-----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, Th9kfN7RPlELTAEX4VgVLQmOYuu1t+VgXRJG5+LGMm9I3EL1/g1V2/3GpPCsz7HV sgAvC53fRZVWZSUePJoKAg== 0000736157-95-000046.txt : 19951119 0000736157-95-000046.hdr.sgml : 19951119 ACCESSION NUMBER: 0000736157-95-000046 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 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: 95591666 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 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 September 30, 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 387,466,914 Description of Class Shares Outstanding as of October 31, 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 September 30, 1995 and December 31, 1994 1 27 Consolidated statements of operations for the three and nine months ended September 30, 1995 and 1994 2 28 Consolidated statements of cash flows for the nine months ended September 30, 1995 and 1994 3 29 Notes to consolidated financial statements 4 30 Management's discussion and analysis of results of operations and financial condition 16 37 PART II. OTHER INFORMATION 43 PART I. FINANCIAL INFORMATION TIME WARNER INC. CONSOLIDATED BALANCE SHEET (Unaudited) September 30, December 31, 1995 1994 (millions, except per share amounts) ASSETS Current assets Cash and equivalents $ 378 $ 282 Receivables, less allowances of $757 and $768 1,426 1,439 Inventories 461 370 Prepaid expenses 868 726 Total current assets 3,133 2,817 Investments in and amounts due to and from Entertainment Group 6,022 5,350 Investments, other 2,499 1,555 Property, plant and equipment, net 1,088 753 Music catalogues, contracts and copyrights 1,167 1,207 Goodwill 5,263 4,630 Cable television franchises 1,716 - Other assets 534 404 Total assets $21,422 $16,716 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts and royalties payable $ 1,346 $ 1,379 Debt due within one year 14 355 Other current liabilities 1,477 1,238 Total current liabilities 2,837 2,972 Long-term debt 9,931 8,839 Deferred income taxes 3,469 2,700 Unearned portion of paid subscriptions 633 631 Other liabilities 486 426 Company-obligated mandatorily redeemable preferred securities of subsidiary (1) 374 - -1- Shareholders' equity Preferred stock, $1 par value, 29.7 million and 962 thousand shares outstanding, $2.994 billion and $140 million liquidation preference 30 1 Common stock, $1 par value, 387.4 million and 379.3 million shares outstanding (excluding 45.7 million treasury shares) 387 379 Paid-in capital 5,410 2,588 Unrealized gains on certain marketable securities 134 130 Accumulated deficit (2,269) (1,950) Total shareholders' equity 3,692 1,148 Total liabilities and shareholders' equity $21,422 $16,716 _______________ (1) The sole assets of the subsidiary that is the obligor on the preferred securities are $385 million principal amount of subordinated notes of Time Warner due December 23, 1997. Such preferred securities are redeemable for cash or, at Time Warner's option, approximately 12.1 million shares of Hasbro, Inc. common stock owned by Time Warner. See accompanying notes. -2- TIME WARNER INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Nine Months Ended September 30, Ended September 30, 1995 1994 1995 1994 (millions, except per share amounts) Revenues (a) $1,981 $1,884 $5,705 $5,109 Cost of revenues (a)(b) 1,274 1,125 3,396 2,923 Selling, general and administrative (a)(b) 686 618 1,966 1,763 Operating expenses 1,960 1,743 5,362 4,686 Business segment operating income 21 141 343 423 Equity in pretax income of Entertainment Group (a) 129 66 235 177 Interest and other, net (a) (259) (177) (615) (514) Corporate expenses (a) (18) (20) (57) (57) Income (loss) before income taxes (127) 10 (94) 29 Income tax (provision) benefit 25 (42) (63) (132) Loss before extraordinary item (102) (32) (157) (103) Extraordinary loss on retirement of debt, net of $26 million income tax benefit (42) - (42) - Net loss (144) (32) (199) (103) Preferred dividend requirements (16) (3) (24) (9) Net loss applicable to common shares $ (160) $ (35) $(223) $(112) Loss per common share: Loss before extraordinary item $(0.30) $(0.09) $(0.47) $(0.30) Net loss $(0.41) $(0.09) $(0.58) $(0.30) Average common shares 386.5 379.1 382.5 378.8 -3- __________________ (a) Includes the following income (expenses) resulting from transactions with the Entertainment Group and other related companies for the three and nine months ended September 30, 1995, respectively, and for the corresponding periods in the prior year: revenues of $50 million and $144 million in 1995, and $56 million and $148 million in 1994; cost of revenues of $(25) million and $(74) million in 1995, and $(34) million and $(80) million in 1994; selling, general and administrative of $10 million and $39 million in 1995, and $14 million and $33 million in 1994; equity in pretax income of Entertainment Group of $(19) million and $(79) million in 1995, and $(31) million and $(95) million in 1994; interest and other, net of $(14) million and $(13) million in 1995, and $2 million and $17 million in 1994; and corporate expenses of $17 million and $47 million in 1995, and $15 million and $45 million in 1994. (b) Includes depreciation and amortization expense of: $ 167 $ 109 $ 398 $ 319 See accompanying notes. -4- TIME WARNER INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Nine Months Ended September 30, 1995 1994 (millions) OPERATIONS Net loss $ (199) $ (103) Adjustments for noncash and nonoperating items: Extraordinary loss on retirement of debt 42 - Depreciation and amortization 398 319 Noncash interest expense 156 162 Excess (deficiency) of distributions over equity in pretax income of Entertainment Group 722 (58) Changes in operating assets and liabilities (465) (32) Cash provided by operations 654 288 INVESTING ACTIVITIES Investments and acquisitions (353) (123) Capital expenditures (176) (143) Investment proceeds 332 144 Cash used by investing activities (197) (122) FINANCING ACTIVITIES Borrowings 1,997 404 Debt repayments (2,643) (376) Issuance of PERCS 374 - Dividends paid (110) (105) Other 21 29 Cash used by financing activities (361) (48) INCREASE IN CASH AND EQUIVALENTS 96 118 CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 282 200 CASH AND EQUIVALENTS AT END OF PERIOD $378 $318 See accompanying notes. -5- TIME WARNER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES 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, Music and Cable businesses. Time Warner's Entertainment Group, consisting of the Filmed Entertainment, Six Flags Theme Parks, Broadcasting-The WB Network, Programming-HBO and Cable businesses owned primarily by Time Warner Entertainment Company, L.P. ("TWE"), 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. Intangible Assets Intangible assets are recorded when the cost of acquired companies exceeds the fair value of their tangible assets. Intangible assets are amortized over periods up to forty years using the straight-line method. Time Warner separately reviews the carrying value of intangible assets for each acquired entity on a quarterly basis to determine whether an impairment may exist. Time Warner considers relevant cash flow and profitability information, including estimated future operating results, trends and other available information, in assessing whether the carrying value of intangible assets can be recovered. Upon a determination that the carrying value of intangible assets will not be recovered from the undiscounted future cash flows of the acquired business, the carrying value of such intangible assets would be considered impaired and will be reduced by a charge to operations in the amount of the impairment. Impairment is -6- measured as any deficiency in estimated undiscounted future cash flows of the acquired business to recover the carrying value related to the intangible assets. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," ("FAS 121") effective for fiscal years beginning after December 15, 1995. The new rules establish standards for the recognition and measurement of impairment losses on long-lived assets and certain identifiable intangible assets, including goodwill. Time Warner expects that the adoption of FAS 121 will not have a material effect on its financial statements. Interest Rate Swap Contracts Interest rate swap contracts are used to adjust the proportion of total debt that is subject to variable and fixed interest rates. Under interest rate swap contracts, the Company either agrees to pay an amount equal to a specified floating rate of interest times a notional principal amount, and to receive in return an amount equal to a specified fixed rate of interest times the same notional principal amount or, vice versa, to receive a floating rate amount and to pay a fixed rate amount. The notional amounts of the contracts are not exchanged. No other cash payments are made unless the contract is terminated prior to maturity, in which case the amount paid or received in settlement is established by agreement at the time of termination, and usually represents the net present value, at current rates of interest, of the remaining obligations to exchange payments under the terms of the contract. Interest rate swap contracts are entered into with a number of major financial institutions in order to minimize credit risk. The net amounts paid or payable, or received or receivable, through the end of the accounting period are included in interest expense. Because interest rate swap contracts are used to modify the interest characteristics of Time Warner's outstanding debt from a fixed to a floating rate basis or, vice versa, unrealized gains or losses on interest rate swap contracts are not recognized unless the contracts are terminated prior to their maturity. Gains or losses on the termination of contracts are deferred and amortized to income over the remaining average life of the terminated contracts. -7- 2. ENTERTAINMENT GROUP Time Warner's investment in and amounts due to and from the Entertainment Group at September 30, 1995 and December 31, 1994 consists of the following: September 30, December 31, 1995 1994 (millions) Investment in TWE $6,237 $5,284 Income tax and stock option related distributions due from TWE 178 423 Credit agreement debt due to TWE (400) (400) Other liabilities due to TWE, principally related to home video distribution (176) (266) Other receivables due from TWE 78 - Investment in and amounts due to and from TWE 5,917 5,041 Investment in other Entertainment Group companies 105 309 Total $6,022 $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. Certain Time Warner subsidiaries are the general partners of TWE ("Time Warner General Partners"). Time Warner acquired the limited partnership interests previously held by subsidiaries of each of ITOCHU Corporation and Toshiba Corporation effective in the third quarter of 1995 for an aggregate cost of $1.36 billion, consisting of 15 million shares of convertible preferred stock (Series G Preferred Stock, Series H Preferred Stock and Series I Preferred Stock) and $10 million in cash (the "ITOCHU/Toshiba Transaction"). Accordingly, Time Warner and certain of its wholly-owned subsidiaries collectively now own 74.49% of the pro rata priority capital and residual equity interests in TWE, and certain additional senior and junior priority capital interests. The remaining 25.51% pro rata priority capital and residual equity limited partnership interests are owned by a subsidiary of U S WEST, Inc. ("U S WEST"). The ITOCHU/Toshiba Transaction was accounted for by the purchase method of accounting for business combinations. 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 $83 million and $145 million in the nine months ended September 30, 1995 and 1994, respectively, no portion of which was allocated to the limited partners. -8- Each Time Warner General Partner has guaranteed a pro rata portion of approximately $6 billion of TWE's debt and accrued interest at September 30, 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, which reflects the consolidation by TWE of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995, the deconsolidation of Six Flags Entertainment Corporation ("Six Flags") effective as of June 23, 1995 and the consolidation of Paragon Communications ("Paragon") effective as of July 6, 1995. TIME WARNER ENTERTAINMENT GROUP Three Months Nine Months Ended September 30, Ended September 30, 1995 1994 1995 1994 (millions) Operating Statement Information Revenues $2,363 $2,215 $6,871 $6,205 Depreciation and amortization 267 261 780 719 Business segment operating income 274 236 749 673 Interest and other, net 128 155 467 451 Income before income taxes 129 66 235 177 Income before extraordinary item 103 42 173 137 Net income 79 42 149 137 Nine Months Ended September 30, 1995 1994 (millions) Cash Flow Information Cash provided by operations $ 1,205 $1,091 Capital expenditures (1,099) (772) Investments and acquisitions (143) (154) Investment proceeds 1,040 43 Loan to Time Warner - (250) Increase (decrease) in debt (1,094) 42 Collections on note receivable from U S WEST 375 129 Capital distributions (957) (119) Increase (decrease) in cash and equivalents (632) 10 -9- September 30, December 31, 1995 1994 (millions) Balance Sheet Information Cash and equivalents $ 439 $1,071 Total current assets 2,943 3,571 Total assets 18,541 18,992 Total current liabilities 2,955 2,953 Long-term debt 6,181 7,160 Minority interests 634 - Time Warner General Partners' senior capital 1,398 1,663 TWE partners' capital 6,351 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 September 30, 1995 and December 31, 1994, the Time Warner General Partners had recorded $178 million and $89 million, respectively, of stock option related distributions due from TWE, based on closing prices of Time Warner common stock of $39.75 and $35.125, respectively. Time Warner is paid when the options are exercised. During 1995, the Time Warner General Partners received net distributions from TWE in the amount of $957 million, consisting of $366 million of TWE partnership income allocated to the Time Warner General Partners' senior capital interest, $575 million of tax-related distributions (of which $334 million was accrued at December 31, 1994) and $16 million of stock option related distributions. On June 23, 1995, TWE sold 51% of its interest in Six Flags to an investment group led by Boston Ventures for $204 million and received $640 million in additional proceeds from Six Flags, representing payment of certain intercompany indebtedness and licensing fees. As a result of the transaction, Six Flags has been deconsolidated and TWE's remaining 49% interest in Six Flags is now accounted for under the equity method of accounting. TWE reduced debt by approximately $850 million in connection with the transaction, and approximately $140 million of income on the transaction was deferred by TWE principally as a result of its guarantee of certain third-party, zero-coupon indebtedness of Six Flags due in 1999. 3. TBS TRANSACTION Time Warner has entered into an Agreement and Plan of Merger dated as of September 22, 1995 (the "Merger Agreement"), providing for the merger of Turner Broadcasting System, Inc. ("TBS") with a wholly-owned subsidiary of Time Warner (the "Merger"). Alternatively, the Merger Agreement contemplates that the structure of the transaction may be changed, if the parties so agree, so that each of Time Warner and TBS will merge with -10- separate subsidiaries of a newly formed holding company (the "Holding Company Transaction" and together with the Merger, the "TBS Transaction"). If the Holding Company Transaction is implemented, it is expected that the issued and outstanding shares of each class of the capital stock of Time Warner will be converted into shares of an identical class of capital stock of the newly formed holding company. In connection with the TBS Transaction, Time Warner has agreed to enter into certain agreements and related transactions with certain shareholders of TBS, including R. E. Turner and Liberty Media Corporation ("LMC"). The Merger Agreement and certain related agreements provide for either Time Warner or the newly formed holding company, as applicable, to issue approximately 171.3 million shares of common stock ("Common Stock") in exchange for the outstanding TBS capital stock, to issue approximately 13 million stock options to replace all outstanding TBS options, and to assume TBS' indebtedness (which approximated $2.3 billion at September 30, 1995). As part of the TBS Transaction, LMC will exchange the 50.8 million shares of Common Stock to be received by LMC in the TBS Transaction for a number of shares of a new class of voting stock economically equivalent to such Common Stock ("LMC Class Stock") and will receive a number of additional shares of LMC Class Stock equivalent to five million shares of Common Stock pursuant to a separate option agreement, all of which will be placed in a voting trust or, in certain circumstances, exchanged for non-voting stock. The Merger is subject to customary closing conditions, including the approval of the shareholders of TBS and of Time Warner, all necessary approvals of the Federal Communications Commission and appropriate antitrust approvals. There can be no assurance that all these approvals can be obtained or, in the case of governmental approvals, if obtained, will not be conditioned upon changes to the terms of the Merger Agreement or the related agreements. 4. CABLE TRANSACTIONS On April 1, 1995, TWE formed a cable television joint venture with the Advance/Newhouse Partnership ("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. TWE consolidates the partnership and the one-third equity interest owned by Advance/Newhouse is reflected in TWE's balance sheet as minority interest. 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 -11- 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. 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 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 acquisition was accounted for by the purchase method of accounting for business combinations; accordingly, the cost to acquire Summit of approximately $351 million was preliminarily allocated to the assets acquired in the amount of $666 million and to the liabilities assumed in the amount of $315 million, in proportion to estimates of their respective fair values. On July 6, 1995, Time Warner acquired KBLCOM Incorporated ("KBLCOM"), which owns cable television systems serving approximately 700,000 subscribers and a 50% interest in Paragon, which owns cable television systems serving an additional 972,000 subscribers. The other 50% interest in Paragon was already owned by TWE. To acquire KBLCOM, Time Warner issued 1 million shares of Common Stock and 11 million shares of a new convertible preferred stock ("Series D Preferred Stock") and assumed or incurred approximately $1.2 billion of indebtedness. The acquisition was accounted for by the purchase method of accounting for business combinations; accordingly, the cost to acquire KBLCOM of approximately $1.033 billion was preliminarily allocated to the assets acquired in the amount of $3.091 billion and to the liabilities assumed in the amount of $2.058 billion, in proportion to estimates of their respective fair values. Time Warner's previously-announced acquisition of Cablevision Industries Corporation ("CVI") and related companies is expected to close during the fourth quarter of 1995 or in early 1996. On a pro forma basis, giving effect to Time Warner's acquisitions of KBLCOM and Summit and the ITOCHU/Toshiba Transaction as if they had occurred at the beginning of the periods, Time Warner would have reported revenues of $5.866 billion and $5.351 billion, a loss before extraordinary item of $221 million and $183 million ($.81 and $.72 per common share, respectively) and a net loss of $263 million and $183 million ($.92 and $.72 per common share, respectively) for the nine months ended September 30, 1995 and 1994, respectively. -12- 5. LONG-TERM DEBT On June 30, 1995, a wholly-owned subsidiary of Time Warner ("TWI Cable"), TWE and the TWE-Advance/Newhouse Partnership executed a five-year revolving credit facility (the "New Credit Agreement"). The New Credit Agreement enables such entities to refinance certain indebtedness assumed from the companies acquired or to be acquired in the cable acquisitions, to refinance TWE's indebtedness under a pre-existing bank credit agreement and to finance the ongoing working capital, capital expenditure and other corporate needs of each borrower. The New Credit Agreement permits borrowings in an aggregate amount of up to $8.3 billion. Borrowings are limited to $4 billion in the case of TWI Cable, $5 billion in the case of the TWE-Advance/Newhouse Partnership and $8.3 billion in the case of TWE, subject in each case to certain limitations and adjustments. Such borrowings will bear interest at specific rates for each of the three borrowers, generally equal to LIBOR plus a margin initially ranging from 50 to 87.5 basis points based on the credit rating or financial leverage of the applicable borrower. The New Credit Agreement contains 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 and other cash payments or transfers of assets from the borrowers to their respective partners or affiliates. On July 6, 1995, TWI Cable borrowed approximately $1.2 billion under the New Credit Agreement to refinance certain indebtedness assumed or incurred in the acquisition of KBLCOM. On August 15, 1995, Time Warner redeemed all of its $1.8 billion principal amount of outstanding Redeemable Reset Notes due August 15, 2002 (the "Reset Notes") in exchange for new securities, consisting of approximately $454 million aggregate principal amount of Floating Rate Notes due August 15, 2000, approximately $272 million aggregate principal amount of 7.975% Notes due August 15, 2004, approximately $545 million aggregate principal amount of 8.11% Debentures due August 15, 2006, and approximately $545 million aggregate principal amount of 8.18% Debentures due August 15, 2007. On September 18, 1995, Time Warner redeemed approximately $1 billion principal amount of its 8.75% Convertible Subordinated Debentures due 2015 (the "8.75% Convertible Debentures") for an aggregate redemption price of $1.06 billion, including redemption premiums and accrued interest thereon. The redemption was financed with approximately $500 million of proceeds raised from the issuance of 7.75% ten-year notes in June 1995, $363 million of net proceeds raised from the issuance of Company-obligated mandatorily redeemable preferred securities of a subsidiary in August 1995 and available cash and equivalents. -13- An extraordinary loss of $42 million was recognized in the third quarter of 1995 in connection with Time Warner's redemption of the 8.75% Convertible Debentures and the write-off by TWE of deferred financing costs related to its former bank credit agreement. 6. MANDATORILY REDEEMABLE PREFERRED SECURITIES On August 15, 1995, Time Warner issued approximately 12.1 million Company-obligated mandatorily redeemable preferred securities of a wholly-owned subsidiary ("PERCS") for aggregate gross proceeds of $374 million. The sole assets of the subsidiary that is the obligor on the PERCS are $385 million principal amount of 4% subordinated notes of Time Warner due December 23, 1997. Cumulative cash distributions are payable on the PERCS at an annual rate of 4%, or $1.24 per PERCS. The PERCS are mandatorily redeemable on December 23, 1997, for an amount per PERCS equal to the lesser of $54.41, and the market value of a share of common stock of Hasbro, Inc. ("Hasbro") on December 17, 1997, payable in cash or, at Time Warner's option, Hasbro common stock. Time Warner has the right to redeem the PERCS at any time prior to December 23, 1997, at an amount per PERCS equal to $54.41 (or in certain limited circumstances the lesser of such amount and the market value of a share of Hasbro common stock at the time of redemption) plus accrued and unpaid distributions thereon and a declining premium, payable in cash or, at Time Warner's option, Hasbro common stock. Time Warner owns approximately 12.1 million shares of Hasbro common stock, which can be used by Time Warner, at its election, to satisfy its obligations under the PERCS or its obligations under its zero coupon exchangeable notes due 2012. Such zero coupon notes are exchangeable and redeemable into an aggregate 12.1 million shares of Hasbro common stock. Time Warner has certain obligations relating to the PERCS which amount to a full and unconditional guaranty of such subsidiary's obligations with respect thereto. 7. CAPITAL STOCK Changes in shareholders' equity are as follows: Nine Months Ended September 30, 1995 1994 (millions) Balance at beginning of year $1,148 $1,370 Net loss (199) (103) Common dividends declared (103) (99) Preferred dividends declared (24) (9) Issuance of common stock and preferred stock in KBLCOM and Summit acquisitions 1,384 - Issuance of preferred stock in ITOCHU/Toshiba Transaction 1,350 - Unrealized gains (losses) on certain marketable equity investments 4 (30) -14- Other, principally shares issued pursuant to stock option and dividend reinvestment plans 132 69 Balance at September 30 $3,692 $1,198 During 1995, Time Warner issued approximately 29.3 million shares of convertible preferred stock in connection with the ITOCHU/Toshiba Transaction and its acquisitions of KBLCOM and Summit. Set forth below is a summary of the principal terms of Time Warner's outstanding issuances of preferred stock at September 30, 1995: Number of Shares of Common Stock Earliest Earliest Shares Issuable Upon Exchange Redemption Description Outstanding Conversion Date Date (millions) (millions) Series B Preferred Stock .4 - - At any time Series C Preferred Stock 3.3 6.8 5/2/98 5/2/00 Series D Preferred Stock 11.0 22.9 7/6/99 7/6/00 Series G Preferred Stock 6.2 12.9 9/5/99 9/5/99 Series H Preferred Stock 1.8 3.7 9/5/00 9/5/99 Series I Preferred Stock 7.0 14.6 10/2/99 10/2/99 29.7 60.9 Each share of Series B Preferred Stock: (1) is entitled to a liquidation preference of $145 per share, (2) is not convertible, (3) entitles the holder thereof to receive an annual dividend equal to $4.35 per share, (4) does not generally entitle the holder thereof to vote, except in certain limited circumstances, and (5) is redeemable, in whole or in part, by Time Warner and the holders thereof in exchange for cash or shares of any class or series of publicly-traded Time Warner stock, at Time Warner's option, equal in value to the liquidation value of the Series B Preferred Stock plus a premium of 2% of liquidation value for each year after May 31, 1995 to the redemption date. The principal terms of each series of convertible preferred stock issued in 1995 (the Series C Preferred Stock, the Series D Preferred Stock, the Series G Preferred Stock, the Series H Preferred Stock and the Series I Preferred Stock, and collectively, the "Convertible Preferred Stock") are similar in nature, unless otherwise noted below. Each share of Convertible Preferred Stock: (1) is entitled to a liquidation preference of $100 per share, (2) is immediately convertible into 2.08264 shares of Time Warner common stock at a conversion price of $48 per share (based on its liquidation value), except that shares of the Series H Preferred Stock are generally not convertible until after five years, (3) entitles the holder thereof (i) to receive for a four year period from the date of issuance (or a five year period with respect to the Series C Preferred Stock) an annual dividend per share equal to the greater of $3.75 and an amount equal to the dividends paid on the Time Warner common stock into which each share may be converted and (ii) to the extent that any -15- of such shares of preferred stock remain outstanding at the end of the period in which the minimum $3.75 per share dividend is to be paid, the holders thereafter will receive dividends equal to the dividends paid on shares of Time Warner common stock multiplied by the number of shares into which their shares of preferred stock are convertible and (4) except for the the Series H Preferred Stock which is generally not entitled to vote, entitles the holder thereof to vote with the common stockholders on all matters on which the common stockholders are entitled to vote, and each share of such Convertible Preferred Stock is entitled to two votes on any such matter. Time Warner has the right to exchange each series of Convertible Preferred Stock for Time Warner common stock at the stated conversion price at any time on or after the respective exchange date. The Series C Preferred Stock is exchangeable by the holder beginning after the third year from its date of issuance and by Time Warner after the fourth year at the stated conversion price plus a declining premium in years four and five and no premium thereafter. In addition, Time Warner has the right to redeem each series of Convertible Preferred Stock, in whole or in part, for cash at the liquidation value plus accrued dividends, at any time on or after the respective redemption date. 8. SEGMENT INFORMATION Information as to the operations of Time Warner and the Entertainment Group in different business segments is set forth below. Cable business segment information for Time Warner reflects the 1995 acquisitions of KBLCOM and Summit. Cable business segment information for the Entertainment Group reflects the consolidation by TWE of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995 and Paragon effective as of July 6, 1995. The operating results of Six Flags have been deconsolidated effective as of June 23, 1995 and are now reported separately to facilitate comparability. Three Months Nine Months Ended September 30, Ended September 30, 1995 1994 1995 1994 Revenues (millions) Time Warner: Publishing $ 914 $ 840 $2,673 $2,442 Music 992 1,051 2,969 2,685 Cable 83 - 83 - Intersegment elimination (8) (7) (20) (18) Total $1,981 $1,884 $5,705 $5,109 -16- Entertainment Group: Filmed Entertainment $1,176 $1,056 $3,514 $3,143 Six Flags Theme Parks - 287 227 499 Broadcasting - The WB Network 7 - 13 - Programming - HBO 409 386 1,195 1,122 Cable 858 552 2,196 1,663 Intersegment elimination (87) (66) (274) (222) Total $2,363 $2,215 $6,871 $6,205 Three Months Nine Months Ended September 30, Ended September 30, 1995 1994 1995 1994 Operating income (millions) Time Warner: Publishing $ 62 $ 56 $ 231 $ 212 Music(1) (39) 85 114 211 Cable (2) - (2) - Total $ 21 $ 141 $ 343 $ 423 Entertainment Group: Filmed Entertainment $ 70 $ 61 $ 196 $ 185 Six Flags Theme Parks - 35 29 52 Broadcasting - The WB Network (7) - (40) - Programming - HBO 70 61 207 179 Cable 141 79 357 257 Total $ 274 $ 236 $ 749 $ 673 _______________ (1) Includes pretax losses of $85 million recorded in the third quarter of 1995 related to certain businesses and joint ventures owned by the Music Division which are being restructured or closed. The losses are primarily related to Warner Music Enterprises, one of the Company's direct marketing efforts, and the write off of its related direct mail order assets that will not be recoverable due to the closure of this business. Such closure will be completed in the fourth quarter of 1995 and will not require any significant cash outlays. The activities that will not be continued are not material to the Company's results of operations, having resulted in insignificant operating losses in prior periods. Three Months Nine Months Ended September 30, Ended September 30, 1995 1994 1995 1994 (millions) Depreciation of Property, Plant and Equipment Time Warner: Publishing $ 15 $ 13 $ 43 $ 36 Music 24 21 71 60 Cable 13 - 13 - Total $ 52 $ 34 $ 127 $ 96 Entertainment Group: Filmed Entertainment $ 28 $ 20 $ 73 $ 53 Six Flags Theme Parks - 25 20 43 Broadcasting - The WB Network - - - - Programming - HBO 4 2 13 10 Cable 123 85 330 251 Total $ 155 $ 132 $ 436 $ 357 -17- Three Months Nine Months Ended September 30, Ended September 30, 1995 1994 1995 1994 (millions) Amortization of Intangible Assets (1) Time Warner: Publishing $ 9 $ 9 $ 27 $ 25 Music 72 66 210 198 Cable 34 - 34 - Total $ 115 $ 75 $ 271 $ 223 Entertainment Group: Filmed Entertainment $ 31 $ 33 $ 100 $ 97 Six Flags Theme Parks - 15 11 26 Broadcasting - The WB Network - - - - Programming - HBO - 3 - 5 Cable 81 78 233 234 Total $ 112 $ 129 $ 344 $ 362 ______________________ (1) Amortization includes all amortization relating to the acquisitions of Warner Communications Inc. ("WCI") in 1989, the American Television and Communications Corporation ("ATC") minority interest in 1992, the acquisitions of KBLCOM and Summit in 1995 and to other business combinations accounted for by the purchase method. 9. CONTINGENCIES Pending legal proceedings are substantially limited to litigation incidental to businesses of Time Warner, alleged damages in connection with class action lawsuits and the pending litigation with U S WEST. In the opinion of counsel and management, the ultimate resolution of these matters will not have a material effect on the consolidated financial statements of Time Warner. 10. ADDITIONAL FINANCIAL INFORMATION Additional financial information is as follows: Nine Months Ended September 30, 1995 1994 (millions) Interest expense $ 663 $ 571 Cash payments made for interest 537 453 Cash payments made for income taxes 207 320 Tax-related distributions received from TWE 575 115 Income tax refunds received 20 46 During the nine months ended September 30, 1995 and 1994, Time Warner realized $35 million and $209 million, respectively, from the securitization of receivables. -18- TIME WARNER INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The comparability of the results of operations and financial condition of Time Warner and its Entertainment Group has been affected during 1995 by (1) the ITOCHU/Toshiba Transaction which resulted in a partial restructuring of Time Warner's ownership of TWE, (2) Time Warner's acquisitions of KBLCOM and Summit, (3) the consolidation of Paragon by TWE effective as of July 6, 1995, (4) the deconsolidation of Six Flags by TWE effective as of June 23, 1995 as a result of the Six Flags transaction, (5) the formation of the TWE-Advance/Newhouse Partnership on April 1, 1995 and (6) certain debt refinancings and asset sales. The impact of these transactions on the financial statements of Time Warner and the Entertainment Group is discussed below. RESULTS OF OPERATIONS Time Warner had revenues of $1.981 billion, a loss of $102 million ($.30 per common share) before an extraordinary loss on the retirement of debt and a net loss of $144 million ($.41 per common share) for the three months ended September 30, 1995, compared to revenues of $1.884 billion and a net loss of $32 million ($.09 per common share) for the three months ended September 30, 1994. Revenues of $5.705 billion, a loss of $157 million ($.47 per common share) before an extraordinary loss on the retirement of debt and a net loss of $199 million ($.58 per common share) were reported for the nine months ended September 30, 1995, compared to revenues of $5.109 billion and a net loss of $103 million ($.30 per common share) for the nine months ended September 30, 1994. Time Warner's net loss for the three and nine month periods ended September 30, 1995 was adversely affected by a $42 million extraordinary loss on the retirement of debt and $85 million in pretax losses ($52 million after taxes) related to certain businesses and joint ventures owned by the Music Division which are being restructured or closed. As discussed more fully below, the increase in Time Warner's net loss for the three and nine month periods ended September 30, 1995, was also principally affected by lower operating income generated by Time Warner's Music Division, a decrease in investment-related income and higher interest expense on approximately $1.3 billion of debt assumed in the cable acquisitions, offset in part by higher operating income generated by Time Warner's Publishing Division and increased income from Time Warner's equity in the pretax income of the Entertainment Group. Time Warner's equity in the pretax income of the Entertainment Group was $129 million in the three months ended September 30, 1995, compared to $66 million in the three months ended September 30, 1994, and was $235 million in the nine months ended September -19- 30, 1995, compared to $177 million in the nine months ended September 30, 1994. As discussed more fully below, the Entertainment Group's operating results for the three and nine month periods ended September 30, 1995 reflect an overall increase in operating income generated by its business segments (including the contribution by the TWE-Advance/Newhouse Partnership), an increase in investment-related income and gains on the sale of certain unclustered cable systems, offset by higher floating-rates of interest paid on borrowings under TWE's bank credit agreements and minority interest expense related to the consolidation of the operating results of the TWE- Advance/Newhouse Partnership effective as of April 1, 1995. 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. EBITDA and operating income for Time Warner and the Entertainment Group for the three and nine months ended September 30, 1995 and 1994 are as follows: Three Months Ended September 30, Nine Months Ended September 30, EBITDA Operating Income EBITDA Operating Income 1995 1994 1995 1994 1995 1994 1995 1994 Time Warner: (millions) Publishing $ 86 $ 78 $ 62 $ 56 $ 301 $ 273 $231 $212 Music(1) 57 172 (39) 85 395 469 114 211 Cable 45 - (2) - 45 - (2) - Total $188 $250 $ 21 $141 $ 741 $ 742 $343 $423 Entertainment Group: Filmed Entertainment $129 $114 $ 70 $ 61 $ 369 $ 335 $196 $185 Six Flags Theme Parks - 75 - 35 60 121 29 52 Broadcasting - The WB Network (7) - (7) - (40) - (40) - Programming - HBO 74 66 70 61 220 194 207 179 Cable 345 242 141 79 920 742 357 257 Total $541 $497 $274 $236 $1,529 $1,392 $749 $673 _______________ (1) Includes pretax losses of $85 million recorded in the third quarter of 1995 related to certain businesses and joint ventures owned by the Music Division which are being restructured or closed. -20- 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 businesses 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, the $1.4 billion acquisitions of KBLCOM and Summit in 1995 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. Three Months Ended September 30, 1995 Compared to the Three Months Ended September 30, 1994 Time Warner PUBLISHING. Revenues increased to $914 million, compared to $840 million in the third quarter of 1994. EBITDA increased to $86 million from $78 million. Depreciation and amortization amounted to $24 million in 1995 and $22 million in 1994. Operating income increased to $62 million from $56 million. Revenues benefited from increases in magazine advertising and book revenues, offset in part by a marginal decline in magazine circulation revenues. Contributing to the revenue gain were increases achieved by PEOPLE, SPORTS ILLUSTRATED, ENTERTAINMENT WEEKLY and book publisher Oxmoor House. EBITDA and operating income increased as a result of the revenue gains, offset in part by significantly higher postal and paper costs as a result of price increases. MUSIC. Revenues decreased to $992 million, compared to $1.051 billion in the third quarter of 1994. EBITDA decreased to $57 million from $172 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $96 million in 1995 and $87 million in 1994. Operating income decreased to a loss of $39 million from income of $85 million. Operating results were adversely affected by $85 million in losses recorded in the third quarter of 1995 that related to certain businesses and joint ventures owned by the Music Division which are being restructured or closed. Revenues decreased principally due to a decline in international recorded music sales relating to artist delays in the release of new product, offset in part by increased music publishing revenues and the effect from consolidating the operating results of certain companies which had previously been accounted for under the equity method of accounting (due to increases in Time Warner's -21- ownership of such entities). EBITDA and operating income decreased as a result of the losses, lower international recorded music results and higher start-up losses for new business ventures, which more than offset improved results for domestic recorded music and music publishing. Operating income was further affected in 1995 by higher depreciation and amortization related to certain acquisitions made in 1995 and 1994. The losses relating to certain businesses and joint ventures being restructured or closed are primarily related to Warner Music Enterprises, one of the Company's direct marketing efforts, and the write off of its related direct mail order assets that will not be recoverable due to the closure of this business. Such closure will be completed in the fourth quarter of 1995 and will not require any significant cash outlays or otherwise significantly affect the results of future operations. CABLE. As a result of Time Warner's acquisitions of KBLCOM and Summit in 1995, cable operating results for 1995 included revenues of $83 million, EBITDA of $45 million, depreciation and amortization of $47 million and an operating loss of $2 million. INTEREST AND OTHER, NET. Interest and other, net, increased to $259 million in the third quarter of 1995, compared to $177 million in the third quarter of 1994. Interest expense increased to $234 million, compared to $197 million, principally as a result of approximately $1.3 billion of debt assumed in the cable acquisitions. There was other expense, net, of $25 million in the third quarter of 1995, compared to other income, net, of $20 million in 1994, principally because of a decrease in investment- related income that included gains on the sale of certain assets in 1994. Entertainment Group FILMED ENTERTAINMENT. Revenues increased to $1.176 billion, compared to $1.056 billion in the third quarter of 1994. EBITDA increased to $129 million from $114 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $59 million in 1995 and $53 million in 1994. Operating income increased to $70 million from $61 million. Revenues benefited from increases in worldwide theatrical, home video and consumer products operations. Worldwide theatrical revenues in 1995 were led by the success of BATMAN FOREVER. EBITDA and operating income benefited from the revenue gains. SIX FLAGS THEME PARKS. As a result of TWE's sale of 51% of its interest in Six Flags, the operating results of Six Flags have been deconsolidated effective as of June 23, 1995 and TWE's remaining 49% interest in Six Flags is now accounted for under the equity method of accounting. Operating results for the third quarter of 1994 included revenues of $287 million, EBITDA of $75 million, depreciation and amortization of $40 million and operating income of $35 million. BROADCASTING - THE WB NETWORK. The WB Network was launched in January 1995, and generated $7 million of operating losses on $7 million of revenues in the third quarter of 1995. The third-quarter operating loss was mitigated by a favorable legal settlement, as well as by funding from a new limited partner in the network. Due to the start-up nature of this new national broadcast operation, losses are expected to continue. -22- PROGRAMMING - HBO. Revenues increased to $409 million, compared to $386 million in the third quarter of 1994. EBITDA increased to $74 million from $66 million. Depreciation and amortization amounted to $4 million in 1995 and $5 million in 1994. Operating income increased to $70 million from $61 million. Revenues benefited primarily from an increase in subscribers, as well as from higher pay-TV rates. EBITDA and operating income improved principally as a result of the revenue gains. CABLE. Revenues increased to $858 million, compared to $552 million in the third quarter of 1994. EBITDA increased to $345 million from $242 million. Depreciation and amortization, including amortization related to the purchase of WCI and the acquisition of the ATC minority interest, amounted to $204 million in 1995 and $163 million in 1994. Operating income increased to $141 million from $79 million. Revenues and operating results benefited from the formation of the TWE- Advance/Newhouse partnership on April 1, 1995 and the consolidation of Paragon effective as of July 6, 1995. Excluding such effects, revenues benefited from increases in basic cable and direct broadcast satellite subscribers and nonregulated revenues, including pay-TV, pay-per-view and advertising. Excluding the positive contributions from the TWE- Advance/Newhouse Partnership and the consolidation of Paragon, EBITDA and operating income increased as a result of the revenue gains, offset in part by 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, decreased to $128 million in the third quarter of 1995, compared to $155 million in the third quarter of 1994. Interest expense increased to $148 million, compared to $141 million in the third quarter of 1994, principally as a result of higher floating-rates of interest paid on borrowings under TWE's bank credit agreement. There was other income, net, of $20 million in the third quarter of 1995, compared to other expense, net, of $14 million in 1994, principally because of an increase in investment-related income and gains on the sale of certain unclustered cable systems in 1995, offset in part by the inclusion in 1995 of minority interest expense related to the TWE-Advance/Newhouse Partnership. Investment-related income in 1995 benefited from income recognized in connection with the restructuring of the Entertainment Group's interest in Court TV. Nine Months Ended September 30, 1995 Compared to the Nine Months Ended September 30, 1994 Time Warner PUBLISHING. Revenues increased to $2.673 billion, compared to $2.442 billion in the first nine months of 1994. EBITDA increased to $301 million from $273 million. Depreciation and amortization amounted to $70 million in 1995 and $61 million in 1994. Operating income increased to $231 million from $212 million. Revenues benefited from increases in magazine circulation, -23- advertising and book revenues. Contributing to the revenue gain were increases achieved by PEOPLE, SPORTS ILLUSTRATED, ENTERTAINMENT WEEKLY and book publisher Oxmoor House. EBITDA and operating income increased as a result of the revenue gains, offset in part by significantly higher postal and paper costs as a result of price increases. MUSIC. Revenues increased to $2.969 billion, compared to $2.685 billion in the first nine months of 1994. EBITDA decreased to $395 million from $469 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $281 million in 1995 and $258 million in 1994. Operating income decreased to $114 million from $211 million. Operating results were adversely affected by $85 million in losses recorded in the third quarter of 1995 that related to certain businesses and joint ventures owned by the Music Division which are being restructured or closed. The revenue growth in the first half of 1995 surpassed the third quarter decline and resulted from increases on a year-to-date basis 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. As a result of increases in Time Warner's ownership in certain direct marketing and merchandising joint ventures, revenues also benefited from the consolidation of the operating results of such companies which had previously been accounted for under the equity method of accounting. Excluding the losses, EBITDA increased, and operating income benefited, principally from the revenue gains and interest income on the resolution of a recorded music tax matter, offset in part by lower results from direct marketing activities attributable to higher amortization of member acquisition costs and expenses incurred in connection with the settlement of certain employment contracts. Operating income was further affected in 1995 by higher depreciation and amortization related to certain acquisitions made in 1995 and 1994. CABLE. As a result of Time Warner's acquisitions of KBLCOM and Summit in 1995, cable operating results for 1995 included revenues of $83 million, EBITDA of $45 million, depreciation and amortization of $47 million and an operating loss of $2 million. INTEREST AND OTHER, NET. Interest and other, net, increased to $615 million in the first nine months of 1995, compared to $514 million in the first nine months of 1994. Interest expense increased to $663 million from $571 million as a result of approximately $1.3 billion of debt assumed in the cable acquisitions and higher floating-rates of interest paid on $2.6 billion notional amount of interest rate swap contracts. Other income, net, of $48 million in the first nine months of 1995 decreased from $57 million in 1994, principally because of a decrease in investment-related income, which was offset by the recognition in 1995 of interest income on the resolution of a corporate tax matter. Investment-related income in both periods benefited primarily from gains on the sale of certain assets, -24- including the sale of an interest in QVC, Inc. in 1995, which exceeded losses from reductions in the carrying value of certain investments taken in each period. Entertainment Group FILMED ENTERTAINMENT. Revenues increased to $3.514 billion, compared to $3.143 billion in the first nine months of 1994. EBITDA increased to $369 million from $335 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $173 million in 1995 and $150 million in 1994. Operating income increased to $196 million from $185 million. Revenues benefited from increases in worldwide theatrical, consumer products and television distribution operations, as well as from international home video. Worldwide theatrical revenues in 1995 were led by the success of BATMAN FOREVER. EBITDA and operating income benefited from the revenue gains and increased income from licensing operations. SIX FLAGS THEME PARKS. As a result of TWE's sale of 51% of its interest in Six Flags, the operating results of Six Flags have been deconsolidated effective as of June 23, 1995 and TWE's remaining 49% interest in Six Flags is now accounted for under the equity method of accounting. Accordingly, revenues decreased to $227 million, compared to $499 million in the first nine months of 1994. EBITDA decreased to $60 million from $121 million. Depreciation and amortization amounted to $31 million in 1995 and $69 million in 1994. Operating income decreased to $29 million from $52 million. BROADCASTING - THE WB NETWORK. The WB Network was launched in January 1995, and generated $40 million of operating losses on $13 million of revenues for the first nine months of 1995. The operating loss was offset in part by a favorable legal settlement in the third quarter of 1995 and funding from a new limited partner in the network. Due to the start-up nature of this new national broadcast operation, losses are expected to continue. PROGRAMMING - HBO. Revenues increased to $1.195 billion, compared to $1.122 billion in the first nine months of 1994. EBITDA increased to $220 million from $194 million. Depreciation and amortization amounted to $13 million in 1995 and $15 million in 1994. Operating income increased to $207 million from $179 million. Revenues benefited primarily from an increase in subscribers, as well as from higher pay-TV rates. EBITDA and operating income improved principally as a result of the revenue gains. CABLE. Revenues increased to $2.196 billion, compared to $1.663 billion in the first nine months of 1994. EBITDA increased to $920 million from $742 million. Depreciation and amortization, including amortization related to the purchase of WCI and the acquisition of the ATC minority interest, amounted to $563 million in 1995 and $485 million in 1994. Operating income increased to $357 million from $257 million. Revenues and -25- operating results benefited from the formation of the TWE- Advance/Newhouse Partnership on April 1, 1995 and the consolidation of Paragon effective as of July 6, 1995. Excluding such effects, revenues benefited from increases in basic cable and direct broadcast satellite subscribers and nonregulated revenues, including pay-TV, pay-per-view and advertising. Excluding the positive contributions from the TWE-Advance/Newhouse Partnership and the consolidation of Paragon, EBITDA and operating income 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 $467 million in the first nine months of 1995, compared to $451 million in the first nine months of 1994. Interest expense increased to $447 million, compared with $417 million in the first nine months of 1994, principally as a result of higher floating-rates of interest paid on borrowings under TWE's bank credit agreements. Other expense, net, decreased to $20 million in the first nine months of 1995 from $34 million in 1994, principally because of an increase in investment-related income and gains on the sale of certain unclustered cable systems, offset in part by the inclusion in 1995 of minority interest expense related to the TWE-Advance/Newhouse Partnership. Investment-related income in 1995 benefited from income recognized in connection with the restructuring of the Entertainment Group's interest in Court TV. FINANCIAL CONDITION AND LIQUIDITY September 30, 1995 Time Warner The financial condition of Time Warner was affected during 1995 by the ITOCHU/Toshiba Transaction, the cable transactions, debt refinancings and asset sales that have closed during the year and is expected to be further affected by the CVI acquisition and TBS Transaction that are expected to close during the fourth quarter of 1995 (or in early 1996) and in mid-1996, respectively. Time Warner had $9.9 billion of debt, $378 million of cash and equivalents (net debt of $9.5 billion) and $3.7 billion of shareholders' equity at September 30, 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 shareholders' equity at December 31, 1994. The increase in debt principally reflects the assumption of approximately $1.3 billion of debt related to the cable acquisitions, offset in part by debt reductions using proceeds raised from asset sales. The increase in shareholders' equity reflects the issuance in 1995 of approximately 2.5 million shares of common stock and approximately 29.3 million shares of preferred stock in connection with the ITOCHU/Toshiba Transaction and the KBLCOM and Summit acquisitions. On a combined basis -26- (Time Warner and the Entertainment Group together), there was $15.3 billion of net debt at September 30, 1995, compared to $15 billion of net debt at the beginning of the year. During 1995, Time Warner and TWE made progress in achieving certain of their financial and operational objectives, principally relating to the expansion of their reach in cable television, the attainment of a new bank credit facility and their plan to reduce debt with funds raised from the sale of non- core assets. In addition, with the announcement in September 1995 of Time Warner's plan to merge with TBS, Time Warner has taken an important step towards attaining one of its operational objectives of achieving the appropriate balance between its content and distribution businesses. The TBS Transaction is expected to result in the issuance by Time Warner of approximately 176 million shares of common stock and the assumption of TBS' debt, which approximated $2.3 billion at September 30, 1995. On a pro forma basis, giving effect to the TBS Transaction and other previously announced transactions (consisting of the cable transactions, ITOCHU/Toshiba Transaction, asset sales and debt refinancings) as if they had occurred at the beginning of 1994, Time Warner and the Entertainment Group would have reported combined EBITDA of approximately $4 billion for the year ended December 31, 1994, compared to historical combined EBITDA of approximately $3 billion. Time Warner completed its previously-announced acquisition of KBLCOM in July 1995 and Summit in May 1995 and, together with the formation of the TWE-Advance/Newhouse Partnership in April 1995, the total number of subscribers under the management of Time Warner Cable has increased to over 10 million, compared to 7.5 million at the end of 1994. The number of subscribers is expected to increase further, to over 11.5 million, after the consummation of the acquisition of CVI and related companies, which is expected to close in the fourth quarter of 1995 or in early 1996. On June 30, 1995, TWI Cable, TWE and the TWE-Advance/Newhouse Partnership executed a five-year revolving credit facility. The New Credit Agreement enables such entities to refinance certain indebtedness assumed from the companies acquired or to be acquired in the cable acquisitions, to refinance TWE's indebtedness under a pre-existing bank credit agreement and to finance the ongoing working capital, capital expenditure and other corporate needs of each borrower. The New Credit Agreement permits borrowings in an aggregate amount of up to $8.3 billion. Borrowings are limited to $4 billion in the case of TWI Cable, $5 billion in the case of the TWE-Advance/Newhouse Partnership and $8.3 billion in the case of TWE, subject in each case to certain limitations and adjustments. Such borrowings will bear interest at specific rates for each of the three borrowers, generally equal to LIBOR plus a margin initially ranging from 50 to 87.5 basis points based on the credit rating or financial leverage of the applicable borrower. The New Credit Agreement contains certain covenants for each -27- borrower relating to, among other things, additional indebtedness; liens on assets; cash flow coverage and leverage ratios; and loans, advances, distributions and other cash payments or transfers of assets from the borrowers to their respective partners or affiliates. On July 6, 1995, TWI Cable borrowed approximately $1.2 billion under the New Credit Agreement to refinance certain indebtedness assumed or incurred in the acquisition of KBLCOM, and TWE borrowed approximately $2.6 billion to repay and terminate its pre-existing bank credit agreement. Time Warner continues to pursue its plan to enhance its financial position and that of the Entertainment Group through sales of non-core assets and, to the extent that market conditions remain favorable, through the issuance of debt to redeem or otherwise repay certain higher-cost debt securities that are currently outstanding. With the sale of 51% of TWE's interest in Six Flags in June 1995, the sale of an interest in QVC, Inc. in February 1995, the sale or expected sale of certain unclustered cable systems and the proceeds raised from the issuance of the PERCS in August 1995, Time Warner and the Entertainment Group on a combined basis will have raised approximately $1.6 billion for debt reduction. The $363 million of net proceeds raised from the issuance of the PERCS, taken together with approximately $500 million of proceeds raised from the issuance of 7.75% ten-year notes in June 1995 and available cash and equivalents, were used to finance the partial redemption in September 1995 of approximately $1 billion principal amount of Time Warner's 8.75% Convertible Debentures for an aggregate redemption price of $1.06 billion, including redemption premiums and accrued interest thereon. Time Warner also filed a shelf registration statement with the Securities and Exchange Commission in August 1995 for the offering of up to $500 million of other mandatorily redeemable preferred securities of certain subsidiaries, the proceeds of which will be used to reduce debt. However, there can be no assurance that such offering will be completed. On August 15, 1995, Time Warner redeemed all of its $1.8 billion principal amount of outstanding Reset Notes in exchange for new securities, consisting of approximately $454 million aggregate principal amount of Floating Rate Notes due August 15, 2000, approximately $272 million aggregate principal amount of 7.975% Notes due August 15, 2004, approximately $545 million aggregate principal amount of 8.11% Debentures due August 15, 2006, and approximately $545 million aggregate principal amount of 8.18% Debentures due August 15, 2007. -28- During the first nine months of 1995, cash provided by Time Warner's operations amounted to $654 million and reflected $741 million of EBITDA from the Publishing, Music and Cable businesses, $957 million of net distributions from TWE and $35 million from the securitization of receivables, less $537 million of interest payments, $187 million of income taxes, $57 million of corporate expenses and an increase in working capital requirements. Cash provided by operations of $288 million in the the first nine months of 1994 reflected $742 million of EBITDA from the Publishing and Music businesses, $119 million of net distributions from TWE, $209 million from the securitization of receivables and a reduction in working capital requirements, less $453 million of interest payments, $274 million of income taxes and $57 million of corporate expenses. Cash flows used in investing activities, excluding investment proceeds, increased to $529 million in the first nine months of 1995, compared to $266 million in the first nine months of 1994, principally as a result of higher investment spending by Time Warner's business segments. As a result of management's debt reduction program, investment proceeds increased to $332 million in the first nine months of 1995, compared to $144 million in the first nine months of 1994. Cash flows used in financing activities increased to $361 million in the first nine months of 1995, compared to $48 million in the first nine months of 1994, principally as a result of the use of available cash and equivalents to redeem a portion of the 8.75% Convertible Debentures in September 1995. In addition, cash dividends paid increased to $110 million in the first nine months of 1995, compared to $105 million in the first nine months 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. Time Warner received over $950 million of net distributions from TWE in 1995 and an additional $75 million of tax-related distributions are expected to be received from TWE in the fourth quarter of 1995. Management believes that Time Warner's operating cash flow, cash and marketable securities and additional borrowing capacity are sufficient to meet its capital and liquidity needs for the foreseeable future 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 September 30, 1995, Time Warner had interest rate swap contracts to pay floating-rates of interest (average six- month LIBOR rate of 6.2%) and receive fixed-rates of interest (average rate of 5.4%) on $2.6 billion notional amount of indebtedness, effectively converting 39% of Time Warner's underlying debt, a substantial portion of which is fixed-rate, and 39% of the combined debt of Time Warner and the Entertainment -29- Group, to a floating-rate basis. Time Warner had interest rate swap contracts on $2.9 billion notional amount of indebtedness at December 31, 1994. Based on the current levels of outstanding debt and interest rate swap contracts, each 25 basis point increase in the level of interest rates prevailing at September 30, 1995 would reduce Time Warner's annual pretax income by an estimated $14 million. Interest rate swap contracts are placed with a number of major financial institutions in order to minimize credit risk. Based on the level of interest rates prevailing at September 30, 1995, the fair value of Time Warner's fixed-rate debt exceeded its carrying value by $247 million and it would have cost $66 million to terminate the related interest rate swap contracts, which combined is the equivalent of an unrealized loss of $313 million. Based on the level of interest rates prevailing 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. Unrealized gains or losses on debt or interest rate swap contracts are not recognized 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 foreign currency exchange rates. At September 30, 1995, Time Warner had contracts for the sale of $505 million and the purchase of $144 million of foreign currencies at fixed rates, primarily Japanese yen (9% of net contract value), French francs (11%), English pounds (32%), Canadian dollars (17%) and German marks (19%), 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 $20 million and TWE had $8 million of net losses on foreign exchange contracts during the first nine months 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, at September 30, 1995 was affected by the formation of the TWE-Advance/Newhouse Partnership, the Six Flags transaction and the consolidation of Paragon. TWE had $6.2 -30- billion of debt, $1.4 billion of Time Warner General Partners' senior capital and $6.4 billion of partners' capital (net of the $396 million uncollected portion of the note receivable from U S WEST) at September 30, 1995, compared to $7.2 billion of debt, $1.7 billion of Time Warner General Partners' senior capital and $6.2 billion of partners' capital at December 31, 1994. The $1 billion reduction in debt resulted principally from the Six Flags transaction. In addition, principally as a result of the payment of over $950 million of distributions to Time Warner in 1995, cash and equivalents decreased to $439 million at September 30, 1995, compared to $1.1 billion at December 31, 1994, reducing the debt-net-of-cash amounts for TWE to $5.8 billion and $6.1 billion, respectively. In the first nine months of 1995, cash provided by Entertainment Group operations amounted to $1.205 billion and reflected $1.529 billion of EBITDA from the Filmed Entertainment, Six Flags Theme Parks, Broadcasting-The WB Network, Programming- HBO and Cable businesses and a reduction in working capital requirements, less $447 million of interest payments, $59 million of income taxes and $47 million of corporate expenses. Cash provided by operations of $1.091 billion in the first nine months of 1994 reflected $1.392 billion of business segment EBITDA and a reduction in working capital requirements, less $411 million of interest payments, $48 million of income taxes and $45 million of corporate expenses. Cash flows used in investing activities decreased to $202 million in the first nine months of 1995, compared to $1.133 billion in the first nine months of 1994, principally as a result of a $997 million increase in investment proceeds relating to management's debt reduction program. Capital expenditures increased to $1.099 billion in the first nine months of 1995, compared to $772 million in the first nine months of 1994. Capital spending by the Cable Division amounted to $832 million in the first nine months of 1995, compared to $431 million in the first nine months of 1994, and was financed in part through $375 million of collections on the note receivable from U S WEST. Cable capital expenditures are budgeted to be approximately $400 million in the fourth quarter of 1995, and are expected to be partially financed by approximately $250 million of additional 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, cable and other 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. Cash flows from financing activities decreased to a use of cash of $1.635 billion in the first nine months of 1995, compared to $52 million of cash provided in the first nine months of 1994, principally as a result of an approximate $1 billion reduction in debt in 1995 and an $838 million increase in distributions paid to Time Warner, offset in part by a $246 million increase in collections on the note receivable from U S WEST. -31- 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 $958 million at September 30, 1995, compared to $852 million at December 31, 1994 (including amounts relating to HBO of $172 million at September 30, 1995 and $175 million at December 31, 1994). The backlog excludes advertising barter contracts. Management believes that TWE's operating cash flow, cash and equivalents, collections on the note receivable from U S WEST and additional borrowing capacity are sufficient to meet its capital and liquidity needs for the foreseeable future. -32- TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED BALANCE SHEET (Unaudited) September 30, December 31, 1995 1994 (millions) ASSETS Current assets Cash and equivalents $ 439 $ 1,071 Receivables, including $176 and $266 due from Time Warner, less allowances of $325 and $306 1,351 1,426 Inventories 1,042 956 Prepaid expenses 111 120 Total current assets 2,943 3,573 Noncurrent inventories 1,763 1,807 Loan receivable from Time Warner 400 400 Property, plant and equipment, net 4,791 3,784 Goodwill 4,151 4,433 Cable television franchises 3,385 3,236 Other assets 1,053 1,429 Total assets $18,486 $18,662 LIABILITIES AND PARTNERS' CAPITAL Current liabilities Accounts payable $ 535 $ 514 Participations and programming costs 1,042 857 Other current liabilities, including $334 due to Time Warner at Dec. 31, 1994 1,361 1,486 Total current liabilities 2,938 2,857 Long-term debt 6,181 7,160 Other long-term liabilities, including $256 and $89 due to Time Warner 984 749 Minority interests 634 - Time Warner General Partners' senior capital 1,398 1,663 Partners' capital Contributed capital 7,398 7,398 Undistributed partnership earnings (deficit) (651) (394) Note receivable from U S WEST (396) (771) Total partners' capital 6,351 6,233 Total liabilities and partners' capital $18,486 $18,662 See accompanying notes. -33- TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Nine Months Ended September 30, Ended September 30, 1995 1994 1995 1994 (millions) Revenues (a) $2,324 $2,203 $6,762 $6,177 Cost of revenues (a)(b) 1,589 1,553 4,640 4,337 Selling, general and administrative (a)(b) 467 415 1,397 1,175 Operating expenses 2,056 1,968 6,037 5,512 Business segment operating income 268 235 725 665 Interest and other, net (a) (178) (155) (509) (435) Corporate services (a) (17) (15) (47) (45) Income before income taxes 73 65 169 185 Income taxes (26) (24) (62) (40) Income before extraordinary item 47 41 107 145 Extraordinary loss on retirement of debt (24) - (24) - Net income $ 23 $ 41 $ 83 $ 145 __________________ (a) Includes the following income (expenses) resulting from transactions with the partners of TWE: Selling, general and administrative $(24) $ (26) $ (76) $ (69) Corporate services (17) (15) (47) (45) Interest and other, net 14 7 20 10 In addition, includes the following income (expenses) resulting from transactions with equity affiliates of TWE or Time Warner: Revenues $ 17 $ 20 $ 75 $ 87 Cost of revenues (19) (22) (72) (53) Selling, general and administrative 2 5 14 19 (b) Includes depreciation and amortization expense of: $260 $ 254 $ 761 $ 707 See accompanying notes. -34- TIME WARNER ENTERTAINMENT COMPANY, L.P. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Nine Months Ended September 30, 1995 1994 (millions) OPERATIONS Net income $ 83 $ 145 Adjustments for noncash and nonoperating items: Extraordinary loss on retirement of debt 24 - Depreciation and amortization 761 707 Changes in operating assets and liabilities 326 199 Cash provided by operations 1,194 1,051 INVESTING ACTIVITIES Investments and acquisitions (130) (113) Capital expenditures (983) (742) Loan to Time Warner - (250) Investment proceeds 1,031 42 Cash used by investing activities (82) (1,063) FINANCING ACTIVITIES Borrowings 2,041 677 Debt repayments (3,135) (627) Capital distributions (982) (157) Collections on note receivable from U S WEST 375 129 Other (43) - Cash provided (used) by financing activities (1,744) 22 INCREASE (DECREASE) IN CASH AND EQUIVALENTS (632) 10 CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,071 1,338 CASH AND EQUIVALENTS AT END OF PERIOD $ 439 $1,348 See accompanying notes. -35- TIME WARNER ENTERTAINMENT COMPANY, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Time Warner Entertainment Company, L.P., a Delaware limited partnership ("TWE"), is engaged principally in the Filmed Entertainment, Six Flags Theme Parks, 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"). Time Warner acquired the limited partnership interests previously held by subsidiaries of each of ITOCHU Corporation and Toshiba Corporation effective in the third quarter of 1995. As a result, Time Warner and certain of its wholly-owned subsidiaries collectively now own 74.49% of the 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. The remaining 25.51% pro rata priority capital and residual equity limited partnership interests are owned by a subsidiary of U S WEST, Inc. ("U S WEST"). The TWE partnership agreement provides for special allocations of income, loss and distributions of partnership capital, including priority distributions in the event of liquidation. 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 consolidated financial statements reflect the deconsolidation of Six Flags Entertainment Corporation ("Six Flags") effective as of June 23, 1995 as a result of the Six Flags transaction, and the consolidation of Paragon Communications ("Paragon") effective as of July 6, 1995 as a result of an increase in TWE's control over the management of such entity. 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. -36- Intangible Assets Intangible assets are recorded when the cost of acquired companies exceeds the fair value of their tangible assets. Intangible assets are amortized over periods up to forty years using the straight-line method. TWE separately reviews the carrying value of intangible assets for each acquired entity on a quarterly basis to determine whether an impairment may exist. TWE considers relevant cash flow and profitability information, including estimated future operating results, trends and other available information, in assessing whether the carrying value of intangible assets can be recovered. Upon a determination that the carrying value of intangible assets will not be recovered from the undiscounted future cash flows of the acquired business, the carrying value of such intangible assets would be considered impaired and will be reduced by a charge to operations in the amount of the impairment. Impairment is measured as any deficiency in estimated undiscounted future cash flows of the acquired business to recover the carrying value related to the intangible assets. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," ("FAS 121") effective for fiscal years beginning after December 15, 1995. The new rules establish standards for the recognition and measurement of impairment losses on long-lived assets and certain identifiable intangible assets, including goodwill. TWE expects that the adoption of FAS 121 will not have a material effect on its financial statements. 2. TWE-ADVANCE/NEWHOUSE PARTNERSHIP On April 1, 1995, TWE formed a cable television joint venture with the Advance/Newhouse Partnership ("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. TWE consolidates the partnership and the one-third equity interest owned by Advance/Newhouse is reflected in TWE's balance sheet as minority interest. 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, which, with respect to Advance/Newhouse, consisted of assets contributed to the partnership of approximately $338 million and liabilities assumed by the partnership of approximately $9 million. No gain was recognized by TWE upon the capitalization of the partnership. On a pro forma basis, giving effect to the -37- formation of the TWE-Advance/Newhouse Partnership as if it had occurred at the beginning of the periods, TWE would have reported revenues of $6.899 billion and $6.572 billion, for the nine months ended September 30, 1995 and 1994, respectively. The pro forma effect on TWE's net income for each of the nine month periods ended September 30, 1995 and 1994 is not material. 3. SIX FLAGS On June 23, 1995, TWE sold 51% of its interest in Six Flags to an investment group led by Boston Ventures for $204 million and received $640 million in additional proceeds from Six Flags, representing payment of certain intercompany indebtedness and licensing fees. As a result of the transaction, Six Flags has been deconsolidated and TWE's remaining 49% interest in Six Flags is now accounted for under the equity method of accounting. TWE reduced debt by approximately $850 million in connection with the transaction, and approximately $140 million of income on the transaction was deferred by TWE principally as a result of its guarantee of certain third-party, zero-coupon indebtedness of Six Flags due in 1999. 4. INVENTORIES Inventories consist of: September 30, 1995 December 31, 1994 Current Noncurrent Current Noncurrent (millions) Film costs: Released, less amortization $ 623 $ 361 $ 585 $ 347 Completed and not released 124 27 123 24 In process and other 16 322 18 361 Library, less amortization - 730 - 769 Programming costs, less amortization 193 323 149 306 Merchandise 86 - 81 - Total $1,042 $1,763 $ 956 $1,807 5. LONG-TERM DEBT Long-term debt consists of: September 30, December 31, 1995 1994 (millions) Bank credit agreement, weighted average interest rates of 6.4% and 6.5% $1,805 $2,550 Commercial paper, weighted average interest rate of 6.2% at each date 583 649 Publicly held notes and debentures 3,781 3,903 Other 12 58 Total $6,181 $7,160 -38- On June 30, 1995, TWE, the TWE-Advance/Newhouse Partnership and a wholly-owned subsidiary of Time Warner ("TWI Cable") executed a five-year revolving credit facility (the "New Credit Agreement"). The New Credit Agreement enables such entities to refinance certain indebtedness assumed from the companies acquired or to be acquired in the cable acquisitions, to refinance TWE's indebtedness under a pre-existing bank credit agreement and to finance the ongoing working capital, capital expenditure and other corporate needs of each borrower. The New Credit Agreement permits borrowings in an aggregate amount of up to $8.3 billion. Borrowings are limited to $4 billion in the case of TWI Cable, $5 billion in the case of the TWE-Advance/Newhouse Partnership and $8.3 billion in the case of TWE, subject in each case to certain limitations and adjustments. Such borrowings will bear interest at specific rates for each of the three borrowers, generally equal to LIBOR plus a margin initially ranging from 50 to 87.5 basis points based on the credit rating or financial leverage of the applicable borrower. The New Credit Agreement contains 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 and other cash payments or transfers of assets from the borrowers to their respective partners or affiliates. On July 6, 1995, TWE borrowed approximately $2.6 billion under the New Credit Agreement to repay and terminate its pre-existing bank credit agreement. In connection therewith, TWE recognized an extraordinary loss of $24 million to write-off deferred financing costs related to the former credit agreement. Long-term debt was reduced by approximately $850 million in 1995 as a result of the Six Flags transaction. Each Time Warner General Partner has guaranteed a pro rata portion of approximately $6 billion of TWE's debt and accrued interest thereon based on the relative fair value of the net assets each Time Warner General Partner contributed to TWE. Such indebtedness is recourse to each Time Warner General Partner only to the extent of its guarantee. -39- 6. PARTNERS' CAPITAL Changes in partners' capital were as follows: Nine Months Ended September 30, 1995 1994 (millions) Balance at beginning of year $6,233 $6,000 Net income 83 145 Distributions (371) (173) Reduction of stock option distribution liability - 178 Reacquisition of Time Warner Service Partnership Assets 124 - Allocation of income to Time Warner General Partners' senior capital (101) (94) Collections on note receivable from U S WEST 375 129 Other 8 10 Balance at September 30 $6,351 $6,195 Since September 1993, certain assets formerly owned and operated by TWE were owned and operated by other partnerships (the "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. In 1994, U S WEST received a judicial order that TWE was no longer prohibited from owning or operating substantially all of such assets. Accordingly, in September 1995, TWE reacquired substantially all of the assets of the Time Warner Service Partnerships, subject to the liabilities relating thereto, (the "Time Warner Service Partnership Assets") in exchange for junior priority capital interests in TWE equal to approximately $400 million. The reacquisition was recorded for financial statement purposes based on the $124 million historical cost of the Time Warner Service Partnership Assets. Effective as of September 15, 1995, TWE is no longer required to make quarterly cash distributions of $12.5 million to the Time Warner General Partners with respect to the Time Warner Service Partnerships. TWE is required to make distributions to reimburse the partners for income taxes at statutory rates based on their allocable share of taxable income, and to reimburse Time Warner for its stock options granted to employees of TWE based on the amount by which the market price of Time Warner common stock exceeds the option exercise price on the exercise date. 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. -40- During the nine months ended September 30, 1995, TWE accrued $25 million of Time Warner Service Partnership distributions, $241 million of tax-related distributions and $105 million of stock option distributions, based on closing prices of Time Warner common stock of $39.75 at September 30, 1995 and $35.125 at December 31, 1994. During the nine months ended September 30, 1994, TWE accrued $38 million of Time Warner Service Partnership distributions and $135 million of tax-related distributions, and reversed $178 million of previously-accrued stock option distributions as a result of a decline in the market price of Time Warner common stock. During 1995, TWE paid $982 million of distributions to the Time Warner General Partners, consisting of $575 million of tax-related distributions, $25 million of Time Warner Service Partnership distributions, $16 million of stock option related distributions and $366 million of distributions of TWE partnership income that had been allocated to the Time Warner General Partners' senior capital interest. 7. SEGMENT INFORMATION Information as to the operations of TWE in different business segments is set forth below. Cable business segment information reflects the consolidation by TWE of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995 and Paragon effective as of July 6, 1995. The operating results of Six Flags have been deconsolidated effective as of June 23, 1995 and are now reported separately to facilitate comparability. Three Months Nine Months Ended September 30, Ended September 30, 1995 1994 1995 1994 (millions) Revenues Filmed Entertainment $1,174 $1,055 $3,508 $3,138 Six Flags Theme Parks - 287 227 499 Broadcasting - The WB Network 7 - 13 - Programming - HBO 404 381 1,181 1,108 Cable 826 546 2,107 1,654 Intersegment elimination (87) (66) (274) (222) Total $2,324 $2,203 $6,762 $6,177 Three Months Nine Months Ended September 30, Ended September 30, 1995 1994 1995 1994 (millions) Operating Income Filmed Entertainment $ 60 $ 55 $ 179 $ 171 Six Flags Theme Parks - 35 29 52 Broadcasting - The WB Network (7) - (40) - Programming - HBO 70 59 207 177 Cable 145 86 350 265 Total $ 268 $ 235 $ 725 $ 665 -41- Three Months Nine Months Ended September 30, Ended September 30, 1995 1994 1995 1994 (millions) Depreciation of Property, Plant and Equipment Filmed Entertainment $ 27 $ 19 $ 69 $ 50 Six Flags Theme Parks - 25 20 43 Broadcasting - The WB Network - - - - Programming - HBO 3 2 11 9 Cable 118 79 317 243 Total $ 148 $ 125 $ 417 $ 345 Three Months Nine Months Ended September 30, Ended September 30, 1995 1994 1995 1994 (millions) Amortization of Intangible Assets (1) Filmed Entertainment $ 31 $ 33 $ 100 $ 97 Six Flags Theme Parks - 15 11 26 Broadcasting - The WB Network - - - - Programming - HBO - 3 - 5 Cable 81 78 233 234 Total $ 112 $ 129 $ 344 $ 362 ______________ (1) Amortization includes amortization relating to the acquisition 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 September 30, 1995 aggregated approximately $5.4 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 of TWE. -42- 9. ADDITIONAL FINANCIAL INFORMATION Additional financial information is as follows: Nine Months Ended September 30, 1995 1994 (millions) Interest expense $440 $414 Cash payments made for interest 442 408 Cash payments made for income taxes (net) 59 48 -43- TIME WARNER ENTERTAINMENT COMPANY, L.P. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The comparability of the results of operations and financial condition of TWE has been affected during 1995 by (1) the consolidation of Paragon by TWE effective as of July 6, 1995, (2) the deconsolidation of Six Flags by TWE effective as of June 23, 1995 as a result of the Six Flags transaction, (3) the formation of the TWE-Advance/Newhouse Partnership on April 1, 1995 and (4) certain debt refinancings and asset sales. The impact of these transactions on the financial statements of TWE is discussed below. RESULTS OF OPERATIONS TWE had revenues of $2.324 billion, income of $47 million before an extraordinary loss on the retirement of debt and net income of $23 million for the three months ended September 30, 1995, compared to revenues of $2.203 billion and net income of $41 million for the three months ended September 30, 1994. Revenues of $6.762 billion, income of $107 million before an extraordinary loss on the retirement of debt and net income of $83 million were reported for the nine months ended September 30, 1995, compared to revenues of $6.177 billion and net income of $145 million for the nine months ended September 30, 1994. As discussed more fully below, TWE's operating results for the three and nine month periods ended September 30, 1995 reflect an overall increase in operating income generated by its business segments (including the contribution by the TWE-Advance/Newhouse Partnership) and gains on the sale of certain unclustered cable systems, offset by higher floating-rates of interest paid on borrowings under TWE's bank credit agreements and minority interest expense related to the consolidation of the operating results of the TWE-Advance/Newhouse Partnership effective as of April 1, 1995. As a U.S. partnership, TWE is not subject to U.S. federal and state income taxation. Income and withholding taxes of $26 million and $62 million in the three and nine months ended September 30, 1995, respectively, and $24 million and $40 million in the three and nine months ended September 30, 1994, respectively, have been provided in respect of the operations of TWE's domestic and foreign subsidiary corporations. -44- EBITDA and operating income for TWE for the three and nine months ended September 30, 1995 and 1994 are as follows: Three Months Ended September 30, EBITDA Operating Income 1995 1994 1995 1994 (millions) Filmed Entertainment $118 $107 $ 60 $ 55 Six Flags Theme Parks - 75 - 35 Broadcasting - The WB Network (7) - (7) - Programming - HBO 73 64 70 59 Cable 344 243 145 86 Total $528 $489 $268 $235 Nine Months Ended September 30, EBITDA Operating Income 1995 1994 1995 1994 (millions) Filmed Entertainment $ 348 $ 318 $179 $171 Six Flags Theme Parks 60 121 29 52 Broadcasting - The WB Network (40) - (40) - Programming - HBO 218 191 207 177 Cable 900 742 350 265 Total $1,486 $1,372 $725 $665 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. Three Months Ended September 30, 1995 Compared to the Three Months Ended September 30, 1994 FILMED ENTERTAINMENT. Revenues increased to $1.174 billion, compared to $1.055 billion in the third quarter of 1994. EBITDA increased to $118 million from $107 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $58 million in 1995 and $52 million in 1994. Operating income increased to $60 million from $55 million. video and consumer products operations. Worldwide theatrical -45- revenues in 1995 were led by the success of BATMAN FOREVER. EBITDA and operating income benefited from the revenue gains. SIX FLAGS THEME PARKS. As a result of TWE's sale of 51% of its interest in Six Flags, the operating results of Six Flags have been deconsolidated effective as of June 23, 1995 and TWE's remaining 49% interest in Six Flags is now accounted for under the equity method of accounting. Operating results for the third quarter of 1994 included revenues of $287 million, EBITDA of $75 million, depreciation and amortization of $40 million and operating income of $35 million. BROADCASTING - THE WB NETWORK. The WB Network was launched in January 1995, and generated $7 million of operating losses on $7 million of revenues in the third quarter of 1995. The third- quarter operating loss was mitigated by a favorable legal settlement, as well as by funding from a new limited partner in the network. Due to the start-up nature of this new national broadcast operation, losses are expected to continue. PROGRAMMING - HBO. Revenues increased to $404 million, compared to $381 million in the third quarter of 1994. EBITDA increased to $73 million from $64 million. Depreciation and amortization amounted to $3 million in 1995 and $5 million in 1994. Operating income increased to $70 million from $59 million. Revenues benefited primarily from an increase in subscribers, as well as from higher pay-TV rates. EBITDA and operating income improved principally as a result of the revenue gains. CABLE. Revenues increased to $826 million, compared to $546 million in the third quarter of 1994. EBITDA increased to $344 million from $243 million. Depreciation and amortization, including amortization related to the purchase of WCI and the acquisition of the ATC minority interest, amounted to $199 million in 1995 and $157 million in 1994. Operating income increased to $145 million from $86 million. Revenues and operating results benefited from the formation of the TWE- Advance/Newhouse partnership on April 1, 1995 and the consolidation of Paragon effective as of July 6, 1995. Excluding such effects, revenues benefited from increases in basic cable subscribers and nonregulated revenues, including pay-TV, pay-per- view and advertising. Excluding the positive contributions from the TWE-Advance/Newhouse Partnership and the consolidation of Paragon, EBITDA and operating income increased as a result of the revenue gains, offset in part by 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 $178 million in the third quarter of 1995, compared to $155 million in the third quarter of 1994. Interest expense increased to $144 million, compared to $141 million in the third quarter of 1994, principally as a result of higher floating-rates of interest paid on borrowings under TWE's bank credit agreement. -46- Other expense, net, increased to $34 million in the third quarter of 1995 from $14 million in 1994, principally because of the inclusion in 1995 of minority interest expense related to the TWE-Advance/Newhouse Partnership, offset in part by gains on the sale of certain unclustered cable systems. Nine Months Ended September 30, 1995 Compared to the Nine Months Ended September 30, 1994 FILMED ENTERTAINMENT. Revenues increased to $3.508 billion, compared to $3.138 billion in the first nine months of 1994. EBITDA increased to $348 million from $318 million. Depreciation and amortization, including amortization related to the purchase of WCI, amounted to $169 million in 1995 and $147 million in 1994. Operating income increased to $179 million from $171 million. Revenues benefited from increases in worldwide theatrical, consumer products and television distribution operations, as well as from international home video. Worldwide theatrical revenues in 1995 were led by the success of BATMAN FOREVER. EBITDA and operating income benefited from the revenue gains and increased income from licensing operations. SIX FLAGS THEME PARKS. As a result of TWE's sale of 51% of its interest in Six Flags, the operating results of Six Flags have been deconsolidated effective as of June 23, 1995 and TWE's remaining 49% interest in Six Flags is now accounted for under the equity method of accounting. Accordingly, revenues decreased to $227 million, compared to $499 million in the first nine months of 1994. EBITDA decreased to $60 million from $121 million. Depreciation and amortization amounted to $31 million in 1995 and $69 million in 1994. Operating income decreased to $29 million from $52 million. BROADCASTING-THE WB NETWORK. The WB Network was launched on January 11, 1995, and generated $40 million of operating losses on $13 million of revenues in the first nine months of 1995. The operating loss was offset in part by a favorable legal settlement in the third quarter of 1995 and funding from a new limited partner in the network. Due to the start-up nature of this new national broadcast operation, losses are expected to continue. PROGRAMMING-HBO. Revenues increased to $1.181 billion, compared to $1.108 billion in the first nine months of 1994. EBITDA increased to $218 million from $191 million. Depreciation and amortization amounted to $11 million in 1995 and $14 million in 1994. Operating income increased to $207 million from $177 million. Revenues benefited primarily from an increase in subscribers, as well as from higher pay-TV rates. EBITDA and operating income improved principally as a result of the revenue gains. CABLE. Revenues increased to $2.107 billion, compared to $1.654 billion in the first nine months of 1994. EBITDA increased to $900 million from $742 million. Depreciation and amortization, including amortization related to the purchase of WCI and the acquisition of the ATC minority interest, amounted to $550 -47- million in 1995 and $477 million in 1994. Operating income increased to $350 million from $265 million. Revenues and operating results benefited from the formation of the TWE- Advance/Newhouse Partnership on April 1, 1995 and the consolidation of Paragon effective as of July 6, 1995. Excluding such effects, revenues benefited from increases in basic cable subscribers and nonregulated revenues, including pay-TV, pay-per- view and advertising. Excluding the positive contributions from the TWE-Advance/Newhouse Partnership and the consolidation of Paragon, EBITDA and operating income 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 $509 million in the first nine months of 1995, compared to $435 million in the first nine months of 1994. Interest expense increased to $440 million, compared with $414 million in the first nine months of 1994, principally as a result of higher floating-rates of interest paid on borrowings under TWE's bank credit agreement. Other expense, net, increased to $69 million in the first nine months of 1995 from $21 million in 1994, principally because of the inclusion in 1995 of minority interest expense related to the TWE-Advance/Newhouse Partnership, offset in part by gains on the sale of certain unclustered cable systems. FINANCIAL CONDITION AND LIQUIDITY September 30, 1995 The financial condition of TWE at September 30, 1995 was affected by the formation of the TWE-Advance/Newhouse Partnership, the Six Flags transaction and the consolidation of Paragon. TWE had $6.2 billion of debt, $1.4 billion of Time Warner General Partners' senior capital and $6.4 billion of partners' capital (net of the $396 million uncollected portion of the note receivable from U S WEST) at September 30, 1995, compared to $7.2 billion of debt, $1.7 billion of Time Warner General Partners' senior capital and $6.2 billion of partners' capital at December 31, 1994. The $1 billion reduction in debt resulted principally from the Six Flags transaction. In addition, principally as a result of the payment of $982 million of distributions to Time Warner in 1995, cash and equivalents decreased to $439 million at September 30, 1995, compared to $1.1 billion at December 31, 1994, reducing the debt-net-of-cash amounts to $5.8 billion and $6.1 billion, respectively. During 1995, TWE and Time Warner made progress in achieving certain of their financial and operational objectives, principally relating to the expansion of their reach in cable television, the attainment of a new bank credit facility and their plan to reduce debt with funds raised from the sale of non- core assets. TWE formed the TWE-Advance/Newhouse Partnership in April 1995 and, together with Time Warner's completion of its -48- previously-announced acquisitions of KBLCOM Incorporated in July 1995 and Summit Communications Group, Inc. in May 1995, the total number of subscribers under the management of Time Warner Cable has increased to over 10 million, compared to 7.5 million at the end of 1994. The number of subscribers is expected to increase further, to over 11.5 million, after the consummation of Time Warner's acquisition of Cablevision Industries Corporation and related companies, which is expected to close in the fourth quarter of 1995 or in early 1996. On June 30, 1995, TWE, the TWE-Advance/Newhouse Partnership and TWI Cable executed a five-year revolving credit facility. The New Credit Agreement enables such entities to refinance certain indebtedness assumed from the companies acquired or to be acquired in the cable acquisitions, to refinance TWE's indebtedness under a pre-existing bank credit agreement and to finance the ongoing working capital, capital expenditure and other corporate needs of each borrower. The New Credit Agreement permits borrowings in an aggregate amount of up to $8.3 billion. Borrowings are limited to $4 billion in the case of TWI Cable, $5 billion in the case of the TWE-Advance/Newhouse Partnership and $8.3 billion in the case of TWE, subject in each case to certain limitations and adjustments. Such borrowings will bear interest at specific rates for each of the three borrowers, generally equal to LIBOR plus a margin initially ranging from 50 to 87.5 basis points based on the credit rating or financial leverage of the applicable borrower. The New Credit Agreement contains 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 and other cash payments or transfers of assets from the borrowers to their respective partners or affiliates. On July 6, 1995, TWE borrowed approximately $2.6 billion under the New Credit Agreement to repay and terminate its pre-existing bank credit agreement. TWE continues to pursue its plan to enhance its financial position through sales of non-core assets. Principally as a result of the sale of 51% of its interest in Six Flags in June 1995, TWE has realized a $1 billion reduction in debt from the levels existing at December 31, 1994. Proceeds to be raised from the sale of certain unclustered cable systems scheduled to close over the next six months are expected to be used for additional debt reduction. In the first nine months of 1995, cash provided by TWE's operations amounted to $1.194 billion and reflected $1.486 billion of EBITDA from the Filmed Entertainment, Six Flags Theme Parks, Broadcasting-The WB Network, Programming-HBO and Cable businesses and a reduction in working capital requirements, less $442 million of interest payments, $59 million of income taxes and $47 million of corporate expenses. Cash provided by operations of $1.051 billion in the first nine months of 1994 -49- reflected $1.372 billion of business segment EBITDA and a reduction in working capital requirements, less $408 million of interest payments, $48 million of income taxes and $45 million of corporate expenses. Cash flows used in investing activities decreased to $82 million in the first nine months of 1995, compared to $1.063 billion in the first nine months of 1994, principally as a result of a $989 million increase in investment proceeds relating to management's debt reduction program. Capital expenditures increased to $983 million in the first nine months of 1995, compared to $742 million in the first nine months of 1994. Capital spending by the Cable Division amounted to $718 million in the first nine months of 1995, compared to $402 million in the first nine months of 1994, and was financed in part through $375 million of collections on the note receivable from U S WEST. Cable capital expenditures are budgeted to be approximately $400 million in the fourth quarter of 1995, and are expected to be partially financed by approximately $250 million of additional 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, cable and other 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. Cash flows from financing activities decreased to a use of cash of $1.744 billion in the first nine months of 1995, compared to $22 million of cash provided in the first nine months of 1994, principally as a result of an approximate $1 billion reduction in debt in 1995 and an $825 million increase in distributions paid to Time Warner, offset in part by a $246 million increase in collections on the note receivable from U S WEST. 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 $958 million at September 30, 1995, compared to $852 million at December 31, 1994 (including amounts relating to HBO of $172 million at September 30, 1995 and $175 million at December 31, 1994). The backlog excludes advertising barter contracts. Management believes that TWE's operating cash flow, cash and equivalents, collections on the note receivable from U S WEST and additional borrowing capacity are sufficient to meet its capital and liquidity needs for the foreseeable future. Based on the level of interest rates prevailing at September 30, 1995, the fair value of TWE's long-term debt exceeded its carrying value by $149 million. 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. Unrealized gains or losses on debt are not recognized unless the debt is retired prior to its maturity. -50- 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 foreign currency exchange rates. TWE is reimbursed by or reimburses Time Warner for Time Warner contract gains and losses related to TWE's exposure. At September 30, 1995, Time Warner had contracts for the sale of $505 million and the purchase of $144 million of foreign currencies at fixed rates and maturities of three months or less. Of Time Warner's $361 million net sale contract position, $119 million related to TWE's exposure, primarily Japanese yen (24% of net contract position related to TWE), French francs (20%), German marks (11%) and Canadian dollars (19%), 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 $8 million of net losses on foreign exchange contracts during the first nine months 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. -51- PART II. OTHER INFORMATION Item 1. Legal Proceedings. Reference is made to the purported class actions entitled DIGITAL DISTRIBUTION INC. d/b/a COMPACT DISC WAREHOUSE v. CEMA DISTRIBUTION, et al. (the "California Federal Action") and BRENDEN BARRY v. CEMA DISTRIBUTION, et al. (the "California State Action") described on page 38 of Time Warner's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995. In the California Federal Action, the defendants moved to dismiss the complaint and, following an initial court conference held in late August 1995, the plaintiff decided to withdraw the complaint and file an amended complaint. On October 6, 1995, the plaintiff filed an amended complaint, which defendants moved to dismiss for failure to state a claim. A hearing on the motion to dismiss is scheduled for January 8, 1996. In the California State Action, the defendants filed a demurrer to the complaint for failure to state a cause of action. The plaintiff has decided to withdraw the complaint and proposes to file an amended complaint in December 1995. 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-43 of Time Warner's Annual Report on Form 10-K for the year ended December 31, 1994. With respect to the remaining RICO claim against the defendant recording companies, on September 21, 1995, the court denied the recording company defendants' motion for summary judgment seeking dismissal of the claim as premature. Reference is made to the litigation commenced in September 1995 by U S WEST and a wholly owned subsidiary against Time Warner and three of TWE's general partners (U S WEST, INC., et al. v. TIME WARNER INC., et al. No. 14555) described on page 5 of Time Warner's Current Report on Form 8-K dated September 22, 1995, which description is incorporated herein by reference. Time Warner filed its answer and counterclaims to the lawsuit on October 11, 1995. U S WEST filed a reply to the counterclaims on October 31, 1995. Discovery is proceeding toward a scheduled trial date of March 13, 1996. In addition to the complaint filed by U S WEST, seventeen complaints have been filed against TBS, Time Warner, certain officers and directors of TBS, Time Warner or TWE, and other defendants, purportedly on behalf of a class of TBS shareholders, and two complaints have been filed against Time Warner, certain officers and directors of Time Warner, and other defendants, by Time Warner shareholders, purportedly derivatively on behalf of Time Warner. The two complaints filed by Time Warner shareholders were filed in the Court of Chancery of the State of Delaware in and for New Castle County on October 30, 1995 (BERNARD v. TIME WARNER INC., et al., No. 14651; PARNES v. TIME WARNER INC., et al., No. 14660). Sixteen of the seventeen complaints filed by TBS shareholders were filed in Superior Court, Fulton County, Georgia; the other was filed in the Court of Chancery of the State of Delaware in and for New Castle County. Of the complaints filed in Georgia, fourteen were filed prior to the approval of the TBS Transaction on September 22, 1995 by the Board of Directors of Time Warner and the Board of Directors of -52- TBS (SHINGALA v. TURNER BROADCASTING SYS., INC., et al., No. E-41502; SCHRANK v. R. E. TURNER, et al., No. E-41501; LEWIS, et al. v. TURNER BROADCASTING SYS., INC., et al., No. E-41500; SILVERSTEIN AND SILVERSTEIN v. TURNER BROADCASTING SYS., INC., et al., No. E-41526; STRAUSS v. TURNER BROADCASTING SYS., INC., et al., No. E-41538; HOFFMAN v. TED TURNER, et al., No. E-41544; BARRY v. TURNER BROADCASTING SYS., INC., et al., No. 41545; MERSEL AND MERSEL v. R. E. TURNER, et al., No. E-41554; FRIEDLAND AND FRIEDLAND v. TURNER BROADCASTING SYS., INC., et al., No. E-41562; SCHWARZCHILD v. TURNER BROADCASTING SYS., INC., et al., No. E-41586; TURNER AND HANSON v. TURNER BROADCASTING SYS., INC., et al., No. E-41637; H. MARK SOLOMON v. TURNER BROADCASTING SYS., INC., et al., No. E-41685; SHORES v. TURNER BROADCASTING SYS., INC., et al., No. E-41749; and KRIM AND DAVIDSON v. TURNER BROADCASTING SYS., INC., et al., No. E-41779). Two of the complaints filed in Georgia were filed after the TBS Transaction was approved by the Board of Directors of Time Warner and the Board of Directors of TBS (ALTMAN v. TURNER BROADCASTING SYS., INC., et al., No. E-43205; JOYCE v. TELE- COMMUNICATIONS, INC., et al., No. 43321). On September 27, 1995, an amended complaint was filed in SHINGALA. On October 24, 1995, an amended complaint was filed in LEWIS, which apparently would consolidate thirteen of the sixteen complaints filed in Georgia. On November 1, 1995, a second amended complaint was filed in LEWIS. The second amended LEWIS complaint is essentially the same as the first amended LEWIS complaint. The purported class action filed by a TBS shareholder in Delaware was filed on October 2, 1995 (JOYCE v. JOHN C. MALONE, et al., No. 14592). As noted above, an action on behalf of the same plaintiff was filed in Georgia on October 23, 1995. (JOYCE v. TELE-COMMUNICATIONS, INC., et al., No. 43321) The seventeen purported class action complaints filed by TBS shareholders allege, among other things, that the terms of the TBS Transaction are unfair to TBS shareholders and that some or all of the defendants have breached or aided and abetted the breach of fiduciary, common law and/or statutory duties owed to TBS shareholders. Among the breaches alleged in many of the complaints are (i) payment of unfair consideration for class members' shares, (ii) conferral of benefits on controlling shareholders at the expense of other shareholders, (iii) corporate waste, (iv) failure to seek competitive bids and an independent appraisal of TBS and (v) entrenchment of TBS board members. Some of the complaints allege that some or all of the defendants have committed fraud and/or have used deceptive and coercive practices to accomplish the TBS Transaction. Among other relief demanded, all of these complaints seek damages, most seek an injunction against consummation of the TBS Transaction, and many seek an auction of TBS. By letter dated October 20, 1995, certain of the plaintiffs in the Georgia actions made a demand upon TBS to repudiate certain of the transactions relating to the Merger as corporate waste or, absent repudiation, seek indemnification from any officers or directors of TBS who authorized the challenged transactions. These plaintiffs indicated that a shareholders' derivative suit seeking injunctive relief would be filed in less than 90 days. These derivative claims have been asserted in the LEWIS amended complaint referred to above. The two purported class action complaints filed by Time Warner shareholders allege, among other things, that some or all of the defendants have violated fiduciary duties owed to Time Warner and its shareholders by, among other things, (i) seeking to entrench themselves in board and management positions and to eliminate the threat of a hostile takeover, (ii) securing economic benefits for -53- themselves or conferring special benefits on Tele-Communications, Inc. and others at the expense of Time Warner's public shareholders, and (iii) structuring the TBS Transaction so as to place Time Warner's chief executive officer in a position which allegedly will involve a conflict between the interests of Tele- Communications, Inc. and Time Warner. Among other relief demanded, both complaints seek an injunction against consummation of the TBS Transaction and an order directing the individual defendants to account to Time Warner for their alleged profits and plaintiffs' alleged damages. 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. (i) Time Warner filed a Current Report on Form 8-K dated August 14, 1995, which sets forth in Item 5 certain pro forma financial statements of Time Warner and the Time Warner Entertainment Group at June 30, 1995 that give effect to certain transactions entered into by Time Warner and TWE during 1995. (ii) Time Warner filed a Current Report on Form 8-K dated August 31, 1995, reporting in Items 2 and 5 that it had signed definitive agreements with each of ITOCHU Corporation ("ITOCHU") and Toshiba Corporation ("Toshiba"), pursuant to which each of ITOCHU and Toshiba agreed to exchange its pro rata priority capital and residual equity interests in TWE, its residual equity interests in certain sister partnerships of TWE, and its option to increase its interest in TWE under certain circumstances for preferred stock of Time Warner and cash. (iii) Time Warner filed a Current Report on Form 8-K dated September 22, 1995, reporting in Item 5 that it had agreed to acquire TBS (the "TBS Transaction") and, in connection with the TBS Transaction, had agreed to enter into certain agreements and related transactions with certain shareholders of TBS. The Merger Agreement and certain related agreements provide for the issuance of approximately 171.3 million shares of Common Stock in exchange for the outstanding shares of TBS capital stock and approximately 13 million stock options to replace all outstanding TBS options, and the assumption of TBS' indebtedness. The Merger is subject to customary closing conditions, including the approval of the shareholders of TBS and of Time Warner, all necessary approvals of the Federal Communications Commission and appropriate antitrust approvals. There can be no assurance that all these approvals can be obtained or, in the case of governmental approvals, if obtained, will not be conditioned upon changes to the terms of the Merger Agreement or the related agreements. -54- 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: November 14, 1995 -55- EXHIBIT INDEX Exhibit No. Description of Exhibit 2.1 Restructuring Agreement, dated as of August 31, 1995, among Time Warner Inc., ITOCHU Corporation and ITOCHU Entertainment Inc. (incorporated by reference to Exhibit 2(a) to Time Warner's Current Report on Form 8-K dated August 31, 1995 (the "August 31, 1995 Form 8-K")). 2.2 Restructuring Agreement, dated as of August 31, 1995, between Time Warner Inc. and Toshiba Corporation (including Form of Registration Rights Agreement, between Time Warner Inc. and Toshiba Corporation) (incorporated by reference to Exhibit 2(b) to the August 31, 1995 Form 8-K). 2.3 Agreement and Plan of Merger dated as of September 22, 1995, among Time Warner Inc., Turner Broadcasting System, Inc. and Time Warner Acquisition Corp. (incorporated by reference to Exhibit 2(a) to Time Warner's Current Report on Form 8-K dated September 22, 1995 (the "September 1995 Form 8-K")). 4.1 Form of Floating Rate Note Due August 15, 2000 of Time Warner Inc. (incorporated by reference to Exhibit 4.2 to Time Warner's Registration Statement on Form S-8 (File No. 33-61497) filed with the Securities and Exchange Commission on August 1, 1995 (the "August 1995 Form S-8")). 4.2 Form of 7.975% Note Due August 15, 2004 of Time Warner Inc. (incorporated by reference to Exhibit 4.3 to the August 1995 Form S-8). 4.3 Form of 8.11% Debenture Due August 15, 2006 of Time Warner Inc. (incorporated by reference to Exhibit 4.4 to the August 1995 Form S-8). 4.4 Form of 8.18% Debenture Due August 15, 2007 of Time Warner Inc. (incorporated by reference to Exhibit 4.5 to the August 1995 Form S-8). 4.5 Certificate of Designations for Series G Convertible Preferred Stock of Time Warner Inc. (incorporated by reference to Exhibit 4(a) to the August 31, 1995 Form 8-K). 4.6 Certificate of Designations for Series H Convertible Preferred Stock of Time Warner Inc. (incorporated by reference to Exhibit 4(b) to the August 31, 1995 Form 8-K). 10.1 Shareholders' Agreement dated as of September 22, 1995, among Time Warner Inc., R.E. Turner and certain associates and affiliates of R.E. Turner (incorporated by reference to Exhibit 10(a) to the September 1995 Form 8-K). 10.2 LMC Agreement dated as of September 22, 1995, among Time Warner Inc., Liberty Media Corporation, TCI Turner Preferred, Inc., Communication Capital Corp. and United Turner Investment, Inc. (incorporated by reference to Exhibit 10(b) to the September 1995 Form 8-K). 10.3 Registration Rights Agreement, dated as of September 5, 1995, among Time Warner Inc., ITOCHU Corporation and ITOCHU Entertainment Inc. (incorporated by reference to Exhibit 10(a) to the August 31, 1995 Form 8-K). -56- 12 Computation of Ratio of Earnings to Fixed Charges of Time Warner Inc. 27 Financial Data Schedule 99.1 Notice of Redemption of Redeemable Reset Notes of Time Warner Inc. (incorporated by reference to Exhibit T3E-1 to Amendment No. 1 to Time Warner's Application for Qualification of Indenture on Form T-3 (File No. 22-22213) filed with the Securities and Exchange Commission on August 1, 1995). 99.2 Complaint in U S WEST, Inc. et al. v. Time Warner Inc., et al. (Civil Action No. 14555) filed by U S WEST, Inc. in the Court of Chancery of the State of Delaware in and for New Castle County (incorporated by reference to Exhibit 99(c) to the September 1995 Form 8-K). -57- EX-27 2 ART. 5 FDS FOR 3QTR 10-Q
5 TIME WARNER INC. FINANCIAL DATA SCHEDULE This schedule contains summary financial information extracted from the financial statements of Time Warner Inc. for the quarter ended September 30, 1995 and is qualified in its entirety by reference to such financial statements. 1,000,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 378 0 2,183 757 461 3,133 2,108 1,020 21,422 2,837 9,931 387 0 30 3,275 21,422 5,705 5,705 3,396 3,396 0 0 663 (94) 63 (157) 0 (42) 0 (199) (.58) (.58)
EX-12 3 Time Warner Ratio of Earnings to Fixed Charges EXHIBIT 12 (In millions, except ratios) Nine Months Ended September 30, 1995 1994 Earnings: Net income (loss) before income taxes and extraordinary item $ (94) $ 29 Interest expense 663 571 Amortization of capitalized interest 1 1 Portion of rents representative of an interest factor 39 40 Preferred stock dividend requirements of majority- owned subsidiaries 3 - Adjustment for partially owned subsidiaries and 50% owned companies 530 485 Undistributed losses of less than 50% owned companies 51 66 Total earnings $1,193 $1,192 Fixed Charges: Interest expense $ 663 $ 571 Capitalized interest 1 1 Portion of rents representative of an interest factor 39 40 Preferred stock dividend requirements of majority-owned subsidiaries 3 - Adjustment for partially owned subsidiaries and 50% owned companies 533 485 Total fixed charges $1,239 $1,097 Ratio of earnings to fixed charges (deficiency in the coverage of fixed charges by earnings before fixed charges)(a) $ (46) $ 1.1x Years Ended December 31 Restated 1994 1993 1992 1992 1991 1990 Earnings: Net income (loss) before income taxes and extraordinary item $ 89 $ 81 $323 $320 $ 52 $(145) Interest expense 769 698 287 729 912 1,096 Amortization of capitalized interest 2 - 1 19 23 22 Portion of rents representative of an interest factor 52 54 52 85 78 74 Preferred stock dividend requirements of majority- owned subsidiaries - - - - - - Adjustment for partially owned subsidiaries and 50% owned companies 665 663 590 97 73 57 Undistributed losses of less than 50% owned companies 82 47 56 56 56 17 Total earnings $1,659 $1,543 $1,309 $1,306 $1,194 $1,121 Fixed Charges: Interest expense $ 769 $ 698 $ 287 $ 729 $ 912 $1,096 Capitalized interest 2 - - 15 17 19 Portion of rents representative of an interest factor 52 54 52 85 78 74 Preferred stock dividend requirements of majority-owned subsidiaries - - - - - - Adjustment for partially owned subsidiaries and 50% owned companies 668 664 571 81 45 33 Total fixed charges $1,491 $1,416 $910 $910 $1,052 $1,222 Ratio of earnings to fixed charges (deficiency in the coverage of fixed charges by earnings before fixed charges)(a) 1.1x 1.1x 1.4x 1.4x 1.1x ($101) (a) For purposes of the ratio of earnings to fixed charges, earnings were calculated by adding pretax income, interest expense, previously capitalized interest amortized to expense, the portion of rents representative of an interest factor, preferred stock dividend requirements of majority-owned subsidiaries, Time Warner's proportionate share of such items for its partially-owned subsidiaries and 50%-owned companies, and undistributed losses of less-than-50% owned companies. Fixed charges consist of interest expense, interest capitalized, the portion of rents representative of an interest factor, preferred stock dividend require- ments of majority-owned subsidiaries and Time Warner's proportionate share of such items for partially-owned subsidiaries and 50%-owned companies. For periods in which earnings before fixed charges were insufficient to cover fixed charges, the dollar amount of coverage deficiency, instead of the ratio, is disclosed. Earnings as defined include significant noncash charges for depreciation and amortization. Fixed charges for the nine months ended September 30, 1995 and 1994 include noncash interest expense of $156 million and $162 million, respectively, relating to the Redeemable Reset Notes due August 15, 2002 and Time Warner's zero coupon convertible notes due 2012 and 2013. -----END PRIVACY-ENHANCED MESSAGE-----