-----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, C3ab0bfePnoO3rsc1xLi5dRhnQotU2UySDqZhEECp4osirvriYUKBDjGaPQVcicJ A5yi7FJO3v3jci9/gFzxgQ== 0000950117-98-001527.txt : 19980814 0000950117-98-001527.hdr.sgml : 19980814 ACCESSION NUMBER: 0000950117-98-001527 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 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: 98684764 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: 98684765 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: 98684766 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 June 30, 1998, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 for the transition period from __________________ to __________________. Commission file number 001-12878 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 Delaware 13-2922502 COMMUNICATIONS CORPORATION Delaware 13-2696809 WARNER COMMUNICATIONS INC. (State or other jurisdiction (I.R.S. Employer (Exact name of registrant of incorporation or Identification as specified in its charter) organization) 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 22 Consolidated balance sheets at June 30, 1998 and December 31, 1997................................................... 11 27 Consolidated statements of operations for the three and six months ended June 30, 1998 and 1997........................ 12 28 Consolidated statements of cash flows for the six months ended June 30, 1998 and 1997............................... 13 30 Consolidated statements of partnership capital and shareholders' equity for the six months ended June 30, 1998 and 1997.............................................. 14 31 Notes to consolidated financial statements................... 15 32 PART II. OTHER INFORMATION................................... 38
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 certain cable-related transactions, including (i) 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"), (ii) the transfer of TWE's and TWE-A/N's direct broadcast satellite operations and related assets to Primestar, Inc., a separate holding company (the "Primestar Roll-up Transaction") and (iii) the sale or exchange of certain cable television systems. The effects of these transactions are described elsewhere herein. 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 and six months ended June 30, 1998 and 1997 are as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------- --------------------------------- OPERATING OPERATING EBITA INCOME EBITA INCOME ------------- ------------- --------------- ------------- 1998 1997 1998 1997 1998 1997 1998 1997 ---- ---- ---- ---- ------ ---- ---- ---- (MILLIONS) ............................ Filmed Entertainment-Warner Bros $121 $103 $ 88 $ 73 $ 240 $209 $174 $148 Broadcasting-The WB Network .... (23) (19) (24) (19) (61) (39) (63) (39) Cable Networks-HBO ............. 113 98 113 98 222 189 222 189 Cable(a) ....................... 374 243 278 168 681 502 491 351 ---- ---- ---- ---- ------ ---- ---- ---- Total .......................... $585 $425 $455 $320 $1,082 $861 $824 $649 ===== ==== ==== ==== ====== ==== ==== ====
- --------------- (a) Includes net pretax gains relating to the sale or exchange of certain cable television systems of approximately $70 million in the second quarter of 1998, and approximately $84 million and $24 million for the six months ended June 30, 1998 and 1997, respectively. THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1997 TWE had revenues of $2.850 billion and net income of $155 million for the three months ended June 30, 1998, compared to revenues of $2.728 billion and net income of $82 million for the three months ended June 30, 1997. As discussed more fully below, TWE's net income increased in 1998 as compared to 1997 principally due to an overall increase in operating income generated by its business segments (including the positive effect of the TWE-A/N Transfers and $70 million of net gains recognized by TWE in 1998 relating to the sale or exchange of certain cable television systems), offset in part by an increase in interest expense and minority interest expense related to the TWE-A/N Transfers. As a U.S. partnership, TWE is not subject to U.S. federal and state income taxation. Income and withholding taxes of $17 million and $25 million for the three months ended June 30, 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 $1.327 billion, compared to $1.254 billion in the second quarter of 1997. EBITA increased to $121 million from $103 million. Operating income increased to $88 million from $73 million. Revenues benefited from increases in worldwide television production and distribution, home video and consumer products licensing operations, offset in part by lower worldwide theatrical revenues. EBITA and operating income benefited principally from the revenue gains, as well as a gain on the sale of certain assets. Broadcasting - The WB Network. Revenues increased to $61 million, compared to $29 million in the second quarter of 1997. EBITA decreased to a loss of $23 million from a loss of $19 million. Operating losses increased to $24 million from $19 million. Revenues increased as a result of improved television ratings and the addition of a fourth night of prime-time programming in January 1998, but were offset by higher programming costs associated with the expanded programming schedule. Operating losses increased primarily as a result of a lower allocation of losses to a limited partner in the network. In October 1998, The WB Network plans to 2 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) expand its prime-time programming schedule to five nights a week. Due to the start-up nature of this national broadcast operation, losses are expected to continue. Cable Networks-HBO. Revenues increased to $509 million, compared to $487 million in the second quarter of 1997. EBITA and operating income increased to $113 million from $98 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 $1.084 billion, compared to $1.066 billion in the second quarter of 1997. EBITA increased to $374 million from $243 million. Operating income increased to $278 million from $168 million. The Cable division's 1998 operating results were affected by the TWE-A/N Transfers and the deconsolidation of its direct broadcast satellite operations in connection with the Primestar Roll-up Transaction. Excluding the effect of the TWE-A/N Transfers and Primestar Roll-up Transaction, revenues benefited 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 ("FCC") and an increase in advertising revenues. Similarly excluding the effect of the TWE-A/N Transfers and Primestar Roll-up Transaction, EBITA and operating income increased principally as a result of the revenue gains and higher net gains relating to the sale or exchange of certain cable television systems, offset in part by higher depreciation related to capital spending. Interest and Other, Net. Interest and other, net, was $183 million in the second quarter of 1998, compared to $139 million in the second quarter of 1997. Interest expense increased to $132 million, compared to $120 million in the second quarter of 1997, principally due to higher average debt levels associated with the TWE-A/N Transfers. There was other expense, net, of $51 million in the second quarter of 1998, compared to $19 million in the second quarter of 1997, principally due to higher losses from certain investments accounted for under the equity method of accounting. SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997 TWE had revenues of $5.760 billion and net income of $263 million for the six months ended June 30, 1998, compared to revenues of $5.328 billion and net income of $402 million for the six months ended June 30, 1997. As discussed more fully below, TWE's net income decreased in 1998 as compared to 1997 principally due to lower, net pretax gains recognized in connection with the sale or exchange of certain cable television systems in each year and the 1997 sale of TWE's interest in E! Entertainment Television, Inc. ("E! Entertainment"). Excluding the effect of these transactions, TWE's net income increased in 1998 principally as a result of an overall increase in operating income generated by its business segments (including the positive effect of the TWE-A/N Transfers), offset in part by an increase in interest expense and minority interest expense related to the TWE-A/N Transfers. As a U.S. partnership, TWE is not subject to U.S. federal and state income taxation. Income and withholding taxes of $32 million and $37 million for the six months ended June 30, 1998 and 1997, respectively, have been provided for the operations of TWE's domestic and foreign subsidiary corporations. 3 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) Filmed Entertainment-Warner Bros. Revenues increased to $2.637 billion, compared to $2.426 billion in the first six months of 1997. EBITA increased to $240 million from $209 million. Operating income increased to $174 million from $148 million. Revenues benefited from increases in worldwide television production and distribution and consumer products licensing operations, offset in part by lower worldwide theatrical and home video revenues. EBITA and operating income benefited principally from the revenue gains. Broadcasting - The WB Network. Revenues increased to $106 million, compared to $53 million in the first six months of 1997. EBITA decreased to a loss of $61 million from a loss of $39 million. Operating losses increased to $63 million from $39 million. Revenues increased as a result of improved television ratings and the addition of a fourth night of prime-time 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. In October 1998, The WB Network plans to expand its prime-time programming schedule to five nights a week. Due to the start-up nature of this national broadcast operation, losses are expected to continue. Cable Networks-HBO. Revenues increased to $1.021 billion, compared to $970 million in the first six months of 1997. EBITA and operating income increased to $222 million from $189 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 $2.237 billion, compared to $2.086 billion in the first six months of 1997. EBITA increased to $681 million from $502 million. Operating income increased to $491 million from $351 million. The Cable division's 1998 operating results were affected by the TWE-A/N Transfers and the deconsolidation of its direct broadcast satellite operations in connection with the Primestar Roll-up Transaction. Excluding the effect of the TWE-/AN Transfers and Primestar Roll-up Transaction, revenues benefited from an increase in basic cable subscribers, increases in regulated cable rates as permitted under Time Warner Cable's "social contract" with the FCC and an increase in advertising revenues. Similarly excluding the effect of the TWE-A/N Transfers and the Primestar Roll-up Transaction, EBITA and operating income increased principally as a result of the revenue gains and higher net gains relating to the sale or exchange of certain cable television systems, offset in part by higher depreciation related to capital spending. Interest and Other, Net. Interest and other, net, was $347 million in the first six months of 1998, compared to $10 million in the first six months of 1997. Interest expense increased to $273 million, compared to $235 million in 1997, principally due to higher average debt levels associated with the TWE-A/N Transfers. There was other expense, net, of $74 million in the first six months of 1998, compared to other income, net, of $225 million in the first six 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 and higher losses from certain investments accounted for under the equity method of accounting. 4 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(CONTINUED) FINANCIAL CONDITION AND LIQUIDITY JUNE 30, 1998 FINANCIAL CONDITION TWE had $6.8 billion of debt, $72 million of cash and equivalents (net debt of $6.7 billion), $225 million of preferred stock of a subsidiary, $1.2 billion of Time Warner General Partners' Senior Capital and $6.0 billion of partners' capital at June 30, 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 July 1998, TWE borrowed $579 million under its bank credit agreement and paid a distribution to the Time Warner General Partners relating to their Senior Capital interests. 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 Primestar Roll-up Transaction. 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 six months of 1998, TWE's cash provided by operations amounted to $586 million and reflected $1.082 billion of EBITA from its Filmed Entertainment-Warner Bros., Broadcasting-The WB Network, Cable Networks-HBO and Cable businesses, $469 million of noncash depreciation expense and $135 million of proceeds from TWE's asset securitization program, less $260 million of interest payments, $39 million of income taxes, $36 million of corporate expenses, and $765 million related to an aggregate increase in working capital requirements, other balance sheet accounts and noncash items. Cash provided by operations of $416 million in the first six months of 1997 reflected $861 million of business segment EBITA and $440 million of noncash depreciation expense, less $243 million of interest payments, $35 million of income taxes, $36 million of corporate expenses and $571 million related to an aggregate reduction in working capital requirements, other balance sheet accounts and noncash items. Cash used by investing activities was $493 million in the first six months of 1998, compared to $425 million in the first six 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 as a reduction of cash flows from investments and acquisitions, offset in part by a $135 million increase 5 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(CONTINUED) in proceeds from the sale of investments. Capital expenditures were $734 million in the first six months of 1998 and 1997. Cash used by financing activities was $343 million in the first six months of 1998, compared to cash provided by financing activities of $86 million in the first six 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 quarter of 1997 and a $95 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 $666 million in the six months ended June 30, 1998, compared to $662 million the six months ended June 30, 1997. For the full year of 1998, cable capital spending is expected to be comparable to 1997 levels, with approximately $700 million 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 and other services. CABLE FINANCING STRATEGY Time Warner's and TWE's cable financing strategy is to continue to use cable operating cash flow to finance the level of capital spending necessary to upgrade the technological capability of its cable television systems and develop new services, while pursuing opportunities to reduce either existing debt and/or their share of future funding requirements related to the cable television business and related ancillary businesses. Consistent with this strategy, Time Warner, TWE and TWE-A/N have completed a series of transactions in 1998, as discussed more fully below. Business Telephony Reorganization In July 1998, Time Warner, TWE and TWE-A/N completed a reorganization of their business telephony operations (the "Business Telephony Reorganization") by combining such operations into a single entity that is 6 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(CONTINUED) intended to be self-financing. This entity, named Time Warner Telecom LLC ("TW Telecom"), is a competitive local exchange carrier (CLEC) in selected metropolitan areas across the United States where it offers a wide range of telephony services to business customers. Time Warner, MediaOne Group, Inc. ("MediaOne," formerly U S WEST, Inc.) and the Advance/Newhouse Partnership ("Advance/Newhouse"), a limited partner in TWE-A/N, own interests in TW Telecom of 61.95%, 18.88% and 19.17%, respectively. As a result of the Business Telephony Reorganization, TWE and TWE-A/N do not have continuing equity interests in these business telephony operations. Road Runner Joint Venture In June 1998, Time Warner, TWE, TWE-A/N, MediaOne, Microsoft Corp. ("Microsoft") and Compaq Computer Corp. ("Compaq") formed a joint venture to operate and expand Time Warner Cable's and MediaOne's existing high-speed Internet access businesses (the "Road Runner'TM' Joint Venture"). In exchange for contributing their existing high-speed Internet access businesses, Time Warner received an 11.25% common equity interest in the Road Runner Joint Venture, TWE received a 25% interest, TWE-A/N received a 32.5% interest and MediaOne received a 31.25% interest. In exchange for Microsoft and Compaq each contributing $212.5 million of cash to the Road Runner Joint Venture, Microsoft and Compaq each received a preferred equity interest therein that is convertible into a 10% common equity interest which, upon conversion, will dilute each of the common equity holders' interests accordingly. Each of TWE's and TWE-A/N's interest in the Road Runner Joint Venture is being accounted for under the equity method of accounting. The aggregate $425 million of capital contributed by Microsoft and Compaq is expected to be used by the Road Runner Joint Venture to continue to expand the roll out of high-speed Internet access services. In addition, as a result of Time Warner Cable being a retailer of the Road Runner business in its franchise areas whereby Time Warner Cable's technologically advanced, high-capacity cable architecture will be used to provide these high-speed Internet access services, Time Warner Cable will initially retain 70% of the subscription revenues and 30% of the national advertising and transactional revenues generated from the delivery of these on-line services to its cable subscribers. Time Warner Cable's share of these revenues is expected to change periodically to 75% of subscription revenues and 25% of national advertising and transactional revenues by 2006. Primestar Roll-up Transaction 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 separate holding company. New Primestar owns the DBS Operations and Primestar partnership interests formerly owned by TCI Satellite Entertainment, Inc. 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. TWE deconsolidated the DBS Operations effective as of April 1, 1998 and the equity interest in New Primestar received in this transaction is being accounted for under the equity method of accounting. 7 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(CONTINUED) 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 TWE-A/N, subject to approximately $1 billion of debt, in exchange for common and preferred partnership interests therein, and completed certain related transactions. The debt assumed by TWE-A/N has been guaranteed by TWI Cable and certain of its subsidiaries. TWE-A/N is now owned 65.3% by TWE, 33.3% by Advance/Newhouse and 1.4% indirectly by Time Warner. 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 $2.225 billion at June 30, 1998, compared to $2.126 billion at December 31, 1997 (including amounts relating to TWE's cable television networks of $222 million and $238 million, respectively, and to Time Warner's cable television networks of $568 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. YEAR 2000 TECHNOLOGY PREPAREDNESS TWE, like most large companies, depends on many different computer systems and other chip-based devices for the continuing conduct of its business. Older computer programs, computer hardware and chip-based devices may fail to recognize dates beginning on January 1, 2000 as being valid dates, and as a result may fail to operate or may operate improperly when such dates are introduced. TWE's exposure to potential Year 2000 problems exists in two general areas: technological operations in the sole control of TWE, and technological operations dependent in some way on one or more third parties. The majority of TWE's exposure to potential Year 2000 problems is in the latter area. Failure to achieve high levels of Year 2000 compliance in either area could have a material adverse impact on TWE. In the former area, technological operations in the sole control of TWE, TWE is engaged in a thorough process involving the identification and remediation of affected technological functions. TWE has generally completed the process of identifying significant potential Year 2000 difficulties and has an action plan in place to address them. At present, it is anticipated that the action plan will be successfully completed in all material respects in advance of January 1, 2000, and that its cost to TWE will not be material. 8 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(CONTINUED) In the latter area, technological operations dependent in some way on one or more third parties, the situation is much less in TWE's ability to predict or control, although TWE has in place an extensive system to test for and attempt to resolve potential Year 2000 difficulties. TWE's business is heavily dependent on third parties, many of whom are themselves heavily dependent on technology. In some cases, TWE's third party dependence is on vendors of technology who are themselves working towards solutions to Year 2000 problems. For example, in a situation endemic to the cable industry, much of TWE's headend equipment that controls cable set-top boxes is presently not Year 2000 compliant. The box manufacturers are working with cable industry groups towards a solution that is presently expected to be implemented successfully before the end of 1999; however, that process is not within TWE's control. In other cases, TWE's third party dependence is on suppliers of products or services that are themselves computer-intensive. For example, if a television broadcaster or cable programmer encounters Year 2000 problems that result in the interruption of its signal, TWE will be unable to provide that signal to its cable customers. Moreover, TWE is dependent, like all large companies, on the continued functioning of basic, heavily computerized services such as banking and telephony. TWE is making considerable efforts to ensure that the third parties on which it is heavily reliant are Year 2000 compliant, but cannot predict the likelihood of such compliance occurring nor the direct or indirect costs to TWE of non-compliance by those third parties or of securing such services from compliant third parties. However, TWE believes that it is in no worse position, and likely a better one, than most U.S.-based companies of its size with respect to the potential for Year 2000 problems and their impact. CAUTION CONCERNING FORWARD-LOOKING STATEMENTS The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This filing, together with management's public commentary related thereto, contains such "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in revenues, EBITA and cash flow and forecasting ongoing debt reduction. Words such as "anticipate", "estimate", "expects", "projects", "intends", "plans", "believes" and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify such forward-looking statements. Those forward-looking statements are management's present expectations of future events. As with any projection or forecast, they are inherently susceptible to changes in circumstances, and TWE is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements despite such changes. TWE operates in highly competitive, consumer driven and rapidly changing media and entertainment businesses that are dependent on government regulation and economic, political, social conditions in the countries in which they operate, consumer demand for their products and services and (particularly in view of technological changes) protection of their intellectual property rights. TWE's actual results could differ materially from management's expectations because of changes in such factors. Some of the other factors that also could cause actual results to differ from those contained in the forward-looking statements include those identified in TWE's other filings and: For TWE's cable business, more aggressive than expected competition from new technologies and other types of video programming distributors, including DBS; increases in government regulation of cable or 9 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(CONTINUED) equipment rates or other terms of service (or any failure to reduce rate regulation as is presently mandated by statute) or opposition to franchise renewals; the failure of new equipment (such as digital set-top boxes) or services to function properly, to appeal to enough consumers or to be delivered in a timely fashion; and greater than expected increases in programming or other costs. For TWE's cable programming and television businesses, greater than expected programming or production costs; public and cable operator resistance to price increases to offset higher programming costs (and the negative impact on premium programmers of increases in basic cable rates); the sensitivity of advertising to economic cyclicality; and greater than expected fragmentation of consumer viewership due to an increased number of programming services or the increased popularity of alternatives to television. For TWE's film and television businesses, their ability to continue to attract and select desirable talent and scripts at manageable costs; increases in production costs generally; fragmentation of consumer leisure and entertainment time (and its possible negative effects on the broadcast and cable networks, which are significant customers of these businesses); continued popularity of merchandising; and the uncertain impact of technological developments such as DVD and the Internet. In addition, TWE's overall financial strategy, including improved financial ratios and a strengthened balance sheet, could be adversely affected by increased interest rates, failure to meet earnings expectations, Year 2000 compliance failures and changes in TWE's plans, strategies and intentions. 10 TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, DECEMBER 31, 1998 1997 ------- ----------- (MILLIONS) ASSETS CURRENT ASSETS Cash and equivalents........................................................................ $ 72 $ 322 Receivables, including $556 and $385 million due from Time Warner, less allowances of $410 and $424 million................................................ 2,199 1,914 Inventories................................................................................. 1,226 1,204 Prepaid expenses............................................................................ 183 182 ------- ------- Total current assets........................................................................ 3,680 3,622 Noncurrent inventories...................................................................... 2,364 2,254 Loan receivable from Time Warner............................................................ 400 400 Investments................................................................................. 543 315 Property, plant and equipment............................................................... 6,360 6,557 Cable television franchises................................................................. 4,061 3,063 Goodwill.................................................................................... 4,114 3,859 Other assets................................................................................ 631 661 ------- ------- Total assets................................................................................ $22,153 $20,731 ======= ======= LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES Accounts payable............................................................................ $ 864 $ 1,123 Participations and programming costs payable................................................ 1,340 1,176 Debt due within one year.................................................................... 7 8 Other current liabilities, including $274 and $184 million due to Time Warner............... 1,653 1,667 ------- ------- Total current liabilities................................................................... 3,864 3,974 Long-term debt.............................................................................. 6,771 5,990 Other long-term liabilities, including $740 and $477 million due to Time Warner............. 2,670 1,873 Minority interests.......................................................................... 1,477 1,210 Preferred stock of subsidiary holding solely a mortgage note of its parent.................. 225 233 Time Warner General Partners' Senior Capital................................................ 1,163 1,118 PARTNERS' CAPITAL Contributed capital......................................................................... 7,537 7,537 Undistributed partnership earnings (deficit)................................................ (1,554) (1,204) ------- ------- Total partners' capital..................................................................... 5,983 6,333 ------- ------- Total liabilities and partners' capital..................................................... $22,153 $20,731 ======= =======
See accompanying notes. 11 TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------- ------------------- 1998 1997 1998 1997 ------ ------ ------ ------ (MILLIONS) Revenues (a)....................................................... $2,850 $2,728 $5,760 $5,328 ------ ------ ------ ------ Cost of revenues (a)(b)............................................ 1,806 1,782 3,752 3,447 Selling, general and administrative (a)(b)......................... 589 626 1,184 1,232 ------ ------ ------ ------ Operating expenses................................................. 2,395 2,408 4,936 4,679 ------ ------ ------ ------ Business segment operating income.................................. 455 320 824 649 Interest and other, net (a)........................................ (183) (139) (347) (10) Minority interest.................................................. (82) (56) (146) (164) Corporate services (a)............................................. (18) (18) (36) (36) ------ ------ ------ ----- Income before income taxes......................................... 172 107 295 439 Income taxes....................................................... (17) (25) (32) (37) ------ ------ ------ ----- Net income......................................................... $ 155 $ 82 $ 263 $ 402 ====== ====== ====== ======
- --------------- (a) Includes the following income (expenses) resulting from transactions with the partners of TWE and other related companies for the three and six months ended June 30, 1998, respectively, and for the corresponding periods in the prior year: revenues-$118 million and $247 million in 1998, $55 million and $121 million in 1997; cost of revenues-$(55) million and $(93) million in 1998, $(26) million and $(36) million in 1997; selling, general and administrative-$(3) million and $(2) million in 1998, $21 million and $40 million in 1997; interest and other, net-$3 million and $5 million in 1998, $5 million and $17 million in 1997; and corporate services-$(18) million and $(36) million in each of 1998 and 1997. (b) Includes depreciation and amortization expense of:............. $ 356 $ 328 $ 727 $ 652 ====== ====== ====== ======
See accompanying notes. 12 TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------ 1998 1997 ----- ----- (MILLIONS) OPERATIONS Net income.................................................................................. $ 263 $ 402 Adjustments for noncash and nonoperating items: Depreciation and amortization............................................................... 727 652 Changes in operating assets and liabilities................................................. (404) (638) ----- ----- Cash provided by operations................................................................. 586 416 ----- ----- INVESTING ACTIVITIES Investments and acquisitions................................................................ (265) (62) Capital expenditures........................................................................ (734) (734) Investment proceeds......................................................................... 506 371 ----- ----- Cash used by investing activities........................................................... (493) (425) ----- ----- FINANCING ACTIVITIES Borrowings.................................................................................. 503 428 Debt repayments............................................................................. (492) (323) Issuance of preferred stock of subsidiary................................................... - 243 Capital distributions....................................................................... (298) (203) Other....................................................................................... (56) (59) ----- ----- Cash provided (used) by financing activities................................................ (343) 86 ----- ----- INCREASE (DECREASE) IN CASH AND EQUIVALENTS................................................. (250) 77 CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................................................. 322 216 ----- ----- CASH AND EQUIVALENTS AT END OF PERIOD....................................................... $ 72 $ 293 ===== =====
See accompanying notes. 13 TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF PARTNERSHIP CAPITAL (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------- 1998 1997 ------ ------ (MILLIONS) BALANCE AT BEGINNING OF YEAR................................................................ $6,333 $6,574 Net income.................................................................................. 263 402 Other comprehensive income (loss)........................................................... (16) (14) ----- ------ Comprehensive income........................................................................ 247 388 Distributions............................................................................... (552) (369) Allocation of income to Time Warner General Partners' Senior Capital........................ (45) (62) ----- ----- BALANCE AT JUNE 30,......................................................................... $5,983 $6,531 ====== ======
See accompanying notes. 14 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. The operating results of TWE's various business interests are presented herein as an indication of financial performance (Note 5). 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 $130 million and $105 million in the three months ended June 30, 1998 and 1997, respectively and $258 million and $212 million for the six months ended June 30, 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 MediaOne Group, Inc. ("MediaOne"), formerly U S WEST, Inc. 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 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. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), effective for years beginning after June 15, 1999, with early application encouraged. The new rules establish standards requiring that all derivative financial instruments, such as foreign exchange contracts, be recognized and measured at fair value regardless of the purpose or intent for holding them. TWE plans to adopt FAS 133 effective as of July 1, 1998, and it is not expected that the adoption will have a material effect on TWE's financial statements. 15 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) 2. ACQUISITIONS AND DISPOSITIONS CABLE TRANSACTIONS In addition to continuing to use cable operating cash flow to finance the level of capital spending necessary to upgrade the technological capability of their cable television systems and develop new services, Time Warner, TWE and the TWE-Advance/Newhouse Partnership ("TWE-A/N") have completed a series of transactions in 1998 related to the cable television business and related ancillary businesses that either reduced existing debt and/or TWE's share of future funding requirements for such businesses. These transactions are discussed more fully below. Business Telephony Reorganization In July 1998, in an effort to combine their business telephony operations into a single entity that is intended to be self-financing, Time Warner, TWE and TWE-A/N completed a reorganization of their business telephony operations (the "Business Telephony Reorganization"), whereby (i) the operations conducted by Time Warner, TWE and TWE-A/N were each contributed to a new holding company named Time Warner Telecom LLC ("TW Telecom"), and then (ii) TWE and TWE-A/N's interests in TW Telecom were distributed to their partners, Time Warner, MediaOne and Advance/Newhouse. TW Telecom is a competitive local exchange carrier (CLEC) in selected metropolitan areas across the United States where it offers a wide range of telephony services to business customers. As a result of the Business Telephony Reorganization, Time Warner, MediaOne and Advance/Newhouse own interests in TW Telecom of 61.95%, 18.88% and 19.17%, respectively. TWE and TWE-A/N do not have continuing equity interests in these business telephony operations. TWE and TWE-A/N recorded the distribution of their business telephony operations to their respective partners based on the approximate $235 million historical cost of the net assets. Road Runner Joint Venture In June 1998, Time Warner, TWE, TWE-A/N, MediaOne, Microsoft Corp. ("Microsoft") and Compaq Computer Corp. ("Compaq") formed a joint venture to operate and expand Time Warner Cable's and MediaOne's existing high-speed internet access businesses (the "Road Runner'TM' Joint Venture"). In exchange for contributing their existing high-speed Internet access businesses, Time Warner received a common equity interest in the Road Runner Joint Venture of 11.25%, TWE received a 25% interest, TWE-A/N received a 32.5% interest and MediaOne received a 31.25% interest. In exchange for Microsoft and Compaq each contributing $212.5 million of cash to the Road Runner Joint Venture, Microsoft and Compaq each received a preferred equity interest therein that is convertible into a 10% common equity interest. Accordingly, on a fully diluted basis, the Road Runner Joint Venture is owned 9% by Time Warner, 20% by TWE, 26% by TWE-A/N, 25% by MediaOne, 10% by Microsoft and 10% by Compaq. Each of TWE's and TWE-A/N's interest in the Road Runner Joint Venture is being accounted for under the equity method of accounting. Primestar In April 1998, TWE and Advance/Newhouse, a limited partner in TWE-A/N, transferred the direct broadcast satellite operations conducted by TWE and TWE-A/N (the "DBS Operations") and the 31% partnership interest in 16 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) Primestar Partners, L.P. held by TWE-A/N ("Primestar" and collectively, the "Primestar Assets") to Primestar, Inc. ("New Primestar"), a separate holding company. New Primestar owns the DBS Operations and Primestar partnership interests formerly owned by TCI Satellite Entertainment, Inc. 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. As a result of this transaction, effective as of April 1, 1998, TWE deconsolidated the DBS Operations and the 24% equity interest in New Primestar received in the transaction is being accounted for under the equity method of accounting. This transaction is referred to herein as the "Primestar Roll-up Transaction". In a related transaction, Primestar also entered into an agreement in June 1997 with The News Corporation Limited ("News Corp."), MCI Telecommunications Corporation ("MCI") 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. In May 1998, the U.S. Department of Justice brought a civil action against Primestar, each of its cable owners, including TWE, and News Corp. and MCI, to enjoin on antitrust grounds the Primestar ASkyB Transaction. The parties have had discussions with the U.S. Department of Justice in an attempt to restructure the transaction and reach a resolution on such matters, but there can be no assurance that an agreement can be reached or that necessary governmental and regulatory approvals will be obtained. 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 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 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 and TWE-A/N exchanged substantially all of their respective beneficial interests in Paragon for an equivalent share of Paragon's cable television systems (or interests therein) serving approximately 500,000 subscribers, resulting 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, Time Warner has consolidated 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. 17 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) In connection with the TWE-A/N Transfers, Advance/Newhouse 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. Time Warner did not recognize a gain or loss on the TWE-A/N Transfers. TWE has continued to consolidate TWE-A/N and Time Warner has accounted for its interest in TWE-A/N under the equity method of accounting. 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 and six months ended June 30, 1997, respectively, revenues of $2.742 billion and $5.358 billion, depreciation expense of $225 million and $443 million, operating income before noncash amortization of intangible assets of $455 million and $920 million, operating income of $334 million and $676 million, and net income of $82 million and $400 million. Sale or Exchange of Cable Television Systems In 1998 and 1997, in an effort to enhance their geographic clustering of cable television properties, TWE sold or exchanged various cable television systems. As a result of these transactions, TWE recognized net, pretax gains of approximately $70 million for the three months ended June 30, 1998, and approximately $84 million and $24 million for the six months ended June 30, 1998 and 1997, respectively. Such amounts have been included in operating income in the accompanying consolidated statement of operations. 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. E! ENTERTAINMENT TELEVISION, INC. 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 for the six months ended June 30, 1997. 18 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) 3. INVENTORIES TWE's inventories consist of:
JUNE 30, 1998 DECEMBER 31, 1997 -------------------- -------------------- CURRENT NONCURRENT CURRENT NONCURRENT ------- ---------- ------- ---------- (MILLIONS) Film costs: Released, less amortization..................................... $ 487 $ 686 $ 545 $ 658 Completed and not released...................................... 241 67 170 50 In process and other............................................ 59 701 27 595 Library, less amortization...................................... - 586 - 612 Programming costs, less amortization............................... 366 324 382 339 Merchandise........................................................ 73 - 80 - ------ ------ ------ ------ Total.............................................................. $1,226 $2,364 $1,204 $2,254 ====== ====== ====== ======
4. 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 six months ended June 30, 1998, TWE accrued $138 million of tax-related distributions and $414 million of stock option distributions, based on closing prices of Time Warner common stock of $85.44 at June 30, 1998 and $62.00 at December 31, 1997. During the six months ended June 30, 1997, TWE accrued $192 million of tax-related distributions and $177 million of stock option distributions as a result of an increase at that time in the market price of Time Warner Inc. common stock. In the six months ended June 30, 1998, TWE paid distributions to the Time Warner General Partners in the amount of $298 million, consisting of $138 million of tax-related distributions and $160 million of stock option related distributions. In the six months ended June 30, 1997, TWE paid the Time Warner General Partners distributions in the amount of $203 million, consisting of $192 million of tax-related distributions and $11 million of stock option related distributions. In July 1998, TWE borrowed $579 million under its bank credit agreement and paid a distribution to the Time Warner General Partners relating to their Senior Capital interests. 19 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) 5. 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 and the Primestar Roll-up Transaction effective as of April 1, 1998. Information as to the operations of TWE in different business segments is set forth below.
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------ ------------------ 1998 1997 1998 1997 ------ ------ ------ ------ (MILLIONS) REVENUES Filmed Entertainment-Warner Bros................................... $1,327 $1,254 $2,637 $2,426 Broadcasting-The WB Network........................................ 61 29 106 53 Cable Networks-HBO................................................. 509 487 1,021 970 Cable.............................................................. 1,084 1,066 2,237 2,086 Intersegment elimination........................................... (131) (108) (241) (207) ------ ------ ------ ------ Total.............................................................. $2,850 $2,728 $5,760 $5,328 ====== ====== ====== ======
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------ ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- (MILLIONS) EBITA(1) Filmed Entertainment-Warner Bros................................... $121 $103 $ 240 $209 Broadcasting-The WB Network........................................ (23) (19) (61) (39) Cable Networks-HBO................................................. 113 98 222 189 Cable(2)........................................................... 374 243 681 502 ---- ---- ------ ---- Total.............................................................. $585 $425 $1,082 $861 ==== ==== ====== ====
- ---------------- (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 and six months ended June 30, 1998, respectively, and for the corresponding periods in the prior year was $455 million and $824 million in 1998 and $320 million and $649 million in 1997. (2) Includes net pretax gains relating to the sale or exchange of certain cable television systems of approximately $70 million recognized in the second quarter of 1998, and approximately $84 million and $24 million for the six months ended June 30, 1998 and 1997, respectively. 20 TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED)
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------ ------------------ 1998 1997 1998 1997 ------ ------ ------ ------ (MILLIONS) DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT Filmed Entertainment-Warner Bros................................... $ 38 $ 41 $ 78 $ 81 Broadcasting-The WB Network........................................ - 1 - 1 Cable Networks-HBO................................................. 5 5 10 10 Cable.............................................................. 183 176 381 348 ---- ---- ---- ---- Total.............................................................. $226 $223 $469 $440 ==== ==== ==== ====
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------ ------------------ 1998 1997 1998 1997 ------ ------ ------ ------ (MILLIONS) AMORTIZATION OF INTANGIBLE ASSETS (1) Filmed Entertainment-Warner Bros................................... $ 33 $ 30 $ 66 $ 61 Broadcasting-The WB Network........................................ 1 - 2 - Cable Networks-HBO................................................. - - - - Cable.............................................................. 96 75 190 151 ---- ---- ---- ---- Total.............................................................. $130 $105 $258 $212 ==== ==== ==== ====
(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. 6. 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. 7. ADDITIONAL FINANCIAL INFORMATION Additional financial information with respect to cash flows is as follows:
SIX MONTHS ENDED JUNE 30, ---------------- 1998 1997 ---- ---- (MILLIONS) Interest expense............................................................................ $273 $235 Cash payments made for interest............................................................. 260 243 Cash payments made for income taxes, net.................................................... 39 35 Noncash capital distributions............................................................... 414 177
Noncash investing activities in the first six months of 1998 included the TWE-A/N Transfers, the Primestar Roll-up Transaction and the exchange of certain cable television systems (Note 2). During the six months ended June 30, 1998, TWE received $135 million of proceeds under its asset securitization program. 21 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. 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 has 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 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 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. 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. 22 TWE GENERAL PARTNERS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1997 WCI had revenues of $905 million and net income of $77 million for the three months ended June 30, 1998, compared to revenues of $830 million and net income of $33 million for the three months ended June 30, 1997. EBITA increased to $94 million from $93 million. Operating income increased to $26 million from $21 million. Revenues benefited from an increase in domestic and international recorded music sales principally relating to higher compact disc sales of new releases from popular established artists and movie soundtracks. At the end of June 1998, WCI had a leading domestic market share of 20%, as measured by SoundScan. EBITA and operating income increased principally as a result of the revenue gains, offset in part by the absence of certain one-time gains recognized in 1997. WCI's equity in the pretax income of TWE was $102 million for the three months ended June 30, 1998, compared to $63 million for the three months ended June 30, 1997. TWE's pretax income increased in 1998 as compared to 1997 principally due to an overall increase in operating income generated by its business segments (including $70 million of net gains recognized by TWE in 1998 relating to the sale or exchange of certain cable television systems and the positive effect of the TWE-A/N Transfers), offset in part by an increase in interest expense and minority interest expense related to the TWE-A/N Transfers. As used herein, the TWE-A/N Transfers refer to 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. Interest and other, net was $16 million of income for the three months ended June 30, 1998, compared to $14 million of income for the three months ended June 30, 1997. Interest expense increased to $6 million from $2 million. There was other income, net, of $22 million in 1998, compared to $16 million in 1997, principally because of an increase in interest income relating to a $610 million note receivable from TW Companies (the "TW Companies Note Receivable") received in connection with the 1997 sale of WCI's interest in Hasbro, Inc., offset in part by the absence of a gain on the sale of an investment recognized in 1997. SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997 WCI had revenues of $1.793 billion and net income of $119 million for the six months ended June 30, 1998, compared to revenues of $1.769 billion and net income of $161 million for the six months ended June 30, 1997. EBITA decreased to $186 million from $200 million. Operating income decreased to $54 million from $64 million. Revenues benefited from an increase in domestic recorded music sales, which more than offset a marginal decrease in international recorded music sales. The increase in domestic recorded music revenues principally related to higher compact disc sales of new releases from popular established artists and movie soundtracks. At the end of June 1998, WCI had a leading domestic market share of 20%, as measured by SoundScan. Despite the revenue increase, EBITA and operating income declined principally as a result of the absence of certain one-time gains recognized in 1997. 23 TWE GENERAL PARTNERS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION-(CONTINUED) WCI's equity in the pretax income of TWE was $175 million for the six months ended June 30, 1998, compared to $260 million for the six months ended June 30, 1997. TWE's pretax income decreased in 1998 as compared to 1997 principally due to lower, net pretax gains recognized in connection with the sale or exchange of certain cable television systems in each year and the 1997 sale of TWE's interest in E! Entertainment Television, Inc. Excluding the effect of these transactions, TWE's net income increased in 1998 principally as a result of an overall increase in operating income generated by its business segments (including the positive effect of the TWE-A/N Transfers), offset in part by an increase in interest expense and minority interest expense related to the TWE-A/N Transfers. Interest and other, net was $15 million of income for the six months ended June 30, 1998, compared to $30 million of income for the six months ended June 30, 1997. Interest expense decreased to $10 million from $11 million. There was other income, net, of $25 million in 1998, compared to other income, net, of $41 million in 1997, principally because of lower gains on foreign exchange contracts and the absence of a gain on the sale of an investment recognized in 1997, offset in part by an increase in interest income relating to the TW Companies Note Receivable. 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 JUNE 30, 1998 WCI had $8.4 billion of equity at June 30, 1998, compared to $8.5 billion of equity at December 31, 1997. Cash and equivalents increased to $141 million at June 30, 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 June 30, 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 six months of 1998, WCI's cash provided by operations amounted to $115 million and reflected $186 million of EBITA, $38 million of noncash depreciation expense and $177 million of distributions from TWE, less $5 million of interest payments, $103 million of income taxes ($71 million of which was paid to TW Companies under a tax sharing agreement) and $178 million related to an aggregate reduction in working capital requirements, other balance sheet accounts and noncash items. Cash provided by WCI's operations of $218 million in the first six months of 1997 reflected $200 million of EBITA, $41 million of noncash depreciation expense, $120 million of distributions from TWE and $52 million related to an aggregate reduction in working capital requirements, other 24 TWE GENERAL PARTNERS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) balance sheet accounts and noncash items, less $7 million of interest payments and $188 million of income taxes ($120 million of which was paid to TW Companies under a tax sharing agreement). Cash used by investing activities was $2 million in the first six months of 1998, compared to $23 million in 1997, principally as a result of a decrease in investment spending and capital expenditures. Cash used by financing activities was $74 million in the first six months of 1998, compared to $152 million in the first six months of 1997, principally as a result of lower advances to TW Companies, offset in part by increased dividend payments of $92 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 six months of 1998, the General Partners received an aggregate $298 million of distributions from TWE, consisting of $138 million of tax-related distributions and $160 million of stock option related distributions. During the first six months of 1997, the General Partners received an aggregate $203 million of distributions, consisting of $192 million of tax-related distributions and $11 million of stock option related distributions. Of such aggregate distributions in the first six months of 1998 and 1997, WCI received $177 million and $120 million, respectively, and ATC received $121 million and $83 million, respectively. In July 1998, the Time Warner General Partners received a $579 million distribution relating to their Senior Capital interests. Of such amount, WCI and ATC received $343 million and $236 million, respectively. YEAR 2000 TECHNOLOGY PREPAREDNESS WCI, together with TWE and like most large companies, depends on many different computer systems and other chip-based devices for the continuing conduct of its business. Older computer programs, computer hardware and chip-based devices may fail to recognize dates beginning on January 1, 2000 as being valid dates, and as a result may fail to operate or may operate improperly when such dates are introduced. WCI's exposure to potential Year 2000 problems exists in two general areas: technological operations in the sole control of WCI and technological operations dependent in some way on one or more third parties. The majority of WCI's exposure to potential Year 2000 problems is in the latter area. Failure to achieve high levels of Year 2000 compliance in either area could have a material adverse impact on WCI. In the former area, technological operations in the sole control of WCI, WCI is engaged in a thorough process involving the identification and remediation of affected technological functions. WCI has generally completed the process of identifying significant potential Year 2000 difficulties and has an action plan in place to address them. At present, it is anticipated that the action plan will be successfully completed in all material respects in advance of January 1, 2000, and that its cost to WCI will not be material. 25 TWE GENERAL PARTNERS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION--(CONTINUED) In the latter area, technological operations dependent in some way on one or more third parties, the situation is much less in WCI's ability to predict or control, although WCI has in place an extensive system to test for and attempt to resolve potential Year 2000 difficulties. WCI's business is heavily dependent on third parties, many of whom are themselves heavily dependent on technology. In some cases, WCI's third party dependence is on vendors of technology who are themselves working towards solutions to Year 2000 problems. In other cases, WCI's third party dependence is on suppliers of products or services that are themselves computer-intensive. Moreover, WCI is dependent on the continued functioning of basic, heavily computerized services such as banking and telephony. WCI is making considerable efforts to ensure that the third parties on which it is heavily reliant are Year 2000 compliant, but cannot predict the likelihood of such compliance occurring nor the direct or indirect costs to WCI of non-compliance by those third parties or of securing such services from compliant third parties. However, WCI believes that it is in no worse position, and likely a better one, than most U.S.-based companies of its size with respect to the potential for Year 2000 problems and their impact. In addition to the foregoing areas, WCI is also exposed to potential Year 2000 problems encountered by TWE in technological operations under its sole control and in TWE's technological operations dependent in some way on one or more third parties. ATC, while not having any independent operations, is similarly exposed to potential Year 2000 problems encountered by TWE. Although WCI and ATC anticipate that TWE will successfully complete its efforts to be Year 2000 compliant in all material respects in advance of January 1, 2000, failure by TWE to achieve high levels of Year 2000 compliance could have a material adverse impact on WCI and ATC. For a discussion of TWE's Year 2000 technology preparedness, see TWE's Management's Discussion and Analysis of Results of Operations and Financial Condition included elsewhere herein. 26 TWE GENERAL PARTNERS CONSOLIDATED BALANCE SHEETS (UNAUDITED)
WCI ATC ----------------------- ---------------------- JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, 1998 1997 1998 1997 ---- ---- ---- ---- (MILLIONS) ASSETS CURRENT ASSETS Cash and equivalents............................................ $ 141 $ 102 $ - $ - Receivables, less allowances of $269 and $264 million........... 758 866 - - Inventories..................................................... 151 140 - - Prepaid expenses................................................ 692 651 - - ------- ------- ------ ------ Total current assets............................................ 1,742 1,759 - - Investments in and amounts due to and from TWE.................. 2,439 2,423 1,851 1,861 Investments in TW Companies..................................... 103 103 62 62 Other investments............................................... 1,241 1,259 355 352 Music catalogues, contracts and copyrights...................... 878 928 - - Goodwill........................................................ 3,575 3,554 - - Other assets, primarily property, plant and equipment........... 414 464 - - ------- ------- ------ ------ Total assets.................................................... $10,392 $10,490 $2,268 $2,275 ======= ======= ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts and royalties payable.................................. $ 939 $ 978 $ - $ - Other current liabilities....................................... 344 464 1 1 ------- ------- ------ ------ Total current liabilities....................................... 1,283 1,442 1 1 Long-term liabilities, including $397, $251, $290 and $187 million due to TW Companies............................. 712 527 290 187 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)......................... 302 450 (105) (4) ------- ------- ------ ------ 10,768 10,916 2,604 2,705 Due from TW Companies, net...................................... (1,785) (1,809) (291) (282) Reciprocal interest in TW Companies stock....................... (586) (586) (336) (336) -------- ------- ------ ------ Total shareholders' equity...................................... 8,397 8,521 1,977 2,087 ------- ------- ------ ------ Total liabilities and shareholders' equity...................... $10,392 $10,490 $2,268 $2,275 ======= ======= ====== ======
See accompanying notes. 27 TWE GENERAL PARTNERS CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, (UNAUDITED)
WCI ATC ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- (MILLIONS) Revenues (a).................................................... $905 $830 $ - $ - ---- ---- ---- ---- Cost of revenues (a)(b)......................................... 555 538 - - Selling, general and administrative (a)(b)...................... 324 271 - - ---- ---- ---- ---- Operating expenses.............................................. 879 809 - - ---- ---- ---- ---- Business segment operating income............................... 26 21 - - Equity in pretax income of TWE (a).............................. 102 63 70 44 Interest and other, net (a)..................................... 16 14 9 8 ---- ---- ---- ---- Income before income taxes...................................... 144 98 79 52 Income taxes (a)................................................ (67) (65) (33) (26) ---- ---- ---- ---- Net income...................................................... $ 77 $ 33 $ 46 $ 26 ==== ==== ==== ====
- ------------------ (a) Includes the following income (expenses) resulting from transactions with Time Warner, TW Companies, TWE or equity investees of the General Partners: Revenues........................................................ $ (2) $ 30 $ - $ - Cost of revenues................................................ (2) (10) - - Selling, general and administrative............................. (5) 5 - - Equity in pretax income of TWE.................................. (3) - - - Interest and other, net......................................... 30 9 - - Income taxes.................................................... (36) (29) (26) (16) (b) Includes depreciation and amortization expense of:....... $ 87 $ 91 $ - $ - ==== ==== ==== ====
See accompanying notes. 28 TWE GENERAL PARTNERS CONSOLIDATED STATEMENTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, (UNAUDITED)
WCI ATC --------------------- ---------------- 1998 1997 1998 1997 ---- ---- ---- ---- (MILLIONS) Revenues (a).................................................... $1,793 $1,769 $ - $ - ------ ------ ---- ---- Cost of revenues (a)(b)......................................... 1,131 1,151 - - Selling, general and administrative (a)(b)...................... 608 554 - - ------ ------ ---- ---- Operating expenses.............................................. 1,739 1,705 - - ------ ------ ---- ---- Business segment operating income............................... 54 64 - - Equity in pretax income of TWE (a).............................. 175 260 120 179 Interest and other, net (a)..................................... 15 30 14 11 ------ ------ ---- ---- Income before income taxes...................................... 244 354 134 190 Income taxes (a)................................................ (125) (193) (60) (88) ------ ------ ---- ---- Net income...................................................... $ 119 $ 161 $ 74 $102 ====== ====== ==== ====
- ------------------ (a) Includes the following income (expenses) resulting from transactions with Time Warner, TW Companies, TWE or equity investees of the General Partners: Revenues........................................................ $ 46 $ 65 $ - $ - Cost of revenues................................................ (11) (20) - - Selling, general and administrative............................. (2) 25 - - Equity in pretax income of TWE.................................. (12) (5) - - Interest and other, net......................................... 38 34 - - Income taxes.................................................... (71) (120) (47) (73) (b) Includes depreciation and amortization expense of:....... $ 170 $ 177 $ - $ - ====== ====== ==== ====
See accompanying notes. 29 TWE GENERAL PARTNERS CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, (UNAUDITED)
WCI ATC ----------------- ---------------- 1998 1997 1998 1997 ---- ---- ---- ---- (MILLIONS) OPERATIONS Net income......................................................... $ 119 $ 161 $ 74 $102 Adjustments for noncash and nonoperating items: Depreciation and amortization...................................... 170 177 - - Deficiency (excess) of equity in pretax income of TWE over distributions............................................ 2 (140) 1 (96) Equity in (income) loss of other investee companies, net of distributions................................................. 48 (5) - - Changes in operating assets and liabilities........................ (224) 25 (1) 5 ----- ----- ---- ---- Cash provided by operations........................................ 115 218 74 11 ----- ----- ---- ---- INVESTING ACTIVITIES Investments and acquisitions....................................... (22) (30) - - Capital expenditures............................................... (44) (62) - - Investment proceeds................................................ 64 69 - - ----- ----- ---- ---- Cash used by investing activities.................................. (2) (23) - - ----- ----- ---- ---- FINANCING ACTIVITIES Dividends.......................................................... (98) (6) (65) (5) Decrease (increase) in amounts due from TW Companies, net.......... 24 (146) (9) (6) ----- ----- ---- ---- Cash used by financing activities.................................. (74) (152) (74) (11) ----- ----- ---- ---- INCREASE IN CASH AND EQUIVALENTS................................... 39 43 - - CASH AND EQUIVALENTS AT BEGINNING OF PERIOD........................ 102 91 - - ----- ----- ---- ---- CASH AND EQUIVALENTS AT END OF PERIOD.............................. $ 141 $ 134 $ - $ - ===== ===== ==== =====
See accompanying notes. 30 TWE GENERAL PARTNERS CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, (UNAUDITED)
WCI ATC ------------------- ------------------- 1998 1997 1998 1997 ---- ---- ---- ---- (MILLIONS) BALANCE AT BEGINNING OF YEAR.................................... $8,521 $9,541 $2,087 $2,331 Net income...................................................... 119 161 74 102 Other comprehensive income (loss)............................... (19) (33) (7) (6) ------ ------ ------ ------ Comprehensive income (loss)..................................... 100 128 67 96 Increase in stock option distribution liability to TW Companies (a)............................................. (246) (105) (168) (72) Issuance of preferred stock..................................... - 38 - - Dividends....................................................... (3) - - - Transfers to TW Companies, net.................................. 24 (146) (9) (6) Other........................................................... 1 4 - - ------ ------ ------ ------ BALANCE AT JUNE 30,............................................. $8,397 $9,460 $1,977 $2,349 ====== ====== ====== ====== - ------------------ (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 $246 million and $105 million for WCI and $168 million and $72 million for ATC were accrued in the first six months of 1998 and 1997, respectively, because of an increase in the market price of Time Warner common stock (Note 2). See accompanying notes. 31 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 3). 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." 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 has 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 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. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), effective for years beginning after June 15, 1999, with 32 TWE GENERAL PARTNERS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) (UNAUDITED) early application encouraged. The new rules establish standards requiring that all derivative financial instruments, such as interest rate swap contracts and foreign exchange contracts, be recognized and measured at fair value regardless of the purpose or intent for holding them. WCI plans to adopt FAS 133 effective as of July 1, 1998, and it is not expected that the adoption will have a material effect on WCI's financial statements. 2. TWE The General Partners' investment in and amounts due to and from TWE at June 30, 1998 and December 31, 1997 consists of the following:
JUNE 30, 1998 WCI ATC - ------------- ------ ------ (MILLIONS) Investment in TWE........................................................................... $2,254 $1,578 Stock option related distributions due from TWE............................................. 398 273 Other net liabilities due to TWE, principally related to home video distribution............ (213) - ------ ------ Total....................................................................................... $2,439 $1,851 ====== ======
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 MediaOne Group, Inc. ("MediaOne"), formerly U S WEST, Inc. 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. 33 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 effective as of January 1, 1998 and the Primestar Roll-up Transaction effective as of April 1, 1998 (each as defined hereinafter).
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------ ------------------ 1998 1997 1998 1997 ------ ------ ------ ------ (MILLIONS) OPERATING STATEMENT INFORMATION Revenues........................................................... $2,850 $2,728 $5,760 $5,328 Depreciation and amortization...................................... (356) (328) (727) (652) Business segment operating income (1).............................. 455 320 824 649 Interest and other, net (2)........................................ (183) (139) (347) (10) Minority interest.................................................. (82) (56) (146) (164) Income before income taxes......................................... 172 107 295 439 Net income......................................................... 155 82 263 402
- ------------------ (1) Includes net pretax gains relating to the sale or exchange of certain cable television systems of approximately $70 million recognized in the second quarter of 1998, and approximately $84 million and $24 million for the six months ended June 30, 1998 and 1997, respectively. (2) 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.
SIX MONTHS ENDED JUNE 30, ------------------- 1998 1997 ------- ------- (MILLIONS) CASH FLOW INFORMATION Cash provided by operations................................................................. $ 586 $ 416 Capital expenditures........................................................................ (734) (734) Investments and acquisitions................................................................ (265) (62) Investment proceeds......................................................................... 506 371 Borrowings.................................................................................. 503 428 Debt repayments............................................................................. (492) (323) Issuance of preferred stock of subsidiary................................................... - 243 Capital distributions....................................................................... (298) (203) Other financing activities, net............................................................. (56) (59) Increase (decrease) in cash and equivalents................................................. (250) 77
JUNE 30, DECEMBER 31, 1998 1997 ---- ---- (MILLIONS) BALANCE SHEET INFORMATION Cash and equivalents........................................................................ $ 72 $ 322 Total current assets........................................................................ 3,680 3,622 Total assets................................................................................ 22,153 20,731 Total current liabilities................................................................... 3,864 3,974 Long-term debt ............................................................................. 6,771 5,990 Minority interests.......................................................................... 1,477 1,210 Preferred stock of subsidiary............................................................... 225 233 General Partners' Senior Capital............................................................ 1,163 1,118 Partners' capital........................................................................... 5,983 6,333
34 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 June 30, 1998 and December 31, 1997, the General Partners had recorded $671 million and $417 million, respectively, of stock option related distributions due from TWE, based on closing prices of Time Warner common stock of $85.44 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 six months ended June 30, 1998, the General Partners received distributions from TWE in the amount of $298 million, consisting of $138 million of tax-related distributions and $160 million of stock option related distributions. During the six months ended June 30, 1997, the General Partners received distributions from TWE in the amount of $203 million, consisting of $192 million of tax-related distributions and $11 million of stock option related distributions. Of such aggregate distributions in 1998 and 1997, WCI received $177 million and $120 million, respectively and ATC received $121 million and $83 million, respectively. In July 1998, TWE borrowed $579 million under its bank credit agreement and paid a distribution to the General Partners relating to their Senior Capital interests. Of such amount, WCI and ATC received $343 million and $236 million, respectively. ACQUISITIONS AND DISPOSITIONS Time Warner, TWE and the TWE-Advance/Newhouse Partnership ("TWE-A/N") have completed a series of transactions in 1998 relating to the cable television business and related ancillary businesses, as well as the theme park business. These transactions are summarized below. For a more comprehensive description of these transactions, see Note 2 to the accompanying TWE consolidated financial statements. Business Telephony Reorganization In July 1998, Time Warner, TWE and TWE-A/N completed a reorganization of their business telephony operations (the "Business Telephony Reorganization") by combining such operations into a single entity that is intended to be self-financing. This entity, named Time Warner Telecom LLC ("TW Telecom"), is a competitive local exchange carrier (CLEC) in selected metropolitan areas across the United States where it offers a wide range of telephony services to business customers. Time Warner, MediaOne and the Advance/Newhouse Partnership ("Advance/ Newhouse"), a partner in TWE-A/N, own interests in TW Telecom of 61.95%, 18.88% and 19.17%, respectively. As a result of the Business Telephony Reorganization, TWE and TWE-A/N do not have continuing equity interests in these business telephony operations. Road Runner Joint Venture In June 1998, Time Warner, TWE, TWE-A/N, MediaOne, Microsoft Corp. ("Microsoft") and Compaq Computer Corp. ("Compaq") formed a joint venture to operate and expand Time Warner Cable's and MediaOne's existing high-speed Internet access businesses (the "Road Runner'TM' Joint Venture"). In exchange for contributing their existing high-speed Internet access businesses, Time Warner received a common equity interest in the Road Runner Joint Venture of 11.25%, TWE received a 25% interest, TWE-A/N received a 32.5% interest and MediaOne received a 31.25% interest. In exchange for Microsoft and Compaq each contributing $212.5 million of cash to the Road Runner 35 TWE GENERAL PARTNERS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) Joint Venture, Microsoft and Compaq each received a preferred equity interest therein that is convertible into a 10% common equity interest. Accordingly, on a fully diluted basis, the Road Runner Joint Venture is owned 9% by Time Warner, 20% by TWE, 26% by TWE-A/N, 25% by MediaOne, 10% by Microsoft and 10% by Compaq. Each of TWE's and TWE-A/N's interest in the Road Runner Joint Venture is being accounted for under the equity method of accounting. Primestar In April 1998, TWE and Advance/Newhouse, a limited partner in TWE-A/N, 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 separate holding company. New Primestar owns the DBS Operations and Primestar partnership interests formerly owned by TCI Satellite Entertainment, Inc. 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. TWE deconsolidated the DBS Operations effective as of April 1, 1998 and the equity interest in New Primestar received in the transaction is being accounted for under the equity method of accounting. This transaction is referred to herein as the "Primestar Roll-up Transaction." 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 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 debt assumed by TWE-A/N has not been guaranteed by the General Partners, but has been guaranteed by TWI Cable Inc., a wholly owned subsidiary of TW Companies, and certain of its subsidiaries. Six Flags In April 1998, TWE sold its remaining 49% interest in Six Flags Entertainment Corporation ("Six Flags") to Premier Parks Inc., 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. 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. GENERAL PARTNER GUARANTEES Each General Partner has guaranteed a pro rata portion of approximately $5.8 billion of TWE's debt and accrued interest at June 30, 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. 36 TWE GENERAL PARTNERS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) The portion of TWE debt and accrued interest at June 30, 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 $3,436 ATC....................................................................................... 40.73 2,361 ------ ------ Total..................................................................................... 100.00 $5,797 ====== ======
4. 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. 5. ADDITIONAL FINANCIAL INFORMATION Additional financial information with respect to cash flows is as follows:
SIX MONTHS ENDED JUNE 30, -------------------------------------- 1998 1997 ---------------- --------------- WCI ATC WCI ATC ----- ----- ----- ---- (MILLIONS) Cash payments made for interest.......................................... $ 5 $ - $ 7 $ - Cash payments made for income taxes, net................................. 103 47 188 73 Tax-related distributions received from TWE.............................. 82 56 114 78 Noncash capital distributions, net....................................... (246) (168) (105) (72)
37 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 Limited 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 Footnote 2 "Acquisitions and Dispositions - Cable Transactions," to TWE's consolidated financial statements included herein. On September 13, 1995, Francis Ford Coppola, Fred Fuchs and FFC, Inc. ("Coppola") filed a lawsuit in the Superior Court of California, County of Los Angeles, against Warner Bros. entitled Coppola v. Warner Bros., alleging that Warner Bros. unlawfully interfered with Coppola's efforts to develop with another film studio a previously unproduced film project based on "Pinocchio." Among other things, Coppola asked that the Court declare that any prior agreement between Coppola and Warner Bros. to produce the film was void or that it be rescinded. In 1997, the Court granted the plaintiffs' motion to declare that any alleged agreement between Warner Bros. and Coppola was void under the Copyright Act's statute of frauds provision. On June 1, 1998 the case went to trial and on July 2, 1998, the jury found in Coppola's favor with respect to the interference claims and awarded $20 million compensatory damages; on July 9, 1998, the jury awarded $60 million in punitive damages for these claims. Warner Bros. intends to move for judgment notwithstanding the verdict and for a new trial, which motions will be decided no later than 60 days after judgment is entered. If the motions are denied, Warner Bros. intends to appeal the jury verdict. Reference is made to the litigation entitled Samuel D. Moore, et al. v. American Federation of Television and Radio Artists, et al., described on page I-27 of TWE's Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K"). By Order dated June 22, 1998, the Court granted plaintiffs' motion to certify its Order denying class certification for appeal to the 11th Circuit Court of Appeals, and granted plaintiffs' motion for entry of judgment pursuant to Rule 54(b) on the ERISA claims against the Record Company Defendants. Based on the Court's Order, plaintiffs have filed a motion with the 11th Circuit Court of Appeals seeking interlocutory review of the Court's Order denying class certification, which motion was opposed by the Record Company Defendants. Reference is made to the purported class action entitled Ottinger & Silvey, et al., v. EMI Music Distribution, Inc., Sony Music Entertainment, Inc., Warner Elektra Atlantic Corporation, UNI Distribution Corporation, Bertelsmann Music Group, Inc., and Polygram Group Distribution, Inc., described on pages I-29 and I-30 of the 1997 Form 10-K. On May 11, 1998, Warner Elektra Atlantic Corporation and other defendants filed a motion to dismiss the complaint for failure to state a cause of action. 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 June 30, 1998. 38 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: August 13, 1998 EXHIBIT INDEX PURSUANT TO ITEM 601 OF REGULATION S-K
Exhibit No. Description of Exhibit - ----------- --------------------------- 27 Financial Data Schedule.
STATEMENT OF DIFFERENCES ------------------------ The trademark symbol shall be expressed as............................. 'TM' 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 six months ended June 30, 1998 and is qualified in its entirety by reference to such financial statements. 0000893657 TIME WARNER ENTERTAINMENT COMPANY L.P. 1,000,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 72 0 2,609 410 3,590 3,680 10,573 4,213 22,153 3,864 6,771 0 1,163 0 5,983 22,153 5,760 5,760 3,752 3,752 0 0 273 295 32 263 0 0 0 263 0 0
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