-----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, AijNqUL8akd4CvOpNIJEZZW07ELlmF6mIE0Nl7hB4mpix3mM/f9D9gBg64hqUt2h f0e+si8tl0sLO4Ur8vsxhw== 0000893657-97-000003.txt : 19970514 0000893657-97-000003.hdr.sgml : 19970514 ACCESSION NUMBER: 0000893657-97-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TIME WARNER ENTERTAINMENT CO L P CENTRAL INDEX KEY: 0000893657 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 133666692 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12878 FILM NUMBER: 97602648 BUSINESS ADDRESS: STREET 1: 75 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2124848000 MAIL ADDRESS: STREET 1: 75 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10019 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN TELEVISION & COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000005910 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 132922502 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-04049 FILM NUMBER: 97602649 BUSINESS ADDRESS: STREET 1: 75 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2033280600 MAIL ADDRESS: STREET 1: 75 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10019 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WARNER COMMUNICATIONS INC CENTRAL INDEX KEY: 0000104650 STANDARD INDUSTRIAL CLASSIFICATION: PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS [3652] IRS NUMBER: 132696809 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-53742-14 FILM NUMBER: 97602650 BUSINESS ADDRESS: STREET 1: 75 ROCKEFELLER PLZ STREET 2: C/O TIME WARNER ENTERTAINMENT CO L P CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2124848000 MAIL ADDRESS: STREET 1: 75 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10019 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WARNER CABLE COMMUNICATIONS INC CENTRAL INDEX KEY: 0000893780 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 133134949 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-53742-12 FILM NUMBER: 97602651 BUSINESS ADDRESS: STREET 1: 75 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 203-328-0600 MAIL ADDRESS: STREET 1: 75 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10019 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TIME WARNER OPERATIONS INC CENTRAL INDEX KEY: 0000914042 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 133544870 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-61714-16 FILM NUMBER: 97602652 BUSINESS ADDRESS: STREET 1: 75 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 203-328-06 MAIL ADDRESS: STREET 1: 75 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10019 10-Q 1 TIME WARNER ENTERTAINMENT 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q / x / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 for the quarterly period ended March 31, 1997, or / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 for the transition period from ------------------- to --------------------- . Registration Number 33-53742 TIME WARNER ENTERTAINMENT COMPANY, L.P. (Exact name of registrant as specified in its charter) Delaware 13-3666692 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) American Television and Communications Corporation Delaware 13-2922502 Time Warner Operations Inc. Delaware 13-3544870 Warner Cable Communications Inc. Delaware 13-3134949 Warner Communications Inc. Delaware 13-2696809 (Exact name of registrant as specified in its charter) (State or other (I.R.S. Employer jurisdiction of Identification incorporation or Number) organization) 75 Rockefeller Plaza New York, New York 10019 (212) 484-8000 (Address, including zip code, and telephone number, including area code, of each registrant's principal executive offices) 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 / / TIME WARNER ENTERTAINMENT COMPANY L.P. AND TWE GENERAL PARTNERS INDEX TO FORM 10-Q Page TWE General TWE Partners PART I. FINANCIAL INFORMATION Management's discussion and analysis of results of operations and financial condition 1 14 Consolidated balance sheets at March 31, 1997 and December 31, 1996 6 17 Consolidated statements of operations for the three months ended March 31 1997 and 1996 7 19 Consolidated statements of cash flows for the three months ended March 31 1997 and 1996 8 21 Notes to consolidated financial statements 9 23 PART II. OTHER INFORMATION 28 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION TWE classifies its business interests into three fundamental areas: Entertainment, consisting principally of interests in filmed entertainment, television production, television broadcasting and theme parks; Cable Networks, consisting principally of interests in cable television programming; and Cable, consisting principally of interests in cable television systems. TWE also manages the cable properties owned by Time Warner and the combined cable television operations are conducted under the name of Time Warner Cable. Capitalized terms are as defined and described in the accompanying consolidated financial statements, or elsewhere herein. Use of EBITDA The following comparative discussion of the results of operations and financial condition of TWE includes, among other factors, an analysis of changes in the operating income of the business segments before depreciation and amortization ("EBITDA") in order to eliminate the effect on the operating performance of the filmed entertainment and cable businesses of significant amounts of amortization of intangible assets recognized in Time Warner's $14 billion acquisition of WCI in 1989, the $1.3 billion acquisition of the ATC minority interest in 1992 and other business combinations accounted for by the purchase method. Financial analysts generally consider EBITDA to be an important measure of comparative operating performance for the businesses of TWE, and, when used in comparison to debt levels or the coverage of interest expense, as a measure of liquidity. However, EBITDA should be considered in addition to, not as a substitute for, operating income, net income, cash flow and other measures of financial performance and liquidity reported in accordance with generally accepted accounting principles. RESULTS OF OPERATIONS EBITDA and operating income for TWE for the three months ended March 31, 1997 and 1996 are as follows: Three Months Ended March 31, EBITDA Operating Income 1997 1996 1997 1996 (millions) Filmed Entertainment-Warner Bros. $146 $131 $ 75 $ 70 Broadcasting-The WB Network (20) (24) (20) (24) Cable Networks-HBO 96 81 91 76 Cable 431 368 183 146 Total $653 $556 $329 $268 TWE had revenues of $2.6 billion and net income of $320 million for the three months ended March 31, 1997, compared to revenues of $2.485 billion and net income of $94 million for the three months ended March 31, 1996. As discussed more fully below, TWE's net income increased significantly in 1997 as compared to results in 1996 due to an overall increase in operating income generated by its business segments and the inclusion of an approximately $250 million pretax gain on the sale of TWE's 58% interest in E! Entertainment Television, Inc., offset in part by an increase in minority interest expense related to the TWE-Advance/Newhouse Partnership. As a U.S. partnership, TWE is not subject to U.S. federal and state income taxation. Income and withholding taxes of $12 million and $18 million for the three months ended March 31, 1997 and 1996, respectively, have been provided for the operations of TWE's domestic and foreign subsidiary corporations. Filmed Entertainment-Warner Bros. Revenues decreased to $1.172 billion, compared to $1.216 billion in the first quarter of 1996. EBITDA increased to $146 million from $131 million. Depreciation and amortization, including noncash amortization of intangible assets related to the purchase of WCI, amounted to $71 million in 1997 and $61 million in 1996. Operating income increased to $75 million from $70 million. Revenues decreased principally as a result of lower worldwide theatrical and home video revenues, offset in part by increases in international syndication revenues. EBITDA and operating income increased principally as a result of the strong performance of international syndication and a gain on the sale of an investment. Operating income was further affected by higher depreciation and amortization principally related to the expansion of consumer products operations. Broadcasting - The WB Network. The WB Network recorded an operating loss of $20 million on $24 million of revenues in the first quarter of 1997, compared to an operating loss of $24 million on $15 million of revenues in the first quarter of 1996. The increase in revenues primarily resulted from the expansion of programming in September 1996 to three nights of primetime scheduling and the expansion of Kids' WB!, the network's animated programming lineup on Saturday mornings and weekdays. The 1997 operating loss principally resulted from the expanded programming schedule and was mitigated by the exercise of an option by a limited partner to increase its ownership in this network. Due to the start-up nature of this national broadcast operation, losses are expected to continue. Cable Networks-HBO. Revenues increased to $483 million, compared to $419 million in the first quarter of 1996. EBITDA increased to $96 million from $81 million. Depreciation and amortization amounted to $5 million in 1997 and 1996. Operating income increased to $91 million from $76 million. Revenues benefitted primarily from a significant increase in subscriptions. EBITDA and operating income improved principally as a result of the revenue gains. Cable. Revenues increased to $1.020 billion, compared to $947 million in the first quarter of 1996. EBITDA increased to $431 million from $368 million. Depreciation and amortization, including noncash amortization of intangible assets related to the purchase of WCI and the acquisition of the ATC minority interest, amounted to $248 million in 1997 and $222 million in 1996. Operating income increased to $183 million from $146 million. Revenues benefitted from an increase in basic cable subscribers, increases in regulated cable rates as permitted under Time Warner Cable's "social contract" with the Federal Communications Commission (the "FCC") and an increase in advertising revenues. EBITDA and operating income increased as a result of the revenue gains, as well as net gains of approximately $24 million on the sale or exchange of certain cable systems. Operating income was further affected by higher depreciation and amortization related to capital spending. Interest and Other, Net. Interest and other, net, was $129 million income in the first quarter of 1997, compared to $89 million expense in the first quarter of 1996. Interest expense decreased to $115 million, compared to $122 million in 1996. There was other income, net, of $244 million in the first quarter of 1997, compared to $33 million in the first quarter of 1996, principally due to the inclusion of an approximately $250 million pretax gain on the sale of an interest in E! Entertainment Television, Inc. in March 1997. FINANCIAL CONDITION AND LIQUIDITY March 31, 1997 Financial Condition TWE had $5.6 billion of debt, $243 million of preferred stock of a subsidiary, $1.6 billion of Time Warner General Partners' Senior Capital and $6.7 billion of partners' capital at March 31, 1997, compared to $5.7 billion of debt, $1.5 billion of Time Warner General Partners' Senior Capital and $6.6 billion of partners' capital at December 31, 1996. Cash and equivalents were $312 million at March 31, 1997, compared to $216 million at December 31, 1996, reducing the debt-net-of-cash amounts for TWE to $5.3 billion and $5.5 billion, respectively. Cash Flows During the first three months of 1997, TWE's cash used by operations amounted to $48 million and reflected $653 million of EBITDA from the Filmed Entertainment-Warner Bros., Broadcasting-The WB Network, Cable Networks-HBO and Cable businesses, less $146 million of interest payments, $12 million of income taxes, $18 million of corporate expenses, and $525 million related to an increase in working capital requirements, other balance sheet accounts and noncash items. Cash provided by operations of $557 million in the first quarter of 1996 reflected $556 million of business segment EBITDA and $181 million related to a reduction in working capital requirements, other balance sheet accounts and noncash items, less $151 million of interest payments, $12 million of income taxes and $17 million of corporate expenses. Cash provided by investing activities was $5 million in the first three months of 1997, compared to cash used by investing activities of $243 million in the first quarter of 1996, principally as a result of a $248 million increase in proceeds from the sale of investments. Capital expenditures were $331 million in each period. Cash provided by financing activities was $139 million in the first three months of 1997, compared to cash used by financing activities of $382 million in the first quarter of 1996, principally as a result of a lower level of debt reduction in the first three months of 1997 and the issuance of 250,000 shares of preferred stock of a subsidiary for aggregate net proceeds of $243 million, offset in part by the absence of $71 million of collections on the note receivable from U S WEST that was fully paid in 1996. The preferred stock was issued by a newly formed, substantially owned subsidiary intended to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended. Management believes that TWE's operating cash flow, cash and equivalents and additional borrowing capacity are sufficient to fund its capital and liquidity needs for the foreseeable future. Cable Capital Spending Since the beginning of 1994, Time Warner Cable has been engaged in a plan to upgrade the technological capability and reliability of its cable television systems and develop new services, which it believes will position the business for sustained, long-term growth. Capital spending by TWE's Cable division amounted to $292 million in the three months ended March 31, 1997, compared to $268 million in the three months ended March 31, 1996. For the full year of 1997, cable capital spending is expected to be comparable to 1996 levels, with approximately $1.1 billion budgeted for the remainder of 1997. Capital spending by TWE's Cable division is expected to be funded principally by cable operating cash flow. In exchange for certain flexibility in establishing cable rate pricing structures for regulated services that went into effect on January 1, 1996 and consistent with Time Warner Cable's long-term strategic plan, Time Warner Cable has agreed with the FCC to invest a total of $4 billion in capital costs in connection with the upgrade of its cable infrastructure, which is expected to be substantially completed over a five-year period ending December 31, 2000. The agreement with the FCC covers all of the cable operations of Time Warner Cable, including the owned or managed cable television systems of TWE, the TWE-Advance/Newhouse Partnership and Time Warner. Management expects to continue to finance such level of investment principally through the growth in cable operating cash flow derived from increases in subscribers and cable rates, bank credit agreement borrowings and the development of new revenue streams from expanded programming options, high speed data transmission and other services. Warner Bros. Backlog Warner Bros.' backlog, representing the amount of future revenue not yet recorded from cash contracts for the licensing of theatrical and television product for pay cable, basic cable, network and syndicated television exhibition, amounted to $1.636 billion at March 31, 1997, compared to $1.502 billion at December 31, 1996 (including amounts relating to TWE's cable television networks of $222 million and $189 million, respectively, and to Time Warner's cable television networks of $396 million and $274 million, respectively). Because backlog generally relates to contracts for the licensing of theatrical and television product which have already been produced, the recognition of revenue for such completed product is principally only dependent upon the commencement of the availability period for telecast under the terms of the related licensing agreement. Cash licensing fees are collected periodically over the term of the related licensing agreements. Accordingly, the portion of backlog for which cash advances have not already been received has significant off-balance sheet asset value as a source of future funding. The backlog excludes advertising barter contracts, which are also expected to result in the future realization of revenues and cash through the sale of advertising spots received under such contracts. Foreign Currency Risk Management Time Warner uses foreign exchange contracts primarily to hedge the risk that unremitted or future license fees owed to TWE domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad may be adversely affected by changes in foreign currency exchange rates. As part of its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, Time Warner hedges a portion of its foreign currency exposures anticipated over the ensuing twelve month period, including those related to TWE. At March 31, 1997, Time Warner had effectively hedged approximately half of TWE's estimated foreign currency exposures that principally relate to anticipated cash flows to be remitted to the U.S. over the ensuing twelve month period, using foreign exchange contracts that generally have maturities of three months or less, which are generally rolled over to provide continuing coverage throughout the year. TWE is reimbursed by or reimburses Time Warner for Time Warner contract gains and losses related to TWE's foreign currency exposure. Time Warner often closes foreign exchange sale contracts by purchasing an offsetting purchase contract. At March 31, 1997, Time Warner had contracts for the sale of $523 million and the purchase of $183 million of foreign currencies at fixed rates. Of Time Warner's $340 million net sale contract position, none of the foreign exchange purchase contracts and $100 million of the foreign exchange sale contracts related to TWE's foreign currency exposure, primarily Japanese yen (24% of net contract position related to TWE), French francs (20%), German marks (12%) and Canadian dollars (19%). This compares to a net sale contract position of $102 million of foreign currencies at December 31, 1996. Unrealized gains or losses related to foreign exchange contracts are recorded in income as the market value of such contracts change; accordingly, the carrying value of foreign exchange contracts approximates market value. The carrying value of foreign exchange contracts was not material at March 31, 1997 and December 31, 1996. No cash is required to be received or paid with respect to such gains and losses until the related foreign exchange contracts are settled, generally at their respective maturity dates. For the three months ended March 31, 1997 and 1996, TWE recognized $7 million and $2 million in gains, respectively, on foreign exchange contracts, which were or are expected to be offset by corresponding decreases in the dollar value of foreign currency license fee payments that have been or are anticipated to be received in cash from the sale of U.S. copyrighted products abroad. Time Warner places foreign currency contracts with a number of major financial institutions in order to minimize credit risk. Based on Time Warner's outstanding foreign exchange contracts related to TWE's exposure outstanding at March 31, 1997, each 5% devaluation of the U.S. dollar as compared to the level of foreign exchange rates for currencies under contract at March 31, 1997 would result in approximately $5 million of unrealized losses on foreign exchange contracts. Conversely, a 5% appreciation of the U.S. dollar as compared to the level of foreign exchange rates for currencies under contract at March 31, 1997 would result in $5 million of unrealized gains on contracts. Consistent with the nature of the economic hedge provided by such foreign exchange contracts, such unrealized gains or losses would be offset by corresponding decreases or increases, respectively, in the dollar value of future foreign currency license fee payments that would be received in cash within the ensuing twelve month period from the sale of U.S. copyrighted products abroad. TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED BALANCE SHEET (Unaudited) March 31, December 31, 1997 1996 (millions) ASSETS Current assets Cash and equivalents $ 312 $ 216 Receivables, including $391 and $383 million due from Time Warner, less allowances of $358 and $373 million 1,638 1,637 Inventories 1,192 1,134 Prepaid expenses 168 159 Total current assets 3,310 3,146 Noncurrent inventories 2,302 2,263 Loan receivable from Time Warner 400 400 Investments 337 351 Property, plant and equipment, net 6,076 5,999 Cable television franchises 3,032 3,054 Goodwill 3,966 3,996 Other assets 671 764 Total assets $20,094 $19,973 LIABILITIES AND PARTNERS' CAPITAL Current liabilities Accounts payable $ 769 $ 935 Participations and programming costs payable 1,269 1,393 Debt due within one year 7 7 Other current liabilities, including $83 million and $82 million due to Time Warner 1,524 1,740 Total current liabilities 3,569 4,075 Long-term debt 5,640 5,676 Other long-term liabilities, including $219 and $138 million due to Time Warner 1,254 1,085 Minority interests 1,103 1,020 Preferred stock of subsidiary holding solely a mortgage note of its parent 243 - Time Warner General Partners' Senior Capital 1,574 1,543 Partners' capital Contributed capital 7,537 7,537 Undistributed partnership earnings (deficit) (826) (963) Total partners' capital 6,711 6,574 Total liabilities and partners' capital $20,094 $19,973 See accompanying notes. TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Ended March 31, 1997 1996 (millions) Revenues (a) $2,600 $2,485 Cost of revenues (a)(b) 1,665 1,665 Selling, general and administrative (a)(b) 606 552 Operating expenses 2,271 2,217 Business segment operating income 329 268 Interest and other, net (a) 129 (89) Minority interest (108) (50) Corporate services (a) (18) (17) Income before income taxes 332 112 Income taxes (12) (18) Net income $ 320 $ 94 ______________ (a) Includes the following income (expenses) resulting from transactions with the partners of TWE and other related companies for the three months ended March 31, 1997, and 1996, respectively: revenues-$66 million and $23 million; cost of revenues-$(10) million and $(24) million; selling, general and administrative-$19 million and $(2) million; interest and other, net-$12 million and $9 million; and corporate services-$(18) million and $(17) million. (b) Includes depreciation and amortization expense of: $ 324 $ 288 See accompanying notes. TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Three Months Ended March 31, 1997 1996 (millions) OPERATIONS Net income $320 $ 94 Adjustments for noncash and nonoperating items: Depreciation and amortization 324 288 Changes in operating assets and liabilities (692) 175 Cash provided (used) by operations (48) 557 INVESTING ACTIVITIES Investments and acquisitions (31) (31) Capital expenditures (331) (331) Investment proceeds 367 119 Cash provided (used) by investing activities 5 (243) FINANCING ACTIVITIES Borrowings 282 63 Debt repayments (318) (498) Issuance of preferred stock of subsidiary 243 - Capital distributions (54) (63) Collections on note receivable from U S WEST - 71 Other (14) 45 Cash provided (used) by financing activities 139 (382) INCREASE (DECREASE) IN CASH AND EQUIVALENTS 96 (68) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 216 209 CASH AND EQUIVALENTS AT END OF PERIOD $312 $141 See accompanying notes. TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Description of Business Time Warner Entertainment Company, L.P., a Delaware limited partnership ("TWE"), classifies its businesses into three fundamental areas: Entertainment, consisting principally of interests in filmed entertainment, television production, television broadcasting and theme parks; Cable Networks, consisting principally of interests in cable television programming; and Cable, consisting principally of interests in cable television systems. Each of the business interests within Entertainment, Cable Networks and Cable is important to TWE's objective of increasing partner value through the creation, extension and distribution of recognizable brands and copyrights throughout the world. Such brands and copyrights include (1) the unique and extensive film, television and animation libraries of Warner Bros. and trademarks such as the Looney Tunes characters and Batman, (2) The WB Network, a national broadcasting network launched in 1995 as an extension of the Warner Bros. brand and as an additional distribution outlet for Warner Bros.' collection of children's cartoons and television programming, (3) Six Flags, the largest regional theme park operator in the United States, in which TWE owns a 49% interest, (4) HBO and Cinemax, the leading pay television services and (5) Time Warner Cable, the second largest operator of cable television systems in the U.S. The operating results of TWE's various business interests are presented herein as an indication of financial performance (Note 7). Except for start-up losses incurred in connection with The WB Network, TWE's principal business interests generate significant operating income and cash flow from operations. The cash flow from operations generated by such business interests is considerably greater than their operating income due to significant amounts of noncash amortization of intangible assets recognized principally in Time Warner Companies, Inc.'s ("Time Warner")* $14 billion acquisition of Warner Communications Inc. ("WCI") in 1989 and $1.3 billion acquisition of the minority interest in American Television and Communications Corporation ("ATC") in 1992, a portion of which cost was allocated to TWE upon the capitalization of the partnership. Noncash amortization of intangible assets recorded by TWE's businesses amounted to $107 million and $110 million in the three months ended March 31, 1997 and 1996, respectively. Time Warner and certain of its wholly owned subsidiaries collectively own general and limited partnership interests in TWE consisting of 74.49% of the pro rata priority capital ("Series A Capital") and residual equity capital ("Residual Capital"), and 100% of the senior priority capital ("Senior Capital") and junior priority capital ("Series B Capital"). The remaining 25.51% limited partnership interests in the Series A Capital and Residual Capital of TWE are held by a subsidiary of U S WEST, Inc. ("U S WEST"). Certain of Time Warner's subsidiaries are the general partners of TWE ("Time Warner General Partners"). ________________ * On October 10, 1996, Time Warner Inc. acquired the remaining 80% interest in Turner Broadcasting System, Inc. ("TBS") that it did not already own. As a result of this transaction, a new parent company with the name "Time Warner Inc." replaced the old parent company of the same name ("Old Time Warner", now known as Time Warner Companies, Inc.), and Old Time Warner and TBS became separate, wholly owned subsidiaries of the new parent company. Unless the context indicates otherwise, references herein to "Time Warner" refer to Old Time Warner. TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) Basis of Presentation The accompanying financial statements are unaudited but, in the opinion of management, contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position and the results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles applicable to interim periods. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of TWE for the year ended December 31, 1996. Certain reclassifications have been made to the prior year's financial statements to conform to the 1997 presentation. 2. INVENTORIES TWE's inventories consist of: March 31, 1997 December 31, 1996 Current Noncurrent Current Noncurrent (millions) Film costs: Released, less amortization $ 418 $ 562 $ 544 $ 535 Completed and not released 379 86 168 42 In process and other 24 696 21 704 Library, less amortization - 651 - 664 Programming costs, less amortization 288 307 319 318 Merchandise 83 - 82 - Total $1,192 $2,302 $1,134 $2,263 3. INVESTMENTS In March 1997, TWE sold its 58% interest in E! Entertainment Television, Inc. A pretax gain of approximately $250 million relating to this sale has been included in the accompanying consolidated statement of operations. 4. LONG-TERM DEBT Long-term debt consists of: March 31, December 31, 1997 1996 (millions) Credit agreement, weighted average interest rates of 6.0% and 6.1% $1,230 $1,555 Commercial paper, weighted average interest rates of 6.0% and 5.8% 599 310 Publicly held notes and debentures 3,782 3,781 Other 29 30 Total $5,640 $5,676 Each Time Warner General Partner has guaranteed a pro rata portion of approximately $5.4 billion of TWE's debt and accrued interest thereon based on the relative fair value of the net assets each Time Warner General Partner contributed to TWE. Such indebtedness is recourse to each Time Warner General Partner only to the extent of its guarantee. 5. PREFERRED STOCK OF SUBSIDIARY In February 1997, a newly formed, substantially owned subsidiary of TWE (the "REIT") issued 250,000 shares of step-down preferred stock ("Step-Down Preferred Stock"). The REIT is intended to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended. TWE used the aggregate net proceeds from the transaction of $243 million to reduce its bank debt. The sole asset of the REIT is a $432 million mortgage note payable of TWE, which will be secured by certain real estate owned by TWE or its affiliates. Each share of Step-Down Preferred Stock is entitled to a liquidation preference of $1,000 and entitles the holder thereof to receive cumulative cash dividends, payable quarterly, at the rate of 14.253% per annum through December 30, 2006 and 1% per annum thereafter, which results in an effective dividend yield of 8.48%. Shares of Step-Down Preferred Stock are redeemable only in the event of certain changes or proposed changes to the tax laws or regulations, such that dividends paid by the REIT or interest paid under the mortgage note would not be fully deductible for federal income tax purposes. Time Warner has the right to liquidate or dissolve the REIT at any time after December 30, 2006 or, at any time prior thereto, upon the approval of the holders of at least two-thirds of the outstanding shares of Step-Down Preferred Stock. 6. PARTNERS' CAPITAL Changes in partners' capital were as follows: Three Months Ended March 31, 1997 1996 (millions) Balance at beginning of year $6,574 $6,478 Net income 320 94 Distributions (139) (121) Allocation of income to Time Warner General Partners' Senior Capital (31) (28) Collections on note receivable from U S WEST - 71 Other (13) 8 Balance at March 31 $6,711 $6,502 TWE is required to make distributions to reimburse the partners for income taxes at statutory rates based on their allocable share of taxable income, and to reimburse Time Warner for its stock options granted to employees of TWE based on the amount by which the market price of Time Warner common stock exceeds the option exercise price on the exercise date or, with respect to options granted prior to the TWE capitalization on September 30, 1992, the greater of the exercise price and the $27.75 market price of Time Warner common stock at the time of the TWE capitalization. TWE accrues a stock option distribution and a corresponding liability with respect to unexercised options when the market price of Time Warner common stock increases during the accounting period, and reverses previously-accrued stock option distributions and the corresponding liability when the market price of Time Warner common stock declines. During the three months ended March 31, 1997, TWE accrued $50 million of tax-related distributions and $89 million of stock option distributions, based on closing prices of Time Warner common stock of $43.25 at March 31, 1997 and $37.50 at December 31, 1996. During the three months ended March 31, 1996, TWE accrued $56 million of tax-related distributions and $65 million of stock option distributions as a result of an increase at that time in the market price of Time Warner common stock. In the three months ended March 31, 1997, TWE paid distributions to the Time Warner General Partners in the amount of $54 million, consisting of $50 million of tax-related distributions and $4 million of stock option related distributions. In the three months ended March 31, 1996, TWE paid the Time Warner General Partners distributions in the amount of $63 million, consisting of $56 million of tax-related distributions and $7 million of stock option related distributions. 7. SEGMENT INFORMATION TWE classifies its businesses into three fundamental areas: Entertainment, consisting principally of interests in filmed entertainment, television production, television broadcasting and theme parks; Cable Networks, consisting principally of interests in cable television programming; and Cable, consisting principally of interests in cable television systems. Information as to the operations of TWE in different business segments is set forth below. Three Months Ended March 31, 1997 1996 (millions) Revenues Filmed Entertainment-Warner Bros. $1,172 $1,216 Broadcasting-The WB Network 24 15 Cable Networks-HBO 483 419 Cable 1,020 947 Intersegment elimination (99) (112) Total $2,600 $2,485 Three Months Ended March 31, 1997 1996 (millions) Operating Income Filmed Entertainment-Warner Bros. $ 75 $ 70 Broadcasting-The WB Network (20) (24) Cable Networks-HBO 91 76 Cable 183 146 Total $329 $268 Three Months Ended March 31, 1997 1996 (millions) Depreciation of Property, Plant and Equipment Filmed Entertainment-Warner Bros. $ 40 $ 30 Broadcasting-The WB Network - - Cable Networks-HBO 5 5 Cable 172 143 Total $217 $178 Three Months Ended March 31, 1997 1996 (millions) Amortization of Intangible Assets (1) Filmed Entertainment-Warner Bros. $ 31 $ 31 Broadcasting-The WB Network - - Cable Networks-HBO - - Cable 76 79 Total $107 $ 110 __________________ (1) Amortization includes amortization relating to the acquisitions of WCI in 1989 and the ATC minority interest in 1992 and to other business combinations accounted for by the purchase method. 8. COMMITMENTS AND CONTINGENCIES Pending legal proceedings are substantially limited to litigation incidental to the businesses of TWE and the pending litigation with the City of New York and Fox News Channel ("FNC") relating to Time Warner's acquisition of Turner Broadcasting System, Inc. and the carriage of FNC on Time Warner Cable's New York City cable television system. In the opinion of management, the ultimate resolution of these matters will not have a material effect on the consolidated financial statements of TWE. 9. ADDITIONAL FINANCIAL INFORMATION Additional financial information with respect to cash flows is as follows: Three Months Ended March 31, 1997 1996 (millions) Interest expense $115 $122 Cash payments made for interest 146 151 Cash payments made for income taxes, net 12 12 Noncash capital distributions 89 65 TWE GENERAL PARTNERS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Set forth below is a discussion of the results of operations and financial condition of WCI, the only General Partner with independent business operations. The financial position and results of operations of ATC, TWOI and WCCI (the other General Partners of TWE, as described in Note 1 to the accompanying consolidated financial statements) are principally derived from their investments in TWE, Time Warner Companies, Inc. ("Time Warner"), Turner Broadcasting System, Inc. ("TBS") and their revolving credit agreements with Time Warner. Capitalized terms are as defined and described in the accompanying consolidated financial statements, or elsewhere herein. The following comparative discussion of the results of operations and financial condition of WCI includes, among other factors, an analysis of changes in operating income before depreciation and amortization ("EBITDA") in order to eliminate the effect on WCI's operating performance of significant amounts of amortization of intangible assets recognized in Time Warner's $14 billion acquisition of WCI in 1989 and other business combinations accounted for by the purchase method. Financial analysts generally consider EBITDA to be an important measure of comparative operating performance for WCI, and, when used in comparison to debt levels or the coverage of interest expense, as a measure of liquidity. However, EBITDA should be considered in addition to, not as a substitute for, operating income, net income, cash flow and other measures of financial performance and liquidity reported in accordance with generally accepted accounting principles. RESULTS OF OPERATIONS WCI had revenues of $933 million and net income of $115 million for the three months ended March 31, 1997, compared to revenues of $983 million and net income of $27 million for the three months ended March 31, 1996. EBITDA decreased to $136 million from $141 million. Depreciation and amortization, including amortization related to the purchase of WCI, was $86 million in 1997 and $88 million in 1996. Operating income decreased to $50 million from $53 million. Despite WCI maintaining its leading domestic market share (over 21%), the decline in revenues principally related to continuing industry-wide softness in the overexpanded U.S. retail marketplace and a decline in international recorded music sales. EBITDA and operating income decreased principally as a result of the decline in revenues, offset in part by certain one-time gains. Management expects that these domestic and international trends will continue to affect 1997 operating results. WCI's equity in the pretax income of TWE was $158 million for the three months ended March 31, 1997, compared to $53 million for the three months ended March 31, 1996. TWE's pretax income increased significantly in 1997 as compared to results in 1996 due to an overall increase in operating income generated by its business segments and the inclusion of an approximately $250 million pretax gain on the sale of TWE's 58% interest in E! Entertainment Television, Inc., offset in part by an increase in minority interest expense related to the TWE-Advance/Newhouse Partnership. Interest and other, net was $17 million of income for the three months ended March 31, 1997 compared to $12 million of expense for the three months ended March 31, 1996. Interest expense increased to $9 million from $7 million. There was other income, net, of $26 million in 1997, compared to other expense, net, of $5 million in 1996, principally because of an increase in gains on foreign exchange contracts and lower losses from reductions in the carrying value of certain investments. The relationship between income before income taxes and income tax expense for the General Partners is principally affected by the amortization of goodwill and certain other financial statement expenses that are not deductible for income tax purposes. Income tax expense for each of the General Partners includes all income taxes related to its allocable share of partnership income and its equity in the income tax expense of corporate subsidiaries of TWE. FINANCIAL CONDITION AND LIQUIDITY March 31, 1997 WCI had $8.8 billion of equity at March 31, 1997, compared to $9 billion of equity at December 31, 1996. Cash and equivalents increased to $113 million at March 31, 1997, compared to $91 million at December 31, 1996. WCI had no long-term debt due to Time Warner at the end of either period. The total capitalization of ATC, TWOI and WCCI at March 31, 1997 consisted of equity capital of $2.4 billion, $674 million and $839 million, respectively, compared to $2.3 billion, $654 million and $814 million at December 31, 1996, respectively. Although these General Partners have no independent operations, it is expected that additional tax-related and other distributions from TWE, as well as availability under each General Partner's revolving credit agreement with Time Warner, will continue to be sufficient to satisfy the General Partners' obligations with respect to their tax sharing agreements with Time Warner for the foreseeable future. Cash Flows In the first three months of 1997, WCI's cash provided by operations amounted to $247 million and reflected $136 million of EBITDA, $26 million of distributions from TWE and $206 million related to a reduction in working capital requirements, other balance sheet accounts and noncash items, less $7 million of interest payments and $114 million of income taxes ($74 million of which was paid to Time Warner under a tax sharing agreement). Cash provided by WCI's operations of $240 million in the first three months of 1996 reflected $141 million of EBITDA, $30 million of distributions from TWE and $130 million related to a reduction in working capital requirements, other balance sheet accounts and noncash items, less $4 million of interest payments and $57 million of income taxes ($25 million of which was paid to Time Warner under a tax sharing agreement). Management believes that WCI's operating cash flow and borrowing availability under its revolving credit agreement with Time Warner are sufficient to meet its capital and liquidity needs for the foreseeable future without cash distributions from TWE above those permitted by existing agreements. WCI and the other General Partners have no claims on the assets and cash flows of TWE except through the payment of certain reimbursements and cash distributions. During the first three months of 1997, the General Partners received an aggregate $54 million of distributions, consisting of $50 million of tax-related distributions and $4 million of stock option related distributions. During the first three months of 1996, the General Partners received an aggregate $63 million of distributions, consisting of $56 million of tax-related distributions and $7 million of stock option related distributions. Of such aggregate distributions in the first quarter of 1997 and 1996, WCI, ATC, TWOI and WCCI received $26 million and $30 million, respectively; $22 million and $26 million, respectively; $6 million and $7 million, respectively; and $8 million and $9 million, respectively. Foreign Currency Risk Management Time Warner uses foreign exchange contracts primarily to hedge the risk that unremitted or future royalties owed to WCI domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad may be adversely affected by changes in foreign currency exchange rates. As part of its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, Time Warner hedges a portion of its combined foreign currency exposures anticipated over the ensuing twelve month period, including those related to WCI. At March 31, 1997, Time Warner had effectively hedged approximately half of WCI's estimated foreign currency exposures that principally relate to anticipated cash flows to be remitted to the U.S. over the ensuing twelve-month period, using foreign exchange contracts that generally have maturities of three months or less, which are generally rolled over to provide continuing coverage throughout the year. WCI is reimbursed by or reimburses Time Warner for Time Warner contract gains and losses related to WCI's foreign currency exposure. Time Warner often closes foreign exchange sale contracts by purchasing an offsetting purchase contract. At March 31, 1997, Time Warner had contracts for the sale of $523 million and the purchase of $183 million of foreign currencies at fixed rates. Of Time Warner's $340 million net sale contract position, $387 million of foreign exchange sale contracts and $166 million of foreign exchange purchase contracts related to WCI's exposure, primarily English pounds (28% of net contract position related to WCI), Canadian dollars (10%) and German marks (22%), compared to a net sale contract position of $221 million of foreign currencies at December 31, 1996. Unrealized gains or losses related to foreign exchange contracts are recorded in income as the market value of such contracts change; accordingly, the carrying value of foreign exchange contracts approximates market value. The carrying value of foreign exchange contracts was not material at March 31, 1997 and December 31, 1996. No cash is required to be received or paid with respect to such gains and losses until the related foreign exchange contracts are settled, generally at their respective maturity dates. In the first three months of 1997 and 1996, WCI had $14 million and $7 million in gains, respectively, on foreign exchange contracts, which were or are expected to be offset by corresponding decreases in the dollar value of foreign currency royalty payments that have been or are anticipated to be received in cash from the sale of U.S. copyrighted products abroad. Time Warner places foreign currency contracts with a number of major financial institutions in order to minimize credit risk. Based on Time Warner's outstanding foreign exchange contracts related to WCI's exposure at March 31, 1997, each 5% devaluation of the U.S. dollar as compared to the level of foreign exchange rates for currencies under contract at March 31, 1997 would result in approximately $19 million of unrealized losses and $8 million of unrealized gains on foreign exchange contracts involving foreign currency sales and purchases, respectively. Conversely, a 5% appreciation of the U.S. dollar would result in $19 million of unrealized gains and $8 million of unrealized losses, respectively. Consistent with the nature of the economic hedge provided by such foreign exchange contracts, such unrealized gains or losses would be offset by corresponding decreases or increases, respectively, in the dollar value of future foreign currency royalty payments that would be received in cash within the ensuing twelve-month period from the sale of U.S. copyrighted products abroad. TWE GENERAL PARTNERS CONSOLIDATED BALANCE SHEETS March 31, 1997 (Unaudited) WCI ATC TWOI WCCI (millions) ASSETS Current assets Cash and equivalents $ 113 $ - $ - $ - Receivables, less allowances of $314 million 767 - - - Inventories 146 - - - Prepaid expenses 613 - - - Total current assets 1,639 - - - Investments in and amounts due to and from TWE 2,115 2,089 586 739 Investments in Time Warner 86 64 17 21 Other investments 1,707 343 92 105 Music catalogues, contracts and copyrights 1,002 - - - Goodwill 3,677 - - - Other assets, primarily property, plant and equipment 518 - - - Total assets $10,744 $2,496 $695 $865 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts and royalties payable 997 $ - $ - $ - Other current liabilities 505 2 - - Total current liabilities 1,502 2 - - Long-term liabilities, including $176, $90, $21 and $26 million due to Time Warner 412 91 21 26 Shareholders' equity Common stock 1 1 1 1 Paid-in capital 10,009 2,893 830 1,033 Retained earnings 443 62 8 9 10,453 2,956 839 1,043 Due from Time Warner, net (1,133) (217) (69) (85) Reciprocal interest in Time Warner stock (490) (336) (96) (119) Total shareholders' equity 8,830 2,403 674 839 Total liabilities and shareholders' equity $10,744 $2,496 $695 $865 See accompanying notes. TWE GENERAL PARTNERS CONSOLIDATED BALANCE SHEETS December 31, 1996 WCI ATC TWOI WCCI (millions) ASSETS Current assets Cash and equivalents $ 91 $ - $ - $ - Receivables, less allowances of $362 million 1,013 - - - Inventories 165 - - - Prepaid expenses 510 - - - Total current assets 1,779 - - - Investments in and amounts due to and from TWE 1,998 1,980 555 701 Investments in Time Warner 86 64 17 21 Other investments 1,695 345 93 105 Music catalogues, contracts and copyrights 1,035 - - - Goodwill 3,704 - - - Other assets, primarily property, plant and equipment 537 - - - Total assets $10,834 $2,389 $ 665 $ 827 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts and royalties payable $ 934 $ - $ - $ - Other current liabilities 518 2 - - Total current liabilities 1,452 2 - - Long-term liabilities, including $137, $55, $11 and $13 million due to Time Warner 395 56 11 13 Shareholders' equity Common stock 1 1 1 1 Paid-in capital 10,009 2,893 830 1,033 Retained earnings (accumulated deficit) 390 27 (2) (3) 10,400 2,921 829 1,031 Due from Time Warner, net (923) (254) (79) (98) Reciprocal interest in Time Warner stock (490) (336) (96) (119) Total shareholders' equity 8,987 2,331 654 814 Total liabilities and shareholders' equity $10,834 $2,389 $ 665 $ 827 See accompanying notes. TWE GENERAL PARTNERS CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended March 31, 1997 (Unaudited) WCI ATC TWOI WCCI (millions) Revenues (a) $ 933 $ - $ - $ - Cost of revenues (a)(b) 606 - - - Selling, general and administrative (a)(b) 277 - - - Operating expenses 883 - - - Business segment operating income 50 - - - Equity in pretax income of TWE (a) 158 135 39 48 Interest and other, net (a) 17 3 1 1 Income before income taxes 225 138 40 49 Income taxes (a) (110) (62) (18) (22) Net income $ 115 $ 76 $ 22 $ 27 __________________ (a) Includes the following income (expenses) resulting from transactions with Time Warner, TWE or equity investees of the General Partners: Revenues $ 35 $ - $ - $ - Cost of revenues (10) - - - Selling, general and administrative 20 - - - Equity in pretax income of TWE (5) - - - Interest and other, net 25 - - - Income taxes (74) (57) (17) (20) (b) Includes depreciation and amortization expense of: $ 86 $ - $ - $ - See accompanying notes. TWE GENERAL PARTNERS CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended March 31, 1996 (Unaudited) WCI ATC TWOI WCCI (millions) Revenues (a) $ 983 $ - $ - $ - Cost of revenues (a)(b) 675 - - - Selling, general and administrative (a)(b) 255 - - - Operating expenses 930 - - - Business segment operating income 53 - - - Equity in pretax income of TWE (a) 53 46 13 16 Interest and other, net (a) (12) 3 1 2 Income before income taxes 94 49 14 18 Income taxes (a) (67) (27) (8) (10) Net income $ 27 $ 22 $ 6 $ 8 ________________ (a) Includes the following income (expenses) resulting from transactions with Time Warner, TWE or equity investees of the General Partners: Revenues $ 38 $ - $ - $ - Cost of revenues (11) - - - Selling, general and administrative 18 - - - Equity in pretax income of TWE (5) - - - Interest and other, net 14 - - - Income taxes (25) (20) (6) (7) (b) Includes depreciation and amortization expense of: $ 88 $ - $ - $ - See accompanying notes. TWE GENERAL PARTNERS CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 1997 (Unaudited) WCI ATC TWOI WCCI (millions) OPERATIONS Net income $115 $ 76 $ 22 $ 27 Adjustments for noncash and non- operating items: Depreciation and amortization 86 - - - Excess of equity in pretax income of TWE over distributions (132) (113) (33) (40) Equity in loss of other investee companies, net of distributions 19 2 1 1 Changes in operating assets and liabilities 159 - - - Cash provided (used) by operations 247 (35) (10) (12) INVESTING ACTIVITIES Investments and acquisitions (30) - - - Capital expenditures (24) - - - Investment proceeds 41 - - - Cash used by investing activities (13) - - - FINANCING ACTIVITIES Dividends (2) (2) - (1) Decrease (increase) in amounts due from Time Warner, net (210) 37 10 13 Cash provided (used) by financing activities (212) 35 10 12 INCREASE IN CASH AND EQUIVALENTS 22 - - - CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 91 - - - CASH AND EQUIVALENTS AT END OF PERIOD $113 $ - $ - $ - See accompanying notes. TWE GENERAL PARTNERS CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 1996 (Unaudited) WCI ATC TWOI WCCI (millions) OPERATIONS Net income $ 27 $ 22 $ 6 $ 8 Adjustments for noncash and nonoperating items: Depreciation and amortization 88 - - - Excess of equity in pretax income of TWE over distributions (23) (20) (6) (7) Equity in (income) loss of other investee companies, net of distributions (3) 2 1 1 Changes in operating assets and liabilities 151 2 2 - Cash provided by operations 240 6 3 2 INVESTING ACTIVITIES Investments and acquisitions (30) - - - Capital expenditures (27) - - - Investment proceeds 2 - - - Cash used by investing activities (55) - - - FINANCING ACTIVITIES Dividends (3) (3) (1) (1) Increase in amounts due from Time Warner, net (185) (3) (2) (1) Cash used by financing activities (188) (6) (3) (2) DECREASE IN CASH AND EQUIVALENTS (3) - - - CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 106 - - - CASH AND EQUIVALENTS AT END OF PERIOD $103 $ - $ - $ - See accompanying notes. TWE GENERAL PARTNERS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION On June 30, 1992, thirteen direct or indirect subsidiaries of Time Warner Companies, Inc. ("Time Warner")* contributed the assets and liabilities or the rights to the cash flows of substantially all of Time Warner's Filmed Entertainment-Warner Bros., Cable Networks-HBO and Cable businesses to Time Warner Entertainment Company, L.P., a Delaware limited partnership ("TWE"), for general partnership interests, and each general partner guaranteed a pro rata portion of substantially all of TWE's debt and accrued interest based on the relative fair value of the net assets each contributed to TWE (the "General Partner Guarantees", see Note 3). Nine of the thirteen original general partners have been merged or dissolved into the other four. Warner Communications Inc. ("WCI," a subsidiary of Time Warner), American Television and Communications Corporation ("ATC," a subsidiary of Time Warner), Warner Cable Communications Inc. ("WCCI," a consolidated subsidiary of WCI) and Time Warner Operations Inc. ("TWOI," formerly Time Warner Cable Inc., a subsidiary of Time Warner), are the four remaining general partners of TWE. They have succeeded to the general partnership interests and have assumed the General Partner Guarantees of the nine former general partners. WCI,ATC, WCCI, TWOI and, where appropriate, the former general partners are referred to herein as the "General Partners." WCI conducts substantially all of Time Warner's Music operations, which include copyrighted music from many of the world's leading recording artists that is produced and distributed by a family of established record labels such as Warner Bros. Records, Atlantic Records, Elektra Entertainment and Warner Music International. The remaining General Partners do not conduct operations independent of their ownership interests in TWE and certain other investments. The accompanying financial statements are unaudited but, in the opinion of management, contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position and the results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles applicable to interim periods. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of the General Partners for the year ended December 31, 1996. Certain reclassifications have been made to the 1996 financial statements to conform to the 1997 presentation. __________________ * On October 10, 1996, Time Warner Inc. acquired the remaining 80% interest in TBS that it did not already own (the "TBS Transaction"). As a result of this transaction, a new parent company with the name "Time Warner Inc." replaced the old parent company of the same name ("Old Time Warner", now known as Time Warner Companies, Inc.), and Old Time Warner and TBS became separate, wholly owned subsidiaries of the new parent company. The General Partners' pre-existing ownership interests in Old Time Warner and TBS were unaffected by the TBS Transaction. Unless the context indicates otherwise, references herein to "Time Warner" refer to Old Time Warner. TWE GENERAL PARTNERS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) 2. TWE The General Partners' investment in and amounts due to or from TWE at March 31, 1997 and December 31, 1996 is as follows (millions): March 31, 1997 WCI ATC TWOI WCCI Investment in TWE $2,327 $2,017 $ 565 $ 713 Stock option related distributions due from TWE 85 72 21 26 Other net liabilities due to TWE, principally related to home video distribution (297) - - - Total $2,115 $2,089 $ 586 $ 739 December 31, 1996 WCI ATC TWOI WCCI Investment in TWE $2,242 $1,942 $ 544 $ 688 Stock option related distributions due from TWE 44 38 11 13 Other net liabilities due to TWE, principally related to home video distribution (288) - - - Total $1,998 $1,980 $ 555 $ 701 TWE was capitalized on June 30, 1992 to own and operate substantially all of the Filmed Entertainment-Warner Bros., Cable Networks-HBO and Cable businesses previously owned by the General Partners. The General Partners in the aggregate hold, directly or indirectly, 63.27% of the pro rata priority capital ("Series A Capital") and residual equity capital ("Residual Capital") of TWE and 100% of the senior priority capital ("Senior Capital") and junior priority capital ("Series B Capital") of TWE. Time Warner acquired the 11.22% of the Series A Capital and Residual Capital limited partnership interests previously held by subsidiaries of each of ITOCHU Corporation and Toshiba Corporation in 1995. The remaining 25.51% limited partnership interests in the Series A Capital and Residual Capital of TWE are held by a subsidiary of U S WEST, Inc. ("U S WEST"). The TWE partnership agreement provides for special allocations of income, loss and distributions of partnership capital, including priority distributions in the event of liquidation. No portion of TWE's net income has been allocated to the limited partnership interests. TWE GENERAL PARTNERS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) Set forth below is summarized financial information of TWE: TIME WARNER ENTERTAINMENT COMPANY, L.P. Three Months Ended March 31, 1997 1996 (millions) Operating Statement Information Revenues $2,600 $2,485 Depreciation and amortization 324 288 Business segment operating income 329 268 Interest and other, net (1) 129 (89) Minority interest 108 50 Income before income taxes 332 112 Net income 320 94 __________________ (1) Includes a pretax gain of approximately $250 million recognized in the first quarter of 1997 related to the sale of an interest in E! Entertainment Television, Inc. Three Months Ended March 31, 1997 1996 (millions) Cash Flow Information Cash provided (used) by operations $ (48) $ 557 Capital expenditures (331) (331) Investments and acquisitions (31) (31) Investment proceeds 367 119 Borrowings 282 63 Debt repayments (318) (498) Issuance of preferred stock of subsidiary 243 - Capital distributions (54) (63) Collections on note receivable from U S WEST - 71 Other financing activities, net (14) 45 Increase (decrease) in cash and equivalents 96 (68) March 31, December 31, 1997 1996 (millions) Balance Sheet Information Cash and equivalents $ 312 $ 216 Total current assets 3,310 3,146 Total assets 20,094 19,973 Total current liabilities 3,569 4,075 Long-term debt 5,640 5,676 Minority interests 1,103 1,020 Preferred stock of subsidiary 243 - General Partners' Senior Capital 1,574 1,543 Partners' capital 6,711 6,574 TWE GENERAL PARTNERS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) The assets and cash flows of TWE are restricted by the TWE partnership and credit agreements and are unavailable for use by the partners except through the payment of certain fees, reimbursements, cash distributions and loans, which are subject to limitations. At March 31, 1997 and December 31, 1996, the General Partners had recorded $178 million and $93 million, respectively, of stock option related distributions due from TWE, based on closing prices of Time Warner common stock of $43.25 and $37.50, respectively. Time Warner is paid when the options are exercised. The General Partners also receive tax-related distributions from TWE on a current basis. During the first three months of 1997, the General Partners received distributions from TWE in the amount of $54 million, consisting of $50 million of tax-related distributions and $4 million of stock option related distributions. During the first three months of 1996, the General Partners received distributions from TWE in the amount of $63 million, consisting of $56 million of tax-related distributions and $7 million of stock option related distributions. Of such aggregate distributions in 1997 and 1996, WCI received $26 million and $30 million, respectively; ATC received $22 million and $26 million, respectively; TWOI received $6 million and $7 million, respectively; and WCCI received $8 million and $9 million, respectively. 3. GENERAL PARTNER GUARANTEES Each General Partner has guaranteed a pro rata portion of approximately $5.4 billion of TWE's debt and accrued interest at March 31, 1997, based on the relative fair value of the net assets each General Partner contributed to TWE. Such indebtedness is recourse to each General Partner only to the extent of its guarantee. There are generally no restrictions on the ability of the General Partner guarantors to transfer material assets, other than TWE assets, to parties who are not guarantors. The portion of TWE debt and accrued interest at March 31, 1997 that was guaranteed by each General Partner, individually and on a consolidated basis for each General Partner and its subsidiaries, is set forth below: Total Guaranteed by Total Guaranteed by Each General Partner Each General Partner and its Subsidiaries General Partner % Amount % Amount (dollars in millions) WCI 33.19 $1,794 47.58 $2,572 ATC 40.73 2,202 40.73 2,202 TWOI 11.69 632 11.69 632 WCCI, a subsidiary of WCI 14.39 778 14.39 778 Total 100.00 $5,406 * * _____________ * Adds to more than 100% and $5.406 billion, respectively, because of the parent-subsidiary relationship between WCI and WCCI. TWE GENERAL PARTNERS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (Unaudited) 4. SHAREHOLDERS' EQUITY Changes in shareholders' equity for WCI are as follows: Three Months Ended March 31, 1997 1996 (millions) Balance at beginning of year $8,987 $9,342 Net income 115 27 Increase in stock option distribution liability to Time Warner (42) (31) Transfers to Time Warner, net (210) (185) Unrealized gains (losses) of certain marketable equity investments (3) 59 Other (17) (3) Balance at March 31 $8,830 $9,209 5. CONTINGENCIES Pending legal proceedings are substantially limited to litigation incidental to the businesses of the General Partners. In the opinion of management, the ultimate resolution of these matters will not have a material effect on the consolidated financial statements of the General Partners. 6. ADDITIONAL FINANCIAL INFORMATION Additional financial information with respect to cash flows is as follows (millions): WCI ATC TWOI WCCI Three Months Ended March 31, 1997 Cash payments made for interest $ 7 $ - $ - $ - Cash payments made for income taxes, net 114 57 17 20 Tax-related distributions received from TWE 24 20 6 7 WCI ATC TWOI WCCI Three Months Ended March 31, 1996 Cash payments made for interest $ 4 $ - $ - $ - Cash payments made for income taxes, net 57 20 6 7 Tax-related distributions received from TWE 27 23 6 8 Part II. Other Information Item 1. Legal Proceedings. Reference is made to the Federal lawsuit filed by TWE in November 1992 seeking to overturn the must carry provisions of the 1992 Cable Act on First Amendment grounds, described on pages I-26 and I-27 of TWE's Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K"). On March 31, 1997, the U.S. Supreme Court upheld the constitutionality of the must carry requirements. Reference is made to the investigation commenced in 1994 by the U.S. Department of Justice into certain worldwide activities of Warner Music Group ("WMG") and other companies in the recorded music industry, described on page I-27 of the 1996 Form 10-K. On April 25, 1997, WMG provided information and produced documents in accordance with the order of the United States District Court for the District of Columbia. Reference is made to the litigation entitled Fox News Network, L.L.C. v. Time Warner Inc., Time Warner Entertainment Company, L.P., Turner Broadcasting System, Inc. and R.E. "Ted" Turner III, described on page I-28 of the 1996 Form 10-K. On March 21, 1997, defendants filed a motion for summary judgment addressed to Fox's remaining state law claims, which motion is scheduled to be argued on May 15, 1997. On April 10, 1997, the court denied plaintiff's motion to dismiss the counterclaims. On April 11, 1997, the Washington and Dallas offices of the Federal Trade Commission notified Warner Elektra Atlantic Corporation ("WEA") that it had commenced a preliminary investigation into whether WEA or others may be violating or have violated laws against unfair competition by the adoption, implementation and maintenance of minimum advertised pricing programs. On March 19, 1997, Six Flags Theme Parks Inc. and its wholly-owned subsidiary Six Flags Over Georgia, Inc. commenced a declaratory judgment action in the Superior Court of Gwinnett County, Georgia, entitled Six Flags Over Georgia, Inc. and Six Flags Theme Parks, Inc. v. Six Flags Fund, Ltd. and Avram Salkin, as Trustee of the Claims Trust. The plaintiffs are affiliates of TWE and seek, among other things, a declaration and determination of the rights and obligations of the partners of Six Flags Over Georgia, L.P. with respect to certain disputed partnership affairs and an accounting of all partnership affairs. On April 21, 1997, defendants filed a motion to dismiss the declaratory judgment action as well as an answer and counterclaim naming Six Flags Entertainment Corporation and TWE as additional counterclaim-defendants. The counterclaim seeks imposition of a constructive trust, compensatory damages of in excess of $250 million and unspecified punitive damages for alleged breach of fiduciary duty, conversion, fraud and conspiracy allegedly committed by the counterclaim-defendants in connection with the management of the Six Flags Over Georgia theme park. The counterclaim-defendants intend to vigorously contest these allegations. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as a part of this report and such Exhibit Index is incorporated herein by reference. (b) Reports on Form 8-K. No Current Report on Form 8-K was filed by TWE during the quarter ended March 31, 1997. EXHIBIT INDEX Pursuant to Item 601 of Regulations S-K Exhibit No. Description of Exhibit 27 Financial Data Schedule. EX-27 2
5 Exhibit 27 TIME WARNER ENTERTAINMENT COMPANY, L.P. FINANCIAL DATA SCHEDULE This schedule contains summary financial information extracted from the financial statements of Time Warner Entertainment Company, L.P. for the three months ended March 31, 1997 and is qualified in its entirety by reference to such financial statements. 0000893657 TIME WARNER ENTERTAINMENT 1,000,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 312 0 1,996 358 1,192 3,310 9,759 3,683 20,094 3,569 5,640 0 0 0 6,711 20,094 2,600 2,600 1,665 1,665 0 0 115 332 12 320 0 0 0 320 0 0
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