-----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, HwNyQS/9IjY7G2SgyBIIj4lrDpuAaEAzWooZbWXkf2IbWaYDnF1Mul2/gyjm9oZH KGZ0oPB0yXkQA2jg/losbQ== 0000950117-98-001036.txt : 19980515 0000950117-98-001036.hdr.sgml : 19980515 ACCESSION NUMBER: 0000950117-98-001036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 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: SEC FILE NUMBER: 001-12878 FILM NUMBER: 98620215 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: SEC FILE NUMBER: 000-04049 FILM NUMBER: 98620216 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: SEC FILE NUMBER: 033-53742-14 FILM NUMBER: 98620217 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 10-Q 1 TIME WARNER ENTERTAINMENT WARNER COMMUNICATIONS INC. AMERICAN TELEVISION AND COMMUNICATIONS CORP. 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, 1998, 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 WARNER COMMUNICATIONS INC. Delaware 13-2696809 (Exact name of registrant as specified in its charter) (State or other jurisdiction of I.R.S. Employer incorporation or organization Identification Number)
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 16 Consolidated balance sheets at March 31, 1998 and December 31, 1997............................... 6 19 Consolidated statements of operations for the three months ended March 31, 1998 and 1997....................................................................................... 7 20 Consolidated statements of cash flows for the three months ended March 31, 1998 and 1997....................................................................................... 8 21 Consolidated statements of partnership capital and shareholders' equity for the three months ended March 31, 1998 and 1997..................................................... 9 22 Notes to consolidated financial statements........................................................ 10 23 PART II. OTHER INFORMATION........................................................................ 29
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 and television broadcasting; 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 EBITA TWE evaluates operating performance based on several factors, of which the primary financial measure is operating income before noncash amortization of intangible assets ("EBITA"). Consistent with management's financial focus on controlling capital spending, EBITA measures operating performance after charges for depreciation. In addition, EBITA eliminates the uneven effect across all business segments of considerable amounts of noncash amortization of intangible assets recognized in business combinations accounted for by the purchase method, including Time Warner's $14 billion acquisition of Warner Communications Inc. in 1989 and $1.3 billion acquisition of the minority interest in American Television and Communications Corporation in 1992. The exclusion of noncash amortization charges is also consistent with management's belief that TWE's intangible assets, such as cable television franchises, film and television libraries and the goodwill associated with its brands, are generally increasing in value and importance to TWE's business objective of creating, extending and distributing recognizable brands and copyrights throughout the world. As such, the following comparative discussion of the results of operations of TWE includes, among other factors, an analysis of changes in business segment EBITA. However, EBITA should be considered in addition to, not as a substitute for, operating income, net income and other measures of financial performance reported in accordance with generally accepted accounting principles. RESULTS OF OPERATIONS As more fully described herein, TWE's 1998 operating results have been affected by the transfer of cable television systems (or interests therein) serving approximately 650,000 subscribers that were formerly owned by subsidiaries of Time Warner to the TWE-Advance/Newhouse Partnership ("TWE-A/N"), subject to approximately $1 billion of debt, in exchange for common and preferred partnership interests therein, as well as certain related transactions (collectively, the "TWE-A/N Transfers"). For a more comprehensive description of the TWE-A/N Transfers, see Note 2 to the accompanying consolidated financial statements. 1 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(CONTINUED) EBITA and operating income for TWE for the three months ended March 31, 1998 and 1997 are as follows:
THREE MONTHS ENDED MARCH 31, ------------------------------------------ OPERATING EBITA INCOME ------------------ ----------------- 1998 1997 1998 1997 ------- ------ ------ ----- (MILLIONS) Filmed Entertainment-Warner Bros.................................. $119 $106 $ 86 $ 75 Broadcasting-The WB Network....................................... (38) (20) (39) (20) Cable Networks-HBO................................................ 109 91 109 91 Cable............................................................. 307 259 213 183 ---- ---- ---- ---- Total............................................................. $497 $436 $369 $329 ==== ==== ==== ====
TWE had revenues of $2.910 billion and net income of $108 million for the three months ended March 31, 1998, compared to revenues of $2.6 billion and net income of $320 million for the three months ended March 31, 1997. As discussed more fully below, TWE's net income decreased in 1998 as compared to 1997 principally due to the absence of the E! Entertainment gain recognized in 1997, offset in part by an overall increase in operating income generated by its business segments and a decrease in minority interest expense related to TWE-A/N. As a U.S. partnership, TWE is not subject to U.S. federal and state income taxation. Income and withholding taxes of $15 million and $12 million for the three months ended March 31, 1998 and 1997, respectively, have been provided for the operations of TWE's domestic and foreign subsidiary corporations. Filmed Entertainment-Warner Bros. Revenues increased to $1.310 billion, compared to $1.172 billion in the first three months of 1997. EBITA increased to $119 million from $106 million. Operating income increased to $86 million from $75 million. Revenues benefited from increases in worldwide television production and distribution operations, offset in part by lower worldwide theatrical and home video revenues. EBITA and operating income benefited principally from the revenue gains and increased income from licensing operations, offset in part by the absence of a gain on the sale of an investment recognized in 1997. Broadcasting - The WB Network. Revenues increased to $45 million, compared to $24 million in the first three months of 1997. EBITA decreased to a loss of $38 million from a loss of $20 million. Operating losses increased to $39 million from $20 million. Revenues increased as a result of improved television ratings and the addition of a fourth night of primetime programming in January 1998, but were offset by higher programming costs associated with the expanded programming schedule. Operating losses increased principally as a result of a lower allocation of losses to a limited partner in the network. Due to the start-up nature of this national broadcast operation, losses are expected to continue. Cable Networks-HBO. Revenues increased to $512 million, compared to $483 million in the first three months of 1997. EBITA and operating income increased to $109 million from $91 million. Revenues benefited primarily from an increase in subscriptions. EBITA and operating income increased principally as a result of the revenue gains, and, to a lesser extent, cost savings. Cable. Revenues increased to $1.153 billion, compared to $1.020 billion in the first three months of 1997. EBITA increased to $307 million from $259 million. Operating income increased to $213 million from $183 million. 2 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(CONTINUED) The Cable division's 1998 operating results were positively affected by the TWE-A/N Transfers. Excluding the effect of the TWE-A/N Transfers, revenues benefited from an increase in basic cable and Primestar-related, direct broadcast satellite subscribers, increases in regulated cable rates as permitted under Time Warner Cable's "social contract" with the Federal Communications Commission ("FCC") and an increase in advertising and pay-per-view revenues. Similarly excluding the effect of the TWE-A/N Transfers, EBITA and operating income increased as a result of the revenue gains, offset in part by higher depreciation related to capital spending and lower gains relating to the sale or exchange of certain cable systems. Interest and Other, Net. Interest and other, net, was $164 million of expense in the first three months of 1998, compared to $129 million of income in the first three months of 1997. Interest expense increased to $141 million, compared to $115 million in the first three months of 1997, principally due to higher average debt levels associated with the TWE-A/N Transfers. There was other expense, net, of $23 million in the first three months of 1998, compared to other income, net, of $244 million in the first three months of 1997, principally due to the absence of an approximate $250 million pretax gain on the sale of an interest in E! Entertainment recognized in 1997. FINANCIAL CONDITION AND LIQUIDITY MARCH 31, 1998 FINANCIAL CONDITION TWE had $7.1 billion of debt, $107 million of cash and equivalents (net debt of $7.0 billion), $229 million of preferred stock of a subsidiary, $1.1 billion of Time Warner General Partners' Senior Capital and $6.1 billion of partners' capital at March 31, 1998, compared to $6.0 billion of debt, $322 million of cash and equivalents (net debt of $5.7 billion), $233 million of preferred stock of a subsidiary, $1.1 billion of Time Warner General Partners' Senior Capital and $6.3 billion of partners' capital at December 31, 1997. Net debt increased principally as a result of the TWE-A/N Transfers. DEBT TRANSACTIONS In April 1998, TWE consummated two previously announced transactions, consisting of the sale of TWE's 49% interest in Six Flags Entertainment Corporation and the transfer of TWE's and TWE-A/N's direct broadcast satellite operations and related assets to Primestar, Inc., a separate holding company that is ultimately expected to be the publicly traded parent of TCI Satellite Entertainment, Inc. As a result of these transactions, TWE reduced debt by approximately $540 million. In early 1998, TWE-A/N assumed approximately $1 billion of debt from TWI Cable Inc. ("TWI Cable"), a wholly owned subsidiary of Time Warner, in connection with the TWE-A/N Transfers. The debt assumed by TWE-A/N has been guaranteed by TWI Cable and certain of its subsidiaries. CASH FLOWS During the first three months of 1998, TWE's cash provided by operations amounted to $441 million and reflected $497 million of EBITA from its Filmed Entertainment-Warner Bros., Broadcasting-The WB Network, Cable 3 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(CONTINUED) Networks-HBO and Cable businesses, $243 million of noncash depreciation expense and $148 million from the securitization of film and television backlog, less $156 million of interest payments, $20 million of income taxes, $18 million of corporate expenses and $253 million related to an increase in working capital requirements, other balance sheet accounts and noncash items. Cash used by operations of $48 million in the first three months of 1997 reflected $436 million of business segment EBITA and $217 million of noncash depreciation expense, 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 used by investing activities was $559 million in the first three months of 1998, compared to cash provided by investing activities of $5 million in the first three months of 1997, principally as a result of the effect of deconsolidating approximately $200 million of cash of Paragon Communications in connection with the TWE-A/N Transfers that has been included in cash flows from investments and acquisitions, and a $344 million decrease in proceeds from the sale of investments. Capital expenditures increased to $352 million in the first three months of 1998, compared to $331 million in the first three months of 1997. Cash used by financing activities was $97 million in the first three months of 1998, compared to cash provided by financing activities of $139 million in the first three months of 1997, principally as a result of the absence of $243 million of aggregate net proceeds from the issuance of preferred stock of a subsidiary in the first three months of 1997 and a $118 million increase in distributions paid to Time Warner, offset in part by an increase in debt used to fund cash distributions to Time Warner. 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 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 $326 million in the three months ended March 31, 1998, compared to $292 million the three months ended March 31, 1997. For the full year of 1998, cable capital spending is expected to be comparable to 1997 levels, with approximately $1.1 billion budgeted for the remainder of 1998. Capital spending by TWE's Cable division is expected to continue to be funded 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 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, TWE-A/N and Time Warner. Management expects to continue to finance such level of investment through cable operating cash flow and the development of new revenue streams from expanded programming options, high-speed Internet access, telephony and other services. 4 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(CONTINUED) 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 $2.152 billion at March 31, 1998, compared to $2.126 billion at December 31, 1997 (including amounts relating to TWE's cable television networks of $238 million, in both periods, and to Time Warner's cable television networks of $515 million and $481 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 or on an accelerated basis using a $600 million securitization facility. The portion of backlog for which cash has 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. 5 TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED BALANCE SHEET (UNAUDITED)
MARCH 31, DECEMBER 31, 1998 1997 ---- ---- (MILLIONS) ASSETS CURRENT ASSETS Cash and equivalents........................................................................ $ 107 $ 322 Receivables, including $465 and $385 million due from Time Warner, less allowances of $410 and $424 million................................................ 1,840 1,914 Inventories................................................................................. 1,201 1,204 Prepaid expenses............................................................................ 190 182 ------ ----- Total current assets........................................................................ 3,338 3,622 Noncurrent inventories...................................................................... 2,310 2,254 Loan receivable from Time Warner............................................................ 400 400 Investments................................................................................. 308 315 Property, plant and equipment............................................................... 6,713 6,557 Cable television franchises................................................................. 4,041 3,063 Goodwill.................................................................................... 4,168 3,859 Other assets................................................................................ 734 661 ------ ------- Total assets................................................................................ $22,012 $20,731 ======= ======= LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES Accounts payable............................................................................ $ 834 $ 1,123 Participations and programming costs payable................................................ 1,365 1,176 Debt due within one year.................................................................... 7 8 Other current liabilities, including $216 and $184 million due to Time Warner............... 1,555 1,667 ------- ------- Total current liabilities................................................................... 3,761 3,974 Long-term debt.............................................................................. 7,108 5,990 Other long-term liabilities, including $586 and $477 million due to Time Warner............. 2,181 1,873 Minority interests.......................................................................... 1,465 1,210 Preferred stock of subsidiary holding solely a mortgage note of its parent.................. 229 233 Time Warner General Partners' Senior Capital................................................ 1,140 1,118 PARTNERS' CAPITAL Contributed capital......................................................................... 7,537 7,537 Undistributed partnership earnings (deficit)................................................ (1,409) (1,204) ------- ------- Total partners' capital..................................................................... 6,128 6,333 ------- ------ Total liabilities and partners' capital..................................................... $22,012 $20,731 ======= =======
See accompanying notes. 6 TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ----------------- 1998 1997 ---- ---- (MILLIONS) Revenues (a)................................................................................ $2,910 $2,600 ------ ------ Cost of revenues (a)(b)..................................................................... 1,946 1,665 Selling, general and administrative (a)(b).................................................. 595 606 ----- ------ Operating expenses.......................................................................... 2,541 2,271 ------ ------ Business segment operating income........................................................... 369 329 Interest and other, net (a)................................................................. (164) 129 Minority interest........................................................................... (64) (108) Corporate services (a)...................................................................... (18) (18) ----- ------ Income before income taxes.................................................................. 123 332 Income taxes................................................................................ (15) (12) ----- ------ Net income.................................................................................. $ 108 $ 320 ====== ======
- --------------- (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, 1998 and 1997, respectively: revenues-$129 million and $66 million; cost of revenues-$(38) million and $(10) million; selling, general and administrative-$1 million and $19 million; interest and other, net-$2 million and $12 million; and corporate services-$(18) million in both periods. (b) Includes depreciation and amortization expense of:...................................... $371 $324 ==== ====
See accompanying notes. 7 TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, --------------- 1998 1997 ---- ---- (MILLIONS) OPERATIONS Net income.................................................................................. $108 $320 Adjustments for noncash and nonoperating items: Depreciation and amortization............................................................... 371 324 Changes in operating assets and liabilities................................................. (38) (692) ---- ----- Cash provided (used) by operations.......................................................... 441 (48) ---- ----- INVESTING ACTIVITIES Investments and acquisitions................................................................ (230) (31) Capital expenditures........................................................................ (352) (331) Investment proceeds......................................................................... 23 367 ----- ---- Cash provided (used) by investing activities................................................ (559) 5 ---- ----- FINANCING ACTIVITIES Borrowings.................................................................................. 489 282 Debt repayments............................................................................. (376) (318) Issuance of preferred stock of subsidiary................................................... - 243 Capital distributions....................................................................... (172) (54) Other....................................................................................... (38) (14) ----- ----- Cash provided (used) by financing activities................................................ (97) 139 ----- ---- INCREASE (DECREASE) IN CASH AND EQUIVALENTS................................................. (215) 96 CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................................................. 322 216 ---- ---- CASH AND EQUIVALENTS AT END OF PERIOD....................................................... $107 $312 ==== ====
See accompanying notes. 8 TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------ 1998 1997 ---- ---- (MILLIONS) BALANCE AT BEGINNING OF YEAR................................................................ $6,333 $6,574 Net income.................................................................................. 108 320 Other comprehensive income (loss)........................................................... (14) (13) ------ ------ Comprehensive income........................................................................ 94 307 Distributions............................................................................... (277) (139) Allocation of income to Time Warner General Partners' Senior Capital........................ (22) (31) ------ ------ BALANCE AT MARCH 31,........................................................................ $6,128 $6,711 ====== ======
See accompanying notes. 9 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 and television broadcasting; 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) HBO and Cinemax, the leading pay television services and (4) Time Warner Cable, currently 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 6). 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 $128 million and $107 million in the three months ended March 31, 1998 and 1997, 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"). 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 10 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) conjunction with the audited consolidated financial statements of TWE for the year ended December 31, 1997. Certain reclassifications have been made to the prior year's financial statements to conform to the 1998 presentation. 2. ACQUISITIONS AND DISPOSITIONS TWE-A/N TRANSFERS In early 1998, Time Warner (through a wholly owned subsidiary) contributed cable television systems (or interests therein) serving approximately 650,000 subscribers to the TWE-Advance/Newhouse Partnership ("TWE- A/N"), subject to approximately $1 billion of debt, in exchange for common and preferred partnership interests therein, and completed certain related transactions (collectively, the "TWE-A/N Transfers"). The cable television systems transferred to TWE-A/N were formerly owned by TWI Cable Inc. ("TWI Cable"), a wholly owned subsidiary of Time Warner, and Paragon Communications ("Paragon"), a partnership formerly owning cable television systems serving approximately 1 million subscribers that was previously wholly owned by subsidiaries of Time Warner, with 50% beneficially owned in the aggregate by TWE and TWE-A/N. The debt assumed by TWE-A/N has been guaranteed by TWI Cable and certain of its subsidiaries, including Paragon. As part of the TWE-A/N Transfers, TWE exchanged substantially all of its beneficial interest in Paragon for an equivalent share of Paragon's cable television systems (or interests therein) serving approximately 500,000 subscribers. TWE, in turn, transferred such systems and certain related assets to TWE-A/N in exchange for TWE-A/N's beneficial interest in Paragon and in satisfaction of certain pre-existing obligations to TWE-A/N. This resulted in wholly owned subsidiaries of Time Warner owning 100% of the restructured Paragon entity, with less than 1% beneficially held for TWE. Accordingly, effective as of January 1, 1998, TWE has deconsolidated Paragon. Because this transaction represented an exchange of TWE's and TWE-A/N's beneficial interests in Paragon for an equivalent amount of its cable television systems, it did not have a significant economic impact on Time Warner, TWE or TWE-A/N. In connection with the TWE-A/N Transfers, the Advance/Newhouse Partnership ("Advance/Newhouse"), a limited partner in TWE-A/N, made a capital contribution to TWE-A/N in order to maintain its 33.3% common partnership interest therein. Accordingly, TWE-A/N is now owned 65.3% by TWE, 33.3% by Advance/Newhouse and 1.4% indirectly by Time Warner. The TWE-A/N Transfers were accounted for effective as of January 1, 1998. On a pro forma basis, giving effect to the TWE-A/N Transfers as if they had occurred at the beginning of 1997, TWE would have reported for the three months ended March 31, 1997, revenues of $2.616 billion, depreciation expense of $218 million, operating income before noncash amortization of intangible assets of $465 million, operating income of $342 million and net income of $318 million. PRIMESTAR In April 1998, TWE and Advance/Newhouse transferred the direct broadcast satellite operations conducted by TWE and TWE-A/N (the "DBS Operations") and the 31% partnership interest in Primestar Partners, L.P. held by TWE-A/N ("Primestar" and collectively, the "Primestar Assets") to Primestar, Inc. ("New Primestar"), a new holding company that is ultimately expected to be the publicly traded parent of TCI Satellite Entertainment, Inc. 11 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) ("TSAT"). New Primestar owns the DBS Operations and Primestar partnership interests formerly owned by TSAT and other previously existing partners of Primestar. In exchange for contributing its interests in the Primestar Assets, TWE received an approximate 24% equity interest in New Primestar and realized approximately $240 million of debt reduction. In partial consideration for contributing its indirect interest in certain of the Primestar Assets, Advance/ Newhouse received an approximate 6% equity interest in New Primestar. In a related transaction, Primestar also entered into an agreement in June 1997 with The News Corporation Limited, MCI Telecommunications Corporation and American Sky Broadcasting LLC ("ASkyB"), pursuant to which New Primestar would acquire certain assets relating to the high-power, direct broadcast satellite business of ASkyB (the "Primestar ASkyB Transaction"). In exchange for such assets, ASkyB would receive non-voting securities of New Primestar that would be convertible into non-voting common stock of New Primestar and, accordingly, would reduce TWE's equity interest in New Primestar to approximately 16% on a fully diluted basis. The Primestar ASkyB Transaction is expected to close in 1998, subject to customary closing conditions, including all necessary governmental and regulatory approvals, including the approval of the FCC which is currently conducting an extensive review of the transaction. There can be no assurance that such approvals will be obtained. SIX FLAGS In April 1998, TWE sold its remaining 49% interest in Six Flags Entertainment Corporation ("Six Flags") to Premier Parks Inc. ("Premier"), a regional theme park operator, for approximately $475 million of cash. TWE used the net, after-tax proceeds from this transaction to reduce debt by approximately $300 million. As part of the transaction, TWE will continue to license its animated cartoon and comic book characters to Six Flags's theme parks and will similarly license such rights to Premier's theme parks in the United States and Canada under a long-term agreement covering an aggregate of twenty-five existing and all future locations. A substantial portion of the gain on this transaction has been deferred principally as a result of TWE's continuing guarantees of certain significant long-term obligations of Six Flags relating to the Six Flags Over Texas and Six Flags Over Georgia theme parks. 3. INVENTORIES TWE's inventories consist of:
MARCH 31, 1998 DECEMBER 31, 1997 --------------------- ---------------------- CURRENT NONCURRENT CURRENT NONCURRENT ------- ---------- ------- ---------- (MILLIONS) FILM COSTS: Released, less amortization..................................... $ 498 $ 683 $ 545 $ 658 Completed and not released...................................... 185 48 170 50 In process and other............................................ 43 644 27 595 Library, less amortization...................................... - 599 - 612 Programming costs, less amortization............................... 393 336 382 339 Merchandise........................................................ 82 - 80 - ----- ------ ---- ------ Total.............................................................. $1,201 $2,310 $1,204 $2,254 ====== ====== ====== ======
12 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) 4. 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 1997 consolidated statement of operations. 5. PARTNERS' CAPITAL 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 stock options granted to employees of TWE based on the amount by which the market price of Time Warner Inc. 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 Inc. 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 Inc. 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 Inc. common stock declines. During the three months ended March 31, 1998, TWE accrued $52 million of tax-related distributions and $225 million of stock option distributions, based on closing prices of Time Warner Inc. common stock of $72.00 at March 31, 1998 and $62.00 At December 31, 1997. During the three months ended March 31, 1997, TWE accrued $50 million of tax-related distributions and $89 million of stock option distributions as a result of an increase at that time in the market price of Time Warner Inc. common stock. During the three months ended March 31, 1998, TWE paid distributions to the Time Warner General Partners in the amount of $172 million, consisting of $52 million of tax-related distributions and $120 million of stock option related distributions. During the three months ended March 31, 1997, TWE paid the Time Warner General Partners distributions in the amount of $54 million, consisting of $50 million of tax-related distributions and $4 million of stock option related distributions. 6. SEGMENT INFORMATION TWE classifies its businesses into three fundamental areas: Entertainment, consisting principally of interests in filmed entertainment, television production and television broadcasting; 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 based on the nature of the products and services offered. TWE evaluates performance based on several factors, of which the primary financial measure is business segment operating income before noncash amortization of intangible assets ("EBITA"). The operating results of TWE's cable segment reflects the TWE-A/N Transfers effective as of January 1, 1998. 13 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) Information as to the operations of TWE in different business segments is set forth below.
THREE MONTHS ENDED MARCH 31, ---------------- 1998 1997 ---- ---- (MILLIONS) Revenues Filmed Entertainment-Warner Bros............................................................ $1,310 $1,172 Broadcasting-The WB Network................................................................. 45 24 Cable Networks-HBO.......................................................................... 512 483 Cable....................................................................................... 1,153 1,020 Intersegment elimination.................................................................... (110) (99) ------ ----- Total....................................................................................... $2,910 $2,600 ====== ======
THREE MONTHS ENDED MARCH 31, ----------------- 1998 1997 ---- ---- (MILLIONS) EBITA(1) Filmed Entertainment-Warner Bros............................................................ $ 119 $ 106 Broadcasting-The WB Network................................................................. (38) (20) Cable Networks-HBO.......................................................................... 109 91 Cable....................................................................................... 307 259 ------ ----- Total....................................................................................... $ 497 $ 436 ====== ======
- --------------- (1) EBITA represents business segment operating income before noncash amortization of intangible assets. After deducting amortization of intangible assets, TWE's business segment operating income for the three months ended March 31, 1998 and 1997 was $369 million and $329 million, respectively.
THREE MONTHS ENDED MARCH 31, ----------------- 1998 1997 ---- ---- (MILLIONS) DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT Filmed Entertainment-Warner Bros............................................................ $ 40 $ 40 Broadcasting-The WB Network................................................................. - - Cable Networks-HBO.......................................................................... 5 5 Cable....................................................................................... 198 172 ----- ----- Total....................................................................................... $ 243 $ 217 ====== ======
14 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ----------------- 1998 1997 ---- ---- (MILLIONS) AMORTIZATION OF INTANGIBLE ASSETS (1) Filmed Entertainment-Warner Bros............................................................ $ 33 $ 31 Broadcasting-The WB Network................................................................. 1 - Cable Networks-HBO.......................................................................... - - Cable....................................................................................... 94 76 ----- ----- Total....................................................................................... $ 128 $ 107 ===== =====
(1) Amortization includes amortization relating to all business combinations accounted for by the purchase method, including Time Warner's $14 billion acquisition of WCI in 1989 and $1.3 billion acquisition of the minority interest in ATC in 1992. 7. COMMITMENTS AND CONTINGENCIES Pending legal proceedings are substantially limited to litigation incidental to the businesses of TWE. In the opinion of management, the ultimate resolution of these matters will not have a material effect on the consolidated financial statements of TWE. 8. ADDITIONAL FINANCIAL INFORMATION Additional financial information with respect to cash flows is as follows:
THREE MONTHS ENDED MARCH 31, ----------------- 1998 1997 ---- ---- (MILLIONS) Interest expense............................................................................ $141 $115 Cash payments made for interest............................................................. 156 146 Cash payments made for income taxes, net.................................................... 20 12 Noncash capital distributions............................................................... 225 89
Noncash investing activities in the first quarter of 1998 included the TWE-A/N Transfers (Note 2). During the three months ended March 31, 1998, TWE received $148 million of proceeds under its film and television backlog securitization program. 15 TWE GENERAL PARTNERS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION On June 30, 1992, thirteen direct or indirect subsidiaries of Time Warner Companies, Inc. ("TW Companies") contributed the assets and liabilities or the rights to the cash flows of substantially all of TW Companies'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 at that time based on the relative fair value of the net assets each contributed to TWE (the "General Partner Guarantees"). In 1997, two of the original general partners, Warner Cable Communications Inc. ("WCCI") and Time Warner Operations Inc. ("TWOI"), were merged into another original general partner, Warner Communications Inc. (the "WCCI Merger" and the "TWOI Merger," respectively, and collectively, the "1997 General Partner Mergers"). After the 1997 General Partner Mergers, eleven of the thirteen original general partners have now been merged or dissolved into the other two. Warner Communications Inc. ("WCI") and American Television and Communications Corporation ("ATC" ) are the two remaining general partners of TWE. They have succeeded to the general partnership interests and have assumed the General Partner Guarantees of the eleven former general partners. In addition to the 1997 General Partner Mergers, WCI acquired two wholly owned subsidiaries of Turner Broadcasting System, Inc. ("TBS") in 1997 that conduct certain of TBS's cable television programming operations in the United Kingdom (the "TBS UK Merger"). The WCCI Merger had no effect on the consolidated results of operations and financial condition of WCI because WCCI was a consolidated subsidiary of WCI prior to the merger and, as such, WCCI's net assets, operating results and cash flows were already included in the consolidated financial statements of WCI. The TWOI Merger and the TBS UK Merger have each been accounted for as a merger of entities under common control, similar to the pooling-of-interest method of accounting for business combinations. Accordingly, the 1997 consolidated financial statements of WCI have been restated to reflect the TWOI Merger and the TBS UK Merger effective as of January 1, 1997. Set forth below is a discussion of the results of operations and financial condition of WCI, the only General Partner with independent business operations. WCI conducts substantially all of TW Companies'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 financial position and results of operations of ATC are principally derived from its investment in TWE, TW Companies, TBS and its revolving credit agreement with TW Companies. Capitalized terms are as defined and described in the accompanying consolidated financial statements, or elsewhere herein. USE OF EBITA WCI evaluates operating performance based on several factors, of which the primary financial measure is operating income before noncash amortization of intangible assets ("EBITA"). Consistent with management's financial focus on controlling capital spending, EBITA measures operating performance after charges for depreciation. The exclusion of noncash amortization charges is consistent with management's belief that WCI's intangible assets, such as music catalogues, contracts and copyrights and the goodwill associated with its brands, are generally increasing in value and importance to WCI's business objective of creating, extending and distributing recognizable brands and copyrights throughout the world. As such, the following comparative discussion of the results of operations of WCI includes, among other factors, an analysis of changes in business segment EBITA. 16 TWE GENERAL PARTNERS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) However, EBITA should be considered in addition to, not as a substitute for, operating income, net income and other measures of financial performance reported in accordance with generally accepted accounting principles. RESULTS OF OPERATIONS WCI had revenues of $888 million and net income of $42 million for the three months ended March 31, 1998, compared to revenues of $933 million and net income of $135 million for the three months ended March 31, 1997. EBITA decreased to $92 million from $114 million. Operating income decreased to $28 million from $50 million. Despite WCI having a domestic market share of 19.5%, the decrease in revenues principally related to a decline in domestic and international recorded music sales. EBITA and operating income decreased principally as a result of the decline in revenues, offset in part by increased licensing income from direct marketing activities. WCI's equity in the pretax income of TWE was $73 million for the three months ended March 31, 1998, compared to $197 million for the three months ended March 31, 1997. TWE's pretax income decreased in 1998 as compared to 1997 principally due to the absence of an approximate $250 million pretax gain recognized by TWE in 1997 in connection with the sale of TWE's interest in E! Entertainment Television, Inc., offset in part by an overall increase in operating income generated by its business segments and a decrease in minority interest expense related to the TWE-Advance/Newhouse Partnership. Interest and other, net was $1 million of expense in the first three months of 1998, compared to $16 million of income for the first three months of 1997. Interest expense decreased to $4 million from $9 million. There was other income, net, of $3 million in 1998, compared to $25 million in 1997, principally because of lower gains on foreign exchange contracts and higher losses associated with WCI's receivables securitization program. 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, 1998 WCI had $8.3 billion of equity at March 31, 1998, compared to $8.5 billion of equity at December 31, 1997. Cash and equivalents increased to $151 million at March 31, 1998, compared to $102 million at December 31, 1997. WCI had no long-term debt due to TW Companies under its revolving credit agreement at the end of either period. ATC had $2 billion of equity at March 31, 1998, compared to $2.1 billion at December 31, 1997. Although ATC has no independent operations, it is expected that additional tax-related and other distributions from TWE, as well as availability under ATC's revolving credit agreement with TW Companies, will continue to be sufficient to satisfy ATC's obligations with respect to its tax sharing agreement with TW Companies for the foreseeable future. CASH FLOWS In the first three months of 1998, WCI's cash provided by operations amounted to $164 million and reflected $92 million of EBITA, $19 million of noncash depreciation expense and $102 million of distributions from TWE, less $1 million of interest payments, $46 million of income taxes ($35 million of which was paid to TW Companies under a tax sharing agreement) and $2 million related to a reduction in working capital requirements, 17 TWE GENERAL PARTNERS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) other balance sheet accounts and noncash items. Cash provided by WCI's operations of $237 million in the first three months of 1997 reflected $114 million of EBITA, $22 million of noncash depreciation expense, $32 million of distributions from TWE and $207 million related to a reduction in working capital requirements, other balance sheet accounts and noncash items, less $7 million of interest payments and $131 million of income taxes ($91 million of which was paid to TW Companies under a tax sharing agreement). Cash provided by investing activities was $32 million in the first three months of 1998, compared to cash used by investing activities of $13 million in 1997, principally as a result of a decrease in investment spending and an increase in investment proceeds. Cash used by financing activities was $147 million in the first three months of 1998, compared to $202 million in the first three months of 1997, principally as a result of lower advances to TW Companies, offset in part by higher dividend payments of $71 million. Management believes that WCI's operating cash flow and borrowing availability under its revolving credit agreement with TW Companies 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 ATC 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 1998, the General Partners received an aggregate $172 million of distributions from TWE, consisting of $52 million of tax-related distributions and $120 million of stock option related 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. Of such aggregate distributions in the first three months of 1998 and 1997, WCI received $102 million and $32 million, respectively, and ATC received $70 million and $22 million, respectively. 18 TWE GENERAL PARTNERS CONSOLIDATED BALANCE SHEETS (UNAUDITED)
WCI ATC ----------------------- ---------------------- MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, 1998 1997 1998 1997 ---- ---- ---- ---- (MILLIONS) ASSETS CURRENT ASSETS Cash and equivalents............................................ $ 151 $ 102 $ - $ - Receivables, less allowances of $258 and $264 million........... 700 866 - - Inventories..................................................... 137 140 - - Prepaid expenses................................................ 678 651 - - ----- ------ ----- ------- Total current assets............................................ 1,666 1,759 - - Investments in and amounts due to and from TWE.................. 2,394 2,423 1,835 1,861 Investments in TW Companies..................................... 103 103 62 62 Other investments............................................... 1,255 1,259 351 352 Music catalogues, contracts and copyrights...................... 902 928 - - Goodwill........................................................ 3,520 3,554 - - Other assets, primarily property, plant and equipment........... 412 464 - - ------ ------ ----- ----- Total assets.................................................... $10,252 $10,490 $2,248 $2,275 ======= ======= ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts and royalties payable.................................. $ 966 $ 978 $ - $ - Other current liabilities....................................... 375 464 1 1 ------ ------ ----- ------ Total current liabilities....................................... 1,341 1,442 1 1 Long-term liabilities, including $313, $251, $229 and $187 million due to TW Companies............................. 575 527 229 187 SHAREHOLDERS' EQUITY Common stock.................................................... 1 1 1 1 Preferred stock of WCI, $.01 par value, 90,000 shares outstanding, $90 million liquidation preference.............. - - - - Paid-in capital................................................. 10,465 10,465 2,708 2,708 Retained earnings (accumulated deficit)......................... 339 450 (72) (4) ------ ------- ------- ------- 10,805 10,916 2,637 2,705 Due from TW Companies, net...................................... (1,883) (1,809) (283) (282) Reciprocal interest in TW Companies stock....................... (586) (586) (336) (336) ------ ------ ----- ------ Total shareholders' equity...................................... 8,336 8,521 2,018 2,087 ------ ------- ------ ------ Total liabilities and shareholders' equity...................... $10,252 $10,490 $2,248 $2,275 ======= ======= ====== ======
See accompanying notes. 19 TWE GENERAL PARTNERS CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, (UNAUDITED)
WCI ATC ---------------- ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- (MILLIONS) Revenues (a)....................................................... $888 $933 $ - $ - ---- ---- ----- ----- Cost of revenues (a)(b)............................................ 576 606 - - Selling, general and administrative (a)(b)......................... 284 277 - - ---- ---- ----- ----- Operating expenses................................................. 860 883 - - ---- ---- ----- ----- Business segment operating income.................................. 28 50 - - Equity in pretax income of TWE (a)................................. 73 197 50 135 Interest and other, net (a)........................................ (1) 16 5 3 ----- ---- ----- ----- Income before income taxes......................................... 100 263 55 138 Income taxes (a)................................................... (58) (128) (27) (62) ----- ----- ----- ----- Net income......................................................... $ 42 $135 $ 28 $ 76 ==== ==== ==== ====
- ------------------ (a) Includes the following income (expenses) resulting from transactions with Time Warner, TW Companies, TWE or equity investees of the General Partners: Revenues........................................................... $48 $ 35 $ - $ - Cost of revenues................................................... (9) (10) - - Selling, general and administrative................................ 3 20 - - Equity in pretax income of TWE..................................... (9) (6) - - Interest and other, net............................................ 8 25 - - Income taxes....................................................... (35) (91) (21) (57) (b) Includes depreciation and amortization expense of:.......... $83 $ 86 $ - $ - === ==== ==== =====
See accompanying notes. 20 TWE GENERAL PARTNERS CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, (UNAUDITED)
WCI ATC ---------------- ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- (MILLIONS) OPERATIONS Net income......................................................... $ 42 $135 $ 28 $ 76 Adjustments for noncash and nonoperating items: Depreciation and amortization...................................... 83 86 - - Excess (deficiency) of distributions over equity in pretax income of TWE.......................................... 29 (165) 20 (113) Equity in loss of other investee companies, net of distributions... 8 22 2 2 Changes in operating assets and liabilities........................ 2 159 - - ---- ---- ----- ----- Cash provided (used) by operations................................. 164 237 50 (35) ---- ---- ---- ---- INVESTING ACTIVITIES Investments and acquisitions....................................... (11) (30) - - Capital expenditures............................................... (20) (24) - - Investment proceeds................................................ 63 41 - - ---- ---- ----- ----- Cash provided (used) by investing activities....................... 32 (13) - - ---- ----- ----- ----- FINANCING ACTIVITIES Dividends.......................................................... (73) (2) (49) (2) Decrease (increase) in amounts due from TW Companies, net.......... (74) (200) (1) 37 ---- ----- ----- ---- Cash provided (used) by financing activities....................... (147) (202) (50) 35 ---- ----- ----- ---- INCREASE IN CASH AND EQUIVALENTS................................... 49 22 - - CASH AND EQUIVALENTS AT BEGINNING OF PERIOD........................ 102 91 - - ---- ---- ----- ----- CASH AND EQUIVALENTS AT END OF PERIOD.............................. $151 $113 $ - $ - ==== ==== ===== =====
See accompanying notes. 21 TWE GENERAL PARTNERS CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY THREE MONTHS ENDED MARCH 31, (UNAUDITED)
WCI ATC ---------------- ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- (MILLIONS) BALANCE AT BEGINNING OF YEAR....................................... $8,521 $9,541 $2,087 $2,331 Net income ........................................................ 42 135 28 76 Other comprehensive income (loss).................................. (18) (21) (4) (5) ------ ----- ------ ----- Comprehensive income .............................................. 24 114 24 71 Increase in stock option distribution liability to TW Companies (a)................................................ (133) (53) (92) (36) Dividends.......................................................... (2) - - - Transfers to TW Companies, net..................................... (74) (200) (1) 37 ----- ----- ----- ----- BALANCE AT MARCH 31,............................................... $8,336 $9,402 $2,018 $2,403 ====== ====== ====== ======
- ------------------ (a)The General Partners record distributions to TW Companies and a corresponding receivable from TWE as a result of the stock option related distribution provisions of the TWE partnership agreement. Stock option distributions of $133 million and $53 million for WCI and $92 million and $36 million for ATC were accrued in the first three months of 1998 and 1997, respectively, because of an increase in the market price of Time Warner common stock (Note 3). See accompanying notes. 22 TWE GENERAL PARTNERS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION DESCRIPTION OF BUSINESS On June 30, 1992, thirteen direct or indirect subsidiaries of Time Warner Companies, Inc. ("TW Companies") contributed the assets and liabilities or the rights to the cash flows of substantially all of TW Companies'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 at that time based on the relative fair value of the net assets each contributed to TWE (the "General Partner Guarantees," see Note 4). In 1997, two of the original general partners, Warner Cable Communications Inc. ("WCCI") and Time Warner Operations Inc. ("TWOI"), were merged into another original general partner, Warner Communications Inc. (the "WCCI Merger" and the "TWOI Merger," respectively, and collectively, the "1997 General Partner Mergers"). After the 1997 General Partner Mergers, eleven of the thirteen original general partners have now been merged or dissolved into the other two. Warner Communications Inc. ("WCI") and American Television and Communications Corporation ("ATC") are the two remaining general partners of TWE. They have succeeded to the general partnership interests and have assumed the General Partner Guarantees of the eleven former general partners. WCI, ATC and, where appropriate, the former general partners are referred to herein as the "General Partners." In addition to the 1997 General Partner Mergers, WCI acquired two wholly owned subsidiaries of Turner Broadcasting Systems, Inc. ("TBS"), a wholly owned subsidiary of Time Warner Inc. ("Time Warner"), in 1997 that conduct certain of TBS's cable television programming operations in the United Kingdom (the "TBS UK Merger," see Note 2). The WCCI Merger had no effect on the consolidated financial statements of WCI because WCCI was a consolidated subsidiary of WCI prior to the merger and, as such, WCCI's net assets, operating results and cash flows were already included in the consolidated financial statements of WCI. The TWOI Merger and the TBS UK Merger have each been accounted for as a merger of entities under common control, similar to the pooling-of-interest method of accounting for business combinations. Accordingly, the 1997 consolidated financial statements of WCI have been restated to reflect the TWOI Merger and the TBS UK Merger effective as of January 1, 1997. WCI conducts substantially all of TW Companies'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. ATC does not conduct operations independent of their ownership interests in TWE and certain other investments. 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 the General Partners for the year ended December 31, 1997. Certain reclassifications have been made to the prior year's financial statements to conform to the 1998 presentation. 23 TWE GENERAL PARTNERS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) 2. TBS UK MERGER In June 1997, WCI acquired TBS's interests in Turner Broadcasting System Europe Limited ("TBSEL") and Turner Entertainment Networks International Limited ("TENIL"), wholly owned subsidiaries of TBS, which conduct certain of TBS's cable television programming operations in the United Kingdom. To acquire TBSEL and TENIL, WCI issued 90,000 shares of a new series of preferred stock. Each share of preferred stock is entitled to a liquidation preference of $1,000 per share and entitles the holder thereof to receive an $80 annual dividend per share, payable in cash on a quarterly basis. The TBS UK Merger was accounted for as a merger of entities under common control effective as of January 1, 1997, similar to the pooling-of-interest method of accounting for business combinations. The operating results of the companies acquired are not material to WCI's results of operations. 3. TWE The General Partners' investment in and amounts due to and from TWE at March 31, 1998 and December 31, 1997 consists of the following:
MARCH 31, 1998 WCI ATC - -------------- --- --- (MILLIONS) Investment in TWE........................................................................... $2,318 $1,622 Stock option related distributions due from TWE............................................. 309 213 Other net liabilities due to TWE, principally related to home video distribution............ (233) - ----- ------ Total....................................................................................... $2,394 $1,835 ====== ====== DECEMBER 31, 1997 WCI ATC - ----------------- --- --- (MILLIONS) Investment in TWE........................................................................... $2,418 $1,691 Stock option related distributions due from TWE............................................. 247 170 Other net liabilities due to TWE, principally related to home video distribution............ (242) - ----- ------- Total....................................................................................... $2,423 $1,861 ====== ======
PARTNERSHIP STRUCTURE AND ALLOCATION OF INCOME 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. TW Companies 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. 24 TWE GENERAL PARTNERS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) SUMMARIZED FINANCIAL INFORMATION OF TWE Set forth below is summarized financial information of TWE, which reflects the TWE-A/N Transfers (as defined hereinafter) effective as of January 1, 1998.
THREE MONTHS ENDED MARCH 31, ----------------- 1998 1997 ---- ---- (MILLIONS) OPERATING STATEMENT INFORMATION Revenues.................................................................................... $2,910 $2,600 Depreciation and amortization............................................................... (371) (324) Business segment operating income........................................................... 369 329 Interest and other, net (1)................................................................. (164) 129 Minority interest........................................................................... (64) (108) Income before income taxes.................................................................. 123 332 Net income.................................................................................. 108 320
- ------------------ (1) Includes a pretax gain of approximately $250 million recognized in the first three months of 1997 related to the sale of an interest in E! Entertainment Television, Inc.
THREE MONTHS ENDED MARCH 31, ----------------- 1998 1997 ---- ---- (MILLIONS) CASH FLOW INFORMATION Cash provided (used) by operations.......................................................... $ 441 $ (48) Capital expenditures........................................................................ (352) (331) Investments and acquisitions................................................................ (230) (31) Investment proceeds......................................................................... 23 367 Borrowings.................................................................................. 489 282 Debt repayments............................................................................. (376) (318) Issuance of preferred stock of subsidiary................................................... - 243 Capital distributions....................................................................... (172) (54) Other financing activities, net............................................................. (38) (14) Increase (decrease) in cash and equivalents................................................. (215) 96 MARCH 31, DECEMBER 31, 1998 1997 ---- ---- (MILLIONS) BALANCE SHEET INFORMATION Cash and equivalents........................................................................ $ 107 $ 322 Total current assets........................................................................ 3,338 3,622 Total assets................................................................................ 22,012 20,731 Total current liabilities................................................................... 3,761 3,974 Long-term debt ............................................................................. 7,108 5,990 Minority interests.......................................................................... 1,465 1,210 Preferred stock of subsidiary............................................................... 229 233 General Partners' Senior Capital............................................................ 1,140 1,118 Partners' capital........................................................................... 6,128 6,333
25 TWE GENERAL PARTNERS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) CAPITAL DISTRIBUTIONS 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, 1998 and December 31, 1997, the General Partners had recorded $522 million and $417 million, respectively, of stock option related distributions due from TWE, based on closing prices of Time Warner common stock of $72.00 and $62.00, respectively. The General Partners are paid when the options are exercised. The General Partners also receive tax-related distributions from TWE on a current basis. During the three months ended March 31, 1998, the General Partners received distributions from TWE in the amount of $172 million, consisting of $52 million of tax-related distributions and $120 million of stock option related distributions. During the three months ended March 31, 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. Of such aggregate distributions in 1998 and 1997, WCI received $102 million and $32 million, respectively and ATC received $70 million and $22 million, respectively. TWE-A/N TRANSFERS In early 1998, TW Companies (through a wholly owned subsidiary) contributed cable television systems (or interests therein) serving approximately 650,000 subscribers to the TWE-Advance/Newhouse Partnership ("TWE- A/N"), subject to approximately $1 billion of debt, in exchange for common and preferred partnership interests therein, and completed certain related transactions (collectively, the "TWE-A/N Transfers"). The cable television systems transferred to TWE-A/N were formerly owned by TWI Cable Inc. ("TWI Cable"), a wholly owned subsidiary of TW Companies, and Paragon Communications ("Paragon"), a partnership formerly owning cable television systems serving approximately 1 million subscribers that was wholly owned by subsidiaries of TW Companies, with 50% beneficially owned in the aggregate by TWE and TWE-A/N. The debt assumed by TWE-A/N has not been guaranteed by the General Partners, but has been guaranteed by TWI Cable and certain of its subsidiaries. In connection with the TWE-A/N Transfers, the Advance/Newhouse Partnership ("Advance/Newhouse"), a limited partner in TWE-A/N, made a capital contribution to TWE-A/N in order to maintain its 33.3% common partnership interest therein. Accordingly, TWE-A/N is now owned 65.3% by TWE, 33.3% by Advance/Newhouse and 1.4% indirectly by TW Companies. The TWE-A/N Transfers were accounted for effective as of January 1, 1998. For a more comprehensive description of the TWE-A/N Transfers, see Note 2 to the accompanying TWE consolidated financial statements. PRIMESTAR In April 1998, TWE and Advance/Newhouse transferred the direct broadcast satellite operations conducted by TWE and TWE-A/N (the "DBS Operations") and the 31% partnership interest in Primestar Partners, L.P. held by TWE-A/N ("Primestar" and collectively, the "Primestar Assets") to Primestar, Inc. ("New Primestar"), a new holding company that is ultimately expected to be the publicly traded parent of TCI Satellite Entertainment, Inc. ("TSAT"). New Primestar owns the DBS Operations and Primestar partnership interests formerly owned by TSAT and other previously existing partners of Primestar. In exchange for contributing its interests in the Primestar Assets, TWE received an approximate 24% equity interest in New Primestar and realized approximately $240 million of debt 26 TWE GENERAL PARTNERS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) reduction. In partial consideration for contributing its indirect interest in certain of the Primestar Assets, Advance/Newhouse received an approximate 6% equity interest in New Primestar. In a related transaction, Primestar also entered into an agreement in June 1997 with The News Corporation Limited, MCI Telecommunications Corporation and American Sky Broadcasting LLC ("ASkyB"), pursuant to which New Primestar would acquire certain assets relating to the high-power, direct broadcast satellite business of ASkyB (the "Primestar ASkyB Transaction"). In exchange for such assets, ASkyB would receive non-voting securities of New Primestar that would be convertible into non-voting common stock of New Primestar and, accordingly, would reduce TWE's equity interest in New Primestar to approximately 16% on a fully diluted basis. The Primestar ASkyB Transaction is expected to close in 1998, subject to customary closing conditions, including all necessary governmental and regulatory approvals, including the approval of the FCC which is currently conducting an extensive review of the transaction. There can be no assurance that such approvals will be obtained. SIX FLAGS In April 1998, TWE sold its remaining 49% interest in Six Flags Entertainment Corporation ("Six Flags") to Premier Parks Inc. ("Premier"), a regional theme park operator, for approximately $475 million of cash. TWE used the net, after-tax proceeds from this transaction to reduce debt by approximately $300 million. As part of the transaction, TWE will continue to license its animated cartoon and comic book characters to Six Flags's theme parks and will similarly license such rights to Premier's theme parks in the United States and Canada under a long-term agreement covering an aggregate of twenty-five existing and all future locations. A substantial portion of the gain on this transaction has been deferred by TWE principally as a result of its continuing guarantees of certain significant long-term obligations of Six Flags relating to the Six Flags Over Texas and Six Flags Over Georgia theme parks. 4. GENERAL PARTNER GUARANTEES Each General Partner has guaranteed a pro rata portion of approximately $6 billion of TWE's debt and accrued interest at March 31, 1998, based on the relative fair value of the net assets each General Partner (or its predecessor) contributed to TWE. Such indebtedness is recourse to each General Partner only to the extent of its guarantee. There are no restrictions on the ability of the General Partner guarantors to transfer assets, other than TWE assets, to parties that are not guarantors. The portion of TWE debt and accrued interest at March 31, 1998 that was guaranteed by each General Partner is set forth below:
TOTAL GUARANTEED BY EACH GENERAL PARTNER -------------------- GENERAL PARTNER % AMOUNT --------------- - ------ (DOLLARS IN MILLIONS) WCI....................................................................................... 59.27 $3,548 ATC....................................................................................... 40.73 2,438 ------ ------ Total..................................................................................... 100.00 $5,986 ====== ======
27 TWE GENERAL PARTNERS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) 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:
THREE MONTHS ENDED MARCH 31, ---------------------------------------- 1998 1997 -------------------- ----------------- WCI ATC WCI ATC --- --- --- --- (MILLIONS) Cash payments made for interest.......................................... $ 1 $ - $ 7 $ - Cash payments made for income taxes, net................................. 46 21 131 57 Tax-related distributions received from TWE.............................. 31 21 30 20 Noncash capital distributions, net....................................... (133) (92) (53) (36)
28 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On May 12, 1998, the U.S. Department of Justice brought a civil action in the United States District Court for the District of Columbia against Primestar, Inc. ("Primestar"), each of its cable company owners, including TWE, and The News Corporation Ltd. and MCI Telecommunications Corporation, to enjoin on antitrust grounds Primestar's proposed acquisition of certain assets relating to the high-power, direct broadcast satellite business of American Sky Broadcasting LLC. For further information with respect to such proposed acquisition, see Note 2 "Acquisitions and Dispositions," to TWE's consolidated financial statements. On April 22, 1998, the purported class actions entitled (i) Chandu Dani d/b/a Compact Disc Warehouse and Record Revolution v. EMI Music Distribution, Sony Music Entertainment, Inc., Warner Elektra Atlantic Corporation, Universal Music and Video Distribution, Bertelsmann Music Group, Inc. and PolyGram Group Distribution, Inc., No. 97-7226, (ii) Third Street Jazz and Rock Holding Corporation v. EMI Music Distribution, Sony Music Entertainment, Inc., Warner Elektra Atlantic Corporation, Universal Music and Video Distribution, Bertelsmann Music Group, Inc. and PolyGram Group Distribution, Inc., No. 97-8864, and (iii) Nathan Muchnick, Inc. v. Sony Music Entertainment, Inc., PolyGram Group Distribution, Inc., Bertelsmann Music Group, Inc., Universal Music and Video Distribution, Warner Elektra Atlantic Corporation and EMI Music Distribution, No. 98 Civ. 0612, as described on page I-29 of TWE's Annual Report on Form 10-K for the year ended December 31, 1997, were consolidated by the Judicial Panel on Multidistrict Litigation before the United States District Court for the Central District of California for coordinated and consolidated pretrial proceedings. 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, 1998. 29 TIME WARNER ENTERTAINMENT COMPANY, L.P. AND TWE GENERAL PARTNERS SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each of the registrants has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TIME WARNER ENTERTAINMENT COMPANY, L.P. By: Warner Communications Inc., as General Partner By: /S/ RICHARD J. BRESSLER ------------------------------------------ Name: Richard J. Bressler Title: Executive Vice President and Chief Financial Officer AMERICAN TELEVISION AND COMMUNICATIONS CORPORATION WARNER COMMUNICATIONS INC. By: /s/ RICHARD J. BRESSLER ------------------------------------------ Name: Richard J. Bressler Title: Executive Vice President and Chief Financial Officer Dated: May 14, 1998 EXHIBIT INDEX Pursuant to Item 601 of Regulations S-K Exhibit No. Description of Exhibit - ----------- ---------------------- 27 Financial Data Schedule. EX-27 2 EXHIBIT 27
5 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, 1998 and is qualified in its entirety by reference to such financial statements. 0000893657 TIME WARNER ENTERTAINMENT COMPANY, L.P. 1,000,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 107 0 2,250 410 3,511 3,338 10,987 4,274 22,012 3,761 7,108 0 1,140 0 6,128 22,012 2,910 2,910 1,946 1,946 0 0 141 123 15 108 0 0 0 108 0 0
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