-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Y1iuk+wPE96Qy+1HhyH5oGz39S3+Q1eWMywbxzY/Z3bb1iWbPRIj80GKl9S4CXdj EbkDP8cVX0OH1fN0u1AX3g== 0000736157-95-000020.txt : 19950516 0000736157-95-000020.hdr.sgml : 19950516 ACCESSION NUMBER: 0000736157-95-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950515 SROS: AMEX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TIME WARNER INC CENTRAL INDEX KEY: 0000736157 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 131388520 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08637 FILM NUMBER: 95538905 BUSINESS ADDRESS: STREET 1: TIME & LIFE BLDG ROCKFELLER CENTER STREET 2: 75 ROCKEFELLER PLAZA CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2124848000 FORMER COMPANY: FORMER CONFORMED NAME: TIME INC /DE/ DATE OF NAME CHANGE: 19890801 10-Q 1 1QTR 10Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 for the quarterly period ended March 31, 1995 , 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 1-8637 TIME WARNER INC. (Exact name of registrant as specified in its charter) Delaware 13-1388520 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 75 Rockefeller Plaza New York, New York 10019 (212) 484-8000 (Address, including zip code, and telephone number, including area code, of each registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock - $1 par value 379,863,970 Description of Class Shares Outstanding as of April 30, 1995 TIME WARNER INC. AND TIME WARNER ENTERTAINMENT COMPANY, L.P. INDEX TO FORM 10-Q Page Time Warner TWE PART I. FINANCIAL INFORMATION Consolidated balance sheets at March 31, 1995 and December 31, 1994 1 16 Consolidated statements of operations for the three months ended March 31, 1995 and 1994 2 17 Consolidated statements of cash flows for the three months ended March 31, 1995 and 1994 3 18 Notes to consolidated financial statements 4 19 Management's discussion and analysis of results of operations and financial condition 10 24 Summarized financial information of the Time Warner Service Partnerships and Paragon Communications set forth at pages 13 and 14, respectively, in the Quarterly Report on Form 10-Q for the period ended March 31, 1995 of Time Warner Entertainment Company, L.P. (Reg. No. 33-53742) is incorporated herein by reference and filed as an exhibit to this report. PART II. OTHER INFORMATION 28 PART I. FINANCIAL INFORMATION TIME WARNER INC. CONSOLIDATED BALANCE SHEET (Unaudited) March 31, December 31, 1995 1994 (millions, except per share amounts) ASSETS Current assets Cash and equivalents $ 309 $ 282 Receivables, less allowances of $766 and $768 1,155 1,439 Inventories 409 370 Prepaid expenses 767 726 Total current assets 2,640 2,817 Investments in and amounts due to and from Entertainment Group 5,443 5,350 Investments, other 1,543 1,555 Music catalogues, contracts and copyrights 1,217 1,207 Goodwill 4,589 4,630 Other assets, primarily property, plant and equipment 1,176 1,157 Total assets $16,608 $16,716 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts and royalties payable $ 1,334 $ 1,379 Debt due within one year 344 355 Other current liabilities 1,035 1,238 Total current liabilities 2,713 2,972 Long-term debt 9,001 8,839 Deferred income taxes 2,657 2,700 Unearned portion of paid subscriptions 677 631 Other liabilities 447 426 Shareholders' equity Preferred stock, $1 par value 1 1 Common stock, $1 par value, 379.8 million and 379.3 million shares outstanding (excluding 45.7 million treasury shares) 380 379 Paid-in capital 2,600 2,588 Unrealized gains on certain marketable securities 148 130 Accumulated deficit (2,016) (1,950) Total shareholders' equity 1,113 1,148 Total liabilities and shareholders' equity $16,608 $16,716 See accompanying notes. TIME WARNER INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Ended March 31, 1995 1994 (millions, except per share amounts) Revenues (a) $ 1,817 $1,558 Cost of revenues (a)(b) 1,103 892 Selling, general and administrative (a)(b) 576 554 Operating expenses 1,679 1,446 Business segment operating income 138 112 Equity in pretax income of Entertainment Group (a) 22 45 Interest and other, net (a) (155) (158) Corporate expenses (a) (20) (18) Loss before income taxes (15) (19) Income taxes (32) (32) Net loss (47) (51) Preferred dividend requirements (3) (3) Net loss applicable to common shares $ (50) $ (54) Net loss per common share $ (.13) $ (.14) Average common shares 379.5 378.6 __________________ (a) Includes the following income (expenses) resulting from transactions with the Entertainment Group and other related companies for the three months ended March 31, 1995 and 1994, respectively: revenues-$45 million and $39 million; cost of revenues-$(24) million and $(21) million; selling, general and administrative-$13 million and $12 million; equity in pretax income of Entertainment Group-$(34) million and $(38) million; interest and other, net - -$6 million and $11 million; and corporate expenses-$15 million and $15 million. (b) Includes depreciation and amortization expense of: $ 112 $ 105 See accompanying notes. TIME WARNER INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Three Months Ended March 31, 1995 1994 (millions) OPERATIONS Net loss $ (47) $ (51) Adjustments for noncash and nonoperating items: Depreciation and amortization 112 105 Noncash interest expense 57 52 Equity in pretax income of Entertainment Group, net of distributions (21) (44) Changes in operating assets and liabilities (175) 185 Cash provided (used) by operations (74) 247 INVESTING ACTIVITIES Investments and acquisitions (143) (20) Capital expenditures (38) (47) Investment proceeds 212 93 Cash provided by investing activities 31 26 FINANCING ACTIVITIES Increase (decrease) in debt 94 (106) Dividends paid (36) (33) Other 12 14 Cash provided (used) by financing activities 70 (125) INCREASE IN CASH AND EQUIVALENTS $ 27 $ 148 See accompanying notes. TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The consolidated financial statements include 100% of the assets, liabilities, revenues, expenses, income, loss and cash flows of Time Warner Inc. ("Time Warner" or the "Company") and all companies in which Time Warner has a controlling voting interest ("subsidiaries"), as if Time Warner and its subsidiaries were a single company. Subsidiaries of Time Warner are engaged principally in the Publishing and Music businesses. Investments in Entertainment Group companies, principally Time Warner Entertainment Company, L.P. ("TWE"), which are engaged principally in the Filmed Entertainment, Broadcasting-The WB Network, Programming-HBO and Cable businesses, and investments in certain other companies in which Time Warner has significant influence but less than a controlling voting interest, are accounted for using the equity method. 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. Certain reclassifications have been made to the 1994 financial statements to conform to the 1995 presentation. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of Time Warner for the year ended December 31, 1994. 2. ENTERTAINMENT GROUP Time Warner's investment in and amounts due to and from the Entertainment Group at March 31, 1995 and December 31, 1994 consists of the following: March 31, December 31, 1995 1994 (millions) Investment in TWE $ 5,231 $ 5,284 Income tax and stock option related distributions due from TWE 480 423 Credit agreement debt due to TWE (400) (400) Other liabilities due to TWE, principally related to home video distribution (147) (266) Investment in and amounts due to and from TWE 5,164 5,041 Investment in other Entertainment Group companies 279 309 Total $ 5,443 $ 5,350 TWE is a Delaware limited partnership that was capitalized on June 30, 1992 to own and operate substantially all of the Filmed Entertainment, Programming-HBO and Cable businesses previously owned by subsidiaries of Time Warner. The Time Warner subsidiaries are the general partners ("Time Warner General Partners") and in the aggregate hold 63.27% pro rata priority capital and residual equity partnership interests in TWE, and certain priority capital interests senior and junior to the pro rata priority capital interest. The limited partners are not affiliated with Time Warner and in the aggregate hold 36.73% pro rata priority capital and residual equity partnership interests. The TWE partnership agreement provides for special allocations of income, loss and distributions of partnership capital, including priority distributions in the event of liquidation. TWE reported net income of $4 million and $48 million in the three months ended March 31, 1995 and 1994, respectively, no portion of which was allocated to the limited partners. Each Time Warner General Partner has guaranteed a pro rata portion of $7 billion of TWE's debt and accrued interest at March 31, 1995, based on the relative fair value of the net assets each Time Warner General Partner contributed to TWE. Such indebtedness is recourse to each Time Warner General Partner only to the extent of its guarantee. Set forth below is summarized financial information of the Entertainment Group: TIME WARNER ENTERTAINMENT GROUP Three Months Ended March 31, 1995 1994 (millions) Operating Statement Information Revenues $2,073 $1,927 Depreciation and amortization 230 216 Business segment operating income 201 206 Interest and other, net 164 146 Income before income taxes 22 45 Net income 11 41 Three Months Ended March 31, 1995 1994 (millions) Cash Flow Information Cash provided by operations $ 317 $ 352 Capital expenditures (300) (241) Investments and acquisitions (28) (48) Increase in debt 52 17 Collections on note receivable from U S WEST 150 - Capital distributions (1) (1) Increase in cash and equivalents 196 111 March 31, December 31, 1995 1994 (millions) Balance Sheet Information Cash and equivalents $ 1,267 $ 1,071 Total current assets 3,720 3,571 Total assets 19,043 18,992 Total current liabilities 2,945 2,953 Long-term debt 7,162 7,160 Time Warner General Partners' senior capital 1,696 1,663 TWE partners' capital 6,279 6,233 The assets and cash flows of TWE are restricted by the TWE partnership and credit agreements and are unavailable for use by the partners and their affiliates except through the payment of certain fees, reimbursements, cash distributions and loans, which are subject to limitations. At March 31, 1995 and December 31, 1994, the Time Warner General Partners had recorded $342 million and $334 million, respectively, of tax related distributions due from TWE in 1995, and $138 million and $89 million, respectively, of stock option related distributions due from TWE, based on closing prices of Time Warner common stock of $37.625 and $35.125, respectively. Time Warner is paid when the options are exercised. In April 1995, TWE agreed to sell 51% of its interest in Six Flags Entertainment Corporation ("Six Flags") to an investment group led by Boston Ventures for $204 million and the receipt of approximately $670 million in additional proceeds from Six Flags, principally representing payment of certain intercompany indebtedness and licensing fees. TWE will recognize a gain upon the closing of the transaction. TWE will deconsolidate the assets, liabilities and operating results of Six Flags, including approximately $126 million of third-party indebtedness, and account for its remaining 49% interest under the equity method of accounting. As a result of this transaction, TWE will reduce debt by approximately $850 million, after related taxes and fees. The transaction is expected to close during the second quarter of 1995 and is subject to customary closing conditions. 3. CABLE TRANSACTIONS On May 2, 1995, Time Warner acquired Summit Communications Group, Inc. ("Summit"), which owns cable television systems serving approximately 162,000 subscribers, in exchange for the issuance of approximately 1.5 million shares of Time Warner common stock and approximately 3.3 million shares of a new convertible preferred stock ("Series C preferred stock") and the assumption of $140 million of indebtedness. The Series C preferred stock is convertible into approximately 6.8 million shares of Time Warner common stock at an effective price of $48 of liquidation value per common share. On April 1, 1995, TWE formed a cable television joint venture with subsidiaries of Advance Publications, Inc. and Newhouse Broadcasting Corporation ("Advance/Newhouse") to which Advance/Newhouse and TWE contributed cable television systems (or interests therein) serving approximately 4.5 million subscribers, as well as certain foreign cable investments and programming investments. TWE owns a two-thirds equity interest in the TWE-Advance/Newhouse Partnership and is the managing partner. Advance/Newhouse owns a one-third equity interest in the partnership. In accordance with the partnership agreement, Advance/Newhouse can require TWE to purchase its equity interest for fair market value at specified intervals following the death of both of its principal shareholders. Beginning in the third year, either partner can initiate a dissolution in which TWE would receive two-thirds and Advance/Newhouse would receive one-third of the partnership's net assets. The assets contributed by TWE and Advance/Newhouse to the partnership were recorded at their predecessor's historical cost. No gain was recognized by TWE upon the capitalization of the partnership. Time Warner's previously-announced acquisitions of KBLCOM Incorporated ("KBLCOM") and Cablevision Industries Corporation ("CVI") and related companies are expected to close during the second half of 1995. 4. CAPITAL STOCK Changes in shareholders' equity are as follows: Three Months Ended March 31, 1995 1994 (millions) Balance at beginning of year $ 1,148 $ 1,370 Net loss (47) (51) Common dividends declared (34) (30) Preferred dividends declared (3) (3) Other 49 41 Balance at March 31 $ 1,113 $1,327 5. SEGMENT INFORMATION Information as to the operations of Time Warner and the Entertainment Group in different business segments is set forth below: Three Months Ended March 31, 1995 1994 (millions) Revenues TIME WARNER: Publishing $ 831 $ 751 Music 991 812 Intersegment elimination (5) (5) Total $1,817 $1,558 ENTERTAINMENT GROUP: Filmed Entertainment $1,207 $1,083 Broadcasting-The WB Network 3 - Programming - HBO 390 362 Cable 578 551 Intersegment elimination (105) (69) Total $2,073 $1,927 Three Months Ended March 31, 1995 1994 (millions) Operating income TIME WARNER: Publishing $ 55 $ 50 Music 83 62 Total $ 138 $ 112 ENTERTAINMENT GROUP: Filmed Entertainment $ 65 $ 66 Broadcasting-The WB Network (21) - Programming - HBO 67 56 Cable 90 84 Total $ 201 $ 206 Three Months Ended March 31, 1995 1994 (millions) Depreciation of Property, Plant and Equipment TIME WARNER: Publishing $ 13 $ 12 Music 23 19 Total $ 36 $ 31 ENTERTAINMENT GROUP: Filmed Entertainment $ 23 $ 17 Broadcasting-The WB Network - - Programming-HBO 4 4 Cable 90 84 Total $ 117 $ 105 Three Months Ended March 31, 1995 1994 Amortization of Intangible Assets (1) (millions) TIME WARNER: Publishing $ 9 $ 8 Music 67 66 Total $ 76 $ 74 ENTERTAINMENT GROUP: Filmed Entertainment $ 37 $ 34 Broadcasting-The WB Network - - Programming-HBO - 1 Cable 76 76 Total $ 113 $111 (1) Amortization includes all amortization relating to the acquisitions of Warner Communications Inc. ("WCI") in 1989 and the American Television and Communications Corporation ("ATC") minority interest in 1992 and to other business combinations accounted for by the purchase method. 6. CONTINGENCIES Pending legal proceedings are substantially limited to litigation incidental to the businesses of Time Warner and alleged damages in connection with class action lawsuits. In the opinion of counsel and management, the ultimate resolution of these matters will not have a material effect on the financial statements of Time Warner. 7. ADDITIONAL FINANCIAL INFORMATION Additional financial information is as follows: Three Months Ended March 31, 1995 1994 (millions) Interest expense $210 $182 Cash payments made for interest 204 183 Cash payments made for income taxes 80 54 Income tax refunds received 7 34 During the three months ended March 31, 1995 and 1994, Time Warner realized $33 million and $180 million, respectively, from the securitization of receivables. TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Time Warner had revenues of $1.817 billion and a net loss of $47 million ($.13 per common share) for the three months ended March 31, 1995, compared to revenues of $1.558 billion and a net loss of $51 million ($.14 per common share) for the three months ended March 31, 1994. Operating income and EBITDA for Time Warner and the Entertainment Group for the three months ended March 31, 1995 and 1994 is as follows: Three Months Ended March 31, Operating Income EBITDA 1995 1994 1995 1994 (millions) TIME WARNER: Publishing $ 55 $ 50 $ 77 $ 70 Music 83 62 173 147 Total $138 $112 $250 $ 217 ENTERTAINMENT GROUP: Filmed Entertainment $ 65 $ 66 $125 $117 Broadcasting-The WB Network (21) - (21) - Programming - HBO 67 56 71 61 Cable 90 84 256 244 Total $201 $206 $431 $422 Time Warner's equity in the pretax income of the Entertainment Group was $22 million for the three months ended March 31, 1995, compared to $45 million for the first three months of 1994. The relationship between income before income taxes and income tax expense of Time Warner 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 of Time Warner includes all income taxes related to its allocable share of partnership income and its equity in the income tax expense of corporate subsidiaries of the Entertainment Group. Certain factors affecting comparative operating results are discussed below on a business segment basis. That discussion includes, among other factors, an analysis of changes in the operating income of the business segments before depreciation and amortization ("EBITDA") in order to eliminate the effect on the operating performance of the music, filmed entertainment and cable business of significant amounts of amortization of intangible assets recognized in the $14 billion acquisition of WCI in 1989, the $1.3 billion acquisition of the ATC minority interest in 1992 and other business combinations accounted for by the purchase method. Financial analysts generally consider EBITDA to be an important measure of comparative operating performance for the businesses of Time Warner and the Entertainment Group, and when used in comparison to debt levels or the coverage of interest expense, as a measure of liquidity. However, EBITDA should be considered in addition to, not as a substitute for, operating income, net income, cash flow and other measures of financial performance and liquidity reported in accordance with generally accepted accounting principles. TIME WARNER PUBLISHING. Revenues increased to $831 million, compared to $751 million in the first quarter of 1994. Operating income increased to $55 million from $50 million. Depreciation and amortization amounted to $22 million in the first quarter of 1995 and $20 million in the first quarter of 1994. EBITDA increased to $77 million from $70 million. Revenues benefited from increases in magazine circulation, advertising and book revenues. Significant revenue gains were achieved by PEOPLE, SPORTS ILLUSTRATED, TIME and ENTERTAINMENT WEEKLY. Operating income and EBITDA increased as a result of the revenue gains, offset in part by higher postal and paper costs as a result of price increases. MUSIC. Revenues increased to $991 million, compared to $812 million in the first quarter of 1994. Operating income increased to $83 million from $62 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $90 million in the first quarter of 1995 and $85 million in the first quarter of 1994. EBITDA increased to $173 million from $147 million. The revenue growth resulted from increases in both domestic and international recorded music revenues, which benefited from a number of popular releases and an increase in the percentage of compact disc to total unit sales, and increased music publishing revenues. Operating income and EBITDA benefited from the revenue gains, offset in part by lower results from direct marketing activities attributable to higher amortization of member acquisition costs. INTEREST AND OTHER, NET. Interest and other, net, decreased to $155 million in the first quarter of 1995, compared to $158 million in the first quarter of 1994. Interest expense increased to $210 million compared to $182 million, principally as a result of higher floating-rates of interest paid on $2.9 billion notional amount of interest rate swap contracts. There was other income, net, of $55 million in the first quarter of 1995, compared to other income, net, of $24 million in 1994, principally because of an increase in investment-related income, including a gain recognized in 1995 on the sale of an interest in QVC, Inc. Investment- related income was reduced in both periods by adjustments to the carrying value of certain investments and losses on foreign exchange contracts used to hedge foreign exchange risk. ENTERTAINMENT GROUP FILMED ENTERTAINMENT. Revenues increased to $1.207 billion, compared to $1.083 billion in the first quarter of 1994. Operating income decreased to $65 million from $66 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $60 million in the first quarter of 1995 and $51 million in the first quarter of 1994. EBITDA increased to $125 million from $117 million. Revenues benefited from increases in international theatrical, international home video and worldwide television distribution operations. Operating income and EBITDA margins were affected by lower domestic theatrical results compared to the first quarter of 1994. BROADCASTING-THE WB NETWORK. The WB Network was launched on January 11, 1995, and generated $21 million of operating losses on $3 million of revenues in the first quarter of 1995. Due to the start-up nature of this new national broadcast operation, losses are expected to continue. PROGRAMMING-HBO. Revenues increased to $390 million, compared to $362 million in the first quarter of 1994. Operating income increased to $67 million from $56 million. Depreciation and amortization amounted to $4 million in the first quarter of 1995 and $5 million in the first quarter of 1994. EBITDA increased to $71 million from $61 million. Revenues benefited primarily from increases in cable and direct broadcast satellite subscribers, as well as from higher pay-TV rates. Operating income and EBITDA improved principally as a result of the revenue gains. CABLE. Revenues increased to $578 million, compared to $551 million in the first quarter of 1994. Operating income increased to $90 million from $84 million. Depreciation and amortization, including amortization related to the purchase of WCI and the acquisition of the ATC minority interest, amounted to $166 million in the first quarter of 1995 and $160 million in the first quarter of 1994. EBITDA increased to $256 million from $244 million. Revenues benefited from an increase in basic cable and direct broadcast satellite subscribers and nonregulated revenues, including pay-TV and advertising. Operating income and EBITDA increased as a result of the revenue gains, offset in part by the impact of the second round of cable rate regulations that went into effect in July 1994, higher start-up costs for telephony operations and, with respect to operating income only, higher depreciation and amortization relating to increased capital spending. INTEREST AND OTHER, NET. Interest and other, net, increased to $164 million, compared to $146 million in the first quarter of 1994. Interest expense increased to $151 million compared to $137 million, principally as a result of higher floating-rates of interest paid on borrowings under TWE's bank credit agreement. There was other expense, net, of $13 million in the first quarter of 1995, compared to other expense, net, of $9 million in 1994, principally because of a decrease in investment-related income. FINANCIAL CONDITION AND LIQUIDITY March 31, 1995 TIME WARNER The financial condition of Time Warner remained essentially unchanged from December 31, 1994, but is expected to be significantly affected by the cable transactions and asset sales that have closed or are expected to close during 1995. Time Warner had $9.3 billion of debt, $309 million of cash and equivalents (net debt of $9 billion) and $1.1 billion of equity at March 31, 1995, compared to $9.2 billion of debt, $282 million of cash and equivalents (net debt of $8.9 billion) and $1.1 billion of equity at December 31, 1994. On a combined basis (Time Warner and the Entertainment Group together), there was $15 billion of net debt at both the beginning and end of the period. During 1995, Time Warner and TWE took steps towards achieving certain of their financial and operational objectives, principally relating to the expansion of their reach in cable television, the negotiation of a new bank credit facility and their plan to reduce debt with funds raised from the sale of non-core assets, such as Six Flags. Time Warner completed its previously- announced acquisition of Summit in May 1995 and, together with the formation of the TWE-Advance/Newhouse Partnership in April 1995, the total number of cable subscribers under the management of Time Warner Cable has increased to approximately 9.3 million, compared to 7.5 million at the end of 1994. Such amount is expected to increase further, to approximately 11.5 million, after the consummation of the acquisitions of KBLCOM and CVI and related companies, which are expected to close during the second half of 1995. As a result of the cable transactions, a new bank credit facility is expected to be obtained for TWE, the TWE-Advance/Newhouse Partnership and for the newly-created cable division of Time Warner ("TWI Cable") in order to refinance or repay approximately $5 billion of acquired and existing indebtedness, and to finance the ongoing working capital, capital expenditures and other corporate needs of each respective entity. Time Warner and TWE are currently in negotiations with an administrative agent for a bank syndicate to secure such financing in the form of one overall, five-year revolving credit facility (the "New Credit Agreement"). A preliminary term sheet for the New Credit Agreement provides for borrowings in the aggregate amount of $9 billion for TWE, TWI Cable and the TWE-Advance/Newhouse Partnership. The aggregate availability for each borrower is expected to be limited in amount to $4 billion of borrowings for TWI Cable, $5 billion of borrowings for the TWE-Advance/Newhouse Partnership and $9 billion of borrowings for TWE, subject to certain adjustments. The preliminary term sheet provides for borrowings under the facility to bear interest at separate rates for each borrower, generally equal to LIBOR plus a margin ranging from 50 to 87.5 basis points based on the respective credit rating or financial leverage of such borrower. The New Credit Agreement is expected to contain certain covenants for each borrower relating to, among other things, additional indebtedness; liens on assets, cash flow coverage and leverage ratios; and loans, advances, distributions or other cash payments or transfers of assets from TWE and the TWE-Advance/Newhouse Partnership to their partners or affiliates. Time Warner continues to pursue its plan to enhance its financial position and that of the Entertainment Group through sales of non-core assets. With the agreement to sell 51% of TWE's interest in Six Flags to an investment group led by Boston Ventures and the sale of an interest in QVC, Inc. in February 1995, Time Warner on a combined basis will have raised approximately $1.1 billion for debt reduction when the Six Flags transaction closes, which is expected to occur during the second quarter of 1995. The closing of the Six Flags transaction is subject to customary closing conditions. During the first quarter of 1995, cash used by Time Warner's operations amounted to $74 million and reflected $250 million of EBITDA from the Publishing and Music businesses, $1 million of net distributions from TWE and $33 million from the securitization of receivables, less $204 million of interest payments, $73 million of income taxes, $20 million of corporate expenses and an increase in working capital requirements. Cash provided by operations of $247 million in the first quarter of 1994 reflected $217 million of EBITDA from the Publishing and Music businesses, $1 million of net distributions from TWE, $180 million from the securitization of receivables and a reduction in working capital requirements, less $183 million of interest payments, $20 million of income taxes and $18 million of corporate expenses. Cash flows used in investing activities in the first quarter of 1995, excluding investment proceeds, were $181 million, compared to $67 million in the first quarter of 1994. Cash dividends paid increased to $36 million in the first quarter of 1995, compared to $33 million in the first quarter of 1994. Time Warner has no claim on the assets and cash flows of TWE, except through the payment of certain fees and reimbursements, cash distributions and loans. Tax-related distributions in excess of $350 million are expected to be received from TWE during 1995. Management believes that 1995 operating cash flow, cash and marketable securities and additional borrowing capacity are and will continue to be sufficient to meet Time Warner's liquidity needs without distributions and loans from TWE above those permitted by existing agreements. Time Warner uses derivative financial instruments to manage its risk against fluctuations in interest rates and foreign currency exchange rates. Interest rate swap contracts are used to adjust the proportion of total debt that is subject to changes in short-term rates. At March 31, 1995, Time Warner had interest rate swap contracts to pay floating-rates of interest (average six-month LIBOR rate of 6.5%) and receive fixed-rates of interest (average rate of 5.5%) on $2.9 billion notional amount of indebtedness, effectively converting 31% of Time Warner's underlying debt, substantially all of which is fixed-rate, and 37% of the debt of Time Warner and the Entertainment Group combined, to a floating-rate basis. Time Warner had interest rate swap contracts on a like-amount of notional indebtedness at December 31, 1994. Based on the current levels of outstanding debt and interest rate swap contracts, a 25 basis point increase in the level of interest rates prevailing at March 31, 1995 would reduce Time Warner's annual pretax income by an estimated $11 million. Based on the level of interest rates prevailing at March 31, 1995, the fair value of Time Warner's fixed-rate debt was $205 million less than its carrying value and it would have cost $158 million to terminate the related interest rate swap contracts, which combined is the equivalent of an unrealized gain of $47 million. Based on the level of interest rates pre- vailing at December 31, 1994, the fair value of Time Warner's fixed-rate debt was less than its carrying value by $572 million and it would have cost $236 million to terminate its interest rate swap contracts, which combined was the equivalent of an unrealized gain of $336 million. Accounting recognition is not given to unrealized gains or losses on debt or interest rate swap contracts unless the debt is retired or the contracts are terminated prior to their maturity. Foreign exchange contracts are used primarily to hedge the risk that unremitted or future royalties and license fees owed to Time Warner or TWE domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad may be adversely affected by changes in exchange rates. At March 31, 1995, Time Warner had contracts for the sale of $564 million and the purchase of $120 million of foreign currencies at fixed rates, primarily Japanese yen (18% of net contract value), French francs (15%), English pounds (27%), Canadian dollars (13%) and German marks (13%), compared to contracts for the sale of $551 million and the purchase of $109 million of foreign currencies at December 31, 1994. Unrealized gains or losses are recorded in income; accordingly, the carrying value of foreign exchange contracts approximates market value. Time Warner had $18 million and TWE had $12 million of net losses on foreign exchange contracts during the first quarter of 1995, which were or are expected to be offset by corresponding increases in the dollar value of foreign currency royalties and license fee payments that have been or are anticipated to be received from the sale of U.S. copyrighted products abroad. Time Warner reimburses or is reimbursed by TWE for contract gains and losses related to TWE's foreign currency exposure. Foreign currency contracts are placed with a number of major financial institutions in order to minimize credit risk. ENTERTAINMENT GROUP The financial condition of the Entertainment Group companies, principally TWE, also remained essentially unchanged from December 31, 1994, but is expected to be significantly affected by the formation of the TWE-Advance/ Newhouse Partnership and the other cable transactions and asset sales that have closed or are expected to close during 1995, as previously discussed. TWE had $7.2 billion of long-term debt and $1.7 billion of Time Warner General Partners' senior capital at March 31, 1995 and December 31, 1994. TWE had $6.3 billion of partners' capital (net of the $621 million uncollected portion of the note receivable from U S WEST) at March 31, 1995, compared to $6.2 billion of partners' capital at December 31, 1994. Cash and equivalents were $1.3 billion at March 31, 1995, compared to $1.1 billion at December 31, 1994, reducing the debt-net-of-cash amounts for TWE to $5.9 billion and $6.1 billion, respectively. In the first quarter of 1995, cash provided by Entertainment Group operations amounted to $317 million and reflected $431 million of EBITDA from the Filmed Entertainment, Broadcasting-The WB Network, Programming-HBO and Cable businesses and a reduction in working capital requirements, less $169 million of interest payments, $15 million of income taxes and $15 million of corporate expenses. Cash provided by operations of $352 million in the first quarter of 1994 reflected $422 million of business segment EBITDA and a reduction in working capital requirements, less $143 million of interest payments, $13 million of income taxes and $15 million of corporate expenses. Capital expenditures increased to $300 million in the first quarter of 1995, compared to $241 million in the first quarter of 1994. Capital spending by Time Warner Cable amounted to $222 million in the first quarter of 1995, compared to $108 million in the first quarter of 1994, and was financed in part through $150 million of collections on the note receivable from U S WEST. Cable capital expenditures are budgeted to exceed $800 million for the remainder of 1995, and are expected to be partially financed by an incremental $400 million of collections on the note receivable from U S WEST. Because management believes that the conversion from coaxial to fiber-optic cable is essential to achieving long-term growth in revenue from telephony and unregulated cable services, significant cable capital expenditures also are expected in subsequent years and will be timed to match the rate at which demand for the new services develops. Warner Bros.' backlog, representing the amount of future revenue not yet recorded from cash contracts for the licensing of films for pay and basic cable, network and syndicated television exhibition amounted to $918 million at March 31, 1995 compared to $852 million at December 31, 1994 (including amounts relating to HBO of $154 million at March 31, 1995 and $175 million at December 31, 1994). The backlog excludes advertising barter contracts. Management believes that TWE's 1995 operating cash flow, cash and equivalents, collections on the note receivable from U S WEST and additional borrowing capacity are and will continue to be sufficient to meet its capital and liquidity needs. TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED BALANCE SHEET (Unaudited) March 31, December 31, 1995 1994 (millions) ASSETS Current assets Cash and equivalents $ 1,267 $ 1,071 Receivables, including $147 and $266 due from Time Warner, less allowances of $310 and $306 1,287 1,426 Inventories 924 956 Prepaid expenses 230 120 Total current assets 3,708 3,573 Noncurrent inventories 1,752 1,807 Loan receivable from Time Warner 400 400 Property, plant and equipment, net 3,931 3,784 Goodwill 4,400 4,433 Cable television franchises 3,189 3,236 Other assets 1,378 1,429 Total assets $18,758 $18,662 LIABILITIES AND PARTNERS' CAPITAL Current liabilities Accounts payable $ 418 $ 514 Participations and programming costs 973 857 Other current liabilities, including $342 and $334 of distributions due to Time Warner 1,429 1,486 Total current liabilities 2,820 2,857 Long-term debt 7,162 7,160 Other long-term liabilities, including $138 and $89 of distributions due to Time Warner 801 749 Time Warner General Partners' senior capital 1,696 1,663 Partners' capital Contributed capital 7,398 7,398 Undistributed partnership earnings (deficit) (498) (394) Note receivable from U S WEST (621) (771) Total partners' capital 6,279 6,233 Total liabilities and partners' capital $18,758 $18,662 See accompanying notes. TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Ended March 31, 1995 1994 (millions) Revenues (a) $ 2,046 $ 1,919 Cost of revenues (a)(b) 1,440 1,343 Selling, general and administrative (a)(b) 415 373 Operating expenses 1,855 1,716 Business segment operating income 191 203 Interest and other, net (a) (161) (136) Corporate services (a) (15) (15) Income before income taxes 15 52 Income taxes (11) (4) Net income $ 4 $ 48 _______________ (a) Includes the following income (expenses) resulting from transactions with the partners of TWE: Selling, general and administrative $ (22) $ (17) Corporate services (15) (15) In addition, includes the following income (expenses) resulting from transactions with equity investees of TWE or Time Warner: Revenues $ 26 $ 9 Cost of revenues (17) (12) Selling, general and administrative 5 5 (b) Includes depreciation and amortization expense of: $ 226 $ 213 See accompanying notes. TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Three Months Ended March 31, 1995 1994 (millions) OPERATIONS Net income $ 4 $ 48 Adjustments for noncash and nonoperating items: Depreciation and amortization 226 213 Changes in operating assets and liabilities 116 81 Cash provided by operations 346 342 INVESTING ACTIVITIES Investments and acquisitions (21) (29) Capital expenditures (270) (239) Investment proceeds 1 31 Cash used by investing activities (290) (237) FINANCING ACTIVITIES Increase in debt 4 17 Capital distributions (14) (14) Collections on note receivable from U S WEST 150 - Cash provided by financing activities 140 3 INCREASE IN CASH AND EQUIVALENTS $ 196 $ 108 See accompanying notes. TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION Time Warner Entertainment Company, L.P., a Delaware limited partnership ("TWE"), is engaged principally in the Filmed Entertainment, Broadcasting-The WB Network, Programming-HBO and Cable businesses. Subsidiaries of Time Warner Inc. ("Time Warner") are the general partners of TWE ("Time Warner General Partners") and collectively hold 63.27% pro rata priority capital and residual equity partnership interests in TWE, and certain priority capital interests senior ("Time Warner General Partners' senior capital") and junior to the pro rata priority capital interests, which they received for the net assets, or the rights to cash flows, they contributed to the partnership at the capitalization of TWE. The limited partners, subsidiaries of U S WEST, Inc. ("U S WEST"), ITOCHU Corporation and Toshiba Corporation, hold 25.51%, 5.61% and 5.61% pro rata priority capital and residual equity partnership interests, respectively. The TWE partnership agreement provides for special allocations of income, loss and distributions of partnership capital, including priority distributions in the event of liquidation. The consolidated financial statements include 100% of the assets, liabilities, revenues, expenses, income, loss and cash flows of TWE and all companies in which TWE has a direct and indirect controlling voting interest ("subsidiaries"), as if TWE and its subsidiaries were a single company. Investments in certain other companies in which TWE has significant influence but less than a controlling voting interest, are accounted for using the equity method. 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, 1994. 2. TWE-ADVANCE/NEWHOUSE PARTNERSHIP On April 1, 1995, TWE formed a cable television joint venture with subsidiaries of Advance Publications, Inc. and Newhouse Broadcasting Corporation ("Advance/Newhouse") to which Advance/Newhouse and TWE contri- buted cable television systems (or interests therein) serving approximately 4.5 million subscribers, as well as certain foreign cable investments and programming investments. TWE owns a two-thirds equity interest in the TWE-Advance/Newhouse Partnership and is the managing partner. Advance/Newhouse owns a one-third equity interest in the partnership. In accordance with the partnership agreement, Advance/ Newhouse can require TWE to purchase its equity interest for fair market value at specified intervals following the death of both of its principal shareholders. Beginning in the third year, either partner can initiate a dissolution in which TWE would receive two-thirds and Advance/Newhouse would receive one-third of the partnership's net assets. The assets contributed by TWE and Advance/Newhouse to the partnership were recorded at their predecessor's historical cost. No gain was recognized by TWE upon the capitalization of the partnership. 3. SIX FLAGS In April 1995, TWE agreed to sell 51% of its interest in Six Flags Entertainment Corporation ("Six Flags") to an investment group led by Boston Ventures for $204 million and the receipt of approximately $670 million in additional proceeds from Six Flags, principally representing payment of certain intercompany indebtedness and licensing fees. TWE will recognize a gain upon the closing of the transaction. TWE will deconsolidate the assets, liabilities and operating results of Six Flags, including approximately $126 million of third-party indebtedness, and account for its remaining 49% interest under the equity method of accounting. As a result of this transaction, TWE will reduce debt by approximately $850 million, after related taxes and fees. The transaction is expected to close during the second quarter of 1995 and is subject to customary closing conditions. 4. INVENTORIES Inventories consist of: March 31, 1995 December 31, 1994 Current Noncurrent Current Noncurrent (millions) Film costs: Released, less amortization $ 525 $ 364 $ 585 $ 347 Completed and not released 94 17 123 24 In process and other 33 322 18 361 Library, less amortization - 756 - 769 Programming costs, less amortization 184 293 149 306 Merchandise 88 - 81 - Total $ 924 $1,752 $ 956 $1,807 5. LONG-TERM DEBT Long-term debt consists of: March 31, December 31, 1995 1994 (millions) Bank credit agreement, weighted average interest rates of 6.8% and 6.5% $2,450 $2,550 Commercial paper, weighted average interest rates of 6.5% and 6.2% 748 649 Publicly held notes and debentures 3,906 3,903 Other 58 58 Total $7,162 $7,160 Each Time Warner General Partner has guaranteed a pro rata portion of substantially all of TWE's debt and accrued interest thereon based on the relative fair value of the net assets each General Partner contributed to TWE. Such indebtedness is recourse to each Time Warner General Partner only to the extent of its guarantee. In connection with the formation of the TWE-Advance/Newhouse Partnership and Time Warner's other cable acquisitions, a new bank credit facility is expected to be obtained. For a discussion of the status of the negotiations to secure such bank financing, see "Financial Condition and Liquidity" elsewhere herein. 6. PARTNERS' CAPITAL Changes in partners' capital were as follows: Three Months Ended March 31, 1995 1994 (millions) Balance at beginning of year $6,233 $6,000 Net income 4 48 Distributions (71) (61) Reduction of stock option distribution liability - 113 Allocation of income to General Partners' senior capital (33) (31) Collections on note receivable from U S WEST 150 - Other (4) 6 Balance at March 31 $6,279 $6,075 Since September 1993, certain assets formerly owned and operated by TWE have been owned and operated by other partnerships ("Time Warner Service Partnerships") in order to ensure compliance with the Modification of Final Judgment entered on August 24, 1982 by the United States District Court for the District of Columbia applicable to U S WEST and its affiliated companies, which may have included TWE. The Time Warner Service Partnerships make certain of their assets and related services available to TWE and TWE is required to make quarterly cash distributions of $12.5 million to the Time Warner General Partners, which the partners in turn are required to contribute to the Time Warner Service Partnerships. If TWE is clearly not prohibited from owning or operating the assets of the Time Warner Service Partnerships, they will be recontributed to TWE on September 15, 1995 (or September 15, 1997 in the case of certain assets), or earlier under certain circumstances, at their then fair market value in exchange for partnership interests in TWE. As a result of a judicial order issued to U S WEST in 1994, TWE is no longer prohibited from owning or operating substantially all of the assets of the Time Warner Service Partnerships. In addition to Time Warner Service Partnership distributions, TWE also is required to make distributions to reimburse the partners for income taxes at statutory rates based on their allocable share of taxable income, and to reimburse Time Warner for its stock options granted to employees of TWE based on the amount by which the market price of Time Warner common stock exceeds the option exercise price on the exercise date. TWE accrues a stock option distribution and a corresponding liability with respect to unexercised options when the market price of Time Warner common stock increases during the accounting period, and reverses previously-accrued stock option distributions and the corresponding liability when the market price of Time Warner common stock declines. During the three months ended March 31, 1995, TWE accrued $13 million of Time Warner Service Partnership distributions, $8 million of tax-related distributions and $50 million of stock option distributions, based on closing prices of Time Warner common stock of $37.625 at March 31, 1995 and $35.125 at December 31, 1994. During the three months ended March 31, 1994, TWE accrued $13 million of Time Warner Service Partnership distributions and $48 million of tax distributions, and reversed $113 million of previously-accrued stock option distributions as a result of a decline in the market price of Time Warner common stock. 7. SEGMENT INFORMATION Information as to the operations of TWE in different business segments is as set forth below: Three Months Ended March 31, 1995 1994 Revenues (millions) Filmed Entertainment $ 1,206 $1,081 Broadcasting-The WB Network 3 - Programming - HBO 385 358 Cable 557 549 Intersegment elimination (105) (69) Total $ 2,046 $1,919 Three Months Ended March 31, 1995 1994 Operating Income (millions) Filmed Entertainment $ 65 $ 61 Broadcasting-The WB Network (21) - Programming - HBO 67 57 Cable 80 85 Total $ 191 $ 203 Three Months Ended March 31, 1995 1994 Depreciation of Property, Plant and Equipment (millions) Filmed Entertainment $ 21 $ 16 Broadcasting-The WB Network - - Programming-HBO 4 3 Cable 88 83 Total $ 113 $ 102 Three Months Ended March 31, 1995 1994 Amortization of Intangible Assets (1) (millions) Filmed Entertainment $ 37 $ 34 Broadcasting-The WB Network - - Programming-HBO - 1 Cable 76 76 Total $ 113 $ 111 _______________ (1) Amortization includes amortization relating to the acquisitions of Warner Communications Inc. ("WCI") in 1989 and the American Television and Communications Corporation ("ATC") minority interest in 1992 and to other business combinations accounted for by the purchase method. 8. COMMITMENTS AND CONTINGENCIES Minimum commitments and guarantees under certain programming, licensing, franchise and other agreements at March 31, 1995 aggregated approximately $4.4 billion, which are payable principally over a five-year period. Pending legal proceedings are substantially limited to litigation incidental to the businesses of TWE. In the opinion of counsel and management, the ultimate resolution of these matters will not have a material effect on the consolidated financial statements. 9. ADDITIONAL FINANCIAL INFORMATION Additional financial information is as follows: Three Months Ended March 31, 1995 1994 (millions) Interest expense $150 $135 Cash payments made for interest 168 143 Cash payments made for income taxes (net) 15 13 Borrowings 106 244 Repayments 102 227 TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS TWE had revenues of $2.046 billion and net income of $4 million for the three months ended March 31, 1995, compared to revenues of $1.919 billion and net income of $48 million for the three months ended March 31, 1994. Operating income and EBITDA for TWE for the three months ended March 31, 1995 and 1994 is as follows: Three Months Ended March 31, Operating Income EBITDA 1995 1994 1995 1994 (millions) Filmed Entertainment $ 65 $ 61 $123 $111 Broadcasting-The WB Network (21) - (21) - Programming - HBO 67 57 71 61 Cable 80 85 244 244 Total $191 $203 $417 $416 As a U.S. partnership, TWE is not subject to U.S. federal and state income taxation. Income and withholding taxes of $11 million and $4 million in the three months ended March 31, 1995 and 1994, respectively, have been provided in respect of the operations of TWE's domestic and foreign subsidiary corporations. Certain factors affecting comparative operating results are discussed below on a business segment basis. That discussion includes, among other factors, an analysis of changes in the operating income of the business segments before depreciation and amortization ("EBITDA") in order to eliminate the effect on the operating performance of the filmed entertainment and cable businesses of significant amounts of amortization of intangible assets recognized in Time Warner's $14 billion acquisition of WCI in 1989, the $1.3 billion acquisition of the ATC minority interest in 1992 and other business combinations accounted for by the purchase method. Financial analysts generally consider EBITDA to be an important measure of comparative operating performance for the businesses of TWE, and when used in comparison to debt levels or the coverage of interest expense, as a measure of liquidity. However, EBITDA should be considered in addition to, not as a substitute for, operating income, net income, cash flow and other measures of financial performance and liquidity reported in accordance with generally accepted accounting principles. FILMED ENTERTAINMENT. Revenues increased to $1.206 billion, compared to $1.081 billion in the first quarter of 1994. Operating income increased to $65 million from $61 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $58 million in the first quarter of 1995 and $50 million in the first quarter of 1994. EBITDA increased to $123 million from $111 million. Revenues benefited from increases in international theatrical, international home video and worldwide television distribution operations. Operating income and EBITDA margins were affected by lower domestic theatrical results compared to the first quarter of 1994. BROADCASTING-THE WB NETWORK. The WB Network was launched on January 11, 1995, and generated $21 million of operating losses on $3 million of revenues in the first quarter of 1995. Due to the start-up nature of this new national broadcast operation, losses are expected to continue. PROGRAMMING-HBO. Revenues were $385 million, compared to $358 million in the first quarter of 1994. Operating income increased to $67 million from $57 million. Depreciation and amortization amounted to $4 million in each of the first quarter of 1995 and 1994. EBITDA increased to $71 million from $61 million. Revenues benefited primarily from increases in cable and direct broadcast satellite subscribers, as well as from higher pay-TV rates. Operating income and EBITDA improved principally as a result of the revenue gains. CABLE. Revenues increased to $557 million, compared to $549 million in the first quarter of 1994. Operating income decreased to $80 million from $85 million. Depreciation and amortization, including amortization related to the purchase of WCI and the acquisition of the ATC minority interest, amounted to $164 million in the first quarter of 1995 and $159 million in the first quarter of 1994. EBITDA amounted to $244 million in each of the first quarters of 1995 and 1994. Revenues benefited from an increase in basic cable subscribers and nonregulated revenues, including pay-TV and advertising. Operating income decreased and EBITDA was flat as a result of the impact of the second round of cable rate regulations that went into effect in July 1994, higher start-up costs for telephony operations and, with respect to operating income only, higher depreciation and amortization relating to increased capital spending. INTEREST AND OTHER, NET. Interest and other, net, increased to $161 million, compared to $136 million in the first quarter of 1994. Interest expense increased to $150 million compared to $135 million, principally as a result of higher floating-rates of interest paid on borrowings under TWE's bank credit agreement. There was other expense, net, of $11 million in the first quarter of 1995, compared to other expense, net, of $1 million in 1994, principally because of a decrease in investment-related income. FINANCIAL CONDITION AND LIQUIDITY March 31, 1995 The financial condition of TWE remained essentially unchanged from December 31, 1994, but is expected to be significantly affected by the formation of the TWE-Advance/Newhouse Partnership, the Six Flags transaction and the other cable transactions agreed to by Time Warner that have closed or are expected to close during 1995. TWE had $7.2 billion of long-term debt and $1.7 billion of Time Warner General Partners' senior capital at March 31, 1995 and December 31, 1994. TWE had $6.3 billion of partners' capital (net of the $621 million uncollected portion of the note receivable from U S WEST) at March 31, 1995, compared to $6.2 billion of partners' capital at December 31, 1994. Cash and equivalents were $1.3 billion at March 31, 1995, compared to $1.1 billion at December 31, 1994, reducing the debt-net-of-cash amounts to $5.9 billion and $6.1 billion, respectively. During 1995, TWE and Time Warner took steps towards achieving certain of their financial and operational objectives, principally relating to the expansion of their reach in cable television, the negotiation of a new bank credit facility and their plan to reduce debt with funds raised from the sale of non-core assets, such as Six Flags. TWE formed the TWE-Advance/Newhouse Partnership in April 1995 and, together with Time Warner's completion of its previously-announced acquisition of Summit Communications Group, Inc. in May 1995, the total number of cable subscribers under the management of Time Warner Cable has increased to approximately 9.3 million, compared to 7.5 million at the end of 1994. Such amount is expected to increase further, to approximately 11.5 million, after the consummation of Time Warner's acquisitions of KBLCOM Incorporated and Cablevision Industries Corporation and related companies, which are expected to close during the second half of 1995. As a result of the cable transactions, a new bank credit facility is expected to be obtained for TWE, the TWE-Advance/Newhouse Partnership and for the newly-created cable division of Time Warner ("TWI Cable") in order to refinance or repay approximately $5 billion of acquired and existing indebtedness, and to finance the ongoing working capital, capital expenditures and other corporate needs of each respective entity. TWE and Time Warner are currently in negotiations with an administrative agent for a bank syndicate to secure such financing in the form of one overall, five-year revolving credit facility (the "New Credit Agreement"). A preliminary term sheet for the New Credit Agreement provides for borrowings in the aggregate amount of $9 billion for TWE, TWI Cable and the TWE-Advance/Newhouse Partnership. The aggregate availability for each borrower is expected to be limited in amount to $4 billion of borrowings for TWI Cable, $5 billion of borrowings for the TWE-Advance/Newhouse Partnership and $9 billion of borrowings for TWE, subject to certain adjustments. The preliminary term sheet provides for borrowings under the facility to bear interest at separate rates for each borrower, generally equal to LIBOR plus a margin ranging from 50 to 87.5 basis points based on the respective credit rating or financial leverage of such borrower. The New Credit Agreement is expected to contain certain covenants for each borrower relating to, among other things, additional indebtedness; liens on assets, cash flow coverage and leverage ratios; and loans, advances, distributions or other cash payments or transfers of assets from TWE and the TWE-Advance/Newhouse Partnership to their partners or affiliates. TWE continues to pursue its plan to enhance its financial position through sales of non-core assets. With TWE's agreement to sell 51% of its interest in Six Flags to an investment group led by Boston Ventures, TWE will reduce debt by approximately $850 million, after related taxes and fees, when the Six Flags transaction closes, which is expected to occur during the second quarter of 1995. The closing of the Six Flags transaction is subject to customary closing conditions. In the first quarter of 1995, cash provided by TWE's operations amounted to $346 million and reflected $417 million of EBITDA from the Filmed Entertainment, Broadcasting-The WB Network, Programming-HBO and Cable businesses and a reduction in working capital requirements, less $168 million of interest payments, $15 million of income taxes and $15 million of corporate expenses. Cash provided by operations of $342 million in the first quarter of 1994 reflected $416 million of business segment EBITDA and a reduction in working capital requirements, less $143 million of interest payments, $13 million of income taxes and $15 million of corporate expenses. Capital expenditures increased to $270 million in the first quarter of 1995, compared to $239 million in the first quarter of 1994. Capital spending by Time Warner Cable amounted to $192 million in the first quarter of 1995, compared to $108 million in the first quarter of 1994, and was financed in part through $150 million of collections on the note receivable from U S WEST. Cable capital expenditures are budgeted to exceed $800 million for the remainder of 1995, and are expected to be partially financed by an incremental $400 million of collections on the note receivable from U S WEST. Because management believes that the conversion from coaxial to fiber-optic cable is essential to achieving long-term growth in revenue from telephony and unregulated cable services, significant cable capital expenditures also are expected in subsequent years and will be timed to match the rate at which demand for the new services develops. Warner Bros.' backlog, representing the amount of future revenue not yet recorded from cash contracts for the licensing of films for pay and basic cable, network and syndicated television exhibition amounted to $918 million at March 31, 1995 compared to $852 million at December 31, 1994 (including amounts relating to HBO of $154 million at March 31, 1995 and $175 million at December 31, 1994). The backlog excludes advertising barter contracts. Management believes that TWE's 1995 operating cash flow, cash and equivalents, collections on the note receivable from U S WEST and additional borrowing capacity are and will continue to be sufficient to meet its capital and liquidity needs. Based on the level of interest rates prevailing at March 31, 1995, the fair value of TWE's long-term debt was $236 million less than its carrying value. Based on the level of interest rates prevailing at December 31, 1994, the fair value of TWE's long-term debt was $460 million less than its carrying value. Accounting recognition is not given to unrealized gains or losses on debt unless the debt is retired prior to its maturity. Foreign exchange contracts are used primarily to hedge the risk that unremitted or future license fees owed to TWE domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad may be adversely affected by changes in exchange rates. TWE is reimbursed by or reimburses Time Warner for Time Warner contract gains and losses related to TWE's exposure. At March 31, 1995, Time Warner had contracts for the sale of $564 million and the purchase of $120 million of foreign currencies at fixed rates and maturities of three months or less. Of Time Warner's $444 million net sale contract position, $166 million related to TWE's exposure, primarily Japanese yen (35% of net contract position related to TWE), French francs (21%), German marks (10%) and Canadian dollars (15%), compared to a net sale contract position of $188 million of foreign currencies at December 31, 1994. Unrealized gains or losses are recorded in income; accordingly, the carrying value of foreign exchange contracts approximates market value. TWE had $12 million of net losses on foreign exchange contracts during the first quarter of 1995, which were or are expected to be offset by corresponding increases in the dollar value of foreign currency license fee payments that have been or are anticipated to be received from the sale of U.S. copyrighted products abroad. Time Warner places foreign currency contracts with a number of major financial institutions in order to minimize credit risk. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Reference is made to the litigation entitled SAMUEL D. MOORE, et al. v. SONY MUSIC ENTERTAINMENT GROUP, et al. described on pages I-43 and I-44 of Time Warner's Annual Report on Form 10-K for the year ended December 31, 1994. On April 19, 1995, the U.S. District Court for the Northern District of Georgia granted the record company defendants' motion with respect to the New York federal action and enjoined the plaintiffs from proceeding any further with such action. On April 30, 1995, the U.S. District Court for the Southern District of New York directed that the New York federal action be transferred to the Northern District of Georgia in order that the Georgia court may determine whether the claims asserted in the New York action should be dismissed or pursued in the Georgia court. 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. Time Warner filed a report on Form 8-K dated January 26, 1995 reporting in Item 5 that it had agreed to acquire KBLCOM Incorporated ("KBLCOM"), a subsidiary of Houston Industries Incorporated, that owns cable television systems serving approximately 690,000 subscribers and a 50% interest in Paragon Communications, which serves an additional 967,000 cable subscribers, for one million shares of Time Warner Common Stock, 11 million shares of new Time Warner Series D Convertible Preferred Stock and the assumption of approximately $1.24 billion of indebtedness. Time Warner also filed a report on Form 8-K dated February 6, 1995 reporting in Item 5 that it had agreed to acquire Cablevision Industries Corporation ("CVI") and related companies that own cable television systems serving approximately 1.3 million subscribers for 2.5 million shares of Time Warner Common Stock, 6.5 million shares of two new series of Time Warner convertible preferred stocks and the assumption of approximately $2 billion of debt of CVI and related companies. The KBLCOM and CVI transactions are expected to close in the second half of 1995 and are subject to customary conditions, including the receipt of certain franchise and regulatory approvals. TIME WARNER INC. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Time Warner Inc. (Registrant) By: /s/ Richard J. Bressler Name: Richard J. Bressler Title: Senior Vice President and Chief Financial Officer Dated: May 15, 1995 EXHIBIT INDEX Pursuant to Item 601 of Regulation S-K Exhibit No. Description of Exhibit 10.1 Agreement and Plan of Merger dated as of January 26, 1995, among KBLCOM Incorporated, Houston Industries Incorporated, Time Warner and TW KBLCOM Acquisition Sub (which is incorporated herein by reference to Exhibit 2(a) to Time Warner's Current Report on Form 8-K dated January 26, 1995). 10.2 Agreement and Plan of Merger dated as of February 6, 1995, among Cablevision Industries Corporation, Alan Gerry, Time Warner and TW CVI Acquisition Sub (which is incorporated herein by reference to Exhibit 2(a) to Time Warner's Current Report on Form 8-K dated February 6, 1995 (the "February Form 8-K")). 10.3 Agreement and Plan of Merger dated as of February 6, 1995, among Cablevision Properties, Inc., Alan Gerry and Time Warner (which is incorporated herein by reference to Exhibit 2(b) to the February Form 8-K). 10.4 Agreement and Plan of Merger dated as of February 6, 1995, among Cablevision Management Corporation of Philadelphia, Alan Gerry and Time Warner (which is incorporated herein by reference to Exhibit 2(c) to the February Form 8-K). 10.5 Purchase Agreement dated as of February 6, 1995, among Alan Gerry, Cablevision Industries of Delaware, Inc., ARA Cablevision Inc., Cablevision Industries Limited Partnership, Cablevision Industries of Tennessee L.P., Cablevision Industries of Saratoga Associates, Cablevision of Fairhaven/Acushnet, Cablevision Industries of Middle Florida, Inc., Cablevision Industries of Florida, Inc. and Time Warner (which is incorporated herein by reference to Exhibit 2(d) to the February Form 8-K). 10.6 Supplemental Agreement dated as of February 6, 1995, including Annex A thereto, among Cablevision Industries Corporation, Cablevision Industries of Delaware, Inc., ARA Cablevision Inc., Cablevision Industries Limited Partnership, Cablevision Industries of Tennessee L.P., Cable Industries of Saratoga Associates, Cablevision of Fairhaven/Acushnet, Cablevision Industries of Middle Florida, Inc., Cablevision Industries of Florida, Inc., Alan Gerry, Time Warner and TW CVI Acquisition Sub (which is incorporated herein by reference to Exhibit 2(e) to the February Form 8-K). 27 Financial Data Schedule. 99.1 Summarized financial information of the Time Warner Service Partnerships. 99.2 Summarized financial information of Paragon Communications. EX-27 2 ART. 5 FDS FOR 1ST QTR 10-Q
5 TIME WARNER INC. Exhibit 27 FINANCIAL DATA SCHEDULE This schedule contains summary financial information extracted from the financial statements of Time Warner Inc. for the quarter ended March 31, 1995 and is qualified in its entirety by reference to such financial statements. 1,000,000 3-MOS DEC-31-1995 JAN-01-1995 MAR-31-1995 309 0 1,921 766 409 2,640 1,459 711 16,608 2,713 9,001 380 0 1 732 16,608 1,817 1,817 1,103 1,103 0 0 210 (15) 32 (47) 0 0 0 (47) (.13) (.13)
EX-99.1 3 TIME WARNER ENTERTAINMENT COMPANY, L.P. SUPPLEMENTARY INFORMATION SUMMARIZED FINANCIAL INFORMATION OF THE TIME WARNER SERVICE PARTNERSHIPS (Unaudited) The Time Warner General Partners are the general partners of the Time Warner Service Partnerships and collectively hold a 100% priority capital interest and 87.5% residual equity interest therein. The assets of the Time Warner Service Partnerships principally include the satellite receiving dishes and broadcast antennas used by TWE's Cable division, the transponders and other transmission equipment employed by TWE's Programming-HBO and Filmed Entertainment divisions and TWE's equity interests in certain programming entities. A summary of financial information of the Time Warner Service Partnerships is set forth below: TIME WARNER SERVICE PARTNERSHIPS Three Months Ended March 31, 1995 1994 (millions) Operating Statement Information Revenues $ 32 $ 8 Operating loss - (6) Gain on investments 126 3 Net income (loss) 131 (8) March 31, December 31, 1995 1994 (millions) Balance Sheet Information Investments and advances $ 72 $ 156 Property, plant and equipment, net 147 120 Due from (to) Time Warner 82 (38) Total assets 312 279 Total liabilities 44 101 EX-99.2 4 TIME WARNER ENTERTAINMENT COMPANY, L.P. SUPPLEMENTARY INFORMATION SUMMARIZED FINANCIAL INFORMATION OF PARAGON COMMUNICATIONS (Unaudited) TWE has an indirect 50% ownership interest in Paragon Communications ("Paragon"), a cable system joint venture accounted for on the equity basis. In January 1995, Time Warner agreed to acquire the other 50% interest in Paragon from KBLCOM Incorporated. Such transaction is expected to close during the third quarter of 1995. A summary of financial information of Paragon (100% basis) is set forth below: PARAGON COMMUNICATIONS Three Months Ended March 31, 1995 1994 (millions) Operating Statement Information Revenues $ 87 $ 86 Operating income 20 21 Net income 31 16 March 31, December 31, 1995 1994 (millions) Balance Sheet Information Property, plant and equipment, net $ 396 $ 392 Cable television franchises 203 206 Total assets 624 628 Debt 222 249 Total liabilities 288 323 -----END PRIVACY-ENHANCED MESSAGE-----