000 and $34,000,000 in 1995, 1994 and 1993, respectively. The Company continually evaluates the need to hedge against rising interest rates. The factors which impact this decision include the amount of floating rate debt as a percentage of the entire debt portfolio, market interest rate risk and the impact of interest volatility on operating profit. During 1995, a 100 basis point change in the underlying base rate of the 1993 and 1994 Credit Agreements would represent a change of approximately $15,000,000 in interest expense. The 1993 and 1994 Credit Agreements contain restrictive covenants (regarding, among other things, additional indebtedness, liens, guarantees, dispositions, investments and dividend payments), and require the maintenance of certain ratios, including funded debt to operating cash flow, operating cash flow to fixed charges and operating cash flow to interest expense, as defined. Furthermore, the 8 3/8% Senior Notes, the 7.4% Senior Notes, the 8.4% Senior Debentures, and the 41 15 zero coupon subordinated convertible notes due 2007 provide each holder of such securities with the right, at the holder's option, to require the Company to purchase all or any portion of the holder's securities in the event of a change of control; provided that with respect to the 8 3/8% Senior Notes, the 7.4% Senior Notes and the 8.4% Senior Debentures, in addition to a change of control, such securities must also be downgraded to below BB+ by Standard and Poor's Corporation or Ba2 by Moody's Investors Service within 120 days of the change of control for the holder to have the repurchase option. A change of control is deemed to occur when neither R. E. Turner and his estate, heirs and legatees, those parties who beneficially owned the Company's Class C Preferred Stock at the date of the issuance of such securities nor any combination thereof have the power to vote at least a majority of the voting power of the Company's voting securities. 12% SENIOR SUBORDINATED DEBENTURES On September 16, 1994, the Company called for the redemption on October 17, 1994, of all of its outstanding 12% Senior Subordinated Debentures due 2001 (the "Subordinated Debentures"). The Company used its unsecured revolving credit facility to redeem the Subordinated Debentures, of which $536,981,000 principal amount, net of unamortized discount of $3,019,000, was outstanding at redemption date. The Subordinated Debentures were redeemed in cash at the rate of $1,045 plus accrued interest for each $1,000 principal amount at maturity. SHELF REGISTRATION On May 6, 1993, the Company filed a registration statement with the Securities and Exchange Commission (the "Shelf Registration") to allow the Company to offer, from time to time, the sale of up to $1,100,000,000 of unsecured senior debt or unsecured senior subordinated debt securities, consisting of notes, debentures, or other evidence of indebtedness. The Company's 8 3/8% Senior Notes, 7.4% Senior Notes and 8.4% Senior Debentures discussed below were sold under the Shelf Registration. 8 3/8% SENIOR NOTES On July 8, 1993, the Company sold $300,000,000 of 8 3/8% Senior Notes due July 1, 2013 (the "Notes") under the Shelf Registration. The net proceeds to the Company were approximately $291,445,000, after market and underwriting discounts. The Notes bear interest at the rate of 8 3/8% per annum payable semi-annually on January 1 and July 1 of each year, commencing January 1, 1994. The Notes are not redeemable at the option of the Company. Each holder has the right to require the Company to repurchase such holder's Notes in whole, but not in part, upon the occurrence of certain triggering events, including, without limitation, a change of control, certain restricted payments or certain consolidations, mergers, conveyances or transfers of assets, each as defined in the indenture relating to the Notes. The Company is not required to make mandatory redemption or sinking fund payments with respect to the Notes prior to maturity. The covenants governing the Notes limit the Company's ability to incur additional funded debt by requiring the maintenance of a minimum consolidated interest coverage ratio, as defined. 7.4% SENIOR NOTES AND 8.4% SENIOR DEBENTURES On February 3, 1994, the Company sold $250,000,000 of 7.4% Senior Notes due 2004 (the "Senior Notes") and $200,000,000 of 8.4% Senior Debentures due 2024 (the "Senior Debentures" and, together with the Senior Notes, the "Securities") under the Shelf Registration. The net proceeds to the Company were approximately $246,282,000 and $196,680,000, respectively, after market and underwriting discounts. The Senior Notes and the Senior Debentures bear interest at the rate of 7.4% and 8.4% per annum, respectively, payable semi-annually on February 1 and August 1 of each year, commencing on August 1, 1994. The Senior Notes are not redeemable at the option of the Company. The Senior Debentures are redeemable, at the Company's option, at any time after February 1, 2004, at a redemption price of 104.161% of the principal amount, plus accrued and unpaid interest to the date of redemption. The redemption price reduces over 10 years to a redemption price of 100% of the principal amount in 2014 and thereafter. Each holder has the right to require the Company to repurchase such holder's Securities in whole, but not in part, at a redemption price, payable in cash, equal to 101% of the principal amount, plus accrued and unpaid interest to the date fixed for redemption, upon the occurrence of certain triggering events, including, without limitation, a change of control, certain restricted payments or certain consolidations, mergers, conveyances or transfers of assets, each as defined in the indenture related to the Securities. The covenants governing the Securities limit the Company's ability to incur additional funded debt by requiring the maintenance of a minimum consolidated interest coverage ratio, as defined. The Company is not required to make mandatory redemption or sinking fund payments with respect to the Securities prior to maturity. The Company used substantially all of the net proceeds from the sale of the Securities to repay amounts 42 16 outstanding under the 1993 Credit Agreement incurred in connection with the acquisitions of Castle Rock and the remaining 50% interest in the Joint Venture. ZERO COUPON SUBORDINATED CONVERTIBLE NOTES DUE 2007 The zero coupon subordinated convertible notes due February 13, 2007 (the "Convertible Notes due 2007") were issued at $343.61 per $1,000 principal amount at maturity with no periodic payments of interest. The issue price of the Convertible Notes due 2007 represents a yield to maturity of 7.25% annually. Each $1,000 principal amount at maturity is convertible at the option of the holder, at any time on or prior to maturity, into 12.783 shares of Class B Common Stock. The conversion rate will not be adjusted for accrued original issue discount but will be subject to adjustment upon the occurrence of certain events affecting Class B Common Stock and, upon conversion, the holder will not receive any cash payment representing accrued original issue discount. The Convertible Notes due 2007 are redeemable on or after February 13, 1995, at the option of the Company, at redemption prices equal to the issue price plus accrued original issue discount to the date of redemption. Each holder of Convertible Notes due 2007 will have the option of requiring the Company to purchase such holder's Convertible Notes due 2007 on February 13, 1997, for a purchase price of $490.58 (the issue price plus accrued original issue discount to such date) per $1,000 principal amount at maturity to be paid, at the option of the Company, in cash or shares of Class B Common Stock or any combination thereof. OTHER Maturities of long-term debt, including debt discount, for each of the five years following December 31, 1995, are: $1,543,000, $1,855,000, $101,596,000, $536,165,000 and $800,090,000, respectively, and $1,362,156,000 after 2000. Included in the maturities of long-term debt are obligations under capital leases of $1,492,000, $1,798,000, $1,534,000, $1,097,000 and $17,000 for each of the five years following December 31, 1995, respectively. Obligations for film contracts payable and obligations for deferred compensation, including imputed interest, for each of the five years following December 31, 1995, are: $79,570,000, $42,475,000, $13,916,000, $1,408,000 and $883,000 respectively, and $10,745,000 after 2000. Early extinguishment of indebtedness in 1993 resulted in an extraordinary charge of $10,693,000, net of approximately $6,253,000 of tax benefit, representing the write-off of unamortized debt issue costs. The redemption of the Subordinated Debentures resulted in an extraordinary charge of $24,996,000, net of $15,981,000 of tax benefit, representing the redemption premium and the write-off of original issue discount in 1994. On January 4, 1996, the Company called for redemption on February 5, 1996 all of the convertible subordinated debentures of a wholly-owned subsidiary. Of the $29,075,000 debentures outstanding, substantially all were converted into the Company's Class B Common Stock at $17.51 per share or 57.11 shares of Class B Common Stock for each $1,000 face amount of debentures. The conversion resulted in the issuance of approximately 1,700,000 shares. NOTE 7 FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of all financial instruments approximates fair value except those discussed below: LONG-TERM DEBT The borrowings at December 31, 1995 and 1994 under the Company's 1993 and 1994 Credit Agreements have floating interest rates and therefore, approximate fair value. The fair value at December 31, 1995 and 1994 of the Senior Notes, the Senior Debentures, the Notes and the Convertible Notes due 2007 is based on quoted market values on the respective dates and is summarized below. See Note 6 of Notes to Consolidated Financial Statements. INTEREST RATE SWAP AGREEMENTS The fair value of the interest rate swap agreements outstanding at December 31, 1994 was the amount the counterparties would charge the Company to terminate the swap agreements on that date. As discussed in Note 6 of Notes to Consolidated Financial Statements, there were no interest rate swap agreements outstanding at December 31, 1995. The carrying amounts and estimated fair values of the Company's long-term debt, net of obligations under capital leases at December 31, 1995 and 1994, respectively, including amounts related to the interest rate swap agreements of $2,300,000 at December 31, 1994, are as follows:
December 31, in thousands 1995 1994 --------------------------------------- Fair value $2,492,000 $2,360,000 Carrying amount 2,476,000 2,513,000 ---------------------------------------
43 17 The 1995 excess of fair value over carrying value of long-term debt, net of obligations under capital leases, is principally due to a decline in market interest rates since the original issuance of the Senior Notes, the Senior Debentures and the Notes. The 1994 excess of carrying value over fair value of long-term debt, net of obligations under capital leases, is principally due to an increase in market interest rates since the original issuance of the Senior Notes, the Senior Debentures and the Notes. INTERNATIONAL CURRENCY CONTRACTS The Company is exposed to limited financial risk as a result of international currency fluctuations due to its growing international operations. The Company has only limited involvement with international forward exchange contracts with commercial banks to mitigate the effect of potentially adverse changes in exchange rates. These financial instruments are designed to minimize exposure and reduce risk from exchange rate fluctuations in the regular course of business. Gains and losses on forward exchange contracts which are designated and effective as hedges of exposures from firm currency commitments are deferred and recognized as adjustments to the bases of those assets or liabilities. Gains and losses on forward exchange contracts which do not qualify as hedges of exposures from firm currency commitments are recognized in income as incurred. Such amounts effectively offset gains and losses on the associated international currency assets or liabilities. At December 31, 1995, the Company had forward exchange contracts for the purchase of approximately $29,000,000 of international currencies at fixed rates, primarily in Canadian Dollars, Pounds Sterling, and European Currency Units. All of these contracts, which mature by September 1996, qualify for hedge accounting treatment. For the years ended December 31, 1995 and 1994, both realized and unrealized gains and losses on international forward exchange contracts were immaterial. As such, the carrying value of international currency forward exchange contracts approximated fair value. The Company has exposure to credit risk but does not anticipate nonperformance by the counterparties to these agreements. Based on the international forward exchange contracts outstanding at December 31, 1995, each 5% devaluation of the U.S. dollar as compared to the level of international exchange rates for currencies under contract at December 31, 1995 would result in approximately $1,500,000 of unrealized gains on international currency purchases. Conversely, a 5% appreciation of the U.S. dollar would result in $1,500,000 of unrealized losses. Consistent with the nature of the economic hedge provided by such international forward exchange contracts, such gains or losses would be offset by corresponding decreases or increases, respectively, in the dollar value of the associated underlying asset or liability. NOTE 8 INCOME TAXES Effective January 1, 1993, the Company adopted FAS 109. The adoption of FAS 109 changed the Company's method of accounting for income taxes from the deferred method pursuant to Accounting Principles Board Opinion No. 11, to an asset and liability approach. FAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Using the enacted tax rates in effect for the year in which the differences are expected to reverse, deferred tax liabilities and assets are determined based on the differences between the financial reporting and the tax basis of an asset or liability. The cumulative adjustment for income taxes as a result of the adoption of FAS 109 on January 1, 1993 was a non-recurring charge to earnings of $306,000,000 and is reflected in the 1993 Consolidated Statement of Operations as a cumulative effect of a change in accounting for income taxes. The amount relates primarily to the TEC Film Library where there were substantial differences between amounts recorded for financial reporting purposes and for income tax purposes. The FAS 109 cumulative adjustment includes $45,000,000 representing the Company's 50% share of the FAS 109 cumulative adjustment recorded by Hanna-Barbera Entertainment Company, now Hanna-Barbera Holding Company, which was acquired in 1991. See Note 3 of Notes to Consolidated Financial Statements. The provision for income taxes for the three years ended December 31, 1995 consists of the following:
Year ended December 31, in thousands 1995 1994 1993 ---------------------------------------------------------- Current Federal $49,516 $42,279 $12,646 State and local 9,300 18,416 9,381 International 17,900 18,525 12,720 Deferred Federal 2,200 (23,647) 18,147 Increase in federal tax rate - - 6,788 State and local 1,600 (12,144) (6,691) International (10,100) (10,258) (4,867) ---------------------------------------------------------- Net provision for income taxes $70,416 $33,171 $48,124 ----------------------------------------------------------
44 18 The provision for income taxes differs from the amount computed by applying the applicable U.S. statutory federal income tax rate (35% in 1995, 1994 and 1993) to pre-tax income from continuing operations as a result of the following items:
Year ended December 31, in thousands 1995 1994 1993 ------------------------------------------------------- Federal tax provision on pre-tax income before extraordinary items at statutory federal income tax rate $60,584 $27,763 $42,199 Increase (decrease) due to: Increase in federal income tax rate - - 6,788 State and local taxes, net of federal benefit 9,925 4,077 1,749 Equity in income of unconsolidated entities - - (3,686) Nondeductible expenses 9,426 5,227 - Change in valuation analysis (3,508) (3,500) - Foreign tax credit (6,845) - - Other 834 (396) 1,074 ------------------------------------------------------- Provision for income taxes before extraordinary item $70,416 $33,171 $48,124 -------------------------------------------------------
Deferred tax assets (liabilities) consist of the following:
December 31, in thousands 1995 1994 ------------------------------------------------------- Deferred tax assets Accruals and reserves $ 96,587 $ 57,504 Tax credits and net operating losses 29,941 30,465 Other 28,321 17,544 ------------------------------------------------------- 154,849 105,513 ------------------------------------------------------- Valuation allowance on deferred tax assets (1,715) (5,223) ------------------------------------------------------- Deferred tax liabilities Film costs and related intangibles (426,127) (426,931) Accounts receivable (87,473) (34,656) Other (40,226) (17,266) ------------------------------------------------------- (553,826) (478,853) ------------------------------------------------------- $(400,692) $(378,563) -------------------------------------------------------
The valuation allowance for deferred tax assets at December 31, 1995 was $1,715,000. The net change in the total valuation allowance for the year ended December 31, 1995 was a decrease of $3,508,000, relating to foreign tax credits ("FTC"). At December 31, 1995, FTC carryforwards of approximately $11,200,000 were available to offset future federal income tax. For tax purposes, the FTC carryforwards will expire from 1998 through 2000. Additionally, an alternative minimum tax credit of approximately $7,200,000 is available to offset the Company's regular tax liability in future years. In connection with the Company's 1993 purchase of the remaining 50% of the Joint Venture, the Company also acquired certain net operating loss ("NOL") and FTC carryforwards which can only be used to reduce the federal income tax liability of the Joint Venture. As of December 31, 1995 approximately $3,300,000 of NOL carryforwards and approximately $1,200,000 of FTC carryforwards remain available to offset the future tax liability of the Joint Venture. The NOL and FTC carryforwards will begin expiring in 2007 and 1998, respectively. In connection with the New Line Merger, the Company also acquired FTC carryforwards which can only be used to reduce the federal income tax liability of New Line. As of December 31, 1995, approximately $2,100,000 of FTC carryforwards remain available to offset the future tax liability of New Line. The FTC carryforwards will begin expiring in 1998. The 1991 and 1992 consolidated federal income tax returns of the Company are presently under examination by the Internal Revenue Service (the "IRS"). The Company anticipates that in 1996 the IRS will issue a deficiency notice for additional taxes. The IRS is prohibited from assessing and collecting the disputed taxes until the taxpayer has had an opportunity to seek a redetermination of the asserted deficiency in the U.S. Tax Court. In the event a deficiency notice is received, the Company will file a petition in the U.S. Tax Court contesting the notice as it believes the items in dispute have been properly reflected in its tax returns. The Company does not anticipate a quick resolution of this matter and the ultimate result cannot be predicted at this time. However, in the opinion of management, any additional tax liability resulting from this matter would not have a material adverse impact on the consolidated financial position or operating results of the Company. The Company's tax liability has been reduced by approximately $2,263,000 and $459,000 in 1995 and 1994, respectively, representing realization of the tax benefits associated with the exercise of stock options. This benefit has been recorded as an increase to the Company's Capital in excess of par value. 45 19 NOTE 9 COMMITMENTS AND CONTINGENCIES COMMITMENTS In addition to long-term noncancelable operating lease commitments for vehicles, sports facilities, satellite transmission facilities and office space, the Company's principal revenue-producing operations enter into extended commitments integral to their respective operations. Amounts payable for the commitments discussed in Note 9 are summarized as follows:
Licensed Produced Employment in thousands program rights programming Newsgathering contracts - ----------------------------------------------------------------------------------- 1996 $ 95,311 $546,949 $ 5,848 $ 96,946 1997 69,073 296,759 2,579 80,170 1998 76,216 74,091 480 150,120 1999 77,147 335 504 25,205 2000 and thereafter 91,416 250 1,115 16,304 - ----------------------------------------------------------------------------------- $409,163 $918,384 $10,526 $368,745 - -----------------------------------------------------------------------------------
At December 31, 1995, the Company was obligated to make future payments under contracts for licensed film rights not currently available for use and, therefore, not included in the Consolidated Balance Sheet. The Company also has commitments under contracts for rights to or production of other programming not yet produced, of which $537,265,000 relates to sports programming. The Company has contracted for newsgathering services and technical support at bureaus and overland transmission services, payable in varying amounts through 2019. In June 1990, the Company entered into an exclusive domestic syndication and licensing agreement, as amended, under which the Company committed to make up to a $10,000,000 advance, recoupable against sales over the five-year period beginning September 1997, to the extent that the Company generates less than $72,000,000 of gross sales less distribution costs, as defined, over the five-year period beginning September 1992. Long-term employment contracts currently in effect provide for, among other items, aggregate annual compensation for baseball players and other employees of the Company. These amounts represent the maximum possible obligation, including potential incentive compensation for certain baseball players (although certain incentive compensation cannot be earned by more than one baseball player per season) that can be earned under the terms of the contracts. In November 1995, the Atlanta National League Baseball Club, Inc. (the "Braves"), a wholly-owned subsidiary of the Company, entered into an agreement with the Atlanta Committee for the Olympic Games whereby the Braves have agreed, under certain conditions, to contribute $23,365,000 toward the payment of certain costs to construct stadium facilities for use in staging the 1996 Summer Olympic Games, including modifications for permanent use as a baseball facility and demolition of the existing facility used by the Braves, both after the staging of the 1996 Summer Olympic Games. All such costs are expected to be paid in 1996 and 1997. CONTINGENCIES AND PENDING LITIGATION Because of the nature of its principal revenue-producing activities, the Company is, in the routine operation of its business, subject to litigation, claims, assessments and various legal matters. In the opinion of management, none of these matters is expected to result in a judgment having a material adverse effect on the Company's consolidated financial position or results of operations. NOTE 10 STOCKHOLDERS' EQUITY (DEFICIT) COMMON STOCK Each share of Class A and Class B Common Stock is identical in all respects except voting privileges. In June 1994, the Company amended its Restated Articles of Incorporation to increase the voting power of the Class A Common Stock to two votes per share. The Class B Common stockholders are entitled to one-fifth vote per share. 46 20 In 1995 and 1994, the Board of Directors declared cash dividends 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 respective record dates each quarter. In addition, holders of the Company's outstanding Class C Preferred Stock were entitled to equivalent cash dividends of $0.105 for each share held on the record date each quarter based on the number of shares of Class B Common Stock which would be receivable upon conversion of each share of Class C Preferred Stock. 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 which limits the maximum aggregate amount of dividends permitted to be paid annually to such holders to $30,000,000. During 1994, approximately 24,000 shares of Class B Common Stock were issued to certain officers and employees. During 1993, approximately 300,000 shares of Class B Common Stock were issued to certain officers and employees and in connection with the redemption of the Convertible Notes due 2004. See Note 6 of Notes to Consolidated Financial Statements. CLASS C CONVERTIBLE PREFERRED STOCK AND CLASS B CUMULATIVE PREFERRED STOCK On June 3, 1987, the Company issued to a group of investors (the "Units Investors") an aggregate of 12,396,976 units of its securities (the "Units Offering"), each unit composed of one share of the Company's Class B Cumulative Preferred Stock (the "Class B Preferred Stock") and one share of the Company's Class C Preferred Stock, for an aggregate consideration of approximately $568,194,000, or $45.8333 per unit. All of the outstanding shares of Class B Preferred Stock have been redeemed by the Company. The terms of the Class C Preferred Stock provide for conversion to Class B Common Stock, at the option of the holder, at a current rate of six shares of Class B Common Stock for every one share of Class C Preferred Stock at any date prior to redemption. The holders of Class C Preferred Stock are entitled to vote as though they held the Class B Common Stock underlying the shares of Class C Preferred Stock and are entitled to vote as a separate class for seven members of the Company's 15 member board of directors. In addition, holders of the Class C Preferred Stock are entitled to dividends (non-cumulative) based on the number of underlying shares of Class B Common Stock. If the number of outstanding shares of Class C Preferred Stock is less than 4,000,000, the right of the holders of Class C Preferred Stock to vote as a separate class for seven directors ceases and the Company may redeem the then outstanding shares at a redemption price per share equal to the common stock equivalent price on the redemption date. STOCK OPTIONS The Company has two stock option plans under which options may be granted to certain key employees at prices determined by the Stock Option and Compensation Committee. Under the 1988 Stock Option Plan (the "1988 Plan"), options may not be granted at less than par value on the date of grant but may be granted at less than the fair market value ("FMV") on the date of grant, except for an incentive stock option. The option price per share subject to an incentive stock option may not be less than the greater of 100% of the FMV per share on the grant date, or the par value per share; however, in the case of an incentive stock option granted to a 10% shareholder, the option price per share may not be less than the greater of 110% of FMV per share on the date of grant or the par value per share. All options granted under the 1988 Plan have been granted at FMV. At December 31, 1995, the total number of shares available for the grant of options under the 1988 Plan was 180,432 Shares of Class B Common Stock. Under the 1993 Stock Option and Equity-Based Award Plan (the "1993 Plan"), adopted November 15, 1993, options may not be granted at less than par value on the date of grant but may be granted at less than the FMV on the date of grant, except for an incentive stock option. The option price per share subject to an incentive stock option may not be less than the greater of 100% of the FMV per share on the grant date, or the par value per share; however, in the case of an incentive stock option granted to a 10% shareholder, the option price per share may not be less than the greater of 110% of FMV per share on the date of grant or the par value per share. At December 31, 1995, the total number of shares available for the grant of options under the 1993 Plan was 8,962,200 Shares of Class B Common Stock. 47 21 In connection with the New Line Merger, the Company assumed three New Line Stock Option Plans in effect at that time. Accordingly, each New Line stock option outstanding at the time of the New Line Merger constituted an option to acquire the same number of shares of Class B Common Stock as the holder of the New Line stock option would have been entitled to receive pursuant to the New Line Merger had such holder exercised such option in full immediately prior to the New Line Merger. Transactions relating to rights to purchase Class B Common Stock under the 1988 Plan, 1993 Plan and pursuant to the New Line Merger for the three years ended December 31, 1995, are summarized below:
Exercise Price (1) ------------------------ in thousands, except share data Number of shares Per share Aggregate - ------------------------------------------------------------------------------------- Balance at December 31, 1992 4,344,120 Granted 2,070,300 Exercised (754,621) $2.792 - 19.500 $7,490 Canceled or expired (188,025) - ------------------------------------------------------------------------------------- Balance at December 31, 1993 5,471,774 Granted 5,346,950 Assumed in connection with the New Line Merger 3,419,997 Exercised (191,908) $2.792 - 19.500 $1,821 Canceled or expired (110,069) Balance at December 31, 1994 13,936,744 Granted 3,858,300 Exercised (558,282) $2.792 - 19.500 $6,746 Canceled or expired (304,359) - ------------------------------------------------------------------------------------- Balance at December 31, 1995 16,932,403 - -------------------------------------------------------------------------------------
(1) The options outstanding at December 31, 1995 are exercisable at prices ranging from $1.3207 to $27.250 per share for a total exercise price of $312,117,682. The majority of the stock options are exercisable at $26.250 (3,215,000 shares), $16.625 (1,942,000 shares), $16.875 (1,485,400 shares), $27.125 (1,301,000 shares), $17.625 (1,110,850 shares), $13.170 (1,068,178 shares), $25.625 (1,053,300 shares) and $12.839 (891,865 shares). The Company has reserved shares of common stock for issuance upon exercise of outstanding stock options, conversion of the Class C Preferred Stock, the Convertible Notes due 2007 and the convertible subordinated debentures of a wholly-owned subsidiary. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). This Statement encourages the adoption of a fair-value-based method of accounting for stock-based compensation plans in place of the intrinsic-value-based method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), for all arrangements under which employees receive shares of stock or other equity instruments of the employer, or the employer incurs liabilities to employees based on the price of its stock. In addition, FAS 123 establishes fair value as the measurement basis for transactions in which an entity acquires goods or services from nonemployees in exchange for equity instruments. The Statement allows entities to chose to adopt the method defined in FAS 123 or to continue to apply the method prescribed by APB 25 while providing disclosure of pro forma amounts representing the effect of fair-value-based accounting. The Company will adopt FAS 123 on January 1, 1996. It is the Company's intention, as permitted by FAS 123, to continue to apply the measurement provisions of APB 25 and provide the required pro forma disclosures. NOTE 11 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 Balance Sheet and the proceeds have been included as a source of cash provided by operations in the Consolidated 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 48 22 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 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 but is intended to be renewed for another one-year term, the Company performs collection and administrative responsibilities as agent for the purchaser on the related purchased receivables. As of December 31, 1995, the Company had sold an undivided interest in this designated pool of domestic cable and advertising accounts receivable that aggregated $300,000,000 and generated net proceeds of $222,000,000. The estimated total cost of the program for the sale of accounts receivable during 1995 approximated $14,300,000 and is reflected as a reduction of operating profit in the Consolidated Statement of Operations. NOTE 12 RETIREMENT SAVINGS PLANS The Company has four domestic and one international defined contribution retirement plans and one defined benefit retirement plan. The Turner Broadcasting System, Inc. Retirement Savings Plan is a tax qualified savings plan with matching Company contributions, which covers essentially all employees of the Company, except the Braves, employees based outside the United States and employees subject to collective bargaining agreements. A non-qualified supplemental savings plan with matching Company contributions covers employees with compensation in excess of the amount taken into consideration by the tax qualified savings plan. A non-qualified retirement plan covers certain key employees. The Atlanta Braves Retirement Savings Plan is a tax qualified savings plan without a matching Company contribution, which covers non-uniformed employees of the Braves. The Company also has a defined contribution retirement plan which is tax qualified in the United Kingdom and covers essentially all employees in London. The Company's defined benefit retirement plan covers non-uniformed personnel of the Braves. The Company's total contribution for all plans described above was approximately $17,000,000, $13,400,000 and $10,500,000 for 1995, 1994 and 1993, respectively. NOTE 13 RELATED PARTY TRANSACTIONS Most of the investors in the Company's Units Offering have ongoing business relationships with the Company, primarily as operators, directly or through affiliates, of cable and satellite television systems which receive and distribute to their subscribers programming provided by the Company's cable television operations. See Note 10 of Notes to Consolidated Financial Statements. The Company recorded subscription fees from the Unit Investors for the delivery of such cable and satellite services (CNN, Headline News, TNT, Cartoon Network, Turner Classic Movies ("TCM") and certain international networks), before deductions for advertising allowances, of approximately $354,611,000 for 1995, $287,026,000 for 1994, and $272,318,000 for 1993. These amounts constituted approximately 48%, 46%, and 50% of the Company's total subscription revenue during each respective year. At December 31, 1995 and 1994, the receivables from the Unit Investors aggregated approximately $92,657,000 and $103,432,000, respectively. Advertising revenues received by the Company during 1995 were also indirectly dependent to a substantial degree on cable television systems operated by the Unit Investors or their affiliates since subscribers to those systems constituted approximately 54%, 54%, 57%, 54% and 53% of the cable audience coverage as of December 1995 for TBS Superstation, CNN, Headline News, TNT and Cartoon Network, respectively. The Company is vulnerable to the risk of loss of future revenues associated with the concentration of such revenues with the Unit Investors. If the Unit Investors discontinued carriage of the Company's cable television operations, subscription and advertising revenues would decrease, resulting in a significant adverse impact on the Company's operating profit and net income in future periods. Warner Home Video, Inc. ("WHV"), a wholly-owned subsidiary of Time Warner, services certain obligations under an agreement between the predecessor of Metro-Goldwyn-Mayer Inc. ("MGM") and the Company to distribute in the home video market most MGM and pre-1950 Warner Bros. films in the TEC Film Library. The original agreement expires in 2001. Revenues recorded in 1995, 1994 and 1993 pursuant to the distribution agreement were $80,361,000, $104,080,000 and $81,723,000, respectively. Expenses recorded in the same periods pursuant to the distribution agreement were $54,441,000, $73,813,000 and $50,549,000, respectively. Time Warner and its subsidiaries have entered into license agreements with the Company pursuant to which the Company has acquired broadcast rights to certain television and theatrical product. The Company paid an 49 23 aggregate of approximately $18,236,000, $19,295,000 and $13,933,000 for license fees during 1995, 1994 and 1993, respectively, under these agreements and is committed to pay $59,946,000 through 2005 under these agreements. Additionally, Time Warner has an ownership interest in n-tv. See Note 3 of Notes to Consolidated Financial Statements. Pursuant to an agreement entered into between New Line and Encore Media Corporation ("Encore"), New Line has agreed to supply, on an exclusive basis, films for exhibition on Starz!, a premium cable programming service, or other pay television services owned or operated by Encore. LMC has a 90% interest in Encore. For the year ended December 31, 1995, the Company recorded revenue of $42,198,000 pursuant to the agreement. NOTE 14 SUPPLEMENTAL CASH FLOW INFORMATION Supplemental disclosure of cash flow information and non-cash investing and financing activities include:
Year ended December 31, in thousands 1995 1994 1993 - ------------------------------------------------------------------------------------- Interest paid, net of interest received $184,025 $198,042 $137,664 Payments of accreted interest upon redemption of related securities - - 74,683 Cash paid for income taxes 71,654 36,721 18,405 Disposal of fixed assets - - 16,327 - -------------------------------------------------------------------------------------
On January 28, 1994, the Company completed the New Line Merger as follows (in thousands): 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 - -------------------------------------------------------------------------------------
In 1993, the Company purchased Castle Rock and the remaining 50% of the Joint Venture and assumed liabilities as of December 31, 1993 (in thousands) as follows: Fair value of assets acquired $660,596 Less: cash paid for capital stock and debt 258,500 cash paid for partnership interest, debt and other acquisition costs 318,900 Liabilities assumed $ 83,196 ----------------------------------------------------
NOTE 15 BUSINESS SEGMENT INFORMATION The Company is a diversified entertainment and information company whose primary business segments include Entertainment and News. Through its subsidiaries, the Company owns and operates four domestic entertainment networks, four international entertainment networks and four news networks. The Company produces, finances and distributes entertainment programming worldwide, with operations in motion pictures, animation and television production, home video, television syndication, licensing and merchandising, and publishing. The table on page 51 summarizes the Company's operating results by business segment. Revenues by business segment include revenues between business segments which are accounted for on substantially the same basis as revenues from unaffiliated customers. Intrasegment and intersegment revenues consist primarily of fees for licensed film rights billed within Entertainment and for lease rentals and facility services billed by the Other segment. Advertising costs, other than advertising associated with film costs, are expensed upon first exhibition of the advertisement. Segment operating results include advertising expense of approximately $95,500,000, $83,200,000 and $84,900,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The Company derives export sales revenues from the transmission of its entertainment and news program services in international markets. In addition, the Company distributes, either directly or through third-party distributors, motion pictures and other filmed entertainment product internationally in the theatrical, home video, pay television, basic cable and over-the-air markets. Total revenues from the export sale of the Company's products and services amounted to approximately $445,000,000, $393,000,000 and $240,000,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Approximately 45%, 26% and 17% of the 1995 export sales were from customers in Europe, Asia and Latin America, respectively. Approximately 50%, 25% and 16% of the 1994 export sales were from customers in Europe, Asia and Latin America, respectively. Approximately 45%, 24% and 23% of the 1993 export sales were from customers in Europe, Latin America and Asia, respectively. 50 24 BUSINESS SEGMENT INFORMATION
Year ended December 31, in thousands 1995 1994 1993 - ---------------------------------------------------------------------------- Total revenue Entertainment Networks $1,207,921 $1,035,775 $ 934,248 Production and Distribution 1,375,622 1,050,374 267,035 Intrasegment revenue elimination (79,816) (84,920) (39,001) - ---------------------------------------------------------------------------- Total Entertainment 2,503,727 2,001,229 1,162,282 News 765,278 667,182 599,352 Other 206,688 164,072 182,339 Intersegment revenue elimination (38,343) (23,358) (22,367) - ---------------------------------------------------------------------------- $3,437,350 $2,809,125 $1,921,606 - ---------------------------------------------------------------------------- Operating profit (loss) (1) Entertainment Networks $ 242,668 $ 128,289 $ 165,530 Production and Distribution (49,147) (27,344) (23,605) Intrasegment elimination 7,174 18,507 1,320 - ---------------------------------------------------------------------------- Total Entertainment 200,695 119,452 143,245 News 264,854 227,374 212,202 Other (77,381) (70,929) (33,267) Gain on sale of equity investment - 21,746 - Equity in loss of unconsolidated entities (2) (5,750) (10,001) (20,040) Cost of accounts receivable securitization program (14,297) - - Time Warner merger costs (9,749) - - - --------------------------------------------------------------------------- $ 358,372 $ 287,642 $ 302,140 - ---------------------------------------------------------------------------- Depreciation and amortization of goodwill and other intangibles (3) Entertainment Networks $ 11,721 $7,533 $ 5,445 Production and Distribution 22,139 17,051 1,508 - ---------------------------------------------------------------------------- Total Entertainment 33,860 24,584 6,953 News 16,403 13,135 11,147 Other 29,677 21,026 21,173 - ---------------------------------------------------------------------------- $ 79,940 $ 58,745 $ 39,273 - ---------------------------------------------------------------------------- Identifiable assets at end of year Entertainment Networks $ 687,297 $ 788,406 $ 779,220 Production and Distribution 3,051,880 2,727,319 1,932,751 - ---------------------------------------------------------------------------- Total Entertainment 3,739,177 3,515,725 2,711,971 News 220,838 282,111 218,040 Other 435,385 274,709 314,851 - ---------------------------------------------------------------------------- $4,395,400 $4,072,545 $3,244,862 - ---------------------------------------------------------------------------- Capital expenditures Entertainment Networks $ 25,742 $ 40,053 $ 9,797 Production and Distribution 13,875 8,687 2,559 - ---------------------------------------------------------------------------- Total Entertainment 39,617 48,740 12,356 News 23,074 26,648 14,479 Other 40,574 33,848 23,735 - ---------------------------------------------------------------------------- $ 103,265 $ 109,236 $ 50,570 - ----------------------------------------------------------------------------
(1) Operating profit (loss) is defined as income (loss) before interest expense, interest income, income taxes, extraordinary items and the cumulative effect of a change in accounting for income taxes. (2) Equity in loss of unconsolidated entities includes the results, in applicable years, of a 50% interest in Hanna-Barbera Holding Company; a 27.5% interest in n-tv acquired March 31, 1993; a 96% interest in the Atlanta Hawks; a 44% interest in the SportSouth Network; a one-third interest in a joint venture which operates a computerized ticket sales agency; and costs associated with a commitment for a 50% joint venture interest in Moscow which was discontinued in late 1994. (3) Includes depreciation on property and equipment and amortization associated with goodwill and other intangible assets. 51 25 NOTE 16 UNAUDITED QUARTERLY FINANCIAL INFORMATION
1995 Three months ended in thousands, except per share data Mar. 31 June 30 Sept. 30 Dec. 31 - ------------------------------------------------------------------------------ Revenue $710,315 $797,886 $1,006,581 $922,568 Operating profit (1) 88,951 83,661 107,073 78,687 Net income 21,990 21,700 39,756 19,235 - ------------------------------------------------------------------------------ Earnings per common share Net income $ 0.08 $ 0.08 $ 0.14 $ 0.07 - ------------------------------------------------------------------------------
1994 Three months ended in thousands, except per share data Mar. 31 June 30 Sept. 30 Dec. 31 - ------------------------------------------------------------------------------ Revenue $567,304 $677,647 $ 738,889 $825,285 Operating profit (1) 29,949 74,242 87,537 95,914 Income (loss) before extraordinary items (13,624) 12,919 20,383 26,475 Net income (loss) (2) (13,624) 12,919 (4,613) 26,475 - ------------------------------------------------------------------------------ Earnings (loss) per common share Income (loss) before extraordinary items $ (0.07) $ 0.05 $ 0.07 $ 0.09 Net income (loss) $ (0.07) $ 0.05 $ (0.02) $ 0.09 - ------------------------------------------------------------------------------
(1) Operating profit is defined as income before interest expense, interest income, income taxes and extraordinary item, where applicable. (2) Extraordinary losses on early extinguishments of debt of $40,977,000, net of income tax benefits of $15,981,000, for the three months ended September 30, 1994, are included in the calculation of net income. 52 26 To the Stockholders and Board of Directors of Turner Broadcasting System, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows and of changes in stockholders' equity (deficit) present fairly, in all material respects, the financial position of Turner Broadcasting System, Inc. and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 2 to the Consolidated Financial Statements, the Company entered into an Amended and Restated Agreement and Plan of Merger dated as of September 22, 1995 which provides for a transaction, if consummated, in which the Company and Time Warner Inc. will each become a wholly-owned subsidiary of a new holding company. As discussed in Note 8 to the Consolidated Financial Statements, the Company changed its method of accounting for income taxes in 1993. /s/ PRICE WATERHOUSE LLP - ------------------------ PRICE WATERHOUSE LLP Atlanta, Georgia February 5, 1996 The consolidated financial statements included in this report were prepared by the Company in conformity with generally accepted accounting principles. Management's best estimates and judgments were used, where appropriate. Management is responsible for the integrity of the financial statements and for other financial information included in this report. The financial statements have been audited by the Company's independent accountants, Price Waterhouse LLP. As set forth in their report, their audit was conducted in accordance with generally accepted auditing standards and formed the basis for their opinion on the accompanying financial statements. They evaluate the system of internal accounting control and perform such tests and other procedures as they deem necessary to reach and express an opinion on the fairness of the financial statements. The Company maintains a system of internal accounting controls which is designed to provide a reasonable assurance that assets are safeguarded and that the financial records reflect the authorized transactions of the Company. As a part of this process, the Company has an internal audit function which evaluates the adequacy and effectiveness of internal accounting controls. The Audit Committee of the Board of Directors consists of directors who are neither officers nor employees of the Company. The Committee meets periodically with management, internal auditors and the independent accountants to discuss auditing, internal accounting control and financial reporting matters. The Director of Internal Audit and the independent accountants have full and free access to meet with the Audit Committee with and without management being present. /s/ Wayne H. Pace /s/ William S. Ghegan --------------------------- --------------------- Wayne H. Pace William S. Ghegan Vice President - Finance Vice President, and Chief Financial Officer Controller and Chief Accounting Officer 53 27 EXECUTIVE OFFICERS R.E. Turner Scott M. Sassa Chairman of the Board of Directors and President Vice President - Turner Entertainment Group and a director Christian L. Becken Vice President and Treasurer Harvey W. Schiller Vice President - Sports Programming William S. Ghegan Vice President, Controller and William M. Shaw Chief Accounting Officer Vice President - Administration William H. Grumbles Robert Shaye Vice President - Worldwide Distribution Chairman and Chief Executive Officer - New Line Cinema Corporation and a director Elahe Hessamfar Vice President and Chief Information Officer Julia W. Sprunt Vice President Marketing and Communications Steven J. Heyer Vice President - Advertising Sales and Marketing CORPORATE HEADQUARTERS W. Thomas Johnson Vice President - News and a director One CNN Center Atlanta, Georgia 30303 (404) 827-1700 Steven W. Korn Vice President, General Counsel and Secretary OUTSIDE COUNSEL Terence F. McGuirk Executive Vice President and a director Troutman Sanders 5200 NationsBank Plaza Wayne H. Pace 600 Peachtree Street, N.E. Vice President - Finance and Chief Financial Officer Atlanta, Georgia 30308-2216 INDEPENDENT ACCOUNTANTS Price Waterhouse LLP 50 Hurt Plaza Atlanta, Georgia 30303
54 28 INVESTOR INFORMATION COMMON STOCK TRANSFER AGENT AND REGISTRAR First Union National Bank of North Carolina Shareholders Services Group 230 South Tryon Street Charlotte, North Carolina 28202-1154 (800) 729-8432 TRUSTEES AND PAYING AGENTS Credit Agreements The Chase Manhattan Bank, N.A. 90 William Street New York, New York 10081 8 3/8% Senior Notes due 2013 7.4% Senior Notes and 8.4% Senior Debentures State Street Bank and Trust Company Corporate Trust Department P.O. Box 778 Boston, Massachusetts 02102 Zero Coupon Subordinated Convertible Notes due 2007 The Bank of New York Corporate Trust Administration Group 101 Barclay Street, 21st Floor New York, New York 10286 PRICE RANGE OF COMMON STOCK The Class A Common Stock trades on the American Stock Exchange ("AMEX") under the symbol "TBS.A" and the Class B Common Stock trades on the AMEX under the symbol "TBS.B." The following table sets forth, for the periods indicated, the high and low sales prices per share of common stock on the AMEX Composite Tape.
Calendar Year ------------------------------ 1995 1994 High Low High Low -------------------------------------------------- First quarter Class A $18 3/4 $16 $27 5/8 $20 1/2 Class B 18 7/8 16 1/4 27 3/4 20 1/2 Second quarter Class A 20 17 1/2 20 17 1/8 Class B 20 1/2 17 7/8 20 17 1/4 Third quarter Class A 30 7/8 21 3/4 19 5/8 17 Class B 30 3/4 22 1/4 20 17 Fourth quarter Class A 27 5/8 25 3/8 20 15 Class B 28 25 7/8 20 3/8 15 1/8 --------------------------------------------------
STOCKHOLDERS The approximate number of holders of record of Class A Common Stock and Class B Common Stock as of December 31, 1995 was 1,800 and 2,000, respectively. This number does not include all individuals with beneficial interests in the stock. DIVIDEND POLICY In 1995 and 1994, the Company paid quarterly dividends of $0.0175 per share on both Class A Common Stock and Class B Common Stock. Holders of the Company's Class C Preferred Stock were entitled to an equivalent cash dividend of $0.105 for each share held based on the number of underlying shares of Class B Common Stock. The Indenture governing the 12% Senior Subordinated Debentures (redeemed in 1994), the Indenture governing the 8 3/8% Senior Notes, the 7.4% Senior Notes, and the 8.4% Senior Debentures and the Company's bank credit agreements contain provisions limiting the ability of the Company to pay cash dividends to the holders of its common shares. Currently, the most restrictive covenant limits the maximum aggregate amount of dividends permitted to be paid annually to such holders to $30,000,000. In any event, the declaration of dividends on common shares is within the discretion of the Board of Directors of the Company and is therefore subject to many considerations, including financial covenants, operating results, business and capital requirements and other factors. RESTRICTIONS ON STOCK OWNERSHIP The Communications Act of 1934 provides that no broadcast license may be held by a corporation in which more than 20% of the capital stock is owned of record or voted by non-U.S. citizens. The Communications Act further prohibits, without Federal Communications Commission approval, the holding by a corporation of the capital stock of another corporation owning a broadcast license if more than 25% of the capital stock of such parent corporation is owned of record or voted by non-U.S. citizens. The Company's Restated Articles of Incorporation incorporate these restrictions on non-U.S. ownership so that such restrictions are applied separately to each class of the Company's capital stock. The Company has reserved the right to refuse to transfer shares of its capital stock which would result in a violation of these restrictions. FORM 10-K REQUESTS The Company will provide copies of its 1995 Form 10-K upon written request directed to: Kitsie Bassett Riggall Assistant Vice President - Investor Relations Turner Broadcasting System, Inc. One CNN Center Atlanta, Georgia 30303 55 EX-21 4 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21 LIST A TURNER BROADCASTING SYSTEM, INC. (WHOLLY-OWNED SUBSIDIARIES) 1. Atlanta National League Baseball Club, Inc. ("ANLBC") ANLBC Subs: a. Atlanta Braves, Inc. b. Braves Productions, Inc. c. The Stadium Club, Inc. *d. Atlanta Braves Spring Training Corp. 2. CR Acquisition Co. 3. Cable News Network, Inc. ("CNN") CNN Subs: a. CNN America, Inc. b. CNN Business News International, Inc. c. CNN Germany, Inc. d. Cable News International, Inc. 4. Castle Rock Entertainment, Inc. 5. Goodwill Games, Inc. ("GWG") GWG Subs: a. Gamma Productions, Inc. b. Turner Leasing Company, Inc. ("TLC") TLC Sub: *1. Turner Capital Corp. 6. HB Holding Co. ("HBC") HBC Sub: a. Hanna-Barbera Entertainment Co., Inc. ("HBEC") HBEC Subs: 1. Hanna-Barbera Enterprises, Inc. 2. Hanna-Barbera Home Video, Inc. 3. Hanna-Barbera Music Corp. 4. Hanna-Barbera Productions, Inc. ("HBPI") HBPI Subs: a. Fil-Cartoons, Inc. b. Hanna-Barbera B.V. 5. Hanna-Barbera Retail, Inc. 6. R-S Pictures, Inc. 7. Raby-Spar Enterprises, Inc. 2 7. Hanna-Barbera, Inc. ("HB") HB Subs: a. Barhanna Music, Inc. b. Hanna-Barbera Cartoons, Inc. ("HBCI") HBCI Subs: 1. Bedrock Productions, Inc. 2. The Endangered Film Company, Inc. c. Newbar Music, Inc. d. Orbit City Art Company e. Vineland Productions, Inc. 8. Hawks Basketball, Inc. 9. ICC Ventures, Inc. 10. New Line Cinema Corporation ("NL") NL Subs: a. Alex Entertainment, Inc. b. Juno Pix, Inc. c. Katja Motion Picture Corp. d. Lampline, Inc. e. Mitchell Entertainment, Inc. f. New Line Distribution, Inc. g. New Line Home Video, Inc. h. New Line International Releasing, Inc. *i. New Line New Media, Inc. j. New Line Productions, Inc. ("NLP") NLP Subs: 1. Justine Pictures AVV 2. Venus Productions Ltd. k. New Line Realty of New York, Inc. l. New Line Television, Inc. m. New Line Television International Limited n. Nicolas Entertainment, Inc. 11. RET Corporation 12. RET Music, Inc. 13. Soviet-American Trading Corporation *14. TBS Funding Corp. *15. Techwood Clearinghouse, Inc. 16. Turner Arena Productions and Sales, Inc. ("TAPS") TAPS Subs: a. Atlanta Coliseum, Inc. b. The Omni Promotions Management Company ("OPMC") 3 OPMC Subs: 1. Techwood Entertainment, Inc. c. Seats, Inc. 17. Turner Broadcasting Sales, Inc. *18. Turner Broadcasting System Asia Pacific, Inc. 19. Turner Broadcasting System Limited ("TBSL") TBSL Subs: a. Castle Rock International (UK) Limited *b. New Line International Limited c. Turner Entertainment Networks International Limited ("TENIL") TENIL Subs: 1. The Cartoon Network Limited 2. Turner Network Television Limited d. Turner Home Entertainment UK Limited e. Turner International Advertising Sales Limited f. Turner International Network Sales Limited ("TINSL") TINSL Sub: 1. Turner Broadcasting International Limited g. Turner International Television Licensing Limited h. Turner Pictures Worldwide (UK) Limited ("TPWUK") TPWUK Sub: *1. Woodtech Productions (UK) Limited *20. Turner Entertainment Group, Inc. ("TEG") TEG Subs: *a. Turner Entertainment Networks, Inc. ("TENI") TENI Subs: 1. The Cartoon Network, Inc. 2. Superstation, Inc. ("SSI") SSI Sub: *a. Turner Original Productions, Inc. ("TOPS") TOPS Sub: 1. TBS Productions, Inc. ("TBSP") TBSP Subs: a. North Center Productions, Inc. b. Ten 50 Productions, Inc. 3. Turner Classic Movies, Inc. *4. Turner Entertainment Networks Asia, Inc. 5. Turner Network Television, Inc. 4 b. Turner Home Entertainment, Inc. ("THE") THE Subs: *1. Rooftop Productions, Inc. 2. Turner Educational Services, Inc. 3. Turner New Media, Inc. 4. Turner Pictures Worldwide Distribution, Inc. 5. Turner Publishing, Inc. *6. Turner Records, Inc. c. Turner Pictures Group, Inc. ("TPG") TPG Subs: 1. Turner Entertainment Co. ("TEC") TEC Subs: a. Clarington Productions, Inc. b. Elstree Ltd. c. Filmland Data Processing Co. d. Filmland Production Co. e. H-B Distribution Co. f. Premier Record Corporation g. TEC Bounty Exhibition, Inc. h. Turner Affiliated Music, Inc. i. Turner Entertainment Associated, Inc. j. Turner Entertainment Co. (de Mexico) k. Turner Entertainment Distribution Services, Inc. l. Turner Entertainment Film Co. m. Turner Entertainment Manila, Inc. n. Turner Entertainment Oriental Co., Inc. o. Turner Entertainment Pictures of Canada Limited p. Turner Music, Inc. q. Turner Tape Storage Co. 2. Turner Pictures Worldwide, Inc. ("TPW") TPW Subs: a. Colbath, Inc. b. Retro, Inc. c. TNT Music Publishing, Inc. d. Techwood Music, Inc. e. Techwood Productions, Inc. f. Turner Films, Inc. ("TFI") TFI Subs: *1. Horseshoe Productions, Inc. *2. Turner Cinema, Inc. g. Turner Pages, Inc. 3. Turner Feature Animation, Inc.
5 21. Turner Home Satellite, Inc. 22. Turner International, Inc. ("TI") TI Subs: a. Turner Czech, Inc. b. Turner Entertainment Co. (de Puerto Rico) c. Turner International Argentina S.A. d. Turner International Australia Pty. Limited e. Turner International Broadcasting Russia, Inc. *f. Turner International Canada, Inc. *g. Turner International China, Inc. h. Turner International do Brasil Ltda. i. Turner International Asia Pacific Limited j. Turner International Holding Company *k. Turner International India Private Limited l. Turner International Japan, Inc. *m. Turner International Mexico, S.A. de C.V. n. Turner International Netherlands B.V. o. Turner International Television Licensing Co., Inc. *p. Turner Productions S.A. q. Turner Slovakia, Inc. 23. Turner Marketing, Inc. 24. Turner Music Publishing, Inc. ("TMP") TMP Sub: *a. Title Match Music, Inc. 25. Turner Network Sales, Inc. 26. Turner Omni Venture, Inc. 27. Turner Private Networks, Inc. ("TPNI") TPNI Subs: a. AC Holdings, Inc. b. COC Holdings, Inc. 28. Turner Program Services, Inc. 29. Turner Properties, Inc. 30. Turner Reciprocal Advertising Corporation 31. Turner Retail Company *32. Turner Second Generation, Inc. 33. Turner Security, Inc. 34. Turner Sports, Inc. ("TSI") 6 TSI Sub: *a. Turner Sports International Enterprises, Inc. 35. Turner Sports Programming, Inc. 36. Turner Teleport, Inc. 37. World Championship Wrestling, Inc.** *New Subsidiary **100 shares of non-voting Class B common stock owned by Jim Crockett Promotions, Inc. 6 7 LIST B TURNER BROADCASTING SYSTEM, INC. ALPHABETICAL LIST OF SUBSIDIARIES 1. AC Holdings, Inc. (27a) 2. Alex Entertainment, Inc. (10a) 3. Atlanta Braves, Inc. (1a) * 4. Atlanta Braves Spring Training Corp. (1d) 5. Atlanta Coliseum, Inc. (16a) 6. Atlanta National League Baseball Club, Inc. (1) 7. Barhanna Music, Inc. (7a) 8. Bedrock Productions, Inc. (7b1) 9. Braves Productions, Inc. (1b) 10. CNN America, Inc. (3a) 11. CNN Business News International, Inc. (3b) 12. CNN Germany, Inc. (3c) 13. COC Holdings, Inc. (27b) 14. CR Acquisition Co. (2) 15. Cable News International, Inc. (3d) 16. Cable News Network, Inc. (3) 17. The Cartoon Network, Inc. (20a1) 18. The Cartoon Network Limited (19c1) 19. Castle Rock Entertainment, Inc. (4) 20. Castle Rock International (UK) Limited (19a) 21. Clarington Productions, Inc. (20c1a) 22. Colbath, Inc. (20c2a) 23. Elstree Ltd. (20c1b) 24. The Endangered Film Company, Inc. (7b2) 25. Fil-Cartoons, Inc. (6a4a) 26. Filmland Data Processing Co. (20c1c) 27. Filmland Production Co. (20c1d) 28. Gamma Productions, Inc. (5a) 29. Goodwill Games, Inc. (5) 30. H-B Distribution Co. (20c1e) 31. HB Holding Co. (6) 32. Hanna-Barbera B.V. (6a4b) 33. Hanna-Barbera Cartoons, Inc. (7b) 34. Hanna-Barbera Enterprises, Inc. (6a1) 35. Hanna-Barbera Entertainment Co., Inc. (6a) 36. Hanna-Barbera Home Video, Inc. (6a2) 37. Hanna-Barbera, Inc. (7) 38. Hanna-Barbera Music Corp. (6a3) 39. Hanna-Barbera Productions, Inc. (6a4) 8 40. Hanna-Barbera Retail, Inc. (6a5) 41. Hawks Basketball, Inc. (8) * 42. Horseshoe Productions, Inc. (20c2f1) 43. ICC Ventures, Inc. (9) 44. Juno Pix, Inc. (10b) 45. Justine Pictures AVV (10j1) 46. Katja Motion Picture Corp. (10c) 47. Lampline, Inc. (10d) 48. Mitchell Entertainment, Inc. (10e) 49. Newbar Music, Inc. (7c) 50. New Line Cinema Corporation (10) 51. New Line Distribution, Inc. (10f) 52. New Line Home Video, Inc. (10g) 53. New Line International Limited (19b) 54. New Line International Releasing, Inc. (10h) * 55. New Line New Media, Inc. (10i) 56. New Line Productions, Inc. (10j) 57. New Line Realty of New York, Inc. (10k) 58. New Line Television, Inc. (10l) 59. New Line Television International Limited (10m) 60. Nicolas Entertainment, Inc. (10n) 61. North Center Productions, Inc. (20a2a1a) 62. The Omni Promotions Management Company (16b) 63. Orbit City Art Company (7d) 64. Premier Record Corporation (20c1f) 65. RET Corporation (11) 66. RET Music, Inc. (12) 67. R-S Pictures, Inc. (6a6) 68. Raby-Spar Enterprises, Inc. (6a7) 69. Retro, Inc. (20c2b) 70. Rooftop Productions, Inc. (20b1) 71. Seats, Inc. (16c) 72. Soviet-American Trading Corporation (13) 73. The Stadium Club, Inc. (1c) 74. Superstation, Inc. (20a2) 75. TBS Funding Corp. (14) 76. TBS Productions, Inc. (20a2a1) 77. TEC Bounty Exhibition, Inc. (20clg) 78. TNT Music Publishing, Inc. (20c2c) * 79. Techwood Clearinghouse, Inc. (15) 80. Techwood Entertainment, Inc. (16b1) 81. Techwood Music, Inc. (20c2d) 82. Techwood Productions, Inc. (20c2e) 83. Ten 50 Productions, Inc. (20a2a1b) 9 84. Title Match Music, Inc. (24a) 85. Turner Affiliated Music, Inc. (20c1h) 86. Turner Arena Productions and Sales, Inc. (16) 87. Turner Broadcasting International Limited (19f1) 88. Turner Broadcasting Sales, Inc. (17) 89. Turner Broadcasting System Asia Pacific, Inc. (18) 90. Turner Broadcasting System Limited (19) 91. Turner Cinema, Inc. (20c2f2) 92. Turner Capital Corp. (5b1) 93. Turner Classic Movies, Inc. (20a3) 94. Turner Czech, Inc. (22a) 95. Turner Educational Services, Inc. (20b2) 96. Turner Entertainment Associated, Inc. (20c1i) 97. Turner Entertainment Co. (20c1) 98. Turner Entertainment Co. (de Mexico)(20c1j) 99. Turner Entertainment Co. (de Puerto Rico)(22b) 100. Turner Entertainment Distribution Services, Inc. (20c1k) 101. Turner Entertainment Film Co. (20c1l) *102. Turner Entertainment Group, Inc. (20) 103. Turner Entertainment Manila, Inc. (20c1m) *104. Turner Entertainment Networks Asia, Inc. (20a4) *105. Turner Entertainment Networks, Inc. (20a) 106. Turner Entertainment Networks International Limited (19c) 107. Turner Entertainment Oriental Co., Inc. (20c1n) 108. Turner Entertainment Pictures of Canada Limited (20c1o) *109. Turner Feature Animation, Inc. (20c3) 110. Turner Films, Inc. (20c2f) 111. Turner Home Entertainment, Inc. (20b) 112. Turner Home Entertainment UK Limited (19d) 113. Turner Home Satellite, Inc. (21) 114. Turner International Advertising Sales Limited (19e) 115. Turner International Argentina S.A. (22c) 116. Turner International Australia Pty. Limited (22d) 117. Turner International Broadcasting Russia, Inc. (22e) *118. Turner International Canada, Inc. (22f) *119. Turner International China, Inc. (22g) 120. Turner International do Brasil Ltda. (22h) 121. Turner International Asia Pacific Limited (22i) 122. Turner International Holding Company (22j) 123. Turner International, Inc. (22) *124. Turner International India Private Limited (22k) 125. Turner International Japan, Inc. (22l) *126. Turner International Mexico, S.A. de C.V. (22m) 127. Turner International Netherlands B.V. (22n) 10 128. Turner International Network Sales Limited (19f) 129. Turner International Television Licensing Co., Inc. (22o) 130. Turner International Television Licensing Limited (19g) 131. Turner Leasing Company, Inc. (5b) 132. Turner Marketing, Inc. (23) 133. Turner Music, Inc. (20c1p) 134. Turner Music Publishing, Inc. (24) 135. Turner Network Sales, Inc. (25) 136. Turner Network Television, Inc. (20a5) 137. Turner Network Television Limited (19c2) 138. Turner New Media, Inc. (20b3) 139. Turner Omni Venture, Inc. (26) *140. Turner Original Productions, Inc. (20a2a) 141. Turner Pictures Group, Inc. (20c) 142. Turner Pages, Inc. (20c2g) 143. Turner Pictures Worldwide Distribution, Inc. (20b4) 144. Turner Pictures Worldwide, Inc. (20c2) 145. Turner Pictures Worldwide (UK) Limited (19h) 146. Turner Private Networks, Inc. (27) *147. Turner Productions S.A. (22p) 148. Turner Program Services, Inc. (28) 149. Turner Properties, Inc. (29) 150. Turner Publishing, Inc. (20b5) 151. Turner Reciprocal Advertising Corporation (30) *152. Turner Records, Inc. (20b6) 153. Turner Retail Company (31) *154. Turner Second Generation, Inc. (32) 155. Turner Security, Inc. (33) 156. Turner Slovakia, Inc. (22q) 157. Turner Sports, Inc. (34) 158. Turner Sports International Enterprises, Inc. (34a) 159. Turner Sports Programming, Inc. (35) 160. Turner Tape Storage Co. (20c1q) 161. Turner Teleport, Inc. (36) 162. Venus Productions Ltd. (10j2) 163. Vineland Productions, Inc. (7e) 164. Woodtech Productions (UK) Limited (19h1) 165. World Championship Wrestling, Inc. (37) *New Subsidiary EX-23 5 CONSENT OF INDEPENDENT ACCOUNTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-24191, No. 33-52173, No. 33-55539 and No. 33-61031) and in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-62218) of Turner Broadcasting System, Inc. of our report dated February 5, 1996 appearing in the 1995 Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears in this Form 10-K. /s/ Price Waterhouse PRICE WATERHOUSE LLP Atlanta, Georgia March 21, 1996 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 85,133 52 596,083 (38,503) 0 1,393,321 635,571 (277,043) 4,395,400 839,639 2,481,313 0 260,438 12,895 164,346 4,395,400 3,437,350 3,437,350 2,080,581 3,078,978 0 (13,645) 185,275 173,097 70,416 102,681 0 0 0 102,681 0.36 0.00
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