-----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, SL/LyrNYSyyZHVOYjuya6sOauQxttH0qCXU+ppcqG0mthAzQJ3voBf5d4g7U0ife kz3ag2ze6NqBnXW1RnV7pQ== 0000950144-96-004929.txt : 19960808 0000950144-96-004929.hdr.sgml : 19960808 ACCESSION NUMBER: 0000950144-96-004929 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960807 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08911 FILM NUMBER: 96605333 BUSINESS ADDRESS: STREET 1: ONE CNN CENTER STREET 2: 100 INTERNATIONAL BLVD CITY: ATLANTA STATE: GA ZIP: 30303 BUSINESS PHONE: 4048271700 MAIL ADDRESS: STREET 1: ONE CNN CENTER BOX 105366 CITY: ATLANTA STATE: GA ZIP: 30348-5366 FORMER COMPANY: FORMER CONFORMED NAME: TURNER COMMUNICATIONS CORP DATE OF NAME CHANGE: 19791016 FORMER COMPANY: FORMER CONFORMED NAME: RICE BROADCASTING CO INC DATE OF NAME CHANGE: 19700909 10-Q 1 TURNER BROADCASTING SYSTEMS, INC 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the transition period from to --------------- --------------- Commission File No. 1-8911 TURNER BROADCASTING SYSTEM, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Georgia 58-0950695 - ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) One CNN Center Atlanta, Georgia 30303 - ------------------------------- --------------------------------- (Address of principal (Zip Code) executive offices) (404) 827-1700 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class June 30, 1996 - ------------------------------- --------------------------------- Class A Common Stock, par value $0.0625 68,330,388 Class B Common Stock, par value $0.0625 140,079,437 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TURNER BROADCASTING SYSTEM, INC. CONSOLIDATED CONDENSED BALANCE SHEETS UNAUDITED (IN THOUSANDS)
JUNE 30, DECEMBER 31, 1996 1995 ---------- ---------- ASSETS Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 118,734 $ 85,185 Accounts receivable, less allowance of $41,711 and $38,503 Unaffiliated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399,972 464,923 Affiliated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,494 92,657 Film costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 620,829 567,031 Installment contracts receivable, less allowance of $6,884 and $7,633 . . . . . . . . . . . . . . . . . . . . 55,757 47,928 Prepaid expense and other current assets . . . . . . . . . . . . . . . . . 136,831 135,597 ---------- ---------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 1,410,617 1,393,321 Film costs, less current portion . . . . . . . . . . . . . . . . . . . . . 2,042,333 1,936,565 Property and equipment, less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368,488 358,528 Goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . 419,867 427,611 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246,803 279,375 ---------- ---------- TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,488,108 $4,395,400 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,677 $ 64,704 Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274,981 292,167 Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,312 83,772 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,636 63,693 Participants' share and royalties payable . . . . . . . . . . . . . . . . . 105,333 107,254 Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,791 33,011 Film contracts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 85,505 69,802 Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . 1,506 1,543 Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 98,229 123,693 ---------- ---------- Total current liabilities . . . . . . . . . . . . . . . . . . . . . 821,970 839,639 Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . 2,600,165 2,479,770 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 421,104 421,685 Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . 173,916 216,627 ---------- ---------- TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . 4,017,155 3,957,721 TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . 470,953 437,679 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . $4,488,108 $4,395,400 ========== ==========
See accompanying Notes to Consolidated Condensed Financial Statements. 2 3 TURNER BROADCASTING SYSTEM, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ------------------------ ----------------------- 1996 1995 1996 1995 -------- -------- ---------- ---------- Revenue Unaffiliated . . . . . . . . . . . . . . . . . . . . . $776,366 $694,634 $1,431,115 $1,278,485 Affiliated . . . . . . . . . . . . . . . . . . . . . . 123,652 103,252 244,104 229,716 -------- -------- ---------- ---------- 900,018 797,886 1,675,219 1,508,201 -------- -------- ---------- ---------- Cost of operations . . . . . . . . . . . . . . . . . . . . 555,215 486,718 1,051,631 897,398 Selling, general and administrative . . . . . . . . . . . . 248,782 201,124 474,171 390,362 Equity in loss of unconsolidated entities . . . . . . . . . 1,423 2,668 4,449 7,737 Costs of accounts receivable securitization program . . . . . . . . . . . . . . . . 5,049 3,258 8,803 3,258 Time Warner merger costs . . . . . . . . . . . . . . . . . 5,762 - 6,713 - Depreciation of property and equipment and amortization of intangible assets . . . . . . . . . . 24,196 20,457 45,488 36,834 Interest expense, net of interest income . . . . . . . . . 38,951 46,576 81,183 97,284 -------- -------- ---------- ---------- 879,378 760,801 1,672,438 1,432,873 -------- -------- ---------- ---------- Income before provision for income taxes . . . . . . . . . . . . . . . . 20,640 37,085 2,781 75,328 Provision for income taxes . . . . . . . . . . . . . . . . 9,369 15,385 1,318 31,638 -------- -------- ---------- ---------- Net income . . . . . . . . . . . . . . . . . . . . . $ 11,271 $ 21,700 $ 1,463 $ 43,690 ======== ======== ========== ========== Earnings per common share and common stock equivalent Net income . . . . . . . . . . . . . . . . $ 0.04 $ 0.08 $ 0.01 $ 0.15 ======== ======== ========== ========== Weighted average number of common shares outstanding, including conversion of common stock equivalents, when applicable . . . . . . . . . . . . . . . . . . . 287,950 283,030 287,343 282,688
See accompanying Notes to Consolidated Condensed Financial Statements. 3 4 TURNER BROADCASTING SYSTEM, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS UNAUDITED (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, -------------------------- 1996 1995 --------- --------- Cash provided by operations before changes in film costs and liabilities, net . . . . . . . . . . . . . . . . . . . . . $ 146,122 $ 343,613 Changes in film costs and liabilities, net Purchased program rights . . . . . . . . . . . . . . . . . . . . . . . . . 37,674 45,328 Produced programming . . . . . . . . . . . . . . . . . . . . . . . . . . . (201,735) (64,505) Licensed program and distribution rights . . . . . . . . . . . . . . . . . (13,297) (9,772) --------- --------- Net cash provided by (used for) operations . . . . . . . . . . . . . . . . . . . (31,236) 314,664 --------- --------- Cash provided by (used for) investing activities Distributions from unconsolidated entities . . . . . . . . . . . . . . . . . 365 6,180 Acquisitions and advances to unconsolidated entities . . . . . . . . . . . . (2,232) (7,051) Additions to property and equipment . . . . . . . . . . . . . . . . . . . . (68,463) (50,245) --------- --------- Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . (70,330) (51,116) --------- --------- Cash provided by (used for) financing activities Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,105 15,000 Payments of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (278) (255,224) Payments of cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . (9,893) (9,809) Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . 5,181 2,398 --------- --------- Net cash provided by (used for) financing activities . . . . . . . . . . . . . . 135,115 (247,635) --------- --------- Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . 33,549 15,913 Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . 85,185 52,895 --------- --------- Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . $ 118,734 $ 68,808 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH INVESTING AND FINANCING ACTIVITIES: Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,536 $ 49,809 Net interest paid, including interest capitalized of $8,865 and $8,503 . . . . . . . . . . . . . . . . . . . . . . 84,833 98,338 Conversion of convertible subordinated debentures originally issued by a wholly-owned subsidiary . . . . . . . . . . . . . . . 29,075 -
See accompanying Notes to Consolidated Condensed Financial Statements. 4 5 TURNER BROADCASTING SYSTEM, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS UNAUDITED NOTE 1. PREPARATION OF INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS The consolidated condensed financial statements included herein have been prepared by Turner Broadcasting System, Inc. (the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the accompanying consolidated condensed financial statements contain all adjustments, which are of a normal recurring nature, necessary for a fair presentation of such financial statements. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, management believes that the disclosures are adequate to make the information presented not misleading. For further information, reference is made to the consolidated financial statements and the notes thereto incorporated by reference in the Company's Form 10-K for the year ended December 31, 1995. Certain prior year amounts have been reclassified to conform to the current year presentation. 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") 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 $0.125 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. 5 6 In connection with the FTC's review of the Mergers and certain related transactions, the Company, Time Warner and TCI have entered into an agreement in principle with respect to a consent order which, if implemented as currently contemplated, will require that certain amendments be made to the Merger Agreement and such related agreements entered into by the Company, Time Warner and Liberty Media Corporation ("LMC") and its affiliates. Such amendments include (i) restrictions, under certain circumstances, on the amount and type of securities of New Time Warner that LMC and its affiliates can hold following the Mergers, (ii) limitations on the extension of existing affiliation agreements pursuant to which Tele-Communications, Inc. and its affiliates distribute the programming produced by the Company and (iii) restrictions on certain actions by Time Warner with respect to the distribution and pricing of programming services. As a result of the arrangements among R.E. Turner, the Company and Time Warner 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, holders of a sufficient number of shares of the Company's capital stock of each class have agreed 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 approval of the Merger Agreement to assure approval by the Company's shareholders, regardless of the vote of any other shareholders of the Company. The LMC Agreement, however, provides that the obligation of LMC and its affiliates to vote 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. It is expected that the LMC Agreement will be amended to provide for the changes required in connection with the consent order described above. Also 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. 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 $65,000,000) 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. NOTE 3. FILM COSTS The following table sets forth the components of unamortized film costs (in thousands):
JUNE 30, DECEMBER 31, 1996 1995 ---------- ---------- Purchased program rights . . . . . . . . . . . . . . . . . . . . . . . $ 980,087 $1,017,761 Produced programming Released . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383,909 397,639 Completed and not released . . . . . . . . . . . . . . . . . . . . . 62,903 73,706 In process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 693,028 504,997 Episodic television . . . . . . . . . . . . . . . . . . . . . . . . 116,374 101,430 Licensed program and distribution rights . . . . . . . . . . . . . . 315,653 302,370 Prepaid licensed program rights . . . . . . . . . . . . . . . . . . . 111,208 105,693 ---------- ---------- 2,663,162 2,503,596 Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . 620,829 567,031 ---------- ---------- $2,042,333 $1,936,565 ========== ==========
Episodic television includes serial television program costs. Prepaid licensed program rights represent licensed program rights for which payments have been made but the programming is not currently available for use. As these programs become available for use they are reclassified to licensed program rights. 6 7 On the basis of the Company's anticipated total gross revenue estimates, over 87% of released and episodic television produced programming costs at June 30, 1996 will be amortized within the three-year period ending June 30, 1999. Amortization of film costs included in Cost of operations is composed of the following (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 1996 1995 1996 1995 -------- -------- -------- -------- Purchased program rights . . . . . . . . . . . . . . . $ 21,827 $ 22,583 $ 43,804 $ 44,946 Produced programming . . . . . . . . . . . . . . . . . 272,346 219,419 516,099 380,804 Licensed program and distribution rights . . . . . . . . . . . . . . . . . . . . . . 31,078 23,440 62,885 50,520 Participants' share and royalties . . . . . . . . . . . 19,402 19,330 45,563 37,440 Non-cash amortization of certain acquisition purchase adjustments . . . . . . . . . 1,447 499 3,342 3,292 -------- -------- -------- -------- $346,100 $285,271 $671,693 $517,002 ======== ======== ======== ========
NOTE 4. EARNINGS PER COMMON SHARE AND COMMON STOCK EQUIVALENT Net income per common share and common stock equivalent is computed by dividing net income applicable to common stock by the weighted average number of outstanding shares of common stock and common stock equivalents, when dilutive, during the applicable periods in 1996 and 1995. Common stock equivalents are principally the incremental shares associated with the Class C Convertible Preferred Stock (the "Class C Preferred Stock") and the outstanding stock options. Fully-diluted income per share amounts are similarly computed, but include the effect, when dilutive, of the Company's other potentially dilutive securities. The Company's zero coupon subordinated convertible notes and the convertible subordinated debentures originally issued by a wholly-owned subsidiary are excluded from the fully-diluted calculations of net income per common share for the three-month and six-month periods ended June 30, 1996 and 1995 due to their anti-dilutive effect. The difference between primary and fully-diluted earnings per share is not significant. NOTE 5. LONG-TERM DEBT Long-term debt is summarized as follows (in thousands):
JUNE 30, DECEMBER 31, 1996 1995 ---------- ---------- Bank credit facilities . . . . . . . . . . . . . . . . . . . . $1,575,000 $1,435,000 8 3/8% Senior Notes . . . . . . . . . . . . . . . . . . . . . 297,474 297,442 7.4% Senior Notes . . . . . . . . . . . . . . . . . . . . . . 249,681 249,666 8.4% Senior Debentures . . . . . . . . . . . . . . . . . . . . 199,847 199,846 Zero coupon subordinated convertible notes . . . . . . . . . . 273,253 263,694 Convertible subordinated debentures originally issued by a wholly-owned subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . - 29,075 Obligations under capital leases . . . . . . . . . . . . . . . 5,102 5,254 Other long-term debt . . . . . . . . . . . . . . . . . . . . . 1,314 1,336 ---------- ---------- 2,601,671 2,481,313 Less current portion . . . . . . . . . . . . . . . . . . . . . 1,506 1,543 ---------- ---------- $2,600,165 $2,479,770 ========== ==========
On January 4, 1996, the Company called for redemption on February 5, 1996 all of the convertible subordinated debentures originally issued by a wholly-owned subsidiary 7 8 and subsequently assumed by the Company. All of the debentures outstanding, which aggregated approximately $29,000,000, 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. NOTE 6. STOCKHOLDERS' EQUITY Stockholders' equity consists of the following components (in thousands, except share data):
JUNE 30, DECEMBER 31, 1996 1995 ---------- ---------- Class C Convertible Preferred Stock, par value $0.125; authorized 12,600,000 shares; issued and outstanding 12,396,976 shares . . . . . . . . . . . $ 260,438 $ 260,438 Class A Common Stock, par value $0.0625; authorized 75,000,000 shares; issued and outstanding 68,330,388 shares . . . . . . . . . . . . . . . . 4,271 4,271 Class B Common Stock, par value $0.0625; authorized 300,000,000 shares; issued and outstanding 140,079,437 and 137,982,831 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,755 8,624 Capital in excess of par value . . . . . . . . . . . . . . . . 1,125,754 1,084,181 Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . (928,265) (919,835) ---------- ---------- Total stockholders' equity . . . . . . . . . . . . . . . . . $ 470,953 $ 437,679 ========== ==========
On February 16, 1996 and May 31, 1996, the Board of Directors declared a cash dividend on the Company's outstanding shares of Class A Common Stock and Class B Common Stock, payable at the rate of $0.0175 for each share held on the record date. In addition, holders of the Company's outstanding Class C Preferred Stock were entitled to an equivalent cash dividend of $0.105 for each share held on the record date based on the number of shares of Class B Common Stock which would be issued upon conversion of each share of Class C Preferred Stock. Cash dividends of $4,944,000 and $4,949,000 were paid on March 29, 1996 and June 28, 1996, respectively, to shareholders of record at the close of business on March 15, 1996 and June 14, 1996, respectively. The Company's ability to pay cash dividends to holders of shares of the Class A and Class B Common Stock and the Class C Preferred Stock is subject to certain covenants in the Company's outstanding debt instruments. Currently, the most restrictive of such covenants limits the maximum aggregate amount of dividends permitted to be paid annually to such holders to $30,000,000. NOTE 7. ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM In May 1995, the Company entered into an agreement with a financial institution whereby the Company can sell on an ongoing basis up to $300,000,000 of an undivided percentage ownership interest in a designated pool of domestic cable and advertising accounts receivable. The initial proceeds 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. 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 8 9 cable and advertising accounts receivable consists of receivables that have been designated as reserves principally for any potential credit costs that may be incurred under the program. However, these costs are not expected to exceed the full amount of the allowance for doubtful accounts which has been retained in the consolidated condensed balance sheet of the Company, as the Company expects to experience substantially the same risk of credit loss as if the receivables had not been sold. The ongoing costs of the program are largely based on the purchaser's level of investment and cost of funds. The costs of the program are anticipated to be less than those the Company would have otherwise incurred under the Company's unsecured revolving credit facilities. Under the agreement, which was scheduled to expire in May 1996 but was renewed in April 1996 for another one-year term, the Company performs collection and administrative responsibilities related to the receivables sold as agent for the purchaser. As of June 30, 1996, the Company had sold an undivided interest in this designated pool of domestic cable and advertising accounts receivable that aggregated $300,000,000, generating net proceeds of $250,000,000. The estimated total cost of the program for the sale of accounts receivable during the three-month and six-month periods ended June 30, 1996, approximated $5,000,000 and $8,800,000, respectively, and is reflected as a reduction of operating profit in the consolidated condensed statements of operations. NOTE 8. INCOME TAXES The 1991 and 1992 consolidated federal income tax returns of the Company have been examined by the Internal Revenue Service (the "IRS"). As a result of the examination, the IRS has issued a deficiency notice for additional taxes. The IRS is prohibited from collecting the disputed tax until the taxpayer has had an opportunity to seek a redetermination of the asserted deficiency in court. On June 25, 1996, the Company filed a petition in U.S. Tax Court contesting the notice as it believes the items in dispute have been properly reported 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. NOTE 9. SUBSEQUENT EVENTS In connection with its acquisition of New Line Cinema Corporation ("New Line Cinema") in January 1994, the Company assumed warrants (the "Warrants") originally issued by New Line Cinema which were exercisable for 250,000 shares of New Line Cinema common stock. Upon the assumption of the Warrants by the Company, the Warrants became exercisable for an aggregate of 240,965 shares of the Company's Class B Common Stock at an exercise price of $14.39 per share. On July 17, 1996, all of the Warrants were exercised for an aggregate exercise price of $3,467,000 and the Company issued an aggregate of 240,965 shares of Class B Common Stock to the holders of the Warrants. As of June 30, 1996, the Company owned a 33.1% limited partnership interest in n-tv, a 24-hour German language news channel. On July 23, 1996, an unaffiliated third-party agreed to acquire a 25% limited partnership interest in n-tv. This transaction, which is subject to regulatory approval, will have the effect of reducing the Company's ownership interest in n-tv to approximately 25.5%. This transaction will not have a material impact on the consolidated financial position or operating results of the Company. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES SOURCES AND USES OF CASH Cash used for operations after changes in film costs and associated liabilities for the six months ended June 30, 1996 aggregated $31 million, including a net change in film costs and associated liabilities of $192 million, and cash interest payments, net of cash interest received, of $85 million. Other primary uses of cash during the period included additions to property and equipment of $68 million. The primary source of cash for the period was borrowings under the unsecured revolving credit facilities of $140 million. Included in the net change in film costs were $563 million utilized by the Company for original entertainment and sports programming (including $351 million for theatrical film productions, excluding promotional and advertising costs). In May 1995, the Company entered into an agreement with a financial institution whereby the Company can sell on an ongoing basis up to $300 million of an undivided percentage ownership interest in a designated pool of domestic cable and advertising accounts receivable. The agreement was renewed in April 1996 for another one-year term. As of June 30, 1996, the Company had sold an undivided interest in this designated pool of its domestic cable and advertising accounts receivable that aggregated $300 million. The original proceeds were used in 1995 to repay amounts outstanding under the Company's unsecured revolving credit facilities. During 1996, the Company has recognized costs of approximately $9 million in connection with this accounts receivable securitization program. The ongoing costs of the program are anticipated to be less than those the Company would have otherwise incurred under the bank credit facilities. See Note 7 of Notes to Consolidated Condensed Financial Statements. See the Consolidated Condensed Statements of Cash Flows for additional details regarding sources and uses of cash and Note 5 and Note 7 of Notes to Consolidated Condensed Financial Statements for additional information about the Company's indebtedness and the accounts receivable securitization program. CREDIT FACILITIES AND FINANCING ACTIVITIES The Company had approximately $2.6 billion of outstanding indebtedness at June 30, 1996, of which $1.6 billion was outstanding under unsecured revolving credit facilities with banks. On January 4, 1996, the Company called for redemption on February 5, 1996 all of the convertible subordinated debentures originally issued by a wholly-owned subsidiary and subsequently assumed by the Company. All of the debentures outstanding, which aggregated approximately $29 million, 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. 10 11 CAPITAL RESOURCES AND COMMITMENTS During the next 12 months, the Company anticipates making cash expenditures of approximately $290 million for sports programming, primarily rights fees, approximately $1.3 billion for original entertainment programming (excluding promotional and advertising costs) and approximately $160 million for licensed programming. Also, during the next 12 months, 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 and film suppliers and additional borrowings. 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") 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 $0.125 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 11 12 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. In connection with the FTC's review of the Mergers and certain related transactions, the Company, Time Warner and TCI have entered into an agreement in principle with respect to a consent order which, if implemented as currently contemplated, will require that certain amendments be made to the Merger Agreement and related agreements entered into by the Company, Time Warner and Liberty Media Corporation ("LMC") and its affiliates. Such agreements include (i) restrictions, under certain circumstances, on the amount and type of securities of New Time Warner that LMC and its affiliates can hold following the Mergers, (ii) limitations on the extension of existing affiliation agreements pursuant to which Tele-Communications, Inc. and its affiliates distribute programming produced by the Company and (iii) restrictions on certain actions by Time Warner with respect to the distribution and pricing of programming services. As a result of the arrangements among R.E. Turner, the Company and Time Warner 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, holders of a sufficient number of shares of the Company's capital stock of each class have agreed 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 to assure approval by the Company's shareholders, regardless of the vote of any other shareholders of the Company. The LMC Agreement, however, provides that the obligation of LMC and its affiliates to vote 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. It is expected that the LMC Agreement will be amended to provide for the changes required in connection with the consent order described above. Also 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. 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. ("SportSouth"). The purchase price for the stock of TSPI (currently estimated to be $65 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. 12 13 RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1996 VS. THREE MONTHS ENDED JUNE 30, 1995
UNAUDITED UNAUDITED THREE MONTHS ENDED THREE MONTHS ENDED JUNE 30, 1996 JUNE 30, 1995 ------------- ------------- (IN THOUSANDS) Revenue Entertainment Networks $379,366 $310,108 Production & Distribution 273,500 262,060 Intrasegment revenue elimination (21,606) (13,065) -------- -------- Total Entertainment 631,260 559,103 News 211,688 196,247 Other 72,424 52,293 Intersegment revenue elimination (15,354) (9,757) -------- -------- $900,018 $797,886 ======== ======== Operating profit (loss) Entertainment Networks $ 69,218 $ 65,335 Production & Distribution (41,196) (25,862) Intrasegment elimination 648 5,212 -------- -------- Total Entertainment 28,670 44,685 News 66,361 69,985 Other (23,206) (25,083) Equity in loss of unconsolidated entities (1,423) (2,668) Costs of accounts receivable securitization program (5,049) (3,258) Time Warner merger costs (5,762) - -------- -------- $ 59,591 $ 83,661 ======== ========
ENTERTAINMENT SEGMENT Entertainment Segment revenue increased $72 million, or 13%, from $559 million to $631 million. In the entertainment networks, advertising revenue increased $44 million, or 20%, from $216 million to $260 million, primarily due to a strong overall advertising market for TBS Superstation and TNT. Subscription revenue for the entertainment networks increased $19 million, or 22%, from $87 million to $106 million, as a result of higher rates as well as an increase in cable and home satellite viewers, primarily at TNT. In the production and distribution companies, home video revenue increased $22 million, or 26%, from $86 million to $108 million due to the number of home video releases in 1996 compared to 1995. Television syndication revenue increased $15 million, from $57 million to $72 million, due to the continued success of the off-network syndication of Seinfeld and an overall increase in New Line Cinema Corporation ("New Line Cinema") and Castle Rock Entertainment ("Castle Rock") product available in the television syndication markets. The revenue increases described above were offset by a decrease in theatrical film revenue of $28 million, from $67 million to $39 million, due to the timing and number of releases in the second quarter of 1996 in comparison to 1995. 13 14 Operating profit for the Entertainment Segment decreased $16 million, or 36%, from $45 million to $29 million. Operating profit for the entertainment networks increased $7 million, or 9%, from $76 million to $83 million, due primarily to the revenue increases described above partially offset by increased costs related to sports and entertainment programming. Operating losses from the production and distribution companies increased $23 million. The increase was primarily due to disappointing results at Castle Rock for domestic and international theatrical releases, which resulted in write-offs of approximately $28 million. NEWS SEGMENT News Segment revenue rose $16 million, or 8%, from $196 million to $212 million. Advertising revenue increased $8 million, or 8%, due to a $5 million, or 35%, increase in international advertising revenue at CNN International as well as an increase in the amount charged per thousand homes at CNN Headline News. Subscription revenue increased $6 million, or 8%, from $75 million to $81 million, due to an increase in both cable and home satellite viewers at CNN and CNN International. Operating profit for the News Segment decreased $4 million, or 5%, from $70 million to $66 million as revenue increases were offset by increased news gathering costs including costs associated with political coverage as well as CNNfn start-up costs. OTHER SEGMENT Revenue for the Other Segment increased $20 million, or 38%, from $52 million to $72 million. Atlanta Braves revenue increased $15 million due primarily to an increase in the number of games played in the second quarter of 1996 as compared to the strike-shortened 1995 season. Increased television syndication revenue at World Championship Wrestling of $4 million accounts for the remainder of the revenue increase. Overall, revenue increases outpaced increased costs, resulting in a $2 million decrease in operating losses for the quarter. EQUITY IN LOSS OF UNCONSOLIDATED ENTITIES/MISCELLANEOUS The Company's share of operating losses from unconsolidated entities decreased by $1 million due primarily to improved operations at n-tv, a 24-hour German news network, and increased earnings from SportSouth. 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 original proceeds were used to repay amounts outstanding under the Company's unsecured revolving credit facilities. The Company recognized costs of approximately $5 million in the second quarter in connection with this securitization program. The ongoing costs of the securitization program are anticipated to be less than those the Company would have otherwise incurred under its unsecured revolving credit facilities. Consolidated interest expense decreased $8 million, from $47 million to $39 million, due to an increase in interest income associated with long-term receivables and lower interest rates related to the Company's revolving credit facilities. 14 15 As a result of the information discussed above, the Company reported net income of $11 million in the second quarter of 1996 ($0.04 net income per common share and common share equivalent). This compares to net income of $22 million in the second quarter of 1995 ($0.08 net income per common share and common share equivalent). RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1996 VS. SIX MONTHS ENDED JUNE 30, 1995
UNAUDITED UNAUDITED SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 1996 JUNE 30, 1995 ------------- ------------- (IN THOUSANDS) Revenue Entertainment Networks $ 673,346 $ 553,522 Production & Distribution 579,907 553,201 Intrasegment revenue elimination (70,882) (46,227) ---------- ---------- Total Entertainment 1,182,371 1,060,496 News 407,125 378,707 Other 108,615 83,962 Intersegment revenue elimination (22,892) (14,964) ---------- ---------- $1,675,219 $1,508,201 ========== ========== Operating profit (loss) Entertainment Networks $ 136,125 $ 108,762 Production & Distribution (89,583) (12,908) Intrasegment elimination (22,403) (3,370) ---------- ---------- Total Entertainment 24,139 92,484 News 126,569 136,863 Other (46,779) (45,740) Equity in loss of unconsolidated entities (4,449) (7,737) Costs of accounts receivable securitization program (8,803) (3,258) Time Warner merger costs (6,713) - ---------- ---------- $ 83,964 $ 172,612 ========== ==========
ENTERTAINMENT SEGMENT Entertainment Segment revenue increased $122 million, or 11%, from $1.06 billion to $1.18 billion. In the entertainment networks, advertising revenue increased $78 million, or 22%, from $360 million to $438 million, due to a strong overall advertising market for TNT and TBS Superstation. Subscription revenue for the entertainment networks increased $38 million, or 23%, from $171 million to $209 million, as a result of higher rates as well as an increase in both cable and home satellite viewers, primarily at TNT. In the production and distribution companies, television syndication revenue increased $27 million, or 21%, from $126 million to $153 million due to the continued success of Seinfeld and an overall increase in New Line Cinema and Castle Rock product available in the television syndication markets. Licensing and merchandising revenue increased $6 million, or 21%, from $29 million to $35 million due to increased sales related 15 16 to Turner Entertainment Co. Library product. The revenue increases described above were offset by decreased theatrical revenue of $31 million, or 26%, from $120 million to $89 million, due to the timing and number of releases in 1996 in comparison to 1995. Operating profit for the Entertainment Segment decreased $68 million, or 74%, from $92 million to $24 million. Operating profit for the entertainment networks increased $36 million, or 28%, from $127 million to $163 million primarily due to the revenue increases described above partially offset by increased costs related to sports and entertainment programming. Operating losses from the production and distribution companies increased $104 million from $35 million to $139 million. The increase was primarily due to disappointing results from domestic and international theatrical releases at Castle Rock, which resulted in net write-offs of approximately $88 million, a lack of comparable theatrical and home video titles from the Company's other units, as well as increased costs associated with certain of the Company's syndicated programming. NEWS SEGMENT News Segment revenue increased $28 million, or 8%, from $379 million to $407 million, due to an increase of $14 million, or 10%, from $146 million to $160 million, in subscription revenue at CNN, CNN International and CNNfn. Advertising revenue increased $9 million, or 5%, from $193 million to $202 million, primarily due to the continued expansion of CNN International. Domestic advertising revenue remained relatively flat in comparison to the prior year, as increased rates were offset by lower viewership when compared with exceptionally high viewing levels associated with the O.J. Simpson trial. Operating profit for the News Segment decreased $10 million, or 8%, from $137 million to $127 million as revenue increases were offset by increased newsgathering costs associated with political coverage as well as CNNfn start-up costs of $3 million. OTHER SEGMENT Revenue for the Other Segment increased $25 million, or 29%, from $84 million to $109 million. Atlanta Braves revenue increased $16 million primarily due to an increase in the number of games played in 1996 compared to the strike-shortened 1995 season. Increased television syndication revenue at World Championship Wrestling ("WCW") of $8 million accounts for the remainder of the revenue increase. Overall, costs associated with the revenue increases described above, as well as general corporate infrastructure spending to support Company growth, outpaced increased revenue, resulting in a $1 million increase in operating losses, from $46 million to $47 million. EQUITY IN LOSS OF UNCONSOLIDATED ENTITIES/MISCELLANEOUS The Company's share of operating losses from unconsolidated entities decreased $3 million due to increased earnings from SportSouth and improved operations at n-tv, a 24-hour German news network. Consolidated depreciation and amortization increased approximately $9 million as a result of increased levels of property and equipment required to support the Company's growth. 16 17 Consolidated interest expense decreased $16 million, from $97 million to $81 million, primarily due to lower interest rates and lower average outstanding balances associated with the Company's revolving credit facilities as well as increased interest income associated with long-term receivables. As a result of the information discussed above, the Company reported net income of $1 million for the six months ended June 30, 1996 ($0.01 net income per common share and common share equivalent). This compares to net income of $44 million for the six months ended June 30, 1995 ($0.15 net income per common share and common share equivalent). 17 18 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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 (the "District Court") challenging the provisions of the Cable Television Consumer Protection and Competition Act of 1992 (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. 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 and will hear oral argument on October 7, 1996. 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. 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 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., 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 18 19 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 (the "Defendants' Motion") 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. Additionally, the Court stayed discovery in these consolidated actions until the Court rules on the Defendants' Motion. 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. On April 1, 1996, defendants in this action filed motions for judgment on the pleadings on all claims asserted in the Third Amended Complaint. On June 17, 1996, the Court transformed the defendants' motion for judgment on the pleadings into a motion for summary judgment with respect to two of the plaintiff's claims, and denied the plaintiff's request for discovery on those claims. The Court has not yet ruled on the defendants' motion. 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. 19 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of shareholders of the Company was held on June 7, 1996. At the annual meeting, the shareholders voted on the following matters: (i) the election of fifteen directors; (ii) a proposal to ratify the selection of Price Waterhouse LLP as the Company's independent accountants; and (iii) a shareholder proposal concerning disclosure of executive compensation. The results of the votes were as follows: Proposal No. I - Election of Directors Election of Eight Common Stock Directors:
FOR VOTE WITHHELD --- ------------- R.E. Turner 159,826,251 votes 582,313 votes --------------------- --------------------- Henry L. Aaron 159,829,374 votes 583,460 votes --------------------- --------------------- W. Thomas Johnson 159,824,979 votes 583,855 votes --------------------- --------------------- Rubye M. Lucas 159,703,734 votes 615,100 votes --------------------- --------------------- Terence F. McGuirk 159,824,717 votes 584,117 votes --------------------- --------------------- Brian L. Roberts 159,799,013 votes 609,821 votes --------------------- --------------------- Scott M. Sassa 159,792,507 votes 616,328 votes --------------------- --------------------- Robert Shaye 159,824,497 votes 584,337 votes --------------------- ---------------------
Election of Seven Class C Directors:
FOR VOTE WITHHELD --- ------------- Peter R. Barton 14,767,614 votes 108,757 votes --------------------- --------------------- Joseph J. Collins 14,767,614 votes 108,757 votes --------------------- --------------------- Jeffrey L. Bewkes 14,767,614 votes 108,757 votes --------------------- --------------------- Gerald M. Levin 14,767,614 votes 108,757 votes --------------------- --------------------- John C. Malone 14,767,614 votes 108,757 votes --------------------- --------------------- Timothy P. Neher 14,767,614 votes 108,757 votes --------------------- --------------------- Fred A. Vierra 14,767,614 votes 108,757 votes --------------------- ---------------------
Proposal No. II - Ratification of selection of Price Waterhouse LLP as the Company's independent accountants for the fiscal year ending December 31, 1996:
Class A Class B Class C Common Common Preferred Total Votes Votes Votes Votes ----------- ---------- ------------- ----- FOR: 134,646,570 25,708,959 14,876,371 175,231,900 ----------------- ----------------- ----------------- ----------------- AGAINST: 9,056 2,263 0 11,319 ----------------- ----------------- ----------------- ----------------- ABSTAIN: 9,762 2,105 0 11,867 ----------------- ----------------- ----------------- -----------------
20 21 Proposal No. III - Shareholder proposal concerning disclosure of executive compensation:
Class A Class B Class C Common Common Preferred Total Votes Votes Votes Votes ----------- ---------- ------------- ----- FOR: 1,978,006 775,394 0 2,753,400 ----------------- ----------------- ----------------- ----------------- AGAINST: 127,004,794 23,573,940 14,767,614 165,346,348 ----------------- ----------------- ----------------- ----------------- ABSTAIN: 150,518 313,604 108,757 572,879 ----------------- ----------------- ----------------- ------------------
21 22 ITEM 5. OTHER INFORMATION 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 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 rule, 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 advance television ("ATV") spectrum, whether restrictions should be placed on the use of ATV 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. 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 22 23 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. 23 24 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 mark-up of 20 cents per channel over actual programming costs, but may not make adjustments to monthly rates for these new services totaling more than $1.20, plus an additional 30 cents solely for programming license fees, per subscriber over the first two years of the three-year period. Cable operators may charge an additional 20 cents in the third year only for channels added in that year. Cable operators electing to use the 20 cents per channel adjustment may not take a 7.5% mark-up on programming cost increases, which is permitted under the FCC's current rate regulations. The FCC requested further comment on whether cable operators should continue to receive the 7.5% mark-up on increases in license fees on existing programming services. Additionally, the FCC will permit cable operators to offer NPTs at rates which they elect so long as, among other conditions, other service tiers that are subject to rate regulation are priced in conformity with applicable FCC 24 25 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. The Company cannot predict the ultimate outcome of the litigation. 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 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 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. LEASED ACCESS The 1984 Cable Act established commercial leased access to assure access to the channel capacity of cable systems by parties unaffiliated with the cable operators. Channel set-aside requirements were established in proportion to a system's total activated channel capacity. A cable operator was permitted to use any unused leased access channel capacity until such time as a written agreement for a leased channel use was obtained. The 1992 Cable Act authorized the Commission to determine the maximum reasonable rates that a cable operator may establish for leased access use. On March 29, 1996, the Commission issued an Order and Further Notice of Proposed Rulemaking on leased access. The Commission is considering changes in its maximum rate formula and regulatory scheme for leased access. The Company at this time cannot predict the overall effect, if any, that any regulatory revisions may have on the Company's operations. 25 26 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 Commissions, 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 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 26 27 exclusive distribution rights to a person with respect to satellite cable programming or that was entered into on or before June 1, 1990. While the Company cannot predict the regulations' full effect on its operations, 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 litigation. REGULATION OF CARRIAGE AGREEMENTS The 1992 Act contains a provision that requires the FCC to establish regulations governing program carriage agreements and related practices between cable operators and video programming vendors, including provisions to prevent the cable operator from requiring a financial interest in a program service as a condition of carriage and provisions designed to prohibit a cable operator from coercing a video programming vendor to provide exclusive rights as a condition of carriage. On October 22, 1993, the Commission issued regulations implementing this provision. The Company cannot at this time predict the effect of this provision on its operations. The constitutionality of this provision has been challenged in litigation filed in the United States District Court for the District of Columbia. On September 27, 1993, the district court upheld the constitutionality of this provision. An appeal of that decision is pending in the United States Court of Appeals for the District of Columbia Circuit. The Company cannot predict the outcome of the litigation. OWNERSHIP LIMITATIONS Section 11 of the 1992 Act directed the Commission to prescribe rules and regulations establishing limits on the number of cable subscribers a person is authorized to reach through cable systems owned by such person and the number of channels that can be occupied by video programmers in which a cable operator has an attributable interest. The Commission must also consider the necessity of imposing limitations on the degree to which multichannel video programming distributors may engage in the creation or production of video programming. On December 28, 1992, the FCC issued a Notice of Proposed Rulemaking and Notice of Inquiry with respect to these provisions. On October 22, 1993, the FCC adopted a Second Report and Order that established a 40% limit on the number of channels that may be occupied by programming services in which the particular cable operator has an attributable interest. The Company is subject to this provision. The FCC also established a national limit of 30% on the number of homes passed that any one person can reach through cable systems owned by such person, but stayed implementation of that provision pending judicial review of its constitutionality. On April 5, 1995, the FCC denied the petitions for reconsideration. The Company cannot at this time predict the effect of this provision or these proposals on its operations. 27 28 The constitutionality of these provisions has been challenged in litigation filed in the United States District Court for the District of Columbia. On September 27, 1993, the district court found the national limit on homes passed unconstitutional, but upheld the constitutionality of the channel capacity limits. An appeal of that decision is currently pending in the United States Court of Appeals for the District of Columbia Circuit. Appeals of the Commission's implementing regulations have also been taken to the United States Court of Appeals for the District of Columbia Circuit. The Company cannot predict the ultimate outcome of the litigation. 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, if any, may have on the Company's operations. 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. On March 4, 1996, the FCC issued implementing regulations with respect to this provision of the 1996 Act. The Company at this time cannot predict the overall effect, if any, that the entry of telephone companies into the delivery of video programming may have on the Company's operations. 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 28 29 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. 29 30 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 4.6.7 Form of Amendment No. 5, dated as of April 25, 1996, among the Company, the banks listed therein and The Chase Manhattan Bank (National Association), as agent, to the Credit Agreement dated as of July 1, 1993. 4.7.2 Form of Amendment No. 2, dated as of April 26, 1996, among the Company, the banks listed therein and The Chase Manhattan Bank (National Association), as agent, to the Credit Agreement dated as of September 7, 1994. 11 Computation of Earnings per Common and Common Equivalent Share. 27 Financial Data Schedule. (b) Reports on Form 8-K On June 26, 1996, the Company filed a Current Report on Form 8-K which described the previously reported transactions contemplated by the Amended and Restated Agreement and Plan of Merger, dated as of September 22, 1995, among the Company, Time Warner, TW Inc., Time Warner Acquisition Corp. and TW Acquisition Corp. (the "Merger Agreement") and provided certain pro forma financial statements with respect to the mergers contemplated by the Merger Agreement. 30 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TURNER BROADCASTING SYSTEM, INC. By: /s/ William S. Ghegan ------------------------------- William S. Ghegan Vice President, Controller and Chief Accounting Officer Date: August 7, 1996 31 EX-4.6.7 2 AMENDMENT NO.5 TO CREDIT AGREEMENT 1 EXHIBIT 4.6.7 Execution Counterpart AMENDMENT NO. 5 AMENDMENT NO. 5 dated as of April 25, 1996 between TURNER BROADCASTING SYSTEM, INC., a Georgia corporation (the "Company"), the Banks (as such term is defined below) party hereto and THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION) ("Chase"), as agent (the "Agent"). The Company, certain lenders (the "Banks") and the Agent are party to a Credit Agreement dated as of July 1, 1993 (as amended, supplemented and otherwise modified and in effect to but excluding the date hereof, the "Credit Agreement"). The Company has requested that the Banks agree, and the Banks party hereto are willing, to amend certain provisions of the Credit Agreement, all on the terms and conditions of this Amendment. Accordingly, in consideration of the premises and the mutual agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1. Definitions. Terms used but not defined herein shall have the respective meanings ascribed to such terms in the Credit Agreement. Section 2. Amendments. Subject to the satisfaction of the conditions to effectiveness specified in Section 4 hereof, but with effect on and after the date hereof, the Credit Agreement shall be amended as follows: A. Certain New Defined Terms. Section 1.01 of the Credit Agreement shall be amended by adding the following new definitions and inserting the same in the appropriate alphabetical locations: "Atlanta Hawks' shall mean Atlanta Hawks, Ltd., a Georgia limited partnership." "'Acquisition Date' shall mean the date that the Company becomes a Wholly Owned Subsidiary of either Time Warner or a Person of which Time Warner is a wholly owned Subsidiary." "'Time Warner" shall mean Time Warner Inc., a Delaware corporation. B. Definition of Cash Flow. Clause (i) of the first sentence of the definition of "Cash Flow" in Section 1.01 of the Credit Agreement shall be amended to read as follows: Amendment No. 5 2 - 2 - "(i) Atlanta Hawks shall be deemed to be a Consolidated Subsidiary during such period unless, on the last day of such period, there shall exist a Lien on any of the revenues of Atlanta Hawks and" C. Definition of Subsidiary. The definition of "Subsidiary" in Section 1.01 of the Credit Agreement shall be amended by adding a new sentence at the end thereof reading as follows: "Notwithstanding anything to the contrary contained herein (but subject to clause (i) of the first sentence of the definition of "Cash Flow" in Section 1.01 hereof), Atlanta Hawks shall not be deemed to be a Subsidiary or a Wholly Owned Subsidiary of the Company." D. Funded Debt Ratio. Section 8.13 of the Credit Agreement shall be amended to read as follows: "8.13 Funded Debt Ratio. The Company shall not permit the Funded Debt Ratio to exceed the following respective ratios at any time during the following respective periods:
Period Ratio ------ ----- From and including the first Delivery Date after March 31, 1995 through but excluding the first Delivery Date after September 30, 1996 6.00 to 1.00 From and including the first Delivery Date after September 30, 1996 through but excluding the first Delivery Date after December 31, 1996 6.50 to 1.00 From and including the first Delivery Date after December 31, 1996 through but excluding the first Delivery Date after March 31, 1997 6.00 to 1.00
Amendment No. 5 3 - 3 - From and including the first Delivery Date after March 31, 1997 through but excluding the first Delivery Date after September 30, 1997 5.50 to 1.00 From and including the first Delivery Date after September 30, 1997 through but excluding the first Delivery Date after March 31, 1998 5.00 to 1.00 From and including the first Delivery Date after March 31, 1998 and at all times thereafter 4.50 to 1.00"
E. Events of Default. Section 9(e) of the Credit Agreement shall be amended to read as follows: "(e) Before the Acquisition Date, there shall occur any amendment in the provisions requiring supermajority vote pursuant to Article 12, Section 3 of the by-laws of the Company as amended on and through July 21, 1988 or any amendment in the provisions which are subject to special class vote pursuant to Article 5, Section C.4 of the articles of incorporation of the Company as amended on and through August 25, 1987; or" Section 3. Representations and Warranties. The Company represents and warrants to the Banks and the Agent that: (a) this Amendment has been duly and validly executed and delivered by the Company and constitutes the Company's legal, valid and binding obligation, enforceable against the Company in accordance with its terms; and (b) after giving effect to this Amendment, (i) no Default shall have occurred and be continuing and (ii) the representations and warranties made by the Company in Section 7 of the Credit Agreement are true and correct on and as of the date hereof with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date). Section 4. Conditions To Effectiveness. The amendments to the Credit Agreement set forth in Section 2 hereof shall become effective, as of the date hereof, upon the receipt Amendment No. 5 4 - 4 - by the Agent of this Amendment, duly executed and delivered by the Company, the Majority Banks and the Agent. Section 5. Documents Otherwise Unchanged. Except as herein provided, the Credit Agreement shall remain unchanged and in full force and effect, and each reference to the Credit Agreement and words of similar import in the Credit Agreement, as amended hereby, and the Notes shall be a reference to the Credit Agreement as amended hereby and as the same may be further amended, supplemented and otherwise modified and in effect from time to time. Section 6. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be identical and all of which, when taken together, shall constitute one and the same instrument, and any of the parties hereto may execute this Amendment by signing any such counterpart. Section 7. Binding Effect. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Section 8. Governing Law. This Amendment shall be governed by, and construed in accordance with, the law of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year first above written. TURNER BROADCASTING SYSTEM, INC. By ----------------------------------------- Title: THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION) By ------------------------------------------ Title: BANK OF AMERICA ILLINOIS By ------------------------------------------ Title: Amendment No. 5 5 - 5 - BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By ------------------------------------------ Title: THE FIRST NATIONAL BANK OF BOSTON By ------------------------------------------ Title: BANK OF MONTREAL By ------------------------------------------ Title: THE BANK OF NEW YORK By ------------------------------------------ Title: THE BANK OF NOVA SCOTIA By ------------------------------------------ Title: BANK OF SCOTLAND By ------------------------------------------ Title: BANQUE FRANCAISE DU COMMERCE EXTERIEUR By ------------------------------------------ Title: Amendment No. 5 6 - 6 - By ------------------------------------------ Title: BARCLAYS BANK PLC By ------------------------------------------ Title: CIBC INC. By ------------------------------------------ Title: CITIBANK, N.A. By ------------------------------------------ Title: CREDIT LYONNAIS CAYMAN ISLAND BRANCH By ------------------------------------------ Title: CREDIT SUISSE By ------------------------------------------ Title: By ------------------------------------------ Title: DAI-ICHI KANGYO BANK, LTD. By ------------------------------------------ Amendment No. 5 7 - 7 - Title: FIRST HAWAIIAN BANK By ----------------------------------------- Title: THE FIRST NATIONAL BANK OF CHICAGO By ------------------------------------------ Title: FIRST UNION NATIONAL BANK OF GEORGIA By ------------------------------------------ Title: FLEET BANK BY ------------------------------------------ Title: THE INDUSTRIAL BANK OF JAPAN, LIMITED By ------------------------------------------ Title: LTCB TRUST COMPANY By ------------------------------------------ Title: Amendment No. 5 8 - 8 - MELLON BANK, N.A. By ------------------------------------------ Title: THE MITSUBISHI TRUST AND BANKING CORPORATION By ------------------------------------------ Title: NATIONSBANK OF TEXAS, N.A. By ------------------------------------------ Title: THE NIPPON CREDIT BANK, LTD. By ------------------------------------------ Title: ROYAL BANK OF CANADA By ----------------------------------------- Title: THE SAKURA BANK, LIMITED, ATLANTA AGENCY By ------------------------------------------ Title: Amendment No. 5 9 - 9 - SOCIETE GENERALE By ------------------------------------------ Title: THE TOKAI BANK, LIMITED By ------------------------------------------ Title: THE TORONTO-DOMINION BANK By ------------------------------------------ Title: UNION BANK OF CALIFORNIA By ------------------------------------------ Title: THE YASUDA TRUST AND BANKING CO., LTD. By ------------------------------------------ Title: BANKERS TRUST COMPANY By ------------------------------------------ Title: BANK OF HAWAII By ------------------------------------------ Title: Amendment No. 5 10 - 10 - BANQUE PARIBAS By ------------------------------------------ Title: CORESTATES BANK, N.A. By ------------------------------------------ Title: CRESTAR BANK By ------------------------------------------ Title: THE FUJI BANK, LTD. By ------------------------------------------ Title: MIDLAND BANK, PLC By ------------------------------------------ Title: PNC BANK, NATIONAL ASSOCIATION By ------------------------------------------ Title: SUNTRUST BANK, ATLANTA By ------------------------------------------ Title: Amendment No. 5 11 - 11 - SWISS BANK CORPORATION, NEW YORK BRANCH By ------------------------------------------ Title: By ------------------------------------------ Title: THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), as Agent By ------------------------------------------ Title: Amendment No. 5 EX-4.7.2 3 AMENDMENT NO. 2 TO CREDIT AGREEMENT 1 EXHIBIT 4.7.2 Execution Counterpart AMENDMENT NO. 2 AMENDMENT NO. 2 dated as of April 26, 1996 between TURNER BROADCASTING SYSTEM, INC., a Georgia corporation (the "Company"), the Banks (as such term is defined below) party hereto and THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION) ("Chase"), as agent (the "Agent"). The Company, certain lenders (the "Banks") and the Agent are party to a Credit Agreement dated as of September 7, 1994 (as amended, supplemented and otherwise modified and in effect to but excluding the date hereof, the "Credit Agreement"). The Company has requested that the Banks agree, and the Banks party hereto are willing, to amend certain provisions of the Credit Agreement, all on the terms and conditions of this Amendment. Accordingly, in consideration of the premises and the mutual agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1. Definitions. Terms used but not defined herein shall have the respective meanings ascribed to such terms in the Credit Agreement. Section 2. Amendments. Subject to the satisfaction of the conditions to effectiveness specified in Section 4 hereof, but with effect on and after the date hereof, the Credit Agreement shall be amended as follows: A. Certain New Defined Terms. Section 1.01 of the Credit Agreement shall be amended by adding the following new definitions and inserting the same in the appropriate alphabetical locations: "Atlanta Hawks' shall mean Atlanta Hawks, Ltd., a Georgia limited partnership." "'Acquisition Date', shall mean the date that the Company becomes a Wholly Owned Subsidiary of either Time Warner or a Person of which Time Warner is a Wholly Owned Subsidiary." "'Time Warner" shall mean Time Warner Inc., a Delaware corporation." B. Definition of Cash Flow. Clause (i) of the first sentence of the definition of "Cash Flow" in Section 1.01 of the Credit Agreement shall be amended to read as follows: Amendment No. 2 2 - 2 - "(i) Atlanta Hawks shall be deemed to be a Consolidated Subsidiary during such period unless, on the last day of such period, there shall exist a Lien on any of the revenues of Atlanta Hawks and" C. Definition of Subsidiary. The definition of "Subsidiary" in Section 1.01 of the Credit Agreement shall be amended by adding a new sentence at the end thereof reading as follows: "Notwithstanding anything to the contrary contained herein (but subject to clause (i) of the first sentence of the definition of "Cash Flow" in Section 1.01 hereof), Atlanta Hawks shall not be deemed to be a Subsidiary or a Wholly Owned Subsidiary of the Company." D. Funded Debt Ratio. Section 8.13 of the Credit Agreement shall be amended to read as follows: "8.13 Funded Debt Ratio. The Company shall not permit the Funded Debt Ratio to exceed the following respective ratios at any time during the following respective periods:
Period Ratio ------ ----- From and including the first Delivery Date after March 31, 1995 through but excluding the first Delivery Date after September 30, 1996 6.00 to 1.00 From and including the first Delivery Date after September 30, 1996 through but excluding the first Delivery Date after December 31, 1996 6.50 to 1.00 From and including the first Delivery Date after December 31, 1996 through but excluding the first Delivery Date after March 31, 1997 6.00 to 1.00
Amendment No. 2 3 - 3 - From and including the first Delivery Date after March 31, 1997 through but excluding the first Delivery Date after September 30, 1997 5.50 to 1.00 From and including the first Delivery Date after September 30, 1997 through but excluding the first Delivery Date after March 31, 1998 5.00 to 1.00 From and including the first Delivery Date after March 31, 1998 and at all times thereafter 4.50 to 1.00"
E. Events of Default. Section 9(e) of the Credit Agreement shall be amended to read as follows: "(e) Before the Acquisition Date, there shall occur any amendment in the provisions requiring supermajority vote pursuant to Article 12, Section 3 of the by-laws of the Company as amended on and through July 21, 1988 or any amendment in the provisions which are subject to special class vote pursuant to Article 5, Section C.4 of the articles of incorporation of the Company as amended on and through August 25, 1987; or" Section 3. Representations and Warranties. The Company represents and warrants to the Banks and the Agent that: (a) this Amendment has been duly and validly executed and delivered by the Company and constitutes the Company's legal, valid and binding obligation, enforceable against the Company in accordance with its terms; and (b) after giving effect to this Amendment, (i) no Default shall have occurred and be continuing and (ii) the representations and warranties made by the Company in Section 7 of the Credit Agreement are true and correct on and as of the date hereof with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date). Section 4. Conditions To Effectiveness. The amendments to the Credit Agreement set forth in Section 2 hereof shall become effective, as of the date hereof, upon the receipt Amendment No. 2 4 - 4 - by the Agent of this Amendment, duly executed and delivered by the Company, the Majority Banks and the Agent. Section 5. Documents Otherwise Unchanged. Except as herein provided, the Credit Agreement shall remain unchanged and in full force and effect, and each reference to the Credit Agreement and words of similar import in the Credit Agreement, as amended hereby, and the Notes shall be a reference to the Credit Agreement as amended hereby and as the same may be further amended, supplemented and otherwise modified and in effect from time to time. Section 6. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be identical and all of which, when taken together, shall constitute one and the same instrument, and any of the parties hereto may execute this Amendment by signing any such counterpart. Section 7. Binding Effect. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Section 8. Governing Law. This Amendment shall be governed by, and construed in accordance with, the law of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year first above written. TURNER BROADCASTING SYSTEM, INC. By ------------------------------------------ Title: THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION) By ------------------------------------------ Title: Amendment No. 2 5 - 5 - CREDIT LYONNAIS CAYMAN ISLAND BRANCH By ------------------------------------------ Title: THE LONG-TERM CREDIT BANK OF JAPAN, LTD. By ------------------------------------------ Title: THE TORONTO-DOMINION BANK By ------------------------------------------ Title: Amendment No. 2 6 - 6 - BANK OF AMERICA ILLINOIS By ------------------------------------------ Title: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By ------------------------------------------ Title: BANK OF MONTREAL By ------------------------------------------ Title: THE BANK OF NEW YORK By ------------------------------------------ Title THE BANK OF NOVA SCOTIA By ------------------------------------------ Title: CREDIT SUISSE By ------------------------------------------ Title: By ------------------------------------------ Title: Amendment No. 2 7 - 7 - THE FIRST NATIONAL BANK OF BOSTON By ------------------------------------------ Title: THE FIRST NATIONAL BANK OF CHICAGO By ------------------------------------------ Title: FIRST UNION NATIONAL BANK OF GEORGIA By ------------------------------------------ Title: THE INDUSTRIAL BANK OF JAPAN, LIMITED, ATLANTA AGENCY By ------------------------------------------ Title: THE MITSUBISHI TRUST AND BANKING CORPORATION By ------------------------------------------ Title: NATIONSBANK OF TEXAS, N.A. By ------------------------------------------ Title: ROYAL BANK OF CANADA By ------------------------------------------ Title: Amendment No. 2 8 - 8 - SOCIETE GENERAL By ------------------------------------------ Title: UNION BANK OF CALIFORNIA By ------------------------------------------ Title: BANK OF HAWAII By ------------------------------------------ Title: CIBC INC. By ------------------------------------------ Title: THE FUJI BANK, LTD. By ------------------------------------------ Title: MIDLAND BANK, PLC By ------------------------------------------ Title: PNC BANK, NATIONAL ASSOCIATION By ------------------------------------------ Title: Amendment No. 2 9 - 9 - CRESTAR BANK By ------------------------------------------ Title: THE NIPPON CREDIT BANK, LTD. By ------------------------------------------ Title: SWISS BANK CORPORATION., NEW YORK BRANCH By ------------------------------------------ Title: By ------------------------------------------ Title: THE TOKAI BANK, LIMITED By ------------------------------------------ Title: THE YASUDA TRUST AND BANKING CO., LTD. By ------------------------------------------- Title: THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), as Agent By ------------------------------------------ Title: Amendment No. 2 EX-11 4 COMPUTATION OD PRIMARY EARNINGS 1 EXHIBIT 11 TURNER BROADCASTING SYSTEM, INC. Computation of Primary Earnings Per Share (in thousands, except per share data)
Three Months Ended Six Months Ended June 30, 1996 June 30, 1996 ------------------ ---------------- Net income applicable to common stock $ 11,271 $ 1,463 ======== ======== Weighted average number of shares outstanding during the period 208,293 207,635 Add:Common equivalent shares issuable assuming conversion of Class C Convertible Preferred Stock 74,382 74,382 Shares issuable upon exercise of stock options 18,870 18,870 Subtract: Shares which would have been purchased with proceeds from exercise of such stock options 13,595 13,544 -------- -------- Weighted average number of common stock, common stock equivalents and converted shares outstanding 287,950 287,343 ======== ======== Weighted average number of Class A common shares and common stock equivalents 68,330 68,330 ======== ======== Weighted average number of Class B common shares and common stock equivalents 219,620 219,013 ======== ======== Earnings per share and common stock equivalent of Class A and Class B Common Stock $ 0.04 $ 0.01 ======== ========
2 TURNER BROADCASTING SYSTEM, INC. Computation of Fully-Diluted Earnings Per Share (in thousands, except per share data)
Three Months Ended Six Months Ended June 30, 1996 June 30, 1996 ------------------ ---------------- Net income applicable to common stock $ 11,271 $ 1,463 Add: Interest expense on zero coupon subordinated convertible notes due 2007 4,854 9,624 Interest expense on 6.5% convertible notes 0 344 Subtract: Additional income taxes (2,281) (4,685) -------- -------- Adjusted net income applicable to common stock $ 13,844 $ 6,746 ======== ======== Primary weighted average number of shares outstanding 287,950 287,343 Add: Common shares issuable assuming conversion of convertible notes due 2007 7,440 7,440 Change in shares due to options assumed converted using the end of period market value 140 89 Common shares issuable assuming conversion of 6.5% convertible notes for applicable period 0 547 -------- -------- Weighted average number of common stock, common stock equivalents and convertible shares, assuming full dilution 295,530 295,419 ======== ======== Weighted average number of Class A common shares and common equivalents and convertible shares, assuming full dilution 68,330 68,330 ======== ======== Weighted average number of Class B common shares and common equivalents and convertible shares, assuming full dilution 227,200 227,089 ======== ======== Earnings per share and common stock equivalent of Class A and Class B Common Stock $ 0.05 $ 0.02 ======== ========
This calculation is submitted in accordance with the rules and regulations of the Securities and Exchange Commission. Under generally accepted accounting principles this presentation would not be made because it is anti-dilutive. EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 118,734 0 520,177 (41,711) 0 1,410,617 680,676 (312,188) 4,488,108 821,970 2,601,671 0 260,438 13,026 197,489 4,488,108 1,675,219 1,675,219 1,051,631 1,591,255 0 6,972 81,183 2,781 1,318 1,463 0 0 0 1,463 0.01 0.00
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